雷神技術公司 (RTX) 2015 Q1 法說會逐字稿

Good morning and welcome to the United Technologies first-quarter conference call.

On the call today are Greg Hayes, President and Chief Executive Officer; Akhil Johri, Senior Vice President and Chief Financial Officer; and Paul Lundstrom, Director Investor Relations.

This call is being carried live on the Internet and there is a presentation available for download from UTC's website at www.utc.com.

Please note the Company will speak to results from continuing operations except where otherwise noted.

They will also speak to segment results adjusted for restructuring and one-time items as they usually do.

The Company also reminds listeners that the earnings and cash flow expectation 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 your 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.

As a reminder, this conference call is being recorded.

Please go ahead, Mr. Hayes.

Okay, thank you, and good morning, everyone.

As you guys saw in the press release today, UTC reported Q1 earnings per share of $1.58, that is up 20% versus prior year and up 7% excluding the impact of restructuring and one-time items.

Foreign-exchange added unfavorable impact of $0.07 in the quarter which equates to about 5% on year-over-year earnings.

So a good start to the year.

We also benefited from a few timing items that Akhil and Paul will walk you through in a second.

Sales of $14.5 billion were up 3% organically led by solid growth at Climate, Controls & Security and UTC Aerospace Systems, which were up 6% and 7% respectively on an organic basis.

Segment operating margins expanded by 20 basis points to 15.6% despite a 40 basis point headwind from pension.

For the full year we continue to expect earnings per share of $6.85 to $7.05.

With that let me turn it over to Akhil and Paul to take you through the results in detail and I will be back and give you some thoughts on the quarter and the remainder of the year before we get into the Q&A.

Akhil?

Thanks, Greg.

Turning to slide 2, organic sales grew 3% in the quarter and that is on top of the 5% organic growth we saw in the same quarter last year.

In the commercial businesses we saw 6% growth in the Americas helped by the ongoing US economic recovery.

Asia also grew by 6% and Europe was up slightly in the quarter.

On the aerospace side defense sales were flattish and commercial grew by 3%, with aftermarket growth of 2% at Pratt and 4% at UTC Aerospace Systems.

Sikorsky's commercial business was down 26% as lower oil prices negatively impacted demand for helicopters and aftermarket in the oil and gas segment.

Taking a closer look at our end markets on slide 3 -- and just a reminder, we will talk to the commercial business orders on a constant currency basis as we usually do.

Although there are some puts and takes, overall macro trends continue to support our expectation of 3% to 5% organic sales growth for the year.

In our commercial businesses we continue to see growth in the US.

Despite a harsh winter in many parts of the country the outlook for commercial construction markets remains encouraging and ABI trends have been positive 10 out of the last 12 months.

We continue to see that in our orders at Otis where US new equipment was up 14%.

At CCS, Americas commercial HVAC equipment orders were up mid-single-digit.

Residential equipment sales were up 3% in the quarter and that is on a tough compare.

Recall that resi sales were up over 20% in Q1 2014.

As many of you know, Carrier's US resi business is primarily a book and ship business and starting with this quarter we will include resi equipment sales on this chart with orders for other long lead CCS equipment businesses.

This gives a better representation of market demand and removes noise from things like last year's SEER 14 change-related pre-order.

We have adjusted the historic data for comparison as well.

Moving on to Europe, we see the economic environment trending positively as quantitative easing measures take hold and a weaker euro supports export growth.

Euro zone manufacturing activity expanded in March to its fastest pace in 10 months driven by Germany, Italy and Spain in particular.

At UTC Otis new equipment orders were up 37% reflecting broad based strength.

Commercial refrigeration orders in Europe were also up 10%.

In Asia economic output in China is moderating.

As we all know, this is not new news.

Real estate investment, new construction starts, floor space sold are all slowing.

Otis equipment orders were down 12% in the quarter.

Now Q1 is our most difficult compare there, but construction activity in China has clearly been slowing.

Shifting to commercial aerospace, as Dave Gitlin said in March, UTC Aerospace Systems had a soft start to the year in the commercial aftermarket where sales were up 4%.

This was driven mainly by a tough prior year compare on provisioning but parts sales were strong, up 12% in the quarter.

At Pratt & Whitney commercial aftermarket sales were up 2% with growth in transactional spares partially offset by lower engine service revenues.

In spite of this slow start we continue to be encouraged by the strong fundamentals of sustained 5% to 6% air-traffic growth and healthy airline profitability projections.

Taking a closer look at the first-quarter results on slide 4, total reported sales decreased by 1% as 3% organic growth was more than offset by 4 points of headwind from the stronger US dollar.

Segment operating profit was flat in the quarter with 5 points of headwind from foreign-exchange.

Operating margins of 15.6% increased by 20 basis points led by CCS where we saw solid drop through once again leading to margin expansion of 120 basis points.

Earnings per share of $1.58 was up 20% in the quarter driven largely by the timing of restructuring and gains.

Recall that the first quarter of 2014 included $0.09 of net restructuring charges while we saw $0.07 of net gains in the first quarter of 2015.

Absent the impact of gains and restructuring earnings per share were up 7%, about $0.10 higher than we anticipated based on earlier than expected finalization of some discrete items at CCS, Pratt, UTAS and Corporate.

Free cash flow in the quarter was 67% of net income driven largely by seasonal inventory build and higher receivables.

Free cash flow was also adversely impacted by a significant net outflow in the quarter at Sikorsky.

Share repurchase was $3 billion including the benefit from the accelerated stock repurchase that we announced last month.

So we are pretty much done with the share buybacks placeholder for this year.

We are maintaining our placeholder of $1 million for M&A and continue to expect free cash flow to net income of 90% to 100% in 2015.

We also continue to anticipate $300 million in restructuring this year all offset by one-time gains.

The recorded pretax equivalent gains of $0.14 in Q1 and expect the remaining $0.09 in the second half.

We spent $93 million on restructuring in the first quarter and expect gains to equal restructuring for the first half.

As we think about first half earnings, we expect organic revenue growth to be in line with the full-year guidance of 3% to 5% and reported EPS growth to be slightly above the high end of the full-year expectation of zero to 3%.

Let me stop there for now and turn it over to Paul to take you through the business unit results in more detail.

Okay, thanks, Akhil.

So turning to page 5, Otis profit improved 1% at constant currency on 2% organic sales growth.

Overall foreign-exchange translation was an 11 point earnings headwind and a 9 point sales headwind.

Profit growth in quarter was driven by contributions from higher volume and productivity initiatives in the Americas and in Asia.

This was offset by a decline in profit in Europe due to lower volume and continued pricing pressure in the service business.

Sales in EMEA were down mid-single-digit with declines in both service and equipment sales.

Both the Americas and Asia regions were up 7%.

The Americas had nearly 20% new equipment sales growth and low-single-digit service growth while Asia had high single-digit growth in new equipment and mid-single-digit growth in service.

Sales in China were up 7% driven by the conversion of new equipment backlog and strong service.

But that plus 7% was softer than the 10% growth we expected this year.

New equipment orders were up 8% in the quarter at constant FX and continued to be strong in the Americas where orders were up high-single-digit.

Orders in EMEA were very strong, up 37% with broad based growth across the region.

Asia orders, however, were down mid-single-digit driven by weaker demand in China which saw a 12% decline on some large projects.

On a unit basis orders were essentially flat.

Q1 was a tough compare for China.

Recall that last year orders were up 25% in the first quarter.

But as Akhil said, activity clearly has softened.

We continue to watch China and Europe service.

And for the year, guidance at constant currency remains unchanged at $100 million to $150 million of profit growth for Otis.

On slide 6 Climate, Controls & Security had good traction in the first quarter with 6% organic sales growth led by Transicold, which grew high teens following the strong order intake we saw in Q4 at both container and North America truck trailer.

We saw mid-single-digit growth in the Americas led by commercial HVAC and the Fire & Security product businesses.

EMEA grew low-single-digits while Asia was down low-single-digit with declines in commercial HVAC, most notably in China and in Southeast Asia, partially offset by growth in Fire & Security field.

Operating profit was up 14% at constant currency driven by drop through on the organic volume growth along with benefits related to the acquisition of a controlling interest in a joint venture and a property sale.

FX translation was a 6 point profit headwind.

Overall operating margins were up 120 basis points from prior year to 16.3%.

Order growth at CCS was led by double-digit growth in refrigeration on a very strong Transicold, up nearly 25% along with better commercial refrigeration where orders were up mid-single-digit.

Global Commercial HVAC orders were up mid-single-digit with strength in the Americas offsetting weakness in Asia.

Fire & Security product orders were flattish while field orders declined by the mid-single-digits.

As Akhil mentioned, CCS equipment orders were up 6%, in line with our full-year mid-single-digit organic sales growth expectation.

With solid results in the first quarter for CCS we continue to expect profit growth of $200 million to $250 million on a constant currency basis on mid-single-digit organic sales growth.

Turning to aerospace on slide 7, Pratt & Whitney sales were flattish organically with military engine sales and commercial aftermarket both up 2%.

Just a comment on that 2% up commercial aftermarket, it is a bit misleading as the large commercial engine transactional aftermarket business was up 6% with spares up nearly 10%.

This signals healthy airline activity.

Aftermarket shop visits were down in the quarter which, with our fleet management programs, means engines are on wing longer.

That is good for the airlines and good for Pratt over the long-term.

Commercial OE was down mid-single-digit driven by the timing of engine shipments.

Pratt operating profit was flat.

Headwinds from higher negative engine margin and pension expense were more than offset by favorable aftermarket mix and performance along with lower engineering and development spending.

The quarter also benefited by $0.03 from a favorable contract termination.

Margins were up 10 basis points to 13%.

For the full year we continue to expect Pratt & Whitney's operating profit to be down $50 million to $125 million.

Turning to slide 8, UTC Aerospace Systems profits grew 4% on 7% organic sales growth.

Sales were driven by double-digit growth in commercial OE and a 4% increase in commercial aftermarket, which were partially offset by a softer military business which was down mid-single-digits.

Commercial OE sales benefited from a change in arrangement that added around $50 million of pass-through sales with no margins.

As Akhil noted earlier, we signaled a slow start to our commercial aftermarket business and we saw that with lower provisioning and maintenance volume in our repair shops.

But we continue to be encouraged by strong parts sales which were up 12% in the quarter.

Year-over-year profit growth was driven by benefits from contract settlements, continued cost reduction efforts and additional licensing income.

These were partially offset by higher pension expense and FX.

Operating margins were up 10 basis points at actual FX to 17.4%.

For the year, based on anticipated improvements in the commercial aftermarket, we continue to expect profit growth of $225 million to $275 million on mid-single-digit sales growth at UTC Aerospace Systems.

Turning to Sikorsky on slide 9, sales were down 7% organically and operating profit decreased by 11%.

The year-over-year sales decline was driven by lower commercial volume as well as continued softness in both military and commercial aftermarket.

We are seeing pressure from the oil and gas segment.

Not only has new capacity been put on hold, the number of offshore working rigs has also come down, which puts pressure on fleet expansion and the existing fleet's aftermarket business.

In the quarter Sikorsky shipped seven fewer S-92 and S-76D aircraft.

Although Q2 should be better, we will likely see continued pressure in the back half of the year.

Softer shipments were partially offset by growth in development programs, which were up significantly as we ramp up on both the presidential and the combat rescue helicopter programs.

The operating profit decline was driven by the impact of lower commercial aircraft volumes and the Canadian maritime helicopter program.

Although margin from the higher development sales did provide some offset, development sales come at a lower margin rate than commercial where we saw the largest declines.

This was a slow start for Sikorsky.

It's too early in the year to point to a guidance change, but we are clearly seeing pressure in commercial from steep spending declines in the oil and gas industry.

During the quarter Sikorsky started ground testing on the first 53K flight aircraft, as well as on the first S-97 RAIDER prototype aircraft and expects first flight of the RAIDER in the second quarter.

These are major milestones for two key programs.

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

Thanks, Paul.

Let me wrap up with just a few thoughts.

So a good start to the year with 3% organic revenue growth, solid earnings growth and continued margin expansion.

Order trends and end markets are broadly in line with expectations with a few exceptions.

China is clearly softer for our commercial businesses.

However, the stimulus programs which were announced yesterday should help.

On the other hand the US slightly better.

HVAC is up in the US, Fire & Security products are up, and Otis new equipment orders are up again and have been strong now for quite some time.

So the US feels pretty good.

Although in the past we've been disappointed by a lack of growth in Europe, I'm encouraged by the signs of growth we are now seeing.

Six months ago we wouldn't have thought that Otis new equipment orders would ever be up almost 40% in the region.

So, great traction there this quarter.

On the aero side, a little slower than expected start in the commercial aftermarket, but we continue to expect growth to improve as we move through the year as the benefits of lower oil prices makes its way into the airline purchasing activity and compares get a little easier.

And while lower oil prices are putting some near-term pressure on Sikorsky, the benefits from lower oil costs in other segments will provide some offset.

So as I said, a good start to the year.

We continue to achieve significant milestones on our programs, continue to secure key wins and position the portfolio to drive long-term shareowner value.

At Pratt & Whitney, Geared Turbofan has now completed more than 16,000 hours and 31,000 cycle of full engine testing, including 3,500 hours of flight time.

In addition to the A320neo flight testing we are also powering flights on six CSeries test aircraft.

Our new engines are meeting or exceeding technical expectations and customer commitments providing a glimpse of the significant value these engines are expected to deliver to customers following entry into service later this year.

You recall back in January we consolidated our Aerospace Systems business from a two P&L structure into a single P&L.

Dave Gitlin and the team have done a good job over the past three months of bringing these two structures together, while staying focused on supporting our customers and delivering best-in-class margins.

As you saw a few weeks ago, we welcomed Bob Leduc back to UTC as the President of Sikorsky Aircraft.

He started earlier this month and has hit the ground running.

Across the aerospace industry Bob is recognized as a proven leader and he has the vision and experience necessary to lead Sikorsky today and into the future.

The building and industrial systems business had another solid quarter delivering mid-single-digit combined organic sales growth for Otis and CCS.

Integration activities continue to progress well with the team finding ways to serve our customers more efficiently.

BIS continues to also strengthen its presence in emerging markets with several new and expanded joint venture relationships, including the commercial HVAC in China, Indonesia, Saudi Arabia and Qatar.

The latter two were recently expanded to include the broader BIS product portfolio.

We also completed the acquisition of CIAT, which is a European commercial HVAC manufacturer, and we begin consolidating its results in Q1.

BIS also expanded its relationship with Toshiba including the launch of a new variable refrigerant flow, or VRF line of HVAC products in the US market.

So good momentum.

As you heard from the president's in March, each of our businesses is well-positioned in our core markets.

This along with continued product innovation will allow us to drive long-term sustainable organic growth.

And we're making progress on our corporate led initiatives as well.

Akhil and the team are making headway towards a simplified corporate cost structure and we're on track to deliver about $100 million in run rate savings by the middle of next year.

As Akhil mentioned earlier, we launched an accelerated share repurchase program in March which accounts for most of this year's $3 billion of share repurchase.

A lot of value in UTX at these price levels.

And lastly, we continue to make progress on the evaluation of strategic options for Sikorsky including the potential for a spin.

We have nothing new to share today on the topic, but we will let you know when the evaluation process is complete, which I now expect to be roughly midyear.

So again, for the rest of 2015 at the UTC level, no real changes from what we told you last month.

With that let's open up the call for questions.

(Operator Instructions).

Julian Mitchell, Credit Suisse.

You mentioned on Sikorsky that the guidance may look a little bit shaky.

But just on Otis the EBIT was down over $50 million year on year in Q1.

The guide for the year is I think is down $100 million to $150 million and the currency effect is pretty stable through the year.

So maybe give some color as to why that should rebound in the second half.

Is it to do with European aftermarket or cost savings coming through?

Yes, so, Julian, I think what we are looking at is the improving signs in Europe to some extent which will help buffer the back half.

The two watch items for us, as Paul said in his comments, was Europe pricing in the service side and also the China equipment.

I think because of the backlog that is coming into the year the China business will still grow this year.

Service business continues to grow very nicely, grew almost 20% again this quarter.

So, yes, a little shy of the expectations on new equipment in China, but the strength in the Otis Europe new equipment orders would hopefully offset a little bit of that.

And America continues to be strong.

So we are watching those two items, the pricing pressure in Europe and the China new equipment market, but broadly we still feel we can get to the low end of the range at least.

Thank you.

And then my second question is just on Pratt & Whitney, the commercial aftermarket business.

You gave some helpful color around sort of the underlying trends versus what was reported at the plus 2%.

But maybe just how quickly do you think the underlying versus the kind of headline number will come together?

Do you still think in Q2 you could see low-single-digit commercial aftermarket sales growth?

Yes, Julian, I think again, we expect an improving aftermarket as we go through the year.

And again, as we talked about, these lower oil prices -- that phenomenon should play out even more strongly I think in the back half of the year as it takes six months or so to get people to change purchasing behavior.

But again I think it's all kind of out there within the guidance.

It started out slow -- Dave Gitlin I think talked about that for the Aerospace Systems group back in March, kind of a slow start.

But again, all the signs are there.

The RPMs continue to be very strong, especially in the emerging markets.

And we expect we will see the engines come back and we will see the parts go out the door.

Right, the important thing to focus on Julian there is the transactional spares number that I think Paul talked about, right?

Once you strip out the spares used in our own fleet management programs, the spares we sell to airlines or the spares we use in time and material jobs collectively are up about 10%, right.

And that is the number which essentially we watch carefully.

If the FMPs are lower, actually it is good news in the long-term.

So I think we're focusing on the right thing here which is the transactional space.

Great, thank you.

Carter Copeland, Barclays.

Just first quick one on China and the order number.

Just kind of digging into that with a little more granularity.

If you were to take a look at that either by residential versus commercial infrastructure, or maybe by brand if it were OCL versus Xizi or any way you would like to cut it, is there a difference in the trends that you are seeing there on the order front that you could highlight for us?

So, residential is a little slower than we expected, that is a big headline first.

So in terms of the brand, I think the Otis brand is doing well, obviously, on the Xizi side, which is more in the residential side.

We see a bigger impact, as you would expect, because that is the part of the market which is a little slower than we had anticipated.

That is probably the broad comment I can offer on that.

The units -- just as a reminder, the units were flattish for Otis, right.

So even the dollar numbers feel like down 12%, but in unit terms the orders were flattish.

And are they seeing any change in the backlog conversion?

I know you guys have talked about that, carrying that backlog into this year.

No, that still feels okay.

And I think as [Geraud] said in March, just the conversion of the backlog into sales this year should give you about 5% to 8% -- 5% to 6% of sales growth.

And then it will all be a function of how many orders we get this year and how much of that gets converted.

And that is the math which will give the ultimate new equipment sales in China.

Great.

And then on the Sikorsky front I wondered if you might give us some color around the commercial spares orders and how much the oil and gas impact may have influenced what you saw there in the quarter.

The commercial aftermarket for Sikorsky was down double-digit in the quarter.

So some of that is just a function of the fact that even the rates which are operational, actually some of the working rigs have been coming down as well.

So it is not only the impact associated with the expansion which impacts the OE side more.

We have seen some impact on the aftermarket.

Now we do believe that aftermarket will actually do better as the year goes through because production is still continuing in these oil rigs.

It is the watch item is more the S-92s or the OE deliveries that we need to make for the year.

Great.

Thanks, Akhil.

Jeff Sprague, Vertical Research.

Could you just elaborate or provide detail on kind of the size of the discrete items in the other segments?

So I assume the one in Pratt at $0.03 is the largest as you articulated that.

But can you give us a little bit more color there?

Sure, Jeff.

So I think it was at CCS we talked about the property sale and the fair value accounting associated with the transaction there.

The collective impact of that was a little over $0.02 there.

And then the third item was also about $0.02 in the UTAS business, the licensing arrangement that Paul referred to.

On top of that there was probably $0.02 you will see in the [elims] line, in the corporate elims line which had to do with some adjustments for a disposed business that shows up in those lines.

So net-net it is essentially timing, Jeff.

It is just stuff that we had always assumed would happen in the plan.

We just assumed it would happen actually later in the year and it got pulled -- by chance it all ended up happening in Q1.

Which is why I think when I spoke in March we were expecting slightly lowered numbers, but I think it came in stronger just as a result of timing of some of these discrete items.

Okay.

And then just shifting gears, could you just come back to Otis Europe?

You mentioned pricing is a watch item and we all know that's been tough for a while.

But are you seeing some change?

Is it declining at a decelerating rate or has there been some trend change there?

Just what do you see going on there?

Jeff, it is still the same I would say.

I mean, in Q1 what we saw, the pricing decline was consistent with what we saw in Q4 and Q3.

But there is no either increase or decrease in the deceleration rate, as you said.

What is encouraging though is -- I think Philippe talked about that in March a little bit and he showed a chart that the first sign of change comes from strength in the new equipment market.

And in fact, if you go back and look at that chart, there were countries where new equipment had done better either in terms of less decline or started to recover, pricing on service was doing better in those markets as well.

So with the strength we are seeing broad-based in the new equipment order rates this quarter, our expectation is that that starts to get better on the service side in terms of pricing as the year progresses.

Now whether it happens quickly enough is something we have to watch.

But definitely that is the first sign which would then release a little bit of pressure on the pricing.

Okay, thank you.

Ron Epstein, Bank of America Merrill Lynch.

So a quick question back on the engines again.

There's been a fair amount of discussion in the trade press that your competitor's engine, the LEAP-1B, is having some issues getting to its performance targets.

So there has been some talk that it is missing its targets by maybe 4% or 5%.

Just curious, have you heard anything from your customers yet that are maybe looking more seriously at the PurePower family of engines if the LEAP engine doesn't seem to be getting where it needs to go?

Yes, I think we have all read that same speculation in the press.

But I'll tell you, Ron, it really hasn't impacted any of the competitions that are going on today for engine orders.

I think the competitors, GE or CFM is going to commit to the same kind of performance improvements that we are seeing on the GTF family.

And I would expect that they will eventually get to the same performance targets that they have committed to.

So there might be some short-term pain on those engines, but again, I think long-term we like where we are with our architecture.

We think the architecture is fundamentally better; we're going to operate at a lower temperature.

That gives us some improvement in terms of not just part count but also the maintenance cost long-term.

So we will see what happens.

Those engines are going to go into service at the end of the year on the neo and that will be the ultimate test of performance is how we do in the field.

And we feel very good about where we are.

Sure, sure.

And then maybe one last one here.

You have already executed on some buyback for the year.

And given where the share price is and it looks like it is pretty good darn good value, are you open to buying back a lot more stock?

A lot more?

No.

Look, I think at the current price it is a good value.

We did the $3 billion or $2.5 billion accelerated share repurchase last month and I think that was well executed.

And it gives us about a $0.05 benefit for the year by having all those shares retire early.

But right now I still think there is things out on the M&A side that we want to do and we're going to keep our powder dry.

We spent $250 million in the first quarter on M&A; we've got a good business in CIAT in France, which Geraud and team are working on.

I think that is indicative of the kind of things we will probably see throughout the year, some smaller deals.

But we are going to continue to look for bigger things too.

And I just don't want to commit to a bunch of share repurchase when there is opportunities out there to do some bigger M&A.

But could we expect to see some more than what you have already done?

Are you done for the year I guess is the question?

Well, we guided to $3 billion for the year.

I think as we go through the quarters here if we don't see additional M&A or if we see some significant weakness in the stock I think we are always open to that where we see value.

And we are going to keep that in mind.

But again, we are going to return more than 70% of free cash flow back to investors this year, probably more than almost 80% with the $3 billion on top of the dividend.

So, we feel pretty good about the capital allocation decisions we have made so far.

Okay, great.

Thank you.

Nigel Coe, Morgan Stanley.

Just wanted to come back to the good news on the European Otis orders on the OE side.

And when you've been coming off sort of a trough type of number you can get some pretty big numbers.

I just wondered, can you maybe just characterize the breadth of the strength that you saw in the OE orders and perhaps comment on the (inaudible) activity you are seeing and whether the strength that we have seen in Otis is also being seen elsewhere such as within Carrier and also Fire & Security?

Yes, sure.

So I think the Otis trend was clearly right based.

You are exactly right, Nigel.

The numbers have gone down, so it is off a smaller base.

But still even on that smaller base we saw a decline last year.

So the fact that it is up and up nicely, and it is up broad-based -- almost every major country saw up orders in Otis' new equipment, that is an encouraging sign for us.

So clearly that portends well for all the stuff that is going on in Europe, in terms of the stimulus that is being put in place there, in terms of the euro weakness that is encouraging, the (inaudible) range of growth there.

So all those things are hopefully resulting in some better economic activity.

Commercial refrigeration in Europe, as I said earlier, was up double-digit as well, that was nice to see.

And HVAC is up, although at a smaller scale, but it was up as well.

So overall we see some improving trends in Europe, that is definitely certainly true in this quarter.

That's great news.

And then maybe just perhaps a bit more color on the CCS margins, up 120 bps.

There's obviously a lot going on here with the Transicold mix and the BIS integration and perhaps some price (inaudible) benefits.

But maybe just add a bit of color in terms of those drivers.

Sure.

So I think the mix definitely as you point out is good.

Transicold grew very strongly and that is one of our high margin businesses.

There is broad-based cost-related conversion that we see very nicely at CCS, that has been a story which has been there for a period of time.

We were obviously also helped a little bit by those discrete items that I talked about and that came from the two items that we had -- that I highlighted earlier.

But overall it is great conversion on the organic growth.

I mean organic growth is up 6%.

And if you hold gross margin and you control the cost that is a recipe for good conversion.

And Geraud and team have been doing that for several years now.

And then very quickly on the raw materials, are you seeing the benefit right now, is that coming through in the second half of the year?

Not as much in the first quarter, Nigel.

I think there was a little bit of benefit from copper.

But as you know, we kind of tend to have longer-term agreements with our suppliers.

So we'll see some benefit a little more in the second half, but probably even more than that in the next year.

If the prices stay at this level.

That's great, thank you very much.

Robert Stallard, Royal Bank of Canada.

Greg, you were fairly open at the investor conference about your desire to do more M&A.

And I was wondering if that prompted any further response in the market and how you would characterize the quality and availability of the assets that are out there?

My phone has not been ringing off the hook if that is what you are asking.

But I think we said we are -- obviously we are open to M&A, we have got the balance sheet to do bigger M&A and we see opportunities in our core markets to do some things.

But at the same time we're trying to be disciplined here in terms of the criteria that we have laid out.

And we say we need to have an IRR north of 10%, it is got to be accretive in year two, it's got to have an ROIC north of 10% by year four.

Those are some pretty high hurdles with the valuations that we see out there today.

So there are some fixer uppers out there that might be attractive to us.

But we are not going to overpay either because that is the best way to make a good deal a bad deal is to overpay.

You can never recover for that.

So we are continuing to look, we've got Mike Dumais and the whole team focused on looking at various properties.

And we're just going to be opportunistic.

Okay, and then as a quick follow-up on foreign-exchange.

I'm just wondering why you didn't use this opportunity to maybe bring your forecast for the foreign exchange hit down a bit.

And whether foreign exchange has had any impact in terms of market share or other issues overseas?

No, I think when we guided back in March we talked about euro at 1.10 today it is at 1.07, if it stays here for the rest of the year I think it will average about 1.09.

So it is not just a very big impact versus what we talked about a month ago.

Obviously if we see euro go towards parity with the dollar that will put pressure on the guidance and probably take us towards the lower end.

But I think it is important, while we don't hedge transactional FX -- translation FX we do hedge transactional FX.

So to the extent we've got a sales contract in one currency and cost in another, we are hedging that on a regular basis.

And I think the other important thing from a market share perspective, we are not really disadvantaged by currency.

We manufacture in Europe, we manufacture in China for those markets.

So in that really impacted very dramatically by -- or disadvantaged.

And then keep in mind too, more than half of the business is aero and that is all US dollar denominated.

So we are neither advantaged or disadvantaged in that market by the currency.

That's great, thanks so much.

Noah Poponak, Goldman Sachs.

Greg, just one follow-up to the M&A question there.

Are you comfortable doing acquisitions while you are still evaluating the overall portfolio or do you need to get through everything you are contemplating with the portfolio before you know which acquisitions make the most sense?

We know which markets we like, we know which product lines we like.

As you think about this portfolio review that we are doing, as I mentioned last month, we have already divested $8 billion of business in the last five years.

If we spin Sikorsky up that will be another $7 billion, so we will have done $15 billion in portfolio shedding by the end of this year.

And there's just not a lot of other big pieces left that we don't think are in attractive markets and there might be some smaller things on the margin.

But I think for the most part we like the hand that we've got now in terms of the ability to grow the business long-term organically.

And so, we are going to look to find pieces that will fit into that puzzle that we have got today and really not try and stretch to find other things outside of the core.

Okay, great.

And then just going back to the aerospace aftermarket, just I guess as a clarification, the comments that that year was off to a slow start in headline numbers I guess made it seem like the actual underlying ongoing business was a little weak.

But it sounds like actually -- given the numbers you have given us excluding provisioning, that it's actually maybe quite strong and the slow start was entirely the provisioning comparison.

Is that a fair comparison or a fair assumption or is there something else (multiple speakers)?

Yes, I think that is exactly --.

As you think about the Aerospace Systems business, the provisioning was down but parts were up nicely almost double digits for the transactional site.

The same at Pratt on the transactional side, we saw almost double-digit increases in spare parts sales.

So that piece of the aftermarket is actually doing nicely.

What we have not seen of course is provisioning; that will come in the back half of the year as some of the new aircraft like the A350 in the A320neo enter into service we will see provisioning pick up in the back half of the year.

So a little slower than what we expected overall.

Shop visits were down, but again to Akhil's point that is actually good news as most of these are on FMP, and the longer those things stay on wing the more profitable those contracts are.

And GE said they are seeing some restocking of inventory from the airlines.

Are you seeing that specifically?

I think you know the issue we have, which is some of our legacy engines, the PW2000 and PW4000 are -- have this issue of legacy spare parts availability and surplus parts available in the marketplace and retirement.

So we see declines there.

In the engine, which is doing well for us, the V2500, actually on a transactional basis we even saw sales up over 30% on the transactional spares.

So that was consistent with what you probably heard from the others, so we saw the same phenomenon.

We just had to deal with this declining issue on the PW2000 and PW4000.

Right.

Okay, thanks a lot.

Peter Arment, Sterne Agee.

Greg, just I guess a follow-on to Noah's question on the aftermarket.

Are you seeing any differences from a geographical standpoint?

You mentioned a lot that China has been slowing, but are you seeing any trend over onto the airspace side out of Asia?

No.

In fact, Asia is probably the strongest if we think about where the aftermarket -- I mean the RPMs there are up more than 30%, I think, year over year in China.

So we continue to see very, very strong growth out of that market.

And truly to Akhil's point, I mean it is these legacy 2000, 4000 engines where we are really seeing the slowdown.

Okay, and just my follow-up also is on (inaudible) and aerospace on Pratt & Whitney.

You mentioned the kind of timing of engine shipments.

Pratt & Whitney Canada engine volume was down 10% year over year.

Is that all timing, or is there something else going on there?

Pratt Canada engine shipments, Peter, were nicely driven by the helicopter end market.

That is where we have seen the big decline.

The business jet engines were actually up, largely attributed to the helicopter segment.

On the other large Pratt side, it is more to do with the military engines where we saw a little bit of delays in a few of the engines there, which hopefully will pick up back in Q2.

Okay, thank you.

George Shapiro, Shapiro Research.

I wanted to pursue first cash flow, the conversion at 67%.

I know you mentioned Sikorsky, and maybe that is some of the helicopters from the oil and gas business.

But last year's first quarter we were at 80%, and we wound up the year at 90% free cash conversion.

And this year we are starting off at 67%, and I think we are hoping to get higher than 90%, at least 90% to 100% from what you say.

So what goes on here?

I mean this quarter we saw sizable increase in inventories, maybe 5% or so.

So can you kind of just walk through from where we are to how we get maybe to the 90% to 100% you are talking about for the year?

First-quarter cash flow is not ever going to probably be close to 100%.

Last year we got a benefit of a $200 million advance at Sikorsky, which certainly helped.

This year if you take Sikorsky out of the equation, cash flow was almost 100% of net income.

So again, really I would point primarily to the Sikorsky cash outflow.

But at the same time, inventories were up; working capital was up, specifically receivables.

And again, though, some of that is just timing as we work through.

You know, Geraud's business, it is a seasonal business on the residential side, so there is some natural inventory build in the CCS business.

But overall, we are also seeing some inventory on the ramp on the GTF, so Pratt's inventories were up.

UTAS inventories were up for the same reasons.

They see these new aircraft going into production.

So again, I think this will get better during the course of year, but we clearly need to focus more on inventory turns because I think overall inventory turns for us were about 4.5, and this really is just not very good.

So there is work to do.

And just one point to add, George, to clarify your comment on the inventory side.

We always see build up in inventory Q1.

In fact, if you pass the numbers for last year Q1, inventory had actually gone up by $660 million in Q1.

This year it was only $470 million.

Only $470 million is still a big number, and certainly not we are happy with, but that is part of the seasonality that we have in this.

And as Greg said, we have a lot of work to do on inventory, but still the Q1 67% does not give us any concern about the ability to meet the 90% to 100% for the year.

Okay.

And, Akhil, my follow up is if you -- you commented about transactional spares being down should be good news.

At what point -- I assume a lot of that is related to your power by the hour contract.

So at what point do you conclude that you can make a higher margin on that power by the hour stuff because the reliability is running somewhat better than you might have been projecting?

George, just one clarification first.

Transactional spares, which I define as spares sold to the airlines and used in our time and material jobs, are actually up double-digit.

What is down was more the spares used in the FMP program.

So there, to your point, we evaluate the programs on a quarterly basis, at least on an annual basis for every FMP, quarterly for the large ones and look at the estimates based on our actual experience and then update the EACs which result in some kind of adjustments periodically that we see.

So I think over the long-term this will definitely be good news on the margins at Pratt.

How it comes into the P&L exactly is a function of the length of the FMPs, the period which is left and the experience that we have achieved so far.

Okay, thanks very much.

Doug Harned, Sanford Bernstein.

I wanted to talk about UTAS and in particular just where you stand now on savings from the Goodrich integration.

You are in presumably the more challenging time here with supply chain and facilities opportunities.

Yes, so I think we are tracking very, well, Doug, on that on the synergy side.

As you know from the original estimates of $375 million we have taken it up over to $500 million.

For this year our expectation was about $100 million and we think we are very much on track for that.

In fact, if anything, we may have a little upside there given the work that Dave and team have done on eliminating the costs associated with the dual structure that Greg referred to in his comments.

So the synergies are moving very, very well.

I think what is left still in front of the team there is not so much the supply chain related -- the supply negotiation related stuff, but it is more about moves to low-cost sourcing.

We still have many, many factories in UTAS, nearly 100 manufacturing locations.

That is what the team is doing in creating the centers of excellence in lower cost locations such as Poland and Mexico, India, etc.

And as work transitions to those lower cost centers of excellence we will see further improvement in the cost structure at UTAS.

Now obviously at some point we have to stop and get off this synergy word, it becomes a matter of course cost reduction like any other UTC Company does and that is where we are heading now.

So I think we can certainly declare we have done the synergies that we expected to achieve and now we need to continue to get regular cost reductions.

Well, and so that is really where I wanted to go.

So as you head beyond the synergy word and look at the opportunities here, I know there has been a focus on reducing R&D, reducing costs in general in UTAS.

Can you give a sense of how much margin opportunity you see going forward?

If we go over the next few years, I mean is this a business where we should expect some pretty good margin expansion?

Doug, there is always opportunity for margin expansion.

I think what we have to keep in mind is as all these new aircraft come into production there is headwind from negative margin not just at Pratt but also a little bit on our Aerospace Systems business.

And so, I think Mr. Gitlin and crew are going to deal with a little bit of that which will keep some of the margin improvement at bay for a time yet.

But clearly there is opportunities out there.

I think we talked a couple years ago about this being a potentially 20% margin business, that is still the target I would say for five years out.

So there might be 50 basis points a year of margin upside here, but we need to keep in mind, at least in the short-term, as all of these new products come to market where the margins that are going out are not positive on most of this new OE equipment.

So that is going to hold margins down a little bit.

Okay, great.

Thank you.

Cai von Rumohr, Cowen and Company.

Yes, thank you very much.

So Otis, you had 2% organic growth with high-single-digit new equipment growth.

Did service -- I mean it looked like service was down some 3% to 4% result which is the weakest number I think I can ever recall.

Could you give us a little bit more color on what is happening in the service market and how quickly you might see an improvement in pricing in Europe as a result of the very strong new elevator orders this quarter?

Thanks.

Sure, Cai.

Just for clarification, service was flat overall, it was not down.

And in fact, where we saw the pressure was more on the modernization side, particularly in Europe where service -- the modernization revenues were down in sort of mid-teens level.

And that is a function of our regulation driven modernization effort that was going on in France particularly and a couple of other markets.

Again, I think maintenance contracts, the number of contracts under maintenance for the quarter were up sequentially when you exclude Russia which was an exceptional situation.

But everywhere else I think our maintenance contracts were up.

Pricing pressure, as I said earlier in response to Jeff's question, is stable.

It is still down but it is not getting down any further.

And as the new equipment market starts to improve in Europe we expect certainly to see the pricing pressure a little bit relieved on the service side as well.

So service was good in [Asia], grew mid-single-digit there, particularly in China which was up nearly 20%.

And it is growing in America's as well.

So just the continuing trends that we have seen in Europe which hopefully get mitigated as new equipment improves.

Great answer.

And maybe a little bit more color into Jeff's question.

It looks like there is $0.09 of kind of discrete operation -- non-operating or whatever they are items within the operation.

You mentioned you have got some favorable timing.

Were all those $0.09 pull forwards from succeeding quarters?

And maybe give us some color as a result of the kind of quarterly pattern we should expect for the year.

I think as I said, Cai, the -- those items were in our plan for -- most of them for Q2, so there is a little bit of timing thing.

You never can call exactly whether something which is a function of negotiation discussions in some events with other parties can happen exactly in March or April or June.

So I think a little bit of that pattern is there.

I did say that our first half we expect the earnings to be at the higher end or up slightly ahead of the 3% mark that we have for the full year, the zero to 3% on a reported EPS basis.

So that would suggest that probably Q2 by itself would be down on a reported basis and that is understandable given the pressure we have on FX and pension and the restructuring which will be in excess of gains in Q2, right.

In Q2 we will have $0.07 of restructuring and no gains.

So that is one reason why the reported numbers start to look a little bit different in Q2.

But in reality when you exclude pension, FX and restructuring we should still see mid-single-digit type of growth in Q2 EPS which is slightly below our full-year expectations given the strength we saw in Q1.

Great answer.

Thank you very much.

Howard Rubel, Jefferies.

Greg, it looks like you started out CapEx below trend.

Have you been able to get a handle on that to the degree you are satisfied or is there still more work to be done?

There is still more work to be done, Howard.

I think again we saw CapEx for the quarter a little bit -- a little bit up from last are, about $15 million actually year over year.

So we spent like $348 million.

It is below a full-year run rate, I'll give you that, but there is still work to do.

And I think all the guys understand, the people understand we need to be focused on constraining CapEx just like we are in every other dollar that we spent.

So there is work to do.

And then the second item, research and development also was down a little bit.

And sometimes that is timing.

Could you provide a little more color and granularity on a couple of the development programs, specifically GTF, both for the variety of items you have whether it is neo or the other customers?

Yes, E&D is starting kind of a natural decline at Pratt as we complete some of the testing on the neo and some of the other engines out there.

CSeries is completing its flight testing this year, neo will be done hopefully this summer or early fall.

So just, E&D just naturally wants to come down.

If you remember, Paul said he was going to take E&D down about $100 million, was down $17 million here in the first quarter.

So naturally you are just going to see a reduction.

And not much change across the rest of the business.

I think Geraud is up a tiny bit, he continues to invest in some new products.

And Aerospace Systems are still on track to probably spend about $800 million for the year.

So not much change there.

Thank you, gentlemen.

Sam Pearlstein, Wells Fargo.

Can I just go back to Transicold which you haven't really talked a lot about?

I thought this was probably the toughest compare of the year and yet you did pretty well.

Can you talk a little bit about how much of that was container versus truck and trailer and maybe price now versus where it was last year?

Sam, so, container -- as you know, Transicold is a little bit of a lumpy business.

So you get some large swings and large numbers there, but it was great to see the 18% or so growth in the quarter there.

A lot of it was driven by container which was up over 30%.

North America truck trailer was up nicely as well.

And in fact the orders in North America truck trailer are very, very strong.

And so that is a precursor sometimes to the US economy and how things are doing there.

So that is certainly very encouraging and we see good strength there.

So both I think container and North America truck trailer were the big drivers.

Europe was also up and nicely up as well.

Okay, thanks.

And then in terms of the Geared Turbofan, is there any way you can kind of help us in terms of planned shipments or anything of that sort, how it looks this year and kind of the ramp into next year?

Just in any way you can help quantify the volume and that OE headwind that we are going to see as that ramps up?

I think for this year we have got somewhere in the range of 40 to 50 GTF engines which will be shipped between the neo and the C Series to some extent.

And I think that number wants to go up to about 200 for next year.

So that is the kind of magnitude of shipments.

And that is the ramp we talk about which has been putting a little bit of pressure on our CapEx, keeping CapEx above 100% of depreciation.

So that is the ramp we have ahead of us.

Okay, that is great.

Thank you.

Okay, so I think we will stop there.

I want to thank everybody for listening today.

The IR team will obviously be available all day, Mr. Lundstrom and crew.

And so thanks for listening.

Have a great day.

We will see you guys soon.

Take care.

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

This does conclude the program and you may all disconnect.

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