雷神技術公司 (RTX) 2012 Q2 法說會逐字稿

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

On the call today are; Louis Chenevert, Chairman and Chief Executive Officer; Greg Hayes, Senior Vice President and Chief Financial Officer; and Jay Malave, 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 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 to two questions per caller to give everyone the opportunity to participate.

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

Please, go ahead Mr. Chenevert.

Thank you very much Stephanie, and good morning, everyone.

I'm pleased to be part of the call on this historic moment for our company.

We have had a full week with many exciting developments.

Greg will take you through the quarter results in just a moment, but first, let me start with an update on our major acquisitions and on our business transformation strategy.

Late last month we closed on the IAE transaction, and this morning we received the final regulatory approvals for the Goodrich acquisition.

We anticipate closing later today or early tomorrow morning.

These are transformational deals for UTC, setting the stage for strong earnings momentum.

IAE brings tremendous after-market runway with the V2500, which now represents Pratt & Whitney largest installed fleet.

There are over 4,500 V2500 engines in service, with an average age of only seven years, and we expect to deliver another 3,000 engines in the future.

The IAE transaction further validates our game-changing GTF technology and strengthens our relationship with nearly 200 airline customers around the world, ensuring a seamless transition from the V2500 to the GTF powered A320neo.

Turning to Goodrich.

I'm very pleased we will close such a large transaction in just 10 months with limited required divestitures.

Goodrich adds a very strong portfolio of complementary products and is a great fit with Hamilton Sundstrand.

Bringing these two companies together will significantly strengthen our position in the growing aerospace segment, and will allow us to develop more integrative systems for our customers and win greater content on next generation aircraft.

Since announcing the agreement we have done significant integration planning.

So, we are ready to begin integrating Goodrich into our propulsion and aerospace systems organization.

A team of more than 50 employees has worked relentlessly on integration planning with hundreds of employees lending additional support.

The leadership team is in place, and our extensive planning activities will make for a smooth transition for our customers, suppliers, and employees.

On large transactions, culture and people are key to success, and I'm very happy with everything I see at this point.

We have already identified all of the $400 million of run rate synergies that we expect to achieve by year five, and leadership is looking at more.

I am confident that Alain and the team will identify additional synergies as they work through the integration process.

We have completed the financing for Goodrich with a structure that was much better than originally expected.

We issued the largest US corporate bond offering since 2009, $9.8 billion at an average interest rate of less than 3%.

We listened to our shareholders and reduced our original need for equity issuance from $4 billion down to $1.1 billion of mandatory convertible units.

We expect to pay down about one third of the total purchase price by the end of 2012, using net proceeds from previously announced divestitures and cash from operations.

We have made great progress on the divestitures.

We reached agreement to sell both the Hamilton Sundstrand industrials business and Pratt & Whitney rocketdyne this week.

These are strong, profitable businesses, but we are streamlining the UTC portfolio to focus on our core of commercial building systems and aerospace.

In the second quarter, we classified another non-core asset, our fuel cell business, has held up for sale and we continue to expect to complete the divestiture at Clipper imminently.

As expected, during the regulatory process for Goodrich, we agreed to divest businesses totalling about $250 million of annual sales, including Goodrich's electric power systems business, pumps and engine control business.

These are attractive businesses with great employees, so we expect a robust auction process.

We also agreed to sell Goodrich interest into the aero engine control original equipment joint venture with Rolls Royce.

Let me sum up by saying great progress on transformational changes that will generate real long-term value for our shareholders.

This team is executing in a superb way.

Before I turn it over to Greg to take you through the second-quarter results, just a few comments on the year.

It is certainly a challenging environment out there with a slowing global economy, the euro trading near $1.20, and the late July close for Goodrich.

Therefore, we are re-baselining our expectations for the year.

We now expect sales of $58 billion to $59 billion, $3 billion lower our prior expectation, and earnings per share of $5.25 to $5.35 versus our prior expectation of $5.30 to $5.50, with FX and the late July close at Goodrich accounting for about $0.15 of additional headwind.

Now, we know how to operate in a tough macro-economic environment at UTC, and we are increasing our investment in restructuring this year to $500 million, up from $450 million.

As always, we will remain focused on what we control in the back half of the year, cost reductions, strong execution, investment in game changing technology, and the seamless integration of Goodrich and IAE into the UTC portfolio.

With that, let me turn it over to Greg.

We are now on slide 2 on the web cast.

As you saw in the press release this morning, second-quarter earnings per share was up 15% year-over-year, to $1.62, and that included a benefit from a lower tax rate.

Our tax rate in the quarter came in at 22.5%, primarily due to the timing of some legal entity reorganizations.

Before one-timers, the tax rate contributed a $0.13 benefit versus our full year expected tax rate of 29.5%.

In the quarter we also faced $0.11 per share of headwind from higher pension costs, E&D investment, and FX.

But despite these headwinds, segment operating margin expanded 80 basis points, with Climate Controls & Security leading the way, with 230 basis points of margin expansion, evidence that we continue to focus on execution and cost control in this difficult economic environment.

UTC's organic sales growth of 1% reflects slowing sales in Europe, China and the commercial aerospace aftermarket.

There is clearly uncertainty out there.

Europe continues to struggle with the debt crisis with no clear solution in place.

Most indicators now point to a very modest growth in the US this year, with the looming fiscal cliff at the end of this year which could further dampen growth prospects for next year.

As we all know, China and India are also faced with slowing growth.

China's reported second quarter GDP slowed to 7.6%.

That is still, of course, pretty strong, but the lowest level we have seen since early 2009.

We do know the Chinese government is taking steps to stimulate the economy, including a second interest rate cut, but the government remains concerned about high property prices.

And despite these near -- this near-term slowdown, the urbanization trends and long term fundamentals are still in place in the emerging markets, and especially in China and in the Central and Western provinces.

We have confidence in the long-term growth prospects of all these emerging markets.

Against this economic backdrop though, we are lowering our second half growth expectations for Otis, CCS and Pratt & Whitney.

We are also lowering our expectations for the euro to a new US dollar-to-euro rate of $1.20.

This represents an additional $135 million of earnings headwind to our original guidance where we pegged the euro at EUR1.35 to the dollar.

As Louis said, we continue to focus on what we control in the face of these challenges.

So in the first half of the year we invested $204 million in restructuring, with $93 million in the second quarter.

The businesses continue to find a way to reduce structural costs, and we are once again taking up our estimate for restructuring for the year to $500 million, which will include Goodrich-related actions.

That's up $50 million from our previous guidance.

As a result of the headwinds and changes we've discussed, we now expect sales of $58 billion to $59 billion as Louis said, with organic growth of 0% to 2% versus our prior expectation of organic growth of 2% to 4%.

We expect earnings per share of $5.25 to $5.35 and, of course, that is down from our previous guidance of $5.30 to $5.50.

This guidance includes $3.6 billion of sales and a net $0.30 EPS dilution from the Goodrich acquisition.

That's lower than our previous guidance of $4.5 billion of sales and $0.25 of net dilution, respectively.

These changes are simply due to the late July close, which is a month later than we originally built into our plan.

So, still a lot of moving parts, such as accounting conformity and amortization around the Goodrich deal, and we will be back to update you, if necessary, later in the quarter, but we don't anticipate any big changes at this point.

On slide 3 now.

A few more points on the quarter.

Total sales were down 5% due to the impact of FX and net divestitures.

Of note, Hamilton Sundstrand delivered another strong quarter with 9% organic growth, on strength of both commercial and military aerospace.

Earnings per share of $1.62 included $0.10 of net one-time gains; that is from the ongoing transformation at CCS.

That was more than offset $0.06 of restructuring.

Excluding restructuring and net one-time items in both years, EPS increased 13%.

FX had a negative impact on the quarter of $0.05.

As you know, we completed most of the financing for the Goodrich acquisition in early June.

Interest expense and transaction costs related to the acquisition were $0.04 in the quarter, and free cash flow was 99% of net income.

UTC continues to deliver strong, consistent cash flow, and we are confident we will deliver free cash flow equal to or in excess of net income for the year.

Order trends, and now on slide 4. As you can see in this chart, CCS's North American residential HVAC orders were up 4% in the quarter, which is in line with our full-year expectations.

At Otis, new equipment orders were down 4% at constant currency, including China, which contracted 13%.

But we did see improving trends late in the quarter as the initiatives the Otis team implemented have started to gain traction.

Pratt & Whitney's large commercial engine spare orders were down 15% for the quarter, and Hamilton Sundstrand's commercial spares were down 10%.

Although RPMs, or revenue passenger miles, are increasing and load factors remain high, airlines continue to conserve cash and limit their spending on spares.

Average sales per shot-visit versus the prior year have dropped about $300,000 to $400,000, and we now expect Pratt & Whitney's commercial spares to be down about 10% organically this year, versus our prior expectation of 5% growth.

So, a solid second quarter with good execution in the business and a tough macro-economic environment.

I will come back and talk a little bit more about the full year at the end, but let me turn it over to Jay to take you through the business unit results.

Thanks, Greg.

Turning to page 5. At Otis, operating profit was down 8% in the quarter, and a 5% decline in sales, with foreign currency translation reducing both sales and profit growth by 5 percentage points.

Operating margin was 22.7%, 70 basis points lower than prior year.

At constant currency, new equipment sales were down low single-digit, with high single-digit sales growth in North America, more than offset by declines in Europe and China.

Although China new equipment sales were down low single-digit in the quarter, the rate of decline improved from the previous quarter.

Overall service sales were up, led by growth in modernization and contractual maintenance.

Aggressive cost reduction actions partially offset the impact from higher commodity costs and continued pricing pressure, mostly in Europe.

At constant currency new equipment orders were down 4%, with North America up double-digits, Europe flattish, and China down 13%.

Thanks to enhanced communication and brand awareness efforts in China, Otis is beginning to stem the decline in new equipment orders and saw solid growth in June.

A much weaker euro, combined with the continued economic slowdown in Europe and soft new equipment volumes in China, are putting pressure on Otis' profit growth.

For the year, we now expect Otis sales to be down mid-single-digit from up mid-single-digit, and profits to be down $175 million to $225 million compared to the previous guidance of up $50 million to $75 million.

This guidance includes $175 million of unfavorable foreign currency translation versus $75 million previously, assuming a euro average of $1.20 for the balance of the year.

Otis increased its restructuring efforts to reduce costs and continue making structural changes to position the business for future profit growth.

On slide 6, UTC's Climate, Controls & Security margins were up sharply to 15.7%, an increase of 230 basis points from prior year, as profits increased 4% in the quarter on 11% lower sales.

Organic sales were flat following 9% growth in the second quarter of last year.

Organic growth was up mid-single-digit in each of the Americas' residential and commercial HVAC businesses, and flattish in Europe, Asia, and the Automation & Controls businesses.

Transicold was down double-digits organically.

Profit growth was driven by restructuring and productivity, including savings from the consolidation of Carrier and Fire & Security.

Global commercial HVAC orders were up mid-single-digit overall, but down low double-digits in Europe.

Transicold orders were down around 25%, and global Fire & Security products were down low single-digit.

While CCS first-half earnings were in line with expectations, full-year guidance is being revised to growth of about $150 million, from up to $225 million, to reflect increased FX headwind and weaker organic growth of around 2%, due to softer end markets.

When combined with the impact of divestitures and FX headwind, we expect reported sales to be down about 7%.

Margin expansion will be strong, up about 180 basis points from productivity, cost reduction, and the benefit from portfolio transformation.

Turning to Aerospace on slide 7. At Pratt and Whitney sales were up 5% in the second quarter, including 1% of unfavorable currency at Pratt Canada.

Higher sales were driven by growth in the military and Pratt Canada businesses, partially offset by lower commercial after-market and lower industrial shipments at Power Systems.

Large commercial spares were down 13% year-over-year, including the benefit from sales to third party after-market parts companies.

Operating profit in the quarter was down 1%.

Higher E&D, pension costs, and lower commercial spares were partially offset by the benefit of higher military and Pratt Canada sales, restructuring savings, and a gain from the sale of an equity position in a commercial after-market venture at about $0.02 per share.

Commercial spares book-to-bill for the quarter was slightly below 1%.

As Greg stated, [crash] conservation at airlines has impacted order rates, and we now expect commercial spares to be down 10% organically versus up mid-single-digits previously.

As a result of the lower commercial spares outlook, Pratt's operating profit is now likely to be down $100 million to $125 million for the year, as compared with down $25 million to $50 million previously.

We now expect sales to be up mid-single-digit versus prior expectations of up high single-digit.

Hamilton Sundstrand delivered a solid quarter with profit growth of 14% on 7% higher sales.

OEM sales were up mid-teens, while after-market was flattish.

Profit growth in the quarter was driven by strong conversion on OEM growth and favorable mix.

Operating margin was up 110 basis points year-over-year to 17.1%.

Overall, commercial spares sales orders were down 10% year-over-year, with declines in both parts and provisioning.

Book-to-bill was below 1%.

For the full year we continue to expect operating profit for the base business to be up $75 million to $100 million in sales up high single-digit.

We will provide an update later in the year on total UTC Aerospace Systems guidance.

Turning to Sikorsky on slide 9. Operating profit grew 5% on 9% lower sales.

During the quarter Sikorsky shipped a total of 51 aircraft.

44 aircraft were based on military platforms and seven commercial.

Lower sales were driven by 19 fewer aircraft deliveries, primarily lower US government and international military deliveries.

Mid-teens growth in after-market sales partially offset the impact of lower aircraft volumes.

On profit; strong performance in after market, favorable mix of commercial aircraft deliveries, including the absence of one Canadian maritime helicopter, offset the impact of the lower military aircraft deliveries.

Productivity and restructuring benefits across the enterprise also contributed towards a second-quarter operating profit growth.

For the full year we continue to expect profit growth of $50 million to $75 million on a mid-single-digit sales decline.

With that, let me turn it back to Greg.

Thanks Jay.

As I said earlier, these are really solid results in a very, very tough economic environment.

Let me just talk about a few highlights in the quarter, just to add to some the other things we've already talked about.

Pratt & Whitney secured an additional 410 orders for our GTF Engine family at the Farnborough Air Show, including a SkyWest order for 200 Mitsubishi regional jet engines.

And we now have over 2,900 firm and option engine orders across the four GTF platforms.

We have also completed over 3,000 hours of testing and concluded the flight test program for both the C Series and MRJ engine.

We continue to expect the C Series engine will achieve certification in the fourth quarter of this year.

Sikorsky signed the Multi-Year 8 contract in early July with the US government.

The contract calls for the production of approximately 650 Black Hawk and Sea-Hawk helicopters, including foreign military sales, and that is valued at $8.5 billion through 2017.

On the commercial side of the business, Geraud and the team are progressing well with the integration of our new CCS organization.

The combined impact of portfolio and operational transformation, along with the synergies from the integration, contributed to a record operating margin of 15.7% in the second quarter.

As far as the 2012 outlook, as we mentioned before, we are going see earnings this year somewhere between $5.25 and $5.35 on sales of $58 billion to $59 billion.

As for other elements of the guidance, while the timing of certain transactions reduced the effective tax rate in the first half of the year, we continue to expect an operational tax rate of 29.5% for the base business for the full year 2012.

And what that means is in the third and fourth quarter we will see an effective tax rate of about 32%.

As I mentioned, we expect to invest about $500 million in restructuring, including Goodrich, and that will be more than offset by about $600 million of gains and other one-time items.

We will come back and update you once we have more access to Goodrich, including our expectations for the new United Technologies Aerospace Systems segment.

And with that, let's stop and open up the call for questions.

Stephanie?

(Operator Instructions)

Joe Nadol, JPMorgan

Greg -- just going up to 30,000 feet here, take us, maybe, on an optimal walk from your old EPS guidance to your new?

Middle of the range, you have gone from $5.40 to $5.30, but the operational things you are laying out there, it's close, like around $400 million off pressure in the segments and then the higher restructuring, this could bigger impact.

So could you give us a bridge, and then where you are, in terms of a contingency at your new number?

There are a lot of moving pieces here, so I will try and go through this as succinctly as possible.

So you think about -- we had a prior guidance at $5.40, and that included a contingency of about $200 million, or $0.15.

As we look at what's happened in the businesses, we've taken about $0.20 of operating segment operating profit away.

About half of that is at Otis, as we've reduced both new equipment and service sales down about $600 million in sales.

The other half of the operational downward pressure is at Pratt and CCS.

Pratt is down about $0.06 and CCS down about $0.04.

This is just the operational piece.

The next piece, of course, is FX, which is another $0.10 of the takedown.

On top of that, now, you add in Goodrich, about $0.05 impact from the one-month delay in closing; about $0.04 from additional restructuring.

We also pick up about $0.04 as we moved UT Power to discontinued ops; we pick up another $0.10 with eliminations in other and some minority interest changes down below the line.

So, we've used up the contingency; at the midpoint of the new guidance, I would say we don't have any contingency.

That's why we really have the lower end at $5.25.

Now, we think, again, we have properly calibrated each of the businesses with these new guides.

But there is still risk out there the back half of the year.

And again, I think we have been conservative on the year at $1.20, it's -- I don't know, it's at $1.22, $1.23 today.

Hopefully we will get some lift out of that, which might add some contingency, but it's little early to tell.

Could you walk through what the pluses are, the $0.04 and $0.10?

Because that's what I was really getting at was, what is offsetting all this other pressure?

So, if you think about CCS, we are taking sales down about $400 million operationally and earnings down about $100 million.

You have got a benefit, though, offsetting that of about $50 million related to commodities, and really, that's just a takedown in sales a bit.

In Asia where we used to think we would see about mid-single-digit growth -- I'm sorry, high single-digit, now it's mid-single-digit.

Transicold; because of the orders rate we have seen in the second quarter has gone from down high-single-digits to, probably, down, if near 10%; and the F&S product lines are going to be up low-single from mid-single.

So, add all that up, you have got about $400 million of takedown in sales at $100 million of EBIT, and then there is $50 million of offset for net commodities.

On the Pratt side, it's a little bit more complicated, but really, it's about spares are going to be down about $350 million from what we previously estimated.

And on top of that, service will be down a little bit.

So Pratt's sales will actually be down about $500 million, and there is about $200 million of earnings associated with that.

Offsetting that, you have got restructuring savings of about $25 million, IAE will add about $50 million -- it is better than what we had expected, just because of some of the timings.

And also E&D will be down about $50 million, as some of these programs have moved to the right.

So net-net, about $75 million of takedown at Pratt and about $50 million of takedown at CCS.

Okay.

That's helpful.

A second question -- just digging into Otis, the margins improved a bit and some of the trends improved a bit sequentially from Q1 to Q2.

What is, as we look towards the rest of the year and the margin pressure we really saw in Q1, do you feel like you have really gotten your arms around the pricing pressure you were facing in Europe?

I don't know if there is labor inflation played a role in the service business.

What can we expect there, going forward?

On top of the overall weakness that we've seen in sales, we are seeing some continued pricing pressure.

If you think about the margin was down 70 basis points in the second quarter after being down 100 basis points in the first quarter, about 30 basis points of that takedown was related to pricing.

Another 40 basis points was related to commodities, mostly rare-earth.

Going forward in the back half of the year, we have got about $75 million of additional headwind from pricing in the current guidance.

So on top of sales being down about $500 million, you have got another $75 million of bad news from pricing.

And commodities give you a little bit of a benefit, restructuring gives you a benefit, but overall you are going to be down somewhere around $260 million or so, from previous guidance, with FX of $100 million.

Okay.

Thanks.

Good luck, you are busy.

We are busy.

Thanks, Joe.

Howard Rubel, Jefferies.

Your Carrier and old Fire & Security Business delivered terrific numbers in the quarter, Greg.

Could you, for a moment talk about some of the successes that Geraud has been able to accomplish?

It looks like some of them are coming through a little quicker than I would have anticipated.

I think the integration of CCS between Carrier and Fire & Security is going probably better than what we had originally anticipated.

It's really just a tribute to Geraud and the team.

They have been able to take out a lot more cost a lot more quickly than what we had anticipated.

But I think more importantly, they have been able to stabilize some of the other businesses at F&S where we saw issues last year, especially in Europe.

You know, we are not getting much traction on the top line with the F&S businesses, but the bottom line is getting better as there is more discipline around pricing, more discipline around the contracts that we are taking.

So, a lot of the bad news that we saw last year, bad news surprises coming out of the UK for instance -- again, sales aren't up in the UK, but profits are now on the legacy at F&S business just because of the discipline, I think, that Geraud and the management team has brought to the pricing process there.

Maybe, Howard, if I could add, I think we were seeing the benefits of a very seasoned team that did profound transformation that Carrier, before that, exercising the leadership skills with the F&S business and, like, the backlog in the UK is getting much better.

I mean much better margin on that backlog as we go forward.

So Geraud is doing a superb job at leveraging all the best practices and implementing quickly across the board, and he knows how to do transformation and he's executing very well.

And then just one follow-up on -- I can't resist -- on Sikorsky a little bit, and talk a little bit about the Canadian maritime helicopter?

Sorry to do that.

But it does look like it slipped again to the right.

How are you accommodating or coming up with a solution that will, maybe, help out your numbers?

Well, let me take that.

Thank you.

First of all, the CMH program, I have to say, is the best maritime helicopter in the world.

And it's basically ready to fly, and we have made incredible progress.

We are also working very closely with the customer to make sure that they get the product they are looking for, that's it's a win-win.

And I would say, Mick Maurer and the team at Sikorsky are aggressively working on make sure we deliver these helicopters and minimizing the impact on the business.

Now, what's very encouraging -- just a heads up -- as we saw some high interest at the Farnborough Air Show this year -- this is the second air show, Paris was the same last year -- we saw outside customers show interest in the platform as is.

And we saw this interest renewed again this year by a couple countries.

And, in my view, while it's been a painful experience to this point, as we move forward and deliver these 28 helicopters -- in my view, there is potential to deliver basically many new helicopters of the same configuration that we've now developed, we have.

And it's all about working with the Canadian government now to make sure that we close on all the issues.

So you need both parties, basically, to agree on tackling the issues, and I would say we are making substantial progress.

Obviously, there have been some key deadlines that we had hoped to meet, and basically, at this point in time, both sides are working to make sure they ultimately get the helicopter that they badly need to replace their aging fleet.

Just a follow-up to Louis' comments.

We have in the forecast this year for Sikorsky to ship five CMH.

Right now, as Louis said, we are still negotiating with the Canadians around the final configuration of what those aircraft are going to be, and we still plan to ship those five this year.

But, obviously, if those slip into next year it gives us a little more headwind.

I think there is nothing to do, in terms of next year's issue around the delivering the 19 helicopters financially, until we resolve the contractual and configuration issues.

But we will, clearly, have an eye towards that, Howard, to see what we can do to help offset some of that -- what will be a pretty big headwind at Sikorsky next year.

Just to close on this, Howard, we have, I think, a path to success that is developing.

And in the upcoming webcast, in the month of September, we should be able to give better color and update as to the progress we are making there.

Thank you both, gentlemen, and I hope you get a little sleep.

It's been busy, Howard.

Douglas Harned, Sanford Bernstein.

I wanted to go back to CC&S.

If you can describe a little bit more about the actions that have been taken -- you talked about more discipline with respect to pricing, and Fire & Security.

What I'm trying to understand -- the margins were very impressive.

If you go across the sub-segments within CC&S, where you saw the most success and what steps were taken with these organizational changes?

Were they head count reductions, facilities consolidations?

What actions are taking place there?

We talk a lot about CCS and the Carrier portfolio rationalization or reorganization that Geraud and team have been undertaking the last few years; and some of that same magic, I think you see that happening with the F&S portfolio.

We did divest a couple of F&S Businesses in the quarter which helped margin a little bit.

But, I think more importantly, at Carrier, CCS has been the operational transformation.

What they have been able to do in the factories -- continuing to implement the ACE operating systems, taking overhead out.

We have talked about the great work they have done in Collierville, Tennessee, with the lines there to reduce overhead, the breakeven point in the factory.

But also, think about all the restructuring that has been done; we have moved a lot work down to Monterrey.

And that has been very successful, transforming the commercial product lines.

We've invested a lot in R&D -- again, I think we've got better products today, much more energy efficient.

And we are getting good pricing in the market for these new products.

I would say it is a combination of portfolio, cost discipline, factory performance, and product investment.

All those things together have really contributed to this margin expansion that we are seeing.

And yet, for the full year, and Jay mentioned it earlier, that we will probably going to get 180 basis points of margin expansion, and you are going to be talking about close to 14% margins this year, which was Geraud's goal for a year from now.

So again, I think they are making great progress and doing it a lot faster than any of us anticipated.

And remember, the skill set was much more advanced at Carrier on the ACE discipline, supply chain development; and by creating CCS they have been able to leverage that skill set into what is the old Fire & Security that was, really, the last one to make progress on ACE and supply chain.

So we have jump-started these initiatives and we are seeing the good impact of the leadership being focused, but also having done it before.

If I think back a few years ago, George David often talked about a goal of 15% margins at Carrier, and that seemed far off.

Is that a possibility here in the reasonable future?

Well, as you know, it's my job always to stretch with big goals, and impose on the BUs, basically stretch targets and then they happily go deliver.

That culture is untouched at UTC.

That's the way I run the business.

I think we are well on track with proving, basically, that we are going deliver on these big goals.

I think that what you might think of, Doug, is from a top-line standpoint, Geraud and team are going to deliver what will be close to 14% margins on organic growth of only about 2% this year.

I think once we start to see some traction in the end-markets, I think, obviously, there has got to be upside.

And Carrier demonstrated that back in 2010 when the markets came back and we got great operating leverage.

So again, I think there is runway here at the end of the day.

Okay.

Great.

Thank you.

Jeff Sprague, Vertical Research Partners.

Just wondering on a couple things on Goodrich.

How much of the incremental restructuring is at Goodrich?

And does the timing change or business trends that you are seeing in aero aftermarket kind of change your view on what the accretion outlook is for 2013?

No.

I think, again, as we look at the combined Hamilton Goodrich Businesses, we are really pretty much on track to what we had expected for the full year this year.

Nothing really out there that would tell us that there is going to be any big impact or longer-term impact on the commercial aftermarket.

I think Goodrich, second quarter, their aftermarket was up a little bit, which was better than what we even saw at Hamilton.

Financially I don't see an issue there.

The restructuring -- it's about $150 million, roughly, of restructuring we will do this year, and that is some at the legacy Goodrich and some at the legacy Hamilton Businesses.

So, as we combine the headquarters down in Charlotte, there will be some cost we will be incurring in Connecticut.

We are also, of course, looking at some rationalization; we will take out the public company costs and all that.

I think Alain and the team have clear line-of-sight to that $150 million this year, and there will be more next year as we get into this.

I think the accretion number we laid out, which is $0.50 to $0.55 next year from the Goodrich acquisition is still right about what we expected it.

Again you think about interest costs are a little bit better, obviously you don't have an issue; a lot less equity makes that number a little bit better as well.

We are really are on track, I think, financially on the Goodrich transaction as we enter day one here.

And maybe to add, everything I thought this deal was, when I announced it last September, I would say is all of that, or better, today.

I mean, the talent that's in there, the opportunities, the synergies, the customer response, the partner response -- all good.

So I'm very happy with closing such a large transaction in such a short period, and everything we mapped out up front got better.

I was wondering -- just changing gears with a second question -- the comment on Otis, June, China looked better, maybe, not trying to overanalyze a month.

Do you, in fact, see and feel a real inflection in just the tone of business there?

Whether it's what's going on competitively, or how the government relations and like are playing out?

And what do you think about the back half?

Obviously you gave your guidance, but just the commercial success of Otis looking into the back half.

Well, first of all, Otis is a very strong franchise, as you know, with great brand recognition.

I would say that the profound changes we have done in China, as far as leadership structure, reporting line, have had a good impact with the customer base and with the results, certainly, as we went through the second quarter.

We made a change with the President of Otis China now reporting to the President of Otis, Pedro Baranda.

We also created a business development office that's now located in Shanghai; and remember, and about a year ago we had announced also the high-rise Center of Excellence was now in Shanghai.

So, there is a great team now in China that is complete, that is driving momentum with the dealers, driving momentum what we adjusted the price as we declared earlier, to reflect the realities of the competitive landscape.

That's after the rare-earth increase we did last year.

And obviously, as the months have gone by, we are starting to see that the penalty that was in front of us with government opportunities has disappeared; and basically, we are now bidding on the opportunities like the next tranche, Beijing Metro, et cetera.

So, I would say Pedro and the team -- Pedro has been to China twice in the last six weeks.

I'm going to be with him at the September Chongqing's mayors conference.

We are going to be opening the new factory in Chongqing that is going to be serving the Central and West region.

As you know, there has also been a big shift in mix from the, basically, traditional mix to more low-cost housing, where perhaps Otis had a bit of weakness.

But now, with the new factory, with the new product line and everything we've put in place, basically, we feel very good that we have a guidance that Pedro can achieve going forward.

And more importantly, is resume our share position in that market.

I think it's all coming together.

And as a matter of fact, as we said, it's one month, but I would say we continue to see similar momentum.

June was a record month of sales for Otis and China, following a couple of very difficult months.

July is off to a reasonable start.

So I mean, it's really in Q3 and I'm not going to give details.

But, I would say everything we've done as we monitor -- and I will be there personally later on in September -- I would say it's coming together.

And Otis is strong franchise and will deliver on its promises to its customers and share holders.

Thank you for the color.

Carter Copeland, Barclays.

Just a quick question on the aftermarket.

Greg, I wondered if you might speak to differences in trends you might be seeing in wide body versus narrow body?

Or even in spares versus MRO at Pratt?

I think it's very platform-specific as we look at the Pratt issues in the aftermarket.

I think what we have seen is actually shop visits are now -- look to be coming down at the back half of the year from what we expected.

And that's really, primarily related to some of the actions that Delta and some the others are taking on the legacy 757 fleet, where we are seeing planes parked and then engines parted out.

Again, I think it's airlines are very focused on cost containment and the 757 fleet, obviously, it is Pratt-powered primarily.

We are seeing a bigger impact from that.

The other piece that catches us a little by surprise, but probably shouldn't have, is on the V-2500.

Again, to Louis' point, we have got 4,500 engines out there in service today.

About five years ago we put in an upgrade called the Select Program, and that's actually extended the time on wing about 2,000 to 3,000 hours.

So some of the V-2500 overhauls that we had expected this year are getting pushed into next year.

So it's not just one thing.

I think you have got a few retirements of 757s.

You have got better on-wing performance on the Vs, and then you have got the 4000, which again, we did a lot of work a couple of years ago, and they are also staying on-wing longer.

So cash conservation by the airlines, better on-wing performance, and some retirements -- all that kind of added up to what we see for the aftermarket this year at Pratt now.

And Carter, a little other comment, which is -- showing the signs of the airline are cautious is the shop-content per visit, perhaps, reflects some of that.

They don't put the full content that we would expect them to put, which means it's going to be a shop visit sooner in the future because of that.

And overall, I'm very pleased, as you know, with the IAE transaction.

Why it doesn't always get the spotlight, I think, as much as it should.

It's a huge transformational deal.

It's a large install base for Pratt with a big backlog.

And those planes are flying.

It's a young fleet.

It's going to be around for a long time, and I think that has a very positive impact on Pratt aftermarket business for a long time to come.

Great.

And just as a second question -- like Jeff, I don't want to get too hung up on single months, but you called out that the residential HVAC orders were up for --.

How did that trend over the quarter and can you speak to what you are seeing in June?

June or July?

July, excuse me.

Because June is easier to speak to.

Maybe I need some sleep, too.

(Laughter) I think as you think about -- it's been a lumpy year on the resi side here in the US.

We started out ahead of a very slow first two months of the year and then a very strong March.

And we ended March with great momentum.

You saw orders up; and then slowed down again in April, slowed down in May, and then with all of the heat across the US we had a very strong June.

And that continued into the first part of July here.

Not surprising, when you look at the temperatures across the US, we have had very good cooling season from that respect.

So again, I think we are still expecting 4% to 5% growth in the res for the year.

Could it be better?

I think it will depend really upon on the weather and the restocking.

Right now, channel inventories look to be about normal for this time of year.

We are seeing good sell-through from distribution.

So I think there might be upside but it's really too early to call.

I think we are properly calibrated on that.

The other thing, of course, you have got to remember, still, the heating season in front of us.

When last year, at legacy Carrier business, there really was no heating business because of the very warm weather we had throughout the fall and early winter last year.

Too early to call, but I would say, right now we are cautiously optimistic on the market for the year.

Great.

Thank you for the color.

Terry Darling, Goldman Sachs.

Just probably a couple of follow-ups here.

First, on the aftermarket -- wondering, from a timing perspective, a number of the items that you have called out here seem transient in nature, but could continue for a couple of quarters, obviously reflected in your guidance.

Thinking about 2013, do you see a bounce-back there?

Is it purely contingent on where the demand in the market is?

Or how do you think about aftermarket growth as you move into 2013?

I guess it's way too early to give guidance on 2013, but let me give you just maybe a bit of color.

Our goal is to grow earnings double-digit, year after year, and we know the formula.

It's probably one-third organic growth, it's one-third margin expansion, and I think the track record of this team on margin expansion speaks for itself; and then the other third is how we deploy capital.

There is no doubt that with the changes we have done with the transformational acquisition we have some good momentum.

And we will expect solid accretion from the Goodrich and IAE transaction next year.

And I think the game plan is in place.

We are working to mitigate some of the headwinds like CMH.

But at the same time, we have a great backlog.

For example on S-92, the backlog is at a record of $1.4 billion.

So there is a lot of moving parts.

This team is -- enthused and energized.

And stay tuned and I think we will deliver UTC-style result as we go forward.

I guess -- go ahead, Greg.

I'd just add on, it's terms of the aftermarket.

One of the things that obviously drives airline behavior is oil prices.

We have seen oil prices come down about 20% in the last three months.

That takes about six months to find its way through, in terms of ordering patterns, at the airlines.

The shop visits which were light -- you know we saw this back in 2010.

Louis has always talked about the wall of spares, and spares over time are going to be there.

I think it's just a question of timing.

So I can't tell you whether that's third or fourth quarter this year.

Obviously, we think it's not going to happen.

We will see it at some point, but it is, to Louis' point, way too early to think about what spares outlook is going to look like.

The world is pretty dynamic, given everything that's going on.

But, again, airlines are flying, flying the planes full.

We have got a big fleet of V-2500s out there, we have got a good fleet of legacy Pratt products.

So spares will come back; I think it's just a matter of timing, to your first point.

And appreciate we are a long way away from 2013 guidance.

But Louis, it doesn't sound like you see anything out there, with regards to the ability to grow double-digit, at this point that you would want to highlight for us.

I guess the question is -- in that context, one-third from capital allocation -- are you thinking the Goodrich accretion in that mix?

In other words, do you think that organically double-digit growth is possible?

You heard what I said before.

It's way too early to give guidance.

But this is the culture of this company, to drive double-digit earnings growth, and that's what we're focused on.

I think we have the pieces coming together.

Stay tuned.

And then, lastly -- non-res construction in the US -- doesn't sound like you've really changed your outlook there.

A bunch of data points on both the positive and the negative side from other players.

How are you seeing that market at this point in and around that mid-single-digit, longer-term outlook?

It's surprisingly strong.

I think, again, to some the earlier discussion, it's really we are still seeing the benefit from new product introduction and this push toward energy efficiency.

While there isn't much new construction going on, there remains a very robust retrofit market.

And I think with the line of products that Carrier has, in terms of the very energy efficient chillers, they are gaining traction in that market, and that's really what I would attribute the results this quarter and our outlook for the year to.

Thanks very much.

Myles Walton, Deutsche Banc.

First one -- just clarification on net proceeds from the divestitures, now that you've come to consummation on the major ones.

Is it still net about $3 billion or plus or minus?

Yes, I think it will probably be $3 billion-plus.

Again, I think we have still got a of couple of pieces to go here, yet.

I think Louis mentioned we are very close on the Clipper divestiture.

I think you will see that in the next -- I don't know -- couple days, couple weeks.

Net-net, I think that $3 billion-plus is still a very good number.

That is, of course, after tax.

There is a little bit of tax leakage on the industrials.

And then the real question is on cash flow for the year.

Just looking at the generation you had in the first half, which is great, and looking at the second half, which should have an absence of pension contributions that have been there in prior years -- I'm just at a loss as to why cash won't be as good, if not significantly better than the last couple of years' back-halfs because of the absence of that pension contribution?

(Laughter) We're not going to change the guidance on cash flow.

But, let me tell you --

I thought you said better or equal.

Yes, cash flow is going to be very strong in the back half, and to your point, there is no cash pension contributions.

You also have the benefit in the back half of the year of the Goodrich amortization, as we write up some of their inventory and other assets and take some charges around -- or some amortization charges.

So cash will be very strong on the back half of the year.

And, I think once we get the Goodrich deal consummated later today, we will come back in September, whether Louis or one of us will probably update you on cash flow, and I would expect it to be better than what we are currently are guiding to.

You mentioned the one-third of the deal price will be paid for from the assets or the divestitures plus cash from the cash flow.

What's the pro forma cash position at the consummation?

I'm sorry -- we have got about $6 billion of cash on the balance sheet today, and I think we have got another $16 billion of restricted cash out there, which will go to pay off the owners.

What we are really going to do, is we have got -- close most of these deals at the end of the year.

I think debt-to-cap at the end of the year will go down to about 48%, and will continue to pay down even into next year.

Again, there is plenty of cash, both from Goodrich operations as well as the UTC operations this year.

We have got some cash on the balance sheet.

I think paying down one-third of this, this year, is not going to be an issue, even with Rocketdyne closing probably early next year, as opposed to late this year.

Got it.

Thanks

Ronald Epstein, Bank of America Merrill Lynch.

Just wanted to just get a quick update on how it's going with the GTF, where we are on the development program.

Because you've got multiple engines, right?

And multiple platforms, and maybe Louis can talk about that -- what's going on with the GTF?

First of all, we are very happy with the traction of GTF in the market.

And, at this point in time, what we have seen is that the engine development is coming together nicely.

All the advanced engineering we did in the technology readiness is paying off with, I would say, better than expected first-time tests for all of the engines.

We've got about -- I think it's 3,000 hours, we have even more cycles.

We just did two very important tests.

We did the flocking-bird test on the GTF, which is the five 1.5-pound bird and the one 2.5, and we have passed that with flying colors, maintained the performance required.

We also did the large bird test.

Those are all the new FAA required testing.

And that is, basically passed very well; the large bird test.

So there is one test left, which is the blade-out test, all our modeling suggests we are on track.

We are geared up to deliver this engine at the end of the year for the Bombardier application, and every program behind.

I would say -- I always challenge the team because this program has gone remarkably well.

And all the expertise we have in Pratt has come together to deliver what's been, so far, a very flawless program execution.

So we are buttoned up, lined up, on all the different platform.

Everything is on track.

And you see it through the R&D investment.

Obviously it's a very intense period for R&D.

And my commitment earlier was that 2012 was going be the peak on R&D; and I would say that the team are holding to that commitment that 2012 will be the peak on R&D.

So everything is on track.

And I would say, the customers, as we have won the different competition, the customers truly value the technology advantage of GTF.

And, not only fuel burn, but noise reduction, emissions reduction.

And they feel very comfortable that our engine is coming together and we will deliver on the promises.

And every transaction, I would say, that Dave and the team have done, I have reviewed them with Greg and we are proud of the wins we got.

We won on the merits of our technology of the platform and it's going very well.

Now, maybe just one follow-up on to that.

So far everything is narrow-body.

How should we think about the potential investment, and, whatever -- a 90,000-pound thrust class engine for a wide body?

Is this technology that can moved up to that level?

Is the Company thinking about that?

Well, I think what we have found out with the GTF architecture now, is that it's also scalable.

And, I think, there is no doubt that the Pratt team has had discussions with some of the key players in the market that see the value of that technology.

But you can expect that, obviously, the operating discipline and the UTC discipline on the program will apply.

All this has to come together where it makes sense for the customers and the shareholders, and, obviously, even the GTF.

And we have big partner content -- and partners have been superb, by the way, whether it's the Japanese or MTU.

And there is big appetite.

As people see the success of our platform, there is big appetite to take on, basically, the portion of the program as a partner.

And then that's something that is a big change over the last couple of years as people recognize we have a superior technology advantage in the market.

Great, thank you.

George Shapiro, Shapiro research.

Louis, kind of a long-term question -- if I go back and look at Otis' history, you had one year of downturn, the last time being in '97, and the time before that in '90.

And then following that, the sharp snap-back to record profits.

My question is, the difference is that you only made 10% margins and you are making over 20% today.

So what is the risk to any steady margin degradation at Otis that would make this time look different than the two downturns we saw before?

I have said that before, as far as Otis margin, there is no doubt Otis is a 20%-plus return business, and I think nothing has changed.

Obviously, we had a soft patch in China over last couple of months.

I explained earlier on the queue that I think we have taken the right measures from a leadership structure, from action with the dealers, and it's starting to recover.

I have high confidence in Otis' future results.

I also remind you that a big portion of the results always come from the aftermarket piece, which is paramount to Otis-based success.

And that, as the install base has grown, by the way, continues to be a huge opportunity.

And Pedro has hired recently, 600 new mechanics that we are training to deliver the highest value service to our customers.

The unexplored territory is still the China aftermarket, and I would say we are all over it at this point in time, with the change of leadership we have done.

Those guys are in the same time zone.

They are there every day.

They know the market.

The nice thing about Otis is, we are 95% localized in China.

We are also local leadership that understands the dynamic of that market, and I think the changes we did allow them to make decision on the spot.

And I think that's going to start to create a lot of good momentum for aftermarket.

I think there is always plus and minuses, but nothing has changed, as far as the fundamental of Otis being the leader in its segment.

And, as you said before, there's been glitches before.

We had another one, but I think Pedro's leadership is making a huge difference.

I guess the thing I am concerned about is the aftermarket, I'm sure, has been a big part of why the margins have gotten so high, and now you are talking about the pricing pressure.

I mean, it would seem to be self-limiting, but can you provide some more color on how much down that might take the margins?

George, I think the issue here is that the aftermarket is very profitable, but we also make money on the OE side, through all the factory cost reductions.

And it's really been the balance between OE and the aftermarket that's been the success story of Otis over the last seven or eight years as they have driven these margins up.

So we have got this huge installed base of 1.8 million elevators that we service around the world.

But we also make money on the OE side, because we have been able to leverage the global scale of Otis.

And even with sales, which really haven't gone anywhere in 3 years, the margins have remained very strong, north of 20%.

And I think if we get a little bit of growth, you are going to see the margins even improve further at Otis.

I'm not worried about a big long-term downturn in Otis margins.

I think that they have a focus on cost in everything that they do, they leverage global scale better than any other business that I'm aware of, and they've got their eye squarely on the goal of maintaining this industry-leading margin.

Okay.

Thanks.

History would certainly support that, but I just figured I would ask you the question.

Sam Pearlstein, Wells Fargo.

First question was just -- in CCS, was that $112 million of favorable adjustments expected when you gave your original year-over-year changes?

Yes, it was.

Okay.

And then, secondly, related to George's question just on Otis -- you've highlighted three different things in terms of the pricing issue, the brand issue, and then the actual high-end residential pieces in China.

And then some of the pricing pressure and services in Europe.

Can you talk about what your assumptions are as you go through the remainder of the year in those different buckets?

And really, is there any reason to think those trends continue into next year as well?

Just trying to think about how much we can see Otis growing into the future periods.

I think about new equipment; we now think, on a constant currency basis, sales will probably be flat for the year and service is only going to be up about two points.

I think there is opportunity, obviously, beyond that.

And I think that one of the focus that Pedro and team have is re-igniting top-line growth.

Flat sales, with China down, is still pretty good.

And as China recovers, as the property market there recovers, there is upside in those markets.

There is still long term growth prospects in all of these emerging markets.

We talk about the 600 cities that are out there by 2025 that will have more than 3 million people, and those are big opportunities for Otis in the next 15 years, and I think we are well positioned to capitalize on that.

We think it's a tough year this year; it's a tough year because of the situation in Europe and some of the missteps we've had in China.

To Louis' point, we've, I think, corrected those missteps in China.

We're getting traction there, we will recover our share, and Europe will get better eventually.

Whether that happens this year or next year, who knows.

I think we have got high confidence in Pedro and the team, in terms of driving top-line growth, which we really haven't seen in three years.

And just a final question, on Goodrich.

Once it closes, really when will you be in a better position to talk about how we should think about the accretion into next year, the restructuring opportunities, once you can get your hands on the books?

Is that something September, October, or is it wait till the December typical guidance.

No, I think we will have a good handle on September.

We have got a couple of webcasts, Louis' got one, I've got one, and we are going to host a half-day session up in Montreal at the end of September with all of the business units.

And at that point, I think Alain and team will be prepared to talk about next year.

I think we still feel good about that $0.50 to $0.55 that we've laid out for Goodrich accretion next year, and I don't think we have seen anything that would indicate that, that's going to be off by any order of magnitude.

But again, I think by the end of September we will have our arms clearly around that.

Okay.

Thank you.

Deane Dray, Citi.

I just want to make sure I calibrated correctly on the guidance change.

And so, it's $500 million of restructuring and $600 million in gains.

Does that mean $100 million will be falling through to EPS?

Yes, we have really got $100 million out there that could fall through to EPS.

Obviously, if we decide to spend that on restructuring, that would take you from that mid-point down to the lower end of the guidance range.

But right now we are keeping that $100 million as kind of our back pocket contingency.

Do you have a backlog of restructuring that you could implement?

And what would trigger you to add?

Because we are seeing a number of companies this quarter increasing restructuring pretty aggressively.

By the end of this year we will have done $2.5 billion dollars of restructuring in the last 3.5 years.

It always amazes me the units come up with new and good pay-back ideas.

Right now that $500 million that we have is fully subscribed, and as we get closer towards '13 and we kind of understand where the markets are going, there may be further call for additional restructuring.

Again, I think the guys have been pretty aggressive in taking out structural cost to deal with the markets, and that's why the margins are up this quarter.

Just continued cost take-down, and that's the formula.

Until markets recover we are going to focus on cost and restructuring, and do what we do best.

And anything else on the divestiture side?

We know Clipper's soon to have an announcement; Fuel Cell and then these required Goodrich divestitures.

Anything else that you are contemplating?

We are always looking at portfolio, Deane, but I would think these are probably the biggest pieces.

As the year goes on, I think I would like to get any of the clean up of the portfolio behind us.

I would say we are never done, but we are certainly getting close to done.

But the big elements of transformation will wrap up this year.

It's that simple, that's why we leave it.

Well, thanks, everyone.

The UTC strategy of delivering top-line growth through innovative products, global market reach is solidly in place.

We will keep investing in our game-changing technologies and emerging markets, and we always maintain our focus on cost reduction and productivity through the ACE operating system.

As end markets recover, we will capitalize on our operating leverage and deliver solid earnings growth.

We will continue to generate strong, sustainable cash flow and effectively deploy that cash through dividend, share repurchase, and M&A.

Goodrich and IAE transactions are historic transformational changes to the UTC portfolio that I am proud of, and confident will generate superior shareholder value for years to come.

Thank you for listening, and we look forward to updating you on even more progress at the upcoming webcasts through September.

Thank you very much.

Thanks, everyone.

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

You may all disconnect and have a wonderful day.