特靈科技 (TT) 2003 Q4 法說會逐字稿

Good day, everyone and welcome to the Ingersoll-Rand fourth quarter 2003 earnings conference call. This call is being recorded. With us today from the company is the Chairman, President and CEO, Mr. Herb Henkel and the Director of Investor Relations, Mr. Joseph Simbionte . At this time for opening remarks, I'd like to turn the call over to Mr. Simbionte, please go ahead, sir.

Thank you, Audra, good morning. I am Joseph Simbionte, Director of Investor Relations for Ingersoll-Rand, welcome to our 4th quarter, 2003 conference call. We released our earnings at 7:00 this morning, and the release is currently posted on our website as most of you probably have received a copy by now.

I'd like to cover, as usual, some housekeeping items before we begin. This morning, concurrent with our normal phone-in conference call, we will be broadcasting the call through our public website. You'll also find a slide presentation there for the call. To participate, go to www.irco.com, click on the yellow link on the left-hand side of the screen. Both the call and presentation will be archived on the website and will be available late this afternoon.

Now, if you would please go to slide number two. Before I begin, let me remind everyone that there will be forward-looking discussions this morning which is covered by our safe harbor statement. Please refer to our September 30, 2003 form 10Q for the details and factors that may influence the results.

Now, I'd like to introduce the participants in this morning's call: We have Herb Henkel, the Chairman, President CEO of Ingersoll-Rand, we have Tim McLevish, Senior Vice President and CFO and Rich Randall, Vice President and Controller. We'll start with the formal presentation by Herb Henkel and one by Tim McLevish, followed by a question and answer period.

Herb will start with an overview, so if you would please go to slide number three.

Thank you, Joe. Excuse me, and good morning, everyone. Welcome to our 4th quarter, 2003 conference call.

This morning, we reported net earnings of $1.12 per share, which includes both continuing and discontinued operations. Total reported earnings were up about 8% compared to last year. Bear in mind that the 2002 4th quarter included $68 million of CDS away anti-dumping benefits and a tax credit of $18.7 million. Our 4th quarter earnings exceeded the high end of the street estimates, despite the fact that we did not receive reimbursement for anti-dumping claims of approximately $35 million which were deferred by U.S. Customs. We expect to receive this 2003 payment during 2004.

As is evident, the strength of continuing operations drove our year-over-year improvement. 4th quarter 2003 net income from continuing operations was up 56% compared to last year reflecting stronger markets and the impact of our continuing operations focus. Full year reported EPS was $3.74, including a gain on the sale of discontinued businesses, equaled to 40 cents per share. Earnings from operations were $3.34 per share, which is above the $3.20 to $3.30 projected range we provided during our last call in October. This was mainly due to the strength of continuing operations, which was up about 13 cents per share, above the upper end of our prior guidance range. This strength more than offset the delayed anti-dumping benefits which is would have added about 12 cents per share to earnings.

Now, please go to slide number four. The tone of business and the overall activity level for the quarter improved considerably compared to last year, and it's shown as steady, gradual improvement since the 1st quarter of 2003. During the last several quarters, we've been able to outgrow our end markets and gain market share through innovative products and solutions, and we continue to expand our recurring revenue stream. Our earnings growth for the quarter was driven by strong revenue increases and improved operating margins, which were close to 10% during the quarter.

4th quarter revenue growth was approximately 10% of which approximately 6% was organic and consistent with the levels we experienced in the second and third quarters. All four of our business sectors increased revenues during the 4th quarter compared to previous year. Specifically, we achieved over 30% growth at Bobcat, 14% at ThermoKing, and 13% at Security and Safety. Also, we made progress on all of our key financial measures.

Now, please go to slide number five. Throughout 2003, we continued to execute our strategy. We continued to focus on three areas to drive shareholder value; dramatic growth, operation excellence and dual citizenship.

I will discuss our progress in each of the key areas, let's please go to slide number six. First, focusing on dramatic growth, despite uncertain conditions in many of our markets during 2003, we achieved organic revenue growth of approximately 7%. Our growth strategy is based on developing and delivering innovative products and solutions and growing our stream of reoccurring revenue.

This slide shows some of the innovations we introduced during 2003. Our continued investment in new products and technologies has been one of the prime reasons that we have generated continued revenue increases despite lackluster markets. We've had successful new product launches in all of our businesses, which added over $200 million to full year 2003 revenues. I've spoken about some of these innovations during 2003. I'll give you an update on how these have contributed to our success.

First, at ThermoKing, the Magnum Refrigeration Unit which has the capability to hold temperatures at 30 degrees below zero fahrenheit has helped increase our market presence in the container business. The product's low temperature capability is highly prized by international carriers because it translates into a premium value proposition that their customers are willing to pay for.

Over the last several years, Bobcat has introduced a number of successful product lines that have expanded its market leading position in the compact equipment market. This flow of innovation continued in 2003 as Bobcat launched 17 new or redesigned products. These products have sailed to over $100 million in 2003. We have over 20 new launches coming out in 2004, including updates on major skids gear and mini excavator platforms.

At Air Solutions, we've been detailing the success of the innovative Nirvana product line for over a year. This energy-saving product continued to achieve customer acclaim in 2003, and we gained 5 points of market share. Nirvana was also recently awarded by the Energy Efficiency Designation by the Shanghai Energy Board, sponsored by the World Bank. It entitled the purchasers of the air compressor to both tax credits and low cost loans, a new oil-free Nirvana was introduced in the 4th quarter and we expect a full commercial launch mid year 2004 and we expect comparable success.

Also new in 2004 from Air Solutions are redesigned large centrifical compressors which are focused on growing in markets such as bottle blowing and geographic markets, especially China, where we had over $100 million in Air Solution revenues in 2003.

The Security and Safety sector has enjoyed strong growth over the last several years by providing innovative solutions to customer requirements in electric access control and time and attendance products. The Solutions business has expanded to include not only volumetric devices such as the market leading hand reader but also software and total systems integration capability. During 2003, we also introduced new and improved mechanical locking products in both the commercial and consumer markets.

We also established the Maritime Solutions business, which is focused on the global port and vessels security markets. The new products and solutions have driven dramatic growth and profit in 2003.

Now, please go to slide number seven. An innovative product line just introduced as we enter 2004 is a completely new line of golf cars at Club Cart. The product is named Precedent"and we believe it will fit new standards for performance, style and comfort in golf carts. The project, which started with a clean sheet of paper resulted in a completely redesigned vehicle with expanded features, including a new, stronger aluminum frame, new body panels with high resistance to damage, and a 360 degree bumper that provides impact protection.

The new product is stronger, more agile and more comfortable than prior models which were already best in class. The "Precedent" also has 50% fewer parts than previous products making it easier and less expensive to manufacture. The new design also provides for clear access to key components which makes it easier for the customer to inspect, to service and to clean. Feedback from golf course owners, managers and professional golfers has been very, very positive.

We believe this is the most dramatic transformation of the golf cart since three wheels and a tiller gave way to the modern electric golf cart more than 30 years ago. The formal introduction of "Precedent" will take place later this week, at the 2004 PGA Merchandising Show in Orlando. If you're in Orlando, we invite you to come and join us, to see why we believe this product will redefine the golf car industry.

Now, please go to slide number eight. During 2003, we continue to deliver on our goal of growing our stream of recurring revenue, our large installed base and powerful market leading brand provide us with significant opportunity to expand revenue and profits. Recurring revenue totals $2.5 billion for the year, an increase of 11% compared to 2002 and a 55% increase compared to 2000. Recurring revenue accounted for 25% of total revenue in the year. Hussman and Air Solutions have been a major focus for our recurring revenue expansion and both made solid gains for the year.

Now, please go to slide number nine. For Hussman, total parts, service and installation revenues increased by 7% for the year and comprised 35% of total revenue. Air Solutions achieved a recurring revenue increase of 10% during 2003, and now accounts for about 48% of total revenue in the Air Solutions business. Additionally, this service business maintained its operating profit margin at over 20% while requiring minimal incremental investment.

Now, please go to slide number 10. Turning to the area of operational excellence, during the year we've benefited from cost reductions associated with our restructuring and our productivity investments. We delivered on our goal of realizing a full year EPS benefit of 25 cents for restructuring activities. We also invested about $30 million in productivity and cost reduction activities during 2003. We maintained our focus on managing the things that we can control, such as costs in inventories, working capital and customer service and I believe we achieved our goal.

Another key enabler for our improving operating performance in 2003 was our cost savings effort targeted on both direct and indirect materials. Since we've purchased more than $4 billion in materials and services each year, we have significant opportunities to reduce costs in these areas.

During 2003, our suppliers footprint initiative, which manages this activity, exceeded its cost reduction target of $100 million despite increased fuel costs. We are targeting net material costs reductions in excess of $100 million in 2004, including expected inflation in commodities such as steel and other nonferrous metals.

During 2003, we also took important actions to restructure our portfolio of businesses by divesting several businesses that did not fit our strategy and long-term growth targets. We divested the engineering solutions business in the 1st quarter and two smaller businesses, Water Jack and Laidlaw during the 3rd quarter.

During the quarter, we continued to use the principles of lean manufacturing as the framework for our lean branch process improvement initiative within our Hussman branch operations. The goal of lean branch is to implement lean processes to establish best branch practices which will then be applied throughout the company. This initiative is focused on three critical areas; back office consolidation, technician productivity and parts sourcing. We're making progress in our lean branch initiative. 4th quarter Hussman branch operating earnings have improved by 60%, and we've added over 3 points of operating margin. We expect these results to continue to improve as our implementation of this initiative progresses. Our target remains to reach 15% operating margin run rate during the second half of 2004.

Now, please go to slide number 11. Now, focusing on dual citizenship. We continued to see the incremental growth and operational excellence benefits of the enterprise strategic initiatives we launched last year. Total sales from these initiatives totaled approximately $135 million an increase of approximately $100 million compared to last year.

The success of these initiatives is a very positive indicator of the transformation of our culture and the way our company goes to market. All around the globe, IR's diverse businesses are working to generate sales leads and to convert them to sales wins. This is very, very encouraging as we look forward. We continue to forecast that this initiative can deliver $750 million in incremental revenues over the 5-year horizon.

Now, please go to slide number 12. Overall, this was a positive quarter and an excellent year. At the same time, we made strong progress in executing our long-range plan. Our recent results reflected by the ability of our strategy and ability of our management to deliver strong performance for our investors. We continue to drive profitable growth by developing and delivering innovative solutions for our customers and by growing and improving the profitability of our recurring revenue stream.

We achieved excellent annual organic growth of 7%, which is above the top end of our target, 4 to 6% range. We maintained our pursuit of continuous improvement to gain the full benefits of our restructuring and productivity investments, and to achieve permanent reductions in our operating cost structure. Security and Safety continues to achieve strong margins in excess of 20% in the 4th quarter and 19.7% for the year.

Our other three sectors that are still below the stated goal of 15% operating margins but move solidly in the direction of 15%, and we expect further improvement in 2004 and we continue to leverage the benefits and the power of collaboration as we utilize the strength of the entire IR enterprise to drive to improve results across all of our businesses. We strengthened our balance sheet in 2004, by reducing total debt by over $900 million in our debt-to-capital ratio to 33.5%, which meets our 35 to 40% target range.

Finally, our full-year earnings of $3.34 exceeded our October forecast of $3.20 to $3.30 and our year ago January forecast of $3.10 to $3.30 per share and for the 6th consecutive year, our free cash flow exceeded $500 million, substantially exceeding our original 2003 target of $400 million. Clearly, I believe we're executing and delivering on our strategy.

Tim McLevish will now cover IR's business unit performance in more detail. Tim?

Thank you, Herb. Good morning. I'd like to begin my discussion with the quarterly financial results.

Please turn to slide 13. We continue to report the results of our divested businesses, including Engineered Solutions, as part of discontinued operations and that of applicable taxes, we have restated 2002 to be on a comparable basis. Revenues for the 4th quarter were up 10% to $2.7 billion. The increase is largely attributable to double-digit growth in our ThermoKing, Bobcat, Road Development and Security and Safety business units. Organic revenues, excluding the favorable impact of currency were up 6% compared to prior year.

Operating income for the 4th quarter was $265.2 million, or 9.9% of revenues, margins have increased by over 3 percentage points compared to prior year. These strong operating results were driven by revenue growth, price realization and operational improvements. The quarter included approximately $19.3 million of increased costs associated with deappreciation of previously worked stock-based compensation and $14.2 million in productivity investments, offset by $13 million of currency benefits. Prior year results included $25.7 million of restructuring and productivity investments.

Moving down the income statement, interest expense was $40.1 million, compared to $53.3 million in 2002's 4th quarter. Approximately $10 million of reduction in interest expense is directly related to the retirement of $700 million of debt from the proceeds of Engineered Solutions divestiture. The balance of the year-over-year improvement is related to additional debt reduction and lower interest rates.

Other income for the quarter, was $2 million compared to $4.3 million expense in the year's 4th quarter of 2002. The other income improvement is largely attributable to the $7.6 million favorable impact from the sale of Timkin shares which occurred in October of this year. Our 4th quarter effective tax rate was 13.7%. 2002's 4th quarter provision reflected a credit of $18.7 million which was a result of an adjustment to bring the year to date provision to the full year rate of 4.6%. The effective tax rate for the full year of 2003 was 13.7%.

Net earnings from continuing operations for the 4th quarter were $196 million, or $1.11 per share, which exceeded our 4th quarter guidance. Discontinued operations was 1 cent positive for the quarter. This included an after tax loss of $3.5 million for the legacy costs of Engineered Solutions and other previously divested businesses and a gain of $5 million resulting from the true-up of several accounting related provisions relating to the Engineered Solutions sale.

Our total net earnings for the quarter were $197.4 million or $1.12 compared to $183.4 million or $1.08 in the prior year's 4th quarter. These results exceeded our guidance, despite not receiving our CTSOA payment, estimated at 12 cents. This payment has been delayed until 2004.

Please turn to slide 14. Our 10% revenue growth showed increases in our major geographic regions. North American revenues were up 7%, and constituted approximately 60% of the total. The European served area revenue growth was 27%, approximately half of which was from the impact of currency. Asia Pacific was up 3%, and Latin America experienced a decline of 16%, largely attributable to economic volatility in Venezuela, which unfavorably impacted our land business.

I would like to now take a few minutes to talk about the results of our businesses, please turn to slide 15. The climate control segment, which includes Hussman and Thermal King reported 4th quarter revenues of $752 million, an increase of 8% or 4% excluding currency compared to 2002. Operating income for the sector was $72 million representing an operating margin of 9.5%, up more than 4 percentage points from the prior year. The operating margin improvement was driven by volume leverage, price realization and a productivity improvement program.

Thermal King revenues were up 14%, or 7%, excluding currency, due to strong growth in our worldwide truck, trailer and bus businesses, as well as continued strength in our after market business. The positive trend in end markets were refrigerated transformation, coupled with new products, producing strong revenue growth in this business.

Hussman revenues for the 4th quarter were up 3% year-over-year due largely to the impact of currency. We continued to see constraint spending across many of the major U.S. supermarket chains, as the industry continues to experience difficult market conditions and economic uncertainty. Profit margins from our branch service operations continue to improve due to our lean branch initiative.

Please turn to slide 16. Air and Productivity Solutions reported 4th quarter revenues of $361 million, representing a 6% increase over prior year. Air Solutions reported a 9% growth in revenues, or 4% excluding currency, driven by new product sales and increased after market business. Recurring revenues were up 10% and constituted 47% of the total. Productivity Solutions total revenues were flat versus prior year, while recurring revenues were up 14%. Operating margins for the segment were 10.5% of revenues, up from 6.2% last year. The year-over-year increase was attributable to improvement in service profitability, new product margins and the impact of our productivity improvement program.

Please turn to slide 17. Dresser-Rand reported revenues for the quarter of $340 million compared to $347 million in 2002. Excluding buyouts, which are components that are sold as a pass through to customers at low margins, revenues were up 3%. Operating income was 7.4% of revenues, versus prior year's 7%, the 4th quarter of 2003 included $5.6 million of cost-related productivity investments and one-time charges, absent these one-time costs, margins would have succeeded 9%.

Please turn to slide 18. The infrastructure segment reported 4th quarter revenues of $781 million, up 18% from 2002. Operating margins were 10.3% of revenues, compared to 6.3% in the prior year. Bobcat revenues increased more than 30%, or 25%, excluding currency. The increase was attributable to strong North American markets, the successful introduction of new products and improved after market sales. Growth development revenues showed a 14% increase, 7% excluding currency, compared to a weak 4th quarter in 2002.

Club Car revenues were up 4%, with market share gains offsetting generally soft golf markets. Segment operating income improved to $80.6 million or 10.3% of revenues compared to $41.6 million or 6.3% of revenues in 2002. The improvement was attributable to favorable business mix, new products and volume leverage.

Please turn to slide 19. Security and Safety continues to report strong results, the segment reported revenues of $432 million, a 13% improvement from prior year. Revenue growth was 10%, excluding the impact of currency. The year-over-year growth was largely attributable to double-digit growth in residential and commercial hardware, and growth in our worldwide solutions business.

Operating margins were 20.8% compared to 19.2% last year. The margin increase reflects the benefits of new product and channel development as well as growth in our new solutions business.

Please turn to slide 20, and let's move on to the balance sheet. Our working capital management program continued to show good results, we finished the year with our investment in working capital at 7.4% of revenues, which is well below our enterprise goal of 10%. Working capital performance is largely attributable to an improvement in our inventory turns from 4.7 to 6.3. We also showed nice improvement in our DSO and a modest decline in days payable outstanding.

At the end of the 4th quarter, our total debt was $2.3 billion, an improvement of $900 million compared to the 4th quarter of 2002. The improvement was largely attributable to the repayment of $700 million of debt, with the proceeds from the disposition of Engineered Solutions. In addition, our free cash flow was used to further reduce debt levels. Our debt-to-capital ratio at year end was 33.5% compared to prior year ratio of 47.5%.

Capital expenditures for 2003 were $108 million, or 1.1% of revenues. We expect to spend $150 million, or 1.5% of revenues, on capital in the current year 2004. The depreciation and. amortization expenses for 2003 were $191 million versus $205 million in 2002.

Herb will now conclude our formal remarks with the outlook for the full year of 2004.

Thank you, Tim. Please go to slide number 21.

During 2003, we demonstrated that our business model is working and that our strategy is on target. In 2004, we expect to build on the momentum generated in the last year and to continue to improve our operating performance across all of our businesses. Activity in most of our end markets continue to improve as we close out 2003 and our orders were up about 12% compared to the 4th quarter of 2002. The order pattern indicates a gradual recovery in most North American markets and continuing growth in Asia..

Based on these trends, we're expecting revenue growth of between 4 and 6% for most of our businesses in 2004. The notable exception will be Dresser-Rand. The elimination of buyout components and low margin projects will remove over $400 million from Dresser-Rand's 2004 revenue. Since these revenues had very low profitability, their elimination will have minimal impact on earnings. Dresser-Rand's profits are expected to improve substantially in 2004 with a target operating margin of 10% for the full year.

Even as our markets recover, we're continuing to focus on reducing our material costs, making permanent reduction in our operating cost structure through productivity gains and reducing our working capital levels. Operating margins will improve from higher volumes and operating cost reductions, additionally, our full year forecast is based on a tax rate of approximately 14%.

Now, please go to slide number 22. Based on the expected macroeconomic environment, diluted EPS from total operations for full year 2004 is expected to be between $3.85 and $4.10. This slide presents a summary bridge from 2003 continuing operations to our expected 2004 results. Operating improvements of 44 cents to 69 cents EPS are primarily made up of higher volumes due to better market conditions, share gains and new product introductions, it also includes productivity savings for the year.

We will also continue to invest in growth initiatives during 2004, with projected incremental spending of $15 million or about 7 cents per share. Lower interest expense and foreign exchange gains should add about 12 cents per share to our earnings, costs from discontinued operations are about 5 cents per share each quarter, or 20 cents for the year, which will be partially offset by the collection of the 2003 anti-dumping payments worth about 12 cents per share. That totals $3.85 to $4.10 per share.

Now, please go to slide number 23. For the first quarter, continuing operations will improve by 6 cents to 16 cents, partially offset by about 2 cents of growth investments. Foreign exchange gains and lower interest expense are expected to add about 7 cents to earnings. First quarter 2004, continuing operations are projected to be 70 to 80 cents per share. First quarter total EPS, therefore, is expected to be 65 to 75 cents per share, including the 5 cents of costs from discontinued operations.

Now, please go to slide number 24. This ends our formal remarks and I'd like to open the floor to your questions. Thank you.

Thank you. The question-and-answer session will be conducted electronically, if you would like to ask a question today, please do so by pressing the star key, followed by the digit one on your touch-tone telephone. If you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. We ask that you please limit yourself to one question and one follow-up to allow everyone the opportunity to submit a question. Once again, please press star one now. We'll go first to Michael Regan with Credit Suisse First Boston.

Good morning, I was wondering you could just provide some more detail on Security. You were pretty adamant in the 3rd quarter that the 4th quarter margins would be down in the kind of 18 to 19% range, given a bunch of investments you were going to be making in products and things like that, I was wondering if you could just kind of clarify how the quarter played out, and what happened relative to your expectations?

What happened is that the revenues exceeded our expectations, we made all of the investments that I was describing during the October call, but if you can imagine with 40% plus growth margins is how we exceeded what we were forecasting, we thought we would be running in the same 8 to 9% revenue that we had been talking about beforehand. And now in terms of auditing, you can see the actual results were up 13%, attributed to stronger than forecasted revenues in both commercial as well as in the residential by the business that drove the improved margins.

And even with electronics getting better, which, I mean, traditionally has been a bit of a negative mixed shift --

Yeah, we were up over 23% on the electronics side, but that also was improving and we are now into the teens in the profitability on the electronics access control.

So that profit continues to accelerate for the year-over-year on a margin basis?

Yes it does.

Great. Thank you.

Sure.

Next we'll move to Alex Blanton with Ingalls & Snyder.

Good morning. I'd like to ask a question about Bobcat and the reason for what appears to be a very good gain in sales, 26% after currency. How did that breakdown domestic and foreign and what role did the rental fleet restocking play in that, do you think?

I would say to you that if I look at the total revenues, we wound up having a significant part of something from the U.S., a lesser part coming from Europe, that also reflects, frankly, the mix between revenues and the U.S.'s revenues in Europe. When I look at the mix inside the U.S., it really was not that much driven, heavily driven by the rental piece, it really went through our traditional Bobcat type channels, if you'll report, there were some reports out that December alone sales were reported industry wide as being up 30% on a year-over-year type basis. So, I would say to you, it mostly attributed to new products, the market share gains, and some attachment sales that increased year-over-year, those were the primary drivers.

Do you think the rental fleets will play a greater role next year, they have said they want to, they've been under investing to age their fleets and now that's over, and they need to spend more, do you think that's coming up?

I would like, I caution myself by I've heard this story before, I think in 2002, and 2003, our forecast as we look at 2004 does not reflect the significant strong increase, we're talking about a 10 to 12% improvement, which does not reflect the kind of numbers that maybe you and I are reading about. I'm hopeful, but right now we're waiting, those orders usually don't show up, until the March, April time frame.

Right. Secondly, when do you expect to see the CDSOA payment? It is not in the first quarter, you said that...

We are right now along with, I think the total number, if I remember correctly, is like 90 companies that are going through a review process, my experience with our colleagues in Washington is that they talk in months where you and I talk in days. So my expectation right now is probably in the second half of the year rather than the first half of the year.

Second half. Okay. And finally, the cap ex figure you mentioned is $150 million?

Yeah, we think that with the new plants we're looking at improving outside of the U.S., the total expected is going to be about 1 1/2% of sales back up to 150, that's mix of new products, as well as some capacity cost reduction activities.

This is a sizable increase in spending, would you say it's due to your increased confidence in the recovery, are you mirroring what is going on with your customers when they're increasing their capital spending as well. how do you feel about that?

I would say that all systems are increasing their risk to spend by about 10 to $15 million, when I look at the mix, most of it is as a result of new product developments, and/or cost reduction activities, productivity.

No, but is it due to your increase confidence that you're raising the spending level?

Just because my increased confidence really is that we generated over $250 million of new product innovation during 2003, and I expect similar type results during 2004, and I am, as you said, confident that our customers will accept them, whether it's the new Nirvanas or whether it is the new tool casts, we believe that's where most of the spending will go.

Okay, thank you.

Sure.

Next we'll go to Steven Goldman with Morgan Stanley.

Good morning. Maybe we can talk a little bit about cash, I don't know if I missed it, did you talk about, are we going to do $500 million in free cash flow again in '04, I suppose we will.

It will be the 7th year in a row.

Okay, good and given the fact that we're already below year debt-to-cap targets and so forth, you talked, Herb, in the past about not needing to do any large acquisitions, but the balance sheet is pretty strong now, and I don't know how you think about redeploying cash?

What we look at, Steve, is we obviously will look at making bolt-on acquisitions, I think we have some interesting target opportunities that are going to extend our global reach as well as new product line extension, and get us some new technologies. We'll continue to focus on developing our recurring revenue stream, we will look at a share repurchase program and if the debt goes down to 30 rather than 33%, I don't think that's bad either.

When you say share repurchase, are you thinking offset creep, or is it something more than that?

Well, I think that one of the good things about stock price being at 70 some odd dollars is we see an exercise obviously of options, so we need to cover that. Plus, I think we also look at the cash coming in, the chance to go and buy a little bit beyond that.

Thanks.

Sure.

We'll go next to David Bleunstein with UBS.

First, just following up on Steve's, the share count did jump in the 4th quarter do you know what the amount of cash receipts from option exercise was in the 4th quarter?

I think it was about $10 million.

Okay and what have you included for share count in your 2004 guidance?

About the same level. It's up a couple million dollars from where it is today -- a couple million shares.

is it about 176 million.

That's correct.

The number we're looking at. My question is on the material cost reductions, first, in 2003, and then again in 2004, what kind of steel headwind do you actually have to offset and can you provide some concrete examples of where you are getting these material cost savings, it's certainly impressive, but just maybe a few examples?

When you look at our steel purchase, the headwind we're facing is in the 10 to $15 million increase year-over-year. Where the predominant improvements have come is as we look at the materials side, is in our castings, our forgings as well as our metal stampings. As we revalue those from sources around the world, we're finding that it's very difficult to get 10% to 15% savings on a year-over-year type savings, so it really is focusing on low cost country and/or doing reverse auctions, David, that are causing these kinds of improvements.

Terrific, thanks.

Moving on, we'll go next to Ann Duignan with Bear Stearns.

Good morning, Ann.

A couple questions or clarifications, on the tax outlook of 14%, it looks to us that you get about 3 percentage points of advantage from your foreign sales corporations, if those disappeared this year, how will you offset those?

Well, we, as you know, Ann, we talked about before, as we further develop our international structure with pushing more business through IR International, we have opportunities to further reduce it, so, I think by virtue of adding international revenues and earnings, well manage it somewhere between the kind of 14, plus or minus 2%.

Okay. Thanks, and just on a clarification on your growth investments in Q1 of 2 cents, can you explain to us what those growth investments will be?

We are continued to focus on electronic access control in the Security and Safety part of the business, and we are now pushing that into the China marketplace, so we're moving now it into Asia Pacific where last year we focused on the U.S. So, we're really going and pushing into our systems. The other piece is really into our IT systems, as we wind up putting into place our trading company over in Ireland, one of the key enablers that we need, Ann, is the ability to be able to process all orders for a customer through one purchase order where in the past, they may have had to place multiples when they're dealing with Bobcat or Air Solutions and so on. So, you're seeing now the IT required to be able to accomplish that.

And that's our growth initiative as opposed to a back office productivity investment?

Yeah, because this is really an enabler for the customer, because they're now able to go and enter on to our systems and do stock status queries across the enterprise, which is the capability we've never had. We're also continuing to invest in our IR financial services, where it is a front face to the contractors and to the Bobcat and so on distributors to where they can see the availability of financing both in the U.S. and now, internationally.

Thank you, any update on break even point? Do you still expect to break even in 2004. Can you give us any indication of when you expect it might happen?

You're talking about, it's actually going to be happening in the 2nd quarter of this year, as the run rate. The other piece I would tell you that I'm very, very pleased when I looked at the 250 that we now have introduced, I think that it's going to make significant inroads, not only environmental, we just took our first order for three more it going into an industrial application, and we're shipping our first 50 Hertz version over to China, into Shanghai in April of this year. So we're on target to hit the break even point in the 2nd quarter, and more importantly, I'm really seeing the successful acceptance by customers on this product.

Just real quick, any update on Wal-Mart for Hussman's products, I think you were saying that Wal-Mart was going to make a decision in January?

We are still awaiting their answer, what we now have as the most recent is that it may be as late as March/April of this year. In the interim, we are actually receiving more orders than was practiced before, we increased, I think about 11, 12%, but the actual release continues to be delayed and now I'm hearing things such as March/April, which, if that were to happen, would mean full implementation probably 6 months later, so not until the 3rd quarter, 4th quarter.

Okay. Thank you.

Yep.

Our next question comes from Gary McManus at J.P. Morgan.

Hi, Herb. I'm looking in your page 21, you're expecting revenue growth of 4 to 6% in most businesses, now, is that what you think the company revenues are going to be? I mean, I would think clearly that ThermoKing and Bobcat, I mean, industry volumes are much higher than that?

Obviously, those are -- I'm giving to you on a by sector basis, so, if I were to look, for instance, climate control, I think that's at the upper end of the range, made up of ThermoKing, I think this was probably where we have some upside. Our forecast right now only has Bobcat in running about 6%, obviously, if you look at the rates we've been at so far, it's been higher than that, but we've learned to be cautiously optimistic, and if you look at Security and Safety, we're looking at it being up like 8%, so infrastructure overall is up 5, because we're seeing some weakness some, of the utility equipment things, by sector, it will be up in general except for Dresser-Rand where we will be taking out $400 million. In general, sectors will be up 4 to 6 with individual players there stronger therein.

This is a lower organic growth than you had in '03. I think you said it was 7%. My second question is, looking at discontinuing operations, because I don't want to deal with the CDO payment. You got the first quarter up, if I just take the midpoint of your guidance, up like 36% for the year, you expect continuing operations to be up, say, 18%. You have to slowdown in the earnings growth beyond the 1st quarter, I think it is about 14% growth for the remaining 9 months. Is that just conservatism or why do you expect earnings growth to slow beyond the first quarter?

I think there's probably two parts to the answer, A, yeah, conservative, probably. But I forecasted 3.10 to 3.30, so I think I could probably accuse of the same fact. The second piece, I think if you look at the quarter over quarter improvements that we experienced, what I'm looking at is the first quarter of 2003 was relatively, obviously the weakest for 2003 overall. And so what we're looking at is the quarter over quarter improvements are going against tougher metrics as the year progresses, that's really all you're seeing here.

Okay. Thanks.

Our next question comes from Barry Bannister at Legg Mason.

Hi Herb, how are you?

Good. How are you?

Good. It kind of follows into what you just said, I noticed the 2nd quarter organic was up 6, and the 3rd quarter was up 8 and the 4th quarter was up 6, should I read into that that the comps are getting more difficult, or more is -- is there more to that deceleration?

No, it really is. I think there's two pieces if you look at it. We obviously are counting on currency, I just can't believe that you're at 125, that's mind-boggling to me. We're thinking that currency may not be upside but potentially may drag the second half of the year, plus, I think we're looking at it being a more gradual recovery, our expectations from all the things we looked at was that we were going to be talking about 3, 4% type of GDP type of improvements in the U.S. So, we're not forecasting any dramatic improvement in that area. Obviously, the biggest drag is the R piece on a year-over-year basis.

When I look at your operating margin in Security and Safety, it was 20.8 versus 19.2, and then you went on to say that that was offset by growth investment.

It was up 160 basis points.

Right. What would it have been if there had been steady state percentage of sales year-over-year in R&D?

You probably would have seen another 1 1/2 points.

Okay. Thanks.

Moving on, we'll go next to Mark Koznarek with Midwest Research.

Good morning.

Hi, Mark.

Question on the climate control business, ThermoKing, we're talking about sales up 14%, but just observing industry shipments of refrigerated trailers or builds, anyway are up 30% in the quarter, I'm wondering if you can step through the components of that, because it seems like you may not have kept pace here in the quarter?

When I look through, let me give you the rough piece while I check, as I look at North American Trailer, we were up there just a little over -- like 11%. Our European trailer was up, candidly, over 60%. Truck was up almost 20 in the U.S., higher than that in Europe. European bus and North American bus were up over 20% levels. Container was up single digits. Our after market was strong enough, about 10%. Our biggest negative really was in Asia Pacific, which is in our case, mostly bus business, as they continue to really delay in some of the work that's going on there. I don't see any reduction in market shares, Mark, that you're looking at. I think it's the rate at which people are building out the trailers, that doesn't match completely to what we're seeing on the refridge side at least compared to dry boxes in trucks, overall.

So, you think the difference between industry builds up 29 and your North American trailers up 11 is a timing sort of thing, you don't think there are share issue there?

I'm not aware of any share issue there yet that's involved, no.

Okay. Then if you could clarify one thing, Herb, for the outlook of 4 to 6%, does that include the $400 million step down at Dresser-Rand?

No, that does not. If you actually, what I said was that in climate control, we're looking at being at the upper end of range ,Air and Productivity Solutions were up at the 6% level. Infrastructure is up in the 5 to 6% range, Security and Safety, it's actually a little bit higher than that. But then if you apply the $400-some-odd million reduction at Dresser-Rand, it actually winds up only taking you down to where you're only up, like 1 to 2%.

1 to 2% at Dresser-Rand?

No, the one to two percent enterprise.

The entire company, okay, yeah. Okay. 100 million, so you're taking on 4% of the total revenue when you do that.

Yeah, exactly.

Okay, it all hangs together. And then final one for you is, when you were talking about the outlook, you know you mentioned continuing growth in North America and you mentioned Asia, but you omitted Europe, can you give us a few comments about your general outlook of Europe for '04?

We look at Europe as being a gradual improvement as things in the central European parts of the world as we get market share penetration. Offset, will be some of the weaknesses that we continue see, basically in the UK, Germany and France. The traditional older if you will, countries and economies I think are going to continue to be a challenge as we go forward. But we think that the more central European parts, we are very, very positive about things like the Czech Republic and moving even further east but overall, that what we look at, once you take the growth out as a result of currency, they're going to be up single digits next year.

For Ingersoll-Rand?

For Ingersoll-Rand, yes.

Alright, thank you.

We'll go next to Joel Tiss with Lehman Brothers.

Hey, guys, one other thing that wasn't mention was the tension under funding and your assumptions for 2004, what's changed?

We've lowered the discount, we haven't changed the rate of return assumption that remains at 8 3/4, we actually have dropped the discount rate from 6 3/4 level last year to a 6% level to reflect current market conditions, we still remain under funded. We've closed the gap some, obviously, as we contribute to $200 million and saw improvement in the performance of our investments, but that was in part offset by the reduction in discount rates. We still remained probably $2 to 300 million under funded out of the $3 billion liability.

Okay, so it's getting pretty close. Also, can you give us your outlook for the road development business and construction outlook as well for '04?

When I look at road development, we continue to see -- that was one of the pleasant surprises we saw in the 4th quarter, but we think that was a disproportionate part. So my expectations for my road development business is going to be somewhere in the 4% type level.

Residential construction?

And residential construction, we continue to be very, very optimistic. As we continue to introduce new product, as we continue to gain shelf space in our traditional big box type customers, we look at that as being something which I think is going to go up more like 8 to 10%.

Thank you.

Incidentally, Joe, as we made a contribution to the pension plan this year, there is no required contribution in 2004.

Thank you.

And our next question comes from Andy Casey with Prudential Equity Group.

Hi, Andy.

Just to follow-up on Joel's question in terms of further strengthening of balance sheet items, where would you likely improve other than the working capital? Thanks.

One of the key drivers for us has been in improving our customer service level while at the same time focusing on inventory returns, we improved by over 1 1/2 turns by 2002 and 2003, I'd like to get that up another half a turn. And the second piece, obviously, for really focusing continues to be in our sourcing and our VAVE activities.

Let me give you an example. We buy over $200 million of diesels a year, we buy 28 platforms, if we can re-engineer that so that we wind up only buying 6 or 7 platforms, imagine the savings that will have on the used parts that we need for that, as well as obviously the purchasing clout we have for those models. I think going through those type of key commodity items and VAVE, the product, we look at how to reduce cost structure and get out some capital.

Thanks. Just to follow-up on the use of capital. Would you be looking at considering fully funding the pension to take advantage of the differential and prevailing interest rates and the return assumption you have there?

We'll look at a further pension contribution as we kind of balance other possible uses of cash, but at this time, we're not going to commit to that.

Okay. Thanks a lot.

Our next question comes from Jeff Hammond of McDonald Investments.

Good morning, I wanted to get a little more color on the commercial side of Securities/Safety. You saw some improvement there, what are you looking for for '04, is that sustainable? And then a quick comment on the compressor equipment side of the business side of the business, thoughts going-forward?

Let me start the answer with the compressor side going-forward. When we look at our compressor business, we clearly believe that continuing to improve the efficiency of reducing the costs for our customers is a great way to entice them to replace their existing units, doing energy audits, 50% of the business now comes from after market work that's on here. And the third piece, I think there are many, many -- keep drinking those bottled waters, will you because that's our biggest application as we do flow molding applications.

In China we now reached $100 million sales last year, and we think that's a 50% growth opportunity year-over-year, we continue to be bullish there. We just introduced our new oil free which really has been the key strength of [INAUDIBLE] and we think we can gain some market share from them as we go into 2004.

If we move over into what you have as the nonresidential type of piece there, the new construction, we continue to see, we break ours up into two pieces, there's the institutional side, which we expect to be up slightly, single digits, the commercial market construction, the office side of it, we expect that to be slightly down as a result of continuing high vacancy rates that are up.

All in, we expect the commercial market itself to be relatively low growth, because we do more in institution than we do in commercial but are real upside is, we continue to provide more solutions and actually get more value per door opening, where we used to sell the closer, we're now able to get the door, the closer, the lock sets and everything else so our yield is actually increasing.

Okay. And then on Hussman service, I guess on a run rate, you know, exiting the year, what is the operating margin look like exiting the year?

We're now talking about an operating margin which is running in the 8 to 9% type level.

Perfect, thanks.

We'll take our next question from Robert McCarthy at Robert W. Baird.

This is actually Pete sitting in for Rob. Herb, can you talk a little more about what the components of your 4 to 6% are next year in terms of volume price and currency specifically?

I am excluding currency of that number, we look at that as being -- I gave you the number that we had -- the total 7 cents in there. We're looking at growing in the 4 to 6% range.

In terms of price realization, what did you get this year, and what are you looking at next year?

Price, if you were to look at this year, I would say it's probably on the order of about 30 to $40 million. I'm just dollarizing it for you rather than giving you a percent.

Similar kind of numbers next year?

Yeah, I think that's about right. As we introduce. For instance, the "Precedent" golf cart we're introducing, we're going to put that out as premium, because it is a premium product as we introduce the oil free decos, it is actually Magnum, as we go with the container, that's at a premium compared to container, it's actually new products coming in also add a higher price point to some of the things that they are replacing which will result in 40 to offset some of the pressures we have on some of the traditional products that have been out there awhile.

And then one quick follow-up on pension, is that going to be a positive impact on the bottom line after you go through all the accounting macerations next year?

Yes, we expect 20 to 25 million dollars worth of lower pension expenses in 2004 than we did in 2003.

Okee Dokee. Thank you -- Just some clarity, that is only one of the part of the health structure. Medical is 25 going the other way, so the two almost net out against each other. So net zero.

Yeah, that's what I'm saying.

Thanks.

Sure.

We'll move next to Joanna Shatney with Goldman Sachs.

Good morning. You ended the year, my best guess, Hussman profit margins at about 2% to 3%, can you just walk-through kind of the expectation of your 3% growth for next year, what can you do on the service side to get that 8, 9% to higher levels and what can you do on the core corporate line, you know, regardless of what happens with, if we don't see any real recovery here, we only see a 3% increase? Is that going to get us something better to in profit margins?

I am expecting to more than double that margin line in the next 12 month period. There's two parts to it, there's the recurring revenues, about 35%, and our lean initiative which really is going after -- everything in the back room to including the customer interface with the technicians, we see that as it's getting up to a 15% run rate in the second half of the year. On the cost structure as it relates to display cases, we have during 2003, made some significant changes in our manufacturing footprint.

We have now established ourselves to where we're able to effectively produce down in Mexico, in addition to U.S. capabilities where we could wind up, I think, totally reducing our costs by 30% on the case goods. So I think we've reduced the cost base, now, what we're looking at is going ahead and seeing how we can go and get frankly some of that Wal-Mart business and do more internationally. We're introducing our Cosco line now into the China marketplace, so non U.S. growth is in my mind something that's in the very, very near future and then the Wal-Mart sagas for the second half of the year and operating improvement from our current revenue base, and that all-in winds up more than doubling the profitability through 2004.

Last question is on your corporate expenses, I understand the incentive costs have an impact that line item. Can you just help us out with what the growth rate will be for comp next year, and with also the corporate expense levels?

We expect corporate expense levels, we actually had a tip up of the unallocated corporate expenses, you saw went up in the 4th quarter this year versus last year this year versus last year, largely as a result of the stock based compensation appreciation of about $10 million in the unallocated number, the total number was about $19 million. Our compensation increase for 2004 is expected to be about 3% up from 2003.

And then the corporate expenses should rise with sales?

I wouldn't expect, no, it better not.

I'd expect them to remain flat.

Okay. Great, thanks, guys.

Our next question comes from Steven Haggerty at Merrill lynch.

Good morning.

Just a quick question on Hussman, I saw where there was no good will write downs in the quarter. Can you update us on the status of any potential good will write downs for Hussman?

We went through the analysis that we always do, based upon our planned projections and cash flows and so forth, at the end of the year, and no impairment was required in 2003. We'll monitor it on a quarterly basis to make sure that our forecast projected to substantiate the evaluation, we'll monitor it on a quarterly basis to see if there's any change and we will do the deep dive at the end of 2004 as we regularly do.

I guess the implication is that the cash flow that you're looking at for this business is at least good enough to allow you to avoid any impairment charge at this time? I'm not looking too positive into it, but it's good that you didn't have to take the impairment charge, is that a fair conclusion?

Yes, that's correct.

One other quick question, in the area of infrastructure sales, how much tax buying do you think there was in the strong close that we heard about across the board for you and other manufactures, how much do you think buying was spurred on by the potential of taking advantage of the deappreciation allowance or accelerated depreciation?

I think if I look at the total number, you're talking about something which is probably more in the 2 to 3% range, than something which is in the 10 to 20% range on it, I don't think it was that significant. I think it was an element, but I think it was minor compared to the rest of the robust activity we saw.

Thank you very much.

Sure.

Gentlemen, there are no further questions at this time, Mr. Henkel, I'll turn the conference back over to you.

Can I make one clarification, David, you asked me the question earlier about the proceeds from stock based from option exercise that number is actually in excess of $100 million for the year, however, that number is not included in our free cash flow number that we identified. I don't have the precise number, but I know it's in excess of $100 million.

For the full year.

For the full year. Joe, would you close it up?

Thank you for joining us, there will be an instant replay of this conference call available at approximately 3:00 p.m., it will be available until February 3rd. The call-in number is 888-203-1112 and the pass code is 668389. For international callers 719-457-080. The audio and slides of today's conference call will be archived on our website. The transcript for the conference call will be available at the Ingersoll-Rand website probably late next week.

Finally, our first quarter release is scheduled for Tuesday, April 20th, and we'll probably do an 11:00 conference call. Please call me, again, Joe Simbionte, if you have any additional questions at 2001-573-3113. This concludes our call. Thank you very much.

This does conclude today's conference, again, thank you for your participation.