United Technologies' CEO Discusses Q1 2013 Results - Earnings Call Transcript

Seeking Alpha

Executives

Gregory Hayes - Chief Financial Officer, Senior Vice President

Jay Malave –Director, Investor Relations

Analysts

Ronald Epstein – Bank of America Merrill Lynch

Sam Pearlstein - Wells Fargo

Joseph Nadol - J.P. Morgan

Howard Rubel – Jefferies

Carter Copeland – Barclays

Jeff Sprague – Vertical Research

Cai von Rumohr – Cowen and Company

David Strauss – UBS

Myles Walton – Deutsche Bank

George Shapiro – Shapiro Research

Nigel Coe - Morgan Stanley

Julian Mitchell – Credit Suisse

Draft version. An edited version will be posted soon.

Operator

Good morning, and welcome to the United Technologies’ First Quarter Conference Call. On the call today are Greg Hayes, Senior Vice President and Chief Financial Officer; and Jay Malave, 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. Then 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. 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 to two questions per caller to give everyone the opportunity to participate. You may also ask further questions by reinserting yourself in the queue and we will answer as time permits.

Please go ahead, Mr. Hayes.

Gregory Hayes

Okay, thank you [Sane] and good morning, everyone. As you saw in the press release this morning, UTC reported first quarter earnings per share of $1.39, that’s up 6% versus 2012 and a little higher than we expected due to a little better than expected execution at Aerospace Systems and our Climate, Controls and Security business, as well at the time with some one-time gains. If you recall back in March, we were talking about a $1.30 number that we’re comfortable with. In fact on that $1.30, we had about $0.05 of gains in excess of restructuring. We ended up with $0.11. So about $0.06 of the $1.39 was a little bit more than we expected at the timing of some gains out of the portfolio that integrate the portfolio that add to CCS. As far as rest of the business, our integration remains on track and we continue to see strong performance in our two major acquisitions with Goodrich and IAE providing $0.21 of earnings in the quarter. Organic sales declined 2% partially due to the touch comparison in commercial aerospace aftermarket in the Transicold business, but we continue to signs of economic recovery especially in North America and emerging markets.

Europe however continues to be a headwind in the legacy PW4000 commercial spares have provided [with me] have yet to recover, so the past could be a bit even but we are confident in our full year outlook. On slide two, on a positive note, order trends that you see on slide two indicated the majority of our portfolio is well-positioned for a resumption of top-line growth as we progressed to the remainder of the year.

Just a reminder we’ll talk the orders on a constant currency basis as we usually do. In our commercial businesses, we see good traction in North America. The housing and commercial construction markets are improving, Americans are invested in their homes again, and our North American Residential HVAC orders are up 11% versus last year. The ABI or the Architecture of Billing Index is now trended about 50 for the past seven months and we see that coming through in our orders, the Otis new equipment orders up 21% in North America.

We did see a 12% decline on our North American Commercial HVAC orders, this is on touch compare and we continue to respect that business to grow 2% to 4% for the year. As I mentioned Europe remains a challenge, although we do see some bright spots. CCS is Commercial Refrigeration business the orders grew 11% in Europe and Otis new equipment orders grew 21% but the Russia, France and the UK more than offsetting weakness in Southern Europe. Wherever CCS’s commercial HVAC and Fire & Security products orders were down 14.5% respectively, so we are not quite out of the Western Europe yet. Otis continues to gain momentum in China, although we have strength we saw in the fourth quarter, orders were up 27% in Q1, CCS commercial HVAC orders were down slightly, while the fire and security product orders grew 8% in China. Our position in emerging markets continues to pay off with combined BRIC orders for the commercial businesses up 22%, in the quarter.

Turning to aerospace we saw modest improvement in our commercial after market business at Aerospace Systems', spares orders were up 2% on a pro forma basis with the strength primarily from the legacy Goodrich business, however we have to see a recovery of that would be legacy commercial spare orders were down 28%, continued declines in wide-body PW4000 orders were partially offset by strong growth in the V2500.

Radar decline also reflects a tough compared to last year and a strong book-to-bill in the fourth quarter, with increasing airline traffic, record load factors declining oil prices and airlines projected to earn more than $10 billion this year, we still expect an increase in order rates as we move through the year.

On the military side although we didn’t see a significant impact for the sequestration, we do see the impact of DOD budget cuts and reduction in flying hours, with aggregate pro forma after market sales down 10% in the quarter across the Aero businesses. So we will keep a close eye on the aerospace, after market look for signs of more stabilization in Europe but order rates and macroeconomic trends broadly support our assumption for growth as we move through the year. We are confident in full year guidance of earnings per year of 5.85 to 6.15 and sales of 64 to 65 billion, that’s up 3% to 5% organically.

Okay, now on to slide three, taking a closer look at first quarter results, total sales and segment operating profit increased 16% and 15% respectively driven by Goodrich and IAE acquisitions.

Climate, Controls and Securities continues to realize savings from the integration, is an increase profit of 8%, on 3% decline in organic sales, and orders continues to gain momentum with organic sales growth for the second consecutive quarter.

EPS of $1.39, as I said before, included a $0.11 of gains in excess of restructuring. About $0.15 of the volume gains came from the tax adjustments related to the 2012 Tax Extenders, which were passed (inaudible) in January of 2013, and the ongoing portfolio transformation at CCS. These gains were partially offset by $0.04 of restructuring. Excluding these items, as well as $0.21 of net gains from last year’s first quarter, (inaudible) earnings per share increased 16% being driven by the IAE and Goodrich acquisitions.

Free cash flow in quarter was 88% of net income. CapEx was $295 million, that’s up nearly 60% versus last year as we prepare for the rapid commercial aerospace. We have also restarted our share repurchase program in January, acquiring $335 million of stock, and we expect to buy back a similar amount here in the second quarter.

Let me stop there for now, I’ll talk more about the full-year in just a second, but first, let me turn it over to Jay to take you through the segment results.

Jay Malave

Thanks, Greg. Turning to page four. Otis sales improved 2% in the quarter with a solid mid-single digit growth in new equipment, and continued growth in Otis sales. Excluding the impact of the currency, new equipment sales were up in the Americas, Europe and Asia, with North America, Russia and China leading the way. Operating profit was essentially flat at constant currency. Continued weakness in southern Europe, offset the benefits of volume growth and continued cost reduction in the rest of the world.

New equipment order growth was strong, up 24% in the quarter with double-digit growth in the Americas, Europe, and Asia led by 27% improvement in China.

Orders strength in Russia moving offset weakness in Southern Europe. Thanks to growing order book and near-term completion of battery transformations around the world. Orders expect to see improving performance as the year progresses. Guidance for the full year remains unchanged with profit expected to be up $150 million a mid single-digit sales growth.

On slide five. Climate, Controls & Security increased profits 8% in the quarter and 7% lower sales resulting in another sharp increase in margins, up 170 basis points from prior year to 13.1%. Organic sales were down 3%, driven by steep decline and container shipments. On a difficult prior year compare and complaint with weaker markets, partially offset by high single digit in the Americas residential HVAC business. Channel was up low single-digits well Asia overall was flattish.

CCS had another solid quarter of earnings growth despite with the decline in order organic sales. Profit growth was driven by restructuring and productivity, including continued savings from the consolidation of Carrier and Fire & Security, lower commodity cost and the absence of ongoing losses from the business we divested in the first quarter last year.

Global commercial HVAC orders were up 8%, following 9% growth last year with double-digit declines in North America and Europe partially offset by low single-digit in Asia. Orders for global Fire & Security products were down low single-digit and (inaudible) were down about 10%.

Transicold orders were up 30% and Commercial refrigeration orders in Europe were up a 11% with solid results in the first quarter and anticipated organic improvement we continue to expect of profit growth of $150 million to $200 million a mid single-digit organic growth, sales growth at CCS. Turning to aerospace on slide 6, at Pratt & Whitney, sales were up 11% in the first quarter driven by the consolidation from IAE and the transfer of AeroPower business. Organic sales were down 2% year-over-year as the clients and commercial after market and military business were partially offset by higher commercial engine OEM and power systems sales. Large commercial spare sales were down 19% organically over last year’s first quarter which was the strongest of 2012.

On a reported basis, large commercial spares were up 23% including consolidated IAE sales. Operating profit in the quarter was down 3%, the impact from lower organic volume and unfavorable mix along with higher pension costs was partially offset by the benefit from the IAE consolidation lower E&D and restructuring savings. The quarter also benefitted from a partnership settlement from contract closeouts which more than offset the absence of last year’s contract closeout benefit.

For the full year, we continue to expect Pratt & Whitney’s operating profit to be up $100 million to $150 million a mid to high single digit sales growth. UTC Aerospace Systems delivered a [forward] quarter with operating profit of $509 million of sales with $3.3 billion.

As Greg mentioned, Goodrich has got off to a better than expected start and contributed $0.18 earnings per share in the quarter. On a pro forma year-over-year basis for UTC aerospace systems sales were up low single digit with commercial OEM up high single digit partially offset by weakness and military after market. Commercial after market sales were up low single digit, orders for commercial spares were 2% on a pro forma year-over-year basis, and commercial spares up above exceeded 1 for the second straight quarter.

Prepared with the fourth quarter which was a fiscal quarter with Goodrich Aerospace Systems' sales were up 3% and operating profit was up 50%. Operating profit was growth was driven by about $90 million (inaudible) related adjustments conversion and higher OEM in commercial aftermarket sales volumes as well as lower E&D.

With a (inaudible) start to the year remain confident in full-year guidance with sales of 13.5%, $14 billion net operating profit $2.1 billion.

Turning to Sikorsky on slide eight. Sales declined 7% driven by lower military aircraft and aftermarket volumes. First we have set the higher commercial aircraft to leverage during the quarter Sikorsky shipped a total of 40 aircraft including 30 military and 10 commercial.

Operating profit declined 32% as a result other lower overall sales volumes. Headwind from the Multi-Year 8 margin reset in higher pension cost.

During the quarter Sikorsky and Boeing science strategic team agreements support U.S. Army is joined multi-role future for collect requirements the joint effort includes the Board of the build the demonstrated aircraft based on Sikorsky X2 technology. To the full-year we continued to expect profit to be done $100 million to $150 million a low single digit sales growth with that let me turn it over to (inaudible)

Gregory Hayes

Okay thanks to you. Run slide nine now so good execution at the business units as we look to further (inaudible) recover as the year progresses the business is as we set our focused on integration and execution, as we at the final pieces of the portfolio transformation.

In the first quarter we closed on the sale of the two regulatory mandated [divestitution] Goodrich long with our fuel sales business we expect the last two large divestitures that’s Pratt & Whitney Power System and Rocketdyne business to close by the middle of the year, and CCS should have their portfolio transformation essentially complete by the end of this year. We also settled notable accomplishments in the first quarter that will drive organic growth well into the future. On our first GTF engine the Bombardier CSeries, we achieved flight certification, while the first A320neo engine completed ground testing and will begin flight testing here in the second quarter.

We also had significant wins across the Propulsion and Aerospace Systems group this quarter most notably at Embraer. The selection of the GTF to power Embraer’s second generation engine, Pratt & Whitney is well-positioned on the next generation regional jets, a key growth market over the next 20 years. We also want a new position for wheels and brakes at Embraer, the combine wins across the Embraer regional jets showed the value we bring to our customers and our early examples of the benefit of the Goodrich acquisition.

As Jay mentioned Sikorsky and Boeing announced the partnership to submit a joint proposal for the Army’s Joint Multi-Role Technology Demonstrator and that’s going to be based on Sikorsky’s X2 technology, Sikorsky also take orders for 15 commercial helicopters in the quarter. On the CMH program we continue to have discussion with our customers but there is really nothing to do report at this time, we remain committed to the program and already to begin pilot training and we are going to maintain our place order of eight new aircraft deliveries for 2013.

In the commercial businesses we continue to win orders in key emerging markets. Otis has 27% order growth in China, including order for a 151 elevators in a high end luxury residential complex near Shanghai and CCS has a order to contract with about two datacenters in China with HVAC, [buyer] suppression and chiller control systems, so this is you’ve heard from the presence in March, each of our businesses is well-positioned and our core markets and continued innovation will allow us to drive long-term organic growth.

Okay, take a look at the rest of 2013, moral changes in what we told you last month. We remain confident in our guidance range of $5.85 to $6.15, despite the potential $0.10 impact of sequestration. The order rates in our commercial businesses are good lead indicators for resumption of organic growth and we will keep a close eye on commercial spares as well as the European market. We’ll also see some easier comparison over the course of the year. If you recall that last year (inaudible) organic spare sales were down only 4% in the first quarter versus 19% decline over the rest of the year. And Transicold entered 2012 with a very strong backlog in the container business, which they burn down on last year’s first quarter and this was followed by double digit sales declines in each of the next three quarters.

So you should see CCS revert to organic growth here in Q2. A) And we’re going to continue to invest in restructuring with visibility, some additional gains and good payback restructuring factors across the business. We now expect to spend about $350 million on restructuring this year, all of which will be offset by one-time gains. We spent $52 million on restructuring in the first quarter and we would expect that to be level loaded with about a $100 million of restructuring in each of the next three quarters. Remaining gains however should come largely in the second quarter, so on top of the $185 million of gains you saw in Q1, we’ll see about a $150 million to $160 million of gains here in the second quarter.

Also strong cash flow remains a hallmark of UTC and we continue to expect free cash flow will equal or exceed that income for the year. In the first quarter, we paid down almost $400 million of debt and we bought back $335 million of shares on maintaining the cash balance of $4.8 billion. We will continue to delever and we not expect to paid down about $2 billion of debt this year. $1 billion that we will target for here in the second quarter and the other $1 billion which is due in the fourth quarter. We are also going to maintain for the time being. Our base order of $1 billion each for share repurchase and M&A. so no surprises, the UTC portfolio is well positioned to take advantage of the megatrends of urbanization in commercial aerospace growth over the next decade as always we are going to remained focused on integration and execution in 2013 and on our strategy just to look a long-term sustainable earnings growth. With that let me stop and open up the call for questions. Sonia?

Question-and-Answer Session

Operator

Thank you (Operator Instructions) Our first question comes from Ronald Epstein of Bank of America Merrill Lynch. Your line is now open.

Ronald Epstein – Bank of America Merrill Lynch

Hey good morning guys.

Unidentified Management Representation

Hey Ron, how are you?

Ronald Epstein – Bank of America Merrill Lynch

Good, quick question on PW4000 actually we are down I guess organically a bunch in the quarter, in my word where did they come back, they are at the (inaudible) what you are expect to see to have that actually come back?

Unidentified Management Representation

Well, we know, you are going to ask that question Ron, yeah, look it’s a complicated story, so let me try and take you through some of the pieces as we see it today. Right now, there is about 2,500 PW4000 engines in services and over the last five years that’s come down in total about 3% and we expect that that’s going to continue to come down 1% or 2% a year for the next five years, so you actually going to see some attrition in the portfolio, but at the same time, the average 8 of these engines is only 14 years we fully expect these things to have a normal lifecycle of 25 to 30 years so at some point they will come back, there is some excess material out there in the engines obviously from some of the retirement, but just not significant enough, so they will come back for LLCs, we will start to see a more normal run rate here as we go throughout the year, so pretty confident, the other thing just to put in perspective, so there is 2,500 4000s out there. Today there are 5,000 V2500s out there. We are going to sell another 3,000 engines over the next five years or so. So the Vs are really going to be the story going forward and we saw that in the quarter, if you dissect that 28% down, what you see is that the 4000s were down about just under 40% maybe they were down about 39%, but the Vs on the other hand were up about 34% on the legacy piece.

So again we’ve made this bet on narrow-body its going to pay-off and again I think its all manageable in terms of what we are seeing on the 4000s in the – over the course of the year.

Ronald Epstein – Bank of America Merrill Lynch

Okay. Okay and then maybe if I can just follow-on to that (inaudible) question. So are you seeing I mean relatively young or engines would not many hours on them, relatively speaking coming off aeroplanes are getting retired computing with your on spares, maybe about kind of part of the issue?

Unidentified Company Representative

Not really. If we are seeing again, these engines have been out there, I think there is some engines that are 25 years old and PW4 in fact more than that, probably from the almost 30 years old, some of the early 4000 so, sort of the older engines are coming off which is providing service little material, we also see the airlines continuing to try and take spare engines and use them and not induct them into the overhaul shaft, so inductions actually on the 4000 are lighter than what we had expected just because the airlines are trying to do what they can to (inaudible), so oil prices at $90 a barrel, I think the airline traffic still very high, capacity very high, really think that we are going to see our favorable return to normal on the 4000s, just not enough engines out there in the fleet than have been retired to provide enough spares to support the fleet that’s out there.

Ronald Epstein – Bank of America Merrill Lynch

Okay, great. Thank you.

Unidentified Company Representative

All right. Thanks.

Operator

Thank you. Our next question comes from Sam Pearlstein of Wells Fargo. Your line is now open.

Sam Pearlstein - Wells Fargo

Good morning.

Unidentified Company Representative

Sam.

Sam Pearlstein – Wells Fargo

First thing is, can you just quantify the partnership settlement and contract closeouts (inaudible) and how much that helped?

Unidentified Company Representative

Yeah. So, last year, there was a, I guess some contract closeouts that gave us a benefit of about $0.02. This year we’ve got contract closeouts in a couple of other things which benefited us between $0.04 of $0.05, lets say. So, have a net $0.03 year-over-year benefitted (inaudible).

Sam Pearlstein – Wells Fargo

Okay. And then, just, talk about lower E&D (inaudible) and also UTC Aerospace Systems in these coming down. And so, I’m just trying to just understand how come R&D is up year-over-year from [$544 million to $610 million]. Where is that additional spending going?

Unidentified Company Representative

Well, that’s just an assumption of Goodrich’s – I mean, sorry, Sam. That’s just assumption of the Goodrich acquisition year-over-year, just consolidating the results versus last year, (inaudible) result in the first quarter.

Unidentified Company Representative

Okay. Those about $100 million of that. Subtract this (inaudible) I think $34 million of (inaudible) come down to $75 million to $100 million. The (inaudible) areas as we said, that certified the [neo] is going to flight test here shortly. So, you will see a real ramp down in the E&D at Pratt as we move through the year.

Sam Pearlstein – Wells Fargo

Okay. Thank you.

Unidentified Company Representative

It’s okay.

Operator

Thank you. Our next question comes from Joe Nadol of J.P. Morgan. Your line is now open.

Joseph Nadol – J.P. Morgan

Thanks, good morning.

Unidentified Company Representative

Joe.

Joseph Nadol – J.P. Morgan

First question is just back on the Pratt spares. Heard everything you said. Could you quantify – I mean your confidence is going to come back. Are you able to quantify in what would you believe is the new normal level for this and where we are we relative to that? So, how much under the long run level of PW4000 do you think we’re running?

Gregory J. Hayes

Well obviously, you down 40% this year in the first quarter 39% that will get better. We had a very tough compare last year and some strong sales of the 4000 and some LLCs that the (inaudible) last years first quarter. I think that rate that we saw down 15% last year, we think that kind of the normalize rate that we saw in the third and the fourth quarter of last years the same rate that we saw this year in the first quarter and that rate should pick up again we still have the airlines after differ in maintenance and I just not to the indications over the sharp so it some points these are going to come back.

Joseph Nadol – J.P. Morgan

And do you think you’re still on track for overall 5% organic growth in (inaudible)

Gregory J. Hayes

Yeah, but I think the mix is going to be different I think you know the 2000s it held pretty well, we saw good orders there the (inaudible) better than what we expected in the legacy side in the 4000s are little weaker, but I still think, with the price increase and everything else that we see out there we can still get to that 5%, we might be a little late to that if the 4000 is still come back it all but if you see strength in the rest of the portfolio there.

Joseph Nadol – J.P. Morgan

Okay and then just one more Greg, overall organic growth you’re still saying 3% to 5%, minus 2% in Q1. What do you think the profile will like over the rest of the year and did you expect Q1 to be minus 2% are you thinking more like flat before?

Gregory J. Hayes

Yeah, I think when we were looking at the year back in December I think we saw get over flattish first quarter came in a little bit late there, again I think CCS renew though the issues are going to see there because of the big compare issue and container, (inaudible) course fee was gone to be down and we didn’t expect (inaudible) to be down much as they were in the quarter. So that’s a little bit of it but again I think its generally you are going to see gradual recovery will see organic growth in the second quarter and it will pickup through the course of the year end the again what I am looking at is order intake specially at the commercial businesses we saw a very strong growth ensuring up but we also saw a growth in Europe that (inaudible) up 21% and North America is pretty good. So again there is momentum with a backlog it’s growing and we should see that play out in the higher sales as we move through the year.

Unidentified Company Representative

Yeah [Justin] when we did see sequential growth in the backlog of both CCS and Otis equipment, so that gives us some confidence as we go throughout the year besides just the compare is getting easier.

Joseph Nadol – J.P. Morgan

Thanks.

Unidentified Company Representative

You’re welcome.

Operator

Thank you. Our next question comes from Howard Rubel of Jefferies. Your line is now open.

Howard Rubel – Jefferies

Thank you very much.

Unidentified Company Representative

Good morning, Howard.

Howard Rubel – Jefferies

Good morning gentlemen.

Unidentified Company Representative

Good morning.

Howard Rubel – Jefferies

For a moment just to follow a little bit more on Joe’s question with the diversified business the way you have, you always have some puts and takes. Where else did you see some things outside of the 4,000 that surprised you on the downside and where we’re maybe some strength that you have been planned for?

Unidentified Company Representative

Yeah, I think there is a one thing I would say; it’s hard to say it surprised us. We knew Europe was going to be weak. The order rates of CCS on the commercial lease backs were probably a little weaker and we didn’t see any real traction of a service side of the business from the F&S business in Europe either but I would say that’s a real surprise maybe we have spoke to – I think Geraud had talked about kind of 1% to 3% growth in Europe this year has markets. Again, I think we did see good growth in truck trailer in Europe and we’ll saw a good growth in truck trailer in North America. But so there are a pockets of goodness in Europe, it’s not dyers people might think. I mean we get good balance across the portfolio. So even if service of CCS has down, I think with truck trailer up. If there is nothing really out there, then I would say it’s a big, big concern as we move through the year.

Howard Rubel – Jefferies

And then you’ve outlined to some degree what you think the gains and also where the restructuring is going to be, could you provide a little more color on that, or a little granularity?

Gregg Ward

Sure, with the restructuring actions?

Howard Rubel – Jefferies

Yes please.

Gregg Ward

So, again, we have identified about, that we probably identified more than 350 million potential actions and we are going to see that as you would expect both at CSS at orders we are going to see some more (inaudible) and the aerospace systems here, but we have a bigger integrations going well, but there is a about a 100 million of restructuring will do there and even Sikorsky as they see volumes down on military will see some restructuring. For the most part the programs that we’re looking at today as paybacks between one and two year, so as they do that, as they take out their restructuring to $350 million that actually gives us a little bit of cushion this year, as well as a runway next year. So, again I think there will be the typical actions, we’re looking to the low to the low cost sourcing, we’re looking to make sure that we will right size the business, we know cuts are coming on the military side we have seen that already in the after market, so we’re going to right size the business for what we see as the market demand especially on the military aerospace side.

Howard Rubel – Jefferies

And then your gains were said, can you just qualify them?

Gregg Ward

So, again, yeah, the gains I think we had a $185 million in the first quarter that the biggest piece I think it’s funny to call it a gain, but that was probably tax extenders package, that was the R&D tax render for 2012 we got passed in 2013, but I’m sure that’s great policy to them, instead of us to spend in 2012 and 2013 that’s another story. The other piece of that was portfolio transformation we sold the Hong Kong guarding business at CCS those are the two gains and in the second quarter we see gains on a the divestitures that we’ve got out there as well as a little bit of additional good news on taxes.

Howard Rubel – Jefferies

Thank you Greg.

Gregg Ward

Thanks, Howard. (Inaudible).

Operator

Thank you our next question comes from Carter Copeland of Barclays. Your line is now opened.

Carter Copeland – Barclays

Hi good morning guys

Unidentified Company Representative

Hi Carter

Carter Copeland – Barclays

Just a couple of question one I want to if you my expand of bit on Europe and now may be qualified how much you have push down on the quarter in the commercial business is and just. Why you saw in terms of the progression of orders over the quarter you know March relative to February relative to January this seems to be a pretty significant slow down they are saw, I want to if you might be able to provide some color on that.

Unidentified Company Representative

Sales, out sand with sales [contract] I get them to orders, sales I bought is we’re up higher level low single digit sales of CCS were down high single digit. It was pretty much across the board you have declines the commercial age fact, you have the high single digits declines are commercially situation any where declines in the fire security business is and the orders as we said order was up 20% in the quarter and CCS little bit mid describe said we’re I said before commercial situation was up to 11% transport refrigeration in Europe was up over 20% each back was down mid-teams and F&S that was also that I think in around mid single digit.

But again, no others was a surprise we are build to send, we’re we (inaudible) pretty much the head were gone for the rest of the year anything better to already in the guidance.

Unidentified Company Representative

Yeah, I (inaudible) know is otherwise know the trend change during the quarter we’re all of us the certain things is went to (inaudible) [hand basket] that may they was simply got of we’ve continuations and what we saw throughout the all of the last year Southern Europe reaming we gives that Northern Europe and Emerging Europe specially rush up in a lot better and during the biggest growth opportunity but you saw growth in the UK. We saw growth in the Germany it was not just across the board bad news.

Carter Copeland – Barclays

That’s great (inaudible) thanks, and just a quick follow up on the good (inaudible) $0.18 in the quarter obviously that a in the track to a bigger accretion number than you’re outlining for the year at $0.60, you also about the $90 million in purchase accounting adjustments do that impact Q1 in particular way that may they larger or (inaudible) thinking about Goodrich accretion over the course of the year relative to what your figures got towards

Unidentified Company Representative

Yeah. I think if Goodrich did a little bit better than what we had expected, and that’s surprising trend under promising over deliver here of the biggest acquisition we ever done, but Goodrich is but nothing but good news for us, and again I [tribute] that really to the Aerospace systems team they on their doing a great job integrating the business I got great people, and again taking care of the problems as they find them and that have been any big surprise and so again a little bit better in first quarter and I would hope to that trend would continue began.

I just thinking about this balance works team here again a little bit of upside on Aerospace Systems this year could also a little bit weakness of the commercial spares so we inflow in the (inaudible) business to the propionate Aerospace Systems good pretty good about the guidance we’ve got.

Carter Copeland – Barclays

That’s great thanks guys.

Operator

Thank you. Our next question comes from the Jeff Sprague of Vertical Research. Your line is now open.

Jeff Sprague – Vertical Research

Thank you good morning (inaudible) just

Unidentified Company Representative

Good morning.

Jeff Sprague – Vertical Research

Couple on the follow ups. Just back to over this the strength in both Europe and China I guess in both cases do you think there is some share gain going on there or the markets really that strong, and I guess in China. I think you provide some color on what’s going on in the pricing environment

Unidentified Company Representative

Yes, so in China I think it is the market is very-very strong I don’t really think that there is (inaudible) actually big gain in share because as we saw the (inaudible) report of this morning they’ve also had very good results in China and the market in change first I don’t think property transactions in the first quarter we’re up 60% in showing us. So again the markets are a lot better than what we had anticipated. We saw that starting in the fourth quarter. We’re also getting traction I think in showing with the new products. We’ve got the new low cost Gen2 for social housing. We’ve tailored the products to that market. So again we’re getting good traction but I wouldn’t say we’re gaining share necessarily but it certainly feels pretty good when you have orders up 27%. As for Europe, again, it was a mixed bag against strength in the UK, strength in Russia, I think we’re obviously, we’re probably gaining share there, also strength in the Middle East, but Southern Europe continues to be kind of a drag and that’s really more of on the service side than it is new equipment. There really isn’t much of a new equipment market in Southern Europe today.

Jeff Sprague – Vertical Research

And then I just didn’t totally understand what the Jay said, when he was talking about container orders. I wasn’t sure to what he said offer up. Were container orders up in the first quarter?

Unidentified Company Representative

Container orders were up over 40% in the first quarter.

Unidentified Company Representative

So you remember last year in the first quarter, we came in with this big backlog of containers and so sales at CCS were very strong in the first quarter but the order rates started to decline and then we didn’t really see any orders in container until (inaudible) about September and then it started to pick up in the trend that we saw in the fourth quarter just accelerated here in the first quarter. So and containers are short cycle business but the leasing companies are buying and that it looks like they’re going to have a pretty good year – about 15% for that market for the year.

Jeff Sprague – Vertical Research

And just one last one and then I will pass. But if you could speak to resi HVAC price costs and what’s going on there? Are you feeling cost of lease given what’s going on with raw math so we’re getting kind of an associated drag down on selling prices as the raw math come down?

Unidentified Company Representative

No in fact I think we feel pretty good about cost price. There was a price increase as an obviously [a good back] effective January 1 so far so good there. Some of the commodity benefits that we see again, its short cycle, its been up and its down, its been as high as about 390 last year, we are pretty well locked in on copper for the year, little bit above what the current prices but again copper is a commodity that continues to come down and importance of CCS as we move to especially on the commercial side some more of the (inaudible) and heat exchangers. So again I think generally we feel pretty good it’s never an easy pricing environment, but I would tell you that its CCS is making some good strides to get great distribution here in the U.S. and good product innovation and that’s helping a lot.

Jeff Sprague – Vertical Research

Perfect, thanks a lot.

Unidentified Company Representative

Sure.

Operator

Thank you. Our next question comes from Cai von Rumohr of Cowen and Company. Your line is now open.

Cai von Rumohr – Cowen and Company

Thanks, so much. So you release the first two defense impact at Sikorsky in the first quarter, could you kind of explain that and maybe give us some color on what you are seeing in terms of Sikorsky impact on the total business?

Unidentified Company Representative

So I may add Jay take you through Sikorsky and I will take shot at the sequester question.

Jay Malave

Cai, Sikorsky we had more deliveries on military aircraft, the after market was down to military after market was down, little bit over 20%, so that’s really we saw the big impact, the deliveries we knew about on the (inaudible) partially offset by some strong growth in commercial aircraft deliveries, and I think this quarter we have 40 deliveries, we are expecting north of 240 deliveries for the full year, so you would expect that volume to increase on as we go throughout the year. So partly just timing of deliveries, partly was in particularly in the after market was due to cuts.

Unidentified Company Representative

As far as the sequester impact, I’d love to tell you that we can quantify at any better than what we did 30 days ago, but unfortunately the customers are not sending us invoices with a 10% reduction for sequester, sequestration. So we are hearing about it, we are starting to see a little bit of it in terms of the order intake. I think Jay talked about it to you that after market was down 10% across aerospace, mostly aerospace in the quarter. That’s really just a reflection, again, reduced (inaudible) in Afghanistan, but also reduced flying hours here. We see some of the fighter (inaudible) being stood down for the remainder of the year, cancelling some of the exhibitions. And again, all of this is going to have an impact on us. It’s just going to take a while for it to play out.

So, we continue to say it’s probably about a $0.10 impact, but again, it’s hard to see it beyond that. I think the bigger concern is on these (inaudible) of the FAA. If they start driving to higher cost in the commercial airlines, but that can do the spares, but again, I think that should be a relatively small impact for us.

Cai von Rumohr – Cowen and Company

You’ve mentioned the military after market down 10% and seeing some cutback in flying hours. I think in December you were still kind of (inaudible) at least modest (inaudible) military after market would be off the chart. It makes (inaudible) down. So where do you now expect military after market to be for the (inaudible)?

Unidentified Company Representative

(Inaudible) I’m proud, we’re expecting it to be flat to slightly up (inaudible) not much (inaudible). In the quarter we actually saw growth in military after market. If Pratt really on the back of F100, F119 and F135 spares, and that was F100 and F119 was really more of a reduction of strong order of sales in 2012 (inaudible) backlog with the liberty on the fist quarter. And F135 is more sort of assumption of its positioning with over 80 engines have been delivered program to date, and so it’s just a matter of provisioning and start to accelerate.

Cai von Rumohr – Cowen and Company

And some of you expect the military after market still to be flat to up for the year, is that correct?

Unidentified Company Representative

(Inaudible) we do. I think what we’re – we will talk about that 10% which we really saw was at Sikorsky and at the Aerospace System review, and military aftermarket down about 20%. So good news at that prior in the quarter but offset by bad news and Sikorsky and at (inaudible) I think again the Sikorsky numbers are little bit worse that what we had expected on the OEM side we know exactly what we are get to be from a military delivery side (inaudible) but a little worse so what we expected in Sikorsky so keep in eye on that was move through the year.

Cai von Rumohr – Cowen and Company

Okay and you mentioned you still have the placeholder for CMH deliveries could you give us an update on your progress are out there Canadian and you know I mean if you don’t have you can’t so when you are going to have a settlement, I mean I assume that various going to be a zero and till you starting months correct.

Gregory J. Hayes

Yeah, like we’re expecting that shift those aid in the back half of the year, but I want to say we are not making progress we continue to have discussion, good discussion with the customer in Canada again this is a very complicated procurement program in Canada with different public words and the department of the first, but we are working with both sides of the Canadian government we are trying to a win, win solution here and its just taking a longer than anybody watch it to obviously we’re ready begin pilot training, four aircrafts (inaudible) I think number 26 of the 28 is on the production line down in the west so we are building them and we are still not done with some of the mission software but we are making very good progress with that, so again will get pass I can’t tell you whether its next week or next month to month after but I still think we have a pathway to deliver additional helicopters of the key for us to get pilot training to begin and were pretty close to that.

Cai von Rumohr – Cowen and Company

Okay thank you.

Operator

Thank you our next question comes from David Strauss of UBS, your line is now open.

David Strauss – UBS

Good morning

Unidentified Company Representative

Hi, Dave

Unidentified Company Representative

Good morning Dave

David Strauss – UBS

Greg just following up on Cai’s question CMH the charge that you guys took in the fourth quarter does that reflect delivering the interim configuration aircraft or does it reflect you know not delivering the interim configuration aircraft waiting to a final configuration?

Unidentified Company Representative

All right, so the charge that we took $157 million I think it was in the fourth quarter that assumes that we working and deliver any aircraft until 2015 with all the machine system software would be done. So, it didn’t anticipate a interim solution even though we think ultimately that the best for both ourselves as well as for the customer to had start deliver these interim aircraft going to fly, but the charge was a more conservative view in the fact that we’re going to be out to deliver anything until 2015.

David Strauss – UBS

Okay. So, if we get to some sort of agreement that reflects the move towards taking the (inaudible) again the interim configuration aircraft potentially it could some good news.

Unidentified Company Representative

Yeah, but I wouldn’t, yeah, there might be a little bit of good news, you are right, again, this is, but again I wouldn’t think it would be a big number.

David Strauss – UBS

Okay. And then China, I know you talked about the strength in China overall in Q1, but can you talk about maybe what you saw as we went through the quarter, it looks like you know, January and February saw pretty strong but then, as we have done in the March and April things might have blown off a little bit and I think your guidance for China overall reflects about 7.5% to 8% GDP growth this year, you still feel that’s the right place to dig?

Unidentified Company Representative

Yeah, we do. In fact, you see it was a weird compare because the Chinese new year was in January last year, February this year, so January start about game busters, then February was slow and then March was even better that I think would anybody had expected, again, we’re, you know, the units were up significantly, we got good order intake and even in April, I think you are, would continue to see a solid order intake, we just did the operating review last week with Otis they are very confident in the China story for the year.

David Strauss – UBS

Thanks.

Unidentified Company Representative

[Good day].

Operator

Thank you. Our next question comes from Myles Walton of Deutsche Bank. Your line is now open.

Myles Walton – Deutsche Bank

Thanks good morning. I just want us to back to go back to the aero systems margins for a second, the implied guidance I think it’s 256 or even slightly below, so I’m curious is there, usually historically both Goodrich legacy and [indiscernible] got better the EBIT growth from the margin side and I guess that 90 million personal accounting that something that hits you in the first quarter or to your early point Grey how much conservatives in this way to the aerospace systems?

Unidentified Management Representation

Myles, 90 million is simply what charge that was taking in the fourth quarter related to the inventory step up but it doesn’t repeat because it got, the inventory seller got fully liquidated in the fourth quarter. So you are dealing here with not only just this recurring earnings, we are just consistent with our guidance of $2.1 billion, we based on what we forecast that we expect will be fairly flat level loaded as far as operating margins throughout the year but as Grey said, it’s partly could be some upside it’s a little early to make that call.

Unidentified Management Representation

Yeah, as you think about we had about just under $50 million of net synergy benefit in the first quarter, we are talking about $200 million for the year obviously those synergy benefits continue to pick up that’s going to accretive to margins and again I think there’s probably a little bit of good news but it’s just it’s April a little way to another quarter or here before we decided that it’s actually that what the upside might be

Myles Walton – Deutsche Bank

Okay, I mean it just seems like the aftermarket will get better historically those margins expand through the course of the year so I’m just trying get out it…

Unidentified Management Representation

Yeah

Myles Walton – Deutsche Bank

Anything in the first quarter but it’s sounds like there wasn’t?

Unidentified Management Representation

No I don’t disagree with you this still Myles.

Myles Walton – Deutsche Bank

Okay and the other question kind of clean up, it’s on discontinued operations cash it looks like it was a big use in the quarter and I guess I don’t know what the cost of that was?

Unidentified Management Representation

Unfortunately the Federal government requires to pay taxes when we make the gain so the gain are the sale of the industrials which closed in the [November] 15 we paid the taxes here on the first quarter, so that was the big cash outflow.

David Strauss – UBS

Okay, makes sense. Thanks.

Operator

Thank you. Our next question comes from George Shapiro, Shapiro Research. Your line is now open.

George Shapiro – Shapiro Research

Hey, yes. Good morning.

Gregg Ward

Good morning.

George Shapiro – Shapiro Research

Gregg, Hamilton Sundstrand had no organic growth in the quarter, is that a combination of [OE] growth, after market growth offset by military being down?

Gregg Ward

Yeah, I think, it would be, (inaudible) the commercial after market was essentially flat at the legacy Hamilton business, military as I said, was down significantly I think commercial OE was up I think 8% to 9% in the quarter.

George Shapiro – Shapiro Research

Yeah, Okay, and then at Otis the margin this quarter was a little bit less than I thought is that still a mix issue and where OE was a little bit worse than service and is that change going forward or we still seeing a lot pressure from the after market renegotiations?

Gregg Ward

I think, yeah, we have, margins were down, this actually should be the low point for the year in terms of Otis margins, but a big chunk of this was as we picked up about a point of mix in new equipment versus service so that’s actually detrimental as you know service margins were obviously better than the OE side, so that was a piece of it. Again, pricing tough around the world, tough in China, but we’re holding the margins I think and we should continue to see benefits. The other thing that keep in mind at Otis you know the process and some of this plant transformation and we’re closing our (inaudible) plant and opening up the facility in Florence, South Carolina we got the new (inaudible) and there is some expenses in the first half of the year which were actually holding margins down a little bit, it should get better as we complete those transfers.

George Shapiro – Shapiro Research

Okay. Thanks, very much.

Unidentified Company Representative

Thank you.

Operator

Thank you. Our next question comes from Nigel Coe of Morgan Stanley. Your line is now open.

Nigel Coe – Morgan Stanley

Yeah. Thanks. Good morning, [gentlemen].

Unidentified Company Representative

(Inaudible)

Nigel Coe – Morgan Stanley

So, I hate to ask you of this question but where does the (inaudible) the midpoint, given these cluster et cetera?

Unidentified Company Representative

Well, it’s actually – if you remember back in March, we’ve said that we were comfortable with analysts consensus, which at the time was [610] with about a $0.10 impact from sequestration. So, again, there was no contingency at [610]. Again, if you go back down to the midpoint of $6, obviously we’ve got a little bit of good news. And again, as a closeout to quarter – we have no surprises here. So, really there are some puts and takes, may be (inaudible) better, try it a little worse in terms of spares. But, I think overall, feel pretty good. We got benefitted from the euro. Again, we’re seeing that 128 it’s been 132, 133. So, right now, I would just tell you it’s around 610, there is no contingency, and that includes an impact from sequestration. And we will expect, we’ll see over the course of the year.

Nigel Coe – Morgan Stanley

Okay. No change. That’s great. And then switching to Otis, obviously, you have great backlog performance this quarter, but how does margin look on that backlog?

Unidentified Company Representative

Actually, margin doesn’t look bad. I mean, again, pricing is tough in China, so the margins there are going to be a little bit under pressure. But, again, as we fill up the factors in all of these orders going through that’s going to help us to grow our margins there. So, even though the equipment, the sales margins are little late, may be we can pick that up. And then in North America, we’re actually seeing much stronger (inaudible) stronger margins in the new equipment. Pricing is stabilized. We’re not seeing, again, all of the, say, cut through of competition that we had. And again, the market is picking up. So that’s good news on new equipment margins.

Nigel Coe – Morgan Stanley

Yeah. Otis continues to take out cost, its done a great job of taking out cost of the elevator unit cost, sorry (inaudible) Ped will show it in the March meeting and that’s going to continue. So still confident that margins will remain and will leverage the volume going forward.

Unidentified Company Representative

Okay. And then just going back to Jeff’s question on the CCS, copper prices, obviously down, that’s (inaudible) pricing holds on the equipment, why won’t steel or lower copper price benefit the second half of the year, as you go through this own hedges?

Unidentified Company Representative

Mostly because of the, we’ve got the year locked in at a price of little bit above what the current market is so, the market is I think around 320 today, because of concerns over China, we could see that 320 moved to 360 or 370 I think pretty quickly but we are locked in for the year, so the CCS guidance was locked in copper, no real benefit from further commodity cost reductions, yeah and that benefit, we are going to see it next year, as we will start to lock in buys for next year at today’s lower prices.

Nigel Coe – Morgan Stanley

I see. And just one quick one obviously container was down this quarter, but orders suggest that’s going to come back strongly in 2Q and beyond, how much mix had been do have from container this quarter?

Unidentified Company Representative

Well, in terms of…

Nigel Coe – Morgan Stanley

On CCS margins.

Unidentified Company Representative

I don’t know but I got that number off to top of my head.

Unidentified Company Representative

Yeah, we don’t I mean (inaudible) one thing I will say about CCS is there, operating margins across the boarder fairly even much more balanced, and I am not sure, that it had huge impact, we will take a look at it again, and as we will get back to you on that.

Nigel Coe – Morgan Stanley

Okay, that will be great. Thanks.

Operator

Thank you. Our final question comes from Julian Mitchell of Credit Suisse. Your line is now open.

Julian Mitchell – Credit Suisse

Thanks a lot. Yeah so I guess my first question is within CCS, you’ve had a bunch of companies Ingersoll, Schneider and so on complaining about how weak far in securities as an end market right now? Could you just remind us how much of CCS as opposed all these divestments just far in security and what you will sort of expectations off for the year in that business?

Unidentified Company Representative

Just one second, Julian and I will give it that for you. So I think of see here, as I would think about Fire & Security, again, the products piece of the Fire & Security business has actually done quite well. You see pretty good strength here in North America. It’s been a little bit weaker in Europe. We’re really seeing kind of the headwind has been on the service side in Europe and that’s been in the early result of just what’s going on economically here in some of the services business, but margins have not been very good. We’re trying to be a little bit more selective there. But in China for instance, I think securities are up very strong. We had a good traction with the GSP business. Correct, I don’t know Jay do you have the exact...

Unidentified Company Representative

Just rough order of magnitude here Julian out of the $17 billion portfolio about 6 billion is Fire & Security.

Julian Mitchell – Credit Suisse

Got it. And you’re expecting that to be kind of flattish or up inline with CCS overall for the year?

Unidentified Company Representative

Yeah I think on the product side, you’d expected to be up inline and then on the service side a little bit light to that overall kind of 5% growth.

Unidentified Company Representative

It varies regionally, in Europe the expectation again were flattish and maybe up slightly.

Julian Mitchell – Credit Suisse

Sure, thanks. And then just my follow up would be again just circling back to the Otis margins as you said Q1 you had, you didn’t have sort of the operational leverage showing because of the mix of OE versus services. I guess it’s likely that European service base weak and the Otis suggest that OE growth in terms of revenue should accelerate. So you’re probably dealing with that mix hits of the balance of the year. Do you therefore expecting an offset to come from a lot more restructuring savings coming through already just the falling out of those costs around the plants transformation

Unidentified Company Representative

Cai its obviously a combination of both, obviously its pretty aggressive with restructuring last year they got more restructuring to do this year. We should be accretive to margins and then you got the factory transformation with keep down really by mid year so that’s all going to be help I think on the margin mix side.

Julian Mitchell – Credit Suisse

Okay the Q2 have you already seen the margins going up sequentially and may be year-on-year.

Unidentified Company Representative

Yeah, they should yes, so…

Julian Mitchell – Credit Suisse

Okay, thank you.

Unidentified Company Representative

(inaudible) Thank you.

Unidentified Company Representative

I will thank you everyone for listening today with (inaudible) on the this quarter and investor relations team it is standing by to take you questions. So thanks very much and have a wonderful day.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Have a great day.

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