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United Technologies (NYSE: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

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.

Emerging markets remained solid and first quarter BRIC country orders for our Commercial companies grew just under 20%. So excellent quarter of solid sales, earnings growth and strong cash flow and an improved end market environment. I'll come back and talk a little bit about the full year. But for now, let me turn it over to Akhil to take you through the business unit details.

Akhil Johri

Thanks, Greg. Turning to Slide 4, Otis delivered a solid quarter with profits up 4% on sales growth up 2%. Operating margins expanded 50 basis points to 22.8%. At constant currency, profits increased 3% on slide sales from continued growth in service.

New equipment sales were down 6% at constant currency, driven by declines in North America and Europe. China new equipment and aftermarket sales continue to grow. Service sales were also up globally with continuing growth in contractual maintenance and improving repair volume. New equipment orders continue to improve, up 14% at constant currency with double-digit growth in North America, Europe and China, even as pricing remains under pressure in most markets.

For the year, Otis expects to see strong new equipment growth in emerging markets led by China,, along with improvement in the U.S. and Northern Europe. Markets in Southern Europe are expected to remain flat. Guidance for the full year remains unchanged with profit expected to grow approximately $150 million.

Turning to Carrier on Slide 5. Falling a very strong order rates experienced late in Q4 and into Q1. Carrier posted an exceptionally strong first quarter. Profits were up $167 million on 12% higher sales, resulting in a record Q1 margin of 11.7%, up 530 basis points from prior year. As Greg said, organic sales growth was 18%. Refrigerated container shipments in Q1 were at a record level contributing to 60-plus percent organic growth at Transicold.

We also saw North America residential distributors restocking in Q1 resulting in shipments of residential systems up in the mid-teens. Earnings growth was driven by a strong conversion on sales growth, the absence of a $20 million charge from last year first quarter related to portfolio transformation items and another $20 million earnings improvement in the Japanese joint venture from activity prior to the earthquake and the tsunami.

The ramp-up in Carrier's Short Cycle businesses in Q1 was truly extraordinary and we expect a return to more normal growth in the balance of the year, particularly the second half. Given Carrier's first quarter performance, we are increasing Carrier's profit growth guidance for the year to $250 million-plus from $175 million previously. We now expect Carrier's organic sales growth to be up nearly double digit for the year.

UTC Fire & Security delivered operating margin expansion of 100 basis points in the quarter on 15% higher sales. Organic sales were up about 3% with product businesses up mid-single digits; Asia, up double digit; and the other Regional Service and Install businesses, flattish. Acquisitions from two months of GE Security contributed approximately 10 percentage points of sales growth. First quarter orders also grew organically at 3%. Importantly, orders in the Service and Installed businesses were up mid-single digits in all regions except the U.K. Backlog is up organically 12% year-over-year and 7% from the beginning of the year.

Operating profit in the quarter grew 27%, 24% at constant currency. The profit growth was largely driven by higher volume and the GE Security acquisition, again from the sale of the U.K. Guarding business also contributed about 1/3 of the profit increase. For the full year, we continue to expect sales to be up high single digits and operating profit up approximately $175 million.

Turning to Aerospace businesses, on Slide 7, at Pratt & Whitney, sales were up 9%, driven primarily by higher overall aftermarket sales. Higher engine sales at Pratt Canada was more than offset by lowered military engine shipments and development revenues. Large commercial engine spare sales were more than 30% higher than the first quarter of 2010 and in line with the expected sales for 2011. Operating profit was up 3% in the quarter.

The benefits from net higher sales and restructuring savings were partially offset by a $75 million increase in Pratt's E&D. Also in the quarter, again from the sale of a minority equity position in a venture offset higher pension costs. Operating margin for the quarter was 15.3%, down 100 basis points year-over-year. Excluding E&D, operating margin was up about 100 basis points. For the full year, we continue to expect Pratt & Whitney operating profit to be down $50 million on flattish sales.

In the quarter, Hamilton Sundstrand operating profit grew 11% on 9% higher sales. Industrial and Aerospace aftermarket sales were up low teens, while Aero OEM sales were up mid-single digit. Commercial spares sales and orders were both up over 20% versus last year. Book-to-bill was slightly above one, and the industrial orders increased mid-single digit. Profit growth in the quarter reflects the benefit of increased sales, partially offset by higher E&D. Operating margin for the quarter was 17.1%, up 30 basis points. For the full year, we continue to expect Hamilton Sundstrand's operating profit to be up about $100 million and the sales up mid-single digit.

Turning to Sikorsky on Slide 9. Operating profits dropped by 2% on 16% higher sales. During the quarter, Sikorsky shipped a total of 58 large aircraft, five more than the first quarter of last year. 51 aircraft were based on Military platforms and seven Commercial.

Higher sales in the quarter were driven by increased international development aircraft, including the first Canadian Maritime Helicopter and higher aftermarket volumes partially offset by fewer S-92 deliveries. Operating profit was down slightly as the benefit from higher U.S. Government shipments was more than offset by losses from international development aircraft and the impact from fewer S-92 deliveries. For the year, we continue to expect profit growth of approximately $100 million on sales growth in mid-single digits.

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

Gregory Hayes

Okay, thank you, Akhil. We're on Slide 10 now. For those of you following now. So a strong quarter, solid topline, margin expansion, earnings growth and the cash flow. As Louis would say, truly UTC style execution. In addition to the solid financial performance, we had some other notable accomplishments in the quarter. Sikorsky was awarded the prestigious Collier Trophy for its achievement on the X2 Technology Demonstrator program. Pratt & Whitney's GTF continues to be a game-changer and has already won firm orders for over 450 engines on the A320 NEO program. That comes from industry leaders Lufthansa and ILFC, as well as a largest order to date for 150 firm and 30 options from IndiGo Airlines. On the Commercial side, Carrier continues to drive its portfolio transformation agenda towards completion. We recently announced the joint venture with Watsco for the residential HVAC distribution to the Northeastern U.S. Importantly, this completes the transformation of Carrier's U.S. distribution footprint.

All right, let's talk about the full year. As I said before, we're very confident in our improved outlook of $5.25 to $5.40 on sales of $57 billion. But of course, we always remain cautious because of some uncertainties that are out there. As I previously mentioned, the impact of Japan is uncertain. We're closely monitoring, working with the supply chain and don't expect this to be a significant headwind.

Also, as you know, high oil prices significantly impact our airline customers. While the airlines have maintain pricing and capacity discipline, sustained high oil prices will likely dampen profitability as a result could lead to reduce capacity and a lower aftermarket demand in the back half of the year.

Some airlines have already announced slower capacity growth for the later part of this year. That said, as this quarter's results show, Commercial Aero aftermarket demand remains robust. But the short cycled business and compares will get tougher in the back half of the year. On the other hand, foreign currency could be a potential upside to our outlook if exchange rates remain at current levels. Our current guidance of $5.25 to $5.40 still assumes that the euro will be about 1.35 for the year. If the euro average holds at 1.40 for the remainder of this year, that represent upside of $50 million in pretax profits, which is not yet reflected in our guidance. This is prudent, we think, as uncertainties of the sovereign debt crisis play out every day.

As far as the other elements of our 2011 guidance, we still expect restructuring to be $150 million to $200 million for the year and equal to one time gains both in the first half and for the full year. For E&D, we continue to expect full year to be up $200 million to $225 million. But this could come under some pressure as we execute on numerous programs and especially in light of Airbus' recent decision to accelerate the A320 NEO program by six months.

The effective tax rate for the quarter is still anticipated to be around 30 1/2% with the second quarter rate of around 29%, and that's down from the 32 1/2% we saw in the first quarter. As always, we expect free cash flow to equal or exceed net income. We still forecast share repurchase of $2.5 billion and acquisition spend of $1.5 billion for the year.

So the world has improved, but the recent shocks from Japan and the Middle East will test the resilience of this recovery. As always, we remain cautious but confident in our ability to deliver on our commitments. We're focused on the top line, and we continue to execute our strategies to capitalize on recovery markets, as well as our strong presence in emerging and growth markets.

I think it's important, we also have a very strong product pipeline across the businesses with programs like the 787, the Geared Turbofan and the Joint Strike Fighter, which will drive solid long-term growth. We're well positioned to benefit from top line growth. At the high-end of our guidance range, 2011 earnings per share will be up 10% from our 2008 peak of $4.90. And that comes at 4% lower sales from 2008, in addition, $200 million of higher E&D this year than 2008. I think all of that is strong evidence of the tough actions taken over the last three years to reduce our structural costs, R&D paying off.

In closing, the seasoned management team is committed to driving long-term growth both on the top and bottom line. We're confident in the guidance and generating sustained double-digit earnings growth well into the future.

With that, let's open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll go to Deane Dray with Citi.

Deane Dray - Citigroup Inc

Greg, I was hoping you could comment on the price cost dynamics in the quarter. I saw some earlier comments this morning that you made that gross commodity costs looking at $250 million. Where are you on pricing? And I have some follow-ups on that too please.

Gregory Hayes

We saw about $50 million of commodity headwind in the quarter. As you know, I think at Carrier we raised prices early in February. So far, those prices seemed to be sticking. But I think for the full year we still expect the commodity -- gross commodity headwind to be about $250 million with about $100 million of pricing to offset that, so still a headwind out there in the guidance for really the back half of the year, call it another $100 million on top of the $50 million we saw in the first quarter. On top of that, there's probably another $75 million of energy headwind from the higher oil prices. Again, that's all back half of the year here.

Deane Dray - Citigroup Inc

How about just specifically at Carrier and the price increases that you think you can put through? Just remind us on a percent basis how much you put through, maybe some sense of the elasticity and how much more room on the upside on pricing might you have?

Gregory Hayes

When we put through price increases, I think we announced them back in the fourth quarter. They were effective early February of about 2% to 6% on the residential side, and those prices seemed to be sticking. And again, I think with commodities holding about where they are, copper at $4.20 to $4.30, we would expect that most of our competition probably has the same price pressure that we do. I'd also say that we've got pricing pressure on the Transport Refrigeration business, I think especially at Transicold pricing remains difficult. But with the market recovery and the fixed cost coming out, I think you see good margin and good conversion through that.

Deane Dray - Citigroup Inc

Great, and just one specific question on the Aero aftermarket. We heard that some carriers could be restocking as some insurance against their own supply chain disruptions. Have you seen any signs of that? Might there been a benefit this quarter from that?

Gregory Hayes

Yes, we have not seen any evidence of restocking. If you look at the order rate growth at Pratt this year, 33%, that's off of a pretty easy compare from last year's first quarter. And it's really in line if you think about the overall sales level about in line with what we expect for the full year. So I wouldn't expect 33% increases during the course of the year, but there might be some upside here if there is some restocking, but so far we really haven't seen it either at Pratt or Hamilton.

Operator

And we'll go next to Ron Epstein with Bank of America Merrill Lynch.

Ronald Epstein - BofA Merrill Lynch

When you look at the guidance the company issued today for the organic growth for the rest of the year, given the order activity in the first quarter and/or the 9% organic growth in the quarter, didn't it seem like that's pretty darn conservative for the second half of the year?

Gregory Hayes

Well, I think again you're not going to see it probably the same level of growth during the back half as you can see in the front half of the year just because the compares get tougher. You recall we started to see an acceleration of organic growth throughout the year last year. And so if you think about we're going to be up 5% in total this year, that's the guidance. It would indicate a slowing growth rate at the back half of the year. And I wouldn't expect to see 18% growth on a Carrier organically in the next couple of quarters. It will probably be more in the kind of mid-single-digit range as we look forward, but we could be surprised on the upside. I think the important thing as Louis has been promising since this recovery started, if we do see good news on the top line, you're going to see it on the bottom line. That's really the message here with the $5.40 at the top end.

Ronald Epstein - BofA Merrill Lynch

Okay, and then maybe a capital deployment question. In the quarter, you bought back, I guess about $750 million for the shares. When we think about that for the rest of the year, what's your view on share buyback? And I know you probably can't say a heck a lot about it, but there's -- all the speculation floating around Tyco, so maybe if I could throw out just a broad M&A question, what you're thinking there?

Gregory Hayes

Yes, I think, again, the placeholder still out there of $2.5 billion for share buyback and $1.5 billion for M&A for the year. In the quarter, we only did about $100 million of M&A just some very small deals. And the M&A remains elusive in terms of some of these bigger deals that we have been chasing. So we still feel good about the $2.5 billion, you can see obviously the run rate, and the first quarter share buyback would be more like $3 billion. I expect if we don't spend the money on M&A just like we've done in prior years, you'll see more on share buyback. So we'll see how the year progresses. And as for specific deals, I think you guys all know I really can't comment at anything as specific to anything, any of those potential deals.

Ronald Epstein - BofA Merrill Lynch

What's the appetite for a big deal? I mean -- meaning greater than $8 billion or something?

Gregory Hayes

Well, obviously, we're always hoping to deals that make sense for the shareowners, but it's having said that, it has to be a deal that make sense. It's going to be something that's strategic. We don't need to do a big deal, I would tell you Ron. We've been saying that for a couple of years. We love the deals like GE Security. We love deals that fit in the core. A big deal, they're tough to do. You need willing buyers and willing sellers, and it really have to be the right price to make sure that we enrich our shareowners as much as we're going to enrich their shareowners.

Operator

And we'll go next to Shannon O'Callaghan with Nomura.

Shannon O'Callaghan - Nomura Securities Co. Ltd.

Couple of questions on Carrier. One on the Commercial HVAC order strength, can you give us a little field geographically in terms of how that played out?

Akhil Johri

Sure, Shannon. I think the strength we saw was across the geographies, Europe and America were both up sort of mid-teens and Asia was much stronger than the average, so Asia was closer to 40%.

Shannon O'Callaghan - Nomura Securities Co. Ltd.

And then in terms of the price increase on the resi side, I mean how did the months kind of play out for the year? And did you see any pre-buy and then fallback or that kind of thing, how did things play out through the quarter?

Gregory Hayes

As we entered the quarter, I think we made this comment back in January that the inventory's out in the channel were really historically low levels. And so we did see some bigger restocking orders January, February slowed down a little bit in March, but still a pretty solid quarter. So yes, I think as we look at channel inventories today, still relatively low at for this time of the year. So we expect again a pretty good second quarter at Carrier on the resi side.

Shannon O'Callaghan - Nomura Securities Co. Ltd.

And are there any further price increases planned?

Gregory Hayes

No, well, at this point, I don't believe there's anything out there, but it's one of those things that you'll just have to see what happens to commodity prices in the market and trying to stay in front of those things.

Operator

And we'll go next to Joe Nadol with JPMorgan.

Joseph Nadol - JP Morgan Chase & Co

On Japan, Greg, just a little more color there. I'm wondering -- you already told us what types of things are -- you anticipate will be in short supply. I'm just wondering in which segments those might fall into? And then more specifically in Aerospace, are there the kind of things that are not replaceable due to your certification concerns? Or do you think that much of what you're going to be missing you'll be able to source somewhere else?

Gregory Hayes

Specifically, on the Aero side, we had a little bit of a scare because obviously we've got some partners on the V2500, that the -- where there factories and sub-tier suppliers suffered some damage, but we think we've got work arounds. We're working actively with those suppliers and I don't see any big requalification efforts on that, may push an engine or two out of a month or two but nothing that's dramatic. The bigger concern as I said in the script is the electronics. 40% of the world's flash memory comes out of Japan and as well as the capacitors, transistors and things, and we use those on a lot of different products from Carrier's controls to the F&S smoke and CO detectors that we make. We're working through that. So far, it looks like we've got good visibility to it, but it's the second and third tier suppliers that we still worry about. I mean, our first tier suppliers were all over that. We've got to make sure that those suppliers are all over their suppliers that we don't end up with the surprise, but I think the system works pretty well. We've got 1,500 key suppliers out there, 27,000 in total and we're working through that process every day, but so far not a big deal.

Joseph Nadol - JP Morgan Chase & Co

Okay, and then secondly just a follow-up on the organic growth, certainly, you're not making sense what you're saying -- and the Q1 was easily below last year for your organic growth it was negative and the rest of the year was positive. And it got -- that's fairly positive towards the end of the year, so the comps are going to get tougher. But if you go back a few years ago, your organic growth across the company was pretty consistently for a few years in the higher single digits. And certainly, the order numbers you're showing us are way above single digits, again not easy comps. But I'm just wondering if you put this into context, what's the opportunity really to keep this in the higher single digits even if it slows a little bit in the back half of the year?

Gregory Hayes

I think when we talked about trying to grow sales here kind of 2x world GDP, 6% to 9%. That is the long-term goal. I would tell you that probably the best metric to point out to is just look at our top line today. Look at the markets that we play in. We are not at peak in any of those markets, say, perhaps the Container and Transportation business at Carrier but only on the Container side. So the $59 billion of sales we had a couple of years ago, there's still runway to get to that and beyond as these markets recover. So I'm still cautiously optimistic you're going to see growth, some this year and even more into next year as all these markets recover, especially on the commercial construction side in the U.S. and in Europe.

Joseph Nadol - JP Morgan Chase & Co

Okay, so you are saying that there could be upside to your number then? I mean I'm just trying to gauge here the confidence level that when you guys are talking about organic growth looking at the rest of this year into next year, what are the chances you think that we're getting back into that sweet spot we were in four or five years ago?

Gregory Hayes

I'm not sure where we're going to be in the sweet spot we are in four and five years ago, although debt is still cheap. And that's what caused the bubble the last time. So there certainly could be some of that impact this time. I think the good news is going to come out on commercial construction. We're seeing that at F&S. Their order rates are improving. We're seeing especially at Otis, which as you know, the orders have been down. But we'll get to the 2012 guidance, maybe in another couple of months here. But for now, I think we're confident in this year and into the future. We're going to drive solid double-digit growth next year and beyond.

Operator

And we'll take our next question from Nigel Coe with Deutsche Bank.

Nigel Coe - Deutsche Bank AG

I don't want to beat the organic growth horse to death but the fall off into the 3% range from 3Q to 4Q compared to 1Q at 9%, obviously, you're putting a big hedge in terms of Japan or airline profitability, but what concerns you most of the two possibilities? Is it the high oil price or is it maybe some significant supply chain shortages?

Gregory Hayes

I think it's actually the data on the calendar that concerns me most. It's early. Carrier's got its biggest selling season ahead of us. The second and third quarter that's when the U.S. Residential business will know whether or not we're going to see the kind of growth continue that we saw in the first quarter. The same I think with the commercial airlines. I think the biggest concern we have is what happens with oil prices. Typically when we see a spike in oil prices, six to nine months before it dries and change in buying behavior at the airlines. And so those are the kind of really the two big things or maybe three, it's early, Carrier's two biggest quarters are coming and you got the high oil prices. But look, we're confident in the numbers. We're going to get there and there maybe upside.

Nigel Coe - Deutsche Bank AG

Obviously you've reached the commitment to delivering the upside of revenues to earnings. But you said the restructure will be matched by gain. But what about E&D? It sounds like there could be an upside buys to E&D in the second half of the year. Now could you use some good news on revenues to maybe accelerate some of those programs?

Gregory Hayes

Well, clearly, there's pressure at Pratt to spend more on these programs. They've got the CSeries, they've got the MRJ, they've got the MC-21 and they've got this NEO program, which is, I mean, it's going gangbusters. Orders are outstanding. Everybody's excited. Airbus wants to accelerate the program. So all of that means they want to spend more and quite frankly we may well accelerate some of that investment into the back half of the year just to try and get ahead of it. The issue right now is just hiring enough good engineers here in the states to meet the demand.

Nigel Coe - Deutsche Bank AG

All right. And then just finally on that Carrier margins, stunning performance. Anything in there that's maybe not sustainable going forward because when I look at 1Q margins, normally, two, three points weaker than 2Q, 3Q, implies this year could be in the 12%, 13% range. How do I think about that? I mean, and anything in this quarter that should be backing out?

Gregory Hayes

Yes, there's a couple of things in there. Let me just say I think we're highly confident in 12 by 12 at Carrier. But the first quarter did have about $40 million, or I'll call it unusual items. Last year's first quarter I think Akhil said this in the script and we had about $20 million from the portfolio transformation cost that came through their segment that we didn't back out. We also, this year in the first quarter, had about $20 million of income from our Japanese joint venture with Toshiba. And again, given what's going on in Japan, we wouldn't expect that the good news we saw in the first quarter is going to repeat. So in of that growth, there's probably $40 million that's not going to repeat.

Akhil Johri

One other point, Nigel, for consideration is you all know that Transicold is a good business for Carrier and has generally high margins than average, and the growth rate there was over 60% organically. And if you assume that's not going to repeat every quarter, which I think is a reasonable assumption, then obviously, that will have a downward pressure on the margins going forward as well.

Nigel Coe - Deutsche Bank AG

Yes, I think you've said that [indiscernable].

Operator

And we'll go next to Howard Rubel with Jefferies.

Howard Rubel - Jefferies & Company, Inc.

First question, just to change and talk about Pratt restructuring or in cost takeout and so on. I mean that's also very impressive considering the higher R&D. Could you talk a little bit about what you've been doing in order to improve the manufacturing base there and then specifically address how you're using that to drive back costs on the 135?

Gregory Hayes

I think there's a couple of things that the investment team for last couple of years have been -- will take a lot of structural cost out of that business. And for this year, we would expect about $75 million of restructuring benefits to flow through. On top of that, we've done I think a great job in terms of business process outsourcing. We've taken back office cost down there. And again, the benefits of ACE in the factories is really starting to pay off. We just priced I think it was Lot 4 or LRIP 4 for the JSF. Those costs are going to come down 16% from LRIP 3. And again, we're driving cost in the factory down. We're also driving cost down in the supply chain.

Howard Rubel - Jefferies & Company, Inc.

I mean the reality is your -- probably headcount is probably down and revenues are relatively flat. And when you look at the mix even if you probably were to adjust for spares, Greg, again, your structural cost seemed to be working in your favor.

Gregory Hayes

That's the point I tried to make earlier, the fact that you know it was revenues down still 4% from peak. Earnings are going to be up 10% with $200 million of higher E&D. So that's really the -- that's the evidence with all of those structural cost that we took out, and we spent $1.5 billion restructuring this place over the last three years. It really does pay off. And that you're going to see it on the bottom line this year and next when these orders come back and sales recover.

Howard Rubel - Jefferies & Company, Inc.

And then just to stay on this issue of restructuring for a moment, if we take out the low-margin revenues from the Distribution business at Carrier and the businesses that you've sold or JV-ed, can you give us a little bit of color as to what -- if we look at revenue comps year-on-year, how much of it -- I mean obviously some of it's Transicold, but some of it's also the absence of lower margin business. Can you sort of provide a little bit of color on that?

Akhil Johri

Howard, you're talking about a benefit to the margin from the portfolio transformation? Actually it's not that big of number. It's probably between 50 to 70 basis points of margin expansion you would attribute to the portfolio transformation. I think if you go back in the road to 12 by 12, with 0 at laid out about 150 basis points of margin expansion going out of the total 450 or 500 basis points. And I think we're getting close to that on accumulated basis. So most of the improvement you saw in Carrier this quarter was support conversion on the volume growth, and it's still that everything to Greg's point of the structural cost that they have taken out and the benefit of the mix to some extent.

Operator

And we'll take our next question from Terry Darling with Goldman Sachs.

Terry Darling - Goldman Sachs Group Inc.

Greg, I wanted to come back to the Carrier margin guidance for the balance of the year. If we back out the first quarter year-over-year from the 250 guidance that $85 million, even if I assume that organic growth drops into the mid-single digits, it implies kind of a 10% incremental margin. You've talked about the commodity headwinds net of price actually get less challenging at the overall company level, presumably Carrier's got the same profile. So I'm still struggling to see why Carrier margins in the back half of the year wouldn't have substantial upside to your guidance here? What am I missing there?

Akhil Johri

Terry, I think, couple of things to think about. First is when you look at the margins or the decremental incremental margins based on just the reported volumes, you got to take into account the divestitures that are happening because they have a slightly different impact on the margins. And when I adjust for that at least internally, when we look at it, it looks like the margins in the back half of the year will be between 25% to 27%, 28% as compared to a little over 30% by the first quarter. So it's not a huge change in the incremental margins we are expecting on organic revenue for the back half. And we can talk more off-line just to -- so I can take you through that math if you want.

Gregory Hayes

But I also say, Terry, that there's a reason we put a plus next to the 275 or 250 rather, 275 I should say.

Terry Darling - Goldman Sachs Group Inc.

And then on the Fire & Security margin I guess going in the other way about 17% incremental despite the ongoing benefits of the GE Security integration. How do you see that ramping through the year? And do you still feel like 15% margins 2012 is a high confidence number at this point?

Akhil Johri

It is, Terry. I think we still feel good about it. First quarter margins were a little light but not surprising because F&S as you know, has been investing in the sales force and in E&D that we'll talked about in March. So some of those costs are coming in, while we continue to get the benefits of the field integration efforts that have been put in place. So as volume comes back and we do expect organic growth to be higher for the rest of the year, you would expect greater conversion or better drop-through in terms of returns from those investments. So I think we do see accelerating margin expansion falls in the back half of this year at F&S, and that should continue and put us on good track for 15 by 12.

Terry Darling - Goldman Sachs Group Inc.

And just to understand the mix implications, I think you called out Asia double digits; products, up mid-single digits; and the rest of it is flat. In terms of this organic pickup, are you talking about the rest of the business, you're non-Asia, non-products picking up and that helps the margin? Because I would have thought the products piece is growing stronger than the other would've been good for margins?

Gregory Hayes

The products piece -- obviously, the margins are a little bit better but we're really going to see this on the service and installation side. That's where the recovery has to come in. Akhil talked about -- we expect field productivity to get better during the course of the year. We didn't see a lot of that in the first quarter but that's really where you're going to see the margin expansion because that's really -- that's structural cost that's been taking out. As those incremental dollars come back, you're going to see really strong conversion on those incremental sales.

Akhil Johri

And just -- I think I mentioned this earlier, Terry, but if you keep in mind the encouraging thing in Q1 orders for F&S was that the organic growth in the service and install orders was better than we have seen all of 2010? It wasn't on the back of product orders. And I think as those businesses do higher organic growth then the benefits of field conversion will be greater, field integration will be greater.

Terry Darling - Goldman Sachs Group Inc.

What was that number on the Service orders, organic again Akhil? Sorry if I missed that.

Akhil Johri

It went up to mid single digits in the first quarter organically.

Terry Darling - Goldman Sachs Group Inc.

And then just lastly on 2Q, Greg, I appreciate and you don't give EPS guidance but I'm just wondering if you might take through some of the items? You did call out the 2Q tax rate? Can you touch on Canadian Maritime impact? And then as it relates to Japan, I mean obviously there is no full year impact, but will there be some negative impact in 2Q that's offset by a recovery in 3Q or 4Q? Or is there no 2Q impact from Japan at all?

Gregory Hayes

A couple of things as you think about Q2. Obviously, the Canadian Maritime will continue to be a drag at Sikorsky. We expect to deliver three Canadian Maritime helicopters. We're losing $10 million to $12 million a piece on those. So that will put Sikorsky's Q2 under a lot of pressure. As far as Japan, again, we're talking less than $0.01 of impact here probably in the second quarter, so any of that would be recovered in the third quarter. But it's not -- it's really not significant in the second quarter. Other than that -- and we've talked about the tax rate that's actually going down Q1 to Q2, and we had a couple of cents of uncovered restructuring. In first quarter, we'll probably have a couple of cents going in the other way in the second quarter. So as we -- some rack and stack second quarter, it looks pretty good.

Operator

And we'll go next to Heidi Wood with Morgan Stanley.

Heidi Wood - Morgan Stanley

A question, Greg. You talked about possibly accelerating E&D with the A320 NEO. Can you also add to that kind of our understanding as you embark on discussions on the A350 GTF potential? If that were to proceed, how should we think about how that would affect E&D heading into this year and over the next several years?

Gregory Hayes

Yes, again, we talked about the GTF on the A350, I think is way out into the future. Pratt's got its hands full, and we're focused really on the narrow-body with this engine. I think the next place you're going to see an application for the GTF would either be on the next-generation Boeing aircraft or a number of [indiscernible] aircraft. But I think the wide-body market is still probably, I'm guessing 5 to 10 years out before we'd see any type of significant investment there.

Heidi Wood - Morgan Stanley

Okay, I wondered about that. I thought it was the bigger leap, so good to get that. And then net on the Carrier side, just to understand better, you said you talked about residential being up in the mid-teens. Can you give us some more granularity on what you're seeing on the puts and takes there? I mean are we sort of seeing we're scraping off the bottom in residential finally?

Gregory Hayes

I think again as we said, entering the year we new the channel inventory was low. And I go back to this whole issue of the replacement market, housing is still anemic. So all of the good news is really going to come on the replacement side, or the add on replacement as we call it. And there's I think I said this morning there's $93 million air-conditioners, residential air-conditioners out there in the U.S. and the replacement cycle would indicate the demand between $5 million and $6 million and the industry is only building $4.5 million. So I really think there's just pent-up demand in the system and as the economy gets better, as people feel better about their job prospects, I would expect we're going to see more of the AOR business and that $4.5 million -- and will that go up a lot this year? Probably not, but certainly the coming years we're going to see a recovery there. That's the upside opportunity we have.

Heidi Wood - Morgan Stanley

All right, great. And then one last question, Greg, on M&A and a little bit of a devil's advocate question, working a little bit off what Ron talked about earlier in this call. Wouldn't it make sense that more strategic deals ought to occur when you're at the trough in the global economy right before we head into an upturn, isn't that theoretically when you're going to have sort of the best opportunities?

Gregory Hayes

I think that's probably exactly right, so I think that's why we paid $1.8 billion for the GE Security business a year ago. That really was the trough of the market. What we're seeing now is price expectations and stocks running up in anticipation of a broader market recovery and people's expectations running even ahead of that in terms of premiums on deals. So we'd love to do deals. We would love to deploy this cash that we've got. We've got $4.2 billion of cash at the balance sheet. We've got debt-to-cap at 31, so we've got a lot of powder. But it's still got to be for the right deal. I would tell you bringing Bill Brown down to the corporate office as Head of Corporate Strategy and M&A, it signals Louis intention, I think, we're going to turn up the game here, but we're still going to be disciplined. We're not going to go after things that don't make sense. It's going to be in the court, it's going to be for the right price.

Operator

And we'll go next to Jeff Sprague with Vertical Research Partners.

Jeffrey Sprague - Citigroup

I was wondering if you could talk a little bit about price and orders? Obviously, there was -- you alluded to some soft price in Otis in other places. It kind of struck me though that even in Transicold containers where you're kind of back to peak volumes you're still seeing weak price. Can you just give us a little bit of a lay of the land there and particularly in large kind of the heavy iron in Otis and Carrier Commercial, are you at least seeing a little bit of firming of price or is it still kind of downward bias?

Akhil Johri

I think, Jeff, Otis certainly is seeing pricing pressure not surprisingly because you know the market has been down for a long time. And in that situation, pricing does come under pressure. It's in select geographies, certain markets have always pay us price special. And the good news is that Otis knows how to offset the impact of debt through cost reduction. They're extremely good at doing that and that's why they're being able to maintain the margins at the levels that they have. So I think that's nothing new. On the Commercial side of our Carrier, pricing is, as you would expect in projects, it's project-dependent. The energy efficiency projects, which have a good payback, generally tend to be better from a price point of view and there are some others, which are new construction-related where pricing can be tougher.

Jeffrey Sprague - Citigroup

Can you give us a sense of that mix how much activity you're actually seeing in physical square footage addition and some of these commercial markets relative to kind of the energy retrofit?

Akhil Johri

A lot of what we are seeing is on the energy retrofit side because I think especially with the prices, fuel prices are our concern and energy efficiency being more topical with new introduction of new energy efficiency -- energy efficient products out of Carrier. I think there is a lot of what we are seeing on that side of the equation and not very much on the new construction.

Gregory Hayes

Just to be clear though, there's really that economy in the market where you got the U.S. and Europe where the focus is on energy efficiency and that's where the BSS or the Global HVAC business is doing well. As well in China, which has just really the boom in new construction. There continues we see at Otis and the orders were up 17%. We saw the Carrier orders were up 34% in the quarter. So that's not just the energy efficiency play. That is really just where the market is going.

Jeffrey Sprague - Citigroup

And on containers, the sloppiness there is just what's driving that? There's still excess capacity there although we're back to peak volumes?

Gregory Hayes

We're close to peak volumes. I think again there's just a lot of pressure we're seeing at the leasing companies come in to the marketplace and there is pricing pressure. There is competition out there. We're trying to maintain our share and we're going to do it profitably.

Operator

We'll go next to Robert Stallard of Royal Bank of Canada.

Robert Stallard - RBC Capital Markets, LLC

Greg, I was just wanted to ask a couple of question on the Aerospace aftermarket, would it be fair to say that your performance in Q1 has beaten your expectations and therefore you've taken down your forecast through the back half of the year?

Gregory Hayes

No, it wouldn't be fair. Look, the first quarter was very solid. But if you take a look at the run rate at Pratt for spares in the first quarter, it's really the run rate where we expect for the first full year. If you go back to last year's first quarter which was just awful from the spares. It went down significantly, so this is just kind of a snapback, but we're still expecting a kind of low-double-digit growth in spares for Pratt for the year, and the same at Hamilton, it's just -- this is an abnormally easy compare to last year. We're down 15% last year.

Robert Stallard - RBC Capital Markets, LLC

Yes, so you'd expect growth in orders in the second half to be roughly half of what you're seeing at the moment?

Gregory Hayes

Yes, that's probably right. Because again, remember, we had a huge fourth quarter last year with orders up over 40%, up more than 30% last year's third quarter. So the compares get really, really tough. And you've got the dynamic of oil and what's that going to do to the airlines' buying behavior in the back half of the year. But we would stand by the forecast of kind of low double-digit. Could we get surprise on the upside? Maybe, but again, it's still April.

Robert Stallard - RBC Capital Markets, LLC

And then secondly, I was wondering if you could give us an update on the 787 or whether you've included any initial 78's bearing in that?

Gregory Hayes

We do have in Hamilton's outlook for the year. Some initial provision, although it's relatively modest, the first customer for 787 is actually ANA, All Nippon Airways, and they're actually going to be on our CARE program, which is a nose-to-tail program where there won't be much provisioning. So really the big bump is going to come next year as Boeing ramps up production and some of the airlines start taking initial provisioning.

Operator

We'll go next to Cai Von Rumohr with Cowen and Company.

Cai Von Rumohr - Cowen and Company, LLC

So you're up $88 million year-over-year in R&D in the first quarter. I would assume Pratt's going to continue to build. So could you be up more than two in the quarter? I mean help us understand that pattern and what drives it?

Gregory Hayes

We talked about for the full year we're going to be up $200 million to $225 million with probably bias to the upside. Pratt's got $175 million of that $200 million to $225 million increase built-in. So the run rate increase probably won't be this big in the coming quarters. Again we ramped up spending last year as the year went on. But clearly, there's a bias on the upside for Pratt on the E&D line.

Cai Von Rumohr - Cowen and Company, LLC

Okay, and then you'd mentioned that the uncovered restructuring, but you also mentioned $20 million of nonrecurring cap gains at Carrier in the quarter. Were there any other nonrecurring gains or negatives in the operations?

Akhil Johri

Yes, Cai, I did mention that in the Pratt segment, there was also a gain roughly $15 million, which offset the pension costs, and that had to do with divestiture of a motion we had in the joint venture.

Cai Von Rumohr - Cowen and Company, LLC

Okay, but $15 million plus $20 million is $35 million so that's actually larger than the restructuring because pension has kind of an ongoing issue. Is that...

Gregory Hayes

It's about even, yes.

Cai Von Rumohr - Cowen and Company, LLC

And then the last one, you're basically were down at Sikorsky in the first quarter with the three Canadian helicopter it sounds like it's a pretty tough second quarter. If you're going to be up $100 million for the year, it assumes huge numbers in the second half. Is that achievable? Or is that maybe have a little bit of a risk to that number?

Gregory Hayes

It is achievable. I would tell you it's not without risk. I think we've got to see a return of growth in the aftermarket at Sikorsky on the commercial side. We need to see a little bit of a recovery on the Commercial side. Most of that increase is going to come from the factory floor, that's cost takeout, and I think we're confident as far as our ability to take out costs in the production cycle. But it's still is dependent upon the market recovery on the commercial side.

Operator

We'll go next to David Strauss with UBS.

David Strauss - UBS Investment Bank

Greg, could you reconcile where we are now with the contingency? I think we started $200 million. You took some in at the Investor Day. Where do we stand now with the contingency?

Gregory Hayes

At the high-end of the range, today, I would tell you that the math that we used to get to the contingency is about zero. But again I think there's probably still upside in the potential. You've got the euro potential upside and perhaps Carrier in the second quarter if the good news there continues. But the math that we talked about, the $200 million contingency, remember that was at the midpoint of the initial range. Now we move that range up from 520 to 533 is the midpoint. At the high-end of that, essentially 0, but still we feel pretty comfortable with where we are.

David Strauss - UBS Investment Bank

And at Carrier, can you run us through your assumptions around res for the full year, commercial for the full year in terms of volumes? And then also at the Transicold and Commercial relative to the low double-digit organic growth you're looking at for the full year?

Akhil Johri

Yes, I think this is -- the only real change based on first quarter is at the Transicold business where we think instead of being up over 10%, which is what Geraud mentioned in March, we probably think it's more like 15% to 20%. And that's the primary reason for the uptick of the Carrier guidance. For most of the other markets, even the res was a little stronger in the first quarter. It is a low quarter, and also some of it had to do with the distributor restocking that we talked about. So we still think that for the full year between 5% to 10% for U.S. residential is an appropriate level at this point. And for the Commercial HVAC, similarly, I think we talked about mid-single-digit type of growth on an organic basis. So not much change in the assumptions for other markets except for Transicold, which we think will be higher now.

David Strauss - UBS Investment Bank

And then similar question at Otis. Your mid single-digit organic growth rate assumption, what are you assuming now for -- are you still -- can we maybe assume kind of low to mid single-digit growth on new equipment revenues?

Akhil Johri

Yes.

Gregory Hayes

Yes.

David Strauss - UBS Investment Bank

And last one for me, I think I recall that back in December, interest expense, Greg, you talked about it being higher in 2011 relative to last year yet it was much lower in the first quarter. What are you thinking about in terms of interest expense through the year?

Gregory Hayes

We still think that the overall interest expense would probably be flattish year-over-year. We're going to issue some additional debt here probably second or third quarter depending upon cash flow. But it looks like we'll probably go to market maybe in the second quarter, early third quarter. But we'll see how that all goes. Also, last year, interest expense is a little elevated in the third quarter. We had some charges associated with some tax reserves. We had to put up some interest on those tax reserves, so it makes the compare a little difficult.

Operator

We'll take our next question from Doug Harned with Sanford Bernstein.

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

Greg, you said that on the F-35 engine, that LRIP 4 versus LRIP 3, that your costs are down 16%. Is that a measure of the pricing in LRIP 4, your cost base? Or is it both that are down?

Gregory Hayes

It's both. This is all cost-based pricing that we're doing out there. We're right down the slope that we had agreed to with the JPO, that's the JSF program office. As we get into full rate production here in the next couple of years so they're on the -- the glide path are getting the cost out as a result of -- that the cell prices are coming down in line with the government's expectations. Are they going to be happy? Probably not. But the fact is we're right on top of where we committed to be so. We feel pretty good about that.

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

And then on the Geared Turbofan, on the A320neo, can you give a sense as to how your discussions are going? What I mean by that is right now, if you look at the series of negotiations you may be having, are those say a few? Are you talking about dozens? What's the scale of the interest in this engine?

Gregory Hayes

There's a lot of interest out there. It is not just a few. I'd say there are numerous airline customers that we're out there talking to. And NEO, it's a great place to be. I think the value that the GTF brings to the table is really recognized by the airlines. I think that's why we won this first three, and I'd expect that there will be more by the time we get to Paris because people see the value proposition of JSF. This thing saves $1.5 million per airplane per year. So again, I think pricing, it's not awful. In fact, I would tell you the pricing on these initial orders is actually better than what we saw on other initial orders for our new platform introductions. So I feel pretty good about where we are.

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

And if you found the challenge on pricing to be more on engine price or on how you're looking at guarantees with respect to maintenance cost liability?

Gregory Hayes

It's all a package as you come to the end of it. But the fact is the GTF, as we told you, as we told our customers, we're going to see about a 25% reduction in maintenance cost over the life of the program, so that's being reflected. But again, I think we're getting the value from that, from the customers.

Operator

We'll go next to George Shapiro with Access 342.

George Shapiro - Citi

Greg or Akhil, sequentially, the spares at Pratt, I assume, were probably down a little bit because of your natural price increase on January. Was that also true with Hamilton Sundstrand?

Akhil Johri

That's true in both cases, yes.

George Shapiro - Citi

Does Hamilton get a price increase in January as well?

Gregory Hayes

Yes, they have the same catalog price increase that goes out to the 1st of October just like Pratt is effective January 1 of this year, so same kind of phenomenon.

George Shapiro - Citi

And I think you mentioned Akhil that Hamilton Sundstrand the book-to-bill was above one, was that above one at Pratt as well?

Akhil Johri

Pratt was almost exactly one, and Hamilton was slightly above one.

George Shapiro - Citi

And then you mentioned that the Sikorsky was hurt in the quarter because you have the one Canadian delivery which you've talked about but also less S-92's. Can you quantify how many less you had versus last year?

Gregory Hayes

Yes, they were about three less S-92's, and that a little more than $0.01 of impact to Sikorsky's results.

George Shapiro - Citi

Okay, and if I look at Carrier and Transicold, it would seem like Transicold was probably up north of $200 million in revenues in the quarter and probably would've been $75 million or so profit contribution. Are those numbers in the ballpark?

Akhil Johri

Yes, not that far.

George Shapiro - Citi

Okay, and then just at Otis, the services you said were up in the quarter or just assume they're kind of up to normal 4% or so?

Akhil Johri

Yes, they are, George.

Operator

Okay, we'll go to Julian Mitchell of Credit Suisse.

Julian Mitchell

Greg, I just had a question really on the year-on-year sort of implied growth rates in your earnings versus your sales. Because I understand the organic sales growth and comps get tougher as you go through the year. If you look at earnings growth, your full year guidance implies I guess earnings growth exiting this year is around half the 19% that you did in Q1. But it sounds as if example, the E&D headwind gets a bit less in terms of year-on-year effect in the second half. So is there anything beyond just organic sales growth slowing that you think will affect incremental margins overall in the second half, perhaps I guess the commodity thing you mentioned earlier?

Akhil Johri

That's one, Julian. Also keep in mind that restructuring in excess of gains last year was like $0.17 in the first half and it was only $0.12 in the second half. And this year, we're talking about being equal in both halves. So I think that does drive a little bit of the EPS compares as well.

Julian Mitchell

And just in Otis, I mean you mentioned pricing yourself earlier. One of your peers in Europe obviously made a big deal about it in their sort of prepared comments this morning as well on their earnings. Is there anything actually changing there? Or is it just -- it's always a steady-state sort of tough pricing environment?

Gregory Hayes

I mean pricing has been tougher as Akhil mentioned over the last couple of years as the market has been dropping here in the U.S. and in Europe. Pricing has just gotten progressively tougher because there were fewer jobs to go after. And we're trying to retain pricing discipline. I think Otis has done that while maintaining its share in the market, but pricing is tough. And I think that will play itself out here as you see we start delivering these orders in the next 12 months.

Okay, as we close out the call, I just want to thank everybody for listening but I also want to say a special thanks to Jay Malave who'll be leaving the IR team next week to take over as Vice President of Financial Planning and Analysis and Treasury at Hamilton Sundstrand. Jay has done a great job these past years. We wish him well. Replacing Jay is Imelda Suit. Imelda has come to us from Otis where she was responsible for FP&A, as well as Treasury Service and Business Development at Otis' North and South American operations. Jay and Imelda will be on the call later today, so please take a chance to wish them both well. We close such a great start for the year. One that gives us confidence in the outlook, and we look forward to talking to you later today. Thank you.

Operator

Again, that does conclude today's presentation. We thank you for your participation.

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