雷神技術公司 (RTX) 2013 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 Jay Malave, Director, Investor Relations.

This call is being carried live on the Internet and there is a presentation available for download from the 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 report, 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 also ask further questions by reinserting yourself in the queue and we will answer as time permits.

Please go ahead, Mr. Hayes.

Thank you, Samya, and good morning, everyone.

As you saw in the press release this morning, UTC reported first quarter earnings per share of $1.39.

That's up 6% versus 2012 and a little higher than we expected, due to a little better than expect execution at Aerospace systems and our Climate, Controls & Security business, as well as the timing of some one-time gains.

You recall back in March, we were talking about a $1.30 number that we were comfortable with.

In fact, in that $1.30 we had about $0.05 of gains in excess of restructuring.

We ended up with $0.11, so about $0.06 of the $1.39 was a little bit more than we expected on timing of some gains out of the portfolio -- the portfolio at CCS.

As far as the rest of the business, our integration remains on track and we continue to see strong performance in our two major acquisitions, with Goodrich and IAE providing $0.21 of earnings in the quarter.

Organic sales declined 2%, partially due to tough compares in Commercial Aerospace aftermarket and the Transicold business, but we continue to see signs of economic recovery, especially in North America and emerging markets.

Europe, however, continues to be a headwind and the legacy PW4000 commercial spares at Pratt & Whitney have yet to recover.

So the past could be a bit uneven, but we're confident in our full-year outlook.

On slide 2 on a positive note, order trends that you see on slide 2 indicate that the majority of our portfolio is well-positioned for a resumption of top line growth as we progress through the remainder of the year.

Just a reminder, we'll talk to orders on a constant currency basis, as we usually do.

In our commercial businesses, we see good traction in North America.

The housing and commercial construction markets are improving, Americans are investing in their homes again, and our North American residential HVAC orders were up 11% versus last year.

The ABI, or the Architectural Building Indices, has now trended above 50 for the past seven months; and we see that coming through in our orders, with Otis new equipment orders up 21% in North America.

We did see a 12% decline on our North American commercial HVAC orders, but this was on a tough compare and we continue to expect that business to grow 2% to 4% for the year.

As I mentioned, Europe remains a challenge, although we do see some bright spots.

CCS's Commercial Refrigeration business, their orders grew 11% in Europe; and Otis new equipment orders grew 21%, with Russia, France and the UK more than offsetting weakness in southern Europe.

However, CCS's commercial HVAC and Fire & Security products orders were down 14% and 5%, respectively.

So we're not quite out of the woods in Europe yet.

Otis continues to gain momentum in China.

Building on the strength we saw in the fourth quarter, orders were up 27% in Q1.

CCS commercial HVAC orders were down slightly, while the Fire & Security product orders grew 8% in China.

Our position in emerging markets continues to pay off, with combined BRIC orders for the commercial businesses up 22% in the quarter.

Turning to Aerospace, we saw modest improvement in our commercial aftermarket business at Aerospace Systems.

Spares orders were up 2% on a pro forma basis, with strength primarily from the legacy Goodrich business; however, we've yet to see a recovery of Pratt & Whitney, where legacy commercial spare orders were down 28%.

Continued declines in wide-body PW 4000 orders were partially offset by strong growth in the V2500.

The rate of decline also reflects a tough compare to last year and a strong book-to-bill in the fourth quarter.

With increasing airline traffic, record load factors, declining oil prices, and airlines projected to earn more than $10 billion this year, we still expect an increase in order rates as we move through the year.

On the military side, although we didn't see a significant impact from sequestration, we do see the impact of DoD budget cuts and a reduction in flying hours, with aggregate pro forma aftermarket sales down 10% in the quarter across the Aero businesses.

So we'll keep a close eye on the Aerospace aftermarket and look for signs of more stabilization in Europe, but order rates and macroeconomic trends broadly support our assumption for growth as we move through the year.

We remain confident in our full-year guidance of earnings per share of $5.85 to $6.15 and sales of $64 billion to $65 billion.

That's up 3% to 5%, organically.

Okay, now on to slide 3. Taking a closer look at first quarter results, total sales and segment operating profit increased 16% and 15%, respectively, driven by the Goodrich and IAE acquisitions.

Climate, Controls & Securities continues to realize savings from the integration, as they increased profit 8% on a 3% decline in organic sales, and Otis continues to gain momentum, with organic sales growth for the second consecutive quarter.

EPS of $1.39, as I said before, included $0.11 of gains in excess of restructuring.

About $0.15 of combined gains came from the tax adjustments related to the 2012 tax extenders, which were passed by Congress in January of 2013, and the ongoing portfolio transformation at CCS.

These gains were partially offset by $0.04 of restructuring.

Excluding these items, as well as $0.21 of net gains from last year's first quarter, and earnings per share increased 16%, again driven by the IAE and Goodrich acquisitions.

Free cash flow in the quarter was 88% of net income.

CapEx was $295 million.

That's up nearly 60% versus last year, as we prepare for the ramp in Commercial Aerospace.

We also restarted our share repurchase program in January, acquiring $335 million of our stock, and we expect to buy back a similar amount here in the second quarter.

Let me stop there for now, and I'll talk more about the full year in just a second.

But first let me turn it over to Jay to take you through the segment results.

Thanks, Greg.

Turning to page 4. Otis sales improved 2% in the quarter, led by solid mid-single digit growth in new equipment and continued growth in service sales.

Excluding the impact of currency, new equipment sales were up in the Americas, Europe and Asia, with North America, Russia and China leading the way.

Operating profit was essentially flat at constant currency.

Continued weakness in southern Europe offset the benefits of volume growth and continued cost reduction in the rest of the world.

New equipment order growth was strong, up 24% in the quarter, with double-digit growth in the Americas, Europe and Asia, led by a 27% improvement in China.

Order strength in Russia more than offset weakness in southern Europe.

Thanks to a growing order book and near-term completion of factory transformations around the world, Otis expects to see improving performance as the year progresses.

Guidance for the full year remains unchanged, with profit expected to be up $100 million to $150 million on mid-single digit sales growth.

On slide 5, Climate, Controls & Security increased profits 8% in the quarter on 7% lower sales, resulting in another sharp increase in margins, up 170 basis points from prior year to 13.1%.

Organic sales were down 3%, driven by a steep decline in container shipments on a difficult prior-year compare, combined with weak European markets, partially offset by high single-digit growth in the Americas Residential HVAC business.

China was up low single digits, while Asia overall was flattish.

CCS had another solid quarter of earnings growth, despite the decline in organic sales.

Profit growth was driven by restructuring and productivity, including continued savings from the consolidation of Carrier and Fire & Security, lower commodity costs, and the absence of ongoing losses from a business we divested in the first quarter last year.

Global commercial HVAC orders were down 8%, following 9% growth last year, with double-digit declines in North America and Europe partially offset by low single-digit growth in Asia.

Orders for global Fire & Security products were down low single digit and the field businesses were down about 10%.

Transicold orders were up 30%, and Commercial Refrigeration orders in Europe were up 11%.

With solid results in the first quarter and anticipated organic improvement, we continue to expect profit growth of $150 million to $200 million on mid-single digit organic sales growth at CCS.

Turning to Aerospace on slide 6, at Pratt & Whitney, sales were up 11% in the first quarter, driven by the consolidation of IAE and the transfer of the Aeropower business.

Organic sales were down 2% year over year, as declines in commercial aftermarket and military businesses were partially offset by higher commercial engine OEM and power systems sales.

Large commercial spares sales were down 19% organically over last year's first quarter, which was the strongest of 2012.

On a reported basis, large commercial spares were up 23%, including consolidated IAE sales.

Operating profit in the quarter was down 3%.

The impact from lower organic volume and unfavorable mix, along with higher pension costs, was partially offset by the benefits from the IAE consolidation, lower E&D and restructuring savings.

The quarter also benefited from a partnership settlement and contract close outs, which more than offset the absence of last year's contract closeout benefit.

For the full year, we continue to expect Pratt & Whitney's operating profit to be up $100 million to $150 million on mid to high single-digit sales growth.

UTC Aerospace Systems delivered a solid quarter, with operating profit of $509 million on sales of $3.3 billion.

As Greg mentioned, Goodrich has gotten off to a better than expected start and contributed $0.18 to earnings per share in the quarter.

On a pro forma year over year basis for UTC Aerospace Systems, sales were up low single digit, with commercial OEM up high single digit, partially offset by weakness in military aftermarket.

Commercial aftermarket sales were up low single digit.

Orders for commercial spares grew 2% on a pro forma year over year basis and commercial spares book-to-bill exceeded one for the second straight quarter.

Compared with the fourth quarter, which was the first full quarter with Goodrich, Aerospace Systems sales were up 3% and operating profit was up 50%.

Operating profit growth was driven by about $90 million of purchase accounting-related adjustments, conversion on higher OEM, and commercial aftermarket sales volumes, as well as lower E&D.

With a solid start to the year, we remain confident in full-year guidance, with sales of $13.5 billion to $14 billion and operating profit of $2.1 billion.

Turning to Sikorsky on slide 8, sales declined 7%, driven by lower military aircraft and aftermarket volumes, partially offset by higher commercial aircraft deliveries.

During the quarter, Sikorsky shipped a total of 40 aircraft, including 30 military and 10 commercial.

Operating profit declined 32%, as a result of the lower overall sales volumes, headwind from the multi-year eight margin reset and higher pension costs.

During the quarter, Sikorsky and Boeing signed a strategic teaming agreement to support the US Army's joint multi-role future vertical lift requirements.

The joint effort includes a proposal to build a demonstrator aircraft based on Sikorsky's X2 technology.

For the full year, we continue to expect profit to be down $100 million to $150 million on low single digit sales growth.

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

Okay.

Thanks, Jay.

We're on slide 9 now.

So good execution at the business units, as we look to further enter our recovery as the year progresses.

The businesses, as we've said, are focused on integration and execution as we wrap up the final pieces of the portfolio transformation.

In the first quarter, we closed on the sale of the two regulatory mandated divestitures from Goodrich, along with our fuel cells business.

We expect the last two large divestitures, that's Pratt & Whitney's Power System and Rocketdyne businesses, to close by the middle of the year, and CCS should have their portfolio transformation essentially complete by the end of this year.

We also had several notable accomplishments in the first quarter that will drive organic growth well into the future.

On our first GTF engine, the Bombardier C series, we achieved flight certification, while the first A320 NEO engine completed ground testing and will begin flight testing here in the second quarter.

We also had significant wins across the Propulsion and Aerospace Systems Group this quarter, most notably at Embraer.

With the selection of the GTF to power Embraer's second generation E-Jet, Pratt & Whitney is well-positioned on the next generation regional jets, a key growth market over the next 20 years.

We also won a new position for wheels and brakes at Embraer.

The combined wins across the Embraer regional jets show the value we bring to our customers and are early examples of the benefit of the Goodrich acquisition.

As Jay mentioned, Sikorsky and Boeing announced a partnership to submit a joint proposal for the Army's joint multi-role technology demonstrator, and that's going to be based on Sikorsky's X2 technology.

Sikorsky also took orders for 15 commercial helicopters in the quarter.

On the CMH program, we continue to have discussions with our customers, but there's really nothing new to report at this time.

We remain committed to the program and are ready to begin pilot training, and we are going to maintain our place holder, eight aircraft deliveries for 2013.

In the commercial businesses, we continued to win orders in key emerging markets.

Otis's 27% order growth in China included an order for 151 elevators in a high-end luxury residential complex near Shanghai, and CCS was awarded a contract to provide two data centers in China with HVAC, fire suppression, and chiller control systems.

So just as you heard from the Presidents in March, each of our businesses is well-positioned in our core markets, and continued innovation will allow us to drive long-term organic growth.

Okay, taking a look at the rest of 2013.

No real changes from what we told you last month.

We remain confident in our guidance range of $5.85 to $6.15, despite the potential $0.10 impact from sequestration.

The order rates in our commercial businesses are good leading indicators for a resumption of organic growth, and we'll keep a close eye on commercial spares as well as the European market.

We'll also see some easier compares over the course of the year.

You'll recall that last year Pratt & Whitney's organic spare sales were down only 4% in the first quarter versus 19% decline over the rest of the year, and Transicold entered 2012 with a very strong backlog in the container business which they burned down in last year's first quarter, and this was followed by double-digit declines in each of the next three quarters.

So you should see CCS revert to organic growth here in Q2.

And we're going to continue to invest in restructuring.

With visibility of some additional gains and good payback restructuring projects across the business, we now expect to spend about $350 million on restructuring this year, all of which will be offset by one-time gains.

We spent $52 million on restructuring in the first quarter, and we would expect that to be level loaded, with about $100 million of restructuring in each of the next three quarters.

The remaining gains, however, should come largely in the second quarter.

So on top of the $185 million of gains you saw in Q1, we'll see about $150 million to $160 million of gains here in the second quarter.

Also, strong cash flow remains a hallmark of UTC, and we continue to expect free cash flow will equal or exceed net income for the year.

In the first quarter, we paid down almost $400 million of debt and we bought back $335 million of shares, while maintaining a cash balance of $4.8 billion.

We will continue to delever, and we now expect to pay down about $2 billion of debt this year, $1 billion that we will target for here in the second quarter and the other $1 billion which is due in the fourth quarter.

We're also going to maintain, for the time being, our place holder of $1 billion each for share repurchase and M&A.

So, no surprises.

The UTC portfolio is well-positioned to take advantage of the megatrends of urbanization and commercial aerospace growth over the next decade.

As always, we are going to remain focused on integration and execution in 2013 and on our strategy to deliver long-term sustainable earnings growth.

With that, let me stop.

We'll open up the call for questions.

Samya?

Thank you.

(Operator Instructions)

Ron Epstein, Bank of America Merrill Lynch.

Quick question on the PW4000.

So they were down organically a bunch in the quarter.

Why would they come back?

Aren't the 6, 7's getting parked?

What do you expect to see to have that actually come back?

What?

We know you were going to ask that question, Ron.

Yes, look, it's a complicated story, but let me try and take you through some of the pieces as we see it today.

Right now, there's about 2,500 PW4000 engines in service.

And over the last five years, that's come down in total about 3%.

And we expect that that's going to continue to come down 1% or 2% a year for the next five years.

So you're naturally going to see some attrition in the portfolio.

But at the same time, the average age of these engines is only 14 years.

We fully expect these things to have a normal life cycle of 25 to 30 years.

So at some point, they will come back.

There's some excess material out there of engines, obviously, from some of the retirements, but just not significant enough.

So they will come back for LLCs.

We will start to see a more normal run rate here as we go throughout the year.

So, pretty confident.

The other thing, just to put it in perspective.

So there's 2,500 4000's out there.

Today, there are 5,000 V2500's out there.

We're going to sell another 3,000 engines over the next five years or so.

So the V's are really going to be the story going forward, and we saw that in the quarter.

If you dissect that 28% down, what you see is that the 4000's were down about -- just under 40%, I think they were down about 39%.

But the V's, on the other hand, were up about 34% on the legacy piece.

So again, we've made this bet on narrow body.

It's going to pay off.

And again, I think it's all manageable in terms of what we're seeing on the 4000's over the course of the year.

Okay.

And maybe if I can, just a follow on to that same question.

So are you seeing relatively young engines with not that many hours on them, relatively speaking, coming off airplanes that are getting retired competing with your own spares?

Maybe that's kind of part of the issue?

Not really.

In fact, what we're seeing -- again, these engines have been out there, I think there's some engines that are 25 years old in the PW, in fact, more than that, probably almost 30 years old from the early 4000's.

So some of the older engines are coming off, which is providing serviceable material.

We also see the airlines continuing to try and take spare engines and use them and not induct them into the overhaul shops.

So inductions, actually, on the 4000 are lighter than what we had expected, just because the airlines are trying to do what they can to conserve cash.

So oil prices at $90 a barrel.

I think airline traffic still very high, capacity very high.

We really think that we're going to see a return to normal on the 4000's.

There's just not enough engines out there in the fleet that have been retired to provide enough spares to support the fleet that's out there.

Okay.

Great.

Thank you.

Sam Pearlstein, Wells Fargo.

First thing is, can you just quantify the partnership settlement and contract close outs in Pratt and how much that helped?

Yes.

So last year, there was, again, some contract close outs that give us a benefit of about $0.02.

This year, we've got contract close outs and a couple of other things which benefit us between $0.04 and $0.05, let's say.

So kind of a net $0.03 year-over-year benefit at Pratt.

Okay.

And then talk about lower E&D at Pratt and also UT Aerospace Systems E&D is coming down, and so I'm trying to understand how come R&D is up year-over-year, from $5.44 to $6.10?

Where is that additional spending going?

Ron, that's just a function of Goodrich -- sorry, Sam -- that's just a function of the Goodrich acquisition year-over-year, just consolidating the results versus last year.

They weren't in the results in the first quarter.

Right.

That was about $100 million of that.

So Pratt did come down, I think, $34 million.

They're well on track to come down to $75 million to $100 million.

The C series, as we said, that's certified.

The NEO is going to flight test here shortly.

So you will see a real ramp down in E&D in Pratt as we move through the year.

Okay.

Thank you.

Joe Nadol, JPMorgan.

First question is just back on the Pratt spares.

Heard everything you said.

Could you quantify?

You're confident this is going to come back.

Are you able to quantify what you believe is the new normal level for this, and where are we relative to that?

So how much under the long run level of PW4000 do you think we're running?

Well, obviously, you're down 40% this year in the first quarter, 39%.

That will get better.

Again, we had a very tough compare last year and some strong sales of the 4000's of some LLCs that drove up last year's first quarter.

Again, I think that rate that we saw, down 15% last year, we think the normalized rate that we saw in the third quarter and the fourth quarter of last year is the same rate that we saw this year in the first quarter, and that rate should pick up.

Again, you still have the airlines out deferring maintenance and just not doing inductions into the shops.

So at some point, these are going to come back.

And do you think you're still on track for overall 5% organic growth in Pratt spares?

Yes, but I think the mix is going to be different.

The 2000's have held up pretty well.

We saw good orders there.

The V's have been better than what we expected on the legacy side, and the 4000's a little weaker.

But I still think, with the price increase and everything else that we see out there, we can still get to that 5%.

We might be a little light to that if the 4000's don't come back at all, but we do see strength in the rest of the portfolio there.

Okay.

And then just one more, Greg.

Overall organic growth, you're still saying 3% to 5%.

You were minus 2% in Q1.

What do you think the profile will look like over the rest of the year?

And did you expect Q1 to be minus 2%, or were you thinking more like flat before?

No.

I think as we were looking at the year back in December, I think we saw a flattish first quarter.

It came in a little bit light there.

Again, I think CCS, we knew the issues that we were going to see there because of the big compare issue on container.

We knew Sikorsky was going to be down.

We didn't expect spares at Pratt to be down as much as they were in the quarter, so that's a little bit of it.

But again, I think it's generally you're going to see a gradual recovery.

We'll see organic growth in the second quarter and it will pick up through the course of the year.

And again, what I'm looking at is order intake, especially at the commercial businesses.

We saw very strong growth in China, but we also saw growth in Europe at Otis, up 21%, and North America's pretty good.

So again, there is momentum with the backlog, it's growing, and we should see that play out in higher sales as we move through the year.

Joe, to that point, we did see sequential growth in the backlogs at both CCS and Otis New Equipment.

So that gives us some confidence as we go throughout the year, besides just the compares getting easier.

Thanks.

Howard Rubel, Jefferies.

For a moment, just to follow a little bit more on Joe's question, with the diversified business the way you have, you always have some puts and takes.

Where else did you see some things, outside of the 4000, that surprised you on the downside?

And where were maybe some strengths that you hadn't planned for?

I think the one thing that I'll say -- it's hard to say it surprised us.

We knew Europe was going to be weak.

The order rates at CCS on the commercial HVAC side were probably a little weaker, and we didn't see any real traction on the service side of the business from the F&S business in Europe, either.

But I wouldn't say that's a real surprise.

Maybe we had hoped, I think, Geraud had talked about 1% to 3% growth in Europe this year, as markets -- again, I think we did see good growth in Truck Trailer in Europe.

We also saw good growth in Truck trailer in North America.

So there are pockets of goodness in Europe.

It's not as dire as people might think.

We've got good balance across the portfolio.

So even as service at CCS is down, I think with Truck Trailer up, there's nothing really out there that I would say is a big concern as we move through the year.

And then, you've outlined, to some degree, what you think the gains and also where the restructuring is going to be.

Could you provide a little more color on that or a little granularity?

Sure.

The restructuring actions?

Yes, please.

So again, we have identified about -- in fact, we've probably more than $350 million of potential actions.

And you're going to see that, as you would expect, both at CCS, at Otis.

You're going to see some more at Pratt.

The Aerospace Systems group, the Goodrich integration is going well, but there's about $100 million of restructuring we'll do there.

And even Sikorsky, as they see volumes down in military, you'll see some restructuring.

For the most part, the programs that we're looking at today have pay backs between one and two years.

So as I take up that restructuring to $350 million, it actually gives us a little bit of cushion this year, as well as some runway next year.

So again, I think there will be the typical actions.

We're looking to move to low-cost sourcing.

We're looking to make sure that we right size the business.

We know cuts are coming in the military side.

We've seen that already in the aftermarket.

So we're going to right size the business for what we see as the market demand, especially on the military aerospace side.

And then your gains you said, can you qualify them?

The gains, I think we had $185 million in the first quarter.

The biggest piece of that -- it's funny to call it a gain, but that was from the tax extenders package.

That was the R&D tax credit for 2012 that got passed in 2013.

Not sure that's great policy to incentivize us to spend in 2012 and 2013.

But that's another story.

(Laughter) The other piece of that was a portfolio transformation.

We sold the Hong Kong guarding business at CCS.

Those were the two gains.

Coming here in the second quarter, we see gains on the divestitures that we've got out there, as well as a little bit of additional good news on taxes.

Thank you, Greg.

Thanks, Howard.

I'll get off my soapbox.

Carter Copeland, Barclays.

Just a couple quick ones.

One, I wondered if you might expand a bit on Europe and maybe quantify how much Europe was down in the quarter in the commercial businesses, and what you saw in terms of the progression of orders over the quarter, March relative to February relative to January.

There seems to be a pretty significant slowdown there, so I wondered if you might be able to provide some color on that.

Sales -- I'll start with sales, Carter, and I'll get into orders.

Sales at Otis were up low single digit.

Sales at CCS were down high single digit.

And it was pretty much across-the-board.

You had declines in Commercial HVAC.

You had high-single digit declines in Commercial Refrigeration.

And you had declines in the Fire & Security businesses.

On the orders, as we said, Otis was up 20% in the quarter and CCS was a little bit mixed, as Greg said, or as I said before.

Commercial Refrigeration was up 11%.

Transport Refrigeration in Europe was up over 20%.

HVAC was down mid-teens, and F&S was also down, I think, in around mid single digit.

But again, none of this was a surprise.

We have built this in.

And we've had Europe as pretty much a headwind going for the rest of the year, and it's embedded already in the guidance.

And I would also say, there was no big trend change during the quarter where all of a sudden things just want to hell in a hand basket.

It was simply a continuation of what we saw throughout all of last year, southern Europe remaining weaker than northern Europe and emerging Europe, especially Russia, being a lot better and really the biggest growth opportunity.

But we saw growth in the UK.

We saw growth in Germany.

It was not just across-the-board bad news.

That's great color.

Thanks.

And just a quick follow-up.

On the Goodrich accretion, you called out $0.18 in the quarter.

Obviously, that tracks to a bigger accretion number than you were outlining for the year, at $0.60.

You also called out a $90 million in purchase accounting adjustments.

Did that impact Q1 in a particular way that made that larger, or how should we be thinking about Goodrich accretion over the course of the year relative to what your previous guidance was?

I think Goodrich did do a little bit better than what we had expected.

And not surprising, trying to under promise and over deliver here on the biggest acquisition we've ever done.

But Goodrich has been nothing but good news for us.

And again, I contribute that really to the Aerospace Systems team down there.

They're doing a great job integrating the business.

They've got great people.

And again, taking care of the problems as they find them and not having any big surprises.

So again, a little bit better in first quarter and I would hope that that trend would continue.

Again, as I'm thinking about this as the balance works theme here, again, a little bit of upside on Aerospace Systems this year could offset a little bit of weakness on the Commercial spares.

So in total, Alain's business, the Propulsion and Aerospace Systems, feel pretty good about the guidance we've got.

That's great.

Thanks, guys.

Jeff Sprague, Vertical Research.

Just a couple other follow-ups.

Just back to Otis, the strength in both Europe and China.

I guess in both cases, do you think there's some share gain going on there?

Are the markets really that strong?

And I guess in China, in particular, if you could provide some color on what's going on in the pricing environment?

Yes.

So in China, I think the market is very strong.

I don't really think that there's been actually a big gain in share, because as we saw, Kone reported this morning, they've also had very good results in China.

And the market in China is very strong.

I think property transactions in the first quarter were up 60% in China.

So again, the market's a lot better than what we had anticipated.

We saw that starting in the fourth quarter.

We're also getting traction, I think, in China with the new products.

We've got the new low-cost Gen II for social housing.

We've tailored the products to that market.

So again, we're getting good traction.

But I wouldn't say we're gaining share necessarily, but it certainly feels pretty good when you have orders up 27%.

As for Europe, again, it was a mixed bag.

Again, strength in the UK, strength in Russia.

I think obviously, we're probably gaining share there.

Also strength in the Middle East.

But southern Europe continues to be kind of a drag, and that's really more on the service side than it is new equipment.

There really isn't much of a new equipment market in southern Europe today.

And I just didn't totally understand what Jay said when he was talking about container orders.

I wasn't sure if he said off or up.

Were container orders up in the first quarter?

Container orders were up over 40% in the first quarter.

So you remember, last year in the first quarter, we came in with this big backlog of containers.

And so sales at CCS were very strong in the first quarter, but the order rates started to decline and then we didn't really see any orders in container until -- that must have been about September.

And then it started to pick up.

And that trend that we saw in the fourth quarter just accelerated here in first quarter.

So in containers, a short cycle business, but the leasing companies are buying and it looks like they're going to have a pretty good year.

I think Geraud had talked about up 15% for that market for the year.

And just one last one, and I'll pass it.

If you could speak to resi HVAC price costs and what's going on there.

Are you feeling cost relief, given what's gone on with raw mats, or are you getting kind of an associated drag down on selling prices as the raw mats come down?

No.

In fact I think we feel pretty good about cost price.

There was a price increase, not a secret, effective January 1. So far, so good there.

Some of the commodity benefits that we see, again, it's short cycle.

It's been up and it's down.

It's been as high about $3.90 last year.

We're pretty well locked in on copper for the year, a little bit above what the current price is.

But again, copper is a commodity that continues to come down in importance at CCS as we move, especially on the commercial side, some more of the aluminum plate fin heat exchangers.

So again, I think generally we feel pretty good.

It's never an easy pricing environment.

But I would tell you that CCS is making some good strides.

We've got great distribution here in the US and good product innovation, and that's helping a lot.

Terrific.

Thanks a lot.

Cai von Rumohr, Cowen and Company.

So your release refers to defense impact at Sikorsky in the first quarter.

Could you explain that and maybe give us some color on what you're seeing in terms of sequester impact on the total business?

Let me have Jay take you through Sikorsky, and I'll take a shot at the sequester question.

Cai, Sikorsky had lower deliveries on military aircraft.

The aftermarket was down, the military aftermarket was down, a little bit over 20%.

So that's really where you saw the big impact.

The deliveries we knew about, but that was partially offset by some strong growth in commercial aircraft deliveries.

And I think just this quarter, we had 40 deliveries.

We're expecting north of 240 deliveries for the full year, so you would expect that volume to increase as we go throughout the year.

So partly, it was just timing of deliveries, particularly in the aftermarket, it was due to cuts.

As far as the sequester impact, I'd love to tell you that we can quantify it any better than what we did 30 days ago; but unfortunately, the customers aren't sending us invoices with a 10% reduction for sequestration.

So we're hearing about it.

We're starting to see a little bit of it in terms of the order intake.

I think Jay talked about the aftermarket was down 10% across Military Aerospace in the quarter, and that's really just a reflection, again, reduced op tempo in Afghanistan, but also reduced flying hours here.

We see some of the fighter wings being stood down for the remainder of the year, canceling some of the exhibitions.

And again, all of this is going to have an impact on us.

It's just going to take a while for it to play out.

So we continue to say it's probably about a $0.10 impact.

But again, it's hard to see it beyond that.

I think the bigger concern is on these furloughs at the FAA, if they start driving higher costs on the commercial airlines, what that could do to spares.

But again, I think that should be a relatively small impact for us.

You mentioned the military aftermarket down 10% and seeing some cut back in flying hours.

I think in December, you were still asserting, at least in March, still asserting military aftermarket would be up at Pratt.

It looks like it was down.

Where do you now expect military aftermarket to be for the year at Pratt?

At Pratt, we were expecting it to be flat to slightly up, Cai.

Not much growth there.

In the quarter, we actually saw growth in military aftermarket at Pratt, really on the back of F100, F119, and F135 spares.

The F100 and F119 was really more of a reflection of the strong order and sales in 2012 built a backlog that delivered here in the first quarter.

The F135 was more a function of provisioning.

We have over 80 engines have been delivered program-to-date, and so just a matter of provisioning starting to accelerate.

And so do you expect the military aftermarket still to be flat to up for the year at Pratt?

At Pratt, we do.

I think when we talk about that 10%, what you really saw was at Sikorsky and at the Aerospace Systems group, you had military aftermarket down about 20%.

So good news at Pratt in the quarter, but offset by bad news at Sikorsky and at UTAS.

I think again, the Sikorsky number is a little bit worse than what we had expected.

On the OEM side, we knew exactly where we were going to be, from a military deliveries side.

But those spares have been a little worse than what we expected at Sikorsky.

So we need to keep an eye on that as we move through the year.

Okay.

And you mentioned you still have the placeholder of eight CMH deliveries.

Could you give us an update on your progress or lack thereof with the Canadians.

And if you don't have -- you can't say when you're going to have a settlement, I assume the eight's going to be a zero until you have a settlement, correct?

Look, we're expecting that we're going to ship those eight in the back half of the year.

But I wouldn't say we're not making progress.

We continue to have good discussions, good discussions with the customer in Canada.

Again, this is a very complicated procurement program in Canada between Public Works and the Department of Defense.

We're working with both sides of the Canadian government.

We're trying to get to a win-win solution here, and it's just taking longer than what anybody wants it to.

Obviously, we're ready to begin pilot training.

There's four aircrafts up at Shearwater.

I think number 26 of the 28 is on the production line down in West Palm Beach.

So we're building them.

We're still not done with some of the mission software, but we are making very good progress with that.

So again, we'll get past this.

I can't tell you whether it's next week or next month or the month after, but I still think we have a pathway to deliver additional helicopters.

And the key for us is to get the pilots' training to begin, and we're pretty close to that.

Great.

Thank you.

David Strauss, UBS.

Greg, just following up on Cai's question on CMH.

The charge that you guys took in the fourth quarter, does that reflect delivering the interim configuration aircraft, or does it reflect not delivering the interim configuration aircraft and waiting until final configuration?

So the charge that we took, the $157 million, I think it was, in the fourth quarter, that assumed that we weren't going to deliver any aircraft until 2015, when all of the mission systems software would be done.

So it didn't anticipate an interim solution, even though we think ultimately that's the best for both ourselves as well as for the customer, to start delivering these interim aircraft, get them flying.

But the charge was a more conservative view of the fact that we weren't going to be able to deliver anything until 2015.

Okay.

So if we get to some sort of agreement that reflects a move towards taking the Canadians taking the interim configuration aircraft, potentially there could be some good news?

But I wouldn't -- yes.

There might be a little bit of good news.

You're right.

Again, I wouldn't think it's going to be a big number.

Okay.

And then China, I know you talked about the strength in China overall in Q1, but can you talk about what you saw as we went through the quarter?

It looks like January and February started off pretty strong, but then as we've gotten into March and April, things might have fallen off a little bit.

And I think your guidance for China overall reflects about 7.5% to 8% GDP growth this year.

You still feel that's the right place to be?

Yes, we do.

In fact, it was a weird compare, because the Chinese New Year was in January last year, February this year.

So January started off gang busters, and then February was slow, and then March was even better than I think what anybody had expected.

Again, the units were up significantly.

We've got good order intake.

And even in April, I think we are continuing to see a solid order intake.

We just did the operating review last week with Otis, and they were very confident in the China story for the year.

Okay.

Thanks.

Myles Walton, Deutsche Bank.

I just wanted to go back to the Aerosystems margins for a second.

The implied guidance, I think, is around 15.6% or even slightly below.

So I'm curious, usually -- or historically, both Goodrich legacy and Hamilton legacy got better as the year progressed on the margin side.

And I guess that $90 million purchase accounting, is that something that hit here in the first quarter?

Or to your earlier point, Greg, how much conservatism is baked into Aerospace Systems?

Myles, the $90 million is simply a charge that was taken in the fourth quarter related to the inventory step up.

It doesn't repeat, because the inventory step up got fully liquidated in the fourth quarter.

So what you're dealing here now is recurring earnings, which is consistent with our guidance of $2.1 billion.

Based on what we forecasted, we expect it to be fairly flat level loaded, as far as operating margins throughout the year.

But as Greg said, it possibly could be some upside.

It's a little early to make that call.

As you think about it, we had about just under $50 million of net synergy benefit in the first quarter, and we're talking about $200 million for the year.

Obviously, as those synergy benefits continue to pick up, that's going to be accretive to margins.

And again, I think there's probably a little bit of good news.

But it's just April, so we're going to wait another quarter here before we decide that it's actually what the upside might be.

Okay.

It just seems like the aftermarket would get better.

Historically, those margins expand through the course of the year.

So I'm trying to get at if there's anything in first quarter, but it sounds like there wasn't.

I don't disagree with your thesis, though, Myles.

Okay.

And the other question, clean up, was on discontinued operations cash.

It looks like it was a big use in the quarter, and I don't know what the cause of that was.

Unfortunately, the federal government requires us to pay taxes when we make a gain.

So the gain on the sale of the industrials which closed in December 15, we paid the taxes here in the first quarter.

So that was the big cash outflow.

Okay.

Makes sense.

Thanks.

George Shapiro, Shapiro Research.

Greg, Hamilton Sundstrand had no organic growth in the quarter.

Is that a combination of OE growth aftermarket growth offset by military being down?

Yes.

I think if you look -- the commercial aftermarket was essentially flat at the legacy Hamilton business Military, as I said, was down significantly, and then commercial OE was up, I think 8% or 9% in the quarter.

Yes.

Okay.

And then at Otis, the margin this quarter was a little bit less than I thought.

Is that still a mix issue, where OE was a little bit worse than service?

And does that change going forward, or are we still seeing a lot of pressure from the aftermarket renegotiations?

So again, margins were down.

And this actually should be the low point for the year, in terms of Otis margins.

But a big chunk of this was as we picked up about a point of mix in new equipment versus service.

So that's actually detrimental.

As you know, service margins are obviously better than the OE side.

So that was a piece of it.

Again pricing, tough around the world, tough in China, but we're holding the margins, I think, and we should continue to see benefits.

The other thing to keep in mind at Otis, we're in the process of some of this plant transformation.

We're closing our Nogales plant and opening up the facility in Florence, South Carolina.

We've got the new Chongqing plant.

And there's some expenses in the first half of the year, which are actually holding margins down a little bit, that should get better as we complete those transfers.

Okay.

Thanks very much.

Nigel Coe, Morgan Stanley.

I hate to ask the obvious question, but where's the contingency now at the midpoint, given the sequester, et cetera?

It actually -- remember back in March, we said we were comfortable with analyst consensus, which at the time was $6.10, with about a $0.10 impact from sequestration.

So again, there was no contingency at $6.10.

Again, if you go back down to the midpoint, to $6.00, obviously, we've got a little bit of good news.

And again, as we close out the quarter, no surprises here.

So really there's some puts and takes.

Maybe UTAS is a little better, Pratt a little worse, in terms of spares.

But I think overall, feel pretty good.

We've got benefit from the euro.

Again, we've seen it at $1.28.

It's been $1.32, $1.33.

So right now I would just tell you, at around $6.10 there is no contingency.

But that includes an impact from sequestration and we'll expect we'll see over the course of the year.

Okay.

So no change.

That's great.

And then switching to Otis, obviously great backlog performance this quarter, but how does margin look on that backlog?

Actually, margin doesn't look bad.

Again, pricing is tough in China, so the margins there are going to be a little bit under pressure.

But again, as we fill up the factories with all of these orders going through, that's going to help overall margins there.

So even though new equipment, the sold margins are a little light, I think we can pick that up.

And then in North America, we're actually seeing much stronger margins in the new equipment.

Pricing has stabilized.

We're not seeing, again, all of the cutthroat competition that we had.

And again, the market's picking up.

So that's good news on new equipment margins.

Otis continues to take out cost.

They've done a great job of taking out cost of the elevator unit costs, and Pedro showed that in the March meeting and that's going to continue.

So feel confident that margins will remain and will leverage the volume going forward.

Okay.

And then going back to Jeff's question on the CCS copper prices, obviously down a fair bit.

Similar pricing holds on the equipment, why wouldn't the low copper price benefit the second half of the year as you go through these rolling hedges?

Mostly because we've got the year locked in at a price a little bit above what the current market is.

So the market is, I think, around $3.20 today, because of concerns over China.

We can see that $3.20 move to $3.60 or $3.70, I think, pretty quickly.

But we're locked in for the year.

So the CCS guidance assumes locked in copper, no real benefit from further commodity cost reductions.

Again, that benefit, you'll see it next year as we start to lock in buys for next year at today's lower prices.

I see.

And just one quick one.

Obviously, Container was down a fair bit this quarter, but orders suggest it's going to come back strongly in 2Q and beyond.

How much mix headwind did you have from Container this quarter?

In terms of --

-- on CCS margins.

I don't know that I've got that number off the top of my head.

Yes.

We don't -- the one thing I'll say about CCS is their operating margins across-the-board are fairly even.

So they've got much more balanced.

And I'm not sure that it had a huge impact, but we'll look at it again, Nigel, and get back to you on that.

Okay.

That would be great.

Thank you.

Julian Mitchell, Credit Suisse.

My first question is within CCS, you've had a bunch of companies, Ingersoll, Schneider and so on, complaining about how weak foreign security is as an end market right now.

Could you just remind us how much of CCS post all these divestments is foreign security and what your expectations are for the year in that business?

Just one second, Julian.

I'll get at that for you.

So I think -- let's see here -- as we think about Fire & Security, again, the products piece of the Fire & Security business has actually done quite well.

We see pretty good strength here in North America.

It's been a little bit weaker in Europe.

Where we're really seen the headwind has been on the service side in Europe, and that's been really a result of what's going on economically in Europe.

Some of the service businesses, the margins have not been very good.

We're trying to be a little bit more selective there.

But in China, for instance, I think Security was up very strong.

We had a good traction with the GST business.

I don't know, Jay, do you have the exact --

Rough order of magnitude here, Julian, out of a $17 billion portfolio, about $6 billion is Fire & Security.

Got it.

And you're expecting that to be kind of flattish or up in line with CCS overall for the year?

I think on the product side, you would expect it to be up in line, and then on the service side, a little bit light to that overall 5% growth.

It varies regionally.

Europe, the expectations, again, were flattish to maybe up slightly.

Sure.

Thanks.

And my follow-up would be again, circling back to the Otis margins, as you said, Q1 you had -- you didn't have the operational leverage showing up, because of the mix of OE versus service.

It's likely that European service stays weak and the orders suggest that OE growth, in terms of revenues, should accelerate.

So you're probably dealing with that mix hit for the balance of the year.

Are you therefore expecting an offset to come from a lot more restructuring savings coming through, or is it just the falling out of those costs around the plants transformation?

It's obviously a combination of both.

Otis was pretty aggressive with restructuring last year.

They've got more restructuring to do this year, which will be accretive to margins, and then you've got the factory transformations which get done really by mid-year.

So that's all going to help, I think, on the margin mix side.

Okay.

But Q2, you already see the margins going up sequentially and maybe year-on-year?

Yes.

Absolutely.

Okay.

Thank you.

All right, Julian.

Thank you much.

Well, thank you, everyone for listening today.

We look forward to seeing you on the road this quarter, and the Investor Relations team is standing by to take your questions.

So thanks very much and have a wonderful day.

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude today's program.

You may all disconnect.

Everyone, have a great day.