United Technologies Corp. - Shareholder/Analyst Call

| About: United Technologies (UTX)

United Technologies Corporation (NYSE:UTX)

September 27, 2012 8:30 am ET


Gregory J. Hayes - Chief Financial Officer and Senior Vice President

Geraud Darnis - Chief Executive Officer of Climate, Controls & Security Systems and President of Climate, Controls & Security Systems

Pedro Sainz De Baranda Riva - President of Otis Elevator Co.

Michael B. Maurer - President of Sikorsky Aircraft Corporation

Louis R. Chenevert - Chairman, Chief Executive Officer, President, Chairman of Executive Committee and Member of Finance Committee

Alain M. Bellemare - Chief Executive Officer of UTC Propulsion & Aerospace Systems and President of UTC Propulsion & Aerospace Systems

David P. Hess - President of Pratt & Whitney


Carter Copeland - Barclays Capital, Research Division

Joseph Nadol - JP Morgan Chase & Co, Research Division

Howard A. Rubel - Jefferies & Company, Inc., Research Division

George Shapiro

Douglas S. Harned - Sanford C. Bernstein & Co., LLC., Research Division

Cai Von Rumohr - Cowen and Company, LLC, Research Division

Gregory J. Hayes

Good morning, everyone. Welcome to the Mirabel engine assembly facility, our new assembly facility for the Geared Turbofan. We'll have a chance to go on a tour a little later to see the facility.

Just a couple of housekeeping details before we get started this morning. Should there be an emergency, and I don't expect one, there is an exit door right to our -- to your right, to my left here. Follow me, but don't get in my way.

Secondly, for those of you who need restrooms, they're located right down the hallway to the right. Also, you should note, this is being carried out on the Web at utc.com, and all the materials are also available on the Web.

Just a quick overview of the day for you here. I'm going to start out, just give a brief overview of UTC. We'll take a couple of questions. And then we're going to go hear from the commercial companies. We're going to start with Geraud, talk about CCS. Then we're going to hear from Pedro. We'll take a break about 10:00, then Mick will come back and talk about Sikorsky. Alain will come up and talk about the PAS, and then you'll hear from Dave. And then lastly, Louis is going to close it out around 11:45 or so. He'll have some closing comments, as well as take your Q&A. So save all of your good questions for the boss.

Lunch will be at about 12:00. There will be a tour at 12:45 or so, led by John Saabas. Is John...

Unknown Executive

Up there in the balcony.

Gregory J. Hayes

There's John. Hi, John. John is President of Pratt & Whitney Canada. Most of you know John. He'll lead the tour around the facility. And we'll depart for the airport around 2:45. So again, that's the day.

Okay. Just a quick reminder. Of course, all of the forward notices -- there will be forward-looking statements, which are, of course, subject to risks or uncertainties. Actual results may differ materially from what you hear, although we hope not. And all materials and SEC filings, of course, are available at utc.com.

Okay. All right. So why do we invest in UTC? What's the thesis? It's actually quite simple. Right? And we've talked about these things for a long time. Global franchises positioned for growth in both the developed and the emerging markets, market-leading franchises in all of our businesses.

We also, today, will talk about the focused portfolio. Right? We are focused on commercial aerospace, on military aerospace and on commercial office and infrastructure projects. All right. We'll talk a little bit more about the transformation, but the key is this is a much more focused company than it was, just 12 months ago.

And we have the ability to leverage global scale. Why does UTC stay together? Because of the ability to leverage the scale of 227,000 employees around the world in technology, in supply chain and, importantly, in leadership, as we can move people from business to business and share best practices, all of that with the idea of delivering value to our customers and our shareowners.

Innovative game-changing products. You'll hear a lot about that today from all of the businesses. We make big investments, but we do it for the long term. And of course, last but not least, strong cash generation, consistently at 100% of net income or higher. And over the last 10 years, we've returned more than 65% of that cash to shareowners in the form of dividends or share buyback.

So importantly, as we talk about the transformation of UTC, I would tell you, it's been a busy year. It's been a confusing year, too, I know, because of all the changes. But the good news is we're just about done. We're done with big deals. We're almost done with the divestitures. And as we move into '13, what you're going to have is a more consistent, more easily understood UTC.

And we've done 2 big deals this year, 2 big acquisitions. You -- we all know about Goodrich, a great business. You're going to hear about that from Alain and company. A great, great deal, and a deal we like better today than we did even a year ago.

And probably one of the biggest aero deals ever, IAE, that nobody ever heard about. And we don't talk about it much, but it really is a great, great acquisition. And you'll hear from Mr. Hess as he talks about the benefit of IAE, truly transformative on the acquisition front. But I think, as you've heard Louis say in the last couple of months, I think we're done on the left-hand side in terms of big deals for now. Got a lot of work to do to digest these, but we're on track.

As far as the divestitures, again, a busy year. The Hamilton Sundstrand, the industrial businesses will close around mid-December, we believe. $3.5 billion sale price. A good multiple in a very tough marketplace, in fact. Great businesses. We love those businesses.

I came, of course, from one of those places, and it's hard to leave them. But they weren't scalable, and I think, again, we did the right thing for shareowners in terms of realizing that value. We also announced, of course, the Pratt & Whitney Rocketdyne sale to GenCorp. That's pending regulatory approval, should close early in the first quarter of next year, we would think. We also talked or announced that we're in the process of selling our UTC Power business. And of course, we have sold the Clipper business. Clipper is gone. It's out of the portfolio as of early August.

We'll talk a little bit about Climate, Controls & Securities portfolio transformation. That's the piece that's not quite all done. I think Geraud will tell you, we've done about $350 million of divestitures, but a few more things to do there. But again, for the most part, by the end of the year, all of that will be done.

So what does UTC look like? This is UTC restated for 2011, taking out the discontinued ops, putting in Goodrich, putting in IAE, went from a $58-billion business to a $65-billion business. And of course, we've increased the aero mix by just over 50% now with the acquisitions of Goodrich. Again, focused on the core commercial buildings and aerospace.

Just a quick update on the Goodrich financing. You know we went to market in late May and early June, had a very successful debt offering. We also issued about $1.1 billion of mandatory convertible units priced very, very well. Average cost of the financing, all in, is about 2.8%. So on the $16 billion -- or $15 billion or so that we actually borrowed, a very, very good rate and, obviously, a lot better than having to issue $4 billion of equity on top of the debt. So at the end of the day, you can see we added about $18 billion, $19 billion of debt. That includes the Goodrich legacy debt of about $3 billion.

Now, of course, that was $2 billion. Then you write it up in purchase accounting so you get to $3 billion. But the plan is, in the next couple of months, we're going to pay down $7 billion of debt. $4 billion is going to come off the balance sheet from our foreign operations. Another $3 billion is going to come from net divestitures, primarily from the industrial businesses. You'll notice that the Rocketdyne is not counted in there. That'll happen sometime next year, give us the opportunity to pay down a little more.

What you also don't see on this chart is the IAE deal, which we closed on June 30. It took about $1.5 billion of foreign cash off of our balance sheet as well. So we've been able to mobilize the foreign cash that's on the balance sheet. We're on track to meet our commitments with the rating agencies in terms of the debt buydown -- debt takedown, and I think we're well, well established.

So let's talk about 2012 for a couple of minutes. Back in July, we updated the guidance for the year. We took sales to $58 billion -- to $59 billion. That's organic growth of 0% to 2%. We talked about EPS in a range of $5.25 to $5.35, recognizing the slowdown in spares that we've seen on the commercial side, as well as some of the challenges that we've had at Otis. And, of course, we had also talked about free cash flow would be very strong again, at least equal to, but probably greater than, net income.

So since mid-July, when Louis and I were on the conference call for the second quarter, just go back and take a look at the key assumptions here on the left-hand side. From an end-market standpoint, the China new equipment market, both at Otis and CCS, is about in line with our expectation. And you'll hear more about that. The commercial aero aftermarket remains a question mark. It remains challenging. And we had expected a second half recovery. We haven't seen it yet, hear a little bit about that from Dave.

North American residential HVAC, about in line with what we had expected. Global economic outlook, I guess that's as big of a question -- perhaps a bigger question today than it was 2 months ago with the European situation, QE3 in the U.S., additional ECB bond buying. None of it seems to make much of a difference, because we haven't attacked the structural issues underlying the problems in Europe and the U.S. So again, China is slowing down, we think, but still a question mark.

Goodrich dilution, we're right on track with that. That's the $0.30 we've talked about. Commodities/E&D, right about on track. And FX, actually, has been a plus. Remember, at the beginning of the year, we had assumed EUR 1.35 to the dollar. Proceeded to see that go down to about EUR 1.20, so we revised guidance. We took euro all the way down to EUR 1.20. You can tell we're not very good currency traders because it's at EUR 1.285 or so this morning. So again, a little bit of good news out of FX. I assume that's going to last -- I think the average rate for the third

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markets. Most of the developed markets still are between 30% and 40% below keep, and there remains a big opportunity for growth just to get back to where we were in 2007.

We're also going to capture a lot of organic growth, and you're going to see that from Dave Hess, just through the new game-changing product innovations. I think Geraud also has a good story here in terms of the commercial HVAC, what we've been able to do from a product innovation standpoint and how that's, today, driving solid, organic growth.

We've got productivity and margin expansion. All right. We talk about this all the time. The key for us is flawless program execution. We're making big investments in new technology. We've got to do that on time and at the right cost.

And of course, continuous cost control. So far, this year, we've initiated $500 million of restructuring, almost $2.5 billion over the last 5 years. We went into the year, I had no idea that we'd be anywhere near that. I think, again, as the economy has not recovered, we've identified more gains, we've taken the opportunity to take more cost out of the business. And the good news is there's always something more to do.

I think the business [indiscernible] you'll hear from them today, there's always opportunity to

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new facility in Chongqing. We'll talk a little bit about that. But we also have big facilities in Monterrey, Mexico. CCS has big facilities in India. Pratts got the engine center in Shanghai. Sikorsky and the rest of the aerospace business has very big presence in Poland. We have presence around the world, and we're taking advantage of low-cost sourcing opportunities, as well as our ability to sell into these markets.

I think, importantly, even in a very, very difficult year, we continue to invest in technology. So this year, we'll invest about $3.5 billion. This is just the legacy UTC business, ex Goodrich. We'll talk about that in a second, but I think it's important, we're going to spend about $150 million more in E&D this year than we did last year. About half of that comes out of Pratt & Whitney, but we continue to make investments really across the portfolio. The mixed Sikorsky business that we're making it on the commercial side and we're making, of course, with Hamilton. The good news is this is the peak year for E&D in the base business. And I say that because by adding in Goodrich, we'll add about $300 million of E&D this year and about $550 million or so, $600 million next year.

So again, the number will go up. But what you will see at Pratt & Whitney, especially, E&D is going to start to come down as we certify the CSeries engine this year and the others over the next couple of years. So peak this year at base business, but we'll still go up as a result of Goodrich.

Okay. So that's the organic side. I think we're well positioned. Emerging markets, great products, great franchises. Let's talk a little bit about my favorite subject, cost.

We have the great ability to put process into our businesses. Back in 2006, Louis laid out this big goal to get the business to be 70% ACE gold and silver. I can tell you, we have exceeded that. We're about 82%, above our 80% goal for this year.

We've also been -- or had a big focus on our supply base. You can see, back in 2008, only 34% of our suppliers were at the Gold or performing level. I mean, only 34% of the suppliers were delivering on time with a good quality. That, today, is at 71%; again, exceeding the goal. The beauty of this is we can take these same processes around ACE, in the supply base and ACE in our factories, and we'll roll this out throughout the Goodrich organization. And you'll hear Alain talk a little bit about that.

As a result of this, I think the true measure of the success is what's happened to the cost of poor quality? And you can see, we're down 25% in the last 6 years. So again, good, good progress there.

We also have opportunity on the supply chain to leverage the scale of UTC. Right? The key, of course, is achieving our target cost on all of the new platforms that we have out there. Aggressive pricing, but we have plans in place to actually get the target cost as soon as the engines go into service. We have a lot of work to do.

The other thing is we have to make sure we have capacity. You recall, in 2006, the last ramp in the commercial aerospace cycle, capacity was an issue in the supply base. You'll hear more about this from Alain. We've actually put in place processes with our suppliers to assure capacity in this next ramp up.

We're also taking a look at non-product cost. And one of the benefits of the Goodrich acquisition, we actually went in and took a hard look at Goodrich's non-product costs, which is about $1.1 billion of spend. We add that to about $9 billion of UTC spend, we've got a $10-billion bucket of cost to go and attack. And what we found, of course, going into the Goodrich detail, is there were opportunities for both Goodrich and the rest of UTC to reduce cost. And we have a team in place that's actively looking to take out about 5% of the cost in the indirect non-product spends. So big opportunities over the next 3 or 4 years.

Okay. Lastly, strong cash generation. We talk about this all the time, but it is a hallmark of UTC. Generate free cash flow equal to or better than net income. And you can expect the same this year, and you can expect the same next year.

The key, of course, is what do you with all that cash? Well, over the last -- what is this, 5 years -- we've spent about $26 billion on acquisitions. Obviously, that's a little tilted because of the Goodrich and IAE deals. But yes, we made some other good deals over this period. The GE Security business, very, very good business. Noresco, Marioff, GST, all strong franchises and good places to invest our dollars.

As we've said, I think we're done on this side of the equation for a while. The key now is on the right-hand side, is to resume share repurchase, and we will. Next year, we'll target at least $1 billion. If cash is better and we're able to pay down debt faster, I think you'll see us -- see pressure on that number to go up. I know Louis wants that number to be much bigger. I'm going to be a little bit more reserved on that, but at least $1 billion, and we'll see where we go. And again, this is more to do with the rating agencies and maintaining the A rating on the debt. But we feel very good about the prospects over the next several years to buy back and resume share repurchase at an even higher level than what we've had historically.

Okay. Let's talk about 2013. It's what you guys are all here for, right? First of all, a lot of things going on. There's a lot of pluses out there for '13. There are some question marks and, of course, there are some things that are going to be headwinds next year. But let's focus on the positive first, shall we?

Obviously, we're going to get good news out of Goodrich and IAE. We will get $0.50 of accretion next year from Goodrich, as well as the absence of the transaction costs this year, which will add about $0.70 of earnings to our base business year-over-year.

We'll pick up about another $0.05 from IAE. Recall, we get about $0.05 this year, another $0.05 next year. So $0.75, I'll stand here and tell you today, we are -- we believe very firmly we're going to see next year. Even with the soft markets that are out there, still have high confidence in that.

We also know that the commercial aero OEM ramp will continue. Strong confidence there. Now that's a positive, but you also see that over there on the negatives because, unfortunately, some of our products, we ship with a little bit of negative margin. So a little headwind from that ramp-up, especially at the engine company. But again, a challenge I think we can overcome.

Commercial aero aftermarket. We can argue whether this should be in a question mark or whether it's in the plus. But quite frankly, the belief is, as long as RPMs continue, as long as airlines are flying, spare part sales will resume at a level we had expected them to be. So we are expecting a recovery. It won't happen in the third quarter of this year. Will it happen in the fourth quarter or the first quarter? We don't know. But I would tell you, we know, next year, we ought to see momentum out of commercial aero aftermarket.

North American HVAC, resi side, I think you will see that. We've seen housing starts improve this year, and that will translate into some improvement next year in the market. And the economy is getting better. There's real talk about that. Emerging markets, again, very strong presence for us, and they will grow. Maybe not at the rate we had expected, but still strong growth there. We're going to get benefit from restructuring and cost reduction that we're doing this year. And of course, share repurchase will also help. So a lot of positives.

There's some big questions, too, of course. Sequestration and the fiscal cliff. All we can do, I guess, is say a prayer that the folks in Washington would get this right and not drive us over the cliff. But a big challenge if that were to happen, if we actually see the tax cuts expire and sequestration take effect. We do about $10 billion of DOD spend, so you can do the math. It could have an impact. It wouldn't be huge, but it would still be a headwind.

We don't think it's going to happen. I don't think -- if you talk to anybody in Washington, they don't believe it's going to happen. They just haven't figured out how to solve it.

Eurozone, we don't think it's going to get any worse. We don't think it's going to get any better. Again, I think the forecast is for flat next year. It's probably about right. But we'll see. Again, we see the impacts of Spain and Greece trying to put new austerity measures in place, but folks are getting tired of it. And again, we'll see how that all unfolds.

Pension. Again, I've got pension in question, and I've got it as a negative. The negative is the known amortization or additional amortization we're going to see just as we burn off the losses from 2008. That adds about $120 million or so of headwind into 2013.

The question mark is around the discount rate. We ended last year at 4.7% for the discount rate on the plan. We said it wouldn't go any lower. In August, it was 3.9%. I think yesterday, we looked, it was 4%. So I'll give you the math. It's pretty simple. For every 1/10 of a point change in the discount rate, it's about a $28 million to $30 million hit to UTC. That number is higher, of course, because we now have the Goodrich folks in there to the pension plan. But the figure is $30 million. That's 70 basis points. That adds another $210 million. You're looking at potentially $330 million of pension headwind.

Now the good news is we did the tough thing. We sunset our plan 3 years ago. We announced the sunset. By 2014, we'll -- the define benefit plan that we have today, this FAE plan, goes away. It'll also then give us tailwind. As we go into 2014, we'll start to see at least $100 million a year of pension tailwind, and that grows, of course, over time. But again, we did the tough thing. We did the right thing. We're not trying to obfuscate around pension or trying to hide the fact that pension is a real cost. The good news is, prior to the Goodrich acquisition, we were about 88% funded at a 4% discount rate.

If you get to a 5.5% discount rate, we're 100% funded. Our funding went down with Goodrich. I think we're at 82% at 4%. But again, the math still works. We get back into the mid-5% kind of discount rates, we'll be fully funded. There is no cash required into the pension funding until 2015, so there's no risk of funding requirement at all for the next couple of years. This year, we've put $200 million of cash in, and it seemed like a good investment. We were generating strong cash. We got an 8% return on it. But the fact is, there is no need for cash in the plan for the foreseeable future, and discount rates will eventually go up.

Commercial construction, it's a question mark. I think we saw in the last month the Architectural Billing Index actually went above 50 for the first time in a while. I think you'll hear that from Pedro. We're seeing some good news in North America. Not sure about Europe. Certainly strong in the emerging markets. Commodities and pricing are always a question but again, generally, not a big deal from what we see right now. FX, we're not very good at forecasting.

Okay. Let's talk about the negatives. And again, there's only 4 things on the right-hand side here, but they're big. And I think, again, you're going to hear from Mick in just a little bit about the CMHP and about multi-year rate and the impact of that on 2013.

Commercial aero OEM, we've talked about that. Pension, we've talked about that. And then DOD spending will be a headwind in the business. We'll see that both at Pratt & Whitney. We'll see it at Sikorsky, that's the spares. There's optempo decreases in Afghanistan as the troop withdrawal continues. We will see headwind in DOD spend. We know it's going to go down, probably in the 5% range next year.

The key with all of this, I believe, we believe, is to focus on what we control. And we know, at the end of the day, we will drive earnings growth next year and solid earnings growth. Just the accretion alone from the deals will drive more than 10% earnings growth at UTC next year. So we've got confidence in a very tough macro-environment we can grow earnings at UTC. At the end, stock price will follow the earnings growth, so we know what we have to focus on. We're well positioned to leverage the global scale of UTC, not just for next year, but to deliver solid earnings growth into the future.

With that, let me stop, and I'll take a couple of questions. Maybe 2 questions.

Question-and-Answer Session

Unknown Attendee

Greg, does the base business, organic growth next year, is it better or below what you're doing this year?

Gregory J. Hayes

It should be better than what we have this year. Again, you almost have to go through that business by business, and you'll hear from the unit presidents. But generally speaking, we would expect a little bit of acceleration. I mean, we're at 0% to 2% this year. So a little bit of an acceleration, probably stronger on the commercial side and commercial aero and weaker because of DOD.

Other questions? I guess I picked a good time. That was very good. Okay. With that, Mr. Geraud Darnis, the President of Climate, Controls & Security.

Geraud Darnis

Good morning. I [indiscernible] sound. Okay. I have 4 messages for you today. First is one of solid execution at CCS. Margins are expanding, and they're tracking to a 15% long-term goal. Integration of legacy carrier and foreign security is well underway. And also, our portfolio transformation is well underway.

The second is that we're well positioned to deliver sustainable revenue and earnings growth on our business, because we focused on markets where we lead, that are driven by strong fundamentals. And several of those markets are currently way off peak and poised for recovery.

Third, you're going to hear me say that the economic environment is a little challenging right now, and of course, you all know that. And that's going to put a little bit of pressure on our assumption of organic growth in the back end.

And fourth is that conditions are building for 2013 for organic growth to be better than this year.

So let's start by execution. On the first half, earnings were flat as we guided on down revenue and strong margin expansion of 120 basis points. And that was achieved with strong momentum, continued momentum on the carrier side -- and thank you for that -- benefit of integration of carrier and F&S in terms of cost reduction, beginning of a turnaround of performance of Fire & Security, and also some benefits of portfolio realignment.

And those benefits were somewhat offset by weaker market than we expected. Recall, we have guided you for 4% for the year, 2% -- we revised that to 2% because we're basically flat, organically, in the first half. And also, we did have the benefit of about $50 million of onetime good news at F&S last year, and foreign exchange was a little bit of a drag for about $20 million.

So margins were up, and let me drill on the revenue side. So first half revenues were down 9%. As you can see, it was basically all the effect of divestitures and foreign exchange. And actually, we have organic growth rate of about 0.5 point, $44 million. And that was below our 2 points that we had expected.

Now if you drill further on the right, you see a little bit of [indiscernible] of our revenue change. And while you can see that most markets were a little below what we anticipated, one market was clearly a drag, and that's container, which we know is a higher-margin business for us. So that was clearly -- container only in the first half cost the full point of margin -- of organic growth to CCS.

I told you when we combined Carrier and Fire & Security at the beginning of the year, that it was very important, we continue to carry momentum. So I'm pleased to report we just did that. Actually, if we roll all the sub-entities and product line of legacy Carrier, we approximate that we have achieved a 15% of margin on the Carrier side in the first half. That's because of the benefit of the portfolio transformation. A lot of the cost that we took out of the business over the last years, productivity and also benefits of new products because while we were doing a lot of stuff, we continue to invest in new products. And we're getting good benefits because actually our revenues have been doing better than market this year.

Now on the integration of legacy Carrier and F&S, we're making good progress. We started by combining benefits of scale, combining basically the headquarters, global headquarters, and also regional headquarters. We cut regional head Qs by about half. That drove a reduction, with layers of about 30% of the executive headcount, combined between Carrier and legacy Fire & Security. That gave us $35 million of SG&A savings in the bank in the first half, and probably have $75 million of hard SG&A savings full year. And employment has declined since the formation of CCS by about 9%, that's 6,500 people. About half of them from business transformation, the other half from productivity. And there's more runway. We're currently looking at facility consolidation where it makes sense worldwide. And again, there's more opportunity, but very good progress so far.

Now also I told you at the beginning of the year that it was important that we started turning around and reversing some negative trend in some of the legacy F&S businesses. And we talked specifically about the U.K., which was a big drag last year. So let me give you a little bit of progress report here.

See 2 charts on the top, that basically show that the last couple or 3 quarters, the trends are reversing. The top left is gross margin in our field business Fire & Security in the U.K. And on the right is that margin in backlog. So climbing up. You see on the bottom left, our portfolio of maintenance, on the far side, is starting to go up, attrition down and addition up more. And some businesses that were challenged, like Marioff, were refocused on a core market and will be profitable this year, again, trending up. So again, good progress here.

And finally, on the execution, good progress on the portfolio realignment. Recall the story of F&S, 61 acquisitions, $9 billion rollup, the top 4 acquisitions were themselves rollups of another 100-plus entities. So about 250 different businesses put together and it created a lot of complexity, very large scope and limited scale.

So the strategy is we want to reduce the scope, increase the scale and focus on the better businesses. We've identified through a very rigorous strategic assessment which product line and business we want to sustain, which are they now that don't fit our investments criteria. And we've come out of about $350 million of revenue so far, and it was mostly about $250 million of that on the field operations in the U.S. and contracting business rollup that had been done over the last few years. And we have about $0.5 billion to go, which I expect in the next couple or 3 quarters will be behind us. So that's on the execution side.

So after all this, let's look at how the CCS look like. And I look at it in 3 different ways. If you look on the top left, this is a geographic mix. So you see about 40% of the business is in North America, about 30%-plus of the business is in Europe, and the rest is in Asia and the rest of the world.

If you cut it by different segments on the top right, you see that about 60% of our revenues are on the commercial. It's basically nonresidential, HVAC, Fire & Security, building, infrastructure, oil and gas. And then you see the rest, 40%, is about half-half between residential, HVAC, also Fire & Security, and the Food Safety refrigeration, both stationary and transport.

And then you see on the bottom, how this splits by end markets. So you see HVAC, about 40% between residential and commercial. And then you see F&S, about another 40% between F&S field and products. And again, you see the Food Safety segment.

So let me take you through each of those key segments and talk about the growth drivers and what we see in front of us.

Starting with residential. What drives residential in HVAC and also in Fire & Security is housing starts. Also, very big growing and aging installed base and regulatory environment that push for efficiency, safety and security. After about a 70% drop unprecedented in housing starts over the last few years, things started to stabilize and, this year, trending up about 20%.

That new -- the residential part of the market, if you look on the top right, you see the red. And the red is basically the new construction part of the HVAC split market, so about 20%. So if you assume that housing starts next year continue on a rate of 20% growth that we see this year, some forecast actually higher than that, you will see 20% of this 20% of the market, you get 4% growth rate unit of splits next year just from housing starts.

Now the bigger part of the market, the 80%, is really driven by the installed base. And you see the chart going up here, where we have about 95% installed units in the U.S. And the age and the wear, the tear, the brake, they need to be replaced. And it's the same dynamic on basically fire detectors and CO2 detector ancillaries. And with the economic environment, we've seen a slowdown in what would be a normal replacement rate. So if you look back at, what, 15 years ago, what the market was and how many units were installed, which should be theoretically replaced, on average, about 15, 16 years later, and you add it up to the new construction benefit, you would see a bigger market than we actually see right now.

So I don't know what the economic environment is going to be in the U.S. I don't know how the consumer confidence and the credit access is going to be, but I do know that it's going to be up just on the base of new construction next year. And then as the units get replaced, they tend to be down -- there's push on energy efficiency, there's change of refrigerant, there's change of regulation. And that also drives the replacement market.

And we're very well positioned. We are the industry leader. We've done a lot of work on the cost side. We have the best distribution. We have best, very well-recognized portfolio of brands, and we've been continuing to invest on our product line, we're about to -- revamped the entire residential portfolio over the last few years with winning products.

Now if we turn to the commercial, there's a different dynamic, whether you're talking about emerging markets or developed markets. And the emerging market is about urbanization. So you look at China and India and you say, "Well, gee, urbanization, that's going to bring more people into cities." There's more big buildings going up, and that drives obviously the new market.

But on the developed market, it's really the installed base, again, that is aging. And with the efficiency improvement, there's a very significant benefit every time you got to replace an old unit in terms of efficiency. And there's, again, regulatory environment on the safety and security side.

Now the ABI index, you can see the blue line over there on the top, has been kind of trending sideways, and a little below what we expected this year after kind of coming back after some down years. No, last month was up. So I don't know what it's going to be, but the historical growth rates and the core driver for those market want to be about mid-single digit. So it's certainly less than that. This year, I think we'll see some resumption of that in the future. And we also are very well positioned on those markets. We have very strong brands. We've been investing significantly on our commercial HVAC product line over the last few years.

We're currently in a very significant program to completely revamp all of our large cheaters [ph]. We're leveraging our best-in-class design center in China that some of you have visited. We're developing global platforms. And also, we've organized all of these with a good momentum on the automation and control side, with automated logic and some solution and services businesses.

Now let's turn on commercial refrigeration. So the drivers are food safety, legitimate exploration for food safety. You go from the market that you see on the pictures to retail penetration. And modern retail penetration outside of the U.S. and Asia -- I'm sorry, U.S. and Europe, is very low. I don't know if you saw recently, about a week ago, in India, they said we're going to allow retailers to come into India. Now each state after that is going to -- see the rule is that, at one point, retail penetration will grow.

And actually, we're seeing today about 20% of our commercial refrigeration revenues, stationary, are now in Asia and the Middle East. And that's from about 0, 10 years ago. And we've seen very nice growth rates. So it's growing nicely and eventually start to become 20% of our revenue is on the commercial refrigeration side.

And on the -- where the retail penetration is high, there is a very strong driver, which is efficiency and also legislation on refrigerant. We're getting a lot of traction in Europe with our natural refrigerant, the CO2OLtec line as we call it, where we can achieve very significant CO2 emission for the retailers. And we've been getting share. We have wonderful portfolio of products. And the whole story, again, from the India [ph] acquisition way back been very, very good. We have world-class plants in low-cost places. We have great product line. We've been getting share, and the margins are getting close to the average, which is pretty good from starting from 0 way back. So good driver here.

And then finally, the transport refrigeration. So on the left, the container side. And we know this market can be lumpy. And actually, you've seen it, you've seen the bar on the first half, this was a big drag for us. And that typically happens when shipping lines are squeezed between old price going up and freight rate going down, and freight rates go down when economy is a little softening or/and when capacity is added on those line, which is everything that is happening right now.

But the real driver is really the trade growth, the tonnage of food that is refrigerated. And that has been growing and is growing at about 5% a year consistently. So the orders of container can be lumpy, but eventually, they tend to catch up to the core growth driver, which is the container refrigerated seaborne trade. And that also comes from retail penetration increase and legitimate exploration for food safety.

Now there's other factor, that is containerization. You go from bulk to containers. Repair utilization rates, shipping lines are getting more productive, so they turn over that stuff more, so they run more, they wear, they tear more, they need to be replaced. And there is a pretty strict and rigorous schedule of replacement of those units after a number of years.

So those are -- again, it's a good solid fundamental. A lot of the same things drive the truck side of the business, which we see pretty large in Europe this year for obvious reasons. And also, regulatory environment on emission, noise and efficiency always drives demand. And we have the tier 4 emission regulation that is kicking in January 1, 2013, in the U.S. And we're well prepared with some very good products that will provide some good payback on efficiency to our customers.

We are the industry leaders. We've continued to invest in products. We're very well positioned. And again, even if container can be lumpy, eventually, it catches up.

So let's talk about current order trends. Economic environment is challenging, no question about it. So let's take 4 of them. The top left, you have the split air-conditioning splits in the U.S. And they generally had been trending a little lower than what we had expected earlier this year. We said 3% to 5%. First half market was actually just a little positive, about 1%. We had a good start to the summer in July. You see the blue line, orders, stronger than the red line, which was last year. But August was a little weaker, and September is kind of trending up there. This is very short cycle, but it should be no surprise in the back end of the year.

Food retail Europe, you can see the lumpiness here, and currently is trending weaker than last year. No surprise. The economies are tough in Europe. Consumer confidence for retail. Retailers are not spending as much money in refurbishing stores and things like this. The bottom left, you see China. The China market has been clearly weaker than we anticipated. We started seeing some slowdown last year in Q3, Q4. The first half commercial HVAC data that we get in China was actually down, down 5% to 10%. We're positive, indicating share gain. And it's been lumpy and you see currently the trends are not very, very good. So I think China may not grow at the rate we've seen years past. But this year is really the reflection of what happened in the slowdown of last year in the last half. And we see some improvement in prospects going forward.

And then on the bottom right, you see the blue line of Transicold overall that has been trending below the red line of last year all year long. And if we zoom a little more, that's basically driven by container. And what you see on this chart is a lumpy business. We all know that. That's normal. But it's not normal. Yet the order rates have been basically stalled for about 3 or 4 months. We just had last Friday a nice pickup of orders above the kind of average of '09. The '09 average, as you remember, when everything kind of stopped in this business for a few months and we had a couple of quarters that were difficult.

So again, this reflects the squeeze of shipping lines right now. Freight rates are down. There's been more ships taking shorter lines. So the capacity has increased, the trade has been a little under pressure. Oil price has been going up, profitability squeezed. So what will they do? They try to lower the capacity. We try to increase price, freight rate. But meanwhile, the squeeze are expensed, and they don't take the order. We've seen in the past that those things eventually catch up to the core driver, which is the refrigerant trade that is shipped. So a little bit of tension here, and that's going to put a little bit of pressure in our back end of the year.

But let's look at -- on the left side, the organic sales. So recall, we had guided you over this year for 4% organic growth rate for CCS. And after the first half, that was essentially flat, we said, well, there's going to be 2%. And that took the guidance from $2.25 to $1.50, and that was this and also some foreign exchange headwind.

As we look at the order range right now, there's a little bit of pressure on our assumption for the back end of the year. Actually, we're almost at the end of Q3, and I think this Q3 bar is going to look more like the Q2 bar. I show you to the right that the Q2 bar on profit was up despite no organic growth, thanks to productivity. And again, that is ramping up in the year. So I expect no less than that, we had good margin expansion, earnings growth, but a bit of pressure.

So Q4 assumption looks a little testy in the current order trend. Those are short cycle. We could get a bunch of orders, actually in the container in the next few weeks as uncertainty and things go up. We don't know. But certainly, it could put some pressure on the $1.50.

Just to put into perspective, if you think of $4 billion of revenue per quarter, 1 point of organic growth is about $40 million of revenue; take 20%, 25% drop. So on that, you're talking about $10 million pressure here; 2 points, it doubles that. The other hand, foreign exchange is getting better that what we saw when we were in July. So that will mitigate some of that. So just again, a little bit of pressure on the current order trend but generally in line.

So let's turn to 2013. Okay, what are we going to see in 2013? First, cost reduction, productivity, that's in our DNA, making very good progress on margin, you've seen that, expect no less next year and continued benefit from our business transformation. We have the usual headwinds. You heard about pension, and we get hit on pension, obviously; improvement costs and also some divested earnings. What we really don't know about is what's going to happen with the market. But there are some markets where clearly as -- this is going to be positive next year, on the residential side. I think you'd see -- we don't know what Europe is going to do, China is probably growing but maybe a little less. If you have container that end up less this year, expect to snapback next year. Generally, I would expect -- I'd predict organic growth rate next year that will be much better than this year for our business. And you should expect with it solid drop-through and margin expansion.

So to wrap up, we're making good progress on the execution of our strategic roadmap. We will be at about 14 points of margin this year. And obviously, that gives us a lot of confidence on the 15% margin growth rate. We can have earning a little bit ahead of schedule on that front.

On that, I'll take any questions. Yes?

Unknown Attendee

[indiscernible] With respect to your initiatives on innovation, can you talk about what you're doing for further copper reduction initiatives?

Geraud Darnis

Okay. If you zoom back a few years, I'll be standing here talking about Carrier using about 140 million pounds of copper. And if I look at what I'm going to use next year, with higher volume, about 60 million, which means we've been taking copper out of the product gradually and reducing the exposure on copper. That means more aluminum, which price is not as bad as the copper side. So that's one of the way we do our cost reduction, et cetera. We have more things -- from a technology standpoint, there's some challenges, whether you're talking about the evaporator or the condensers and whether it's a heat pump and all sorts of things. But we're making good progress, and we have more to go. Yes?

Unknown Attendee

When you showed the increase in margin in H1, can you talk about what that would have been -- I think the 2.1% increase over the last year, if you look at that from an organic basis, how much is that -- would you attribute to organic improvement as opposed to divestitures and pruning of the portfolio?

Geraud Darnis

I would say that it's probably all organic because even if you get a little benefit of the pruning of the portfolio, you also have some headwinds, some onetime headwinds that went away, so they were compensated organically.

Unknown Attendee

If we head to the 15% number, again, is that mostly organic? Or how much would we see from the divestiture of low-margin businesses?

Geraud Darnis

I think you're asking for a level of precision to go -- how do we go from 14% to 15% in 3 years, essentially who will give you the breakdown. To me, the business transformation is not so much that you take a business that is less than average in loss. And therefore, you take it out, it makes your rough average go up because it's marginal. We're talking about $0.5 billion maybe that is going to move, and some of it is profitable, but some of it just doesn't belong in our portfolio because it's not scalable or we don't like the market or et cetera. Okay.

Unknown Attendee


Geraud Darnis

Yes, correct. The bigger part is really the simplification of the business and the focus that come with it and the cost and delayering and efficiency we can get once you get a lot of the complexity out of the business. We've really seen that on the carrier side. Once we took a lot of the residential international outside of Carrier, once we took some of the burning platform like we had this commercial refrigeration business in the U.S. or things like this, all your attention is on how you make your good business better. And we've seen a lot of traction from that. So to me, that's the bigger benefit, and we could reconcile, I mean, exactly what this benefit of the business transformation is. But from the F&S side, it's marginal in terms of the roadmap. It's good core organic productivity growth with good drop-through. Who is first? Yes, right here, Carter.

Carter Copeland - Barclays Capital, Research Division

Yes, Geraud, just, I wondered if you might expand a bit on resi and the growth you expect there and sort of delve into share dynamics and product mix. Some of the competitors have talked about even in that sort of growth environment, people are trading down to some of the lower-end units, and that's affecting some of the share dynamics. How do you see that impacting 2013 and the growth you expect from a returns standpoint?

Geraud Darnis

Okay. So again, if you assume how these starts go up by 20%. And you do the math, you're going to see 20% of the market is from new construction. So you see 4 points of unit growth next year just if -- even if the replacement stays flat. Now the new construction comes with lower margin than the replacement. So you shouldn't get the same drop-through as you get if you had the replacement margin. And it depends what builder and what geography gets the volume. But typically, that come with a little lower margin. We have seen movement towards R-22 dry units, which was a little lower and last year, picked up a lot. I think it had picked almost 20% of the market. It's come down. I think it's maybe between 10% and 15%. We do our share of that, and we don't expect that to grow in the future. If anything, we expect that to come down. The replacement market is driven by weather, is driven by an aging kind of installed base. If the consumer doesn't have money in their pocket, they may not want to buy the better units that can give them savings on their electricity or lower sun or whatever it is, and they go for the lower tier. We've seen the compression of the market over the last few years, which we always see when there is tough economic condition. So as the economic condition improve, you should see actually a re-tiering of the market over time.

Okay, the boss asked about share. Yes, I know. I don't like to talk about share, other than to say we're doing better than the market and we've been doing better than the market for a few years. We've been spending a lot of time and effort and dollars on really revamping all of our product line. We're in a very, very good position. So I feel good about our prospects, and we're certainly very well prepared if and when the market snap back from a productivity standpoint, from a factory standpoint and product standpoint, you name it. Yes?

Unknown Attendee

Geraud, you said that the container costs are 1 point organic growth in the first half. How much of a margin hit did you take on that within the confines of the mix? And then the second piece is what is now embedded in 2012 for Transicold? And if there was a snapback in '13, can you put a boundary condition on what a normalized snapback would look like?

Geraud Darnis

Gee, you guys are tough. When times are good, container margin are better than average. When times are bad, container margin are lower than average. So you look at our transport refrigeration, how much is container. You look at my drilldown chart on the revenue chart in the first half, take your protractor, do the maths and you can get there. Hey, you're the analyst. You're smarter than I am. Yes?

Unknown Attendee

What's embedded in the [indiscernible] forecast now? And what's the normalized snapback rate?

Geraud Darnis

It's hard to say. Again, right now, we have told you at the beginning of the year, container will be down by more than 10. And that's because last year, there was a big snapback. If you go from '10 to '11, the market went up 35%. Of course, the market had come down by more than that, the previous 2 years. So it snapped back and kind of above historical average. So I think this year, we see a little bit of correction on that. I think we're down 25% in the first half. We expected our organic growth rate guidance at the back end of the year to be about there. It's clearly lower than that. If you look at the backlog chart, it looks like down 90%. So again, if it goes down this year another 10, 20 points, you should get some snapback next year. I can't -- we'll tell you more in December based on where we are. I mean, I really cannot predict those order rates when they come. We're certainly talking towards the shipping lines. We know when units are replaced, are due for replacement, all those sort of things, just don't know when we get the order. Joe? I will take 2 more. One more. So you pick, you like Joe or George?

Joseph Nadol - JP Morgan Chase & Co, Research Division

Geraud, when you look at your business, the company overall has been really focusing on accelerating organic growth and looking for opportunities long run organic growth. You pruned some of your more troublesome businesses, and you're going to continue to do that. When you look at your end markets now on a blended basis overall, what's the secular organic growth that you think is embedded in there? And then what targets do you set for your business looking over the long run for your organic growth rate relative to those markets?

Geraud Darnis

Mid-single digit organic growth rate in a recovery period for a sustained period is reasonable. We should do better than that. But we've seen all the markets, you really don't go the same way at the same time. So secular, again, if you look at the mix of developed, emerging, mix of -- it's hard to say because, again, take residential, the growth rates are going to be higher for a period of time because they've been down now for 5 years. So you'll have a snapback for a few years, which will drive the overall growth rate up to what's secular. That's why I'm hesitant in this thing. But it should be -- it's more than GDP. It's 3% to 5% secular or more and if everything goes in the right direction at the right time, and we always try to do a little bit better than that. So it doesn't feel like it this year.

Unknown Attendee


Geraud Darnis

Well, last year and the year before on the carrier side, we had very strong organic growth rate. Remind me the number, it was -- we had 12% and 7% in '10 and '11 organic in the carrier side. Now of course, it would have to have dropped the year before. But without really a recovery of residential, the drop was mainly driven by the Transicold market. So we had on the share side, actually, some very good momentum across the businesses in which we focus. On the carrier side, in every business, we had very nice, steady, consistent, sustainable, I think, gains in most geographies on those businesses we focused. So again, you talk about business transformation. I think that's the benefit. We really focus on where we're good and getting better. We're positioned better for when the market snaps back.

Okay. I guess you guys don't want to talk to me anymore, so thank you.

Unknown Executive

[Indiscernible] stay on schedule.

Geraud Darnis

George is not happy. You talk to the boss. He kicks me out.

Pedro Sainz De Baranda Riva

All right. Well, thank you, Geraud. Good morning. So today, I'm going to focus on 2012 and mainly in 2013 how we see it. But first, let me start taking a quick look back at our performance in the past few years. Where's the clicker? Thank you.

All right. If we go back to the precrisis years before 2008, '09, we had a very good performance at Otis driven by both top line growth and margin expansion. And the top line growth was supported, as you can see at the bottom left of the chart, by very strong new equipment markets. Our new equipment orders grew up to the crisis in 2008 and '09, and then they took a beating everywhere.

In developed economies, the markets came down about 40% from the peak and have remained substantially at those levels since. North America is starting to pick up a bit, and we'll see later. But remember that those markets, which were a significant portion of our new equipment orders, are down 40% from the peak.

Emerging markets, however, also dipped in 2009 but recovered very quickly, mainly driven by stimulus packages in China. Now in that period, that's in 2008 and '09, our sales didn't drop as much as our orders, thanks to the balance provided by the service portfolio. And we managed to increase earnings that period, thanks to margin expansion only on essentially flat revenue, thanks to our focus on cost.

Okay. So now let's take a look at 2012. It's been a challenging year for us. Our sales of $5.8 billion are down 3% compared to last year, and our operating profit of $1.28 billion is down 7%. Now there's 3 main reasons for this disappointing performance in the first half of the year: first, our market share losses in China; second, the economic situation in Europe, which is putting pressure on our businesses there; and third, FX, that accounts for 3 full points of headwind both for the top line and for the bottom line.

Now I will talk more about those 3 things as we look out into 2013. But first, let me discuss the expectations for 2012. Now the way we see the year in line with the guidance given in July, which I would like to reaffirm today, is that we will be down for the full year somewhere between $175 million and $225 million. And that takes into consideration some operational improvement in the back end of the year, offset by more FX headwind. Now just in Q3, we expect to see 6 to 7 full points of headwinds for the Q3 numbers.

So with that, let me discuss with you how we see 2013. It's a mixed bag, with more pluses than minuses. On the plus side, China. We expect significant improvement in China, driven more by an improvement of our own market position relative to where we started this year than to a significant growth in the market. We expect the market to grow mid-single digit 5%.

We go to the minus side, Europe. We continue to see drag coming from the economic uncertainty in Europe, where we have a weak market combined with tough pricing that's putting pressure on our business there. We'll see more about that in a minute.

We move back to the other side, the pricing is going to be tough in Europe but also elsewhere, which underscores the importance of our continued focus on cost. We see positives in emerging markets. We're seeing good traction this year, but we expect to continue 2013 in places like Latin America, Russia, Asia and India. We'll see more about that. We expect that to be good for us in 2013.

We are not unlike the other companies, where you can see -- we expect to see some pension headwind. We still don't know exactly how much. We will know by the end of the year, but it will be headwind next year. On the other hand, it's good to start the year with a big service portfolio, and we are taking actions to grow it. We'll speak more about that in a minute.

FX. When we prepared the chart, we were convinced FX was going to be a big merit given the uncertainty with Europe. Now with QE3, things have eased a bit. We really don't know. It looked great last week, now it's back weak again, so we don't know where it's going to go. There's not much we can do about it. And the other good positive is restructuring. We have taken firm actions where we've seen opportunity to increase our efficiency, mainly in developed economies. And we should see the tailwind of that in 2013.

Now I'll go into more detail in each one of these. Starting with China and based on the questions I got last night, I guess this is what interests you. So first, China continues to be a big market, the biggest market in the world for new equipment. It had some fantastic years in the past couple of years. Last year, it grew by 25%. This year, we're expecting it to grow again by about 5%. And the outlook for 2013 is not bad either. It will continue to grow at moderate rates around 5%.

Now as Greg and Louis have discussed with you in the past, we have had a couple of issues mainly related to pricing and to the impact of an incident we had in the Beijing Metro over a year ago that have taken a toll on our market share in China. As a matter of fact, it was about 15% in the first half of this year compared to about 20% in the first half of 2011.

Now we've taken strong actions to recover, including improvements in quality control, in our field operations, training programs. We've revised pricing. We've strengthened communications with the Chinese media, as well as with the Chinese authorities, which are very important; and launched also new products such as the one we show here, the Gen2 core, based on our Gen2 platform specifically tailored for the Chinese social housing. With all those efforts, we've seen some improvement in our market position in Q2. And we expect again improving our market share in Q3. It's still 2 days to go but I'm quite confident that we'll be better in Q2. We're fighting 'til the last day.

So we think that the situation in China for us is improving. And in that light, well, our goal is to be back to where we were in 2011, and we expect to get there by 2013. And I can tell you that I see that goal very much within reach today. And in that light, we continue to invest in China. You heard about the Chongqing factory opening. We just were there on Friday, opening a new factory in Chongqing, which will manufacture our Gen2 products to serve the Inland and West parts of China. I will talk more about Chongqing in a minute because it was a fantastic place. It was my first time, and it's an unbelievable place.

Okay. We also started to have the first shipments from our high-rise Center of Excellence that we are building in Shanghai, assembling about 100 experts from around the world there to support the high-rise market not just in China, but around the world. And we have had some nice wins. I'm showing here the Hangzhou Metro, a very nice win for us. We have 299 heavy-duty escalators and 50 Gen2s. We'll book it in August, good news for us there.

And more importantly, building for the long term, our talent footprint. We have over 12,000 employees in China today. We've added more than 700 this year alone, and we continue to invest in training. We think we'll invest about 400,000 hours in training this year, and we'll continue to invest heavily in training. And I think this talent flow is probably the best lever we have to strengthen our position in China.

So with all of this, I am confident that next year, China will show solid double-digit order growth for us. And it's going to be a very good story.

Now Europe is different, so I'll move to the other side. Europe is not China, unfortunately. It's been a source of fantastic news for us for many years. We have strong companies there, good management teams. However, the economy is not helping a lot today, especially in South Europe. Now although the relative weight of Europe in the Otis global business is declining, it still accounts for about 50% of our earnings. And really, the market is weak and the pricing is tough, and that's putting pressure on the businesses there.

Now despite the tough environment, this year, we have seen high-single digit new equipment order growth. But it's coming mainly from strength in Russia, in Turkey and some very nice wins like the crossrail project from -- transferred from London, which is 107 heavy-duty escalators that we will book also in Q3. Now all of that more than offsets continued weakness in South Europe. South Europe is still not seen any recovery in new equipment.

Interesting trend also, modernization and repair. We saw that business always growing, with the growth of our portfolio and with the aging of the units. Now after 2009, it started to decline despite the fact that the portfolio continues to grow and the units continue to age. So we think there's good pent-up demand there, that will come back as soon as the economy eases a bit. Will it be next year? Perhaps. We're seeing some signs in places that it may be coming back, but perhaps not.

So overall, for Europe, I think the outlook is not positive. We are expecting no positive news in the economy in Europe next year, and those businesses there should be flattish.

Now another developed economy this -- because I'll go to the other side because this is better. North America, you heard Geraud talk about the indicators. They're kind of mixed but generally trending in the right direction, and I'm very much more optimistic about North America than Europe. Now the economy is, I would say, sluggish but much better than Europe. And we are completing 2 important programs of the transformation agenda we have for North America. One is we launched a new suite of products that are specifically tailored for the North American market, that you see up there on the top right. And they've been very well accepted in the marketplace. And second, we are transferring production to our Florence, South Carolina facility that is going to give us very good efficiencies and productivity and competitiveness improvement by colocating there the engineering, the manufacturing and the supply-chain functions.

Now we also enjoy successes in major projects. I don't know why I'm showing this hospital here in Toronto because you saw a big job coming over, which is the McGill University Hospital, which is also great. They should have put that picture here.

So overall, with all these things in North America this year, we are seeing double-digit new equipment order growth, and we expect North America to be a solid contributor to earnings growth in 2013. So a different story from Europe.

Also, shifting gears to other emerging markets. Brazil continues -- the economy continues to be solid. Construction is strong. We have completed the localization of the Gen2 platform to the Brazilian market and are building the new facility there. That should be producing by the first half of 2013, and that will strengthen our footprint and our presence there. We continue to enjoy good wins, such as the Tishman Speyer property you see on the left-hand side and the Corinthians Stadium. I showed you the Maracanã Stadium at my last presentation where the final of the World Cup will be played. Well, the Corinthians Stadium is now an iconic stadium where the opening game will be played and will also be held. And for those of you last night who asked about soccer, good news.

Overall, Brazil is growing double digit for us, and we also expect that to continue next year. It should be good news coming from Brazil as an example of emerging markets.

Let's turn to India. India has a slightly different story in the sense that it's a great opportunity, yet to be fully materialized. Very large population, early urbanization stages. Any way you look at it, India is under elevator-ed. If you compare India with Spain, I like Spain as a comparison, the elevators per capita are 100x less. India when compared to China, which is a little closer, it is 7x less. So it's a long runway ahead. We have a long history in India. We have a sizable installed base, good portfolio, seasoned management teams. I visited them last week. In Bangalore, we are expanding our Bangalore facility and building a test tower also and developing an engineering facility there to better support the markets.

We've completed the localization of the Gen2 suite again, also for India, and are launching a new product there in Q4, which, I think, is going to be well accepted, which is battery-driven, single phase and it continues operating in the case of a blackout. So think it's going to be well accepted by our residential customers there in India.

So overall, India should be a good story for us next year. Now I have to tell you that I think the true potential of India is yet to be unleashed, still relatively small.

Very good. Let me move on to another thing that should be a positive next year. It's good to start with a significant portion of the revenue coming from recurring business. Service remains the backbone of Otis and provides the stability even in the downturns via the economic growth or new -- or construction. Our focus has to be -- continues to be on delighting our customers to make sure they repeat and also investing in technology to improve productivity. We're launching, for instance, a new -- [indiscernible] now, a neat mobility tool based on tablets that -- the purpose is to streamline the processes and make sure that our mechanics spend their time with our customers either face-to-face or servicing their equipment. So there's some runway there.

We have some nice wins. I show a couple here, 600 units of the Incheon International Airport in South Korea or the 100-plus units in the European Parliament in Strasbourg, France.

And overall, you'll hear me say many times that there's no business like repeat business. We love it, and we continue to invest in it not just in training or in technology, but also in acquisitions. We continue with our acquisition strategy, perhaps the most noticeable one announced in the first 8 months of the year was the deal with Ascensores ENOR in Spain. It's a very good company, with a great team of people, with about 18,000 units in the portfolio between Spain and Portugal, solid reputation in the marketplace and with a culture that is not unlike ours. It should add about a full point of growth to our global portfolio. The deal is still subject to regulatory approval, and it should be closed Q3 -- sorry, Q4 of this year or Q1 next.

I think most of the deals we do are kind of like this or even smaller, which is bolt-on deals and straight into the core business. And we'll continue with that strategy going forward.

And as it's light on service, we have a big opportunity ahead of us is China. It's the biggest installed base in the world already and the fastest-growing service market, with one peculiarity, that only 1 in 4 of the installed units is serviced by the OEMs. And we have to work to change that. We have a couple of initiatives going. The most important one perhaps is improving our coverage, make sure that we are close to the customer once the units are installed.

I used to show you a chart. That's our service footprint in 2000. This is how it looked in 2006. This is how it looks today. And we expect to add about 50 dots to that chart in 2013. That's the first approach. The second is beefing up our business development capabilities. We're starting to do that.

So overall, I think the opportunity is there. We have the right approach, and we should see solid double-digit growth in our service business in China for several years to come.

Okay. Another issue that should help us in 2013 is cost. We continue to have a strong focus on cost be in leveraging global platforms or placing the manufacturing facilities close to the markets they serve, investing in productivity. But there's some places where the economy is so sluggish that we have to rethink our structure and our footprint. And we continue to do so. We will invest over $150 million in restructuring in 2012. That should be a tailwind for us in 2013.

Okay. Now let me finish my presentation by telling you that while our priorities remain the same, we have to continue to focus on emerging markets, developing the talent pool, the branch network and the manufacturing infrastructure to win those markets and to continue to focus on service growth through conversions, additional acquisitions but mainly by delighting our customers. We have to continue to focus on costs as you heard, and we'll continue to focus on innovation, products, processes and services to be different from our competitors. While we continue to keep that strategy, we have to put more attention to growing the top line.

And that takes me to my last slide. Okay. We based our performance in the last decade, good performance, on a combination of moderate top line growth and margin expansion. And we're very good with margin expansion. We excel at operational efficiency and achieving economies of scale, but we haven't excelled as much in growing the top line. I think we have to leverage our operational excellence, operational efficiency to grow the top line. And the opportunity is going to be there for us.

Of course, we want to maintain our industry-leading margins. And the fundamentals of the industry, when we look at it, are there. I think the mega trends of urbanization, the increased life expectancy of the population and the heightened concerns for accessibility are there to grow the industry at a good rate.

The footprint may look a little different. What you see here on the left are the megacities today. A megacity is defined as a city with more than 10 million people in the urban area. And this is how we'll look in the next decade. So 2 important things. I think the growth of megacities is going to be much faster that what it has been in the past, and the shift is a little bit towards Asia. Most of the megacities will be in Asia. Talk about Chongqing. Chongqing is one of the new dots that show up there. The market in Chongqing this year for new equipment is going to be bigger than the market in France. That's one city.

So the footprint will change. I think Asia will have more importance going forward, that's why we've moved some of our decision-making towards Asia. We just announced moving the marketing and business development global function to China. While the equipment may change, the fundamentals of the industry are going to be there. And we have the brand, we have the know-how, and we have the scale to take full advantage of that opportunity.

So with that -- how am I doing time-wise? I have time to take a few questions.

Unknown Attendee

Just looking at the organic sales growth, this cycle compared with the prior cycle. Clearly, you're targeting a higher sales growth this time. But I guess, if you look at the OE market, China has been 70% of global OE demand for the last few years in elevators. That's clearly going to be slowing to maybe a mid-single digit growth rate for the next few years. So I guess, how do you think you can make up for China going from 20% CAGR in the market to 5% and yet accelerate your own organic sales globally? And also, related to that, I guess, obviously, price is one weapon you can use in planning of margin versus organic growth. Could you give some idea around the price elasticity in the emerging market?

Pedro Sainz De Baranda Riva

Okay. China is slowing. Well, first, let's look at the overall picture. I think we have a market that has good fundamentals. We've discussed urbanization. There's still to come in many places, including China. There's still a 51%. We have a long way to go. India is lower than that, Southeast Asia. So the mega trends are there. We think our industry is poised to grow a little faster than GDP. And don't forget that we stand today with a big market and the developed economies at a repressed state. So I don't think our market is going to grow low-single digit going forward. I think the growth in the industry will be higher than that. So including -- I mean, China growing at 5% is not a bad story. The service side will grow faster because of the low starting point. So I think, overall, the growth in the industry should be around 5% -- 4.5%, 5%. And that's the fundamental baseline that we have to start with. And regarding cost and price, I think price has always been an issue. The key is to make sure we leverage our scale both in the back-office, as well as in the product. We have to leverage or get the platforms out there so we can leverage our global scale. And with that and a little bit of improved economies that will ease the pricing pressure in particularly in Europe, I think the margins should not be a bad story for us going forward. We have the scale to do it.

Unknown Attendee

Are you more willing to use price as a weapon this cycle because you've got your cost base better aligned with volume to market?

Gregory J. Hayes

Well, we use price very judiciously. We were never considered a low-price supplier, and I think we're not going to change that. I think gaining market share has also to do with presence, with presence, and we've always done it that way. Also, I think it's critical to realize that there's been a big mid-shift in China from the coastal area to inland, and adding the right product line is critical. And that's where, for example, the new factory in Chongqing, which is the low-cost Gen2 for the low-cost housing, gives you an advantage to grow a bigger portion of that very fast growing market. I mean, GDP growth in Chongqing is 14%, while it's 0% on the coast. But it's mostly low-cost housing. So that's why these changes that Pedro has done that we support are critical, in my view, to shifting the needle towards higher growth.

Pedro Sainz De Baranda Riva

That's a good point. Talking about China alone, if you look at the granularity of the market, it's shifted from negative growth almost in Tier 1 cities to robust growth in Tier 3 to 6, and that's why expanding the branch network is so important because that's the way you can tap the growth. And that's really going to come, which is urbanization in smaller cities, small for -- for European standards, they're big.

Gregory J. Hayes

Agility to move from Tier 1, where all this risk in Tier 1 cities to Tier 2, Tier 3 is critical, and that's what Pedro has done with all the changes in structure, with putting new leadership that reports directly to him, with putting the high-rise Center of Excellence, with putting E&D [ph], so all the moves now give him agility to move very quickly so.

One more question here, Pedro? Howard?

Howard A. Rubel - Jefferies & Company, Inc., Research Division

Could you talk for a moment about the tools that you're using to create productivity growth and how widely spread they are and how much more you think you can do? And then could you kind of give us a benchmark of what you're looking for in terms of revenues per employee? I know there's a couple of different businesses, but if you might be able to talk about that.

Pedro Sainz De Baranda Riva

Okay. Productivity, the way we're working productivity and service, typically, we get a couple of points in productivity per year. And we're trying to accelerate that by introducing -- the introduction of global mobility platforms. We have them already in some countries, but we have to introduce them in a more global scale and...

Howard A. Rubel - Jefferies & Company, Inc., Research Division

Can you talk, I mean, the percentage of [indiscernible] percentage of what you think are some of the improved productivity techniques that you have, where you think they are, versus where do you think you can take it? And then again, to my kind of question in terms of revenues per employee?

Pedro Sainz De Baranda Riva

Revenues per employee is a hard question to answer because of -- with the globe we have, the cost per employee and -- it just varies widely from country to country. So typically -- I mean, for us, productivity is the key and productivity and service is still to be tapped. There's some inertia in just the scale. When you add a new unit to the portfolio, most of the time, it doesn't come with as many hours as when you have to start anew in a new town. But the next frontier of productivity is really having a global mobility tool that I think can accelerate and for the next years, maybe get us maybe another point that we're shooting for besides what we're normally getting through our already established processes.

Unknown Attendee

Since I have the microphone, can I ask a question? One of the things that I guess you faced this year was some pricing pressure on the services, especially in Europe. Can you just talk a little bit about what the trends have been there? Is there any improvement? And then what is the tail in terms of if pricing improves now, how long does it take because of the length of time of service contracts until you start to see that benefit? Where can you take out costs in order to offset some of the pricing and just talk about that.

Pedro Sainz De Baranda Riva

Okay. Pricing in Europe has been tough, as I said in my presentation. It's been tough for some period since 2009. Now we're seeing it is varying now from region to region. And if we look outside of Western Europe, it's improving. Northern Europe is kind of flattish now, and we still see significant pressure in South Europe. Now if the trend changes, the impact is almost immediate. The impact is almost immediate. There's no lag.

Yes, one more?

Unknown Executive

Yes, one more [indiscernible].

Pedro Sainz De Baranda Riva

Okay, good.

Gregory J. Hayes

Fifteen minutes' break and we come back with Mick Maurer with Sikorsky, and we'll do the whole aerospace side. Thank you.


Michael B. Maurer

Okay. All right. Good morning. Before I get started on the presentation, I want to acknowledge my predecessor, Jeff Pino. Jeff led Sikorsky through a period of historic growth and transformation. He took us from #4 to the #1 helicopter company in the world. So we're all very grateful for Jeff, his contribution, and we wish him the best in his retirement.

Okay. On Slide 1, you'll see that Sikorsky's 2012 sales and operating profit guidance remains consistent with what we told you at the March meeting. The positives for the year include a backlog that has grown to nearly $1.5 billion for the S-92 commercial aircraft, strong year-over-year performance by our aftermarket business and aggressive restructuring activities, which help offset the dip in international military deliveries and another year of pension headwind.

We signed a new BLACK HAWK, SEAHAWK Multi-Year contract in July. This is a 5-year contract with the U.S. Government worth $8.5 billion. It includes both U.S. military and foreign military sales aircraft. And the award of the multiyear contract is a really important achievement, particularly in this budget climate. Our focus on cost reduction and strong execution gave the customer all the ammunition they needed to sign the biggest contract in Sikorsky history. However, as expected, we're seeing headwind from a margin reset that is typical of the early years of this cost-based contract, and we expect the customer to exercise fewer options than we saw on Multi-Year 7. Delivery started in July, so there's some impact this year, and we'll see even more in 2013, the first full year under the new contract, from both the margin reset and lower deliveries.

Having said that, one nice feature of this contract is the long-term view that the customer is taking. We have an incentive to reduce cost even further in that Sikorsky keeps 100% of the cost savings in addition to those already contemplated at the time of the contract signing. That means there's opportunity for margin expansion as the contract progresses, and of course, the customer will ultimately benefit from that cost reduction in pricing for Multi-Year 9. While we're holding our sales and operating profit guidance for 2012, projected aircraft deliveries of about 250 aircraft is lower than what we showed you in March. This is primarily due to the timing of shipments for the S-76D and the upgraded S-61 aircraft, partially offset by higher S-92 volumes.

Looking at our 3 business units, as we stated in March, there were lower sales in Sikorsky Military Systems due to lower U.S. government and international military sales volumes. And the military team continues to work product cost reduction to deal with the lower sales volume and margin headwind. Our commercial business, Sikorsky Global Helicopters, will see higher sales volume with approximately 50% greater sales of the S-92 and margin growth from that volume, along with continued operational excellence in our Pennsylvania facility. Sikorsky Aerospace Services, the aftermarket business, is flat year-over-year, with strong conversion resulting from operating performance improvement and continued restructuring of their diversified portfolio.

Delivery of the planned 5 aircraft for the Canadian Maritime Helicopter program or CMHP in 2012 is uncertain at this point. We know we will not deliver any aircraft in Q3 and are positioned to deliver up to 5 in Q4. The delivery quantity depends upon the outcome of ongoing negotiations with the customer. We're working together on a potential win-win solution, and I'm confident that we'll find resolution. I'll discuss the Canadian program further in an upcoming slide.

If we do not deliver the 5 CMHP aircraft this year, then Sikorsky will of course realize operating profit growth above our guidance range. It is important to note that excluding CMHP deliveries, we will demonstrate our ability to get to a 14% return on sales in 2012, 2 years ahead of the original time line for this goal, and this really demonstrates strong operational performance being achieved across all of our business units and long-term potential for Sikorsky to be a mid-teens return business.

Speaking of operational performance. Since 2008, we have steadily increased our delivery performance, currently delivering 96% of the aircraft on time to contract. As discussed in the March meeting, we've seen a steady increase in deliveries quarter-over-quarter and are confident in our ability to manage the ramp-up in Q4. In fact, approximately 50% of our planned Q4 aircraft deliveries are in the final stages of assembly today, so we fully expect the fourth quarter to provide significant year-over-year earnings growth. Our operational performance has also led to increased customer satisfaction. The growing backlog for both the military and commercial segments is a direct reflection of the customer satisfaction scores in our core programs, which are all at ACE Gold and Silver levels.

Let me spend a few minutes on our major development programs: the Canadian Maritime Helicopter program, the S-76D commercial helicopter and the CH-53K military heavy lift helicopter.

Progress on the Canadian Maritime program continues. Currently, there are 4 aircraft being used for training with the Canadian government, 4 more aircraft in flight test, and there are another 7 aircraft on the final assembly line in Florida. And we've now started production on 23 of the 28 contracted aircraft. Maintenance training of the Canadian military personnel began in August, and the state-of-the-art maritime helicopter training center in Shearwater, Nova Scotia. Pilot training is expected to commence this fall.

The air vehicle is in very good shape, with little remaining to establish complete air vehicle capability. The biggest remaining development challenge is mission system software, verification and validation. The first release of this software for use in qualification testing is expected to be ready for the fourth quarter of this year.

As I mentioned, discussions continue with the Canadian government to reach agreement on an alternative contractual solution that achieves our shared objective of reaching initial operating capability as soon as possible and allows us to put this great product in the hands of the operators, customers anxious to replace some very old equipment with what will be the most capable maritime helicopter in the world. We certainly have work ahead of us to finish the program, but we're encouraged by what we've seen in flight tests and by the interest shown in the aircraft by other navies, including conversations we've had with Germany and inquiries from a couple of other countries. They're as anxious as we are to see this product fielded.

FAA certification of the S-76D is on track for mid-October. I'm pleased to report that all flight testing for initial certification is complete, and the S-76D builds on the proven best-in-class dispatch reliability and safety of the legacy S-76 while providing significant improvements in performance in fuel efficiency. This aircraft will fly 21 knots faster than the S-76C++ at best range, will burn 8% less fuel at the same speed and has best-in-class external noise signature.

The 76-D uses newly designed composite main rotor blades and powerful Pratt & Whitney Canada engines to greatly improve performance. It will have 1,100 pounds of increased useful load versus the prior product, and it will be equipped with the latest health monitoring capabilities, building on the success we've achieved in predictive analytics with the S-92 aircraft.

With certification imminent, the proven performance validated through our testing and our legacy of reliability and safety, we're starting to see increased customer interest, particularly in the offshore oil market segment, with 3/4 of new orders over the past 2 months coming from this customer type. We expect to deliver about 10 of this aircraft in the fourth quarter.

The Sikorsky picture looks good regarding Pentagon priorities. CH-53K heavy lift helicopter program, along with our BLACK HAWK helicopter, are 2 of the top 3 Department of Defense rotorcraft acquisition programs. As big as the 860 franchise is for Sikorsky, you can see from the planned spending shown on this chart that the future is bright for another pillar in our portfolio with the CH-53K. We're on schedule and on budget for the Pentagon's only rotorcraft development program. Their 5 prototype's on the final assembly line in West Palm Beach. A ground test vehicle is about to be delivered to the test team sometime in the next week or so, and the first flight is on track for 2014.

The CH-53K continues to be viewed as a model program by the Department of Defense. Program funding is on solid ground as the 53K remains firmly among the top 3 aviation priorities for the United States Marine Corps. We expect to sign a $500 million contract within the next 6 months for 4 initial production test aircraft, and the production portion of this program includes 200 aircraft beginning in 2016 and continuing through 2028.

Okay. I'll now move the conversation to future business. The drop in orders that we experienced in 2009 and 2010 is showing up in lower sales for 2012 and 2013 due to the lead time of our products. Orders started picking up in 2011, and that has continued strong in 2012. We started 2012 with a $9.4 billion backlog and expect that to grow to more than $11 billion by the end of the year. As you'll see in upcoming slides, we're confident about the future growth due to the healthy number of orders that are currently in our sales funnel. We see increasing demand within our commercial segment, especially for the offshore oil market, and international military orders remain strong. We'll discuss this further in a couple of minutes.

The backlog is a positive indicator for long-term growth, but we have to work through the dip in 2012 and 2013. So we continue to take actions to improve our cost structure. Over the past 2 years, our manpower has come down 11%, but more importantly, we've grown our low-cost capacity. Currently, over 20% of our shop hours are in low-cost locations. We're also rationalizing our footprint to eliminate excess capacity in higher cost locations while adding workload in other more competitive sites, like Alabama, Florida and Poland. Our aggressive actions will continue to drive productivity improvements and higher operating profit per employee.

Let's turn to 2013 specifically. We're faced with a challenging environment for 2013. The U.S. government and international military aircraft volumes will decline and will experience a full year of lower multi-rate margins. Our military aftermarket business faces lower volumes due to Pentagon spending cuts, especially for spare parts. Pension is also expected to generate a year-over-year headwind going into 2013. All these factors have a significant impact on the 2013 outlook for sales and operating profit.

On the plus side, compared to 2012, our commercial aircraft volumes are expected to rise for both the S-92 and S-76D aircraft. As I mentioned, we have strong customer interest in both platforms and a strengthening commercial market. We're also working on aggressive restructuring and productivity measures, which provide some offsets to the volume challenges.

The delivery profile for the Canadian Maritime Helicopter program is uncertain. Regular meetings with the customer indicate a willingness to collaborate on the best path forward, and I expect to have better visibility on the projected delivery profile sometime in the next month or 2. Like every other defense contractor, we continue to evaluate the potential impact of sequestration.

If you set CMHP and sequestration aside at this point, we would expect a net reduction in our return on sales in the range of 100 to 200 basis points, depending upon how we end this year and how we firm up the rest of the business for 2013. The long-term outlook for sales and operating profit is good, with a growing backlog, but let me give you a few more specifics on those prospects for the international military and commercial OEM segments, where we'll see the majority of the top line growth in the near term.

Here's a snapshot of some of our international military campaigns. So far, in 2012, we've contracted for over $3 billion of international orders and are pursuing campaigns with a high win probability for another $6 billion. We're encouraged by the fact that these contracts come from virtually all areas of the world and in all of our product classes.

The commercial outlook is equally strong. The S-92 is our hottest product right now, driven by growth in offshore oil and continued success in search and rescue, including 4 aircraft for the British government earlier this year. With additional search and rescue campaigns underway in the United Kingdom and Norway, we can see another 20 or 30 aircraft on just 3 tenders alone. The S-76D has a launch customer in the search and rescue segment with a contract for 7 aircraft and options for another 3.

And the Asian market in general and China in particular is starting to pick up for Sikorsky. We recently sold our first S-76D in China, a VIP configuration, and we're in final negotiations to sell another 4 to 8 search and rescue aircraft for the China Ministry of Transportation, who already operate the S-76C++. Our installed base in China consists of about 35 large commercial helicopters and 45 light commercial helicopters, and it's growing. We see another $1.6 billion in sales opportunities over the next 4 years. And this is just the start in China, because as the air space opens up, we're going to see additional opportunities and additional applications that will be allowed in the future to expand our market there.

Okay. So we've been working hard on our footprint and cost structure to address the 2012 and 2013 volume challenge. However, we remain very confident in the longer-term growth forecast starting in 2014. And I want to point out on this chart here, we've taken CMH out of this picture, because we don't know when those deliveries are going to happen, and this will give you a picture of what we see for the rest of the business.

So the international military segment is projected to grow between 20% and 30% annually from 2012 to 2016, and it'll be the backbone of our top line growth over the next few years. In addition, S-92 and S-76 sales within the commercial OEM segment are projected to be strong with mid-teens compound annual growth over the same time period. The declining U.S. government OEM base will be more than offset by the international military, commercial and aftermarket segments, giving us confidence in the return of top line growth. And as I mentioned earlier, with the CH-53K program, the picture looks good even beyond what you see here.

I'll change gears for a minute and look a little farther over the horizon. And although we're intensely focused on the near term, as Louis mentioned, we're not afraid to invest in key technology development for the long term. Leveraging 6 years of company- and partner-funded development in the X2 Technology Demonstrator and the S-97 RAIDER, Sikorsky's positioned itself as the solution for the Armed Aerial Scout and the future vertical lift programs. The future vertical lift will eventually replace both the BLACK HAWK utility and Apache attack helicopters, a program whose value could exceed $80 billion.

So in conclusion, we're committed to achieve our 2012 guidance and return strong margin growth with slightly lower sales. We're confident that we will work through a win-win solution on the Canadian program, and our customers know they can depend on us for strong execution with the safest and most reliable aircraft in the world. Despite operating in the harshest conditions in Iraq and Afghanistan, Sikorsky BLACK HAWKS have 1.6 million hours of operation without a material failure. Our commercial products deliver best in class for safety, reliability and availability, and our customers' confidence in our products and confidence in our performance is driving a growing backlog, positioning Sikorsky for long-term growth.

Thank you, and I'll be happy to take any questions.

Unknown Attendee

Yes, Mick, 2 quick ones. The first is with respect to the old 14 in '14 goal that we had for Sikorsky, we didn't mention that. Is that still achievable with the impact of Multi-Year 8? And secondly, with respect to the profit profile, how long do you think it'll take under Multi-Year 8 to get back to the sort of profitability levels we were seeing on 7?

Michael B. Maurer

Absolutely -- the answer is absolutely, yes. I didn't talk about 14 x 14, but I think I talked about 14 x 12. So basically, our business x CMH is already there today. We are going to see some headwind in '13. We see some other good things happening, as we mentioned, with the international military growth in '14 and margin expansion that we expect over time as we start to work our way through the Multi-Year. That same thing happened on Multi-Year 7, right? Each year of that contract, we did progressively better as we were able to go down the learning curve and work with our suppliers to reduce their cost. And we also did some shifting of where some parts of the BLACK HAWK were produced to improve the overall mix. And so we actually saw some very good, very healthy margins at the end of Multi-Year 7, and we're planning to go through -- use exactly the same process on Multi-Year 8. And the other thing that happens with us, when you talk about 14 x 14, part of the reason that we feel bullish about that has got nothing to do with the U.S. government. That kind of is what it is. We see upside with the mix of the other business. If you see the international military is -- we tend to do better on the international military segment than the U.S. government, and we absolutely do better with the commercial segment than we do with the U.S. government. So to the extent that those grow, you see that mix improve, and you see us in a better position for return on sales.

Louis R. Chenevert

And maybe just to add a bit of view is I think a Multi-Year -- while the bad news near term is we got Multi-Year 8 and we got a reset, the good news is, I mean to Sikorsky's credit, we came in because of our track record of on-time delivery, reliability, performance and were able to actually secure Multi-Year in an environment where nobody else is able to secure Multi-Year contract. So we now have, on our side, the window of opportunity to go leverage cost, to do the things that we do so well at UTC that will bring back these margins that also assures us predictability in a time of great uncertainty with DOD spend. So...

Michael B. Maurer

Right. One of the things we are able to offer the customer, is their average cost per unit on Multi-Year 8 is actually a little lower than Multi-Year 7, very unusual in any DOD program. And the other thing that, again, why we start to feel bullish, they were holding back on certain FMS, foreign military sale contracts, until we signed the Multi-Year. They didn't want to -- orders, essentially, that we had in the bag. They didn't want to put that on Multi-Year 7. They put it on Multi-Year 8. So we signed about 106 aircraft just in the last few months. But because of the timing of those contracts, those deliveries don't really start until 2014. So again, that's one of the reasons we feel pretty good about that growth picture.

Unknown Attendee

Had a question over here. Just for -- one is just clarification. You mentioned a 100- to 200-basis-point headwind x CMHP. Are you using that from baseline to the 14 x CHMP in 2012? Or are you doing it from where you actually will come out in 2012 with assumed 5 deliveries? And then a follow-up is, is there -- what can happen with Canadian helicopter? Can any of those deliveries stretch out beyond 2013? Is that a likely resolution, that it takes longer to get to 28 aircraft?

Michael B. Maurer

Okay. On the first one, yes, it's x CMH both ways. On the second question, we don't know yet, but yes, the deliveries could stretch into 2014. What we're trying to do is we reached -- we have a contract that, because of the way it's structured, doesn't really allow us right now -- doesn't allow the customer to accept the aircraft until absolutely essentially everything is done. And then they begin their test and evaluation, and then it gets -- then they go to their initial operating capability. If we were to follow -- stick with that contract and follow that path, the customer -- end customer would not be very happy with that, right? It's further delays. We have a -- we're negotiating an alternative now that would allow us to introduce, essentially, blocks over time. As I mentioned, the air vehicle's essentially done. We're ahead of anything they could test or evaluate today. So what we're considering is incrementally introducing that so that we can start their initial operating test and evaluation now, do that in parallel so that when the, I'll say, everything is done, you just have a few things left to check. Essentially, these will be software block upgrades. And so with that sort of strategy, we think we can pull -- what's really important -- we care about delivery dates, obviously. But what's really important to the customer is the initial operating capability and the deployment to the field for their customers. And we think we can pull that to the left by at least 18 months, if not 2 years, if we reconfigure this contract to allow that flexibility, which is typical of this kind of contract with every other customer. It just didn't come together that way for this program, where we've sort of reached a point where we're kind of out of phase if you look at the different pieces of the program versus where we are today.

Joseph Nadol - JP Morgan Chase & Co, Research Division

Just another quick one on CMH. Is this mostly about performance in the software? Or is this a money issue? Can this -- what are they asking for? Just if you help us draw a line under how bad this can get, is there any implicit threat here, like Australia a number of years ago with their maritime helicopter, where they canceled it? I mean, you mentioned that Canada really wants these things, and they have all the equipment, but how bad can this get? And what do they want?

Michael B. Maurer

I mean I don't want to sort of negotiate in public about what they want, but what they want is, certainly, sounds perfectly reasonable, right? They want their aircraft the way they ordered them. The issue is that this is a development program, and it really wasn't structured as a development contract. So we're both trying to navigate that and they have to follow their procurement rules and regulations. So in order to accommodate, as I mentioned, sort of allowing the program to continue and sort of updating the contract to match where we are, we have to restructure the contract. In terms of how bad can it get, we think anything -- the unknowns are very limited at this point. We've got thousands of hours of flight testing. Like I said, we're on -- we've got #23 out of 28 on the line. So the parts have been designed. We know how to build them. Our suppliers know how to build them. So the hardware is already there. The amount of risk associated with building these things and doing any of the tests on the base aircraft, pretty limited. It is all about the mission equipment software. And we see some risk there, but it's really more about -- we think about schedule, timing of getting it in than it is about cost. We think we're appropriately gauged in terms of understanding our risk on the program, in terms of what could happen with the cost. And we do think the customer wants to work through this with a solution that works for -- obviously, for the customer and for Sikorsky as well.

Louis R. Chenevert

And maybe to add, Joe, Sikorsky has had the benefit of personal follow-up by the Chairman for the last couple of months. I was just in Palm Beach, actually, 4 weeks ago, and I saw firsthand, on the line -- helicopter 16 was on the line. Helicopter 10 was in the water test, ready to go. So I mean the equipment, mechanically, is good to go. In talking to the employees, talking to the program manager, we've made a lot of progress, and I think that's recognized by the Canadian government. As Mick said, 23 of 28 is now in process. That means in Keystone, they're assembling the cabin and all that. I have high confidence we'll find a win-win in that. But like other programs in aviation, I mean, we wind up where the intent was to buy a off-the-shelf helicopter but customize it slightly to specific requirements, which became more complex upfront, and I think we're now down to software. And if you look at any program, you could talk to Alain about our last step on 787, I mean you're ready to go, but you won't really know if all your stuff works until you fly. And you fly more, and you find out little bugs, and you fix them. You look at JSF, I mean, a different scale. I mean JSF, when it's all said and done, F-22 is the same, is all about software. So Mike McQuade, which is our Head of Technology, has been involved with the technical people at Sikorsky, with the contractor in Canada that does the software, which is GD Canada. So there's a big partnership, and it's not unusual. Now if you look at it from a contractual perspective, well, you wanted 100%. But the fact is if you -- when you take -- you get 100%. When you start flying, you'll find a couple of bugs, and you'll have to go fix it. And that's really what we're trying to resolve at this point in time to make it simple. So I've had several visits to Palm Beach, and I would say the momentum has improved. I feel confident that we're going to have the absolute best helicopter in the world for the Canadians, and more importantly is that there's international demand. I mean, it's exciting to see at the air show last summer in Farnborough that people show interest in the CMH platform, and they say, "Well, it's good for me as is, maybe even a couple less features. We don't need all the stuff that they got inside." So the minute -- I mean, we've capitalized R&D on the CMH. So the minute we get done with these deliveries, the good news is we know how much it costs. We know what the platform can do. Any future sale is going to be a smile on our face. So while it's painful today and it's going to remain painful, there's going to be good momentum in the future.

Michael B. Maurer

And we think there's going to be more and more pull. Now that we've got some aircraft up in the hands of the customer today. And once the pilots actually start flying, the customer pilots start flying that aircraft, we're expecting even more pull to get this fielded.

Gregory J. Hayes

One last question.

Michael B. Maurer


George Shapiro

Yes. I just wanted to clarify what the betting case would be, because right now, I'm on the understanding that you're going to deliver 5 this year, which you're saying this may be suspect and that next year, you were going to deliver 19. So is that still the betting case? Because if that is, then you're going to pick up another $200 million in losses next year at Sikorsky in addition to the roughly $100 million lower year that you've talked about because of the reset on the BLACK HAWK, right?

Michael B. Maurer

Right. With the CMH deliveries, the profile will define where that headwind is. That's why we put it under a question mark. So we have to go through this negotiation with the customer. Once we reach agreement on that, then we'll have better visibility on what -- exactly what the profile is in terms of the deliveries.

Louis R. Chenevert

And then, George, the good news is -- I mean, Multi-Year is set. That's the good news, and we know what the headwind is. By that time I see you all in December and give the '13 guidance, I mean by then, we should have this whole CMH behind us, and we'll know exactly what the parameters are and what it means. And we're going to be looking for a win-win solution but also trying to, obviously, optimize the future picture.

Unknown Attendee

Are there any updates say over the last month on the -- trying to redo that contract to split it into the 2 pieces?

Louis R. Chenevert

I think it's inappropriate to discuss this at this point. I mean, it's ongoing negotiations. I mean, Canada is a huge customer for us, and it's also a huge partner. I mean, we're in Mirabel here and look at what we've done. Look at our presence for all our divisions, whether it's commercial or aerospace. We love them as a customer. They fly C-17. They -- we have big content, and we're going to try to find a way to make sure this program delivers to their parameter. And I think we're on a really good path. It's just there's some issues that need to be finalized. But we never want to be doing contract negotiations in public. That's up to Sikorsky. And they have the ball, and they'll get it done. Okay?

Michael B. Maurer

Thank you. Over to Alain Bellemare.

Alain M. Bellemare

Thank you, Mick, and good morning, everyone. I'm losing my voice here. And we had a nice evening, had too much discussion with David last night. So UTC Propulsion and Aerospace System is really a $25 billion organization. And as you recall, we've brought together Pratt & Whitney and our new UTC Aerospace System organization, which is made up of Goodrich and Hamilton Sundstrand. So I mean these are very exciting times for us as we are right now profoundly transforming our business.

So in March, we've told you that this would be a critical year. Today, I can tell you that everything that we've said we would do, we have done. So we've laid the foundation for tremendous growth. On July 26, we completed the Goodrich acquisition. This is the largest in UTC history and one of the biggest in the aerospace industry. We closed this $18 billion deal in just 10 months, and I'll talk about it way more.

We also completed the IAE transaction. It's a great deal for Pratt as it strengthens our position in the large commercial engine business, and Dave will cover this in more detail. In parallel, we have continued to make solid progress with our GTF program. We are winning campaigns. We have now more than 3,000 running hours on the engine, and honestly, we are on track right now to achieve all of our performance targets.

On the JSF, we have 33 engines in the field, and the performance is just perfect. Since we last talked and as Greg mentioned this morning, we divested our HS Industrial business, Clipper and Rocketdyne, which is allowing us to focus on our core businesses moving forward. And finally, we have created UTC Aerospace Systems, and I'll cover this in more detail.

So as you can see, we've done a lot in a very short time frame, and I am very proud of the team and for the work that they've done. So today, Dave will cover Pratt in more detail, and I will take you through our new UTC Aerospace System organization.

So by combining HS and Goodrich, we have created the largest aerospace system provider in the world at $13 billion. This new business has tremendous runway for top line growth, for margin expansion, for advanced technology and for system integration. After 10 months of intense planning, we were ready on day 1, and the team hit the ground running. The feedback from our customers has been very positive. So I'd like to show you a very brief video to introduce you to our new UTC Aerospace Systems organization.


Alain M. Bellemare

So as you saw, we have organized UTC Aerospace Systems into 2 major segments, each about $6 billion to $7 billion in size. And we have Curtis Reusser leading Aircraft Systems and Mike Dumais leading Power, Controls & Sensing Systems. We have both Mike and Curtis here with us today.

So the team is fully in place, and we have a very nice balance of Goodrich and HS leaders across the business.

So each segment is made up of 7 strategic business units. Aircraft Systems consist of mainly mechanical systems such as the nacelle, wheels and brakes and actuation. And Power, Controls & Sensing Systems has more electronic content, with electric generators and sensors. These business units operate as full P&L, with revenues ranging from $400 million to over $2 billion. So we have a very broad range of products with market-leading position across all of these businesses.

We also like the mix of our new business, with 70% of sales coming from commercial and 30% coming from defense and space. We will clearly benefit from the commercial OE upcycle that we have in front of us and from the great content that we have, which will drive solid aftermarket.

On the defense side, HS is very well positioned on new platforms such as the Airbus A400M, the JSF, the Boeing tanker and the CH-53K. And Goodrich brings wonderful businesses such as ISR and sensing, which are really less susceptible to the pressures on defense.

So it has been 60 days since we closed the deal. And so far, so good. No surprises. And the team is really committed to achieve the full potential of this business, and we're really focused on 4 key priorities: driving cost synergies in SG&A in the supply chain and global footprint optimization, flawlessly executing the many new development programs that we have right now on our plate, sharing technology across the business to come up with more competitive products and winning new business.

So in March, I shared with you that we had a plan to deliver $400 million in synergies. And today, I remain highly confident to achieve this. And of course, we're getting pressure from Louis and from Greg to deliver it more and many questions from you as well. It's early, but I think that it's going to be good.

So over the next year or this year, we expect about $50 million in savings. And for next year, we're planning $450 million. So over the next 3 years, savings will come from general and product procurement, and beyond that, it will come from our global footprint optimization. So as I shared before, we will have nearly 300 sites between Pratt & Whitney and UTC Aerospace Systems. So we will consolidate sites, and we will also increase local sourcing activities.

As you know, at UTC, we have an extensive low-cost network with operations in Poland, in Russia, India, Singapore and China. And Goodrich brings additional capabilities in India and Mexico. So when you put all of this together, we have a great global footprint to increase volume in low-cost sources, and this is something that we know how to do well.

We've established also a technology council to leverage our technologies across the business and to come up with new products that will bring more value to customers. So last time, I talked to you about the propulsion system, really integrating the engine, the nacelle, accessories really to optimize the performance of the entire system. Well, now we're seeing in 60 days in, we're seeing more opportunities at the component level. So for example, we know that HS has very strong electrical capabilities, and we see opportunities to leverage that on Goodrich products. Goodrich has very good, great acoustic and composite technology that will help us reduce weight and noise moving forward. They also bring some real good sensing and health monitoring technology that we will be able to use for more proactive maintenance solution. So when you combine all of this, we have a great technology portfolio to shape up the next-generation of aircraft system.

At HS, we've been winning much higher content on new platforms, and the integration of Goodrich strengthened our position even more. So with this deal, we have doubled our content on the 787. And we have more than doubled it on the Airbus 320neo. So we have a very impressive presence on all new platforms moving forward. So if you look forward now, we are extremely well positioned, with a backlog of $150 billion for UTC Aerospace Systems. So this will clearly drive very strong OE and aftermarket growth for many years to come.

And we have one of the largest and most comprehensive aftermarket network in the industry to support this growth. So at UTC Aerospace Systems, we have 6,000 customer service employees. We have 64 sites around the globe just for MRO and aftermarket support. And we have a 24/7 technical support worldwide. We have unmatched knowledge, capabilities and global footprint to serve our airline customers. So as you can see, we are very excited about this new business.

So now I'd like to turn to our guidance. For 2012, we are very confident in meeting our targets. Hamilton Sundstrand is on track to achieve high-single digit top line growth, with operating profit up $75 million to $100 million, and that is despite lower-than-expected aftermarket growth.

And as Greg mentioned, Goodrich will be dilutive to earnings this year, $0.20. For 2013, we are confident to achieve $0.50 accretion from Goodrich. And at HS, we see another solid year of performance. I mean, the base business at HS is very, very strong and will clearly benefit from the OE upcycle that we have in front of us. Aftermarket should be up, driven by traffic, our strong content and pricing.

I mean, we'll see a bit of pressure on defense, and as Greg mentioned, there will be also a bit of pressure coming from pensions. So pension will be a headwind. But overall, our new UTC Aerospace Systems business will see solid earnings growth for 2013.

So in conclusion, I really want to leave you with 5 key takeaways: First, is that we have strategically transformed our UTC Propulsion and Aerospace Systems business with the Goodrich and IAE deals and the divestitures. Second, we are very well positioned for solid top line and earnings growth moving forward. Third, is we have a great team in place with the knowledge and expertise to drive perfect execution, UTC style of execution. Fourth, we have best-in-class, leading-edge technology to bring more value to our customers. And finally, I am convinced that we will continue to deliver superior performance for customers and for shareholders.

So on this, I think that we've got time for a few questions.

Unknown Attendee

Alain, a quick question on the $0.50 of accretion for next year. Obviously, that's sort of held firm, but several things have changed since we originally laid out that target, whether it's commercial aero spares or military spares, and we've talked about it in Sikorsky. Obviously, Goodrich would have pension headwind as well that you'd have to make up for. What's the other side of that that's causing you to maintain that target?

Alain M. Bellemare

Well, the punchline is we're accelerating the synergy capture. So last time, we were talking about $100 million of synergy for 2013, and I just mentioned now, we're seeing $150 million in synergies for next year. So I mean, that's really what we're trying to do. And we're doing that in anticipation of maybe a little bit of softness still in the aftermarket.

Unknown Attendee

A question on your comments about the spend to get the $400 million worth of synergies over the 5-year period. How does that return on investment of the $700 million to get the $400 million over a 5-year period compare to what you would have been doing at Hamilton or Pratt to begin with? And secondly, what's the profile of that spend in terms of how much is front end versus back end of that?

Alain M. Bellemare

Okay. So what you're seeing here are incremental synergies to what we had in the baseline at both Goodrich and HS, okay? So that's over and above, and we've been very careful in making sure that we track it this way. So we're talking about incremental synergies coming from the deal. Now in terms of the profile, we -- what we're seeing here is on the saving side, $50 million this year, $150 million, and then it will go up $250 million, $350 million, $400 million. And on the cost side, we have roughly $150 million this year, and you -- we're forecasting roughly $100 million a year for the following 4 years.

Unknown Executive

And the nice thing is as we accelerate some of these synergies and savings, it makes it easier for me to ask more sooner.

Alain M. Bellemare

So maybe we can move to the next topic. But just kidding aside, I mean, it's only 60 days, and as I said, there's no surprise. It's a great business. We are very well positioned. Goodrich was very well positioned, very similar to HS on all the good platforms. So the growth is clearly solid. And we do have some challenges like in any business, but there's nothing that we've seen up to now that we don't know how to address and to improve quickly. For our next question?

Unknown Attendee

Alain, could you just comment, give us some color on the aftermarket? Have you seen any sequential pickup from what you saw in the second quarter and maybe break out between Hamilton Sundstrand and Goodrich?

Alain M. Bellemare

Okay. First, I mean, sales side, you've seen that. We were slightly up at HS, and Goodrich was slightly better on the sales side. Orders were soft at HS, down roughly 7% in the second -- 10% in the second quarter, 7% in the first half. Sequentially, we are not seeing significant improvement right now, but year-over-year, we are. So it's like -- it's not worse in the third quarter. It's a little bit better or kind of flattish at HS. And we're seeing pretty much the same thing at Goodrich. Howard?

Howard A. Rubel - Jefferies & Company, Inc., Research Division

So you probably asked preliminary plans from your business unit heads as to what they think 2013 could be. Could you help us kind of get there a little bit? I mean, there's still some asset sales I know, and there's still probably some purchase accounting issues. But could you give us a general idea of what you think the top line is and the operating line might be, Alain, for next year?

Alain M. Bellemare

Well, we've -- we will -- I could, but not today. But we will talk more about that seriously, Howard, in December. But I would just say the top line right now, I mean, what we're -- and I'm talking about Aerospace Systems, I mean, the top line looks pretty good, and the bottom line looks pretty good as well. We have a few issues to address, but we also have some opportunities as well that we can leverage. So right now, as we speak, it looks like we're in pretty -- I mean, we're tracking well to achieve the $0.50 accretion for 2013.

Unknown Attendee

Yes. Alain, could you give us a little color on what you're seeing in the military aftermarket at both of those businesses?

Alain M. Bellemare

Well, military aftermarket actually has been very good in the first half. So we expect the second half to remain good. We -- for next year, we expect some softness. But this year, first half is very -- aftermarket HS, very good and very similar at Goodrich.

Unknown Attendee

When you say some softness, I mean, do you feel people are kind of pre-buying in anticipation of sequestration? So I mean, could some softness mean down 10% to 20% next year?

Alain M. Bellemare

Honestly, I cannot quantify it, I mean, because we all know that it's very difficult right now. There's so much uncertainty around this. I mean, could there be some like pre-purchase, pre-buying? It could be. I mean, that's something that we are actually looking at right now. And in anticipation of that, we're planning for lower aftermarket sales on the military side next year. And who knows where this thing will go. So we'll know more in December.

Unknown Executive

I also think that the optempo reduction based on the wind-down of war in Iraq and Afghanistan impacts more near-term propulsion than it does some of the Aircraft Systems because of flight hours that diminish on some of these long-term fly-by-the-hour agreement that we got like on the C-17, et cetera. You will see the optempo impact sooner than you would on the system side. Just to give you a bit more color.

Alain M. Bellemare


George Shapiro

Just a quick one, Alain. Several months ago, when you initially came out with the guidance, you said Goodrich would be $1.550 billion to $1.6 billion next year in profits. Do I just take $50 million off of that now based on the increase in cost savings? Or how do I look at that number yet?

Alain M. Bellemare

Yes. We're trying to stay away from numbers for next year. So we're going to stick right now to our $0.50 accretion for next year for Goodrich. And we'll provide more detail as we get closer to year end.

George Shapiro

One other one. What's the 787 content now you gave? You said it's obviously much higher, but how about a dollar figure?

Alain M. Bellemare

Yes. We were like at $3 million for ships [ph] at HS. Goodrich is above $3 million. So in total, we're above $6 million versus that on the 787. Okay. Maybe 1 or 2 more questions. I guess we're good.

We're clear. Okay, thank you, guys. Dave?

David P. Hess

Thank you, Alain. When Geraud got up this morning, he said he had 4 messages. I've got one message. Pratt's going to resume earnings growth in 2013. You can write that down. And I'll talk more about that, obviously.

But first of all, on behalf of Pratt & Whitney, let me welcome you to our Mirabel operation. You had a chance to see, I think, firsthand this morning some of the investments we're making in the future of Pratt & Whitney with the revolutionary new Geared Turbofan, one of our Pratt Can engines, the PW300 family that will go on a broad variety of business jets. Also, you've got to see the investments we made in the flying test bed. And soon after this presentation, you'll get a chance to tour our new world-class manufacturing assembly and test facility. And I can guarantee you, you won't see a more impressive assembly and test operation in the world.

So with that, let me get started. So this is Pratt. Again, just under $13 billion aerospace engine company that in 2011 generated just under $2 billion in profits. The pie chart looks a little bit different from the last time I showed it to you, now with the sale of Rocketdyne being announced and that being moved into UTC discontinued operations. You can see that's now missing from our pie. We're now more focused on our 3 core engine businesses: in terms of size, our large commercial engine business that serves OEMs and airlines around the world; our military engine business, #1 in the world in the military engine fighter segment; Pratt & Whitney Canada, #1 in the world in small engines for utility aircraft, helicopters, business jets and regional turboprops.

And next time you see this pie chart, you'll see the newly branded Pratt & Whitney Aero Power business in this pie, that's the APU business that we recently transferred from legacy Hamilton Sundstrand into Pratt & Whitney obviously. And APU is just a small turbine engine, so we think it has great synergy with Pratt & Whitney from both a manufacturing and an engineering standpoint.

Let me start with the large commercial engine business. There's really 2 big transformational activities going on right now in the business. This is one of them. The acquisition that we made of Rolls-Royce this year, of IAE, that we closed on in June 29 of this year, and let me tell you why that's important to Pratt & Whitney. And Louis touched on it already. The expanded share that we now have with the V2500 is going to generate earnings growth for Pratt & Whitney starting this year and going forward to the end of this decade.

If you look at the installed base of engines, we've now delivered more than 5,000 V2500 engines, and we estimate we'll deliver another 3,000 more before production of the classic A320 comes to an end in 2018 or 2019 or so.

So -- and even after 2018, we're going to continue to get earnings lift from the great aftermarket revenue stream that this great installed base is going to generate.

Second, the deal really presents a great opportunity for us to consolidate 2 great organizations -- our Pratt & Whitney large commercial engine business organization as well as the IAE organizations -- into one organization that gives us a much stronger channel to market and as well as gives an opportunity to capture our cost synergy in excess of $25 million a year and at the same time again strengthen our channel to market and give us an opportunity to better serve customers, particularly customers that own and operate A320s now and V2500s as we go forward in the marketplace and market the A320 Geared Turbofan for the neo program.

And finally, the deal really extends Pratt & Whitney's reach and brand to another 100 customers that, quite honestly, Pratt hadn't served previously. These are customers -- these are IAE customers that again that Pratt hasn't touched, though. Again, this expands and increases our channel to marketplace. So we're very excited about this acquisition.

And the second big deal or big transformational activity in large commercial engine business is obviously the development of the next-generation product family of engines. You can see the 4 applications here: the MRJ, the CSeries, the A320neo and the MC-21. Combined, these 4 programs over the life of these programs are going to generate in excess of $325 billion for Pratt & Whitney.

And the market response to the next-generation product family of engines continues to be very strong, and we've now got firm and option orders for close to 3,000 engines, 3,000 Geared Turbofans. And you can see many of the operators have chosen the engine for their fleets, and I think of particular note, if you look in here, you can see a lot of leasing companies. And clearly, the leasing companies believe that the Geared Turbofan has great asset value in the marketplace and are speaking up with their orders and their backlogs.

Now as you know, we're sole source on the MRJ, the CSeries and the MC-21. So when they sell an airplane, we sell 2 engines. But on the A320, as you know, we're (sic) [not] the sole source. So there's a competition as airlines and leasing companies sign up for airplanes. We've now won slightly more than 51% of the orders for the A320neo. And there's another 500 airplanes that are on firm order with Airbus, where the engine has not been selected yet. So you can imagine we continue to be very active with campaigns.

And it's really not just the quantity of orders but it's the quality of orders that we have in the backlog. And if you'd look at the mix of people here, we have a very good mix of flag carriers in high economic growth regions, places like the Middle East, India, Philippines, and again, the leasing companies that will help to seed new customers for Pratt & Whitney.

And I think also of note here is in 5 of the neo competitions, we've been able to win customers who in the past had 100% GE or CFM legacy fleets. I think that was pretty impressive. And none have gone the other way. I know a couple of you have asked me about the Jetstar campaign, which the other guy did win. But even in that case, if you look at Jetstar's Qantas fleet, far more than half of that is GE and CFM engines.

Okay. This chart is really a simple illustration as to why we continue to be so confident that the conventional engine -- and you can substitute LEAP-X if you want in conventional engine -- cannot match the numerous benefits offered by the Geared Turbofan. You've heard us talk about it before, the lower fuel burn, the lower emissions, it's a quieter engine and lower maintenance cost. And it all had to do simply because the higher cycle efficiency that's introduced by the introduction of a gear system in the engine.

What that enables you to do is to take out 6 of the rotating or LLP rotating stages, or LLPs, in the engine. That's a 25% reduction in rotating stages in the engine. With that comes about 2,000 airfoils. That's about 46% of the airfoils.

If you put on top of that the fact that this engine runs quite a bit cooler than LEAP-X or a conventional engine, all of that adds up to significant advantages if you look at manufacturing costs, maintenance costs, lower fuel burn, longer time on wing and ultimately lower cost of ownership. So I know the other guys have claimed on occasion that there's an NPV benefit that goes with LEAP-X over Geared Turbofan, but quite honestly, as I've said before, they have to defy the laws of physics and economics for that to be true. This is simply -- GE is a great company, but we simply have a better engine here.

Okay. As we continue to accumulate test hours in the Geared Turbofan, we continue to gain confidence in this engine, and all the data we're seeing coming off the development programs continues to give us confidence we're going to meet the commitments that we've made to the marketplace. We've now accumulated about 3,800 hours -- so I think that's now 3,800.5 hour after the flight test demonstration this morning -- and about 10,000 cycles of ground and flight testing between the MRJ and the CSeries engine. Combined, that's about halfway done with the test program. If you look at CSeries alone, we're about 3/4 of the way done. And that engine continues to track for certification by the end of this year. In fact, if you look at the tests that we've run, many of the high-risk tests like the bird strike test and the fan blade out are now behind us. So we feel very good about that.

MRJ is progressing. We completed the flight test program for that first engine on June 21 of this year. And the A320neo engine, the Geared Turbofan and the MC-21 continue to make progress as well. In fact, the first A320neo engine is in assembly today, and that will be in the test cell before the end of the year.

Okay. So that's kind of the future. Let me talk about what we're seeing in the commercial engine marketplace today, and quite simply what we're seeing is an economic environment that's a mixed bag. If you look at the fuel prices here, obviously, fuel prices were down early in the year. But now, we've seen them kind of creep back up, kind of consistent with the fuel price levels that we saw in 2011. If you look at the airline profitability, they've been able to offset much of the fuel price increases with higher ticket prices and fees. I'm sure many of you found that out as you flew here today. So the airlines continue to be profitable, albeit at levels below what they saw in 2010 and 2011. And revenue passenger miles, despite again the higher ticket prices, people continue to fly more frequently in airplanes. RPMs we expect to be up this year about 5%. ASMs maybe a point below that, but still flying hours are going to be up this year substantially. But kind of in the background of all that is there continues to be this kind of economic uncertainty or cloud. You can see the GDP forecast here, steadily coming down from the forecast for 2012 and 2013. And you kind of add on top of that U.S. presidential elections, sequestration, fiscal cliffs, Eurozone crisis, slowing growth in Asia. Again, it's a very uncertain environment. And so airlines consequently are being much more cautious with their cash and their aftermarket spending.

So as a result, you saw this in our second quarter earnings release when we announced that commercial spares were down in the first half of the year by 8%. And again, consequently, you heard Greg revise our commercial spares guidance from up mid-single digits to down 10% year-over-year.

Third quarter, so far, continue -- we continue to see weakness in the third quarter. So I think there's going to be continued pressure on this forecast that you can see here. On a reported basis, we'll be up. We now have 100% of the V2500 revenues in our numbers. So again, on a reported basis, you will see our numbers be up in the quarter. But if you look at kind of the legacy portfolio, again, that continues to be under stress.

So obviously, the big question is what's going to happen in 2013? And it's not unusual. As you've seen before, this pattern before, it's not unusual for us to have a sharp recovery following a very steep decline.

And another reason I think we have some cause of optimism for 2013 for commercial spares being back up again is if you look at our portfolio of spare parts sales here, if you look at 2000, you can see that more than half of our revenues were being generated by the declining installed base of JT8D and 9D engines. Fast-forward to kind of 2012 and you can see the pie is not only different. Obviously, the commercial spares revenues have grown since 2000. But on a pro forma basis, in other words, if we had kind of looked at it having the IAE deal done on January 1 versus July 1, so a full year of the IAE portfolio, which is the makeup that we'll see in 2013. More than half of our spare part revenues now are coming from the growing installed base of V2500 engines.

You couple that with the fact that the V2500, as Louis touched on, still has a very young fleet. About 90% of the installed base of V2500 engines are the most recent model, the A5 model. Those average about 6.5 years in service. And if you look at that population again, only about half of those have come in for their first shot of business, so there's a lot of runway there.

So commercial spares revenues will certainly be up 2013 on a reported basis. Again, we're going to have a full year of the IAE revenues versus 1/2 a year in 2012. But even on a legacy portfolio basis, we'd expect commercial spares to be up again in 2013.

All right, let me move to the military engine business. And the highlight here, obviously, continues to be the Joint Strike Fighter program. The flight test program is going very well, continues to be running ahead of plan. I'm proud and pleased to report we don't have any significant technical issues with the engine. We're well into production now. We've delivered 71 production engines and about 27 lift fans. And I think notable is the first F-35 delivery we made to the U.K. in July of this year.

We continue to attract on the cost objectives and the cost targets we committed to the DOD in 2009. In fact, we're down about 40% for the first -- from the cost of the first production engines. And you can see that with the pressure on military budgets, you can see that the ramp rate for Joint Strike Fighter has moved to the right. We're flat for a couple of years here, but then you can see the steep ramp in deliveries as we get into the back half of the decade. Now as we've talked about before, we're also seeing declines in some of our legacy engines with F119 deliveries for the F-22 coming to an end this year and F100s and F117s ramping down. So overall, military engine deliveries will be down this year, single digits, and down double digits next year.

But while the military OEM business is down, we're -- our installed base of engines and consequently, our military aftermarket, continues to grow. We're seeing double-digit growth in military aftermarket this year, and we expect it to be up again in 2013. You can see the complexion of the installed base is shifting a little bit, less F100s, more F117s and F119s, and as we move to the end of the decade, obviously, more F135s. But I think this will continue to give us lift.

And then beyond that, beyond the F135 program and also tanker, which starts to deliver production engines in 2016, there are a lot of new programs in the military pipeline. I think of note is the AETD program that we were recently selected for. This is an advanced technology program to develop engine technology for next-generation military fighter engines. So we're engaged in that program. Beyond that, we're developing, in a joint venture with Honeywell, a 3,000-shaft horsepower turboshaft engine targeted at the BLACK HAWK and Apache markets. And on the bottom right, you can see the Northrop Grumman X-47B unmanned air vehicle that's powered by a PW100 engine, just one of the number of unmanned vehicle programs that Pratt's participating in.

Moving to Pratt Canada. After growing to more than 4,000 engine deliveries in 2008, Pratt Canada was obviously hit hard by the worldwide economic crisis and the related impact that had on business jet deliveries and some of the other segments that they serve. In aggregate, '09, '10 and '11 engine deliveries were down from their peak by about 33% over that period of time.

The good news is we're starting to see recovery in their market. Business jet deliveries were up in the first half of this year, 10% year-over-year. There have been a number of major orders in the marketplace, NetJets and others. If you look at the used business jet inventories, they're down to about 14% now, still not back down to historic lows of 12% or 13% but certainly, well down from the peak of 18% that we saw in 2009.

Pratt Canada engine deliveries are going to be up 10% this year, and that's in the face of 100 engines coming out of the plan because of the situation at Hawker Beechcraft, so another strong year for Pratt Canada. Aftermarket in Pratt Canada will be up double digit as well. And again, given the general market recovery, as well as the large number of new product introductions for Pratt Canada, we expect Pratt Canada OEM and aftermarket to be up again next year.

And through good times and bad, Pratt Canada continues to certify, develop and certify new engines and win new programs. In fact, they have certified 73 new engines since 1994. And that trend, as you can see, continues today as we continue to bring forward the PW800 engine, targeted at the large business jet marketplace. We've got recent wins with the PW300 family of engines. You saw one of them fly today, the 308. It will be on the Lear 85 and the Dassault 2000S, Cessna Latitude. Helicopters continues to be a very good market for us with the new PT6 variant just certified for the EC175. And we're proud to say that we're on the S-76D. Thank you, Mick. And we recently had a selection on the Eurocopter X4. As you know, we're also the market leader in the regional turboprop segment, and we intend to maintain that position. We continue to invest in next-generation turboprop engine technology there.

Now obviously, with the investments that we've been making into the future, Pratt E&D has been a headwind for us in recent years. Our E&D is going to be up this year, another $75 million or so. On a cume basis, we're up about $425 million since 2009. And by the way, if you add on top of that the pension headwind, combined headwind from E&D and pension over that period of time starting in '09 as the base, it's about $600 million, just about all of that offset by good performance in the business.

So why is that interesting? You guys don't pay for hypothetical performance. You pay for earnings growth. I think the point is that as we go forward and E&D becomes tailwind instead of headwind in 2013, and in 2014 when pension becomes tailwind instead of headwind, this business has generated the ability to grow earnings and we're going to continue to do that going forward. And again, the good news for 2013 is that E&D will be a tailwind for us, not headwind.

Certainly, part of our strong performance that I just talked about since '09 has been the hard work that we've been doing on restructuring. We continue to work on our cost structure, moving manufacturing and aftermarket operations from high cost to low cost, going to low-cost sources and then consolidating our remaining footprint. Taken together, we've now produced almost $370 million in incremental savings over this period of time. And there is more work to be done as we look to resume earnings growth in 2013 and beyond.

And given the steep production ramp that's in front of us, we're doing a lot of work on our supply chain. Internally, we're shifting a lot of our talent into the sourcing area, into the supply chain and into manufacturing to prepare for what's ahead of us here. If you look at our low-cost spend, we've got plans that will triple our low-cost spend over the period that you can see here, so a lot of work being done here to establish the global supply chain to make sure that we can support the ramp-up that's in front of us. And as we do that, we're certainly making sure that we capture the leverage that we get in the marketplace from the volumes that are ahead of us here.

Okay. So this chart basically sums up everything I just told you. It looks a little different from what I showed you in March, largely the result of the commercial spares moving from the left side of the chart to the right side of the chart. We've been able to offset much of the weakness we've seen in the commercial aftermarket, with stronger performance in military OEM and aftermarket, incremental benefit of IAE, the additional restructuring, as well as hard work on controlling discretionary spending and E&D cost. But as Greg told you, as a result of the change in guidance for commercial spares, we've adjusted our guidance down by $75 million from the guidance I originally gave you in March of this year.

Beyond 2012, these are quite honestly exciting times for us. If you look at the forecast for revenues over the decade, this business is going to double. And this is not some aspirational goal that Louis's given me or Alain's given me. This is math. If you multiply the programs we've won, the airplanes that are going to get delivered, the engines that we have on those airplanes and make some assumptions, reasonable assumptions, for aftermarket, this is what happens in the business over the decade. So this is a combination of the 4 new Geared Turbofans that are in the pipeline right now, sole-source position, and Joint Strike Fighter, multiple new applications for Pratt & Whitney Canada. If you add it all up, this is what it looks like. But I know you guys care about the future, you care more about 2013 and I'll close in saying again, Pratt looks forward to resuming earnings growth in 2013.

With that, I'm happy to take any questions you have.

Douglas S. Harned - Sanford C. Bernstein & Co., LLC., Research Division

On the IAE transaction, when you go to next year, your spares will be up substantially on the V2500 because of that, right? But the sourcing of the spares will initially all be from Rolls. How would you contrast the margins that you'll be getting on the spares from that part versus what you get on your own spares today?

David P. Hess

You won't see any margin deterioration in the IAE business. I mean, some of that we're taking over now, Doug. Some of the stuff that they bought in the supply chain, we're transitioning to our sourcing organization today. So that's happening right now. There are certainly parts, the big rotating machinery, the compressor and some of the other parts that they provide, they'll continue to supply to us on a transfer pricing agreement maybe for 10 to 15 years or so. And on those is there won't be any deterioration in the margins.

Douglas S. Harned - Sanford C. Bernstein & Co., LLC., Research Division

But if you transition over -- to take over some of that work over time, would your margin go up?

David P. Hess

We'd hope it to go down. I mean -- excuse me, we'd hope the margins to go up. If we can have a little bit more success in leveraging the supply chain, maybe than they did, I think we have an opportunity to expand margins there. But we certainly wouldn't expect the margins to contract. Yes, Joe?

Joseph Nadol - JP Morgan Chase & Co, Research Division

Yes, do you have growth next year x IAE? And can you quantify what you expect IAE to contribute next year?

David P. Hess

Yes. Can you go back to the guidance chart? Can we go back, right there. I mean, basically, this is the 2012 chart. If you want to make 2013, draw a line to military OEM and move it from the left to the right. And then draw a line from commercial spares and E&D there on the right and move them over to the left. That's really the story for 2013. So we're going to get lift from military aftermarket. We'll get lift from Pratt & Whitney Canada, OEM and aftermarket, continued cost reduction and restructuring benefit, full year of IAE. We won't have the E&D headwind next year. It should be tailwind. We expect commercial spares to be up. We'll still have some pension and FX headwind to deal with. That's kind of the math for 2013. You roll that all together and we'll be up next year.

Unknown Attendee


David P. Hess

Yes. We've said that, yes. Yes, Joe?

Joseph Nadol - JP Morgan Chase & Co, Research Division

Two questions. The first is, can you give us the latest on the scalability, how you're viewing the scalability of GTF to the widebody engine size and opportunities there? And are you feeling more confident about that than you were 6 or 12 months ago just given what you've been doing, what -- and conversations you've been having? I'll let you answer that first.

David P. Hess

Well, I've said before that we think -- if you look at the benefits of the geared architecture as you move to larger fan diameters and higher thrust levels, we think they scale very well. In fact, I think even the competition, I think, has made that statement as they see the benefits even better as you get to larger fan diameters and higher bypass ratios. Now obviously, we're talking to people about possible applications for widebody aircraft, but we'll see what happens there. It seems like Boeing is signaling that 777x is going to drift to the right a little bit. We're certainly not contemplating it in our numbers next year. And beyond that, it will have to be a good business case. But technically, it is not an issue with the scalability. In fact, again, the engine scales very well as we get to larger engines.

Joseph Nadol - JP Morgan Chase & Co, Research Division

And second question. Obviously, your answer -- or the outcome of that issue will play a big role in this. But when you look at the E&D profile the next number of years, this is the first down year. Next year, you're up 425 over 3 years. What's your visibility on the profile for '14, '15, '16 on E&D?

David P. Hess

Too early to say. It depends on what new opportunities present themselves. I mean, obviously, we're looking at what's going on in every year. We're talking to other air framers. There's a lot of opportunities in John Saabas' business at Pratt Canada. So we'll have to see what the market brings us. If there's a good business case, we'll see. But we're going to manage the E&D. And we're going to grow earnings for the business.

Alain M. Bellemare

And also an update, maybe on what's going on -- one thing that we're trying to do is to reuse, I mean, what we've been doing. So we're trying to minimize E&D moving forward. So although E&D might stay relatively flattish 2014 and beyond, which is not clear, as a percentage of sale, E&D will be coming down.

Unknown Attendee

Dave, could you talk about pricing on the GTF or A320 as it compares to V2500 pricing and then talk about the opportunities -- platforms that you see out there for the PW800?

David P. Hess

Well, we're pretty happy with the pricing we're getting on the GTF wins that we're having on neo. We're ahead of the business case that we had established for ourselves. If you look at the totality of the deals, we're happy with the numbers. And the competitions are tough in the marketplace. Obviously, CFM and GE are tough competitors. But as I stated before, we simply have a better engine. And I think they've even stated themselves in the marketplace that while they can't beat us technically, they can try to compete with us commercially. So I think the other guys have been very aggressive with some of their commercial offers. We're being -- I characterize and I guess as responsible and restrained. The deals that we're signing up are good deals and we're very happy with the pricing.

Unknown Attendee


Louis R. Chenevert

Great value for the customers. And at the end, that's all -- GTF is a win-win. I mean, the customers see the benefits in fuel burn. More and more people talk about the benefits of noise reduction, which is 50%, which is very substantial, reduction in emission, and then the operating costs are for real. I mean, you save all these stages in 2,000 parts. I mean -- and we have also basically less exotic material. So we know with certainty that over the life cycle of the product, it's going to do well in the customer, which is embracing the product. In my interaction with them, that's what they're starting to put their money on. They vote that they know with confidence this is going to be a best-in-class engine.

David P. Hess

If the other guys could do a Geared Turbofan today, they'd be doing it.

Unknown Attendee

[indiscernible] PW800.

David P. Hess

PW800, we think, has got great opportunity. It's -- keep in mind that it's a great opportunity to kind of reuse the core that we've developed for the MRJ and the CSeries engine. So this is really part of the overall family plan strategy. But that technology, that engine continues to mature. Obviously, there's a number of people that are out there looking at large business jets, and we're talking to all of them. But we're hopeful about the prospects for that engine. Cai?

Cai Von Rumohr - Cowen and Company, LLC, Research Division

Yes, Greg mentioned kind of commercial OE increase as a negative on the P&L. Could you comment a little bit about, as you look at 2013, what are the elements? I mean, are most all of those programs read? And as the volume builds as you move out, does the loss get bigger or smaller as a percent of sales as the volume builds?

David P. Hess

It's really not a significant factor in our plan for next year, Cai. I mean, we're really not going to start to see this steeper ramp there until kind of 2014, '15, '16, there. Some of these engines may have a little bit of negative engine margin, but not all of them do. I mean, I think we've done a good job in working on the cost side of the equation. I've talked about the fact that we've been, I think, restrained on pricing. And it's not going to be a big driver for us, certainly in 2013 and '14. As volumes start to build, it will be a little bit more of a factor as we get into 2015, '16 and beyond.

Cai Von Rumohr - Cowen and Company, LLC, Research Division

Profile as the volumes build, I mean, does the loss -- the dollars lost as a percent of the volume, does that go down as we get into '16 and '17? Or does it kind of stay at the same level so the loss gets [indiscernible]?

David P. Hess

You've got to look at the overall profile, not just GTF. I mean, we were delivering 4,000 V2500s and a lot of other engines as well. So in aggregate, as we increase our OEM volume, certainly, we may see a little bit growth in the negative engine margin going forward to the decade. George?

George Shapiro

Dave, when -- with the sales growth you have, when do you get back to, say, the peak profitability level and maybe $2.1 billion or so that you had in the 2008 time frame?

David P. Hess

I don't have an answer for you there. We're going to grow earnings next year. I can guarantee that. And I expect to continue to grow earnings every year going forward.

George Shapiro

Okay. I'll ask a different one, entirely different one. How much of the geared fan advantage can GE make up for by having higher temperature ceramic alloys in their engine?

David P. Hess

We estimate that the advantages of the geared architecture are somewhere in the order of 5% to 6%. So maybe by running hotter in the turbine, they can close some of that gap. But there is a significant trade-off in terms of maintenance cost and the need to put in expensive exotic materials in order to do that. So it's not an easy trade. You're going to lose one way or the other. So again, it's simply a better architecture and a better engine. And again, if they could do one today, they'd be doing one.

Unknown Attendee


David P. Hess

Yes, the noise is down, as well. Noise, emissions -- I mean, what's interesting and somewhat unique about the architecture, there's not a trade-off. Everything gets better. Fuel burn gets better. Maintenance cost gets better. Manufacturing costs get better. Noise is lower. Emissions is lower. It's an amazing engine, quite honestly.

Unknown Attendee

Dave, could you talk about where the portfolio is prior to IAE in terms of power by the hour as a percent of the service fleet? Where it is with IAE, and where do you think it will be, 5 years out, power by the hour?

David P. Hess

If you look at Pratt's total fleet, we probably have about 40% of our engines under FHAs. If you look at -- and it continues to grow as you look at new engines. If you look at our installed base of V2500-A5s, for example, we're -- somewhere around 60% are under FHAs right now. And as we look at Geared Turbofan, that number is going to be even higher. I think we're running close to 80% or so. And the deals that we're doing for Geared Turbofans come with FHA. So you're going to see a higher and higher percentage of that going forward. Great, thank you.

Louis R. Chenevert

Okay. You've had a busy morning. It's time for me to wrap up. Let me make a couple of closing comments.

First of all, a very exciting time at UTC. Big deals are done, as you heard from me, from Greg, reiterated through the team. But I think it's important to highlight big deals are done, but what a year it's been. The accomplishment to close, in my view, a true transformational acquisition of Goodrich, very complementary to the portfolio, very strong synergies going forward.

And the one thing UTC has is the ability to focus on best technology. In my view, we have the best technical skills in the industry by far. We're not afraid to invest in R&D and create game-changing product. I think you see it through GTF. You see it through X2. I think you see it through how we've complemented the portfolio, even the commercial companies. You heard many messages today in the commercial side that we've revamped our total line of resi business, of commercial product. We're adding to the portfolio low-cost Gen2. So I mean, across, we've not been afraid to invest in technology. And I think that's a real competitive advantage that we have to offer, supervise the customer. And that's how UTC is going to differentiate itself in years to come. It's that we now have a portfolio that is more focused more to the core. And basically, you're going to see this team -- I think you already see it in this morning's presentation. I mean, the mission is clear as we move forward. It's all about execution. It's all about delivering the value to these customers and bringing home on the bottom line as we move forward because we know how to convert. So we've got the right portfolio. We've got also the right organization. We've got unbelievable talent at UTC. And I think you saw just a quick snapshot today through the leadership, but a lot of other people in this room that you interacted with last evening at dinner. I mean, we have profound knowledge. We have tremendous financial capability. We have tremendous technical capability. When you put it all together and these new big organizations, PAS and CCS, you're seeing the power of those organization in action, I mean. And that's why I look at the future and I smile. I know that we're going to have phenomenal momentum in the future. And yes, there is always some headwinds. And yes, the economies certainly are not the best at this point in time. And the fact is we know how to operate in a tough environment. And that's why you see us restructure aggressively. I think the $500 million that we've discussed so far wants to be higher. The BUs basically know how to put together good restructuring projects that have good payback. And I wouldn't be surprised if we come back at year end and the numbers wants to be higher than the $500 million that we've portrayed. And we're going to support because it positions us better for next year.

So we're confident also on this year's guidance, $5.25 to $5.35. And I would say that, you saw through the different presentations, the team is very focused. The team is going to execute. I mean, it's -- we're about done with Q3. We know what the end markets are although we've got a couple of short cycle business that could always surprise us, be a little better or be a little worse. But I think all in all, we're balanced. And that's -- one of the great things about UTC is our global footprint, our global franchise. I mean, there is always plus and minuses.

And I'm also proud that as a team, we are not afraid to take action -- to take tough action. I mean, I think the pension headwind that we see this year, that we're going to see next year, the fact is, I smile because we took the tough action and we did it the right way with a 5-year sunset. We brought Goodrich in and we brought them in the same architecture of plan on the FAE sunset. And basically, we've created new momentum because after '13, the headwind diminishes and it becomes tailwind. And it's going to be tailwinds for year to come, so very much like we're not afraid to optimize E&D. We're not afraid to make tough decisions when it comes to structural. We're restructuring the business. So I look at all these new program also that are going to come in the future with the ramp-up of GTF, the ramp-up of JSF. As 787 ramp up, A350 ramps up. As the marketplace offers opportunities for Otis, for CCS because regulations are going to continue to evolve in emerging market, where they're adopting at a fast pace basically more regulation. That's going to be our friend in the future. And that's why these franchise are going to grow remarkably. And while, near term, it's easy to get spooked and say everything is bad in Europe, I mean, everyday, you read the paper, it's difficult. And we've got our own challenges here and emerging market are slowing down. The fact is the fundamental power in the franchise, long term, is truly remarkable. And I think we're going to start to see some of that come through. You heard Alain talk about the accretion for Goodrich. You heard Dave talk about the accretion for IAE. And we know how to deal with the tough business, and we got a couple of tough big issues like CMH that we're dealing with. But the fact is we know how to put those behind and create the right win-win with the customer. And we're going to go do that.

You look at going forward. I'm not going to give guidance for '13. But certainly, the fact is you've got a pretty good roadmap as to what we see at this point in time as we wrap up '12 and the big elements for '13. You know that you're going to get basically a Goodrich tailwind of $0.70. And we're going to challenge ourselves. I mean, the reason why it's not all done is because Greg and I pushed the BUs all the time to go outperform and to go find ways to bring home results that will outperform peers. And this year is going to be no different, and that's what we're going to push them to go do. And as I said earlier, we're going continue to restructure as we see tough environment. I mean, the opportunity is we go restructure some more.

You also see me be impatient now with the top line. And you heard me in a couple of interaction about market share for Geraud in certain segment, market share for Pedro. And I think it's a big opportunity for us because we've invested so much in R&D, because we got best-in-class products. It's our chance to bring the mix of top line growth with more certainty given the value that our products create in the market. And we've got clear focus. There is less distraction in this company than there was 12 months ago as we've streamlined the portfolio. So we can focus on the core business. And the organization, honestly, gives me great confidence because it creates a larger scale organization that is really focused, that has a lot of levers to pull. I just look at what we're doing with supply chain, the non-product, the product side, and I look at these -- and that's one of the great value of UTC. Is the businesses, as we push them to get more, they want to embrace the solution. You look at the journey we've had on this. The reason why we've been so successful is because people embrace safety, see it as value creating for themselves, for their customers. And yes, we've got a reset coming up next year because of Goodrich, because we start from scratch although there is a robust foundation. And I would say, so far, what I see in the Goodrich interaction -- and people are enthused. People are enthused that they've got a platform-like case that has a proven track record of delivering and they want to get on with it as soon as possible.

And as we ramp up volume, because there will be ramp-up because of all these new programs in the future, it also gives me great confidence that we can basically book capacity. We know how to extract value-added supply chain and make sure we have assurance of supply. Because when the momentum ticks up and it's sometimes hard to see when the macros are so difficult, but the momentum will come back just because of RPM growth, just because of airline OEM schedule, we're going to be prepared to deliver and meet our commitment always.

So I'll just end by saying that we got stability and execution that is now ahead of us, and we know how to do this. We've got phenomenal cash generation in this company. And you heard the numbers from Greg, where we're going to pay back a big piece of our debt this year on the Goodrich acquisition. You also heard Greg to say that between he and I, we've got the challenges. We're going to basically go next year with $1 billion placeholder on M&A. We've got $1 billion in share buyback. At the current stock price, I'd love to have a barge and back it up and load it up. And that's why we're going to do it my view. I mean, what I see is I would love to do $2 billion-plus of share buyback as we move forward. I've said that in the webcast recently. I'll reiterate. We're great value and I look at the runway that we're creating. The good news is this company generates phenomenal cash. And it's how we're going to redeploy and put it to work that's going to make also a huge difference in how we sustain momentum and outperform our peers.

So I'll stop here, and I'll take a couple of questions. And then we're going to go for lunch, and you'll get a chance to see this afternoon this Mirabel facility. And also, I urge you to see the flying test bed inside and take a close look at the GTF. And a question, yes?

Unknown Attendee

If you look at the last cycle, organically, you had a few years in a row of kind of 8% core growth.

David P. Hess

6% to 8%.

Unknown Attendee

6% to 8%. This time, it sounds like, looking at the various presentations today, 5% is maybe the organic growth target, which is a lot better than 1% in the last 12 months. So I guess, could you talk a little bit about how you get from that 1% back up to the 5%? Obviously, how much of that is end markets? How much is all the portfolio changes that you've done the last 3 years? And how much is maybe market share gains in your existing business?

Louis R. Chenevert

Well, I think from a high level, it's going to be a combination of opportunities at end markets given the new product offering that we have. It's going to be also some little market share gain because we've also complemented product line. The mix shift in China is a good example. I mean, it was high-end res and it was tall buildings and all of a sudden, I mean -- and low-cost housing was much smaller than what it wants to be as the Chinese development has moved from coastal to central to west. And that facility we just opened, Pedro and I, last week gives us confidence that that's how he is committed to, we've got to redeem the share because now we have the right mix. And I would say you saw his slide on India, same thing. And while India is perhaps, as Pedro remarked, slow, the fact is the market in India is now the size that is 2x the North American market from the new equipment. So that number looked tiny but the opportunity, if you have the right product and he is introducing Gen2, for example, in his Bangalore facility, the more modern product to serve locally, you've got to be close to the end market in this business to be able to serve. And then you've got all these platform that are going to be launching just the content basically on 787, 350. So yes, the top line wants to be probably mid-single digit. But also with good momentum, as I look forward, I mean, you heard Mick talk about the 53K. That kicks in somewhere '16, '17. And then you've got the continued success with oil and gas with S-92, which is honestly the premier helicopter today, and Sikorsky always is about safety, about reliability, robustness. And the customers are starting to recognize the value and they know when they have a Sikorsky, they fly it harder. It's always there for them. And that is a big attribute that's going to help us grow top line, okay? Yes, Howard?

Howard A. Rubel - Jefferies & Company, Inc., Research Division

I hate to sort of ask a little bit of a boring question. But for the third quarter, there's more things going on there than you could ever imagine. And if you wouldn't mind if I ask Greg sort of if he could kind of give us a sense of some of the bigger numbers because you could have any kind of range you want for an EPS for the third quarter.

Gregory J. Hayes

No, it's fine. Okay, since I knew you were going to ask this question, I actually went and took a look because there's a lot going on in the third quarter. I think that's -- it's a fair statement, and I know it's really tough as you guys have put your models together because there's a lot of moving pieces. But let me just kind of summarize the key pieces here that are other than the base business. And you've got Goodrich dilution, which is going to be about $0.10 to $0.12 in the quarter. In the fourth quarter, that goes down to about $0.04, and that's what makes up the $0.20 or so for the year. You've got restructuring net of gains, so headwind of $0.05 in this quarter and $0.20 in the fourth quarter. And you'll recall we had gains in the first half of the year that we didn't offset with restructuring, so $0.05 and $0.20. So that's not new news. That's been out there. I think just to quantify maybe the one piece that's not known to anyone is we will get a much lower tax rate in the quarter, which will save us about $0.05. That's just on tax planning that we're able to avail ourselves to. Tax rate goes right back up to kind of 32% in the fourth quarter, but there is about $0.05 of good news on the tax rate in the quarter. And then FX is bad news by about $0.08 in the quarter. And that goes down to about $0.03 to $0.05 in the fourth quarter, so you've a lot of moving pieces. Say the one piece that's really -- the Goodrich were still finalizing the amortization of the intangibles. We've been working through that since we closed in July. Again, I think that's contemplated in that $0.10 to $0.12. And it could be lower. It could be higher. But it's within that kind of range. So does that -- okay. Okay, thanks.

Louis R. Chenevert

Thank you, Greg. Other questions? Yes?

Unknown Attendee

For Louis. You've got a lot going on, I mean, the challenging market conditions, acquisitions. Where are you focusing your time now?

Louis R. Chenevert

Well, where I'm focusing my time is clearly execution as we go forward because again, I have more the big deal in mind. I mean, we'll resume to the $1 billion placeholder. It's about execution in the business. And as you know, this is one of my skills. I mean, that's where I came from. And I could be helpful. That's why when I see issues, I get involved. And we have a team that basically knows how to deal with the issues, leveraging our scale globally, making sure we have the right parties in the right market. That's why I keep traveling internationally. I just got back from China. I'll be in the Middle East at the end of October. I was in India in June. I mean, it's kind of up to me to shine the light and make sure that as I look forward, that we position this company to have the right people, the right skill set, working with Mike McQuade and the different BUs to make sure that we kind of look at the horizon, look at technology, where could we make a difference. And the one thing -- part of why I think, for example, the big acquisition was well received by customer is our reputation of when we take something on, we're going to deliver for you, we're going to be on time, we'll have best in class. And when we partner with OEMs or when we partner with large builder infrastructure, I mean, you can see it's known that we'll be there for the partner -- we'll be there for the OEM, we'll be there for the customer. We're going to go and deliver. So that's where I'm focused, making sure that we have a lot of balls in the air, making sure we don't drop any. I know that when it comes to the financial, we've got a superb team. And we make it roll up. I mean, basically, things come together because we're executing well. So that's where I'm spending a lot of my time and thinking about the macro trends. I mean, what's happening in Europe at this point in time and where are the opportunities going forward. I mean, South America, I was there earlier this year -- to make sure that we continue the momentum. So while you've got a mixed bag of -- I mean, honestly, you read the press and it's depressing, right? I mean, it's like, "What else is going to go wrong today or tomorrow?" At the same time, it's my job to make sure we carve out all of this opportunities that come through execution, that come through the great talent pool, the connectivity we have with the end customers. I mean, we have 227,000 people that are there to delight customers, that are there to serve these customers, connect with them, understand their needs and make sure we provide the right solution. And that's where CCS, by the way, and maybe as we go forward, it's something we need to highlight even more, the opportunity in some of these markets that have come through the CCS integration of providing that higher value per building with big builders, et cetera. It's coming together. So I would say the big moves we did, I mean, are producing results, okay? Yes, George?

George Shapiro

Yes, this is maybe just a follow-up with Greg. Was that $0.05 tax benefit in the third quarter something that would be additive to the $5.25 to $5.35 and you kept it at that because we're seeing a little weaker number maybe out of Carrier and a little lower spares number?

Gregory J. Hayes

Yes, it certainly gives us a little more contingency. I think again, we've got some cash coming back in the fourth quarter, where the rate goes back up. So you lose a little bit of that benefit with some of the repatriation activities, but you get a little bit of additional contingency as a result of that tax good news.

Louis R. Chenevert

Okay? Okay. Well, you will get the usual from Louis in December. I'll be there with the team. We'll give you the specific guidance for '13, but I think you've got a pretty good high-level overview of how we stand in '12 and plus or minuses for '13. And thank you very much for being here at Mirabel. We're excited about the visit this afternoon and look forward to see you through the tour. Thank you.

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