雷神技術公司 (RTX) 2014 Q1 法說會逐字稿

Good morning, and welcome to 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 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 the one-time items, as they usually do.

The Company also reminds listeners that the earnings and cash flow expectations and any other forward-looking statements provided in this call are subject to risks and uncertainties.

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

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

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

Please go ahead, Mr. Hayes.

Thank you, Stephanie, and good morning, everyone.

As you saw in the press release this morning, a solid finish to the first quarter, with earnings per share of $1.32 on 5% organic sales growth.

Earnings were a little bit better than what we expected, driven by the higher organic sales.

Segment operating profit was up 9%, reflecting improvement in all five segments, and operating margins expanded by 90 basis points to 15.4%.

So, a good start to the year, which gives us confidence to increase the bottom end of our EPS guidance range.

We now expect 2014 earnings per share of $6.65 to $6.85.

That's growth of 7% to 10%, and an increase from our prior guidance of $6.55 to $6.85.

Okay.

Turning to slide 2. Organic sales grew 5% in the quarter, with growth in all five segments.

As the momentum coming out of the fourth quarter of 2013 continued, in the commercial businesses, we saw 7% growth of the Americas, helped by the ongoing US economic recovery.

And we continue to see signs of improvement in Europe, where organic sales were up 3% in the quarter.

The commercial businesses also saw 7% growth in Asia, led by China, where sales were up 14%, more than offsetting some softness in other parts of the region.

Looking at aerospace, continued weakness in defense, where sales were down 2%, was more than offset by strong growth in commercial OE and aftermarket, where overall sales increased 8%.

Okay.

Let's look at orders now on page 3. Overall order trends remained positive for the majority of the portfolio.

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

First, in our commercial businesses, we continue to see traction in North America.

Despite some weather-related impacts at the beginning of the year, the outlook for housing and commercial construction markets remained encouraging.

North America residential HVAC orders were up 19% versus last year, as the housing market continues to improve and distributors stock for the summer season.

The Architectural Building Index, or the ABI, trends are positive, and we see that coming through in our orders at Otis, where new equipment was up 39%.

North American commercial HVAC orders were down 4% in the quarter, reflecting an uneven demand for large engineered systems, although we continue to expect that business to grow for the full year 2014.

In Europe, the economic environment is trending positively, albeit slowly.

Eurozone PMI expanded for the ninth consecutive month, and economic sentiment is at the highest levels since about mid-2011.

Unemployment continues to be near all-time highs and deflation remains a concern.

At UTC, CCS commercial HVAC equipment and fire and security product orders grew 15% and 10%, respectively, while Otis new equipment and CCS commercial refrigeration orders were each down about 2%.

Okay, on China.

While reports recently suggest a property market slowdown in parts of the country, we continue to see solid demand in housing and infrastructure in the first quarter.

Otis new equipment orders were up 25% in the first quarter, with several large infrastructure project orders coming in the quarter.

CCS commercial HVAC was up 10% and fire product orders were up mid-single digits.

So our building and industrial systems businesses continued to be well-positioned, building on the strength we saw in 2013.

Moving to aerospace.

With increasing air traffic and airline profits projected to be almost $19 billion this year, we continue to see solid conversions of OE backlogs, including growth in our commercial aftermarket businesses.

At Pratt & Whitney, commercial spare orders were up 11%, while at UTC aerospace systems, spares orders were up 9%.

So, good broad-based orders growth across the portfolio.

We'll keep a close eye on China and the other emerging markets, and continue to look for signs of further progress in Europe, but order rates and macroeconomic trends broadly support our assumptions for organic growth as we move through the year.

Okay, let's go take a look at the first-quarter specifically now on slide 4. Full reported sales increased 2%, as 5% organic growth was partially offset by headwinds from net divestitures and FX.

On the FX side, the benefits from the euro were more than offset by headwinds in other currencies.

Segment operating profit grew 9% and operating margins increased 90 basis points, including the benefit, of course, for pension.

CCS saw solid drop through and continues to drive cost reduction, where operating profit grew 15%, leading to margin expansion of 200 basis points.

Aerospace systems and Pratt & Whitney expanded margins by 170 and 80 basis points, respectively, each on the higher commercial aftermarket benefits from cost reduction actions as well as pension.

Earnings per share -- $1.32; that's down 5%, as segment operating profit growth of 9% was more than offset by $0.20 of net restructuring headwinds in the quarter.

Recall that in the first quarter of 2013, we had $0.11 of net gains, while we saw $0.09 of net restructuring charges in the first quarter of 2014, as we invested in cost reduction initiatives ahead of some expected gains around the middle of the year.

Absent the impact of gains and restructuring in both this year and last year, earnings per share were up 10%.

Free cash flow in the quarter was 83% of net income.

Capital expenditures were $333 million.

That's up 13% versus last year, as we continue to invest for the ramp-up in commercial aerospace.

And working capital grew by $521 million in the quarter, driven primarily by an inventory build to support sales growth in the year.

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

I'm going to stop there for now.

I'll be glad to talk more about the full-year, but first, let me turn it over to Jay, who will walk you through the business unit results.

Thanks, Greg.

Turning to page 5, Otis sales improved 7% at constant currency in the quarter, with new equipment sales up mid-teens, including solid growth from all areas -- most notably, double-digit growth in China, the Americas, Eastern Europe, and the Middle East.

Service sales were up slightly.

Operating profit was up 1% at constant currency.

The positive impact from higher sales volume was partially offset by continued pricing pressure and carryover costs associated with the North America factory transformation.

New equipment orders were up 11%, with double-digit growth in China and North America.

EMEA orders were down low-single digit.

From a strong order book and near-term completion of the factory transformation in North America, Otis expects to see improving performance as the year progresses.

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

On slide 6, Climate Controls and Security increased profits 15% in the quarter on flat sales, resulting in another sharp increase in margins of 200 basis points from prior-year to 15.1%.

Organic sales were up 3% in the quarter, benefiting from product and marketing investments.

On a regional basis, the Americas business was up mid-single digit, driven by 21% growth in the residential HVAC business, some of which was due to earlier stocking by distributors for the cooling season from what we experienced last year.

Europe is turning the corner and was up slightly, led by growth in commercial HVAC.

China was up high-single digit, while Asia overall was flat, driven by softness in other Asian countries.

And Transicold was up 7%.

Profit growth in the quarter was driven by strong conversion on organic sales as well as restructuring and net productivity gains, driven by ace and operational excellence.

Orders for global commercial HVAC equipment were up low-single digit.

Orders for global fire and security products were up high-single digit, partially offset by a decline in the fire and security field businesses.

Transicold orders, which tend to be more choppy, were down high-teens.

With solid results in the first quarter, we continue to expect profit growth of $225 million to $250 million on mid-single digit organic sales growth at CCS.

Turning to aerospace on slide 7. At Pratt & Whitney, organic sales were up 4% in the first quarter, as commercial sales growth across the businesses more than offset declines in military.

Including the divestiture of power systems, sales were down 2%.

Large commercial aftermarket sales were up 10% over last year's first quarter, which was the weakest of 2013.

Operating profit was up 4%, driven by higher organic sales, lower pension costs, and restructuring savings, which more than offset headwinds from adverse large commercial OE mix, the power systems divestiture, and the absence of last year's contract closeout and partnership settlement benefits.

For the full year, we continue to expect Pratt & Whitney's operating profit to be up $175 million to $200 million on low-single digit sales growth.

UTC aerospace systems delivered a solid quarter with 17% profit growth on 6% higher sales.

Sales growth was driven by higher commercial volumes, with OEM up high-single digit and aftermarket up 10%.

Overall military sales were down low-single digit, with military OEM flattish and military aftermarket down mid-single digit.

Year-on-year profit growth was driven by higher commercial aftermarket volumes, continued synergy traction, pension tailwind, and higher income from licensing agreements, partially offset by headwinds from higher engineering spend and new program OE growth.

Operating margins expanded 170 basis points to 17.3%.

Orders for commercial spares grew 9% on a year-over-year basis, with strength in both parts and provisioning.

For the year, we continue to expect profit growth of $300 million to $350 million on mid to high-single digit sales growth at UTC aerospace systems.

Turning to Sikorsky on slide 9. Operating profit grew 8% on 9% higher sales.

During the quarter, Sikorsky shipped a total of 48 aircraft, including 36 based on military platforms and 12 commercial.

The sales increase was driven by higher international military and commercial OE volumes.

Operating profit growth was driven by higher sales volume and net favorable contract performance adjustments in our military business, partially offset by unfavorable aircraft and aftermarket mix.

During the first quarter, Sikorsky, the Turkish government, and key Turkish aerospace suppliers, signed a licensing and manufacturing agreement for 109 multi-mission aircraft to be used by the Turkish government.

For the full year, we continue to expect flattish operating profit on high-single digit organic sales growth.

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

Okay, thanks, Jay.

So, a solid start to the year, and we continue to achieve significant milestones in our programs and secure key wins for the future.

At Pratt & Whitney, IAE reached a new production milestone in February when it shipped its 6000th V2500 engine.

We also continue to see strong demand for the GTF engine, with new engine offerings wins at ANA and Tiger Air, and additional orders of the regional jet market on both the Embraer E2 and the C-Series platform.

Customers clearly see the advantage of our engine, and have placed firm and option orders for over 5300 engines to date.

Now on the military side, the Republic of Korea announced its selection of the JSF as its next-generation fighter jet.

Korea's commitment to purchase 40 F-35A conventional takeoff and landing aircraft will bring expected international deliveries to over 700 aircraft.

At aerospace systems, the segment recently announced a long-term agreement with Lufthansa Technik for maintenance, repair and overhaul services for aircraft interiors, products, sensors and integrated systems on the Boeing 787 aircraft.

We also recently extended our C.A.R.

E. Program to Singapore Airlines, which provides a repair services and asset management to the airline's expanded fleet of Boeing 777 aircraft.

Also in the quarter, Sikorsky announced the entry into service of the S76D.

As Jay mentioned, Sikorsky also signed agreements with the Turkish government to supply 109 T-70 helicopters, which are variants of Sikorsky's S-70i international Black Hawk.

On the US government side, prospects for the combat rescue helicopter and the VXX presidential helicopter program remains positive, with firm decisions expected around the middle of this year.

Okay, let's talk about CMH for just a second.

We continue to make progress on the CMH program, and we've recently executed a second Principles of Agreement with the Canadian government, which now defines a final configuration for the aircraft as well as a phased delivery schedule, which allows for the retirement of the Canadian Sea King helicopters beginning in 2015.

We also now expect that the final cost of the aircraft will be significantly higher than previously estimated as a result of additional requirements, retrofit costs, and extension of the program schedule.

We continue to negotiate the financial impact of these program changes with the Canadian government, but we would expect to record a charge this year associated with the acquisition contract upon the completion of definitive agreements.

We expect the charge will be largely offset by other one-time gains and beneficial items during the year.

We'll provide an update later in the quarter as we work to finalize the agreements and complete our analysis of total program cost.

BIS, our Building and Industrial Systems, had a very strong first-quarter with a combined organic sales growth of 5%.

The integration activities continue to progress well, and the CCS and Otis teams continue to look for ways to serve our customers more efficiently and offer integrated high-value systems.

We are pleased with the continued CCS momentum, the return of profit growth at Otis, and the overall growth prospects for the business.

And we continue to win orders in key emerging markets.

Otis's 25% order growth in China included large orders for the Shenzhen and Chengdu Metros, and CCS was awarded major maintenance contracts for the fire safety and HVAC systems of the new Cathay Pacific Cargo Terminal in Hong Kong.

We continue to expect the combined capability of the CCS and Otis and the new Building and Industrial Systems organization to further accelerate topline growth.

So, just as you heard from the presidents in March, each of the 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 2014, no real changes from what we told you last month.

The compares get tougher as we move through the year, where order trends and end markets are essentially in line with our expectations so far.

Of course, as we've seen with recent developments in the Ukraine, things can change quickly.

But as I sit here today, we remain confident in our updated guidance range of $6.65 to $6.85, with a path towards the high-end on sales of about $64 billion.

And we continue to expect quarterly earnings per share growth of about 9% to 10% per quarter, absent the impact of gains in restructuring for the remainder of the year.

We continue to invest in restructuring.

With visibilities to some additional gains and good payback restructuring projects across the business, we now expect to spend about $375 million on restructuring this year, all offset by one-time gains.

In the first quarter, we spent $125 million, and we would expect the spend to be relatively level-loaded for the rest of the year.

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

Strong cash generation remains a hallmark of UTC.

And although pressured by the increase in CapEx and working capital in 2014, we continue to target free cash flow equal to net income from the year.

We're going to maintain our placeholders at $1 billion for each of share repurchase debt paydown and M&A activities.

Looking ahead, we remain focused on growth and execution in 2014.

We are well-positioned in our end markets, and we'll continue to leverage our industry-leading franchises and global scale.

UTC's portfolio is poised to take advantage of the commercial aerospace growth and organization megatrends over the next decade.

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

Stephanie?

(Operator Instructions).

Julian Mitchell, Credit Suisse.

I just had a question on Otis.

Because I guess in Q1, you had organic sales growth in line with the full-year target of 6%.

The EBIT was flat, though.

So I guess what's giving you the confidence that, with a given organic growth run rate the rest of the year, you can get the EBIT up?

Is it just the US factory relocation costs were again a very big headwind in Q1, and that drops out?

Or is there something in the mix that you're expecting?

There's a couple of pieces here, Julian.

I think the Florence factory transformation was a headwind, but a small, small headwind this quarter -- I think less than $10 million.

So, it drove a little bit of headwind.

Really, the biggest issue was continued pricing pressure that we saw around the portfolio.

And if you think about it, where the growth came in the quarter, we had 16% growth in OE and only 1% growth in the service business.

So, it is the pricing pressure around OE that is really -- is pushing margins down a little bit, and causing us to see, I would say, tepid growth on the op profit side here in the first quarter.

But it will get better during the course of the year.

We expect service to improve; we'll come down the cost curve on the new equipment; we'll get cost reduction in the factories.

We'll see some of the benefits from the integration of BIS.

So, all those things give us confidence we're still on track for $125 million to $150 million of profit growth at Otis for the year.

$100 million to $150 million.

$100 million to $150 million.

Thank you, Jay.

Great, thanks.

And then within I guess BIS overall, you are targeting, I think, around mid-single digit growth for the year.

You did 7% growth in Q1.

What's your sense on the sort of nonresidential markets in North America specifically?

Is that trending in line or you've seen kind of choppiness there through last year?

Well, there is really, I would say, two different stories in North American nonres.

Clearly, on the Otis side, we've seen very, very solid growth in the commercial construction side of the business.

And again, that's being driven by, again, the ABI above [50] here for most of the last year, and really solid momentum in the commercial building space.

On the CCS side, specifically on the carrier side, I think Jay mentioned a little tougher compare there on the orders for the carrier commercial business -- I think down about 4%.

But keep in mind, I think you -- a little different business there.

That is primarily or 80% of retrofit business; only about 20% relates to new building construction.

So we are seeing traction, I think, on new buildings.

I'd also point out that the Otis new equipment business fell much more dramatically than the carrier commercial business during the last downturn.

So, I still think we'll see growth in commercial business at carrier for the year, slight growth.

And we expect the order trend momentum at Otis to continue as well.

Great.

Thank you.

Carter Copeland, Barclays.

Just a couple of quick ones.

One -- with respect to the pricing pressure at Otis, I wondered if you could, might kind of give us some color there?

Has that intensified or eased at all?

What's been the -- your sense on that this quarter versus what you talked about last year?

Yes, I wouldn't tell you there is any trend change here.

We continue to see pricing pressure in most of the markets for new equipment.

As you can imagine, China remains the most competitive of all of the new markets, and continuing to see pricing pressure there.

North America, a little bit better.

Again, we've got new products that have come out that have -- we've done very well in terms of market penetration.

And pricing looks to have stabilized, at least in North America.

And Europe -- well, it's Europe.

I mean, it's a tough, tough market.

So, I wouldn't say we've seen an inflection here, but I don't think we've seen any improvement in pricing.

Okay, great.

And on the military front, with respect to the down 2% number, you quantified the numbers in UTAS.

But I wondered if you might speak to the declines you called out in -- at Pratt, and then at Sikorsky, given obviously what should be a pretty tough aftermarket compare there?

Sure, Carter.

At Pratt & Whitney, the military business was down low-double digits.

The OE business was down high-teens, and the aftermarket business was down low-single digits.

At Sikorsky, the military business, the OE was actually up as well as the aftermarket.

The OE was up on the back of the international deliveries, the higher international deliveries.

The aftermarket was up, as I said during my remarks, there was a performance adjustments -- contract adjustments -- that impact profit as well as impact sales.

So that business, including that, was up around 10%.

If you exclude the adjustment, what would the growth rate have been?

It would've been more, I think, flattish.

Okay.

All right, thanks for the color, guys.

Okay.

Joe Nadol, JPMorgan.

Could you speak a little bit more to Pratt spares?

I guess, first of all, on the mix, the -- versus the Legacy 4000, 2000?

And then just thinking about the year, the comps get a lot tougher starting this quarter.

And so, do you expect to be up as we look -- I know you're not going to give quarterly guidance for this one line item, but maybe more on the profile.

So let me start with some of the data points on orders.

The PW4000 and the V2500 were both up.

The PW2000 was down.

But if you recall in the fourth quarter, we had a significant amount of orders for the PW2000 for delivery in 2014.

So the book to bill in the 2000 was well above -- around 1.5.

As far as going forward, it is really -- as far as what we see, there's really not much of a change in our expectation for mid-single digit growth for the year.

As Greg mentioned during his remarks, traffic is still flowing well.

Airline profitability is still strong.

We are seeing a little bit of higher content per shop visit as we start the year.

But again, you know, these things change.

So, really no significant change to our expectations for the full year at this point.

Okay.

And then just secondly, on Transicold, sales up nicely but orders down quite a bit.

The Baltic Dry Index is down -- was down pretty significantly in Q1, so this is a pretty quick turn business.

So when you think about profile, particularly margin profile for CCS the rest of the year, how is this going to have an impact?

Yes, clearly, I think we've got some headwind going into Q2 in CCS.

I think container was down more than 50% in orders in the first quarter.

But again, sales were up big.

So, your point is a very short cycle business.

We're still seeing the trend for refrigerator transport on a positive basis up probably 3% to 4% this year.

So, it's lumpy in the orders and I wouldn't panic about the Transicold as I sit here in April.

I think it was a year ago, we went six months without orders in the carrier container business, and then all of a sudden it was gangbusters.

So, we should really focus on the longer-term prospects.

I think we are well-positioned with great products as well as a continuing expanded market.

Yes, Joe, our expectations for the year are not overly aggressive.

We're expecting for the total Transicold business to be up low to mid-single digit.

So, we are not banking on big growth in that business this year.

Okay.

If I might just sneak just one more quick one in.

Greg, you have $375 million of restructuring to offset now, plus what seems like it could be a couple-hundred-million -- or I don't know -- in $100 million range-plus of CMH charge.

So could you give a little color on the gains that you're expecting to generate?

Yes, there's -- I won't -- no, I actually won't, Joe.

I'll tell you this.

We do see gains out there, adequate gains, to cover what we think is the range of potential loss on the CMH.

The good news on CMH is, with this new contract, I think we get a big chunk of the acquisition cost behind us, changing the way we account for this going to a cost-to-cost basis.

So it gets it behind us.

And we have the flexibility with some things that we've got in the pipeline to be able to cover most of that cost.

So, as I think about guidance, $6.65 to $6.85, still very confident even with the CMH charge.

Thanks.

Jeff Sprague, Vertical Research.

Just a couple of things.

Just on resi HVAC in the US, just a little peculiar that people would be stocking early, it seems.

Is there something going on there where stock is extraordinarily low?

Any other color you would shed on that?

Well, I think, as we've talked about most of last year, the dealer stock was relatively low on a historic basis.

If you look at inventories today, it looks like they're up about 20% as we end the first quarter, which is in line with, of course, the 20% -- or 19% growth we saw in the US res business.

Again, dealers are preparing for what they think is going to be a very strong summer season.

And despite this weather issues that we saw in the first quarter, I think people are generally optimistic.

Housing starts are trending positively.

We'll do over 1 million.

And keep in mind that this is still an 80% add-on replacement business.

Only 20% really goes to resi new construction.

And as the US economy picks up, I think everybody's got confidence we're going to see a very strong start to the season here.

It's early, though, so I don't want to get ahead of ourselves here.

We still expect good growth, but clearly not at that 19%, 20% that we saw in the first quarter.

And often it's kind of tough to really know what's going on with pricing this early in the season.

But what do you see playing out on pricing, both in resi HVAC and in commercial HVAC this year?

The visibility that we have, Jeff -- there's a little bit of benefit in pricing on the residential side.

I don't have visibility on the commercial side.

But a little bit of an uptick that we saw in the quarter.

Okay.

And then, finally from me, I was just wondering if we could come back to Otis and service.

Is service price also declining?

Or are your comments strictly around the OE equipment?

And I'm wondering if you're seeing any firming in service in Europe at all?

Yes.

Service is still tough in Europe.

We're still seeing some price headwind, especially in the southern markets.

I think service was down even in France this time.

Again, it was offset -- it was good in Germany, it was good in the UK, it was good in Russia.

I think what's most encouraging, as I think about Otis and service -- we've been talking about this for several years -- is, we're getting really good traction in China.

Last year, the service business in China was up about 20%; the first quarter was up almost 20% in service.

Last year, I think we added about 50 branches or depots for service.

We are going to add another 50 this year.

We are getting traction there.

I think, again, this issue of pricing in Europe, again, we think it's going to stabilize as we go throughout the year.

We've seen signs of that.

But the future of service for Otis is going to be in China.

That's where the growth is going to come and that's where we are focused right now.

All right.

Thank you.

David Strauss, UBS.

Back to Otis again, in terms of the phasing of the quarters as we go through the year, are you expecting it to continue to be all the EBIT growth to come in the second half, and Q2 to be relatively flat year-over-year on an EBIT basis?

That's probably right.

You might get a little bit of growth here, but primarily -- again, as you think about where the cost reduction is going to come in the factories, or the cost reductions is going to come in terms of some of the integration activities that BIS is undertaking, we are seeing mostly cost on the front-end, and then you pick up the benefits in the back-end.

Okay.

Back to CMH.

So, Greg, are you implying now that the contract -- new contract that we are going to have here, it's going to be restructured to the point that you can actually charge-off the entire loss that you were going to see with new deliveries, so we won't have this $14 million per unit hit on a go-forward basis?

Let me try and explain this as succinctly as possible.

We're going to go to a percentage of completion accounting or cost-to-cost.

So, we'll write off about 70% to 75% of the acquisition cost or the losses on the acquisition contract this year, because we're about 70% to 75% done.

There's some small tailwind in the next couple of years as we complete deliveries, but it's not in the order -- it's nowhere near what we were talking about before, kind of this $120 million-plus a year.

It's substantially lower.

On top of that, we'll start to see the benefit of the ISS contract kick in, in 2015 and 2016, to offset some of the losses.

So, the goal here is to get most of the bad news behind us.

I think by adopting this accounting, which we think is probably a more realistic look in terms of the way the contract has been restructured, gives us the opportunity to do that.

And just as a last follow-up, what does this do to the Sikorsky guidance for the year?

I think the flat EBIT number had baked into it that $120 million loss?

Yes, obviously, they had $120 million baked in, and we'll run this through the segment results.

So whatever the charge is there, the gains aren't coming in at Sikorsky, but the cost certainly will.

So, as you think about Sikorsky guidance that we've given, it is ex-CMHP, except for the $120 million that's baked into the forecast.

Thank you.

Thanks too.

Howard Rubel, Jefferies.

Actually I want to follow a little bit more with respect to what David said.

I mean, Greg, if I understand, you've built almost all the helicopters already.

So, the charge should be -- I don't know, $350 million, $400 million -- the way to think about it when you affect this accounting?

Yes, Howard, I'm just -- I'm not going to get into the exact number.

The reason is, as I mentioned earlier on, we've renegotiated the scope of the aircraft.

And so the aircraft will be more expensive because of the increased requirements of the spec changes that we are making.

We've got some retrofit costs and all of them previously contemplated.

So, the total cost for the aircraft is going to go up.

And as I said, we are 70% to 75% done with the total acquisition contract.

So, it's a good trade here.

I think we're pretty confident that we've got the wherewithal to cover this.

Oh, I mean forever and a day, I've been hoping that.

I mean, because when you look on the balance sheet, it's over $800 million of sort of capitalized costs, if I'm not mistaken, related to this contract at the moment.

It's actually over $1 billion, but who's counting?

I mean, I guess -- but keep in mind, too, we are still negotiating with the customer on this contract.

We're not done yet.

And so, we've got to finish the contract negotiations, which should be in a couple of weeks.

We've got to go through that and do a bottoms-up estimate and complete for the whole contract.

I think when Louis stands up at EPG by the end of May, we should be in a pretty good position to give you guys a number.

And clearly, if it happens after that, we'll let everybody know as soon as we do what the impact is here.

I appreciate that.

That's a big help.

The other thing that's important has been that you've been working to lower costs in a lot of the other businesses.

Could you address some of the actions that UTA has done to drive out its costs?

I mean, clearly, there was some profitability related to pension and spares, but you're also trying to lower the recurring costs of what you're doing to become even more competitive.

There is a -- I mean UTA, I think you're referring to UT Aerospace Systems, as opposed to UT Automotive.

Yes.

(laughter) You and I have been around too long.

Yes, I think so.

(laughter) You know, there's a couple of things.

I think you mentioned.

We've got some good news out of pension in the first quarter.

We continue to get good news out of cost reduction on the products.

We're coming down the learning curve on the 787.

I think we're up to 10 shipped sets a month on 787.

So, driving costs down there.

Also, we continue with some of the synergy savings.

We're going to get about $100 million of incremental synergy savings during the course of the year, and there's probably $25 million sitting in the first quarter.

So, all of those things that Alain and Dave Gitlin and Mike Dumais talked about a month ago, are all coming to fruition.

Really good margin expansion.

Obviously, the pension is -- was a little bit of a one-timer; got a big benefit here in the first quarter, but still underlying of good, solid cost-reduction, good execution across the Aerospace Systems business.

And then last, I noticed you had about $100 million of divestitures or proceeds from divestitures.

Can you characterize them a little bit?

And are there some other businesses that continue to keep Nicole busy?

I think, actually, these were keeping Geraud busy, because primarily, this was -- again, this is part of the whole portfolio rationalization that Geraud has been talking about for the last three or four years.

Nothing big on the horizon; a couple of small fire security-related businesses but nothing significant.

I think it was a guardian business as well that was divested in the Far East.

But there's really nothing terribly significant.

Thank you very much.

Thanks, Howard.

Sam Pearlstein, Wells Fargo.

Greg, you mentioned that the majority of the gains are going to be coming in the second quarter.

I know you don't typically like to give any sort of quarterly run rate, but how should we be thinking about the size of the gains that are going to exceed the restructuring in the second quarter?

Well, we talked about $375 million of gains for the year to offset the restructuring.

All $375 million will come in the second quarter as it relates to that piece that is covering the restructuring.

As far as the gains to cover the Sikorsky charge, there will be a little bit in the second quarter and then some in the third and fourth.

Okay.

And then just going back to some of the comments around Europe, the -- I think, Building and Industrial Systems being up 3%; you've guided Europe to being up slightly.

And so I'm trying to just think about you just talked about Otis service really hasn't improved.

So where is that improvement?

And at what point are you prepared to talk about Europe perhaps being a little better this year than you've had in the outlook?

Probably in December.

(laughter) No, look, I think Europe has been better.

Again, we've seen strength in Northern Europe on the new equipment side; I think I mentioned on the service side as well.

So, good order traction in Northern Europe.

Southern Europe remains a concern.

I think orders were down in Spain, Greece, and Italy.

So again, it's this balance.

But I think, generally, we look at consumer sentiment, it's up across the continent.

Unemployment remains high but things are getting better.

I just don't want to declare victory.

I think right now, first quarter, positive signs; we look at auto sales are starting to pick up.

Interest rates remain very low.

All of those indicators are there that we should see a recovery.

And so, absent, again, something bad happening in Eastern Europe to upset the apple cart, I think we feel pretty good about the projections that we've got right now.

Okay.

And one last question.

The $660 million increase in inventories, you said it's supporting sales growth later in the year.

So when we look at the year-end, should we expect inventories to be flat with where they were at the end of last year?

That is the plan, Sam.

(laughter) Inventory was up a little bit.

I think the issue will probably be at Sikorsky on the CMH program and continue to add; Pratt's starting to add inventory as they start to ramp-up for production on C-Series and on the A320neo.

So, there will be a little bit of inventory growth.

But the growth that you saw in the first quarter, although it was across all the businesses, you should see most of that start to come back in the cash flow as we go through the year.

Okay.

Thank you.

Ron Epstein, Bank of America.

Just maybe a follow-on to Howard's question.

How should we think about M&A?

I mean, you hinted at the investor meeting up in Connecticut that you guys liked bigger M&A.

How should we think about that over the next, say, 12 to 18 months?

Is UTC contemplating doing something?

Or how do we think about it?

Well, in very simple terms, I would tell you I think there's no big deals this year.

As we sit here in -- whatever this is, April -- the thought of actually consummating a big deal this year is very unlikely.

But we continue to look.

And I think there will be some smaller deals, less than probably $1 billion for the total year still.

Again, primarily in the CCS side of the business or the BIS side.

And that is, we'll continue to look for those opportunities of scale.

We want to do things that fit into the core but that also will capitalize on the global scale.

We're going to continue to buy back shares this year, as we had talked about, and if there is opportunity without M&A, maybe we'll take share buyback up again towards the end of the year.

But right now, we are focused on this as more of a long-term goal.

And pricing is very difficult in the M&A market today.

When we bought Goodrich back in 2011, timing was very, very good.

Interest rates remain low, but today, prices are up, as you know, in the equity side and everybody wants a 30% premium, which makes these deals very, very difficult.

So, we're going to continue to look; look for value.

But I've got to tell you, with underlying strength in the business and good organic growth, I'm not in a hurry to spend the shareowner money on deals just to grow.

We don't need to buy growth.

We'll buy opportunistically, we'll buy for value, and we'll buy on the core.

Okay, great.

And then just second question, changing gears a little bit.

When we think about the gear turbo fan -- and you're starting to move into a period here with we're not too far away from the A320neo going into service and -- well, how do you -- how are you guys going to recognize profitability on those engines?

Right?

Because my understanding is you're selling with something like 80% of them was power-by-the-hour contracts.

So, how -- will it be different -- won't it be different than what we currently see with the V2500?

Or is that going to go?

So, yes.

You know, right now, again, it's a little bit in a state of flux, because I think there's a new revenue recognition standard coming out from the FASB in May that's supposed to be due out last year, which is going to cause us to relook at how we recognize revenue.

But as we sit here today, we're going to continue to recognize revenue the way we always have in the commercial engine business -- which is, as we ship an engine, we'll recognize the revenue or we'll recognize the loss on the engine when we ship.

We don't have the ability that Rolls-Royce does to smooth earnings over the life of an aftermarket and OE contract, where you can look at a 20-year aftermarket revenue stream and just normalize margins.

That's just not allowed under US GAAP, and it won't be allowed under the new revenue recognition standard either.

But once this new rev rec standard comes out, we'll take a look at it.

It's not adopted until 2017, which is just coincident with the big ramp-up that we're going to see in the GTF production.

So, we've got time.

We'll take a look at it and see what the impact is.

It will impact some of the other businesses, because it will force us to go to percentage of completion on some of the military programs, some of the Black Hawk.

But again, a little early to worry about that.

Okay.

Okay.

And then if I can just squeak in one quick one.

It's my understanding in the quarter your -- you had -- China orders for Otis were up, what, 27%.

And in that, I mean, I think you guys had two big China orders.

I mean, if you were to exclude kind of the two major orders out of China, how would we think about (multiple speakers) --?

That was about half of the growth came from infrastructure projects.

And not just those two, but broadly speaking, half was infrastructure, half was on the property side.

Okay.

Okay, great.

Thanks a lot.

Okay, Ron.

Thanks.

Robert Stallard, Royal Bank of Canada.

Greg, just a quick aftermarket question.

Should we read anything into the slowdown in the order growth in the first quarter?

Or is that just the normal timing ahead of the price increase?

Yes, first quarter is typically the slowest quarter for order growth.

As you mentioned, we increased prices, catalog prices, January 1. The catalog is published, I think, October 1. So, yes, we saw a big ramp-up in fourth-quarter orders across the Aero business.

So, first quarter, I think I feel pretty good about it.

Again, this was all driven -- continued RPM growth, right?

I mean, the airlines are flying the airplanes.

The airlines are making money.

And they are bringing the engines back to be repaired.

We're seeing -- actually, I think the most encouraging thing is content per shop business is starting to trend more positively.

So, I think it all feels pretty good.

And look, we don't expect this trend -- we're not going to grow 16% for the rest of the year, but we still feel very confident of the guidance for spares for the year.

Okay.

And then secondly, on the share buyback, you're also trending ahead of that overall annual amount in Q1.

You said you're going to see the same in Q2.

Is there any sort of strategy behind this?

Or is it just the availability of cash?

Be there early.

Yes, I think the key, of course, is the quicker you buy the shares back, the better the average share count is for the year.

And we've got the cash sitting here.

We took advantage of that.

We bought back most of these shares early in the first quarter.

We are buying back shares through a 10b-5 program today in the marketplace.

And we'll probably do that again in the third quarter -- trying to, again, get ahead of this.

And then if we get to the fourth quarter, we'll probably spend all the share buyback by the end of the third.

If cash looks good and there's no other big M&A opportunities out there, we'll probably take share buyback up again, just like we did last year.

I'm not talking a big number but a little bit.

All right.

Thanks very much.

Cai von Rumohr, Cowen and Company.

So a follow-up on CMH.

So, Greg, was the total expected loss higher than it had been before as a result of the new contract?

As I said, Cai, the total cost of the aircraft is going to go up.

And you've got new specs, new specifications from the customer and a little bit higher retrofit cost.

And the program is going to last a little bit longer than the acquisition, so, it will go up.

And again, I'm not prepared to tell you exactly how much, because, quite frankly, we're not done negotiating.

I just know as I sit here today, it's going to be higher.

And I think we -- we'll clarify all that.

Right.

But so before, kind of it looked like roughly $335 million if we kind of do the rollout.

And for a contract of this size, I mean, it kind of sounds like this total number could be in the area of $500 million to $600 million.

And if a quarter of it is still in front of us, is it unfair to assume that we got another $100 million, $150 million-something in that order of magnitude in front of us in 2015 and 2016?

Cai, you're getting way ahead of me here.

Look, until we get the contract actually negotiated and until we know what the total contract value is going to be, both the aftermarket and the OE, and all the trades are made, before we get the EAC done, I really can't comment.

All I know is the aircraft is going to be more expensive.

As I said, we're 70% to 75% done, and again, depending upon what these retrofits look like.

So, I'm going to stay out of the math for today and I'll let my boss do that for you, hopefully, in May.

Okay.

And then just back maybe to the principal.

So we basically split this into two contracts, which is kind of equipment and then aftermarket support.

So that the aftermarket support portion of this should be profitable.

Is that the way -- the right way to think of it?

That -- as has always been the case, Cai, I think we've always said the money on this contract, at least for the last five years, it's been the aftermarket contract that provided the shield, if you will, for the losses on the OE.

And that's not going to change.

Okay.

And then a last one.

The GTF, with kind of the slip on the C-Series, how many units are we looking for this year?

And give us some color on the expected build in unit production, maybe in 2015 and 2016.

You're talking deliveries this year, Cai?

Yes.

Yes, you're talking small numbers.

You're probably in the range of less than 10 shipments this year.

It's small numbers.

And how does that build in 2015 and 2016?

Well, (multiple speakers) -- I was going to say, if you think about the run rate production of somewhere between 36 and 48 aircraft a year, it will build over the next several years -- again, we, I think, originally planned about 20 aircraft this year -- or 20 deliveries this year.

It will build next year.

But I've got to tell you the real ramp will be starting the end of next year on the neo, where by 2017, we'll be delivering 500-plus engines a year.

So, C-Series -- very important customer, but the volumes are going to be very small compared to what we're going to see on the neo.

Terrific.

Thanks so much.

Thank you, Cai.

Doug Harned, Sanford Bernstein.

At CC&S, you had $43 million in restructuring costs in the quarter.

And that's higher than we've seen in some time.

What's the focus of the restructuring at CC&S?

And what should we expect to see over the course of the year?

Yes, the biggest piece of the restructuring for the quarter was actually a factory that we had outside of Milan called Villasante, where we made commercial -- I'm trying to think what's the right word for it -- chillers.

And again, we've been downsizing that facility for a number of years.

We finally, in the fourth quarter -- first quarter here, agreed with the Works Council there on a plan to close that facility.

Again, that was a relatively large portion of the charge.

There's some other headcount-related actions and some smaller things around the globe, but Villasante is probably the biggest piece of the restructuring in the first quarter.

So then going on later in the year, we shouldn't see that level, I assume?

There will be additional restructuring across CCS.

Again, I think -- most of the factory actions, I think, are done.

I think what you're going to see is more BIS integration-related activities as we close offices and consolidate some of the facilities around the globe.

Again, most of that will be Otis, but some will leak into the CCS segment as well.

Okay.

And then at UTAS, you said that E&D was higher in the quarter.

And what's driving the increase right now?

And how do you look at the E&D trajectory going forward for UTAS?

Yes.

It was higher but we're talking a small number, right?

Less than $10 million of growth in E&D for the quarter.

Really, if you think about everything that's on the plate at the UTAS, you've got, obviously, the A350, the C-Series, the neo, the 777X now -- I mean, all of these new programs driving requirements -- the 787-9; you've got the 787-10 coming up.

There's all sorts of fun things to do there.

And all that's driving a little bit higher engineering expense.

So engineering, we think -- it's more frontloaded, we think, for the full-year; total across the Aero business will be relatively flat, but a little bit higher here in the first half.

So you're not looking at a sort of as you take the 787-8 up, I mean, there is enough work on the 787-9 and the 787-10 that we shouldn't see this come down very quickly over the next 12 to 18 months.

Is that fair?

No.

I think -- again, I think the pipeline is pretty full at the Aerospace -- I mean, both at Pratt & Whitney and at the Aerospace Systems group.

I think the engineering pipe is pretty full.

Remember, we are going to get done with the C-Series this year and entering the revenue service, hopefully, towards the end of the year or early next year.

And you've got the neo; you've got the Mitsubishi regional jet.

You've got Irkut out there.

And then you've got the Embraer airplane coming after that.

So, engineering spend -- again, it will come down gradually at Pratt as all these aircraft get certified.

It will be the same kind of profile as you're going to see at the Aerospace Systems business.

Okay, great.

Thank you.

Good.

Shannon O'Callaghan, Nomura.

Hey, Greg, just maybe a little more on this disconnect between Otis and commercial HVAC in North America.

I mean, up 39% on Otis, down 4% on commercial.

I mean I hear your point about the retrofit but that's still a pretty big difference.

I mean, is there anything else you see going on in terms of the lag in the market?

Or I know you were coming out with some new applied products; is there anything going on there?

It just seems like probably even adjusting for this retrofit point, you made a little bit of a wider gap than you would think.

Yes, I think we continue to have -- see really good traction on the light commercial rooftops.

I think, again, where we are lagging, and we have lagged for a number of years, is on the applied side.

To your point, we have new products in the pipeline, new products coming out that we think will address this as we go through the year.

That's why we're confident as -- again, sales will pick up in that commercial business as we move through the year as we get these new products out there.

But clearly, the issue has been on the applied.

This is not a new phenomenon.

The small rooftops continue to be very good business for us and good share.

But we're a little bit behind on the applied side.

Okay.

And then just following up on your point on China service really being the story for Otis going forward, did you have to take any more additional actions there to kind of gain critical mass?

And have you seen any meaningful shift in the willingness to pay OEs to do this service?

No, I think -- this is about investing for the future.

I mean, you've got to continue to add service technicians.

You've got to continue to add infrastructure, offices and depots.

Otis has been making investments for the last two years now.

They added a couple-of-thousand people into the service work force over there.

This will just take time.

You also have to remember the way we go to market there in China is a little bit different, because our biggest business was with Sheitzo.

As we go through agents and we don't get the same attachment rate or conversion rate there, we are working with the agents to make sure that we can capture more of that service revenue and find a win-win with the agents to capture that going forward.

So, yes, I think we're getting good traction.

It's going to be an investment for us for a number of years, but margins will continue to improve as we get better route density and as we expand the footprint there in China.

Okay.

Thanks, guys.

Our final question comes from Myles Walton from Deutsche Bank.

Your line is open.

Maybe one quick clarification on CMH.

Just for 2015, as you look at it in isolation by everybody that built-in a loss on the delivery of a set of aircraft, is your baseline assumption now that we are in a better position or worse position or neutral position to that, Greg?

You know, I don't think we are in a worse position, but I really can't tell you exactly where we are.

I think, again, the idea here is to get a big chunk of the cost behind us this year to eliminate most of the headwind.

But I'm just -- I'm very reluctant, Myles, to go out there until we get this thing negotiated, to give you a final number.

Okay.

And then the other clarification or maybe color I wanted was on the F-35 -- the fan failure and the fix that's ongoing.

How is that affecting your deliveries or progress, your recognition on the contracts?

And where is the kind of the escape trajectory from here?

Yes, I think we're on track for the F135 engines.

We had good deliveries in the first quarter.

We continue to come down the cost curve.

There was an issue on a test stand, and we talked about that.

I think, again, we understand the root cause, working on all that.

So, again, these things happen.

That was an engine that was a long cycle endurance.

And we are clearly on track with the development of the technical aspects of that engine.

It's fixed.

Okay.

Great, thanks.

Okay.

Thanks, Myles.

All right.

So with that, let me just wrap up.

And first of all, I wanted just to maybe a little housekeeping.

And first of all, welcome Casey Forrest to the IR team.

Casey is joining us from our Financial Planning group.

So Casey will be on the phone with you guys later today.

And I want to thank Jos Banas for his 3.5 years of service to the IR group here.

He's done a great job.

Many of you know him.

I hope you wish him well.

He's off to get a real job as a CFO of our Actuation and Prop business over in the UK.

So, wish he and his family well.

So, with that, thanks very much for listening, and look forward to hearing from you guys today.

Thanks very much.

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

You may all disconnect and everyone have a great day.