United Technologies Management Discusses Q2 2012 Results - Earnings Call Transcript

United Technologies (UTX)

Q2 2012 Earnings Call

July 26, 2012 10:00 am ET

Executives

Louis R. Chenevert - Chairman, Chief Executive Officer, President, Chairman of Executive Committee and Member of Finance Committee

Gregory J. Hayes - Chief Financial Officer and Senior Vice President

Jeffrey P. Pino - Former President of Sikorsky Aircraft

Analysts

Joseph Nadol - JP Morgan Chase & Co, Research Division

Howard A. Rubel - Jefferies & Company, Inc., Research Division

Douglas S. Harned - Sanford C. Bernstein & Co., LLC., Research Division

Jeffrey T. Sprague - Vertical Research Partners Inc.

Carter Copeland - Barclays Capital, Research Division

Terry Darling - Goldman Sachs Group Inc., Research Division

Myles A. Walton - Deutsche Bank AG, Research Division

Ronald J. Epstein - BofA Merrill Lynch, Research Division

George Shapiro

Samuel J. Pearlstein - Wells Fargo Securities, LLC, Research Division

Deane M. Dray - Citigroup Inc, Research Division

Presentation

Operator

Good morning, and welcome to the United Technologies Second Quarter Conference Call. On the call today are Louis Chenevert, Chairman and Chief Executive Officer; Greg Hayes, Senior Vice President and Chief Financial Officer; and Jay Malavay [ph], 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.

[Operator Instructions] Please go ahead, Mr. Chenevert.

Louis R. Chenevert

Well, thank you very much, Stephanie, and good morning, everyone. I'm pleased to be part of the call on this historic moment for our company. We've had a full week with many exciting developments. Greg will take you through the quarter results in just a moment. But first, let me start with an update on our major acquisitions and on our business transformation strategy.

Late last month, we closed on the IAE transaction and this morning we received the final regulatory approvals for the Goodrich acquisition. We anticipate closing later today or early tomorrow morning. These are transformational deals for UTC, setting the stage for strong earnings momentum. IAE brings tremendous aftermarket runway with the V2500, which now represents Pratt & Whitney's largest install fleet. There are over 4,500 V2500 engines in service with an average age of only 7 years, and we expect to deliver another 3,000 engines in the future. The IAE transaction further validates our game-changing GTF technology and strengthens our relationship with nearly 200 airline customers around the world, ensuring a seamless transition from the V2500 to the GTF-powered A320neo.

Turning to Goodrich. I'm very pleased we will close such a large transaction in just 10 months with limited required divestitures. Goodrich adds a very strong portfolio of complementary products and is a great fit with Hamilton Sundstrand. Bringing these 2 companies together will significantly strengthen our position in the growing aerospace segment and will allow us to develop more integrated systems for our customers and win greater content our next-generation aircraft. Since announcing the agreement, we have done significant integration planning. So we are ready to begin integrating Goodrich into our Propulsion and Aerospace systems organization. A team of more than 50 employees has worked relatively on integration planning with hundreds of employees lending additional support. The leadership team is in place and our extensive planning activities will make for a smooth transition for our customers, suppliers and employees.

Our large transactions, culture and people are key to success and I'm very happy with everything I see at this point. We have already identified all of the $400 million of run rate synergies that we expect to achieve by year 5, and leadership is looking up more. I am confident that Alain and the team will identify additional synergies as they work through the integration process.

We've completed the financing for Goodrich with a structure that was much better than originally expected. We issued the largest U.S. corporate bond offering since 2009, $9.8 billion at an average interest rate of less than 3%. We listen to our shareholders and we reduced our original need for equity issuance from $4 billion down to $1.1 billion of mandatory convertible units. We expect to pay down about 1/3 of the total [ph] purchase price by the end of 2012, using that proceeds from previously announced divestitures and cash from operations.

We have made great progress on the divestitures. We reached agreement to sell both Hamilton Sundstrand Industrial's business and Pratt & Whitney Rocketdyne this week. These are strong profitable businesses but we are streamlining the UTC portfolio to focus on our core commercial building systems and aerospace.

In the second quarter, we classified another non-core asset, our fuel cell business, as held up for sale. And we continue to expect to complete the divestiture of Clipper eminently. As expected, during the regulatory process for Goodrich, we agreed to divest businesses totaling about $250 million of annual sales, including Goodrich's electric power systems business, pumps and engine control business. These are attractive businesses with great employees so we expect a robust auction process. We also agreed to sell Goodrich interest into the air engine control original equipment joint venture for Rolls Royce.

Let me sum up by saying great progress on transformational changes that will generate real long term value for our shareholders. This team is executing in a superb way.

Before I turn it over to Greg to take you through the second quarter results, just a few comments on the year. It is certainly a challenging environment out there, with a slowing global economy, the euro trading near 1.2 and the late July close for Goodrich. Therefore, we are rebaselining our expectations for the year. We now expect sales of $58 billion to $59 billion, $3 billion lower than our prior expectation and earnings per share of $5.25 to $5.35 versus our prior expectation of $5.30 to $5.50 with FX and the late July close of Goodrich accounting for about $0.15 of additional headwind.

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