特靈科技 (TT) 2002 Q1 法說會逐字稿

Good day and welcome Ingersoll-Rand first quarter 2002 earnings conference call This call is being recorded. With us today from the company is the Chairman, President, and Chief Executive Officer Mr. Herbert L. Henkel and the Director of Investor Relations Mr. Joe Fimbianti. At this time for opening remarks, I would like to turn the call over to Joe Fimbianti. Please go ahead sir.

Good morning. Welcome to our first quarter 2002 conference call. We released earnings at 7 am this morning and the release is posted on our website. I would like to cover some house keeping items before we begin This morning concurrent with the normal phoning conference call, we are broadcasting the call through our public website. There you will find the slide presentation, which goes along with the call. Participate via the web at www.ircl.com. Click on the yellow link on the left hand side of the screen. Please not that of the slides will be immediately available. We will prompt you when we change them. Both the call and the presentation will be archived in our website and will be available late this afternoon. Now if you would please go to slide number two. Before we begin, let me remind that there will be forward-looking discussion this morning, which is covered in our safe harbor statement. Please refer to our 2001 form 10-K for details of factors that influence the results. I would like to introduce the participants for the call this morning. As noted earlier, we have Herbert L. Henkel, Chairman, President, and Chief Executive Officer of Ingersoll-Rand; we also have Steven R. Shawley, our Vice President and Corporate Controller. We will start with the formal presentation by Herbert Henkel followed by a question and answer period. Now if you would please go to slide number three, Herb...........

Thank Joe and good morning everyone. Thank you for joining us on our first quarter 2002 conference call. This morning we reported net earnings from continuing operations of 0.58 cents per share, which is in line with our previous guidance. These results are adjusted for restructuring charges and the new goodwill accounting standards, which added about 0.18 cents per share to our earnings. The impact of the change in goodwill accounting on our business segment in detailed on schedule number four, which is a part of the press release. Please go to slide number four.

When I review the first quarter it appears to me that somewhat tentative recovery has begun in the overall economy, but that has not taken hold in either the general industrial markets or specifically the construction machinery markets. We have seen pockets of improvement, but the overall picture is not that of a robust recovery. Our total order rates for the first quarter were up slightly. Orders excluding acquisitions were down about 2 percent. We had increased first quarter orders at Dresser-Rand, at Security & Safety, Bobcat, and in our automotive bearings business. Offsetting this higher activity, we experienced weaker orders in industrial, road machinery, and transport refrigeration businesses. We continued to forecast an exact sluggish demand as we go into the second quarter. Revenues for the first quarter were up about 1 percent based on acquisitions and strong growth at Dresser-Rand. Although, first quarter revenues were up slightly, we did experience a 3 percent reduction in our core businesses and 5 percent reduction with our Dresser-Rand. This was in line with our expectations. Currency had about a 1 percent negative impact on revenue. The revenue decline was mainly associated with the sales of complete units. The recurring revenues, which consist of parts and service, were actually up 13 percent and they now make up 21 percent of our sales compared to 18 percent last year. Please go to slide number five.

North America continued to be the principal area of weakness. Here, first quarter revenues were down about 4 percent organically compared to last year. European revenues were down slightly, Asia-Pacific was up 7 percent. Our operating margins of 8.5 percent for the quarter excluding restructuring decline about 1 percentage point on a comparable basis to last year. This was mainly attributable to lower volume in several of our major businesses, unfavorable product mix and climate control, investments in energy systems, and Security and Safety and some continued pricing pressures in our infrastructure business. The structure and activity had a positive impact on margins overall. We continued to implement phase two of the restructuring program. Total pre-tax restructuring costs for the quarter were about 24 million dollars. Today, we closed 25 manufacturing facilities with four additional closings in process and reduced headcount by approximately 5900 employees. We expect to have this program completed by year-end and we will add about 50 cents to the full year 200 earnings . As of note, the tax rate for the quarter was 20 percent, which was down essentially from last year, just due to our reincorporating in the fourth quarter of 2001. We currently expect to hold at 20 percent rate for the balance of 2002 and believe it to be . I will now like to review the results of operations by segments excluding restructuring. The 2001 operating margins on the charts we are going to be discussing has been adjusted to exclude goodwill amortization for comparability with 2002. So, please go to slide number six.

For the climate control sector, revenues were up 15% reflecting the and the acquisitions. Operating results and margins were slightly better than the first quarter of last year. Hussmann's supermarket orders and sales were similar to last year's first quarter as sales for large national chains stabilized. We enjoyed higher activity at convenient stores, which generated an increase in revenues of more than 20 percent compared to last year. Current industry forecasts are for a 3 percent increase in supermarket remodeling square footage for 2002 and we should have a reasonable level of demand for the balance of the year. Now please go to slide number seven.

The installation and service business continues to expand in the quarter. We now have a large mutli store pilot program in progress providing comprehensive service to more that 2500 stores from several major chains covered in our national contract programs. Total service revenues were up nearly 65 percent from last year, driven by internal growth and the acquisitions of and . Now please go to slide number eight.

Thermo King revenues were down about 12 percent as sales for the North American heavy truck and trailer, container, and the worldwide bus markets continued to decline. The recent expansion and orders for heavy truck appears to be a pre-buy to avoid the year-end emission standards. It has not been transvoided into higher volume for refrigerated trailers. At some point though, these trucks will be needed to be fitted with trailers and we will be seeing some increased activities down the road. Container revenue was down 48 percent in the quarter. It continues to be weak as (indiscernible) are reluctant to invest in new capital equipment. Now please go to slide number nine.

Next, in the industrial solutions sector, revenues for air and productivity solutions were down about 6 percent in the quarter, as complete unit sales declined by 10 percent and service revenues increased by 9 percent. Slowing industrial and electronic assembly activity in North America has led to reduced demands for tools and the related air compressors. Margins declined due to the lower volumes and the continuing investments in the energy system business. The Air Care programs continued to accelerate in the quarter and we added over 1,000 new contracts for a total of over 4,500. During the quarter, over half of the new contracts were outside the US, indicating that the overseas roll out of the program is gaining momentum. About one-quarter of the service revenue is based on long-term contract which usually has a for us. The Nirvana compressor lines continued an extremely successful introductory ramp up both in the US as well as in Europe. We booked approximately 6 million dollars for orders in the first quarter, which was 14 percent ahead of the fourth quarter rated 2001. April orders for continued to do well. Now please go to slide number 10.

In energy systems, we continued to make progress during the first quarter. A total of 32 microturbines were shipped including 13 to external customers. We also shipped 12 OEM . Also during the quarter, we continued the activity to bring to market a grid independent unit. Testing on this 70 KW unit is scheduled to begin at the end of April and expects to have units available by the end of the second quarter. In additions, our renewed 250 KW units should also begin beta testing in the second half of 2002. Please go to slide number 11.

Dresser-Rand revenues were up 17 percent in the quarter based on a 37 percent improvement in completes and 11 percent gain in parts and service. Orders and backlog are also up strongly as energy companies continue to invest to update equipments to improve their efficiencies. Total backlog at Dresser-Rand now stands at 814 million dollars, which is 38 percent above the backlog at the end of last year's first quarter. Please go to slide number 12.

The engineered solution segment, which we formerly called bearings components had a 6 percent improvement in revenues for the quarter. Strong car and light truck demand in the 2001 acquisition of Nadella drove a 20 percent improvement in the automotive bearing business. The industrial and the after market business revenues declined close to 10 percent due to weak demand from industrial customers and based on high levels of inventory at our major bearing distributors. Another positive development in the automotive business was our announcement last week of a new joint development program with Delphi, on automotive steering systems. This venture is focused on the development of cost effective steering products to expand our coverage in the worldwide passenger car and light truck markets. This is another example of our progress in expanding this business and new geographic markets. Now, please go to slide 13.

In the infrastructure sector, revenues were down about 4 percent in the quarter and operating margins continued to be hampered by pricing pressures and financing subsidies and compact equipment as competitors attempted to deal with excess channel inventories. Bobcat's first quarter orders and market share improved slightly compared to last year based on the introduction of new equipment lines. We will be continuing to introduce new products throughout 2002 to expand our leadership in the compact equipment field. The paving and compaction businesses declined in the quarter due to lower customer demand in North America. Uncertainties surrounding the next level federal funding for highway construction in 2003 has caused many contractors to delay investment and hold on to their current equipments. Our sales major rival companies declined further in the first quarter. Many rival companies have experienced lower utilization rates and they continue to protect their cash flow by cutting capital expenditures on equipment. We have held our market share in all of our infrastructure businesses and continued to maintain at a level of consistence with the current demand. Please go to slide 14.

In our security and safety sector, orders and revenues were both up about 3 percent in the quarter at slower activity in European and North American commercial markets were more than offset by improved revenues and residential security and electronic solutions. Operating margins at close to 20 percent remained very strong due to our continued focus on costs and expense reduction. In the first quarter, we completed the acquisition of 30 percent of CISA, a security company based in Italy. CISA has sales of 150 million dollars and manufactures an array of security products including locks, cylinders, door closers, and panic bars. CISA operates worldwide, enables us to provide customers with a complete portfolio of security products in the Americas and in the European and the Asia-Pacific markets. This acquisition continues IR's aggressive efforts to increase participation in the global security and safety market. Now, please go slide 15.

Moving on to the balance sheet, we continued to focus on working capital management. At the end of the first quarter, working capital as a percentage of revenue was 9.9 percent compared to 12.2 percent of revenue at the end of last year's first quarter. Continued improvement in the inventory management has played a part in maintaining our low levels of working capital. Inventory returns are at now at 4.3, a slight improvement over 4.2 a year ago. We continue to target a year over year capital to be below the target level up 10 percent of revenues. For 1Q, capital expenditures amounted to 33.2 million, excluding restructuring compared to 34.4 million in last year's first quarter. We anticipate full year capital expenditures to be in the 150 to 175 million-dollar range excluding restructuring. Now, please go to slide 16.

Our debt-to-capital ratio at the end of the first quarter stood at 47.5 percent, up slightly from our 2001 year-end level of 46.2. Now, please go to slide 17.

Also, during the quarter, we launched three very important enterprise-wide growth initiatives. These initiatives are being operated as separate business units by cross-functional gains from across the company taking advantage of IR's existing organization and resources. The growth initiatives, which were identified in 2001, had the target to add 750 million dollars incremental revenue by 2005. The first of these initiatives we call IR Works, which is developed in the cross selling capability of the sales force to provide customers with access to a broader range of the company's products. At the core of this process is the key account management with one business taking a lead introducing the other businesses to the customers. This concept includes our independent distributors with our opportunities increased by the types of products sold with specific markets or customer segment. Our second initiative we call IR Supplier Solutions, focusing on cross selling IR products to our high priority suppliers. Currently, we have got a large balance of trade gap with our supply base. We purchased substantially more from our suppliers than they purchase from us. Where opportunities exist, IR supplier solutions will demonstrate the benefits of strengthening the relationships with our current business partners. And our third, IR Retail Solutions was formed to implement a cost business approach to serving grocery in convenient stores. While this market represents a standing customer base for our climate control sector, the market remains largely by our other businesses. This initiative goes beyond products to include store designs, installation, service, and around-the-clock monitoring. We have got some early success by retail solutions during the quarter. We received six microturbine orders from three different supermarkets and convenient store customers. We have also had the first order for doors from a major grocery store chain. These three enterprise-wide initiatives are going to help us support our growth going forward and we will report their ongoing success in the future quarters. Please go to slide 18.

I would like to conclude my remarks with an outlook for the second quarter and for the full year. Most of our end markets appeared to have stabilized during first quarter. However, as I noted earlier, order rates had yet to signal a sustained upward trend in demand. Second quarter 2002 EPS is expected to be in the range of 0.65 to 0.75 cents excluding restructuring. The second quarter forecast reflects stable market fundamentals and is based on revenues that as flat to down slightly compared to last year. No, please go to slide 19.

Our outlook for the full year remains unchanged. We expect revenues for full year 2002 to be flat compared with 2001. Operating margins will begin to recover in the second half as the North American economy improves and restructuring is completed. Additionally, the normal seasonally and Dresser-Rand results were also expected to generated favorable earnings comparisons in the second half of 2002. We will continue with the focus on permanent reductions in our internal cost structure while making strategic business investment to generate growth. Diluted earnings per share for full 2002 are expected to be in the range of 3.00 to $3.45 cents excluding restructuring. Free cash flow is expected to once again exceed 500 million before restructuring. We intend to use this free cash flow to further reduce the debt and continue to pursue bolt-on acquisition. With that I conclude my remarks. I thank you and I would like to now open the call for you questions,

Good day. The question and answer session will be conduction electronically. If you would like to ask a question, please press the star key followed by the digit one on your touch-tone phone. We will proceed in the order that you signal. Once again, to ask a question, press star one. We will pause for a moment to get everyone an opportunity to signal.

Also please just one note. If you would limit yourself to one question and a followup, we will try to stay to finish all the questions.

We will take our first question from David Raso with Salomon Smith Barney. Please go ahead.

Hi. Good morning.

Good morning David.

One question, can you just take me through the road map on the EPS from 2001 to 2002? The guidance calls for roughly about three dollars, and 12 cent number. If you strip out the 70 cents from goodwill, the 50 cents expected from restructuring saving and then the pending and whatever your pre-tax income base is, the tax rate going from 27 percent last year down to 20 percent sales this year saves you another 20 to 25 cents. Those three items are about a dollar, you know, maybe a dollar 40 or dollar 45. That means the core apples to apples is a dollar 67 to a dollar 72. If sales are flat to the expectation for the year with the mix looking a little better given the complete units down, service and parts up, why should the core business go from two dollars and six cents down to a dollar 67 and a dollar 72?

David, if you would allow me, I have worked up the while you were talking, let me see if I can do it this way. For the full year, I started off with 2001 being two dollars and six cents onto which I add the FASB of 68 cents to come up with two dollars and 74 cents that is my starting point. When I look at our volume in a mix, I look at that as in the bandwidth, I am looking at, it starts from the low end, if we are off (indiscernible) a couple of percent like we said it being off like 17 cents for being up to eight cents. That is the bandwidth of the volume in mixed size. Productivity vise, I expect about 20 cents from that and restructuring about 30. That is the 50 cents we have always talked about. We are going to spend about 50 million on investments between energy and enterprise initiatives and so on. So, that is (20 cents). Our insurance and our pension are going to cost about 25 million year-over-year, so that is about 10 cents off. Just to give you a middle range with it, 40 to 60, so allow me just to give you 50 as middle of the range, so it is a 50 million, that is 30 cents. And then on the year-over-year base is because we had the price that came in May of last year, we are going to be looking at 170 million somewhat shares versus 160 something we had last year that cost 7 cents. So, if you add that bandwidth up, that takes you then from a comparable base of 2.74 in 2001 to an outlook of 3.00 to 3.25 as a bandwidth for 2002.

Okay. On the spending, this 50 million the P&L, but none of that is capitalizing?

We are not capitalizing any of that. As I said if you what we said there is that we were going to be going in specifically into the development on the 250 and the power running and the independent running on the energy systems. We have got some Bobcat stuff going, we have got some electronic solutions going in, and we have got these three initiatives. So, I am expensing all 50 of that in our top .

Okay. I'll follow Joe's instructions, get back into queue. Thanks.

We will take our next question from Mark E. Koznarek in Midwest Research. Please go ahead.

Yeah. Good morning. I am wondering if you can help me get a little bit underneath the security and safety, the residential performance versus the commercial versus the momentum you might be showing in the electronic and the systems initiatives that we have heard so much about?

I would you that when I look at commercial overall and a lot of it, obviously has to do with office. We are up there in the three to five percent range year-over-year mark and we are more than offsetting that on the residential side. Our solutions business, although it is up, big numbers that really represents to less than a 100 million, so I would tell you, the big driver really continues to be the strength in the Schlage residential security business as we gain shelf space and market share in both big box as well as through the distribution channels. A year ago, we changed our sales organization around and we pulled them all together as one business unit that really seems to be paying off.

We have heard about Home Depot, in some initiatives you got there and are there specific updates you can give about the progress with that large customer?

I would say to you we continue to make good strides set in both linear feet as well as in our after sales there, but it is not the just the Home Depot, we have also made some very nice strides in both Loews as well as in the and some of other large box of distributors. The other piece, I would think is the continuing broadening of the product line, remember when I including our Kryptonite business, and Kryptonite in itself was up over 20 percent compared to what it was when we bought it a year ago and they are all numbers. So, the ability to leverage the channel we have and bringing all those products to there continues to really do well for us.

So, on a full year basis, do you think you can get back towards that historic kind of high single-digit growth rate that this business has shown?

The only would be if we continue to have a very significant weakening in the office side. That is where obviously lot of our product goes in the commercial part. So, that would be the piece I would watch out for. mark outside of that. You are absolutely right. We have also had some pretty good success with the as we tried to electrify Schlage. So, the big challenge for us is how weak does the commercial side get reflecting office-type activities out there being offset by the continuing strength in new products, Kryptonite and residential shelf space.

Great. Thank you.

Sure.

We will go next to John with Bear Stearns. Please go ahead.

Thank you. Good morning.

Hi. John.

Do you guys have a sense of what your operating cash flow was in the quarter as it is going to be reported in the statement cash flows?

I think it was about a -150 in the quarter, John compared to that is what our usual schedule. I don't have it in front of me, but that is the number I remember. If you look at my debt charge, you will see it there. I think it is -150. Excuse me. I was off. It was 159.6 to be precise.

Fine. That is 159.

Yeah.

The followup is could you just give us an update on your search for a CFO and what we should think of in terms of timing?

Well, I would start off by saying to many of you that around the call, I thank you for your support and please look to our release later this afternoon as we introduce our new CFO will be starting here in the next week.

Thank you.

Sure.

We will take our next question from Joel Tiss with Lehman Brothers, Inc.

Hi. How are you doing guys? I just wonder if you could give us a sense on in the first quarter, I know you are still doing restructuring but it seems like the margin is a little bit slow for all the plants you've closed and all the people that have gone. So, can you just give us a sense of what is going on behind the scenes, you know, above and beyond mix, on the margins?

I would say that we have the, plant movement has really settled down and we are at this point of time seeing, we actually saw about 10 cents in the quarter that we were able to identify. We had about 10 million of productivity and we had about 15 million of restructuring savings that actually flowed through in the quarter. So, we realized the 25 million at that time. I think what you are missing, is what obviously the numbers don't reflect, which is sort of drilled into it. The organic volume excluding Dresser-Rand was off about 5 percent. That costs us about 16 cents. We made about 12 million in the investment side, so that is about 5 cents. Insurance and pension cost us about 2 cents. So, it is there but I am afraid we continued to have a lot of price pressure. I mentioned to you before. The infrastructure side, we are seeing a, you know, three years no payment for us. So, I'll look at that about 1 to 2 percent on the price point and we really seeing the work that is being offset by continued tough, overall, macroeconomics.

Okay. Then a similar question on Dresser-Rand, you know, why is such a huge increase in revenues and a small increase in operating profits there as well?

Well, I am this company because that is exactly where we are digging into. I was frankly, personally disappointed when we saw the 40 million increase year-over-year and only half a million in OI. I know that a goodly part of that has to do with the pass through stuff, but what we were doing is, completing the system and the package for the customer. What I would tell you is that, my expectation frankly is that we missed about 2-2.5 and I would gladly get back to you in about a week after we find out about it as to whether that was some progress that we were making on the project or whether there was some. I know there is the one timer million dollars, but I am missing about 2.5 and as soon as I find the , I am going to share it with you and the rest.

And I will be looking forward to my cheque. Thank you.

No, no. Not cheque. Info. Info. .

We will go next to Joanna Shatney with Goldman Sachs. Please go ahead.

Good morning. Can you talk about the infrastructure business and just talk about what your expectations are for Bobcat versus The Road Machinery business for the next couple of quarters?

Yeah. Let me finish. To start off, I said to you obviously, as we saw it in , activity out there. I think the one I remember is reading an article, I think, the Chicago and thereafter, which said like overall business unit is being off like 10 percent. That is the kind of stuff we are seeing in our large equipment when it gets into compaction, frankly, even running more like 20 percent off. But when I get into the Bobcat side, we are really very close to where we were a year ago on the revenue and a lot of that would have to do because of the new product we introduced out at that show. The other piece that is hitting the numbers at this point in time has got to do with our Club Car business. You may have been reading some of the issues that had to do within the large Golf Car association, American Golf and and so on. We are seeing the actual revenues in Club Car almost off like 10%, but we see that coming back as we have some other new products start coming out of there. So, as I rack up the year going forward, our biggest concern has to do with the Road Machineries I described to you and I am afraid there, everything I hear from others, where there is and so on, I think we will be in the same kind of like-minded 10 percent somewhat range of revenues. When I get into the compact equipment side, and I am including in there, the portable and the Bobcat, we are probably going to be relatively flat compared to where we were. Club Car will probably pick up and be also relatively flat. So, the biggest issue to be road development. We also haven't talked about it a lot and that is with the specialty equipment side and although, we had an increase in the first quarter, I am worried some of the mining stuff, which has an impact maybe knock it down 1 to 2 percent there. That is the bandwidth. Large equipment off 8-10 percent, small equipment flat, and rental continuing to be an issue as we see them continuing to reduce their purchase by maybe as much as another 20 percent from the year ago.

Okay.

Does that help?

Yes. On the cost reduction, you said 10 cents for this quarter. When does phase two actually kick in, is there some big 4Q benefit?

It actually starts in Q3. We already have individuals leaving. We started the transition really in the fourth quarter and the first quarter. I think you will be seeing that very obviously in the third and fourth quarter as we go forward, because we are taking it all as we go forward right now.

Okay. Great. Thanks.

Sure.

We will take our next question from Gary F. McManus with JP Morgan.

Good morning, Herbert.

Good morning, Gary.

In the press release, you talked a little about Thermo King. You said the year-to-year decline in trailer demand was less severe than expected in the quarter and available use of equipment has dropped by 50 percent. Can you elaborate a little bit further on this in terms of how well the trailer demand hold up versus your expectations and the 50 percent decline seems pretty severe. I want to know, if you can put that in historical context, if whether you have seen such a huge drop, and where is it? It is such a low level now that could spur on some new demand?

Yeah. Let me see if sort of rank up what I see overall. When I look at Thermo King and we break it into the biggest part in North American trailer part. We actually saw that falling off over 20 percent first quarter compared to what we saw last year. That is the dramatic number, but I am telling you, I thought it was going to drop off even more than that. We had heard numbers like an additional 40 to 50 percent. So, that is off, let us say 25 percent for round numbers. We see that actually improving as the year progresses to our expectation really right now is that should come back to about where it was last year's level in the second or for the rest of the year. European trailer was up very, very, very, strong and we expect that to flatten off a little bit. I mean, strong in terms of being up a little over 50 percent year to date. North American Truck is off and then the other one, which really surprised me the most had to do with North American Bus that was off by 20 percent somewhat. Container, I never, it is a small number you are talking about, 20 somewhat million dollars of revenue but that was off, as we said 48 percent in the quarter. We expect that to pick up where we wind up about 10 percent off. Overall, Thermo King was off 12 percent, but it runs from bandwidth of European Trailer being up 50 percent to container being off 50 percent. What I am starting to learn, as I get old in this business is the fact that the year-to-year spikes are incredible and you have got to look at it on a brick-by-brick basis. And these are consistent. If you remember, at the analyst meeting, we had to put up that chart saying 50 percent swings in revenues overall on a year-to-year basis appeared to be quite normal.

And then just some commentary on the availability of used equipment decline by 50 percent. I mean that seems like a lot of used equipments, some have been taken off the market. I mean is that normal to occur in a weak environment that we dropped this much and you know, just put some context on that drop?

Yeah. Truly, it is trucks that is really off and what you are seeing is obviously the cost of the used truck being as attractive as it is compared new ones before just going and buying those and the new units are sitting there. We about one out five of the trailers or . The other four are just dry boxes and so ours gets hooked onto that and what we are seeing is the real big movement in the used equipment that I am reporting, not our numbers, but the data that comes from the trucking industry, that is where the big reduction is, it is on the truck side and not the trailer side.

Okay, Herbert. Great. Thank you.

Sure.

We will go next to David with UBS Warburg. Please go ahead.

Good morning.

Hi David

Dresser-Rand seems to be somewhat kind of some of your other businesses, I guess the question is are you still marketing the business actively? Are you considering keeping it or even attempting to add to it?

Well. I guess that is what I have to say to you. I think you are doing well so far with all the above. For us, obviously, as we acquired it, we said that our initial intention was to sell it. That in the long term continues to be our interest because we have a tough time seeing how we leverage that business with other parts of our company. But I also am intent on making sure that if and when we sell it, it is, that which provides benefits to the shareholders and not at a distress price and so we continue to try to improve the operating performance until we finally find a strategic buyer who will frankly value it at a level that makes it better to have it as a one-time cash source for the company than an ongoing stream for that continues to be our process.

Okay. Fair. And the somewhat not related followup is that these supplier solutions program seems almost like tear in the stick. I mean the question is have you dropped any of your suppliers based on lack of participation in that higher solutions program?

No. It really isn't focused on that. It really got down to when we started looking and doing penetration by customer group. What we found in doing with data now because we have obviously, we have enough data on the supplier. What we just found is that for whatever reason, we were not really having a focus on going and meeting with those customers. A lot of it is through distribution. And so we looking at it, we really is a group that, obviously, we can have our guidance introduce us and I would hope, we would as a result be able to get to the customers and then we still had to provide them with proposition. I am not proposing. I have no interest in using the threat of if you don't do business with us, we will pull away. That usually results in bad relationships. We just found that as we did the analysis, why we looked at their total buy because they gave us access to their buy list, which is why we got the numbers. We found that frankly we had not gone and pursued them as aggressively as we probably should. So, we just got to be an area of focus, just the same what you do when things are tough. You start looking where most likely place to go or obviously, we know these folks, and we think to pursue them.

Okay. Terrific. Thank you.

We will take our next question from Barry with Legg Mason Wood Walker, Inc. Please go ahead.

Yes. Good morning.

Hi Barry.

Last quarter and the fourth quarter, the in Security and Safety, there was a 490 basis point negative swing in the operating margin. About half of that was R&D, which I perceived to be pretty discretionary as to when you spent that money. You did versus in security and safety this quarter. Can you give us the increment or decrement to what you spent on R&D that helped you make that positive number perhaps?

I think the way I would give it to you is that the sort of continued investments we make. We are making investments in the range of about 15 million dollars a quarter in what I would call the electrification of Schlage in the electronic solution side business. In addition to that, we made some investments in getting launched. You know, those are especially areas that have to go into pushing into the advertising and then in addition to that, obviously, we now have Kryptonite, which shows up in there. So, we have been doing an awful lot for getting Kryptonite launched. So, it would say, there is a lot of in the SMA side as we are going and really moving into the advertising to the of another couple of million dollars. So, it is really the sum of all of those types of activities that we continue to invest in for the growth of that place.

So, when I add up to the 15 million ongoing investment and the other promotional items you , can you give me a dollar figure of the year-over-year comparison?

Yeah. What I would say is that when I add them all up that way is I am talking about coming up with 20 plus million dollars of the kind of the final number I was investing in the quarter for all those kind of things going forward.

And, that is versus what a year ago?

Well, I am just giving you the increment between what we are doing above and beyond what we did in first quarter of last year.

Okay. Great. Thanks a lot.

Sure.

We will take our next question from Peter with Robert W Baird. Please go ahead.

Hi. Good morning.

Hi.

A quick question regarding the progression of order rates through the quarter, it looks as though that your forecast for revenue may be a slightly bit better than what your were previously thinking. Can you comment on how orders progress through the first quarter?

Yeah. There are already two pieces, if I can answer that part, number one, if I exclude Dresser from the map a second, the rest of our organic operations for the quarter were off about 5 percent and if I go back to fourth quarter, which we did in January call, I had said at that time, we were expecting about four to six. So, that sits pretty close to where we were in. When I look inside of that, the disturbing piece is that, we were further ahead in January than we wound up at the end of March. And as for some of you that I met at that time, to me, I think some of that had to do with, frankly the weather issues that were there and some of our construction site, there was not a flake of snow to be seen anywhere around the US and I think our dealers and our customers were buying things that went all in. The first quarter got in pretty close to where we were but it was more of an earlier start and a slower finish rather than it continuing to be a strong robust, all the way on through. So, as a result, we sort of in that entire quarter activity level and said that you know, Q1 if I go back towards off by 5%. I still think that Q2 looks a lot like Q1, maybe someway off 4%.

Then, that is for the first half overall was like off 4 percent, the second half overall in my mind, still looks like a 0, -1 type range. So, all in for the year, we are still in the -1, -3 type category.

Okay.

In terms of followup maybe a longer-term question, are you hearing any sort of demand pick up that would be generated by the fiscal stimulants bill?

Well, I don't think they have got our address. I have not seen that at all in our activity as a matter of fact. My biggest worry is that some of the pending legislation related to T21 bill re-appropriates money, which will actually hurt us rather than support us. The only positive thing I have got in the works is potential tax credit that would go to distributor powers. So, in future would be buying things from us in microturbines or other portable power side would be positive, but as you know that is a small part of on our company. That really does not have a real upside for us.

We will go next to Michael Regan from CS First Boston. Please go ahead.

Thank you. Have you adjusted already relative to the disruption cost of restructuring that may have hurt in the fourth quarter? I am wondering if you just look at your infrastructure business, traditionally, I would think your fourth quarter in that business would be sort of highest margin quarter. It was the lowest for the year in 2001 and real strong rebound in the first quarter relative to overall margins. Can you use that segment as an example of what might have been going on in terms of disruption costs from restructuring? Was that the issue or was there something else?

There are two things. Number one is that if I look historically back, I find the second quarter, which is usually the highest margin quarter for the infrastructure piece. But fourth quarter if you recall what I said is that I actually shut down the factories for over three weeks in December because, we did not want to and build the inventory and put extended floor plants. That to me is a double waste of money. The biggest part that we had if you actually go back and look in the fourth quarter, yes, there was disruption because of the movement of plant. But frankly I shut it down for almost all of December, because we didn't want to go and built inventory level. We wanted to keep the field inventory in the 60 somewhat day range. That was the biggest issue, I think.

You were producing full time in 1Q, is that correct?

Yes, we were.

And that field inventories, as you said about 60 days, is that correct?

Yeah. That is where we were building to. We are not into that of trying to go and put that out there and then go and put foolish waste of money. So, we continued to have throughput in equal retail sales at the dealer level.

We will take a follow-up question from Mark E. Koznarek with Midwest Research

On the Works initiative, how much incremental did we spend in this quarter? What is your budget for the year in terms of the expense we are to be thinking about associated with that business?

We are spending somewhere between 25 to 35 depending on what we have got on the new product. That was the target levels ahead our front. We spent about five incremental over what we spent in first quarter of last in first quarter of this year. As we wind up getting to more of the data coming out on the 250 and stand-alone unit, that is why the 5 will go up to more like 6 in the next quarter or two.

This 25 to 35 is an absolute number or is it vs. the year ago?

That is the absolute number. Last year we only spent like 10.

So, then in the quarter we got 5 million. What was the absolute number a year ago for the quarter?

We spent about 3 last year. So should be 8 something this year.

So, it is really going to be somewhat level through the year?

Yeah. We are going to go up about 1-2 million because we are spending as much right now working on the prototypes for two different units. The increase is really as we put up the data units and that is 1 or 2 million dollars.

What are the early feedbacks that you are getting? Are there issues that you suspect might delay more aggressive roll out?

It is amazing how the fervor of California has come and gone. I have never seen anything come and go as that. So, the California has died off. But the good news is that we are accounting on that. What we are seeing more at this time is the thing that is slower than we had forecasted is the reception by our utility friends in the interconnects. They clearly view this as long-term strategic threat as they were having more of a difficult time as I said. If you look all competitors, it is the same way they are talking about it. The interconnect is becoming a longer hassle than we had hoped for. We probably are going to require regulation to have the monopoly open up. The why if you go back the number I said, our installations at this time are more constrained by interconnects in utility than they are by customer acceptance? We have found that at some of our work, we did some land site land fill, we did some waste water type thing and we are finding that in the area where we are using gases, hydrogen sulfide and so on; methane is coming out basically as a waste product. Converting that into power is going to be a windfall for both IR as well as customer group. I significantly underestimated how much a potential there was for that application. We continue to have the interest level from both supermarket and convenience stores for obvious reason. We are seeing some significant upside on some of these other areas of wastewater treatment side. The biggest issue that we are dealing with right now is getting through these interconnects, so we can actually go and get the Internet online. It is taking us 60 to 90 days to by the utility. That is not just acceptable.

So, there was no technical problem that popped up at some regulatory?

We had a leak in one plant, we had go and fix it, but (indiscernible) breaker continues to work fine. It really has more to do with the regulatory side than the construction side.

We will go next for a follow-up question with David Raso with Salomon Smith Barney.

I wanted to ask about the Hussmann business, especially with the goodwill amortization not any equation any longer, can you tell us where the margins are at Hussmann in the first quarter in particular? Historically in good times mid-single digit five to six percent margin business. The first half of the year and then 10 to 11 percent in second half of the year. Can you give us an update on where we are in the first quarter?

That sounds that you have been doing your homework. When we added on the we added one more revenues. We are on target to get up most of the 10 percent as the year progresses going forward.

How much is the order rate at Hussmann right now looking out? How much visibility can you have into the stronger part of the year typically for Hussmann in second half?

That is one of the things we really pushed in our retail solutions. The most encouraging news for us is what I said before about the full year, square footage gave us for the supermarket being up 3 percent year-over-year and we continue to gain market share, so with that kind of a forecast in front of us, I think we are looking at being up almost double digits year-over-year on the revenue side. And it is major change in the North American piece while we also go after the smaller

My only concern there will be Wal-Mart; when you lost share on the (indiscernible) packages? The industry number if one thing, but Wal-Mart is the biggest force driving it. Are you using more content on?

Don't write me off on the Wal-Mart case just yet. When you look at our retail solutions, that are obviously a key account, and if you recall, I said just now, that we had a successful run with and it was with a major North American chain - Wal-Mart. We are seeing not only progress recovery there but we do see it in the rest of our supermarket chains as well. So, it isn't just disproportionately one of the winners going forward. We did temper our numbers to reflect that it is only going to be market wise up, small single digit and the rest we have to earn ourselves.

We would take a follow-up question from Joel Tiss from Lehman Brothers. Please go ahead.

Just 2 more quick ones. Can you give us a target on your SG&A as a percentage of revenues?

What I am seeing is as we go into more of the service business is that we are going to be somewhere in the probably 14.5-15 percent range is about where I look at coming in, based on taking out SG&A and then adding back in S&A as it related to the service-type business. Right now as we look at our numbers for 2002, we are plugging it in, at somewhere between 14.5-15 percent.

That seems awful high.

I agree with you. For instance, when we did Kryptonite, it was at a small number, some 30 percent S&A. NRS and Taylor is collectively over 18%. So, as we add in, shall I say, labor intensive, that is where you are seeing the headcount. So, when I keep looking at all these pieces, I am looking at how we wind up lending what I would call more of our traditional manufacturing type base with the S&A. I am expecting it to be in the 10-12 percent range. Adding on to that, I see service business running 15-20 percent and blending that together and coming up with something which is currently 14.5-15 and driving it down to 12-13, we've got a couple of percent we've got to go yet. When you start off with these acquisitions, what we find is they have run down as 55 independent locations rather than as one company with individual branches. So, that is the activity level we have got to go through. We have got to put systems in place to make that all happen.

And last can you give us a sense of what the lag is between truck engine sales, which is strong now, and the trailer sales?

On a historical basis, the trucks and the trailers ended the run fairly consistently, if you look at how they went over time. There has been a considerable disjoint. It started in fourth quarter. There is usually a fairly specific ratio of trailer to truck sales. Fourth quarter started go off as first quarter . So, it got to catch up at some time. The numbers should catch up soon.

Don't you think that is more pipeline (indiscernible) rather than retail sales at this time?

Could be both. I would think it's more putting out into the channel rather than it being put out to the end user. That's why my expectation is as it goes out to the end user, we'll see that in the next 60 days-time horizon. That is the speculation at this time.

We have a follow-up question from Barry Bannister with Legg Mason.

Two years ago you sold the compression services business out of Dresser-Rand and if that sale what presumably might have been a profitable service business permanently negatively altered the profit profile at Dresser-Rand, so we really cannot expect that much as their volume picks up and prices go up?

Actually, the piece that we sold off had a shelf lock attached to it. It really was an installed base, which had a shelf life of about five years going forward. They were winding down so that base was going to go away. Its profitability level was not really that which we didn't suffer. We will not suffer as a result of that having gone away. There was not that much of a `service business`. This was more of a rental business, so you had `in place` large compressors, and you were getting paid for it as they consumed it. I do not think that this reduces the profitability. If I look at Dresser-Rand, we are now where we used to be 50-50. We now see the order level being more like 60 percent where we are able to go in and demonstrate the ability to improve the extraction of oil and gases, so we are seeing 60 percent being rather than 40 percent being on new projects. You'll see profitability go up and reach a 10 percent OI level.

So, basically it is an operating leverage story on the side given that your completes are finally rising?

Yes. We have got the largest installed base that is out there, but the problem is it is used right now to generate x-number of barrels or so many cubic feet and our challenge is going in to show them that my spending 5 million bucks to able to get a pay back of 1-2 years or they get more to extract. That is the business model that we are really driving right now.

We will take our last question from Michael Regan with CS First Boston.

Is there anything that you feel like national fleet car sales are not that robust going forward. Does that hasten your decision in terms of wanting to do something with Club Car?

My optimism for this is, it is not really driven off Golf fleet car sales. We have what you will be hearing about very soon, some very large attractive non-Golf fleet vehicle type businesses that people are dealing with. I tried to get them to let me talk about it today. What I am looking at is a lot of other things that we are working on, other types of units that we have firm orders in place, that we are looking at delivering over the next two quarters, which more than offset the weakness I continue to expect on the Golf car side.

We are going to ramp up now. We will announce second quarter results on Thursday, July 18th. The replay of today's conference call will be available at 3 pm. It will be available till April 25. The call in number for the instant replay is 7194570820. And the pass code is 632932. Audio and slides from today's conference call would be achieved on the website and finally the transcript for the conference call will be available on our website next week. Please call me if you have any additional questions. I am at 2015733113. That will be end of our call. Thank you very much.

This will conclude today's Ingersoll-Rand first quarter 2002 earnings conference call. We thank you for your participation and you may disconnect at this time.