雷神技術公司 (RTX) 2009 Q1 法說會逐字稿

Good morning and welcome to the United Technologies' first-quarter 2009 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 risk and uncertainty.

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.

Mr.

Hayes, you may begin.

Thank you, Tamara.

Good morning, everyone.

As you saw in the press release this morning, no surprises in the first quarter.

The end markets were difficult as we expected resulting in UTC revenues of $12.2 billion.

That is down $1.7 billion, or 12%, from last year's first quarter -- 5% organically down, 6% from foreign currency translation.

Net divestitures accounted for the remaining one point decline in revenue.

However, I will point out proactive and aggressive cost-reduction actions across the businesses limited the impact of the revenue reduction.

The gross margin rate adjusted for restructuring remained essentially flat.

This is in spite of declines in our high-margin transport refrigeration and aerospace aftermarket businesses.

SG&A, again after adjusting for restructuring, was down 20 basis points as a percentage of sales.

While there is little we can do about the global economy, we are focused on the things we can control, such as overhead cost and spending and we are continuing to invest in our products and global franchises so that we will emerge even stronger when the economy does recover.

Okay, on earnings.

Earnings per share for the first quarter was $0.78.

That is 24% lower than last year and in line with the expectations we discussed back in March.

Current quarter results include $0.12 of structuring costs and a $0.03 tax benefit.

Last year's first quarter had a $0.02 charge for structuring costs, so absent the impact of restructuring costs in both quarters and the one-time tax benefit in 2009, earnings per share were down an adjusted 17%.

FX was also a big headwind in the quarter as expected.

Foreign currency translation, combined with Pratt & Whitney Canada's currency hedging, adversely impacted earnings per share by $0.08.

From a business unit standpoint, Sikorsky was the highlight of the quarter with 30% revenue growth.

They delivered 49 large helicopters and that is a 63% increase over 2008 first-quarter deliveries.

Revenues were down at the other five businesses with particular weakness in our shortest cycle businesses.

As expected, Carrier's revenues declined 19% on an organic basis in the quarter.

At a macroeconomic level, we have not really seen any significant changes in market conditions since our investor meeting in early March.

First-quarter order rates continued on the trendlines we discussed then with weakness in both commercial and aerospace orders.

Akhil will take you through the detailed order rates by business in just a few minutes.

The good news is that while order rates continue to be down, there are signs of stabilization in the order rates, particularly in China, which is starting to see the early benefits from the stimulus program there.

Despite this challenging environment, we did see 80 basis points of margin expansion at Otis and 70 basis points of margin expansion at both Fire & Security and Sikorsky when adjusted for restructuring.

This is primarily from our continued focus on restructuring and discretionary cost reduction across the businesses.

Turning to slide 3 on restructuring.

In the quarter, we spent $163 million on restructuring to deal with the volume declines and to take out structural and overhead costs.

As you would expect, Carrier and Pratt & Whitney Canada launched the biggest programs in the quarter as both have seen significant volume challenges.

As we announced in March, we expect to spend almost another $600 million restructuring the business throughout the rest of 2009 for a total of $750 million of restructuring.

This restructuring will provide us with a $250 million benefit this year and a further $350 million of savings in 2010.

And the net payback on this $750 million investment is only 1.3 years.

These programs will also result in a headcount reduction of 11,600.

The expected breakdown of the $750 million by segment you can see here on slide 3.

About 60% of the restructuring spend will be in the commercial businesses, 40% on the aerospace side.

2009 programs will target removing overhead and simplifying structure and about two-thirds of that headcount reduction will be in the salary or indirect employee ranks, making the Company leaner and more cost-competitive when the economy does recover.

On cash, free cash flow in the quarter was 44% of net income attributable to common shareowners.

While we did see some of the normal seasonality associated with Carrier's residential business, the bigger issue was at Sikorsky and Pratt & Whitney, which each had a net working capital outflow of more than $300 million in the quarter.

While inventory growth was expected at Sikorsky to support the increased volumes, we also saw a significantly lower level of customer advances due to lower commercial order intake at Sikorsky.

At Pratt Whitney, inventory increased as sales declined more rapidly than we were able to adjust the long leadtime material inputs.

Pratt also had some significant customer payments slip into early April.

On the plus side, capital expenditures decreased 30% compared to a year ago.

This cash performance has the attention of everyone in the organization and it's safe to say that nobody is very happy with it.

With that said, we'll focus on this and we will fix it and we remain committed to our guidance of full-year free cash flow being equal to or in excess of net income attributable to common shareowners.

I will come back and talk about the outlook for the rest of 2009 and some preliminary thoughts on 2010.

But for now, let me turn it over to Akhil to take you through the business unit in detail.

Thanks, Greg.

Turning to page 4, let me remind you that I'll talk to the segment results adjusted for restructuring and nonrecurring items as we usually do.

Otis had a good quarter despite the sharp global construction downturn and significant adverse foreign currency impact with operating margin expanding 80 basis points to 19.8% thanks to service business strength, as well as aggressive cost-reduction actions.

Operating profit was down 9% in the quarter on 13% lower revenues with foreign currency translation accounting for approximately nine points of the profit and 10 points of the revenue decline.

At constant currency, revenues were down 3% as continued growth in the service business was more than offset by a double-digit decline in new equipment sales with shorter cycle emerging markets such as China and Russia seeing some of the larger declines.

Operating profit was flat at constant currency as field efficiencies and cost-reduction actions offset the impact of volume decline.

Otis reduced headcount by over 1000 employees during the quarter.

New equipment orders at Otis declined 43% in the quarter from record first-quarter orders in 2008.

Excluding FX, orders were down 37% with significant declines across all regions.

New equipment backlog at constant currency was down 5% since the beginning of the year, but still up 1% versus the first quarter of the last year.

We continue to expect Otis revenues in 2009 to be down mid to high single digits and operating profit to be down $125 million to $175 million, principally due to adverse foreign currency translation.

On slide 5, turning to Carrier.

Consistent with the guidance given at the March investor meeting, Carrier's first-quarter operating profit decreased $196 million, or 76%, on 27% lower revenues, including a 19% organic decline.

Carrier's most significant volume decline occurred in the higher-margin transport refrigeration business with sales down about 40% at constant currency.

The commercial HVAC business was down low teens organically as they completed projects in backlog and saw new equipment orders decline 17% at constant currency.

Carrier's other businesses were down about 20% to 25%.

Operating margins contracted about 500 basis points, led by the volume declines, adverse cost impact from worldwide currency shifts and lower equity income from the Toshiba joint venture in Japan.

These were partially offset by deep and aggressive cost reduction and restructuring, which contributed about 200 basis points of margin in the quarter.

Carrier also reduced headcount by approximately 1800, or 4%, from December 2008 to March 2009, excluding the impact from divestitures.

On a similar basis, Carrier's headcount is down approximately 4500, or over 10% since a year ago.

While the summer cooling season has yet to begin in the US and Europe, current order rates continue at the depressed levels Geraud shared at the March meeting.

Sequential volume improvements are needed in the second half for Carrier to meet its 2009 guidance of revenue decline in the low 20% range and operating profit down $375 million to $425 million.

On slide 6, UTC Fire & Security delivered a good quarter with operating margin expansion of 70 basis points on 20% lower revenues.

Unfavorable foreign currency translation reduced revenue 16% in the quarter, net M&A activity accounted for two points of the year-over-year revenue decline and organically, revenues contracted 2%.

On an organic basis, fire safety was flat while security revenues were down mid single digits in the quarter.

Operating profit decreased 12%.

Excluding FX, profits grew 9%, reflecting the benefits of restructuring, integration and continuing productivity and cost control initiatives, along with net M&A activity.

We remain confident in UTC's Fire & Security's 2009 guidance of flat profits on down mid-teens revenue change.

Turning to aerospace businesses.

Before I start with Pratt & Whitney, let me note that all current and prior year revenue and margin data have been adjusted to reflect the EITF 07-1 accounting for collaborative arrangements, which Greg referred to at the March meeting.

Just as a reminder, this increases Pratt's revenues by $257 million in Q1 2008 from prior reported numbers and $220 million in Q1 2009.

There is no impact on operating profit in either period.

On slide 7, you see revenues at Pratt & Whitney declined 8% in the quarter, driven by lower overall aftermarket and military development revenues.

Engine shipments were higher across the business with Pratt Canada up 10%.

Now as commercial engine space revenues were down over 20% and book-to-bill was slightly below one.

Operating profit declined 7% in the quarter.

The profit impact from lower revenues and adverse mix was partially offset by benefits from restructuring and better manufacturing and SG&A cost performance.

E&D was also slightly favorable in the quarter.

Operating margin at 15.7% was up 10 basis points.

Net hedging activities at Pratt Canada reduced revenues by approximately $125 million and, combined with favorable translation of costs, had minimal earnings impact.

This added 70 basis points to operating margin in the quarter.

Continuing downward revisions to the production schedules by the business jet OEMs have put additional pressure on Pratt Canada.

We now expect engine shipments there to be down double digits in 2009 compared with our prior expectation of flat.

As a result, Pratt & Whitney will likely be at the lower end of the 2009 operating profit guidance range of zero to negative $50 million year over year.

Turning to Hamilton.

In the quarter, revenues were down 5% with aerospace aftermarket down mid-teens and industrial businesses down low teens.

Aero OEM revenues were up mid single digits driven by space-related programs and military ground vehicles.

Operating profit declined 8%, primarily from lower commercial spares, down more than 50%, lower industrial volume and higher E&D.

This was partially offset by higher Aero OEM volume, discretionary cost curtailment across the business and productivity improvement in the repair shops.

Orders for the industrial business continued to feel the impact of global economic slowdown and were down about 25% in the quarter, including four points from foreign exchange.

Commercial spares' book-to-bill was also below one, reflecting significant weakness in the orders for provisioning by the airlines as they conserve cash in these tough times.

These order rates have put greater pressure on Hamilton Sundstrand's 2009 outlook.

However, more aggressive restructuring, furloughs, merit deferrals and other cost actions are anticipated to result in Hamilton's 2009 earnings being about flat in 2008.

Year to date, Hamilton has launched actions to reduce headcount by over 1000 employees.

Turning to Sikorsky.

Operating profit grew 41% on 30% higher revenues.

As Greg mentioned, Sikorsky shipped a total of 49 large helicopters, 38 based on military platforms and 11 commercial.

Sikorsky's workforce continues to improve its productivity and is on track to deliver between 230 and 240 large aircraft in 2009.

Operating profit expanded 70 basis points in the quarter to 8.7% from higher military helicopter shipments, primarily Black Hawk.

In February, Sikorsky signed a new first five-year contract with the union, which included the payment of a ratification bonus worth approximately $20 million in the quarter.

Sikorsky also achieved a key milestone in Q1 towards the expansion of its global low-cost sourcing initiative.

PZL Mielec, Sikorsky's subsidiary in Poland, completed its first cabin for the international Black Hawk.

With this solid start to the year, we remain confident in 2009 guidance for Sikorsky with revenues projected to grow in the high teens and operating profit expected to increase approximately $125 million.

With that, let me turn it over to Greg for wrap-up.

Okay, thanks, Akhil.

We are looking at slide 10 now on the webcast.

Just in summary, first-quarter results were in line with the expectations we laid out at the March investor meeting.

Earnings per share were down 24% due to the adverse impacts of foreign exchange, restructuring and excessive gains and the challenging end-market conditions, particularly in our shorter cycle businesses.

So no surprises.

And we have taken aggressive steps to protect the P&L in the toughest economy we have seen in decades.

We had about $200 million of cost-reduction actions in the quarter, which mitigated the gross margin decline associated with $1.7 billion of lower revenue.

Looking forward, we continue to expect full-year 2009 EPS to be in the range of $4.00 to $4.50.

That is down 8% to 18% from 2008 and excludes the impact of acquisition-related costs.

Our full-year 2009 revenue expectations continue to be approximately $55 billion.

While we expect revenues to be down year over year in most of our businesses in the second half, we also expect that the rate of decline to be less than what we have seen here in the first quarter.

And our expectation for free cash flow remains the same at equal to or in excess of net income attributable to common shareowners.

We will continue to invest in key E&D programs in 2009 as well.

Pratt & Whitney's overall E&D spend will be down a little bit, but Pratt will continue to invest in the geared turbofan engine, which will exclusively power Bombardier's C-Series aircraft and the Mitsubishi Regional Jet.

We are excited about the prospects for the GTF.

One of the highlights in the first quarter was the selection of the C-Series by Lufthansa and Lease Corporation International.

They became the first customers for the C-Series agreeing to a combined 50 firm and 50 option aircraft.

Hamilton Sundstrand will also reduce its E&D, primarily on the 787 as that program achieves its first flight and looks towards entering the service.

We are pleased to note that during the quarter Hamilton Sundstrand completed delivery of all of its equipment and software to Boeing in support of its first flight.

Our 2009 M&A placeholder remains at $2 billion; although our acquisition spend in the first quarter was light at only $122 million.

As we have said many times before, we have no liquidity issues and we will be aggressive while remaining disciplined in identifying and pursuing acquisition opportunities this year.

Our 2009 share repurchase guidance remains at $1 billion.

First-quarter share repurchases were about $200 million, more or less in line with the full-year run rate.

Okay, turning to slide 11.

I know it is still early in 2009, but let me just share a couple of thoughts about next year.

There are, of course, a lot of moving pieces at this point and as you can see on page 11, we do have some known headwinds.

Obviously, pension and lower large commercial aftermarket and business jet deliveries will impact us next year, as well as the slowing commercial construction market.

There is also some big unknowns, including foreign exchange and the timing and magnitude of the economic recovery.

The good news is balance works at UTC and we have got lots of tailwind going into 2010 as well.

Sikorsky, Fire & Security and Otis could all see margins continue to expand next year.

Pratt & Whitney and Hamilton's military business should remain stable, while Pratt Canada should see its 2009 FX headwind reverse.

Hamilton's positioning on new programs such as the 787 should also be beneficial.

Carrier's short cycle refrigeration and US residential businesses should also be the first to see the benefits of an economic recovery.

In addition, proactive restructuring focused on high-impact, high-payback projects will deliver $350 million of incremental savings next year.

Including 2008 and 2009 programs, we will have completed $1.1 billion of restructuring actions and reduced headcount across UTC by 18,000.

Collectively, these tailwinds should allow UTC to resume earnings growth in 2010.

As always, our ace operating disciplines, restructuring expertise and disciplined cash redeployment and market-leading products give us confidence in our ability to continue to outperform regardless of the bumpy conditions.

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

Tamara, if we could take the first question.

(Operator Instructions).

Joe Nadol, JPMorgan.

Thanks, good morning.

Greg, on Carrier, to start, can you give some sense -- I don't want to parse things too much, but order trends made by months through the quarter, any perking up or just flattening out of the negative of the rate declines as we progress through the quarter and I am particularly focused on Transicold.

I think, Joe, I am not going to quote order rates by month.

I think generally what we would say is that order trends remain relatively stable throughout the first quarter as Geraud had talked about.

No surprises in really any of the businesses.

I think the one bit of good news we saw was a little bit of advanced activity in China.

That is primarily though on the commercial side as opposed to on the Transicold business, but generally I would say order trends will remain fairly stable, albeit at fairly low levels.

And then at Otis, you had highlighted three months ago some deferral activity that had really picked up.

What are you seeing more recently there, particularly in China?

No big change, Joe, in deferral activity.

I think we quoted 5500 units or so at the end of the year.

We have got some pluses and minuses to that, but orders were down obviously in China in the first quarter, a little better towards the back half of the quarter than the front half.

So I think generally we feel pretty good about the outlook for China.

It is going to be down for the year, but I think we've seen again signs at Otis that it will start to pick up here.

Okay.

And then just one more on Hamilton spares.

Obviously Q1 was a very tough backdrop.

The numbers were a little bit lower than I might have expected.

Do you attribute that just to -- the down more than 20% -- just to inventory destocking?

Is it your exposure to the widebodies, which got hit a little harder?

Any specific platforms?

I think, Joe, first, thank you for picking up that error in my speaking because more than 20% down, not 15% as I spoke.

But secondly, I think the issue was more on the provisioning side, which is more like capital for the airlines.

And as you can imagine, in these tough times when everybody is trying to conserve cash, the airlines were much tighter on provisioning requirements, which is what caused this disproportionate decline in the Hamilton spares.

Okay, so you expect some sequential improvement there?

It will be seen how provisioning plays out.

Again, it is a matter of when the airlines start to feel a little better about things and so to some extent related with the general economic recovery.

But yes, over time, provisioning does come back.

It can sometimes take a while before that happens.

Okay.

Thanks, guys.

Terry Darling, Goldman Sachs.

Thanks.

Greg, wondering if you could touch base on the comment on pension for 2010, how we might handicaps that at this point?

Do you have an update there for us?

Let me give you what we know so far.

Year to date, I think pension returns are negative 5%, which is a heck of a lot better than what it was at the beginning of March.

Right now, we are expecting around about $175 million of additional pension headwind next year.

And that assumes just a zero return for the year and the discount rate at the same level it was last year, which I think was 6.2%.

So discount rate can move us around.

The returns can move us around a little less so.

But right now, I would say between $150 million and $200 million and we will see how the year progresses.

Okay.

And then on Carrier in terms of the potential for -- as Akhil indicated -- some kind of recovery in the second half of the year.

The down 19% organic for the quarter, I wonder if you are able to parse in any way impact from inventory destock and where you think you are in that process.

Terry, This is Akhil.

I think what we would say is, in our expectations, we are not expecting a big economic recovery or a big recovery in the housing markets.

But sequentially as compared with say the 19% decline organically in Q1, we think the second half would be more like 10% to 15% organic decline.

So still a decline, still pretty significant, but less than what we have seen in the first quarter or what we might see in the second quarter.

So is the translation the differential is just we're going to get through some inventory destock here and that is kind of where baseline demand is running down 10% to 15%?

In fact, Terry, I think baseline demand is not down nearly as much as what orders are down.

So there has obviously been some destocking, especially on the Transicold side where we know refrigerator transport is essentially flat from a demand standpoint, even though orders are down like in the 50% to 60% range.

So we would expect people will need to start reordering and that inventory overhang, if there was any, would be used up relatively soon.

And on Carrier pricing, are you seeing any weakness there?

There is always some pressure when the volumes go down so much.

I think the industry and Carrier have been bearing it fairly well thus far.

We, in fact, had some relative positive pricing in the first quarter, but we do expect pricing pressure to continue as the year goes through if the economy does not improve quickly.

And overall for the Company, Greg, any change in the price cost spread assumption for the year at this point or any biases you want to highlight for us there?

I don't think there is anything different than what we laid out last month.

Obviously we are getting a little bit of pricing on the aero side, a little bit more difficult on the commercial businesses, especially on the shorter cycle businesses.

On the cost side, I think that is where the traction is going to come this year.

We've continued to take overhead costs out, reduce factory overheads, the indirect as well as the direct labor force.

So we kept margins flat in the first quarter, which, when we saw the final numbers, it was quite amazing that you could take out enough costs, even with volumes down in those high-margin businesses, to keep margins flat.

So I think generally speaking, pricing a little bit of pressure, but most of that should be overcome by cost traction.

One other point, Terry, on Carrier, just to remind -- I think what we are seeing at Carrier is a move towards the higher tiered products in the US residential business and you recall that the stimulus package had a $1500 rebate, which is now available for 16 SEER products or above and I think that is helping a little bit as well as we saw some of the benefits of that coming through in the April orders.

That's helpful.

That helps pricing.

Thanks and good luck.

Nigel Coe, Deutsche Bank.

Thanks.

Good morning.

Just wanted to clarify -- when you talk about stabilization in orders, are you talking about the rate of decline in orders or are you talking about the absolute dollar level of order intake?

No, we are talking about the absolute order level here.

Orders have declined absolutely as we have talked about.

What we're talking about here is they have not continued to decline more during the course of the quarter, so they have stabilized at this rate that we are talking about here across the business.

Got it.

Got it.

Okay and then moving on to Pratt and Hamilton, I guess given the expense of the spares declines, I am a bit surprised we are not seeing a bit more pressure on margins.

Margin performance is extremely good.

Could you maybe just isolate in a bit more detail the impact of mix that you saw during the quarter in both Pratt and Hamilton and so maybe the offsets in terms of price inflation, productivity, etc.?

The answer, Nigel, is more cost really.

It is not so much mix as you would imagine with the higher-margin spares down both at Hamilton and Pratt.

The mix was adverse if anything.

It is the significant restructuring actions that Pratt took, the number of heads -- [they started earlier] -- took out last year.

The improvements they have seen through ACE in the manufacturing side are starting to bear fruit and certainly all that is helping preserve the margins to some extent in these tough times.

Oh sure, absolutely, but what was the actual impact of that adverse mix of OE vs spares during the quarter?

Do you have that number?

I don't know whether I can quote a number on that for you.

I can certainly give that to you -- we can give that to you later on.

It is clear, obviously, spares are much higher margin on the OE side both at Hamilton and Pratt and it has put significant pressure on the margins.

I think what you have seen at both businesses, again as Akhil is talking about, is just a huge focus on taking cost out.

We also -- again, we saw little bit of good news on the military OEM side at Pratt on the engine deliveries.

Pratt Canada still had a pretty good quarter despite the fact that volumes are coming down up there.

All those things I would say combined to keep margins where they were, just up 10 basis points at Pratt and quite frankly 70 basis points of benefit in the Pratt number is from hedging activities at Pratt Canada.

So margins would have been down, let's call it, 60 basis points versus 40 at Hamilton.

But still I think a pretty good performance in terms of just taking costs out across all the businesses to try and keep margins where they were.

As we look ahead, Nigel, you will recall, last year, we saw a significant decline in the spares starting in the third quarter at Pratt.

And so we don't expect this 20% rate on spares to sustain.

What we have seen is some change in the [build] standards by the airlines.

There are lighter builds coming through right now, but that will reverse at some point as well and so hopefully the mix, the tough mix that Pratt saw in the first quarter will improve as the year progresses.

So it looks like one more quarter of big declines, then we see some element of civilization there?

Certainly on the spares we would expect.

And then can you just maybe call out the difference in what you're seeing on the JT8s and the newer engines such as the V2500s?

Yes, I think the JT8, JT9, which are the old legacy Pratt engines, have seen the biggest decline.

In fact, we actually saw a little bit of uptick out of the V2500, which is the new IAE engine that we sell to Airbus for the A320 family.

Those spares were actually up in the quarter versus down big for the legacy JT8s, JT9s.

You will recall, Nigel, that that was $1 billion business back in 2001.

Last year, that was less than $300 million and I suspect it will be down significantly from even that level this year.

Not a huge piece of the aftermarket at Pratt, but still obviously important from a margin standpoint.

Right.

Thanks a lot.

David Strauss, UBS.

Good morning.

Greg, you talked or I guess Akhil talked a little bit about Otis on the aftermarket side, what you're seeing there.

Can you just flush that out a little bit more and then also talk about Carrier on the aftermarket side, what you are seeing?

Well, Otis aftermarket, we saw some growth, up low single digits roughly, David.

I think what we saw was some decline as you would expect in the early parts of this kind of an economic cycle on the modernization revenues.

They were down year over year, not surprisingly, but the maintenance contracts continued to grow at the normal rate of around 4% overall for Otis.

And the repairs were up slightly, but not as much as we have seen in the past.

So tougher compares on March, but overall service still continuing to grow at the rate as you would expect regardless of the economy.

Okay.

And then, Akhil, I think you said new equipment sales at Otis were down double digits.

Was that including FX or was that -- what basis was that?

That was at constant currency.

Constant currency, okay.

And I think that's steeper than I would have thought this early on.

I think you have guided to Otis new equipment sales flat to down mid single digits in 2009 and 2010 and we really haven't seen the impact of the slowdown in commercial construction.

So kind of how does that jive with what you saw in the quarter?

I think the issue, David, is, as we talked in March, both Didier and Ari did, you are seeing some quick impact in the shorter cycle emerging markets like China and Russia, which were down a lot more.

So even though the backlog is there, the deferral of projects or some slowdown in activities, they saw a significant impact on new equipment revenues in those markets.

We expect, as Greg said, the China stimulus to start working sooner rather than later and that should give us some easier compares in the second half in China, which is a big market for new equipment as you know.

So we are watching it closely and we still think that there is a possibility that we could be down in the minus 5% range for the new equipment.

But depending on the second quarter goes, we will come back and talk to you if we need to change or relook at that.

Okay.

And then back to aerospace on the aftermarket side, obviously with order rates worse than expected on the spare side, I think you had talked about Pratt commercial spares down low teens through the year and Hamilton aftermarket flat to down low single digits.

Are you revising that forecast or are you kind of still in that range or what should we think about as far as the forecast?

I don't think we want to revise the forecast just based on the first three months of a quarter data.

I think, again, you have got to look at the specifics of what is happening with the spares at both the businesses.

Pratt, Akhil alluded to the fact that, on the repair side, we have seen a much lower engine build standard from the airlines.

They have been trying to conserve cash not just on the provisioning side, but also on the repair side.

So when they have a lower build standard, although it still meets FAA requirements and it is still a safe engine, at the end of the day, it speeds up the repair cycle.

So we will see those engines back sooner and we will put more parts in later.

I think it is just one of these things where everybody is in cash-conservation mode on the airline side.

As you can imagine, they are losing a lot of money.

But for the full year, I would still expect spares will come back from the levels that we have seen.

The fact is that the airlines can't continue to fly the aircraft without buying more spare parts than what we have seen here in the first quarter.

In fact, on the newer engines, we have seen spares are still pretty good.

So I don't think it is time to revise down the forecast.

The same at Hamilton.

The provisioning, it is a big deal.

It is a very profitable business for us, but it is also, as Akhil said, it is a capital item for the airlines and they are conserving cash, but eventually they will need the equipment.

RPMs will be down for the year.

We still think probably down in the 4%, maybe more, range.

I think down more than that obviously in the first half, down 7%, 8%, maybe 9% here.

But for the full year, we still expect a better back half.

Okay.

Thanks, Greg.

Thanks, Akhil.

Joseph Campbell, Barclays Capital.

Good morning.

I have two things.

The first is what are we talking about exactly at the provisioning and Hamilton Sundstrand.

This is old, existing airplanes and airlines buying their very first A320 or something or whatever or is this related to 787 lay in of initial spares and provisioning?

What exactly is going on when you say provisioning?

Provisioning is probably a term of ours that we have at Hamilton Sundstrand.

I think Hamilton's standard went away about 10 years ago, Joe.

Yes, right.

I always say that because I came from Sundstrand.

Provisioning, though, is -- really it is what we would consider to be line-replaceable units, LRUs, and these can be anything from a generator to an APU, a full APU system.

And typically when an airline takes a new type of aircraft, they lay in additional provisioning at all of their line stations so that they can replace the LRUs as --.

Yes, but usually that is when they are changing -- if you had one kind of equipment and you are getting another kind of equipment, so I am just wondering what is it that is going on.

Because if you are adding three or four more planes to an existing set of spares that you already own then the provisioning isn't really a big deal.

While if you are getting a whole new line of equipment, the provisioning lay-ins are very big.

You are exactly right.

So for instance, next year, one of the big benefits we see, the 787 going into commercial service, there would be a large amount of provisioning associated with all of those airlines.

Right.

But is that what is missing, that you had it in there for this year and now it is not?

Or what -- so I mean -- because it is hard to see provisionings on standard stuff they have been shipping for 10 years.

Yes, provisioning is one of those things that's obviously impacted by new aircraft type going into service.

So 787 will be a big, big impact next year, but we still have a typical normal provisioning level, which is down significantly.

I'm talking more than 50% here in the first quarter from what we saw last year.

And part of that too is just airlines deferring -- airlines in India, airlines in China -- not taking new aircraft.

And so there is a typical kind of replacement of these LRUs as they are used.

But this is not a big new program we are talking about like the 787.

Okay, great.

The other thing that I wanted to ask about is just this sort of general feel that says, well, Pratt could be at the low end of the guidance and Hamilton could be at the low end of the guidance and Carrier could be at the low end of guidance unless things happen.

And I am trying to get a sense for the extent to which in order for -- I mean you have given yourself on some huge company some miniscule ranges.

At Pratt, minus 50 to zero and zero to 25, pretty small numbers really.

But I am trying to get a sense of whether the -- what happens in the back half of the year is just the comparison of weak numbers in '09 to weak numbers in '08 because we run into the weak part of the last year and therefore, the compares are better or whether you are actually saying United Tech is hoping that the economy and therefore our businesses get better and if it happens, great and if it doesn't, well, we will miss the numbers?

Joe, let me just be very clear.

We stand by the guidance that we gave last March and we stand by it again today.

Obviously if the order rates continue at what we have seen in the first quarter, it would be difficult to make guidance.

But having said that, orders don't have to go back to where they were last year.

We still have adequate contingency; we talked about a $350 million contingency.

That equates to about a $1 billion of revenue that we could miss in the back half of the year and still make the earnings guidance range.

On top of that, you have got better compares on FX, you have got restructuring savings that gain momentum during the course of the year.

You have got commodities and E&D, the timing of that you will see will even benefit the back half of the year.

So all of those things are what give us confidence to reconfirm the guidance, even with these awful order rates that we have seen in the first quarter.

I still think, we still think and are committed to these numbers.

And I would tell you that Dave Hess, Alain Bellemare, Geraud Darnis, they are committed to making the guidance numbers and they are doing dramatic things on the cost side to make sure that they can indeed make those numbers.

It is tough out there.

There is no doubt about it, but they are going to make it.

Great.

Great.

That was exactly what I wanted to hear you say.

I mean somehow the comments left me worried a little bit that maybe there was something that was up in the air.

And I appreciate the definitive kind of answer and the reminding of the FX and the E&D and the other things in the back half that help make the compares easier, not just a wish for an improving or less or a cessation in the declines.

Thanks.

Thanks, Joe.

Doug Harned, Sanford Bernstein.

Good morning.

On Carrier, when -- you have taken a lot of people out already.

Have you at the same time also made changes to the reporting structure of the organization in doing that?

Yes, absolutely and Geraud is in the process of doing that as we speak and I think trying to simplify, as Ari talked about, the overall structure of Carrier is one of the priorities that we have for the year and trying to make the reporting lines say leaner.

Geraud does have more direct reports than he did a year ago.

But I think, again, that is the whole idea is to be empowering the people that are on the line running the businesses.

Has this changed though or has it yet or do you expect it soon to change the way Carrier operates?

In other words, are you doing anything -- let me go back up a second.

You laid out a picture of the portfolio, Carrier's portfolio at the investor conference with a triage of businesses that included some fix and exits and some very significant changes that it looked like you may be heading toward.

Have you made progress in that direction to changing the portfolio, how it reports, those sorts of things?

Absolutely.

We are not going to make any announcements on this call, but I would tell you that Geraud and Ari are making very good progress on that, I will call it, portfolio rationalization.

The whole idea, of course, is to get a leaner, more focused organization and to be in markets where we know we can be successful over the long term.

And I think you'll be pleasantly surprised over the next couple of quarters at the progress that they make.

So you are expecting this to be over the next two to three quarters that we will see something substantially different in terms of what Carrier looks like?

Well, again, I think it depends how you define substantial.

I would tell you that they will be making progress each quarter going forward.

Is Carrier going to be a $5 billion business?

Absolutely not.

But will it be a leaner, more focused organization?

Absolutely.

And the whole idea here is to get accountability at the business unit level within Carrier to have those general managers to be successful and to have them have the focus on costs.

And I think that is what this whole organizational structure realignment is about.

And then one last thing, on Carrier, what are your assumptions now in guidance with respect to benefits from commodity pricing for the year?

Overall, we have about $100 million for the year.

Right.

They saw about $30 million of benefit here in the first quarter, about $100 million full year.

Copper has kind of moved around a little bit on us.

First-quarter copper I think was just under $3 average price, but for the full year, we are thinking it is going to be about $2.30 or so.

So they'll still see some back-half benefit from copper.

Okay, great.

Thank you.

Jeff Sprague, Citi Investment Research.

Thank you, good morning.

Greg, just on acquisitions, you remarked that the Company will continue to aggressively pursue acquisition opportunities.

But could you actually speak to kind of the landscape of opportunities that you see, obviously not naming names, but some color on the pipeline and kind of what the tempo is in the pipeline?

I think the pipeline is full, as it typically is, but I think the difference today, and the reason we continue to use the word aggressive, is we see valuations that are very attractive.

And I think especially on the aerospace side, we see some very compelling types of valuations and some businesses where we see some synergy opportunities between ourselves and the target company.

Obviously you have got to remain disciplined; you can't chase these things and overpay in this market.

I think the problem, as we talked about even in March, is you need a willing seller along with a willing buyer.

We have got the ability, we've got a great balance sheet, we've got typically strong cash flows; we can afford to do a lot of things.

But you still need to have somebody out there that is willing to sell their business and right now with the valuations down where they are, it is becoming more difficult.

I think the other point to mention, of course, is we are talking about things in the core here, whether it is aerospace or whether it is commercial and we want to stick to the core, stick to things that we know how to fix and things that we know where we can get true hard cost synergies in these businesses.

Other than that, I know it is frustratingly slow sometimes, but it is just a process that, again, you have to stay disciplined and these things will happen.

And as we think about kind of the placeholder construct, if the year continues to unfold and the deals are not materializing, would we expect some pickup in share repurchase or do you just let the dry powder mound here?

No, I think we will probably take up share repurchase.

Right now, we only did $200 million in the first quarter.

We have got $1 billion placeholder with $2 billion of M&A.

I would expect that we would see higher share repurchase in the back half of the year if we don't think we are going to see a significant type of acquisition.

And then just on the cash flow question, your comment about Sikorsky and Pratt using cash was pretty clear.

But as you think about the remainder of the year, do those businesses actually generate cash this year in excess of net income or is there just some normalization in those businesses and the cash performance ultimately comes from Otis and elsewhere in the portfolio?

Well, let me make it clear.

We expect all of our businesses to generate cash flow equal to or greater than net income.

I think the challenge is probably bigger at Sikorsky than it is at Pratt Whitney.

I will tell you most of the issues at Pratt Whitney were timing.

Obviously inventories, although they were up in the quarter at Pratt, inventories in March were actually down.

And unfortunately those inventories went down in March, accounts payable went down and that hurt their working capital.

They also had a few payments that slipped out.

So I don't think there is anything structural at Pratt that is going to prevent them from hitting 100% or free cash flow to net income.

The challenge on Sikorsky, again, is they are going to see a 20% plus increase in the top line and that means more inventory.

I think the challenge for them is inventory turns have to improve.

Inventory was up a little over $250 million in the first quarter at Sikorsky.

That is half of the total inventory increase across UTC now.

Again, most of that was planned, but turns have to get better and I think inventory turns are one of those things that, as you know, we've struggled with sometimes because at a growing business like Sikorsky, it is hard to get turns to improve.

But Jeff and team have a plan to get cash flow back equal to net income for the year.

Part of that will be reducing capital expenditures, but also just being aggressive on the inventory-reduction front.

And then just finally from me on China stimulus, do you feel that you can actually kind of draw a line, so to speak, from kind of the theory of the stimulus to what is on the drawing board as it relates to commercial construction opportunities in the country or is there maybe some risk that those dollars are flowing into other infrastructure type projects that maybe don't play directly to Otis?

Well, I think we do -- even though Otis, Jeff, is our largest business, we do to play in the infrastructure side through Fire & Security and that business is seeing some benefits from the stimulus already in terms of the dollars which are flowing through the infrastructure.

We are seeing both at Carrier and Otis, even though it is not translated into orders yet, but increased level of interest, increased level of quotation activities, increased interaction with the builders in China.

So we think some of that will ultimately flow through and hopefully sooner rather than later.

Thank you very much.

Myles Walton, Oppenheimer.

Thanks, good morning.

Just a quick question on Pratt Canada.

I know that you have lowered the expected engine shipments since March, which was down since December.

And I also note you'd previously cited it in the Analyst Day that only about 35% of that was corporate.

So I am just curious what is driving the magnitude of that reduction?

Obviously there have been business jet makers cutting forecasts, but again that 35% figure you threw out would seem to mute that to some extent.

So what is driving the sequential change to guidance and also is that the kind of pressure you are seeing at Sikorsky's commercial helicopter business?

Let me take the Pratt Canada question first, Myles.

I think the decline, even though overall we are talking about double-digit declines for engine shipments, I think the corporate segment, which by the way is closer to 50% of the total aircraft for the Pratt Canada in the shipments, is more like to be down over 30%, which is more in line with the reductions we have seen from the customer base.

So inside of that double-digit decline of engine shipments overall, the corporate is down over 30% and that probably is more consistent with what you would expect.

The other parts of the business, which is the utility, the regional and the aftermarket engine shipments, are flat to up and that's what gives the total double-digit decline.

On the Sikorsky side, obviously first quarter was a little tough on the commercial side.

We had no orders there on the commercial aircraft, but that is going to over time I think as things stabilize and things change, hopefully that will start to see some recovery as well.

Did you see any cancellations at Sikorsky on the commercial side and also did you see any lack of acceptance of built aircraft?

No, we did not see any cancellations.

I think the one thing I would point out we had a couple of contracts that were deferred on the commercial side, but no cancellations.

Okay.

And then last one from me, do you have any clarity yet on Secretary Gates' position with respect to the second engine on JSF and his new go-forward plan?

It is interesting, Myles.

He actually didn't mention the second engine as part of his overall budget cut, but we took that to mean that he wasn't going to support it.

We will have to see how that moves through Congress.

I think obviously accelerating the JSF program was positive and we are still on track in terms of the overall engine testing program, which I think we start STOVL testing here in July.

Okay, great.

Thanks so much.

Ronald Epstein, Bank of America securities.

Hey, good morning, guys.

When I look at the numbers on the quarter, it looks like Otis and Fire & Security didn't have any decremental margins.

Is that right?

I mean did you guys just take out costs quicker than the revenues fell or were there any one-time things in the quarter?

I'm sorry, that was at Otis and --?

Fire & Security.

Fire & Security.

Yes, I think it really was just a cost takeout.

I think on the Otis side, they also benefited from the fact that new equipment was down significantly, as we said, about 10% or so and as new agreement goes down, you have got more service.

Obviously that helps on the margin side.

Okay, great.

And then can you give us some color on -- I know Airbus was doing some tests with the geared fan on one of their platforms.

Can you give us any color on that, how'd that go and when will we hear more about it?

Yes, the program was actually completed back in the fourth quarter.

We flew the GTF on the A340 flying testbed.

We are still waiting I think for the final test reports out of Airbus.

But our own data and what we have heard from the team over there was that the engine performed to its expectations or better in most cases, including fuel burn, noise and emissions.

So I think everybody was very pleased with the test program.

And that really quite frankly is probably the last you will hear about the GTF test program until we actually start first flights on the C-Series here with the new GTF.

And again, it is a whole new core for the C-Series and the Mitsubishi Regional Jet as opposed to the engine that we flew on the testbed.

So I think the testing is over and now it is just about development.

Okay, great.

Thanks.

Howard Rubel, Jefferies.

Thank you very much.

A couple things.

Did you provide some aircraft financing in the quarter, Greg and how do you sort of see your position in that market over the next six to twelve months?

We didn't provide any net financing in the first quarter.

As you know, we do occasionally provide some backstopped financing at Pratt & Whitney for some of the engine campaigns, but typically that is backstop and we have not generally been called upon to finance a lot of aircraft.

I think we have got a placeholder, $250 million for the year.

Last year was a little light of that, but it is not a big number.

We manage that very closely.

We don't want to be in the financing business.

I think Louis has said that about 10,000 times, and we will reiterate it today.

We do not want to be in the financing business.

Well, that is encouraging.

There is -- on CapEx, the number was sharply lower than I might have expected.

What sort of -- I mean are we going to see $800 million in CapEx for the year or will it be lower than that?

Well, we've talked about a number down 20%, and I think what you are seeing here is the business unit presidents just clamping down on CapEx just to make sure that we hit free cash flow.

I don't know whether I want to quote a new number.

Last year we spent $1.2 billion or so on CapEx.

We expect that number to be less than $1 billion.

Could it be $800 million?

I don't know.

I think there is obviously pressure out there for some of the longer-term development programs to facilitize and things, but all the businesses are rationing capital as you would expect in this market.

Just two more.

One sort of staying with capital on the R&D side.

Also that looked like that was a $200 million benefit year-on-year, and you did indicate most of -- it sounded like most of that was at Pratt; is that correct?

R&D was not much of a -- I don't know, the $200 million, where you're getting that number.

I thought that was in -- I may have misread the income statement.

If I did, I'm sorry.

Yes, I think -- I mean E&D in total is almost flat at about $409 million.

Oh, yes.

I read the wrong line.

I apologize, yes.

But still in all, are you still sort of seeing it flat for the year, or is it going to -- are you going to be looking at that?

It is going to go down, E&D, I think.

We talked about a $100 million decrease.

I think you'll see Pratt take E&D down in the back half of the year.

Most of that just as customers have slid programs to the right.

You're also going to see, I think, a fairly big reduction at Hamilton as 787 goes to first flight here in the second quarter.

You'll see just a natural reduction in spending there.

I think that should be down up to $50 million for the year.

And then the last thing is supplier health.

I know you have been monitoring that very carefully.

Are there some suppliers that you are at a position where you need to take them over or make sure that you are protecting your security interest in the business?

Could you elaborate on what you are doing there?

Yes, we have got a watchlist that our corporate supply management team puts together.

We review it every single week.

I think right now, we have got about -- in fact, I know we have exactly 31 key product suppliers on that list.

And there are varying levels of, I would say, financial distress.

In some cases we have moved work out of suppliers if we don't think they are going to make it.

A couple have asked for increased -- or decreased payment terms, I guess, but we are managing that very well as you would expect.

It is just one of the things that Jothi Purushotaman and his team do on a daily basis with the business units is manage that supply base.

And that is 31 out of 1500 key suppliers.

It is not a huge number, but we try and stay on top of that to avoid any surprises.

And if I'm not mistaken, that has really not changed very much.

It has not.

The list stays relatively constant.

We'll get one or two moving in or out, but it stays just around that 30-ish level.

Thank you very much, Greg.

Okay, Tamara, if we can take our last question, please.

Cai von Rumohr, Cowen & Company.

Yes, could you fill in the spares orders you didn't get like commercial large engine MRO, Hamilton MRO and Pratt Canada?

I think we talked about the fact that large commercial engine spares orders were down 28%.

No, no, no.

I meant MRO, are talking spares plus MRO or just spares?

Yes, that was spares, right?

MRO is down sort of mid teens for Pratt, the total aftermarket.

So I think MROs are slightly less than that.

And we -- on the Hamilton side, it is a similar story where you have total aftermarket down sort of mid teens with spares down over 20%.

And then at Pratt Canada, what did the spares do?

Excluding FX, high single digit down.

Okay.

And you mentioned that you took a $20 million union payment bonus at Sikorsky.

If we add that back, that would imply that margins were over 10%.

Was there anything abnormal on the plus side there?

I think you did the math exactly correct.

I think the other thing that benefited Sikorsky in the quarter was just the mix of the helicopters that went out.

We had some foreign military in there that had a little bit better margin than the typical Black Hawk deliveries and so that is what drove margin up for the year.

We still expect margins to go up at Sikorsky this year, but we are not forecasting 10% for the year.

I think that is a 2010 target.

Okay.

And then the last one, you mentioned customer delays because of provisioning and tight finances of the airline customers.

Was that situation getting worse as you exited the year and what are you kind of seeing in early April?

Well, I think it was absolutely getting worse as we exited the year.

I think as the economy has continued to slow down into the first quarter, provisioning and order rates were worse in the first quarter than what we saw in the fourth quarter.

Spares did start to slow down at Pratt I think last year in the third quarter, --.

I guess I meant is it -- really was it -- exiting March and April -- is that continuing to get worse or is that too starting to stabilize?

I don't know that I want to forecast the first two weeks of April, Cai.

I would say that what we saw in the order rates during the course of the quarter is they were fairly stable again, albeit at the lower rates that we saw.

So it got progressively worse from Q4 into Q1, but during the quarter, it kind of remained at this lowish rate that we have seen.

We just didn't see the bump in the March timeframe that we might have expected.

Got it.

Thank you very much.

Okay.

Thank you very much, everyone.

Just to wrap up here, I appreciate everybody's time on the call.

It was I think a very good quarter for UTC despite $1.7 billion of revenues down.

Cost control across the business is taking hold.

There is a lot more costs to take out and the business units are focused on it.

The guidance is secure.

We still stand by the $4.00 to $4.50 for the full year and free cash flow equal to net income.

And like I said earlier on, we are going to focus on the things that we control -- the costs in the business.

And with that, I thank everyone.

Take care.

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

We appreciate your participation.

You may disconnect at this time.