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United Technologies (NYSE:UTX)

Q2 2011 Earnings Call

July 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

Howard Rubel - Jefferies & Company, Inc.

Terry Darling - Goldman Sachs Group Inc.

Ronald Epstein - BofA Merrill Lynch

Joseph Nadol - JP Morgan Chase & Co

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

Jeffrey Sprague - Citigroup

Joseph Campbell - Barclays Capital

Julian Mitchell

Samuel Pearlstein - Wells Fargo Securities, LLC

Myles Walton - Deutsche Bank AG

Deane Dray - Citigroup Inc

Question-and-Answer Session

Joseph Campbell - Barclays Capital

I think that's just what people wanted to hear, and I think the way that Otis responds will probably be indicative of the way in which you'll recover from this. And it seems although the tabloids are all over this and it just doesn't seem to want to go away, as long as this is working sort of hand-in-hand with the authorities, it should over time go away, I would guess.

Gregory Hayes

Yes, I think the key is to work with the customers and to make sure this never happens again and to make sure that our systems are in place from a supplier quality standpoint that this kind of escape can never happen. But again, I think Otis is on top of this, and they're doing all the right things.

Joseph Campbell - Barclays Capital

Just back to the AMR thing again. So are the regular A320s, do you think an opportunity for IAE? Or as -- or are we talking about when you say there's still a competition, you're talking about those 130 neos and 300-and-some-odd options for neos?

Gregory Hayes

Well, Joe, I think those are all up for grabs. The A320 family is the first they'll be in the American fleet, and I think IAE will have a good shot at that with the V2500. We're going to pursue that aggressively with our partners as well as the opportunity for the neo. There's no fleet commonality here issue that we have to worry about. So I think we've got a good shot with American. We'll put forth our best foot, and I think we've got a great engine. And we'll hopefully have a good opportunity here.

Joseph Campbell - Barclays Capital

Do we have a sense of when this will happen?

Gregory Hayes

I think it'll be sooner rather than later. I asked Louis that question this morning. I think he mentioned before the end of the summer, we would expect to have some type of decision on the engine selection.

Joseph Campbell - Barclays Capital

But not days or weeks? Not tomorrow, but yes.

Gregory Hayes

I would say again we're seeing mid-July, probably before the 1st of September.

Joseph Campbell - Barclays Capital

Okay, great, terrific.

Gregory Hayes

Well, let me just close out. Again, solid results in the quarter, continued momentum in order trends, all good news. We're confident in our improved outlook and in our ability to outperform peers. So I thank everybody for listening in the earnings call this morning. Akhil and team will be available for you throughout the remainder of the day. So thank you again and have a wonderful day.

Operator

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

Operator

Good morning, 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, 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 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

Okay, thank you, Dana, and good morning, everyone. As you saw on the press release this morning, we had another solid quarter with organic sales growth of 6%, and that's after 9% organic growth in the first quarter. You'll recall that we actually saw the recovery in our sales group start in the second quarter of last year where we saw 4% organic growth. So with 5 consecutive quarters of organic growth under our belt, we're confident now in the sustainability of the recovery in our end markets, and we're confident in our full year forecast organic sales growth of 5%.

Earnings per share in the quarter, $1.45. That's up 21%. Continued focus on cost reduction and operating leverage from higher sales through a segment margin expansion even as we increased investments in engineering and development. It is no surprise that most of that E&D increase was at Pratt & Whitney as we continued to invest in the development of multiple Geared Turbofan platforms.

We're clearly operating in a better economic environment than a year ago. However, most measures still point to a slow and uneven recovery. High unemployment, a weak housing sector and a deficit standoff in Washington all continue to dampen consumer sentiment here in the U.S. Our European sovereign debt worries still plague financial markets and constrain government spending in the EU.

On the other hand, emerging markets continue on their growth trajectories even with the adoption of cooling measures by the various governments to hold down inflation. And importantly, airlines continue to fill seats in spite of higher airfares.

So with this uneven economic backdrop, we continue to see sales and order rates consistent with our full year expectations for most of our businesses. Carrier's Transicold business remains exceptionally strong, more than offsetting a softer U.S. residential HVAC market. This improved Carrier outlook, along with the translation-related benefits from a weaker U.S. dollar, gives us confidence to raise the sales and earnings outlook for 2011 one more time. We now expect sales of around $58 billion. That's up from $57 billion we've previously estimated, and now up nearly 7% from 2010. We also expect 2011 EPS to be in a range of $5.35 to $5.45. That's up from our previous guidance of $5.25 to $5.40. That's a range of 13% to 15% up over 2010.

The foreign exchange has clearly been a benefit so far this year, and the Euro has averaged $1.40 for the first half of the year as compared to our original assumption of $1.35. So now we're assuming that we're going to continue to see this year average of $1.40 for the balance of the year. This FX benefit and the improved Carrier outlook will more than offset additional engineering and development investments at Pratt & Whitney and a lower outlook at Fire & Security in our increased guidance.

Before I start with the second quarter discussion, just a reminder that we'll talk to you -- talk to the segment results adjusted for restructuring in onetime items just as we usually do.

Okay, turning to Slide 2, 2nd quarter results. You can see sales up 9% with 6 points organic revenue growth. More importantly, this is the first time in 3 years that all of our businesses reported year-over-year organic sales growth, reflecting a broad based improvement in our end markets. And we still have runway with most of our businesses well below peak levels, with the exception of Carrier's Transicold business and Hamilton Sundstrand's industrial businesses, both of which are now likely to be at or near their 2008 peaks. In the quarter, Carrier again led the way with 11% organic growth, while Otis' sales were up 3% organically. That's after 9 quarters of year-over-year decline at Otis. So a real turning point there.

As I mentioned earlier, earnings per share in the second quarter were up 21%. Restructuring expenses were offset by onetime gains in the quarter compared to a net charge of $0.12 last year. Excluding restructuring and onetime items, second quarter EPS increased 10%, and foreign currency was a net benefit of $0.06 in the quarter.

Gross [ph] segment operating profit increased 10% even with $67 million of higher engineering and development investments. Segment operating margin was 15.9%. That expanded 20 basis points with 5 of our 6 businesses reporting higher margins. Carrier segment margins were up 110 basis points to 13.9%. Now with Carrier's operating margins now at 12.9% for the first half of the year, it's highly likely they'll be close to their 12% margin target for the year. And that's one full year ahead of schedule.

Okay, maybe the one soft spot in the quarter. I think the one thing, of course, that my boss is not very happy about in the quarter, free cash flow is only 80% of net income, which is, of course, below our normal benchmark of 100%. Working capital increased by more than $600 million in the quarter due to higher shipments across the businesses and the timing of cash receipts. However, we point out for the year we're very confident that free cash flow will still equal or exceed net income.

Share repurchase was $750 million in the quarter, and year-to-date, we've invested $1.5 billion in share repurchase, a pace well ahead of our guidance of $2.5 billion for the year.

Acquisition spend was light again. And year-to-date, we spent $184 million. Our Bill Brown and his team continue to work on a robust pipeline, and deals are hard to predict. As you've seen in the past, in the GE Security acquisition, we have the appetite and the capacity for large acquisitions, and we know how to integrate them well. That said, given that it's already July, we will likely spend less than the $1.5 billion placeholder on M&A this year and will likely spend slightly more than the $2.5 billion placeholder on share buyback.

Okay, on Slide 3, orders. We continue to see strong order trends in the aerospace aftermarket with Pratt & Whitney large commercial spares up 23% and Hamilton commercial spare orders up 25%. At constant currency, Otis new equipment orders grew 15%, and Carrier's global Commercial HVAC equipment orders were up 9%. That's a positive sign for commercial construction. Emerging markets continue to do well with particular strength in the BRIC countries where combined orders for the commercial business units were up 26%.

So solid quarter, strong organic sales growth, earnings growth and margin expansion, all while continuing to make significant investments in these new technologies. I'll come back and talk a little bit more about the back half of 2011. But for now, let me turn over to Akhil to take you through the business unit results.

Akhil Johri

Thanks, Greg. Turning to Page 4. Otis delivered a strong quarter with profits up 14% on sales growth of 12%. Operating margin expanded another 20 basis points to 23.4%. Foreign currency accounted for 10 points of profit growth and 8 points of sales growth. New equipment sales were up 8% in the quarter at constant currency, led by strong growth in China and Russia. Service sales were also up in the quarter with continued growth in contractual maintenance and repair. New equipment orders increased 15% at constant currency, led by China where orders were up close to 30%. Orders in North America were up mid-single digit, while orders in Europe were flattish. Pricing remained under pressure in most markets.

After including the translation benefits from a weaker U.S. dollar, we now expect full year profit at Otis to grow around $225 million as compared to the prior guidance of approximately $150 million. Sales are now expected to grow high single digit based on FX.

On Slide 5, Carrier posted another very strong quarter with profits up $78 million or 20% on 10% higher sales. As Greg said, operating margin for the quarter was 13.9%, up 110 basis points from prior year. Organic sales growth was 11%, led by continued rebound of the Transicold refrigeration market. Transicold showed strength across all products and geographies with sales up organically more than 40%, led by the refrigerated container business. On the other hand, North America residential shipments moderated this quarter after a strong start to the year. While split system unit shipments were up mid-teens, this was offset by a double-digit decline in gas furnaces.

Earnings growth was driven by volume, strong conversion from continued productivity and cost reduction and about $15 million earnings improvement in our Japan joint venture from business transformation actions. The first half growth in Carrier's Transicold business was truly exceptional. We expect more normal growth rates in the balance of the year for Carrier. After a first half organic growth of 14%, we expect Carrier's organic sales to be up about 10% for the year. Given the strong first half performance, we are increasing Carrier's profit growth guidance for the year to about $325 million from $250 million-plus previously.

UTC Fire & Security delivered profit growth of 15% in the quarter on 8% higher sales. Organically, sales were up 4% with mid-single-digit growth in the products businesses. Among the service and install businesses, we saw high single-digit growth in Asia and Australia and high single-digit contraction in the U.K.

Second quarter orders grew organically 5%. Backlog continues to expand and is up approximately 15% organically year-over-year and from the beginning of the year.

Operating profit in the quarter grew 8% at constant currency. Favorable litigation resolution contributed around $25 million of profit growth. Benefit from higher overall volumes was more than offset by substantial profit decline in the U.K. from lower sales and productivity.

For the full year, we now expect F&S operating profit to be up approximately $150 million instead of the prior guidance of $175 million as benefits from a weaker U.S. dollar and favorable onetime gains are likely to be more than offset by lower-than-expected organic growth for F&S as a whole and lower margins in the U.K. We continue to expect F&S sales to be up high single digit.

Turning to aerospace on Slide 7. At Pratt & Whitney, sales were up 5%, driven primarily by higher overall aftermarket sales. Large commercial engine spares sales were in line with expectations and up more than 20% over the second quarter of 2010. Operating profit was down 7% in the quarter. The benefits from net higher sales and restructuring savings were more than offset by a nearly $70 million increase in E&D, unfavorable engine mix in both the large commercial and military businesses and higher pension costs. Operating margin for the quarter was 14.3%, down 190 basis points year-over-year due to the impact of higher E&D and the unfavorable engine mix.

As a result of higher E&D investments primarily from timing of programs, Pratt's operating profit is now likely to be down around $100 million for the year as compared with prior guidance of down $50 million. We also expect Pratt & Whitney sales to be up slightly for the year.

Hamilton Sundstrand delivered a solid quarter with 13% profit growth on 11% higher sales. Organic growth was 8 points, while foreign currency translation contributed 3 points. Sales growth in the quarter was driven by continuing strength in the industrial and aerospace aftermarket businesses. Commercial spares were up around 35%, while aero OEM sales were flattish as commercial aero growth was offset by declines in space and defense. Profit growth in the quarter reflects the benefit of net higher sales and slightly lower E&D, partially offset by higher program costs. Operating margin was up 40 basis points year-over-year to 17.7%. Commercial spares orders increased 25% versus last year with book-to-bill slightly below one. Industrial orders were up about 20% and remained particularly strong at Sullair. This quarter, we also saw an improvement in the longer cycle Sundyne business. For the full year, Hamilton Sundstrand remains on track to increase operating profit by about $100 million with mid-single-digit sales growth.

Turning to Sikorsky on Slide 9. Operating profit increased 17% on 6% higher sales. During the quarter, Sikorsky shipped a total of 70 large aircraft, 2 more than the second quarter of 2010. 57 aircraft were based on military platforms and 13 commercial, including only one Canadian Maritime Helicopter. Higher sales in the quarter were driven by increased aftermarket volumes and higher commercial aircraft deliveries, partially offset by lower international and military aircraft deliveries.

Operating margin expanded 110 basis points in the quarter to 11.5%, primarily reflecting the benefits of higher aftermarket volumes, low-cost sourcing and slightly lower E&D. For the full year at Sikorsky, we continue to expect profit growth of approximately $100 million on sales growth of mid to high single digit.

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

Gregory Hayes

Okay, thanks, Akhil. We're on Slide 10 now for those of you following along.

A solid quarter. Continued momentum on organic sales growth puts us on track to deliver on improved sales and earnings outlook for the full year. I think that's the really good news here. It was also great to see Otis report organic growth for the first time since the fourth quarter of 2008. And of course, it's heartening to see Carrier continuing to deliver on its operational and portfolio transformation agenda with a very strong quarter.

Also in the quarter, some big accomplishments. Otis won a contract to modernize and maintain the Empire State Building elevators as their biggest modernization contract in history. On the aero side, we achieved a major milestone on Pratt & Whitney's Geared Turbofan. Pratt's first GTF engine for the CSeries aircraft successfully completed its first flight on June 20, and it validated the performance metrics that make it an industry leader on fuel burn, noise and emissions.

Hamilton Sundstrand is firmly on track to support the 787 entry into service, which we now expect to be in September. And Sikorsky's BLACK HAWK platform continues to drive international growth with significant wins this quarter in both Australia and Turkey.

So with solid results year-to-date and the healthy order trends, we're confident in achieving the increased outlook of $5.35 to $5.45 for EPS on sales of around $58 billion. That's earnings growth, as I said before, of 13% to 15% on sales up nearly 7%.

This conversation wouldn't be complete if we didn't talk a little bit about some of the concerns. So let me tell you first of all that we're confident in our cost reduction efforts and our initiatives to drive growth. There are concerns out there. We all know what they are, and it's a sluggish recovery in the U.S., a weak consumer sentiment. There's continuing uncertainty in Europe. And we hear a lot about commodity inflation driven by emerging market demands as well as high oil prices, which are putting a damper on airline profits. We know about these things, but we're focused on doing things under -- focus on what we can control. And that's cost, and that's delivering value to customers.

We also talked about pressure on E&D as we continue to invest in these innovative new technologies, particularly as we ramp up multiple next-generation product platforms with Pratt & Whitney. For the full year, we now expect engineering and development to increase by at least $275 million. We also expect restructuring expenses of around $200 million for the year. And for the full year, consistent with our prior expectations, we see onetime gains will offset restructuring expense for the year.

Other couple of changes. Effective tax rate will be a little bit higher, we think, about 31% now for the year. That's up from the 30.5% we previously looked to or previously estimated. And we'll use that additional tax or the higher tax rate to repatriate some additional foreign cash later this year.

As I mentioned before, free cash flow is slightly before 100 -- slightly below 100% of net income in the first half. We're still confident that free cash flow will equal or exceed net income for the full year.

We continue to expect solid conversion for organic sales growth for the balance of the year based on our relentless focus on costs and continuing to take advantage of operating leverage across our businesses. So overall, we're very confident in our improved 2011 outlook.

We've got a great seasoned management team that's focused on positioning the business for long-term growth with innovative products, a global market presence and flawless execution. Now let me stop there. Let's open up the call for some questions.

Operator

[Operator Instructions] And we'll take our first question from Terry Darling with Goldman Sachs.

Terry Darling - Goldman Sachs Group Inc.

Greg, real strong performance out of Otis and Carrier in the quarter relative to our expectations. And I'm wondering on Otis if you can just talk about the step-up in profit forecast there given the pricing pressure comments that you made. It doesn't look like maybe the mix is as much of a headwind as you thought before. What are the dynamics at Otis that are going on? And then maybe you can address some of the press reports on the China issue there if there's anything to talk about there.

Gregory Hayes

Yes, first, I think in Otis, they had a very good quarter. Continued to grow earnings, continued to deliver on conversion. So even the operating profit or segment op margin, I think it was up 20 basis points for them. Obviously, they do benefit from the mix shift. Right now, about 60% of their business is service, about 40% new equipment. And we're going to see some pressure going forward, I would tell you, on that margin as new equipment starts to pick up. And we had a good quarter. I think 15% on a constant currency basis increase in orders. Very, very strong in China, up almost 30% in orders. So again, good growth there, good growth around the word. We saw good growth in Russia, in India, in Brazil. The U.S., Europe kind of a different story. Kind of flattish. The U.S. is a tougher compare because of the big order we had last year with the LAX airport. But I think good momentum across the new equipment business at Otis and, as always, a strong focus on cost control, which is why you're seeing these very, very strong margins. The second part of your question, I think everybody has heard there was an incident in the Beijing metro a week or so ago, a tragic accident where we had a -- one of our escalators fail. We're obviously working with the people in Beijing. We've identified the problem. It's a pretty small -- probably -- so think about escalator sales in Otis. It's really less than 10% of their total China revenue. This particular model is less than 200 of them in service. So we're out there, obviously, actively working to correct the problem. We've identified the root cause, and we've got to make sure it doesn't happen again. But no big financial impact, we think, to Otis. Obviously just a terrible accident.

Terry Darling - Goldman Sachs Group Inc.

And then, Greg, just on Carrier's second half implied guidance. I mean, you're up almost $300 million in profit in the first half year-over-year. I think you had mentioned 6% organic assumption for the second half. Can you take us through the pieces within Carrier around that 6%? And then, it does look like the flow-through on the second half year-over-year revenue increase is kind of light. And is that caution? Is that copper prices moving up? Or what's driving that?

Gregory Hayes

Oh, Let me start, and I'm going to have Akhil fill you in with the details. The first half on an adjusted basis, we're up about $245 million. There's about another $80 million of back half earnings growth that we see. Again, we saw very strong organic growth in the first half of the year driven by Transicold. That's going to slow down beginning in the back half of the year. And so again, that's a high-margin business. We see good sales conversion on that. So you're going to see a little bit lower conversion in the back half of the year. But having said that, I think all of the businesses are hitting on all cylinders there. And slowest in the residential side but still, I think, good earnings momentum there, and it's going to be a good year. You just have to remember, the compares get tougher in the back half of the year not just for Carrier but on the commercial aero aside as well. And that's why again, a very strong first half. It will have a good back half but probably not the same big headlines that we saw here in the front.

Akhil Johri

Yes, just a couple of data points to add what Greg said. I mean, first half organic growth for Carrier, nearly 50% of that came from Transicold, which, as you know, is the high-margin business. In the back half, that slows down a little bit because of tougher compares. Transicold had started recovering last year, as you will recall, and certainly in the fourth quarter. So you'll see probably 10% of Carrier's organic growth in the second half will be from Transicold. And what picks up is international residential, particularly Latin America, which is one of the lower margin businesses. So I think there's a little bit of impact from that base [ph]. And in reality, 23% conversion in the back half is not really something to feel bad about. I think it's a pretty good conversion still given that mix issue.

Terry Darling - Goldman Sachs Group Inc.

That's helpful.

Operator

And we'll go next to Joe Nadol with JP Morgan.

Joseph Nadol - JP Morgan Chase & Co

Just sticking with Carrier for our first question. Could you guys comment on whether Transicold was up or down sequentially from Q1? And then just a little bit of commentary maybe on the gas furnaces, which is something we pay a little bit less attention to maybe than the splits. What were the different demand dynamics there? And why was that down?

Akhil Johri

Transicold was slightly -- was flattish, although container, which is a big part of that business, was down in the second quarter compared to the first. Not surprising, Joe, because I think, as we talked about, first quarter container was very, very strong. And if that run rate had continued, the implied market for the year would be 60% above their prior peak, which was not going to hold. So I think that's the -- so we see the trends, which are not surprising at all. The truck trailer business picked up a little bit.

Gregory Hayes

Yes, I think, too, on gas furnaces, obviously we've seen the impact in the quarter of the elimination of stimulus during the year. Gas furnace was down. I think cooling was up in the quarter. So the net residential effect was about flat. I think the good news is Carrier's got a great new product they're introducing in the back half of the year. The new Aurora [ph] is a very high-efficiency furnace. We hope to actually use that to leverage sales growth in the fourth quarter and into next year. But again, it goes back to it's a slow economy out there on the consumer side. Housing still relatively anemic. But again, positioning ourselves, making investments today to grow on a long term.

Joseph Nadol - JP Morgan Chase & Co

And then second question, just turning over to Pratt. You bumped up your E&D expectation. Is there -- and I know you have got a lot going on there. We understand, of course, why E&D is going up. But in terms of the incremental change in the quarter, are there areas you're struggling on with the GTF that you have to put more resources into? I didn't really see any acceleration of any schedules out there in terms of your platforms during the quarter. So just wondering what that is due to.

Gregory Hayes

Oh, I think what we saw in the quarter is the run rate on E&D picked up a little bit from the first quarter. And so that run rate that we saw in the second quarter we just recognized is going to continue on through the year. So I think in total, E&D at Pratt will be approaching $1 billion for the year. The key here is to get ahead of the curve here and to continue to make these investments to make sure that we're ahead of the schedule. Airbus, obviously, is anxious to get the engine out there. We've pulled that schedule up. We've said before about 6 months from our original expectations. But the key here is just making sure we get everything done ahead of schedule because if you get behind schedule, these programs get very expensive. And Pratt, as we said before, they have to execute flawlessly on these programs. And to the credit of the folks over at Pratt & Whitney, I think they're spending the resources, they're spending the money today. And they're getting the results, right? We validated the CSeries on the first flight. We met the fuel burn. We met noise, we met emissions. So everything is going along. But there's a lot on their plate.

Joseph Nadol - JP Morgan Chase & Co

Can you comment, Greg, more quantitatively in any way you see that if possible? Help us understand exactly how you're tracking relative to plan, not from a dollar standpoint but how many boxes are you checking on the program relative to where you should be.

Gregory Hayes

Yes, we just had our operating review with Pratt & Whitney last week. And it's a great question, Joe, because again, as you're spending all this money, the question is are you spending it as efficiently and as effectively as possible. So we have something called an earned value management system, which tracks the progress that you're making on a day-to-day basis with each dollar that you spend. And I think what was heartening for us is that Bob Sigh [ph], who heads the program, said they are right on track from an earned value standpoint from the cost. The dollars that we're spending so far have been as efficient as we had expected them to be. So it's not to say there's not going to be problems later on, but, I said so far, I think we're doing great job.

Operator

And we go next to Deane Dray with Citi Investment Research.

Deane Dray - Citigroup Inc

On Sikorsky, we're expecting 3, the Maritime deliveries. Does that change the outlook for deliveries for the second half?

Gregory Hayes

Yes, absolutely. I think for the full year, we're still at 6. So year-to-date, we've only gotten 2 out. So you'll see again some of the -- I think probably 3 push into Q3 and then most likely 1 into Q4.

Deane Dray - Citigroup Inc

Okay, and then over at Fire & Security, the softer operating profit outlook, you tied it to both, I think it was lower demand and also lower margins in the U.K . I was hoping you could expand on both of those.

Akhil Johri

Yes, I think, Deane, as you know, the U.K. issue first, the government austerity there is hitting the F&S business significantly because, as you know, the U.K. is a pretty big portion of total F&S, and the government jobs were higher margin. And with them going away, there has been some kind of a negative pressure on the margins. They've also had challenges with some of their portfolio attrition rate, which has been decent, but the margins they're losing on some of those contracts is being replaced with lower margin contracts and that's hurting a little bit. And finally, I think the thing which Scott is focused on -- very much so -- is that costs were added a little ahead of the sales. There was a significant number of sales force additions in that country, and we haven't seen the sales to support that. So costs are a little ahead of schedule there. And with all that comes some pressure on margin. But Scott and team are on it, and it will be addressed.

Deane Dray - Citigroup Inc

So no change to the Fire & Security target margin for 2012? Plus 15%?

Gregory Hayes

No, I think what you're going to see, Deane, is the margins will be north of 13% this year. We'll get good margin expansion. Obviously, we're disappointed in the first half. But these are things that we can fix. Scott, Louis focused on this with the team. We're going to get these things behind us. And I think that 15% target is still out there. It's still something we're going to focus on achieving next year. I think it's -- we've got a roadmap to get there.

Operator

And we'll take our next question from Myles Walton with Deutsche Bank.

Myles Walton - Deutsche Bank AG

Just a quick question for you on the interest expense here running a little bit light in the first half relative to I think you're looking for flat year-over-year. Is that still the expectation? Or are you going to run at this run rate for the rest of the year?

Akhil Johri

Myles, I think the rate goes up a little bit in the back half because we do -- we are still planning to issue some debt in the third quarter. So I think what we see is probably $50 million reduction in interest expense for the year as compared with -- I think what we were really thinking would be flattish. So some good news there, yes.

Myles Walton - Deutsche Bank AG

And then the F-22 sounds like it's being held in terms of deliveries at the OEM level from the oxygen distribution system. Is that affecting the military engine shipments as well? Are you continuing to ship those at pace?

Gregory Hayes

Yes, now for the F-22, we're in the process of shipping spare engines right now. In fact, the production engines, those are all gone. This is just we're finishing up this year and into next. I think by next April or May, we're done with the spares. And then that'll be it for Pratt in terms of F-22 SDF [ph] 119 engine.

Operator

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

Ronald Epstein - BofA Merrill Lynch

I just want to talk to you quickly about the announcement this morning out of American.

Gregory Hayes

Oh, yes, what's that?

Ronald Epstein - BofA Merrill Lynch

But thinking about the GTF on the neos. It didn't go that way. I mean, were you surprised by that? I mean, how much of a campaign was it for you guys? How should we think about that?

Gregory Hayes

Well, let's be clear. There's been no engine selection on the A320neo. I think the only news in terms of engine selections is the fact that Boeing has decided on an interim basis to re-engine the 737 with the leadbacks. But I think the engine competition is still out in front of us. In fact, I think it's -- this decision by American to go with Airbus to break up the Boeing monopoly that they've had on the fleet is really a testament to the success we've had on the GTF and what we've been able to do in terms of performance. I fully expect you're going to -- the A320 family of aircraft with the GTF power is going to outperform the 737 in the current configuration. The neo is still the best value out there. And we've got a real engine, we've met the performance criteria already and we're going to get there sooner than GE and CFMI. So I think it's actually good news for us in the fact that we've opened up the possibility of Airbus aircraft at AMR, and we think we've got a very good shot at putting our engine on those aircraft.

Operator

And we'll take our next question from Sam Pearlstein with Wells Fargo.

Samuel Pearlstein - Wells Fargo Securities, LLC

Greg, can you talk a little bit about, I guess, the balance sheet and just the cash, which is one is, why were receivables up, I guess, $540 million or so in the quarter? Anything in particular driving that? And then secondly, to get to the $4 billion or so that you said between buyback and acquisition this year means you've got about $2.5 billion left to spend. If I look at where you are at the end of this quarter, you still got $5.4 billion or so in cash, certainly more than enough, and you're going to continue to generate cash. So what is the right cash balance we -- you should be targeting as we go through the year?

Gregory Hayes

To your point on the balance sheet, first of all, back to cash flow. Obviously, the growth in receivables, it's mostly at Carrier. Obviously, that's again part of the selling season. I think we missed the -- a little bit of -- a few cash receipts that we had been expecting. There was some timing on a couple of issues. But nothing really that gives us concern here. This is really just, I think, a week-to-week, a month-to-month time issue. So for the full year, we feel very confident about hitting the free cash flow and net income target. As far as the balance sheet goes, look, there's lots of firepower sitting there. We've got $5.4 billion of cash at the end of the quarter. Debt-to-cap is a little north of 32%. Right now, we're going to buy back stock because we don't see the right M&A target out there. But I would tell you that Louis, that Bill and the team are focused on doing some transactions. And eventually, we're going to get there. In the interim, we're going to use the cash, use the capital that we have to deploy it effectively, and that's right now share buyback, which, you look at the quarter, we picked up a couple of points of earnings, EPS, because of share buyback. We've taken 100 million shares out of the count in the last 6 years by share buyback, and it's still a very good accretive investment. But we want to do deals, and it's all about timing.

Samuel Pearlstein - Wells Fargo Securities, LLC

But you've said being north of $2.5 billion in buyback this year. I don't know if we should be using this Q2 run rate. But I guess what I'm trying to ask is you ended last year at over $4 billion in cash. I mean, it still seems like you're running with an awful lot of cash. And really, what should that balance be?

Gregory Hayes

Well, obviously, we are running with a lot of cash. But again, we use that cash every day in our operations. So again, a big piece of that cash, probably north of $5 billion, is sitting overseas. So we use that to fund our overseas operations. So if you think about it, can you -- you probably don't have access to every single dollar out there, but we do put most of it to use every day through our inter-company lending program. And look, it's higher than we want it to be in terms of the cash balance because the M&A spend has been light. I think, again, you'll see us take up share buyback. Probably, it's in the third quarter, probably to the same pace that we saw in the first half of the year. Again, we just don't see a big call from M&A right now. But these things, they can change quickly. I'm reminded. Two years ago in June of 2008, GE Security wasn't on the horizon. And by the end of the year, we had inked a deal for $1.8 billion with GE. So these things can happen quickly.

Samuel Pearlstein - Wells Fargo Securities, LLC

So then one last question. Just in terms of your thoughts with regards to what was going on in Europe with Otis. In particular, a fine. I don't know exactly when it gets resolved. But how do you factor that and that likelihood into your outlook especially in 2011 for Otis?

Gregory Hayes

Well, in fact, we just heard back from the first appellate court that we took the case to. And In fact, we did not get any relief from the fine that we originally paid I guess 4 years ago now of about EUR 300 million. So we hadn't been counting to get any money back. I think we still believe we have some opportunity there. We're probably going to appeal. There's a latest ruling, I think, to the European Court of Justice. But I'm not going to bake any of that in. I think those are things that if they happened, they're very nice and we'll use that kind of a onetime gain to invest some place else in the business. So we didn't count on it, and we're not going to count on getting anything back.

Operator

We'll go next with Jeffrey Sprague with Vertical Research Partners.

Jeffrey Sprague - Citigroup

Just another question on the whole AMR situation. Did you guys have -- were you in any way in discussions or have an opportunity to talk about GTF on the 37 (sic) ß re-engine? Or did that happen kind of totally outside your sphere of communication?

Gregory Hayes

Look, it's a small industry. Obviously, we've been working with Boeing. We've talked about this publicly in the past, about the opportunity to re-engine the existing 737. And I think, again, the problem we have with re-engining, we've made it pretty clear, is that they have an exclusive agreement with CFM. And until we have a new aircraft with the Boeing company for the 737, we're probably not going to have an opportunity. At the same time, I think the A320 is a great aircraft. It's going to compete very effectively against the 737, this re-engined 737.

Jeffrey Sprague - Citigroup

Can you give us a sense, Greg, on what we should expect for E&D trajectory into '12 and '13? And at what point does the line start to bend at Pratt?

Gregory Hayes

Yes, my crystal ball is a little cloudy. And I think we've said before E&D will probably peak at Pratt next year. I'm loathe to give any kind of guidance on 2012. I mean, we're -- there's a lot of things that will happen between now and December, when Louis stands up to give guidance. But I think, again, the thought here is E&D will peak next year, probably start to go down '13, '14.

Jeffrey Sprague - Citigroup

Then I was also just wondering on Carrier. A couple of prior questions that Akhil hit it in the open. But can you just be a little bit more specific, Akhil, on -- you gave us Transicold very specifically, but how commercial equipment performed in the quarter? Not the orders but the actual performance and the U.S. resi business?

Akhil Johri

Globally, Jeff, the Commercial HVAC equipment was up high single digits, and U.S. residential was slightly up just kind of very low single-digit type of level. I think geographically, U.S., Europe -- Asia was stronger than others, but the U.S. and Europe also grew for Commercial HVAC.

Jeffrey Sprague - Citigroup

And can you give us some color on price realization in HVAC, in particular in the U.S.?

Akhil Johri

I think as you know, Carrier announced a price increase in February. That has been doing pretty well. I think we also just recently last week announced a second price increase up to 6% on both residential and commercial products. That should go into effect over the next 75 days or so. So overall, still the net number for the year that we are expecting is still about $100 million negative for Carrier as the gross commodity costs are probably negative $200 million offset by about $100 million of price realization.

Jeffrey Sprague - Citigroup

And just finally, same thing on Otis. You mentioned price is still tough on new equipment. Any change, though, in kind of the level of pricing? Is it the same? Is it worse? Is it moderating? Are there any geographic differences that stand out?

Gregory Hayes

Yes, I think the market especially in the U.S. and Europe remains tough. Obviously, with the dearth of new commercial construction in both the U.S. and Europe, there's a lot -- not that much new work going on, so the bidding is tough. At the same time, we've recently raised prices in China on new equipment to compensate for the higher commodity costs, especially of some of these rare earth metals that we've seen. So that happened, I think, July 1 we've raised prices. So again, Carrier's got this $100 million kind of net commodity. I think Otis will probably have $60 million or so of net commodity headwind for the year assuming we get good price realization in the back half of the year.

Operator

And we'll go next to Robert Stallard with Royal Bank of Canada.

Robert Stallard - RBC Capital Markets, LLC

On the aerospace aftermarket, Greg, I don't see Hamilton Sundstrand had a very good quarter. I was wondering if you can give us some sort of clarity on what you think some of the underlying trends might be there, and whether they're sustainable even though you're coming up against tougher comps in the second half.

Gregory Hayes

I think, Rob, that we had a very good first half. And I would say it's a little bit ahead of our expectation. We talked at Hamilton for the full year kind of 10% to 12% growth in spares for the year, obviously a good start to the year. But to your point, compares get very difficult in the back half of the year, not just in Hamilton but it's Pratt as well. But I think the good news is that even with these high oil prices, airlines are still making money globally, and they're still spending money on maintenance and they're still filling up seats. So could -- I think could aftermarket be a little bit better than what we expected? I think so. Again, inventory, we know, is low out there both in the engine shops and in the repair shops. So I think there are still some opportunity for a little bit better aftermarket both at Pratt and in Hamilton than what we had originally expected.

Robert Stallard - RBC Capital Markets, LLC

You're not expecting any sort of underlying trends to deteriorate in the second half? It's just a mathematical calculation?

Gregory Hayes

Yes, it's just simply math. If you think about spares at Pratt in the back half of the year, we're up 30%, and we're up for the first half, north of 30% now. So it's kind of tough to grow another 30% off of the 30% from last year. And again, oil is always out there as a concern to hold down or to dampen demand in the back half. Not that we're predicting a big slowdown. I think we're going to see a continuation of the run rates that we've seen in the first half in the back half of the year.

Robert Stallard - RBC Capital Markets, LLC

And then secondly at Pratt, I was wondering if you could comment on how, say, business jets aftermarket spares have gone in the quarter and you're thinking of the future here. And similarly, on the aftermarket, have you seen some of these heavier maintenance checks coming through on the engines?

Akhil Johri

Yes to both. I think on the Pratt Canada side, the business jet spares overall were up sort of mid-teens, excluding FX. And it's consistent with what you are seeing on the takeoffs, and the regionals particularly have also been doing very well. So I think based on that, the Pratt spares, Canada spares were also in line with expectations. And to your second point, I think that the answer is yes.

Operator

And we'll go next to Doug Harned with Sanford Bernstein.

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

Going back to M&A, you've taken -- you've put Bill Brown in charge of the group. It seems like you're putting a lot of energy into that area. Yet we've had a placeholder that is small compared to history. And could you talk about what you're trying to do there? Should we expect the numbers for M&A or your placeholder for M&A to go up substantially in the future given an increased emphasis on the group?

Gregory Hayes

Yes, I think, Doug, you make a very valid point. The fact is, the $1.5 billion placeholder we've put in place for this year is before Louis put Bill in charge of the group. We're going to stay disciplined in the M&A side, but I think we have an appetite to do more. And while it's easy to buy back shares and not as easy to buy companies, we think we can create value out there with the M&A agenda. We've got 6 great global franchises, we've got opportunities around the road to do things. And just stay tuned. I think we've got more to come and probably a stepped up rate of M&A spend, too, during the next couple of years.

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

Okay, so making this into a higher profile unit, which it seems like you've definitely done here, that is consistent with a much stronger focus going forward?

Gregory Hayes

Yes, I think -- and you're going to see us put our balance sheet to work, you're going to see us put more cash to work on the M&A side. And that's where I think a big piece of growth is going to come from over the next few years. It's going to come from the M&A. Again, commercial construction is going to be slow, residential slow in the U.S. But we've got a lot of cash and a lot of capabilities on the M&A side. I think that's what -- what Louis saw in putting Bill in that role is that we needed a bigger focus and a better focus, and I think Bill is doing exactly that. It just takes time.

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

And then on Fire & Security, the top line growth you had seems to be a little bit less than you expected. When you look forward and you're talking about this picking up in the back half of the year, but what should we expect longer term? Should we expect growth rates to move up more toward high single digits? And if so, what's going to drive that?

Gregory Hayes

I think, obviously, first half organic sales growth and even full year, we've taken the target down from 6% to about 4%. So a little disappointed in the rate of growth. And there's been a couple of issues geographically. Akhil talked about the U.K. I think what's important as you look at the backlog, it's up about 15% year-over-year. So this back half sales growth looks to be in backlog, and I think, again, we're getting momentum out there. But you've got to remember, a big piece of what Fire & Security does in the service and install business is directly related to commercial construction activity, right? And so to the extent that there's a dearth of commercial construction activity, you're also going to see kind of slowish growth here. So it will come back. I think commercial construction will come back. We've started to see signs of that at Otis. But it may take a little longer than what we have thought. But at least for the back half of the year, confident in the sales forecast based on the backlogs that we have.

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

But you're seeing the growth at Otis, and you're not yet seeing it here. Is that related to geography or longer lead times at Otis?

Gregory Hayes

I think it's really geography. If you think about where F&S is particularly strong, it's the U.K. and it's continental Europe. And those are -- and North America commercial construction. Those are the same places where Otis is not seeing big new equipment growth. In the quarter, Otis grew new equipment orders I think 15%. But Europe and the U.S. were not stellar in that regard if you back out Russia. So it's really the geography that F&S suffers from today. Australia is doing very well. Again, with the economy down, they're doing well. Commercial construction is picking up. And F&S is doing well in that geography. They're doing well in Asia. But unfortunately, the majority of their business is in Europe and North America. Those are the markets that continue to suffer.

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

Okay, great.

Operator

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

[Technical Difficulty]

Howard Rubel - Jefferies & Company, Inc.

Just a follow-up on couple of things. One is, you're usually very conservative in thinking about your financial planning. So this change in R&D at Pratt, does this mean that there's been additional opportunities? Or are there some other challenges that you've come across in the process?

Gregory Hayes

I don't think that there's other challenges. I mean, the real issue when we started out the year, the timing of the neo still looked to be entering the service probably 2016. Obviously, there's pressure from Airbus to move it up. We talked about maybe late 2015 now. And it's just the recognition that we have to get these programs underway. We're at peak spend right now on CSeries, and it's just you've got a lot of resources. And I think the Pratt guys are doing the right thing. They're spending more money sooner to try and make sure that we reduce the risks as we go forward in the development program. So that's why I think you're seeing this greater spend now. It would all give us a benefit, albeit maybe not next year but it'll -- soon or the year after.

Howard Rubel - Jefferies & Company, Inc.

No, I get it. In other words, really way to think about it is you're not finding -- you're pushing the envelope on risk now and you're not finding anything?

Gregory Hayes

Yes, it's about risk mitigation today. And I think, again, with all the bench testing and all of the rig testing that they've done to -- we call it TRL, technology readiness level 6, we're there on all of our technologies. And spending on that is not cheap, but it's a lot cheaper than spending it when you're developing the engine and find a failure on a development test bed. So yes, I think they're doing the right thing. They're spending the money. And quite frankly, we can afford in the guidance here. So while -- we're taking it up a little bit. We're doing the right thing long term for the business by investing here.

Howard Rubel - Jefferies & Company, Inc.

And then the second thing. Again, I'd say F&S probably has been, of all the businesses, the most challenging or the one that's not quite met your expectations. Is there a need to do some further reshaping of the way the business is focused to improve where you'd like to take it?

Gregory Hayes

I'll tell you, we've done 61 deals over the last 7 years to pull together the Fire & Security business. So we think we've got a very solid quarter of business both on the fire products, electronic security products and the service and install business. There's always opportunity, I think, to take a look at the portfolio that you've assembled, just like we've done at Carrier, and call out those that don't make a lot of sense, that don't have the same growth attributes that the rest of the business does. So Scott and team are focused on that. They're really working with Bill, I think, on that agenda. So there's opportunities both in M&A and, I would tell you, in disposition. And I think you'll hear a lot more about that as we go throughout the year and especially in December when Louis gets up and talks about next year.

Akhil Johri

And Howard, maybe it's a little bit of pride of authorship here for me, but, I mean, we've taken 4% ROA businesses and moved them to north of 12%. So that's not something we feel too badly about, I think, right? And there is opportunity to do more. But certainly, 15% next year will be a great target. And once we get there, there is room to do more.

Howard Rubel - Jefferies & Company, Inc.

Though I know we've had this discussion a bunch, I appreciate that, Akhil. And then just the last thing is the restructuring, frankly, is very modest relative to the size of the company and the various business units. I mean, what -- when you sort of look at what you're doing now today, Greg, in terms of the targets for improving performance, what are the sort of actions you're finding are most effective?

Gregory Hayes

Obviously, as we take out and consolidate back office functions, those things have the highest payback. And you talk about modest restructuring. I think we've done about $1.7 billion of restructuring here last couple of years. And although we're only doing $200 million this year, I would tell you that the businesses have identified well more than $200 million of potential things to do. So there's always an appetite to do more restructuring, to take out structural costs and to get more efficient. And the $200 million placeholder is that, that I think if gains come in higher than $200 million, you might see us take that up. The key is gains will lead to restructuring for the year. We've tried to maintain that discipline to go back to it for the last couple of years. We've spent in excess. But we've done enough. There's always more to do, but we always have our eye on what's going to make sense from a productivity standpoint in the long term.

Operator

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

Cai Von Rumohr - Cowen and Company, LLC

Yes, first a tactical question. Given that we slipped some of these Canadian helicopters into the third quarter, maybe give us a little help on the pattern we should look for in Q3 and Q4?

Akhil Johri

Well, as Greg said, I think we're looking for somewhere in the 2 to 3 Canadian Maritime for the third quarter and then the remaining in the fourth. We're still looking at about 6 for the year. Did that help?

Cai Von Rumohr - Cowen and Company, LLC

Yes. I mean, just in terms of the earnings, should we therefore look for...

Akhil Johri

I think we -- look, as you know, Cai, we're not going to give quarterly guidance for Sikorsky. But I think overall, we still feel very good about their $100 million. Second quarter was a good $30 million increase year-over-year in earnings. And as we look ahead, aftermarket is going to grow even at a faster rate, and I think we get some additional benefits on the military side from cost reductions. So I think those 2 components will help offset incremental loss from the Canadian Maritime, and we still feel very good about being able to get the $100 million.

Gregory Hayes

Yes, Cai. I'd also add we've talked a lot about the Canadian Maritime and the financial impact or the losses associated with the deliveries. I think that's all well known. I think the key here is we're developing the world's most capable maritime helicopter, and we had great reception over the Paris Air Show from everybody, from the foreign governments that were looking at this thing. And like any developing program, there's going to be fits and starts and trouble delivering a couple of these early this year. Again, I think that'll all be behind us soon. We recognized in the forecast the fact that Sikorsky has got to deliver 6 of these this year. It's going to cost them, I don't know, $70 million, $75 million in earnings. And the base business at Sikorsky is doing phenomenally well. I think you back out these development helicopters, you'll see a business that's probably going to do 14%. But the fact of the matter is we've got to deliver these helicopters. They're going to cost a lot, but we're going to have a great, great aircraft when this is all done.

Cai Von Rumohr - Cowen and Company, LLC

Terrific. And then I guess a bigger question, obviously, I guess, in one respect, good news that American is looking at the neo, and I guess you're in the hunt. Bad news, given that Boeing is deciding to re-engine the 737 and, therefore, pushing out the new single-aisle, which would have been the big opportunity for you, while it's not your call, do -- you obviously must be talking closely to Boeing, do you have any sense as to when the new single-aisle might happen given this turn of events?

Gregory Hayes

I think, obviously, to your point, we have been working closely with Boeing on the opportunity to re-engine. I think, again, it's -- the better outcome we always said for Boeing is a new airplane with the GTF engine on it. We just don't have the opportunity, as you know, contractually with Boeing to offer a re-engine on this -- on the current 737. When Boeing is going to launch a new aircraft? I think time will tell. I think to the extent that the A320 outperforms the 737 with our GTF engine, that just puts more and more pressure. And again, the GTF is out there today. We're flying that thing. We've got hours on it. We know it works. We're going to have a very, very competitive aircraft with the A320neo with this engine on it. And if anything, hopefully Boeing will move up its decision to build the new aircraft. But that's really a question for Mr. McNerney and Mr. Albaugh.

Cai Von Rumohr - Cowen and Company, LLC

Okay, and our last one. Your military engine deliveries, 44, up from 30 in the first quarter. Where did the big uptick come? And I've been looking for that to be off 15% to 20%. Is that still the right range for the year?

Akhil Johri

Sorry, Cai. Repeat that again?

Cai Von Rumohr - Cowen and Company, LLC

The military engine deliveries were 44 in the quarter, up from 30 in the first quarter. Where did the uptick come from? And is that in line with looking for those deliveries to be off 15% to 20% this year?

Akhil Johri

It is. I think it's -- the delivery increases came from all categories. I think the F-119s were a little up, F-117s were a little up and also your F100s. But I think it's all in line. First quarter was in line, but full year is in line with what we had said earlier.

Operator

We'll go next to Julian Mitchell with Credit Suisse.

Julian Mitchell

My first question, I guess, was on what you're seeing and what your expectations are for your construction-related businesses in China because I guess you've got very good order growth in Q2. Obviously, if we look at things like construction machinery orders and shipments in China, those have been down double digit year-on-year the last 2 or 3 months. So potentially, some -- that's a lead in some respects for some of your equipment going into building. So can you sort of clarify how you see that market over the next sort of 6 to 12 months?

Gregory Hayes

Julian, I think you've got to look at the various segments in which we participate in China. It's really on the building side as opposed to on the machinery and equipment side. And the biggest single driver for growth in China is going to be social housing. I think year-to-date, they've started about 5 million new social housing units. They expect to build about 10 million for the year and do that for the next 5 years, and I think that's driving growth. You also see at the provincial level still big investments in commercial real estate development. It may be slow on the east. But in the west, it's not that way. So again, people need a place to live. We continue to see this big trend in urbanization. We continue to see that as the driving macro force in China that's going to benefit our businesses. A little different than the machinery and equipment segment because these people need a place to live. Obviously, it's going to slow down. I think China, the growth rate that we saw in this quarter was 30% or nearly 30% at Otis and over 20% overall for our businesses is not sustainable. But I still think this is a country that's going to grow at least high single digits over the next few years, and we're going to get more than our fair share there.

Operator

Okay, we'll go to Joseph Campbell with Barclays Capital.

Joseph Campbell - Barclays Capital

I wanted to go back to the Beijing escalator accident. The story continues to sort of stay in the Beijing newspapers, and I wondered if you could just talk a bit more about the extent to which this is -- is the investigation and the sort of pause of using Otis restricted just to Beijing and just to escalators? Or is it countrywide, Otis-wide? And yesterday or the day before, there were some comments about perhaps doing the same thing in Shanghai. And how you see this progressing to sort of restore the normal good relations that Otis has China-wide?

Gregory Hayes

Well, again, it was a tragic accident, Joe. We're obviously working closely with the authorities in Beijing. So far, the suspension of Otis has been related to escalators and has been really related to the Beijing area. We haven't seen this spread countrywide. As I said, I think we ship about 6,800 escalators in China annually. Not a huge, huge market for us. And again, as we get to root cause working with the folks in Beijing, I think we'll quickly get to the point where people are comfortable that this was not a basic quality concern from an Otis standpoint. We think it's probably a sub-tier supplier that supplied some substandard parts. We're working through that. We'll figure it out. I think right now, there's again less than 200 of these escalator models out there. We inspected, I think, more than 20% as of yesterday. We'll get through those in the next couple of weeks. We'll get all these back in great working order, and we'll recover the lost business. But clearly, it's an unfortunate incident. These things happen. But the key is how we recover and how we respond to this. And I think the Otis folks in China have done a great job. You never like to hear about these things, though.

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