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Executives

Gregory Hayes - Senior Vice President, Chief Financial Officer

Akhil Johri - Vice President Investor Relations

Analysts

Nigel Coe - Deutsche Bank

Joseph Nadol - J.P. Morgan

David Strauss - UBS

Jeff Sprague - Citigroup

Deane Dray - FBR Capital Markets

Cai von Rumohr - Cowen & Co.

Doug Harned - Sanford Bernstein

Howard Rubel - Jefferies

Joseph Campbell - Barclays Capital

Myles Walton - Oppenheimer & Company

Ron Epstein - Bank of America

Heidi Wood - Morgan Stanley

United Technologies Corporation (UTX) Q2 2009 Earnings Call July 21, 2009 8:30 AM ET

Operator

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

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

Please go ahead Mr. Hayes.

Gregory Hayes

Thank you and good morning everyone. As you’ve seen from our press release this morning, a tough quarter on the top line, with exceptional execution across the business; no surprises here, just the type of execution you come to expect from the UTC team. Our focus on cost continues to pay off; segment operating margin reached a record high of 14.9%, that’s adjusted for restructuring and a one time gain, with aggressive restructuring and cost reduction actions leading to 50 basis points of margin expansion.

We also saw excellent progress in driving down working capital this quarter. As a result free cash flow was 140% of net income, even with $400 million of contributions to our domestic pension plans. As far as the order rates, no significant changes in the year-over-year order rates in the quarter; however, order rates do appear to be stabilizing.

Strong execution and relentless cost reduction give us confidence, even in the face of difficult markets, that we will resume earnings growth next year while delivering on our commitments this year. The evidence of the cost reduction is in the segment operating margins, all were double-digit and 406 Otis, Fire & Security, Sikorsky and Pratt & Whitney saw operating margin gains of 100 basis points or more, again adjusted for restructuring a one-time gain.

Otis led the way at 21.9%, that’s 210 basis points higher than the prior year. Carrier delivered double-digit margins this quarter as a result of a relentless focus on cost takeout, despite very difficult end markets. This margin performance was achieved even while UTC’s revenues decreased $2.7 billion or 17% to $13.2 billion.

Revenues decreased 11% organically and 5% from foreign currency translation. Net divestiture accounted for the remaining one point of the revenue decline. Again, no surprises as we knew the competitors would be the toughest this quarter, against a very strong second quarter last year.

Earnings per share for the quarter were $1.05, that’s 20% lower than last year and inline with the first half expectations we’ve been communicating throughout the quarter. Current quarter results include $0.22 of restructuring costs and a $0.06 non-taxable gain related to acquiring a controlling interest in an Otis joint venture.

Last year’s second quarter you recall had a $0.06 charge for restructuring costs. Absent the impact of these restructuring costs in both quarter and the one time gain this year, earnings per share was down 12%. Approximately two-thirds of this decline or about $0.11 was from foreign currency translation, combined with a negative impact of Pratt & Whitney currency hedging program.

On the revenues, only Sikorsky saw a growth. Revenues of the other five businesses were down, with particular weakness in our short cycle segments. Carrier revenues declined 29% in the quarter, 21% organically. While we would all like to say that the economy is improving, we’ve really seen simply stabilization in order rates across the businesses.

Consumer confidence does show some indication of improvement, but the US Housing starts outlook is more or less the same as we saw in March and the outlook for commercial construction and aerospace traffic are somewhat worse.

China, on the other hand, has started to show the positive impact of the government stimulus program. As we’ve said before, we’ve always expected China to recover first and we did see early signs of that in this quarter. New equipment orders in China, at Otis and Carrier Commercial HVAC were down about 18% year-over-year in the second quarter on a constant currency basis, compared with a decline of almost 40% in the first quarter.

Turning to slide three, as a result of the continued weakness in order rates, we’re revising our full year revenue guidance from $55 billion to $53 billion. That’s down 11% from last year, rather. We still expect to spend about $750 million on restructuring this year and we now estimate one-time gains to be only around $200 million. So restructuring in excess of gains looks to be around $550 million at the high end of our prior range of $400 to $550 million.

With the lower revenue outlook and a higher net restructuring, we’re tightening our EPS guidance range with the top end at $4.20, compared with $4.50 previously. Better than expected traction on cost reduction actions, higher savings from restructuring, and a weaker US dollar give us confidence in the bottom end of the range of $4, despite those significantly lower revenues. We’re now assuming the euro at 1.38 for the rest of 2009 versus our assumption of 1.27 going into the year.

On restructuring, we spent about $300 million this quarter, that’s $464 million year-to-date, will addressed volume declines and to eliminate structural and overhead costs across all of the businesses. All 2009 programs are now expected to yield a run rate savings of $700 million; $300 million in 2009, an incremental $300 million next year and then another $100 million in 2011. All this will make the company more cost competitive when the economy does recovery.

In addition to restructuring savings, we’re also seeing the benefits of other cost reduction actions, in areas such as travel, furloughs, E&D employee attrition. As an example, our overall headcount has now gone down by more than 12,000 since December, and that excludes the net impact of acquisitions and divestitures. About 70% of that 12,000 decrease results from the 2008 and 2009 restructuring programs.

As I noted before, free cash flow in the quarter was 140% of net income attributable to common share owners at $1.4 billion that included $400 million of domestic pension contributions. The solid cash flow resulted from strong working capital performance across the business, particularly in collections.

While we’ve made some progress reducing inventory there’s still a lot of work to do there, particularly at the aerospace businesses. Year-to-date, free cash flow is now at 99% of net income and for the full year we continue to expect free cash flow to be equal or excess of net income.

I’ll come back and talk more about the outlook for the rest of 2009 in just a minute, but let me turn it over to Akhil to take you through the business unit detail.

Akhil Johri

Thanks Greg. Turning to page four, let me remind you that I’ll talk to the segment results adjusted for restructuring and non-recurring items as we usually do. Otis delivered another strong quarter as Greg said, with margin expansion of 210 basis points with 21.9%, despite the downturn in global construction. Operating profits in the quarter were down 6% on a 15% decline in revenue.

At constant currency, operating profits grew 5% on 6% lower revenues as aggressive cost reductions and continued strength in the contractual maintenance business has mitigate the impact of lower new equipment volume. Since the beginning of the year, Otis has reduced headcount by over 2,600 employees or 4% of its workforce.

New equipment revenue was down 9% excluding currency, with mid-teen declines in Europe and North America. Revenues in Asia were flattish with China up mid-single-digit. At constant currency, new equipment orders were down 38% from last year’s record level, which included a large order for the World Trade Center.

Year-over-year, orders in China were down high teens, compared with down around 40% in Q1. Given that first half order rates, Otis now expects full year revenues to be down near double digits compared with 2008. However, in light of Otis strong operating margin performance, good traction on cost reduction actions, continued strength in the maintenance business, and improved foreign currency translation, we now expect profit for the year to decline by $50 million, $100 million improvement from the midpoint of our previous guidance range.

On slide five turning to Carrier, operating margin exceeded 10% in the quarter, down 210 basis points on 29% lower revenues. Carrier continues on the path of aggressive transformation, to a simpler, more focused, higher returns business. Cost reduction and restructuring actions contributed more than 250 basis points of margin in the quarter and helped mitigate the impact of this steep volume decline.

Since June of 2008, Carrier’s headcount has been reduced by 5200 or 13% of the workforce, before the impact of net divestitures. Carrier’s organic revenue declined 21% in the quarter. As in Q1, Carrier’s most significant volume decline occurred in the higher margin transport refrigeration business, with sales down about 40% at constant currency, driven by container and Europe truck trailer.

The commercial HVAC business was down mid teens organically and we saw new equipment orders there decline about 20%, again at constant currency. U.S. residential was down 16%, about inline with the market. Carrier’s prior guidance assumed an improvement in business conditions in the second half of 2009.

In light of continued weakness in order rates, Carrier now expects organic revenues in the third quarter to be down inline with first half and expects profit growth to resume in the fourth quarter on the back of easier compares and continued cost reductions. For the full year Carrier expects revenues down in the mid 20s and earnings down in the range of $500 million to $550 million, with second half earnings down approximately $100 million to $150 million versus prior guidance of flat second half earnings.

On slide six, UTC Fire & Security delivered a solid quarter with operating margin expansion up 180 basis points to 10.6% on 23% lower revenues. Organically, revenues contracted 8%, with both fire safety and electronic security revenues down high single digits in the quarter. Unfavorable foreign currency translation reduced revenue 12% and net M&A activity accounted for three points of the year-over-year revenue decline.

Operating profit decreased 8%, excluding FX profits grew 9%, reflecting the benefits of integration of field operations, restructuring and continuing productivity and cost control initiatives. We remain confident in UTC Fire & Security’s 2009 guidance of flat profits on revenues down mid teens.

Turning to the aerospace businesses on slide seven, revenues at Pratt & Whitney declined 15% in the quarter, driven primarily by lower overall after market volume and Pratt Canada engine shipments. Revenues were also adversely impacted by net hedging activities at Pratt Canada.

Large commercial engine spare revenues were down in the mid 20s and book-to-bill was slightly below one. Engine shipments at Pratt Canada were down about 25%. Operating profit declined 7% in the quarter. The impact from lower revenues adverse mix and unfavorable foreign currency impact at Pratt Canada was partially offset by benefits from restructuring, productivity improvements and fewer large commercial engine shipments. E&D was also favorable in the quarter. Operating margin at 16.8% was up 100 basis points.

Turning to the full year, we now expect large commercial spares revenues to be down around 20%. At Pratt Canada, we expect engine shipments to be down in the high teens. Our prior expectation for both was down double digits. Pratt’s large engine MRO activities are also lower than expected as airlines conserve cash in phase of lower traffic and yields.

Overall, Pratt & Whitney 2009 revenues will likely be down mid-to-high single-digits. Operating profit is now expected to be down $100 million year-over-year, as compared with the prior guidance of down $0 million to $50 million. Pratt continues to aggressively reduce operating costs and rationalize capacity in manufacturing operations and maintenance repair and overhaul networks.

On slide eight in the quarter, Hamilton Sundstrand revenues were down 15%. Organic revenues were down 9%, with aerospace after market down double-digits, the industrial business down 25% and Aero OEM flat. Operating profit declined 20% primarily from lower volume in higher margin businesses. Commercial spares revenues were down over 20% again.

Lower E&D discretionary cost curtailment across the business, favorable mix in Aero OEM and productivity improvements in the repair shops, partially offset the volume impact. Orders for the industrial business continue to reflect the impact of the global economic slow down and were down about 35% in the quarter, including three points from foreign exchange.

Commercial spares book-to-bill was above one, including a few large long lead time orders. Depressed order rates in high margin businesses continue to put pressure Hamilton Sundstrand’s 2009 outlook. We now expect commercial after market to be down low teens for the year and the industrial business to be down in the mid 20s.

In total, we now expect Hamilton revenues to be down mid-to-high single-digits, operating profit to be down $75 million to $100 million as compared to the prior guidance of flat. Hamilton continues to reduce operation costs through workforce resizing, furloughs, merit deferrals and other actions in response to the challenging market conditions.

Turning to Sikorsky on slide nine, operating profit grew 26% on 6% higher revenues. During the quarter, Sikorsky shipped a total of 50 large helicopters, 40 based on military platforms and end commercial. Sikorsky continues to target delivery of between 230 to 240 large aircrafts in 2009. Operating margin expanded 160 basis points in the quarter to 10.1%. This improvement was primarily due to better aircraft mix and lower manufacturing costs.

Sikorsky continues to expand its footprint of international suppliers. During the second quarter it completed an agreement to manufacture S-92 helicopter cabins with the Tata Group in India. Sikorsky is also making progress with the international Black Hawk in its facility in Mielec, Poland.

While we see continued weakness in the commercial market, we expect Sikorsky to continue its strong performance for the remainder of the year, with revenues still projected to grow in the high teens and operating profit expected to increase approximately $125 million.

With that, let me turn it over to Greg for a wrap-up.

Greg Hayes

Okay. Looking at slide 10 now on the webcast, a very strong quarter in terms of execution and very strong cash performance and very, very strong cost traction in the phase of difficult end markets. Continued focus on what we can control resulted in over $350 million of discreet cost reductions, including the restructuring savings in the quarter and this limited the impact of the $2.7 billion revenue decline.

Just a reminder, the $350 million of savings follows $200 million for cost reductions in the first quarter, so even more traction from aggressive cost actions in the second quarter than what we saw in the first.

Wrapping up, our full year 2009 revenue expectation is now $53 billion, that’s down 11% from last year and this $2 billion decrease from our prior guidance reflects the expectation, an incremental $2.5 billion decline in organic revenue, and about $500 million from recently announced divestitures, partially offset by the weaker US dollar.

The negative margin related to this volume decline is expected to be partially offset by incremental benefits of the cost reduction and restructuring actions, as well as more favorable net commodities and a weaker US dollar also helps. Our full year 2009 EPS guidance as I said before is a range of $4 to $4.20, down 14% to 18% from 2008, excluding the impact of acquisition related costs.

Excluding restructuring expense and one-time gains, we see earnings per share down to 7% to 11% compared to 2008, and a revenue decline of 11%. A big slice of that revenue reduction is coming in our high margin aerospace spares and our transport refrigeration businesses, making the lower EPS drop-through even more impressive.

As for other guidance for 2009, our expectation for free cash flow for the year remains unchanged and equal to or in excess of net income come. Capital expenditures in the quarter were down 43% or 37% year-to-date and as a result we now expect the capital expenditures to be down about 30% for the full year.

Our 2009 M&A placeholder remains at $2 billion, although our acquisition spend year-to-date is only $153 million net of divestitures. As always, deals happen when they happen and we’ll continue to be aggressive in identifying and pursuing acquisition opportunities. We also remain disciplined in our approach. On share repurchase, our share repurchases guidance remains at $1 billion. Second quarter share repurchase was $150 million year-to-date, $350 million.

Okay slide 11 now, a couple of thoughts on 2010. I’ve been getting a lot of questions about whether we expect earnings to grow next year. Well, there are many moving pieces at this point. I would simply remind you that the strength of UTC is in its market leading franchises, with geographic customer and product diversity, along with strong after-market businesses. This portfolio of businesses and the aggressive cost reduction action we’re taking this year, will position the company to resume earnings growth next year.

To be clear, we do not anticipate a significant economic recovery in 2010 and as we begin building our detailed 2010 financial plan, the business units are developing cost-led plans without much reliance on top-line recovery. We will see some tailwind next year from restructuring actions taken this year, another $300 million.

While there maybe some weakness in our long cycle businesses next year, such as commercial Aero OEM and Otis new equipment in commercial HVAC, our short cycle businesses such as the commercial aero after-market, residential track and transfer refrigeration should be among the first to recover when the economy does improve.

Our continued focus on process improvement is driving cost reductions we’ve seen across the businesses. Currently 54% of our businesses are operating at the gold and silver level, well on our way to meet the goal that Louie laid out of 70% by the end of this year. Also, our ACE initiative with suppliers is gaining traction with 44% of key suppliers spend now with gold or performing suppliers; well on track to Louie’s target of 70% by 2011.

With our relentless focus on cost, season management team, significant after-market content and continued investment in innovative new products, we believe we’re well-positioned to outperform again in 2010.

With that Erin, let me stop here and open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Nigel Coe - Deutsche Bank.

Nigel Coe - Deutsche Bank

You’ve got Carrier in the question mark column, yet. You called out growth in 4Q EBIT, which implies that you’re pretty confident in the first half growth at least in 2010. So I’m just wondering why that would be in that column rather than the plus.

Greg Hayes

I think Carrier, there’s a lot of pieces to Carrier. I think the long cycle part of Carrier, which is the HVAC and commercial HVAC pieces is a bit of question mark for next year. We actually would expect that to be down slightly. I think the real question on Carrier though goes to the nature of the economic recovery and when we’re going to see a rebound in housing and when we’re going to see a rebound in demand for the transport refrigeration products.

Again those are very economically sensitive businesses. They have been hurt the quickest and most I would say. So until we see some real signs of an economic recovery, I think Carrier remains in that kind of question mark column for next year.

Nigel Coe - Deutsche Bank

On the revenues of [Inaudible], that’s too much of a surprise, but at this point do you think revenues are becoming a bit more predictable for fiscal ‘09? I mean is the rate of change in your projections from month-to-month starting to moderate?

Greg Hayes

It has Nigel. In fact if you think about it, the order rates have stabilized as we said. Really since March we’ve seen the order rates fairly stable, albeit at these low rates. So as we look at the back half here and we are sitting here in July, we’re fairly confident in this $53 billion.

Could it be a little better or a little worse, yes depending upon FX, but I think for the most part we’ve got pretty good visibility and I would say realistic revenue guidance here based upon what we see today in the markets.

Nigel Coe - Deutsche Bank

Then one more for me, a quick one; what’s the buffer right now protecting the low end range? What’s the buffer you’re continuing to see at the bottom in the range right now?

Greg Hayes

At the $4 level we have about $150 million of contingency left. You’ll recall back in March, at that time we talked about a $350 million contingency, that’s obviously been eaten up a little bit by the revenue reduction, as well as the lower gains on restructuring, but we’re offset by some good news on cost traction as well as FX. $150 million, it feels it’s like about like the right number as we sit here in July again, with half of the year behind us.

Nigel Coe - Deutsche Bank

If that $150 million’s still there at the beginning of December, do you then use that for additional restructuring?

Greg Hayes

That is a great question for Louie to ask, the answer in December, but I would say probably as we sit here today, if the business remains strong and cost traction improves, I would say there is probably more restructuring in the future.

Operator

Your next question comes from Joseph Nadol - J.P. Morgan.

Joseph Nadol - J.P. Morgan

Greg, on the restructuring, you’re well above half of your 750 so far. How do you think this plays out next couple quarters? I mean how much more than 750 could you come in at, if the dollar weakens or something else happens in your favor?

Greg Hayes

We were a little bit above this quarter. I think we talked about 250; we actually launched a little over 300 million, so I think 467 year-to-date. We feel good about the restructuring list that we’ve got. It is a robust list. It is well north of the $750 million that we have targeted. I think the issue that we’ve got as it looks towards the back half of the year is execution.

In all of the businesses you’ll see with the exception of Sikorsky, have taken on significant restructuring activities. So there’s a lot of things going on out there. There is pressure to probably spend more. I think we’ll even see a little bit of restructuring follow into 2010 and we’ll have to play it by year, but the number will only go up from where it is today, and certainly you can expect to see some additional next year.

Akhil Johri

Joe, with regard to your calendarization question, I think we’re right now putting about $200 million for third quarter and the balance in Q4 to go up to the $750 million.

Joseph Nadol - J.P. Morgan

Okay. In China, that’s where you’re seeing the best results in the company and of course that is where the GDP looks by far the best. How sustainable though do your people there, particularly in Otis think that this recovery is?

Greg Hayes

Well, what we’ve seen in the last quarter Joe is really a recovery at the low end of the market. In terms of order rates, our XOEC business orders I think are actually up about 15% or so, and that low end is where the government stimulus program is helping the most; this is on the residential construction market.

I would tell you, I think that looks to be sustainable. The 7.9% or 8% GDP growth is all very good. We’ve also seen foreign direct investment start to come back to last year’s level. Still down year-over-year, but again, as foreign direct investment picks up and I think the compounding effect of the stimulus picks up, we’ve got a lot of confidence we’re going to see a good back half for Otis in China, as well as Carrier and even a strong 2010.

Joseph Nadol - J.P. Morgan

Then just two more quick number questions; what’s your commercial HVAC backlog down year-to-date, first of all? Secondly, could you just discuss your Hamilton E&D spending and where you’re running versus where you thought it would be?

Akhil Johri

Hamilton E&D was a little bit of a reduction in the second quarter Joe, on a year-over-year basis. Overall as you know we had E&D down about $50 million this quarter and Hamilton was roughly 40% of that in terms of year-over-year decline. We do expect a continued decline in the second half there, primarily as the 787 spend comes down. Although, you can imagine with the delay in the first flight, there is some pressure on that.

With regard to commercial HVAC, I think the orders have been worse than these revenues that we have generated, so backlog is down. The orders have been down roughly 20% plus for the first half, while the revenues have been down organically in the low teens. So you can do the math, it’s down slightly, not huge.

Operator

Your next question comes from David Strauss – UBS.

David Strauss – UBS

Greg, could you maybe touch on the outlook for Otis new equipment shipments as you think about 2010? I think you had previously guided; originally we started thinking about flat and I think you talked about down 5 to 10. Just given the order rates you’re seeing now, how do you think about Otis new equipment in 2010?

Greg Hayes

I think for this year, we expect Otis new equipment to be down kind of in that 10% ‘ish range, it’s down 9% in the quarter and certainly with orders down around 40% on the new equipment side, that 9% or 10% down will play out next year. So I think again, another 5% down next year is probably in the realm of reasonableness. I think part of the question here is how quickly China recovers.

We have to remember, China accounts for a third of the new equipment business at Otis. So even though we’ve got these big order rates coming down, China is recovering, as well as there were a lot of deferrals at the end of this year that will probably play out next year.

So as we’re thinking about it, I think there is obviously pressure on new equipment next year, but again I would say 5%, but it’s a little early and we’ll come back to you obviously at the end of the year with some better visibility there.

David Strauss – UBS

Then on the revenue side overall for this year, I mean order rates are relatively stable sequentially, yet you’re looking at I guess in the second half of the year that revenues are going to actually increase I think 10% or so sequentially second half versus the first half of the year in total. What specifically other than a little bit of a benefit on the FX side, what else is going to be driving that? I guess what kind of gets better on the revenue side in the back half of the year versus the first half of the year?

Akhil Johri

FX clearly is a big driver as you pointed out, David. The other factor is that sequentially we do have some improvement in the second half, particularly in our commercial construction related industries every year, because more projects get completed in Q4 as people are running to complete their budgets if you will. So there is some seasonality which we see every year in our business in the second half versus the first half sequentially.

On a year-over-year basis I would point out that the benefit from easier competitors, if you recall Pratt spares were down mid teens in the third quarter; similarly carrier organic revenue was down 7% in fourth quarter. So we’re coming off some easier compares, better FX and just the normal seasonality of the business season.

David Strauss – UBS

Okay, and the last one Greg, what was the net pricing benefit if you had one on the quarter, how much was it in total?

Greg Hayes

Yes, there was a small net pricing benefit; it was about $40 million for the quarter across the business.

Operator

Your next question comes from Jeff Sprague - Citigroup.

Jeff Sprague - Citigroup

I’d like to get into the restructuring a little bit more; Greg you mentioned kind of furloughing and other actions kind of driving the 350 in Q2 versus the 200 in Q1. I just wondering if you can kind of separate what’s going on in terms of kind of structural cost reductions, relative to things that will eventually kind of swing back the other way when we do get a volume turn.

Greg Hayes

If you think about it, the $350 million of savings we talked about in the quarter, about a little less than $150 million of that came from actual restructuring, which I would consider to be structural type of cost takeout. We’ve also of course had a lot of just cost control, cost containment.

We have seen for instance, travel is down more than $150 million in the quarter. We have seen the benefits of furlough across all of our businesses, and furlough is simply people taking days off without pay. I think everyone of our businesses have done that. We’re also seeing the benefit of net attrition. Net attrition is more than 3,000 people year-to-date rather and we’re just not back filling those jobs. We’ve also deferred merit increases out of the year.

So, if you think about it, some of that will obviously come back. I would say, two-thirds of the savings rather is structural and one-third is probably timing that will come back. You also have to point out; I think the employees have been remarkably good about all of the cost takeout.

There has been a lot of sacrifice across all of the businesses from the furloughs, flying coach to Singapore is no fun thing to do, but all of that is part of what we’ve been doing here to contain costs. So again, its good traction; of that 350 we’ll get a little bit of that back, because we will have merit increases and we won’t have furloughs forever, but I would say, roughly two-thirds probably structurally out of the business.

Jeff Sprague - Citigroup

Then if I think about this 700 that you rolled up, 300 this year, 300 next and 100 left in ‘11, those are all structural cost takeouts.

Greg Hayes

That’s correct. Those are run rate savings that will repeat year-over-year.

Jeff Sprague - Citigroup

Kind of changing gears a little bit, I wonder if you could just give us a little more granularity on Carrier as it relates to kind of the price and cost dynamics in that business.

Akhil Johri

Jeff, we still saw some pricing benefits in Carrier this year. You recall that in third quarter last year, U.S. residential Carrier raised prices by up to 6% for its various products and we have continued to do see some benefits off that. The Carrier team would tell you though that there is increasing pressure and you would see probably, particularly on U.S. residential side and on the Commercial HVAC side, increasing price pressure in the back half. However, on the opposite side we would see increasing benefits on the commodities.

As you know, they have a rolling blocking practice with the copper consumption that they have, so these back half benefits on the commodities side will be greater than they’ve seen in the first half. So net-net, I think first and second half are balanced; their dynamics are just different; pricing more in first half, less in second, gross commodities more in first and less in second.

Jeff Sprague - Citigroup

Finally Greg, when do you pull the lever a little harder on the share repurchase if the deals don’t start to materialize?

Greg Hayes

I guess that’s clearly a second half action for us. You can see, we’re really pretty light to the $1 billion guidance here. Quite frankly, we’ve been conserving cash in the first half of the year as cash was very, very light as you remember back in the first quarter. So I would expect you would see share repurchase run rate ramp up here in the third and the fourth quarter.

Jeff Sprague - Citigroup

Just actually one more quick one if I could. Given the growing importance of Chinese new equipment as it relates to Otis, any update on kind of service attachment rates there? Are you making any better progress on the market side?

Akhil Johri

Yes, service has been growing at a slightly faster rate than new equipment, but this is a long term opportunity for us. It’s not something which will happen in a quarter or in a year even, but we think the installed base that we are creating in China will help Otis over the long time over many, many years.

Operator

Your next question comes from Deane Dray - FBR Capital Markets.

Deane Dray - FBR Capital Markets

Greg, if we compare your commentary back in March about M&A, there was an expectation that UTC might be a bit more aggressive going after deals. Since then the tone has gone back to a little bit more of the placeholder comments staying disciplined. Give us a sense of what the pipeline looks like, were there deals closer that you thought you might get in the beginning of the year and how do you expect that to play out?

Greg Hayes

I don’t know if we’re been any less disciplined or more disciplined. I think it’s just typical UTC acquisition reviews and we were hopeful I think earlier, where back in March when we saw equity prices solo, that there would be opportunities for us to do some deals that quite frankly would be very accretive to the business, but it’s taking time and quite frankly, it may take some more time.

I think people’s expectations of price have not really come down to what the level of their stock price is and so we’re just going to wait this out I think, again. We don’t expect the economy to recover any time soon. We expect as these 52-week highs go into the rear-view mirror, people will become more receptive I would say, to some of the discussions. It is a very full pipeline.

I think we’ve got a lot of good targets out there, but it just takes time. So I wouldn’t say we have toned down the aggressive nature of the pursuit; it’s just simply a realization as we get here in July. It’s going to be probably tough to get a lot of things done yet this year.

Deane Dray - FBR Capital Markets

That’s helpful. If I could just go back to Otis for a moment, the 8% decline in backlog, how do you measure that in months versus where we were in the beginning of the year?

Akhil Johri

Given the decline being of about 9% to 10% in new equipment revenues, I would say the 8% decline, the backlog is still about 12 months worth of revenues expected, based on the 8% to 10% decline that we have talked about on new equipment. So there’s still about 12 months worth of backlog.

Deane Dray - FBR Capital Markets

Great, and then any commentary regarding “activity,” and then obviously, it doesn’t look like you’ve seen a lot in the way of push outs or deferrals, but any comments there would be helpful.

Akhil Johri

In China there is clearly a lot more interest, a lot more dialogue with the customers, project developers, etc. I would say geographically, Europe has been pretty consistent at a low level and same in the case of U.S., which had very, very touch compares in the second quarter, but the activity level is pretty stable at low levels there, but China and Asia is showing some increasing signs of discussions with customers.

Operator

Your next question comes from Cai von Rumohr - Cowen & Co.

Cai von Rumohr - Cowen & Co.

Your R&D, are you still looking for it down $100 million for the year, given that it was down as much, it was kind of as low as it was in this quarter?

Greg Hayes

Yes Cai. We were down $50 million or so and $53 million year-to-date. You remember, first quarter was essentially flat. We still expect down $100 million or so for the year. So probably it’s third and fourth won’t be as dramatic as what you saw in Q2, but we’re also going to see a ramp up on spending in the back half of the year on the CSeries, as well as the MRJ. So, that will be good news.

We’ll see a little bit of a ramp down on 787, which will offset some of that. So I think the other piece is probably Columbus, with that being deferred by Cessna is also going to take some of the back half pressure down. So the $100 million still seems about right.

Cai von Rumohr - Cowen & Co.

So, you would still see a sequential build as we go through the year?

Greg Hayes

Yes, absolutely.

Akhil Johri

It is a normal seasonality Cai in the engineering spend.

Cai von Rumohr - Cowen & Co.

Do you have any recovery from Textron for the cancellation of Columbus?

Greg Hayes

I do not believe that we have. I believe the program has been deferred as opposed to cancelled as a result. We’re actually continuing to work on the core of that engine, because the core to the Columbus is the same core as we’re using on the MRJ. So it’s not as much of a savings as you might otherwise think from the deferral of that platform.

Cai von Rumohr - Cowen & Co.

You talked to Jeff’s question about one third of the savings were kind of timing related things, like merit deferrals. So that’s basically what, like $110 million, $120 million, something like that. Should we expect that timing impact to continue at that level in the third and the fourth quarters? You mentioned it’s probably going to comeback at some point, how should we think about it coming back next year?

Greg Hayes

Yes, clearly Cai. I think the pressure on cost is not going to let up this year and I would even tell you into next year, as we don’t see a recovery in the markets, there’s going to be this continuing focus on costs. It’s really nothing new to UTC; we’ve been doing this stuff for a long time. We’ve done $3 billion of restructuring over the last 10 years.

The furloughs and the merit deferrals, those are a little bit tougher, but I think you may well see some furlough activity next year if the aerospace markets don’t recover. Merits obviously, that will comeback a little bit next year for headwind, but actually I wouldn’t think all of that’s going to comeback next year. You may see a piece of it obviously, but not the whole 30% or so.

Cai von Rumohr - Cowen & Co.

The last one; I mean you had this huge cash flow in the quarter and yet you didn’t buy very much stock. Was that just timing that the cash flow came in the back part of the quarter, and you were blocked out because of reporting the earnings early on when the price was so low? How come you were so cautious on share buyback?

Greg Hayes

I would tell you, we entered the quarter after the kind of the disappointing first quarter cash flow performance and we were a little bit leery of ramping up share repurchase right away, until we saw what the markets were going to do. Obviously as the quarter progressed we started taking up share repurchase as the prices hovering there in the kind of low 50s, high 40’s.

Also a big piece of the cash flow in this quarter came from collection activity. That’s something really was back half of the quarter loaded. So, back half cash wasn’t very strong. We also took the opportunity to fund the pension plan by that $400 million and we had planned to do $400 million for the year, but only going to do a couple of hundred million in the quarter. We saw the strong cash coming in.

The best thing to get behind us was the pension contribution that earns us 8.5%. Share repurchase, we will be aggressive in the back half of the year. With the price remaining in this mid 50’s range, it is still a very, very good deal for us. So, I would expect to see that much more aggressive in the back half.

Operator

Your next question comes from Doug Harned - Sanford Bernstein.

Doug Harned - Sanford Bernstein

On the overall restructuring gains, when you went to the lower end of the range, the $200 million to $350 million down to $200 million, what led to that? Is this just taking longer? Is the opportunity less?

Greg Hayes

Yes, actually we had seen or had visibility to I’ll say a sizeable back half gain that looks like it’s just going to get pushed out into 2010 and because we had given the forecast of 250 to 350, as we were going to close out the quarter here, it really became apparent we weren’t going to get this last transaction done this year. So, it’s just a timing issue.

Doug Harned – Sanford Bernstein

But what’s pushing that back?

Greg Hayes

Just the completion of the deal and I really can’t be more specific Doug, other than to say that it’s a deal with we look to close sometime in the back half of the year, but probably won’t see the gain until sometime next year.

Doug Harned – Sanford Bernstein

Okay, and then on pricing you described the pricing benefit and then I would assume that Carrier, you’re getting some benefit from efficiency incentives related to residential. If you look overall at Carrier and I would say also Fire & Security and Otis, what are you seeing as the pricing trends in the market and how are you responding to those trends today in term of your aggressiveness on pricing?

Greg Hayes

Pricing has become very difficult I would tell you, at Otis and the new equipment. It’s always difficult in China; I would say there’s been no let up there. We’ve also seen pricing pressure in North America and in Europe and again as the volumes have come down; the competition has of course ratcheted up the price pressure. So we are seeing pressure there. Really no different at Carrier on the commercial side again, so we’re still seeing price pressure there.

As far as the efficiency from the stimulus program, we’re actually seeing a big increase in our tier 15-plus product, more than 30% increase year-over-year in volume there, so that’s actually been a plus for us, because obviously the higher tier product better margin for us, so not as much price pressure there. Still a lot of price pressure at the low end as you can imagine with the amount of excess capacity in the residential HVAC business here in the US.

Doug Harned – Sanford Bernstein

One last thing on Hamilton Sundstrand, other than Sikorsky you talked about the least amount of restructuring effort, but it looked like there was a fair amount in Q2. What specifically are you going after in Hamilton Sundstrand in the restructuring area?

Greg Hayes

Well, I think there’s really two areas; one is on the industrial side and they have been very aggressive in terms of taking out capacity on the industrial side and taking out people, as well as the Belmont has been just taking out overhead costs.

I think they’re reducing overhead G&A type positions by 17% or 18% up there, so we’re talking about structural takeout, that’s exactly what they’re doing up there and I think we spend over $50 million year-to-date up there on structuring and I would expect more in the back half of the year, as well.

Operator

Your next question comes from Howard Rubel – Jefferies

Howard Rubel – Jefferies

I want to go first to restructuring for a moment. When we look at the natural class statement Greg, when we look at SG&A as a percentage of sales, its 11.9% in the second quarter versus 11.1% in the year ago numbers. Now I know a chunk of it is the restructuring items in there. Can you give us a sense of what you’d like to target for SG&A going forward, so that we can actually get a tangible sense of the improvement?

Greg Hayes

I think what you see in the quarter, if you get back out restructuring for both this year and last, you’ll actually see that SG&A as a percentage of sales is down to about11.1 to 11.2 year-over-year. I think that’s what you’re going to continue to see; is that trend of holding SG&A as a percentage of sales down slightly quarter-over-quarter.

Now if you think about taking out 17% of your revenues and holding SG&A flat to slightly down, that means we’re taking out a huge amount of SG&A and I think that trend is going to continue here in the back half of the year.

Howard Rubel – Jefferies

So the goal really is that when volume comes back, it will just drop to the bottom line.

Greg Hayes

That’s the idea.

Howard Rubel – Jefferies

Then to talk about inventories, this is always the promise and never quite the result. It always seems to be one area or another that’s not. Could you sort of talk through some of the business units. I mean you talked about aerospace still being a challenge, what is it in particular? We’ve seen this de-stocking at the back end of the channel fairly substantially. Why can’t you get ahead of the curve?

Greg Hayes

I think in fact the businesses, especially Carrier and Otis have gotten ahead of the curve. Well if I look at Carrier performance year-over-year, their inventory is down over $600 million. Obviously the market is down, but even sequentially Carrier was down almost $200 million. Otis took inventory down, F&S took inventory down both sequentially and year-over-year.

The real challenge for us remains on the long lead aerospace side. I think that’s the continuing frustration of inventory here and Pratt has been working very hard on it, but they still saw inventory go up sequentially just a little bit, and Sikorsky saw more than $200 million of growth on inventory.

Really good work by Ari and his team on the commercial side in terms of giving inventory down. Jeff down at Sikorsky is faced with a different problem and that is a good problem of having a lot more volume. So his inventory continues to go up. I’ll tell you, his turns are nothing special. They’re aware of that and they’re continuing to work on it.

Howard Rubel - Jefferies

Just a follow-up on Carrier; the fact that you were down sequentially $200 million with the usual seasonal build means the turns were up fairly sharply then.

Greg Hayes

Yes.

Howard Rubel - Jefferies

And then last, could you just talk about transportation a little bit? I mean, I remember at the analysts meeting, the surprise by Geraud, just how bad the numbers were. Could you talk about the environment and what you’ve done to improve it, because I know those run sustain ably low levels.

Greg Hayes

The numbers that Geraud talked about back in March, where you talked about truck trailer and the container being down 70% or 80%, obviously they have recovered from that level. I think transit for the quarter was down, just about 40% or so, a little less, about 35% or 40% in terms of orders and we still see container being very, very weak. Truck trailer North America has gotten a little bit better and even in Europe truck trailer, we’re starting to see some signs of some activity in that market.

You got to remember; the underlying demand for refrigerated transport as best we can tell is only down 2% or 3% around the world. So the fact that we have seen this remarkable reduction in order rates, in my mind it is a temporary thing, because if demand is there, eventually we will see orders come back. Part of it is of course the credit markets. We’ve been talking about this for the last few months as the unavailability of credit is really what’s hurting that business.

Shipping business of course is in trouble; there’s a lots of excess capacity out there. Everybody is constrained by capital, but until the credit markets really free up and our customers have access to credit again, I think we’re going to see a pretty tough market there. Again, that will come back. Underlying demand is not evaporated for refrigerated transport; that is foods and medicines being moved around the world. So we like the business long term, it’s just a very tough year.

Howard Rubel - Jefferies

Just one last thing is, if you were to kind of look at all your businesses, are there any managers that are coming to you and saying I’d like to either add some hours on direct labor or hire some people in direct labor? I know I’m being optimistic, but I’m sorry, this is one area you might see it first or in service at Otis.

Greg Hayes

I think service at Otis continues on the maintenance side to be a strong business, but we’ll tell you, even at Otis we are taking headcount out as we continue to drive productive in that business. It is not the time to be adding direct labor or any kind of overhead right now into the business. Obviously, the idea here is to get productivity as the markets improving, not bring back all of the people that are being let go now. So I would tell you around the business, we are not adding much if any, anywhere.

Operator

Your next question comes from Joseph Campbell - Barclays Capital.

Joseph Campbell - Barclays Capital

I wondered if you could talk a little bit about Europe. You’ve talked about China coming back. What’s happening in the developed economies of Europe and say in Northern Asia for you?

Greg Hayes

I think Europe has been very slow. When we look at both at Otis and at Carrier and we’re not seeing like many signs of life in any of the European markets. I think Spain has been particularly bad, Italy not much better, Ireland of course has been down because of the housing bubble there. Eastern Europe still looks to be promising, although Russia with the commodity meltdown we’ve seen over the last 12 months, we’ve seen a fairly large contraction in order activity.

So I think our own view is Europe is probably behind the U.S. in terms of the timing of the recovery and we would expect to see it here first. So I just don’t have much good things to say about Europe. I guess the tour to France is going on, so we can said that, but other than that, not much with the activity.

Joseph Campbell - Barclays Capital

Northern Asia?

Joseph Campbell - Barclays Capital

Korea has come back a little bit. I think Otis actually saw some good traction there in Korea in the quarter. Japan not so much. Japan was down significantly, but as far as China, we already talked about China, but those were the two other big markets for us in Northern Asia.

Joseph Campbell - Barclays Capital

Then just switching to aerospace, Boeing and Airbus, perhaps surprisingly to many, continue to stick to their no cuts or if any modest cuts. Are you thinking along the same lines? Have you revised OE outlook upward other than 787 shipments or are you still thinking that Airbus and Boeing probably will have to make some cuts?

Greg Hayes

We’re continuing to work with both Boeing and Airbus on the long lead production items. I think we all realize that with air traffic down 7% or 8% this year, there’s probably a lot of excess capacity and at some point we believe that volume will have to comedown. At the same time you still look at the backlog, I think there’s almost 7000 aircraft in backlog between the two.

So, long term demand remains strong, but we would not be surprised in fact if we saw a cut in production next year or at the latest 2011, but right now we’re working very closely with them. I know they’re both concerned about suppliers making cuts in productions, so they can’t be supported. So we’re making sure we’ve got the long lead items in place, but I think from a financial planning standpoint, we’re pretty cautious about the near term outlook I would say for production.

Joseph Campbell - Barclays Capital

On this small engines Greg, there’s a lot that’s been announced. Are you thinking that we’ve kind of seen it and we get down to these new much lower run rates and then we kind of hang out there? Is the small engine business a place where there’s another round of output? I’m not talking any one guide, but just sort of collectively across the board here.

Greg Hayes

I think what we would fully expect is another down year, next year.

Joseph Campbell - Barclays Capital

You would get that if you just see; the back half of the year is just down from the front half and from Q4 last year. What I’m asking is, now that you’re down there, does it sort of hang out at those rates or does it take another notch down from sort of the Q4 levels?

Greg Hayes

I think what you’re going to see is a continued reduction in the run rate of engine production at Pratt Canada. What’s driving the bizjet market is the same thing that’s driving our transport refrigeration business. So that is customers can’t get credit. On top of that, the corporate profitability is a great precursor in terms of when bizjet production will increase. You wouldn’t expect to see that probably until 2011 or maybe even 2012.

We’ve also got of course a lot of used planes on the market, so it is a tough market. I would not be surprised to see run rates comedown again even into next year, as the OEMs build out their backlog this year and try and pull airplanes into this year for delivery to fill slots that they’re building. So it’s a pretty tough market and I would not expect it to be any better next year, probably a little worse.

Operator

Your next question comes from Myles Walton - Oppenheimer & Company.

Myles Walton - Oppenheimer & Company

I was wondering if we could fix on Otis a bit in terms of the EPS guidance provision there. Nice upside to the prior expectation; obviously the top line coming in lower than previously expected. I know one of the moving parts would be 4X. Can you walk us through that $75 million to $125 million and improve that look at Otis on the EBIT side; how much of that is 4X?

Akhil Johri

Actually Myles, if you look at it there, revenue declines resulted in some margin impact as well and that has been pretty much more or less offset by the strong execution on the cost side and the restructuring and other actions that they’re doing on the field performance.

So, big strong cost reduction benefits offset pretty much entirely the negative impact from volumes and then the improvement is pretty much all FX if you look at it. So benefits of cost reduction and field performance offsetting volume decline, FX improvement flowing through to be improved guidance.

Myles Walton - Oppenheimer & Company

So Greg, to putting context your prior comment about OE Otis being down maybe 5% next year in a constant 4X environment even under that scenario, could you see Otis up?

Greg Hayes

Absolutely. I think again just because OE production is down, it doesn’t mean we’re going to stop driving costs out of the business. You also got to remember, 55% of that business comes from the service side, which traditionally continues to grow.

You’ve got $1.6 million elevators under service contract around the world and that population continues to grow 2% to 4% every single year. So, between productivity improvements, cost reduction in our factories and the service side of the business, we would certainly expect Otis to grow earnings next year.

Myles Walton – Oppenheimer & Company

Could you give us a little bit of color on the portfolio shaping you’re doing at Carrier. How much of these businesses that you’re shedding or spending into JVs, where sources of restructuring spend in the past that won’t be there on an ongoing basis and also kind of the size of the further portfolio shaping to come?

Greg Hayes

We’ve taken about $1.1 billion of revenue out of Carrier on a run rate basis so far. That includes the transaction we did earlier this year with GL buyer to get rid of European commercial parts refrigeration distribution business. That includes the part that we joint ventured with Watsko and also the exiting of the commercial refrigeration business here in the US.

In terms of restructuring, we’ve done some restructuring as part of the exit of those activities. It has not been a source during the past of huge restructuring spend though, so I wouldn’t expect that to be a kind of a year-over-year change in the restructuring.

What we said all along is probably another $1 billion of additional revenues to take out and Geraud and Ari have been working on that. They’ve talked about that plan I think at length. It takes time to execute, but I would think over the next 12, 18, 24 months you would see that continuation of the more focused Carrier start to emerge and again, it’s not magic; it is just a lot of hard work and focus.

Operator

Your next question comes from Ron Epstein – Bank of America.

Ron Epstein – Bank of America

Greg, you’ve been I guess very cautious about the economy in terms of talking about stabilization. What would you have to see to become more positive?

Greg Hayes

That’s a great question Ron, because I think we all are looking for the positives in the economy. Clearly consumer confidence and the leading economic indicators are pointing upward. Unfortunately what’s happening is that consumer spending or savings I should say, continues to soak up some of that good news out there in the economy.

I think when we start seeing the credit return to more normal levels and when our customers aren’t saying that “Look, we’d love to place an order, but we can’t have access to credit,” that will be the real sign for us and we’ll see it in some of our short cycle businesses. We will see it at the transcycle, because again, underlying demand is there. I think we’ll see it obviously in the housing market as well; and mortgage rates are at record lows here and we’re still only talking about 550,000 or 560,000 new housing starts this year.

So again, we hear some good news, there is some things out there that might give us confidence that things will get better, but quite frankly as we look at the order rates today and we look at the underlying unavailability of credit, I think we’re still very cautious about any type of return to growth next year.

Ron Epstein – Bank of America

The Gear TurboFan, can you just give us an update on how that program is going and how the test one at Airbus and what we should think about it?

Greg Hayes

The tests last fall at Airbus, I think we’ve gotten all of the data back and the test program exceeded everybody’s expectations in terms of the fuel burn and in terms of the noise levels of the engine. I think everybody was very excited about those results. Right now we don’t have an engine on test for the C-series, we won’t have an engine on test for the C-series or MRJ until next year, but we are continuing with the development program.

We’ve got about 20,000 cycles of testing now done on the gear set, which is of course the heart of the Gear TurboFan. As we’ve taken that apart after those tests, it all looks excellent in terms of the predictability of the wear on the unit. So in making progress, spending is going ramp up, back half of the year will increase again, next year we’ll get the first engine to test, but I’ll tell you right now, we’re all on track and there has been no showstoppers in terms of technology development.

Operator

Your last question comes from Heidi Wood - Morgan Stanley.

Heidi Wood - Morgan Stanley

Greg, I actually want to get your thoughts on sort of a bigger picture item on Pratt. Can you talk a little bit about what you see as sort of the long term margin potential structurally there? As we look at the puts and takes, I’m just wondering about the feasibility of the high teen margins at Pratt.

I know it’s been something you guys have long had a goal on and there’s always something that interrupts it and every year you take restructuring charges and I know R&D is coming down, but as we think over the next several years with the installed base continuing to decline, it looks like the CFM engine venture really hasn’t panned out. Pratt & Whitney Canada is coming down, your military engines volumes are probably flat up, but do you have the structural underpinnings to get to those eventual high teen margins?

Greg Hayes

Yes. Heidi, I think if you take a look even at this quarter, if over 100 basis points of margin expansion in a market where you see Pratt Canada down 25%, spares down 25%, those are high margin businesses and we still had margin expansion. Dave Hess and the whole team over at Pratt are focused on this 20%. I think it’s realistic.

You’ve got cost take-out and cost potential from low cost sourcing on the engineering side. You’ve got low cost manufacturing that we’ve done in Poland. You’ve also got a very strong future because of the JSF, that’s a huge program. We’re not going to see a big benefit until probably 2013, but clearly there is margin upside to the 20%.

Pratt’s military engine business is great. The small engine business is wonderful and even the commercial business with the GTF, it will return to high levels of profitability in the future. So 20% is not out of the question, and Dave is not letting his foot off the gas there. They’re going to get to it.

Heidi Wood - Morgan Stanley

Can you refresh us as to what your installed fleet of large commercial aircraft engines is today and where it’s going to be in the next couple of years by your estimates?

Greg Hayes

About 16,000 engines today that includes a few that of course have been part, for about 16,000 out in the fleet. That’s obviously declining every year. Some of the old GT8s and GT9s get retired. I don’t know that we have an actual forecast of fleet size, but we can get back to you with that.

Heidi Wood - Morgan Stanley

So, basically you’re saying that the low cost sourcing and the manufacturing changes in Poland and the growing volumes in military are going to help more than offset the decline in the installed engines that you ask now?

Greg Hayes

If you think about it Heidi, we’ve seen a dramatic decrease in profitability associated with a big piece of that installed base as the GT8s and GT9s. In 2001 that was $1 billion of revenue. Two years ago that was $350 million. This year it’s going to be less than $200 million.

So I would tell you if most of that, which you would be concerned about, has already happened and Pratt has been able to overcome it and the V2500 parts continue to be very strong on that program, you’ve enough other things in the hopper I think to offset this. Again they’ve done good job overtime. It’s not just something that just going to fall off the cliff right away.

Heidi Wood - Morgan Stanley

No, I don’t say it’ll fall off the cliff, but it’s interesting to see what has happened between Hamilton Sundstrand in 2001 and Pratt & Whitney, where you’re fighting a good fight at Pratt, but it seems it’s always hard to kind of get above a sustainable 16% and higher.

Volumes are doubled at Hamilton and gone from sort of 13%, 14% onto 17%, whereas Pratt & Whitney in the early 2000 and 2001 was doing 16% and 18% and now we’re looking at 14%, 15%, so again with sales just about doubling. So I’m just wondering; as we think about the global recovery and after market demand picking up, whether Pratt & Whitney was going to see whether that benefit is going to be feasible?

Greg Hayes

Well, we like this challenge. This is what we come to work for; to do every single day is to drive margin improvement in each of the businesses. Obviously Hamilton, they’ve had a little bit better recovery over the last five or six years. They’ve got more aircrafts around the world, but Pratt has done a tremendous job in terms of offsetting the decline in front of that old installed base and driving cost reduction.

You think about the low cost sourcing that the Pratt has done, it’s been tremendous both on the engineering side and factory side. There is more of that to come. So 20% and Dave is going to get there.

David Hess

A minor point Heidi, also remember that collaboration accounting drives margins down effective this year by almost 100 base basis points for Pratt. That’s just an accounting change, that’s not operational.

Heidi Wood - Morgan Stanley

Greg, will you give us a sense as to how many years from now we can look for that 20%?

Greg Hayes

That’s a great question to ask Dave when you see him in next March.

I want to thank everybody for listening into the earnings call today. Obviously a tough market out there, but I think what you’ve seen here is tremendous execution across all of the businesses and 50 basis points of margin expansion in this market is really something remarkable.

So, I thank everyone for listening and we’ll be in touch over the next couple of weeks. Thank you.

Operator

Once again, ladies and gentlemen that concludes our conference today. Thank you all for your participation.

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Source: United Technologies Corporation Q2 2009 Earnings Call Transcript
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