雷神技術公司 (RTX) 2007 Q1 法說會逐字稿

Good morning and welcome to the United Technologies first-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 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 result to differ materially from those anticipated in the forward-looking statements.

At this time I would like to turn the conference over to your moderator for this morning, Mr.

Greg Hayes.

Please go ahead, sir.

Thank you, Anthony.

Good morning, everyone.

As you can see from our earnings release this morning, 2007 has gotten off to a strong start.

As usual in just a few minutes we'll have Ken take you through the business unit details and then we'll take your questions.

But first let me start out by highlighting a few of the key items from the quarter.

First of all, our revenues up 16% to $12.3 billion with organic growth a strong 10%.

Of course a little over half of this organic growth relates to Sikorsky which you'll recall had a six-week strike in last year's first quarter.

Even excluding Sikorsky the aerospace companies grew organically 8% in the quarter with the commercial companies in aggregate growing 5% organically.

Foreign exchange added another 3 points to revenue in the quarter as the first-quarter average (indiscernible) of $1.31 was significantly higher than last year's $1.20 first-quarter average.

Earnings per share of $0.82 was up 8% over last year and this includes a net $0.07 drag associated with the resolution of the Otis EU matter.

Ken will walk you through the math on this in a little bit because it's a little messing on the P&L, but the key for us is that the net impact is right where we expected it to be and also consistent with what we told you to expect at our February analyst meeting.

Excluding this onetime charge earnings growth in the quarter was 17% and this 17% adjusted growth number does benefit from the year-over-year improvement at Sikorsky which delivered essentially a zero profit in last year's first quarter versus $70 million in this year's first quarter.

FX also contributed about 3 points to the reported gross.

So a good start to 2007 with continued strong performance at both Pratt & Whitney and Hamilton Sundstrand and good progress at Sikorsky.

The commercial businesses also performed well with strong new equipment orders at Otis, ongoing margin expansion at UTC Fire and Security, and solid results at Carrier despite a significant drop in the North American residential heating and cooling markets.

We feel good about the year and we continue to expect the earnings per share will be in the range of $4.05 to $4.20.

Free cash flow $245 million in the quarter.

As we mentioned in February, Q1 cash flow was impacted by the payment of the EU fine and tax filing initiatives in Canada.

These two items resulted in a net outflow of approximately $500 million.

Absent these items cash flow was still light to our usual standard of free cash flow equal to net income.

In addition to Carrier's normal pattern of first half working capital build we also saw continued growth in inventory across the aerospace businesses as a result drawn organic growth and continued aerospace supply chain pressures.

Due to the headwinds of the Otis EU matter and the tax planning strategies we're still confident that for the year free cash flow will equal or exceed net income.

On the M&A front the acquisition pipeline remains full and fully priced, so we remain committed to a disciplined cash redeployment strategy.

We repurchased $500 million of our stock in the first quarter and at this point of the year we're maintaining our guidance for both acquisition spending and share repurchase, $2 billion for acquisitions and $1.5 billion for share repurchase.

We're pleased with our most recent portfolio adjustment in Fire and Security.

As you know, we announced just a few weeks ago our acquisition of Rentokil's electronic security business for approximately $1.2 billion.

This business folds nicely into UTC Fire and Security's existing electronic security business in Europe and will increase our already solid market positions in the UK, France and the Netherlands.

Concurrent with the acquisition we also announced our intention to divest of our manned guarding businesses in the UK and Australia.

Ken again will go through the details and impacts to F&S' guidance for 2007, but the bottom line is that as a result of these moves the portfolio will be stronger in the long run.

We particularly like adding a higher margin business and exiting a lower margin business while at the same time strengthening our position in the marketplace.

So with that let me hand it off to Ken to take you through the business units.

Thanks, Greg.

And to begin I'm going to go through the details of the EU charge and the offsets that get us to the net $0.07 impact Greg mentioned earlier.

As you know, we were fined a total of approximately $300 million for the Otis EU matter.

The fine was partially offset by related reserves with the net charge at approximately $0.20 per share.

During the quarter we also incurred about $35 million of restructuring charges.

Partially offsetting these items were realized gains associated with the sale of marketable securities, a benefit at Pratt & Whitney due to the favorable impact of a contract termination, and the sale of land recorded in the Otis segment with the minority share going through the minority interest line.

The net impact of all these items was $0.07 per share, just as we told you to expect.

So now as I move on to pay 4 I'll remind you that I'll talk to segment results with restructuring added back and excluding these onetime gains just as we usually do.

Otis delivered another strong quarter with profit growth of 11% on revenue growth of 13% before taking into account the $84 million gain from the sale of land.

Foreign exchange contributed about 5 points of the revenue growth and 6 points of the profit growth.

The strong revenue growth reflects higher new equipment backlog entering the year as well as robust new equipment execution across the globe.

The continued shift in sales mix towards new equipment, as I already commented at the February analyst meeting, resulted in 30 basis points of margin deterioration, although margins remain solid at 18.5%.

Profit growth was driven by volume and continued cost containment partially offset by escalating commodity costs and continued price pressure in China, Japan and Korea.

New equipment orders continue to be exceptionally strong, up 27% in the quarter.

Orders increased double-digit in all geographic areas with notable strength in North America and China.

At Carrier operating profit increased 7% year-over-year on 8% higher revenues.

Favorable foreign exchange contributed about 3 points to the growth rates.

We said the balance works at UTC and it works at Carrier as well as double-digit revenue and earnings growth in the commercial and refrigeration businesses helped to offset continued weakness in the U.S.

residential market.

Residential split system shipments in the quarter were down more than 30% and gas furnace shipments were down more than 15% resulting in another quarter of significant earnings decline in this historically high margin business.

Commercial markets on the other hand were strong in most regions and we benefited as well from prior restructuring and pricing actions.

Backlog in this business is up 20%.

Refrigeration growth was driven by a robust container market and solid performance in Europe.

Revenues in emerging markets were particularly in China and India strong in the solid double-digit range.

Higher commodity costs exceeded incremental pricing in the quarter by about $35 million at Carrier largely driven by copper prices.

Since the February analyst meeting the price of copper has increased by more than 30% to about $3.65 per pound.

Although prices at these levels will add to the commodity cost headwind, we're still comfortable that Carrier will deliver $150 million of earnings growth for the full year.

Now at UTC Fire and Security performance was solid as revenue was up 12% and profits were up 31% in the quarter, favorable foreign exchange contributed approximately half of the revenue growth and organic growth at 3% was stronger than we've seen in recent quarters with double-digit growth in Asia and at Lenel and mid single-digit growth in the Americas partially offset by a decline in Australia.

Operating profit improvements were driven by previously announced restructuring actions as well as continued benefits from Kidde integration.

Favorable foreign exchange added about 8 points of the profit growth.

As Greg said, we look forward to the addition of our newest company to the portfolio, Initial Electronic Security Group, a division of Rentokil.

We anticipate that this deal will close by the end of the second quarter and will provide almost $300 million of incremental revenue in the back half of 2007.

After intangible amortization and other initial costs, Rentokil Security is expected to have no impact on Fire and Security operating margin guidance of 8.6% for 2007.

However, as a result of the acquisition we do now expect Fire and Security full-year operating profit growth of $125 million on mid-teen revenue growth versus previous guidance of high single-digit revenue growth and $100 million of operating profit growth.

Guidance at the UTC level is not impacted by this as costs associated with financing the acquisition will essentially offset the incremental profits at a half-year of ownership.

If necessary we'll adjust guidance for our recently announced intent to divest the manned guardian business in both the UK and Australia.

These businesses have annual revenues of slightly less than $550 million at mid single-digit operating margin.

Pratt & Whitney revenues increased $184 million of the water or 7% led by double-digit aftermarket growth in the large commercial engine business.

New engine volume growth continued at both Pratt & Whitney Canada and in the power systems business.

Pratt Canada revenues were up mid single-digits on 15% higher year-over-year engine deliveries and power systems revenues were up around 50% in the quarter.

Revenues in the military engines business declined on lower shipments and lower development revenues.

Operating profit growth of 13% reflects the profit contribution from strong first-quarter aftermarket revenues partially offset by the mix of new engine deliveries and the impact of higher year-over-year commodity costs.

Operating margins at Pratt increased by 80 basis points in the quarter.

At Hamilton Sundstrand revenues were up 13% and operating profit was up 19%.

Organic revenue growth was strong in the quarter as 10 of the 13 points of growth did come organically.

Foreign exchange contributed about 2 points of both the revenue and profit growth.

Following the trends seen throughout 2006 revenue growth was solid in both the industrial and aerospace aftermarket segments with similar growth profiles for operating profit.

R&D investments, principally on the 787 program, continued to be a headwind and as in recent quarters had a negative impact on margins.

Better mix and cost performance more than offset the impact.

At Sikorsky revenues and profits were up significantly over last year which, of course, was depressed by the labor strike; revenues were up almost $500 million and profits were up $67 million over last year.

First-quarter profit was up subsequently from the fourth quarter of 2006 and is in line with our outlook of continuing sequential profit growth each quarter throughout 2007.

During the first quarter Sikorsky shipped a total of 36 large helicopters, 19 military and 17 commercial.

Now with that let me turn it back over to Greg for a few final items.

Thanks, Ken.

Those of you who following along on the webcast, we're now on page 10.

I'm just going to spend a minute talking about our outlook for the remainder of 2007 before we get to the questions.

As we look at the topline, we continue to see very strong growth through the remainder of 2007 benefiting from continued strong markets for commercial aerospace and nonresidential new construction as well as sustained growth from emerging markets around the world.

Sikorsky production ramp, it remains on track, but it is too early to declare victory as there is still much work to do on both delivery performance and cost performance.

It's encouraging but it's not yet done.

Foreign exchange also looks to be a tailwind as we look forward, especially given the U.S.

dollar at about $1.35 and $1.36 this morning to the euro versus our first-quarter average rate of $1.31.

But it is still early in the year to take this to the bank.

Likewise commodity prices continue to surprise us.

We entered the year assuming about $150 million of net commodity price headwind.

Today that number looks to be more like $300 [billion].

But again, it's early in the year and, as we've seen with copper over the last eight weeks, these things can change dramatically and in a hurry.

The U.S.

residential new construction market is always on the radar screen here.

But at less than 4% of UTC's worldwide revenues, we also try and keep it in perspective.

I would also note that the tight aerospace supply chain continues to put pressure on aerospace inventory levels and delivery performance, something we'll continue to monitor throughout the year.

As we said earlier, we're still comfortable that free cash flow will equal or exceed net income for the year despite the headwinds we've seen in the first quarter.

We will see our usual Q2 cash flow pressures due to working capital growth at Carrier as well as pressure from inventory growth at the Aerospace businesses, again, as a result of their strong organic growth and the tight Aero supply chain.

So lots of work to do on cash, but as we saw in 2006, we would expect cash flow to be much stronger in the second half of the year than in the first.

In summary, a good first quarter, but a long way to go in the year with a number of uncertainties.

Just to keep it in perspective, we should remember that we started out the year with a consensus earnings estimate with $4.14 a share.

Since then the consensus has moved up to $4.17 a share including the $0.07 charge for the Otis EU matter.

So an apples-to-apples comparison, the consensus looks to be 424 versus the 414 at which we started the year.

This equates to a very strong 14% year-over-year earnings growth in EPS.

We've essentially lost a dime to consensus already and it's only April.

There's nothing more to say on that other than that we're still comfortable with our guidance range of $4.05 to $4.20 for the year, even with the net $0.07 Otis EU charge.

So with that let me open up the call for questions.

(OPERATOR INSTRUCTIONS).

Joe Campbell, Lehman Brothers.

The first time that I recall your highlighting the aerospace supply chain -- and apparently it was a factor in the cash flow in the quarter -- I wondered if you could just tell us a little more about what's happening here.

This is -- you're unable to get shipments out the door and so you've got partially built PWC engines that can't get shipped because of supply chain issues or what more precisely is going on here?

Joe, this is Greg.

I wouldn't say this is the first time we've mentioned Aero supply chain; I think it's been an issue really for the last year and a half or so.

And you saw all last year we were putting pressure on inventories.

And I think what you point to is absolutely correct.

We've got parts coming in the door and we don't have every single part coming in the door we need to ship engines, or helicopters for that matter.

And as a result inventory has been building.

And again, with strong organic growth I think what we're seeing is just continued pressure on the Aerospace entire supply chain, top to bottom.

And we know that they have not been making investments over the last few years and they're falling behind.

And it's really having an impact on deliveries for all of our Aero businesses.

Again, it's something I think we'll work through throughout the year, but it certainly was a drag on the first quarter where we saw almost $400 million of additional inventory of the Aerospace side.

Did that mean they missed their revenue targets?

In other words, it would look fine on the revenue.

But had you expected or hoped to do better than you actually did?

I think there is always some upside.

Obviously we would have liked to have done all the parts and we would have liked to have shipped all that inventory that we had.

And so, I think we like the results for the first quarter -- it could have been better.

Great.

Thanks very much, Greg.

Steve Binder, Bear Stearns.

Good morning.

Can you maybe just talk on Otis' margins and revenue -- just looking over at the operating margin line, if you kind of just break out new equipment margins on a year-over-year basis, service and modernization -- how do we look if you look at those three buckets of margins year-over-year?

First of all this is Ken.

Let me just give you the numbers on the mix change.

New equipment mix is up about 1.5 points year-over-year in the quarter and that obviously puts some pressure on overall operating margins at Otis.

And you saw that in the 30 basis points of decline.

If I kind of give you some indications on new equipment margins versus service margins, there's clearly, as we pointed out, some pressure on new equipment margins in China, Japan and Korea.

So still good, but not expanding a lot in that business right now with new equipment.

And then in service, a little bit of pressure in Europe on the service business but, again, still healthy margins in that business.

I guess I wouldn't be too concerned about underlying margin trends within service versus new equipment, but point you to the new equipment shipped itself.

I would just add, Gary -- as we try to quantify the impact of the shift to new equipment, that's about 40 basis points of margin deterioration at Otis.

They were down about 30 basis points in total.

And again, part of that again is commodity cost that they're seeing flowing through this year versus last.

But we actually look at this new equipment; the backlog is very, very strong.

This is actually very positive sign I think long-term for Otis.

There's lots and lots of runway out there with these strong new equipment orders.

This is all gross margin issues and not with respect to mix and so forth and nothing with respect to overhead.

Overhead as a percentage of sales would you say is still down year-over-year?

Absolutely.

And then with respect to commodity costs -- Greg, you touched on the $300 million number if prices prevailed.

Can you maybe kind of give -- or Ken -- a sense of on a year-over-year basis I think aerospace was previously going to be the bulk of the $150 million.

How would it look today -- how much of a headwind would you see out of Carrier?

I think you're correct and out of the $150 million we talked about before, primarily it was driven by the Aerospace business.

Right now the growth in the number is really flat, has grown a little bit in their outlook on titanium and nickel.

Carrier would have the next biggest piece of that on a gross commodity headwind and that's clearly driven by copper pricing.

And then Otis is seeing a little bit more versus what they planned this year and that's driven by the content -- the nickel content within stainless.

It hasn't moved around too much in the other businesses.

And the last question with respect to inventories, they're up $850 million in the first quarter, which obviously you touched on the reasons.

How much was Sikorsky of that increase and when you look at the balance of the year, you touched on Q2 in the second half, how much -- where do you see the inventory growth for the full year?

If you think about that $850 million, about half of that was at Carrier and the other half was at the Aero businesses.

And Sikorsky was a little less than $150 million of that first-quarter growth.

We're going to continue to see inventory pressure especially at Sikorsky.

We're looking at order rates increasing this year probably 20% growth or so next year, which is going to continue to put pressure on inventories at Sikorsky throughout the year.

So I think the hope was to see a big improvement in turns this year.

We have not seen that yet; that was really going to be the focus is on turns.

But I think gross inventory is going to continue to increase, at least for the quarter or so.

Okay, thank you.

Nicole Parent, Credit Suisse.

I'm looking for some additional color on Carrier.

Do you have the actual decline in North American residential?

How would you characterize the prebuilt in front of the spring and summer selling season and what does the North American residential backlog look like?

We were down in line with the market in North American residential, so share didn't move around very much is the first thing I'll tell you.

So (inaudible) system units were down about 35% in the quarter; gas furnaces were down around 20% or so in the quarter.

We move basically in line with that market.

As we told you as we ended 2006 the inventory channel was about as clean as we had seen in the last three or four years, but the market was soft, so there wasn't a lot going into it.

So we'd still tell you that the inventory channel is pretty clean right now as the season comes, and you know the second quarter is very important.

The biggest quarter in weather drives a lot of the dynamics within that quarter.

The channel is ready to absorb a bunch more inventory as soon as the market calls for it.

Okay.

So then it's fair to say you think the channel is as low as it's going to go given where we are in the season?

Yes.

Second would just be on Sikorsky, when we look at the military ramp could you characterize where you are versus plan and then on total in the quarter as you look at the recovery going on there?

Past dues are about actually flat from where we ended the year.

We shipped 36 large helicopters; we're a few helicopters behind plan.

We expect a very strong Q2 in terms of helicopter shipments, still on track with 160 plus that we talked about back in December and again in January.

So we're making progress I would tell you.

I think we all feel better.

We still spend a lot of time down at Sikorsky, Louis and myself and the whole management team here focused on this.

And I'll tell you, I think Jeff Pino and crew have turned the corner.

We were very, very pleased with the first-quarter progress, but, as I said, there's still a lot of work to do.

And we've got cost issues to overcome; you saw the margins still, only about 7% this quarter.

And they've still got some delivery issues and a lot of that is just this Aero supply chain that I mentioned.

Okay, great.

And just one last one.

When we look at Hamilton Sundstrand can you give us the actual revenue growth in the euro and then industrial and then I guess are you seeing any slowdown in the industrial North American part of Hamilton Sundstrand?

To your last question first, the order rate in industrial in the first quarter was a little bit slower than the sales rate.

So backlog did decline a little bit.

I would still tell you it looks very healthy, the business looks very healthy, but we are seeing a little bit slower order rate than we've seen in the last few quarters.

Industrial growth in the quarter was around 20% in revenues and aerospace overall was up a little bit more than 10% with most of the growth obviously on the aftermarket side.

Okay.

And what was the actual order rate in the quarter?

The order rate for industrials?

Yes.

Up mid single-digits.

Okay, great.

Thank you.

Howard Rubel, Jefferies.

Thank you.

Not to beat Sikorsky to death, but just to go through some numbers for a moment.

It looks like typically Sikorsky's first quarter is the slowest for the year and at $1 billion; this would sort of indicate you're going to do a little bit better than what you're talking about in revenues.

And then maybe talk about mix because it looks like either there's a lot of R&D in there or a bunch of spares?

Could you just address that first?

As we look at revenues throughout the year, both revenues and profits are going to continue to improve I would say sequentially.

We did miss a few helicopters, as I said, but still $1 billion in revenue -- pretty strong, or you're going to see stronger revenue growth throughout the year.

Just to note, there's a $9 billion backlog there.

So there's plenty to ship, we just need to get it out the back door.

In terms of the margins at 7%, we did turn on a little bit of R&D again this quarter, so things that we had deferred last year.

Nothing significant there.

But again, I think the real impact on the margins is just this higher outsourcing cost that we've seen as well as some of the carryover costs that we had from 2006.

Again, most of that gets behind us here by the end of the second quarter.

You talked about higher industrial gas turbine or power business at Pratt, Greg.

Can you talk about the number of units and could you address the backlog?

I've noticed you've had a couple of orders there and where do you stand with this PW4000 project?

Let me give you the units, Howard.

In the first quarter the units were seven and last year in the first quarter they were four.

So low numbers but a big growth rate.

We continue to see that business actually being very strong in terms of an order rate, too.

I think we're going to see that business up over 50% this quarter year-over-year, and that type of growth will probably continue for the year because of the backlog we have in place.

I would tell you it's not a high margin business and that's obviously got a drag on Pratt's overall margins.

As far as the 4000 project, I'd tell you we have not yet made a final decision whether we're going to launch that in the stationery market and that's a relatively large investment and we need to make sure that the market is actually there for the long run before we make that investment.

And then the last question.

There was a contract termination of around -- that benefited the quarter around $40 million.

Could you characterize that and how does that sort of compare with normal everything that happens -- I don't know whether, Ken or Greg, you'd like to answer that.

Let me start and Ken can fill in the blanks here.

It is, I would tell you, just a normal course of business occurrence at Pratt & Whitney when you have these contract terminations.

We chose to pull it out of the segment along with the Piaggio I would say to give you I would say a more reasonable run rate on the business.

And again, it's because of the size of the termination, $40 million, just didn't seem right to characterize it as part of Pratt's ongoing business.

We're still a partner and we're still committed to -- or Pratt's still committed to the $200 million earnings growth for the year.

And I think it was just a onetime good news item that helped us get through this Otis EU matter.

I'm sorry, did you say it was with Piaggio or were you being specific with the customer?

No, no, I was not.

What I was just mentioning is the fact we also -- as you do the comparisons the way we have portrayed Pratt's 13% earnings growth, obviously we've pulled out Piaggio from last year's number as well as this contract termination from this year's number to give you a run rate comparison on the business.

Thank you very much, gentlemen.

David Bluestein, UBS.

Good morning.

Two quick question.

First, can you spend a minute on the domestic supermarket capital spending trends you saw in the quarter, and then also comment on what you're staying at Transicold domestically?

Sure.

U.S.

commercial trends were basically flat in the quarter, which is consistent with what we've seen, I guess, over the last five or six quarters.

So our revenue growth was flattish, and I guess that would be an indication of capital spending trends in that part of the business.

On Transicold, container was strong.

Revenues were up close to 20% in the quarter.

I think we talked about last year we saw a little bit of weakness towards the middle of the year and it started coming back.

We continue to see healthy growth in that business.

This year in the first quarter and then truck-trailer overall was up mid-single digits with Europe continuing at a strong growth rate of midteens.

And the U.S.

truck-trailer market was down in the quarter and could be a little of an impact from this Class A truck change.

How much was down in the quarter in the U.S.?

I think it was down probably between 20 and 30%.

Then we have certainly seen a few signs of a decent margin in the U.S.

In terms of your U.S.

industrial businesses, did your orders seem to improve throughout the quarter with March being the best month, or did things just sort of slip a little bit?

I think they were consistently at the mid single digit rate of growth throughout the quarter.

I don't think we saw much of a hockey stick or anomaly within the quarter.

Terrific, thanks a bunch.

George Shapiro, Citigroup.

If you can just go through what you are hedged at on copper at Carrier, because I know you had some hedging for the first part of the year.

quarter.

Yes, we stopped laying hedges on as we talked about in, I think, the December and February meeting in November.

What we have hedged now for the second quarter is about 30% of our needs, and in the third quarter about a quarter of our needs.

Okay.

If I switch to Pratt, assume you had double-digit growth in the spares business in the quarter.

is that 11, 12%, that kind of number?

Yes.

In fact, it was even a little bit stronger than that, I would say mid teens.

And was that pretty even throughout the quarter then?

As we looked at order rates I would tell you they have been a little bit stronger than what we had thought they were going to be.

But we didn't see, again, any noticeable change month-to-month.

Obviously these things spike week-to-week, day-to-day, but as you look at the months it's all been pretty much normal here.

And Greg, the book to bill in the quarter?

It's about 1.

Okay.

It always tends to be about 1.

It's amazing how that works out, isn't it?

It was a good quarter.

And then just back on Sikorsky for a minute.

The guidance for revenues I thought was more like $700 million give or take a little in the quarter.

So when you do $1 billion, is that reflecting you just being conservative because of the disappointments at Sikorsky, or kind of what happens to have that big of a difference?

I think, George, we're just reflecting the fact that we're one quarter to a year.

We've got three more quarters to go and a lot of work to be done, but it is a good start for the year.

I would tell you that that $1 million is -- we've been right about where we had forecast.

We said 160 aircraft for the year, each quarter sequentially better.

So I think that's -- again, last year's first quarter was $500 million or so, this was just the recovery of that and it's going to get better from here.

Okay, thanks very much.

Cai von Rumohr, Cowen and Company.

Thank you.

If we look at your Aerospace shipments, it looked like you were light in large commercial engines but did okay at Pratt Canada.

Is that correct?

And do we expect to catch up in the second quarter?

Because if inventory continues to be an issue are we just going to be short for the year in terms of our deliveries in large Pratt engines?

Yes, the quarter was lighter this quarter than the first quarter of last year on the large side.

We think that's timing.

It reflects both 4000's and B2500's and it's the timing of how the numbers lay out for the year.

We're still telling you that for the year large commercial engine shipments will be up slightly.

Pratt Canada, as you noted, continues to remain strong with shipments of the new 600 series.

Okay.

And so Pratt Canada -- and you still expect to hit your delivery targets there despite the supplier issues?

And on the military side you still expect to hit your delivery targets despite the supplier issues?

Yes.

Absolutely, I would tell you.

Again, these issues -- we will overcome them throughout the course of the year.

And nothing is changing in the guidance as it relates to deliveries of either the military or Pratt Canada.

I think we feel very good about the deliveries.

They are a little bit behind, but again, we're going to catch up.

When you say it was a timing issue is that you expected the first quarter to be light because given the magnitude of the inventory buildup it would look like you just didn't get enough stuff out the door because you didn't have parts to do so.

I think what we mean is it's just a 90-day period and that doesn't make a trend.

So we shipped a couple less engines this quarter and (multiple speakers) pretty good for the full year.

Okay.

And copper at Carrier, a 35 million headwind, that's what -- 150 now for the year net of price recoveries and any kind of pattern?

Should we get a bigger hit here in the second quarter that that's going to be bigger and then less as we go through the year because of price recovery?

Give us some sense of the timing there.

Second quarter you also have not only higher purchases, but it's the quarter where you would receive more of your pricing benefit flowthrough.

So I would probably calendarize it more evenly than you're indicating with the big spike in Q2.

Okay, great.

Thank you very much.

Deane Dray, Goldman Sachs.

(multiple speakers) still stay at Carrier.

Could you provide some more color on the commercial side of the business and perhaps the orders from a geographic perspective?

Sure.

As we said, orders were strong everywhere and I'll tell you that in North America we saw teens growth rate in orders.

And Europe, we also saw a healthy growth rate in the commercial business there; something closer to maybe even 20% or so, 15 to 20%.

Asia was very strong across the region with China being the strongest piece, but Asia overall was in the 20 plus percent growth range and that would be on both the sales side and the orders side, those would be reasonably comparable indicators.

And if you could address pricing first of all by region?

Pricing by region?

Well, just -- are there are any changes in trends in North America?

You had said that China was perhaps seeing a little bit of pressure.

Most of the pricing that we're seeing come through is clearly in the North America region, our biggest market, and that's where we focused on pricing over the last couple of years as you've seen us make announcements.

The pricing in the quarter was probably about where we expected it to be.

We did announce an additional price increase on January 1st, and that was a little bit more specific to markets and products.

And that was anywhere between a point or two of price increase and an additional 10% depending on, as I said, the products and the customers and the markets.

But pricing is more heavily focused in North America and about where we thought it would be.

It is clearly tougher as we move down this pricing path after you do four or five price increases in a softening market, but we're staying disciplined on that.

And then last question on the commercial side of Carrier.

For North America is there any particular vertical that you would call out -- is it education, healthcare -- being on the stronger side and which is on the weaker side?

No, I think in the case of Carrier it's pretty much across the board.

Okay.

And then just one last copper question.

The point that you stopped the hedging in November, is that something that you would revisit?

Because clearly no one is calling copper correctly here and what is the ideal percent that you would like to see hedged on a go forward basis by quarter.

So near quarter is at 50% or should it be higher?

First of all, on copper let me just say that none of us are going to make any money trading on the copper exchange here given our call on copper.

But at the same time we view the copper as still with a big speculative bias in the price today.

And so we took off the hedging at the end of last year because we really believe that copper should, just on the fundamental, start to come down.

Now obviously we were right for a couple of months and now for the last eight weeks has not been quite so good.

We are always looking at the hedging strategies here and I think [Lou Chereau] will be talking about whether or not to put on hedges as we go throughout the rest of the year into next year.

Not much to do at this point though for the rest of 2007.

As Ken said, we were about 30% hedged in Q3 -- I'm sorry, Q2; and then 25% in Q3.

And I think we're going to be revisiting that and we'll probably get back to you guys at the end of the second quarter with where we're going with the hedging strategy.

Got it.

Thank you.

Joe Nadol, JPMorgan.

Good morning.

I'll just start out on Carrier like everyone else is seeming to.

The first question there is on commercial you've noted that you're getting some nice revenue and earnings balance.

I'm wondering if the margins are improving though.

Yes, the margins are improving and they've been improving for the last few quarters as a result of not only the volumes, as we've talked about, but the pricing and restructuring actions that Carrier has been doing.

As you know, they closed down the McMinnville factory a few quarters ago and that has helped as they've moved product around.

So yes, margins are improving.

So how much confidence do you have that that trend can continue?

Because there's possibly a lot of leverage there that could offset what's going on in residential?

I think we're confident that trend will continue.

We'll continue to see benefits not only from the volume, but additionally incremental benefits from the factory moves.

Okay.

And then just one more on pricing, although you've answered a number of questions on that already.

I'm wondering if you've -- you mentioned you had a January 1 increase, but that copper has really spiked just really in the last six weeks.

You've lost a little bit of market share last year when you pushed pricing more aggressively than in the past.

But what's the appetite of Carrier I guess to continue to push the envelope there a little bit?

I think the question is not so much the appetite at Carrier as the appetite of the market.

With the market down, as we said, about 35% in the first quarter I think price increase on the residential side would be difficult.

But again, we can't really get into predicting where we're going to go on pricing.

We always look at it.

It's a cost issue that is in front of us.

But it's really been an eight-week phenomenon here, so I don't think we want to get panicked over copper today.

And obviously we look at this, Chereau and the team are on top of this for all the markets and we will adjust pricing appropriately.

And Joe, I'll just point out because I think it's important in your analysis of the pricing trend that we did say and we do agree that we lost a little bit of market share in 2006.

We don't attribute that too much to our pricing actions; we attribute that more to the Collierville ramp up issues that we saw in the first part of the year.

So that helps in looking at the pricing trend.

I would also tell you I think that with the new SEER 13 productline, as we talked about all last year, we think the product has got great market acceptance.

It's a great product.

It's 35% more cost-efficient than the old products.

So we think we've actually got more room here to take market share throughout the rest of the year.

Just with the products at the pricing levels that we have today margins are going to get better.

Okay.

And then one pricing issue -- a question at Pratt.

Did you say that the commodity price increases are going to hurt you more incrementally at Pratt than at Carrier the rest of the year?

Yes, actually as we look at it today I would tell you that commodity prices in Pratt's productline, specifically titanium and some of the other specialty metals, have continued to grow beyond what we had forecast just a couple of months ago.

So what's your ability to pass that along?

It's obviously not great in the short run.

You've got commercial pricing, spare parts pricing which gets increased once a year, and then you have long-term agreements with the major customers, most of which have adjustment clauses in them but they are retrospective and it's something we probably wouldn't get a chance to pass out at least until the next contract year is up.

So I wouldn't look at pricing as a big offset.

I think we've got to focus on cost reduction there and efficiency in the shops to try and overcome some of this headwind.

This is Jim.

Maybe -- everybody else has gotten to talk about commodity, so maybe I'll throw my own two cents in here for a second.

And that is, clearly we've seen in the last eight months a spike in commodity prices which creates a headwind in the business.

But I would remind you, at a big company like UTC, when something bad like that happens it usually happens in tandem with something else that's good and in this case I can think of two things.

Commodity price rising is a function of a good economy and you see that in our top line.

And the second factor is another reason we have higher commodity prices today is the weaker dollar.

So you've got a euro is approximately for that is $1.35 or I think, as somebody said earlier, $1.36 this morning.

I have the highest confidence that both copper prices and the foreign exchange rate will change in time, probably as soon as tomorrow.

But again, these things tend to work and offset each other and that's one of the beautiful things about a company of UTC's size and global scale.

Okay.

I have just one more that's in a different direction.

On the corporate costs and eliminations line -- obviously, as you noted, there are a lot of moving parts in there.

But was there anything else of significance that you didn't mention?

Corporate costs came in I think fairly light relative to what you've been saying and eliminations were roughly flat ex the two big items you noted.

Is that sort of in line with what we'd expect the rest of the year?

No, in fact if you look at it, you strip out all of the onetime gains and charges below the line.

There's actually about a penny of headwind down in elims and other, which is what we had told you to expect back in December and then again in February and we expect that that type of headwind will continue throughout the rest of 2007.

So nothing unusual I would tell you, just kind of the normal ongoing corporate cost levels and no surprises.

Okay, thank you.

Doug Harned, Sanford Bernstein.

Good morning.

Staying on Carrier, when you describe the growth rates you're seeing in commercial HVAC which are quite strong, is that all about market growth or was that also share gains for you in the U.S.

in particular?

We're certainly focusing on share gains.

I think the market, as you know, is strong, but it's a little bit early in the year to make a prediction on share gains for the year.

But commercial is moving along positively.

We think there might be some share gains.

But keep in mind that plus it's not the biggest part of Carrier.

And then similarly on the container side, I know in February you looked at '07 and saw fairly flat industry shipments going forward in '07.

And now you're looking at some very good growth there.

Again, is that something where you're seeing an unexpected level of growth in the industry, or is this also a case of gaining share?

The container market can be lumpy.

There are few suppliers and there are few purchasers.

So we're still looking at the year of being a relatively flat market.

While we saw some good strength in the first quarter, we do recognize the fact that that market is not always completely even throughout the year.

That really wouldn't change your outlook for a fairly flat industry for the year?

Not just after the first quarter.

And then one last question.

On Collierville, should we view that as completely behind you now?

Yes.

It's done.

In fact, we shipped over 10,000 on two shifts just last week and it's really -- it is behind us.

Okay, good.

Thank you.

Myles Walton, CIBC World Markets.

Good morning, guys.

A question for you -- maybe to follow-up on Jim's comment regarding top line.

I think you had previously talked about $51 billion.

It certainly looks like you'd come in well above that.

Do you have a revised topline number?

And also at Sikorsky, I think you're still saying high teens type of growth, but I think, Greg, you said that it was going to sequentially grow throughout the course of the year which would get you to high 20% growth.

Could you just resolve those two?

I would tell you on the top line with the FX rate where it is today, you could certainly see an upward revision later in the year.

But I think as I mentioned these FX rates which are really driving some more growth than what we had expected, just not giving us confident yet to raise overall revenue guidance for the year.

Again, we'll see how second quarter progresses and we'll get back to you.

As far as Sikorsky, I think we're still confident in the guidance that we gave you.

That they will indeed deliver $150 million of earnings growth year-over-year which would take them to about $340 million or so op profit.

And as we also said, it will improve quarter-over-quarter sequentially.

So we're off to a good start in the first quarter, second quarter looks good so far and we're encouraged by the progress they're making.

Just to clarify a little bit.

On the revenue growth though, you expect that to improve sequentially quarter-over-quarter throughout the course of the year as well?

I think it will improve from the first-quarter level.

I think as we look about 160 helicopters for the year, 160 plus, we delivered 36.

We'll deliver a few more in the second quarter and probably sustain at that rate through the rest of 2007 and then we would look to see sequential improvement in 2008 at a 20% higher order rate.

All right, that's fine.

And then if you tie everything together that you talked about with respect to commodity headwinds, forex and where we are today, at the analyst meeting George talked about a $90 million to $100 million contingency still in the pot.

Where does that stand now as you close the quarter?

Well, let's go back to George's math.

We had about a $100 million -- that was about a $100 million contingency which George was talking about and that was when the consensus was at 420.

And before we took into consideration the $0.07 net EU charge.

Obviously consensus moved down about $0.03 on that $0.07 and I don't understand that math, but you guys do.

So we lost a little bit of the contingency on the EU matter.

We're still fairly confident in the year ago.

The stated contingency would probably only be half of what we saw.

But again, the businesses remain very strong and we have not seen a downturn in the U.S.

markets or in the aero markets.

So I will tell you that we're very confident in the guidance that we gave and with the consensus that's out there.

Okay, that's great.

Thanks again.

Ron Epstein, Merrill Lynch.

Good morning.

We haven't really touched on the acquisition pipeline at all.

So I was wondering if you guys could just have any comments on what you're seeing in terms of acquisition flow and what's out there?

Ron, it's Jim.

Thanks for the question.

The pipeline is pretty full, it's even got some good stuff in it, and we like doing deals like the one we just announced, Rentokil.

But we always approach the pipeline with an eye to valuation.

So I can't make a prediction for you today, like what we've done to date.

But with valuations where they are we're going to hold our $2 billion placeholder.

Okay.

And then just a couple follow ons if I might.

Earlier the PW600 was mentioned.

Now I know there have been some issues with the production certification for the Eclipse.

What impact has that had on the shipment plan for the PW600's out of Pratt Canada?

It's actually -- we are line to line with Eclipse and we have been monitoring their progress and getting FAA certification for their manufacturing facility.

Right now we're a little bit behind perhaps where we thought we would be six months ago, but again, not a huge impact to Pratt Canada's bottom-line as these are not high margin engines when they go out the door.

And then one final question.

On global material solutions, I think at the last call you guys had one major customer.

How does the customer base look like it's stacking up for that venture?

It looks good.

We've been talking with a lot of customers.

But like you, we are very eager to sign up our second customer, hopefully that will be soon.

Can you give us some color on maybe why the customers have been more tentative about it?

I think it is a change in industry practice for these parts.

So some people are interested but reluctant to be the first mover.

So then we've started to ship some of these parts soon, and hopefully that will give the market more confidence.

Okay, and then just one last one.

When we look at the geared turbofan, there's been a lot of talk about that out of Pratt.

Are there any milestones we should keep an eye on -- outsiders looking in, that the development of this going where you want it to.

That the industry is getting more confidence in it?

What should we be looking for?

We're going to run a test/a demo this year.

We'll do first flight next year and those are two milestones we're all working towards and all watching.

Okay, great.

Thank you.

Jeff Hammond, KeyBanc Capital Markets.

Good morning.

If you could just talk -- what are you seeing as the big outstanding risks as it relates to your Sikorsky ramp?

What could go wrong I guess?

I would tell you I think that it's all under our control, it's really about execution.

And I would tell you the risk is obviously on the supply chain is everybody going to deliver to the schedule.

We've got lots of people out in the supply chain working with our suppliers on a day-to-day basis.

But at the end of the day I think it comes back to execution and I think we've got the right team in place down there today to execute to the plan that they've put forward.

So it's in our control.

Okay.

And then just a final question on Carrier.

Is there any evidence as you move into the selling season, March/April, that the demand weakness we've seen for Q1 [queues] is abating at all?

We still watch the same indicator as you do.

And residential new construction is looking like it's going to be -- the latest indicator is 20% down for the year.

A little bit worse than what we all saw walking into the year.

So while our replacement is a big piece, we certainly don't see any extremely bullish turns in the outlook as we move forward.

Perfect, thanks.

Thank you, everyone.

That ends our call, Anthony.

This does conclude today's conference.

We thank everyone for their participation; you may disconnect you lines at any time.

Have a nice day.