雷神技術公司 (RTX) 2010 Q2 法說會逐字稿

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

On the call today are Greg Hayes, 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 is 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, 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.

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

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

Please go ahead, Mr.

Hayes.

Okay, thank you, Christy, and good morning, everyone.

As you saw in the press release this morning, solid results and improving end market environment.

Some key takeaways for the quarter, first, organic revenues grew for the first time since the fourth quarter of 2008.

Secondly, order rates continue to show broad improvement across the business.

Third, our relentless focus on cost reduction continues to drive year-over-year margin expansion.

And finally, we once again saw strong cash generation this quarter, driven by tight control over working capital and CapEx.

We certainly have seen volatility in the markets over the last three months, and there is uncertainty as to the shape of the recovery, and the health of the overall global economy.

However, UTC's strong first half performance, along with improving order rates, and exceptional cost traction give us confidence to raise our EPS guidance to a range of $4.60 to $4.70 a share.

That is up from our previous guidance range of $4.50 to $4.65, even as we expect to face headwinds from foreign currency in the second half of the year.

EPS is now expected to grow 12% to 14%, and revenues around $54 billion.

That's up 2%, from 2009.

Turning to second quarter results, organic revenue growth resumed this quarter at 4%.

On the commercial side, Carrier had a very strong quarter, with 7% organic growth, driven by strength in Transicold, and the US residential business.

On the Aerospace side, Sikorsky led the way with growth of 22%, that was driven by the delivery of 66 large helicopters, versus 50 in 2009.

Earnings per share in the quarter were $1.20, and that's up 14%.

Net restructuring and one time items were a charge of $0.12.

Most significant actions were at Carrier, related to ongoing portfolio transformation initiatives, and overhead cost reduction projects, and Hamilton Sundstrand, which continued to advance the low cost sourcing strategy that Alain articulated back in March.

Excluding restructuring and one time items in the second quarter of both 2009 and 2010, EPS increased 9%, on 5% higher revenue.

Foreign currency was a net benefit of $0.03, that's from the positive impact of currency hedges at Pratt Canada, more than offsetting adverse translation.

Cost execution was solid across our business resulting in segment margin expansion of 80 basis points to a record of 15.7% adjusted for restructuring and one time items.

This marks the fifth consecutive quarter of margin expansion at UTC.

Excluding net restructuring charges and one time items, total segment operating profit grew 10%, on revenue growth of 5%.

Five of the six business units improved margin.

On an adjusted basis with Carrier, Otis, and Hamilton Sundstrand increasing by over 100 basis points.

Carrier's portfolio transformation restructuring and cost reduction initiatives continue to pay off, as they delivered solid conversion on the incremental volume we saw, and drove margin expansion of 260 basis points to 12.7% in the quarter on an adjusted basis.

Okay, on slide two, on orders, we saw broad improvement in order rates in the quarter.

And we continue to see good growth in the short cycle Carrier, and Hamilton Sundstrand industrial businesses.

Commercial aerospace aftermarket orders also improved sequentially, which is consistent with our expectations for second half growth in those businesses.

More importantly, orders at our long cycle businesses, such as Otis New Equipment, Carrier commercial HVAC, and fire and security also grew year-over-year in the quarter, signs that the worst is behind us.

Emerging markets continue to do well, with particular strength in India and Brazil, where combined orders for the commercial businesses units grew by over 25%.

As expected, order growth rates in China have begun to slow from the first quarter levels, as compares get more difficult.

But overall, orders in China still grew at an 11% rate year-over-year.

This is a trend that we expect will continue.

Difficult compares, making year-over-year growth more modest, but we still see solid double digit growth in China in the back half of the year.

Slide three, in the quarter free cash flow, 112% of net income, evidence that we remain focused on constraining working capital, even as revenue growth returns.

Working capital turns improved to 8.6, that is both a sequential and a year-over-year improvement.

And capital expenditures to depreciation was below 70% in the quarter.

For the year, we continue to expect free cash flow to equal or exceed net income.

We contributed $200 million in cash, and $250 million in UTC stock to our domestic pension plans in the quarter, a prudent action in light of the historically low discount rates we are seeing, and the anemic asset returns in the first half of the year.

In addition, we increased the pace of share repurchase to $650 million in the quarter, taking advantage of an attractive buying opportunity with the shares in the 60s.

Year-to-date, we repurchased $1.15 billion of stock.

And for the full-year, we now expect to spend around $2 billion on share repurchases, that is up from our prior guidance of $1.5 billion.

Acquisition spend in the quarter was $260 million, that was primarily at Otis.

Acquisition spend is $2.4 billion year-to-date, and we still expect it to be around $3 billion for the year.

So a strong quarter, with organic revenue growth and continued focus on cost reduction, all of which drove solid earnings growth, margin expansion, and good cash flow.

I will come back and talk a little bit more about the back half of 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 another strong quarter, with profits up 3%, on a 2% decline in revenues.

Operating margin expanded 130 basis points to a record 23.2%.

Excluding currency, profits grew 4% on 3% lower revenues, as result of ongoing cost reduction programs, as well as strong conversion on manufacturing volume in China, and higher service volume globally.

New equipment revenue was down 10% in the quarter excluding currency, as continued growth in China was offset by declines in most other major markets.

Service revenue was up low single digit, with continued growth in the contractual maintenance business, and a resumption of growth in repair sales.

New equipment orders in the quarter were up 11% at constant currency, with increases in all geographic regions.

Orders in China were up low teens.

And following a two year decline, orders in North America rebounded nicely, up around 30%, including a major order for the Los Angeles International Airport.

The foreign exchange benefit in the first half of the year is expected to be more than offset in the second half, with approximately $75 million of FX headwind for the full-year at Otis.

Based on solid cost traction and recovering volumes, at current exchange rates we expect Otis full-year profit growth to be around $50 million, on a low single digit revenue decline.

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

Profit grew 25%, on flat revenues, resulting in 260 basis points of margin expansion with an operating margin of 12.7%.

Organic revenue growth was 7%, the strongest since fourth quarter of 2007.

Profit growth was driven by conversion on the strong revenue growth, combined with the carryover benefits of agressive cost reduction, and organizational restructuring.

Q2 shipments of US residential systems were up mid teens year-over-year, and Transicold organic revenues were up over 30%.

On a global basis, commercial HVAC equipment revenues were down high single digits.

Order rates for the quarter continued to improve.

At constant currency, global commercial HVAC equipment orders were up mid single digits.

Transicold's organic orders were up nearly 40%, driven by container and truck trailer orders that were up over 50%.

Given Carrier's strong first half performance, we are increasing Carrier's profit growth guidance for the year to $250 million plus, on mid single digit organic revenue growth, up from $175 million plus previously.

UTC Fire and Security delivered operating margin expansion of 100 basis points on 22% higher revenue.

Organically, revenues contracted 4% with the product businesses declining slightly and the service and installed businesses declining mid single digits.

Net acquisitions, primarily GE Security contributed 25 points of revenue growth.

Second quarter orders grew at mid single digit rates, representing the first quarter of organic orders growth since Q2 2008.

Backlog increased at a low teens organic rate from the beginning of the year.

Orders in the global product businesses, and the service and installation business in Asia increased at double digit rates year-over-year in the quarter.

Operating profit grew 33%, driven by net acquisitions.

The profit impact of low organic revenue was largely offset by the benefits of integration of field operations, restructuring, and cost controls.

As a result of the adverse translation impact from a stronger US dollar, we now expect F&S revenues to grow high teens, and operating profit to be up $200 million to $225 million for the full-year.

Turning to aerospace businesses on slide seven, Pratt and Whitney had revenues up 6% in the quarter, including 4 points from favorable currency conversion at Pratt and Whitney Canada.

Large commercial engine and military OEM shipments were significantly higher than prior year, while Pratt Canada shipments down 13%.

Large commercial engines spares revenues were about flat with the second quarter of 2009, but sequentially better than the first quarter of 2010.

Book-to-bill in the quarter was about 1.

Operating profit was up 2%, as the benefits of favorable foreign currency at Pratt Canada, and higher military OEM shipments more than offset higher E&D, and the impact of lower Pratt Canada shipments.

Operating margin at 16.1%, was down 70 basis points, largely due to higher E&D on next generation product platforms.

Recent improvements in air traffic trends and order rates are in line with our expectation of higher commercial after market revenues in the back half of 2010, supporting Pratt's operating profit increase of $75 million to $100 million, for the full-year, on low single digit growth in revenues.

In the quarter, Hamilton Sundstrand operating profit grew 7%, on 1% lower revenues.

Aero OEM revenues were down high single digits, while aero after market was up low single digits.

Industrial revenues were up high single digits.

Commercial spares revenues were flat, while orders were up 7%, versus second quarter of 2009.

Book-to-bill was about one.

Industrial orders increased approximately 30% on a constant currency basis.

Orders improved across all industrial businesses, with particular strength in the Sullair compressor business.

Operating margin expanded 120 basis points, reflecting the benefits from cost control, restructuring, and growth of higher margin industrial and aero after market businesses.

These benefits more than offset the cost of higher E&D.

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.

Turning to Sikorsky on slide nine, operating profits grew by 26%, on 22% higher revenues.

During the quarter, as Greg said, Sikorsky shipped a total of 66 large helicopters, 57 based on military platforms, and 9 commercial.

Military shipments was 17 more than second quarter last year, while commercial shipments were down by one.

Commercial market remains weak, with only four net aircraft orders in the quarter.

However, total backlog is robust at $10.5 billion due to the strength of the military business.

Operating profit growth of 26%, reflects benefits of high volume and lower manufacturing costs, which more than offset increased E&D.

Operating margin expanded 30 basis points in the quarter to 10.4%.

We remain confident in Sikorsky's 2010 guidance, with revenues projected to grow in the high single digits, and operating profit expected to increase $100 million to $125 million.

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

Okay, thanks, Akhil.

So it's nice to see a return to revenue growth, and continue to see strong cost performance.

And as a result, record margins and strong cash generation.

It was also good to see broad improvement in the order rates across the business.

UTC's results this quarter once again demonstrate the strength and resilience of our global franchises.

Some other take aways from the quarter, GE Security's integration is on track, and the business continues to exceed our expectations.

Carrier is also on track with its aggressive transformation agenda towards a simpler and a higher returns business, and it has now announced divestitures or joint ventures representing about $2.1 billion in annualized revenue.

We also continue to invest in game-changing technology across the business.

And our aerospace companies continue to make progress on their key development programs.

As examples, the Pratt GTF core has accumulated more than 260 hours, and validated the performance expectations.

And Sikorsky's Canadian Maritime helicopter continues its successful flight testing, with first delivery scheduled for the end of the year.

One question that's come up repeatedly over the last couple of months, is whether we are faced with a repeat of 2008.

What we all saw in 2008, of course, was a dramatic reduction in orders rates across our end markets, as a result of the unprecedented deleveraging of the financial institutions.

And while we remain cautious, there are a number of factors that make 2010 very different from 2008.

First, the availability of credit to finance demand is tight, but not frozen.

Secondly, the negative impact from destocking of inventory that we saw in 2008 has already occurred.

And third, many end markets in 2008 were already at peak levels, while today's levels are significantly lower, and still below underlying demand in some cases.

As an example, new housing starts are substantially below new household formations.

That's a trend that will eventually result in the growth of new housing construction.

Also in Carrier's transport and refrigeration business, even though the markets are expected to be significantly higher in 2010 from 2009, they will still be at only two-thirds of the peak levels we saw in 2008.

Similarly, as air traffic recovers from the lows of 2009, and airline profitability improves, aircraft engine maintenance will shift from light to heavy overhauls, driving stronger after market demand.

So we're in a different place than we were two years ago.

It gives us confidence that our year-to-date results and improving order rates are sustainable.

Based on that improved business unit outlook, our full-year expectation for organic growth is now at about 2%.

That is at the high end of our prior guidance range.

However, we expect overall revenues to be closer to $54 billion, due to the weaker euro.

On earnings, we will see solid conversion from the organic revenue growth in second half, based on the cost traction we've seen.

However, we expect some headwinds, particularly from FX and E&D

You will recall that last year, the euro averaged 145 in the second half of 2009.

Our previous guidance for a second half of the year assumed a 135 euro.

And today, our current guidance assumes 125 euro.

That translates to about $0.08 of headwind year-over-year in the second half, of which $0.04 is incremental to our April guidance.

E&D will also be higher in the second half of the year.

First half of the year, E&D was up $63 million, and we expect the second half to increase by approximately $100 million, as development programs ramp up, such as the first engines to test for CSeries and MRJ.

Overall, while we remain cautious, we are confident our 2010 earnings per share outlook of $4.60 to $4.70, up 12% to 14%.

The management team is seasoned, and prepared to lead in a challenging and ever-changing environment.

And we remain committed to delivering double digit earnings growth as the markets stabilize.

As our track record demonstrates, strong execution and cost traction are hallmarks of UTC, as always we remain focused on what we can control.

So with that, let me stop there, and let's take some questions.

Christy?

Thank you, sir.

(Operator Instructions).

And we will go to our first question.

It comes from Terry Darling with Goldman Sachs.

Your line is open.

Thanks, good morning, gentlemen.

Hi, Terry.

Greg, I think the Carrier margins were probably the most positive feature of the variances versus what we were expecting-- very positive to see that.

I'm wondering if you can kind of deconstruct the year-over-year improvement in margins there.

You had mentioned volume dropped through, I think Akhil had.

Maybe you can break out volume drop through, divestiture impact, product cost reductions, restructuring, price costs, some of those pieces, just talk about the sustainability of that going forward.

Hi, this is Akhil.

I think the key point of the 260 basis points.

Just about 70 basis points was a function of the portfolio transformation that had been going on.

Pricing and commodities were a slight headwind, but nothing significant.

Bulk of the margin expansion came from the cost reduction actions that Carrier has taken, and the solid conversion on the incremental volume.

It really boils -- if you boil it down, it's going be the conversion.

You are going to see 7% organic revenue growth.

We saw very, very good incremental margins, so we expect that is going to continue in the second half of the year.

It's, just as Akhil said, it's because of the cost we took out over the last two years at Carrier.

And Greg, in terms of reaching margins, longer term margin targets, I'm kind of forgetting exactly what the timing of hitting the targets is, but sounds like we are getting closer sooner, any other thoughts on that part of the question?

Well, I think the goal has been full-year 12% by 2012.

And I think we are clearly on the path to get there.

And in fact, we saw good margins this quarter, we will see good margins for the back half of the year.

And I think with the portfolio transformation and the cost tractions that Geraud and team have seen out there, that 12% seems very, very achievable in 2012.

I would agree with that.

And then maybe shifting over, one of the big topics here in the aviation world is the higher E&D spend, kind of across engine makers, can you talk about how we should think about 2011 and 2012 at this point, based on how the programs are shaping up as you see them?

Well I think for -- as we've said -- E&D is going to go up in the back half of the year by about $100 million.

The bulk of that will be at Pratt Whitney, as they take engines to test on MRJ and CSeries.

We've also got headwinds next year probably of an incremental $100 million or so, on those programs as we ramp up to kind of full test, and get a lot of hardware in.

So we know we got at least a $100 million of E&D headwind.

There is other E&D headwind associated with the A320, should that program get launched later this year.

And I am not prepared to give you a number on that, but I will say there is incremental headwind.

And that $100 million 2012, is that just Pratt or is that across the portfolio?

That's just the Pratt number.

Okay.

As you think about engines, the core on the GTF, we're scaling up from the MRJ to C-Series, and then we would scale up again, as we work on the Russian, the Irkut program, and the A320.

So there is some incremental E&D, but probably not as much as you might think from a individual engine program.

And, Hamilton does that come down in 2011?

As we get in to the 787 production, and presumably Sikorsky probably flatish?

Is that the way to think about those pieces?

Well, I think you in fact, that you will see a little bit of pressure on E&D at Hamilton next year as we ramp up our CSeries and the A350.

We are seeing a little bit of good news this year, in the back half of the year, on 787 as that winds down.

And we spent about $150 million last year on that, probably around 100 this year, and then that should come down even more next year.

But again, all replaced by CSeries and other new platforms.

Sikorsky, I think you will continue to see E&D ramp a little bit next year.

We've got the X2 technology which we are trying to capitalize, and you also got S-76D, and some of the other programs that are continuing in the development process.

Great.

Thank you very much.

Thank you.

And our next question comes from the line of Joe Nadol from JPMorgan.

Your line is open.

Hi, Greg and Akhil.

So, Greg, the order numbers look great, obviously, kind of across the board.

I am wondering if you can give any just more color on Europe specifically, in particularly towards the end of the quarter, of how the financial markets reacted?

Did you see any changes?

You noted also that Otis, North America, looked good, China looked good.

I guess Europe probably wasn't as good?

In fact, the order rates in Europe actually surprised us, I think in the second quarter, much better than our expectations.

We saw order growth at Otis in the new equipment side, the orders in the Carrier were -- slightly down, but again ahead of our expectations.

We'd expected Europe to be flat pretty much for the year.

It's actually doing a little bit better.

I wouldn't say there is much change, month to month within the quarter.

We haven't really seen a big impact from all of this sovereign debt crisis in Europe.

And the aftermarket business remains very strong over there for us.

Market by market, Germany remains very strong.

Eastern Europe is strong.

The UK has been weak, and of course, the countries around the Mediterranean have been weak.

Overall, I would say it surprised us to the upside, not a lot, but a little bit.

And Joe, again keep in mind that 60% of revenues in Europe come from commercial business units aftermarket, which is relatively stable, and the aerospace businesses.

So I think that's a data point to keep in mind, as you think about exposure to Europe.

Okay, and the second question, Akhil, you might have mention this during your run through the segments, but the Sikorsky top line, was this mostly timing, as you think about sort of as the year profile, and not really changing the guidance, or what's going on there?

This really doesn't change.

The full-year remains like, 255 to 260 large aircraft.

First quarter was a little bit light.

This is just a little bit of catch up, so for the full-year we expect revenues high single digit growth in Sikorsky.

Okay, thanks guys.

Thanks, Joe.

And our next question comes from Jeff Sprague from Vertical Research Partners.

Your line is open.

Thank you very much.

Good morning, gents.

Just a couple things, first on North American commercial Otis.

Could you give us a sense of how -- I don't know how significant that LA order was, certainly was big.

Were you up in North America, ex that LA order?

Yes, we were.

In fact,the month of June was very strong.

We started out the quarter very slow in North America, and then June kind of turned things around.

LAX was a big deal, but there was broad order strength across North America.

So we did see growth, ex of the LAX.

Ex the LAX order, hard to say.

It's hard to find a pulse on starts or anything, is it retrofit activity, or are you, in fact, seeing some real construction activity return in some places?

No, this is real construction activity.

Otis remember keeps -- this is just new equipment for -- it is not modernization which is what you would typically see in the retrofit business.

And modernization has not been very good so far this year.

But new equipment is actually for new construction starts.

Again, we are coming off of low levels here, Jeff.

So we shouldn't get too excited about it.

It's a pretty easy compare, but I still think we probably touched bottom here in the second quarter.

And still expect by the back half of next year, we ought to see kind of a return to growth in new equipment in North America.

Is commercial Carrier in North America turning up yet?

I would think that would lag Otis a little bit?

In fact, commercial HVAC in North America has been better than Otis, and that's really because of the retrofit market is -- building owners are looking for more energy efficiency.

We continue to see pretty good strength in the commercial HVAC side, even though commercial construction starts remain down.

Can you give us a number on commercial Carrier...

how much it's up, orders or sales?

Orders were up high single digit in North America, for commercial HVAC.

And on the resi side, Greg or Akhil, obviously it's been hot in some places, just what do you see the state of play, in terms of where inventory is, and how we are following through into the third quarter on the resi side?

Well, the resi, the res business - it started out very strong in the second quarter.

We saw really, really good shipments in April.

It cooled down in May, and came back a little bit in June.

We would expect that we would see some restocking.

Inventories are very low out in the channel right now, because of all the heat that we've seen.

So we would expect that third quarter, we should see some restocking activity.

We haven't seen much yet, but again, as people work down these channel inventories, there has got to be some restocking coming.

And then just finally the modest guide down in Otis on profits, is that all currency, or is there some other dynamic going on there?

No, no, it's all currency.

In fact, operationally, they're actually going to be up a little bit, the underlying business.

But currency is more than offsetting that.

So, it's all currency.

Okay, great.

Thank you very much.

Thank you, Jeff.

And our next question comes from Howard Rubel with Jefferies.

Thank you.

First, I just wanted to touch base again on your management of sort of costs and capital.

Greg, I mean it looked like SG&A as percentage of sales was down 120 basis points, and CapEx clearly looks like it's not going to reach a $1 billion dollars for the year.

Could you sort of first address what you are doing in SG&A, and how much you think you are going to hold to?

It sure looks like a little bit better than I would have thought.

And then, also what are you thinking CapEx?

The SG&A is really not a surprise, given all the costs we have taken out.

And we've continued to constrain spending with the markets where they are.

We are not seeing a lot of top line growth here.

The earnings growth has to come from cost reduction, cost take up.

So that SG&A number you are going to continue to see that probably improve here, because and the idea here is, we're going to hold SG&A, as the revenues come back give more traction or even better conversion with those incremental revenues.

Again, lots of restructuring, and we are going to get $400 million of benefit from those restructuring programs, and you are seeing see a big piece of that show up in the SG&A line.

On CapEx, again, it's the same story, it's all about doing more with less, than just constraining the spending.

And we are still going to hold onto the $1 billion dollar number for the year.

I think again, we will have to see how 2011 shapes up before we have a final look at CapEx, but clearly back half will be more than front half.

But the $1 billion dollars is still probably a good number for now.

And then tax rate was a little higher at 30.

Could you help us a little bit understand what is going on in Washington, with respect to attempts to repeal, or hurt sort of the tax benefits, or the tax structure that exists for foreign earnings, and how we might think about that?

It was all in the quarter, the effective tax rate was about 30%.

And that's because some of the charges that we took, some of the restructuring impairment charges we took, we didn't tax benefit those, because we aren't done with the divestitures yet.

So, a little bit higher tax rate, and that is what really drove it from -- up a couple of points.

As far as tax policy in Washington, we I think we dodged a bullet the tax extenders package.

And we have been working closely with the folks in Washington.

We have been down there -- I have been down there myself, talking to the folks on the Hill, talking to people in the administration.

And we have a corporate tax system that is just not competitive worldwide.

And one of the things we need to focus on for this country to drive jobs here, is to make us more competitive globally.

We got the highest tax rate amongst all of developed countries.

We are one of the only countries that tries to tax overseas profits, as opposed to a territorial system which almost every other developed country has.

And what we hope to have is a full open debate on tax reform next year.

And we will see how that whole thing shapes up.

And obviously as they tax some of these planning initiatives that we have, and try and close what they perceive as loopholes, to try and tax some of these foreign earnings, it's going to put pressure on the rate going forward.

So, we are on top of it, we follow it very closely, and we spend a lot of time.

The tax team, the Washington office team is all over this.

But right now, we are I would say, we are just monitoring the situation and trying to influence where this thing comes out.

And our next question comes from the Joseph Campbell with Barclays Capital.

Your line is open.

Hi, good morning, Greg and Akhil.

My question relates to the aerospace guidance which didn't change, either in revenues or profit.

It's the same as it was when we last spoke.

But it does seem that the traffic is up, Boeing and Airbus both raised production rates, And the 787 seems like it's going to make it out of development in to production.

I might have thought there was positives.

I guess you also saw some pick up in the order rates, although the spares deliveries were flat.

Is there some offset that's keeping you from upping the aerospace expectations at all?

If you think about Pratt and Hamilton specifically here, we did see decent order growth rate in the quarter.

I think it was 8% and 7%, respectively.

The key for us though, is the second half we've always anticipated having much stronger growth than that, in the commercial aftermarket.

I think that Pratt has got to grow 15% in the commercial aftermarket.

Hamilton a little less than that.

So we are still expecting to see a return of spares, at Hamilton and Pratt.

Certainly airline traffic would support that, airline profitability would support that.

It's unfortunately, a little bit lumpy.

I think we feel good about the back half of the year at Pratt, but it's not without risk in terms of the timing of the spares recovery.

Does it happen in third quarter, fourth quarter, or first quarter of next year?

But having said that, again we feel good about the guidance for all the aerospace businesses.

A little bit of pressure in the back half of the year at Pratt, which I think is also constraining the guidance there.

But overall, we feel pretty good about it.

But is it, the E&D spend is the same as you previously expected I would have thought the traffic and orders are higher than you might have expected, but that's not true?

I think we had been talking about 4% to 5% traffic growth.

And I think as the airlines reported, we have seen traffic about in line with that.

We haven't seen all the inductions in to the shop that we had been expecting.

That is still all to come in the back half of the year, Joe.

If I may add one other thing on Pratt, our guidance was growth of 6% to 7% in commercial spares for large engines.

And for the first half, we have been down 7%.

So this face of that first half, we are still relying a lot on aftermarket improving in the second half.

And I think that until we see that come through in the third quarter, it's a little too early to say, the benefits of all the traffic and airline profitability improvement is starting to show up.

And is the E&D number coming in on budget?

Yes, yes it's pretty much on budget.

I think, again, we see an opportunity to maybe spend a little bit more in the back half of the year.

Again, that will just depend on how well the spares hold up.

I think clearly, there is pressure on E&D.

To the extent that we can get ahead of some of the 2011 spend, and pull it into 2010, we will try and do that.

Great.

Thanks very much.

Thanks, Joe.

And our next question comes from the Nigel Coe from Deutsche Bank.

Your line is open.

Good morning.

I just wanted to kick off with Carrier, I mean just cutting the numbers from your first guidance, it looks like the margins might break 10%, is that in line with your model?

It's a possibility, Nigel.

I mean, clearly very strong beginning to the first half.

And we would think around 10% should be possible for Carrier.

That's quite a landmark.

Yes, it is.

So you talked about, Greg, I think you talked about some FX and E&D headwinds in the second half of the year, do you have any other cost headwinds coming through?

And I'm thinking here, about some of the Carrier businesses like Transicold, where have you got big volume ramps.

Do you got any additional head count to come through?

Well, I think the only other headwind I would point out really goes back to commodities.

We are going to see about a $70 million in commodity headwind in the back half here, and a little more than half of that is at Carrier.

You will recall, last year copper was $2.60 a pound for the full-year.

This year it is averaging around, I think $3.10 is what we locked in for the year.

So that's the only other big head cost wind.

Bringing folks to deal with the additional volume, that's all contemplated in the guidance that we got out there now.

That's not a big number.

Okay.

And then as you pinch -- you get the pinch from FX in the second half of the year, I'm thinking that's probably a net benefit to your margin, given that your European margins are probably a little bit lower?

Would that be fair?

I'm sorry.

Say that one more time?

I'm trying to think how the FX impacts the margins.

I'm just trying to gauge the sustainability of your 15.7% margin in the second quarter.

And I'm thinking that a stronger euro helps you, suits you?

Yes, absolutely.

Because, again, think about where the Otis, for instance, earns most of its margin in euro, again, it is 70% aftermarket there.

So as you translate that back with a stronger euro, that actually is helpful to us, in terms of overall margins.

That is really the story.

Europe is generally more profitable than the rest of the world.

Okay, and then just the orders, it's hard to try and judge underlying trend given the weak comps you've gotten year-over-year.

So if we looked that chart on a Q over Q basis, 2Q versus 1Q, would we see growth across the board?

Yes, that would be true.

I think it is true for the aero aftermarket companies.

Certainly both Pratt and Hamilton spares were up in Q2 versus Q1.

Industrial, Hamilton is up.

So I think it's broadly true across the businesses.

Okay.

Then I think Greg you threw out a chart in June showing Hamilton spares up 20% in April, May.

I think they are up 7% this quarter, just trying to reconcile those two numbers.

Yes, in fact we had a very strong April and May at Hamilton, especially on the provisioning side.

And what we saw in June, was the provisioning orders that really just dried up.

Keep in mind, that provisioning is a lumpy business.

And it's a capital item for the airlines.

So as the summer season started back in April, and getting ready for that, we saw a good provision orders, and then it dried up.

The underlying piece for our demand was up strongly in the month of June.

So, again, it is lumpy, but I think broadly, we like the trend line here.

Okay, and then just finally, you called out the maintenance of growth in China in the second half of the year.

North American orders growth in North America was not expected by myself.

Would you expect North America to maintain growth in the second half of the year?

I think we expect it to continue to grow, but certainly not at the levels we saw here in the second quarter.

We expect very modest growth in new equipment orders.

Again, commercial construction has not recovered.

We saw some signs of it, but I wouldn't hang my hat on it on a big second half in orders in commercial construction business.

Okay, thanks, Greg.

And our next call comes from Cai von Rumohr with Cowen and Company.

Your line is open.

Yes.

Thank you.

Following up, as I recall your orders in April and May at Pratt for large commercial engines spares also were over 10% or over, and now you have 7% or 8% range.

What did June look like.

And maybe give us some color.

What are you seeing in June impact from the European volcano, weaker stock market, euro prices, I mean are airlines being slower in terms of ordering here?

On the spares, Cai, I think April-May was up 10% for Pratt, and now it's 8%.

So I wouldn't call that a dramatic difference.

I think the Hamilton was more pronounced.

So the trend rates have been pretty consistent.

You do get some lumpiness in monthly orders, but that is the risk of looking at the data on a monthly basis.

But with regards to the volcano --

Again, as you look at -- obviously RPM suffered back in April and May with the volcano activity.

And I think the profitability obviously suffered for the year, and for the airlines as well.

But as we see the airlines start to report their results here, I think you are going to see very, very strong results that continue to constrain capacity, and continue to make money.

Business class first class, the traffic, premium traffic is up.

So I think the European airlines again, although they had a tough couple of months with the volcano, we still expect them to have a very good year.

Okay, and then I joined a little late but pension, could you give us some update on pension investment performance year-to-date?

And maybe some color on what we should think about next year, if we closed out the year, about where discounts rates are, and given where the markets are?

Okay, going into this year, we knew we had $100 million of pension headwind in 2011, just as you continue to amortize the losses in 2008.

If you snap the line at June 30th, the discount rate had gone from 6% at the end of 2009 to 5.3%.

That is a record low discount rate.

Just to kind of give you a rule of thumb, for every 25 basis points change in the discount rate, that impacts our expense line by about $50 million.

So again you're down from 6 to 5.3, obviously there is over $100 million of headwind we would see next year.

Although again, snapping the line on June 30th is really premature, as we think about 2011.

We would expect interest rates to move back up.

I mean we see Treasuries below 3% now.

But as economic activity picks up, I think interest rates will pick up, and the discount rate ought to move north towards 6%.

Asset returns year-to-date have been zero.

Asset returns don't have the nearly the impact that the discount rate has.

It's for every one point difference between expected ROA, which is 8.4%, and actual performance, every one point difference costs us $5 million the following year.

So that's right now that would be $40 million.

But again, we've seen -- that's started to come back in July as the markets recovered.

I think right now, we're probably through yesterday, up about 3%.

So, too early to call on pension.

But clearly, there is headwind out there.

And we will have to see as we get towards December what that number is, when we see where discount rates are moving.

You had a slightly higher than expected tax rate in the Q2.

What should we use in modeling the full-year for your tax rate.

29% I think is still a right number, Cai.

As I mentioned earlier, that was really impacted by some the lack of tax deductibility associated with a couple of impairment charges we took.

So again, that's just kind of a timing issue for us.

29 for the balance of the year, Cai, and whatever has happened on discrete basis in the past.

is past.

Got it.

Okay.

And then last one, as Bombardier closes out, what is your assessment in terms of the likelihood of the CSeries getting firm orders here?

We still -- we still see a solid pipeline of orders for the CSeries aircraft.

I think again, people may have been disappointed not to see orders get announced this week.

But clearly we are working with folks at Bombardier, and their customers.

And we see it's as a pretty robust pipeline out this.

And we are going to get the orders.

It's a great aircraft it's got 20% operating cost efficiencies versus the competition.

It's going to sell.

We got great technology there.

So there is no panic here.

I think it's just all timing.

By the end of the year, I think we will all be smiling.

I recall -- they made some type of comment that Bombardier had said they were very close, and the issue wasn't really with Bombardier.

Is the issue in terms of getting things over the goal line, really dotting the i's, and contractual issues with you or Bombardier?

Or is the issue that Boeing and Airbus are kind of talking other plans, and that people are just stepping back?

No, no, no.

There is a little bit negotiating in the press going on here.

And I think we don't want to get into that here.

But suffice it to say, we are working closely with Bombardier and their customers to give very competitive FMP's.

And again, it will all sort itself out here in the coming months.

Terrific, thank you very much.

And the next question comes from Julian Mitchell with Credit Suisse.

Your line is open.

Yes.

Thanks.

I had a couple of questions, and the first one was on overall organic order growth.

Across all the businesses, what was that growth rate in Q2, and how do you think that will change in the second half?

Obviously you commented a bit on that you expect spares orders to accelerate, possibly some tailing off in parts of Otis.

So just, overall company, what do you think organic order growth will be in the second half versus what you saw in Q2?

And then secondly, on the pricing environment, if you've seen any change in any parts of the commercial businesses?

I mean there are some stories of price competition, and lifts in Europe, with both you and your peers reporting very good margins.

If you could give an update on that?

Julian, this is Akhil.

I think if you look at your first half, our organic growth has been about flat.

First quarter was down 4, and second quarter was up 4.

And our full-year guidance is 2%.

So that would say that our second half organic growth is going to be more like 3% to 4%, is what our expectation is for the back half.

On the order intake?

And the order rate supports that.

Because a lot of our business does not necessarily get orders in advance, there is some short cycle businesses.

And a lot of aftermarket business is just sort of on a daily basis, but it's a lot more stable as well.

So I think that's probably the rough order that we can talk about.

And then on pricing.

Yes.

I would just would say on pricing,we seen the normal levels of pricing pressure, both in the Carrier business, as well as the Otis business.

Really nothing out of the ordinary though.

We had expected a tough pricing environment this year.

It's not as bad as perhaps as we had expected it to be.

There is still a lot of capacity out there in the system of the US res side.

We know Otis pricing is very, very tough in China.

That is not a new story.

Again, nothing really new or dramatic on the pricing front.

I think it is just the normal day-to-day pricing pressure we see.

Obviously, last year we lost a little share at Otis.

We got some of that back.

And that came with some adjustments to pricing.

Again, there is nothing unusual going on there.

Okay, thanks.

And our next question comes from George Shapiro with Access 342.

Your line is open.

Yes, Pratt Canada, the OE deliveries are up sequentially.

I mean is that just seasonal, or what did you just actually see there that caused the OE deliveries to be up?

Well, again, you are coming off the lowest quarter of the year, which was the first quarter.

And for the full-year, we still expect to deliver 2800 engines.

Engine deliveries were still down 13% year-over-year at Pratt Canada in the quarter.

So it's not that there is a dramatic turnaround occurring here, It's simply that we expect to see a little bit of a recovery in the back half, again about 2800 engines for the year.

Okay, and Greg if you can walk through Carrier, in terms of where we stand in the planned divestitures, and how much of the revenues were reflected.

Well, I guess you can back out how much revenues were reflected, because you gave organic growth, but in terms of what we should look for in the second half of the year?

Well, there is still -- as I said earlier, we've done about $2.1 billion of divestitures since 2008, across the Carrier product lines.

There is another $500 million to a $1 billion to go.

And that will happen over the next 18 months or so.

And we are in negotiations.

We have joint ventures on some of our distribution assets, both here in the US, as well in South America.

We divested, joint ventured some of our business in Israel and Egypt this past quarter.

And this stuff is all evolving, Carrier will be almost about $3 billion smaller, but a lot more profitable, and a lot better growth prospects long-term with this new portfolio.

And then one last one if I might.

Pratt Canada, the aftermarket what happened there in the quarter?

It was flattish, George, in the quarter.

Okay.

Thanks a lot, guys.

And our next question comes from Sam Pearlstein with Wells Fargo Securities.

Your line is open.

Good morning.

Can you talk a little bit about those Pratt spares, or just talk about how it changed from Q1 to Q2?

And at the current dollar levels the comparisons are still relatively easy in the second half.

But how much in dollars do we have to start to see growth in the second half to get that up 15% in that time period?

I think if you look at the second quarter, it was better than the first quarter, Sam.

And I think if you take what the our guidance is based on, off of a second quarter run rate, we need to see about 10 to 12% increase in the second half spares, compared with our second quarter run rate.

That's the expectation that we have, and the traffic data and improvement and expectation of heavier overhauls would support that.

That's basically what the expectations Pratt are.

Okay.

And Greg, the comments you made about pension, and what the impact of the discount rate, does that factor in the contributions you made in the second quarter?

And then can you talk about what your expectations for contributions in the remainder of the year, and can you perhaps make more contributions to offset some of the headwind for next year?

Yes, obviously the contribution itself, so we have done about $450 million in the first half of the year, 250 in stock and 200 in cash.

And for the back half of the year, I think we have got at least another $200 million that's going to go in to the domestic plans, and probably a similar amount into the international plans.

Obviously that helps, because you get the asset for the ROA on that money, in terms of your expected pension expense.

I think again, if cash continues to look solid as it does, you might see us take that number up, again just to try and get ahead of the headwind we are probably going to see in 2011.

Okay.

Thanks a lot.

And our next question come from Finbar Sheehy with Sanford Bernstein.

Your line is open.

Good morning.

Good morning.

I just wanted to take you back to Otis for a moment, and just ask you a sort of longer term question.

When you look at the aftermarket volume there, relative to the size of your install base, can you compare that stage two, what it would be in the more developed market like North America or Europe?

You are talking about comparison in emerging markets versus China versus developed markets?

Yes, in China or emerging markets.

As you think in obviously, in the more developed markets, Europe for instance, 70% of the business there is aftermarket.

Across Otis, it's about a 60/40 split aftermarket to OE.

Most of the OE activity is obviously is coming in the emerging markets, and the biggest piece is obviously is in China .

In China, service revenue is still only around 6% or 7% of our total revenue there.

So in the quarter, I think great news is that service in China grew 25%.

The bad news, is that is off of a very low base.

And so that's a trends that will continue.

We expect to see very rapid growth.

But it will take a long time before China gets to the level of what we see in the developed countries.

India maybe a little bit different.

We actually saw good conversion India, almost 80% conversion rates for the new equipment there.

So it's different market by market.

But clearly, the most challenging aftermarket area is going to be China for the foreseeable

Thanks.

At Pratt & Whitney, you commented that you are expecting to see a recovery in the back half of the year.

Can you tell us a little bit more about what would drive that?

We talked about a run rate of 2800 engine shipments overall.

And therefore it is driven by the customer requirements of the timing of those engine shipments.

It's not a dramatic recovery we are talking about at this stage.

Yes, and just keep in mind, that's not driven by biz jets, that's really driven by the turbo props.

It's the A4 -- I'm sorry, that's another one -- it's the regional -- turbo props that are actually driving that demand.

Thanks.

And just one final one then, just looking at Sikorsky.

You got a number of current or potential development programs going on there.

You got the S-76D, the CH-53K the, X2.

You are partnered up to the reiteration of the Presidential helicopter, and doing some upgraded combat search and rescue.

As you look at how the defense budget shaping up, and the weakness in commercial demand, how do you think about which of these programs might get pushed to the right, and by how much, and what that might mean for your development spending.

Well, I think the CH-53K has been pushed to the right, again, taking in to account some of the challenges that they are having at the DoD.

Right now we are starting to negotiate on lot 8, for the BlackHawks or Seahawks and all of that.

We still see very strong demand from the armed services for vertical lift.

Both in Iraq and in Afghanistan, and we are seeing strong interest from the foreign military customers for verticallift.

So growth will moderate at Sikorsky over the next couple years, But I don't see a big downturn coming from the military.

Again, multi-year seven will be finished next year, 2012, then we go into multi- year eight.

And there lots of requirements still out there, that will keep volumes relatively robust for the next several years.

Thank you.

Our next question come from Ajay Kejriwal, from FBR Capital Markets.

Your line is open.

Good morning thank you.

Maybe if you can provide some color on what you are seeing in orders China, in the construction markets there, with a tightening of credit?

And also maybe update on the lower price product for the China market?

We continue to see good order growth in China in the second quarter.

I think orders there were up kind of low teens, 13%.

Is that right?

Low teens.

Of course, compare that to the first quarter where we saw order rates up 49%.

Obviously, we have a seen a slowdown from that.

Part of it again, is the year-over-year compares, where last year we started to see a recovery in the second quarter in China and that continued throughout the year.

And we have seen some impact from the tightening.

Obviously, we don't expect 20% plus growth in China in the back half of the year.

But from what our people on the ground are telling us, they see very solid double digit growth, kind of like what we saw in second quarter, ought to be repeatable through the back half of the year.

And then, you provided colors on pricing for orders.

But you see prices coming off maybe you can talk about pricing materials spread and your expectation for the balance of the year?

A lot of our pricing, Ajay, doesn't relate with the commodity prices in a direct manner.

A lot of pricing depends on the volume in the market, the projects being bid, and the competitive nature of those bids.

So I think it's difficult to correlate with what is happening with steel or copper prices, to what the end market prices are going to be.

Good.

And then lastly for me, with all the puts and takes on end markets and FX, maybe if you can update us on the contingency, where it stands now versus where you were start of the second quarter.

Yes, back in April we had talked about $100 million contingency at the high end of the guidance range, which was 465 at the time.

Since then, obviously FX has gone against us, and that's cost us $100 million.

That's again, primarily Otis and other commercial businesses.

Offsetting that though has been good performance operationally at Carrier, and stronger performance out of Otis.

You add all that up, and back to $100 million of contingency.

And now the midpoint of our guidance range, which is still 465.

So, we feel very good about the year, with six months to go with $100 million of contingency, it feels pretty good.

Thank you.

Okay.

Well, I will tell you, the only disappointment this quarter is that nobody said, great quarter, guys.

But I want to thank everyone for participating today.

A very good quarter, obviously strong results, encouraging order trends.

And we are confident in the improved outlook.

And we continue to position UTC to outperform in any environment.

Thank you for listening, and we look forward to seeing you all thoughtout the remainder of the year.

This concludes our call for today, thank you for your participation.