雷神技術公司 (RTX) 2008 Q1 法說會逐字稿

Good day, everyone, and welcome to the United Technologies first-quarter conference call.

Today's call is being recorded.

On our call today will be Greg Hayes, the Vice President of Accounting and Finance; Jim Geisler, Vice President of Finance; and Ken Parks, Director of Investor Relations.

Today's call is being carried live on the Internet and there is a presentation available for download from UTC's homepage at www.UTC.com.

The company reminds listeners that the earnings and cash flow expectations and any other forward-looking statements provided in this call are subject to risks and uncertainties.

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

Now at this time, I would like to turn the call over to Mr.

Hayes.

Please go ahead, sir.

Thank you, Dana.

Good morning, everyone.

As you saw in the press release this morning, UTC had a solid start to the year driven by strong performance across the businesses.

Revenues were up 12% and 7 points of organic growth.

Earnings per share were $1.03 and that is up 26% over last year.

As of the impact of last year's Otis EU charge and gains in restructuring in both periods, EPS was up 18%, a really great start to the year.

FX generated a small benefit in the quarter with a positive impact from the euro partially offset by foreign exchange headwinds out of Pratt & Whitney's Canadian operations.

We invested this benefit along with some of the good news from the businesses into restructuring, about $0.02 of EPS.

Adjusted for restructuring and onetime items, four of the six units reported double-digit revenue growth and five of our six businesses reported double-digit profit growth.

All three of our commercial businesses saw margin expansion in the quarter, with Otis and Fire & Security up 50 basis points, and Carrier up 40 basis points.

This was a result of continuing tight cost control and good execution across the businesses.

Both Pratt & Whitney and Hamilton Sundstrand saw strong topline growth as they continued to ramp up production in the face of a record backlog, and Sikorsky, despite shipping only 30 helicopters in the quarter, grew profits 17% and margins 100 basis points.

A good quarter all around and the kind of performance you've come to expect from UTC.

I will let Ken take you through the business unit details in just a few minutes, but let me spend a couple of minutes addressing the question we've been hearing from all of you for the last couple of months, and that question of course is have you see many signs of a slowdown in your business as a result of the slowdown in the U.S.

economy?

As we all would have expected, there are some signs of moderation of order rates in a few of our shorter cycle businesses, but for the vast majority of UTC, the economic environment still looks very favorable.

Looking now at page 3 in our webcast, we tried to lay this out by major market segment.

First on the commercial aero side, we continue to see good growth on the OEM side of the business and backlogs remain very robust.

Commercial aftermarket growth did slow a bit to about 6% in the quarter and high fuel prices are of course impacting the airlines.

However, we still expect RPMs to grow 3% or 4% this year on strength in business travel and emerging markets.

We are watching the RPM trends closely since they are typically impacted relatively quickly by consumer spending and economic downturns.

Emerging markets, they remain buoyant in spite of the slowdown in the U.S.

economy.

Foreign exchange also looks to be a tailwind for the year, although as we saw this quarter, a weak dollar is not universally advantageous to all of our businesses.

Commercial construction order growth, while lower than last year, remains solid even in the U.S., where Otis saw order growth of nearly 20% in this quarter and Carrier's commercial HVAC business saw order growth of 5%.

Even Hamilton Sundstrand's industrial businesses, some of our most economically sensitive businesses, continued to see solid order growth in the quarter.

So where do we see the weaknesses?

Well, the U.S.

residential business continues to be a challenge, with housing starts now expected to be down nearly 35% in the already depressed levels of 2007.

No surprise there.

We are also beginning to see weakness in orders in our refrigeration business both in the U.S.

and Europe.

Fire & Security's U.S.

residential business, which sells through the major retail chains, has also been negatively impacted and we are also seeing a bit of a slowdown in F&S's European electronic security business, primarily in the UK.

Let's keep this in perspective.

We should note that these markets combined represent only a little more than 10% of UTC's total revenues.

So no surprise here.

As you would expect, as we see the U.S.

and a few of these European economies slowing, we are preparing by taking costs out of the business.

We invested over $30 million this quarter in restructuring and we anticipate additional restructuring actions throughout the remainder of the year.

Total restructuring could approach $200 million for the full year funded by good news on foreign exchange, continued strength in the businesses, and a few onetime gains in the back half of the year.

I will also point out that investment in new products like Pratt & Whitney's Geared Turbofan and Hamilton's platform on the 787 will continue to be a priority for us.

These investments will fuel continued growth for years to come.

Overall E&D was $29 million higher year-over-year in the first quarter, but we continue to expect $200,000 of growth for the full year, so there is some headwind in the next three quarters from E&D.

Although these trends will make the back half of the year more challenging, we remain comfortable with the guidance for both the individual business units as well as our overall UTC earnings and cash flow guidance for the year.

Just a word on Q1 cash, free cash flow as you saw came in at about 65% of net income, not unexpected given the normal seasonality at Carrier, as well as lower shipments from Sikorsky and the inventory build on the aero side.

Let me also point out that these high inventory levels remain an irritant to you and to us and fixing this problem is a priority for all of us here at UTC.

Now (inaudible) on cash flow for the year though, as it is unchanged.

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

Finally, we repurchased $801 million of UTC shares during the first quarter and we continue to expect repurchases to total about $2 billion for the year.

With that, let me turn it to Ken to take you through the business units in detail.

Okay, thanks, Greg.

Before I begin on page 5, let me remind you I will talk to the segment results with restructuring added back and excluding onetime items just as we usually do.

Otis delivered another strong quarter with profit growth of 19% on revenue growth of 16%, foreign exchange contributed approximately half of the growth.

Revenues increased in all geographic regions, led by double-digit growth in North America, China, and Russia, reflecting the robust new equipment backlog entering the year.

Margins expanded 50 basis points despite a continued shift in sales mix towards new equipment as the Otis team continues to execute their strategic initiatives on product and other cost reductions, [new] logistics acceleration, and field performance a new equipment installations.

New equipment orders were up 20% in the quarter, reflecting double-digit increases in all geographic regions.

At Carrier, operating profit increased 15% year-over-year on 9% higher revenues.

Operating margins expanded 40 basis points in the quarter.

Foreign exchange contributed about 6 points of the revenue growth and 9 points of the profit growth.

The commercial HVAC business with double-digit revenue and earnings growth in all regions more than offset continued housing-related weakness in North America.

Carrier has recently seen moderating growth in commercial HVAC orders and slowing order rates in our refrigeration units particularly in the U.S.

The overall moderation in order trend is consistent with our expectations as we enter the year.

At UTC Fire & Security, performance was solid as revenue was up 28% and profits were up 38% in the quarter.

Favorable foreign exchange contributed about 8 points of the revenue and profit growth.

Acquisitions contributed the remainder of the revenue growth.

Revenue declines of approximately 30% in the U.S.

residential business and low single digits in the electronic security business in the UK, entirely offset growth in the other regions and segments.

Operating margin expanded 50 basis points year-over-year to 7.6%.

Benefits of prior restructuring actions primarily from the Kidde factory rationalizations and cost containment initiatives were partially offset by the impact of lower U.S.

residential volume and recent acquisition and integration costs.

Pratt & Whitney revenues increased nearly $0.5 billion or 18% in the quarter led by 30% growth at Pratt & Whitney Canada and power systems revenues that more than doubled.

Military revenues were up approximately 15% on favorable mix as well as higher engine deliveries year-over-year.

Operating profit improved 15% in the quarter, reflecting the higher revenues, partially offset by the unfavorable FX impact of the Canadian dollar and higher year-over-year E&D investments supporting new program wins.

The combined impact of these headwinds on operating margin was more than 100 basis points in the quarter.

Hamilton Sundstrand revenues were up 11% in the quarter with Aerospace OEM, aftermarket, and industrial all growing at double-digit rates.

Operating profit grew 3% and margins contracted in the quarter as lower margin commercial volume accounted for substantially all of the aero OEM growth.

In addition, Hamilton reported incremental cost on fixed-price development programs in the quarter.

Hamilton is currently assessing the risk due to the recent rescheduling of the 787 program; however, these changes clearly will put pressure on Hamilton's full-year operating profit growth guidance of $100 million.

At Sikorsky, operating profit was 17% on revenues that were essentially unchanged year-over-year.

As a result, operating margin expanded 100 basis points in the quarter and reached 8%.

During the quarter, Sikorsky shipped a total of 30 large helicopters, 14 military and 16 commercial.

Since the end of the first quarter, eight additional aircraft have been delivered and we continue to expect more than 200 larger aircraft deliveries for the year.

Now I will turn it over to Greg to wrap up.

Okay, thanks, Ken.

So another solid quarter, 7% organic revenue growth, 18% earnings growth, continued backlog expansion in all of our businesses.

In fact, we ended quarter with $60 billion in backlog, a record for UTC.

While there are always opportunities for better performance in our business, we know that the [balance] of UTC works to deliver superior results in good times and bad.

In the face of uncertain economic conditions, we are also well positioned to reduce cost through restructuring and continued ACE implementation, factories, the supply chain, and the back offices.

All of this is why we remain confident in our full-year guidance of earnings per share in the range of $4.65 to $4.85 with revenues of $59 billion and free cash flow equal or exceeding net income.

As you all know, UTC's Board last week elected Louis Chenevert as Chief Executive Officer of UTC.

This is a significant milestone for the company, but all know it is not a change in direction.

Creating shareholder value continues to be our number one priority under Louis.

We'll do it by focusing on strong topline growth from innovative products and global market leading franchises, cost reduction, and margin improvement and disciplined cash flow redeployment.

All of that executed by an experienced leadership team.

We are confident we will deliver on our guidance for '08.

We have a top line in excess of worldwide GDP growth and make investments in the company for a solid 2009.

Let me stop there.

Let's just open up the call for questions.

All right, Dana?

(OPERATOR INSTRUCTIONS) Steve Binder, Bear Stearns.

Can you maybe just touch on I guess Hamilton's performance?

I think you touched on some of the fixed-price issues.

Maybe call out what the programs were.

And you talked about -- it just looked like disappointing incremental margin performance.

I'm just wondering -- is there a plan, a downside plan now given the change in R&D in the first quarter performance?

Then also touch on Sikorsky's performance with all the issues that kind of held back deliveries this quarter and what the year looks like for Sikorsky.

Sure.

Let me start with Hamilton.

As you saw, margins were down 140 basis points, not really unexpected.

I think Dave mentioned that he expected that back in the conference back in February.

The fact is OEM orders were up strong.

We saw I think a 12% increase in OEM deliveries and most of those of course went out with very low margin, as they typically do on the OEM side.

So no surprise.

Aftermarket was strong, as we had expected, and I think maybe the surprise a little bit was on some of these fixed-price development contracts.

We are working on the A400M on a fixed-price development contract.

We've got some work at one of our subsidiaries in the UK doing some work that have some helicopter work.

That was also a bit of an overrun.

These are not big numbers.

We're talking less than, you know, $5 million or $10 million in each of these programs.

But again, with only 3% growth in the quarter they kind of shine through as a little bit of a bump.

Overall though, I still think Dave is confident in his guidance.

We are confident in Dave's guidance for the quarter -- for the year, rather.

And we'll have to wait and see as Boeing finalizes the reschedule, the 787, how that impacts us, but clearly it is going to have some challenge with that, but nothing to derail us.

Then if you look at -- you said order growth.

Was it order growth you touched on for commercial aircraft (multiple speakers) a market of 6% or was that sales growth?

Sales growth.

What was the order growth for Hamilton and Pratt in the quarter for aftermarket in particular, catalog spares?

Aftermarket, overall commercial aftermarket growth was about 6% across UTC.

It was flattish at Pratt and it was up kind of high single digits at Hamilton.

So if you think about the Pratt, just to maybe digress for a second, it was flattish, but that is coming off a 20% growth in last year's first quarter.

We also saw a lot of inductions into the engine center just that the average repair cost is a little bit lower than we had seen last year.

So I don't see any big trend here.

I think the engines are still coming off [wing], as we would expect, and the orders will be there by the end of the year.

And, Steve, book to bill at Pratt was about 1, so the order growth was similar.

All right, last question is rather than touch -- you touched on inventories already and receivable performance clearly wasn't great in the quarter, but if you look at the line of business within UTC in the family, what were the pluses from a cash flow standpoint and the minuses?

Who were the generators and who were the users?

I think the biggest generator was obviously Otis.

As they typically do, they have a very strong first quarter, but they had really strong performance across their businesses.

Fire & Security had a good quarter from a cash standpoint.

The aero businesses, not so good as you would expect when you see inventories grow like this.

As well as Sikorsky, because they only shipped 30 helicopters.

They missed some shipments at the end of the quarter which also would have had some cash associated with them.

So commercial side pretty good.

Carrier really just normal seasonality and not concerned.

It's the inventory growth that obviously we have our eye on.

I think Steve, just to touch just for a second on Sikorsky because we have talked about the 30 helicopters -- the backlog is obviously robust.

We've got $12 billion of backlog at Sikorsky and as you look at the commitment for the year, which is 200 plus large helicopters, shipping 30 helicopters in the quarter is light.

But a couple of things to keep in mind.

We were out at the factory just the other day, Jim and I, walked the floor.

The pipeline is full.

Parts are there.

They are building these helicopters.

What we're seeing really is a big mix shift.

Last year we shipped eight of the L models.

The L models have about 4000 hours of assembly.

This year we're shipping Ms, and in the quarter, I think we shipped 10 Ms verses two last year.

They have got about 12,000 hours.

We also shipped some R models, some Romeo models, they were about 24,000 hours of assembly.

So what we really have is this big mix shift where we've got to get productivity on the floor.

We've got to get these helicopters moving down the line at the right pace.

I think we've shipped about eight helicopters so far this month.

I'm not concerned at all about the quarter.

We told we're going to make those 200 helicopters, but there was a little bit of a slow start and we feel pretty good about it.

Okay, thank you.

Joe Campbell, Lehman Brothers.

I wondered if you could say a few words -- and I don't want to know about the tactics effort, but about the strategy and why it is that you would like to acquire Diebold?

Sure, Joe.

Diebold to us is a very attractive property for a couple reasons.

It is number two in the world in ATMS.

It has a great global footprint with good presence in China and India and it offers margin expansion opportunity.

Margins right now or at least the last time they reported were down mid single digits.

That's where UTC's businesses were back in the mid '90s.

One of the keys to that business also, Joe, is in growing margins and providing good service is to have an exceptionally good local service network, and you know we have that in Otis.

We're building in some of the other businesses and we think we could bring some of that management and expertise to the business.

So I think in a lot of ways, it looks very much like a UTC commercial business.

Great, thanks very much.

Deane Dray, Goldman Sachs.

I was hoping you could address the raw material headwinds on Carrier vis-a-vis the copper verses earlier in the year and where that stands in terms of -- might that eat into any of your contingency?

Yes, you know, as we look at the first-quarter results, really not much headwind from commodities at Carrier net of the pricing recovery.

I think our average price for copper was around $3.21 or $3.22.

I'll compare that to today's $3.96 or $3.97 spot.

So first quarter it is a light shipments quarter.

I think where we're going to see commodity headwind will be in second and third quarter.

Things that are really going to qualify that will be about $50 million of potential headwind and the reason it's not more is we do have a certain percentage of our suppliers on long-term agreements, so we've locked in some of the copper.

It's about 40%.

And we have also locked in most of the steel.

So as steel has run up since the beginning of the year, we have been really been protected by the LTA.

So we don't expect it to be a huge headwind, but $50 million is still -- it is one-third of the operating profit growth at Carrier this year.

So they've got some work to do to take some costs out and to contain that.

That's the same $50 million that you talked about at the beginning of the year, so that hasn't changed, correct?

It has not.

Okay, good.

Then just at Otis for a moment, 20% order growth looks stellar in this environment.

How about on the negative side?

In December you talked a bit about seeing a few push outs, a few cancellations.

I felt maybe that was related to some financing on smaller projects.

How has that changed at the margin over the course of the quarter?

It really hasn't changed, Deane, at the margin.

I would tell you we still see a few of the smaller projects being deferred or delayed.

The big stuff though was still going out at record levels.

I mean 20% growth in North America, 20% order growth rate worldwide, strong orders in China.

It is hard to find a soft spot outside of maybe a Southern Europe for Otis right now.

But again, I think we are very confident those guys are going to deliver for the year.

There are bumps in the road there.

Very helpful, thank you.

Howard Rubel, Jefferies.

Thank you very much.

Just a couple things.

One, Greg, is a lot of these working capital issues that you addressed, they have sort of been nagging for a while.

What is the management team doing to sort of change the fact that we have kind of heard this for maybe three quarters or so?

We've actually heard it for about 2.5 years I think, just to be fair, Howard.

Inventory has been growing.

It has been the result of two things primarily, strong organic revenue growth as well as disruptions in the supply chain.

And organic growth is still strong, although it is abating somewhat.

It is still good growth.

And the supply chain issues are coming I will say under control.

Let me just point out I think it is the number one issue that we have in terms of working capital is how do we get inventory under control this year.

I touched on this a little bit back in February.

It's those 32,000 suppliers.

It's the 75% of our cost of sales that we don't directly control and we need to do more work in our supply chain than a supply base to get the ACE operating systems embedded in their thinking.

We're down on the line at Sikorsky and we talked about an 80% fill rate to MRP from suppliers and 80% sounds like it is pretty good.

But the fact is that means you are missing 20% of what you need to assemble a helicopter at the station.

So there is still a lot of work to do in the supply base and that would be I think the focus.

It is not going to happen today or tomorrow.

We are working on it.

It is going to take some time.

We think we've got our factories where we want them to be from a productivity standpoint, but it has got to be in the supply chain next.

Well, I mean you are up almost $1 billion in inventory.

Now some of that I grant you is currency but it's almost $1 billion in a quarter.

Could you just articulate what you think you could do in terms of some turns for the year and from where we are?

And do you think you could be below year end of inventories?

Well let's just dissect it.

I think inventories of $975 million roughly, you back out FX, that's about $800 million net of inventory growth.

$350 million of that is just normal Carrier seasonality and that of course will turn into receivables here in Q2 and it will get back into cash in the third and fourth quarter.

On the aero side, you got a little bit of R&D that's capitalized on the balance sheet.

That's some of the Sikorsky programs as well as Hamilton.

Having said all that, you still have $300 million, $400 million of growth at the aero units that we need to address.

I will tell you inventory turns in total were down about 1/10 this quarter verses year end.

Our focus obviously is to improve inventory turns.

I'm not going to give you a forecast today, because quite frankly anything I tell you I'm not positive we could actually meet it.

But it is a priority for us.

No, I think that's pretty fair.

Just two other things.

One, we all are aware of the difference between the JT8D and newer version engines.

How are you going about managing the wind down of that business?

I know it's is largely spares today and it's probably, what, maybe 5% of your aftermarket business?

Yes, and in fact I think that number is closer to about 10%, Howard, so I tell you we have been managing that down or the impact of the JT8s going out of inventory pretty well for the last ten years.

And it is not a surprise it's continuing to happen.

But we are still shipping 400 large commercial engines out of Pratt last year, probably a similar number this year.

The V2500 fleet is growing.

We are also of course taking share on the aftermarket through aftermarket services.

So the growth strategy at Pratt and the aftermarket is pretty clear.

It is to capture more of our own work.

It is also to capture more of everybody else's work.

So I don't see this as a huge issue.

It has been in front of us for a long time.

I think we're managing it pretty well at Pratt & Whitney.

I agree.

I just wanted to make sure I -- you had bounded it.

Then last, with the geared fan, there will be some opportunities to sell some participation interest in that.

How will we see that offset R&D later in the year?

We assume a certain level of partnership.

As we gave guidance for the year, that $200 million of R&D, about $125 million of that was at Pratt & Whitney.

That assume some level of partner participation, maybe 30% or 35%.

I think we are pretty comfortable with that level for the year.

We signed up MTU so far.

I think Hamilton has now signed up for a piece of the engine as well.

So I think we are well on track, making good progress on the GTF from a technology standpoint and I think we feel pretty good about all the programs that the GTF has won.

Thank you very much.

George Shapiro, Citi.

Just (inaudible) on the inventories a little bit.

You said $400 million in aero.

How much of that would just be due to missed shipments at Sikorsky and how much is due to some of the tougher issues to get at?

I think maybe up to half of it, not quite half of that would be the missed shipments at Sikorsky.

If you just think about Sikorsky, had they been linear, delivering 50 helicopters a quarter, that is obviously not going to happen in the first quarter, but that's about half of it.

And the rest of it is maybe this harder to get at supply chain inventory.

Also at Hamilton Sundstrand, how much of the inventory build maybe is reflecting not getting paid by Boeing on the 787 at this point?

It is not a huge number.

We continue to obviously bring hardware in.

We've been working with our suppliers to try and push or hold some of that at the supply base.

We've been trying to be very aggressive in terms of not bringing any more than we think we're actually going to ship.

They did see inventory growth at Hamilton in the quarter.

I would not attribute it all to 787.

I think a bigger piece of it is really related to just big ramp up in OEM volume across all of their productlines.

Okay, if we go back to Pratt for a minute, the joint strike fighter engine problems that you had, was that a -- shown as R&D to Pratt this quarter?

Or how do you handle that?

Or was it a small number anyway?

You know, that is a cost-plus contract and I would tell you typically on a cost plus, the cost of the analysis, the cost of the fix, most of that is covered by the contract.

There really wasn't any incremental R&D at Pratt & Whitney that would have flowed through to the bottom line as a result of that.

And then one last thing.

At Pratt Canada, what do you see as book to bill?

I mean clearly the deliveries were very robust.

Yes, deliveries were up 30%, I believe.

Revenues were up 30%.

We shipped over 800 engines, but book to bill still remains about 1.

So we have got good backlogs and it is remaining pretty strong.

Okay, thanks a lot.

Nicole Parent, Credit Suisse.

(multiple speakers) the big picture as you step back and think about it, Greg, in your initial comments, you talked a little bit about slight pockets of weakness as you look at Europe.

Could you talk a little bit about as you see the tight credit markets impacting general commercial construction trends and then what is your outlook?

Have you guys seen any slowdown in Asia and specifically China?

I'll start with China, Nicole, and say there really has not been any slowdown.

I still see very, very strong growth out of China.

It is interesting.

It is a great question because we keep I guess expecting to see some fallout of the credit crisis in commercial construction.

As I said, Otis, it's up 20% and that is really around the world with the exception of southern Europe, where we saw really I think it was Spain primarily where we saw a little bit of weakness for the year.

But other than that, really have not seen much of an impact.

Let me just throw out on China, a couple of statistics for you.

As we look at it year-over-year, fixed asset investments up about 24%, real estate investments up about 33%, large construction projects up about 22%.

We don't make those numbers up.

They actually come from the National Statistics Bureau of China.

That is pretty good, solid growth that is continuing in China.

So no spill over impact that we can see in our markets from the credit crisis, especially in the emerging markets.

Okay, and I guess with respect to Sikorsky, can we just go back and think about --?

I mean just given the light revenue and shifts in the number -- in the quarter and you talked about how you have already shipped I think you said eight so far this month.

As we sit here and look about -- you cited the mix shift and kind of between L and M and the hours that it takes to get it through.

Presumably we knew that.

Could you just give us some sense as you look back over the metrics that you have really shored up within Sikorsky in terms of passthroughs and everything else where we are and how we should get comfortable that this isn't going to continue through the year?

Well the only thing I could tell you -- let me just tell you a couple of things.

Obviously it has got our attention.

Louis has been focused on this for the last I guess almost two years since we had the initial -- the labor actions out of Sikorsky back in 2006.

I think Lou was down.

He saw the new L line.

We've opened that down in West Palm Beach.

I think he felt very good about what was going on down there.

As I said, we look at the lines.

And the lines are full and I think it is just a question of coming down learning curve more quickly than we are and so that a little bit of difficulty and the hours on some of these newer models, as you would expect.

I guess I don't really have a concern of hitting the 200 for the year.

Just got the ACE operating system there.

We are working this.

They are going to get to goal here in the next year or so.

I just have great confidence in the team down there.

They are going to perform.

Okay, great.

I guess justly lastly on M&A, Jim, as you kind of step back and think about what has gone on in the market, have you seen a willingness of potential sellers to come down on price?

And based on the competitive landscape, would you guys expect to be getting more aggressive absent Diebold?

I'd say right now, Nicole, there are a lot of assets to consider, but it takes a while for sellers' expectations to reset sometimes.

They might remember their stock price or some valuation that they could have gotten last year or recently.

So it takes them a while to reset as well as a lot of industrial companies and folks that we might bid against or cover the same assets, you know have pretty strong balance sheets.

So we look at lots of different things but like any other deal, Diebold included, we will stay disciplined.

Great, thank you.

Nigel Coe, Deutsche Bank.

I think it's interesting you mentioned about the steel, the long-term agreements.

Steel is notoriously hard to hedge.

How long are these agreements in place for?

When do you get exposed to the spot steel price again?

These are annual agreements, Nigel.

Okay, so 2009 if we don't see the fuel price moderating, then that is when we will start to see that come through?

Okay.

Secondly, you mentioned 787.

You need to assess the impact on Hamilton.

Is that a common [term], E&D spend, or is it supply chain, or is it both?

I think it is all of that.

I think we have got a -- it will have an impact on our own factory load as we try to move some of the ships out, that will have an impact on supply base.

It's going to have an impact on E&D.

I just can't give you a great answer today on what the overall impact is.

We love the program.

We're going continue to support them wholeheartedly, but it is kind of -- we are in a little bit of the state of flux here, having just heard the announcement a week or so ago in terms and reschedule.

And we actually haven't had a formal modification I think of the purchase order yet.

So we will get through that and Dave is has committed to his guidance for the year and we are going to figure out how to get the 787 within the guidance for the year.

Sure, and then on refrigeration you mentioned some weakness in the U.S.

Is that a comment on just the stationery refrigeration or was that including the transportation as well?

Well it includes truck/trailer in North America, which has been slow really for the last year and a half or so I guess.

But it is really both pieces.

We also saw a little bit of slowness on container on the order rates, and very, very strong shipment order but order rates were down a little bit there.

So it is really a broader comment on the refrigeration business in total.

Okay, then just finally then on residential, it looks like Trane is trying to put through 4% to 6% price increase -- I think it is Vegas coming in June.

Is Carrier planning that as well?

No, in fact we have not yet had a residential price increase and I think we are obviously looking at the market, but right now we're just trying to get our costs in line to be very competitive in what has shaped up to be the most competitive market we have ever seen.

Okay, then just a quick one on restructuring.

You are going to be flat and the gains are [fitting] the restructuring or do you expect to be net restructuring for the year?

I think right now as we would look at it, we would -- we have $200 million of restructuring for the year, I would expect that gains will not equal restructurings.

We will probably have a little bit more restructuring.

I can't give you an exact number.

I don't know what the exact amount of the gains are.

But clearly as we go throughout the year, we've got good news on foreign exchange that we see at least ahead of us here in the second quarter and some strong performance from our businesses.

We are going to take that good news and we're going to invest it in the restructuring.

Okay, thanks, Greg.

Cai von Rumohr, Cowen and Co.

Yes, thank you.

So you mentioned the FX good news.

Your February meeting you were talking about $1.44 on the euro.

It is now $1.58.

The renminbi is up.

The yen is up.

The Canadian Looney is starting to behave.

Could you quantify what you are now assuming in terms of FX and why you didn't raise your revenue estimates?

We didn't raise our revenue estimates because FX as we all know, it does move around quite a bit.

Obviously as we saw this quarter where we had 4% of the revenue growth came out of FX, there probably is more good news to come on the top line from FX if the euro stays where it is.

I think one of the things that we need to keep in mind and maybe the little bit of news this quarter on FX is Pratt Canada has become a much bigger piece of a puzzle here.

Their cost structure obviously is in Canadian dollars and in fact the Canadian dollar content has been going up as they are assembling a lot more engines.

And their sales are denominated in U.S.

dollars.

So they have really felt the pinch over the last year or so, because really the last two years as the Looney has appreciated versus the dollar.

Now as we look forward to the back half of the year, if you were to keep the euro where it is today, the Looney, we still see good news from FX and probably more than what we saw in the first quarter.

About half of that we had planned and the other half is probably opportunity.

As we talk about opportunity, that is what we're talking about for potential restructuring funding.

You mentioned that, you know, that if FX moves around, which it does, so you were assuming $1.44 on the euro in your plan.

Based on your current guidance, what is the number?

What are you assuming?

If you play out the number today at $1.58 I believe, which is where the euro is, and you keep the Looney, you could see maybe again, versus last year, you might see another $0.10 or so of additional FX good news for the year.

Got it.

Cai, maybe just one other comment on that, because clearly FX could be good news for the corporations in the north throughout the year, particularly versus our plan, and we've seen a little bit of it in the first quarter.

But I think we also have to keep in mind that the environment is toughening.

There's probably going to be some offset to FX or it is certainly possible in the second half of the year.

And I -- we don't think now is a good time for overreaching or over promising.

I don't think you want us to be in that position and we don't want to be in that position.

Right, right.

If you look at the quarter, R&D was only up -- as you pointed, $20-odd million, so that was kind of a surprise that it wasn't much.

But SG&A was up 50 bps, really a huge gain, about $240 million.

Can you explain kind of why was the SG&A up?

Anything abnormal in there?

How should we think about the build in both R&D and SG&A over the remainder of the year?

Let's do SG&A first, Cai.

Up about $240 million, as you said, year-over-year in the quarter.

About half of that is related to acquisitions and FX combined.

So you can kind of put that into one bucket.

Then the other thing I'll point out to you is you remember last year we set up the distribution for California Carrier business.

That had some impact in the quarter.

Then the rest of the growth is really just the growth related to the volume.

Now let's talk about R&D for just a minute.

As you pointed out, a $29 million year-over-year in the quarter; about one-third of that is at Pratt I would say.

But as we told you all the way along as we started in third quarter call last year going through our February meetings, you can anticipate the R&D to be more timed to the second half of the year because of the programs that we're talking about at Pratt, the GTF-related programs.

So I guess I would attribute some of that to timing and we are still saying that and confident that R&D will be an increase of around $200 million for the year, so it is clearly calendarized more to the second half.

SG&A was 11.9% of sales.

Is that what we're assuming for the year?

Because it was 11.2 last year.

Or what is SG&A likely to run as a percent of sales?

I think we would not tell you to expect SG&A as a percentage of sales to creep up.

For the year.

For the year.

From what level?

From last year's level.

So therefore, it is going to be a plus going forward year-over-year in terms of percentage of sales?

Compared the first quarter.

Can you explain that?

I guess I'm still confused.

I'll give you one data point, which is European operations.

So for Carrier, you've got European operations.

But their big selling season is really the second quarter, but you've a cost infrastructure in place in the first quarter that is converting at a higher euro.

So you've got more euro dollars on the front end on the cost side and you'll have the selling season after that.

So that is one reason of a long list.

Okay, terrific.

Thank you very much.

Heidi Wood, Morgan Stanley.

I wanted to talk a little bit about whether you are seeing in aerospace -- in airlines actually with the five bankruptcies, talk about the Northwest/Delta merger.

Can you give us a sense of bandwidth and maybe a high/low of what you think this means for commercial aftermarket for Pratt, if we get some retirements particularly on the Northwest Airlines fleet?

And also talk about what happens to the long-term service engine maintenance contract you have with Northwest?

Let me try and dissect that if I can, Heidi.

First of all, the bankrupt airlines, I think we've all read about that.

We've all seen that.

Not really an impact to Pratt & Whitney or to UTC specifically.

These are small airlines.

They didn't have any real exposure per se in terms of receivables or anything.

The Northwest/Delta merger, of course those are two very important customers to Pratt & Whitney.

They are Pratt & Whitney powered fleets.

I think the good news is we look at this potential merger -- and I will say potential, because it is not done yet -- is the fact that they don't a lot of overlap on their route structure.

As a result, we don't see this as really a plan to take a lot of capacity out of the two combined airlines.

Obviously there are synergies with costs, G&A, and perhaps maintenance, but again, these are both very good customers.

They fly Pratt powered aircraft, and we value both of them.

I think long-term it makes for a stronger industry by the consolidation and with oil at $110 or limited $115 a barrel, whatever the heck it is today, I think there's going to be lots and lots of pressure on the combined airlines to push for a new more fuel efficient fleet.

And I think that's why we are really confident with the GTF, that it is going to give us a leg up in this competition going forward.

We've got the C Series.

We've got the MRJ.

We've got potential for other opportunities there.

I think -- again, this is long-term good news for Pratt & Whitney and UTC and for the airline industry.

Does the maintenance contract though spell potential opportunity?

Have you -- if they park that contract and they move on though, does that have implications -- does that move the needle in terms of earnings for Pratt?

I don't know that I could speculate in terms of what that impact is.

We've got contracts in place.

We do service for both of the fleets.

It is hard to be specific.

All I can tell you is what balance works at UTC and it works at Pratt & Whitney, and it's not really a bump in the road for them.

Okay, a couple more questions if you don't mind.

Going back to the inventory question that has been asked a couple of times, can you give us a little more color, maybe flesh out what you expect on quarterly progression or maybe talk about what you think is reasonable to expect by year-end?

What would you define as satisfactory progress on inventory?

Heidi, it's Jim.

We've talked a lot about inventory today, and inventory is important.

And we must do better, full stop, period.

But we also have to keep focused on the big picture, and inventory is one element of cash flow.

This quarter free cash flow was short of net income because of Carrier's seasonality.

The boot from that is you can go back over the last four quarters and see that free cash flow has been in excess of net income when you take out Carrier's seasonality.

So we will have more for you in the future on inventory.

Obviously, we have to do better, but we also have to remember free cash flow in total.

No, I know that.

I just wandered if you wanted to put a stake in the sand as to where you start to find yourself feeling better about it, just for context, that's all.

I think when we have better turns, lower inventories, we will start to feel better.

All right, on 787, Boeing finally came out with full rate production of 10 a month by 2012.

Can you talk about what kind of investment might be required to take the rates there on your side?

Are you capacitized now for seven?

No.

In fact, Heidi, we are capacitized for what we believe is the long-term production rate.

We were actually thinking it could be up to 12 a month.

So I don't see there's any incremental investment.

I think -- keep in mind, 75% or 80% of this content comes out of our own supply base, so it is not a huge incremental piece to Hamilton.

But there's really no big news there in terms of additional investment.

All right, great.

Just a couple quick ones.

Hamilton Sundstrand, did I hear correctly that the industrial orders were solid?

Was the book to bill north of 1 there?

Yes.

Okay, then the stock buyback, I think I missed it.

How much did you guys spend and how many shares did you buy back?

$801 million at I think of an average price of about $71, so you do the math, about 11 million shares Jim tells me.

Great, thanks very much.

Joe Nadol, JPMorgan.

On cash flow and not on inventories -- on receivables, actually, you had an upward tick there that was much more than the usual.

I'm wondering if you could give any color on that.

Perhaps, Greg, like you did on inventories, if you could break it down into maybe bigger chunks.

Yes, let me tell you we have got the growth in the quarter that's -- a big chunk of it is due to the Otis service billings, which is typical for the first quarter, and an even higher number year-over-year because of the growth of that business.

That's probably a couple hundred million dollars or so.

The next big chunk would be at Carrier, which is kind of the seasonality as we build into the selling season for the residential business in the U.S..

Then the rest of it is fairly spread evenly.

Just organic growth related.

Okay, because it was up more than the usual sort of first quarter.

Right, most of the up more is due to the progress and sales at Otis.

Okay and then if you look at cash flow, just free cash flow by month over the first quarter, I don't know if you have these numbers, but was March weaker than you might have expected or was it sort of a typical pattern?

I'm not going to get into monthly forecasts or reviews of cash.

I would say there were no surprises in March.

The business remains strong.

There wasn't any deterioration in receivables or collections or anything like that.

It was really just the usual normal, real good cash flow everyday here obviously.

No surprises, no weakness in the businesses, no underlying trend that I would be concerned about.

Right.

Okay then on the share repurchase, you bought back a very, very even $500 million a quarter last year and obviously this was a big tick up.

You are keeping your guidance for the year.

I'm just wondering if you look at your pattern, it hasn't really been opportunistic.

In the past, it has been pretty steady.

Your stock was down in the first quarter.

You bought back more.

Was this a change in your behavior or how do we interpret the higher number in the first quarter?

I don't know that I would say change in behavior.

Obviously when the stock was in the 60s it was just a hell of investment.

And so we just piled in.

The fact is, we like the stock as an investment.

The $2 billion placeholder is still in place for the year, but we're going to continue to go out when the stock is priced at levels that we think it shouldn't be.

We're going to go out and buy.

Do you think perhaps there's some possible upside to that $2 billion dollar number?

You're just not ready to move that up yet?

Yes, these numbers are all placeholders, Joe.

We will see how the year progresses.

Right now we're sticking by the $2 billion and we will come back to you at the end of the second quarter and update on all of this.

Okay, thank you.

Doug Harned, Sanford Bernstein.

On Fire & Security, you've talked about getting margins above 10% or at least to 10% this year.

The first quarter was well below that.

Can you talk about how you expect this to progress over the year?

Yes, you've got a couple of things happening in the first quarter that held it down.

And before I tell you that I will also remind you that in February when Bill was in front of you, he said exactly that.

He said the margin expansion will be greater and that as we progress through the year.

But in the first quarter remember that we still do have the manned guarding business in our numbers and the Australia piece will go away in the near-term and the UK stays.

But that does hold the margins down a bit.

Plus, as we said, we do have the acquisition -- investment related to the acquisitions on the integration side for the initial Marioff, the other acquisitions we did last year.

So for all those reasons, while we would like to see a very nonseasonal margin progression ultimately at Fire & Security, we said that will take a few years to do and this year it would still be more back end loaded.

And those couple of reasons are some of the primary factors.

But you still expect -- if you expect the 10% for the year, then you are looking at really getting to a more sustainable run rate above that if you're going to compensate for the shortfall at the beginning.

Yes, we are still -- we are not coming off of our 10% for the year and we are confident we can get there.

Then more broadly, when you've talked about conservatism in terms of how you're looking at the back half of the year, are there any specific areas that you are more concerned about than others?

I don't know that there's any one particular business.

Obviously we talked about a lot of different things in the environment.

The aerospace aftermarket, and again RPM growth, we're keeping an eye on that.

We're also obviously in the shorter cycle businesses at both Carrier and Fire & Security.

We've already seen a downturn or a softening there.

Those are the businesses that will move us around in the short term in the second half of the year.

So no real single thing that -- it's more of a general sense that you need to be conservative?

Yes, I think we read the same papers that everybody else does.

I think we do believe that there is a softening of the U.S.

economy.

Whether or not we're in a recession, we can leave it to the economists to tell us that in about two years, but right now we know is softening in the U.S.

economy and we're going to prepare for it by taking costs out of our businesses.

Okay, great.

Thank you.

Ronald Epstein, Merrill Lynch.

Just a couple of questions.

You spoke about the commercial construction in Asia.

Can we just talk about some of the other regions of the world?

What you are seeing in Europe, Eastern Europe, Western Europe, and if we could take -- maybe take a little trip around the world in terms of construction.

Sure, commercial construction in Europe, I would say it was very strong, but it is regionally strong in Eastern Europe, Russia, Ukraine, Poland.

I think all of those markets remain very, very robust.

Southern Europe, not so good, a little bit of overbuilding, as we had expected, in Spain, and also I think the UK has been softening on us.

So there is new Europe and old Europe, I guess, and old Europe is not moving quite as quickly as new Europe.

Go around Asia, it looks pretty good there, with the exception of Japan.

Japan has been slow to declining here in the quarter.

Korea looks to be coming back a little bit, not double digits, but still fairly good order growth in Korea.

India I think everything is on track there.

It's maybe a little lumpy, but I don't think we have any concerns.

And South America, although not a big piece of our business, continues to be very, very good.

Okay, also to just kind of change gears here to Pratt, you guys mentioned this in one of your charts, you have 18% organic growth in Pratt.

You said aftermarket spares were flat.

Is that right?

Is that what you told Steve?

Yes.

So what was driving that 18% growth?

That's huge.

It's Pratt Canada, primarily.

Well, I should say it is Pratt Canada which was up about 30%.

You also had good growth on the military side.

You had higher -- about 9 higher military engines delivered in the quarter and the power systems business was also up very strongly.

So really kind of a broad-based strike at Pratt.

Okay, now in power systems, you said it was up I guess 2 times.

You said that in your prepared remarks.

What was driving that?

Is it -- aero derivatives or what is that?

Yes, and we have seen it for the last 18 months or so.

That has been a very strong part of -- that has been in a good place in the market, I should say.

Lots of demand out there as you know for power and I think this is -- we're in a great spot with Pratt Power Systems to deliver on that right now.

Okay and then just one last question if I may.

The Geared Turbofan, you brought that up a little bit.

What is the next milestone we should be looking for on the geared fan?

We just -- I think we have completed about 40,000 take off and landings or equivalent take off and landings on it.

We're loading in the new engine into the nacelle.

We're going to fly it -- I think the most public milestone you are going to hear about is flight tests in the middle of the year.

And that I think we are pretty confident is going to happen, I don't know, June/July/August timeframe.

It will fly when it's ready, but we're certainly expecting that by midyear.

Okay, great.

Thank you.

Dana, can we take our last caller, please?

Myles Walton, Oppenheimer.

Greg, you've taken the conservative stance of not raising the full year guidance, but I guess maybe the important question is where do the contingency stands with respect to the full-year guidance.

I think you started the year at about $150 million at the top end of the range, but with FX here, it looks like maybe that is plus $50 million to $100 million, offset a little by Hamilton.

So I guess the question bottom line, where is the contingency today with respect to the top end of the guidance?

You've done the math pretty well, Myles.

I don't know if I can add much to it.

The fact is, we started the year with $150 million contingency.

We still feel very, very good about the year, because of that contingency, because of good news on FX and again, it's a solid contingency.

Right now as you mentioned, Hamilton's got a little bit of potential risk and we always wonder with commodities at Carrier, whether that is going to continue to flow through.

But overall, I tell you, we just feel very good about the year.

Myles, again, maybe just to pile into that earlier comment I made, we do feel very good about the year and you are right, the math is all -- all higher.

But it is an environment that can change and there's just no benefit with three quarters of the year left to overreach or go higher.

And again, I don't think we want to be in the position of being stressed like that in a possibly declining environment.

I don't think you want us to be releasing earnings and doing calls under that scenario either.

I think it is good commentary, though.

I mean essentially your contingency is flat to up and you are booking away some of the uncertainty for the back half of the year and I think that's the important takeaway.

Thanks Myles.

Thanks Myles.

Okay, let me just maybe wrap up with just two last thoughts, if I can.

First of all, you've heard everybody that we had a very, very good quarter, strong backlog, and of course there's a little bit of economic uncertainty on the horizon.

But we are very confident in our guidance and we're going to work to continue to be transparent with you guys, as we always have.

This is a culture of no surprises and we're going to endeavor to make sure there are no surprises as we go forward.

We may be conservative, but we think it's appropriate in this environment.

We've got a great operating system here with ACE.

We are really focused on hitting the guidance for the year, so again, a good quarter and I think it's going to be a very good year.

Lastly, I just want to say thanks to Ken Parks.

Ken Parks is leaving soon, maybe right after this call in fact to become the CFO at UTC Fire & Security.

Ken has been doing a great job here for the last three years, so we thank him very much.

I know you guys can all reach out and say your own words of thanks, but he has really done just a tremendous job.

At the same time, I would also like to welcome Akhil Johri back to corporate office as Head of our Investor Relations function.

He is leaving Fire & Security after almost five years, five long years.

He was in IR, some of you may have known for a short time back in 2003.

But we welcome back Akhil and I think he is uniquely positioned with his operating experience at Fire & Security to take us through these next three years.

So thank you to Ken and welcome to Akhil.

Akhil will be the calls this afternoon with Ken, so please take a moment and welcome Akhil back in, as we all do.

So with that, I thank everyone and be talking to you.

Goodbye.

That does conclude today's conference call.

Thank you for your participation.

You may disconnect at this time.