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United Technologies Corporation CEO Presents at the Electrical Products Group Conference (Transcript)

United Technologies Corporation (UTX)

Electrical Products Group Conference

May 21, 2013 11:30 AM ET


Louis Chênevert - President and CEO



Unidentified Analyst

I have the pleasure of introducing Louis Chênevert from UTC and Louis thank you very much for joining us last night as well for a cocktail. We really appreciate it and welcome.

Louis Chênevert

Thank you very much Dan. Good morning everyone. It’s always nice to be here. Let me start by saying we have had a good start to 2013. Total sales increased 16% and as you know that’s driven by the Goodrich and IAE deals. EPS was up 6% reported but a solid 16% when gains and restructuring are excluded from both periods. We also paid down additional debt and resumed our share buyback program in Q1.

Some other important accomplishment; we just as of last week had the first flight of the geared turbofan for the Neo. That is exciting. As you know we have already certified the C-series engine and now we got the Neo flying in flight test. We had the first launch last week of an unmanned aircraft from a carrier. You probably saw the Northrop Grumman vehicle, the X-47B, and that is also Pratt powered. And we won in this recent period the Otis Hyderabad Metro that’s over 400 escalators and 250 gen-2 elevators. This is the biggest Otis win in the history in India, and something we are very proud of.

So turning to what I see in the economic front, first of all let me talk about the aero-side. RPM increased again by 5% in 2012. I expect similar trend going forward and that will drive really the demand for 30,000 new aircraft over the next 20 years and I feel fairly confident at this point that based on the flight line it’s all coming together the right way. Airline profitability looks better for ‘13, and prices are forecasted around $10.6 billion versus the $6.7 billion of last year.

DoD sales today represent 17% of our portfolio and that’s down with the changes from earlier 21% - 22%. We are on the right program and we see a lot of international opportunity. I will talk about this a little more later on.

So with the Goodrich and IAE deals, basically I love our position in aerospace. Goodrich certainly has gotten a lot of headlines, but IAE will provide also significant benefit to Pratt with these aftermarket business and it is something that's sometimes overlooked.

So as compared to 2000, if you look at the spares activity specifically, the V2500 now makes about half of the business and nearly half of those engines have yet to be overall, and that even before we deliver the final 2500 additional engines that are scheduled to deliver as we transition to GTF. So we have seen obviously some deferrals on the legacy PW fleet, but these engines are still flying and this is something we monitor carefully.

We know that retirements of aging aircraft happen, but they happen gradually and I would say at this point in time from everything I see and the discussions I have with customers on an ongoing basis, they are retiring basically on a normal path. I don’t see any cliffs coming up. I see basically normal usual.

We have seen this fleet transition before on older 80s and 90s and it is something we know how to manage well. But I think when you have the increment of the V2500, that’s now 50% of our installed base as we move forward, it’s a powerful force to make that transition. Bottom line with the IAE acquisition, PW's spare business is better balanced and we are well positioned basically as we move forward.

So moving on to the economic indicators; we see indicators which point towards strengthening economies. Housing starts are expected to increase 25% this year. It is a good sign for our rising HVAC businesses.

North America Commercial Construction is also improving. If you look at the ABI, it has been over 50 now for eight consecutive months. European Construction remains obviously under pressure, but we did see some bright spots in Q1 with Otis new equipment that improved as well as CCF commercial refrigeration orders.

And there is also good momentum in the emerging markets. Our BRIC orders were up 22% in Q1. If you add it all up we are seeing momentum in the order rates at our commercial businesses and if you look specifically at commercial equipment, Otis has had three straight quarters now of new equipment order growth with strength in China and North America driving Q1's 24% overall growth.

We have also seen two quarters in a row of mid-single digit growth in global CCS equipment order which represents roughly 70% of our CCS business today. So as a result, I remain confident in our 2013 guidance.

The Q1 order rates are a good leading indicator in my view for resumption of organic growth on the back half of the year. If you think about what we just booked in Q1 and what we see as trend that continues in Q2, I mean on long cycle businesses, obviously that bode well for the future but on commercial and normally elevators get delivered in nine to 12 months later.

So I think we are well positioned to see the momentum on the back half of the year. So we continue to expect EPS in the range of $5.85 to $6.15 on sales of about $64 billion to $65 billion. And on cash we continue to expect free cash flow equal to or in excess of net income for the whole year.

So let me now turn to longer term. As always, we are focused on what we control. And there is no change to the three key pillars of our strategy. We are focused on our core of commercial buildings and aerospace. We remain best and class margin which is the hallmark in UTC and we know how to drive best in class margins and we will continue to drive strong cash generation which enables us to return cash to share owners and invest in the business, like we did for the Goodrich and (inaudible) transaction.

So, taking a closer look at each piece, we have made significant investments to strengthen our core. Balance truly works at UTC, we have industry-leading franchises in commercial building as well as in aerospace. Otis and CCS are well positioned in emerging and recovering markets and in aerospace, it’s important to remember two-thirds of our business is commercial and one-third is military.

We are taking advantage of the tremendous opportunity in commercial aerospace that is driven by 5% increase in RPM for the last 40 years and I know that that trend will continue. Al the signs are there and if you look at the order, if you look at the pipeline, balance between emerging and traditional markets; I think it’s all coming together.

Military, we have also positioned the company very well. I like the ISI exposure a lot that came with the Goodrich business, I like our programs, the JSF, the tankers, the Blackhawks, the 53K, the only new helicopter program in play at this point in time and we are doing very well in that program.

I would say UTC is very well positioned to take advantage of two overriding market trends. If you look at the two megatrends that drive UTC going forward, its urbanization and it will continue to be a very powerful force in China.

In India alone, over 25 million people move to the cities every year. This drives grow for our commercial products and creates demand obviously for air travel and commercial aerospace grows 5% virtually every year as I said earlier and this is what drives the demand for that 30,000 new aircraft to be delivered in next 20 years.

And in our case we positioned the company as well as it has been positioned for decades. We have got five new platforms, on regional and narrow body, with the GTF that are just creating tremendous momentum. We have got over 3500 GTF sold and I would say that these programs are being executed very well and the response from the customer; I have been with customers last couple of weeks a lot and what I hear from customer is a very positive, the GTF is very well received, there is a lot of enthusiasm of Pratt's renewed position in the commercial aviation market. So these megatrends, to go back to the macro trend offer tremendous opportunities for us basically in emerging market as well as in the aerospace and UTC is extremely well positioned.

If you look at today, UTC has 21% of its sales that come from emerging markets. Looking at some of our key markets, China elevators per capita is still about half of the U.S. level. Now, penetration has improved a lot from about 0.7 elevators per 1000 people five years ago to 1.7 today and it should continue to increase and we should see new U.S. levels in less than five years from now in China and that’s why I feel that there is still tremendous momentum.

Now, the big change is the demand has shifted a lot from the coast to central and west and third tier, fourth tier city and this is where our strategy of new plans and approach has been working very well. There are similar opportunities in the cold chain and with HVAC in emerging markets, our innovation and localization will enable us to capture these market opportunities.

Now, in aerospace we have brought the right technology to marketplace at the right time in my view and that will drive ultimately for UTC top line growth. We have a lot of content on new platform. It's led by the GTF that we expect if we look at the slide by 2020, Pratt will return to the volume that it used to have in the 1980s and will be delivering engines at a rate that we have not seen basically for over 30 years and the ramp up all starts to occur as C series enter the service, Neos and then MRJs and then G2.

So we will see a tremendous ramp up from 15 to 20 and if you add to that some of the other programs like JSF we would also began to ramp up about that timeframe, it's going to be a lot of change on top line at that very period of time.

And in the aircraft system if you look at Hamilton Sundstrand had nearly doubled its aircraft content since 2000 with the Windsor 787. Now with the addition of Goodrich that content doubled again and I would say again the customers feel good that UTC is there to respond to them, creating the value for them, supporting the products out in the field. So these are great examples that shows the value of our innovation and now we continue basically to invest in game changing technology that create that top line growth as we move forward.

As you know we invested over $4 billion in E&D in 2012 and we expect to increase our company funded E&D by another $225 million this year and that’s mostly the full year of Goodrich on the portfolio.

We are focused on energy efficiency and if you look at the GTF, its game changing with its 16% better fuel burn, 50% less noise. If you look at the multiple Gen2 derivative we have now launched, the low cost Gen2, the mid-range Gen2, the specialized Gen2 for India, all those are boding very well in the markets that they serve.

You look at the Carrier Weather Expert rooftop unit, in areas of high cooling demand, we are now seeing payback on these. Rooftop replacement could be as low as one year and one year because of the extreme demand of cooling. We now have an efficiency advantage where the payback is quite good for the end customer.

At Sikorsky we will leverage our X2 technology on the Joint Multi-Role that we have announced, demonstrated r with the Boeing Company and we are excited about that. In addition though to innovation, obviously at UTC that cost reduction is always a way of life and we know how to expand margin and we know how to drive momentum to do more with less and we have invested nearly $600 million in restructuring in 2012 and nearly $2.5 billion since 2008.

The business continues to find ways to reduce cost and we anticipate again as we said another $350 million for 2013 which will be offset by onetime gains. Based on strong payback and the projects that we have on the drawing board, we’ve accelerated their timing this year and now expect to spend about a $150 million in the second quarter this year.

If you look at Goodrich, Goodrich is better than we expected. We see $500 million of synergies by the end of 2016, which is increased from the original $200 million synergies that we have planned back in the early days of the acquisition. It’s coming up, hard to believe, but it’s coming up on one year anniversary of Goodrich, just couple weeks from now.

I would say, the Goodrich products, Goodrich talent, the Goodrich opportunity or all of that I ever wanted, expected and a lot more. Every time I go visit facilities, every time I look at opportunities and how we could leverage the common UTC language, which is ACE and our IT platform, we see a lot of changes that work force is embracing and creating a lot of value for end customers as well as for shareholders.

So, we continue to leverage UTC’s global scale through ACE. This is the common tool, the common language that drives productivity across the whole company. We’ve reached our goal of 80% gold and silver ahead of schedule. But now we’ve reset that because of the Goodrich acquisition. So, the actual is now at 68% internally and I have no doubt that the way the work force is embracing our ACE operating system, we’re going to see resumption and quick acceleration and by the way it’s all opportunities to improve our bottom line results and delivery to customer and shareholder values.

So, basically, the ACE journey is taking traction in all the different facilities of Goodrich. They like it, they needed the common language to make the next step in performance. We’ve also raised the bar in performance requirement. We got tougher basically standards that we’ve imposed as we had achieved the 80%. So, for Goodrich that comes on board, it’s even harder to achieve some of these new levels, but we’re confident we are going to get back to 80% by 2015.

And then, we see similar opportunities with the supply chain and supply chain is going to be critical because of the big ramp up that we have coming up and the new program launches and what I see is basically increased requirements and reset also for Goodrich. We raised the bar of on time delivery for the supplier. With the reset of Goodrich basically we went from being 75% of our supply chain down to 38% actual. And I’m confident we are going to get back to that 75% by 2016.

Remember we start from scratch. They didn’t have ACE in their supply chain and by the way the suppliers, many of them are the same as ours. So they are embracing quickly and I have high confidence that we’re going to see tremendous momentum.

So, turning to the last key pillar of our strategy which is the strong cash generation. We consistently generate free cash flow equal or in excess on net income. I expect we’ll do the same this year and in the future. We expect to pay down $2 billion debt in 2013. We have a place holder for billion dollar for M&A. I would say, we have path today, it’s already made. We have path after that amount. So, obviously we’ll have some allocation of capital that we need to decide as we move forward into the year.

I see a lot of opportunities to return more cash to our shareholders is the bottom line. So, with that let me do a quick wrap up. Our portfolio transformation is essentially complete and delivering. We’re focused on integration and execution with a superb and seasoned leadership team. I’m very proud of the team that we’ve assembled. I’m proud of the talent that joined from Goodrich, from IAE and now it’s working within the UTC culture.

The portfolio is well positioned to deliver top line growth because of platforms that we’ve invested in and the launch that we see going forward. I stand here today to tell you, I love our portfolio and I love what it does for the company going forward.

Our global scale and focus on cost reduction gave a strong operating leverage and that will drive earnings growth well into the future and we know experience that earnings growth will continues to drive share price increases.

So, I stand here today. Its exciting period for the company. I see lot of momentum developing obviously. There is unevenness in the global economies in certain areas but I’ll say this; is when you look at the macro trends that drive our business, when you look at the momentum that we’re developing because of all of these launches, I see a bright future not only this year but accelerating in the years to come.

So, with that let me take couple of questions.

Question-and-Answer Session

Unidentified Analyst

GTF, what will be the total dollar cost of the establishment of this program and when the program matures, what would you estimate the penetration or share to be of the commercial plate?

Louis Chênevert

Well, the GTF basically, as you know we invest a $1 billion in technology readiness and right now we’ve committed about $3 billion to $4 billion of additional R&D. Some of that’s already behind driven by the platforms that we’ve won. Obviously CCS is certified so now that comes down in R&D. Neo is and right behind is our margin, then we have the G2.

The good news is it’s a platform. If you look at the total investment on GTF, the good news is we’ve scaled the architecture to different size trust class and therefore you don’t have the old style of R&D expenditures that you would see of launching all these programs differently. I also see a lot of traction with customers. So, I just want to share. Obviously there is some platform where we are still sore. So it’s simple to figure out, right, the C-Series the G2 the MRJ and the (inaudible) are sole source.

So we meet basically an opponent or competitor on the A320neo. We like basically our product offering a lot. I think we still have to see the benefits of noise. 50% less noise is a big deal in the market and I would say that based on the order intakes so far and the discussions with customer, I’m confident we will have more than 50% share on that platform and actually we do very well even on the bigger airplanes. The 320, 321 is real strength. The GTF is the perfect match for that architecture and configuration. So that’s kind of where we stand today.

Unidentified Analyst

We got the Paris Air Show coming up next month, obviously very important trade show for you guys. Can you just give us some color in terms of your expectations for the air show in terms of orders and announcements?

Louis Chênevert

Well obviously I’m not going to announce anything here today, we’re going to keep that for the air show, but I would say there is lot of orders that have been in dialogue for many airline customers that are about to yield the results. So I think what you would see as there is not big announcements of new platform launch. Those are already done. It's more that its order secured within some of these platform, there is going to be a lot of those and we feel pretty good about that.

Unidentified Analyst

Yes really and one of the expressions that UTC uses and used here today was balance works and the Goodrich acquisition has tipped the scales to more of aerospace waiting for the company and longer term what is the right mix and a related question is some of the non-aerospace businesses, especially like fire and security are still under restructuring mode and maybe just as a follow-up explain how you expect to see fire and security as part of this whole building services solution for the company between elevators and air conditioning and so forth?

Louis Chênevert

Okay, well let me start maybe with the fire security and commercial piece. First of all Neo (ph) has done a magnificent job as you know reshaping integrating that CCS portfolio, I think it’s transformation is about two thirds done as we speak. I think we will be about 90% by yearend. We are seeing a lot of sales synergies with the way we reshaped these offices where basically the combination of these separate offices on the one roof creates opportunity for dialogue and those people are talking and these people are capturing new opportunities.

So we feel good about the value we create in large building, large structures and I would say that there is going to be some opportunities as we move forward to leverage that integrated position in these building and also at the same time see what are these missing technologies that we need to invest in or go after to compliment the portfolio.

So, I think there is lot of momentum. If you look at all these cities the 25 million people moving to these large cities this is all opportunity for us and we have a good footprint in these emerging markets and we’re capturing the maximum position of these.

As far as the Goodrich transaction, effectively Goodrich has been everything I thought it would be and better because I would see the integration where yearend now, this is always on big acquisition by the way, it's always the risk, the culture is no-mesh and you end up having some kind of dislocation, you lose some key players.

We’ve been able to retain the right players. We’ve been able to create the value for customers. I would say the customers that we are seeing are always excited about the bottom line results that we create for them and also the ACE operating system, the IT platform, what it creates for them.

Unidentified Analyst

Just to clarify for the idea that Goodrich transaction fused the revenues more towards…

Louis Chênevert

That was the next thing I was going to do. So this momentum in Goodrich, I got similar with IAE. So your concern is without the new platform, what happens with the balance of UTC. I would say what I’m most concerned with at this point in time is synergies integration and creating the bottom line results for our shareholder and I would say that is going to get the propelled by these new platforms.

So I think naturally if we didn’t do anything on the commercial side, you could wind up where aero 55% to 60% of business over the next decade. At the same time there is a powerful force which is called urbanization driving. Think about the Q1 where Otis saw 27% increase order in China. Think about the momentum developing in these BRIC, our commercial business growth is much more related to high growth area and despite what we hear of GDP at the account lower rate and prior years, the fact is what I see when I visit China, I was just there for my 48 trip to China, I saw 15% GDP growth in places like Chongqing, like Chengdu. I see 0% on the coast.

So the opportunities are there if you willing to be 1000 miles away from where your comfort zone was before. So I would say there is going to be more growth in the commercial businesses that meets the eye and guess what we’re still below the peaks for these commercial businesses. Think about the recoveries still to happen in resi business and commercial et cetera.

So I think there is couple of complimentary technology that we’re investing in. There is couple of areas of opportunities we’ll need to go after but ultimately I’d like to see the portfolio close to 50-50. I think this is the good place to be for us long term.

Unidentified Analyst

Yes just couple of question. Just first on cash. You mentioned returning cash to shareholders, that’s always been our priority of yourself for sure. You’ve been actively kind of tendering for some debt. I think there is some offshore cash. What are the prospects maybe for you to take share repurchase up in back half of the year, relatively kind of your stated goals?

Louis Chênevert


Unidentified Analyst


Louis Chênevert

The piece that there is also important to remember, you saw last week we announced the closure of the power systems business. There is only one divestiture left and that's not closed and that should close in Q2. I mean all these divestitures this year bring another $1.5 billion of cash into UTC. So obviously, we got lots of capability as we move forward.

So, stay tuned. You saw we had an aggressive launch to Q1. We're off to good start in Q2 as well and stay tuned. Also our dividend, that's a priority as you know. 77 years in a row uninterrupted, no excuse. We've always paid the dividend every five quarters. We increased the dividend; by the way that's coming up shortly.

Unidentified Analyst

Also just on a separate topic, could you comment on Europe aftermarket for Otis. Does is that show signs of stabilizing yet or is there still some mixing down or other negative dynamics there?

Louis Chênevert

Europe, still difficult. We have a plan to macro Europe. We have planned kind of flattish to maybe a slight decline, if that. I would say there is pockets of strength that I described under my presentation. For example Otis new equipment order and carry on the transaxle side.

As far as the specific relating to Otis aftermarket Europe, I would say we've seen some decline over the last several months but I would say it looks like its stabilizing at this point in time. The fact is there is lot of elevators installed in Europe and they all need service and I would say as we drive efficiencies in our system, with aggregating all these different service contracts that we have; we have ways to reduce our costs and improve the productivity as well as provide the customers better value and that’s I think the secret sauce and making sure that we start to recover.

The fact is those elevators are not going away. We have the best recipe to support and maintain them. So I'd say long run I still feel very good about our position there. It’s just the economy is kind of a dark cloud over what otherwise is I would say a very healthy period in other regions.

Unidentified Analyst

Just on the restructuring; it sounds like it accelerated a little bit for Q2. I think it’s a $150 million now, it was about a $100 million before. Is that just because of the timing of gains, that you are getting some gains now or is there something in the order book that has driven that and maybe related to that, I just wanted to know, in Otis; you talked something about a transition I guess in the last 18 months, the price changes, the shift in China and then new plant there. Do you feel now that Otis is coming out of that period of transition in a way that you find sort of satisfactory or do you think there is still some maybe reorganization that has to be done?

Louis Chênevert

Well first of all on restructuring I would just say that the point you made is absolutely correct. We have declared a $100 million in Q2. We have now moved it up to $150 million and that's because we have projects that we have on the drawing boards which have matured enough, where we see the confident to exercise those projects from Q2.

And its unrelated to all the gains that are flowing in it. It's just we are ready to execute these projects and the sooner we do, and they are all good pay back projects, so we will see the benefit as we move forward.

As far as Otis, in China I would say Pedro and the team have done a fantastic job basically to drive, to understand the issues we had and first of all, they launched a new plant in Chongqing for new Gen2. All the Gen2's we sell in China today are reGen as well as LED lighting, very energy efficient.

We've also got the low cost Gen2 for the low cost housing segment, which was really a gap in our product line before where we have to perhaps discount our regular Gen2 more than we should have, to meet the market requirements.

So now we have the right products to compete and I would say it's making a huge difference in our selling to the market. We've customized these offerings. So Pedro has done a nice job with his team to make sure we understand the different tier level and by the way the big move from the coastal area to central and west, what happened with that is a big change in mix. There is less high end resi, there is more low cost housing et cetera. So I think we are well aligned and I would expect that the momentum throughout the rest of the year certainly as I stand here today, it's already past mid-May, and I would say the trend has continued that we saw in Q1.

So we feel good about the leverage created by these big order influx as far as what it does for reducing our costs, delivering for our customers. So I do expect that you will see some nice momentum in the coming months and by the way also top line will resume because what we sold in Q1, guess what we'll deliver starting somewhere late Q3, Q4. Okay?

Unidentified Analyst

I have a question on Otis in China. Can you update us on where you stand with getting service contracts over there? And are you getting anywhere other than in the Class A office buildings and should we resign ourselves to maybe never getting the low end stuff or where does that stand?

Louis Chênevert

Well, that is a very good question and this is something that Pedro and the team are working aggressively on. It's important; if you think about new builds; in my view you got about 10,15 years to go on a lot of new equipment order and therefore it's important that you start building aggressively your aftermarket business now because that's what's going to create the momentum long term beyond those 10,15 years.

We've made some progress in certain areas. We've hired a lot of mechanics that we’ve trained to our standard that we’ve deployed in these small city. The big challenge with service in China is that you could have lot of people in Shanghai, Beijing and Qinhuangdao but you need to have people in all these smaller cities to capture these aftermarket deals. They need to be trained, they need to be ready for those opportunity.

So that's what we have done last 12 months. We are starting to see signs of moving the needle with that effort but I would say it’s not a huge transition yet. We're working with the dealers, we're working our structure there and I would say, we're going to see a lot more in my view in the next probably 12 to 24 months as far as starting to change that curve of capturing the aftermarket. Okay?

Unidentified Analyst

Louise, we have a couple of questions from by siders in the room directly; anonymously. The first one is, when will Pratt margins get back to the mid-teens?

Louis Chênevert

Okay, that's a big priority by the way and obviously for Pratt, what you got is the R&D. While R&D is up for all, you can see the fact is Pratt committed to reduce its R&D. It is coming down this year. In my view it is going to continue to come down in the future years. They are going to have the opportunity.

Pratt has a unique window here where if you look at where we are, the volume in the market and then the volume starting in ’15 and beyond there is some restructuring probably that is needed that will drive also margin improvement. The fact that we are executing better on these program, that were coming out of the shoot to flawless gives us confidence and opportunity to say we can resume to that level of margin.

I would say I am not going to put a date certain today. I think this is the stuff I keep for some of the big investors meeting with my key unit but Alain I would say is a tiger focused on driving this margin expansion and at the right time like we did with synergies going from 400 to 500, gave some timing, like we have done with any big roll outs, you would at UTC or hear the same. Okay.

Unidentified Analyst

There is also something you have touched on before but I think (inaudible) is asking a little bit more directly, what happened to Otis margins in 1Q and can full year Otis margins be flat with 2012?

Louis Chênevert

Well I think for the year Otis is committed as we have always said to be a 20 plus percent business. As they capture the opportunities in the market I would say it is going to be pretty much in line with what we have seen last year, maybe a little less but Pedro was driving aggressively some opportunities to drive momentum and reorganize the business to add the margins that you have come to expect for them. And I would say I feel very confident in the earnings power of Otis.

I think what you are going to see at this point in time from Pedro is that the earnings guidance he gave to the street, he is going to deliver on and he is very focused on it and maybe that yields a slightly different margin number but he will deliver on the profit growth and the same thing is true for the future and he is building up the business. Okay.

Unidentified Analyst

And one from me and then we still have time for one other question from the audience too -- Just what are you seeing so far in early season HVAC trends and its pricing holding in the channel and things like that?

Louis Chênevert

Well it has been slow start to the season. At the same time I would say we are not stressed and we have done quite well. If you look at the numbers I think came out a couple of days ago they compare to last year, we are basically 35% in cooling in temperature, 35% below last year, 5% below the national average. So, we are starting behind, although last week was a good week. But we feel good about the order intake, we feel good about the way we have seen the flow with our partners and I would say we will deliver on our promises at this point in time but we all know we are just about to be in the big season. So if it stays hot like it is and if June sustains I would say we are lined up, we have the right product line we have great products for high energy efficiency and we have improved the payback and some of these replacements. There is a lot of enthusiasm today at Carrier around the resi business.

Unidentified Analyst

We heard some other folks talking about non-resi picking up a little bit lately. Are you seeing (Inaudible)?

Louis Chênevert

I would say yes, we have some pockets where it is encouraging and it tends to be a little lumpy but I would say as I said, I talk to Joe (ph) regularly and when I see Joe (ph) not stressed I like it. That means that he feels good about Q2 and that is kind of where we are.

Unidentified Analyst

So when you look at what has been going on with spares, we see airlines in cash conservation mode and then Delta recently instituted a dividend and a buyback and so when you look at companies by customer and by geography are you seeing more spares pressure by some customers in some geographies than others?

Louis Chênevert

We see different behaviors from different customers. The key premiere the airplanes are flying, the hours flying the cycle. We have seen some the activity on the V by the way is totally as planned. The activity on the 2000 has almost recovered to our plan level. What is still weak is the 4000 that we described in Q1 but even that, part of what has happened that maybe is change in the airlines’ behavior is the performance of the product has been good enough and they maintain the fleets well enough that in some cases they have reduced the number of spares that they hold.

Typically, if you look at big fleets, they hold like 10%, 12% spare engines to support the fleet. We have seen that number be single digit now with many of the airlines. So that is basically creating some of the near term stress. But the fact is as long as the cycle in there, they will need this, they will need gas spare parts. So I see basically different behaviors in different areas of the world mostly U.S. I think has done more focus on what could they do near term but the fact that they are going to be profitable this year, the fact that the hours are there and they are not retiring the planes.

You hear all sorts of rumors but there is no big retirement cycle with the customers that I talked to about our UTC/Pratt. They are dribbling down some of the older planes but otherwise and then in the emerging markets, it's a lot of new planes, it is a lot of engines that have yet to see their first cycle. What we like about those areas is that a lot of them are on S&Ps with us support the program. So we have predictability.

Unidentified Analyst

Louis, before I hand it over to you to wrap up, just to remind everybody we are going to have after lunch 12:30 resumption. Any wrap up comments, Louis?

Louis Chênevert

No. Thank you very much for all your questions and I am excited about where we stand and it is already almost end of Q2 and a lot more to come in the balance of the year. Thank you.

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