特靈科技 (TT) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Ingersoll-Rand second-quarter 2005 earnings conference call. Today's call is being recorded. Time for opening remarks and I would like to turn the call over to director of Investor Relations, Mr. Joe Fimbianti. Please go ahead, sir.

Thank you, Eric. Good morning. This is Joe Fimbianti Director of Investor Relations for Ingersoll-Rand. Welcome to our second quarter 2005 conference call. We released earnings at 7:00 a.m. this morning and the release was posted on our website.

I would like to cover some items before we begin. This morning concurrent with our normal phone-in conference call, we will also be broadcasting the call through our website. You will also find the slide presentation for the call on the website. To participate go to www.irco.com and click on the yellow link on the screen. The call and the presentation will be archived on our website, which will be available late this afternoon.

Please go to slide number 2. Before we begin, let me remind everyone that there will be forward- looking discussion this morning covered by our Safe Harbor Statement. Please refer to our March 31, 2005 form 10Q for the details on the factors, as they may influence results. Now, I would like to introduce the participants of this morning's call. We have Herbert Henkel, Chairman, President and CEO of Ingersoll-Rand. Timothy McLevish, Senior vice President and Chief Financial Officer. And Rich Randall,our Vice President and controller.

We will start with the formal presentation. We will start with the formal presentation by Herb Henkel and Tim Mclevish. Followed by a question and answer period. Herb will start with an overview. Please go to slide number 3. Thank you, Joe and good morning, everyone. This morning we announced strong earnings growth for the second quarter.

Total EPS was $1.67 per share, which was above our guidance of $1.55 to $1.65 per share. EPS from continuing operations was $1.71 per share, which is 26% higher than our strong EPS performance in the second-quarter of last year. Total revenue increased by about 13% compared to last year. Our contact vehicle technologies, which comprises Bobcat and Club Car, Construction Technologies, Industrial Technologies and Security Technologies were particularly strong with double digit revenue increases compared to last year.

I am pleased to note our second-quarter performance extends our string of delivering consistently strong financial results. Against the backdrop, I would like to reiterate the strategic framework driving our company's success. What ultimately is the Ingersoll-Rand story.

Please go ahead to slide number 4. First, Ingersoll-Rand story reflects the Company that is creating market demand and generating consistent solid revenue growth by focusing on proprietary innovations and solutions that deliver improved efficiency, productivity and profitability for our customers. Second, the story is about a Company that is pursuing creative, formal, and globally aligned processes to achieve continuous improvement and operational excellence in order to drive margin improvement, and strong financial results throughout the business cycle.

Third, it is a story of a Company that benefits from its diversity to operate and perform better than it's aggregated businesses. This means we can mobilize existing entrepreneur resources to pursue new markets, collaborate on innovative technologies, maximize and optimized production capacity, and satisfy multiple customer needs.

All of this is leading to clear cut benefits. We're securing global business and market leadership that enables us to grow faster than secular markets. We're reducing the effects of cycles on our financial performance. We're generating financial returns that allow us to reinvest in our business and to reward shareholders. And we are well positioned to achieve stronger operational and financial results over the long-term. We saw a number of these benefits in our second quarter performance.

Now, please go to slide number 5. Our revenue growth during the quarter was generated across diverse markets and geography.. This product that market diversity help to drive our earnings growth in the second quarter and longer term will make us more resistant to future North American business cycles.

During the second quarter, our major end markets generally experience strong activity. We achieved total revenue growth of about 13% or about 10% organic growth in the second quarter. Four of our five operating segments had double-digit revenue growth in the quarter compared to last year. 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 bolt on acquisitions. I would like to take a few minutes to up indicate our progress in the second quarter.

So please go to slide number 6. Our ongoing investments in new products, technologies, and services has been a major reason for our revenue growth and market share gains over the past several years. We introduced a number of new products and solutions in calendar year 2005 and expect to produce $250 million in net revenues from innovation introduced in 2005. We're off to a strong start in the first half with new product offerings in each of our reporting segments.

Now, please go to slide number 7. During the second 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 the strong foundation for consistent financial performance throughout any economic cycle.

Recurring revenue for the second quarter totalled $530 minimum, an increase of 13% compared to 2004 and equal to about 19% of total revenue for the quarter. Compact vehicles, construction, industrial, and security all had double-digit improvements in recurring revenue. Climate Control Technologies recurring revenue improved by about 5% compared to 2004, mainly due to the cancelation of some low-margin contracts with a major customer in Europe. Climate Control America and Asia both had double-digit increases in recurring revenues for the second quarter.

Please go to slide number 8. We also helped fuel our growth through bolt-on acquisitions. During the first quarter, we completed an important bolt-on acquisition with the purchase of the remaining interest in Chesa (ph), an energy-based securities technology company serving global markets.

For the second quarter of 2005, Chesa (ph) added about $65 million of revenue to Security Technology results and excluding one-time purchase accounting costs, Chesa's operating margins were approximately 17%.

During the second quarter, we also added two important additional bolt-on acquisitions to Security Technologies portfolio. On may 12 the company acquired Security One Systems, a security systems integrator based in Florida. Security One provides security design solutions, including access-control, closed-circuit TV, video surveillance and alarm monitoring to communications, finance service, government and health-care markets.

With 2004 revenues of approximately $30 million, it is the largest security systems integrator in the southeast United States operating six branches in Florida. This acquisition continues the Company strategy to pursue recurring revenues through service-related business.

We also expanded the market presence and the manufacturing footprint in the Security Technologies field by signing a definitive agreement to establish a joint venture with Taiwan Fu Hsing Company Limited, a leading manufacture of mechanical door locks based in Taiwan. Fu Hsing founded in 1957 is a global market and distributor of mechanical door locks primarily for the North American and Asia market. The Company is manufacturing locations in China, Malaysia and Taiwan. Annual revenues for 2004 were approximately $135 million with about one-third of annual volume going to Ingersoll-Rand Security Technologies.

We expect to complete the joint venture agreement in August 2005. This joint venture enhances our strategy to provide comprehensive security solutions worldwide.

Also, during the second quarter the Company acquired the U.S. distribution rights to market and sell Tremac branded hydraulic brakers and demolition tools, as well as vibratory contacters cutting heads. Tramac attachments are used on a wide range of construction equipment primarily used for new construction and demolition projects. This transaction fits Ingersoll-Rand's long-term strategy for the Attachment Business. The Attachment Business provides substantial growth opportunities and this transaction will enhance the attachment bundles we make available for our customers.

During the quarter, the Company also acquired the remaining 20% interest in China based Shanghai Ingersoll-Rand Compressor Company. Major product lines include stationary and portable air compressors and light towers, which are sold locally in China and other global markets.

Additionally, this gives Ingersoll-Rand a network of 20 company-owned distribution centers located in major cities in China which sell, install, and service Ingersoll-Rand products.

For the balance of 2005 and going-forward, we will continue to make high value bolt-on acquisitions as part of our ongoing strategy to complement organic growth. Since 2000, we made about 50 bolt-on acquisitions that aided our growth, expanded our product line, and extended our geographic reach. We believe our Security and Industrial Technology businesses in particular have considerable opportunities to expand globally through acquisitions and enlarge their solution portfolios and geographic reach.

We believe the major 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 will add a new platform to our business. Now please going to slide number 9.

I would now like to turn to the area of Operational Excellence. During the quarter, we continued to benefit from cost reductions associated with our productivity investments. Operating income improved by 19% and margins increased by 7/10 percentage points from the benefits of higher revenue and our ongoing efforts to drive down costs by adopting lean Six Sigma and other continuous operating improvement processes. We were able to partially offset the impact of significant material cost inflation through price increases and surcharges. Tim will discuss material costs from productivity in greater detail during his presentation.

Now, please go to slide number 10. We maintained the strength of our balance sheet in the first quarter. Our debt balance for the quarter was about 2.2 billion or about 1.3 billion of net debt. Our debt-to-capital ratio is approximately 28% which is comfortably below our long-term target of 30 to 35%. I am sorry I misspoke. I said first quarter. I said have, obviously, said second quarter.

Now, Please go to slide number 11. During the quarter, we continued to deploy our cash balance to create shareholder value. We repurchased 3 million common shares in the second quarter leaving 2 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 the third quarter of 2005.

Now, please go to slide number 12. We recently completed our annual long-range plan review that covers the next five years. These meetings have reaffirmed our belief that we have substantial opportunities to expand our revenue and earnings going-forward. We continue to believe we can grow organic revenue by 4 to 6% for the total Company and that our cash flow will allow us to do bolt-on acquisitions to reach our 8 to 12% annual revenue growth.

Our plan also indicates we still have substantial opportunities to lien out our operations, to reduce costs and to increase efficiency. We continue to target a 15% operating margin which will help us reach our earnings growth, ROIC and cash-flow goals.

Now, please go to slide number 13. In summary, we had an excellent second quarter, and we are expecting record earnings for the 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 to deploy the cash to generate greater value for our shareholders. We also believe our current diversified portfolio of businesses and our lien business model will dampen the impact of future market cycles on our North American businesses.

Now, please go to slide number 14. Fundamentally our story is straight forward and you will hear it again. It is about achieving growth, by creating demand that exceeds overall market trends through customer-pleasing innovations and solutions. It is about pursuing operational excellence by expanding lien methods, Six Sigma programs, create continuous improvement efforts, and formal business systems that enable ongoing cost reductions and improve productivity.

The story is about a major diversified enterprise that purposefully takes advantage of its global expertise and resources to power its growth and operational excellence programs without significant incremental investments. This story surely isn't unique. It is a formula for long-term success. We look toward to writing now chapters to this book as we go forward. Timothy McLevish will now cover IR's 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 second quarter were in excess of $2.7 billion, up 13% from comparable period in 2004. Excluding acquisitions, total revenues increased by 10% compared to last year. The increase is attributable to double-digit growth in our Industrial, Compact Vehicle, and Construction Technologies segments.

Excluding the favorable impact of currency, organic revenues increased 9%. The 1% currency impact on revenues was consistent across all of our reported segments.

Operating income for the second quarter was $379.1 million, up $60 million or 19% from 2004. This reflects a margin of 13.7% of revenue, up from 13% last year. These continued strong operating results were driven by volume leverage, new product introductions and operational improvements, while overcoming material cost inflation and operational inefficiencies resulting from 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 quarters earnings included approximately $10 million of incremental productivity investments, while benefiting by approximately $9 million reported to favorable currency. Also affecting the quarter was the negative impact of approximately $53 million in material cost inflation, mostly attributal to steel, nonferrous metals and plastics.

The impact of these cost increases was substantially off-set by savings from our productivity programs and price surcharges. Moving down the income statement, interest expense was $37.7 million, which was $2 million lower than the second quarter of 2004. Other income for the quarter was $10 million compared to $2 million of expense in the prior year.

This year's second quarter included approximately $5 million of interest-income on our cash investments and $4 million of currency gains. While last year included approximately $3 million of currency losses.

Our second quarter effective tax rate was 17% which reflects our expected increase in 2005 earnings and a full-year projected rate of 16%. This full year rate reflects the benefits of our ongoing tax planning initiatives. Earnings from continuing operations for the second quarter were $291.8 million or $1.71 per share, which exceeded the upper end of our guidance range. Our favorable results were attributable to strong markets with improved operating margins, currency gains, and a benefit from the change in stock-based liabilities. Discontinued operations consisting of legacy costs from previous divested businesses reflects the cost of $6.4 million or $0.04 per share for the quarter. Our net earnings for the quarter were $285.4 million or $1.67 per share.

Please turn to slide 16. Our 10% organic revenue growth reflects increases in most of our major geographic regions. North American revenues were up 10% and constituted approximately 65% of the total. European revenues were up 13%, of which less than half was from the impact of currency. Latin America increased 25%, while Asia-Pacific declined 2%.

I would now like to take a few minutes to talk about the results of our businesses.

Please turn to slide 17. The Climate Control Technology segment consisting of the market-leading brands Hussmann and Thermo King reported second quarter revenues of $728 million. In total, revenues were flat to the prior year. Continued strong revenue growth in our Transport business was offset by softness in our Display Case markets while Installation and Service revenues grew by 20% versus the prior year.

Operating income for the segment was $84 million, representing an operating margin of 11.5%, versus 12.6% in 2004. The operating margin decrease was driven by an unfavorable business mix and impact of material cost inflation. Climate Control Americas revenues were flat versus 2004. The continued strength in Transport and the growth in our Installation Service business offset by continued weakness in our display case volume. Climate Control International revenues for the quarter were up 1% year-over-year. European Truck and Bus volume increases were largely offset by decline in our Trailer business and lower Display Case revenues.

Please turn to slide 18. The Compact Vehicle Technology segment generated second-quarter revenues of $727 million, up 20% from 2004. Operating margins were 16.1% of revenues, compared to 16.3% in the prior year. The slight decline in operating margin percentage is attributable to the negative impact of material costs inflation and material availability disruptions, which were largely offset by strong volume growth.

Bobcat revenues increased more than 27%. The Increase was attributable to strong North American markets, new product introductions, and the strength of the after-market parts and attachment businesses. Despite its stagnant Gulf market, Club Car revenues up 2% from prior year, due to continued strength for the present golf car and growth in service parts.

Please turn to slide 19. The Construction Technologies segment reported revenues of $343 million, up 21% compared to 2004. Operating margins were 12.2% of revenues, compared to 13.1% in the prior year. The reduction in margin percentage was largely attributable to commodity cost increases and unfavorable product mix in the quarter. Road Development revenues increased 23% over 2004, largely driven by strong North American markets and improved national rental account business. Utility Equipment business showed strong double-digit revenue increases and improved operating margins, versus the prior year.

Please turn to slide 20. The Industrial Technologies segment produced second-quarter revenues at $432 million, an 11% increase over prior year. Air Solutions revenue grew 13%, driven by strong North American and European markets and new product growth. Recurrent revenues were up 12% and constituted 46% of the total. Productivity solutions revenues up 7% versus prior year due to improved growth in all product categories.

Operating margins for the segment were 13.7% of revenue, up from 11.2% last year. The year-over-year increase was attributable to volume leverage, new product profitability, and the benefits of our productivity improvement program.

Please turn to slide 21. Security Technologies segment revenues were $529 million, up 20% compared to 443 million in the prior year. Excluding the impact of acquisitions and divesture from both periods. Revenues were 9% hirer than comparable 2004. North American revenues up 9% from the prior year, after adjusting for divested and discontinued business. The increase is largely attributable to continued strange in residential and commercial markets.

Additionally, we continued to see strong growth in our Electronic Controls and Integrated Systems businesses at 19%. Operating margins for the quarter were 17.9%, compared to 14.1% last year. The margin improvement is largely attributable to volume leverage and strong North American margins, offset in part by Chesa purchase accounting and integration costs. Last year's margins were negatively impacted by several one-time charges in the second quarter.

Please turn to slide 22 and let's move on to the balance sheet. Maintaining customer service levels in the double-digit growth environment, while facing supply shortages and availability issues possess a challenge for our working-capital management program.

We finished the quarter with our investment in working -- in operating working capital at 11.8% of revenue, which is above our target range of less than 10%. Which showed an improvement from the first quarter of this year. Our working capital performance was impacted by a deterioration in inventory turns versus prior year. During the period of raw material shortages, we expanded our safety stock levels to alleviate supply disruptions. As these supply availability issues subside, we will bring these stocks back to normal levels. Day sales outstanding increased slightly year-over-year, while we improved our base payable versus prior year.

At the end of the second quarter, our total debt was $2.2 billion, an increase of $100 million compared to the second quarter of 2004. This increase is largely attributable to $300 million of ten-year notes issued during the quarter to lock in attractive interest rates. This new debt will replace higher coupon borrowings which mature next year. Our debt-to-capital ratio at the end of the quarter was approximately 28%, which is reduction of two percentage points relative to the prior year.

Capital expenditures for the quarter were $29 million or about 1.1% of revenues, while depreciation and amortization expense for the quarter was $46 million. Our solid balance sheet continues to provide foundation to support the growth strategy of our Company. Herb will now conclude our formal remarks with the outlook for third quarter and full year. Herb?

Thank you, Tim, please go to slide number 23.

Activity in most of our major end-markets continued at strong levels of demand during the second quarter. Orders, excluding acquisitions, were up about 8% compared to a strong 2004 with double-digit growth rates raised in Bobcat, Construction Technologies, and Industrial Technologies.

Based on our recent order trends, we expect year-over-year total revenue growth into 10 to 12% range for the third-quarter of 2005. This includes 3 percentage points of revenue growth from bolt-on acquisitions. We continued to focus on minimizing the impact of material costs increases by making permanent reductions in our operating cost structure through productivity gains and by adjusting prices. Operating margins will improve from the higher volumes and cost reductions.

Earnings from continuing operations for the third quarter are forecast to be $1.40 to $1.50 per share, 19 to 27% improvement compared to last year. This continued operations in the third quarter are expected to be $0.05 per share of cost for total Company EPS of $1.35 to $1.45.

Now, please go to slide number 24. 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 $5.95 to $6.10.

The new forecast mid-point range is approximately $0.18 per share above our previous guidance for 2005. Full year discontinued operations are expected to be about $0.20 of costs for total company EPS of $5.75 to $5.90. Available cash flow, which is cash flow from operations less capital expenditures, is expected to be approximately $775 million.

We are also expecting continued growth in 2006. Our recently completed long-range plan forecast indicates market conditions supportive to achieving our fourth 6% organic revenue growth target and our 12 to15% EPS growth rate target next year. We will provide a more extended forecast for 2006 during our fourth-quarter earning's conference call next January. Please go to slide number 25. This ends our formal remarks and I would now like to open the floor to your questions. Thank you.

Thank you, gentlemen, the question and answer session will be conducted electrically. [Operator Instructions]

Eric, one other thing. This is Joe Fimbianti. If you would please focus our question on second-quarter results or long-range forecast, so that we can answer everyone's questions. If you have detailed questions about historical information, please call me and we'll take those off-line. Thank you, Eric.

First go to Alex Blanton of Ingalls & Snyder.

Good morning.

Good morning, Alex.

You mentioned that you had substantially offset material costs inflation. Can you give us more detail on that? What percentage is offset or what percentage is not offset?

We had -- during the quarter, we experienced year-on-year increases in raw materials of about 50, $53 million.

Right.

Productivity through production efficiencies and through raw material sourcing of other commodities or other components was about $30 million, and then we had pricing surcharges that largely made up the remainder of the difference.

Okay. So you actually offset just about all of it, then, through either price or productivity.

Yeah, it was a push.

Okay. Secondly, the whole construction equipment industry is running behind in deliveries, mainly because of capacity shortages at suppliers. What's the situation with Bobcat? Are they behind and by how much? How far ahead are you booking orders right now?

I would say we have really caught up. We were, I think, really behind through the first quarter. And during the second quarter, we were actually able to get back up to where, I think right now, we're operating within a two week to three week forecasting horizon.

Two weeks to three weeks most lead times, compared to where we were well over one month about a quarter ago.

The shortages that you're pointing out, Alex, are very valid as it relates to not only Bobcat, but, I think, it's even more pronounced in the road machinery equipment, where we're seeing things such as tires, and steel, and hydraulics really causing the delay. It's probably more in road than it is in light equipment like Bobcat.

Okay. And does the 27% increase in the quarter reflect any catch-up from past quarters that you finally were able to deliver because you caught up on your suppliers? In other words, do we see that declining in the second half, that percentage?

As I said to you, we did go from backlogs, which were over a month to backlogs like down to two weeks, so you had a couple of dollars, obviously, that came from that.

If I look at our overall growth rate for Bobcat going forward, we still see is being well north of 10%, still into the strong double digit.

As you know, I have been forecasting 12% increases for the last three years, and I am sure one of these days it will actually be right. We're actually looking at increases in the second half, which will probably still be north of 15%.

Thank you.

Sure.

Our next question will come from David Raso of City Group.

Hi. Good morning.

Good morning, David.

The results -- I will speak to the diversification of the Company -- to see Industrial and Security to provide the upside, but we still have 60% of earnings coming from the old Infrastructure and Climate Control. And I am trying to understand the margin decline, especially Climate Control and some of the issues just discussed on the Construction businesses.

Looking out in the second half of the year, how temporary are some of the cost issues, component availability issues, or some things unique to the second quarter that you feel comfortable that they're behind you in the second half? I am not sure if there was Hussmann plant moves, costs on Hussmann maybe buried in there? Climate Control hasn't had a down margin year-over-year in over two years. It is not like the Thermo King orders are accelerating. If anything, they are decelerating. So just give me a little concern about the second half on the upside, if the two big divisions are already down on margin.

Let me start off, if I can, with the Construction side. The Construction Technologies piece had, as we discussed before, probably the biggest impact on raw material, as well as operating inefficiencies that resulted from delays on delivery from our supply base. They actually counted when we did the dollarizing of the costs, that was well over 3 margin points, almost 4 margin point deterioration caused by those inefficiencies.

We see that start to really mitigate in the third quarter and behind us by the fourth quarter. I am much more optimistic about leveraging up the revenues that we see coming in the second half of the year, both at Bobcat, as well as in the rest of the construction technology segment.

If I speak to Climate Control Technologies, what we saw with the revenues increasing very, very slightly in Thermo King and continuing to have weakness in the Display Case in North America with the exception of Wal-Mart. which is up 50%, we see that the mix, our contracting business is a single-digit profit level, versus our Display Cases which were double-digit type profit levels. So really, as we describe it, has to do with the revenue increases showing up in contracting and reductions in revenues coming from our Display Cases, which have the biggest negative impact on what we're doing in Climate Control.

As I get to the second half of year, we actually see a strengthening of the Display Case business. We continue to see that improving and with that we will actually see an improvement of the margins in Climate Control as well.

Just so I am clear because for a couple years we've thought Display Cases might be picking up, but, obviously, seasonality there,of course, book looks better in the summer because a lot of people take shipments before the November/December holidays.

Is this something already on your books and feels different than the last couple years or a Wal-Mart Display Case? What's the confidence in acceleration of the Display Case? That's probably critical the Climate Control may be getting margins back up year-over-year?

I would say to you that in many of the North American national chains continue to display continued weakness with probably one or two exceptions being in the safe way area. We do, as I said to you before, we have in contract at this point in time some significant orders coming in from Wal-Mart, which will give us upside. Not only doing Display Cases, we are also doing re-skinning, where they basically change sheet metal around, and we have well over 100 stores we have under contract to do that. So we actually have visibility at this time, Dave, to the opportunities that are in the front of us.

So in summary, the second half the Infrastructure businesses margin up year-over-year, something you're excepting, Climate Control is maybe, maybe not, but an improvement from here?

I would say, I believe, more in the "maybe". I am not in the "maybe not" camp with you. I think what we see here is the improvement going-forward is a pretty, I think, "realizable".

Great. Thank you, very much.

Moving on we'll take our next question from Gary Mcmanus of J.P. Morgan.

Good morning. I am a bit surprised that we had down margins in both the Compact Vehicle and the Construction areas with like 20% growth.

I know you addressed some of this already. Are we having -- usually when you get 20% top-line growth, you get absorption benefits. Are we starting now to be at a point where revenue growth won't really impact operating leverage in any great degree?

No, I think they will continue to impact it, but I would give you that as I look through our manufacturing productivity impact, for instance, Compact Vehicles alone, and most of this was Bobcat, the negative that we experienced in the quarter was well over $12 million. So we see the inefficiencies, if you will, as a result of still having to tumultuous supply.

We were way having problems with tracks. We were having problems with hydraulics, and all the rest of the things. We continue to see material inflation as being a very, very significant material issues were causing us well north of 3.5 margin points.

If you wind up taking all of those and putting it back into the proper where it should be, we see ourselves leveraging well north of 22 to 25% on incremental revenues going forward.

A lot of this, you believe, is none recurring and works its way out in the second half?

That's right. The biggest question, we really got, Gary, is how much of the material that I have now in stock that you heard that Tim was talking about, where, unfortunately, in order to cover up for material questionable delivers, we wind up putting extra safety stock in.

So it's probably going to take us two to three months to work that through, at the higher cost we have in until we start really seeing the now going-forward reduced cost price pressures.

We were particularly hit hard, Gary, within Bobcat and the Road Machinery business by the raw materials. More than 50% of the 53 million that I identified earlier, fell within that segment. We're anticipating that that will decline considerably within the second half of this year as some of the material prices subside some.

My second question, we don't have a cash flow yet. I did some guesstimate of working capital is going to be in cash flow and looking at the increase in inventories and accounts receivable.

I come up with, maybe a first half working capital, being a cash of somewhere around 500 million. That may be impacted a bit with that, but I assume it is still pretty high. Is that related to the inefficiency you're walking about? It that just seasonal? Where do you see working capital being in terms of source of use of cash for all of 2005?

Naturally, some of it is going to be the increased volume of activity going to drive it up some. You're directionally correct. We probably have year-to-date $450 million worth of working capital builds. The majority of that is from inventory builds.

Probably half of the increases in inventory is attributable to normal volume of activity and half of it is that supply buffer that we're building in to make sure that we have availability parts to beat the strong demand.

We're certainly expecting and it is going to be dependent upon how the material shortage issue plays out over the second half of the year, but certainly we're expecting that inventory level to come down, both seasonally and structurally in the second half of the year.

Just -- most of the time inventory increases in the raw material side, not finished goods or work in progress?

More than 100% of the increase is attributable to raw material.

Okay. Thank you.

Finished good and inventory are. We are in good shape.

Next we'll here from Joel Tiss of Lehman Brothers.

How are you doing guys?

Good morning, Joel.

Can you give us a little sense of why Security and Safety is so strong in Europe? What's behind that?

I think that when we look at the benefit we get from now having Chesa, as giving us a broader base to operate in Europe, it gives us not only -- they are more than 50% of revenues but a much better critical mass to approach customers and distribution to listen to our story.

Okay. And I'll glue two clean ups together. Can you talk about price increases in the Vehicle segment and the operating margins in the Service business in Climate Control? Or just a ballpark on the second one?

Well, we're looking -- clearly we're in the second quarter, we saw some price increases in the Bobcat business and the Compact business.

The price increases and surcharges probably fell a little bit short there of the material price increases, but we're able to realize the good price increases nonetheless.

And then the operating margins on the service side of Climate? Would that be a reason why the mix seems like it is going against you a little bit?

That's really it. We saw actually good growth, in particularly in the Service side in North America but you're talking about margins there that are kind of the mid-to upper single digit kind of levels. You're seeing a overall deterioration of margin as a result of that business mix shift.

Okay. Thank you.

Sure.

Our next question will come from Mark Koznarek of FTN Midwest Securities.

Hi. Good morning.

Good morning, Mark.

I had a question on pricing. I think Tim mentioned a little bit earlier, about he is going through the quits and takes and you had the 53 million of raw material inflation and then, one of the offsets sounded like it was around 20 million of price overall. And it strikes me, that's less than 1% of overall revenues, which is a lot lower than price realization occurring at a lot of other companies and I am wondering, if you can address that?

Is there more realization to come in the pipeline or a conscious strategy by Ingersoll to keep prices low for volume growth purposes or whatever?

The answer is, we absolutely don't have a strategy to keep prices low. The number that I referenced earlier actually was what we will refer to.

The distinction between them gets somewhat blurred, but I referenced price surcharges, where we directly have a surcharge associated with the raw material price increases. We have an addition to that price increases which would more than double that amount.

So you have about 25 million, roughly 24, 25 million in price surcharge and about a 1.5 to 2% on what we call traditional price increases?

Okay. That's more reasonable. I had a follow up on your Club Car business that was up 2% this quarter, but up 23% in the prior quarter, and I am wondering if that's -- if that's a deterioration that's going to continue in the second half? You know, looking negative year-over-year. Is there something unique happening here?

Let me talk through it. If we could get into it in the first quarter of 2004, we began the introduction of our new precedent Gulf car. It had a robust, very robust, 30 plus percent type growth in 2004, but we saw in terms of now as we get into the second year of that, we are getting into now the replacement cycle for those there.

We're getting back to now where we're replacing more of the existing fleet with precedent plus exist the old car that we had. And we are seeing a growth that's really only running around 2%, because that's how slow new golf car construction markets are growing.

So overall, Mark, what I see going forward is that by the time we're all done we will probably run in the third and fourth quarter slightly behind where we were last year because we had, again. the introductions introduced incremental revenues and for full year I expect that we'll be probably only up about 2, 3% other year-over-year.

Okay. Herb, thank you.

Our next question will come from Ann Duignan of Bear Stearns.

Good morning.

Hi, Ann.

Hi. Could you give us an outlook for reap demand for the rest of this year and going into 2006? Do you expect any kind of substitution demand for trucks and away from refrigerated vehicles ahead of the old (indiscernible)?

When we look at the trailer demand, we really have two different directions going on, between what's going on in North America and what's going on in Europe. We see that in the second quarter, we saw a slower growth rate, still positive, but lower single-digits, compared to stronger rate in the first quarter. As I now look at full year, we see that again picking up.

We think, we had somewhat of dip in growth rate in second quarter, and overall year-over-year, we expect that we'll wind up with Trailer in North America being up somewhere in the 13 to 15% compared to last year. If you move over into Europe, we see almost a mirror image of that. We saw during the second quarter over 10% reduction in Trailer compared to last year. The market is only half a large but, again, it was off 10%. And we expect so see that continuing through the rest of the year.

Asia-Pacific is such a small number but that's up slightly. Overall, we see the overall market up, as a result of U.S. market being twice the size of the EASA market, but that percentage wise, the movement is almost the same going back and forth. So Trailer all in, turns up to be up about 3, 4% by the time I get done with that long-winded answer.

What about '06, Herb? Any thoughts on '06? Do you anticipate there could be substitutions spending away from traders?

We continue to seeing the fact that the demand for loads are being carried will continue to demonstrate growth. We think next year will continue to see a good double-digit type, probably 10 plus% increase on the full-year type basis.

Because if you look at the cycle that traditionally have been, we're way short of where the normal cycle. I think the last one peaked out well north of 42,000. We're still down in the mid-30s when we look at this.

We still think there is run way ahead of us. Even with people focusing maybe on the front-end of the truck instead of back end. We think that the demand overall cycle will generate upside next year.

One quick follow up. I mentioned that Air Solutions saw strong demand in Europe.

Yes.

Thats kind of countered to what we're hearing coming out of Europe in a macro economics standpoint. With you give us some color of what that business is doing over there and where they're seeing the strength?

What we see is really both in the new product area as we wind up continuing to come out with the energy efficient type units. And we are starting to see things, obviously, the recurring revenue continues to be strong.

We did, however, start seeing some softness in both the U K. and Italy during the quarter, but the rest of the region posted solid gains.

We're still very positive. We think our oil-free rotary compressors had record bookings and that continues to be the benefit of new product and answers for customers that maybe are giving us good increases in market share.

Remember that business tends to be a later cycle business and we're seeing some slow down,as you point out in the European economy.

We're also seeing some benefits by continued growth in eastern Europe, and we're benefiting some by improvement in the oil-gas markets.

Is there any difference in operating profits North America versus Europe?

No, they are really very, very comparable.

Thank you.

Our next question from Barry Bannister of Legg Mason.

Hi guys. Before I ask the question to clarify, of the 13% sales growth, did you say that 3% was acquisitions, 2% was price, 7% was units and 1% was currency? Is that right?

That's about how it adds up, right.

Could you give us what the second quarter order growth was and sort of compare that to what the sequential comparison was last quarter and maybe the quarter before if you have it?

We said second quarter growth was about 8%, excluding the Chesa (ph) and over 10% including it. If I compare that to last year or first quarter?

First quarter would be better.

First quarter we were up about 7.5 or so. So it actually got stronger in the -- that's including Chesa, and without it, it was about 5%.

So the orders actually improved, second quarter versus first quarter. 2 or 3 percentage points.

Right.

Do you have any idea the precedent recall is going to have any effect above warranty reserves on your margin in the segment?

I think, we're pretty well positioned in that we have appropriately I think, reserved for that. It's included in our numbers.

Thanks.

Next question come from Scott Mackie (ph) of Robert W. Baird.

Good morning, gentlemen. I wanted to follow up on Barry's question about order growth and the 8% order growth in the second quarter. Can we can get that broken out by segments?

If I look at Climate Control, it was flat. If I wind up looking at the Industrial, it was up almost 20%. Bobcat/Club Car combination, in the Compact Vehicle side was up almost 10%. Construction Technologies up over 15%, and Securities, again, including Chesa, you have to go -- including Chesa, we were up like 18%. If you took that out up about 4 or 5 percent.

Did you notice any discernible change in momentum throughout the quarter? In terms of orders?

I would say actually strengthened again in June. That's why I feel for more optimistic than if it was decelerating. We actually saw pick up at the back end.

Good. And then when we talk about on a geographic level, Asia Pacific being down I believe 2% overall, what businesses are we talking about or where is the hit there, the decline?

The biggest participants really when you get into, it is that you have -- first of all, you wind up getting into Industrial Technologies, you saw we wound up picking up that piece over in China. That business was actually continued to do well.

The real impact came informs the Road development side, as government continued to make significant reductions. We were off there by well over a third. So really China specifically. Road in China that caused the biggest part of deterioration in the number.

Thank you very much.

Our next question from Eli Lustgarten of Longbow Research.

Good morning.

Good morning.

Can you talk a little about machinery itself. We had very big numbers last year, domestically, even though the highway bill hung up. I know we have a two days now and a bill likely to come.

It looks like the demand across the board in Road Machinery business. Particularly, North America has been much stronger than the market probably would suggested given the way the funding is. A lot of prebuying participation of the bill or what do you expect as you look forward in that business.

I think what you're really seeing Eli is the fact that there still are ongoing projects and with what we saw, significant increase in the rental as the rental fleets were somewhat updated. And we're starting to see the biggest increase really was in the soil compaction markets. That's in the early faces, asphalt compaction was up 20 some odd percent. Large paver retailer up 35. I think it's just the amount of the activity level thats out there. And now I think that if the T-Bill actually gets signed, it will I think extend the cycle at the same level. I don't expect if the T-Bill got signed tomorrow, we would see another big bubble increase. I think what it would do is extend the cycle that we're seeing.

There is an expectation that it ultimately will get signed and in the range. There is not a big difference between the various proposals out there. There is an expectation it will get signed. I don't think as Herb said, there will be a big bubble but I don't think we're being pressed currently. I think activity continues strong.

I want to follow up during the comments you talked about optimism 2006. What's the tax rate assumption for next year versus this year?

We talked about even with our continued growth being under 20%. So as our earnings continue to grow, we're probably in the upper teens probably 17, 17.5%. Would be my expectation.

Thank you.

Eli, if you look at we had going forecast at the end of the first quarter, we were running around 15%. Then with the revised forecast we gave, picking up the numbers, you saw that caused us to move it up to about 16%. I think if that gives you a gauge as to the sensitivity, if you will, to what the increase would be like if we go up another 12, 15% next year.

The tax rate assumption, I know. Raise the outlook. Thank you.

(Operator Instructions) We will go next to Quint Nefer of SIG investments.

Good morning this is Scott on behalf of Quint. . A quick question about corporate expenses. Seems like they've been running lower than historically, and I was trying to get guidance on the balance of the year.

You actually have when we typically what we expect more in the 25, 26 million-dollar a quarter range. When you look at both last year second quarter and this year's second quarter, you have kind of opposite impacts on the benefits side. Last year, we benefited by about $13 million worth of gain on the sale of some real estate.

So the 14 million, I think we reported last year, really was more like 27 million on adjusted basis, and we benefited as we commented by about $10 million worth of stock based liability benefits, gains, resulting from the decline in our stock price.

That $10 million fell within that corporate unallocated number. You have anomalies in there, you should be thinking of it somewhere in the 27 million-dollar level.

Okay. Thank you.

We're hopeful that number will increase as stock prices increases in the third and fourth quarters of the year.

Last question in the queue, at this time, comes from Nigele Cove (ph) of Deutsche Bank.

Good morning. Good results. I want to pick up on China. Can you tell us -- give us some sense of the mix between the sale in China and perhaps the manufacturing facilities in China? And perhaps how reevaluation of the might impact you going forward. Thanks.

I think if we look at China as to being local in region, obviously, then we will deal with the translation type reported. We rate now our biggest procurement from China comes in our Security businesses, as I mentioned when we wound up talking about Fu Hsing, we were talking about 40 some, $50 million worth of purchase over there.

To the degree that you would wind you mean having the one changing. Look in terms of as to procurement being somewhere in the 50 to $70 million range. If you look at a significant increase of 10%, and I am making that as an example,not forecasting it, you can see the total impact to us would be in the 5 to $7 million range for a full year.

Thanks.

It is not that significant.

Most of the time other businesses manufacturing is primarily accommodating region demand.

Okay. Thanks a lot.

Sure.

We have a follow up question coming from SIG Investments.

Yes, quick follow up. What's the expectations for other income for the balance of the year?

Well, usually we talk about that as being somewhere in the $5 million range. Probably will be a little bit higher as a result of higher cash balances over the course of the rest of the year.

Thanks.

Thank you very much, Eric. We will end the call now, please.

Very good, sir.

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