United Technologies Corporation (UTX)

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United Technologies (UTX)

Q1 2011 Earnings Call

April 20, 2011 9:00 am ET

Executives

Akhil Johri - VP, IR

Gregory Hayes - Chief Financial Officer and Senior Vice President

Analysts

Cai Von Rumohr - Cowen and Company, LLC

Robert Stallard - RBC Capital Markets, LLC

Terry Darling - Goldman Sachs Group Inc.

Howard Rubel - Jefferies & Company, Inc.

George Shapiro - Citi

Joseph Nadol - JP Morgan Chase & Co

Shannon O'Callaghan - Nomura Securities Co. Ltd.

Ronald Epstein - BofA Merrill Lynch

Douglas Harned - Sanford C. Bernstein & Co., Inc.

Heidi Wood - Morgan Stanley

Jeffrey Sprague - Citigroup

Julian Mitchell

David Strauss - UBS Investment Bank

Nigel Coe - Deutsche Bank AG

Deane Dray - Citigroup Inc

Presentation

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 Akhil Johri, Vice President, Financial Planning and Investor Relations. This call is being carried live on the Internet, and there is a presentation available for download at UTC's Home page at www.utc.com.

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

Gregory Hayes

Thank you, Dana, and good morning, everyone. As you saw on the press release this morning, a great start to the year with solid organic sales growth of 9%. Combined by the benefit of strong operating leverage on the higher sales, UTC delivered earnings per share growth of 19%. Cash generation was also strong. And finally, as expected, order trends continue to improve across UTC, including now much of our Late Cycle businesses. As we look across the globe, we see end markets are improving, much as we had expected back in December. In the U.S., the recent employment and consumer spending data are encouraging signs of further recovery, while Europe, generally remains stable in spite of the continuing sovereign debt concerns.

Of course, emerging markets continue to leave worldwide economic growth, and UTC's businesses are capitalizing on this opportunity. There are always, of course, concerns. The biggest threats we see on the horizon are first and foremost, commodity inflation especially higher oil prices. Secondly, the emerging supply chain disruptions caused by the tragedy in Japan are a potential growing issue. While we're confident in Japan's resilience and ability to recover, there likely will be some short-term supply chain disruptions in our businesses.

The biggest area we continue to monitor closely is electronics, microprocessors, capacitors and other such components. We feel many of our product across our business units and deeply into the supply chain and second and third tier suppliers. We continue to work with our suppliers in securing available inventory and alternative sources, and we expect that the impact of disruptions, if any, will only be felt in the back half of the year. But let me stress, all of this is manageable with the scope of our current guidance.

All right, notwithstanding these potential overhangs with the stronger-than-expected performance in Carrier's short cycle businesses and improving order rates in both our Long and Short-cycle businesses gives us confidence to increase our full year outlook. We now expect 2011 earnings per share to be in the range of $5.25 to $5.40. That's up $0.05 in both the top and bottom ends of the prior range or 11% to 14% EPS growth. We also expect sales of $57 billion at the high-end of our previous range of $56 billion to $57 billion, so that's sales growth of 5% year-over-year. Before we start with the first quarter results, just a reminder that we'll talk to the segment results adjusted for restructuring and one time items as we usually do.

Okay, on Slide 2. In the quarter, sales were up 11% from prior year with organic growth of 9%. Importantly, five of the six businesses saw organic sales growth. Carrier and Sikorsky led the way with 18% and 15%, respectively. While the strong growth is partially due to a tough first quarter last year, it's also evidence of a broader recovery in our end markets. We are seeing a strong rebound in our Short Cycle businesses such as Carrier's Transicold and U.S. Residential HVAC, as well as our Commercial Aero aftermarket.

Carrier's U.S. residential gas furnace and split shipments were up mid teens in the quarter despite continuing weakness in the U.S. Housing segment. Our Longer Cycle businesses are also gaining traction as expected with growth in Commercial Aero OEM, Global Commercial HVAC at Carrier, as well as Fire & Security.

Importantly, Otis' new equipment sales, which are still lagging, but solid order trends give us confidence in the sales recovery in the back half of the year. Total segment operating profit increased 15%, at even with higher E&D of $88 million as the businesses continue to execute other growth strategies most significantly at Pratt & Whitney as it advances multiple development programs at the Geared Turbofan technology.

Segment operating margin expanded 80 basis points in the quarter. Carrier led the way once again with margin expansion of 530 basis points to a record of 11.7%, reflecting exceptional conversion on its 18% organic sales growth. Earnings per share in the first quarter were $1.11, that's up 19%. Restructuring costs in the quarter were $31 million or $0.02 compared to $67 million or $0.05 in last year's first quarter. Excluding restructuring costs in both quarters, earnings per share increased 15%. Foreign currency was a $0.01 benefit to EPS.

In the quarter, free cash flow was 117% of net income. Even as inventory grew significantly in the quarter in support of the robust organic sales growth. Share repurchase in the quarter was $750 million, a strong start to this year's program. And we also increased the dividend 13% last week, another sign of confidence in our outlook, as well as our commitment to delivering consistent shareowner returns.

Okay, on to Slide 3. First quarter order rates. First quarter order rates remain strong, and this is what gives us confidence in our 2011 sales outlook. In Aerospace, first quarter commercial spares, orders at Pratt & Whitney and Hamilton Sundstrand were up 33% and 23%, respectively. At constant currency, Otis new equipment orders grew 14% in the quarter, and Carrier's Global Commercial HVAC new equipment orders were up 24% further evidence that end markets are indeed recovering.

Read the rest of this transcript for free on seekingalpha.com