雷神技術公司 (RTX) 2008 Q3 法說會逐字稿

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

On the call today are Greg Hayes, Senior Vice President and Chief Financial Officer, 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 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.

Please go ahead, Mr.

Hayes.

Thank you, Lena.

Good morning everyone.

Just a reminder, on the -- there is a webcast slides on our website that is available and we are going to start on page two.

Let me just start out by saying that in times like these it is good to be a part of a company that makes real products that people around the world need and use every day.

Our third-quarter results demonstrate once again that balance works.

Performance was strong across our businesses.

We saw margin expansion at five out of our six businesses and are overall 60 basis points of operating margin expansion adjusted for restructuring and one-time gains.

We also saw double-digit earnings growth at four of our six businesses.

Cash flow in the quarter was strong with free cash flow at 123% of net income on top of strong collections at Pratt, Carrier and Otis.

It is this operating performance along with continued robust free cash flows that gives us confidence in the future, confidence you saw demonstrated by the 20% increase in our dividend last week by the almost $1 billion of shares we repurchased in the quarter.

With three quarters of the year now under our belts, we also remain confident in our '08 outlook and we are raising the bottom end of her EPS guidance range $4.90.

Despite the adverse headlines, we are all seeing regularly, we now expect 2008 EPS of $4.90 to $4.95 a share.

That is a 15% to 16% increase over 2007 and revenues of around $60 billion.

Of course for the full year, we continue to expect the usual UTC standard of free cash flow greater than or equal to net income.

I will have Akhil take you through all the business unit detail in just a minute but let me just hit a couple of other highlights.

Earnings per share in the quarter $1.33; that is up 10% over last year and includes $93 million of restructuring charges funded by strong operating performance and a small $37 million non-cash gain at Pratt & Whitney.

Net of this gain we had $0.03 of uncovered restructuring charges in the quarter.

The majority of the $93 million of spending was for headcount reductions at Carrier and Pratt & Whitney.

Absent the impact of restructuring and gains in the results for the third quarter of both '07 and '08, earnings per share was up 16%.

Okay let's go to slide three.

Organic growth in the third quarter was 4%.

This was impacted of course by slower growth at both Pratt & Whitney and Carrier.

Pratt & Whitney saw a mid-teens decline in its large commercial spares and a book to bill below one.

In contrast, Hamilton Sundstrand's commercial spare sales were up in single digits and book to bill was about one.

Carrier's commercial refrigeration and international residential businesses were also weak in the quarter.

As for commercial construction activity, we saw slowing order rates at Otis, especially late in the quarter.

On a global basis, Otis's new equipment orders were flat year over year in the third quarter.

Carrier's commercial HVAC new equipment orders on the other hand were up double digits worldwide.

So we are not immune to market weakness.

Balance actually does work.

Fire and Security, very strong quarter, 5% organic revenue growth, its best quarter yet.

Strength in the Fire Safety business on the back of solid presence in the petroleum, oil and gas markets and the marine segments drove that result.

Our backlog remains strong at about $59 billion.

Otis new equipment backlog at the end of September is up 18% from the beginning of the year and Sikorsky's backlog is almost $12 billion.

For the full year, we still expect mid single-digit organic revenue growth.

As you have seen, currency markets have fluctuated dramatically all year.

In July you will recall we revised our earnings guidance to a range of $4.80 to $4.95 when the euro stood at 1.58 to the dollar.

Actual average euro rate in Q3 was about 1.52.

That did provide a bit of revenue earnings tailwind in the third quarter versus 2007 but certainly not as much as we had expected.

Today the euro stands at 1.35, and amazingly that is down 15% in the last 90 days.

Other currencies such as the South Korean won and the Australian dollar have appreciated even more steeply against the US dollar.

At today's exchange rates, these currencies create approximately $0.06 of EPS headwind in the fourth quarter versus the July guidance.

So in anticipation of a slower growth environment and currency headwind, we've accelerated the cost reduction actions across the businesses.

Year-to-date restructuring spending is $221 million with a small offsetting gain of about $37 million.

For the full year, we continue to expect restructuring costs of around $300 million with an offset for one-time gains of about half that amount.

The largest being a further IRS tax settlement which should come in the fourth quarter.

We also had a little bit of good news on the tax line in the quarter as a result of reducing our full-year forecasted effective tax rate of 28.5 to 28.

That is actually the result of a couple additional international planning opportunities coupled with the expected impact of the recent R&D tax credit.

I'll come back to you at the end to talk about our preliminary outlook for 2009 but for now let me turn it over to Akhil to take you through the business unit details.

Thanks, Greg.

Before I begin on page four, let me mention that I talk to the segment results with restructuring added back and excluding one-time gains as we usually do.

Otis delivered another strong quarter.

Revenues increased 11% led by strong new equipment volume as well as higher modernization sales in Europe.

Geographically the increase was driven by continued double-digit growth in North America, Europe and China.

Operating profit grew 14% as higher volumes and better field installation efficiency more than offset headwind from input costs.

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

Operating margin expanded by 60 basis points to over 20%.

New equipment orders were up 15% year to date, 8% excluding the impact of foreign exchange despite being flat in the third quarter.

In the quarter, Otis saw continued double-digit growth in Asia in the orders offset by a significant decline in North America influenced in part by a single large project cancellation in Las Vegas.

Other growth in China remains strong in the quarter up around 30%, about 20% excluding the impact of foreign exchange consistent with the first half of the year.

With the impact of strengthening dollar, we now expect Otis full-year earnings growth to be up mid teens as compared with nearly 20% in our previous guidance on double-digit revenue growth.

At Carrier, on slide five, operating profit increased 5% on 5% higher revenues.

Operating margins were flat despite difficult conditions in several of Carrier's end markets.

Favorable foreign exchange translation contributed most of the revenue and earnings growth while the net commodity headwind in the quarter was about $20 million.

Economic conditions in Europe contributed to a slowing in Carrier's residential HVAC and refrigeration sales in that region.

Also unfavorable currency shifts have pressured margins on certain refrigeration products manufactured in Eastern Europe and Asia.

As expected, ongoing weakness in the US residential HVAC market affected our US residential business although so far this year Carrier's shipments have held up better than the market.

A bright spot at Carrier was the commercial HVAC business which continued its strong performance with mid-single-digit revenue growth and double-digit new equipment order growth in the quarter.

Carrier continues to implement restructuring and other cost reduction initiatives to offset market softness.

Given the impact of market conditions and the strengthening dollar, we now expect Carrier's full-year earnings growth to be up around 7% as compared with 10% plus in our prior guidance on low single-digit revenue growth.

On slide six, UTC Fire and Security also delivered strong performance in the quarter.

Revenue grew 10% including five points of organic growth.

Fire Safety lead the growth with solid double-digit expansion in the Americas and Asia.

FX contributed an additional two points of growth with the remainder from net acquisitions.

Fire and Security completed the previously disclosed sale of the Australian manned guarding business during the quarter with no profit impact.

Operating profit increased 27% or $33 million.

Higher organic revenues along with the benefits of restructuring, integration and continuing productivity initiatives generated approximately two-thirds of the profit growth.

FX contributed only one point of growth while net acquisitions contributed the remainder of the increase.

Operating margin at Fire and Security expanded 130 basis points from 9.5%.

With the recent strengthening US dollar, we now expect Fire and Security's full-year operating profit to be up around 30% on mid teens revenue growth.

Now turning to the aerospace businesses on slide seven, revenues at Pratt & Whitney increased 3% in the quarter.

High teens revenue growth at Pratt Canada on the back of over 35% higher engine volumes was partially offset by lower military development revenues and engine deliveries.

Revenues in the commercial engine segment were flat with spares sales down mid teens, as Greg mentioned.

Operating profit improved 6% on higher engine volumes at Pratt Canada, better commercial engines mix, reduced net commodity headwinds and a favorable resolution of a legal dispute.

These increases were partially offset by lower commercial spares and aftermarket activity.

Operating profits were also adversely impacted by unfavorable foreign currency impact from weaker US dollar at Pratt Canada.

Commercial space orders continued to soften with the book to bill ratio again below one in the quarter.

Pratt's E&D expense for the year is now expected to be up around $50 million as compared with prior guidance of up to $100 million primarily due to better definition of program schedules.

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

Before moving on, one last item to mention you might have seen the press release.

Airbus began flight testing of the PurePower geared turbo fan engine on its A340 flight test aircraft earlier this week.

Hamilton Sundstrand revenues were up 7% with industrial businesses up low double digits; aerospace OEM up high single digits; and aftermarket up mid single digits.

Operating profit grew 10% and margin expanded by 80 basis points primarily from high single-digit growth in commercial spares, industrial businesses volume and mix, lower E&D spend as a percent of revenues, and several contract renegotiations.

For 2008, we expect revenues at Hamilton to be up double digits, slightly lower than our prior guidance of up low teens.

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

On slide nine at Sikorsky, operating profit grew 29% on 10% higher revenues.

Operating margin expanded 130 basis points in the quarter to 9.2% from higher aircraft deliveries and favorable mix.

During the quarter, Sikorsky shipped a total of 57 large helicopters, 40 military and 17 commercial.

Sikorsky continues to make progress improving its production system and remains on track to deliver more than 200 large aircraft in 2008.

Sikorsky also achieved significant technical milestones in Q3 plus flight of its X2 TECHNOLOGY demonstrator and first flight of the Fly-By-Wire Black Hawk.

Sikorsky continues to expect operating profit growth of approximately 25% on mid-teens revenue growth in 2008.

Now I turn it over to Greg to wrap up.

Thanks, Akhil.

We are on slide 10 of the webcast.

But just summing it up, it has been a very, very good quarter for UTC despite some tough end markets.

Revenues were up 7%, EPS up 10%, and net of restructuring gains EPS was up 16%.

We feel confident in our 2008 guidance of 15% to 16% EPS growth for the year on revenues of $60 billion, free cash flow equaling or exceeding net income.

We now expect share repurchase for the year to be around $3 billion and we expect acquisition related spending for the year to the about $1 billion which is lower than our traditional $2 billion placeholder for acquisitions and it reflects the deliberate reallocation by us.

The fact is with a PE around 10 and the price where it is today, we think UTC is an exceptional buy.

Louis will provide detailed guidance for 2009 at our traditional December investor meeting.

However, let me give you some preliminary thoughts.

Our commitments to long-term double-digit earnings growth remains intact.

Although I will tell you the environment is making this increasingly difficult for 2009.

We know that 2009 is going to be as tough a year as we have seen in some time for the obvious reasons of slowing economies around the world and the potential impact of the credit crisis on our customers, suppliers and consumer confidence in general.

This will of course impact our short cycle businesses specifically Carrier's residential HVAC and refrigeration businesses and the commercial aerospace aftermarket businesses at Pratt & Whitney and Hamilton.

The strengthening of the US dollar will also create some tough compares in 2009 and pension expense also now looks to be a headwind.

But there are plenty of good things on the other side of the ledger.

Number one for UTC is the balance of the business.

And we see this with continued good growth expectations in 2009 from our longer cycle businesses like Otis, Sikorsky and the commercial and military OEM aero businesses.

Significant aftermarket content at several of our businesses also provides a natural buffer in tougher times.

And there will be benefits in 2009 from this year's restructuring costs and of course the continued implementation of UTC's ACE disciplines.

Lastly and perhaps most importantly, UTC has a seasoned and experienced management team that knows how to deal with tough times and to deliver on investors' expectations.

Our goal as always is to continue to outperform our peers.

As Louis would say, you can expect UTC style execution in 2009.

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

Lena?

(Operator Instructions) Nigel Coe, Deutsche Bank.

Good morning.

Can you give a bit more color on where the backlog is right now for Otis?

And secondly, if you could just maybe kind of cuff back to '01.

The last time we saw commercial construction markets turning down, did we see significant backlog erosion at that point?

Nigel, this is Akhil.

The backlog for orders as we said is up 18% for new equipment from the beginning of the year which is still about a year's worth of new equipment orders, if you will, or new equipment revenues.

Last time when the commercial market turned down there was some impact on backlog.

We haven't seen that yet, the orders as we said is bad in third quarter but still pretty decent year to date at 15% growth.

So we continue to watch that closely and we will see how things turn out in Q4.

I guess just to give you some comfort too on Otis, although the orders were flat around the world, we continue to see very strong order growth rate in China up more than 30%.

In the US obviously it was down.

We knew it was going to be down.

It was driven a big piece of that by a cancellation of a project in Las Vegas, I think it was the Echelon Hotel.

So I wouldn't draw a conclusion from I think one quarter's worth of data.

Backlog remains strong.

I think Otis is going to have a very good rest of this year and into 2009.

We also have not seen vacancy rates increase dramatically around the US although I think we saw maybe some preliminary indications that they are up a little bit but nothing near what we saw in the last boom.

So I think the fundamentals are still there for Otis to have a very good 2009.

Okay, perhaps one more.

Could you just remind us on how much margin has been lost to raw material inflation over the past four or five years specifically within Carrier but perhaps overall UTC would be helpful as well?

I can tell you a couple of years at least and then we can go back and give -- refresh you for the older ones.

I've got it.

In fact let me -- I've got the numbers on the top of my head here.

Commodity inflation over the last seven years has been about $1 billion and about $700 million of that has been at the Carrier Corporation.

So Carrier has seen a disproportionate impact and really that started in 2004 when copper first moved from $0.80 to $1.20.

So if you think about Carrier ex the copper and the other materials inflation, you are thinking about another 200 basis points over time that we would have had an additional margin at Carrier ex that commodity inflation.

For overall UTC, Nigel, this year it's about 20 basis points, and last year was maybe about 40 to 50.

Okay, thanks, that is very helpful, thanks.

Joseph Campbell, Barclays Capital.

Good morning.

Sorry I haven't learned to use the phone yet.

Could you comment a bit either Akhil or Greg about how the pension fund is -- how the performance is and how you see the rates which are the [sprinkler] backup on the 10-year?

How do you see those in your plans potentially offsetting each other or not?

It is a great question, Joe.

The fact is as we looked at pension performance through September 30, our plan actually had a negative return of about 22%.

You compare that to our expected ROA of about 8.5% and you see a 30 point or 30% delta to expected performance.

So that is obviously going to be a headwind next year.

Maybe kind of a rule of thumb, you think for every one percentage point miss, it costs us about $6 million in additional pension expense for each of the next five years and we obviously smoothed that out.

Offsetting that to a certain extent though is as you know the long bonds with the spreads where they are today, I think with the Moody's AA that we've looked at is around 6.9%, that is versus a 6.2% rate when we set the plan expectations here in early '08.

So we will get maybe half of the offset to the increased pension expense that we would see from the miss in the ROA made up for by the increased discount rate.

Although I have to tell you we are looking at a discount rate in the spreads as you note that are in unprecedented territory.

We won't actually know the AA rate until December 30 or the 31 when we actually set the rate for next year.

So it is a little bit of good news now and if the spreads narrow, that will obviously take away from that.

But we will keep an eye on it and Louis will update you guys in December on where that is.

Would you contemplate, Greg, putting additional money into the fund or is the attractiveness of the buyback so much greater that you would wait and see whether the performance would pull you back?

I think we had always planned this year about $250 million of pension funding although we thought most of that was going to go to the international side.

I tell you right now with the markets down as much as they are, putting UTC stock in might be a heck of an investment for the long-term.

But I don't think we are ready to make that decision.

I think we will wait and see where we are at year end.

I think the buyback for us seems to be the preferred alternative right now.

But again, we just have to see how these markets come back as we get toward the end of the year.

Could I ask you to do something with regard to what you have seen in the credit crunch?

You did mention the cancellation of a project in Vegas.

But can you just give us a little more sense of what it means at a company like UTC these last few weeks have been horrendous in the markets.

But if you are a company looking at doing business, how has this manifested itself at UTC in little blips and things that you had to work and whether they seem like they're going to be -- take really a while to work out or whether they are things that are just problems to be solved and to be worked around so that you can keep going?

You know, there was a little bit of excitement here when your former company went bankrupt that Monday morning and we saw the (multiple speakers).

There was a lot of excitement in our offices too.

We obviously saw commercial paper rates spike for a couple of days that week.

But really since then, the commercial -- or our access to commercial paper is still very strong.

We continue to access the market on a regular basis.

I would tell you the one place where we see a little bit of a constraint is in the long-term debt market.

We don't have any maturities coming due in the next 90 days.

I'm not really worried about going to the market.

But as we think about doing deals I would tell you that it's a little bit more expensive today with a 400 basis point spread.

As far as the other impacts that we see, I think Sikorsky saw one of their customers who had a little trouble getting financing at the end of the quarter for one aircraft.

But for the most part, most of the customers seem to be weathering the storm pretty well.

Again, we have got big, big customers out there around the world and we also have a huge daily aftermarket business that just goes on and on and it's not terribly impacted.

Supply base still looks good, we look at that every single day with our operations group out in Farmington to make sure that our suppliers still have adequate access to capital.

So so far I would tell you it is business as usual with the exception -- and I say the long-term debt market which is just a little pricey given the spreads where they are.

So I think we will weather this fine and we are going to keep an eye on both customers and suppliers, but so far so good.

Thank you very much.

Nicole Parent, Credit Suisse.

Good morning.

I guess first, could we actually get the new equipment orders by business and geography in the third quarter?

And I guess for both Otis and Carrier when we think about North America, Europe and Asia?

And I guess maybe get some color as you think about how this impacted the business in September?

Nicole, this is Akhil.

Let's talk Otis first.

I think in the Americas there was a significant decline in Q3 over 20% adjusted for that large order cancellation.

It is still down over 20%.

Europe was flattish while Asia was very, very strong in the high teens.

It is driven on the back of the China numbers that Greg mentioned earlier.

So pretty goods mix there.

We don't believe the North America trend is something that the team expects to see at that level going forward.

There was some lumpiness in the orders last year which drove that what looks like a dramatic situation there.

At Carrier, large commercial business, had -- the commercial HVAC business had good order growth across the geographies, North America up mid to high single digits, Europe up mid single digits and Asia up as well.

So they seem to have been able to get through this environment much better at this point of time in the order rates.

On the commercial refrigeration side which is another business where the orders have -- we seen some impact, North America was down and Europe was down even more so in that business.

With regard to trends within the quarter, September was a little worse than what July and August were but it wasn't like we fell off the cliff.

It was just a slight deterioration in the trends but nothing over dramatic.

Okay.

I guess if you think about the strength that you are seeing in China as you think big picture and I don't want to front run the December meeting, there is some chatter out there of things boiling over in China.

As you guys sit here today and look at the strength, the relative strength by geography with China really pulling the lion's share on the growth here, how do you think about that as we go forward?

Nicole, I think China remains the growth engine that it has always been.

We did see a little bit of slowdown on the sales side in Q3 around the Olympics.

I think everybody has reported that just because of the focus on the Olympic activity.

But the order rates remain strong there.

And the trends and urbanization still are driving the growth and the infrastructure business around China.

So I think the question that people have on their mind is will decrease in demand in the US impact China?

It absolutely will.

I think the good news is you have got 550 million urbanized Chinese citizens that also are driving demand in this cycle which is helping to sustain some of the growth out there.

So it may slow down a little.

I think overall the growth rate in China will be slower next year than this but not materially so.

Okay.

And could you actually quantify how you guys are thinking about the impact of the Boeing strike on your results in '08 and '09?

Hope it is not much in '09.

Right now the guidance that we just gave you for Q4 anticipates a 60-day work stoppage at Boeing.

So we are assuming that by the first of November they are back to work in Seattle.

If that doesn't happen, you can look for again probably for each month about $10 million or so, $5 million to $10 million of EBIT per month of the strike.

If it drags into 2009, I guess we will have to relook at that.

But I think that is a good rule of thumb.

Again most of the impact is at Hamilton from an EBIT standpoint.

Okay and just one last one on M&A.

Happy to see you guys are walking away from Diebold.

I guess could you maybe update us on your perspective in terms of the portfolio, the willingness to step up going forward into new platforms versus given where prices have come down particularly on the aerospace and defense side, what your view is, where you may put money to work going forward?

Prices have certainly gotten to be very, very attractive although I will tell you our price is probably the most attractive thing out there for us.

At the same time, we are actively looking at aero properties, they are way off obviously -- the [peak] of the cycle pricing and the question simply it goes to the question of willing sellers and willing buyers.

We are a willing buyer.

And will there be willing sellers?

I think what you can expect, Nicole, is more in the core.

I wouldn't expect a new platform in this environment.

I think we are not going to put or take a lot of risk but at the same time if there is a property out there that expands the core aerospace business or even the core commercial businesses, we would say we are buyers in this market and I don't believe we are constrained with debt to cap at about 32%.

We have got pretty plenty of firepower here.

Okay, thank you.

Myles Walton, Oppenheimer.

Thanks, good morning.

I wanted to circle around with you on R&D.

Akhil, you said Pratt was now looking for about $50 million increase in their funded versus the prior $100 million.

And I think previously for the whole company you had been looking for about a $200 million increase in R&D.

What is that outlook now across the company?

Is it $150 million or have you found other places to trim as well?

That is the exact conclusion you reached, Myles.

The change is only in the Pratt guidance and that drops through to the UTC level.

So up $150 million now is what we are thinking.

We spent in Sikorsky and Hamilton which are the other big drivers of the company funded E&D continues at the same pace as before.

Okay.

And you said better formulation of the expected development so you didn't actually stop any development.

You just realized lower costs on the same plan?

Right.

We are meeting the milestones.

It is basically just that when we had set up the plan, we were a little more conservative in terms of the timing of some of these programs and now as those have been firmed up with the customers, this is just a recalibration based on the final timeline.

Okay, fair enough.

Greg, is there any contingency left at the top end of your 4.95 guidance to cover ForEx continued -- I guess strengthening from here?

If we look at the current consensus today for the year, I would tell you because of FX we are essentially line to line from a contingency standpoint.

So FX is certainly hurt.

We are still comfortable with the guidance but it's certainly not as easy a path with the foreign exchange rates where they are today.

Okay.

And then lastly, you reiterated the delivery targets for Sikorsky.

I am a little confused.

Looking at the numbers, it looks like a pretty substantial run for the roses in 4Q.

Can you comment on those and paint a picture as to why you have confidence in the 100 or so?

Yes, I think as you think about it we had 57 deliveries here in Q3, 140 year to date.

We are going to do 200 plus which would indicate we are going to do 60 plus helicopters.

It should be a little bit more than that.

The fact is you have got one part sales which where you would actually build the helicopter earlier in the year, you ship it off to the completion center and it gets delivered in the fourth quarter.

So I wouldn't really call it a run for the roses.

I think it is just the way the production system down there works with these one part sales.

I think there is about nine one-part helicopters that have to go in the fourth quarter that is helicopters we have already built and flown and they are just being completed at the completion center.

So I think Jeff has got a good plan there.

They are on track.

They are making improvements every day down there.

Still not where they want to be from a production standpoint but again, I think Q4 is very, very doable and I have confidence in them.

Okay, thanks a lot.

Cai von Rumohr, Cowen & Company.

Yes, thank you.

You mentioned that you had a legal recovery at Pratt and some contract renegotiations at Hamilton Sundstrand.

Could you quantify those for us and indicate any other nonrecurring items you might have had throughout the company?

We called out the two which were relevant, Cai.

The Pratt legal dispute is an old 10-year matter which we had a settlement in the quarter.

It was just over $0.01 of impact in the Pratt segment.

And similarly the contract renegotiations at Hamilton were across various customers.

It is stuff that we do usually, it is nothing abnormal.

It's just that it was a number slightly over $0.01 in the quarter and we decided to call it out just because it was significant to the segment.

So it was also a little bit over $0.01.

Is that correct?

Yes, --

That is right.

Yes, both just over $0.01.

Okay.

And you still talk of $300 in restructuring which really would imply that restructuring would be lower in the fourth quarter than the second and the third.

Given the enormity of the credit crisis, what is the chance that it could be a bigger number and if not, why not?

We have done 221 year to date.

It would imply you are going to do another let's call it $80 million in the fourth quarter versus $93 million in the third.

The fact is there are always restructuring opportunities around UTC.

We are managing those things within the guidance range for the year and we continue to look at additional gains and restructuring opportunities for not just the fourth quarter but even into the first quarter.

So there are lots of things to do.

I wouldn't say we are going to be done at 300.

Got it.

Okay, thank you.

Deane Dray, Goldman Sachs.

Thank you, good morning.

Can we circle back on Carrier for a moment?

I may have missed it, did you comment on the backlog if we were thinking going into the quarter it was around six months.

Where does that stand today?

That is the commercial HVAC business, right, Deane?

Yes.

Because Carrier overall backlog doesn't make as much sense since it's a very short cycle business unlike Otis.

But the commercial HVAC business still has a pretty decent backlog.

Their orders grew nicely in the quarter.

We still think they have a good visibility up to six months in that business.

Unlike say Otis which is over 12 months.

If Otis was 12 months, does that come down from maybe an 18-month run rate earlier this year?

No, I think the 18-month number that you recall was more to do with the visibility in the sense that the projects get completed between 12 to 18 month's time frame.

So we have visibility that far but the new equipment backlog has always been a little over 12 months and it stays at that level.

Great.

And I know we mentioned the Las Vegas cancellation but setting that one aside, any commentary on about push outs or cancellations at the margin?

No.

In fact, Deane, we asked that question because we are obviously mindful of what is going on in the economy.

But the fact is the Otis folks tell us that awards -- the awards activity which are the precursor to contract signing actually still looked pretty good.

There is always kind of that 1% to 2% noise in the system related to cancellations or deferrals but that really hasn't grown significantly.

Maybe ticked up a tiny bit but still all kind of in the expected range.

Great and just a follow-up on Sikorsky.

There was an issue last quarter about inventory.

How did that get resolved this quarter?

Inventory at Sikorsky grew I want to say a little less than $90 million.

Again, I think their inventory turns are actually improving there as is working capital.

Again, a lot of what Jeff is doing down there is not just current year production but he is also gearing up for an increase in production next year.

So we would expect inventory at Sikorsky to continue to grow.

And I think gain, they are making a little bit of progress on the turns still not where we want them to be.

Great, thank you.

Doug Harned, Sanford Bernstein.

Good morning.

On Carrier, your margins ex-restructuring were -- looked pretty good this quarter.

Could you talk about what you are doing there in terms of restructuring initiatives?

I know you have made a number of management changes at a senior level.

What is underway right now in terms of changing things at Carrier?

There have been, Doug, as you know Carrier has been very aggressive with restructuring.

In fact year to date, they have a lot of the most maximum restructuring has been at the Carrier level.

Geraud has been very focused anticipating the slowdown in the economy.

He had tightened the cost side of the equation at Carrier beyond restructuring, just the discretionary cost element as well in terms of cutting back on hires, headcount freezes and things like that.

So there is just a lot of cost related focus at this point of time there.

Also the commercial HVAC business has been doing extremely well in terms of product cost reductions and driving margin expansion at a faster rate in particularly that segment.

And with the topline growth there, we are seeing some benefits from that as well.

Doug, I guess I'm not sure where you get the idea of management changes.

Obviously Ari is responsible now for the commercial businesses but Geraud with the exception of a couple of changes, we brought in a few folks from Otis to help out, the team is pretty much in place though.

And I don't expect big changes out there.

I think they've got their arms around the problem and as Akhil said, they are attacking costs as hard as you can imagine.

To hold margins flat in this environment at Carrier I think was a Herculean task and they are not done yet.

They've still have got more work to do here but I think they have done a really nice job.

And that is -- what I was getting at were the people that Ari had brought over from Otis.

And just trying to get a sense as to which -- in which of the four units, where you are seeing the most potential, the types of things that you are doing or is this more of a just overall overhead reduction effort?

I think it is an overall overhead reduction.

Obviously I think Bob McDonough in the residential business here in the US, he has been on this cost reduction kick for well over a year now as the market has slowed.

But I would tell you it is not confined to RLCS, the refrigeration business.

We are taking people out of both the commercial refrigeration as well as transit cold.

It is really broad-based G&A type reductions.

The Otis folks I think Ray Moncini is over there now heading up operations.

He is a longtime Otis guy, knows operations and he is bringing some of the Otis manufacturing disciplines there are I think he is -- again, it is about putting ACE in the factories and Ray is the guy to do that.

Doug, if I may, also there is a lot of focus in particularly the BSS segment to increase the aftermarket content of that business.

Again, make it more like Otis drive more of the aftermarket particularly in that segment.

Okay and if I can, just one other thing.

On Hamilton Sundstrand, you are talking about some very -- it looked to me very good numbers in terms of spares growth considering the environment.

What is driving that?

It is actually coming -- the spares growth was actually, just about I would say commercial spare piece parts.

I've got to be very careful here.

We are about flat in the quarter.

Where we saw good growth, Doug, was in the provisioning side, that is end item provisioning and that was up very strong in the quarter on the back of some big orders around the world.

You've got to remember Hamilton is not going to be impacted like Pratt is with these capacity cut backs in the US nearly as much.

So their businesses remain pretty good.

Quite frankly, I think the airlines are in pretty good shape now.

So we have not seen a big cut back in airline procurement here.

Okay, great.

Thanks.

Howard Rubel, Jefferies & Co.

Thank you very much.

You haven't, Greg, you haven't talked about the industrial gas turbine business which has been a key part of Pratt.

Was there any change in that business in the quarter?

No, I think we are still -- I think the shipments were actually down a little bit year-over-year but for the full year, we still expect the gas turbines to be up about 20% as we had talked about last quarter.

So still a very strong backlog there, it is still again opportunity.

And when we go to cash flow, nice to see a bit of a strong third quarter with free cash flow well in excess of net income.

I would think that with the change in commodity prices and probably a reduction in increases in production rates pretty much across the board in aerospace that we might very well see some liquidation of inventory in the fourth quarter?

We sure hope so.

Now I think you are right on track there, Howard.

I think we still need to drive inventory down.

Inventory was really flattish in the quarter and we have a lot of work to do on inventory.

I think Louis has talked about taking $1 billion to $1.5 billion out in the next 18 months and I think we are still on track to do that.

You will see fourth quarter come down and I think it is going to come down even more.

Some of this is just due to the change in the market and also I would think that pricing changes with inputs for when you think about it that way is clearly going to help matters?

(multiple speakers)

Clearly the commodity cost coming down is going to help on the input side specifically in Carrier.

Where we haven't seen a big drop I would tell you though is on the steel side although I have to believe that steel will pull back a little bit.

But bit commodity cost impacts this year have actually in steel at Otis and most of that has been in China.

Haven't seen that flow through yet but I think as the economies do slow down and commodities all come back to more historic levels, we ought to see some benefit there.

I just have two more.

One on industrial.

Also Hamilton Sundstrand rather than seeing kind of 20% growth, it is basically half of that it sounds like --

It's about 10%

What market -- I mean and then as you look at the backlogs, do you see that sustainable or is it -- or do you see further deterioration?

The slow down on the Hamilton industrial business really came at Sullair on their construction business.

That is again part of it is seasonal but also I think part of it just reflecting the weakness here in the US.

The international market specifically China for Sullair were still very strong.

And on the rest of the industrial side the pump business the backlog there remains very strong and I think we have got good visibilities.

It's a longer cycled business and it should have a pretty good runway into next year.

And then last.

It is my understanding that you have made real progress with the Canadian government regarding the H92 and I know the Q kind of raised some issues in the second quarter.

How has -- how have you progressed with that and mitigated the risk?

You know, we obviously we brought that to investors' attention earlier this year was it is a big issue.

We have been working very, very closely with the Canadian government.

We think we have a go forward path now and we expect we will have that renegotiation wrapped up by the end of the year.

The fact is we will be late delivering the helicopters as everyone knows but at the end of the day, we are going to deliver the best search and rescue helicopter the world has known when this contract is done.

So Sikorsky is committed to getting it done and the Canadian government is working very closely with them.

So the risk has changed for the better.

Is that a fair statement?

I would say the risk has been pretty well mitigated at this point.

Thank you very much.

(Operator Instructions) David Strauss, UBS.

Good morning.

Thank you.

Greg, looking at Otis and Carrier, the aftermarket businesses there, what have you been seeing and what do you expect as far as growth out of the aftermarket side of those businesses in the environment that we are in moving forward?

The aftermarket business at Otis I think we have a 1.6 million units under contract.

We have seen a little bit of pricing pressure and specifically in Europe for that business.

But cancellation rates are really not up.

Everything looks to be on track and if you think about it even if the economy turns down here and I guess we would all agree that it has and will, that aftermarket business is still pretty solid because you have to service elevators.

Whether you have a 50% occupancy rate or 100% occupancy rate in a building, you are going to service those businesses -- those elevators.

So I think that is rock solid.

No a big trend line change there.

As Akhil mentioned, I think the aftermarket business at Carrier is actually an upside for us as Kelly Romano and team and BSS there continue to press for additional services or press for additional service business there.

And again, as people look for in energy efficiency and environmentally friendly solutions, the Carrier product line fits right into that niche.

And I think they are doing a nice job of exploiting it.

And on foreign exchange, based on if you just assume the dollar kind of holds here, what kind of a headwind from an earnings perspective are you looking at in 2009?

Any kind of sensitivity you can provide?

If we take a look at it today at a EUR1.35, I think you are looking at perhaps up to a $200 million headwind versus 2008.

But again, that is just a spot rate today and as we know these markets fluctuate dramatically day to day, week to week and month to month.

But if you were to model this out, I would tell you we are seeing headwind next year of maybe up to $200 million at the current rate versus this year.

Okay.

And last one, the color that you gave on 2009 seems obviously it's going to be difficult to hit double-digit earnings growth.

Based on what you are seeing, you still think somewhere in the mid single-digit kind of EPS range for growth in 2009.

Is that realistic?

I appreciate the try but I am not actually going to go there.

Look, we always target 10% plus growth here.

We are going to do everything in our power to drive performance here next year.

It is going to be a tough year, as I said.

Louis will come back and give us -- give everybody guidance in December.

I'm not going to front run that.

The fact is with the ACE operating system and the margin improvement that we have seen and the restructuring benefits, we are going to outperform in this market.

Okay, thanks.

I thought I would try.

I think with that, we are going to cut off the call here.

I thank everyone for their participation.

It has obviously been a very good quarter for UTC.

We are going to have a very good year.

Tough times ahead for the economy but I think the UTC will outperform.

It is in our DNA, as we say.

So thank you very much and we will see you all soon.

And this does conclude today's conference call.

We thank you for your participation.

Have a great day.