特靈科技 (TT) 2005 Q1 法說會逐字稿

Ingersoll-Rand first-quarter 2005 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; the Chief Financial Officer, Mr. Tim McLevish; and the Director of Investor Relations, Mr. Joseph Fimbianti.

At this time for opening remarks, I'd like to turn the call over to Mr. Joseph Fimbianti. Please go ahead, sir.

Good morning. This is Joe Fimbianti, Director of Investor Relations for Ingersoll-Rand. Welcome to our first-quarter 2005 conference call. We released earnings at 7 AM this morning and the release is currently posted on our website.

I would like to cover some of the usual items before we begin. This morning, concurrent with our normal phone-in conference call, we'll be broadcasting the call through our public website. There you'll find a slide presentation for the call. To participate via the Web, go to www.irco.com. Click on the yellow link on the left-hand side of the screen. Both the call and the presentation will be archived on our website 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 December 31, 2004, Form 10-K with the details on factors that may influence results.

I would like to again introduce the participants for this morning's call. We have Herb Henkel, Chairman, President and CEO of Ingersoll-Rand; Tim McLevish, Senior Vice President and Chief Financial Officer; and Rich Randall, Vice President and Controller.

We'll start with formal presentations by Herb Henkel and Tim McLevish, followed by a question-and-answer period. Herb Henkel will start with the overview. Now if you would please go to slide number 3. Herb?

Thank you, Joe, and good morning, everyone. This morning, we announced strong earnings growth for the first quarter. EPS was $1.28 per share, which was above our guidance range of $1.10 to $1.20 per share. EPS from continuing operations was $1.33 per share, which is 45% higher than our relatively strong EPS performance in the first quarter of last year.

Total revenue increased by about 16% compared to last year. We had double-digit, year-over-year organic revenue growth for all three months of the first quarter. January and February results were in line with our expectations. March was much stronger than our forecast. Bobcat, Club Car, Construction Technologies and Industrial Technologies were particularly strong. Our strong first-quarter performance reflects our ability to execute our strategies to drive growth and operating efficiency. We have generated revenue and earnings growth driven by our innovative solutions and continued expansion of our recurring revenue stream. In addition, we are making significant progress in reducing the cyclical profile of our business portfolio, lowering cost, improving productivity and implementing pricing to offset significant material cost increases and supply base delivery issues.

Please go to slide number 4. By the end of 2004, we completed the divestiture of the businesses that did not meet our requirements for revenue and earnings growth and return on capital going forward. With these transactions, we have substantially completed a transformation of our business portfolio from heavy machinery and heavy construction orientation to a diversified industrial company. In the 1980s and 1990s, over half of our revenue came from cyclical low-return businesses like automotive components, mining and process.

Today, we generate our revenue across diverse markets and geographies. This product and market diversity help to drive our earnings growth in the first quarter, and longer-term, will make us more resistant to future market cycles. Now please go to slide number 5.

During the quarter, we enhanced our segment reporting to better reflect the diversity of our business mix and to provide greater transparency of our results to our investors. We have divided the sector which we formally reported as Infrastructure into two reporting sections. The largest segment, which we have designated as Bobcat and Club Car, is a world leader in compact equipment, with revenues of approximately $2.2 billion in 2004. Both Bobcat and Club Car have a history of generating consistent, strong growth through innovation and achieving strong operating margins. Over the last 10 years, this segment has been less cyclical than traditional heavy equipment companies. Its revenues have grown at a compound annual rate of approximately 11%, which is approximately 35% above the rate experienced by the folks that make that yellow and green equipment. The national returns are also much stronger and less cyclical than traditional heavy equipment businesses.

Duche (ph) growth prospects are also bright, as there is increasing demand for versatile, flexible, low-cost equipment and attachments. Additionally, this business has historically been concentrated in North America. We expect market growth in Asia and South America to expand opportunities for compact equipment growth going forward.

At the end of 2004, only about 11% of our total revenue was made up of machinery and equipment that serves road and highway refurbishment and general construction. We will report this segment as Construction Technologies. This group of businesses does not follow the same business cycle as most heavy equipment makers and has improving profit margins. The business also generates about 20% of its revenue from aftermarket parts. Plant consolidations, including the closure of two manufacturing facilities in 2003, have enhanced this business's future profitability. We believe we are well-positioned to take advantage of future growth in Asia, which will help balance the traditional cycles of the North American road development market.

We have constructed a very solid $10 billion diversified industrial company with strong future growth potential and an improved ability to generate consistent earnings, included during economic downturns in North America.

As we enter 2005, our major end markets generally experience strong activity. We achieve total revenue growth of about 16%, or about 13% organic growth in the first quarter. We attribute these gains largely to the effectiveness of our growth strategy, which emphasizes development of innovative products and solutions, growth of recurring revenue and low-risk high return, both on acquisitions.

I would now like to take a few minutes to update our progress in the first quarter, so please go to slide number 6. Our ongoing investments in new product technologies and services has been a major reason for our revenue growth and market share gains over the past several years. In both 2003 and 2004, we launched new products in all of our businesses. We have planned a number of new products and solutions for introduction in 2005, and we expect to produce $250 million in net revenues from innovations introduced in 2005. We are off to a strong start in the first quarter with new product offerings in each of our reporting segments.

Now please go to slide number 7. I am also happy -- no, actually, I'm thrilled that we have positive news to report about the relationship between Wal-Mart and Hussmann. During the first quarter, our Hussmann stationary refrigeration business reached an agreement to become Wal-Mart's prime display case supplier for their requirements in the United States. This represents a significant increase in Climate Controls' Wal-Mart display case business. This agreement, which covers a two-year period, begins in June of 2005 with Wal-Mart's new store planning process. Actual shipments to Wal-Mart under this agreement will begin in the first quarter of 2006.

As a next step in the relationship, Hussmann will seek Wal-Mart's U.S. refrigeration system business. Wal-Mart is currently testing Hussmann's proprietary refrigeration system to evaluate the benefits they can provide their operations throughout the United States. We regard these developments as the continuation of a long-term goal to become a key partner with Wal-Mart as it expands throughout the world.

Now please go to slide number 8. During the first quarter, we also continued to deliver on our goal to grow our stream of highly profitable recurring revenue. Our large installed base and powerful market-leading brands provide significant opportunity to expand revenue and earnings going forward. Recurring revenue also creates a strong foundation for consistent financial performance throughout the economic cycle.

Recurring revenue for the first quarter totaled $466 million, an increase of 5% compared to 2004 and equal to about 19% of total revenue for the, quarter. Bobcat and Club Car, Construction Technologies and Industrial Technologies all had double-digit improvements in recurring revenue. Climate Control Technologies' recurring revenue declined by about 7% compared to 2004, mainly due to the cancellation of some low-margin contracts with a major customer in Europe and reduced display case installation activity in North America.

Now please go to slide No. 9. We also helped fuel our ongoing growth through bolt-on acquisitions. We completed an important bolt-on acquisition with our January 2005 purchase of the remaining interest in CISA, an Italy-based security technologies company serving global markets. The purchase price for 100% of CISA was approximately EUR267 million and included the assumption of approximately EUR190 million of debt. CISA manufactures a wide array of products that range from electronic locking systems and cylinders to door openers and closers. It also markets safes and padlocks. The company, which has been in operation for nearly 80 years, is a strong, well-established business with innovative technology, competitive brands and global market presence. CISA's 2004 revenues were approximately $270 million with operating margins of approximately 15%. For the first quarter of 2005, CISA added about $65 million of revenue to Security Technologies' results. And, excluding onetime purchase accounting costs, CISA's operating margins exceeded 16%.

On February 8, the Company acquired ITO Emniyet, an Istanbul, Turkey-based company that markets and sells Turkey's market-leading brand of mechanical locks and architectural hardware. ITO products are also sold in Eastern Europe and the Middle East. The acquisition of ITO solidifies our platform for serving promising high-growth security markets in Turkey and neighboring regions. It also adds a competitive ITO brand and technologies to our world-class portfolio of security products, bolstering our market leadership as a global provider of comprehensive solutions.

Now please go to slide number 10. At the end of March, we completed the acquisition of the remaining 25% interest in Superay International Limited, a manufacturer of pneumatic tools based in Changzhou, China. Ingersoll-Rand acquired a 75% interest in Superay in a series of transactions completed during 2002. The acquisition of Superay advances our strategy to operate wholly owned manufacturing facilities that produce high-quality, cost-competitive products in emerging markets for local and international customers. Since acquiring our first interest in Superay in 2002, the Company's facility has tripled production while achieving global quality standards. This acquisition will allow us to better leverage Superay's manufacturing and engineering capabilities to expand our presence in several of China's high-growth markets such as automotive service, electronics, appliances and various process industries.

During 2005, we will continue to make high-value, bolt-on acquisitions as part of our ongoing strategy. We believe our Security and Industrial Technology businesses, in particular, have considerable opportunity to expand globally through acquisitions that enlarge their solutions portfolios and geographic reach. We believe the platforms we have in place will support substantial growth in earnings, margins and ROIC. Therefore, we do not expect to make any large acquisitions that would add a new platform to our business.

Now please go to slide number 11. Turning to the area of operational excellence, during the quarter, we continued to benefit from cost reductions associated with our productivity investments. Operating margins improved by 1.5 percentage points from the benefits of increased revenue growth and our ongoing efforts to drive down costs by adopting lean Six Sigma and other continuous operating improvement processes. Price increases and surcharges helped to partially offset the impact of significant material cost inflation. Tim will discuss material cost and productivity in greater detail during his presentation.

Now please go to slide No. 12. We maintain the strength of our balance sheet in the first quarter. Our total debt balances at the end of the quarter declined by $300 million compared to last year, and our debt-to-capital ratio is 25.9%. We are comfortably below our long-term target of 35%. Additionally, during the first quarter, Standard & Poor's raised our debt rating to single A- in recognition of our cash-generating capability and the balance of our -- the strength of our balance sheet.

Now please go to slide number 13. During the quarter, we continued to deploy our cash balance to create shareholder value. We repurchased about 3 million common shares in the first quarter and an additional 2.5 million shares in April, leaving about 2.5 million shares available under the program approved by the Board of Directors in August 2004. We expect to complete the purchase of the remaining shares in 2005.

Now please go to slide number 14. In summary, we had an excellent first quarter, and we are expecting to enjoy an excellent year. We are successfully executing a sound long-term growth strategy. We are well-positioned to continue to deliver profitable growth, generate strong cash flow and deploy the cash to generate greater value for our shareholders. We also believe our current diversified portfolio of businesses and our lean business model will dampen the impact of future market cycles on our North American businesses. Tim McLevish will now cover IR business unit performance in more detail. Tim?

Thank you, Herb, and good morning. I would like to begin my discussion with the quarterly financial results. Please turn to slide 15.

Revenues for the first quarter were in excess of $2.4 billion, up 16% from the comparable period in 2004. Excluding acquisitions, total revenues increased by 13% compared to last year, increases attributable to double-digit growth in our Industrial Technologies, Bobcat and Club Car, and Construction Technology segments. Excluding the favorable impact of currency, organic revenues increased 12%. The 1% currency impact on revenues was consistent across all of our reported segments.

Operating income for the first quarter was $296.9 million, up 71 million or 32% from 2004. This reflects a margin of 12.1% of revenue, up 1.5 percentage points from the prior year. These continued strong operating results were driven by volume leverage, new product introductions and operational improvements, while overcoming material cost inflation and the operational inefficiencies caused by material availability issues.

I would like to take a moment to discuss certain year-over-year items that are included in our reported results. The strategic bolt-on acquisitions outlined by Herb earlier increased our first-quarter revenues by approximately $67 million and operating income by approximately $3 million. In addition, the quarter included approximately $6 million of incremental productivity investments, while we benefited by approximately $9 million related to favorable currency. Also affecting the quarter was a negative impact of approximately $58 million in material cost inflation, mostly attributable to steel, nonferrous metals and plastics. The impact of these cost increases was substantially offset by savings from our material productivity programs and price surcharges.

Moving down the income statement, interest expense was $36.6 million, which was 4 million lower than the first quarter of 2004. The year-over-year improvement resulted from lower debt levels. Other income for the quarter was $7 million compared to $3 million of expense in prior year. This year's first quarter included approximately $5 million of interest income on our cash investments and $2 million of currency gains, while last year included approximately $3 million of currency losses.

Our first-quarter effective tax rate was 13.2%, which reflects our full-year projected rate of 15% offset by the benefit of a onetime credit of $5 million in the quarter. We expect the remainder of the year to be at the projected rate of 15%, which reflects the benefits of our ongoing tax planning initiatives.

Earnings from continuing operations for the first quarter were $232.3 million, or $1.33 per share, which exceeded the upper end of our guidance range. Our favorable results were attributable to strong markets with better operating margins, the onetime tax credit, currency gains and lower expense from stock-based liabilities. Discontinued operations consisting of legacy costs from previously divested businesses reflects a cost of $9.2 million, or $0.05 per share for the quarter. Our net earnings for the quarter were $223.1 million, or $1.28 per share.

Please turn to slide 16. Excluding acquisitions, our 13% revenue growth reflects increases in all of our major geographic regions. North American revenues were up 14% and constituted approximately 66% of the total. European revenues were up 7%, of which approximately half was from the impact of currency. Asia-Pacific grew 12%, while Latin America increased 26%.

I would now like to take a few minutes to talk about the results of our businesses. Please turn to slide 17. The Bobcat and Club Car segment generated first-quarter revenues of $661 million, up 30% from 2004. Continued strong order rate are supporting this revenue growth while maintaining solid backlogs. Operating margins were 16.4% of revenues, compared to 14.4% in the prior year. This operating margin improvement is attributable to volume leverage, new product margins and the impact of our operational improvement programs. The results were negatively impacted by material cost increases and availability of component parts. Bobcat revenues increased more than 30%. The increase was attributable to strong North American markets, new product introductions and the strength of the parts and attachment businesses. Club Car revenues were up 23% from prior-year, largely due to strong growth for the new President golf car and new vehicle introductions.

Bobcat increased inventory levels during the quarter to address supplier-related component availability challenges. This caused the business to temporarily increase working capital investment to maintain service levels and meet their growing market demand.

Please turn to slide 18. The Climate Control Technologies segment, consisting of the market-leading brands Hussmann and Thermo King, reported first-quarter revenues of $639 million. In total, revenues were up slightly versus the prior year. Strong revenue growth in our transport business was offset by continued softness in the display case and service businesses. Operating income for the segment was $60 million, representing an operating margin of 9.4%, up from 9.1% in 2004. The operating margin increase was driven by favorable product mix and the benefits of our operational improvement program. Climate Control America's revenue were up 3%. The continued strength of Thermo King truck and trailer businesses was largely offset by weakness in our display case volume due to continued capital spending constraints across the North American supermarket industry.

Climate Control International revenues for the quarter were down 4% year-over-year. European truck and bus volume increases were offset by a decline in our trailer business and lower display case revenues versus the prior year. Revenues in Asia-Pacific improved slightly, driven primarily by improved growth in bus, truck and trailer markets.

Please turn to slide 19. The Construction Technology segment reported revenues of $270 million, up 22% compared to 2004. Operating margins were 9.5% of revenues, compared to 8.4% in the prior year. The improvement was largely attributable to leverage from increased volume and the results of our productivity improvement program while overcoming material cost increases and operational inefficiencies caused by material availability issues. Road development and utility equipment revenues increased 22% over 2004, largely driven by strong North American and European markets and improved national accounts business.

Please turn to slide 20. The Industrial Technologies segment produced first-quarter revenues of $403 million, a 17% increase over prior-year. Air Solutions revenue grew 20%, driven by strong North American markets and new product sales. Recurring revenues were up 14% and constituted 47% of the total. Productivity Solutions revenues were up 13% vs. prior-year, due to improve vehicle service and industrial markets. Operating margin for the segment was 11.7% of revenue, up from 9.8% last year. The year-over-year increase was attributable to strong revenue leverage, cost control, new product margins and the benefits of our productivity improvement program.

Please turn to slide 21. Security Technologies Segment revenues were $486 million, up 17%, compared to 415 million in the prior year. Excluding the impact of acquisitions and divestitures from both periods, revenues were 5% higher than the comparable 2004. North American revenues were up 6% from the prior year after adjusting for divested and discontinued businesses. The increase was largely attributable to continued strength, residential and commercial markets. Additionally, we continued to see good growth in our Integrated Systems Solutions businesses. Operating margins for the quarter were 14.2%, compared to 17.4% last year.

Please turn to slide 22. The first-quarter 2005 margins were unfavorably impacted by approximately $8.6 million of purchase accounting and integration cost from the CISA acquisition and approximately $6.7 million of transition costs related to the realignment of the segment's manufacturing and sourcing footprint. Operating margins are expected to be in the 17% range for the balance of 2005.

Please turn to slide 23, and let's move on to the balance sheet. Maintaining service levels in a double-digit growth environment while facing supply shortages and availability issues posed a challenge for our working capital management program. We finished the quarter with our investment of working capital at 12.3% of revenue, which is above our target range of less than 10%. Our working capital performance was impacted by a deterioration in inventory turns. In the quarter, we increased our inventory levels seasonally and accelerated our component purchases to ensure material availability and alleviate some of the supply disruptions.

Days sales outstanding and days payable were essentially unchanged year-over-year. At the end of the first quarter, our total debt was $2 billion, a reduction of 300 million compared to the first quarter of last year. Our debt-to-capital ratio at the end of the quarter was approximately 26%, which is a reduction of over 7 percentage points relative to the prior year. Capital expenditures for the quarter were $29 million, or about 1.2% of revenues, compared to prior-year's $22 million. Depreciation and amortization expense for the quarter was $52 million versus 42 million in 2004. The majority of this increase is attributable to our acquisitions. Our solid balance sheet continues to provide a foundation to support the strategy of our Company.

Herb will now conclude our formal remarks with the outlook for the second quarter and full-year 2005. Herb?

Thank you, Tim. Please go to slide number 24.

Activity in many of our major end markets continued at strong levels of demand during the first quarter. Orders excluding acquisitions were up about 5% compared to a strong 2004, with double-digit growth rates in Bobcat, Construction Technologies and Industrial Technologies. We also have strong backlogs across many of our businesses. Based on our recent order trends, we expect revenue growth in the 11 to 12% range for the second quarter of 2005, including approximately 3 percentage points of revenue growth from bolt-on acquisitions.

We are continuing to focus on minimizing the impact of material cost increases by making permanent reductions in our operating cost structure. Operating margins will improve from the higher volumes and cost reductions. Earnings from continuing operations for the second quarter are forecast to be $1.60 to $1.70 per share, representing an 18 to 25% improvement compared to last year. Discontinued operations in the second quarter are expected to be $0.05 per share of cost, for a total EPS of $1.55 to $1.65.

Now please go to slide number 25. We remain very positive about our prospects for the second half of 2005. We are increasing our forecast for full-year EPS from continuing operations to $5.75 cents to $5.95. The new low end of the range is $0.10 per share above our previous guidance for 2005 that we gave you in February. Full-year discontinued operations are expected to be about $0.20 of cost for total Company EPS of $5.55 to $5.75. Available cash flow for full-year 2005 is expected to be approximately $775 million. We define available cash flow as cash flow from operating activities and discontinued operations, excluding voluntary pension contributions, minus capital expenditures.

Now if you would please go to slide number 26. This ends our formal remarks, and I would like to open the floor to your questions. Thank you.

(OPERATOR INSTRUCTIONS)

Also, this morning -- again, this is Joe Fimbianti -- so we can hopefully answer everyone's question this morning, please focus your inquiries on first-quarter operations and our forecast. If you have any other questions about historical operations or anything out of our Forms 10-K, 10-Q, or the proxy, please call me off-line and we can complete your inquiry. So, Bill, if we could take the first question.

Ann Duignan, Bear Stearns.

I have a question on your raw material costs. I think you said that raw material costs increased by 58 million. And you mentioned that you were able to offset that through surcharges. You didn't mention permanent price increases, and I think last year you had mentioned that surcharges only represented about 20% of your total price increases. Could you just give me some color on that and update us on where you are getting price increases and where you are getting surcharges?

I will try to respond to your question. The surcharges we offset part of the run-through (ph) cost increase, the $58 million, with pricing surcharges; maybe half of it was offset by surcharges. The other half plus -- about half of it is related to productivity investments or our productivity savings. The price piece of it, we also commented that we saw a lot of supply disruption that caused problems with our manufacturing and operations. We saw a lot of expediting; we saw increases in freight, and so forth. For practical purposes, the price increase we saw essentially overcame those disruptions.

What are you anticipating going forward for price increases versus surcharges? What do you anticipate once you get through all of the noise with supply chain disruptions? Do you expect to fully offset raw material costs with prices?

Right. We expect as we go through the full year, we are going to see the net of all of the supply disruptions which we would expect to subside some in the second half of the year, the third quarter on -- or the second quarter on. The raw material price increase inflation, our productivity investments, surcharges and prices to be essentially offset for the year, which is what is really embedded within our forecast for the full -- or our guidance for the full year.

Just a quick follow-up on Superay. Pneumatic tools -- where does that fit in the organization? You talk about bolt-ons, but what does it bolt on to?

It bolts on to our productivity solutions business, which has also other types of Ingersoll-Rand-branded tools that are used for assembly applications. So it enhances an already existing range of pneumatic hand tools.

And do you intend to take these products and develop a breadth of products for other markets, or is it simply to supply the Chinese market?

It is right now -- we already are -- the product that is produced there is suited for the local Chinese market. In addition to that, we have introduced that into chains such as Lowe's in the United States.

David Raso, Smith Barney.

Questions regarding the forecast '05 and then a peek into '06. The full-year revenue forecast, can you just clarify that for me? What is the full-year revenue forecast all in, acquisitions, everything?

We are looking at all in, about 13%, which reflects about 3% of CISA and then about 10% of base -- organic.

Our total revenue is around 10.6 the way we would look at it, full-year.

That makes it a little easier when you announce -- I was just trying to run the numbers where it looks like the second quarter, the incremental margin, a lot of variables that roughly dropping to 17-18% or so. But with the slower sales growth in the back half, but with the EPS guidance, it's implying the incremental margins don't really slow much in the back half, despite a little softer topline. Is there something embedded in there from assumed cost release or the midyear price increases? I'm just trying to get a feel for why the marked incrementals wouldn't weaken a bit on a (multiple speakers) the topline.

If you look at our costs for the first quarter, you'll see in turn we're actually up about four-tenths of a percentage point, when, if I looked at what we were forecasting, operationally, we thought we would have an improvement. There is a lot of noise as a result of having to daily shift manufacturing processes, and we expect that as our supply base really improves, that those disruptions will wind up improving. We will get less. So we are actually going to see productivity going up about 2 percentage points. That's what then increases the profitability and honestly, the productivity for the second half of the year without being totally dependent on the revenue side.

I would say to you that, as I mentioned in the first quarter, January and February was right on to where our expectations were. We were pleasantly surprised by the strength of March. If March -- if there are nine more Marches in the rest of the year, obviously we will wind up revising our forecast up. But as I look at the activity level going in for April, we think they are going in and forecasting like a 10%-type organic growth for the full year. It is pretty consistent with what we've see in macroeconomics that are out there. We have seen some weakening, as Tim reported, in Climate Control in Europe, which is the first time for quite a while that we have seen that go off. And so we are cautiously looking at what is happening there.

And the March strength was pretty broad geographically outside of the euro climate control?

Yes, that's right.

And then looking at the '06, can you size for us, to some degree, the opportunity at Wal-Mart in '06 and '07?

Yes, I have to rely, obviously, on what they now talk about as to their forecasted new store openings. And I think it is really important that we are going to go have to deal with Wal-Mart, A, as an existing customer that we already have in the Americas and the rest of the world. And that business level is going to be measured to the tune of $50-some-odd million. We then look at display cases incrementally in the U.S. based on what we see as forecasts from them for new store openings, translating into somewhere about 40 to $50 million for full-year 2006-type impact.

We are also, as I mentioned, looking at their refrigeration, their service and renovation-type work. I would say that a full load of Wal-Mart, including revenues from service as well as from refrigeration, would be north of $100 million. But the contract as we currently see it, we estimate it to be about $50 million for 2006.

Andy Casey, Prudential.

Could you help break out the order by -- the order trends by segment as you have done in previous calls?

It's Douglas. First quarter, Andy?

Yes.

When we look at the first quarter, their climate of raw (technical difficulty) U.S., it was off by 4-some-odd percent, and Europe was actually off 10%. So overall, it is about minus 5, minus 6, roughly.

Industrial Technologies, as someone accurately forecast, it was up 12.4% in the first quarter, stronger than we originally had forecast it. Our Bobcat/Club Car was up also double-digit, up over 11%. Construction Technologies was really the strongest, reflecting over a 16% increase. Security Technologies, excluding CISA -- this would be for Donnelley North America, then -- was up about 2%. So all in, when you do all of those combined, that's how I came up with about the 5-some-odd percent for first quarter Company-wide.

And then in the security business, was that -- well, actually, let me ask the question a little bit differently. When you said across the board outside of the EU, in terms of order growth, was there any one segment that stood out differently than the others?

I think if you looked at the climate control with Z1 (ph), that was, I think, the -- out of line compared to the very, very strong results we saw elsewhere.

Mark Koznarek, Midwest Research.

I want to explore Security and Safety a little bit more, because it looks like sales growth, base sales, have been decelerating consistently since the second quarter a year ago, and I just noted that you really didn't mention the electronic access control that you used to highlight as being double-digit growth. And our survey work shows that that accent line that you rolled out is doing very well in the big boxes. So it seems like some part of the business is not working too well. Could you elaborate on that, please?

Yes. Well, we're not ashamed of 6% revenue growth in North America that we experienced. Electronic access control continues to do well. It is a relatively smaller part of the portfolio, as you know, it is rapidly growing. We experienced about 37%, or 35% plus increase year-over-year. Our European hardware business is -- actually was quite soft this quarter versus last year. That is one of the reasons why we have acquired CISA, to fill out that product line and obviously improve also some operational synergies as well.

I think the other part, Mark, that has slowed down compared to, as you are saying, early 2004, is in the institutional side. When we look at monies been spent today by the communities for schools as well as for hospitals and so on, it has slowed down significantly. That used to be a consistent double-digit for us. It is now something which is running into low-single-digit rates.

And what about the profit margin on that business, excluding CISA, dropping down to 17%? It was not too long ago that we were in 19 to 20% range. Is that kind of a permanent shift in profitability, or is this a function of increased investment or expenses associated with growth?

I expect, as we had mentioned, I think, last year if you would look at it long term, what I expect is that will be running into 17 to 18% with this type of a business going forward. That is a combination of traditional hardware door closures and so on which were running in the low 20s. And now, as we get into electronic access control and continue to drive that going forward, we see that as being in the mid to upper teens. So collectively, our forecast gets to being about 17%.

This was one where we continue to see the need to go and to invest in low-cost sourcing in order to continue to have the gross margins going forward for, especially, big-box investments. And then also continue to focus on new markets and new product introductions. So this will be a balancing act of how to try to get double-digit growth while maintaining margins in the 17 to 18% level.

Andrew Obin, Merrill Lynch.

Just a question on the overall items. It was a pretty solid beat (ph) in the quarter, $0.08 versus, I think, the upper end of your guidance. At the same time, the upper end of your outlook for the year remained unchanged. Could you just give me a little bit more clarity? March was strong, what has changed? What is the big negative?

I wouldn't say there's a negative. The rest of the year looks much as we had anticipated before. We were $0.08 above our guidance range, and basically we took that to firm up the bottom end of our range. We said last time that to the extent some of the raw material prices subside some, that there's -- that will move us further up in the range and potentially there's even upside from there.

I think, Andrew, if you look, that approach is very -- not that it's right, but it is consistent, at least. That is exactly what we did last year, when you saw, we did the first-quarter numbers that were higher. We said we now feel confident that that eliminates some of the downside risk that we have. And if the quarter continues to demonstrate the same type of strength that our March did, we will then revise the second half of the year upward, but I think right now it's prudent to say we have good visibility to the numbers that we had forecasted with less downside risk as a result of the performance that we have behind us in the first quarter.

Question is on Security and Safety business. You guys have stated explicitly in the press release that you expect the margins to be at 17% for the remainder of the year, and you are talking about 17 to 18%. And if I remember correctly, at the end of '04, we were talking about the 18% margin for the business. A, am I just misreading it? B, what has changed? It is a follow-up to the question that was asked before, but I'm just trying to understand what is changing in the Security and Safety business versus a quarter ago?

I would say that Herb commented our 18 -- 17, 18% is our long-term outlook. The rest of the year, as we look at it, we continue to make investments. We have some mix changes we are more aggressively growing. We are investing in growing the electronic access control more aggressively. The CISA mix has an impact, and we are -- have some investments and growth expectations in Asia as we ramp up and accelerate our growth over there. The total of the mix, we think, is going to be a little bit more heavily weighted towards some lower-margin business that is going to bring us to a kind of a 17% rest of the year. But long-term, we expect 17, 18% as the normalized margins for the business.

So it's pretty much marginally, mix has shifted a little bit versus the fourth quarter.

Yes. I would say to you the real change, if you add it up, has got to do with our cost of raw materials having gone up and our inability to go into push pricing, specifically into the big-box part of that business. And if you look at the revenues and the cost of materials that go into that part, that would translate into almost a half a margin point.

Joel Tice (ph), Lehman Brothers.

I wonder, can you talk a little bit about the road development business or the construction technologies, and if that business has what it takes to get to overall corporate 15% operating margin goal? And maybe what are the things that have to happen to get us from here to there?

Let me start up with that I'm confident from what we see, Joel, that it has 15-plus percent written all over it. The challenges that we face is really that this business has three different pieces. We have an attachment business, which we wind up having in Europe, called Montebert (ph) that is already at the OI margin level that you are describing. We have a road development business that if I take the noise out of the manufacturing stuff we saw in the first quarter because of parts and some of that, we're talking about something which already is also at the 15%. So the singular focus for the margin improvement goes into what we call utility equipment. This is where we have our portable air compressors plus a comprehensive line of many, frankly, buyout-type items. That part of the business last year was running around 3% of OI and is about 6.5% on the first quarter.

Our goal as we drive that forward is to get that up to about 10-some-odd percent. The OI percentage in that business is relatively low, obviously, compared to the rest. The good news is it is a very high ROIC-type business. We believe we need to have that product offering to augment what our distributor channel needs to be able to provide them with a full comprehensive package. So we need to take -- what we currently do is a lot of buyouts where we are making 15 to 18% gross margins, turn them into more vertically integrated opportunities where gross margins go up into the mid-20s. That is really the game plan for that business going forward over the next year to two years.

Tim, can you talk a little bit about why the corporate expense was so low in the quarter and how it might track for the rest of the year?

We normally think about the corporate unallocated expense to be a $25 million or so number. We actually were considerably lower than that this year. We're about $14 million for the year, or for the quarter. The biggest piece of that, quite frankly, is there's a stock -- you know, we talk about stock-based liabilities. We had anticipated, and last year we would have seen 5 to $8 million worth of expense associated with that as our stock price depreciated. But this year, our stock price is essentially flat over that time, over the first quarter, and so it brought it down about $8 million. Other benefits we saw, and we continue as we talked about before, as we absorb these fixed costs associated with some of the divested operations, it takes us some time to rationalize that, so we continue to see some benefits as we rationalize those costs that were legacy costs remaining from previously divested businesses.

Barry Bannister, Legg Mason.

I'm trying to get my arms around understanding the Wal-Mart deal. Is this a transaction whereby you are selling a display case, but not the guts of it, which is the refrigeration and the aftermarket that would be associated with that, and you hope to get that on the back end?

They are really two different applications. One is that we do wind up having the entire display case, which includes, in (indiscernible) obviously, the refrigeration unit inside. Then there are, in the back of the store you have the compressor -- refrigerated compressors and so on, and we are also try to get that type of business. So there is really two places. There is the complete display case and then there is the back room. So we have gotten the order for the display case and we're now focusing on also getting the back room, where you have the compressor racks.

Right, and the display case has its own built-in refrigeration, so there is aftermarket associated with that?

Yes. Now, there are two different types of -- those that are actually our stand-alone type units, where you have an entire unit including refrigeration and talking about compressors and so on. And then you have the rest, which are in the back of the store. There is definitely service opportunity for all of these because there are fans and other type of mechanical parts that wind up having wear.

Of the 8 million share repurchase that you might complete in '05, what will be what we see at the bottom line in terms of net share shrinkage in excess of options creep and other things?

I can give you for the first quarter during the time, as we said, is that we bought back 3 million shares. During April we said bought back another 2.5, so collectively that put you at 5.5. I checked, and as of last night, we had just shy of 1.4 million options that had been exercised. So you would subtract the one-four from that number.

Our forecast, if you recall for the full year, is that we said that we were thinking along the lines of anywhere between 2 to 3 million options would be pretty typical to be estimated to be put out there for the full year.

John McGinty, Credit Suisse First Boston.

Wondered if we just come back for a second, if we look at the first quarter, the revenues, ex-acquisition, ex-currency, were up 12%. How much of that is pricing? As you look going forward, given the inflationary increases, surcharges or not, are you assuming that you are going to achieve more price on that? Can you give us a flavor of what the price is in that number?

I would say to you that the total element of price you can measure as being just about 1%. First quarter and going forward on, John, is that I think that may stretch to 1.5% as sort of like the full year, so I do not see that as being a very significant attributable (ph) beyond this.

And the half a -- just the half a margin point you were talking about was, when you talk about the big boxes, that was just in -- just over Safety and Security, or --?

Yes. Our biggest, if you look at the security business and you wind up saying, as we do, somewhere around $400 million worth, and you look at our total cost and the material increases that we see in security, we have firm pricing with them, and saying is so that is what moves the margin total about a half a point in security -- Not Company-wide, I'm just talking about (MULTIPLE SPEAKERS).

And then as the follow-up, can we come back to the March, because there's always -- March is usually the strongest month of a quarter for a company, but obviously you're factoring that in when you are talking about March being substantially better than you were looking for. And I guess clearly Europe is the outlier, but there is evidence that a lot of the rest of the world is picking up. Why -- are we just kind of looking at a traditional first quarter? We are going to be conservative because it would seem to me that -- or are you actually seeing data in April go back to where it was? It wasn't clear. To see March strong, one wonders if maybe we aren't looking at something accelerating, and what -- how much of what you're saying, go back in March, was just trying to be conservative, and how much -- what can you see that's gone on since the end of March?

When I look at the order level in March and as it -- for the first quarter, we had orders of about 5% year-over-year. And we actually saw in March, that was not as strong an order month as was January-February. There's always this issue of when you get the bookings versus when you make, obviously, the shipment. So what we got at the point in time was that we actually saw March not being a rip-roaring (technical difficulty) extra on the booking side, it was on the throughput side that we were actually able to catch up on. So that is why I'm not that confident to go and to raise further the forecast from what we already saw in it, John. There is nothing from the order intake level that increases an uptick. I will also say the other way, there is nothing that would demonstrate a downtick. So that is why we left it in terms of where we were sitting going forward of doing that full-year about 10% organic.

How do you feel about the first three weeks of April in terms of the orders?

I would say that from what we see so far is that it continues to be -- honestly, April is strong in construction, but is not so strong in a couple of the other pieces. I'm talking just typical seasonality. There is nothing that I see there that would cause me to say something different, obviously than what I just said to you beforehand. So I see a continuation. So no downside movement, but also nothing that says, wow, I have nine Marches in front of me.

Alex Blanton, Ingalls & Snyder.

Just along the same lines, I notice that if you take the first half, mid-range forecast would be 288 and that would leave -- and we're talking total operations here -- 267 to 287 for the second half, or about $1.39 per quarter. So that would seem like you are looking for the second quarter to be the strongest quarter of the year. Could you clarify that?

I think that's fair. The second quarter is our strongest quarter of the year, as we see, particularly, our rogue (ph) machinery or our rogue machinery and utility equipment, strength of our Bobcat and Club Car businesses, strength -- lots of shipments in the second quarter. I think that is consistent, seeing a little bit more strength in the first half than the second half with a strong second quarter.

So second-half earnings lower than the first-half earnings?

Modestly.

Excuse me, modestly. Second question is this. Companies like yourselves and Caterpillar and Covins (ph) and others just having blowout quarters here. And it seems as if the better the quarter gets, the greater the skepticism gets about it continuing. What is your take on that? I don't know if you heard Jim Owens yesterday at Caterpillar talk about a strong seven-year cycle in its equipment, and that's four more years from now, and 4% economic growth worldwide to go along with it. What is your thinking along those lines, the longer-term outlook?

I guess I'm also more optimistic than pessimistic. I think that when I look at what we see, I do not, for instance, think that 30% year-over-year is a sustainable level, and I think that -- but I think that 4 to 6% or 6 to 8%-type numbers definitely are. I think that we envision a longer, if you will cycle, in the North American now that construction will be again financed courtesy of a T-bill, hopefully, going through. I think we see more longer duration and we wind up, obviously, being able to couple that with new, innovative-type products. Our key, we think, for success for our customers going forward is how we wind up introducing products that make them more profitable. To the degree we're able to do that, we see the ability to far outgrow the marketplace.

So I am optimistic about the macros and very, very positive about our ability to come up with solutions that make it even more profitable for our customers. We keep saying, in our game, we think the real issue is, I want to get off of my customers' balance sheet, make them think I'm part of their income statement to where we're generating profits for them. I think that demand will then wind up being really sustainable and I think if you look at our Bobcat type numbers, that's really what that kind of stuff demonstrates.

Robert McCarthey, Robert W. Baird.

Could you share with us, roughly, I guess, on a percentage basis, how big this -- how big today, before CISA, your European hardware business is, and some idea, order of magnitude, how much it was down in the first quarter?

The overall European hardware business for us is somewhere in the range of shy of $250 million. And now you add, obviously, this onto it and you wind up coming up to where this will now wind up driving it into somewhere around a $500-some-odd million.

And the (multiple speakers) was down how much in the first quarter, Herb?

We are talking about, if you look at the traditional hardware, it was off by over 20%.

I think if you look at the recent ASSA ABLOY numbers, you'll find that that they experienced similar-type thing, I think, on a macro basis. It wasn't market share loss that we had there.

Understood. Going forward, of course, lot of attention to what kind of margins you expect in that segment. Could you talk a little bit about your expectations for the balance of the year in each of the key pieces? The North American hardware business, the European hardware business and electronic assess control?

The North American hardware business, we've talked about that as being 20-plus percent and we have really seen no deterioration in that.

Tim, I'm sorry, I'm talking about the growth outlook going forward. Not margin.

I think that you're going to see the North American piece for us being in the 5 to 6%-type level. And then you wind up taking and adding onto that. What we wind up doing in Europe, obviously, as we add CISA onto it, it changes our dynamics tremendously. And we actually see that then turning positive as we wind up going forward. Assume there's probably 10%.

But because of the addition of CISA.

Yes, because what it also will do is we are able to then take what their product offering is, put it through our channel, take our stuff, put it through their channel. That's why we see the real thing picking up.

But as I understand what you're saying, you are expecting ongoing downward pressure on the original?

That's correct.

And for access control, surely you don't expect to sustain 35% growth the rest of the year?

I would say to you that we see strong double-digit. I'll let you plug in what you think that is. I think it's something along the lines of 15 to 20%, is really quite doable. You are talking about relatively small numbers, and when you wind up adding projects that are a million dollars at a time, you do wind up having -- and clearly, I would say to you we're going to continue to look at the ability to do bolt-ons. Either we wind up opening up new branches because there are geographic parts of the country that we're not covering, or we wind up doing bolt-on acquisitions. It is just to make by piece (ph).

So right now we do not cover the entire U.S. when we wind up doing this work. So what you're still seeing at this point in time is significant growth also coming from not only share gains in New York, where we are, but also moving out into the West Coast, where we have not been. That is why the number is that large.

Gary McManus, J.P. Morgan.

Just a couple quick questions. In the Climate Control (ph), can you talk about how strong the growth was in the transport area or Thermo King, and how weak is the display cases?

Transport for the quarter, I mean, we have a mix, obviously, we have -- trailer was up the strongest. We are talking probably total T.K. in the 15%-type range, 14, 15%. And we are actually showing pretty flatter down in the display case part.

The overall revenues are flat, and I thought the two businesses, Thermo King and Hussmann, are about the same in revenue size, so I don't see how that adds up.

What we said is in North America, we said our total revenues were up about 3%.

I'm just looking at total. International is down -- I don't know, 15% on Thermo King; is that just North America?

Yes, that's what we're talking about on it.

So display cases are about flat?

Yes, display case is about flat, yes. 15%, 14-15% is the total North America. We talked about Europe as being soft on both the transport and the stationary side and Asia was about flat. So you are talking about, what, 7% in TK overall globally.

The biggest reduction that we had, Gary, was really on the service and installation side of Hussmann North America. That's where the real reduction was.

Second question is the other income was 7 million or so. In the release it talks about higher cash balances, but that compares with like one million in the fourth quarter, and your net debt actually went up from the end of the fourth quarter to the first quarter. So can you -- is there anything in that 7 million other than -- is that sustainable?

Yes, let me say first of all the net debt increase really was because we assumed EUR200 million worth of CISA debt; that's what you saw there. But frankly, we are paying that down from a cash balance in the second quarter. We had some FX last year. We a couple million dollars' worth of unfavorable FX. This quarter of 2005, first quarter, we had a couple -- 2 to $3 million worth of positive. So you've got a net swing from last year, $5 million there. We had some sale of a small piece of investment we had in India that generated a gain of about $2 million. And then as we still have quite a number of partially owned affiliates that we've consolidated. So we have got a minority interest as our earnings have risen. The minority interest component has gone up, so that's about $1 million offset. At least (ph) $11 million year-on-year change.

Steve Voltman (ph), Morgan Stanley.

Why was the refrigeration service business so weak?

The service business is -- really has two parts to it. One is obviously the maintenance work. And the second thing that we capture in that pile as well is the installation for new, and the installation for new was very, very, very weak.

What do you mean, weaker than the new display case sales would imply?

Yes. What happen is that when you wind up -- let's give you some specifics. We were off $10 million (technical difficulty) which is like a 50%, reduction. And what you really do is that we wind up, when we offer a display case, we do it either as a display case or a display case installed. And what we found in terms of (technical difficulty) is even in some of the areas where we traditionally did installation, we wound up having that go to, quote, local competitors at a lower-type price. So installation was really the key negative we saw in that entire area. Service itself was almost flat from where it was a year ago. So the big trick, I said, it was the installation.

So it sounds like you are trying to hold the line on price there and that some other folks are willing to undercut that a little?

That's a very correct statement.

As we look at the Wal-Mart stuff going forward, are you going to be installing that, or is that somebody else?

The expectation is that we will be doing a turnkey project for those installations.

And then I know you guys have been working on profitability of the service business. This probably doesn't help, but can you give us an update there?

Yes, what happens is that obviously the installation people are the same as the maintenance people. And so what we had is we did not take a lot of people out. We wound up as a result having a deterioration in the margin from where we were, but we had more activity going through in the fourth quarter. This is really, I think this is our biggest challenge for this year, is to get this up to the double-digit profitability level that we were targeting and really validating the value proposition that we have as a national chain.

It's really become very clear to us that the intensity of competing against what I refer to as the local Yellow Pages-type supplier, that is hand-to-hand combat. We're actually seeing more success in the nontraditional supermarket cases, where we're able to go and convincing a Rite-Aid or a Tiffany's to go and to do their stores. So we are seeing at this point in time more pressure, if you will, from the local. Wal-Mart, on the other hand, really prefers to get into a national service-type agreement. They consider that, as I said, as a turnkey project. So we need to keep focusing on how to make our value proposition profitable for us and for our customers throughout the supermarket chain. That's a challenge for '05.

We continued to make some progress on the productivity side as we consolidated some the back office, we've talk about in the past, and we've consolidated some of the purchasing, purchasing more of the component parts through our national distribution channels. So it made progress on those sides, but as Herb pointed out, some of the volume cost us some of the margins as well.

Marty Pollack, NWQ Investment Management.

Just if you would, could you clarify a little bit, give us a little bit more color on the cost pressures referring to Q1? What was the projected for outlook for this year previously? Also, if you would just explain whether, in effect, in that 58 million, is there lost revenues and income on inability to ship, and how much of that is in fact related also to problems you might have had in the customer service area? In the services side of the business?

As we pointed out, the premature (ph) cost increases was probably 58 to $60 million in a quarter. We are anticipating $150 million level for that for the full-year outlook. We don't believe -- there was considerable supply disruption and it cost us more on the margin side, we believe, than it was on the revenue side of it. I think most of our competitors, as I think you've heard or perhaps have heard, experience similar-type disruptions from supply and component parts availability. So we don't think that we really lost revenues. I think, as Herb pointed out earlier, we typically schedule our plants on a two-week leadtime, a week to two-week leadtime, and we found over the first quarter that we are planning them on a daily basis. And that obviously caused a lot of additional cost. We incurred additional freight, as we've had to expedite orders and so forth. The impact was really much more on the margin side than it was on the revenue side. And as I think I've pointed out earlier, our expectation is is that the raw material and component part increases we expect to see over the course of the year is going to be made up or at least -- fully made up and maybe even some more so between our productivity and the pricing surcharges we expect to impose.

Is your guidance is Q2 trend rate on these cost pressures beginning to decline or is it more of a second half --?

Our expectation is is that the second quarter looks very much like the first quarter does with regard to raw material prices and component parts increases. We think that maybe -- the expectation is some of the availability issues will subside as our suppliers ramp up their production capabilities.

So what you saw, Marty, in the first quarter is an increase in our inventory. So obviously to the degree that we have those now in our pipeline, that will reduce some of the rejuggling that we have to do on the operating piece. So my expectation is that our cogs will improve because will have less variances being able to run actually the plant the way we had it scheduled. That's where the improvement will come, although the raw material cost per piece I expect to be very, very comparable to what it was in the first quarter. So production savings that improve the profitability, then I think in the second half of the year, if there is continued weakness in the automotive, we'll probably start seeing some reduction in our steel-type costs.

Barry Bannister, Legg Mason.

A couple of years ago, Ingersoll-Rand wrote off most of the goodwill, I think, associated with the acquisition of Thermo King back in 1997, if I recall, in the fall. And you've owned Hussmann now for almost five years next year. So when do you next test the goodwill, and does your goal of getting to double-digit margins tie into that test date? And could we see your debt-to-cap change literally just by changing your goodwill and -- your goodwill and intangibles account?

In 2002, we wrote off on a gross basis $865 million worth of goodwill associated with Thermo King. We, on a regular basis, as we've explained before, test our goodwill balances according to our expectations of the value of the businesses, and we do that on a quarterly basis with a deep dive look on an annual basis kind of in the third and fourth quarter of the year. As we did our deep dive test last year, the goodwill balance was supported by our expectations for the value of the business and therefore no goodwill write-off was required. And as we test that on a quarterly basis, we haven't seen -- we're hopeful and optimistic that that will continue as we go forward, and there will be no goodwill requirement.

How much goodwill is there associated remaining with Hussmann itself, or can you say?

I think -- I mean there's, I think, a billion, a billion and a half, billion-four (multiple speakers).

I'll get back with you, Barry, on that. Bill, we're going to take one more question here.

Mark Koznarek, Midwest Research.

I just want to know if the Climate Control Service business is about breakeven now?

Yes, it is. We are not happy about the return level or the OR margin as we said earlier, but it clearly is about breakeven.

Thank you very much. We will wrap up now. Thank you for joining us for this call. There will be an instant replay of today's conference call available at approximately 1:30 and it will be available until April 28. The call-in number is 888-203-1112 and the pass code is 4204180. The audio and the slides from today's conference call will be archived on our website. And finally, the transcript of this conference call will be available on the Ingersoll-Rand website sometime hopefully next week. Please call me if you have any additional questions at 201-573-3113. And that concludes our call.

Again, ladies and gentlemen, thank you for your participation. You may disconnect at this time.