United Technologies Corporation (UTX)

Q2 2010 Earnings Call Transcript

July 21, 2010 9:00 am ET


Greg Hayes – SVP and CFO

Akhil Johri – VP, Financial Planning and IR


Terry Darling – Goldman Sachs

Joe Nadol – J.P. Morgan

Jeff Sprague – Vertical Research Partners

Howard Rubel – Jefferies

Joseph Campbell – Barclays Capital

Nigel Coe – Deutsche Bank

Cai von Rumohr – Cowen and Company

Julian Mitchell – Credit Suisse

George Shapiro – Access 342

Sam Pearlstein – Wells Fargo Securities

Finbar Sheehy – Sanford Bernstein

Ajay Kejriwal – FBR Capital Markets



Good morning and welcome to the United Technologies second quarter conference call. On the call today are Greg Hayes, Senior Vice President and Chief Financial Officer, and Akhil Johri, Vice President, Financial Planning and Investor Relations. This call is being carried live on the Internet and there is a presentation available for download from UTC's homepage at www.utc.com.

The company reminds listeners that the earnings and cash flow expectations and any other forward-looking statements provided in this call are subject to risks and uncertainties. UTC's SEC filings, including its 10-Q and 10-K reports, provide details on important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements.

Once the call becomes open for questions, we ask that you limit your first round of questions to two per caller to give everyone the opportunity to ask a question. You may ask further questions by reinserting yourself into the queue and then we will answer those questions as additional time permits. Please go ahead, Mr. Hayes.

Greg Hayes

Okay. Thank you, Christine. Good morning, everyone. As you saw in the press release this morning, solid results in an improving end market environment. Some key takeaways for the quarter. First, organic revenues grew for the first time since the fourth quarter of 2008. Secondly, order rates continued to show broad improvement across the business. Third, our relentless focus on cost reduction continues to drive the year-over-year margin expansion. And finally, we once again saw strong cash generation this quarter driven by tight control over working capital and CapEx.

We certainly have seen volatility in the markets over the last three months, and there is uncertainty as to the shape of the recovery and the health of the overall global economy. However, UTC’s strong first half performance along with improving order rate and exceptional cost traction give us confidence to raise our EPS guidance to a range of $4.60 to $4.70 a share. That’s up from our previous guidance range of $4.50 to $4.65, even as we expect to face headwind from foreign currency in the second half of the year. EPS is now expected to grow 12% to 14% and revenues of around $54 billion that’s up 2% from 2009.

Turning to second quarter results, organic revenue growth resumed this quarter at 4%. On the commercial side, Carrier had a very strong quarter, with 7% organic growth driven by strength in Transicold and the US residential business. On the Aerospace side, Sikorsky led the way with growth of 22% that was driven by the delivery of 66 large helicopters versus 50 in 2009.

EPS in the quarter were $1.20, and that’s up 14%. Net restructuring and one-time items were a charge of $0.12. The most significant actions were at Carrier related to ongoing portfolio transformation initiatives in overhead cost reduction projects and at Hamilton Sundstrand, which continued to advance the low-cost sourcing strategy that Alain articulated back in March. Excluding restructuring and one-time items in the second quarter for both 2009 and 2010, EPS increased 9% on 5% higher revenue.

Foreign currency was a net benefit of $0.03. That’s from the positive impact of currency hedges at Pratt Canada, more than offsetting adverse translation. Cost execution was solid across our business resulted in segment margin expansion of 80 basis points to a record 15.7%, adjusted to restructuring and one-time items. This marks the fifth consecutive quarter of margin expansion in UTC. Excluding net restructuring charges and one-time items, total segment operating profit grew 10% and revenue growth of 5%.

Five of the six business units improved margin on an adjusted basis with Carrier, Otis and Hamilton Sundstrand increasing by over 100 basis points. Carrier’s portfolio transformation, restructuring and cost reduction initiatives continued to pay off as they delivered solid conversion on the incremental volume we saw and drove margin expansion of 260 basis points, 12.7% in the quarter on an adjusted basis.

On slide two, our orders, we saw broad improvement order rates in the quarter and we continue to see good growth in the short-cycle Carrier and Hamilton Sundstrand Industrial businesses. Commercial aerospace after-market orders also improved sequentially, which is consistent with our expectations for second half growth in those businesses. More importantly, orders at our long-cycle businesses such as Otis New Equipment, Carrier Commercial HVAC, and Fire & Security also grew year-over-year in the quarter signs that the worst is behind us.

Emerging markets continued to do well, with particular strength in India and Brazil where combined orders for the Commercial business units grew by over 25%. As expected, order growth rates in China have begun to slow from the first quarter levels as compared to get more difficult. But overall, orders in China still grew in a 11% rate year-over-year. This is a trend we expect will continue. Difficult compares making year-over-year growth more modest, but we still see solid double-digit growth in China in the back half of the year.

Slide three, in the quarter, free cash flow 112% of net income, evidence that we remained focused on constrained working capital even as revenue growth returns. Working capital turns improved to 8.6. That’s both a sequential and a year-over-year improvement. And capital-expenditures-to-depreciation was below 70% in the quarter. For the year, we continue to expect free cash flow to equal or exceed net income.

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