雷神技術公司 (RTX) 2006 Q1 法說會逐字稿

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

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

Greg Hayes, Vice President Accounting and Control; and Ken Parks, Director, Investor Relations.

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.

Today's call is being recorded.

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 forward-looking statements.

Mr. Geisler, I would like to turn the conference over to you.

Thank you, Jamie, and good morning, everyone.

This morning, we reported very strong first-quarter results.

Revenues are up 13% to $10.6 billion, and earnings per share up 19% to $0.76 a share.

Free cash flow is 101% of net income.

Organic revenue growth continued strong at 9% as there is strong demand for our products in the marketplace.

Excluding Sikorsky, the rest of portfolio had very good organic revenue growth of 10% in the quarter, led by Pratt & Whitney with 20% organic revenue growth, and Hamilton Sundstrand, 12%.

This growth reflects robust aerospace demand, particularly in the aftermarket, which grew by more than 20%.

Carrier and Fire & Security both increased margins 80 basis points and grew earnings double digits.

Otis also started off the year well, with solid mid single digit organic revenue growth and operating profits of nearly 10%, but these results were obscured by a weaker euro.

The euro was significant headwind in the quarter.

The euro averaged $1.20 in the first quarter of this year versus $1.31 last year, a nearly 10% hit to euro-based earnings costing us $0.02 in the quarter or 3 points of EPS growth.

In addition, research and development spending was higher by approximately $80 million as our businesses increased investment to support future organic revenue growth.

A headwind outside the norm in the quarter was the strike at Sikorsky.

It had been over 40 years since Sikorsky had had a six-week strike.

The salaried employees redeployed into the factory did an outstanding job, and we're proud of their accomplishments.

But not unexpectedly, Sikorsky's profits were significantly reduced in the quarter.

Lower volumes resulted in lower profits, and we continued R&D spending for products with bright long-term prospects.

Overall, the Sikorsky strike impacted UTC's first-quarter results by $0.04.

The quarter's results also included a $0.02 per share gain from the sale of a partnership interest in a small engine program at Pratt & Whitney Canada.

UTC has often said balance works, and this quarter proves it again.

But growth works as well, and we definitely saw that across our Company this quarter.

As a result of our good growth, we are increasing our full-year EPS guidance today to a range of $3.50 to $3.60 a share, compared with our previous guidance $3.40 to $3.55 a share.

We also now expect full-year revenue growth or full-year revenues of $46 billion as organic revenue growth continues to be strong.

We are also seeing excellent organic revenue growth not just in one business, but across UTC.

We have challenges, as we always do.

In the second quarter, Sikorsky will be off a penny or two in EPS as they ramp back up to full production.

Although we do expect to recover most of the strike-related impact in the second half of the year, their full-year profit growth of $75 million does have some risk to it.

Also, commodities are an increasing headwind.

The spot price for copper is nearly $3.00 a pound versus less than $2.00 when we set the 2006 plan and $2.30 when we met in February.

We will still buy over 100 million pounds of copper in the remainder of the year, mostly at Carrier.

So this creates obvious headwind.

And of course we have the all-important summer selling season in front of us at Carrier.

In the press release we mentioned that restructuring will offset onetime gains in the year and actually could exceed them.

So, as we usually note on this call, it is April and there is a long way to go yet in 2006; but we sure do feel good.

With that, I'm going to hand it off with Ken to discuss with you the business unit results.

Ken?

Thanks.

I am going to take you to page 3 of the webcast.

As Jim mentioned, revenues grew 13% in the quarter to reach $10.6 billion.

This includes organic revenue growth at 9%, a solid number, especially considering the decline in Sikorsky revenues.

Acquisitions, primarily Kidde and Rocketdyne, contributed most of the remaining revenue growth.

Earnings per share at $0.76 were up 19% in the quarter, with solid quarter at Pratt, Hamilton, and Carrier as well as Fire & Security.

First-quarter results include restructuring charges of $31 million, which slightly exceeded a $25 million onetime gain from the sale of some marketable securities.

Consistent with our discussion at the February meeting, FX continues to be a headwind on both revenue and profit.

The average euro rate of $1.20 this past quarter as compared to $1.31 last year reduced revenue by approximately 2 points and EPS by approximately $0.02.

Taking a look at the businesses, starting on page 4 of the webcast -- and before I begin let me remind you that I will talk to segment results with restructuring added back, just as we usually do.

Otis revenues grew 1%, but were up 5% at constant currency.

Profit grew 3% or nearly 10% at constant currency.

Cost containment resulted in another 40 basis points of margin expansion in the quarter, this despite the currency headwind as indicated at the February meeting and an increase in new equipment mix.

As already noted at the analysts meeting, the first-quarter margin expansion is below the rate we expect for the year at Otis because of the euro's impact on our above-average profitability in the euro zone.

Revenue growth for the core was led by North America.

New equipment orders increased near double-digit in the quarter, with China and North America leading the way, each with strong double-digit growth.

We continue, however, to see volume declines in Japan and Korea, as well as significant price pressure in these markets and China.

At the current euro level, FX will continue to represent headwind for Otis this year, with the greatest remaining impact on Q2.

Now to Carrier.

Operating profit for the quarter increased 19% on revenue growth of 7%.

This translated to 80 basis points of margin improvement.

With the exception of a softening container segment, markets were generally healthy and resulted in solid organic revenue growth at 8%.

The U.S. residential market was particularly strong and was helped by the transition to the new 13 SEER Minimum Efficiency Standard, where new product line has been very well received.

Profit improvements were driven by organic growth; benefits from restructuring actions launched in 2005; and continuing performance improvement in our European commercial refrigeration business.

These earnings growth drivers more than offset ramp-up expenses resulting from the complete factory retooling for our new cooling product line as well as the translation impact of the euro.

Commodity costs, specifically copper, continued to increase during the quarter even beyond the levels we discussed in February.

These increases generated $25 million of commodity headwind, which exceeded price recovery and reversed the trend from the past two quarters, where pricing equaled or exceeded commodities.

At UTC Fire & Security, performance was solid and remains on track with expectations.

Revenue was up 46%, principally the result of the Kidde and Lenel acquisitions.

Organically, which is legacy Chubb, revenue was up 3%, led by Fire Safety business primarily in Australia and Europe.

The operating profit improvement of 68% was again primarily the result of the acquisitions, but also reflected growth in the Legacy Chubb business.

Resulting Fire & Security operating margins expanded 80 basis points in the quarter and was driven primarily by Chubb restructuring actions launched in 2005.

The Kidde integration is on track including the facility closure plans.

When complete nearly 30% of the Kidde manufacturing square footage will be eliminated, including a nearly 50% reduction of floor space in high-cost locations.

Pratt revenues reached $2.6 billion or growth of 28% in the quarter.

New engine deliveries and aftermarket revenues, including spare parts and services, were up double-digit in the large engine business.

Pratt Canada sales increased over 25%, primarily reflecting higher new engine volumes.

Rocketdyne contributed about 20% of the quarter's revenue increase.

Operating profit growth at 26% reflects the strong year-over-year commercial aftermarket performance and higher volumes at Pratt Canada.

Results also include a $25 million gain from the sale of an interest in a newly formed commercial engine partnership.

R&D was higher as a result of program-related timing, and impacted operating margins by roughly 160 basis points in the quarter.

Now, at Hamilton Sundstrand revenues grew 13% and operating profit was up 17%, with operating margins increasing 50 basis points in the quarter.

Legacy Hamilton revenues grew 10%, primarily from strength in the industrial businesses and in the commercial aftermarket.

Kidde's aerospace, fire, and suppression business contributed nearly $75 million of revenue to the quarter along with solid operating margins.

Legacy operating profit was up mid single digits, reflecting higher R&D and factory closure efforts.

The higher R&D spending in the quarter, primarily on the 787 programs, impacted operating margins by approximately 120 basis points.

Sikorsky's fourth quarter was a tough one due to the six-week strike by the Teamsters which settled on April 2.

Compared to last year, revenue was down 15% in the quarter, with six less helicopter shipments and lower aftermarket volumes.

While volumes were down in the face of the labor-related issues, 14 helicopters were shipped in the quarter, eight military and six commercial.

Operating profit was a little more than breakeven on lower volumes and the resulting unabsorbed overhead.

R&D investments continued during the strike and increased $12 million year-over-year with efforts on the H92, the S-76b, and X2 Technology development programs.

As Jim mentioned, the poststrike ramp-up will be a headwind to Sikorsky in the second quarter.

While working to recover most of the strike impact in the second half of the year, this will put pressure on their full-year guidance.

Now let me turn it over to Greg to take us through a few other items.

Thanks, Ken, and good morning, everybody.

Just a couple of things.

First of all on R&D, you will note that R&D spending in the quarter was up about $80 million as compared to last year's first quarter.

So it was as anticipated.

Again this was led by program efforts at Pratt, Hamilton Sundstrand, and Sikorsky.

Pratt has had higher spending on a number of the Pratt Canada small engine programs.

Hamilton's increase, as Ken noted, was related to the 787 program.

Sikorsky had higher spending on the S-76b as well as the Canadian Maritime H92.

We expect R&D will continue to grow this year and should be up by more than $100 million for the full year, as we invest in new products across our businesses to sustain future growth.

A few words on cash flow.

As you have heard, free cash flow was $774 million or 101% of net income for the quarter.

This was particularly impressive as inventory was a significant cash headwind in the quarter due to Carrier's seasonal build of inventory, the strike impact at Sikorsky, and generally strong revenue growth across the other aerospace businesses.

Higher collections and advances helped to partially offset the impact of the higher inventory.

You will also note on the statement of cash flows that we did not make a voluntary pension contribution this quarter.

We do, however, still expect to make up to $500 million contributions to our pension plans that will most likely now be in the back half of the year.

On share repurchase, during the first quarter we repurchased $375 million of our shares, significantly more than last year's first-quarter spending of $115 million and on track to meet our $1.5 billion goal for 2006.

At this level of repurchase we would expect that the share count will continue to decrease throughout the year.

[Net] acquisition spending in the first quarter was only about $90 million, but we're still keeping our usual placeholder of $2 billion for the year.

As we have pointed out, deals happen when they happen; and given the low level of acquisition spending in the first quarter, we would expect the deals to be more of a second half impact.

We also incurred $31 million of restructuring costs in the quarter.

Most this was related to trailing costs on previously initiated programs.

These restructuring costs were offset by a gain on the sale of marketable securities.

This gain shows up in the elims and other line, which included a similar size gain in the first quarter of 2005.

The $34 million year-over-year favorability that you see in elims and other primarily results from lower hedging costs and higher interest income.

In the second quarter, we expect to record a gain of about $100 million with the finalization of our 1994 through 1999 open tax years.

We're working to offset this gain with new restructuring costs in the second quarter.

This is different from last year's second quarter where, you will recall, we had a significant onetime gain that were not fully offset inside the quarter.

That resulted in about a $0.09 benefit in last year's second quarter, which we then restructured away during the second half of the year.

As Jim mentioned, for the full year we still expected restructuring to once again equal or perhaps even exceed these favorable items.

Okay, turning to page 11 in summary, it was a very good quarter for UTC in the face of some very challenging issues.

Total revenue growth of 13%, even with headwinds due to Sikorsky's strike and FX, organic revenue growth a very strong 9%, and 10% ex-Sikorsky.

For the year, we now expect total revenue to approach $46 billion.

In the quarter EPS was up 19% to $0.76.

We've increased our EPS guidance for the year to a range of $3.50 to $3.60 per share.

We also had solid free cash flow of $774 million, slightly exceeding net income.

For the full year we once again expect free cash flow to equal net income.

During the first quarter, we repurchased $375 million of our shares, and last week we increased our dividend by over 20% to an annual rate of $1.06 per share.

For the full year, we now expect to return over 70% of our free cash flow to investors in the form of dividends and share repurchase.

This reflects our confidence in the business and our ability to continue to generate solid cash flows.

With that, I think it's a good place to stop.

So let's open up the call for Q&A.

Jamie?

(OPERATOR INSTRUCTIONS) Cai Von Rumohr with Cowen and Company.

Good quarter, guys.

Some of the deliveries for (technical difficulty) in terms of how you got to the stronger volume there.

Sure, let me give you the engine shipments for the quarter, Cai.

Commercial engine shipments 105, military 41, and Pratt Canada 526.

Those are all -- the respective increases are 27% increase on commercial year-over-year; 17% on military; and 23% on Pratt Canada.

Great, thank you.

You mentioned the strong commercial aftermarket.

Could you give us for both Pratt as well as Hamilton Sundstrand?

I guess you said 20%-plus at Pratt; but what the percentage gains were in sales and what the book-to-bill was in the quarter, commercial aftermarket?

Cai, both businesses had aftermarket increases of about 20% and the book-to-bill was a little bit above 1.

Okay.

Could you explain why it was so strong?

Because clearly that is above the ASM growth we are seeing.

We have seen good improvement in aerospace and particularly aftermarket starting in at around the midpoint in 2003, after the start of the Iraq War and the SARS scare.

We have been seeing good, steady, sequential and year-over-year improvement since then.

Again, I remind people we're getting back to a level where we're just a little bit above 2000 levels.

So we had a big dip, and now we have had a good steady recovery, and that feels very good right now.

Great, and last question.

A little more color if you might at Carrier, in terms of maybe commercial.

You mentioned I think the Transicold was starting to soften; if you could give us more color by the key businesses.

Yes, let me give you a couple of comments about that.

North America residential business was up about 25% in the quarter.

Strong growth.

We believe that is consistent with where the market sits.

We made a comment about container market softening.

But I will tell you that the container backlog within Transicold is a little bit better today than it was at the end of the year last year.

So it is softer year-over-year, seen a little bit of improvement since year end.

The truck trailer part of that business continues to grow at healthy rates, in the midteens rates.

Thank you very much.

Joseph Campbell with Lehman Brothers.

This is actually [Andrea Shen] sitting in for Joe Campbell.

A couple of questions for you guys.

Can you quantify on the impact of the tax settlement?

Also can you clarify whether the volume decrease that you mentioned in Japan and Korea, whether that would have any impact on the Otis margin?

Let me start off on the tax settlement.

Right now, we are expecting to wrap up with the IRS [and through] joint committee open tax years of '94 through '99 sometime here in the second quarter.

As a result, we would expect to realize a gain of about $100 million, most of which we would hope to offset in the quarter with additional restructuring actions.

On the Otis piece?

Korea is a very important market for Otis.

We have a very good share there and a very strong franchise.

The market is weak right now.

So we are seeing a decline in revenues in a weakening market.

There is price pressure throughout Asia, so that is obviously a drag on Otis's margins.

Are there anything you can do to offset that?

Or, I mean, is China strong enough to offset Japan and Korea?

China?

Again, you go around the world by country, and you know the portfolio well, Andrea.

China for us is still a very good story.

We saw revenues up in China around 20% in the quarter, and that was very broad-based, including Otis.

So although Korea is an important market for us, and we do work there always at cost reduction and improving efficiency and growing the service business, it is just one market of many for us at Otis.

All righty, thank you.

Steve Binder of Bear Stearns.

Can I just touch on the Pratt sales growth in the quarter?

Because you touch on Pratt Canada being up 25%, if I am not mistaken; maybe that was delivery number.

Obviously the aftermarket up 20%.

Rocketdyne it sounded like contributed about $110 million of revenues, I think, based on the comments.

But there seems -- and you had the $25 million gains.

But am I missing anything else?

Any other revenue contributors in the quarter?

Military OEM was also a little bit stronger this year quarter-over-quarter at Pratt.

How much was the catalog parts business up year-over-year?

You touched on the 20% aftermarket growth.

But how about the parts business on the large engine side?

Yes, we had increased prices back in December by about 5% (multiple speakers).

No, I'm saying sales.

How much was the catalog parts sales up for the quarter year-over-year?

It was in line with the aftermarket, very strong.

Okay.

Then can you maybe just touch on Carrier as far as profitability, Linde?

I think you lost $10 million last year.

How much did you make this year?

Yes, Linde is -- this is still seasonally weakest quarter for Linde?

But we improved.

We did lose $10 last year, and that is what we quoted.

The number was better.

It is still not a significant profit driver, basically close to a breakeven number in the quarter, but showing improvement year-over-year.

Okay.

Lastly, I think goodwill was up about a quarter of a billion dollars in the first order.

What is that associated with?

I'm sorry, we could not hear you, Steve.

Yes, goodwill was up $250 million in the first quarter from the year end number.

Right, we actually finalized all of the purchase accounting, Steve, on the Kidde and Lenel acquisitions.

This really relates to additional reserves that we have taken at Fire & Security for restructuring costs, (inaudible) the Kidde business, as Ken mentioned.

So is that additional cash that flows out this year, or how should I look at that?

Yes, it will flow out.

A portion of it will flow out this year;

I would say, about half of that this year with the remainder over the next year or so.

There's some additional other liabilities like environmental that also get trued up, that are longer term.

But the majority of it is restructuring that happens this year.

Okay, thanks very much.

Heidi Wood of Morgan Stanley.

Nice quarter.

On Hamilton Sundstrand, I want to get a little more color.

The 15% growth, can you characterize a little bit tighter where that strength was coming from?

Give us some sense about what happened on the industrial side, and then commercial and military at Hamilton?

Sure, let me start on the industrial side there, Heidi.

We actually saw industrial sales were down year-over-year in the quarter.

But if you exclude Falk you would see that industrial sales at the remaining businesses were actually up over 20%.

Orders were up and even stronger; they were up over 30% in the quarter.

Military sales, again, on the OEM side very strong.

On the military aftermarket, however, we did see a little bit of a drop there ex-Kidde.

Of course the biggest part of the revenue growth at Hamilton this quarter was for the Kidde acquisition.

Okay.

Then on Carrier, can you give us again some more color on the SEER 13 market demand?

Where specifically are you seeing demand?

Give us color on what you are seeing on pricing?

You mentioned that, for the moment, that the commodity increases have exceeded pricing.

But how is that trending relative to where you thought things were going to go on SEER 13?

Yes, let me talk a little bit about demand.

You probably saw ARI numbers in January of like up 89% in shipments, and then still again strong in February.

I think that is a combination of the fact that it was a warmer winter, so therefore the season lasted longer; as well as the fact that most of the distributors are trying to get their inventory levels appropriate as they go into the new selling season with 13 SEER.

So we see a healthy demand out there.

As far as pricing, we did see pricing improvements.

We did note that commodity has exceeded pricing by a little bit this quarter.

Keep in mind that we talked about -- I think Geraud quoted and George has quoted -- an average kind of midteens, 18% pricing improvement year-over-year from the new portfolio of products versus the old portfolio of products.

We have seen that start to come through.

But keep in mind that January would have still been a heavy 10 SEER shipment month.

So you won't see 18% in the quarter; you will see something less than that.

But the pricing trend seems to be holding up well, and we think it looks good.

Is demand -- are you seeing demand across the board?

Or is there anything happening specifically geographically?

I know it is early, but we have already started to see at least a warm spring on the East Coast.

Are you seeing some benefit of that?

Heidi, demand is good.

Can you give us some geographical color?

It is still early in the season.

The economy, though, is still very good.

As Ken mentioned we saw good demand through the winter.

Maybe weather will be warm in the spring.

We will see.

But the underlying demand is very strong right now.

The only geographic comment I would throw in, which would be a natural one, is that you would see the season start earlier in certain parts of the States.

So therefore the demand will ramp up more quickly there.

New England, as you point out, will be a little bit later; but the demand indicators still look strong [underneath].

Okay.

Final question just on the R&D and the 787 at Hamilton Sundstrand.

Is that going to be increasing at kind of a 50 to $60 million for the year rate?

I think what you will see is throughout the course of the year you will see similar sized investments each quarter at Hamilton.

This is our biggest year of investment on the 787 program, getting ready for first flight next year.

All right.

So it's tracking at first-quarter level?

Yes.

All right, excellent.

Thanks very much, guys.

George Shapiro with Citigroup.

Yes, a couple of questions.

Greg, I thought you said that R&D for the year will be up $100 million.

It was up $80 million this quarter, so we're not going to see much incremental change the rest of the year.

I think what you will see, George, is the second quarter will be up not to the same extent as first quarter; but it will be up.

Then the compares become, I think, more reasonable.

Because if you will remember, last year's second-half R&D was up versus the first half.

I think we were up over $100 million last year.

All of that happened in the second half.

So I think again what you will see -- first half increase, and then second half at about the first-half run rate.

Let me add to that, George, also.

You have seen good revenue growth on an organic basis out of UTC.

We are always interested in investing in the future.

So if the economy remains good and UTC continues to form, and we have full expectation of that, then you could see us invest in new products as we move through the year for, again, future organic revenue growth.

So I think will be at least $100 million higher.

Okay.

Greg, if you could go through, you commented that inventories were up because of Sikorsky and Carrier.

But they are up like nearly $800 million from the end of the year.

Could you break out how much was to each and how much then we expect to decline as we go through the next several quarters?

Let me give you just some broad guidelines.

You are looking about that $800 million increase, about 25% of that was at Sikorsky; about 25% at Carrier; and the remainder was across the Hamilton and Pratt businesses as they geared up for the higher OEM volumes that we're seeing both at Pratt Canada and on the OEM side.

Okay.

Then Jim, maybe you could go through.

You mentioned strength in commercial construction market in North America.

Could you just go through what you're seeing in the different regions in the world in terms of the commercial construction business?

Let's do this.

We talked a little bit about North America, which is a big market for us.

But maybe, Ken, you will take that.

Take George through that.

Yes.

Again, North America strong both in the Otis business as well as the Carrier business, which are probably the two that you think about.

Healthy double-digit growth rates in Otis on new equipment orders.

At Carrier, we have talked about the commercial HVAC business over the last three years having kind of sequentially lower numbers quarter-over-quarter.

We saw it start to stabilize towards the end of last year.

What we saw now in the first quarter is actually some growth up around the double-digit rates.

That is volume and pricing.

Because as you know, with commodities coming through, we really worked on a pricing agenda in the commercial business last year and really managed that closely at Carrier.

So good healthy numbers in North America.

Europe, I would say is kind of continuing where it was, low to mid single digit growth in the markets there.

There is talk about signs of improvement.

We see it continuing to be kind of relatively healthy.

Haven't seen a major change in the trend there.

China, up strong, as we pointed out for Otis; and I would say Carrier had the same kind of order pattern.

You're talking about double-digit, healthy double-digit growth rates on the revenues as well as the orders.

Latin America is a small region for us, but a very growing region and some healthy growth rates there, too.

So I would say you're kind of looking at a double-digit kind of -- high single digit, low double-digit kind of number in the main regions, with the exception of Europe which is still kind of in the low single digit range.

No change in trends.

Okay, thanks very much.

Howard Rubel with Jefferies and Company.

A couple high-level questions.

I don't know whether Jim or Greg, if you were to first sort of look at pricing, as how it influenced revenues overall, it sounds like there's puts and takes at Otis and at some of the other businesses.

But my guess is that service probably came through for you in a big way.

Is there any way to sort of say, well, in aggregate maybe you had like 4% or 5% price increases across the board?

No, Howard, we did get some pricing pieces of the business that had the commodity impact.

For instance, at Carrier you saw that we got pricing that almost offset the impact of all commodity.

But price is not determined by us; so I think it is too broad a statement to say we got 4% or 5%.

We maybe got a percent or so.

Again, price is determined by the market.

That is why we always remain focused on cost to drive margins, to drive operating profit improvement.

Talking about that, again a broad statement is typically at the beginning of the year George sort of provides us with a bit of a cushion in terms of the difference between what we think you might end up doing and what sort of the sum of the segments totals to.

If we look at your commentary on copper, I don't know whether you have been -- can you sort of address that a little bit?

If you still have 100 million pounds to buy during the course of the year, versus sort of your expectations there; and also maybe some of the other commodities?

I would think you are probably dug into that to some degree.

Howard, we feel very good about our outlook and the new guidance range we gave this morning.

I think you see it in all the segment performance are on track to meet the guidance that was given three months ago and then reaffirmed by George just about a month or so ago.

We highlighted two things as we move through the year to watch.

One is commodities.

If the spot for, say, copper remains at $3 a pound then there obviously would be headwind in many of the businesses, particularly Carrier on that.

But the spot is the spot.

So it could well move between now and this month, or even now and November.

On the plus side, we gave you the fact that we're seeing higher revenue growth across the businesses as an offset to this copper.

So I would say higher range; a couple things to watch, revenue growth and commodities.

But we still fear very good about the outlook and feel that our position is good on the range.

Then last, in terms of M&A, the reason things have moved to the right, is it because certain deals that you might have looked at have gone away?

Or are you still sort of talking to the same people and it's just taking longer to get deals done?

I think, Howard, obviously we continue to have a very full pipeline out there.

Some of the deals as you have seen have gotten very, very pricey.

We continue to pursue things in the core, specifically at Fire & Security.

But the deals are binary.

They happen when they happen.

As we look at it today, there is a lot of activity but probably nothing that is going to close here in the second quarter.

But I think we still feel very good about the acquisition agenda.

No, I understand that.

But was it just some of the things that you looked at just you're still negotiating?

Or is it that they have gone to other players, or they have just stalled?

I think clearly some of the -- a couple of the properties that we had our eye on, we had intention to try and close this quarter, have just simply slid out because of the timing of the deal.

There's other deals that we have decided not to pursue that we originally had in the pipeline, because the pricing just got to be beyond what we considered to be reasonable.

So I guess it's just a combination of events.

But there is nothing out there that I would say that we have not gotten that we really wanted.

I appreciate the discipline.

Thank you.

Nicole Parent with Credit Suisse.

I guess, Jim, could you help me understand a little bit?

With aftermarket up so much for the quarter, why aren't we seeing better incrementals in the aerospace business?

Should we expect the aftermarket to continue at a 20%-plus clip as we roll through the year?

R&D.

We're investing in new products, particularly in the aerospace side of the house.

If you add back the R&D we spent, you will see operating profit and margins are up a great deal in the aerospace piece of the portfolio.

I am sorry, what was the second part of your (technical difficulty)?

How long should we expect this strength as we look in the aftermarket?

Well, we love this growth we're seeing right now in the aftermarket.

But we have got no crystal ball, and I think as somebody pointed out on the call ASMs and RPMs are not growing this rapidly.

And the airlines, although healthier than they were, are by no means a healthy customer.

So I think you notice, Nicole, we are always a little bit I think reserved when it comes to aerospace aftermarket, again, because of the state of the customers.

So no crystal ball here.

We like this quarter.

We like the fact that book-to-bill was a little bit above 1, so we've got a little bit of near-term visibility, which makes us feel good.

But we will have to see what happens, particularly when oil prices are above $70 a barrel.

Okay.

I guess with respect to better organic growth and the guidance increase, as we look at the various businesses, you kind of talked about the headwinds that you have with higher copper and the FX issues.

I think we know what R&D and restructuring is going to look like.

But as we look at the better organic growth through the segments, where should we expect to see better leverage?

I think [in answer to you], Nicole, you're going to see it in the aerospace business, because where the growth is coming is in the aftermarket, which obviously provides good leverage for us.

Okay.

I guess on Carrier, did you give us how much the container business was down in the quarter?

It was down single digits.

Like I said, it was a little bit better than where the backlog ended up at the end of 2005.

So it showed a little bit of improvement.

But still the backlog at the end of the quarter was down year-over-year.

Okay, great.

Thank you.

Joe Nadol with JPMorgan.

First question is I am wondering if you can give a little color on where we might see some of that higher restructuring number in Q2.

It would be a pretty uptick.

There must be some new initiatives in there.

I think as we look at this, Joe, there's opportunities across all of the businesses in terms of high-cost manufacturing.

I think what you will probably see is, though, a focus on some of the higher payback G&A actions, specifically at Carrier as they struggle with some of these higher commodity costs.

Geraud and team are going to be taking some action to try and offset that.

I am sure they will be first in line on restructuring.

But I really expect the [build] would be across all of the business.

Okay, okay.

Then I just want to dig into that Carrier with a little bit more of perhaps some specificity on a couple of the issues.

You noted that the relationship between pricing and commodity cost in Q1 specifically.

Can you help out with -- first of all, have you put through another price increase incremental to the one Geraud mentioned a month and a half ago?

Can you help out with how over the rest of the year the relationship between those two items might look?

Okay, the one that Geraud mentioned a couple of months ago is the one that takes effect on May 1.

It takes a couple of months to push that through the distribution channel, and there is notification and all that stuff.

So it is the one that we have talked about.

It is basically about a 5% increase on the cooling products, and it's effective May 1.

So it is out there and it is incremental to what we did last year, obviously.

The mix between commodities and pricing, as we said it slightly exceeded it in the quarter.

We said commodities were $25 million.

The reason we point it out is because in the past couple of quarters you saw that ramp up to where in the fourth quarter pricing did exceed commodities.

What is the outlook for that?

As Jim talked about, pricing is a function of the market.

But we certainly are working on ways to mitigate that additional headwind from copper as we look out for the rest of the year.

But at the spot price today, I will reiterate the point that it is a significant headwind for Carrier that Geraud and the team are working on actively.

Okay.

Then just on a couple of the order trends.

You mentioned your book-to-bill was healthy.

I'm wondering if you have any comments or any idea now how your market share is looking on the 13 SEER product.

Everyone seems to think that they are going to take market share.

Also we have seen housing starts really drop the last couple of months.

Have you seen any impact yet from that?

Or is that later in the year?

Joe, I think we have actually joked on this call before that if you add up everybody's market share you get to about 130%.

I think the same thing on this SEER 13 introduction.

It is very early in this.

Customers really haven't seen the products yet.

They get more familiar with them in the summer.

Distributors will get to understand the product and its future better.

I think if there is any share change it is going to be after there has been a time of introduction.

So that is probably something that we can talk about later in the year.

Housing starts are down.

We thought they were going to be down around 10%.

Looks like it will be a little less than that, maybe more like 5%.

But that is just one factor in Carrier North American revs.

Because recall, two-thirds of their business is add-on replacement.

So although housing starts don't look to be maybe as slow as we would have thought three months ago, I would say that is just one modestly positive good factor in their business at this point.

Okay.

Then one last one just on the pricing pressure you are seeing in Otis in Asia.

Is that due to domestic competition?

Can you maybe just give a little more color on what is driving that?

Are your margins down in Asia?

It is indigenous manufacturers.

I mean the usual suspects that we compete against in North America, they have all been in China for a while.

But we are seeing indigenous competitors rise up, and of course they come in on the low end.

China is still a great market for us.

There's plenty of growth.

We continue to hold a very big share there and continue to grow profits.

On the margins, can you comment there?

Margins are being pressed, obviously, because of pricing.

Okay, all right.

Thank you.

Glenn Engel of Goldman Sachs.

Can you talk about Sikorsky in terms of you're saying it is going to be a challenge with the strike?

Is it a challenge just to hit the revenue targets, or is it just going to be a challenge to hit the margin targets because of the strike?

I think first of all you have to look at just on the top line.

Obviously, we missed six weeks of production, or a fairly low rate of production during the strike.

It's going to take a couple or three weeks to get Sikorsky back up to speed in terms of full production here in the second quarter.

So Sikorsky had a very aggressive revenue plan for the year, as you will recall.

Up midteens.

It's going to be a challenge, I think, for Jeff Pino and company to hit those very aggressive revenue targets.

Having said that, though, if they get the revenue I think they will clearly get the margin.

So as we look at this it's going to be a question of how quickly they get back up to speed and whether or not they can actually hit the top-line number.

Can you talk about Sikorsky and new contracts?

The double-digit revenue growth that is forecast going out for the next several years?

Yes, I think what you saw yesterday, we signed over a $3 billion contract for the CH-53.

That is a development contract, obviously.

It will employ a lot of engineers initially and eventually with production starting probably not for another seven or eight years.

But we see a lot of opportunity for production growth.

The Blackhawk [M] program specifically, we see 1,200 helicopters out of that program.

There is also a Naval Hawk that is being worked on.

There's other opportunities out there too, like combat search and rescue.

We are working all of those very aggressively along with the commercial programs.

On the commercial side, is the book-to-bill still over 1?

Yes, the book-to-bill is over 1.

I think we have seen very good market acceptance of the H92; and the S-76 continues at full production, so no stopping that.

Thank you.

Myles Walton with CIBC World Markets.

Good quarter.

Steve, (technical difficulty) questions, just two quick ones.

The container business, is that still about 25%, 30% of the overall Transicold business, with truck trailer being the larger element?

Yes, it is between 25% and 30% depending on the quarter, but that is a good average, and truck trailer is the rest.

So overall, Transicold was up for the quarter?

Yes.

Okay, great.

And within the eliminations line, it looks like there may have been about a $40 million higher year-over-year profit contribution, if you exclude both the Snecma sale from last year and the marketable securities sales from this year.

Can you give us some color on what is underlying that?

Are they just cats and dogs?

Let me try and take you through that.

It is not probably the simplest explanation, but bear with me here.

Last year, as you recall, we had some big investments that we were making on the acquisition for us, specifically in Kidde.

As a result last year, we incurred a lot of hedging costs as we made investments in the British pound.

And we also had some intercompany lending that we do out of our holding companies in Eurodollars.

As U.S. rates have ticked up over the last year and the rate differential has gone down, what we have seen is our hedging costs on all of those intercompany transactions has gone down significantly.

So it's a real cost to the business, this hedging, and it's actually good news that we would expect to continue at least as the U.S. interest rates and U.S. dollar remains relatively stable to the pound and the euro.

We also saw some good news on interest income, and again that should continue at least for the next quarter or so.

So that underlying rate around $20 million in the eliminations and other is not -- it should be around that as a reasonable run rate for the next quarter?

At least for the next quarter or so that we have visibility to on the rates.

Okay, great.

Thanks, and good quarter.

All right, why don't we take one more question today?

Nigel Coe with Deutsche Bank.

On Rocketdyne, (indiscernible) I missed this; but what was the revenue and profit contribution from Rocketdyne this quarter?

Revenues were about $120 million contributed to the quarter from the roll in, at mid single digit operating profit.

Okay.

Is that a bit low on a run rate basis, the sales number?

I think that is relatively consistent quarter-to-quarter.

Okay, great.

Secondly on Otis, I think the EU is introducing some regulation.

I think it is called the SNEL regulation.

Do you see any upside from that move?

Yes, Ari and his team in Europe actually like that regulation.

What it is. is the norm for -- Safety Norms for Elevated Lifts or something.

The point is that it goes into safety codes that they are trying to implement in the euro zone for door mechanisms and retrofitting and maintenance and things such as that.

The team is working on it.

They like the regulation because it drives service and aftermarket margins, as well as the safety of the equipment.

So we are actively involved.

Okay, is too early to try and assess the impact?

It is, because those regulations are adopted -- or they're set at the euro level, and they are adopted locally.

Each market is going through a process of looking at those and adopting them.

I think a couple of markets have taken them on; but it will be a while before they roll out to all of the countries.

Okay.

Secondly, on the -- sorry, thirdly, on the hedging.

You made some comments on the hedging in the last question.

Does that mitigate the impact of the spots movements for the balance of the year?

No, actually it is more of a short-term hedging instrument that we do on our intercompany lending.

Again, the hedging that we do is generally only 30 to 60 days out, so it's not going to take out volatility as we look across the rest of the year.

Okay, so the impact of the stronger dollar in the second half of the year, that was about what, about a cent?

I'm sorry, Nigel;

I didn't hear that.

What is in the guidance for the stronger dollar in the 2Q and for the rest of the year?

Is about $0.01 of drag for the rest of the year?

Probably look at the rate we had in the first quarter, which is about $1.20 it would cost us in the neighborhood of $0.04 or $0.05 for the full year.

$0.04 or $0.05, okay, great.

Finally on the UTC Power, what was the loss during the first quarter?

We have talked before in the past, Nigel.

We invest typically $0.03 or $0.04 a year in that business; so you would see again almost a $0.01 investment.

Okay, so no change. (multiple speakers) Great, thanks a lot.

All right.

I think that brings us to a close.

So I want to thank everybody for joining us on the call today.

Ken Parks and the rest of the IR team will be available to take your questions.

Thanks a lot.

Once again, ladies and gentlemen, that does conclude today's call.

Thank you for your participation.

You may disconnect at this time.