United Technologies Q2 2010 Earnings Conference Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Terry Darling - Goldman Sachs - Analyst: Thanks, good morning, gentlemen.

Answer By: Gregory Hayes - United Technologies - SVP, CFO

Question: Terry Darling - Goldman Sachs - Analyst: Greg, I think the Carrier margins were probably the most positive feature of the variances versus what we were expecting-- very positive to see that. I'm wondering if you can kind of deconstruct the year-over-year improvement in margins there. You had mentioned volume dropped through, I think Akhil had. Maybe you can break out volume drop through, divestiture impact, product cost reductions, restructuring, price costs, some of those pieces, just talk about the sustainability of that going forward. ¬2010 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by

Answer By: Akhil Johri - United Technologies - VP, Financial Planning, IR

Answer By: Gregory Hayes - United Technologies - SVP, CFO

Question: Terry Darling - Goldman Sachs - Analyst: And Greg, in terms of reaching margins, longer term margin targets, I'm kind of forgetting exactly what the timing of hitting the targets is, but sounds like we are getting closer sooner, any other thoughts on that part of the question?

Answer By: Gregory Hayes - United Technologies - SVP, CFO

Question: Terry Darling - Goldman Sachs - Analyst: I would agree with that. And then maybe shifting over, one of the big topics here in the aviation world is the higher E&D spend, kind of across engine makers, can you talk about how we should think about 2011 and 2012 at this point, based on how the programs are shaping up as you see them?

Answer By: Gregory Hayes - United Technologies - SVP, CFO

Question: Terry Darling - Goldman Sachs - Analyst: And that $100 million 2012, is that just Pratt or is that across the portfolio?

Answer By: Gregory Hayes - United Technologies - SVP, CFO

Question: Terry Darling - Goldman Sachs - Analyst: Okay.

Answer By: Gregory Hayes - United Technologies - SVP, CFO

Question: Terry Darling - Goldman Sachs - Analyst: And, Hamilton does that come down in 2011? As we get in to the 787 production, and presumably Sikorsky probably flatish? Is that the way to think about those pieces?

Answer By: Gregory Hayes - United Technologies - SVP, CFO

Question: Terry Darling - Goldman Sachs - Analyst: Great. Thank you very much.

Answer By: Gregory Hayes - United Technologies - SVP, CFO

Question: Joseph Nadol - JPMorgan - Analyst: Hi, Greg and Akhil. So, Greg, the order numbers look great, obviously, kind of across the board. I am wondering if you can give any just more color on Europe specifically, in particularly towards the end of the quarter, of how the financial markets reacted? Did you see any changes? You noted also that Otis, North America, looked good, China looked good. I guess Europe probably wasn't as good?

Answer By: Gregory Hayes - United Technologies - SVP, CFO

Answer By: Akhil Johri - United Technologies - VP, Financial Planning, IR

Question: Joseph Nadol - JPMorgan - Analyst: Okay, and the second question, Akhil, you might have mention this during your run through the segments, but the Sikorsky top line, was this mostly timing, as you think about sort of as the year profile, and not really changing the guidance, or what's going on there?

Answer By: Gregory Hayes - United Technologies - SVP, CFO

Question: Joseph Nadol - JPMorgan - Analyst: Okay, thanks guys.

Answer By: Gregory Hayes - United Technologies - SVP, CFO

Question: Jeffrey Sprague - Vertical Research Partners - Analyst: Thank you very much. Good morning, gents. Just a couple things, first on North American commercial Otis. Could you give us a sense of how -- I don't know how significant that LA order was, certainly was big. Were you up in North America, ex that LA order?

Answer By: Gregory Hayes - United Technologies - SVP, CFO

Question: Jeffrey Sprague - Vertical Research Partners - Analyst: It's hard to find a pulse on starts or anything, is it retrofit activity, or are you, in fact, seeing some real construction activity return in some places?

Answer By: Gregory Hayes - United Technologies - SVP, CFO

Question: Jeffrey Sprague - Vertical Research Partners - Analyst: Is commercial Carrier in North America turning up yet? I would think that would lag Otis a little bit?

Answer By: Gregory Hayes - United Technologies - SVP, CFO

Question: Jeffrey Sprague - Vertical Research Partners - Analyst: Can you give us a number on commercial Carrier how much it's up, orders or sales?

Answer By: Akhil Johri - United Technologies - VP, Financial Planning, IR

Question: Jeffrey Sprague - Vertical Research Partners - Analyst: And on the resi side, Greg or Akhil, obviously it's been hot in some places, just what do you see the state of play, in terms of where inventory is, and how we are following through into the third quarter on the resi side?

Answer By: Gregory Hayes - United Technologies - SVP, CFO

Question: Jeffrey Sprague - Vertical Research Partners - Analyst: And then just finally the modest guide down in Otis on profits, is that all currency, or is there some other dynamic going on there?

Answer By: Gregory Hayes - United Technologies - SVP, CFO

Question: Jeffrey Sprague - Vertical Research Partners - Analyst: Okay, great. Thank you very much.

Answer By: Gregory Hayes - United Technologies - SVP, CFO

Question: Howard Rubel - Jefferies & Company - Analyst: Thank you. First, I just wanted to touch base again on your management of sort of costs and capital. Greg, I mean it looked like SG&A as percentage of sales was down 120 basis points, and CapEx clearly looks like it's not going to reach a $1 billion dollars for the year. Could you sort of first address what you are doing in SG&A, and how much you think you are going to hold to? It sure looks like a little bit better than I would have thought. And then, also what are you thinking CapEx?

Answer By: Gregory Hayes - United Technologies - SVP, CFO

Question: Howard Rubel - Jefferies & Company - Analyst: And then tax rate was a little higher at 30. Could you help us a little bit understand what is going on in Washington, with respect to attempts to repeal, or hurt sort of the tax benefits, or the tax structure that exists for foreign earnings, and how we might think about that? ¬2010 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by

Answer By: Gregory Hayes - United Technologies - SVP, CFO

Question: Joseph Campbell - Barclays Capital - Analyst: Hi, good morning, Greg and Akhil. My question relates to the aerospace guidance which didn't change, either in revenues or profit. It's the same as it was when we last spoke. But it does seem that the traffic is up, Boeing and Airbus both raised production rates, And the 787 seems like it's going to make it out of development in to production. I might have thought there was positives. I guess you also saw some pick up in the order rates, although the spares deliveries were flat. Is there some offset that's keeping you from upping the aerospace expectations at all?

Answer By: Gregory Hayes - United Technologies - SVP, CFO

Question: Joseph Campbell - Barclays Capital - Analyst: But is it, the E&D spend is the same as you previously expected I would have thought the traffic and orders are higher than you might have expected, but that's not true? ¬2010 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by

Answer By: Gregory Hayes - United Technologies - SVP, CFO

Answer By: Akhil Johri - United Technologies - VP, Financial Planning, IR

Question: Joseph Campbell - Barclays Capital - Analyst: And is the E&D number coming in on budget?

Answer By: Gregory Hayes - United Technologies - SVP, CFO

Question: Joseph Campbell - Barclays Capital - Analyst: Great. Thanks very much.

Answer By: Gregory Hayes - United Technologies - SVP, CFO

Question: Nigel Coe - Deutsche Bank - Analyst: Good morning. I just wanted to kick off with Carrier, I mean just cutting the numbers from your first guidance, it looks like the margins might break 10%, is that in line with your model?

Answer By: Akhil Johri - United Technologies - VP, Financial Planning, IR

Question: Nigel Coe - Deutsche Bank - Analyst: That's quite a landmark.

Answer By: Akhil Johri - United Technologies - VP, Financial Planning, IR

Question: Nigel Coe - Deutsche Bank - Analyst: So you talked about, Greg, I think you talked about some FX and E&D headwinds in the second half of the year, do you have any other cost headwinds coming through? And I'm thinking here, about some of the Carrier businesses like Transicold, where have you got big volume ramps. Do you got any additional head count to come through?

Answer By: Gregory Hayes - United Technologies - SVP, CFO

Question: Nigel Coe - Deutsche Bank - Analyst: Okay. And then as you pinch -- you get the pinch from FX in the second half of the year, I'm thinking that's probably a net benefit to your margin, given that your European margins are probably a little bit lower? Would that be fair?

Answer By: Gregory Hayes - United Technologies - SVP, CFO

Question: Nigel Coe - Deutsche Bank - Analyst: I'm trying to think how the FX impacts the margins. I'm just trying to gauge the sustainability of your 15.7% margin in the second quarter. And I'm thinking that a stronger euro helps you, suits you?

Answer By: Gregory Hayes - United Technologies - SVP, CFO

Question: Nigel Coe - Deutsche Bank - Analyst: Okay, and then just the orders, it's hard to try and judge underlying trend given the weak comps you've gotten year-over-year. So if we looked that chart on a Q over Q basis, 2Q versus 1Q, would we see growth across the board? ¬2010 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by

Answer By: Akhil Johri - United Technologies - VP, Financial Planning, IR

Question: Nigel Coe - Deutsche Bank - Analyst: Okay. Then I think Greg you threw out a chart in June showing Hamilton spares up 20% in April, May. I think they are up 7% this quarter, just trying to reconcile those two numbers.

Answer By: Gregory Hayes - United Technologies - SVP, CFO

Question: Nigel Coe - Deutsche Bank - Analyst: Okay, and then just finally, you called out the maintenance of growth in China in the second half of the year. North American orders growth in North America was not expected by myself. Would you expect North America to maintain growth in the second half of the year?

Answer By: Gregory Hayes - United Technologies - SVP, CFO

Question: Nigel Coe - Deutsche Bank - Analyst: Okay, thanks, Greg.

Question: Cai von Rumohr - Cowen and Company - Analyst: Yes. Thank you. Following up, as I recall your orders in April and May at Pratt for large commercial engines spares also were over 10% or over, and now you have 7% or 8% range. What did June look like. And maybe give us some color. What are you seeing in June impact from the European volcano, weaker stock market, euro prices, I mean are airlines being slower in terms of ordering here? ¬2010 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by

Answer By: Akhil Johri - United Technologies - VP, Financial Planning, IR

Answer By: Gregory Hayes - United Technologies - SVP, CFO

Question: Cai von Rumohr - Cowen and Company - Analyst: Okay, and then I joined a little late but pension, could you give us some update on pension investment performance year-to-date? And maybe some color on what we should think about next year, if we closed out the year, about where discounts rates are, and given where the markets are?

Answer By: Gregory Hayes - United Technologies - SVP, CFO

Question: Cai von Rumohr - Cowen and Company - Analyst: You had a slightly higher than expected tax rate in the Q2. What should we use in modeling the full-year for your tax rate.

Answer By: Gregory Hayes - United Technologies - SVP, CFO

Answer By: Akhil Johri - United Technologies - VP, Financial Planning, IR

Question: Cai von Rumohr - Cowen and Company - Analyst: Got it. Okay. And then last one, as Bombardier closes out, what is your assessment in terms of the likelihood of the CSeries getting firm orders here?

Answer By: Gregory Hayes - United Technologies - SVP, CFO

Question: Cai von Rumohr - Cowen and Company - Analyst: I recall -- they made some type of comment that Bombardier had said they were very close, and the issue wasn't really with Bombardier. Is the issue in terms of getting things over the goal line, really dotting the i's, and contractual issues with you or Bombardier? Or is the issue that Boeing and Airbus are kind of talking other plans, and that people are just stepping back?

Answer By: Gregory Hayes - United Technologies - SVP, CFO

Question: Cai von Rumohr - Cowen and Company - Analyst: Terrific, thank you very much.

Question: Julian Mitchell - Credit Suisse - Analyst: Yes. Thanks. I had a couple of questions, and the first one was on overall organic order growth. Across all the businesses, what was that growth rate in Q2, and how do you think that will change in the second half? Obviously you commented a bit on that you expect spares orders to accelerate, possibly some tailing off in parts of Otis. So just, overall company, what do you think organic order growth will be in the second half versus what you saw in Q2? And then secondly, on the pricing environment, if you've seen any change in any parts of the commercial businesses? I mean there are some stories of price competition, and lifts in Europe, with both you and your peers reporting very good margins. If you could give an update on that? ¬2010 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by

Answer By: Akhil Johri - United Technologies - VP, Financial Planning, IR

Question: Julian Mitchell - Credit Suisse - Analyst: On the order intake?

Answer By: Akhil Johri - United Technologies - VP, Financial Planning, IR

Answer By: Gregory Hayes - United Technologies - SVP, CFO

Question: Julian Mitchell - Credit Suisse - Analyst: Okay, thanks.

Question: George Shapiro - Access 342 - Analyst: Yes, Pratt Canada, the OE deliveries are up sequentially. I mean is that just seasonal, or what did you just actually see there that caused the OE deliveries to be up?

Answer By: Gregory Hayes - United Technologies - SVP, CFO

Question: George Shapiro - Access 342 - Analyst: Okay, and Greg if you can walk through Carrier, in terms of where we stand in the planned divestitures, and how much of the revenues were reflected. Well, I guess you can back out how much revenues were reflected, because you gave organic growth, but in terms of what we should look for in the second half of the year?

Answer By: Gregory Hayes - United Technologies - SVP, CFO

Question: George Shapiro - Access 342 - Analyst: And then one last one if I might. Pratt Canada, the aftermarket what happened there in the quarter?

Answer By: Akhil Johri - United Technologies - VP, Financial Planning, IR

Question: George Shapiro - Access 342 - Analyst: Okay. Thanks a lot, guys.

Question: Sam Pearlstein - Wells Fargo Securities - Analyst: Good morning. Can you talk a little bit about those Pratt spares, or just talk about how it changed from Q1 to Q2? And at the current dollar levels the comparisons are still relatively easy in the second half. But how much in dollars do we have to start to see growth in the second half to get that up 15% in that time period?

Answer By: Akhil Johri - United Technologies - VP, Financial Planning, IR

Question: Sam Pearlstein - Wells Fargo Securities - Analyst: Okay. And Greg, the comments you made about pension, and what the impact of the discount rate, does that factor in the contributions you made in the second quarter? And then can you talk about what your expectations for contributions in the remainder of the year, and can you perhaps make more contributions to offset some of the headwind for next year?

Answer By: Gregory Hayes - United Technologies - SVP, CFO

Question: Sam Pearlstein - Wells Fargo Securities - Analyst: Okay. Thanks a lot.

Question: Finbar Sheehy - Sanford C. Bernstein & Company, Inc. - Analyst: Good morning.

Answer By: Gregory Hayes - United Technologies - SVP, CFO

Question: Finbar Sheehy - Sanford C. Bernstein & Company, Inc. - Analyst: I just wanted to take you back to Otis for a moment, and just ask you a sort of longer term question. When you look at the aftermarket volume there, relative to the size of your install base, can you compare that stage two, what it would be in the more developed market like North America or Europe?

Answer By: Akhil Johri - United Technologies - VP, Financial Planning, IR

Question: Finbar Sheehy - Sanford C. Bernstein & Company, Inc. - Analyst: Yes, in China or emerging markets. ¬2010 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by

Answer By: Gregory Hayes - United Technologies - SVP, CFO

Question: Finbar Sheehy - Sanford C. Bernstein & Company, Inc. - Analyst: Thanks. At Pratt & Whitney, you commented that you are expecting to see a recovery in the back half of the year. Can you tell us a little bit more about what would drive that?

Answer By: Akhil Johri - United Technologies - VP, Financial Planning, IR

Answer By: Gregory Hayes - United Technologies - SVP, CFO

Question: Finbar Sheehy - Sanford C. Bernstein & Company, Inc. - Analyst: Thanks. And just one final one then, just looking at Sikorsky. You got a number of current or potential development programs going on there. You got the S-76D, the CH-53K the, X2. You are partnered up to the reiteration of the Presidential helicopter, and doing some upgraded combat search and rescue. As you look at how the defense budget shaping up, and the weakness in commercial demand, how do you think about which of these programs might get pushed to the right, and by how much, and what that might mean for your development spending.

Answer By: Gregory Hayes - United Technologies - SVP, CFO

Question: Ajay Kejriwal - FBR Capital Markets - Analyst: Good morning thank you. Maybe if you can provide some color on what you are seeing in orders China, in the construction markets there, with a tightening of credit? And also maybe update on the lower price product for the China market?

Answer By: Gregory Hayes - United Technologies - SVP, CFO

Question: Ajay Kejriwal - FBR Capital Markets - Analyst: And then, you provided colors on pricing for orders. But you see prices coming off maybe you can talk about pricing materials spread and your expectation for the balance of the year?

Answer By: Akhil Johri - United Technologies - VP, Financial Planning, IR

Question: Ajay Kejriwal - FBR Capital Markets - Analyst: Good. And then lastly for me, with all the puts and takes on end markets and FX, maybe if you can update us on the contingency, where it stands now versus where you were start of the second quarter.

Answer By: Gregory Hayes - United Technologies - SVP, CFO

Question: Ajay Kejriwal - FBR Capital Markets - Analyst: Thank you.

Answer By: Gregory Hayes - United Technologies - SVP, CFO