雷神技術公司 (RTX) 2006 Q3 法說會逐字稿

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

On the call today are Greg Hayes, Vice President, Accounting and Finance;

Jim Geisler, Vice President, Finance and Ken Parks, Director, Investor Relations.

This call is being carried live on the Internet and there will be 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 risk and uncertainties.

UTC's SEC filings include its 10-Q and 10-K reports, provide details on important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements.

Today's call is being recorded.

At this time, I'd like to turn the call over to Mr. Hayes.

Please go ahead, sir.

Thanks, Tony, and good morning, everyone.

I'm pleased to report this morning that UTC once again delivered solid results in our just-completed third quarter.

Revenues were up 12% in the quarter, including a full eight points of organic growth, more than 2X worldwide GDP growth.

All of our businesses delivered both revenue and profit growth, led by Pratt Whitney and Hamilton Sundstrand where revenues and profits grew at double-digit rates on continued strength in Commercial Aerospace.

Otis expanded margins to 19.3% with operating profits up 10% on a 9% revenue increase.

Fire and Security continued its margin expansion with operating profit up a strong 22%, resulting in 110 basis points of margin expansion.

At Carrier, revenues grew 6% and operating profits 4%, resulting in 10 basis points of margin contraction as continued recovery in our commercial HVAC businesses could not overcome market downturns in both the U.S. residential HVAC market and the transport refrigeration market, Carrier's highest-margin businesses.

Sikorsky saw revenues increase 36% on the strength of strong military and commercial backlog.

However, the factory struggled to adjust to the significant volume ramp and operating profits grew only 9% in the quarter.

Sikorsky results are particularly disappointing, but like [Collierville], we know how to fix this and we're devoting significant additional resources to supplement the Sikorsky team and get this back on track.

I should note that all of these year-over-year segment comparisons exclude disclosed gains and restructurings.

Turning to EPS, earnings per share in the third quarter were $0.99, an increase of 22% over last year's third quarter.

Stripping out gains and restructuring costs in both Q3 '06 and Q3 '05, EPS grew at a rate of 20%, in line with the growth we saw in both the first and second quarter of the year.

Given this year-to-date performance, we're increasing our 2006 earnings-per-share guidance to $3.65 to $3.69, or 17 to 18% growth for the full year, excluding the impact of FIN 47 from our 2005 results.

This reflects both our confidence in the continued performance of our businesses while still cautious in that the economy may be slowing as we've seen in some of Carrier's shorter-cycle businesses.

I'm also pleased to report that free cash flow in the third quarter was back on track at around 118% of net income, despite continued strong organic revenue growth and tight Aero supply chains.

Working capital was a net source of cash this quarter, driven by strong collections and customer advances.

Strong organic revenue growth, especially in our Aero businesses, coupled with continued Aero supply chain issues, resulted in an increase of more than $300 million in inventory in the quarter.

Since the end of the year, inventory is up more than $1.5 billion, so clearly, still a lot of work to do on inventory.

We remain confident that free cash flow will again equal or exceed net income for the full year.

We also recently announced a higher share repurchase target for the year of $2 billion, up from our earlier guidance of $1.5 billion.

During the quarter, we repurchased 580 million of our own shares, bringing the year-to-date total to 1.3 billion.

We also, not coincidentally, reduced our $2 billion acquisition spending target for the year to $1 billion.

Although the M&A pipeline remains full, valuations have proved difficult to support.

In the quarter, we spent $152 million on acquisitions, and that brings our year-to-date total to $535 million.

We remain committed to a disciplined cash redeployment strategy, so we have chosen to invest in our own stock, which we still see as attractively priced.

Through the combination of share repurchase and our dividend, we will return a healthy 80% of free cash flow to shareholders this year, more than double the rate from a few years ago.

So with that, I'll hand it off to Ken to take you through the business unit details.

I will then finish up with some initial thoughts on 2007.

Ken?

Thank you, Greg.

I'm going to begin on page 3 of the webcast and remind you that I will talk to segment results adjusted for restructuring and onetime gains, just as we usually do.

Otis had another strong quarter with revenue growth at 9% and profit growth at 10%.

Foreign exchange contributed about 3 points on both revenue and profit growth in the quarter.

Otis revenue was up in all regions, but was particularly strong in the Americas and China and new equipment orders were up more than 25% in the quarter, led by the Americas and Asia.

Margins expanded another 30 basis points this quarter, tempered to some degree by increasing new equipment mix and significant downward price pressure in Korea, China and Japan.

Otis continues to perform well.

Year-to-date, revenues have grown 5% and operating profit has grown 7%, resulting in margin expansion of 50 basis points.

FX is still unfavorable on year-to-date results.

Otis is well on track for another year of solid performance.

At Carrier, operating profit increased 4% year-over-year on 6% higher revenues.

Residential unit shipments in the U.S. were down about 30% in the quarter, reflecting week end markets and a slowing housing industry.

Refrigerated Container shipments also declined in the quarter by 15%.

As a result, earnings were down significantly in these two higher margin segments.

This drop was more than offset by earnings growth in the balance of Carrier's businesses, including strength in commercial HVAC and benefits of restructuring.

Higher year-over-year commodity costs impacted the quarter by approximately $80 million,.

While pricing improved year-over-year, there was still a net drag of approximately $15 million in the quarter.

We now expect Carrier's earnings growth for the year to be about $100 million, with caution on high-single-digit revenue growth.

Now UTC Fire and Security continues to deliver on guidance.

Operating profit growth was strong at 22% on revenues that increased 2%.

Resulting margin expansion in the quarter was 110 basis points and restructuring actions and KITA integration efforts continue to bear fruit.

The revenue increase reflects the favorable impact of foreign exchange, along with growth in Europe and Asia, partially offset by lower revenues in Australia and a focus on higher-margin business.

During the third quarter, Fire and Security increased its presence in the strategic U.S.

Security and China Fire Safety markets with the announcement of the purchase of Red Hawk, an integrated securities solution provider with branches throughout the United States, and the purchase of a minority stake in GST, the leading fire detection system and solution provider in China.

Fire and Security does remain focused on margin expansion, generating 130 basis points of margin improvement year-to-date and is well positioned to deliver full-year margin expansion at the high end of our 100- to 120-basis-point improvement range.

Pratt & Whitney revenues increased $357 million, or 15% in the quarter.

Rocketdyne provided about 3 points of that revenue growth.

Organic growth was led by aftermarket sales in the large engine business, which again grew by more than 20%.

Pratt Canada revenues grew mid-teens, driven by both new engine shipments and aftermarket.

The Power Systems business was also up more than 50%, although off of a small base.

Operating profit growth of 19% reflects profit contributions from the higher revenues in both commercial aftermarket and Pratt Canada, partially offset by approximately $40 million net of higher year-over-year raw material costs.

Increases in R&D spending negatively impacted operating margins by approximately 70 basis points in the quarter.

Pratt continues to benefit from the strong Aero environment and is positioned to deliver full-year results on the plus side of our guidance.

At Hamilton Sundstrand, they also delivered another strong quarter with 19% operating profit improvement on 16% revenue growth.

As a result, operating margins expanded 40 basis points.

Revenue growth was solid across the portfolio in both Industrial and Aerospace.

Operating profit growth was driven by solid performance, both aftermarket and OEM, as well as the strength of the Industrial segment.

As we have seen throughout 2006, higher program-related R&D spending, principally on the 787 program, impacted operating margins by approximately 130 basis points.

As at Pratt, Hamilton continues to benefit from the strong Aero cycle and is also positioned to deliver full-year results on the plus side of guidance.

At Sikorsky, revenue growth was an impressive 36% in the quarter as customer demand, coupled with recovery from the labor strike, drove the top line.

Sikorsky delivered 32 helicopters in the quarter, compared to 20 last year.

Profits were only up 9% and margins declined 190 basis points as Sikorsky struggled with the steep military production ramp-up, further intensified by the labor strike and incurred additional manufacturing costs to deliver these helicopters.

Given the performance to date, we now see full-year operating profits flat with 2005 on revenue growth in the mid-teens.

A couple of additional items to cover.

During the quarter, Carrier completed the divestiture of Scroll Technologies, its compressor manufacturing joint venture with the Bristol Compressors, generating a gain of $61 million, which is included in Carrier's reported result.

UTC restructuring spend in the quarter of $93 million more than offset this gain, resulting in a net $0.02 hit to earnings which we had forecast in our second-quarter call.

You'll also recall that we expect an additional $0.05 hit from the restructuring in the fourth quarter and we continue to expect that restructuring will equal or exceed onetime items for the full year.

R&D spending was up $49 million in the quarter as anticipated with Pratt and Hamilton Sundstrand driving the growth.

We estimate that full-year R&D spending will be up approximately $150 million as we continue to invest in new products to sustain future growth.

I will also note that we have solid performance below the segment line where [elims] and other are better year-over-year.

As we anticipated and similar to Q1 and Q2, this is primarily composed of higher interest income and lower hedging costs, as well as the absence of last year's charge for costs related to an ongoing legal matter in the third quarter.

With that, I will turn it back over to break.

Thanks, Ken.

We are page 9 of the webcast, for those of you following along.

Obviously a great start to 2006, three quarters down and almost 20% growth in each of those quarters.

But, as we get to the end of 2006, we are of course increasingly focused on our outlook for 2007.

As always, we like the things that we control and we see continuing opportunities to improve quality, working capital and other key processes across all of our businesses.

We also feel very good about the continued commercial construction recovery and the continued expansion of emerging markets.

However, we are cautious that recent trends in the U.S. housing market will dampen growth at Carrier in 2007 and that the commercial aerospace aftermarket business will return to more reasonable growth rates, something closer to half of the 20%-plus that we've seen in the first three quarters of 2006.

We also see additional headwind from R&D in 2007 (technical difficulty) continue to work on key programs like the 787 at Hamilton and to ramp up our investment in the geared turbofan in preparation for the next-generation narrow-body.

So to sum it all up, we look ahead to 2007 with cautious optimism.

We see another year of above-GDP organic revenue growth, coupled with margin expansion, our usual growth model, which in turn gives us confidence in another year of 10%-plus EPS growth.

But, we do remain concerned that the slowing housing market may be a precursor to an overall slowdown in the economy.

We're continuing to work the details and we will as usual take you through our outlook in just another eight weeks.

So on that note, let me open up the call for questions.

Tony?

(Operator Instructions).

Heidi Wood, Morgan Stanley.

Good morning.

A couple of questions.

These Otis orders are really pretty stunning.

Can you walk us through in a little more detail what is going on, and perhaps talk to us about the new orders by geographical segment?

Sure, Heidi.

I think that that's probably good way to describe the Otis order book.

It has been a very, very strong start to the year with orders up more than 25%.

In fact, we have seen strength across almost all geographies, led by North America and of course China, which are both up more than 30% in the quarter.

We did see about high-single-digit growth rate in Europe.

Even Asia was strong at above 20%.

I would say the only two weak spots are the continuing concerns we have in both Japan and Korea where we saw very slow to almost weak growth in Korea.

But altogether, I would say the Otis order backlog was very, very good.

When was the last time the order backlog was this strong?

I just don't recollect.

Heidi, we have to go way back in history, and -- this is Jim.

It has clearly been a very good year at Otis -- good penetration in emerging markets, [we think] market share gains continuing in the developed markets of the world, and just very strong momentum in that business right now.

Okay.

Just another quick question on Fire and Security.

It looks like you're finally starting to get some progress there.

Now that you have owned this for awhile now, can you talk to us a little bit about what some of the assumptions that you made when you acquired it, where you have seen the biggest differences, and where the surprises have been?

Let me start with that.

Clearly, the growth rate at Fire and Security has been slow this year, maybe not unexpected.

Bill Brown and team have done a very good job this year, continuing on the margin expansion journey, and that really has been the focus out there.

I think as you look back three years ago, it was July of 2003 when we first purchased Chubb, we certainly saw a business that was in need of some fixing up.

We like the electronic security business.

We saw it as a high-growth business eventually.

What we have been struggling with for the last couple of years in that business is to really get the basics of the business in line, getting operating disciplines in place, getting processes, procedures.

I would say that we're poised for growth in that business, and we do see strong growth going forward.

It's just taking us a little bit longer I think to fix it.

I would say Kidde, on the other hand, is still a very strong business.

Again, not super strong growth, perhaps because of some of the markets that we play in, like Europe.

But again, we that as another business that gives us a real opportunity to grow in coming years.

Alright.

I will let some others go ahead.

George Shapiro, Citigroup.

Good morning.

I wanted to pursue a little bit more at Carrier.

At the end of the second quarter, you said that if copper stayed where it was and the price increased where it -- that you had implemented, that we wouldn't see any effect from commodities.

So the 15 million is reflecting what?

With the market slowing, George, in the third quarter, we certainly saw a little bit more price pressure from some of the large homebuilders.

However, to dissect that $15 million, I think it's important to consider that we had about $80 million of gross headwind at Carrier, which was the biggest quarter of commodity headwind, and they also recovered about $65 million of pricing, which is a very good number.

So pricing did stick.

Pricing is working through the system, but it was a little bit shorter as the cycle softened.

Okay.

And then on the other side, you mentioned the Container business was weak, and I think in the second quarter, that was relatively flat.

Can you talk to how much that was down and what your kind of crystal ball tells you about the future?

We'll avoid maybe a lot of the crystal ball, but I will tell you what we know now, which is the Container market in the third quarter was down about 15% in the quarter.

And we feel like we have a pretty good handle on that being comparable to the market, because as you know, there's only a couple of players in that market so we have pretty good visibility into what's going on.

That was offset in the Transicold business by continued strength in the Truck/Trailer business, both in North America and in Europe.

So Container down about 15% and Truck/Trailer up offsetting that with flattish revenues at Transicold.

Okay, and then just one on Pratt & Whitney.

The book-to-bill in the quarter was what?

It was actually just a little bit below 1, and I think that's just further evidence that we see a little bit of a slowing in the order rate for the aftermarket here in the second half of the year.

Can you go through, Greg, a little bit -- we saw traffic growth worldwide slow to what looked like about 3% in the third quarter, and you're still running around 20% in the aftermarket.

Just go through what explains that big a disparity?

I think, well, as we've been saying really all year, the 20%-plus growth in the aftermarket is just not sustainable.

There has been a slowdown.

We saw it in North America specifically here in the third quarter, we've seen it worldwide, as you say, down to about 3% RPM growth.

At the same time, I think as the airlines became more profitable, especially the legacy U.S. carriers.

We saw a lot of backlog come into our shops, and that drove a lot of demand in the first part of the year.

And we're really working off of that backlog now here in the third quarter and probably the fourth quarter as well.

And then let me go back one last one on Carrier and I will jump off.

The Commercial Construction side of Carrier, that obviously grew and that's where you have had relatively weaker margins.

Are we seeing margin improvement in that part of the business?

Both revenue and margin improvement in that business.

The revenues were up about 10% in the quarter, and continuing improvement because we're starting to get some of the benefits of restructuring actions, like the McMinnville closure over the last couple of years.

Okay, very good.

Thanks, George.

Steve Binder, Bear Stearns.

Greg, can you maybe just touch a little bit more on the inventory issue, because back on the second quarter call, there was an anticipation that you were going to reverse a big chunk of the growth in inventory in the first half of the year.

I guess a couple of things.

One is, inventory looks like it's up roughly over $340 million or so from the second quarter.

Can you maybe just talk about where that growth was?

And two, can you give us a better sense of how inventory is going to finish up for the year now?

I wish I could tell you, Steve, where inventory was going to finish for the year.

Obviously, when we talked back in the second quarter, inventory had grown about $1.2 billion, and most of that of course was on the Aero side, driven both by the higher organic revenue growth in the Aero businesses at Sikorsky, Pratt and Hamilton.

And it has really been a -- it has been a struggle for us with the Aero supply chain issues as well.

I think what we've seen in the quarter is continued issues, in terms of getting product out the back door.

You saw Sikorsky with 36% growth in revenue, but they had a very large increase in inventory as well during the quarter, again, trying to get all of this ramp-up behind them, and it has been very difficult.

So I would tell you, about half of the growth that we've seen in inventory for the year is really related to Aero supply chain, but the other half is related to the organic revenue growth that we have seen on the Aero side as well.

As we look forward, we clearly have to reduce inventory.

It is a big target.

Louis Chenevert and team have been out doing reviews with all of the businesses as we focused on this in the second half, and I cannot tell you where it's going to end the year.

It will be significantly better than where it is today, and that's what gives us confidence really the free cash flow will exceed net income for the year.

And are we going to still see a $0.25 billion of cash pension contributions for the plant this year, or is that going to come below that?

It should be about $0.25 billion.

Again, most of that's going to be international as the returns in the U.S. plant have been very, very good this year.

We still see a need on the international side to fund it.

We fund it a little bit, a tiny bit here in the third quarter, and we'll do some more here in the fourth quarter, up to probably -- maybe just south of $250 million, within that range.

If you look at Carrier for the full year from the original plan, you're going to come up $50 to $100 million of profit short of the original plan.

But, if I look at the third quarter restructuring, it looks like you only took out -- [big] expense, around $27 million, for structuring.

So was there any overhead-related actions taken in Q3?

There were a few overhead reductions.

If you remember, Steve, back in the second quarter, Carrier did a major G&A restructuring action, which took out about 300 heads.

Most of the restructuring in the third quarter has been related to factory consolidations.

They closed a compressor facility in Korea.

Not a lot of G&A actions, but again, [Gereux] and team are continually working that angle.

And, lastly, I know you talked about book-to-bill, but if you look at just like catalog parts, order growth, order growth year-over-year for the large Pratt engine business, as well as at Hamilton, can you give us a sense of what kind of -- did we see a high-single-digit growth rate, or what did that look like?

I think what you're actually going to see is, you will see at least mid-teens kind of growth in both businesses for year-to-date, in terms of the aftermarket parts business.

No, I just meant for the third quarter, if you look at order growth alone.

Orders are up in both businesses, mid-teens.

Okay, thanks very much.

Joseph Campbell, Lehman Brothers.

Hi, this is actually [Andresh].

I have a couple of questions.

Given the weakness in the residential market, are there going to be more restructuring charges to come for Carrier in the coming quarters?

And also, given that weakness, would that impair the growth outlook for the Fire and Security division?

[Andrea], it's Jim Geisler here.

You know, we're always looking to take out cost at UTC.

So, I would expect that in the next couple of quarters, you'll see cost reduction actions at Carrier, and probably in the other businesses as well.

This year, we're on a pace to do $250 million, $350 million of restructuring, and that's a nice steady diet of restructuring for UTC that puts fuel in the tank for the coming year.

In Fire and Security, again there will I think be restructuring there, but North America is not a huge business for Fire and Security, even with the acquisition of Red Hawk.

So I don't think you can read a whole lot into North American housing (indiscernible) the Fire and Security business.

It's a global business with a big footprint outside the states and quite a bit of activity in Europe.

And then another question on Sikorsky.

I understand the issues with the military ramp-up.

Approximately in which quarter can we expect to see the issues at Sikorsky abate?

I would like to tell you it's going to happen tomorrow, Andrea, but it really is not.

It's going to take us some time to work through the issues.

I think what you will see is a very strong fourth quarter out of Sikorsky, and we'll see that that rate will be sustained into next year.

But I would tell you that the supply chain issues that we've seen and the production difficulties that we've seen and the cross issues, it will take to midyear next year before we see a dramatic turnaround there.

Okay, thank you.

Nicole Parent, Credit Suisse.

I guess first, just on Otis, what is the restructuring activity in the quarter there?

It was bigger than I thought it would be.

Nicole, that is, again, in Korea.

Otis Korea had a voluntary early retirement program that took out over 300 heads in Korea, again, to try and help it to the profitability in that business.

Okay, great.

I guess with respect to the non-res recovery, both Otis and Carrier are seeing very strong order and sales growth there.

Would you say that the recovery there is better than or in-line with your expectations at the beginning of the year?

I'd say, a little bit better, Nicole.

But, again, recall that commercial nonresidential construction isn't a huge piece of the business, if you look at it just in the States, right, because Otis is only about -- well, less than a third in the U.S. and a big piece of that is service.

And then Carrier, again, the residential business is bigger than the commercial.

So, while it has been one of the favorable factors for this year, I wouldn't overdramatize its importance.

Sure, just more curious on the health of the market.

I guess with respect to Carrier, could you update us on [Lenny's] contribution in the quarter?

Yes, Linda's contribution in the quarter was pretty well on track with what Gereux had said in February -- about $5 million of profit contribution year-over-year in the quarter, and that's right in line with his $20 million growth for the full year.

One other one.

When you think about Hamilton Sundstrand, could you give us the revenue breakout, Industrial versus Aero?

If you take a look at -- Commercial Aero was up about 20% in the quarter, the same as Industrial.

The Industrial businesses have continued to perform, very, very strong orders, as well as sales growth on both sides of the business.

Great.

And just lastly on price cost dynamics, how should we think about them as we move into 2007?

Where do you think you can get price when you think about your hedging strategies, in terms of lost setting the higher cost by business?

You know, Nicole, as much as I would like to answer that today, and I actually know the answer for that, I think we have to defer for a little bit of time.

Again, part of the cautionary words that Greg used are just that we're still a little bit away from '07 and we watch to see if the economy is going to turn at all.

So, obviously, we've done a nice job through this cycle so far of not only passing -- of announcing price increases, but also holding price.

We have the full intent to continue that into 2007.

But the economy is going to have a lot to do with that and we just to get closer to 2007 to see that a little better.

Fair enough.

I'll look forward to that.

Cai von Rumohr, Cowen & Company.

Last follow-up on Carrier.

Could you comment -- what do you expect net recovery of raw material cost to be in the fourth quarter?

And could you comment about what's happening in Europe residential?

Sure.

On the first point about pricing, we obviously are working closer and closer to parity.

I guess we would say, if pricing holds, at the levels that we're seeing right now, we would expect the fourth quarter to be substantially offset.

On residential in Europe, we actually saw some nice growth in Europe this quarter, up mid-single digits.

It was a hotter summer and we saw a little bit of improvement there.

We also saw high-single-digit growth in Asia and Latin America.

So residential international had some nice growth in the quarter.

Okay.

And ARI no longer provides inventory data.

Could you update us on kind of where we look in the U.S. res with kind of field stocks?

Yes.

We actually feel pretty good about where we go into the fourth quarter.

Our inventory levels are actually slightly down year-over-year, although still higher than a normal year because of the transition.

But we are down a little bit year-over-year from the third quarter last year.

Okay.

And just a comment -- thank you for providing the shipment data by quarter; that's very helpful.

Industrial Gas Turbine -- you said it's up 50%.

How many units did you ship in the quarter?

We shipped 10 units.

Okay.

And what are you expecting there and kind of in the other sectors that you gave us for the year, because based on kind of where I was looking for, you guys should have pretty huge shipments of commercial large engines and -- at Pratt Canada in the fourth quarter, and helicopters.

Have those numbers changed, or is that what we're looking at?

Well, I think we're still looking at very strong fourth quarter, both from a helicopter shipment standpoint, as well as at Pratt Canada.

Can you update us just broadly in terms of the unit targets we're looking at for those categories?

I think we will have to do that probably after they call, Cai.

I just don't have the full-year numbers for those targets.

No problem.

I think you had mentioned next year 787 would -- R&D would still be a headwind for Hamilton Sundstrand.

Could you comment a little bit on the R&D trends with what's happening the Airbus, both on A380 and the A350 looking like it's moving to the right?

I guess as we look at next year, let's talk specifically about 787, we still think that 2006 will be the peak year of R&D for that program.

But, clearly, there's still a lot of work to do and I think the number is still going to be fairly significant at Hamilton next year.

I think perhaps the good news as we look out is, on the A350, it looks like that program could get pushed out to 2012 or even 2015 for and entry into service.

So that might actually help, although we had not planned to spend a great deal of money next year on that program.

As far as the A380, again, we're still spending a little bit of money, both at Pratt & Whitney and at Hamilton Sundstrand on the program, but most of that spending is behind us.

The real issue today is inventory and there's probably somewhat -- a little bit less than $100 million of inventory on our books between Hamilton and Pratt related to that program that will be on the books probably for another 1.5 years or so until we roll out and start shipping again.

And is the 787 on track so that we should see a good profit swing next year with the R&D down and the shipments presumably starting it again later in the year?

Yes.

I think what you're going to -- you won't see a huge increase in profitability at Hamilton as it relates to the 787 program next year.

Again, there will be some small shipments, some initial test shipments to Boeing.

But, again, it's early in the program, and those ship sets generally go out at fairly low margin early in the program.

So I'm not looking for, or we're not looking for a lot of tailwind out of 787 next year.

Terrific.

Thank you very much.

Joe Nadol, JP Morgan.

Good morning.

I guess I'd just start for a moment, go back to Carrier.

You mentioned that in the Container business, you thought you were down with the market.

I am wondering in the North American Res business, if you think you lost market share, or if you were down with the market as well?

No, our estimation is we were down in line with the market there also.

So you had said that you lost a couple of percentage points of share in Q2 because of year Collierville issues.

I guess (multiple speakers) you made those back up, or do you think you were flat sequentially?

I would say that we did not make all that up in the third quarter, that we were down consistent with the market in the third quarter.

Okay.

And then secondly, over at Sikorsky, could you be more specific on I guess where the ramp problems are?

Is it across the board?

Are there specific programs?

I think you were doing some -- you were moving some product lines around on the commercial side to make room for some military business.

Was that a part of the problem?

Just any more color on that.

I would say that the Sikorsky ramp-up issue is really on the Black Hawk line and it's related to the significant increase in Black Hawk volume.

We are still in the process of moving some of the commercial lines down to Keystone, but the commercial helicopter delivery is not really an issue.

And the problem is multifaceted as these things generally are.

We have a problem in our own machining centers in trying to get back on our MRP schedule and get enough product to the floor to assemble these helicopters.

We have also had problems with our supply chain, in terms of them ramping up to match our production.

And we have also had a capacity issue at the plant in Stratford, and as a result, we've had to outsource some of the assembly work to various suppliers.

And as a result of that outsourcing, we have seen cost increase, as you would expect.

Asking people to do work for you is never as efficient as doing it yourself.

So we really need to work through the production process, we need to work with our suppliers and we need to get our own machining shop back on track before this problem is going to be behind us.

Maybe just for a second, more on that.

This -- volume is just a wonderful, wonderful problem to have of all of the problems in the world, and we saw it in the second quarter.

You know we had ramp-up issues at Collierville, and in the third quarter, those have essentially gone away.

We've gotten on top of that because of UTC.

We do run good factories and we do get out of production issues when they pop up.

I think we have the same thing now at Sikorsky where the strike exacerbated what was already a volume issue, pushing volumes up further in the second half of the year, and we'll get on top of that as well and the volume will be there to support it in the out years.

We're sold out of S76Ds for 2007, and if you want an S92, you better order one in the next day or two, because we're almost sold out for those in 2007.

So we'll get on top of this, just like we did Collierville, and the business will be stronger for it because the backlog is there.

You think those issues cost you about 20 million in the quarter?

Is that a fair estimate?

That's a good round number.

And then just one more, which is on the broader Aero supply chain issues that I guess are affecting your inventories.

Is this really just across the board?

Is it more raw materials, more components, more subsystems?

Any additional color you can give?

I wish I could tell you it was one specific thing, but in fact, I think it's all of those things that you mentioned, Joe.

I think some of the casting supply issues that we saw earlier in the year are getting resolved.

More capacity is coming online.

There has been a shortage of raw materials, and that is what has driven up raw material costs.

We saw a $40 million headwind this quarter at Pratt just from increased raw material costs, and I think that's just endemic of what's going on out there in the supply chain.

Costs are going up, they're getting passed along and it's not a short-term solution.

Again, it's probably sometime early to mid next year I think before we can safely say these issues are going to be behind us.

Okay, thanks guys.

(Operator Instructions).

Ron Epstein, Merrill Lynch.

Good morning, guys.

Just a couple of questions.

I just want to follow up some more with Joe's question on the Aero supply chain, if you could give us some more color.

Is it specific suppliers?

Is it really just from raw materials?

If you could just give us some more color on that.

John, maybe I take from -- Ron, from this angle, and that is in aftermarket, we've seen volume growth of over 20% for several quarters in a row and the supply chain is just simply not geared for that level of growth.

I think you'd probably see it in the aerospace companies that you follow.

They're not going out and spending a lot of money on CapEx or additional capacity because they don't believe it's going to last, and neither do we.

So we take this goodness while it happens and it drags along with it a little bit of squeakiness in the supply chain.

But I don't want to point at one thing, it's just simply a matter of volume and volume we think will ramp down here in the coming quarters and these supply chain issues will abate.

Okay, fair enough.

Just a couple more.

At Sikorsky, do you guys have any more color on the CSAR program?

Yes, we expect final a decision on CSAR some time right around or right after the election here in November.

We feel very good about our prospects as we look at the S-92 or H-92 versus the CH-47 and the EH-101.

We think we have a very cost-competitive program, a low-risk product.

And as we have worked very closely with the Air Force on this selection, we see nothing but green in terms of the program.

So we're feeling very confident.

I'm not going to say win or drop dead, but I think, again, we do feel very confident in the program.

Okay, and just two more, if I may.

Global Material Solutions -- how is that doing?

That was I think a pretty intriguing move when you guys did it.

If you could give us an update on how that's going?

Well Ron, it continues to go well.

We continue to have dialogue with lots of customers.

We're optimistic that you will see additional partners or customers signed up here in the next quarter or two.

But to your point, it was intriguing when it happened, it was a big deal for the industry [or] so many industry participants said and the industry wants to look at that and talk with us about it.

But there's been a lot of interest and we're optimistic that the solution is a good one and that customers will accept it.

When should we expect something that's more than just a CFM56-3 move into other engines?

Right now, the focus is on the CFM56-3, as it should be, because this is a new investment for Pratt and UTC and we have to see how that investment pans out and if customers ultimately accept it before we do anything else with any other engine model.

Okay.

And then just one little detail question.

With your year-to-date, with the guidance that you gave out for the year, it kind of implies an $0.81 to $0.85 range for Q4.

Is that the right way to think about it?

Ron, I think we feel pretty good about the fourth quarter.

We feel about 2006 full year, and obviously the fourth quarter is a piece of that.

I think what you see [you know] slightly larger range than we typically have; it's just our own feel or questioning that around -- is the economy turning?

Again, you will see good performance in the fourth quarter, and we believe you will see good performance in 2007 as well.

But we don't want to get ahead of ourselves here and make a presumption that might be incorrect.

So we pause a little bit here and where Greg uses caution, I think that's appropriate, given some of the headlines you've seen and the way of a couple of our markets have turned.

But even with that, I think you'll see a good fourth quarter and we'll have a good meeting in December.

Great, thank you very much.

We're standing by with no further questions signaled at this time.

I would like to turn the conference back for any closing or additional comments.

I would just like to say, thank you all.

Ken and team will obviously be available the rest of the day for questions, so thank you very much for calling in.

Have a great day.

This does conclude today's conference.

We do thank you for your participation.

You may disconnect at this time.