特靈科技 (TT) 2003 Q2 法說會逐字稿

Good day, everyone, and welcome to the Ingersoll-Rand second quarter 2003 earnings conference call. This call is being recorded. With us today from the company is the Chairman, President, and Chief Executive Officer, Mr. Herb Henkel. And the Director of Investor Relations, Mr. Joseph Fimbianti. At this time for opening ration I would like to turn the call over to Joe Fimbianti. Please go ahead, sir.

Thank you David. Good morning, this is Joe Fimbianti, director of investor relations for Ingersoll-Rand. Twol our second quarter 2003 conference call. We released earningings at 7:03 this morning. And the release is currently on your web site. This morning, concurrent with our normal phonin.conference call we will be broadcasting this call through our public web site. There you will also find the presentation with the call. To participate, go to the web at www.IRCO.com. Click on the yellow link on the left-hand side of the screen. Both the call and the presentation will bear chived on our web site and will be available later this afternoon. Now, if you would please go to slide number 2. Before we begin, let me remind everyone that there will be forward-looking discussion this morning which is covered by our safe-harbor statement.

Please refer to our march 2003 form 10 K with a detail on factors that pi may influence results. Now I would like to introduce the participants for this morning's call. We have Herb Henkel, president, chairman and CEO of Ingersoll-Rand. Tim McLevish, our senior Vice President and CFO. And Rich Randall, Vice President and controller. We will start with formal presentations by Herb Henkel and Tim McLevish, followed by a question and answer period. Herb Henkel will start with an overview. Now if you would please go to slide number 3. Herb?

Thank you, Joe. Good morning, everyone. Welcome to our second quarter conference call. This morning we reported net earnings of 81 cents per share, which includes both continuing and discontinued operations. EPS from continuing operations was 89 cents per share, which substantially exceeded the 74 to 79 cent range we provided during our first quarter conference call back in April. The strong performance was primarily related to better than expected results from our operating businesses, especially for the month of June. Tim will discuss the results in greater detail later in the conference call.

Discontinued operations were negative 8 cents per share. Our original expectation was for about 4 cents of costs related to these operations. The additional 4 cents per share of aftertax cost is mainly attributable to a refund we were required to make to the U.S. customs for overpayment of antidumping benefits we received for the year 2002. This repayment was necessary due to a calculation error by the U.S. customs department.

Would you please go to slide number 4. Our overall activity level for the quarter improved compared to last year and to the level that we experienced during first quarter. However, demand from some of our key industrial and construction end markets remain sluggish. We are able to outgrow our end markets by gaining market share through product innovation and our continued focus on expanding our stream of recurring revenue. We are pleased by a strong operating performance in the quarter. I believe it clearly demonstrates we are executing our strategy.

Our total earnings increased 30% compared to last year, and earnings from continuing operations grew by 68%. The key drivers of this performance were revenue growth as well as moirj -- margin improvement. We achieved revenue growth of 11%. And we also delivered on our stated goal of growing organically of 4 to 6% achieving organic growth for the quarter on the upper end of the range by delivering 6%. Additionally our productivity -- as margins improve by a full percentage point up to 8.7%. This focus on operational excel sense has put IR in a strong position to reach our full year earnings target of 3.10 to 3.30 in spite of some of the sluggish market environments we are experiencing. Additionally, we may progress on strengthening our balance sheet.

Our debt to capital ratio was at 39% at the end of the quarter, which is consistent with our 40% target range. Since the second quarter of last year when our debt to capital ratio was close to 50%, we have reduced our debt by over $1 billion.

Now please go to slide number 5. As the results of our key metrics indicate by their positive nature and direction we are executing our strategy and I believe it's working. Now I would like to update you on our successes by taking you through the three components of our vision at IR. The drive shareholder value through dramatic growth, operational excellence and dual citizenship.

Please go to flid slide number 6. Focusing on dramatic growth, despite challenges conditions in some of our end markets we achieved end market growth and achieved our organic growth goal of 6%. As we discuss prefld our growth strategy is built around developing and delivering innovative products and solutions. Growing our stream of recurring revenue, and by leveraging positive bolton acquisitions. Please go to slide number 7. I would like to update you on some of our emerging innovative products and successes. Our sfle. new products and technologies has been one of the prime reasons that we have continued to increase revenue in spite of difficult end markets. In our climate control sector during the first half of 2003 we have seen a resurgence in our refrigerated container sales at Thermo King some of which is due to our new Mack numb refrigeration units. For example, a major marine transplant company purchased 2500 units because of their fishltsy and ability to hold temperatures at minus 30 degrees heron fight.

Hamburg can now transport fruits and vegetables in premium conditions for an extended period of time to its customers around the world. They are using the magnum units to pursue market share and premium shipping rates in the highly competitive seafood trade. I think this is a prime example of Ingersoll-Rand enterprise using technology to help our customers increase their revenues and more importantly their profits.

Please go to slide number 8. In our infrastructure secretary Bobcat sales contributed despite tough lackluster end all market activity. The tool cat achieved retail sales in the second quarter and Bobcat continues to target $100 million in are of knew from new products in this year. We have an aggressive schedule for new product introductions in the next several years which we are confident will continue to drive the growth of our compact equipment business.

Please go to slide number 9. In our industrial solutions sector, the energy saving Nirvana air compressor product line continued to expand in the second quarter as we shipped the 1,000th unit in June. Interestingly enough the unit was sold to Thompson Plastics, a key supplier to Club Car through our IR supplier solutions team a strategic initiative team that's driving dual citizenship and dlab collaboration across our enterprise and a great example of neutral third party endorsement of our products Nirvana was added to the Dutch energy allowance list in recognition of the energy savings to our customers. Now that shir Vanna has been added to this list, customer who by the compressors can qualify for an increased tax deduction that is call to the entire cost of the unit. These have helped fuel air solution revenue growth despite the depressed level of industrial production in many key markets in North America and Europe. Second quarter orders were up 15% compared to last year following a similar improvement in the first quarter. Please go to slide number 10. Another example of innovation in our industrial solutions sector comes from our energy systems business where we continue to make progress during the quarter. We combined our industrial generating product line with our micro turbine business and we can now offer our customers a turn key solution for their distributed power requirements. This will also allow us to capitalize on the benefits of combining technical and support resources along with our sales channels.

We had a record order month for June and for the second quarter we booked about $8 million in orders, which translates into about 3.56 megawatts of power. This is made of up 12 250 KW machines and 8 70 KW machines. The introduction program remains on target for intro in the third quarter. Our first units will be shipped in August. We are focusing our energy systems efforts on environmental markets and cogeneration applications. Customer acceptance reflects the favorable economics of the solution and a demonstrated reliability of the new technology. Now please go to slide number 11. And in our security and safety sector we have begun marketing an innovative product to the airline industry N. June, IR's recognition systems and interflexion business displayed their dual biometric recognition system for the first time during the annual meeting of the international air transportation association. The system combines hand geoMetairie and face recognition technology to create a convenient and highly accurate system to verify people's identities.

A demonstration of the product provided and proved that interflexion enterprise software can quickly process a high volume of people and seamlessly integrate with many biometric devices. In an airport environment personnel can use the system to verify the identity of people as they pass through the security process including check in security check points, boarding and immigration lines. Please go to slide number 12. During the second quartering we also continued to deliver on our goal of growing our stream of recurring revenue. Our large installed base and powerful market leading brands provide us with the significant opportunity to he can panned revenue and profitability.

During the quarter, we made additional progress in developing our recurring revenue stream as recurring revenues totals over $600 million, an increase of approximately 12% compared to last year, and 28% compared to 2001. Hussmann and air solutions have been our major focus for recurring revenue expansion, and both made solid dpains in the quarter. Please go to slide 13. Our Hussmann service offerings to supermarkets and convenient stores also expanded during the quarter as we added over 500 locations. We now service more than 4 -- 4400 locations. Total parts service and installation revenue was up in the quarter compared to last year, and comprised 34% of total revenues.

Please go to slide 14. In air solutions, we achieved a recurring revenue increase of about 11% during the quarter. This accounted for over 48% of the total revenues for the air solution business. We booked 10500 air care contracts. This is a year to date increase of approximately 25%. Additionally, the service business maintained its operating margin at well over 20% while requiring no additional investment.

Now, please go to slide number 15. From a bolton acquisition standpoint we continue to see the positive impact from our second quarter of 2002 acquisition of ETC. During the quarter, our security and safety sectors electronic access control revenues were particularly strong helping fuel the sector's 7% revenue increase. Please go to slide number 16. By focusing on operational excellence, we continued to benefit from cost reductions associated with our restructuring, and we are on target to deliver our goal of realizing a full year EPS benefit of 25 cents from our restructuring activities. We also maintained our focus on managing the things that we can control, managing costs and inventories, improving our working capital terms, and maintaining high levels of customer service.

Now please go to slide number 17. A key factor in our ability to deliver on our operating excellence goals has been our implementation of lean manufacturing at our facilities around the world. Our execution of lean manufacturing principles has helped us improve our cost structure and contributed to our working capital management improvements. As we discussed during our last call, we are utilizing lean principles as the foundation for a significant process improvement, which we call the lean branch initiative. Our goal is to implement lean processes to establish best branch procedures which we then will leverage across the entire company. We have significant opportunities to improve on husbandman branch operations. These opportunities are focused in three critical areas. Back office consolidation, technician productivity, and parts sourcing. Currently, our profits from Hussmann service operations substantially lag the over 20% operating margins that air solutions achieves on their service business.

The full year 2002 operating margin was only 3% of sales. We have made some excellent progress in the second quarter, and we have been able to raise the Hussmann branch operating margins to 6% of sales. Additionally, we have now begun leveraging our Thermo King parts purchasing and distribution infrastructure to centralize our aftermarket activity for Hussmann service operations. Our target is to achieve a 10% annual run rate on operating margins by the fourth quarter of this year and a 15% margin for 2004. We're off to a good start, and we will keep you updated on our progress in this area.

Please go to slide number 18. Focusing on dual citizenship. We continue to see the incremental growth in operational excellence benefits of the enterprise strategic initiatives we launched last year. A great example of this comes from our IR retail solution initiative. Last year, retail solution sales totaled approximately $32 million. This year, we have already achieved more than $40 million and are on target to achieve our goal of $85 to $90 million for the full year. This is a very positive indicator of the effectiveness and the impact of our strategy, especially when you note that more than 25% of this incremental revenue has come from our traditional climate control supermarket customers purchasing IR Security and Safety products.

Now please go to slide number 19. Overall, this was a successful quarter for our enterprise, one where we were able to meet or exceed our stated targets. We believe that our results clearly demonstrate that our investment in innovation, as well as the operational improvements that we continue to make, are building a stronger company, one that's able to perform well in all market conditions. By continuing to execute our strategy, we expect to maintain our track record for strong cash generation and to continue using our free cash flow to fund further profitable growth and innovation. I'd now like to turn it over to Tim McLevish, who will cover IR's business unit performance in more detail.

Thank you, Herb, and good morning. I would like to begin my discussion with the quarterly financial results. We continue to report the results of Engineered Solutions as part of discontinued operations net of applicable taxes. We have restated 2002 to be on a comparable basis.

Please turn to slide 20. Reported revenues for the second quarter were up 11% to $2.5 billion. The increase is largely attributable to double digit growth at our Thermo King and Bobcat business units and other industrial solutions sector. Excluding the positive impact of currency, revenues were up about 6% compared to last year's second quarter.

Operating income for the second quarter was $219.5 million or 8.7% of revenues. Margins have increased by a full percentage point compared to last year's second quarter, driven by strong operating results and the favorable impact of currency, partially offset by several one-time items. I would like to take a moment to discuss the year-over-year coststhat are included in our reported results. Our 2003 results include approximately $25 million of increased pension and medical costs, $14 million of costs associated with the appreciation of previously awarded stock based compensation, and $7 million in productivity investments. Prior year results include $15.2 million of restructuring and productivity investments.

Moving down the income statement, interest expense was $44 million, compared to $59.1 million in last year's second quarter. Approximately $10 million of the reduction in interest expense is directly related to the retirement of $700 million of debt from the proceeds of the Engineered Solutions divestiture. The balance of the year-over-year improvement is related to additional reduction in debt and lower interest rates. We continue to aggressively manage our balance sheet to ensure it is in line with our operations.

Other income for the quarter was approximately $2.6 million compared to an expense of $10.9 million in last year's second quarter. The change is largely attributable to the favorable impact of currency. Our second quarter effective tax rate was 14%, compared to 13.7% in last year's results. As communicated during our last conference call, we expect to maintain a 14% effective tax rate for the remainder of 2003. This rate reflects our ongoing tax planning initiatives and the associated reincorporation savings.

Net earnings from continuing operations for the second quarter were $153.1 million or 89 cents diluted earnings per share, which significantly exceeded our original second quarter guidance of 74 to 79 cents. Discontinued operations, which includes the results from Engineered Solutions and legacy costs associated with previously disposed businesses, reported an aftertax tax loss of $13.8 million or 8 cents per share in the second quarter. This included a $5.9 million charge to reimburse the U.S. Customs Department for excess anti-dumping payments received in 2002.

Our total net earnings for the quarter were $139.3 million or 81 cents per share, compared to $107.4 million or 63 cents in last year's second quarter.

Please turn to slide 21. On a geographic basis we showed revenue gains in most major regions. Second quarter north American revenues were up about 8% and constituted about 62% of total revenues. The European serve area reported strong revenue growth of 31% compared to last year, some of which was attributable to currency gains.

Asia Pacific was up 2% and Latin America was down 7% compared to last year. Approximately 5% of the overall 11% revenue gains were due to favorable currency.

I would now like to take a few minutes to talk about the results of our businesses. Please turn to slide 22. The climate control segment, which includes Hussmann and Thermo King, reported second quarter revenues at $656 million, an increase of 7% compared to last year's second quarter. Operating income for the segment was $55 million, representing an operating margin of 8.4%, which reflects an increase of more than 2 percentage points compared to last year.

Hussmann revenues for the second quarter were down 1% year-over-year, due to weaker revenues in North America. We continue to see depressed spending on refrigerated display cases across many of the major supermarket chains. The supermarket industry is experiencing a period of turbulence and financial uncertainty, which has a direct impact on Hussmann's results.

Thermo King revenues were up 16%, or 9% excluding the favorable impact of currency, due to stronger growth in our North American Trailer, European Truck, Worldwide Container, Worldwide Bus, and our after-market business. Based on this trend, and industry data, we believe that the markets for refrigerated transportation are in recovery.

Please turn to slide 23. The Air and Productivity solutions segment reported second quarter revenues of $353 million, representing a 9% increase over prior year. Air Solutions reported a 10% growth in revenues driven by new products and services. Recurring revenues in Air Solutions were up 11% and constituted 48% of its total.

Productivity Solutions revenues increased by 9% over the second quarter of last year. Operating margins for the segment were 6.1% of revenues compared to 4.3% last year, due to improved price realization, new product introductions, favorable product mix and productivity improvement programs. Please turn to slide 24.

The Dresser-Rand segment reported revenues for the quarter of $337 million, up from $235 million last year, an increase of 44%. Revenues, excluding purchased components that are sold or passed through to customers at low margins, were up 34% while our more profitable recurring revenues were down slightly. Operating income improved to $8 million compared to break even last year. We continue to focus on maximizing the returns from this business through our Operational Excellence Program and by driving improved profitability on our complete units.

Dresser Rand's backlog remains strong at $650 million at quarter end.

Please turn to slide 25. The infrastructure segment reported second quarter revenues of $791 million, up 8% over last year, and operating margins of 12.7% of revenues compared to 12.3% last year.

Bobcat revenues increased 12% as a result of new product introductions, improved rental account activity and stabilized pricing. Club Car had revenue growth of approximately 3%, driven by market share gains and contributions from the GM pathway program. The IR branded business showed modest growth compared to a weak second quarter last year.

Slide 26. The Security and Safety segment continues to report strong results. The segment reported revenues of $388 million, a 7% improvement compared to last year - 3%, excluding the effect of acquisitions.

Year-over-year growth was largely attributable to strong performance in North American residential markets. In addition, we experienced growth in our Worldwide Solutions business, driven primarily by our Electronic Technologies Corporation acquisition in 2002.

During the quarter we experienced a strengthening order rate and ended the second quarter with a strong backlog. Operating margins were 17.2% compared to 17.7% last year. The lower margin percentage reflects the impact of one time costs and continued investments.

Please turn to slide 27. Let's move onto the balance sheet. Working capital improvements were achieved in the second quarter compared to the prior year's second quarter. Working capital as a percent of revenues was 10% compared to 10.8% for the comparable period last year. Revenue growth and our ongoing inventory and receivable management programs primarily drive the improvements from working capital for the quarter.

Please turn to slide 28. We continue to focus on debt reduction. At the end of the second quarter, our total debt was $2.5 billion, an improvement of $1.1 billion, compared to the second quarter of last year. The improvement was largely attributable to the repayment of $700 million of debt with proceeds from the disposition of Engineered Solutions. This resulted in a debt to capital ratio of 39% at quarter end compared to the prior year ratio of 49.7%. Capital expenditures for the second quarter were $25 million, consistent with our plan.

Herb will now conclude our formal remarks with the outlook for the third quarter and for the rest of the year.

Thank you, Tim. Please go to slide number 29. As I noted to you earlier, activity in our end markets remained mixed as we completed the second quarter. Although our recent order and shipment activity improved during the month of June, we remain cautious because there are continuing sluggish markets that we participate in. We currently expect EPS for the third quarter of 2003 to be in the range of 70 cents to 75 cents. This includes 74 to 79 cents from continuing operations, offset by approximately 4 cents of costs related to discontinued operations.

Please go to slide number 30. We are also maintaining our full year diluted EPS projection of $3.10 to $3.30 from operations, and 31 cents from the sale of Engineered Solutions for a total of $3.41 to $3.61. Please go to slide number 31. Overall, this was a positive quarter where we made strong progress in executing our long-range plan. From a dramatic growth standpoint we continue to drive profitable growth by developing innovative solutions for our customers and by growing and improving the profitability of our recurring revenue stream.

From an operational excellence focus, we maintained our pursuit of continuous improvement to gain the full benefits of our restructuring activity and achieved permanent reductions in our operating cost structures. And from a dual citizenship standpoint, we continue to realize the benefits of collaboration as we harness the strength of the entire IR enterprise to drive improved results across all of our businesses. Our results reflect the effectiveness of our strategy and our commitment to execute it. We achieved excellent organic growth, achieving 6%, the top end of our 4 to 6% range. We made additional progress on improving our operating margins to sectors that are below our stated goal of 15% have moved solidly in that direction. And the remaining sector, Security and Safety, maintains strong margins in excess of 17%.

We strengthened our balance sheet and we now have a debt to capital ratio below our 40% target. And we are on track to reach our full year earnings forecast of $3.10 to $3.30 per share, and to achieve our free cash flow target of $400 million.

If you would please go to slide 32. This concludes our formal remarks. And I would now like to open the floor to your questions.

Thank you, Mr. Henkel. If you would like to ask a question at this time you may ask it by pressing the star key followed by the digit 1 on your touch tone telephone. As a reminder, that is star 1 if you have a question. First question from Michael Reagan at Credit Suisse.

Good morning. Herb, just given what I thought was outstanding numbers in the quarter, especially on the top line, I was a little surprised by y our commentary, you know, that you are not extremely upbeat for the second half of the year, just sort of status quo for the second half of the year. So is it that the top line performance was really just driven by tremendous execution, share gains, new products, that kind of thing within Ingersol. and that your end markets aren't doing much and it gets harder to continue to do that in the second half? Just trying to understand, because, again, I thought this quarter was so exceptional, I would have expected you to be more upbeat for the second half.

Let me see if I can increase my enthusiasm, Michael.

Sorry.

Having lived on the other side of this coin for so long, you wind up becoming somewhat -- I guess cautious would be the way I would have to describe my temperament at this time.

Yep.

As we described in our write-up, June was an exceptional month. And April and May were more in line with what we had forecast. So what we look at in our bookings and our backlog as we go into the third quarter, they are obviously positive at this time. But I guess I am at the stage where I say one month does not a year yet make, and I would rather go and continue to focus on the cost side, assuming that the markets are not dramatically improving.

As I listen to some peer companies that are also reporting out results today, I think some of them experienced the same type of upside in June. I don't want you to think that I am worried about running out of steam. I'm just cautious about the fact that June was great month, and I want to make sure that it wasn't that some folks were going on vacation early and placed their orders before they took off in July. That's really what I'm trying to reflect to you.

Okay. Terrific. Thank you.

Just a reminder. If you have a question, press the star key followed by the digit 1 on your touch tone telephone. If you could also limit yourself to one question and one follow-up question. Next is Alex Glen at Ingalls and Snyder.

Good morning.

Good morning.

How much of the European operation or sales was currency? You said 5% of the overall, but of the 31% increase in Europe how much --

Probably half, half that increase is attributable to currency.

And the other half looks remarkably strong in view of what has been happening in European economies.

Alex, remember I mentioned before about the very, very strong orders we received from the Hamburg suit that had to do with the containers and so on. We are seeing those kinds of activities of new products. Our road development business was up significantly as well. So I think we actually have seen the benefit of some of the new stuff we have introduced going into that part of the world.

Okay. New products.

Yeah, the same was true in Air Solutions. Nirvana is doing an excellent job for us in terms of gaining significant market share growth. And the recurring revenue is picking up as well.

Sounds good. The rental growth at Bobcat, could you comment on that. Are you talking about sales and rental equipment leases and why is it picking up?

We have two areas that we support when we wind up doing rental at Bobcat. One has the do with the large U.S. rental accounts.

Yes.

In that area we have seen an increase in activity. I want to give you in magnitude as you look at it. You are talking about something that goes up from the 25 to $30-some-odd million dollar range. This is not a dramatic percentage number that's there, but it's up 28% if you did the math.

What is up 28%?

The sales to large U.S. rentals, going from the 25 to 32 some odd million dollars.

28% versus last year during the quarter?

Correct.

And what do you -- well, they have been aging their fleets?

That's what you are really seeing is the replacement of -- you know, we look at those customers as trying to have fleet ages that are in the three year range, two and a half to three year range. And I think if you looked at the math you saw they were getting closer to 40 -- 44 years, I think what we see is some of the makeup in that category. This is obviously a product category I think which is attractive for the rental market in general.

I would also tell you that we are really focusing very, very heavily on supporting what we are doing with the Bobcat distributed-type channels and trying to make sure the customers have the rent alternative, with rent quite often many times leading to buys.

So last year they had -- they were underspending to age their fleet. Now they are going back to a normal level?

I think that is how I would see that, yeah.

Are you seeing that in any other products besides Bobcat?

We're seeing-- a little bit of it is showing up in Road.

But, again, there, we are talking about activity level in a total of $10 million range. So it's easy to see swings of a couple million dollars in both directions. But even that is positive. So I think what you are seeing there is a return to more normal replacement cycles rather than any type of a boom growth period.

We'll go next to Mark Coznak of Midwest Research.

Good morning,Herb.

Hi, Mark.

Just a follow-up to Alex's question there, I was going ask the same thing about rental. And if you went up from $25 to $32 million, that's only 1 or 2% of Bobcat's 12% growth. Is there another element in there of rental?

No. The real growth I said would wind up coming from increased sales of our Track and Tool Cat-type products. That's really what's driving the growth. And obviously there is a, quote, "currency" piece of it for the sales that we wind up manufacturing in north Dakota and shipping to Europe. I think that represents almost -- what do we have, half of that?

Yeah.

Half I think was currency.

So base is really up like 6% or so for Bobcat?

That's right.

Gotcha.

We still have that logged $300 million a year that we shipped up -- wind up shipping to Europe. That piece has a significant growth. So it's new products, some of the rental and I think the important piece behind it that I really like is the fact that we are seeing strong return to the margins that we've experienced in the past.

Here is what I really wanted to ask you about, was Security and Safety. The margin at 17% levels over the last 20 quarters there has only been two quarters, it's been that low. What's going on there? Is that a one time investment? Or is that a manufacturing stumble? What should we be expecting for the second half?

The normal rates. As Tim mentioned to you during his comments, we had a large list of one time events that we took into account. They ranged from operating pieces that we made changes moving factories around. And I will also tell you we are now also having a lot of organic growth that's taking place in the solutions business that we invested in. I mentioned the biometrics stuff that's there. And we actually have higher margins still to date looking at our more traditional hardware-type business. So the real growth came out of the non-traditional hardware, which has margins which would drive it closer to 17%.

For the second half it should remain around 17?

No. Take the one time stuff out and go back and dust off your numbers from last year, and you should be be seeing numbers that are very comparable to that. 18 to 19% for the segment. Their margins remain strong, the operations remain strong. The deterioration you are seeing is purely from your factor of one-time items and restructuring, a variety of different things. So, north of 18 percent, Mark, going forward.

We will go to David Ross from Smith Barney.

Good morning. A question on the cash flow and the use of it. Looking at your dividend rate right you now, 1.5% versus a group average of about 2%. You can get the dividend from the current 76 cents per dollar and it only costs you $41 million incremental per year. Given your free cash flow, free dividends, essentially each and every year is at least $500 million, and going forward you are assuming strong cash flow, probably monetized the Timken stock you got in the deal relatively soon, what is holding you back on the dividend?

Our board meeting is in August, David, not in July. I say that flippantly, but let me be very, very precise in this part. We had last year as we discussed as a priority to get our balance sheet to where our debt was down back into the 40% range. And we have now accomplished that fact. We remain very confident of the free cash flow going forward, so the option of revealing our dividend policy is one that I think right now is pretty high on the list of things to look at as we get together in our next board sessions.

At the minimum, a group average?

I've found that chairmen should not committee on what committees are going to be talking about in our August meeting.

Okay. One follow-up, the second half earnings outlook, if you use the mid-point of your third quarter range it implies the fourth quarter, again using the midpoint of the full year range, that the numbers are down year-over-year about 1.07 versus 1.19. You have 8 cents lower dumping credit this fourth quarter versus last. You lose a pretty big chunk of bearings earnings. As you know the fourth quarter was always the pretty big earnings quarter, so it's the deal for that quarter at a minimum is dilutive, sitll in the business -- but it is still implies, at best, flattish maybe for the fourth quarter.

Again, anything in the fourth quarter we should be thinking about that would cause that performance to be that much softer than this quarter and what you are implying about the third quarter? I think, well, I'll let Tim speak to part of it. I think there were two big issues. Number one, if you look at the fourth quarter we had taxes which were down in the 9 percent. And obviously we also have a lower CBO and the other drag that we are going through obviously has to do with pensions, are about another 10 cents.

So that's what we need to overcome, is the delta on the taxes, lower CBO and the pension results.

Obviously, if we were to continue to see the strength of what we saw in June going forward, one would have to forecast some sort of an increase. But what I said before when I was talking to Michael is that we are just at this point in time after a short relative period of time are not that yet that bold to make that kind of improvement.

We'll go to Gary McManus of JP Morgan.

You said June was stronger than expected. Can you tell me what specific end markets or business units saw the strength?

yeah. I would fell it it -- it would be a shorter list if I told you which one didn't. It was pretty much across the board. And it was it was in all of the sectors, not just one of them. And it was a matter of relative magnitude that came in. The biggest improvement I would say during the quarter which was very favorable for us had to do-- that was in the security. We saw a dramatic improvement in June, more, frankly, than any of the other sectors. But every one of them was actually up.

It seems that the second quarter skid steer and truck trailer volumes were strong. Correct me if I'm wrong. Can you tell me to what degree? Have you raised your second half industry outlook in those areas?

When we wound up looking at the compact equipment range, what we keep looking at is our second half expectations are in the 8 to 10% range of increased sales on a year-over-year basis, which is not that different than what we saw in the first half of the year.

Okay.

On the truck side, actually, when you look at the climate control piece, we had interesting numbers. The numbers are awesome. When I look at North American Trailer on the first half of the year, we are talking about 30% increase on the year. Again, it was from an ugly spot on earth that we came. When you are in the bottom of the hole at minus 60 odd numbers, we went up 30 odd. We think it's going to be well over 25%.

And at Container, I think, as I mentioned before, we had pleasant surprises. That was also up over 30%. European truck was up over 20, and European Bus, which is small in numbers, but even so European bus was up over 20%. If we continue to see those kinds of increases, we are talking about North American Trailer, we are talking about European Truck, we are talking about European Bus, and we are talking also I would say that our aftermarket is up double digit which is 36% OI numbers attached to it. We see that as a pleasant sign. I hope like heck this is the same leading indicator traditionally that we have found - remember that transport refrigerator coming up - that six month later we see a general economic uptick.

And we'll go to John Inch at Merrill Lynch.

Thank you, congratulations.

It is a step, John.

I understand. The fee paid to customs it reflects 85 cents. Again, given the original guidance of 70-75 cents, would you have been on track to hit those numbers if June hadn't hit those numbers you have been describing?

Yes. Give more windage maybe on the upside. But it wouldn't have been enough to have an early coach release. That's really what I'm saying to you.

Your guidance, both sequentially and for the year, is not assuming that you can see a continuation of the trend in June, it's more than June is the abberation?

That is an accurate statement.

Just as a technical point, herb had, I think you said orders were up 1.4% in the first quarter. I couldn't find what the orders were for the company in the second quarter.

You are talking about -- you have your notes from the April phone call.

Right.

I would tell that you the total order rates when you look at it were up over 4% in the second quarter.

Okay. And then just lastly, the earnings impact from foreign exchange, what was facility in the second quarter roughly?

It was about $22 million.

We'll go to Ann DeWitman at Bear Stearns.

I wanted to ask you a question on Dresser-Rand. If I look at your back logs versus last year it's down about 30% and down about 15% sequentially.

Right.

Should we be looking at a different seasonal person this year? Does that indicate some pull forward out of the back half?

Can I rephrase it this way. We had two key initiatives. One was to reduce the through put time. And what we had said is with the investments we wound up making in systems and prayingal through puts, we looked at how we wind up taking what traditionally has been an 18 to 24 month cycle down to a 6 to 8 months cycle. What you are starting to see is the pulling in of that backlog because people know they don't have to give it to us two years in advance. The second thing is we don't want Christmas once a year. We would like to have Christmas 12 times a year. We have been working with the management team to say we need to do a better job of leveling out the earnings throughout the year. We are starting to see improvement.

Good. Just to follow up on that, the recurring revenues is about 42% of total sales, which would imply to me in a the original equipment is still losing a significant amount of money. What is your long term strategy with Dresser? I mean is now going to be a good time to look for a strategic buyer or financial buyer?

Ann, I think that we are starting to see the improvements that we had strived for with Dresser-Rand. Our goal is to be at a 10% OI run rate by the fourth quarter of this year. And to continue to reduce the working capital requirements, therefore generating cash. And we continue to evaluate the ongoing stream of cash flow from dresser versus it being a one time source. But so far, I would say to you is that we see more benefit to the shareholder in continuing to drive the improvement rather than the kind of things that are floating around as one time sources.

We'll go to JoAnne Shatney at Goldman Sachs.

Good morning. Can you just comment at all on July. Obviously, the June numbers were good. But there is some concern just because the 4th of July kinds of fell in the middle of the week that maybe you are right, maybe they put some orders in. You guys must have looked at that as much as we all probably want to.

I would say that's a safe assumption. We continued to see thing going forward in a rate which is not quote indicating a significant falloff.

Was it as strong as June?

You know, the problem that you run into is when we are sitting here in the middle of the month is that we don't have that kind of visibility because many of our businesses have longer lead times and so I couldn't give you a very accurate answer. I would tell you overall our forecast right now -- we talked to the operating units for the June type stuff going into July, obviously there is a falloff from the one month to the next but it is in line with what our expectations are. We don't see any cratering taking place. Except you have got to in the third quarter with Europe being basically on vacation in July the one I look at is September. That's where you wind up having again a disproportionate. It's not one third, it represents over 40% of the through put. I don't see anything in July that is overwhelming but the overall magnitude of what we look for in July is not that critical. It's really the third month of the quarter.

When you had your analyst meeting you talked about the second half being treshlly stronger for Hussmann. What is it this year? Are we looking for that normal seasonal uptick?

Yes.

Okay, great.

We will go to Jeff Hammond at McDonald investments.

Hi, good morning.

Good morning.

My question is on the air and productivity solutions.

If you look at the margin year-over-year there was a nice improvement. If you look at it relative to the last couple of quarters where you saw nice improvement I just wanted to understand you know, what the sequentiallyal margin deterioration was in light of a pretty good top line. The biggest impact frankly was the first quarter there was a couple of million dollars I think we commented on the first quarter phone call that were some unusual benefits. So there is about a $2 million anomaly in the first quarter. So our second quarter shows modest improvement on the margin line relative to a normalized for first quarter.

Okay thank you.

We continue within that segment to investment in the micro turbine business and energy systems which is a modest drag on that system.

and we will go to Joe Tish At Lehman Brothers.

Hi, guys, how are you doing.

Hi, Joe.

How do the margins on the Nirvana product line tack up -- stack up against the whole division.

Higher than. It is a positive contributor because the cost is lower and the selling price is actually slightly higher because of the value proposition that's there. So that's a real plus going forward.

As you guys roll out the oil free is that go to increase margins further or is that going to drag for while until you get up to the volumes you need.

Oil free and Nirvana will have comparable benefits as does the currently oil flooded.

Next, can you give us sense as to why Asia was up so little and we are seeing a lot of strength in other companies of strength in other companies there.

Our predominant presence in Asia is broken down into the ron machinery piece which continued to be relatively strong. We saw reduction having to do with the climate control which is understanding considering the SARS issue that was there.

We wound up seeing -- we do an awful lot of air-conditioning for buses in China for instance. They not drive air conditioned buses. They had to have open windows and so forth. We are shut down much of the quarter. We are seeing particular problems as to the market we were serving. And Dresser-Rand unit is in that part of the world. I see that as a quote, abberation, Joel, that is now as they continue to have people coming back to work we will go back to the double digit growth we have experienced in the past.

And go to Robert McCarthy.

Hi, gentleman.

Good morning, Robert.

Let me ask about the second quarter in a different fashion. The high end growth was at the high end of the range. But earnings was well in excess of the high end. Which businesses specifically performed better than you expected?

I would say to you -- let me do it sector by secondor because it isn't across the board. The Thermo King unit was a significant improvement. And we were talking about OI stuff that was up about 70 plus percent on a year-over-year base. I think that was a pleasant surprise. The good news it really shows unfortunately what it is when you lever back up again when you bring products that have margins over 40%.

If I move over to the industrial solutions side, I think we saw a big improvement in Dresser relative to what traditionally has been the case. Even stronger than we thought coming out. Then we move over into the infrastructure part. We had a very, very strong Bobcat. And I think maybe for some of our competitors a stronger than expected Club Car type business.

And then over in the Security and Safety side, the real strength had to do with the ability to continue to deliver on the margin side in the traditional hardware as you saw our retail business continued to grow, unlike what we were originally forecasting. So it is those pieces inside that made the numbers happen.

Okay.

Related question. In the first quarter you shared with us that the Hussmann business in aggregate operated at roughly break even on the operating income line. Can you speak to what kind of improvement we saw in this quarter?

When we look at the Hussmann number now, we are talking about we gained almost 4 percentage points from the first quarter.

We will go to Andrew Casey at Peru Equity group.

Good morning.

Good morning.

Just kind of a cycle question, if you will. You mentioned that Thermo King tends to be an early indicator. What tends to follow that? Are you seeing the normal pattern? Or did June just get better totally across the board?

Usually the second pattern is that we wind up seeing in our industrial solutions business some of the equipment, the air and so inside going on. Our competitors also talked about an increase of 2%. And I looked at ours. That's usually the second wave and we are starting to see the beginning of that second wave.

Okay.

Large air in orders, no. That you put into an industrial facility to go with assembly line operations. And then comparisons June last year wasn't really any different than may last year; is that correct? No. As a matter of fact, last year was strange in that we had this weird phenomena in that the first two months of the quarter were strong followed by a weaker third. And so that really was surprising versus this year now what we have experienced more the second quarter was more traditional of where you had the stronger third month in the quarter. It is really the opposite effect. We would be last year -- if we were to go back you would see I was talking about a stronger April A medium plus on the may and then a weaker June. And now we are going the other way. It is a reversel to more traditional type growth appearance.

Great. One last question on supermarket Cap Ex. Are you seeing any indication that that should follow the guidance pattern that you gave in the first quarter? Or is that kind of pushed out a little bit and the other markets are taking up the slack?

The world in which we operate in climate control when it comes to the stationary refrigeration can be broken down into a continuing stressed north American display case market, which continues to be flat to down slightly. A continuing improvement in the aftermarket recurring, which makes sense. That means we have put more focus on keeping the existing operations going. And frankly, a surprisingly stronger international piece in both display case as well as on the recurring, which probably says that the coffers of the worth are stronger than some of their north American brethren are like.

We will go to David Bluestein at UBS.

Can you walk through the pricing pressures and the pricing opportunities you had in the quarter?

How about I say that overall what we are starting to see is a lessening of aggressive pricing practices across the business. So directionally thing are flat to up I would say almost across the entire business profile that we have.

Of the increase in revenues, of that 6% organic increase in revenues, how much was manufacturing volume up and how much was pricing?

I would say I look at it as pricing being zero from that horizon which is positive from what it was in the past.

By business unit, can you walk through each business unit's revenue begin from currency?

This is our test, Tim. -- your test, Tim.

I'm not sure, David I have the components. David, if you check the press release, the big -- the three big units that it effects are Thermo King, the air solutions business, and Bobcat. That's really where the majority of it would be. 80% of it is there.

Climate control in total is about 28. Industrial solutions similar amounts. Infrastructure about 38. And security and safety is a much smaller kpen component of international. That's probably 10 million. And as Joe said, Thermo King is the preponderance of air control. Air Solutions and Dresser-Rand. Just to make the math easy. Climate control, 30. Industrial solutions, 30, infrastructure, 35, and security and safety 10. That would sort of be the revenue breakout.

And we will return to John Inch at Merrill Lynch.

Thanks. Just a quick question or a quick follow-up here on the trend in Hussmann. Does it imply, based on kind of what's going on in the service and so forth that the propensity to take an impairment on the billion for good will has now been reduced do you think?

it was never there, John. And it continues not to be there is what I would say to you.

Fair enough. Thanks.

Currently showing no further questions at this time. Mr. Joe Fimbianti, would you like to make any additional or closing remarks?

Very well. Thank you. I will wrap up now. Thanks for joining us this morning. It was a great quarter, and I am happy to have you here to share it with us. There will be an instant replay of today's conference call available at approximately 2 p.m. and it will be available until July 24th. The call-in number for the replace is as follows. 888-203-1112. And the pass code is 719694. Audio on the slides from today's conference call will be archived on our web site and the transcript for this call will be available on the Ingersoll-Rand web site next week. If you have additional questions, please call me at 201-573-5113. This will conclude the call. Thank you very much.

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