雷神技術公司 (RTX) 2012 Q1 法說會逐字稿

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

On the call today are Greg Hayes, Senior Vice President and Chief Financial Officer, and Maria Lee, Director, Investor Relations.

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

Please note, the company will speak to results from continuing operations, except where otherwise noted.

They will also speak to segment results adjusted for restructuring and one-time items as they usually do.

The company also reminds listeners that the earnings and cash flow expectation, and any other forward-looking statements provided on this call are subject to risk and uncertainties.

UTC's SEC filings, including its 10-Q and 10-K reports, provide details on important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements.

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

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

Please, go ahead, Mr.

Hayes.

Okay, thank you, Stephanie.

Good morning everyone.

As you saw in the press release this morning, first quarter earnings per share were up 24% year-over-year to $1.31, that includes $0.21 of gain in excess of restructuring.

Excluding these items for both years, earnings per share grew 2% to $1.10 which is a little better than we expected back in March.

Keep in mind these results include $0.13 per share of headwind from higher pension costs, higher A&D and negative FX.

Stronger sales in our US residential HVAC business towards the end of the quarter drove better than expected operating profit at UTC Climate, Controls and Security.

On the other hand, while we know the urbanization trend will drive continued long term growth, as we said in March, our business in China is off to a slow start.

Otis new equipment sales in China were down 9% in constant currency in the first quarter.

The ongoing government effort to bring housing prices down has negatively impacted the higher end of the residential sector which represents about half of Otis' China sales.

We've also seen some pricing pressure in China and a temporary impact as a result of the Beijing metro incident last year.

We addressed the root cause of the incident and we're confident that it's been corrected.

As we all know the global economy remains uneven.

We have seen some encouraging signs in the US over the past few months with an increase in residential construction and an improvement in consumer confidence.

However, with continued weakness in Europe and the short-term slowdown in construction activity in China, we'll continue to focus on what we control as we usually do.

In the quarter, we invested $111 million in restructuring and the business has continued to find ways to reduce structural cost.

As a result, we're taking up our estimate for restructuring for the year to $450 million including the Goodrich-related restructuring actions.

That's up $100 million from our expectations in March.

We also continued the process of evaluating and reshaping the UTC portfolio to position the company for long term sustainable growth.

And, just as we did through the 2008-2009 recession, we continue to invest in E&D, spending an incremental $77 million, or $0.06 a share, in the first quarter over the prior years.

As we continue to develop innovative technologies like the GTF and S-97 RAIDER that will give us a sustainable competitive advantage and deliver real value to the customers.

So, despite the uneven economic outlook, we remain confident in the full year expectations for earnings per share of $5.30 to $5.50, that's 0% to 4% growth on sales of $61 billion to $62 billion.

And, that guidance includes the sales impact and net $0.25 EPS dilution from the proposed Goodrich acquisition which we still expect to close at mid year.

As you heard from the business unit Presidents in March, much of the operating profit growth will come in the back half of the year.

As the year progresses, we'll see more normal year on year comparison across our businesses and we believe that the Chinese government will continue to pull back on some of the tightening measures which should lead to improvement in the high end residential construction market in China.

Okay, turning to first quarter results on Slide 2.

Total sales were down 2%, organic sales growth was 1% and in line with our expectations after a strong 9% organic growth in the first quarter of last year.

Hamilton Sundstrand lead the way this quarter with 10% organic revenue growth on strength in both commercial and military aerospace.

Sikorsky sales on the other hand were down 15% organically following 15% growth in the first quarter of last year due to the absence of international development aircraft as well as lower than expected shipments at the end of the quarter.

Total segment operating profit was down 2% driven by the commercial businesses.

The slow start in China and ongoing weakness in the European markets drove Otis' operating profit down 6% on flat sales.

UTC Climate, Controls and Securities operating profit was down 5%.

In March, you'll recall, we had expected CCS to be down around 10% after 70% growth in the first quarter of last year.

But, a strong rebound in residential cooling orders at the end of the quarter provided some unexpected upside.

Hamilton Sundstrand had another strong quarter with 15% operating profit growth from solid conversion on organic sales growth.

Segment operating margins were down 10 basis points, a continued focus on cost reduction and productivity nearly offset the $0.13 of headwind we talked about from E&D, pension, and FX, and about half of that headwind is actually in Pratt's results for the quarter.

As I mentioned, earnings per share were $1.31, that's up 24%.

A $0.23 gain from the 2006 through 2008 tax settlements and a $0.16 gain from the sale of a controlling interest in a CCS joint venture was partially offset by $0.09 of restructuring, $0.08 of impairment on assets held for sale at CCS, and an additional penny for the legal reserves for the previously disclosed export licensing compliance matters.

Excluding restructuring and all these one-time items in both years, earnings per share grew 2%.

As I said, FX had a negative impact of $0.02 in the quarter, on top of that deal toss from the Goodrich acquisition was an additional $0.02 of headwind.

Free cash flow in the quarter was 95% of net income.

As you saw in the Press Release, net income also had the benefit of non-cash items.

So, once again, very strong free cash flow generation as you've come to expect.

We spent $72 million on acquisitions in the quarter and there was no share repurchase.

You'll recall we decided to suspend share buyback last September a result of the Goodrich transaction.

With our domestic pension plan, 90% funded at a discount rate of 4.6%, there will be no additional contributions to the domestic pension plans in 2012.

Slide 3 now, on orders, briefly.

You see selected order trends.

Pratt & Whitney large commercial engine spare orders were actually down 3% following a 33% growth in last year's first quarter.

Hamilton Sundstrand's commercial spare orders were up 1% with strength in 787 initial provisioning and this follows 23% growth in the first quarter of 2011.

Obviously, tough compares but still confident in our outlook for the year.

We're keeping a close eye on oil prices due to the impact on airline profitability.

Of course, on the flip side of these higher oil prices, this just enhances the value of the GTF offering which will provide a 16% better fuel efficiency than current engine design.

On CCS, North American residential HVAC orders were up 10%.

So, obviously better than we expected with the robust activity late in the quarter.

At Otis, new equipment orders were down 10% in constant currency.

Otis' new equipment orders in China contracted 21% in constant currency after growing 7% in the fourth quarter.

And, we continue to believe in our emerging market strategies which allow us to leverage our worldwide scale to deliver innovative products in a cost efficient way and deliver real value to our customers from Mumbai to Chengdu to Sao Paulo.

We continue to see strong but moderating growth in these emerging markets consistent with our expectations.

And, of course well ahead of the growth rates in the developed markets.

Although China orders were down 15% in the quarter across UTC, we saw a good traction in the other BRIC markets with Brazil, Russia, and India each up over 20% in the quarter.

So, the first quarter results a little better than we expected from what we told you just a few weeks ago.

I'll come back and talk about the year in a little bit more detail, but first, let me turn it over to Maria to take you through the business unit results.

Thanks, Greg.

Turning to Page 4.

At Otis, operating profit was down 6% in the quarter on flat sales.

Operating margin was 21.4%, 140 basis points lower than prior year.

Foreign currency translation reduced both sales and profit growth by about one point.

At constant currency, new equipment sales were flat as a 9% decline in China was offset by continued growth in other emerging markets.

On the same basis, service sales were up lead by growth in modernization and contractual maintenance.

Pricing pressure in Europe, higher commodity costs, and a slow start in China more than offset the benefits of cost reduction actions in the quarter.

At constant currency, new equipment orders were down 10% with China down 21%.

Consistent with guidance from the March analyst meeting, we expect the new equipment market in China to be up low to mid single digits for the year.

Otis will aggressively pursue restructuring actions this year.

Otis' full year guidance of $50 million to $75 million of profit growth on mid single digit sales growth assumes savings from further cost reductions as well as improvement in the top line, especially in China for the balance of the year.

On Slide 5, UTC Climate, Controls and Security profit contracted 5% in the quarter on 6% lower sales resulting in margin of 11.4%, up 20 basis points from prior year.

Organic sales were up 1% following 12% growth in the first quarter of last year.

Mid single digit organic growth in the Europe and automation and controls businesses was partially offset by modest contraction in Asia and Transicold as well as the impact of our Thailand factory which resumed operations in March.

As Greg mentioned, better than expected profit performance was driven by strong US residential HVAC orders in the second half of March.

This drove low single digit growth in split systems unit shipments for the quarter as CCS benefited from warmer than normal temperatures across much of the US.

About half of the $25 million year-over-year profit decline is driven by the absence of a gain on the sale of the UK guarding business last year.

The balance is largely in the Americas business, primarily lower furnace volume.

For the full year, CCS continues to expect operating profit growth of about $225 million on 4% organic sales growth.

But, given the recently announced portfolio transactions, reported sales will be down low single digits.

Turning to aerospace on Slide 6.

At Pratt & Whitney, sales were up 6% in the first quarter including one point of unfavorable currency at Pratt Canada.

Sales growth was driven by higher military and Pratt Canada engine sales and higher industrial volume at power systems, and was partially offset by lower commercial aftermarket and engine deliveries.

Large commercial spares were down 4% year-over-year.

Operating profit in the quarter was down 1%, higher E&D, pension cost, and unfavorable currency at Pratt Canada were partially offset by the benefit of net higher sales and restructuring savings as well as the benefit from a contract termination of about $0.02.

For the full year, we continue to expect Pratt & Whitney operating profit to be down $25 million to $50 million on high single digit sales growth.

Hamilton Sundstrand posted a strong quarter with profit growth of 15% on 9% higher sales.

Sales growth came from both OEM and aftermarket, each up high single digits.

787 provisioning sales drove the aftermarket growth.

Profit growth in the quarter was driven by the benefits of increased aftermarket volume and lower E&D.

This was partially offset by higher pension costs.

Operating margin was up 90 basis points year-over-year to 16.2%.

For the full year, we continue to expect Hamilton Sundstrand's operating profit to be up $75 million to $100 million and sales up high single digits.

Turning to Sikorsky on Slide 8.

Operating profit declined by 2% on 15% lower sales.

During the quarter, Sikorsky shipped a total of 39 aircraft.

34 aircraft were based on military platforms and five commercial.

Sales were lower, driven by 19 fewer aircraft deliveries including the absence of international development aircraft and lower US government deliveries.

On profit, benefit from strong aftermarket performance and the absence of one Canadian maritime helicopter was offset by lower military aircraft deliveries, and higher E&D spend.

Of note during the quarter, Sikorsky signed a contract with Bond Aviation Group for 16 firm S-92 helicopters marking the largest one-time order of S-92 aircraft ever received.

For the full year, we continue to expect profit growth of approximately $50 million to $75 million on mid single digit sales declines.

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

Okay, thank you, Maria.

Before we get into the full year, let me just give you an update on some of the other activity that's going on at UTC, and there is a lot of things going on.

As I said, the good news is they're all on track.

Our two new organizations, CCS and PAS, are both in place and we are encouraged by the results so far.

First, at CCS, Climate, Controls and Security, Geraud and the team are progressing well with the integration of our new organization and they've begun the portfolio transformation of the legacy Fire and Security business with the divestiture of the US branch operations announced earlier this month.

CCS also formed a joint venture with Watsco for distribution in Canada, building on our successful partnership in the United States.

All of this comes while CCS continues to innovate and produce the most efficient solutions for both our residential and commercial customers.

On the aerospace side, Alain and the team at Propulsion and Aerospace Systems continue to make great progress on the Goodrich integration planning.

We've also fine tuned our financing plan, reducing the need for an equity issuance from $4 billion to only $1.5 billion.

And, we've made good progress on the divestitures that we announced last month, and we're on track to complete these divestitures before year end.

Whereas proceeds from these divestitures will help finance the Goodrich acquisition and more importantly allow us to focus on our core business of aerospace and commercial buildings.

We expect to sign a contract shortly for Rocketdyne and initial bids show very strong interest for the industrial businesses.

As you saw in the Press Release this morning, we recorded charges in the first quarter of discontinued operations.

But, we expect net gains for the full year as the sale of these businesses is completed.

Okay, at Pratt & Whitney in the quarter we secured an additional 156 firm orders for the A320 engine.

The GTF engine continues to validate performance characteristics in testing with now over 2,100 hours complete, and the first flight of the Mitsubishi regional jet engine scheduled for later this month.

So, good progress on our new organization and we continue to execute on the transformational changes to the UTC portfolio.

As for the outlook for 2012, we remain confident in our guidance of $5.30 to $5.50.

That is 0% to 4% growth, as I said, on sales of $61 billion to $62 billion including Goodrich.

Q1 was a little better than expected but, as we told you, most of the operating profit growth will still be in the back half.

Sikorsky shipments are weighted towards the back half with about one-third in the first half and two-thirds in the back half.

CCS faces easier compares and will realize more benefit from the integration and portfolio transformation and Otis still expects improvement in the new equipment market as the year progresses.

As for other elements of our guidance, we have visibility of an additional $100 million of gains.

So, we now expect $600 million for the full year.

And, we expect the excess of $0.21 gain from the first quarter will be offset in the back half of the year with restructuring in both Goodrich and the core business.

We expect engineering and development to increase by about $150 million, primarily at Pratt & Whitney.

And, our first quarter operational tax rate came in right where we expected at 32% and we continue to expect an operational tax rate for the full year of 29.5%.

Although, of course, there's volatility across the quarters.

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

With our transformational deals, the new organization, industry leading franchises, and a sustained focus on structural cost reduction, we are well positioned for long term earnings growth.

With that, let me stop and open up the call for questions.

Stephanie?

Thank you.

(Operator Instructions)

Jeff Sprague, Vertical Research.

Thank you, good morning, everyone.

Greg, can you give us a little more color on where you're actually going after the additional restructuring with the gains that you're finding?

And, some color on resulting benefits from restructuring in 2012 and 2013?

Yes, I think -- we did about $111 million of restructuring, I think, in the first quarter.

That really was spread out with Otis, there was about $28 million, CCS, about $35 million, Pratt, $37 million, and a little bit of Sikorsky and Hamilton.

I think you're going to continue to see spending in those three businesses primarily.

Certainly, as Geraud continues with the CCS portfolio transformation you're going to see additional restructuring actions there.

Otis, again, it continues to look for ways to reduce some structural costs.

So, I think you'll see additional restructuring in Otis, and the same at Pratt & Whitney.

So, I think, the three big businesses will probably get the bulk of it.

Also, keep in mind, there will probably be $150 million of restructuring associated with the Goodrich acquisition.

So, again that's all back half.

Should we expect those restructuring costs to payback in similar dollars into 2013 or what's the payback look like?

The payback on the programs that we're looking at today are between one and two years.

I think some of the Goodrich payback will be very quick, it'll be SG&A, overhead as we eliminate some duplicates in functions.

Some of the bigger restructuring, is we're looking at capacity, will take a little bit longer.

But, I tell you, usually, in one and two years is the average payback we're seeing.

Some of it -- some of the quicker SG&A stuff like we did at CCS earlier this year, again, we're seeing that benefit this year.

And, you'll recall in Geraud's road map to $225 million had savings in there from restructuring in it.

Right, and can you elaborate a little bit more on the magnitude of price pressure at Otis?

And, is there any way to measure how significant the fall out from the metro accident actually has been?

And, are you confident that cloud is fully lifted at this point?

Let's talk about pricing first and then we can touch on the Beijing metro.

I think last year in July, we saw the spike in rare earth metals in China and Otis, I think, reacted very quickly to try and raise prices.

In fact, I think we raised prices about 5% last July.

Unfortunately, that price increase did not get much traction in the market.

And, in fact, resulted in some of the declines that we've seen in orders even into the first quarter of this year.

Now, one of the things that Pedro and team are doing right now is going back and re-looking at pricing.

Obviously, the headwind from the rare earth has abated.

So, I think there's a good case to be made there to adjust pricing.

But, it certainly hurt in the last quarter of last year and the first quarter of this year.

The Beijing metro incident, again, I think that's behind us.

Again, it was a tragic accident.

I think everybody is aware of an escalator incident in Beijing.

Again, we've been working with the Beijing government and hope that's behind us.

It's one of these difficult things, obviously, when you have an accident that gets that kind of visibility.

But, and we're doing the right things in terms of working with the customers and working to make sure that the brand has not been damaged in any way.

The other thing you keep in mind, I think, in terms of the Otis China situation in the quarter, and even into last year, is the mix issue.

Again, we are strongest in that -- the residential construction market.

And, obviously where the growth is coming is primarily in the social side where we're not as strong.

So, we've been hurt by mix, we've been hurt by pricing and hurt a little bit by this Beijing metro, so all of its correctable.

I think as the year progresses we expect to have better results in China.

Plus, you're going to see some of the tightening measures loosen there to, again, hopefully improve the outlook to get back to a more normal growth rate.

Okay, great, thank you.

Thanks, Jeff.

Joe Nadol, JP Morgan.

Thanks, good morning, Greg and Maria.

Good morning.

First question is on drilling down to Otis.

Just I want to drill down a little bit more into these margins which were a bit below our number and certainly I think below where they've been for a few years on a quarterly basis.

And, sales were flat overall for the business.

And, the mix, from a service and OE standpoint, even improved a little bit.

I understand China is good margin on the OE side.

But, Greg, is there any way of maybe, I don't know, explaining a little bit more clearly what's happening there?

And, if you think maybe this is a blip this quarter or we should maybe expect margins to come off a little bit from what we're use to expecting here.

Yes, margins are still pretty good.

I'll give you that.

But, they were down 140 basis points.

I think there are really two big pieces here to the margin decline.

First of all, we saw commodities.

And, this is as we continue to bleed off the inventory, some of this rare earth metals you saw about, what, 60 basis points, I think, of margin deterioration just from commodities at the quarter.

So, that's a big number.

The other 40 basis points of contraction came from the pricing that we talked about.

So, that's really the biggest piece of this.

And, we also were continuing to make investments around the world.

We're continuing to buildout the CLC in Shanghai and as well as consolidate the factory down in South Carolina.

So, just some unusual expenses.

So, I'd expect, again, margins should get better.

But, certainly we're not really, like I said, we're not really surprised that we're contracted in the quarter.

And, so the margin erosion was exclusively on the OE side and service margins were flat or up a little bit?

No, in fact a little bit of that pricing that we talked about actually came on the service side.

And, most of that came in Europe where we continue to see a little bit of pricing pressure on the service side.

I think Pedro mentioned that back in March.

Okay, and then switching over to CCS.

So, I guess the reduction in the sales expectation is due to the divestiture you announced.

What exactly is in there now for incremental divestitures over the remainder of the year?

And then, additionally, within the same segment, it was a nice surprise in, I guess, in the second half of March you got a nice surge of orders in US residential.

How much can we read through for the season and for Q2 specifically?

And, how much might this continue?

Let me take the second part of that question first which is the res market improvement.

Obviously, we stood up in March and we talked about CCS being down about 10% in earnings after being up 70% last year.

It actually came in only down about 5%.

And, that was really on the back of this surge in orders that we saw in the residential side and really on the cooling side.

I think orders were down in the first two months of the quarter.

And then, really came back such that, I think, overall cooling -- overall res orders were up about 10% and we think cooling was up almost 19% in the quarter.

So, again, all of that strength really came in the back half.

Obviously there was no heating season.

So, there's not much to talk about on the heating side.

But, again, I think we picked up a little bit of share maybe in the quarter on really a strong rebound and I guess it's not surprising.

We did see pick up in residential construction markets in the first quarter and with the warm weather it was a pleasant surprise.

As far as the year in terms of what's in, I don't know, Maria, do you have the --?

Yes, so, we have -- well, the organic growth for CCS remains about 4%, the -- yes, 4% growth, FX probably account for about a 2% headwind, and then the acquisitions net is probably about 5% to 6% on sales.

And, what do you have done right now in terms of the deals you've already announced, how much would that reduce sales at this point?

So, the AFSS announcement was about $200 million for the rest of the year divestiture impact.

And, the Canadian distribution was about $100 million.

So, that's about $300 million incrementally from what we would have had in the prior guidance.

And, that's included in the 4%, 5% acquisition divestiture net.

So, yes, we talked about $750 million of divestitures around this portfolio transformation.

We're getting towards that number but we still have a little ways to go.

So, there's probably another $250 million or so that might get divested.

You just won't see a full year impact of that.

We'll be out in front of that with you, Joe, as we get those deals done.

Okay, thanks, everyone.

Thank you.

Myles Walton, Deutsche Bank.

Thanks, good morning.

Question back on -- clarification I guess on the CCS business.

The divestiture lowered sales expectation for the year, you left EBIT intact.

Is that having the resi upper in there or were the divestitures not really contributing?

Divestitures weren't really contributing.

We're still on track, I think, for res in terms of sales up about 3% to 5% and the guidance is still up $225 million.

I would tell you, the res, although it was good for the end of March and into early April here, we don't want to get too far ahead of ourselves with the cooling season here.

We saw this play out last year.

We had very strong first quarter and then a slowdown throughout the year.

So, right now, the $225 million is still the guidance.

And, there's still a task out there to hit even that number.

And, as Geraud's got line of sight to do that through additional restructuring.

If there is some upside related to the res business, we'll certainly see that in the next quarter here.

But, for right now, I don't think -- we're not anticipating any big upsurge beyond that 3% to 5% that we talked about.

Okay, and then, the other one was on Otis in terms of the full year outlook for sales.

Can you talk about what you're expecting for Otis versus the market?

And, if there's any share gain built into your expectation?

And, how were you in the first quarter.

And, if you didn't have a share gain, what would that mean to the EBIT outlook?

Yes.

I think in the quarter, obviously sales were flattish with earnings down 6%.

And, we probably lost a little bit of share in China, probably held share around the rest of the world.

Clearly we're expecting to get a little bit of traction.

I think we have new equipment up kind of mid single digits from a guidance standpoint.

And, that assumes a little bit of improvement here in North America, flat in Europe, and normal growth rates around the rest of the world.

So, a little bit of share loss in the first quarter, but again, we're expecting we'll get that back as the year progresses.

And, one more thing just specifically on the China market.

I think we talked about the pressure that we're seeing on the high end residential side and we think that was down double digits in the quarter.

We do think that that will likely, with the pullback on some of the tightening measures with the China government, that will likely not be down as much for the year.

So, that would help the overall market in China improve.

Okay, great.

Thanks.

Thanks, Myles.

Cai von Rumohr, Cowen & Co.

Yes, thank you very much.

So, could you give us some more color on the spares orders at Pratt and Hamilton Sundstrand?

How -- were they at all impacted by pre-buying in the fourth quarter?

And, maybe some color on what you're seeing here in the early days of April?

Yes, spares, Cai, as I said, we were down 3% at Pratt after being up 33% last year in the first quarter.

So, in my own view it's just a tough compare.

We seem to be -- we're on track, we think, at Pratt for a mid single digit growth in spares for the year.

I think we've got line of sight to that based upon the shop visits that are scheduled and our talks, dealings with the airlines.

So, again, first quarter was tough, again, part of this, again, you never know how much pre-buy goes on at the end of the year with price increases.

So, first quarter sometimes light.

But, again, I think we're pretty much on track at Pratt.

With Hamilton, again, up 1% versus 23% last year in the first quarter.

So, again, a very tough compare.

Repair inputs were actually down a little bit in the quarter more than expected so that's just a timing issue.

We still know that flight hours are way up.

The RPMs are up, ASMs are up and capacity is up.

So, the airlines are still making money despite the oil prices where they are.

So, we're going to see the repairs come in at Hamilton.

And, I think we've got up nearly 10% in the expectation for spares.

And, part of that will be the benefit from additional 787 provisioning which continues to be robust as well as a recovery, I think, in this repair activity.

Okay, so some of that really looks like it was just largely timing then?

I believe it is.

R&D was up year-over-year, I guess you're going at your annualized run rate.

Is there anything in terms of the timing there?

Is that going to be flat throughout the year or how should we think about that?

So, if you think about it we were up $77 million in the quarter and a little more than $50 million of that was at Pratt.

And, really Pratt is now on the run rate that we expect for the rest of the year.

You'll recall we had a slow start to last year but eventually they were up more than $225 million in E&D.

So, this really just getting Pratt on the run rate.

So, you'll see the increases slowdown.

Obviously, the $150 million expectation of increase half of it was in the first quarter.

So, again, you'll see a little bit more increase in the second and then flatten out towards the back half of the year.

Keep in mind the C-series engine should be certified by the fourth quarter.

So, there will be a step down in spending there.

Making good progress on the other engines as well.

So, again, this is the peak year for engineering spending at Pratt & Whitney.

I know Mr.

Bellemare, Mr.

Hess are keenly aware of the commitment to you all to make sure that this is the peak year and that should still be the case.

Last quick one.

Goodrich, you said you still expect to close at mid year and yet given that the EC is gone into Phase II, is it maybe more likely that mid year would be late July or early August which is still near mid year, maybe you can update us there?

I really can't comment, Cai, on where we are with the regulators.

We're obviously working with the DOJ, we're working with the EU.

And, we believe we're still on track, And, I said mid year, whether that's plus or minus a couple weeks I couldn't handicap it that closely.

But, I would tell you we're still highly confident that we're on track to close the deal.

Thank you.

Thanks, Cai.

Carter Copeland, Barclays.

Good morning, Greg and Maria.

Good morning.

Hi, Carter.

Couple quick ones.

One, a point of clarification on Joe's question relating to the Otis margins.

So, you called out 40 bips of headwind from pricing and 60 bips from the rare earth impact.

But, given they were down a little bit more implies a profit differential in China versus the other emerging markets that you called out that were growing that would be pretty substantial.

Is that right?

How big should we be thinking the margin differential is between China and the rest of the BRIC countries?

The margins in China are probably -- they're comparable to overall Otis margins.

Again, it's mostly a new equipment business there.

If you think about it, earnings in China were obviously adversely affected and it hurt margin as we lost sales.

Again, sales were down 9% in the quarter.

So, that obviously had an impact.

But, I wouldn't diminish the impact of what's going on in Europe either with a very slow start there on the service side.

So, it's really, it's Europe and China, I'd say, were the two pieces of the puzzle here in terms of where we saw the earnings decline and the margin decline.

Okay, and on Pratt, you called out a favorable contract termination, I presume that helped the margins in the quarter.

Can you quantify how big that may have been in Q1?

It's about $0.01.

$0.02.

Or $0.02, I'm sorry.

About $0.02.

Okay, and one last quick one, on the 787 initial provisioning for Hamilton.

Do you have a sense of how much that's contributing to your full year growth guidance for spares at Hamilton?

The 787 provisioning?

Yes.

Yes, last year it contributed about $70 million of provisioning benefit last year from 787.

We probably expect a similar amount this year.

So, it's a meaningful piece of the growth year-over-year.

Wonderful.

Thank you.

Shannon O'Callaghan, Nomura.

Good morning.

Hi, Shannon.

Greg, can you go through, in terms of Otis for the rest of the year when you think about getting to your numbers, can you break it out between this high end resi piece, the public housing piece, and commercial?

And, just give a sense of what you expect for the different components?

I think what we would expect is, again as we said, the social housing piece, we continued to see decent growth in that market in the first quarter.

We would expect to see the residential pick up in the second quarter from what we saw in the first quarter.

And, the commercial side is really, it's slowing growth but still growing.

Really, this is really a story about the residential, the high end residential.

As the government there has started to ease and we have seen prices come down in the market.

We continue to expect again that the growth will come during the back half of the year.

Probably not going to see a lot of growth in the second quarter.

But, again, as the year progresses we should see good growth.

And, again, China, it's a huge market, a huge market for us.

Obviously, most of the growth is starting to come now in the western part of the countries in places like Cheng Du and Chong Chang and all of those and we've got good positions there.

We've got the new Gen 2 low cost elevator in our factory in Chong Chang that's going to be opening later this year which should again provide some impetus for growth and to help us attack even more of the low end social housing.

And, in terms of the higher end resi piece, are you seeing evidence of this loosening starting to feed through yet?

And, I guess if it doesn't, if not, is there a Plan B?

Yes, I would tell you right now we have not seen much of an impact.

We still see prices, I think last month were down about 1%.

We think-- we saw the loosening start in the first quarter, we expect that's going to continue.

But, we really don't expect to see any significant movement in the market really until the second half.

If that doesn't happen, obviously, there's a risk to Otis' guidance for the full year.

Think about first quarter, we're down 6%.

For the full year we're talking up $50 million to $75 million.

So, there's obviously some need for improvement as we go throughout the year.

Overall though, again, all of the risk out there in Otis is I think is more than covered by what we have in terms of contingency at the UTC level.

So, we're still highly confident in the guidance, even if Otis China doesn't recover as fast as we expect still should not be an issue at the UTC level.

Okay, thanks, and just maybe I missed it.

Did you go through the -- what commercial equipment and container actually did in the quarter, truck/trailer, some of the sub components of Carrier?

We did not.

Let's see if you look at commercial HVAC orders, let's see for new equipment, overall they were up high single digits at constant currency with North America up about 20%.

That continues to be strong.

And, EMEA up low single digits and Asia down mid single digits.

So, that's commercial HVAC.

Did you also ask about the other pieces?

Yes, so Transicold transport refrigeration as expected that was down about 15% midteens range as we had expected.

Again, the weakness there was primarily in Europe truck trailer as the European economy continues to sputter.

I think one of the good news pieces on commercial refrigeration we actually saw some decent sales growth.

So, up high teens organically which was good news.

Also on the ACS business, the Automated Controls Business, that was up revenue was up high single digits.

So, a little bit of weakness at Transicold, as we had expected, pretty good on the commercial HVAC and in strength at ACS and the refrigeration.

Okay, great.

Thanks, a lot.

David Strauss, UBS.

Good morning.

Hi, David.

Greg, CCS obviously outperformed a bid in the first quarter down on the operating profit side down about 5%, I think you'd said down 10% to 15%.

You had said -- you guys talked about a flat first half.

Is that what you're still looking at or is the second quarter a little bit better?

No, I think the second -- Yes, we had said flat first half with first quarter down 10%.

Now, with first quarter only down 5%, I think second quarter will continue as we had expected which means it will actually start growing earnings in the second quarter.

So, a little bit better first half than what we had expected.

Okay, sorry to go back to Otis China but I guess a couple questions.

First of all, the down 9% on new equipment, how did that compare to your expectations for the first quarter?

And then, looking at comps, it looks like the comps are very difficult for China new equipment in the second and third quarter and then they ease in the fourth quarter, is that correct?

Yes, that's right.

I think what we saw in the second and third quarter last year was like 20% to 30% growth then it slowed down to about 7% growth in orders in the fourth quarter of last year.

As far as our expectation, obviously we came in a little light to expectations in the first quarter down 9% on orders that were down 21%.

We went into the year with a strong backlog up about 20% year-over-year.

But, again, with the slowing measures out there what we have seen is just deferral and delay on some of the shipments from the factories to the job sites.

So, a little disappointing there from what we had originally expected.

But, again, it's the only one quarter so I'm not going to get too excited about it.

So, based on the tough Q2 comp is it fair to assume that China new equipment would be down and your expectation is that it's down again in the second quarter?

Well, I think, just based on the order rates that we saw in the first quarter and the comps that you have to last year you're probably going to see a pretty tough compare.

I don't know that we have a really solid estimate for second quarter in terms of the shipments.

But, I would think just from 50,000 feet that it's going to be tough with the order rates where they were in the first quarter.

Okay, thanks, a lot.

Terry Darling, Goldman Sachs.

Thanks, good morning, Greg and Maria.

Terry.

Greg, maybe just a couple clarifications when you're talking about commercial HVAC, up high single digit was that revenues or was that orders?

That was actually both.

For both.

Yes.

Okay, and then, on the -- back on the Pratt spares, are you expecting that to turn around in Q2?

I guess we're picking up a little bit of some European OEMs, destocking, maybe that has to do with cadence of other OEMs we're thinking of in that context in terms of their pricing, and you're not seeing the same thing.

But, sounded like you hadn't changed your full year forecast.

And, just wondering what the confidence is behind that?

I think the order rates, we look at them every week, Pratt probably looks at them every day, continue it's lumpy.

First quarter we started out strong in January and slowed down a little bit.

But, overall, again, I think what you're going to see as the year progresses the compares get a lot easier.

I think we were up about 22% in the second quarter last year and 33% in the first.

And then, it slowed down in the back half.

So, I think what you're going to naturally see is as the year progresses the comps get easier.

We ought to be able to pretty easily hit that 5% growth rate in spares at Pratt.

Okay, and sorry to jump back to CCS here, forgot one there.

And, that's just do you have an organic all in on the old Carrier and old Fire and Security basis as we used to know it?

I don't.

I think we've given you most of the elements there.

The one piece we probably didn't talk about was Fire products and that was up globally about 5% in orders.

On the Fire service in Europe, that was actually down a little bit.

Down mostly in Northern Europe and offset by a little bit of strength in Southern Europe, surprisingly.

I think the business in the UK continues to stabilize, still not fixed but at least it's not continuing down.

So, again, I think pretty much on track with where we expect it to be.

Okay, and then Greg, anything else you'd want to highlight on 2Q either from the standpoint of Sikorsky shipments or tax rate?

Anything else you want to call out there?

We're going to, I think gains will equal restructuring here in the second quarter.

We've got a line of sight to some additional gains.

I think the tax rate will be about what we had forecast for the full year.

You're not going to see like the first quarter where we had a higher rate.

And, other than that, I think it's going to be a solid second quarter.

Again, the trends that we saw in the first quarter at Sikorsky should get a little bit better.

Keep in mind, though, at Sikorsky, I think they're going to ship 90 helicopters in the first half and almost twice that in the second half of the year.

So, still a little bumpy down at Sikorsky in the second quarter.

Otis again, we should see a recovery.

Again, talked about the CCS before, you're getting good traction.

Pratt and Hamilton again pretty much on track with what we saw in the first quarter.

And then, sorry, one more in the weeds here.

On the North America resi HVAC order strength, are you confident that pricing on that unit acceleration is at a level that is tracking in line with your profit expectations?

I guess we're picking up a little in the channel some price discounting going on by a number of OEMs on that volume lift in March.

Actually, we did not see that.

In fact, we took -- we raised prices last October in the res market and that price has pretty well stuck.

Again, we raised that on the back of commodity prices.

We're actually seeing good pricing trends.

And, look, the inventory of the channel was really low going into the year.

So, some of this is restocking.

But, we're also seeing some good sell-through from a distribution out to the field.

So, we have not seen much pricing pressure this year at Carrier.

That's good news.

Thanks, very much.

Okay, Terry.

Howard Rubel, Jefferies.

Thank you, very much.

Greg, just talk about cash a little bit and where you're going.

Could you touch base on your line of sight to funding Goodrich, how do you feel today versus earlier in the year?

Feel really good, Howard.

I think we've got line of sight on the financing.

As I'm looking at rates today, the 10 year Treasury less than 2% looks pretty attractive.

And, I think the financing plan that we've laid out, we're not going to have any trouble in the marketplace absent some big macro are event.

But, that's why you have the bridge in place just in case.

But, I think we feel really good about the ability to place the debt and the rate at which we're going to be able to place that debt.

So, I feel very good.

Cash in the quarter was strong.

If you think about it, we had these couple of non-cash gains.

You need to take those out, we're over 120% of free cash flow to net income.

So, the business continues to generate solid cash.

Without share buyback, of course, the businesses funding is really pretty robust.

So, I don't see any issue at all going to market in the second quarter ahead of the deal to place all this debt.

So, have you brought the cash back from Europe yet or wherever to fund part of the transaction or is that TBD?

No, I think all the cash move that will happen as part of the deal or towards the end of the year.

So, we'll use some of the international cash obviously for the IAE transaction as well which is also scheduled to close mid year.

But, a lot of moving pieces.

You'll see us in the debt markets here shortly, well at least probably a few three, four weeks ahead of whenever we think Goodrich is going to close.

So, I think that's all good news.

And, the international cash, we'll access what we need to throughout the back half of the year.

And then, the other item, as I recall on the March 13th Analyst day, Mr.

Pino addressed the Canadian helicopter item as just a small software glitch.

And, yet we're still not seeing deliveries of that helicopter.

Could you bring us up-to-date on where you are with that program please?

Yes, so the CMH, I think we're going to deliver five helicopters this year.

We've got a couple of the interim configuration to deliver yet.

And then, we'll actually have final configuration helicopters towards the end of the year.

And, of course we'll deliver the bulk of those helicopters next year.

The plan was always to deliver these things in the second half of the year.

I think one may have slipped from June to July.

But, again, I think we're still on track on the interim version.

And then, the final version, the final software configuration version, we're still working that to get those out before the end of the year to meet the contractual commitment to the customer.

So, again, we're on track, we're working with the customer all the time.

The helicopter continues to perform well, it's a great helicopter in flight testing, no issues with the airframe.

This really is just about the mission equipment as Jeff talked about.

And then, just following on that, as you talk about readjusting the portfolio, in some cases you'll sell things like Rocketdyne but then you're investing money in Eclipse.

Can you explain how you're making some of these portfolio decisions?

Can I make it very clear we are not investing any more money in Eclipse?

We bought -- we did make a small investment, less than $25 million in Eclipse, really to service the after market of the aircraft.

I think there's about 300 of those airplanes that have been delivered.

But, we are not in the light jet business, if you will.

We're in the after market business supporting the planes that are out there.

But, we're not in the manufacturing business for light jets.

So, again, if we haven't made that clear before.

You've made it crystal.

It's crystal.

Thank you, very much.

Thanks, Howard.

Sam Pearlstein, Wells Fargo.

Good morning.

Hi, Sam.

You talked about the additional restructuring and one-time items, you mentioned Q2 that they're going to line up, can you just talk about how those progressed through the year if there's any other mismatches?

Yes, I think what's really going to happen, that $0.21 of net good news that we saw in the first quarter, it will play out in the third and fourth quarter.

A big chunk of that, actually, is going to be third quarter as we start to accrue some of the restructuring related to the Goodrich acquisition.

And, the remainder will be in the fourth quarter.

I can't give you an exact number today, quarter to quarter, third quarter versus fourth quarter, but as we get towards the end of the second quarter and we get to the close of Goodrich and we know exactly what the restructuring dollars are, we'll lay all that out for everybody.

Okay.

And then, on CCS, you talked about the container move and the Euro.

Has there been any improvement from this point forward?

Just because I think that was the number for the year was about down 10% for container, should we see growth in future quarters now?

I think, again, the compares will get easier as we go throughout the year on container.

So, we should see a little bit of improvement.

I think we were down low single digits, I guess, in terms of actual shipments in the quarter.

But, down midteens in terms of the orders.

So, again, we should see a little bit of an improvement as we go throughout the year.

All right.

And then, just on the Pratt after market, how much of that 5% growth is from the IAE joint venture versus the organic side of the business?

That's actually, that's all organic.

That does not include the IAE transaction.

Okay, all right, thank you.

Thanks, Sam.

George Shapiro, Shapiro Research.

Yes, I wanted to ask, Kone had orders up 27% in the quarter versus your down 10%.

Greg, you think that's all due to the mix issue you talked about in China or is something else going on or haven't you looked at the numbers yet?

As we were coming down this morning I saw the Kone report come across-the-board.

I haven't really had a chance to study it or talk to the folks out at Otis.

But, I think it's really -- it's to all of those issues we talked about with China in terms of the pricing and the mix that we saw over there.

So, I think again, we obviously lost a little bit of share.

I think Kone had a pretty good quarter, it looks like, from an order perspective in China.

Okay, and then, just the book-to-bill at Hamilton and Pratt, I know you gave the spares and orders but without knowing the exact numbers, how were the book-to-bill numbers in the quarter?

Yes, at Pratt it was about one.

And Hamilton?

And, Hamilton was slightly below one.

It was a little lower than one, less than one.

Okay.

Thanks, very much.

Thanks, George.

Douglas Harned, Sanford Bernstein.

Good morning.

Hi, Doug.

On Pratt and Hamilton, can you say what the spares did if you go sequentially from Q4?

I don't know.

Give us just a second.

I think we can probably figure that out.

So, sequentially, spares sales were down mid single digits at Pratt.

Down about 5% sequentially.

And, sequentially, I don't know that I have the Hamilton number so we can get back to you on that.

Okay, great.

And then, if you just pull up -- you said at the beginning that the results for the quarter were better, a little better than you'd expected but there's a lot going on here.

If you were to pull out the two or three things that you thought were clearly better for the quarter when you look at the whole year and the two or three that you would say did not come out as well, what would you highlight?

I think the things that you'd highlight naturally, of course, CCS and I think the res business there was better than what we had expected.

I think the Hamilton business also, again, a little bit better than what we had expected.

Really a strong start to the year.

So, really solid organic revenue growth and good conversion with 15% profit growth.

So, I think those were both pleasant surprises.

I'd also tell you even in CCS, the traction that we're getting on the restructuring there and the consolidation of the F&S business continued to pay dividends so margins were strong at CCS.

I think you're going to continue to see that throughout the year.

On the downside, there's just a lot of stuff going on.

Obviously, China was a bit of a surprise although it was really -- we talked about it back in March.

We knew it was going to be soft in China.

Sikorsky, a little bit weaker than we expected, but again, that's just timing.

They missed five helicopters at the very end of the quarter due to a small supplier quality issue.

Those helicopters have all shipped.

So, not really any bad news at Sikorsky.

And, I think at Pratt things continue on track.

We're -- development engineering is up but it's up in line with expectations.

We continue to make good progress there.

So, it's a very atypical for UTC given all of the moving pieces here.

We've got acquisitions, we've got divestitures, we've got markets that are a little bit choppy.

But, I think long term, we're doing the right things from a portfolio standpoint, aligning the portfolio with where we want to be with the growth markets.

And, it's going to be a tough year this year but I think it will be a solid year and we're going to be able to deliver on the commitments.

And then, lastly, when you look at China, and both from an Otis standpoint and from a Carrier standpoint, and you see shifts in expectations for commercial construction growth there, how do you approach that?

In other words, what changes do you make to those businesses operationally when you're looking at different types of outlooks?

That's a great question.

In fact, one of the things that we've done in China is to actually realign the geographies from a leadership standpoint.

China is part of Otis, used to be part of the North Asia operation under Charles Vow.

Charles is retired and we've brought in Thomas Vining to take over China as a standalone region.

And, the reason we've done that is because the after market opportunity remains the single biggest opportunity across the Otis business for future profit growth.

And, it's only 7% of the business in China today.

We think within a few years it's going to get back up towards the more normal 50/50 kind of business.

A few years might be 10 years, but really the focus is going to be on growing the after market.

One you see moderating growth as we see today on the commercial construction side.

So, long term focus there is to grow the after market.

I think Pedro talked about that in March and you'll hear us continue to talk about that in the coming months and quarters as the real focus of the business is to grow the after markets.

Quite frankly, that's where the beauty of Otis is.

It's in that 1.8 million elevators that we service around the world every day.

It's that annuity.

It's a wonderful thing and we need to grow it in China.

But, it sounds like what you're saying is that when you see a quarterly or six-month changes in outlooks for China that doesn't cause you to react very much in terms of your China strategy and your operational approach.

No, I think, again, the focus is going to continue to be on China and we'll continue to do the right things for the long term.

As I said, we opened up this new factory in Chong Chang with a low cost Gen 2 elevator and continue to make investments in China.

And, China is going to be a growth market for years to come.

The urbanization trends, they aren't a one-time thing.

And, again we've seen this thing play out before where you see quarter to quarter you'll see ups and downs in China.

But, a couple of quarters of China being down doesn't dissuade us from the opportunity that's there.

Okay, thank you.

Thanks, Doug.

Deane Dray, Citigroup.

Thanks, good morning.

Hi, Deane.

I know we touched on this, on Carrier residential, but the idea here is that you got this big surge of orders the last two weeks of March and a number of OEs have reported seeing the exact same thing.

So, it's really important if we could get some color regarding how that transitioned into April.

Because that way, we get a better sanction about is this real demand coming back or were these dealer incentives?

But, any color regarding the demand you've seen so far in April would be helpful.

Yes, I'm not going to give you weekly order trends.

I know you look at this every week.

But, I would tell you the season is off to a very good start and the strength that we saw at the end of March has continued into April.

A little bit slower rate than March, but still pretty strong as we move into April here.

Do you run any risk of component shortages?

Because if you do get that perfect storm and you do get a resurgence in demand, supplies, inventories are really lien here including compressors.

Is there an issue where you might get some inventory stock outs or is that, you don't expect that as a scenario?

In fact, I asked Geraud that same question a week ago as we saw the surge in orders.

And, it's a short cycle business so we see this all the time.

But, I know that Geraud and the Carrier folks have been working with all of the suppliers.

I know that they've been working with Emerson to make sure there's adequate supply of compressors.

And, we have not seen any shortages so far.

Although, again it's something we keep an eye on as these trends continue.

Again, we've got the capacity in our factories to ramp up pretty quickly and I believe most of the supply base does as well.

And then, the last one is within the resi orders that you've received has it been skewed towards the lower price point entry level 13 seer or has there been any step up in terms of the higher price points?

I haven't really seen any skew.

I think, again, last year we saw a big, or last couple of years we've seen a down and dirty where everything is entry level seer 13.

Orders look to be pretty good in the quarter, so we've got a little bit better news there.

Including some of the, I think, the R22A shipments were in line with the market still.

So, I don't see any big macro change there in terms of buying patterns.

That's really helpful, thank you.

Thank you, so much.

All right, everyone, thanks.

So, the start the year is a little bit better than we expected.

We're confident in our full year outlook.

And, of course, we're positioning the company for earnings growth both this year and beyond as we continue our focus on cost reduction and the transformational changes to the portfolio as well as the continued investments in these game changing technologies.

Thanks for listening today and look forward to seeing you throughout the remainder of the year.

Maria and team will be available for calls throughout the day.

So, thanks very much.

Thank you, ladies and gentlemen.

That does conclude today's conference.

You may all disconnect and have a wonderful day.