雷神技術公司 (RTX) 2008 Q2 法說會逐字稿

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

On the call today are Greg Hayes, Vice President, Accounting and Finance; Jim Geisler, Vice President of Finance; and Akhil Johri, Vice President Investor Relations.

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

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

Please go ahead, Mr.

Hayes.

Thank you, Nikki, and good morning, everyone.

As you saw in the press release this morning, we had another very strong quarter, driven by solid performance across the businesses.

Revenues were up 13% with 6 points of organic revenue growth.

Earnings per share in the quarter were $1.32, and that is up 14% over last year and includes $0.06 per share of uncovered restructuring charges.

Absent the impact of restructuring in the results for both the second quarter of '07 and '08, earnings per share was up 17%.

Foreign exchange generated a net $0.04 benefit in the quarter, with a positive impact from the euro and other currencies, partially offset once again by the FX headwind at Pratt & Whitney's Canadian operations.

Most importantly, we remain confident about the year.

Accordingly, we've taken our earnings guidance for the full year up to a range of $4.80 to $4.95 per share.

That is up 12% to 16%, $0.15 on the bottom, $0.10 on the top of the prior range.

This increase is on the back of better earnings at Otis and UTC Fire & Security.

Both units are now expected to deliver operating profits higher than the guidance Ari and Bill confirmed just this past February.

All the other businesses are on track with their prior profit guidance.

I should note that the revised guidance does assume the euro with the current spot rate of about $1.58; and you will recall that our plan assumed a euro rate of $1.44, so a little bit of tailwind there.

We are also updating our guidance on full-year revenue, which we now expect to be over $60 billion, and on restructuring spending as well.

Year to date we've incurred about $130 million in restructuring costs, all of this uncovered by gains.

We do expect some gains in the second half of the year, and we are also increasing today our outlook for restructuring spending for the year to about $300 million.

That is double the $150 million we forecast at the beginning of the year.

Now, as you know, it is not unusual for us to see some lumpiness in the timings of gains in restructuring on a quarter to quarter basis.

But we do expect that restructuring will be significantly in excess of gains for the full year.

On free cash flow, that came in at 87% of net income for the quarter.

That is primarily due to Carrier seasonality, as you would expect, as well as slightly lower advances at Sikorsky.

We are encouraged, however, by inventory performance in the quarter.

While the overall level of inventory remains high, especially at the aero businesses, total inventory was essentially flat for the quarter.

Improving inventory performance remains a focus, and there is still a lot of work to do.

On full-year cash flow, we expect the usual UTC standard of free cash flow greater than or equal to net income.

Also in the quarter, we repurchased $719 million of UTC shares, bringing the year-to-date total to over $1.5 billion.

For the full year, we are going to continue to be optimistic in our repurchases, and share repurchases will likely exceed the $2 billion guidance that we have for the year, especially if the stock continues to trade at its decade-low P/E multiple.

I'll have Akhil take you through the business unit details in just a minute, but let me talk about some of the concerns here that we've been hearing from investors over the last few months.

Those concerns are, of course, commercial aerospace markets, commercial construction order trends, and commodity inflation.

With oil around $135 a barrel, we are all concerned about the impact to our airline customers' profitability and the associated capacity reductions that they have all forecast.

In the second quarter, large commercial engine spare parts sales at Pratt & Whitney were about flat with last year, generally in line with Pratt's expectations going into the year.

And book-to-bill was marginally below 1.

Hamilton Sundstrand's commercial spare parts sales in the quarter grew in the mid-single digit range.

For the year, and our outlook for spares at both of these divisions remain generally in line with where they were at the start of the year, but we will be watching these trends closely.

As for commercial construction activity, we continue to see very strong orders at Otis and decent growth in Carrier's commercial business.

In the quarter in North America, new equipment orders at Otis grew double-digits and worldwide orders were up 23%.

Carrier's commercial HVAC business, new equipment orders, in North America were essentially flat in the quarter, but commercial HVAC orders worldwide were up double-digits.

In Europe, new equipment orders at both companies were strong in the quarter, with Otis up nearly 40%, although about half of that was from the benefit of the euro.

Otis saw a particularly good growth in France, Germany, and Eastern Europe.

Carrier's commercial HVAC business grew about 12% in Europe in the quarter at a constant currency rate.

Asian orders for both companies continue to grow at double-digit rates.

Now, refrigeration orders at Carrier both in North America and Europe continued weaker in the quarter, as we had previously discussed.

We are also mindful that construction industry forecasts for the US are generally down, although our order book doesn't indicate this yet.

Given this overall environment, all of our commercial businesses are continuing to focus on cost reduction and restructuring actions.

The last issue I want to touch upon is commodity cost increases.

You recall, going into the year we expected gross commodity cost impact excluding energy to be about $200 million, with about half of that offset by pricing.

We now see these gross commodity cost increases of over $300 million, with pricing still expected to offset a little more than half of the impact.

As you all know, steel prices have roughly doubled in the past year, along with the cost of oil.

Some of the metals used in the aero businesses as well as copper are also up, although to a much lesser extent.

On the other hand, we are getting better pricing than anticipated.

In sum, higher commodity costs than anticipated at the beginning of the year, but also a better pricing environment.

Now, UTC's response to all these challenge is, of course, to continue to work on costs and productivity.

That's why we bumped the year's restructuring to about $300 million.

Also why we continue to focus on the implementation of ACE across all of our businesses.

As a result of tight cost control, restructuring, and process improvements, we saw 40 basis points of margin expansion in the quarter, adjusting for restructuring.

Our portfolio of companies has allowed us to outperform in the past, and we expect to continue to outperform even in the current market environment.

Our target of 10% or more earnings growth annually remains unchanged; and our executive compensation incentives are all tied to this target.

Let me turn it over to Akhil and have him walk you through the business units.

Thanks, Greg.

Before I begin on page 4, let me mention that I'll talk to segment results with restructuring added back, as we usually do.

Otis delivered another very good quarter.

Revenues increased 19% with growth in all geographic regions, led by double-digit growth in North America, France, Russia, and China.

This reflects the strong new equipment backlog entering the year as well as higher modernization and repair sales in Europe, which benefited from changes to elevator safety laws in France and Spain.

Operating profit grew 25% as higher volumes, product cost reductions, and other cost-containment initiatives more than offset headwinds from input cost increases.

Favorable foreign exchange contributed approximately half of the improvement in revenues and profits.

As a result of all of the above, operating margin expanded by 90 basis points to 19.8%.

Otis new equipment orders were up 23% in the quarter, as Greg mentioned, 14% at constant currency, reflecting double-digit increases in all geographic areas.

In light of very strong first-half performance and Otis's current expectations, we are now increasing profit growth guidance for Otis from 10%-plus to nearly 20% for the full year.

Also, we are increasing revenue growth guidance from high single digit to low teens.

At Carrier, operating profit increased 9% on 7% higher revenues.

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

Operating margin expanded 10 basis points to 12.2%.

Benefits from product cost reductions and prior restructuring actions in the commercial HVAC and North American residential businesses more than offset $30 million of net commodity headwind in the quarter and adverse shift towards lower-margin segments in the refrigeration and international residential businesses.

The commercial HVAC business remains solid, with mid-single-digit revenue growth.

On the negative side, however, we still have the US housing recession; the cooling season started poorly in Europe; and commercial refrigeration markets were down both in Europe and North America.

In the face of market softness, Carrier has launched significant restructuring and other cost-reduction initiatives.

As a result, we remain comfortable with Carrier's full-year earnings growth guidance of 10%-plus on mid-single-digit increase in revenues.

UTC Fire & Security performance was also strong.

Revenue grew 29%, with acquisitions contributing 18 points and foreign exchange 7 points of this growth.

Organic growth was 4%, with the fire safety businesses in Europe and the Americas up mid-single digits; the security business in Europe up low single digit; and the man guarding business down moderately in the quarter.

Operating profit increased 46%, with foreign exchange contributing 8 points of the growth.

Benefits of restructuring actions and continuing productivity initiatives, along with the profit contribution from acquisitions, were partially offset by the impact of lower US residential volume.

Operating margin expanded 100 basis points to 8.8%.

Based on performance to date, we are increasing UTC Fire & Security's full-year operating profit growth guidance from 25% to 30%.

We are also increasing the revenue growth guidance from high single digit to mid teens.

Now, turning to the aerospace businesses.

On slide 7, Pratt & Whitney revenues increased 6% in the quarter, led by continued engine volume growth at Pratt & Whitney Canada.

Revenues improved over 20% at Pratt Canada.

Revenues at Pratt & Whitney Rocketdyne and Power Systems also grew over 10%, while military revenues were essentially flat.

Large commercial engine aftermarket grew low single digits, with spares about flat.

Operating profit also improved 6% in the quarter, led by the military business on favorable aftermarket performance and improved engine mix.

This was partially offset by adverse shop visit mix in the large commercial engine aftermarket business.

The profit contribution from high revenues at Pratt Canada was largely offset by the unfavorable foreign currency impact from the weaker US dollar.

E&D for Pratt was essentially flat in the quarter.

We continue to expect Pratt & Whitney revenues to be up mid-single digits and operating profit to be up approximately 10% for the year.

Hamilton Sundstrand revenues were up 18%, with Aerospace OEM and industrial businesses up nearly 20% each.

Commercial aftermarket revenues were up double-digit.

Operating profit grew 11%, and margin contracted in the quarter primarily from adverse mix.

Lower-margin development revenues grew by about 20%, while higher-margin commercial spares revenues grew only mid-single digits.

Hamilton also faced pressure from commodity and input cost increases during the quarter.

For 2008, we now expect revenues at Hamilton to be higher, up low teens.

We continue to see operating profit up 10% or $100 million, as indicated last December.

At Sikorsky, operating profit grew 28% on 9% higher revenue.

Operating margin expanded 120 basis points in the quarter to 8.5% from higher military volume and favorable mix.

During the quarter, Sikorsky shipped a total of 53 large helicopters, 37 military, and 16 commercial.

Sikorsky remains committed to its guidance of more than 200 large aircraft deliveries for the year.

Sikorsky continues to expect midteens revenue growth, with operating profit up approximately 25% in 2008.

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

Okay, thanks, Akhil.

Before we open the call up to questions, let me just hit on a couple of the significant new product milestones that we've achieved just this past quarter.

First, on the 787 program, Boeing -- as you have no doubt heard -- has successfully completed the 787 power-on testing with the support of Hamilton Sundstrand.

The next big milestone on the 787, of course, is first flight, which is scheduled for later this year.

The second big milestone for UTC, of course, is the GTF -- or PurePower PW1000, as we now call it -- which flew successfully for over six hours at our 747 test bed this past week.

Most importantly, the engine met or exceeded all of its pre-test performance targets.

This will, of course, power the new Bombardier C-series aircraft which was formally launched earlier this week, with a letter of interest for up to 60 aircraft from Lufthansa.

Finally, in the commercial space, UTC Power secured an order to supply 12 of our brand-new 400 kW fuel cells for the Freedom Tower and three other towers at the World Trade Center site in New York.

All right, summing it all up, it has been a very good quarter -- more noteworthy given the economic uncertainties that we are all dealing with.

Revenue is up 13%, EPS 14%, and net of restructuring 17%.

We increased guidance $0.15 on the bottom of the range and a dime at the top.

We now expect 12% to 16% EPS growth for the year.

Not unusual performance for UTC, just more of the same type of performance that you've come to expect.

Balance across geographies and products, tough restructuring, cost, and productivity mentality, especially in more challenging times, and an unusually strong string of product launches which look to be highly successful in their markets.

And of course, cash content and net income supporting increased cash returns to shareholders.

It's too soon to talk about 2009 specifically, but you know that we are all focused on double-digit earnings and cash flow growth.

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

Nikki?

(OPERATOR INSTRUCTIONS) Nicole Parent with Credit Suisse.

Good morning.

I guess first, when we think about commercial, the order numbers across Otis and Carrier on the commercial side look very strong.

Can you just talk, I guess, a little bit about -- are you seeing any cancellations?

Where do you guys feel you are in terms of the order process, when you think about what your products are going into and kind of the comfort with the sustainability of the orders that you are seeing?

And I guess with respect to -- how do you look ahead when you just look at the backdrop of the environment and the DOD and the [ABI] numbers in terms of thinking going forward?

Do we see cancellations in some of these orders that you are getting?

Thanks, Nicole.

That's a great question.

I wish I had a crystal ball to tell you exactly what's going to happen.

Me too.

(multiple speakers) a couple of quarters.

What we can tell you -- what we see out there in the market is we have not seen order cancellations to any extent.

There is always the odd there or one-off cancellation.

But we have not seen large-scale cancellations anywhere.

I think the one soft spot as we continue to note is kind of at the lower end of the product line in some of the low- and mid-rise office buildings, as well as on anything that touches the retail.

So strip malls and any of the retail side for Carrier's HVAC business here in the US.

China still very, very strong.

And Europe actually surprised us, I would say, with the strength that we've seen there.

We all see what the indicators are out there.

We all hear that things should be slowing down.

We just have not yet seen any significant slowdown in any of our businesses outside of, I'll say, commercial refrigeration in the US and Europe.

Again, I attribute that more to the retail spend than the general commercial construction.

So, so far so good; and we're obviously watching it closely.

Okay.

With respect go restructuring, you guys absorbed an enormous amount of restructuring in the quarter.

When we think, it is probably reasonable to think about the restructuring efforts at Carrier, but you also ramped it up at Fire & Security and Pratt probably relative to my expectations in prior quarters.

Could you just give us some sense on what is going on there and how we should think about that number for the full year?

Yes, we did, as I said, about $130 million year to date.

We've done a lot of restructuring at Carrier, obviously, in response to what's going on in the residential market there, as well as on the refrigeration side of the business.

I think what you are going to see for the rest of the year is just more of the same.

These actions have been primarily people-related.

We have closed a couple of factories and taken out about 1 million square feet.

The actions to date have affected about 2,500 people; it's about 1% of our worldwide workforce.

I think as you go to the second half of the year, more of the same.

More restructuring at Pratt, more restructuring at Carrier, and continued restructuring at Fire & Security.

But I would say no big change there.

It is just a focus on taking costs out to continue to be competitive in this very difficult environment.

Super.

One just one, just on M&A as we see the commercial airspace names get hit on concerns about the end of the cycle.

Could you give us a sense of what your thought is on aerospace acquisitions?

Then also give us an update on Diebold.

Yes, Nicole.

This is Jim.

I think, obviously with the decline in the market, aerospace valuations are more attractive.

For many of them though, they have only been more attractive for a couple weeks, so I think it might take a while for potential sellers' expectations to reset.

We are a buyer in aerospace, that is clear, and hopefully that opportunity or opportunities in aerospace will arise and they will be greater than they have been in the last couple years.

On Diebold, it's a good property.

It has very good ATM share, has a great global footprint, and obviously there is margin expansion opportunity because it's in mid-single digits and UTC runs its businesses in double digits.

But it's never been a must-have.

We made our proposal back at the end of February, and a lot of time has passed, and there are other opportunities in the world.

Including buying UTX stock.

So we will have to see.

Okay, great.

Thanks.

Good quarter.

Deane Dray with Goldman Sachs.

Thank you.

Good morning.

Just to clarify on Nicole's last question, a couple data points you used to provide on the backlogs of both on the commercial side, Otis and Carrier.

Otis was at 18 months on the last update and six months on Carrier.

Where do those stand today?

I would say they are just about the same.

Yes, we have seen strong order growth or continued strong order growth at Otis.

Backlog is relatively constant.

So I would tell you we still have about 18 months of visibility on the new equipment side.

It's the same on Carrier.

But just to be specific, it's Carrier's BSS or commercial business that we are talking about that we've got six months of visibility to.

And those orders outside of the US have remained relatively strong.

Backlog looks pretty good.

Okay.

Then the second question relates -- I know you've said that you will be light on 2009 specifics.

But with regard to the press release comments and intro comments regarding the potential slowing and expected slowing in commercial aftermarket on the aero side, can you talk a bit about what the offsets might be?

What would be different in '09 versus '08 in terms of your mix?

Let's say the power by the hour contracts, the number of deliveries out of Pratt & Whitney Canada.

So just give us some context, because we can certainly see the expectations about capacity coming out of the US commercial airlines.

But how is UTC positioned differently in '09?

You know, Deane, I would love to get into an '09 discussion; but unfortunately I think it is just a little bit premature.

I'll tell you, we are targeting 10%-plus growth as we said in the intro comments and in the release.

Obviously, with commercial aero in a challenging environment, that becomes more difficult.

But I think we feel pretty good about the prospects for next year.

As this year comes to a close and we see what really happens with the airlines and what happens with oil, I think we will have a better feel for it.

But I will tell you right now we have got confidence we can continue to grow earnings no matter what the environment.

If I asked it this way, could you tell us what the economics are as you today have your power by the hour contracts?

What you can do in terms of expense control and management there, and what the offset might be, just conceptually.

I'm not looking for a P&L impact.

About 40% of Pratt's aftermarket is FMP or power by the hour type contracts.

It's a similar number at Hamilton.

So obviously those contracts, or the revenue associated with those, is all going to be based upon flight hours, as opposed to RPM.

So planes are still flying and revenue still looks pretty good there.

In terms of cost control, I think it is just back to the UTC playbook.

We are going to take costs out where we can.

We are going to try and increase productivity, use the ACE operating system to improve back office as well as factory productivity.

It is just going to be the basic playbook, Deane.

I can't give you a lot of specifics unfortunately, but we are confident as we look forward.

Great, thank you.

George Shapiro with Citi.

Yes, good morning.

A couple of quick ones.

The revenue increase at Otis and Fire & Security, is that all just reflecting your currency change, or is there actually some organic increase that you are seeing?

George, at Otis about half of the revenue increase or half of the 19%, approximately, was currency.

So about 10% organic growth there.

In case of Fire & Security, about 4% organic growth.

No, what I mean is the increased revenue guidance that you provided for the year, is that all currency related or is it also some organic?

It's a combination of the two.

There is some currency in there, but there is a lot of operating performance both in Otis and Fire & Security.

Okay.

Then, if we look at the Hamilton Sundstrand, you mentioned spares up mid-single digits but the whole aftermarket up double digits.

What is the mix there between the maintenance business and the spares business?

George, as we look at the Hamilton Sundstrand business, we said commercial aftermarket was still pretty good with spares up kind of mid-single digits.

The repair side was actually up almost 20% in the quarter.

So we continue to see good input into the shops, which is actually I think a good indicator as we go forward that the aerospace business is not perhaps in as dire straits as people might have thought.

So good input into the shops.

And we actually saw the same thing at Pratt & Whitney, where we saw better inductions in the second quarter than the first quarter into the engine shops.

So unfortunately the problem with the repair operations is it's much lower margin than what we see on spares.

Still indicative of a pretty robust market out there.

Greg, what is the rough mix between the two in the aftermarket?

Repair is slightly below 50% of the commercial aero, but they are about equal.

Yes, about equal.

Okay.

Then just back on Otis and Carrier, I found it ironic that the order growth this quarter was actually greater than the order growth that you had detailed in the first quarter.

Some of it might have been a little bit extra currency, but is there any areas that you actually saw relatively better this quarter than the first quarter to account for that?

I think Europe was probably the surprise for us, especially Otis, where you saw almost 40% growth in orders.

Again half of that being currency, but still very strong underlying growth as I said in France, Germany, and Eastern Europe, specifically in Russia.

Okay.

Maybe one last one, Greg.

At Pratt & Whitney you've done a remarkable job of holding the margins up where they are despite zero spares growth.

From how you look at it, what would have to happen for those margins to start to come down at Pratt & Whitney?

Obviously, if you had a significant slowdown in spare parts sales, it is still a large percentage of Pratt & Whitney's profitability tied to spares.

But as you try and size that, Pratt is more than just commercial aerospace.

The commercial aerospace is about $4.5 billion of Pratt's $13 billion or so of revenue.

So you would have to have, I think, more than just commercial aerospace turned down to really see a big decline in margins at Pratt.

You have got good strength at Pratt Canada.

You have got good strength on the military side.

Rocketdyne is doing well.

It is a big well-balanced company, just like UTC.

Okay, very good.

Thanks a lot.

Howard Rubel with Jefferies & Co.

Thank you very much.

First, could you talk for a moment a little bit about Sikorsky?

Some progress, but still maybe not the margins you would like to see.

Then, Greg, also address the MP, the maritime helicopter program please?

I guess I would -- if I might take a little bit of umbrage with your first question there, I think actually we saw pretty good performance out of Sikorsky this quarter.

They delivered 53 helicopters; that is up from 30 in the first quarter.

They saw 120 basis points of margin expansion, 8.5%, so it's good performance.

Is it where we want them to be ultimately?

Absolutely not.

There is still room to go there.

We have talked and Jeff has talked about double-digit business here in the next couple of years -- or next three years, I guess.

But they are making progress.

We are still committed, or Jeff and team are still committed to deliver over 200 large helicopters this year.

There is more than just, I would tell you, the helicopter deliveries; that is about half of their revenue.

They are also doing well on the development side with the CH-53 and some of their other big programs.

So I think it was a very good quarter.

Again, it's just indication that they are on the right track and they are on the right trajectory for this year and into the future.

As far as the Canadian Maritime program, I don't have much of an update other than to say that we are working very closely with the Canadian government.

We will be late with the helicopter, as we have talked about before, probably up to 24 months late at this time.

We are working closely though to make sure that the helicopter meets the requirements of the Canadian government both from a schedule and a cost standpoint.

At the end of the day it's going to be the best world's best search and rescue helicopter the Canadian government is going to be buying from Sikorsky.

So the program is, I would say, back on track.

Flight tests will happen later this year.

Deliveries will start probably in around late -- or 2010, I guess at this point, 2011.

So a little late; the first helicopters will be a little more expensive; but overall from a program standpoint, it is still a great program.

No, I hear you and that is encouraging, and I appreciate that.

Yes, I guess it could concede 8.5% is clearly a move in the right direction.

You didn't talk about industrial at Hamilton Sundstrand.

My guess is elements of that business continue to be very strong.

Could you just talk for a moment on that?

Then I have one other item.

Yes, it was actually a very strong quarter in industrial.

They had their revenues up about 20%.

As you would expect, the businesses that are impacted by growth in China and Asia, very, very strong.

Saw a little bit of slowdown in some of the US-centric construction businesses.

Any of the hydrocarbon processing work, primarily Sundyne, Milton Roy, all those businesses continue to be very strong.

Order growth was a little less than the 20%, but still strong.

I think they are going to have a pretty good year.

Then, Greg, finally, one of the challenges is always trying to figure out how Fire & Security organic growth is being measured.

Could you or maybe Akil, because he is so familiar with that business, address --?

I'm going to (multiple speakers) right to Akil.

Good handoff, right?

But seriously, some of the metrics that you could talk about, either customer adds or other things that you can point to where there is organic growth.

There is good growth, Howard, in the fire safety side of the business.

As you recall, fire safety is about two-thirds or 60% of the total revenue base for Fire & Security.

That grew in mid-single digits, which was good to see, both in North America and Europe.

In fact, inside of North America, the residential business, which we had talked about last time in the first quarter had been down 30%, was down 16% this quarter as well.

Yet the overall fire safety business in North America grew mid-single digit.

So very encouraged with all the focus and effort that Bill and team are putting on the organic growth side.

Security EMEA, which was a little bit down also in first quarter, was up low single digits.

So again, encouraging signs there.

I think the team is focusing on organic growth and hopefully will report better numbers going forward on that.

Thank you, gentlemen.

Joe Campbell with Lehman Brothers.

Good morning, Greg, Jim, and Akil.

Could you just -- I have just two things.

One is, you have given us a lot of information, most of which is reasonably constructive about order rates in the various businesses and the various global markets.

But rather then kind of business-wise, is it possible to piece together sort of Europe, Eastern Europe, Asia, China, and so on?

Just kind of go around the world.

I am struck, for example, that you've got such strength at Otis; but then you are off to a slow cooling market in Europe; and then you've got weak refrigeration.

Is there a way to kind of pull this together region by region, so that we can see whether your views of what seems to be going on, taken in the aggregate, is really that different from what we read in the paper and so on?

Then the second question, I will just give it to you right now, is whether or not we think we can -- can we achieve kind of 10% margin in Fire & Security?

Or are we backing off from that with the strength in the revenue growth?

Let me start, Joe, on kind of the geographic overview, if you will.

I don't think there is any surprise as we look at where we are strong and where there is a little bit of slowness.

As you think about the US overall, from a UTC perspective now, growth there is kind of mid-single digits in terms of revenues for the quarter.

Obviously the weakness in the US residential market is a big piece of that slowdown.

I think we actually saw some encouraging signs, I think, in the residential market today, where housing starts actually were up in June.

Carrier's res business is actually getting a little bit of traction, I would tell you, in a down market, mostly on the back of cost reduction.

But the US kind of mid-single-digit growth.

It was the slowest growing area around the world.

Europe, I think maybe that is the surprise to everybody here.

Again, we saw very strong growth at Otis as well as Carrier.

That is mostly, I would say, France, Germany, and Eastern Europe.

There is still a lot of slowness in the UK, Spain, Italy, both in the cooling markets as well as at the elevator business.

So again no surprises.

I think it coincides pretty well with what you guys probably see in the paper.

Asia, again very, very strong.

Talking about double-digit growth there.

Again, I had to differentiate.

China continues more than 20% kind of growth rates across our businesses in China.

Japan, that is slow.

Korea is slow.

But Asia in general in total, including India, up strong double digits.

So I don't think there is a dichotomy here in terms of what we are seeing versus what you are reading.

It is just that we are being very successful in those markets that are expanding, especially in the emerging markets.

Joe, on Fire & Security, you will see very strong profit growth for the year.

But I think on 10% margins we will come up just shy of that.

And there is no shame in being a little bit short of 10% margins for the year.

We wanted to sell and announce the sale of some of the low-margin man guarding businesses, but the valuation wasn't there in this tough market.

So we decided to retain some of those business, and they have margins that are low to mid-single-digit, so it just dilutes the margin.

But you still get the same earnings growth that we talked about earlier in the year, and actually a little bit more with foreign exchange.

So Jim, that change in the resulting margin, the earlier guidance assumed that you would be able to get rid of some of those.

So really the businesses are stronger ex-that, rather than weaker; and it's just the sum of them, if I understand it correctly, that is pulling the average margin down.

Joe, you said it better than I said it.

I know I did.

All right, thanks so much, Jim.

Thanks, guys.

Nigel Coe with Deutsche Bank.

Good morning.

So Otis margins, 19.8%, I think that is a record, up 90 bps year on year.

So the story last year was mix is offsetting the top-line growth and that is keeping the margin leverage below trend.

But we are not seeing that now.

I'm just wondering, are we starting to see the impact of operating leverage on the [volume] growth offsetting that mix impact?

Maybe if you could just comment on what the OE margins are doing right now.

Nigel, firstly, the mix in the quarter did not change unfavorably.

That is because the service revenues grew almost as fast as the OEM revenues grew for the quarter.

That was certainly not a headwind as we have talked about in the past.

The second thing is we truly are seeing tremendous operating leverage, the high volumes on OEMs, the product cost-reduction actions and other cost actions that are Ari and now Didier and team are taking in Otis -- it is just great execution there.

You are seeing the benefits of OEM margins expanding and the mix really not changing as service revenues grow about at the same rate as OEM.

Okay, I'm surprised that revenues grew at the same level as the OE.

Is that sustainable?

Keep in mind that Europe is where we have a larger proportion of service revenues as a percentage of total revenues.

When you have the currency benefit in euro like we have seen, that helps at the actual currencies -- the mix part a little bit.

Okay, I understand.

Then, Greg mentioned a little bit of traction in the resi market in the US, which is -- on the HVAC side, which is interesting.

I just wonder if you could just expand on that.

On the pricing side for residential, obviously you announced a price increase last quarter.

You are starting to see some good pricing coming through on the PPI numbers for air-conditioning.

I'm just wondering, are you seeing that pricing action sticking?

Let me start first maybe on the overall market.

We saw some preliminary statistics which would say that the market was down about 9% or 10%.

This is overall split systems market in the US in the second quarter in preliminary numbers.

Our revenues were about flat year-over-year; so that would tell us that we are getting a little bit of traction in the market.

That is really continuing the trend that we saw in the first quarter.

So again, I think they are addressing some of the concerns that were out there in distribution and in the cost side.

They are doing a lot of things to try and take back a little bit of share, and that has been going quite well.

As far as the pricing, we did announce a price increase last month which is effective actually July 15.

We are getting a little bit of traction with pricing, which is good news.

I think we've seen pricing from the competitors as well.

But in this environment where we see input costs going up, we are actually getting, I would say, better pricing than we have historically seen on the res side.

Okay.

Then just one final one.

I think you talked about some gains offsetting the restructuring in the second half of the year.

Can you just give us a little more bit more color on those items?

Well, we've got a few gains, although I can't give you any specific number on them today.

We've got a small business that Pratt just disposed of here in the beginning of the third quarter, which will generate a small gain.

We have also -- we are working on a tax settlement related to 2000 and 2003.

I can't really be very specific because I just don't have that finalized yet with our friends at the Internal Revenue Service, but we expect that that will be resolved by the end of the year.

We expect that that will be a fairly sizable reversal there, but I just can't give you a specific number on it.

What I do know is that restructuring is going to be very strong in the back half of the year.

Obviously, we have done $130 million so far.

We see at least another $170 million, and the gains could be up to that level or maybe even a little higher.

We will have to just wait and see what happens.

Okay.

Then just I was a little bit surprised that the Pratt restructuring wasn't a little bit higher given that is where a lot of the pressure is going to be felt in '09, I presume.

Can you just maybe comment on that?

I think as always, I think all of the units are teeing up restructuring as they think about 2009.

Pratt certainly has been focused on this, and I think as you go into the third quarter that $170 million that we just mentioned, you will see Pratt be a fairly large participant in that pool.

Okay.

Thanks, Greg.

Cai von Rumohr with Cowen and Company.

Yes, thank you.

It looks like if you kind of hit your targets that you will see a pickup in commercial helicopter deliveries in the second half.

I believe those have lower margins than the military.

Can you improve your margins at Sikorsky from where you were in the second quarter?

Absolutely, Cai.

I think we saw very good progress, 120 basis points.

I think we will continue to see margin traction there throughout the year.

I'm not going to say 120 basis points, but we should continue to see cost come down, especially on the helicopter production line.

Hours have to continue to come down; and they have to come down not just from a cost standpoint but also from a delivery standpoint so that we have the capacity to deliver these next 120 helicopters or so in the second half.

So sequentially you should be able to improve the margins from the 8.5?

Not year-over-year, obviously, [except] in the fourth quarter.

Yes, I think that's right.

Okay, great.

Then could you give us the number of industrial gas turbines that you shipped in the quarter and give us some color?

That market appears to be relatively strong.

Talk about order intake, what you expect for the year, and kind of momentum you might have going forward.

Well, we actually shipped about 20 of the industrial gas turbines.

That is actually up 100% from what we saw last year in the second quarter.

That market continues to be very robust around the globe, as people are looking for peaking and standby energy.

I don't know that we have -- I'm just looking to Akhil here to see if we have the order intake for industrial.

If not, maybe we will get back to you with a call if that will be helpful.

Then so -- what do you expect to do for the -- what is the plan for the year?

I don't know that I have a forecast for the year for industrial gas turbine shipments.

Again, what I will do is I will ask Akhil or Maria to try and get that data for you.

Okay.

Than the last one, Greg, you mentioned that the nonrecurring gains in the second half could equal or exceed the $170 million.

Which would mean, as opposed to being a headwind of $128 million in the first half, restructuring would be essentially neutralized in the second half.

To the extent, you know, kind of business goes well, what is your inclination in terms -- like if you have a bigger nonrecurring gain, what is your inclination in terms of even pushing that restructuring higher?

Because you are really implying a decline in the run rate from where you were in the second quarter, versus letting more of the earnings flow through.

I think as you think about the year 2008, we have taken the guidance up to on the top end about $4.95; and we have contemplated in that the restructuring up to $300 million.

I would tell you, given what we see for '09 today, I would suspect that we would probably want to do more restructuring as opposed to flowing it through to earnings at this point.

I think that we saw that here in the first half of the year, and I think we will have that playbook in the second half of the year.

If there is appetite for restructuring, we want to make investments for the long term here.

We are going to do what is right for the business over the long term.

Okay.

The last one in terms of the timing of the nonrecurring items, can you give us any sense?

If it is like 150 or kind of whatever it is, what are the key items that could contribute to that and when might they fall in the third and the fourth quarter?

Cai, really, again, we have got one small gain that we know that has already closed here early in the third quarter.

That's the Pratt disposition.

But in terms of the larger gain, as it relates to the tax or a few of the other things that we are working on, I can't tell you whether that is third quarter or fourth quarter today.

We will certainly let you know as we know about those things, so that there is no surprises here.

But it should be one big lump in either the third or the fourth?

Yes, it could be one big lump, it could be some other things as well.

I just can't give you a specific in terms of timing today.

Okay, that's great.

Thanks a lot.

Cai, just to close the loop on the industrial gas turbine forecast, I think that we have had about 35 shipped in the first and second quarter; and we have full-year forecast of between 55 and 60.

Thank you.

Chris Edwards with JPMorgan.

Good morning, guys.

Congratulations on a good quarter.

Joe wanted me to say hi, too.

He is on a flight back.

A couple of quick questions, because most of mine have been answered.

You referred earlier to some of the capacity reduction announcements that the airlines have announced.

A lot of those planes are Pratt engines, MD-80s.

We were just curious to see what percentage of the Pratt installed base you expect might be parked over the next year or so.

Chris, I don't know that I would have a percentage.

As you think about the announcements that have happened so far, I think American just talked about taking 50 or 60 MD-80s and reducing that capacity here in the third or fourth quarter.

Maybe the bigger capacity reduction has actually been announced I believe at United, where they are talking about taking old 737s, which are actually CFM powered as opposed to Pratt powered aircraft.

As you think about Pratt's aftermarket, the commercial aftermarket is about $3.5 billion.

We've given these numbers before.

About 10% of that is kind of the older model engines, the JT-8's and JT-9's .

I think what's important just to keep it in perspective is five years ago that business was about double the size it is today.

So we've already seen a fairly large reduction in spare sales related to those older models.

So again, there could be some further capacity reductions beyond what has been announced; and it is painful to the extent it impacts spares; but it's not catastrophic in any way.

I think it is just something that we will have to manage at

Right.

No, that sounds good.

Thank you.

Then shifting gears a little bit, commercial refrigeration has been relatively weaker in the first half of the year.

How do you think about that going forward for the rest of the year and maybe into next year?

In terms of commercial refrigeration we have seen some weakness both in the US as well as in Europe.

Again, that is really more retail spending related.

So I don't know that I would call a rebound in that market in the near term.

I think, again, it will depend upon what happens in the US economy as well as the broader European economy.

We've got a good position still, though.

Is that refrigeration weakness split over kind of like the store-based sort of products and containers?

Or is it more one or the other?

I think what Greg was talking about is more the display case.

Display case.

Display case business, which is the store-based part as you are calling it.

Okay, but container remains good?

Actually, container was down in the quarter.

We actually saw weakness in the container shipments for the quarter versus last year.

Again, it is hard to call that.

We look at -- containers are a pretty lumpy business.

So down in the quarter, but I think for the year we are pretty still pretty optimistic that containers are going to come back.

Okay.

Then you've spoken about, I guess, truck trailer before.

How is that going in the US and Europe?

US truck trailer has been very strong.

It has come back quite a bit from last year's depressed levels, so we are seeing good growth there.

Europe has actually started to moderate a bit.

That again is a bigger business than the US truck trailer, but it's also a very profitable business.

So that was actually down a little bit in the quarter.

Okay, thank you very much.

Doug Harned with Sanford Bernstein.

Good morning.

On commercial construction, and I would say both Otis and Carrier are commercial, when you talked about the growth you are seeing in orders, can you characterize that versus market growth?

Obviously that depends on geography.

But I'm trying to understand, are you seeing growth in the market or are you capturing share gains?

This is Jim.

I think we are seeing both.

I think we are seeing the market continues to grow.

I think we have good products both with Gen2 at Otis and some of the Carrier commercial products allowing us to take share gain.

I would note, because we have talked a lot about it this morning, though, that we have had good backlog growth; and particularly at Otis we have been getting pricing in this market.

We have been executing, part of the reason you see higher margins.

But as we look forward, architectural billings are down; and we have seen a little bit lower quoting activity; and that usually precedes quarters.

So I think we've had very good backlog growth, but I don't think we're going to sustain these very high growth rates and backlog growth rates into the future.

What I was getting at is outside of the US.

Are you able to compensate some for any slowing we may see by some share gain in some of these other markets?

I think we will have to see.

But to date we've had both.

We've had growing share in robust markets.

Then on Fire & Security, you talked about organic growth and the FX effect.

Could you talk a little bit more specifically about the part that is -- the piece that is acquisition, the non-organic part of this?

And then what the actions you are taking that lead to the restructuring charges, in other words, what are you doing there that is leading to fairly substantial restructuring charges?

With regard to the acquisitions, actually both questions are related to some extent, because the acquisition of Initial which we announced third quarter of last year is driving part of the restructuring charges as well.

What is happening there is that was more of a density play.

If you recall, we had a position in UK, France, and Netherlands; and with Initial coming on top of that, it gives us an opportunity to drive the combined revenues to a lower infrastructure in terms of lower number of branches, single head office, et cetera.

So that is driving some of the restructuring.

The integration of Initial is going very, very well.

We seem to be on track with that.

That is part of the reason why Bill is expecting some margin expansion in the second half of '08 larger than what you've seen thus far.

The other acquisition of significance was Marioff, which was fourth quarter last year.

Again, the order rates there continue to be very strong.

The business is doing extremely well, and we are very, very happy with those plays that were made in Fire & Security.

So when you look forward, and you talked about 10% margins this year, and I was assuming that that was 10% including restructuring before, are you on a track for something like that?

Then when you look long-term at the 15% goal that you've described, is that all pretty much intact?

Or long-term could it even be stronger, given what you have done?

It is very much on track is what I would say, Doug, at this point.

When we give op margin guidance it is always adjusted for restructuring cost.

Certainly we have the benefits of restructuring in those guidance numbers, and that continues to be the reason why we feel Bill has a good path to get to the 15%.

Okay, good.

All right, thank you.

We've got one more question.

Lee Rawlings from Morgan Stanley.

Good morning.

Nice quarter.

Just a few questions.

When you talk about your new equipment order growth, I'm taking that's in dollars.

Could you characterize that in units overall?

I think you said it was 40% in Europe.

Could you do that for us?

It is tough to talk about units, only because units is made up of so many different sizes and types and components it becomes difficult for us to characterize that.

Clearly, the way to look at is the FX, which we talked about.

15% of the 40% is roughly FX.

So if you adjust for that, at constant currency you are about 19%, 20%.

I think on a unit basis, again, Otis plays very well in the higher end, so the dollars per unit for Otis wins are typically larger than the market in some cases.

But to give you an exact number in units, that it's tough for us to do.

Okay, fair enough.

Then in the US, could you tell us just maybe regionally where the strength is coming from?

And maybe in Europe, maybe a country by country for Otis?

Europe is easier to talk about; let me start with that.

I think that one is more, I think as Greg said, France.

Certainly for Otis we have seen strength in France, Germany, Eastern Europe, particularly Russia.

Weaknesses on the other hand have been basically UK, to some extent Italy, and Spain to a smaller extent.

With regard to US, I think that is a little -- something maybe I can take later on, on the call.

I will talk to you about that.

We will try and get you some more detail here.

Give Akhil a call.

Okay.

Then just to switch it up a bit, I know going for into power-on, I think Hamilton had a few outstanding items that were necessary to be complete for power-on.

Just wondering, could you give us an update there and just what is going on with the program?

What are you guys working on?

Any surprises, positive or negative.

I wouldn't characterize that we had any real surprises.

It's a development program, so you always have things that you may have to re-work as part of the process.

But I would tell you the power-on process from a Hamilton perspective was about as good as we could have ever expected.

We are obviously supporting the first flight certification hardware, so we've got a couple of outstanding items there.

I expect all of that will be done by the end of this month, end of July, to support first flight, which of course won't happen until sometime towards the end of the year.

So we feel very good about the program.

I think Dave Hess and team and Tim Morris and all have done just a great job in supporting Boeing through this very long and difficult development process.

But not done yet, still spending money, but I feel -- I think we all very good about the program.

Right.

What are the systems that are outstanding for first flight?

Again, I don't know that I have those specifics.

I know again a lot of it has to do with the certification of software.

It's primarily going to be related to electric power distribution systems.

But I'm sure there is more kind of nits and gnats that have to be concluded as well.

I just don't have a complete rundown for you here.

Sure.

Then I think Nicole asked about an update on Diebold.

I don't remember the answer, the question being addressed, though.

If you did, I apologize.

But could you give us an update there?

Yes, actually I will give an update.

I did speak about it about 50 minutes ago, and actually my response is going to be similar to what it was 50 minutes ago, but the (multiple speakers).

I apologize.

No, that's all right.

I was going to say actually the response is going to be the same as it was an hour ago and as it was four months ago, which is -- we really like the property, but it's not a must-have.

There are other opportunities in the world, and we will have to see how it goes.

Got it.

Thanks.

Okay, I just want to thank everybody for dialing in, listening in this morning.

Obviously, a very strong quarter and we've got a lot of confidence in the year.

The focus right now, as we've mentioned many times on this call, is about preparing for '09 and dealing with the economic uncertainties we all face.

But we feel very good about where we are.

We've got great products, great people, and we are going to have a great year.

So thank you very much.

Ladies and gentlemen, this does conclude today's conference.

Thank you for your participation.

You may now disconnect.