雷神技術公司 (RTX) 2013 Q2 法說會逐字稿

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

On the call today are Greg Hayes, Senior Vice President and Chief Financial Officer; and 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 an 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. Hayes.

Okay, thanks Pablo.

Good morning, everyone.

As you saw in the press release this morning, UTC reported second-quarter earnings per share of $1.70, that's up 5% versus 2012 with better-than-expected segment operating profit growth and higher net gains.

Segment op profit grew by 15% led by strong performance at Climate Controls and Security, and also the benefit of the Goodrich and IAE acquisitions.

Gains in the quarter exceeded restructuring by $0.05 as compared to $0.04 last year.

And taxes were a $0.13 headwind two earnings growth.

You recall that last year we had about a 23% effective tax rate in the second quarter as compared to about 28% this quarter.

So is it was a solid first half of year, even in and uneven economic environment.

We've accelerated restructuring to position the business though for further grow.

Additional restructuring savings, combined with good orders momentum easier compares in the back half, give us confidence to increase the bottom end of the EPS guidance range.

So as you saw in the press release, we now expect earnings per share of $6 to $6.15, that's growth of 12% to 15%, an increase from the prior guidance of $5.85 to $6.15.

We continue to expect double-digit earnings growth despite these uneven end markets.

In the US, the potential Fed tightening caused some volatility in the markets but we still believe the economy is recovering and we are seeing strength in the leading sectors.

Auto sales were up 8% in the first half and are growing at the fastest rate five years, housing starts are 24% higher year-to-date and in commercial construction the architectural building index has shown expansion in eight of the last nine months.

So good progress in the US.

Europe, of course, is a little different story with unemployment now over 12% and PMI, or purchasing managers index, consistently below 50.

Now we didn't plan for much growth in 2013 but the fact of the matter is we are still seeing a slight contraction in sales in Europe.

Year-to-date sales are down about 3% across our commercial businesses.

On the other hand, we do see continued strength in China.

And we're all cautiously watching the economic indicators coming out of China.

We talk about some falling imports, exports, tightening of credit markets, lower GDP forecasts, but whether it is 7% to 7.5% GDP growth, still one of the fastest-growing markets.

Fixed investments has continued to grow and that is driving very strong order growth at both Otis and CCS.

In aerospace, we continue to see to see strong growth in the commercial aviation industry, RPMs up 5.6% in the month of May, airlines are now projected to earn over $12.7 billion for the year.

And while we continue to see pressure in the military, particularly at Sikorsky, the overall aerospace industry remains very healthy.

Okay, let's talk about orders for a second.

We are on Slide 2 for those of you following along on the webcast.

We talked about economic uncertainty remains but as you can see on Slide 2, overall our orders position us well for growth in the second half of the year.

And just as a reminder, we talk to orders at constant currency as we normally do.

Otis as we mentioned, very strong quarter, 22% growth in new equipment orders and that was led by China with 35% growth.

That is 32% growth in China year to date for Otis, so very strong recovery.

Climate controls and security global equipment orders grew for the third straight quarter.

This reflects the strength in the US economy where residential HVAC orders were up 19%, but partially offset by Europe which was down about 4% across the CCS businesses.

Turning to aerospace, a very encouraging sign at Pratt & Whitney.

After five quarters of contraction, legacy Pratt & Whitney large commercial spare orders grew 15% organically.

And importantly, this included growth across all three major engine families, PW2000, PW4000, and V2500.

At aerospace systems we saw growth for the second straight quarter with orders up 4% on a pro forma basis.

Were still looking for more recovering in the back half but it is good to see growth at both Pratt and UTAS on the commercial spares side.

So in summary, despite the uneven end markets, strength in the US, emerging markets and commercial aerospace are going to offset the softness we are seeing in Europe and defense.

Our orders momentum still points towards a recovery in the back half but as I said in June, if year-to-date organic sales down slightly, we are now probably going to see organic revenue growth of about 3% for the full-year which is at the low-end of our prior range.

Total sales are now expected to be just around $64 billion for the year.

Turning back to Q2 results, on Slide 3, total sales and seg op profit increased 16% and 15% respectively, as driven of course by Goodrich and IAE acquisitions and the strong operating performance at CCS.

Organically sales were flat versus prior year following a 2% decline in the first-quarter.

CCS had another strong quarter, 7% operating profit growth and margins expanded 120 basis points as they continue to realize savings from the integration of carrier and FNS and capitalize on their operating leverage.

Overall, segment operating margins at UTC declined 20 basis points with the strength at CCS more than offset by headwinds from pension and the decline at the military business at Sikorsky.

Goodrich and IAE acquisitions continue to exceed expectations and contribute $0.20 of earnings in the quarter.

As I mentioned, earnings per share of $1.70 include $0.05 of gains in excess of restructuring.

$0.19 of the gains in the quarter came from the sale of the Pratt & Whitney Power Systems business and some small tax settlements, these are more than offset $190 million we invested in restructuring, including $93 million at Pratt & Whitney as we continue to reduce the cost base there.

Foreign currencies, small impact about $0.01 in the quarter.

And free cash flow, 101% of net income.

We repurchased an additional $335 million of stock and we expect to buy back a similar here early in the third quarter.

I'll stop there for a second and let Jay take you through the segment results and we will come back and talk about full-year.

Jay?

Thanks, Greg.

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

New equipment sales were up in all regions led by double-digit growth in China and Russia.

Operating profit was up 1% at constant currency.

Solid growth in China and other emerging markets was offset by continued weakness in developed Europe and transition costs associated with the factory transformation in North America.

New equipment order growth was strong, up 22% at constant currency with double-digit growth in Americas and Asia, led by a 35% improvement in China.

Orders in Europe were down mid single digits.

Given continued pressure in Europe and the significantly weaker yen, we now expect full-year profit growth at Otis of $75 million to $100 million versus the prior range of $100 million to $150 million.

We expect profit improvement to come in the second half based on conversion of the higher new equipment backlog, especially in China, continued savings from restructuring, and completion of the factory transformation in North America.

On Slide 5, climate, controls and security increased profits 7% in the quarter on 1% lower sales, resulting in another sharp increase in margins, up 120 basis points from prior year to 16.9%.

Organic sales were up 1% with mixed results across geographies.

Europe was down mid single digits and continued economic weakness in the region, while Americas was up low single digit driven by 13% growth in the residential HVAC business.

China was also up mid single-digit while Asia overall was flattish, driven by a decline in Australia.

Transicold was up 11%.

While the organic growth in the quarter was modest, this was the first quarter of growth in over year and we anticipate acceleration for the remainder of the year.

On profit, CCS had another solid quarter of earnings growth, driven by strong conversion on the higher organic sales, restructuring and productivity, including continued savings in the consolidation of Carrier and Fire and Security, and lower commodity costs.

Global commercial HVAC orders were flattish, with 10% growth in Asia, offsetting declines in North America and Europe.

Orders for global fire and security products were up mid single-digit, while the field businesses were down a similar amount.

Transicold orders were up 5% and commercial refrigeration orders in Europe were down 5%.

With solid results in the first half and anticipated organic improvement, we now expect profit growth to be in the range of $175 million to $200 million, up from $150 million to $200 million on low single digit organic sales growth at CCS.

Turning to aerospace on Slide 6, at Pratt & Whitney, sales and profit increased 5% in the second quarter.

Higher sales were driven by the consolidation of IAE and transfer of the aero power business.

Organically, sales were down 6% year over year, due to lower military engine shipments, partially offset by higher large commercial engine OEM sales.

Large commercial spares sales were up 2% organically over last year's second quarter.

On a pro forma basis, including consolidated IAE sales in both quarters, large commercial spares sales were up 5%.

Profit growth was driven by the benefits from the IAE consolidation, restructuring savings, and lower E&D, partially offset by lower organic sales and higher pension costs.

In addition, the absence of favorable one-time items in last year's second quarter offset the benefit of a commercial contract close out this quarter.

As Greg mentioned, Pratt & Whitney large commercial spares orders were up 15% organically.

Based on year-to-date sales, however, we now expect large commercial spares to be flattish for the year organically from up mid single digits.

Pratt & Whitney's proactive cost reduction and restructuring measures give us confidence in its full-year profit growth outlook of $100 million to $150 million on mid-single digit sales growth.

UTC aerospace systems delivered another solid quarter with operating profit of $532 million on sales of $3.3 billion.

On a pro forma year over year basis, sales were up mid single-digit with commercial OEM up double digits, and commercial after market up mid single digits, partially offset by declines in military OEM and military after market of mid single digit and low single-digit respectively.

Orders for commercial spares grew 4% on a pro forma year over year basis.

Compared with the first quarter, profit was up 4% on 2% higher sales, driven by solid conversion on the sales growth and continued synergies capture.

With the first half of the year complete, we now expect full-year sales to be around $13.5 billion, the low-end of our previous guidance range of $13.5 billion to $14 billion.

We continue to expect operating profit of around $2.1 billion in spite of lower sales due to continued cost containment and better-than-expected synergy traction.

Turning to Sikorsky on Slide 8, operating profit decreased 24% on 3% lower sales.

During the quarter, Sikorsky shipped a total of 62 aircraft, including 47 based on military platforms and 15 commercial.

The sales decrease was driven by lower military after market volumes, as well as unfavorable military aircraft mix, partially offset by higher commercial volumes.

The profit decline was driven by lower sales, as well as headwinds from the multi-year eight margin reset and higher pension and export compliance cost.

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

We expect profit improvement in the second half from the benefits of higher aircraft volumes and restructuring savings.

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

Okay, thanks, Jay.

So I'm happy to report that with the completion of the Rocketdyne divestiture in June, we are now done with the major portfolio transformation.

The entire organization took on huge task over the last two years, complete two significant acquisitions, integrate new organizations, divest over $4 billion worth of businesses and pay down $7 billion of debt.

I will tell you, the team executed flawlessly.

We now have a portfolio that is well positioned for long-term growth and we've capitalized on the big urbanization and commercial aerospace ramp.

Some other highlights in the quarter, we announced significant wins across our aerospace businesses at the Paris Air Show.

Pratt & Whitney announced orders for over 1,000 engines, including orders for the launch of the second generation Embraer regional jet.

Customers see the advantage of our engine and have placed firm and option orders now for over 4,500 engines.

UTAS aerospace systems business is also well positioned with electric system, nacelle, wheels and brakes, and other systems at Embraer.

They also secured new long term MRO contracts from several airlines and supported Airbus in the certification of the A400M.

Sikorsky continues to see strong international demand, announcing orders for 11 S76D search and rescue helicopters for Japan, and 6 additional S92 for the Chinese oil and gas market.

On the commercial side, our businesses continue to win key orders.

Otis was awarded the largest elevator contract ever in India to install 670 elevators and escalators for the Hyderabad Metro.

Otis also won a contract to install 255 units at Tianjin 117, which at nearly 600 meters will be one of the tallest buildings in China.

CCS was awarded a contract in the quarter with China Resources Land to provide HVAC, fire detection systems in residential and commercial buildings across China over the next two years.

So the investment in innovative new products is paying off, we are delivering real value to our customers and securing key orders that will drive top line growth well into the future.

Okay let's take a look at the rest of 2013.

As I mentioned, we now see earnings of $6 to $6.15, that is the top half of our prior range and represents earnings growth of 12% to 15%.

Our relentless focus on cost reduction will allow us to deliver double-digit earnings growth.

We continue to invest in restructuring as well.

We spent about $240 million in the first half of the year and the businesses have good payback projects in the pipeline.

With almost $435 million of one-time gains realized today on a pretax basis, we now expect about $450 million of both gains and restructurings for the full-year, that's up from our prior estimate of $350 million each.

You can expect about $100 million of restructuring in each of the next two quarters.

Strong cash flow, of course, remains a hallmark of UTC.

We continue to expect free cash flow will equal or exceed net income for the year.

We paid down $1.2 billion of debt in the second quarter and that is almost $1.6 billion in the first half and we have an additional $1 billion due in the fourth quarter.

We will pay down about $2.5 billion of debt this year.

We're also buying back shares, the remaining $335 million in our original share repurchase plan will be completed here early in the third quarter and we expect to do a little bit more towards the end of the third quarter or early fourth quarter, assuming cash flow remains strong.

So, portfolio transformation is behind us, we're focused on integration and execution, and we are seeing a gradual recovery in our end markets.

The order book supports a resumption of organic growth in the back half and we are confident in the revised EPS guidance.

With that, Pablo, let's open up the call for questions if we can.

(Operator Instructions)

Carter Copeland, Barclays

Jeff Sprague, Vertical Research.

Thank you.

Good morning, everyone.

Just a couple questions, Greg, first just on share repurchase, so you're going to blow through your placeholder really quick but it still sounds like you're soft-pedaling in the back half of the year.

Can you give us some thought on how cash looks in the back half, your efforts to maybe repatriate some foreign cash that you talked about and why there wouldn't be for that repo to come up a little bit more?

Yes, I might take issue with the soft-pedaling the share buyback, we're going to take it up.

I think the question is how much.

I said maybe between $200 million, $300 million, $400 million and it will really depend upon strong cash flows in the back half of the year.

As you know, CapEx is on a ramp.

We spent a little over $600 million year-to-date, we've got a plan for about $1.7 billion so there is still a call on cash in the back half of the year which is a little higher than what we expect.

We also, as I said, are paying down about $2.5 billion of debt and you recall going into the year we talked about only about $1 billion of debt due, so I think we've been aggressive on the debt pay down.

We've got CapEx in front of us but we still have room to take share buyback up and we've still got that $1 billion place holder out there for M&A.

Not a lot going on but there is always a possibility something could still happen for the year.

So, I think we are in line to do more share buyback and clearly if the M&A doesn't happen it gives us a little bit more room, but just going to tell you there are other calls on cash right now.

Right, got it, understood.

Also, could you just give us your quick take on what your pension tailwind looks like for next year, if you were to snap a line today at these interest rates?

So obviously there's going to be tailwind next year in the pension.

There's a lot of things going on there.

First of all, you've got the fact that four years ago we decided to sunset the plan, so we've taken the tough actions and that gives us tailwind.

We also have losses from 2008 that have come off and you've got a higher interest rate.

I think right now we snapped the line about 4.6% on a discount rate versus 3.9% last year.

You guys know how to do the math on that, about $28 million, $29 million for every 10 basis point.

There is definite tailwind from pension next year.

Again, it is a little early because there's other assumptions that go into the pension number, mortality and all of that but for the most part there will be a pretty good tailwind next year.

And then finally I'll move on but just on China, Otis, can you just give us a little more color on where you are seeing the strength?

Is it broad or is it Western China and just what is going on competitively with pricing in particular?

Yes, so, we talked about orders on a constant currency basis we are up 35%, I think actual FX was 39% orders growth and sales were up about 20%.

We also saw pretty good traction on the service business with sales up 25%.

So good strength there.

Pricing remains tough but the margins are holding up in China because we continue to be able take cost out of the supply chain and leverage on the higher volumes.

The thing about specifically from a market perspective, where we are seeing the growth, residential is obviously the key.

It is the biggest market for Otis elevators and it is the very, very strong still despite some of the cooling measures.

We've also seen the commercial office building start to improve.

Social housing has kind of leveled off.

I think Otis would tell you today that the market is growing a lot faster than what we had anticipated going into the year, and I think these order rates more than support that.

Great, thank you.

Howard Rubel, Jefferies & Company.

Good morning, thank you.

Nice numbers.

Couple of things, Greg, and kind of rattle through them.

One on interest expense, I can't ever seem to get it right.

You're refinancing, you're taking some charges for doing some things, could you just give us a range of what you think you could look at for interest expense for the full year?

Howard, for the year, we are in the range of about $950 million as where you'd expect it should be for the year.

Okay.

You took some fairly substantial actions at Pratt to lower costs, could you talk about some of the benefits from the operating leverage that you expect in the second half of the year going forward given the change in mix and other things?

Yes, so, back half of the year at Pratt is good.

Obviously spares are not going to be as we had expected originally going in.

We talked about 5% growth or so in spares going into the year, probably more like flattish given how low the first half was but again, good orders momentum.

We should clearly get some traction out of spares in the back half of the year.

We took out, I think, about 575 people took advantage of the voluntary early retirement program that we just offered.

That will help again in the back half of the year, add some earnings growth to Pratt.

We're taking some other actions around the business as well to take advantage of some of the cost reduction opportunities that are out there.

R&D is coming down as we had expected about probably $75 million to $100 million, I think it was down about $14 million in the second quarter, $35 million in the first, so we're halfway there in terms of the R&D reduction.

So, a lot of good things going on at Pratt, spares are coming back and this was a tough year at Pratt.

We have this big trough because military engines are coming down significantly, although military spares have held up pretty well and you've got an increase in the commercial shipments which as you know, come with a little bit of a bill.

You changed management at Pratt commercial, separated the organization into two?

What are the marching orders for the two gentlemen going forward on that?

Yes, so, Todd Kallman who has led that business as president for the last seven years, he is the guy that has been the forefront of the GTF marketing campaign and I've got to tell you, he has done a hell of a job.

But it is a huge job and I think what we have decided to do with Dave Hess and Alain have done is to split that up between an after market focus and an OEM focus.

And so Dave Brantner is going to take over as head of the OEM side of the commercial engine business, be President there.

And then Matthew Bromberg, who is head of our corporate strategy development group for the last couple of years, he is going to lead the after market.

And his focus is simply on making sure we have a flawless launch on the GTF and making sure that we capture the after market channel going forward on all of these five GTF platforms that we have won.

So, yes, I think it makes a lot of sense.

Mr. Brantner has to focus on getting engines delivered, getting costs down, winning new campaigns.

And Matthew has to focus on winning that after market and continuing to drive growth in the after market.

I just had one last question.

787 has had some challenges in operation or very minor ones, but some of it comes back to working on enhancing the reliability of the electrical system, what are you doing there and how -- can you talk about some of the improvements you have made already?

Yes, Howard, as you know, I think with any new airplane there is always teething problems and we have had a couple of issues on the electric power system.

We work closely with Boeing.

During the production hiatus I think we took the opportunity to go out there and improve reliability in some of the power panels where we had a couple of issues.

And there is just constant teething problems.

But again, because of the 787 has gotten so much publicity I think people are hearing a lot more about it.

But the fact is this plane is as reliable or more reliable than the 777 was when it was introduced into service and our systems are doing very, very well.

Look we've got a lot of systems, nine major systems on the aircraft.

Each one might have a minor glitch but I think overall the Boeing company would tell you that we are working very closely with them to get all these things behind us.

Thank you, Greg.

Shannon O'Callaghan, Nomura Securities Intl.

Hi, Greg, a couple of things in CCS, maybe can you just give us a sense of how you're thinking about the second-half there?

Transicold, you had revenues up 11% but orders I think you said up 5%, so that looks like maybe it slows a bit.

Can you gauge the different components of CCNS in the second half?

Yes, we didn't go through all of the CCS businesses, obviously Transicold is an important part but not the only part.

We did see decent orders growth in the second quarter and sales were up mostly because of a very easy compare last year.

You recall last year on the container side, we didn't get any orders I think from May through September in that business.

So, the compares get very easy in the back half of the year and we continue to see pretty good traction on the container side.

We are also on the truck trailer side, both in North American and Europe seeing good order growth.

Europe surprisingly is strong given where the economy is, but that is all coming from cold chain expansion in the Eastern European area.

So, that business is doing well.

Think about res in the US, again, very strong orders growth, good revenue growth.

And we think that trend is going to continue and will support a very strong back half of the year.

So, if you think about it, first half of the year we didn't get much growth out of CCS in total, but we did get growth in some key markets and again, China was another place where we saw good growth at CCS.

Orders, I think on commercial HVAC were up about 15% or 16%, F&S products were up over 30%, so there is good momentum in emerging markets despite the fact that Europe overall was down 1% on commercial and a couple of points on the F&S business.

So, lots of moving pieces.

We've taken the revenue guidance down for CCS.

We now expect probably around 3% organic revenue growth for the for the full-year which still indicates pretty solid growth in the back half of the year.

Okay, great.

Thanks.

And just -- you've taken out the restructuring, in terms of pay back, what kind of year-over-year savings do you now expect in '14 from the actions you are taking?

This is -- a lot of these programs on average are about two years, Shannon.

So, this year we are talking about incremental 100 plus.

And so you're probably looking next year in that range of another 100 of these actions.

And so, total, in terms of the total $450 million, how much year over year saves through?

So as Jay said, you get about $100 million of benefit this year because we have taken a lot of these actions in the first half of the year and a lot of them are the quicker pay back, that is the voluntary early retirement program that we've done at Pratt.

The other head count actions we've taken at CCS and UTAS.

Some of the other things that we are still doing in the back half here will be a little bit longer pay back, probably about one and a half to two years, so let's call it a $100 million this year and $100 million to $125 million next year of savings, so probably $250 million of run rate savings by the end of next year.

Joe Nadol, JPMorgan.

Just following up, actually, on the restructuring, Greg, are you seeing the same pay back opportunities now on some of these new projects that you were a year ago, two years ago, and when you look across the Company and you look going forward, do you think there is continued opportunity to -- the same kind of quality opportunities as we look into next year as you have seen in the past?

Well we came into this year thinking we would probably do $150 million to $200 million of restructuring and the fact is restructuring is a way of life here at UTC, it is how we drive productivity.

And I tell you, the units continued to come up with good pay back programs.

There are some things out there, some of these structural factory actions that we take a little bit longer.

Obviously, some of the CCS things, I'm sorry, CCS, some of the UTAS actions that we are taking as we consolidate Goodrich will take a little bit longer to pay back but on average, even with all that said, we're still looking at two years or less pay back for all of these programs.

Okay.

Could you provide an update on CMH, there were some -- they have a media flurry the last two days with some implications that they are still not taking helicopters.

I know that is not new but just an update on the program.

And underlying the question, you still -- what is your level of confidence that this doesn't turn into a much, much bigger deal down the road?

Yes, I think I would tell you I feel better about CMH today than we have probably in the last year.

We are making or creating momentum with the customer.

I think importantly, we are going to start pilot training in August, so another month.

We have four helicopters up in Sure Water Canada.

That is going to start pilot training.

We have another five helicopters that are sitting up in Plattsburgh, New York ready to be delivered, there is two more in flight test.

The eight that we talked about going into the year, I think we've got a solid plan to deliver those and.

Still some issues obviously to work with our customer, but I think again we are seeing positive momentum there and I don't think we are going to see a big, big bad news item come out here.

I think you saw some things in the Canadian press with the Sea King, 50 years in service and it's been a great helicopter but again, 50 years as they are starting to have some issues with that helicopter, we've got that best maritime helicopter sitting right there ready to go.

I think it's all pretty positive right now, I think Mick has really done a great job with the whole team and turning this thing around.

Okay and just one quick one, on UTAS spares, do you still expect high single-digit or 10%, I forget your exact guidance, I know you dropped the sales guidance a little there or to the lower end of the range, specifically on spares?

So spares at UTAS, I think we're about 4% on a pro forma basis in the quarter they were up and for the full-year, we talked about 10%, that's probably going to be more like 7% or so by the time we get all done just because we haven't seen the first growth, but continue to see pretty solid growth.

And look at parts versus provisioning, and remember we sell both spare parts as well end items, spare parts of the quarter were up over 10%.

Provisioning was down about 10%.

So, there is still -- provisioning is still a little bit lumpy.

We talked to the guys yesterday, they see we've got line of sight down the provisioning number to hit the full year.

So pretty confident we're going to get in the mid 7%, maybe 8% range.

Okay, very good, thank you.

Ron Epstein, BofA Merrill Lynch.

Good morning.

Just a couple, on the Pratt orders, can you describe in more detail where you see that coming from?

Is it from -- you're seeing more from the freighter market or where has the order activity pick up come from?

I think obviously freighter is an important part but I think most of the orders could actually come on the commercial airline side.

As Jay mentioned, I think we talked about in the script, PW2000 spares were up significantly, the 4000s were up over 15% and the Vs were up almost 15% so we're really seeing strength across the board.

Inductions into the engine centers are down year-over-year and content hasn't really improved, but we know as these planes keep flying, the customers need parts and they can go only so long and I think Louis has been talking about this one, whether it's four quarters, five quarters or six quarters, eventually spares come back and I think that's what we saw this quarter and we expect that kind of momentum to continue into the back half of the year.

And is there any regional strength, are you seeing it stronger come out of North America, out of Europe, out of Asia, if you could characterize that?

Well, Ron, the Pratt legacy fleet is more concentrated in North America and Asia, so that -- we saw that pretty much across the board, there.

V2500 fleet is a little bit more broad-based and is including Europe.

Again, there wasn't any one particular region that it really stood out one way or the other, it was pretty even.

Okay, great.

And maybe one more, Greg, if you don't mind, a much bigger picture question.

Now that the portfolio reshaping has settled down, what has to happen for you guys to feel comfortable again about maybe adding something else to the mix?

Is there a bias towards aero, is there a bias towards industrial, how should we think about -- and I know this is longer-term question -- about where you want to go with the portfolio over the next several years?

So I think as we said, the portfolio, at least the near-term, is set.

I think we are 55% aero, 45% commercial.

Eventually you'd like to probably get back to 50-50 split but for right now we like the hand we've got, especially with what is going on the commercial aero side.

So the focus right now is really at execution.

The next deal I would tell you is, again, as you think about the 50-50 split will probably be on the commercial side.

I know Geraud has some ideas, Pedro has some ideas, nothing really imminent though.

I think again, we've got a lot on our plate right now and we like, again, we like the hand we've got.

Urbanization continues to drive or will drive strong organic growth for years to come on the commercial side and also helps on the aero side.

So, I wouldn't look for anything big coming out of UTX for a few years.

Okay great.

Thank you very much.

Sam Pearlstein, Wells Fargo.

Just back on the restructuring, the incremental $100 million, can you talk about which segments those are in?

And then related, what are the favorable items that are coming into offset that, that weren't expected earlier?

Most of the favorable items we've actually already seen.

We had a gain this quarter from Pratt Power, the sale of Pratt Power Systems, we also had a couple of small tax settlements out there with the IRS that gave us a little bit.

Now there is may be one or two more small divestitures on the CCS side that might generate a little bit more gain, so the gains are pretty much done.

As far as the actual spend in the back half of the year, I think you'll see that across the business.

UTAS, again, we've talked about this, they've got about $100 million spend plan for the year.

They've got some work to do to get to that $100 million but they've got a lot of projects lined up.

Pratt continues to look for things on the aftermarket side to do in terms of consolidation, more to come there.

Obviously, Otis in Europe has some work to do with sales continuing to atrophy there on the service side.

Pedro and team, I know are looking for ways to take some structural cost out of Europe so I would expect more to come there.

And really again, everywhere we look we find opportunities to reduce costs.

It's amazing what Geraud and the CCS team have done is they have brought F&S and Carrier together, they are on a run rate is probably take $200 million of cost out of that business which is incredible.

So always opportunities and it will be spread across all the businesses.

Okay and then you talked about for Otis the profit being a little bit worse because of Europe and the weaker yen, are those about equal and is there anything that is a positive move that is offsetting that?

Sam, if you look at the move from the mid point to the mid point, you talk about $38 million, two-thirds of that was the currency driven by the yen.

And then the other third was essentially just the net weakness from Europe, partially offset by higher restructuring and some favorability in China.

And then a last question is, you had talked, it was last month, about that F100 court case and as we look out into the remainder of the year, is there an additional reserve that we should be looking for or any sort of a cash impact as we go forward?

No and no.

For those of you that we are talking about here is the FEC, or fighter engine competition, that started in 1983.

I think I'd just been out of college a year then so it is not my fault.

The whole issue here is, we have the case we had won in the trial court, government appealed it, it was remanded back to the trial judge.

Right now, based upon outside legal counsel, our own review, we don't believe or we believe that we will prevail on appeal so we have not taken any reserve associated with this.

We would not expect to have any cash impact on this for quite some time.

And the way these court cases work, my General Counsel is sitting here, it will probably be a year and a half or so before we ever get any resolution on this thing again and it has been going on for 30 years.

So, we continue to believe the government wasn't harmed and as you take a look at the 10-Q, which we are going to file on Friday, we will have some expanded disclosure in there so I'd go through all that.

If you have any questions give us a call but bottom line is we think we are going to prevail on appeal.

Okay, thank you.

Peter Arment, Sterne Agee.

This first question on Pratt & Whitney, I get the margin performance there really from the consolidation and some of the restructuring gains, but I was surprised given the amount of commercial engine ramps, particularly in large commercial, what -- is that the level we be expecting for the second half with a big sequential uptick?

On the OE?

On the OE side, yes.

The OE should be should be growing a little bit in the second half on the -- we had in the quarter, we had higher shipments, particularly in the wide bodies, with the GP7000 and 8380 and for the year we're expecting GP7000 to still be up year-over-year so we will see some growth there.

Other than that, I don't know it will be significantly higher than where it is today.

I think what we did in the quarter is, generally speaking, probably where you will be.

Okay that is helpful and just a quick one on Sikorsky, I get that the domestic DOD pressures, can you just give us an update and color on some of the major international pursuits that are out there?

I think Sikorsky continues to make good progress on the international side.

We are working with Turkey on a relatively large opportunity there with the Turkish utility helicopter program.

We expect to get something finalized by the end of the year, there.

The India Navy contract has been a little bit of a disappointment because it keeps pushing out to the left.

But we've had good traction in Brazil.

We've had good traction in Columbia.

And the Middle East, so, again, there's lots of foreign military opportunities out there and Sikorsky continues to win more than its fair share.

Okay, thank you.

Cai von Rumohr, Cowen and Company.

Can you comment -- give us some color on the impact at Carrier of the blistering heat wave we have had in the US and Europe in July?

Yes, it's good to own an air conditioning company when it's hot out.

We talked about this, Cai, orders were up almost 20% in the quarter on the res side.

Yes, but you basically didn't see the heat wave in June, you saw it in July.

Right, and so sales were up 12%, 13%, orders were up even more.

The fact is, it takes some time to actually see that come through the channel.

It is two step distribution so we sell into our major distributors who then sell out to the dealers, so we would expect to see some level of good news yet here in July-August and I think orders have continued to be pretty good.

Okay.

And at Pratt, at Powers you were sort of talking about things being somewhat better and it looks like things were definitely more than somewhat better, particularly on the 4000.

Was there sequential improvement as I read, as you went through that quarter and give us any color on what you're seeing in July?

Well sequentially in the quarter sales were up about 15% and orders were up over 30%.

Sequentially.

I'm talking about at Pratt, the PW4000.

No, that was just in total.

On the 4000 itself, I would have to get back to you on it, Cai.

Cai, the fact is we started to see orders pick up in April and May and I think it just accelerated into June.

We had a very good month in June of bookings but it's hard to point to any one thing in particular, other than just pent up demand we have been talking about for the last year.

So, again, it's one month or one quarter does not a trend make, but we feel pretty good about the back half of the year.

And frankly, as we are sitting here, the 23rd of July, I think orders are okay, here, but I don't think I want to be giving order data on a weekly basis, here.

Just in terms of color, did this sequential improvement continue in July, as best you can tell?

Cai, let us get back to you on that.

I don't really recall -- I've been focused more on second-quarter than third quarter, but we will take a look and see if there's anything significant, there.

Terrific and the last question, you mentioned that military after market was week at Sikorsky, maybe give us a broader view of impact you are seeing or expect to see from sequestration and basically military aftermarket across the Company.

Yes, so, military sales or military aftermarket sales were down about 25% at Sikorsky in the quarter and order were down about 40%.

And it's hard to delineate between the budget cuts and what is going on as the overseas contingency operations wind down versus sequestration.

There has been some impact from sequestration just because it is taking us longer to get orders processed through the government, to get contracts amended and things like that done.

But it's a pretty tough environment on the aftermarket side but, not surprisingly, the overseas contingency operations the funding is down about half and Sikorsky, of course, was a big beneficiary of the Afghanistan campaign.

So, some of that is just natural and a little bit is also from sequestration.

Thank you.

Robert Stallard, Royal Bank of Canada.

Greg, just a couple of quick balance sheet questions.

You've got around, I think, $5 billion of cash on the balance sheet.

Do you think that is a good face number to keep going forward or do you see an opportunity to bring that down going forward?

The issue with the $5 billion, Rob, as you know, most of that is sitting overseas, if not all of that right now.

And we use that cash on a daily basis.

We've got an inter-company lending program where we lend out to the businesses for working capital needs but that's not $5 billion.

You've also got a lot of cash, over $1 billion, sitting in China that continues to grow as the businesses there continue to generate strong cash flows.

But hard to get at.

So, how much do we really need, probably half of what is on the books.

The other half of it is just hard to get at and quite frankly from a tax perspective very expensive to bring back to the US.

So, we talked a lot about this.

One of the benefits of that foreign cash is it does give you the opportunity to make investments overseas and to do acquisitions overseas.

As you think about the M&A agenda, that is probably where to look next.

Right, and then secondly on the balance sheet, you mentioned you got another $1 billion of debt you want to pay down this year.

If you look over longer-term, what is your thinking on debt repayment on a five-year period?

Yes, we've got the $1 billion that is due in December is the 18 month floating rate note that we issued last May, that will actually get paid off.

And then I would say there is no debt payment due next year, although I would expect we would probably do another $1 billion of pay down next year and probably another $1 billion of pay down the following year, trying to get back into that solid A range with the rating agencies.

So I would model $1 billion, $1.5 billion of pay down each of the next few years and there's not much due after that but again, I think we will continue to deleverage until we see an opportunity to do something more significant on the M&A side.

That's great.

Thanks, Greg.

Julian Mitchell, Credit Suisse.

I just had a question on Otis profits.

Looking at the guidance, it seems that you are assuming around flattish margins year on year in the second half after they were down about 70 bps in the first half.

I just wondered, does the guidance embed any sequential or year on year improvement in your European after market volume or price?

No, in fact I think Europe in the first half has been a drag, probably over $40 million of headwind here in the quarter from first half rather from Otis' service business in Europe.

But we think that is starting to stabilize, although there is still little bit of pressure, particularly in southern Europe.

Year to date, Otis' essentially flat earnings, we've taken the guidance down to $75 million to $100 million.

A piece of that is currency, a piece of that is Europe.

But with this very strong orders momentum that we've seen here in North America, as well as China, I think back half of the year should be very good for Otis and they should get back on the path for earnings growth and should be able to hold margins as well.

Okay thanks and then on the overall business, I think you mentioned 3% organic sales growth for the full-year, you're running at about minus 1% in the first half so does that mean we should expect mid-single digit organic sales growth already in Q3, because otherwise you will need double-digit growth in Q4?

Yes, it will pick up probably in that mid-single digits in Q3.

Q4 will even be a little bit better.

As I think about these Otis orders that we are getting today, it is about a six-month turnaround time for the European or for the China orders.

The other businesses a little bit longer cycle than that but spares, again, order rates were good.

Thing about spares at Pratt were up 15% organically, sales were only up 2% so a very strong book to bill.

Sales will pick up again as we move into the third quarter and lastly, I just remind you that CMH will deliver in the fourth quarter.

We have eight helicopters, that's about $400 million of revenue out of Sikorsky, just in the last quarter.

Thanks and then just lastly a quick one, CapEx is up about 50% in the last six months, is that a good run rate for the second half as well?

Yes, in fact it is going to pick up a little bit more.

I think we spent over $600 million first half of the year, we've got $1.7 billion planned.

That is really being driven by the aerospace guys as they continue to ramp up or facilitize for the ramp up in production that we are seeing on the commercial aero side and the new GTF platforms.

Thank you.

Doug Harned, Sanford Bernstein.

I'm interested in UTAS.

You talked about provisioning being down a little bit but I would think going forward with 787 growth, you would see some real benefits from provisioning going forward pretty soon.

So I'm interested in how you look at the 787 and UTAS right now, both in terms of provisioning but also in terms of any impact we might see with respect to margins on OE deliveries.

Provisioning obviously is a little bit slower in the first half of the year than what we had expected because of the production delays at Boeing but again as I mentioned before, we see pretty good provisioning picking up in the back half of the year, especially as all of these new customers come online.

Boeing is going -- I think right now we are at 7 a month, they are on track to get to 10 month.

We are going to support that and that is actually going to drive some good provisioning orders.

Keep in mind about half of our customers are on care programs, which is where we actually do the provisioning ourselves and then charge a flight hour payment to the airlines, so we are not getting quite the pick up that we had historically on some of the new program introductions but from a return on investment standpoint, it is a really good program, benefits both the airlines and UTAS.

So good back half of the year.

On the OE side, it is still a pretty tough story.

We've got about $6.5 million of OE content and the margins are awful.

And we've got a lot of work to do on cost reduction, yet on 787.

We've talked about this.

We are working with the Boeing Company trying to identify cost reduction opportunities to take cost out to save both them and us some money, but it is a tough slog right now and there's a lot of work to do right now on cost reduction, particularly on the aerostructure side of the business out in Chula Vista.

And also interesting, when you look broadly at the whole business, you've done quite a bit of restructuring over the last couple of years, it looks like it's been very successful in terms of delivering better margins, getting cost down.

But, now when you look ahead you've gotten some very encouraging orders in this last quarter and do you see a point here where you're transitioning to really a different way to think about the Company in terms of more growth, potentially less restructuring because you may not need to get your fixed cost base down much more?

When can you get comfortable, there?

I think as soon as we turn the corner on organic growth and I think as we exit Europe and if we do as we expect, which would be on a 5% or 6% run rate going out of the year, I think the need to do further structural cost reduction, while it never goes away, I think again the focus will be on delivering on the organic growth and that just gives us huge operating leverage.

I can imagine, CCS grew profits in the first half of the year on really no revenue growth is all cost take out and that really has been the story of the first half of the year.

I can tell you, it is a lot more fun to see the top line growing and to focus on satisfying customer demand than restructuring, but restructuring never goes away and we are always looking for productivity and room to grow margins.

You are comfortable that with the restructuring efforts you've done and you have underway right now, you haven't done anything to your base that would constrain your growth, you're basically getting to a point where you are prepared for it is that --

That's exactly right.

I think on the aerospace side specifically we've moved some work to lower cost locations, trying to consolidate work across the UTAS business.

There is still more work to do from the Goodrich, Hamilton, Sundstrand consolidation standpoint but we feel very comfortable with where we are with the footprint.

Very good, thank you.

All right, well thanks everyone, appreciate you listening in on the call.

We will obviously be around later in the day to answer any of your specific questions, but really appreciate you all listening.

So, have a great summer.

Thank you.

Thank you.

And again, thank you, ladies and gentlemen, for your participation in today's conference.

You may now disconnect.

Have a great day.