雷神技術公司 (RTX) 2014 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, Jay Malave, Director of 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 structuring 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.

UTCs 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.

(Operator Instructions)

Please go ahead Mr. Hayes.

Okay, thanks, Kevin, and good morning everyone.

As you saw in the press release today UTC reported second-quarter earnings per share of $1.84.

That's up 12% excluding the impact of restructuring and one-time items.

And adjusted segment operating margins expanded by 90 basis points to 17.1% in the quarter.

That concludes a solid first half with 4% organic sales growth and earnings per share up 11% excluding the impact of restructuring and one-time items.

All that gives us confidence to increase the bottom end of our EPS range so we now expect 2014 earnings per share of $6.75 to $6.85.

That's growth of 9% to 10% versus our previous guidance of $6.65 to $6.85

Okay, turning to slide 2, organic sales.

Organic sales grew 3% in the quarter led by strong growth at Aerospace Systems and Otis.

In the commercial businesses we saw 3% growth in the America led by 15% growth at Otis.

In Europe where the economic recovery remains tepid, organic sales were down 1% in the quarter.

However, Asia saw 5% growth.

In China specifically, commercial sales grew by 10% led by Otis which was up 15%.

Looking at aerospace, continued weakness in defense where sales were down 4% was more than offset by strong growth in commercial OE and the aftermarket where overall sales increased 7%.

Moving to slide 3, order trends, overall trends remain positive for the majority of our portfolio.

Just as a reminder we will talk to the commercial businesses on a constant currency basis as we usually do.

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

US consumer confidence hit a six-year high in June and the outlook for commercial construction remains encouraging.

ABI trends are positive and we continue to see that coming through in our orders at Otis where North America new equipment orders were up 44%.

Commercial HVAC orders were up 3% in the quarter.

North American residential HVAC orders were down slightly versus last year.

And you'll recall we had a very strong first quarter as distributors ordered ahead of the summer cooling season but residential orders year-to-date are essentially in line with our expectations for the year.

In Europe, as I said before the economic recovery remains slow.

Eurozone PMI and economic sentiment eased some in June on concerns over rising oil prices and the situations in the Middle East and the Ukraine.

Both indicators remain in positive territory and growth is expected to pick up in the second half.

And we saw that reflected in UTC's order rates in the region.

Otis's new equipment orders were up 10% led by strong growth in Eastern Europe where orders were up more than 20% while in developed Europe orders grew at a 4% rate.

CCS fire and security product orders grew 18% and commercial refrigeration orders were up 5% in commercial HVAC grew at 2%.

In China as you know the government has recently stepped up spending on infrastructure project and eased banks reserve requirements to shore up growth.

In the second quarter orders for CCS commercial HVAC were up 7% and fire products were up 10%.

Otis new equipment orders were flat on a tough compare from last year.

You'll recall that last year Otis saw orders up 39% in China in the second quarter partly due to a large order for the Goldin Finance 117 Tower in Tianjin.

China new equipment backlog is up 20% versus the prior year and on a unit basis new equipment orders were up 12% in the quarter So our Building and Industrial Systems businesses continue to be well-positioned as we head into the back half of the year.

Moving to aerospace with in-line profits projected to be almost $18 billion this year and ongoing growth in air traffic, we continue to see solid conversion of new equipment backlogs and growth in our commercial aftermarket businesses.

At Pratt & Whitney, commercial spares orders were down 6% due in part to a strong first quarter.

Total large commercial engine aftermarket sales were up 10% in the quarter on the back of a continued trend of heavy overhauls going through our shops.

And this continues to support our expectations for full-year aftermarket growth of about 5%.

At UTC Aerospace Systems, commercial spares orders were up 28%, driven primarily by strength in provisioning.

While some uncertainty still exists in the global economic outlook, order rates and macroeconomic trends continue to support our assumptions for organic growth of about 4% for the full year.

On slide 4, taking a closer look at the second quarter, total reported sales increased 7% as 3% organic growth and the $830 million cumulative sales adjustment for the Canadian Maritime program were partially offset by headwinds from net divestitures.

Segment operating profit grew 8% and operating margins increased by 90 basis points including the benefit from pension.

CCS saw the benefit of restructuring and product cost reduction initiatives where operating profit grew 9% leading to margin expansion of 210 basis points.

Pratt & Whitney and Aerospace Systems expanded margins by 150 and 70 basis points, respectively, each on the benefits from cost reduction actions and lower pension expense.

Earnings per share in the quarter were $1.84, that's up 8%.

Restructuring costs and other one-time items which include the CMHP charge in the quarter were fully offset by favorable tax related items.

You'll recall the second quarter of 2013 had $0.05 of net gains.

Absent the impact of the prior-year net gains, earnings per share were up 12%.

Free cash flow in the quarter was 80% of net income, capital expenditures were $406 million.

That's up 10% versus last year as we continue to invest for the ramp up in commercial aero.

And working capital grew by more than $400 million in the quarter.

We acquired $335 million of our stock under our share repurchase programs and we expect to buy back a similar amount in the third quarter.

Let me stop there for now.

I'll be back more to talk about full year, but first let me turn it over to Jay to take you through the business unit results.

Thanks, Greg.

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

Service sales were up slightly.

Operating profit was up 3% at constant currency.

Strong new equipment volume, most notably in Asia and the Americas drove the increase in operating profit moderated by continued pricing pressure.

New equipment orders were up 3% with double-digit growth in the Americas and Europe.

As Greg mentioned earlier, orders in China were flat for the quarter against a tough compare to last year which included the Goldin Finance 117 in Tianjin project.

While new equipment activity in China is normalizing to levels in line with our expectations for the year, we were encouraged in the quarter with solid growth in new equipment unit bookings.

Based on year-to-date trends we now expect operating profit for the full year to increase $100 million to $125 million from our prior expectation of $100 million to $150 million on mid single digit sales growth.

Otis expects to see improving performance in the second half from strong new equipment sales growth and continued improvement in factory performance in North America.

On slide 6, Climate Controls and Security increased profit 9% in the quarter on 3% lower sales.

Resulting in margin expansion of 210 basis points to 19%.

Organic sales were down 1% with mixed results across regions.

Organic sales in Asia were down low single digit including slower backlog conversions in the commercial HVAC business.

Transicold was flattish and Europe was up slightly.

U.S. residential HVAC was flat for the quarter following a solid first quarter which included the benefit of early distributor stocking.

For the first half the residential HVAC business reported high single digit sales growth in line with the full-year expectation.

Profit growth in the quarter was driven by restructuring and integration savings, lower commodity costs, as well as continuing product cost reduction effort.

Equipment orders were up 2% with global commercial HVAC equipment up low single digit led by China.

Orders for global fire and security products were up mid single digit, more than offsetting a decline in the fire and security field businesses.

Transicold equipment orders were up mid single digit.

Based on first half results, we continue to expect profit growth of $225 million to $250 million for the full year at CCS.

Now on low single digit organic sales growth from our previous expectation of mid single digit.

Turning to aerospace on slide 7, at Pratt & Whitney operating profit was up 11% on 1% lower sales, resulting in margin expansion of 150 basis points.

Organic sales were up 1% as 10% growth in large commercial aftermarket more than offset declines in commercial OE and military.

The operating profit growth was mainly driven by lower pension costs and restructuring savings.

And the absence of last year's contract close out benefit was partially offset by a gain on sale of product line this quarter.

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 another solid quarter with 14% operating profit growth on 9% higher sales.

Sales growth was driven by higher commercial OE and aftermarket volume, up a combined 16% partially offset by a low single digit decline in military sales.

Year-on-year profit growth was driven by higher commercial aftermarket volume, the favorable income from a customer contract settlement, continued synergy traction, and pension tailwind.

Partially offset by higher engineering spend on new OE programs.

Operating margins increased 70 basis points to 16.7%.

Orders for commercial spares grew 28% on a year-over-year basis led by strength in provisioning.

Commercial spares in the first half of the year are up 18% on a year-over-year basis, with year-to-date book-to-bill just north of 1.0.

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 decreased by 10% on 1% lower sales.

During the quarter, Sikorsky shipped a total of 63 aircraft including 46 based on military platforms and 17 commercial.

The sales decrease was driven by lower US government OE and aftermarket volumes partially offset by higher international military and commercial OE sales.

On profit, the headwinds from net unfavorable contract performance adjustments, primarily in the military business, more than offset benefits from restructuring, pension, and other cost reduction actions.

During the second quarter, Sikorsky was awarded two significant contracts for the development of the VXX Marine One replacement aircraft for the U.S. Navy and a combat search and rescue helicopter for the U.S. Air Force.

These contracts in total exceed $2.5 billion with follow-on production orders expected to exceed $10 billion.

Based on CMHP contract amendments and other contract performance adjustments as well as aftermarket trends through the first half, we now expect higher year-over-year operating profit of about $25 million on low single digit sales growth from our prior expectation of flattish profit on high single digit sales growth.

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

Okay.

Thanks, Jay.

So overall another solid quarter for UTC and we continue to achieve important program milestones and secure key wins the future.

Some highlights in the quarter.

We announced several significant wins at the Farnborough Airshow last week.

At Pratt & Whitney we continue to see strong demand for the GTF engine across platforms including recent wins on the A320NEO, C-Series, Embraer E2 and MRJ.

Customers clearly see the advantage of the GTF product and have placed firm and option orders for 6,000 engines.

In May, Pratt delivered the first ship set of geared turbofan engines to Airbus.

And is ready to support the first flight of the NEO later this year.

As you no doubt heard we've had a couple of engine related development issues in the quarter.

While certainly disappointing these things do happen in development programs which is why we put the engines through such a rigorous test process.

The good news is that the issues are unrelated and in the big picture the fixes will be relatively minor.

We're pleased that the Pentagon has approved the JSF for resumed flying on a limited basis, the F135 engine has accumulated more than 26,000 ground and flight test hours, but we continue to learn and develop the technology to provide our customers with the capability and reliability they require.

On the C-Series, we understand the root cause of the incident and we are working closely with Bombardier to resume flight testing as soon as possible.

The fundamental architecture of the geared turbofan engine remain sound.

And with nearly 10,000 hours of ground and flight testing, it's the most mature of the new generation of advanced commercial engines entering the market.

With significant testing behind us we look forward to bringing the GTF engine family into service in 2015.

Also in the quarter on the aerospace systems segment, we were selected to provide wheels and carbon brakes for both Boeing 737 Max and the Airbus A320NEO platform.

They also secured new long-term MRO contracts from several airlines and they celebrated the delivery of the 10,000th Boeing 737 nacelle.

At Sikorsky, they were selected on two key US DoD programs in the quarter.

It was awarded the engineering and manufacturing developing contracts to build the next generation Marine One presidential helicopter and to develop new combat search and rescue helicopters for the U.S. Air Force.

Combined, these two programs represent over $12 billion of future sales opportunity.

On the commercial side, the Civil Aviation Administration of China recently issued a type certificate for the S76D which allowed Sikorsky to begin delivering the helicopter to customers in China.

We're also pleased that Sikorsky and the Canadian government conclude contract amendments in the second quarter which defined a final configuration for the CMH aircraft.

And a phased delivery schedule allowing for the retirement of Canadian Sea King helicopters beginning next year.

We recorded sales of $830 million and a charge of $438 million in the quarter reflecting the cumulative effect of progress to date towards completion of the modified program.

This puts us the CMHP OE losses largely behind us.

Under percentage of completion accounting we will have some small charges as we progress on the program but they are manageable within the Sikorsky numbers going forward.

The Building and Industrial Systems businesses had a solid second quarter with a combined 7% profit growth.

Integration activities continue to progress well with Otis and CCS teams finding a way to serve our customers more efficiently.

A recent example of this was in Hong Kong where UTC Building and Industrial Systems was selected to provide building systems for the iSquare shopping and entertainment complex.

This project will include intelligent building managed systems, chiller plant optimization and remote monitoring.

ISquare is also equipped with Otis escalators.

So each of the businesses is well-positioned in our core markets and we're delivering real value to our customers and securing key orders that will drive top line growth well into the future.

All right, taking a look at the rest of the year.

Not much really changed from the last time we spoke.

As you know, the compares get tougher as we move through the year but first half order rates and end market trends continue to be broadly in line with our expectations.

And we're confident in the revised guidance range of $6.75 to $6.85 with a path towards the higher end on sales of about $65 billion, up from our prior expectation of about $64 billion primarily on the Q2 CMHP sales adjustment.

We now expect quarterly earnings-per-share growth of about 7% to 10% in the last two quarters of the year, absent the impact of gains and restructuring.

On restructuring, we are investing about $375 million for the year and we spent $180 million in the first half so you can expect to see about $100 million of restructuring spend in each of the next two quarters.

As we committed we expect the restructuring and one-time charges including the second quarter CMHP charge will be offset by gains during the course of the year.

We also continue to anticipate debt pay down of about $1 billion this year and we now expect share repurchase of $1.25 billion for the year.

That's an increase of $250 million from our prior expectations.

On the M&A side we expect spend will now be a little bit less than $1 billion.

As you know, at UTC we typically deliver free cash flow greater than or equal to net income.

Through the first half free cash flow is 81% of net income and cash flow is generally stronger in the second half.

But as I sit here today I think 90% to 100% for 2014 is more realistic based on the continued investments we're making on the aerospace side to deal with the aerospace cycle.

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

We are well-positioned in our segments and will continue to capitalize on our industry-leading franchises and global scale.

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

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

Kevin?

(Operator Instructions)

Jeff Sprague, Vertical Research.

Greg, I was wondering if you could address a little bit cash flow into next year at least at a high level.

Obviously the working capital burden may remain heavy but do you still feel that you're at kind of a peak level for CapEx and how might those items trend in the next year?

I think as we've said before, Jeff, I think CapEx definitely peaked this year at just shy of $2 billion.

It's up from about $1.7 billion last year.

And then next year we will see that come down $200 million, $300 million again as the ramp, or the facilitization for the ramp is pretty much complete by next year.

Again we're going to start delivering these engines at the end of next year and we have to be ready so the money is going out now.

It's part of the working capital build as well.

And we continue to target 100% of free cash flow to net income both this year and next year.

I think we're just acknowledging now that it's going to be really difficult to do it this year just given the big CapEx ramp and the working capital ramp associated with the GTF launch.

I was wondering if you could provide a little more color on US commercial HVAC trends, both around the applied and unitary market.

Jeff, just for in total -- total commercial HVAC orders were up low single digit.

The applied was actually up higher, mid to high single digit and the light commercial was up a little bit low single digits.

Okay those order numbers or?

Those are orders.

And do you have sales?

Sale, I do not have sales in front of me.

I will have to get back to you on that, Jeff.

All right.

Thank you.

I'll pass the floor.

Jordan Bell, JPMorgan.

On the UTAS spare side obviously some pretty good numbers and I know it's provisioning but does that give you more confidence in your profit guidance for the year for UTAS or how is all that flowing through?

There is a lot of elements to the profit growth at the aerospace systems group in the back half of the year, there's a big chunk of synergies coming through and obviously the aftermarket is supportive of the guidance.

Clearly it's a big number fur UTAS and the back half of going to be big.

But generally I think where we've guided to about high single digits I think, Jay, for Aerospace Systems aftermarket growth it's obviously a little bit better than that, so I think it all just goes to the back half of the year.

And everything should be pretty much in line.

Okay.

And then over at CCS you brought the mid single digit down to low single digit for expected organic growth.

Can you give some color on, not in the quarter but just in terms of the guidance for the year, where -- in which end markets that's lower in.

First half of the year organic growth at CCS was about 1%.

Back half of the year we're expecting about 4%.

So we've got a little bit of a hill here in the back half of the year.

And again still confident we're going to hit the guidance number out there, $225 million to $250 million even on the lower sales expectations.

I think generally things are in line with what we expect.

Resi was a little soft in the second quarter but that really just relates to the big pre-buy we saw in Q1.

I think it's about up 9% year-to-date.

We expect it to be up high single digit in that range in the back half of the year as well.

Order rates on the commercial businesses, commercial HVAC has improved.

Order rates at Transicold have pretty much stabilized.

So again I think all the pieces are in place to get to that 4% growth.

And obviously there's cost reduction initiatives and other things that give us confidence to hit that number, but generally speaking I think Geraud and team, we're pretty well on track to deliver that back half growth.

Okay.

Thank you.

Julian Mitchell, Credit Suisse

If I look at the Pratt EBIT guidance for the year, I think it implies growth of about $120 million in the second half.

You did about plus $70 million in the first half.

And I guess if you look at what's going on in Q2, you've had weaker commercial spares orders and also you mentioned maybe there might be some extra E&D needed for the engine fixes.

So I guess what gives you the confidence that you'll see a big step up in year-on-year EBIT growth in Pratt in the second half?

Julian, what we have -- for the year for Pratt a substantial part of their profit growth is restructuring savings, we just pretty much baked -- a lot of that was taken last year.

As well as pension benefit, again that is pretty much going to be reflected in their results.

Aftermarket as Greg said is up 10% year-to-date.

That will moderate a little bit in the back half.

The other piece of it is it will actually get a little bit better performance out of the military business, a little bit lighter on shipment on the military engines, particular in the JSF.

We will see that ramp up in the second half of the year.

We'll also get a little bit of lift out of Pratt & Whitney Canada, it was off to a pretty reasonable start year-to-date.

So those two businesses will help offset some moderation I'd say in the large commercial aftermarket.

Yes, I'd also just point out we're in the process of definitizing the LRIP 7 with the JSF so there were a number of engines that could of or should of gone out the door here in the second quarter.

More than 12 of them will go out here in the third quarter so you're going to see a bump in military OE coming into the third quarter which is going to help as well.

Thanks, and then just my follow-up is that in BIS your China sales in the first half are up about 12% I think in total, what do you expect for that second half revenue growth number to be?

I think on the Otis what we've guided to is mid teens about 15% which is exactly what we saw here in the second quarter.

The CCS side a little bit lighter than that.

Just a little less than 10% in the back half, and again, order rates as we look at the GST business and the other businesses, the commercial HVAC all supportive of that back half.

Great.

Thank you.

Doug Harned, Stanford Bernstein.

On Otis, what was it that lowered your guidance outlook for profit for the year?

Has the outlook changed at all in terms of pricing or demand?

No.

I think it was a small tweak.

I think we took down the top end by about $25 million.

We've grown earnings just under $30 million in the first half of the year.

We saw a nice return to profitability or profitability growth in the second quarter.

But it's just a realization that we're probably not going to get to the top end of the range.

Continue to make investments in new products.

I think we saw that in -- when we were over in China couple of weeks ago.

But we going to get -- that factory transformation is pretty well complete.

You going to get some tailwind from that.

It's probably not going to get to the top end again Europe pricing is still a little choppy and it's just a realization that's more likely towards the middle of that range.

Okay, and then on UTAS when you look at how the 787 program is going, can you comment on progress there?

And as you look forward presumably the program will become a bigger contributor to UTAS margins.

How should we think about the trajectory for the 787 in terms of profitability?

Well clearly 787 we're still in a negative margin situation across all of 787.

I think we talked last year, we mentioned we were down, we were losing about $3 million a ship set, that number is coming down significantly.

Within I think 2015, 2016 we will be close to a breakeven point on 787, so coming down the learning curve as we expected, still a lot of work to do.

Reliability is improving on the aircraft systems that are out there.

We're close to our contractual goals that we've got with the Boeing Company and continue to work with Boeing on product improvement opportunities, so program's going well.

There's really no surprises there.

And also Doug, we've got the Dash 9 coming online here too.

And don't forget part of the growth and provisioning this quarter was on the back of the 787 so you see nice profitability and provisioning which helps offset at least a portion of the negative margins associated with the OE.

And is the Dash 9 leading to some significant change activity for you in this that sort of pushes the trajectory back a little?

No, there's -- a few of the systems are different on the Dash 9, the control, the ECS system was upgraded, but most of the other systems are the same.

It is actually helping in terms of the learning curve on the product.

Okay great.

Thanks.

Thanks, Doug.

Peter Arment, Sterne, Agee.

First a clarification on the GTF engine fix, I assume that's applying out to all the models.

Is that going to affect any of the certification timelines?

No in fact this particular fix we think is just related to the C-Series engine itself.

Each of the architecture is a little bit different and we have not seen a similar issue on any of the other models that are out there.

Okay.

And then just a quick one on just Pratt & Whitney Canada.

Are you seeing any RPM change regarding the lower end of the business jet market, I think that's 40% of your mix up there.

Yes, no, I guess the best word to describe it is it is still a little choppy.

Deliveries are picking up a little bit but there's still a lot of used inventory out there.

Orders are really not picked up.

I think the best news there is flying hours have picked up a little bit, and as you know most of that business is powered by the hour so we're still seeing decent cash inflow but really not seeing a big step change in terms of the growth in the market.

Thank you.

Thanks.

Peter.

Robert Stallard, Royal Bank of Canada.

Greg, I was wondering if you could kick off on China on the order trends you've seen there.

Have you seen any shift in market share in your various products?

Nothing dramatic I would say.

I think again Otis has regained its, or is regaining I guess I should say the share that we had lost in previous years.

Which is really a trend that started last year, it's continuing into this year.

Getting a little bit more traction on the commercial HVAC side and GST continues to gain a little bit of share, but again, generally everything is improving as about as we had expected in China there.

Okay.

And then secondly on the Aerospace Systems aftermarket, did you actually say what the aftermarket revenue growth was in the quarter?

And it would be helpful if you could split out how much was provisioning?

Total aftermarket revenue growth was up around 10% in the quarter.

It was led by, again spares were up low teens, spare sales were up low teens in the quarter.

And the amount that was provisioning?

Provisioning sales, I have orders Rob, but I'll get back to you on the sales element of provisioning versus parts.

Okay, but I imagine this could be quite lumpy, this provisioning.

Yes.

Provisioning is very lumpy, so of that 28% growth that we saw here in Q2, don't look for that to repeat, but again it's primarily 787 related which is good news.

A lot of airlines out there taking new aircraft which leads to all of this provisioning.

The trend will continue but just not at that 28% rate.

Thanks so much.

Thanks, Rob.

Cai von Rumohr, Cowen and Company.

You had a flat compare in orders and Otis China against a very stiff compare.

But if you look at the monthly data on residential housing prices it looks like it's rolling over.

What's your expectation for kind of orders in the third and fourth quarter and for growth in China Otis next year?

I wish I had a crystal ball Cai to answer that question.

Generally I think the thing to think about is the back half of the year is backlog which is up about 20% so we're expecting about 15% sales growth.

We've got I would say the backlog to carry us through the, at least through this year and even into next year.

Orders have continued to be good.

Last year orders in the second quarter were up 39%.

Obviously on the back of that one large order.

But you take out the Tianjin 117 order last year and orders were up about 14% or 15% this year on an apples to apples basis.

The trends have remained positive in the business.

Back half of the year, is it going to slow, probably.

I think again, is it going to be somewhere between 5% and 10% perhaps.

We have seen the Chinese economies is cooling a little bit, we expect growth of 7.5%.

Residential prices we know have been moderating and even coming down in some markets.

And that's a big piece of our business but infrastructure has more than taken up the slack where we're seeing the drop on the residential side.

Terrific, and then kind of getting back to spares.

Boeing is saying they're going to have about 16 to 18 new customers introductions this year and the same next year.

And next year we also have the A350 coming online.

So maybe give us some color on the expectation for continuing to configure and provisioning.

Maybe not at 28% this year and next year.

Look, I think that's all baked into what we consider to be the guidance for this year which was high single digits, 9% kind of growth of the Aerospace Systems aftermarket.

Clearly the introduction of the 787 to all of these new customers is what's driving the provisioning growth this quarter and will continue to drive it into next quarter.

So I mean it's great that this plane is going to so many new customers, it really does support a lot more provisioning.

Although not everybody gets provisioning.

Some people go on our total care package where we're actually providing the spares for them.

But again I think the trends that we're seeing this year, there's nothing out there that would tell me those trends should not continue into next year, but I think it's a little early to start talking about FY15 guidance.

Thank you.

Thanks, Cai.

Howard Rubel, Jefferies.

Greg, we've had a lot of restructuring items and I appreciate some of the walk.

But could you talk a little bit about tax rates for the second half of the year?

I mean we know a 16% rate in this quarter's not sustainable and then I'll have a follow-up.

Yes, I would ignore the ETR, the effective tax rate in this quarter, because again, all these one-time tax related items that we had, the settlement of the FY09 and FY10 tax years, a couple of other minor tax adjustments, the rate wanted to be about 31% in the quarter on a operating basis.

Back half of the year we'd expected about 29%.

So again, a little bit of better news in taxes coming up but not a lot.

The wild card out there of course is extenders which we still don't have in the guidance and whether that happens this year or not I think nobody knows, but obviously it still gives us upside if it does.

To follow-up, that 29% does not include some of the benefits that you've outlined.

That you're likely to recoup or record as gains during the balance of the year, right?

Yes, there is about $0.25 of additional gains we're going to see in the back half of the year on top of the $0.28 that we picked up in Q2 on the tax rate.

So when I'm talking about the 29% rate, that is operational.

That is not I would say the reported rate.

We'll pull all those gains out of the math for you so that we can try and keep it clean in terms of an operating result.

So those gains also include like the Watsco benefit that will show up in the third quarter?

The Watsco benefit.

Is that you're talking about the option exercise?

Yes or.

Yes, it's small.

It's not very big at all.

And then the last thing is, just to go to Pratt, we've had these collaboration intangible benefits for some time that have helped the numbers.

How do you sort of sort of see that playing out and doesn't that sort of help the reported results at Pratt over the intermediate term before you transition to the GTF?

So you're talking about the collaboration benefits associated with the IAE transaction, Cai, I am sorry Howard.

Usually I get confused with George.

That's all right thanks, Greg.

Yes, I am.

Some of them I know are installing payments and effect to Rolls but the balance reflects I think pricing of engines.

Could you, doesn't that sort of help the Pratt numbers?

In fact, you really need to go back to the original IAE transaction where as part of the consideration for Rolls transferring its share of IAE to Pratt, we agreed to give them higher pricing on the OE side so that was really part of the purchase consideration.

So the losses on the engines actually go up as a result of that, but under the purchase accounting rules that becomes an intangible as we ship those engines, those losses go into an intangible asset.

Really part of the purchase price.

And also it starts to shrink to dramatically because those were only engines that were in backlog as of the day that we closed on the IAE transaction.

All the new orders for these that we've had don't reflect any of that benefit although they do reflect the higher price we pay to Rolls-Royce on the new, on their share of the engine.

So yes, it's out there, it was all contemplated at least the collaboration piece, all contemplated as part of the overall consideration just like the flight hour payments.

Thank you.

Ron Epstein, Bank of America.

Two quick ones for you.

Your prior guidance I believe didn't -- had $0.05 in it for the Canadian Maritime helicopter.

Now that that's out of their guidance how come you guys didn't take up the higher end of your range by a nickel or so which was the -- had the previous guidance for the Canadian maritime in it?

Make sense?

Yes, your precision exceeds our accuracy though.

The fact is you're right we did have $120 million baked in for the CMH.

The back half of the year there'll still be about $50 million of CMH related costs in addition to the charge.

So nominally we could've picked up a little bit.

We did take Sikorsky's guidance up about $25 million.

But they've had some much slower military aftermarket sales than what they had expected.

They had some EACs that have gone against them in the first half of the year.

They've consumed about $50 million of the good news associated with what should of been guidance on the CMHP.

So really we've only increased by $25 million which is a couple of pennies.

And we just didn't feel like we're going to take up the top end of the range for $0.02.

Okay.

Great.

And then switching over to Climate Controls and Security.

In the quarter, the margins were really good right, 19% before the one-time stuff.

How should we think about that through the remainder of the year?

That's a pretty darn good trend, right?

It's a great trend Ron, but don't forget the second quarter is typically the heaviest, particularly on the US residential side so you'll always see a stronger margin percentage in the second and even third quarters.

That'll come down sequentially.

There'll still be margin expansion over last year but you're talking probably on average in the range of say 17% in the back half of the year.

Okay and I guess was there any one-time positive things in there, or big sales or something that --

No, it was a very clean quarter.

No one timers or anything like that.

Everything got pulled out that would have been a one-timer so, very clean quarter.

Just, again, good performance on the cost side.

Good traction really around the whole business from a cost standpoint.

Okay.

Great.

Thank you.

Thanks, Ron.

Noah Poponak, Goldman Sachs.

Greg, I wondered if you might be able to just actually provide more detail on what the C-Series engine fix and resolution is and how the implementation of that is going to play out?

Because what we can see in the press has been fairly high level and it sounds simple but I guess the aircraft have now been grounded almost two months, so any more detail there would be really helpful.

Yes, I didn't get my engineering degree unfortunately so I'm not going to be a little give you probably the technical answer that you're looking for.

We do know, I mean we identified a root cause of the engine oil seal leak early on in the investigation.

We've been -- we have a fix in place.

We're continuing to work with the customer, Bombardier, to work with the Canadian airworthiness authorities to get the plane flying again.

We expect it will be a couple of weeks.

Again, this is not a big deal in terms of the architecture.

This happened back in the turbine section, had nothing to do with the gear upfront.

And really a relatively minor fix.

Unfortunate that it happened when it did in the testing program.

But again not a big fix in terms of engineering development costs.

Okay.

But seeming like another couple of weeks before the aircraft are back in the air it sounds like?

Yes, I can't give you anything better than that.

I think that's what we heard earlier this week and I know the folks at Pratt and Bombardier are working as hard as they can to get that thing flying again.

Okay.

And Jay, you are about to give the Aerospace Systems order -- spares order provisioning versus parts breakout.

Can you actually just provide those numbers?

Yes, the provisioning was quite high.

You're talking in the range of about 80% and the parts were flat.

Sales or orders?

Orders.

Parts were flat.

Parts were flat.

I'm sorry --

28%.

Yes about, year-over-year.

Okay.

Thanks a lot.

Okay.

Deane Dray, Citi Research.

I might have missed this, but for Otis China orders what was the attachment rate and maybe some broader context of where you expect to see that trend over the next year or so with the new regulations.

I think the conversion rates or the attachment rates as you're referring to I think are pretty consistent with what we've seen where we're getting somewhere around 60% or so out of the Otis China brand and a much lower conversion rate on the XOEC and the Sigma brands.

Again if you recall we sell direct to the Otis China Limited and we're selling through distribution so attachment rates in total are still around 25% I think across the portfolio.

Nudging upwards a little bit as we're trying to again make a big push towards the aftermarket.

I think aftermarket, service 20% last year.

We expect it to grow another 20% this year.

We added 50 branches last year.

We're in the process of adding another 50 branches this year.

We're putting the infrastructure in place to support the continued growth in the service.

And the real key will be for us to work with our distributors through the distribution model to make sure that we can capture more of the aftermarket or conversion from the XOEC brand.

Great and then on capital allocation, just the updates that you've given us this morning, boosting buybacks and maybe cutting back on that placeholder on M&A.

Just put this in context for us.

And also how are you funding the buybacks, a lot of the -- most of your cash is offshore so what's the expectation in terms of funding those?

Yes, well again, we're working to get some of that cash back as tax efficiently as we can, but as I sit here today I think we've spent less than $90 million on M&A through the first half of the year.

It's just a realization as we're sitting in July.

We've got a couple of smaller deals in the pipeline but you're talking less than $250 million or $300 million each.

So hard to imagine were going to get towards that $1 billion placeholder.

So we just took it down directionally and we will give you more guidance at the end of September.

And again, as we're taking up the share buyback and looking at the price over the last month or so we've obviously been trading down.

It's a very attractive investment terms of our M&A dollars so we're going to put more there.

And we're going to be patient on the M&A side.

Great.

Thank you.

Thanks, Deane.

Carter Copeland, Barclays

Just a couple of quick ones.

Greg, you said the CMH, the charges going forward would be manageable but I think last quarter you said the charge you were going to take was going to be about 70% to 75% of the total loss which would imply if that didn't change kind of $125 million or so to go.

Is that still the right order of magnitude and how should we think about the phasing of that over the next two years?

Yes, so let me, just to be clear, when we took the charge for the $438 million that included all the losses going forward on the program and it included an extension of the initial in-service aftermarket training and support which actually drove the loss higher because instead of putting these aircraft in service in 2015 and 2016, it's going to take it out through 2021 before we're done.

So that drove about another $100 million of losses that we're going to recognize as part of this whole charge.

If you think about it, back half of the year we'll probably see as I said $50 million, about $25 million a quarter.

Next year the total number goes, it's around $20 million a quarter, not quite.

And then really after that it becomes noise.

Because the aftermarket starts, they start accumulating hours on the aftermarket which more than offsets any of the losses that we're going to have as we complete.

So we're about 70% done.

We've incurred about $700 million of losses on that program so you can nominally think there's about $300 million to go between now and 2021, but the real headwind is third and fourth quarter this year and then next year and then it's really behind us.

Okay great.

That's great color, thanks.

And then just as a quick follow-up, Jay, you mentioned in your remarks the difference in unit order growth versus dollar bookings at China Otis.

Could you give us those numbers?

The unit bookings were up, I think Greg mentioned in his remarks, were up 12%.

Okay.

Thank you very much, guys.

Okay.

Thanks, Carter.

David Strauss, UBS.

Greg, in terms of the organic growth in the second half you mentioned the comps get a lot tougher yet you're forecasting organic growth for the most part in line with what we saw in the first half.

Can you just talk about at a high level what's going to drive that?

Yes, there's a couple of things.

I mentioned before we didn't get a bunch of the JSF engines out the door at Pratt.

That contract should be done here in another month or so, LRIP 7, so that's going to help on the military side at Pratt.

Continue to see a ramp on the Aerospace Systems side.

Aftermarket is going to continue to grow.

I think again, as I look at the backlog today it really supports the back half sales forecast.

Orders, down 6% at Pratt in the aftermarket, the total aftermarket was still up 10%.

We're seeing heavy overhauls going through the shops.

It looks like it should be pretty achievable to get to that 4% growth.

I think clearly Otis has the backlog, not just in China but around the world, we see new equipment orders continue to grow.

CCS has good backlog in its businesses, and really no, again, could bad things happen, absolutely, but really as we sit here today I feel pretty good about the overall economic growth in our markets.

Okay.

And on GTF you mentioned some of the wins at Farnborough but looking at it versus your competitor it looked like your competitor actually announced more orders.

It looks like market share has kind of shifted a couple of points in favor of LEAP, so could you just talk about how you think GTF is going overall in the market and what kind of pricing you're seeing on GTF relative to what you're realizing on V2500?

Thanks.

Yes I think again it was a big airshow.

I think GE announced a lot of orders in conjunction with GECAS.

We've got right now about 6,200 engines I think on order.

We said 6,000, I think right now it's about 6,200.

We've got just about 50% market share.

It's lumpy.

I mean these campaigns happen sporadically where there will be 100 or 200 engines that get awarded at a time.

GE's been successful the last couple of weeks.

At the end of the day, I think the market will decide which technology is best.

And we still think the GTF architecture in terms of what it does from a fuel efficiency, from a noise, from an emission standpoint is going to outperform the LEAP in the marketplace.

And that will ultimately be the determinant of what the market share is.

In terms of pricing, pricing is tough.

But it's always tough in this entry into service space.

So I would say there's not much difference that we have seen in terms of market pricing dynamics.

But it's a tough market out there.

Thank you.

Myles Walton, Deutsche Bank

Just a couple of cleanups, the order rates at Pratt in particular, can you just help us with the split between the Vs and maybe the 2000, 4000 -- 4000 particular?

Yes, again the order rates, the Vs were up high teens, the 2000s were down substantially, 70% plus again on the tough compare.

The 4000s were down around 10%, in that range and again a little bit of just timing of shop visits.

There we actually saw some of the older models, we're seeing nice content per visit and we actually saw nice growth on the older models.

So it was actually some of the newer models that showed a little bit more weakness and that again is more of a function of just timing.

As you look out to 2015 can you give a rough proportional mix?

Is it still about 50-50 between Vs and other or is it going to be 60-40 by that point in time?

The Vs are essentially growing at 10% to 15% and I would say the older engines will be flattish going forward.

So you're going to see that mix shift continue, so it'll probably be 55% and going towards 60%.

Okay, and then the other cleanup, Jay, the contract benefit size on UTAS, can you size that?

Yes, it's about $0.03.

Okay, all right.

Thanks guys.

Thank you.

Thanks, Myles.

George Shapiro, Shapiro Research.

The aero margin looked weak to me, particularly with what you size as the gain.

You were down sequentially from the first quarter and revenues were up $200 million so can you just tell me what was going on there?

George, it was basically the E&D, they were up in E&D, this was the highest quarter for E&D at UTC Aerospace Systems and we expect that to come back down in the back half of the year.

They account for all of increase in E&D in the quarter.

Right.

Okay.

And then how much was the gain at aero in the quarter?

Are you talking about the contract settlement?

Yes.

$0.03.

I meant to ask this, at Pratt, you had also mentioned there was some gain.

How big was that one?

Less than $20 million.

Okay.

Thanks very much.

Thank you.

This concludes the Q&A portion of today's conference.

I'd like to turn the conference back over to our host for closing remarks.

Okay, thanks, Kevin and thank you, everyone for listening in.

A solid quarter and on our way to a solid year at UTX and we look forward to taking your calls this afternoon.

Thanks again.

Take care.

Ladies and gentlemen, this does conclude today's presentation.

You may now disconnect and have a wonderful day.