雷神技術公司 (RTX) 2010 Q1 法說會逐字稿

Good morning and welcome to the United Technology's first quarter conference call.

On the call today are Greg Hayes, Senior Vice President and Chief Financial Officer, and Akhil Johri, Vice President, Financial Planning and Investor Relations.

This call is being carried live on the Internet and there's a presentation available for download from UTC's home page 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 include its 10-Q and 10-K reports, provide details on important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements.

Once the call becomes open for questions, we ask you limit your first round of questions to two per caller to give everyone the opportunity to ask questions.

You may ask further questions by reinserting yourself into the queue and then we will answer those questions as additional time permits.

Please go ahead, Mr Hayes.

Thank you, Trisha, and good morning everyone.

As you saw in the press release this morning, a great start to the year with strong performance across the business in a tough but improving end market environment.

Some key takeaways from this quarter, first, cost traction continues resulting in margin expansion in each of the businesses.

Second, we are seeing improvement in order trends and continued strength in our short cycle businesses, and finally, we saw strong cash generation in the quarter.

Recalling our March investor meeting we expressed confidence in our original EPS guidance provided back in December, as pressure from the Euros weakness was partially offset by benefits from pension, the early closing of the GE Security deal and strength in our short cycle businesses.

Since that time, the Euro has weakened a little bit more, but the continuing strength of cost traction and a broader improvement in order trends has increased our confidence in the outlook.

As a result we're going to raise the low end of our EPS guidance range to $4.50 from $4.40.

So we now expect EPS to be in the range of $4.50 to $4.65, that's up 9% to 13% from 2009 and revenues still expected to be around $54 billion to $55 billion, up 2% to 4%.

Getting back to first quarter results, performance was solid across our businesses, with segment operating margin expansion of 180 basis points to 14.2% adjusted for restructuring.

On that same basis, total segment operating profit grew 13% and a revenue decline of 1%.

All six business units improved margins with Carrier, Otis and Sikorsky leading the way.

Carrier's margin expansion of 390 basis points reflects strong progress from its restructuring actions and cost reduction initiatives, in addition to the benefits of a relatively easy compare given the very tough Q1 in 2009.

Earnings per share in the first quarter were $0.93, that's up 19% and includes a charge of a little bit more than $0.01 from the recently enacted healthcare legislation which eliminated the Medicare Part D tax subsidy.

Restructuring costs were $67 million, that's slightly below the net $75 million that we had expected.

Excluding restructuring costs in both quarters and the one-time gain in last year's first quarter, earnings per share increased 13% on 1% lower revenue.

Foreign currency was a benefit of $0.06, that's from translation and the positive impact of currency hedges at Pratt Whitney Canada.

Foreign currency translation also favorably impacted revenues by 3%.

Organic revenues declined by 4% in the quarter, that's a slight improvement from the 6% decline we saw in the fourth quarter.

We expected organic revenues this quarter to be down as last years first quarter benefited from a strong backlog.

The best example is probably Pratt Whitney Canada which shipped nearly a thousand engines in the first quarter of 2009 compared to 633 this quarter, that's down 35%.

That's the lowest quarterly rate we expect this year in Pratt Canada, and for the full year we still expect Pratt Canada to ship about 2,800 engines.

Now on slide two on orders.

While first quarter organic revenues were down, first quarter order rates showed market improvement with continued strength in most of our short cycle businesses.

Carrier's US residential shipments and Transicold orders were up year-over-year with strong improvement in Truck/Trailer and containers.

In China, total orders across our commercial business units grew by 40% and other emerging markets such as India and Brazil also saw strong improvements.

Additionally at Hamilton, we saw growth in the commercial aero aftermarket and at their Industrial businesses.

Not surprisingly, commercial construction related orders, particularly in North America, remained weak.

Akhil will take you through the detail orders by business unit in just a few minutes.

Now on slide three, in the quarter free cash flow was 116% of net income.

Our focus on working capital and control over CapEx continues to pay off and we drove solid cash flow performance.

Working capital turns improved to 8.3 even in the face of lower revenues, and capital expenditures to depreciation was slightly below 70% in the quarter.

Share repurchase in the quarter was 500 million, a strong start to this year's program as we continued to believe that our shares were attractively priced.

Acquisition spend in the quarter was $2.1 billion, that's primarily from the GE Security and Clipper Windpower transactions.

So no surprises, just like we told you since December, a strong quarter where we saw continued margin expansion and excellent cash flow in difficult but improving end markets.

We'll come back and talk a little bit more about 2010, but for now let me turn it over to Akhil to take you through the business unit details.

Thanks, Greg.

Turning to page four, let me remind you that I will talk to the segment results adjusted for restructuring and non-recurring items as we usually do.

Otis delivered an exceptionally strong first quarter with profit growth up 15% on 3% higher revenues.

Operating margin expanded 240 basis points to 22.2%, as the benefits of aggressive cost reduction actions over the past year and continued strength in contractual maintenance more than offset the impact of lower new equipment volume.

At constant currency, revenues were down 3% while operating profit was up 8%.

New equipment sales were down 7%, as a strong rebound in China was more than offset by a continued decline in North America and Europe.

Service revenues were down slightly with growth in the contractual maintenance business offset by lower modernization and repair volumes.

New equipment orders resumed growth for the first time since second quarter of 2008 and were up 9% versus prior year, or up 3% at constant currency.

The increase was driven by China, where orders were up close to 50% from a weak first quarter of 2009, partially offset by a 30% decline in North America.

Orders in Europe remained flat for the second quarter in a row.

While the foreign exchange benefit in the first quarter is expected to be more than offset by headwinds in the latter part of the year, based on the solid cost traction and strong orders in China, we now expect Otis full year profit growth to be at, or above, the higher end of our prior guidance range of $75 million to $100 million on flattish revenue.

On slide five, Carrier continued its transformation to a higher returns business and posted another quarter of record margin expansion.

Profit grew 149% on 2% lower revenues resulting in 390 basis points of margin expansion.

This was largely driven by carryover benefits of the aggressive cost reduction and organizational restructuring, strong volume and earnings conversion in parts of the business, and lower commodity costs.

One-time impact of new divestiture related transactions reduced profit by about $20 million.

Consistent with expectations, organic revenues were up 2% in the quarter following 18 months of contraction.

First quarter shipments of US residential systems were up high single digits year-over-year, the second consecutive quarter of growth.

Although order rates in the longer cycle commercial HVAC businesses in the Americas and Europe were down in the low teens at constant currency, order rates in China were up mid-teens.

Transicold orders were up for the first time since third quarter 2008, up over 35% at constant currency and container and Truck/Trailer orders nearly doubled albeit from a low base.

I'm sure you remember these segments had significant drops in orders last year.

While the cooling season is still in front of us, based on the solid start, we now expect Carrier's operating profit growth for the year to be at or above the higher end of our prior guidance range of $150 million to $175 million.

UTC Fire & Security delivered operating margin expansion of 110 basis points on 10% higher revenues.

Organically, revenues contracted 8% with double digit decline in fire safety and a mid single digit decline in electronic security.

Net acquisitions, primarily from the acquisition of GE Security on March 1, contributed 10 points of revenue growth.

Foreign currency translation increased revenues 8% year-over-year.

While first quarter orders declined organically at a low single digit rate overall, the rate of decline continued to improve sequentially.

Orders in Asia and the Fire Products business increased year-over-year in the quarter.

Operating profit grew 24%, including 11 points from favorable FX and 20 points from the GE Security acquisition.

The large negative impact from lower organic revenues was partially offset by the benefits of integration of field operations, restructuring and cost controls.

For the full year we continue to expect revenue to be up 20% plus and operating profit up $225 million to $250 million.

Turning to the aerospace businesses on slide seven, at Pratt & Whitney, revenues declined 9% in the quarter driven by lower overall aftermarket volumes and significantly lower OEM shipments at both Pratt & Whitney Canada and Power Systems.

Military revenues were flat, while favorable currency conversion at Pratt Canada contributed three points to revenues.

Large commercial engine spares revenues were down mid-teens while book-to-bill was slightly above one.

As Greg said, Pratt Canada engine shipments were down 35% from a strong first quarter last year.

Operating margin at 16% was 30 basis points higher than prior year.

The impact from lower revenues, particularly of higher margin spares, was more than offset by restructuring benefits, favorable foreign currency at Pratt Canada and lower E&D.

Recent improvements in air traffic trends are consistent with our expectation of higher commercial aftermarket revenues in the back half of 2010 and for the full year, we remain confident in Pratt's operating profit increase of $75 million to $100 million on low single digit growth in revenues.

In the quarter, Hamilton Sundstrand operating profit grew 6% on 3% lower revenues.

Aero OEM revenues were down high single digits, while aerospace aftermarket and commercial spares were both up low single digits.

Industrial revenues were also up slightly.

Commercial spares orders were up low double digits versus the weak first quarter 2009 levels.

Book-to-bill was slightly above one.

Industrial orders increased mid-teens on a constant currency basis.

Orders improved across all industrial businesses with over 20% growth in the Sullair compressor business, a positive sign as this segment has been a leading indicator.

Operating margin expanded 130 basis points reflecting the benefits from restructuring, cost control, and lower E&D, which more than offset the impact of lower revenues.

For the full year, we continue to expect Hamilton Sundstrand's operating profit to be up $25 million to $50 million and revenue up slightly.

On slide nine turning to Sikorsky, operating profits grew 25% on 2% higher revenues.

During the quarter, Sikorsky shipped a total of 51 large helicopters, 44 based on military platforms and seven commercial, reflecting the continuing strength of the military business and the weakness in the commercial markets.

Operating margin expanded 190 basis points in the quarter to 10.6% from favorable mix of military and aftermarket shipments and the absence of approximately $20 million first quarter 2009 payment of a union contract ratification bonus.

E&D spend was slightly higher in the quarter.

Final assembly on the first international BLACK HAWK was completed in March at Mielec in Poland.

This new variant uses a global supply chain and is the first BLACK HAWK helicopter assembled in Europe.

We remain confident in Sikorsky's 2010 guidance with deliveries of 250 to 260 large helicopters, revenues up high single digits and operating profit up $100 million to $125 million.

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

Thanks, Akhil.

Well, a very solid quarter.

Great cost performance, great margin expansion and all that came with good cash conversion as well and signs of life on the end markets.

Some other highlights, like most importantly we closed on the GE Security acquisition and the F&S team is now focused on the hard work and integration of this really wonderful property into the F&S family.

Carrier continues to implement its portfolio transformation agenda as well.

Since the beginning of the year, Carrier has announced new divestitures and joint ventures for about $200 million in annualized revenue, and that's in addition to the $1.7 billion previously completed.

On the aero side, Pratt & Whitney's GTF engine continues to gain momentum in the market with the Bombardier C series order for 40 firm and 40 option aircraft from Republic Airways.

And Hamilton Sundstrand, they were recognized as Supplier of the Year by The Boeing Company for its performance on the 787 program.

Okay as for the outlook for all of 2010, while there is still some uncertainty regarding the pace of global economic recovery and foreign currency continues to be a forecasting challenge, we are very confident in our revised EPS guidance of $4.50 to $4.65 a share.

As I said before, we continue to expect revenues of $54 billion to $55 billion, that's up 2% to 4% from last year.

And as I stated earlier, order trends are improving and that's all in line with our expectations for organic growth to resume in the second half of the year.

While full year expectation for organic growth remains in the range of 0% to 2%.

No other changes to guidance for 2010.

Still expect $350 million of gross restructuring, partially offset by one-time gains of about $100 million.

Our restructuring in the first quarter was lower than we expected due to the timing of some of the projects, we continue to expect gross restructuring charges of $200 million and about $25 million of one-time gains in the first half of the year.

So that's about $0.08 of net restructuring in the second quarter, if I can do the math for you.

E&D was down slightly in the first quarter, but we still expect full year to be up about $150 million due primarily to GTF development and the acquisition of GE Security.

And of course, we continue to expect free cash flow to be equal, or be in excess of net income.

On share repurchase, our guidance remains at $1.5 billion for the full year and we're keeping our $3 billion placeholder for acquisitions of 2010, of which $2.1 billion was used in the first quarter.

While the world feels much better than it did three months ago, keep in mind it is still April and our guidance relies on organic growth in the back half of the year, particularly in the high margin commercial aero aftermarket.

As always we remain confident but cautious.

We also remain focused on what we control and we continue to position UTC to outperform.

By the end of this year we will have invested over $1.5 billion since the beginning of 2008 in restructuring to rationalize our cost structure.

At the same time, we continue to focus on moving to low cost sources and we're re-shaping business unit portfolios to become simpler and more focused to deliver consistently high returns.

And on the top line, we continue to invest in game changing technologies and to enhance our presence in growth markets to fuel sustainable top line growth in excess of global GDP growth.

In closing we're confident in delivering our 2010 commitments and the leadership team is committed to generating double digits earnings growth in 2011 and beyond.

Let me stop there and Trisha let's open it up for questions, if you could.

(Operator Instructions) We'll take our first question from Joe Nadol from JPMorgan.

Good morning.

Hi, Joe.

Greg, just on organic growth company wide, you had said 2% to 3% down for Q1 and you came in minus 4%, and my sense is that Q2 might be a little lower than you were thinking a couple months ago.

Where are you seeing -- is it in aerospace that you are seeing the weakness?

And what's your confidence level on that full year guidance, which you didn't change?

Organic growth did come in a little bit lighter than we expected.

I think there are really three places I would point to.

F&S was down organically about 8% and that was a little bit lower than what we had expected.

The orders have started to pick up there sequentially, but still a pretty tough environment on the F&S side.

Also you saw we were down 9% organically at Pratt.

That was a big number for us, but of course that was really pretty much in line with expectations given the big backlog that burned down in last years first quarter and the other place I'd say is probably Sikorsky came in a little bit light.

They delivered only two more helicopters this year than last year and part of that is the nature of the commercial business where we had a little problem with some of the customers.

We didn't get things delivered that we probably could have, and I expect again second quarter will be a better story than first quarter.

Okay, and then Pratt & Whitney Canada spares, you gave us the big Pratt but how did that look in the quarter?

Joe, it was down like mid to high teens level, excluding FX.

And how does that compare to what you saw late last year and what do you think is going to happen in the next couple quarters there?

I think a little worse than what we saw last year, but we do believe fully because of the improvement in the traffic that we are seeing in the customers use of the business jets, that number should improve as we go through the year.

So we do believe this quarter was probably the lowest compares that Pratt would see all of this year.

Okay, I just want to on the first question I asked on the organic growth, I just want to get back to that for one second.

The fire and security had negative 8%.

Where was the weakness organically, because that's been a pretty stable business historically.

Was it fire or security and any details you can give.

Yes, really, we saw weakness really around the globe, particularly in the US, Australasia.

I think the one bright spot in the quarter was Asia itself, but for the rest of the markets it was really pretty much down across-the-board.

One other thing, Joe, if I might add, while it was a little lower than we expected, the orders in the third quarter last year for F&S were down 14%, they were down eight in third and they are now down three in the first quarter.

So we are seeing an improving trend, and again like Pratt, we do believe that the organic compares would start to get better for F&S as well going forward.

Okay thanks.

Sure.

Thank you.

Our next question comes from Ronald Epstein with Banc of America.

Hi, good morning.

Good morning, Ron.

When we think about volume coming back through the business, how much of the cost take out do you expect to be sticky?

How much of it is going to go away when volume comes back to the business?

I think the placeholder that we have been talking about for the last year or so is about two thirds of the cost we have been talking out are structural and should not come back when volume comes back.

A third of the costs are just related to the volume reductions that we've seen.

So headcount has been taken down sharply at Pratt Whitney Canada, obviously it's come down sharply at Carrier with the volumes coming down.

The DLPs will come back, but as far as the other cost savings, those things will want to stick.

Okay, so we are thinking that's what $500 million, $600 million off cost take out, ballpark?

That's probably a good ballpark.

And then maybe one other question.

On the geared fan, if we were to see a reegining announcement from Airbus or Boeing this year and it did involve a gear turbo fan architecture engine, what kind of investment would you expect that would be in terms of R&D for Pratt?

Well again every time you look at it at a large commercial engine you're talking about an investment somewhere in the neighborhood of a billion dollars, but you've got to keep in mind that's over probably a four to five year period and there's lots of partners involved.

The clear preference of course is to offer GTF through the IAE joint venture, and again that takes a big burden of the E&D on to the partners.

Even if we don't end up going through IAE, you can be assured we'll have lots of partners willing to sign up for that.

So at least half of the engine would probably be partnered out regardless, so again all kind of manageable within the context of UTX.

So we're thinking it would be like $150 million to $200 million a year something like that?

Well if you take, yes, a billion dollars over five years is $200 million a year and half of that would be on our nickel, so $100 million a year, rough numbers.

Okay, great.

Thank you.

Yes.

Our next question comes from Jeff Sprague with Vertical Research Partners.

Hi, thank you, good morning.

Greg, I was wondering if you could provide a little bit more color on where the cash flow upside is coming from and specifically I'm wondering given the actions you've taken at Carrier, are you seeing, although you're in your seasonal low ebb, are you seeing better cash performance there?

Carrier I think was probably the most pleasant surprise in the quarter, not just for margin expansion but also they had positive free cash flow in the quarter, which considering it is their big inventory build quarter, it was remarkable performance.

Carrier's inventory was up a couple hundred million in the quarter, but their turns were up over a point.

So you take a look at working capital last year was an out flow of about $700 million.

This year only about $200 million, so that's really where the strength came in.

If you parse that down, inventory was up in the quarter but not up as much as probably otherwise it would have been.

So turns have actually improved across UTC , working capital turns have

So I would bet that typically Carrier's negative cash flow in Q1 going back forever --

Yes.

Do you think that's a permanent structural change in the business that you're going to -- it's going to be seasonally weighted still to the middle of the year, but the working capital and other changes have inherently changed the cash flow of Carrier for the good?

Well I think it would certainly change it for the good, obviously as we get out of distribution we're not sitting there with all of that inventory that gets shipped from the factories into distribution.

We still have the receivables however.

Carrier is always going to be light cash first half of the year because of the big impact of the Summer cooling, but again, structurally having gotten rid of, or divested a big piece of the distribution business so far, has taken a big piece of working capital and put it on somebody else's balance sheet.

Now you did indicate that raw mats were favorable in the quarter and I'm sure that helped Carrier.

Just wonder how the channel is acting relative to price with potentially year end negative footsteps on cost as we progress through the back half of the year.

Yes, I think it was about a little less than, or about a penny I guess I would say of headwind at Carrier in the quarter, so I'm sorry, tailwind, associated with raw materials, copper was lower this year than last year.

Copper has gone up, we see it around $3.60.

I think when Geraud gave guidance last month, we were talking about a $3 average price and it's probably more like $3.15 now.

Pricing is obviously very difficult in the market.

Channel inventory is actually down we think year-over-year and I think it's going to be tough to push price in the back half of the year, even with raw materials going up because there's so much excess capacity.

At the same time, everybody else has essentially the same cost structure as we do in terms of inputs.

So given Carrier's scale, I think we're better positioned to take advantage of the market than many of the others.

And if you have the data, do you know how GE Security performed organically in the quarter, if you looked at it on a pro forma basis?

I don't know that we have that data.

We can probably get that for you, but I don't know that we have that handy here.

I'll pass the baton, thanks.

Thanks, Ron.

Thank you.

Our next question comes from Terry Darling with Goldman Sachs.

Thanks, good morning, Greg, good morning, Akhil.

Greg, I wonder if we can talk about some of the pieces in Otis, the China orders very, very strong, the profit forecast kind of bias to the upside but revenues unchanged.

First question is sort of the way to put those pieces together just mix and secondly, can you address the question a lot of people are wondering about here in terms of the China property bubble?

Let's get to that one last.

Okay.

Because I don't have an answer for you.

The Otis story in the first quarter was really on the cost performance.

New equipment was down 7% and even service was down slightly, but overall really it was a great quarter because they took out a lot of cost.

They got 240 basis points of margin expansion, and about 50 basis points of that came just from mix.

I'd also tell you though, they got a big piece of benefit from currency obviously and that's actually going to be a headwind for them as they go throughout the year.

So we don't expect this kind of performance to continue throughout the year.

Obviously a big piece of their guidance in the first quarter, but for the full year we still expect new equipment to be down 5% to 10%, service has to come back from the first quarter levels before we're going to be able to take their guidance up.

Now, as far as China, orders were up just about 50% there, but again, that's off of a very low compare.

Last year's first quarter was down 40%, so you do the math and we're still not back to where we were in the 2008 levels even though the headline 50% sounds really, really good.

Clearly, the Chinese government is concerned about a property bubble.

We've seen some of the actions they've taken in the last couple of weeks in terms of trying to limit the property sales and increasing down payments and such, but quite frankly, we haven't been very much impacted by that.

Most of the growth we see has come in the social housing and in some of the western provinces where the housing bubble isn't nearly as apparent as what we see on the East side.

Okay, and then very helpful there.

And on the confidence in the second half Pratt commercial spares improvement, you mentioned some of the macro factors out there that also all of us are seeing.

I'm wondering if there's anything more on the micro level at this point, either customer indications or anything along those lines that you can point to that reinforce your confidence on that?

I think I'd love to be able to point to inductions into the engine centers or customers telling us that they are sending a bunch of engines in, but quite frankly it goes back to the macro view that as RPM's increase, we saw them up double digits in February.

I think we're going to continue to see engines come back.

Right now, as we look at why are spares down so much at Pratt, it's really because the overhaul still continued to be these light overhauls instead of the regular heavy overhauls in the engine center.

So average spare parts are down maybe 30% on some of these engines going through the shop.

So again, we expect as traffic picks up the airlines become more profitable during the course of the year, we're going to see a return to more normal levels of repair activity and spare sales.

Obviously, this problem with the volcano in Iceland isn't helping matters any.

I think the industry probably lost a couple of billion dollars of revenue, but despite that, I still think we're pretty confident that we're just going to see a lot of engines come back and we have to see parts come back relatively robustly.

And then just lastly on M&A, I'm wondering still around a billion dollars on the placeholder for this year.

How you're thinking about sort of the public versus private opportunities out there, I guess if you look at the valuations in the public market moving up, does that shift your focus to the private side more or not necessarily?

Not necessarily.

I think we remain open to deals both public or private.

Obviously as valuations pick up, it becomes more difficult to do a deal.

We like to buy for value.

I think GE Security is a great example of that, and as we sit here today, we don't see any big deals on the horizon, but as we sat here at the end of the first quarter last year we didn't know about GE Security either.

So deals happen when they happen and we continue to evaluate a lot of different things and we'll just have to see how they all develop.

Okay, thanks very much.

Thank you.

Our next question comes from Sam Pearlstein with Wells Fargo Securities.

Good morning.

Hi, Sam.

Greg, I just wanted to go back to one thing you just said.

So the engine shop visits right now, has the work scope unchanged?

You aren't seeing people moving back towards a normal work scope in terms of the shop visits?

That is exactly right.

That's one of the things as we think about what's going to change during the course of the year, the airlines again, as they have more cash can afford the bigger repair bills we're going to see that just naturally pick up.

Okay.

And then this would be the time I guess just on Carrier, especially on the residential side when you would be building inventory for the cooling season.

Can you talk at all about what your production schedules look like now as in April and May versus a year ago?

Orders as we start to look at the beginning of April, orders are certainly trending up on the cooling side.

We're running a full shift in Collierville.

Right now we're not working a second shift.

We didn't work any overtime at all last year.

The production is ramping up in Collierville though and we expect really good growth for the cooling season here coming up.

Okay, and then on F&S at the analyst day, I guess the comment was that February was the first positive organic growth in, I think it was 18 months, something of that sort.

Did that continue into March and April or is the discussion about the organic growth being a little bit less a sign that Pratt didn't continue?

I think the reference, Sam, was to the orders, organic orders were up in February and we saw the improvement in orders for the quarter, as I said, it was down only 3% compared with down 8% and down 14% in the prior two quarters.

So I think we still expect maybe some negative organic quarters, one or two, just given the lead time of the conversion of those orders, but we do expect that to turn around and be positive in the second half of the year.

Okay, great.

Thank you.

We'll take our next question from Howard Rubel with Jefferies.

Thank you.

Greg, just as a -- you pointed out about the volcano, so some of your eco-wash business I'm sure is up a little bit here, but you talked about working capital improvement.

Could you address a little bit why that's happened especially at Carrier?

You talked about distribution but that's not really all of it.

No, I think, well, should we comment on eco-wash?

Obviously it's probably the biggest growth opportunity we have right now is washing engines in Europe, but I don't think that's probably not going to drive the Pratt's second quarter.

I know that.

As far as the working capital at Carrier, you look at inventories, as I said, was up a couple hundred million dollars, but that is much less than what we had seen in previous years and again I think there's not a lot of inventory out in the channel right now, but Carrier has taken out so much structural cost and they have such a tight focus on cash, CapEx, and the whole working capital area, I think they've just been able to turn the corner.

Cash has been strong at Carrier really since the last half of last year going into the first quarter.

So as you take the residential distribution business out, that takes a big piece of working capital out.

We don't have to carry all that inventory that we previously did.

And you've done a nice job, it shows with the numbers at Carrier in the aggregate.

Is there still some more trimming around the edges or are there some things you need to do to strengthen the franchise as you reposition it from here?

I think we've announced, as I said, a couple hundred million dollars of dispositions in the first quarter.

That's the distribution in California.

That's going to be gone or going into a joint venture here shortly.

We're still working on some of the other distribution here.

I think we've got the Northeast and Canada left.

We'll also probably looking at divesting or joint venturing some of our other European and South American residential HVAC.

So again, that's all part of this ongoing, we think we're going to get $2.5 billion of net revenue divestitures, so we're probably 75% of the way there now.

Just to follow-up on one other thing is research and development obviously is a function of projects and timing and other things, but could you address where you are with the run-off on the 787 at Hamilton?

The numbers really were a nice improvement year on year in terms of profitability.

Yes, Hamilton did see a big improvement year-over-year in E&D on the 787, they were down about $15 million, still a little higher than the run rate we expect for the year.

That's not unusual in this phase of the flight test program.

For the full year we still expect about $100 million or so of spend on the 787 program.

The first quarter was probably 35% or so of that total.

Thanks, Greg.

Thank you.

We'll take our next question from David Strauss with UBS.

Good morning.

I apologize if this has been asked.

I joined late, but Greg are there any changes to your underlying assumptions at Carrier for the year by market whether it be residential, commercial, truck, trailer, container, any of the guidance points that you gave at the investor conference?

Obviously the order rates are up wonderfully at Transicold and probably a little bit stronger than we had anticipated, if you think about truck trailer North America is up, truck trailer Europe combined those are up over 80% in orders in the quarter were a very low base.

On the commercial side, commercial HVAC, still down around the world ex-Asia, but again trend line is improving there.

I think overall we just feel better about the year.

For the year still only expecting 2% organic revenue growth, so it's not a -- we haven't really forecast a big increase.

Orders are better.

I think we feel a lot more confident than the guidance, but a lot of that guidance confidence is coming from the cost traction that we've seen in business.

Okay, so nothing really changed in terms of the underlying assumptions by market?

Yes, probably be better conversation we have as the cooling season takes hold and maybe we can have this again in a couple months time, we'll have better information.

Okay, and then Greg, looking up to 2011 in terms of headwinds, how should we think about, in terms of quantifying F22 and C17 and then Shuttle, could you give us an idea of what each of those headwinds might look like?

Well I don't know if I can actually quantify the exact dollar amount.

We know production on the F22 is going to end after the first quarter of next year.

C17 we think production will go down, we think they will probably be eight aircraft in the DOD budget versus 16 this year and obviously, the space shuttle going away is impacting Rocketdyne even this year, so those are known headwinds.

I think on the upside, you're going to see a recovery at Pratt Canada next year and I think spares are going to come back relatively strong in the back half of this year and into next year to kind of offset a big piece of that headwind at Pratt.

Okay, thanks.

Thank you.

We'll take our next question from Cai von Rumohr with Cowen & Company.

Yes, thank you very much.

Could you give us some color on the sequential monthly trends in the commercial aftermarket at both Pratt and Hamilton Sundstrand?

We typically, Cai, we don't talk about monthly data as such, but I think the point to make probably would be that there is improvement in Hamilton that we've been seeing as evidenced in our overall quarterly numbers, and it's not surprising given the broader base that they have across the aircrafts around the world.

So Hamilton is the first one to see the improvement and they also saw improvement in the provisioning side, which is also encouraging to see.

On Pratt I think that gets impacted more by the fleets they are on and the fast aircraft phenomena, which you are well aware of and also to remind you that Pratt spares for first quarter last year was the strongest quarter of the year for last year.

So I think when we do talk about significant decline year-over-year, we still believe that it's due to tough compares and that should get easier as the year goes around, in addition to the improving traffic and the phenomenon that Greg talked about of maybe higher, heavier build schedules as the engines come back later half this year.

Okay, and I didn't really want specific, we were up 10% or whatever by month, but just any general color as you went through the quarter?

Was January the worst?

Did things get a little bit better in general?

Was it about level?

Any kind of color to that extent would be very helpful.

Yes, Cai, we look at things on like a three-month rolling average here and things are very lumpy day to day, week to week and month to month, but January -- really the whole quarter was just about on forecast where we had expected it to be.

There were no surprises either positively or negatively in the quarter on spare run rates at Pratt.

Okay, and then also, could you kind of walk us through, I joined a little late, Transicold clearly truck trailer was strong, the orders were strong, when do you expect that to kind of translate into volume and kind of do you have any sequential color, are things really starting to pick up or was it even throughout the quarter?

Any color there would be greatly appreciated.

Sure.

Bear in mind, Cai, that the quarter compares could be slightly different than revenues because orders in first quarter for last year Transicold were down over 60% so we can move that up a lot.

The revenues were not down as much, right, so I think because of the backlog, sometimes you have slightly different compares on orders versus the revenues.

In terms of translating the orders we got in Q1, I think we should expect to see that at Carrier in the next three to six months.

We still believe, as Joe said in March that container and truck trailer should see somewhere in the neighborhood of 20% or so increase year-over-year.

That's what we expect the market to do.

One or two of the quarters might be different, but that's what the full year outlook still remains.

Okay, thank you.

Thank you.

We'll take our next question from Robert Stallard with Macquarie.

Good morning.

Just a couple of quick ones on the aftermarket.

Greg, you did note that Hamilton Sundstrand saw the aero aftermarket up low single digit and the commercial spare orders up low double digit.

Does it imply you're being a little bit conservative about how the aftermarket is going to track this year at HS, and are you confident that your supply chain is ready for this pick up in aftermarket demand through 2010?

I can't believe you're accusing us of being conservative.

It was a good quarter.

In fact it was a little bit of a positive surprise for us because for the year we had expected aftermarket to be up high single digits at Hamilton.

Obviously when orders are up in excess of that that's always good news.

As far as the supply chain goes, we have not seen any real issue with supply chain.

Keep in mind, the supply chain problems of two and three years ago were on some record volumes and we've come off of those and pretty much adjusted to that.

So right now we could clearly handle 10% to 15% increase in sales without any disruption to the supply chain or bumps from the supply chain.

Okay, and then just quickly, did you get your normal price increases in the spare parts aftermarket at the start of the year?

Yes, both Pratt and Hamilton published catalogs back in the first of October, I think spare parts price increases were averaged around 5%.

Great.

Thanks so much.

Thank you.

(Operator Instructions) We'll take our next question from Doug Harned with Sanford Bernstein.

Good morning.

Hi, Doug.

Going back to the gear turbo fan, you referred to it a billion dollars of investment if Airbus or Boeing decided to re-engine with it and that's a typical cost for a new engine, but what I'm trying to understand is if you're already developing a similar thrust class engine for the MS21, doesn't that imply that you would be spending that money anyway and also wouldn't that have implications for how you would structure investment in something like an IAE structure?

Doug, you're exactly right.

Obviously if you build an engine for the A320 family, which is going to be very similar to the MC21 that we're building for Irkut, so there's obviously big synergies on the core side.

You still have obviously specific testing that you have to do, certification testing and all of that, but that billion dollar number comes down materially if you're able to use the same core from plane to plane.

And so I would expect you to be able to do that given what the aircraft look like and if you go that way, do you envision -- let's say you sold it through IAE.

Wouldn't you envision having say a much larger share in terms of revenues coming out of IAE given your investment and your intellectual property would be contributing.

Those are all things, Doug, that we're talking to the partners about today.

Obviously, we very much want to do the Airbus reengining through the IAE joint venture.

Most of the partners are aligned with us and one of them is not and that's part of the problem.

But one of the reasons why this is more difficult than it otherwise would be to forecast for you, but we're working on every possible scenario with Airbus, with IAE, and with our partners.

I think if we can't come to conclusion with Rolls Royce on this on how IAE goes forward, clearly Pratt is going to go it alone and I say go it alone it means it will still have partners.

So to your point we'll get a lot more than a third of the revenues in a geared turbo fan engine program than we see on the V2500 today.

I was only going to say as you well know, it's still all a hypothetical discussion.

There's still a lot to happen between now and before Airbus decides to re-engine and put GTF on.

So better guidance and better direction as we always provide.

We will give all this data to you once those decisions are made and we are further along.

And then if I can quickly, decline in service revenues at Otis.

Typically Otis is something that service tends to improve year-over-year in good times and bad times.

Why do you think service is down and what's your thinking about that for the rest of the year?

Service is down in the first quarter but just slightly, you're talking 1% or so and as you look at the three pieces of service, the biggest piece of the service revenue comes out of the contractual maintenance.

That's about two thirds of the revenue and that was actually up as it normally is.

That just keeps growing every single year as the number of units under service contract grow.

What was down in the quarter was repair and modernization, and they are probably equal in terms of their weighting in the revenues.

Modernization was down the most though.

That's one of the things that we think will come back strongly in the back half of the year.

There's still a requirement in Europe to modernize all of the older elevators, so we expect, as we typically do, that repair and mod will pick up as the year goes on.

It's just a natural tendency to our guys out there selling this and building owners have to get things done by the end of the year.

So it's just kind of a -- it was a bad first quarter but again, doesn't really cause us concern for the year yet.

Okay, great, thank you.

Thank you.

We'll take our next question from Heidi Wood with Morgan Stanley.

Yes, Greg, a question on Otis as well.

On the new equipment orders, can you break those out in terms of geography?

Was largely all the strength in orders from China or was there strength elsewhere?

As you think about it, North America was down about 30% on new equipment, like Akhil said Europe was flat ,which was the second quarter in a row that Europe has been flat and in China we saw orders up nearly 50%.

So again, keep in mind as we said before that's off a very easy compare when orders were down 40% last year, but the strength is really in Asia right now.

Commercial construction continues to be a problem here in North America.

I think the only good news we saw today, I think ABI finally came out and it's trending positively.

Still not at the 50% level but again, we're going to have a tough year in new equipment in North America and it's probably not going to be great in Europe either, but that trend will reverse and again one of the reasons we're confident next year is going to be so much better is we're going to see a rebound at Otis new equipment next year.

Okay, and then another question on M&A.

You answered it from one angle, but I wanted to take it from another which is we haven't seen strategic M&A in commercial aerospace from you since I think Hamilton Sundstrand in the late 90s.

Can you talk a little bit about sort of where you see opportunities in that arena and how are you addressing kind of gaining share with Comac given you know their long term ambitions in China.

Are we going to see more joint ventures out in Asia as a consequence of that?

I think you're exactly right, Heidi.

Comac is an important customer and important market and Pratt and Hamilton have been working with the AVIC companies for a number of years.

I think we view this Comac opportunity as unique and that we'll be able to, at least on the Hamilton Sundstrand side, develop a joint venture to supply the Comac aircraft within China and also to use those joint ventures as low cost sources for the rest of the products that we deliver.

So I think that's the good news.

As well on the engine, although we did not win the initial competition on the engine, we're still talking to the Comac folks about potential for the GTF on the next generation or the next version of that aircraft.

So lots of opportunity in China on commercial aviation and most of it is going to happen through joint venturing.

But does this interest you in being larger in commercial aero from an M&A standpoint?

Is there more things you think you should be buying to expand this new entrance?

We have a duopoly market that some day over the decades is going to be on oligopoly and how are you positioning for that?

I think as we look at commercial aero opportunities, it's primarily the aftermarket space.

Again, you see Pratt & Whitney has been doing this for a number of years.

We just opened up the China Eastern joint venture to overhaul CFM engines.

We opened up the Turkish engine overall center, again a CFM overhaul shop, and as we think about M&A opportunity it's really in the aftermarket area.

There's three engine manufacturers out there, or three big engine manufacturers out there.

It's kind of hard to do consolidation there.

Obviously, there's opportunity on the Hamilton side from a systems perspective to go down the wires further to offer more systems, but some of the big aero subsystem suppliers are very expensive.

I think our money is better spent on aftermarket where the margins are better and the opportunities are greater.

Terrific, thank you so much, Greg.

Heidi.

Thank you.

We will take our next question from George Shapiro with Access 342.

Greg, if you go through Hamilton Sundstrand's aftermarket and kind of break it up by the provisioning, the piece parts, and the maintenance, was there much difference in any of those categories?

George, this is Akhil.

The provisioning orders came back a little stronger, as you would imagine because they had fallen off a lot in first quarter last year so then easier compares there.

Both were up in terms of orders, provisioning probably a little more than piece parts and in terms of revenues I think it was about the same.

Provisioning was still a little down, but piece parts were up.

And then if you look at Carrier, you got almost $100 million increase in profit in the quarter.

So why wouldn't 175 for the year be conservative and then if you could just comment on how much of that Carrier profit if at all significant came from the Watsco joint venture?

First quarter was very strong, you're absolutely right, George, but if you take a look, we did get a big benefit in the quarter, had a very strong Summer selling season down in South America and in Brazil and Argentina and also had tailwind from commodities that's not going to repeat, actually going to be a headwind in the back half of the year.

But to your point, as we look at the guidance for Carrier, we're very confident that they are going to be at the top end and perhaps above that, not based again on revenues but just on the very strong cost traction that we've seen in the business.

And then Greg, the Watsco, is there a significant number you get there from the way you accrue the joint venture profit in Carrier?

No.

It's not a big number, especially in the first quarter George.

We've got 40% of that joint venture.

So we're picking up a pro rata share of the earnings but it's just not significant in the first quarter.

Let me sneak in one more, Greg.

$700 million, almost $700 million increase in inventories, you mentioned a couple hundred was probably Carrier.

Can you break out where the rest is from?

Yes, if you think about that, about $200 million came from the GE Security transaction and another $230 million or so I think was at Sikorsky, and again that's just part of the issue we talked about in terms of some of the commercial aircraft not getting shipped in the quarter that's going to go out in the second quarter.

So most of the other units had very, very small increases if at all.

It was really just the big pieces.

Okay.

Thanks a lot.

Okay.

Well, with that, Trisha let's conclude the call if we can.

I want to thank everybody for dialing in and listening.

Real strong quarter obviously, we're confident in the improved full year outlook.

So thanks for listening and Akhil and team will be around to answer questions throughout the day.

Thank you.

Thank you, ladies and gentlemen, for your participation.

This will conclude today's conference call.