雷神技術公司 (RTX) 2007 Q2 法說會逐字稿

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

On the call today is 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 at UTC's home page, 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 forward-looking statements.

Mr.

Hayes, please go ahead, sir.

Thanks, Amy.

Good morning, everyone.

As you can see from our earnings release this morning, this is another strong quarter for UTC.

As usual, Ken will take you through the business unit details in just a minute and Ken, Jim, and I will take your questions.

First, let me just spend a couple minutes on a highlights of the quarter.

First on revenues, up 13% to $13.9 billion with organic growth strong again at 10%.

We're now in our fourth year of solid organic revenue growth.

Since 2004, annual organic revenue growth has equaled or exceeded 7%.

That is a direct result from the innovative new products, our strong presence in emerging markets, and robust global commercial aerospace and construction markets.

Leading the way in revenue growth this letter was Sikorsky, which grew revenue 56% as a result of strong demand and continued recovery from last year's strike.

Excluding Sikorsky, the aero businesses saw 11% organic revenue growth on continued strength from both their OEM and aftermarket businesses.

Commercial companies in aggregate grew 5% organically, led by Otis, which again saw new equipment orders growth over 20%.

Foreign exchange also accounted for the remainder of the growth as the second quarter average Euro rate at a $1.35 was significantly higher than last year's second quarter average of $1.25.

Earnings per share, $1.16.

That is up 6% over last year and that includes uncovered restructuring charges of $0.02, while second quarter of last year included a net $0.07 gain in excess of restructuring.

Absent the onetime gains and restructuring, earnings were up 16%.

So from an earnings perspective, this was a solid quarter across the entire UTC portfolio, with all six business units develop delivering double-digit earnings growth, including restructuring and onetime items.

Pratt & Whitney and Hamilton both benefited from strong global aero markets and Sikorsky, which delivered 49 helicopters in the quarter, remains on track with their recovery plan and production ramp.

On the commercial side, as noted, Otis continued to gain market share globally while still delivering best-in-class margins.

Fire & Security delivered another quarter of solid earnings growth and 120 basis points of margin expansion.

Carrier also had a very strong second quarter with earnings up 13% and 50 basis points of margin expansion.

Balance works at UTC and balance works at Carrier, where strong performance in commercial HVAC, international residential HVAC, and the refrigeration business more than offset the weakness in the U.S.

residential business, where earnings were down more than 30%.

Geraud and his team remain committed to deliver earnings growth of $150 million this year despite higher commodity costs and a U.S.

housing slump, which looks to be significantly deeper and longer than we or most others thought even six months ago.

On cash flow, again, performance very solid in the quarter.

Free cash flow was $1.2 billion, reaching 104% of net income.

Inventory, especially within the aerospace companies, does remain in issue.

Total inventory has now increased $1.3 billion since year-end.

Now, about half of that is attributable to the normal Carrier seasonality and a little bit to FX, but the remaining issue, or the remaining increase is really due to the strong organic revenue growth of the aero businesses and the resulting tight aero supply chain we've been talking about.

Although we remain focused on improving our processes throughout the aero supply chain, realistically these higher inventory balances will continue to be a drag on cash flow as long as organic growth remains robust.

What we're doing to offset this inventory drag is to focus on collecting cash from our customers, both from receivables as well as in the form of advances.

So despite continued inventory growth in the quarter, overall working capital performance was quite good.

As a result, we still expect that for the year free cash flow will equal or exceed net income.

On the acquisition side, we continue to expect acquisition spending for the year to be about $2 billion.

You'll note that on July 2 we completed our purchase of most of Rentokil's electronic security business, including businesses located in the Netherlands, UK, and the U.S., giving us a strong market position in each of these countries.

A note on share repurchase.

In the quarter we repurchased $500 million of our stock, which brings our total year-to-date to $1 billion.

You should also note that in June we increased our quarterly dividend by 21% to $0.32 a share.

That is effective with our September payout.

This reflects our confidence in the sustainability and strength of the businesses going forward.

Now, given the solid first-half results and the strong outlook for the second half of '07, we are also raising our full-year revenue guidance from $51 billion to $53 billion and we are increasing our full-year 2007 guidance for EPS to be in the range of $4.15 to $4.25.

That is 12 to 15% growth year-over-year.

So with that, let me turn it over to Ken to take you through the business unit details.

Thank you, Greg.

Before I begin on page three, let me remind you that I will talk to segment results with restructuring added back and excluding one-time gains, just as we usually do.

Otis delivered another strong quarter with both profits and revenues up 13% over the prior year.

Favorable foreign exchange contributed more than one-third of that growth.

Revenues increased in all geographic regions, with double-digit growth in North America and Asia.

Revenue continued to shift toward more new equipment with higher new equipment mix than last year's second quarter and this year's first quarter.

In spite of the mix shift, Otis was able to deliver strong margin performance at 18.9%, equal to last year's second quarter and 40 basis points higher than the first quarter.

Higher volume and continued cost containment initiatives helped to mitigate margin pressure from the higher new equipment mix, headwind from escalating commodity and labor costs, and continued new equipment pricing pressure in Asia.

New equipment orders continue to be robust, up 26% year-to-date with notable strength in China, the U.S., France, Russia, and India.

Given the continued strong performance and favorable FX, we now see Otis revenues increasing at near double-digit for the year, up from our prior guidance of mid-single digit growth.

And operating profit is now expected to be up $200 million plus, up from our prior growth guidance of $175 million plus.

At Carrier, operating profit increased 13% year-over-year on 8% higher revenues, resulting in 50 basis points of margin expansion.

Favorable foreign exchange contributed three points to both revenue and profit growth.

Carrier continues to benefit from worldwide geographic balance as double-digit revenue and earnings growth in the building systems and residential and light commercial international businesses more than offset continued softness in the U.S.

residential market.

We saw a good start to the European cooling season and our commercial business is experiencing both healthy markets and the benefits from new products and prior-year restructuring actions.

Carrier's refrigeration business also grew earnings double digits on the benefits from lender restructuring and a robust first half container market.

In the U.S., the soft housing market continues to impact our residential business, where we had a 5% revenue contraction in the quarter.

The market is particularly weak in the new construction segment, which amplifies the impact to Carrier given our strong position in this area.

This combined with our previously-announced investments to launch a company-operated distribution network in California will impact Carrier's second-half results, primarily in Q3.

Building systems, residential international, and refrigeration continue to perform well in good markets and remain comfortable with Carrier's full-year guidance of $150 million of earnings growth on mid-single digit revenue growth.

At Fire & Security, performance was solid, as revenue was up 16% and profits were up 36% in the quarter.

Favorable foreign exchange contributed about six points of the revenue growth.

Organic growth in the quarter was 2%, reflecting double-digit growth at Lenel and in Asia, while Australia continues to be weak.

Operating profit margin expanded 120 basis points year-over-year driven by the benefits from Kidde integration efforts, in particular the completion of the Fire Europe factory closures as well as other previously-announced restructuring actions.

Favorable foreign exchange added about 9 points of the profit growth.

Year-to-date results are tracking to current guidance of operating profit growth of $125 million plus on mid-teens revenue growth.

Pratt & Whitney revenues increased $381 million, or 14%, in the quarter, led by growth in the large commercial engine business.

Commercial aftermarket revenues were up mid-teens.

New engine volume growth continued at Pratt & Whitney Canada with revenues up midteens on about 20% higher year-over-year engine deliveries.

Power systems revenues are up over 50% in the quarter, while revenues in military engine business were flat.

Operating profit growth of 15% reflects the contribution from higher second quarter aftermarket and engine revenues partially offset by the impact of higher year-over-year commodity costs and increased E&D spending.

We continue to expect Pratt & Whitney to deliver solid results for the year and we now see 2007 revenues up high-single digits, up from our previous guidance of mid-single digits, with operating profit growth now expected to be $200 million plus.

Hamilton Sundstrand's revenues were up 10% and operating profit was up 14%.

Following the trend of recent quarters, performance was solid in the aerospace aftermarket and industrial segments, both with double-digit revenue and operating profit growth.

R&D investments, principally on the 787 program, continued to be a headwind and given the year-to-date spending, we currently expect full-year 787 R&D to be slightly higher than 2006.

Better mix and cost performance more than offset the impact.

We now see full year revenue growth of low-double digits with operating profit growth at $100 million plus.

At Sikorsky, revenue was up 56% with profits up 43% over last year's levels, which were depressed due to the recovery from the strike.

Second-quarter profit was up sequentially from the first quarter and is in line with our outlook of continuing sequential profit growth each quarter throughout 2007.

During the quarter, Sikorsky shipped a total 49 large helicopters, 29 military, and 20 commercial.

For the year, we now see 170 large aircraft deliveries compared to earlier guidance of 160.

Given Sikorsky's performance year-to-date and what we expect in the months ahead, we are revising full-year guidance upward to over 30% revenue growth and now expect operating profit growth of $150 million plus.

Now let me turn it over to Greg to wrap up.

Thanks, Ken.

So as you have heard, it has been a very strong start to 2007, with solid execution across all of our businesses.

As we look ahead to the second half of 2007, we see a continuation of this, robust top line growth and continued solid execution from all of our businesses.

Global demand remains strong in both the commercial aerospace and commercial construction markets.

Although the residential new construction market in the U.S.

remains depressed, you should remember that this portion of the Carrier business represents only about 2.5% of UTC's estimated $53 billion of revenue.

Commodity prices look to be a headwind in the second half, as copper prices have remained stubbornly high.

Although some of this may be offset by the continued benefit of a weak U.S.

dollar.

It's a little bad news on commodities and maybe some good news on FX.

We will also continue to evaluate opportunities to make additional investments in our businesses.

As an example, we now expect R&D investments to exceed last year's total by more than $100 million.

We also expect that for the year restructuring costs will now exceed one-time gains.

Likewise, we continue to expect make investments in ERP systems and the ACE operating system and in Carrier's distribution network, as Ken noted.

All of this with an eye towards long-term sustainable growth.

So, a great start to 2007 and a solid outlook for the remainder of the year.

As we noted our press releases morning, we are raising our full year revenue guidance to $53 billion with a forecast now of high single-digit organic revenue growth.

Likewise we're increasing our estimate of full year EPS to be in the range of $4.15 to $4.25 and that includes the $0.07 charge associated with the Otis EU matter back in the first quarter and the $0.02 of uncovered restructuring here in the second quarter.

We also expect to meet our usual standard of free cash flow equal to or exceeding net income.

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

(OPERATOR INSTRUCTIONS) Howard Rubel, Jeffries & Co.

Just two questions, one, if you look at the Carrier results and we back out the currency, then on kind of a real basis there is still a little bit of deterioration in the business.

If that's a fair way to think about that?

The growth rate of Carrier was 13% and about 3% of FX, so X FX you're talking operating growth of around 10%.

Yes, but, Ken, if I look at it in terms of guidance, you did not really -- there was no real change there and yet you have had better-than-planned currency year-over-year.

Is that a fair way to think about that?

Howard, that is right.

If you think about it, Carrier has had a benefit from FX going forward.

We have talked about that and we've seen that in the results.

I think what you're seeing that is offsetting that, of course, is commodities.

There is about $50 million of higher commodity costs in Carrier's numbers for the year, which has really offset the benefit of FX.

Res, of course, is a lot worse than what we had thought even a few months ago, so I think it is fair to say business is not better than what we had thought, but I think the three other parts of the business -- that is that make up 80%, that is the commercial HVAC, international res, and the refrigeration businesses -- are hitting on all cylinders.

So I would not characterize it as anything other than a very strong performance in Carrier.

I hear you and that is the opportunity you have.

You're not yet at the point where you see that market bottoming, though, do you?

I realize every time anybody has made a step, it has been wrong.

When we started the year, we thought about 5.9 million units in the U.S.

residential market.

We think that is probably more like 5.5 million today.

We had thought we would see a second half recovery and I think everybody today would tell you it is going to be '08 and perhaps even late '08 before we see a real recovery in the U.S.

housing market.

But again, I think Geraud and team have done what they need to do.

They're taking costs out.

They're closing factories.

They are keeping their cost structure in line and making investments at the same time to prepare ourselves when that market recovers.

I agree, especially with some of the things you are doing in the distribution area.

Then the second thing is just to turn to Pratt, a very impressive aftermarket.

How would you characterize the split there between unit and price?

I am not quite clear how to answer that question.

As we look at aftermarket, we're talking, you know, a very strong aftermarket performance.

The spares were good, book-to-bill about 1.

Price increases, most of that of course come with our annual catalog price increase at the end of the year, so I would not characterized the revenue growth as really much related to spare parts pricing increases --

So it has been very much an (multiple speakers)

It is a volume statement.

It's volume, then.

That is terrific, thank you.

Ronald Epstein, Merrill Lynch.

Just a follow on maybe Howard's question, can you just give us a feeling for the aftermarket for Hamilton Sundstrand in the quarter?

Was it price?

Was it volume?

How'd that go?

Again, I think we would probably -- we would go back and tell you it is the same Pratt, which is volume related.

The aftermarket at Hamilton was up midteens, high teens in the quarter.

Okay, great.

Then just maybe two more quick follow-ons.

There has been a lot of press lately about potential foreign military sales for Sikorsky.

Can you give us feel for your outlook for that and where that stands?

I think that it is actually a huge opportunity for Sikorsky.

We recently purchased the Mielec aerospace business in Poland to give us a base for international Blackhawk.

We have had good luck in the Middle East with the Saudi Arabia ordering Blackhawks as well as others.

Turkey has continued to order.

I think the goal long-term, of course, is you have to have a cost competitive offering and I think this is going to be a big opportunity for Sikorsky.

As you know, I think the U.S.

military is pretty well sold out going forward with our $9 billion backlog, but still big opportunities with the FMS business.

I read -- you know, there's been press reports I think like there might be 130-helicopter-sized opportunity out there if you add them all up.

Is that about right?

I guess I'm not really comfortable commenting on the exact size of the market.

I know we have certainly won our fair share of the market, we believe, with the Blackhawks.

Okay, then one last final question.

Thinking about geared turbofan now, what milestones as kind of outsiders looking in should we be looking for for progress on that program?

Well, there's really two milestones I think that I would keep in mind.

Here in the fourth quarter, Pratt expects to run a demonstration engine, a ground run, and that is all on track as we look at it today.

Then probably mid next year we will actually do a flight test of the engine.

Again, I think all of that is on track.

We're spending a little over $100 million this year, probably a similar about next year, but the program looks to remain on track.

Okay, great.

Thank you.

Steve Binder, Bear Stearns.

A couple things.

One was I would just like to -- maybe I missed it on commodity headwind for the Corporation, the total number for the quarter and how was that allocated by business?

Yes, the total corporation for the quarter was about $60 million net and that was primarily at Pratt.

Carrier had about $70 million in commodity headwind gross in the quarter that they were able to substantially recover through price.

The Pratt headwind is consistent with what we have said before, which is primarily nickel, nickel alloys, and other specialty metals.

Okay, and then - Second, with respect to Otis's, maybe you can just touch on new equipment margins.

Earlier you talked about headwind from new equipment mix but if you isolate new equipment versus service on a year over year basis, how yould you characterize the year over year variance?

I guess if you kind of tried to break it down between margin and mix, I would say margin rates are relatively the same year-over-year both in new equipment and in service, but I did not quantify when I talked earlier, but there was about two points of shift into new equipment mix in the quarter year-over-year and also first quarter to second quarter.

So it was a couple of points.

And then if you look at Sikorsky's margins, on a year-over-year basis, incremental margins are only about 6%.

Can you maybe just break out and just talk about what you're seeing from a cost performance standpoint and what would the -- were there any non-recurring items in the quarter?

Were there any specific headwinds that you see that go away in Q3 and Q4.

I know that you expect to see improving learning curve in the next couple quarters, but maybe you can just touch on the incremental margin performance?

And also aftermarket profits within Sikorsky, were they up year-over-year?

Steve, this is Greg.

As you look at Sikorsky, I would tell you last year's second quarter had a very low production rate of helicopters and so this year on a year-over-year basis, we are -- we do have headwinds from also the lower margins on the Blackhawks that are going out the door.

The real issue at Sikorsky as we look forward is to take costs out of the supply chain.

The margin this year was 7.3 here in the Q2, it was only 7% in the first quarter.

They have to make a lot more progress throughout the year on cost and it is not going to all be done this year.

As we look out, this is probably more like an 18-month journey to try and take costs out of the supply chain, because quite frankly we've POs out there today that already go out in 12 to 18 months.

So there's lots and lots of work to do about cost.

There was nothing really significant I would tell you on a one-time basis in Sikorsky's results.

It is just shipping a lot of helicopters.

It is 49 helicopters.

It was a big quarter.

Aftermarket was also very strong, margin is down a little bit in the aftermarket, but it really -- it is a story about taking cost out going forward.

With a $9 billion backlog, there's lots of opportunity to take costs out.

All right, then lastly, inventories.

Do you expect year-end inventories in '07 to be below the first quarter level or will they be up?

That is a real good question.

Inventory is up $1.3 billion.

We were up $851 million in the first quarter.

A big piece, as I mentioned, of that is Carrier and the Carrier inventories will come down as they naturally do.

It goes into receivables here in the third quarter when we collect that cash.

But inventories is going to be a continuing problem.

I think we will see inventories down from the level we see here in fourth quarter.

I do not think it'll be flat with what we saw in the first -- at the beginning of the year, but we do expect to make progress on inventory.

I've got to tell you, with Sikorsky and their backlog, it is tough.

It is not like this does not get a lot of attention.

I would tell you that George and Louis are both frustrated.

Louis hosts regular meetings on inventory to try and get to the bottom of this.

And as I have said before, it really is about high organic revenue growth driving this inventory.

It is problematic.

All right, thanks a lot.

Heidi Wood, Morgan Stanley.

A couple of questions back at Pratt.

I just want to understand a little bit better if you take the margins on a per-restructuring basis year-over-year, it looks like margins were down 17% versus 20% last year.

Can, Greg, you walk us through in a little more detail the puts and takes that sort of account for that?

Hold unjust one second.

Let me take a look.

Heidi, I will give you the numbers and then I'll let Greg talk a little bit here, which is if you adjust each set of numbers for restructuring, margins are actually up about 10 basis points in the quarter year-over-year.

There was a gain last year in the quarter that maybe working into your map on the collaboration settlement.

If you pull that out, margins are up 10 basis points, so with that, I'll hand it over to Greg.

I think that is exactly it.

Last year we settled the collaboration matter.

We ended up paying the government about $300 million, but there also was a benefit for that.

It popped Pratt's operating profit last year.

We have adjusted all that out on the webcast slides here and in our discussions.

Okay, then you have talked about the geared turbofan.

You have an engine in need of a plane with the geared turbofan and Airbus' A350 plane family probably needs more engine OEs.

Can you talk to us about whether you're seeing any change in the odds on there being some news there or potential announcement on the Mitsubishi regional jets?

I guess, let's start with the A350.

I think that is a plane we would agree probably in need of a second engine.

I know GE, we all know that GE has been in negotiations with Airbus over an engine for that.

We have also had discussions with Airbus and with our partner on the engine alliance, which is GE, on the GP7000 for that.

But quite frankly, we do not see a lot of progress on the GP7000 right now.

I think will play itself out here over the next six months or so.

As you think about the geared turbofan, we think they are lots of opportunities out there.

Obviously the key to the market is going to be the next generation single aisle, that is Boeing and Airbus of course, but there's other opportunities.

You mentioned the Mitsubishi aircraft, Bombardier is looking at aircraft, we all know about that.

But our focus right now is demonstrating that the technology works.

And once we've demonstrated that the technology works, I think there will be a different view from the airframers in terms of the viability of that engine because if we really do show 12% fuel burn gain on that, it will be a differentiator in the marketplace.

Great, and then last question, how would you describe the status of your schedule on all of Hamilton Sundstrand's deliverables on the 787 at this juncture?

We would say it's all quite good.

We're supporting the plane.

Our equipment is there.

We have supported them throughout the program and we continue to in fact build inventory and ship product to them to meet their very aggressive production ramp up schedule.

Are you on time?

For the most part, I would say yes.

We are in no way holding up that aircraft.

Okay, great.

Thanks very much.

Deane Dray, Goldman Sachs.

I would like to get some clarity on the change in guidance from the total company level and specifically what influence and factor for foreign exchange both on revenue and earnings.

Dean, why don't I take that?

Foreign exchange is a benefit in the guidance for both revenues and profits, but part of that is offset, as we have talked on the last call about commodity costs, because that's related to a weaker dollar.

I would step back for a moment and look at the overall guidance for UTC.

I think longtime followers of the Company would say it's classic UTC.

We expect and we deliver to you a company that performs well in the current period and -- and is probably the most important word in this sentence -- we also take goodness in the current period and invest for future periods, because we are already starting to invest in '08 and '09 now -- and I know that you all don't care much about those years now, but you will and one day the stock will trade off '08 and '09.

So I think this is classic UTC in the guidance, which is a little bit more today and also a little bit of investment for future periods.

Sure.

We do care about those out years, I promise you.

But on that point, just walk us through on the incremental spending, $100 million more in R&D, some more restructuring; I think you said ERP and some more ACE investments.

Just give a sense of the timing of this, the magnitude, and the decision-making as to where you are going to allocate this additional spending.

I think first and foremost on the E&D, it's going to go towards the new technology, which is going to be the geared turbofan.

We continue to invest in the 787.

We're also probably going to ramp up and spend some more on the A350 this year, especially at Hamilton.

Again, lots of opportunities at Pratt & Whitney as well outside of the big engine business.

At Pratt Canada, they continue to have a very successful run up there.

So R&D, there's lots opportunities to invest.

We take a look at all those opportunities and there's more to come.

I think on ACE, again, lots of opportunities.

As Louis just mentioned many times, we have got a long way to go on ACE and that takes investment, investment in people, investment in systems, to get processes under control.

And at the end of the day as you improve process, you improve quality and you reduce cost.

So I would tell you ACE would be up there.

And you've got ERP systems, and Carrier is a prime example.

They're making an investment in SAP here in North America.

It's a big investment for them this year in a very tough year, but it is for the long-term good of the business.

So lots and lots of different opportunities for investments.

Let me give you one other example, Deane, and that is if you look at Carrier right now, the residential market is weak and profits are down year over year.

So that would be a very easy environment to say, well, we ought to cut advertising spending.

But in point of fact, we've increased it over the course of the year even though the market is bad, because we have to support the brand and we'll be there when the market turns, and it will turn at some point.

It may not be until '08, but we'll make investment in the brand and the market now for when it does come back.

Great.

Just specifically on restructuring, the timing, what's the expectations for third quarter?

Is there anything, any one-timers in the third quarter we should be aware of?

We would expect -- we do have some restructuring actions teed up really across all the businesses.

We're looking, as you'll see in our Q, at a small tax gain which will probably offset restructuring.

So I think as we look at Q3, restructurings will probably equal the one time gain.

Then as we look out to fourth quarter, we see more appetite for restructuring.

We do not yet have visibility to other gains, but we will work those things over the next few months.

And again, if there is good restructuring, we are going to do it.

Thank you.

Nigel Coe, Deutsche Bank.

Just a quick clarification on Deane's question on restructuring.

The comment he made about restructuring being greater than gains, does that speak to the full year or do you expect the second half of the year for restructuring to be greater?

I was speaking, Nigel, to the full year.

And again, we just had $0.02 in excess and there may be more, as Jim indicated, in terms of investments here later in the year.

On that comment, $0.07 of drag in the first quarter, is that included in that calculation or are we just talking about here about $0.02 in the second quarter?

No, we're just talking about the $0.02 here in the first quarter.

Okay, that's helpful.

And then with Carrier, you gave us the residential decline of 5%.

Can you just fill in the pieces for the other parts of the business, specifically commercial and refrigeration?

Commercial actually globally was very strong in the quarter, up mid-teens on the revenue side.

Residential international also, as I said, had a good start to the season.

It was up about 10% in the quarter.

Refrigeration, I'm going to break apart for you a little bit, but give you the overall growth rate of high-single digit.

I think it is important to think about some of those pieces of that business.

You have got the stationery refrigeration and then you've got transport refrigeration.

In the transport refrigeration business, both the container and the European truck trailer business were very strong.

We continue to see some softness in the North America truck trailer business.

That is consistent with what we saw in the first quarter.

Then on the stationery side, pretty consistent with what we've seen on the last couple of years, which is mid-single-digit growth on revenues.

Great, and you talked about the new construction channel being very weak.

Can you just quantify what that is and what would your North American residential exposure, how much of that would be newbuild?

As we break out the market, what we see for the residential new construction market is that is down more than 20% year-to-date, probably more than 25% actually.

AOR markets, the add-on replacement is about flat, maybe slightly up.

So again, as you think about Carrier's business, which is hundreds of -- at least 50-50, I would say, in volume.

We have been hurt more than others I would say from a market perspective.

Okay, and you talked about obviously the residential market surprising to the downside, but as we get to second half of the year and into 2008, do we still get negative comps or does it just flatten out?

We certainly walked into the year thinking that the comps in the second half would be easier than the first because we saw the decline begin in second half of last year.

Greg talked about in his comments that the look on the market in the North America, the recovery is stretching out.

So comps will be definitionally easier, but the market is still not helping us much at this point in time.

Okay, thanks a lot.

Nicole Parent, Credit Suisse.

Just following up on that question, when we think about Carrier and you look at the remainder of the year, when you think about commercial global, the international residential portion, and then the break out of refrigeration, European truck trailer versus U.S., how should we think about kind of the dynamics over the remaining part of 2007?

I think more of exactly what you've seen in the first half, which is strong commercial, strong international.

The same dynamics within those pieces of transport and residential we're still very cautious on.

Okay and I guess big picture, when we think about the non-res market, you talked about North American Otis orders.

Can you compare them Q2 versus Q1, the health of kind of -- I guess big picture, international global?

Can you give us a kind of growth perspective in terms of revenues U.S.

versus rest of world and maybe break out by Europe and Asia?

Let's talk about 1Q versus 2Q to give you some flavor there.

The Americas and China, I specifically said the U.S.

and China, were as strong if not a little bit stronger on the order rate in the second quarter versus the first.

We actually saw some tick up in the orders and sales in Korea this quarter, so that was a little bit of a difference between the second quarter and the first.

As you know, that is an important market that we watch.

Asia overall was up in orders about 21% in the quarter.

With the health of China and the up tick of Korea, that is actually a little bit better overall growth in Q1.

Europe, up mid-single digits.

That is a healthy market in all of our businesses.

We've talked about it positively on each one of our segments.

Those order rates are up mid-single digits, as I said before, and revenues are growing that like also.

Great, thank you.

Joe Nadol, JPMorgan.

I would like to start out just looking at your aero guidance for the three businesses.

You raised your sales guidance for each, in some cases materially, but your operating profit growth in each case is flat with a little plus on it.

We know about the commodity issues, although nickel has certainly retraced quite a bit in recent weeks, but I am wondering is it just commodities or across the businesses, or would you say it is a basket of things that is preventing you from increasing your operating profit guidance in line with your sales guidance?

I think commodities certainly play a piece of this puzzles as we look out in the second half of the year.

You're right, nickel has come down.

It has not come down to nearly the levels we saw.

I mean, it is up 5x over the last four years, so it is still very, very high.

When you think about it, though, the reason we're not let's say more bullish on the guidance is about the investments that we talked about.

There are lots of places to invest in the aerospace side and both Pratt & Whitney and Hamilton are taking this opportunity as they've seen a little bit stronger revenues to make some further investments.

And Sikorsky, they will probably do little better, as we said in the guidance, but they have still got a lot of work to do on their costs.

So I do not think we're ready to declare victory at Sikorsky, but we will see.

We've got another six months to go and I think there's lots of opportunity there.

Joe, you said we put little plus after each one of the guidance numbers, but it is just a plus and it is a bump up to the guidance numbers.

Okay, these investments that you're making, are these sort of -- these are over and above your previous plan even from last quarter?

I would say that, again, there are some incremental investments that we're making in each of the businesses that we're not in the plan when we started the year.

Okay, on the residential HVAC business, did I get the numbers right that you said that sales were down 5%, but earnings were down 30 plus?

That is correct.

Does that 30 plus factor in the $50 million hit you took because of your factory issue last year?

Yes, it's actually if you think about last year, I think we said there was about $35 million of actual factory costs.

There was another 15 or so of lost margin, but on a year-over-year basis, that is a fair comparison.

Okay, so how do we think about I guess the detrimental margins there?

I mean obviously that would seem to be much more negative than one would normally expect.

You said you would get, from a commodity cost standpoint you've got most of it back in pricing.

How do we think about that?

Joe, it is a pretty tough market right now and we have a much higher mix, again, towards new construction as opposed to add-on replacement and that's low margin.

And we are also saying because commodity prices have flattened out a little bit, we are also seeing price pressure, particularly on the low end.

So all the good pricing that we had gotten, obviously that is tough to get in a market that is contracting.

But we have got the good share and a good product and this market and business will turn.

I think, again, we're investing right now in that for the long-term.

In the meantime, we've got three businesses growing at 15% plus in the other parts of Carrier.

Joe, as you think about, too, you've got to keep in mind the factory at Collierville is sized to deliver 10,000 units a day.

I think Halsey Cook and the guys running the North American business have been faced with some volume shortfalls as a result of this market contraction.

They have shut the factory down a number of times that were not planned early in the year and we have lost a lot of absorption.

So when you've got a big factory, it has got to be full.

It has got to be running full-out and that is not happening right now.

So that is why I think the incremental margins are as poor as they are.

Just one more.

On Rentokil, you closed that pretty sizable deal.

What can you tell us about I guess your intentions there with regard to restructuring because I think there is quite an overlap in your facilities and that is probably a big part of the appeal to you of the acquisition.

That is absolutely right.

We like the Rentokil acquisition a great deal in part because it sits on our existing footprint, the branch structure and the call network.

So there are very good synergies out of the business.

Obviously to harness those, we've got to do some restructuring.

I think you'll find most of it to be in purchase accounting, but some will be branch closures of our pre-existing facilities and offices.

So you'll see little bit of the restructuring comes to the P&L.

That is what Greg talked about when we have an investment in the business.

You'll see that over the next couple quarters.

So from a net standpoint, though, we should not expect much net benefit the back half of the year, I guess, because you are going to be spending to save.

But next year, we should definitely start to see some of the benefits?

In fact, if you remember last quarter we actually took up Fire & Security's guidance to 125 because of the benefit we're going to see from the Rentokil acquisition.

Most of that of course gets absorbed by higher interest costs below the line, but certainly within their business, they are going to see incremental margins for this business this year.

Right, I just meant from a pure cost-savings standpoint.

When do you start to see really hit the net cost savings hit the operating profit line?

We start on those actions today, but you see most of the benefit 12 to 18 months out.

Alright, thank you, everyone.

George Shapiro, Citi.

Let me just follow up a little bit on the Carrier.

So at this point, the commercial -- have the commercial margins at Carrier gotten up to at least the high-single digits?

Yes.

Would the residential margins now this quarter be below the commercial margins?

Tough quarter and the answer is yes.

And then if I switch back to Pratt & Whitney for a minute, in the aftermarket growth of 15%, could you break that into how much was actually spares versus overhaul and repair?

Spares were essentially flat on year-over-year basis.

You'll recall, George, we had a very tough -- had a very strong '02 -- second quarter '06, so the compares are very tough.

But spares remain just about even with last year.

The real benefit has come on the volume side.

As I said before, we're seeing a lot more engines come through the shop and we're seeing 20%-plus growth on the services side.

Okay, but that would have somewhat of a negative impact on the margin because you're not making nearly as much on the [O&H] business as you are on the outright spares.

Absolutely.

I think as you look at Pratt's margins, revenues this quarter are up over $3 billion.

We did get 10 basis point of margin expansion, but the two pieces of the business that are growing fastest, which is the aftermarket services, are not the high margin business like the spares.

You've got power, which again, very solid revenue growth, but relatively lower margins.

Did you make any deliveries to Airbus for the 380 this quarter?

I would think if you did, those engines probably have even bigger losses than the average engine.

Yes, there was actually four engines that got delivered this quarter.

What is the outlook for how many you'll do the rest of the year?

We're targeting probably about twice that many for the year.

Okay, that's good.

That's my questions.

Myles Walton, CIBC World Markets.

We have not talked about pension in a while, probably a good thing, but I think the Company's expense this year will be down on absolute basis may be $140 million year over year.

Is that about right?

No, it is not quite that much.

I think it is -- are we talking this year?

It is down, but it is less than $100 million.

Okay, and which of the segment is that helping the most?

I think you're seeing a benefit in Fire & Security.

They are getting a little bit of pension good news.

You're also seeing it really at the aero businesses, because they are the big U.S.

employers.

Okay, and hard to predict, but going into next year a similar if not better compare on pension, given prior year losses rolling off?

I think that is fair.

We will get a little bit of tailwind out of pensions.

It is a little early to focus on '08, but I think if you do the math, you are going to see little bit of good news there.

Alright, that's great.

Then can you just quantify the R&D increases at Pratt and Hamilton year over year in the quarter?

UTC overall was up about $47 million, $48 million in the quarter.

Both Pratt and Hamilton were up $14 million, $15 million, so they were the biggest pieces of that change.

Are they also the recipients of the $50 million increase in the quarter of the guidance for R&D for the year?

Yes, aerospace businesses, yes.

Grade, then just one last one.

If you look at the slides in the presentation, last quarter you did have the aero supply chain as a concern.

You did not have it is a concern with this quarter.

Is that -- from your comments it certainly sounds like that is still a very serious watch area, but was there anything in the way of risk retired in the quarter that motivated taking off the list?

I would tell you it is getting a little bit more predictable, if not better, and I think that is why we have taken it off.

It is still a problem out there.

It is hurting us at an inventory standpoint.

It is hurting us from a delivery standpoint.

I think, again, things have started to settle down the supply chain.

It is just not getting better, so I would say it is not under control, but from where we sit, I think we see the light at the end of the tunnel.

It is going to be another 12 months before we really see any big changes there.

Alright, that is helpful.

Thanks a lot.

Cai von Rumohr, Cowen and Company.

Sikorsky, you did 49 deliveries.

You talk about 170 for the year.

That implies you do less in Q3 and Q4 than Q2.

Is that what you're looking for?

Is that a conservative number?

That is the way the math works, you're absolutely right.

We have done 85 helicopters year-to-date.

The thing you should focus on, too, you'll notice there was a lot of commercial helicopters here in Q2.

The mix actually goes against us in terms of the number of hours as we start building the new Blackhawks.

Those are much more hour-intensive down in the factory, so assembly hours will be up and so production will be down a little bit, but can Jeff do more than 170?

Perhaps, but I think we're all comfortable with 170 helicopters right now.

Okay, and if we look at Pratt, you did 98 commercial engines, so you're up two.

But you're still kind of down year over year in kind of a booming market.

Are we looking -- particularly I am thinking about the V2500 likely to move up?

Do still expect engines to move large commercial up for the year?

Was this quarter restrained by supplier issues, because that number looks a little lighter than I thought it might be.

It's actually -- I think if you take a look at I, Cai, it's much better what we did in the first quarter where, I tell you, the supply chain issues were even worse.

Supply chain did not really constrain us here in Q2.

I think for the year we are still comfortable engines are going to be -- are going to be up and especially at Pratt Canada, they're going to be up substantially.

If they're going to be up, you are going to have pretty good sequential gains in the third and fourth quarter in large commercial.

I think that is absolutely true on the revenue side.

You will see higher sales there.

Okay, the last was you had mentioned you raised the R&D guidance and Sikorsky -- excuse me, Hamilton Sundstrand was up $15 million year over year.

To get to your new number, it looks like R&D has got to run at about that $420 million you did in the quarter, in both the third and the fourth.

I would think that Hamilton Sundstrand would start to come down given the huge balloon you have in the second quarter on the 787.

Is that correct or --?

I think you're absolutely right, Cai, that on the 787 program, the spending will start to trend down here in the second half of the year, but that is about the first flight.

Once that happens, people will start rolling off.

In fact, we have already started rolling down the spending here little bit in Q2 as we have delivered all the hardware.

As I mentioned, there's lots of other places that Hamilton is making investments.

Specifically on the A350, it looks to be a lot of content, perhaps not as much as we saw in the 787, but there's lots of appetite from Airbus to engage Hamilton on that program.

Excellent, thank you very much.

Chris Kotowicz, A.G.

Edwards.

Maybe just a couple things.

Are you seeing any indication -- and maybe I missed this -- but are you seeing any indication that nonresidential construction is going to slowdown in North America over the next 12 months?

It sounds like things are good, but --

We have not, especially in those markets where we are very, very strong -- in the hospitality side, very strong and more than 40% orders growth at Otis.

I think it is just a testament to how strong the market really is.

Would you say it is accelerating outside of North America?

Everything we are hearing is that Europe and the Middle East in particular are really good.

Are you seeing it that way or is it just steady, but really good?

Steady but really good.

I would tell you Europe, again steady.

Asia, especially China, very, very strong.

We mentioned 50% -- 40% kind of order growth rate in China, so no slowdown there.

In Europe and rest of world really still really very strong.

Okay, then switching to power, I do not recall hearing anything real specific about unit shipments on the swift and twin packs.

Can you advise us how many unit shipments you had in the quarter?

We shipped actually 10 units in the quarter combined of all the power units.

Okay, and from an outlook standpoint, it sounds like that is probably going to pick up.

Can you add some commentary on how you see the market evolving?

I think at least for the remainder of this year we see a very strong market in power, a little bit slower perhaps next year.

I think Pratt Power has actually benefit for the availability of the machines and they have been able to capitalize on what is a very strong market out there, so I do not want to comment too much on '08, but I would tell you at least for the last half of '07, that should continue to be pretty strong at Pratt.

Strong meaning better than 10 a quarter?

Yes.

Okay, and then just some housekeeping.

What's your current foreign exchange assumption on dollar to euro?

We have just done at spot, which is about $1.36 when we put this together.

Okay, thanks guys.

Okay, thank you very much, everybody.

I appreciate your time and attention this morning.

Ken and the team will be available to answer your calls throughout the day.

Thanks again.

Thank you.

That does conclude the conference.

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