雷神技術公司 (RTX) 2005 Q2 法說會逐字稿

Good morning and welcome to the United Technologies second-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 homepage 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 including its 10-Q and 10-K reports provide details on important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements.

Please go ahead, Mr. Geisler.

Thank you and good morning, everyone.

As you saw in this morning's release, we have another solid quarter to report.

Just a couple of numbers to get us started; 16% higher revenues included six points of organic growth.

We had 17% EPS growth and that 16% growth if we back out the gain and the restructuring activity out of both this quarter and last year's second-quarter.

Five of our six business segments were up more than 10% in operating profit and again free cash flow performance in the quarter exceeded net income, as it has for the first half.

Outside of operations we also had some good news in the form of tax items and an investment gain on some shares of SNECMA that we hold.

They netted to $0.09 of goodness in the quarter and that will fund restructuring in the second half of the year to the tune of at least this amount, roughly $0.04 to $0.05 in each the third and the fourth quarter.

As you know restructuring in offsetting gain is not new for us and neither is this calendarization.

We had a similar profile last year with $0.07 of restructuring in the second quarter which we restructured way in the back half of '04.

We like this restructuring model a lot.

It has worked well for us, driving margin expansion across the business for many, many years.

The second-quarter performance again demonstrated that balance works for UTC as our market leading businesses continued to generate sustained revenue growth and deliver improved returns.

We had another solid quarter at Otis, which delivered double-digit revenue and profit growth, leading to 90 basis points of margin improvement in the quarter.

We had continued cost tracks at Chubb coupled with the addition of Kidde's industrial fire protection business resulted in 70% profit growth in Fire & Security and recall that does not include the high margin aerospace business.

Pratt had another excellent quarter with 100 basis points of margin improvement and solid teens operating growth.

In total, the aero companies grew earnings 19% as they continued to execute well during the upswing in the aerospace cycle that we have seen that since late 2003.

Now these good results more than offset a down quarter at Carrier.

The residential HVAC markets were down both in the U.S. and in Europe against a tough compare, reflecting cool weather in the early months of the important summer selling season.

It is warm now in the states and even getting warm in Europe, so our second half story remains the same.

We expect solid or improved second half earnings growth up in the high teens and the factors that are in place for that are the same ones that Geruad mentioned to you in March.

Linde is a seasonally stronger in the second half and we have restructuring benefit from the closure of our McMinnville, Tennessee facility.

In addition, the commodity compares get easier in the second half when we continue to get price even with higher residential inventory levels.

If you think about it, this strong second half performance is the flip side of last year.

Last year's second half grew single digits organically while earnings in the first half grew around 20%.

In total for the corporation revenue growth was a solid 16% including 6 points of organic revenue growth.

Half of the revenue growth in the quarter came from the recently completed Linde and Kidde acquisitions, which add scale to our businesses and also reset the margin runway.

And we are working aggressively investing up front integration at Kidde to seize on that margin runway.

We are full in the aerospace fire suppression business into Hamilton Sundstrand and the industrial and commercial fire protection businesses into UTC Fire & Security and we are pleased with the integration program here introducing Ace lean manufacturing and cost reduction initiatives.

Kidde's industrial fire protection business has typically tracked its customers annual budgeting cycles, making these businesses stronger in the second half.

Last year nearly two-thirds of the profits for the year were reported in the second half, weighted towards the fourth quarter.

So we anticipate stronger performance for Kidde as we move through the year.

We also closed the Lenel acquisition earlier in the quarter.

Lenel has more than doubled its revenues over the last three years and grown profits by more than that.

We are on track at Kidde.

And at Chubb, profits are up more than 30% in the quarter in the legacy business alone and we like the Lenel fit a lot.

So consequently we bumped the Fire & Security guidance this morning to reflect Lenel's balance of the year profit contribution.

Free cash flow was strong in the quarter, above net income even with pension contributions.

Year-to-date free cash flow is above net income at 105% including 165 million of pension contributions.

So with this good performance in the first half we are revising upwards our free cash flow guidance to be free cash flow equal to net income including now our standard placeholder of $500 million in cash pension contributions.

And we have covered $500 million in pension contributions in each of the last three years and clearly are on schedule to do that again.

So with this strong first half performance thanks to a favorable world economy and good UTC style execution across the businesses, both of which we see continuing into the second half, we are tightening our full year earnings guidance today to the high end of the previous range.

We now expect 2005 EPS in the range of $3.00 to $3.07 a share or 14 to 16% growth over 2004 even with the spot dollar 20 euro that is below our guidance rate of $1.27 and offers no tailwind in the second half.

Balance works.

UTC performs.

So with that, I will turn it over to Dave to take you through some of the quarter's good results.

Okay, Jim.

Thanks.

I will start on page three of the webcast for those that are following along and then get into segment performance following that.

So beginning on page three, you see again strong revenue growth up a solid 16% in the quarter to over $11 billion.

And as Jim mentioned, that includes organic growth of 6 points this quarter similar to or just as we saw actually in the first quarter, and then acquisitions principally Linde and Kidde contributing much of the remainder.

Earnings per share of $0.95 a share were up 17% in the quarter and this includes the $0.09 net benefit Jim just took us through and we talked about in this morning's release.

So adjusting for it and last year's net benefit of $0.07, earnings per share improved 16% on an adjusted basis again against a tough compare when you look at year ago earnings per share performance up over 20%.

Double-digit profit growth at Pratt, at Hamilton, and at Sikorsky as well as at Otis and in the Fire & Security business drove the performance, more than compensating for the weakness we saw at Carrier in the quarter.

Now despite the recent strength in the U.S. dollar translation contributed about $0.02 to earnings in the quarter and that is $0.03 on a year-to-date basis.

Free cash flow of $1 billion included 100 million of voluntary pension contributions, some seasonal working capital build, and then higher year-over-year CapEx with CapEx this quarter roughly equal to depreciation.

Year-to-date, cash generation has been solid at 105% of net income.

Moving on to the segments and I will begin with Otis.

Another solid quarter at Otis.

Operating profit was up 16% on 10% higher revenues, driving margin improvement in the quarter of 90 basis points.

As we traditionally do and I have done in the past, I'm talking to segment results here with the impacts of restructuring added back.

Revenues at Otis were up in all regions and this was led by strong new equipment sales.

Organic growth was more than half of the quarter's revenue improvement and currency contributed about 40% of the increase.

Operating profit at constant currency was up double-digit, reflecting both volume increases and margin expansion, from fuel efficiency improvements, from product cost reductions and from effective management of overhead costs.

Foreign exchange contributed about 30% or 5 points of the reported 16% profit growth.

New equipment orders increased upper single digits in the quarter at Otis, with Europe and North America leading the way each with double-digit growth.

And then in Korea, orders were down as we continue to see the trend that we talked about last quarter as the market there remains soft.

Otis has delivered solid performance in each of the first two quarters this year and we expect this good performance to continue.

For the year, guidance is unchanged.

We continue to expect mid single digit revenue growth and operating profit growth of more than 10%.

Now at Carrier, profit was down 7 million year-over-year on 13% higher revenue and this follows last year's strong 20+% second-quarter profit increase and also includes Linde.

Linde contributed approximately 230 million of revenue in the quarter or about 8 points of the quarter's revenue growth but was dilutive to margins.

Revenues grew 1% organically at Carrier.

This was the combination of the cool early season weather we have seen and the tough year-over-year compares for the industry and in Carrier's European and North American residential air conditioning businesses.

Growth remained very solid in Transicold and in Asia.

Profit improvement from improved pricing and productivity were offset by commodity cost inflation, higher SEER 13 investment and the softness in the residential HVAC business that I just mentioned.

Price increases continue to stick with better price realization this quarter than in 1Q.

Price increases this quarter covered about two-thirds of the $70 million year-over-year commodity headwind in Carrier's second-quarter numbers.

Foreign exchange contributed 3 points of the quarter's revenue growth and 2 points to profit.

So looking ahead we continue to expect strong earnings performance at Carrier in the second half.

As Jim mentioned, a number of factors give us confidence including Linde's results will continue to improve as the business there moves into its traditionally stronger back half, restructuring benefits from previous actions provide tailwind in the second half and price realization should continue to improve.

The compares get easier as well.

Recall last year's first half that Carrier saw earnings growth over 20%.

For the year we now see earnings up less than 10% at Carrier.

At Fire & Security, revenue was up over 60% and operating profit was up about 70%, driven by good performance at Chubb and then the inclusion of Kidde.

In the legacy Chubb business, profits were up more than 30% in the quarter, on track with the earlier Chubb stand-alone guidance that Olivier laid out for you back in March and continuing the good cost traction that we have seen in that business since late in 2004.

Operating margins improved over 100 basis points at Chubb.

Organic revenues increased with the European fire safety and electronic security businesses providing good operating performance in the quarter, offsetting some softness we saw in the monitoring and response segment.

Currency added about 5 points to the quarter's growth.

Kidde revenues in the quarter were about $400 million and that is the Kidde Industrial businesses, the aero piece of Kidde is part of Hamilton, as you know.

And the Kidde business here produced low single digit operating margins.

We are making upfront integration investments in the Kidde business and expect to see improvement there in the second half, particularly in 4Q, reflecting the traditional profit profile of this business and from lower inventory amortization expenses.

With Lenel now added to the Fire & Security portfolio, we continue to see revenues up more than 40% for the year with op profit now increasing by more than 90%, up from the 80% we forecast last quarter.

Moving on to the aero companies and beginning with Pratt, a solid quarter at Pratt with revenue up 9% and operating profit up 16% in the quarter.

These increases were led by growth in the large commercial aftermarket business and at Pratt Canada.

Aftermarket revenues were up double digits sand Pratt Canada volumes continued strong, up around 20%, reflecting both higher engine shipments as well as spare part deliveries.

Military revenues in the quarter were about flat with good profit performance or contribution reflecting a favorable mix of higher profit engine and aftermarket revenue offsetting slightly lower development revenues.

Guidance for Pratt is unchanged.

We expect the good performance to continue with revenues up mid single digits and profits up in the mid teens.

Turning to Hamilton then, revenues were up about 20% with profits up 25% and this includes the impact of acquisitions, principally Kidde.

Legacy Hamilton revenues were up low double digits and profits were up high single digits, consistent with the first-quarter results and the pre-Kidde guidance that Dave Hess laid out for you back in March.

Kidde's aerospace fire business contributed nearly 70 million of revenue in the quarter with solid operating margins.

Within the legacy Hamilton portfolio, revenue increases were led by continued strength in the commercial aftermarket, which grew double digits in the quarter and then the industrial businesses, which were up about 20%.

A partial offsetting these improvements were lower military spares, a trend we have talked about over each of the last few quarters.

Profit at legacy Hamilton was driven by solid volume growth in the aftermarket, the commercial aftermarket, and at the industrial businesses, offsetting the impact from lower military spares and the higher 787 R&D program spending in the quarter.

Guidance for Hamilton is unchanged with revenues up about 10% for the year and operating profits up in the low teens.

And finally then at Sikorsky, revenue was up 13% and profit was up 16% in the quarter.

Revenue performance was strong across the Sikorsky business including solid aircraft deliveries and aftermarket volumes, which more than offset the loss we saw of nearly 35 million in prior year 2Q Comanche revenues.

Profit improvements were led by higher aircraft volumes and this good aftermarket performance.

Sikorsky delivered 43 aircraft in the quarter, including 17 Schweizer light helicopters and we booked over 50 S-76 and S-92 orders in the quarter.

The S-92 is now in daily operating service in the North Sea, offshore in Canada, and the Gulf of Mexico and current customers are buying more.

Guidance at Sikorsky remains unchanged, with both revenues and operating profits expected to be up more than 10% from last year with margin expansion at Sikorsky.

So now I will turn it over to Greg to take us through a few corporate and disclosure items outside of segment results.

Greg?

Thanks, Dave, and good morning.

We are now on page 10 of the webcast.

Let me take you through the makeup of the favorable items on the restructuring actions that we had in the second quarter.

In terms of favorable items, really two events.

First of all the IRS has finalized its review of our '94 through '99 open tax years.

As a result, we have got some good news on both tax expense line and the interest income line.

A tax adjustment for about $60 million or $0.06 a share reduced our effective tax rate in the quarter to 23.8%.

For the remainder of the year we still expect our effective rate to be right around 28% absent any other discrete items.

Additionally we recognized about $45 million of interest income associated with the '94 through '99 tax years.

That's equal to about $0.03 per share benefit.

The pretax impact of that is reflected in the elims and other.

The second event was the SNECMA and Sagem merger.

As we mentioned earlier this year, UTC has held shares in SNECMA for quite some time.

Upon completion of their merger in the second quarter, we were required to recognize the gain on those shares, which totaled about $75 million or $0.05 a share.

This gain is also reported down in elims and other.

So for the quarter, about $0.14 of net favorable items.

I should also note during the quarter that we divested Hamilton Sundstrand's Falk business.

That is a nonstrategic business which manufactures gears and couplings.

We also divested a small non-core refrigeration business at Carrier.

The Falk business had fairly significant tax costs due to the low tax basis of the business; however, this tax cost was substantially offset by the tax benefit generated from the productline sale at Carrier.

Neither transaction had a significant impact on pretax earnings.

Okay, partially offsetting the quarter's favorable items $70 million of restructuring charges or $0.05 a share.

About 45 million of these charges were related to new actions initiated in the quarter, mainly G&A related actions at Carrier and Otis.

The remaining $25 million of costs were from restructuring period costs associated with previously initiated actions primarily for Carrier and Hamilton Sundstrand's plant reconsolidation (ph) activities.

So for the quarter $0.09 per share of net gain in excess of restructuring.

Let's look at page 11.

As you have just seen, there's the $0.14 of favorable items in the second quarter and $0.05 of restructuring costs for the net benefit in the second quarter of about $0.09.

During the second half of the year, we expect to see $0.04 to $0.05 of additional restructuring costs in each of the next two quarters.

As you can see from the graph on the webcast presentation, it is the same type of calendarization we had in 2004.

Last year was a $0.07 per share net benefit in Q2 with offsetting restructuring costs in the third and fourth quarters.

For the full year of 2005 we still expect restructuring costs to exceed the favorable items just as it did last year.

So a little lumpy from a calendarization standpoint over the balance of the year, but we continue to like the model of using these onetime good news items to cover cost reduction actions across the business.

Let me just give you a few words on cash flow.

As Jim mentioned, free cash flow in the quarter was very strong at 104% of net income.

This solid performance came in spite of the seasonal build of receivables at Carrier and the non-cash nature of the favorable items that I just discussed.

Year-to-date cash spending on restructuring and purchase accounting related actions was about 120 million.

For the back half of the year, we now see cash spending on restructuring and purchase accounting actions will be right around 280 million for a total spend this year of about $400 million.

We also expect to make more than $300 million of voluntary cash contributions to our pension plans in the second half.

So just as we pointed out last quarter, there is some pressure on free cash flow for the year, but also manageable within our overall cash guidance that we've just updated for you.

Moving on to acquisitions.

A we mentioned earlier, we completed the acquisition of Kidde effective April 1 and we also closed on the acquisition of Lenel during the quarter.

These two acquisitions accounted for nearly all of our $2.5 billion of acquisition spending in the quarter.

Our full-year guidance for acquisition spending remains unchanged at $4.5 billion.

Share repurchase in the quarter was 260 million and for the year thus far is 375 million.

We are moving up our forecast of share repurchases today for the full year to $1 billion, up from our previous guidance of 600 million.

This reflects our confidence in both the second half performance of the businesses and the value of our stock.

In summary, on page 12, as you have heard, another strong quarter, continuing the double-digits earning growth we saw last year.

Portfolio balance was again a big plus, allowing UTC to overcome a relatively soft quarter at Carrier, further evidence that the UTC growth story is alive and well.

We were also able to make further restructuring investments in the quarter and we are committed to continuing these important cost reduction programs in the second half of the year.

The businesses continue to perform well with solid momentum.

We feel good about the second-quarter results and we have confidence in the remainder of 2005, which is why we have tightened our earnings range for the year, now anticipating growth in the 14 to 16% range.

So with that, let me open up the call to questions.

Joseph Campbell.

I wondered if you could give us an update on the acquisition outlook?

You have done a lot of stuff.

Greg just mentioned we're going to do something like 4.5 billion -- I guess still to do is Rocketdyne.

I guess that is all I am aware of that is still open and announced and not closed.

Can you give us just some color on what sort of in general is going on?

You bought a lot.

Should we expect a slowdown as you digest this or can this stepped-up level of activity perhaps continue?

Let me take that.

We expect that Rocketdyne should close here shortly and deals are binary.

So you take them when you can get them and you hate to miss an opportunity because it might go away from you for 20 years.

So we take a look at these deals and we always do them with the attention to showing our value and sometimes they happen and sometimes they don't.

We like the $4.5 billion placeholder.

There is still a lot of good assets in the pipeline.

But again, we will have to see if those things come our way at an attractive price.

So we keep the $4.5 billion placeholder and if we don't hit that, if it ends up being a little higher or lower that will be fine.

And could I just ask you also you have been putting a lot of money in the pension fund to give us an update midyear where we stand in terms of how the assets have been performing.

And I guess the interest rates at this point are lower.

Does it feel like we'll have to continue to put a fair amount of money in the pension plan for the foreseeable future or just kind of an update on where we are with regard to continuing needs to do this?

Thank you very much.

Let me take that.

The pension plan is just about on track for the year in terms of the return on assets that we look at.

As you know I think we've got an 8.5% annual return assumption in the plan and we are tracking to that for the year.

Interest rates obviously a concern if they stay at this level of course with discount rates being down.

But as we sit here today and we feel pretty comfortable with the $500 million that we have got as a placeholder for pension expense.

The measurement dates in November -- we'll have to get back and see how rates move towards the end of the year, but for now we feel pretty comfortable with the performance of the pension plan and the $500 million placeholder we've got out there.

Heidi Wood, Morgan Stanley.

Jim, can you give us an update on the commodity costs that you're seeing overall for the corporation?

You guided 300 million for the year and can you tell us how that is tracking?

Heidi, we are tracking towards that $300 million number.

Okay and then on Hamilton Sundstrand, you really did some great margins on a pre-restructuring basis of 16.6 and even if I back out Kidde and assume some pretty good profitability there, I still can't quite account for that strength.

Can you tell us what the main drivers were?

I think you had good performance in a couple of pieces of the Hamilton business in the quarter.

The commercial aftermarket in particular and that is a good margin or a return business as you know.

The industrial companies continue to perform very, very well also, up about 20%.

Again good marginal returns there and that allowed us to continue investment in the 787 platform in the quarter.

So I think good performance organically in the legacy Hamilton businesses plus the Kidde aerospace business that you just mentioned.

Okay, and then last question.

You talked about the restructuring costs at Kidde.

Can you give us a little bit of sense as to what you are spending and how that will track into 2006?

Will we see an absence of restructuring spending in '06?

Let me take that.

We're still finalizing our plans on the Kidde integration and as I think we have told you, there are over 40 manufacturing facilities associated with Kidde.

And Louis (ph) and his team and Dave Hess and his team are actively reviewing all of those plant sites today looking for ways that we can introduce some of our lean manufacturing and base initiatives there, as well as to consolidate them and perhaps move them to some lower-cost locations.

As of today, the $400 million number that I quoted for restructuring and purchase accounting really doesn't contemplate any big spend on the Kidde restructuring activities.

It will probably be more like a 2006 and perhaps even 2007 outflow.

Got you, okay.

Thanks very much.

Steve Binder.

A couple of things.

Restructuring first of all, previously in the 10-Q you talked about restructuring would be 100 million in the back end of 2005 for previously announced actions.

And I am just wondering, the additional 125 in the second half of the year pretax, is that all from previously announced actions including the second-quarter actions or is it contemplating new actions?

Is also, Steve, contemplating some of the new actions.

As we said, the $0.04 to $0.05 of spending that we're going to do in each of the next two quarters.

So are we still on track -- I just want to make sure relative to the previous plan of 100 million in the last nine months of 2005, is that still the right number for previously announced actions or are you upping that?

Yes.

For previously announced actions, Steve, that is on target, recognizing there was some spending against that 100 million trailing cost in the quarter.

Right, I'm just saying that 25 million -- so are we still expecting the 75 million from previously announced actions from the (technical difficulty)?

Yes.

Secondly, Pratt's margins and Pratt's -- last year you had that environmental charge at Pratt, so when you look at it on a year-over-year basis, you had good mix of business year-over-year but frankly the year-over-year variance on incremental margins were roughly about 15% and they were up single digits sequentially.

I am just wondering were there any one-time items in the quarter there?

Because you did have a favorable mix.

I think you hit it on the head, Steve, and maybe just a quick correction.

No environmental charge at Pratt last year.

I think you must be speaking to the collaboration accounting matter that we talked about in the first quarter but no other one-timers at Pratt this quarter.

Good performance in the commercial aftermarket as I said.

The military business continues to perform well, as does Pratt Canada on a real good volume growth in the quarter.

And with respect to Carrier, can you maybe just touch on what Transicold revenues did year-over-year and also what was that incremental SEER 13 investment you had in the quarter?

Transicold revenues were up in the quarter year-over-year about 10% or so, Steve, and the SEER 13 incremental investment was single digits millions but it moves the Carrier numbers around a little bit.

And so what did residential North America end up down the quarter, Dave?

It was down 2%

Thanks very much.

And one last thing.

With the integration expenses at Kidde in Q2, were they in line with your plan or were they greater than your plan?

In line with the plan, Steve.

The other thing you see there is the rollout of higher inventory that you put on the purchase accounting balance sheet but the integration costs were as we expected.

Okay, thank you.

Howard Rubel, Jefferies.

Good morning.

I have a couple of marketshare questions.

First could you address the Carrier, if it is down 2% North American res?

And then you figure you had a couple of points of price, then unit volumes were probably down in the order of 5%.

How does that stack up versus the market?

The market in the quarter also down some, Howard, but you're right.

We had about 2% down reported in units, a little more than that actually.

But you said pricing held, right, exactly.

So unit could've been down the order of five.

Is that a good stab at it?

Sure, yes.

And so did you lose a little bit of share versus the market?

And then related to that, how are your inventories going forward from here?

The market was down in the quarter more than that, Howard.

And in terms of inventories we said now that we had higher inventories coming into the quarter.

Inventories continue to be high.

But I think we are encouraged by recent movement through distribution and in Carrier in the back part of the quarter.

If it gets any hotter we are all going to go into work in shorts.

I understand that.

We like the hotter weather, Howard, you are right.

Then the second thing is that there was a JetBlue order for aftermarket for the V2500 that went to MTU which is your partner on part of the program but nonetheless, that is part of your strategy for expanding Pratt aftermarket.

Could you address that and what are you doing to combat that?

We like to grow in the aftermarket with good returns, Howard.

So we will continue to do that.

If your competitors continue to offer things that are difficult to compete against, don't you have to go back at a cost structure?

You know, Howard, you visited our facility in Singapore which did not do V2500s but it is a very good overhaul facility.

And so you also saw that we have gained share in the last three or four on the V2500 and you saw our plan to continue to do that.

So you lose one and then you win some.

And then last, you talked about really good numbers at Pratt Canada.

Could you give us what the units are if you don't mind please?

Sure Howard.

Units were up about 25% in the quarter and this is a trend that we've seen now for a couple of quarters.

So it was 530 engines in the quarter against more like 425 the year ago period.

So very, very good performance there.

We had good unit shipments in the military business as well; flattish to last year but the mix better with Aetna 119 engines and then big Pratt engines were up over 20 at 108 for the quarter.

Thank you very much, I appreciate it.

Nicole Parent, CSFB.

I guess just big picture I hopped on a little bit late.

Could you just talk about globally what you are seeing in terms of consumer and commercial demand?

And I guess more specifically in terms of China -- we've seen the government reign in some spending controls over there in the first and second quarters.

Are you seeing that?

Let me talk about China for a second.

We saw double-digit revenue growth in China in the quarter and profits up double digits as well and the backlog remains up double digits for us, so a uniformly good picture in China.

Orders were a little slower in this quarter.

Is that the start of a trend?

We'll have to see.

Recall in the third quarter last year there was all this drama around the fact that orders were a little bit lighter and that ended up not being a slowdown.

The fourth quarter and the first quarter became strong again.

So we think we're in a good position in China.

If this is a start of a little bit of slowdown, that's fine.

We love China and we would look for the opportunity to invest more.

You have heard some of our great stats on China before, Half an elevator per 1000 people versus 10 times that or five elevators per 1000 people here in the West.

So we will see if it slows.

If it slows a little bit, that is all very well manageable within the UTC balance story and we would look to make our share and presence in China bigger.

Europe?

Europe is not China and it was slower in (technical difficulty).

You always want to start with the basics.

Europe obviously was slower, actually it was down in the quarter and a piece of that is weather but also I would say the economy.

Italy is in recession.

Greg and I were just there about a month ago.

Germany is weak and there is still structural impediments to growth in Europe.

Restructuring is cumbersome and difficult for many companies.

Fortunately that is part of the standard UTC playbook and we have restructured there.

But we announced that in our Linde operation as well as some other operations with the closure of Stadthagen last year.

So I think Europe is slower and may be slowing but fortunately it is less -- well less than a 30 UTC and a big piece of that is aero, which is doing very, very well.

And I guess just general North American industrial demand, could you characterize the health of the residential and the commercial markets as you inspect them?

Res is still very good.

You saw housing starts remain high and with the weather and the good economy, as Dave said, we've started to see good underlying movement which will allow us to reduce these inventory levels.

And then on the commercial side, it’s been weak in nonresidential construction for a couple years.

So we're seeing a little bit of an improvement there gut I would just caution that the commercial business for Carrier is only 15% of the business.

So restructuring for us is a bigger driver than waiting for the market to return.

Great.

And I guess just could you put the guidance that you gave in the context of the very strong (indiscernible) and very solid Q2 results?

Are there any additional headwinds that we should be thinking about for the back half of the year?

Is it fair to say that this is conservative guidance?

It is good guidance and it is always good to be prudent.

Thank you.

Tony Boase, A.G. Edwards.

Thanks and good morning.

Just to confirm on Carrier, clearly you expect sales to shift to the third quarter from the second quarter.

What you didn't sell in the second quarter isn’t loss for ever.

Is that a correct assumption?

As Jim mentioned, yes, that is a good assumption, Tony.

As Jim mentioned, we expect good back half performance out of Carrier.

They will perform.

And then on the restructuring, I guess how is that going to transpire through the second half?

Is it going to be $0.04 to $0.05 per quarter?

And also which businesses are going to be affected by the restructuring?

Tony, it's Greg.

Again as we sit here today I think all of the businesses have keyed up various restructuring programs.

I think Carrier continues to look at the facility consolidation, as does Hamilton.

Pratt & Whitney has some programs that they have lined up, as does Otis from some of their European operations.

So I think it will be spread really across all of the businesses and as we see it today, probably $0.04 to $0.05 in both of those quarters and we're just working on finalizing the plans in the next couple of weeks here.

And what were spares up in the quarter for large commercial jet engine -- or for Pratt & Whitney and for Hamilton Sundstrand?

Spares were up over 10% at Pratt and about the same at Hamilton for the quarter.

And also I did not hear an actual integration number for Kidde in the quarter.

What was the actual integration number?

It was part of their performance in the quarter, Tony, and so we had integration and we had these higher -- I will call them inventory amortization costs.

You make an acquisition, you would put the inventory on at fair value so it comes out in the gross margin a little bit lower but we feel real good about the Kidde guidance and the Fire & Security guidance for the year.

Lastly, I notice that R&D was a little bit lower as a percent of revenue.

Any comment about that?

Tony, we invest a truckload in the businesses so R&D spending is at a high level and an appropriate level.

All right, thanks very much.

Cai Von Rumohr, SG Cowan.

Yes, the follow-up on the R&D -- with SEER 13, 787 building, what should we expect R&D to be for the year?

I think as we said going into the year, Cai, we expect R&D to be up some.

We continue to expect that and we've got against a pretty sizable increase in 2004 to Jim's point of lots of spend on good R&D programs.

Obviously in any quarterly period, the timing moves around program to program but there will continue to be healthy R&D investment in the business as we move through the year.

And a follow-up on the inventory amortization at Kidde, how much was that in the second quarter?

And you said that we should be lower in the second half.

How much do you expect it to be for the year?

Again, we laid out in a lot of detail last quarter, Cai, the expectations for Kidde's contribution to the margins at Fire & Security as well as at Hamilton Sundstrand.

I think the biggest piece of the delta for the quarter in terms of margin or profits is this drain from amortization and the integration load together with Jim's comment that Kidde historically has been a back half performer, a strong 4Q performer.

And we're looking for a similar kind of pattern or profile as we move through the year this year.

We feel very good about the guidance for that segment.

Right, but my recollection is the guidance you gave was kind of a full year impact at Kidde.

Just so we can understand what is happening -- how big was the inventory amortization again like in the second quarter?

And how much do you expect for the second half?

Since you mentioned it as a specific item.

It was less than 10 and most of it was done this quarter.

Okay, great.

Thanks.

Joe Nadol, J.P.

Morgan

First question -- just a follow-up kind of a specific one on China.

I had heard that in the HVAC business orders were down very significantly across the industry in Q2.

Did you see that well into the double digits or 20s?

We saw softer orders but not down.

Okay, so you were actually up in China year-over-year for Carrier?

Not down, flat.

Okay, got it.

Secondly, could you give an update on how the restructuring at Linde is going?

Where are you with the unions and your progress in building the new facility?

Joe, just during the quarter we did reach an agreement with the Joint Works Counsel in Germany.

We are going to be moving about 1200 factory positions from Germany to the Czech Republic over the next 18 months or perhaps two years.

Again the restructuring costs associated with that is going to flow through the purchase accounting for the Linde transaction because we've contemplated at the time of acquisition.

So not a big hit (ph) to earnings going forward but we think it is a great outcome with the Works Counsel.

And in terms of profit improvement, when do you start to see that flow through in the way the accounting works?

What will happen is we start moving the jobs later this year.

You will start to see some of the benefit next year with the whole role and impact in about 2007.

Okay and then finally, you had spoken at the air show about your new engine potentially with Bombardier in the C Series.

Any update on that program or how you see things going and progressing the rest of the year?

We're continuing to work with Bombardier to understand that market.

As you know we signed an MOU with Bombardier and the big question for all of us is does the market exist and are we going to have a competitive aircraft?

It would be a new centerline engine for Pratt & Whitney.

We like the narrow body market and we're still really in the process of trying to understand the Bombardier market.

And really the focus will ultimately be on the business case and the focus on shareholder value just as it was on the 787 engine decision.

And no more numbers you can give us on potential investment?

We're really too far away from that to give you anything specific at this time.

Thanks.

George Shapiro, Citigroup.

Good morning.

To go back a couple of things I think Howard had asked about HVAC.

I just want to get a comparison from you.

American Standard said on their call that their residential business was up 5% and that they got 4% price and you did not specifically give price.

I guess I can make an assumption you got the same price they did.

But you said overall you were down 2%, so is it a mix difference or do we assume you lost some share this quarter to American Standard or how do I interpret the differences?

Surprisingly most of us didn't actually listen to the American Standard call so I can't comment on their results but let me comment on the Carrier results.

As Dave said, we saw pretty a weak market and we had -- our results were down a little bit in terms of revenue in part from what we've talked about the last three quarters, which is high inventory levels.

There's no new news in that.

We came out third quarter last year.

It was cool and talked about how we had higher inventory levels and they were going to take a couple quarters to burn off.

And they may have held back some results versus others in the second quarter.

We don't know and I can't comment.

But what I can tell you is, it has been hot and we have started to see good movement trends.

Something you said earlier I just wanted to clarify.

What you said at Hamilton that the legacy Hamilton Sundstrand business before Kidde had low double-digit revenue growth and high single digit profit growth.

And if that is correct, then my question is is the weaker margin in the legacy business then just due to the higher 787 investment and if you could quantify how much that was then?

George, I said high in the legacy Hamilton business that we have high single digit profit growth.

And I thought you said low double-digit revenue growth unless I heard it wrong.

That's correct.

Yes, you did.

And the margin compression part from the R&D investment (technical difficulty) right on the guidance that Hess talked about earlier in the year.

So my question is -- was the margin compression just due to the 787 investment or was there something else going on?

That is the driver.

Then would you care to quantify what that incremental 787 investment was?

It was up over $10 million year-over-year.

Okay.

And then do I interpret anything different from the standpoint you said you had strong aftermarket growth -- one would have expected the legacy margin to be a little bit higher based on that basis.

I think we go back to the full-year guidance at Hamilton and we talked about high single digit.

That is the mix of all of the businesses.

We talked about some weakness in military spares but the commercial aerospace component of the business performing well.

And it allows us to invest in these program wins that are pretty exciting for us as we move forward.

One last one, the book to bill in the quarter at Pratt, you mentioned that spares are up over 10%.

How about the book to bill and how are the spares sequentially?

We're seeing good both order and revenue growth, as Greg talked about.

So the book to bill is still about one and up sequentially as well, really tracking with the traffic recovery that we have seen for a couple of quarters now.

Okay, thanks a lot.

Byron Callan, Merrill Lynch.

Two quick things.

Are you changing your assumptions about currency?

I think you mentioned clearly the spot rates changed but your full year assumptions remain unchanged?

Not being a currency forecaster, we just look toward the spot and it is now $1.20 and that is clearly within our guidance range.

Good.

And then on the military spares business, that's been fairly soft recently.

Are you expecting any pick up anytime soon as we work through whatever had been built up and not used?

Could we see that in 2005 or is that more a 2006 phenomena?

We're not really expecting a big return to the robust growth we saw in military spares three or four years ago.

I think you're just continuing to see some of the budget pressures at the Pentagon and spending we just don't think is going to be up in this area at least for the engine manufacturer and up at Hamilton.

Sikorsky of course continuing to see very strong growth in the military spares business.

But really kind of flattish at Hamilton and Pratt for the rest of this year.

Okay, that's it.

Thank you.

Thank you, Byron.

And Janna, why don't we see if there is another caller out there.

I think we have time for one more.

Myles Walton, CIBC World Markets.

Good morning.

Good performance at Sikorsky.

I wonder if you could comment on delivery numbers there as well as a little bit on mix?

And also should we expect margins to trail off from here through the rest of the year, the typical seasonal pattern?

And also how much of that margin improvement is from reduced R&D?

Let me take that, Myles.

For the quarter, we saw real strong shipments, 43 aircraft. 17 of course of those were the light helicopter, the Schweizer, but 26 of the larger helicopters very, very strong S-76 backlog in shipments and strong backlog really across the business.

We don't see any deceleration I would say in the back half of the year.

In fact we continue to see strength down at Sikorsky both on the helicopter shipments side as well as at the aftermarket level.

Great.

And the last one has been touched on a few times but could you perceive R&D percent of sales going below 3% for 2005?

We see, Myles, we continue to see strong investment in the R&D programs that we have talked about and to the degree that you have revenue growth out of the commercial companies.

Where the degree of R&D is lesser on a percentage of sales there is a map (ph) outcome there but we feel really good about higher year-over-year R&D and the programs we are spending on.

Great, thanks.

Let me make two comments here in closing.

The first is to thank Myles for that comment on good performance even if it was limited to Sikorsky because in total we think it was a good quarter, revenues up 16% at 6 points of organic growth.

EPS up a great 17%.

Very good.

And we, as a result, bumped the guidance to the high end of the range we had out there before.

And have done the same with free cash flow and net income, bumping that guidance up also to cover our placeholder for $500 million in pension.

I think all for what makes at least in our view a good quarter in a good economy for a Company that has good runway and looks forward to a good second half.

And we even think about 2006 even though it is only the middle of 2005.

I want to make a final comment on a more personal note and this is on behalf of Greg Hayes and myself.

I want to especially thank Dave Porter for his exemplary work in Investor Relations over these last couple of years.

He has been a good study and counselor to me and hopefully worked very well with you.

I know it to be the case because many of you have commented that to me.

He is moving on now to Pratt & Whitney where he will be the Chief Planner.

And we will miss him here at UTC but he won't be far, about three miles away across the river.

And in his place you'll meet Ken Parks, who is currently the Chief Planner at Carrier and he is incoming as the new IR Director.

So I am sure you will also want to tell Dave how much you enjoyed working with him and wish him luck in the future.

And also introduce yourself to Ken later today.

And on that, I think we are done.

Thank you.

This concludes today's conference call.

You may now disconnect.