特靈科技 (TT) 2006 Q2 法說會逐字稿

Good day, everyone, and welcome to the Ingersoll Rand second quarter 2006 earnings conference call. This call is being recorded. At this time for opening remarks, I would like to turn the call over to the Director of Investor Relations, Mr. Joseph Fimbianti. Please go ahead.

Good morning, and welcome to our second quarter 2006 conference call. We released earnings at 7:00 a.m. this morning and the release is posted on our website.

I'd like to cover 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 the presentation for the call. 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, I'd like to remind everyone that there will be forward-looking discussion this morning which is covered by our Safe Harbor statement. Please refer to our March 31, 2006 Form 10-Q for the details and the factors that may influence results. Now I'd like to introduce the participants for this morning's call. We have Herb Henkel, the Chairman, President, and CEO of Ingersoll Rand; Tim McLevish, our Senior Vice President and Chief Financial Officer; and Rich Randall, our Vice President and Controller. We'll start with formal presentations by Herb and Tim followed by a question-and-answer period.

Now Herb Henkel will start with our overview. And if you would please go to slide number 3. Herb?

Thank you, Joe. Good morning, everyone.

Today we announced record revenues and record second quarter earnings of $0.95 per share, which is a 14% increase compared to last year. Our overall financial performance was at the upper end of our previous forecast for the quarter of $0.90 to $0.95. Tim will review the quarterly results and our business unit performance in greater details later this morning.

Now please go to slide number 4. During the first half of 2006, our major construction, industrial, and transport refrigeration end markets have generally enjoyed excellent activity levels. Second quarter commercial construction and road development markets showed steady year-over-year growth. Consistent with our original expectations for 2006, residential building activity in North America slowed somewhat in the quarter compared to record 2005 levels. The slower activity primarily impacted our compact equipment and residential security businesses. However, we continued to expect solid residential construction markets for the balance of 2006 and on into 2007. Total revenue growth for the quarter was 10% which was above our initial expectations of 7 to 8%. Organic revenue increased by 9%. Currency had minimal impact on reported revenues. We also continued to successfully expand our highly profitable recurring revenue stream. Recurring revenue for the second quarter totaled $612 million, an increase of 11% compared to 2005 and equal to about 20% of total sales. Year-to-date recurring revenue has increased by about 13% with strong growth in all of our major business sectors. Order intake remained robust and was up approximately 14% compared to strong activity last year. The order growth was more business-unit specific compared to the first quarter when we had double-digit order growth across the board. In the second quarter, there were double-digit increases at three of our sectors-- Climate Control, Construction, and Security Technologies. Our recent order activity indicates sustained growth for the balance of 2006 for our major end markets in our five business sectors. We believe that scheduled price increases also pulled forward some demand into the second quarter, and we expect overall organic revenue growth in the range of 6 to 8% for the balance of 2006.

I want to update you today on some of the major topics related to our operations and end market activity. And after Tim's presentation, I'll talk about the outlook for third quarter and for full year 2006. Please go to slide number 5. First of all, I'd like to -- excuse me. I'd like to update our stepped up investment spending for 2006. As I indicated on our January call, we expect to invest about $80 million above last year in growth initiatives such as new product development and expanding our global presence in high potential markets such as India and China where we made a number of acquisitions in 2005. These investments include a number of individual projects and cover all of our five business sectors. As I noted last quarter, all of this investment spend willing be absorbed through the income statement and are included in our earnings forecast. We spent approximately $20 million on these programs in the second quarter and about $32 million year-to-date. We expect to spend approximately $25 million per quarter for the balance of 2006. These new program investments are expected to add $200 million to 2007 revenues and $300 million to 2008 revenues. This new revenue will be an important offset to any slowing in economic activity that might occur going forward.

Now please go to slide number 6. Secondly, there remains a high level of interest about our investment priorities for our strong available cash flow which we are targeting for 850 to $900 million in 2006. During the second quarter we remained active in our program to add high-value bolt-on acquisitions. Even though we did not complete any transactions, we have made substantial progress on several deals, and we expect to close on these transactions during 2006. We remain committed to our disciplined approach to pursuing bolt-on acquisitions that create value. We are assessing opportunities in several different markets, and we continue to expect to spend about $400 million for 2006. We purchased approximately 5 million shares in the second quarter for $220 million. Additionally, the turmoil in the equity markets in July gave us the opportunity to purchase additional shares. So far, during July we have purchased 2.5 million shares for, again, approximately $100 million. Over the last two years, we have purchased over 35 million shares, which is about 10% of our total shares outstanding. We previously raised our buyback program from $600 million to $800 million for the year. Now, given our strong operating outlook and our belief that the common shares are substantially undervalued at current levels, we are exploring the prospect of expanding the buyback activity beyond the $800 million target.

Please go to slide number 7. Last quarter, we also spoke about the North American heavy truck cycle, and its impact on Thermo King. The refrigerated trailer market continued to grow in the second quarter, with shipments up about 6% compared to last year and the build up about 8%. We expect Thermo King North American trailer revenue to grow in the 5 to 10% range for the year, which is consistent with the forecast we gave you in the first quarter. Activity in Europe also continued to improve with year-to-date industry sales up about 5% compared to last year. At this point, Thermo King operations in both North America and Europe appear to be on track for solid growth in 2006 and continuing into 2007. Heavy truck orders and shipments also continued to be substantially ahead of the growth rate of refrigerated trailers. This is consistent with the usual purchasing pattern before a new emission standard goes into effect. Fleet owners purchase their cabs that beat emission standards, and they eventually need to purchase the trailers. All the trucks shipped in 2006 will be the base for refrigerated trailer sales in 2007. We estimate there will be an undershipment of 7,000 to 8,000 refrigerated units in 2006 that will fall into 2007. Even if there is a decline in the North American truck market next year, we do not expect a decline in refrigerated trailers. The TriPac auxiliary power unit that we introduced in the second half of 2005 also continued to move forward in the second quarter. TriPac sales for the first half of the year were $40 million and were on target to reach our 90 to $100 million revenue forecast for 2006. TriPac also had improving operating margins and we have opportunities to reduce the product cost through our value engineering process.

Now please go to slide number 8. A final area of review is the performance of the residential end markets, especially as it relates to Bobcat and security sales. Bobcat has enjoyed several years of above trend growth. Bobcat revenues have increased by $1 billion from 2001 to 2005, or about a 17% compounded rate. So it's apparent that we're running into some difficult year-over-year comparisons. However, the steps we have taken in recent years to diversify Bobcat's product offerings and geographic footprint have positioned Bobcat to enjoy continuing growth. For the first half of 2006, the traditional skid steer loader industry was down slightly in North America. However, track loaders, all-wheel steer loaders, and mini-excavators have all been up by more than 20% compared to last year. We also enjoyed solid sales growth in overseas markets, especially in Europe, for our compact equipment. Additionally, parts and attachment sales have also helped to expand volumes. We expect Bobcat revenues for the balance of 2006 to increase in the mid single-digit range. We have a significant number of new product offerings that should bolster revenue growth and operating margins in 2007.

Now please go to slide number 9. Security product sales for the residential markets were also impacted in the second quarter. For perspective, about $500 million of the security segment annual revenues goes to the residential market, with only 150 to 200 million directly to the major home builders. Homebuilder sales were up slightly in the first half of 2006, but declined slightly in the second quarter. We expect the builder channel to decline about 5% in the second half against very strong comparisons in 2005. The majority of the residential business goes through big box retailers. During the first half of the year, our sales to major big box customers declined as they reduced their inventories. We expect big box second half 2006 order rates to remain flat compared to 2005. The remaining 75% of the security business relates to commercial construction and continues to do very well and will more than offset the slowdown in the residential channel. For the second half of 2006, we expect Security Technology's revenue to increase by 8 to 10% compared to last year's; and for full-year operating margins to be in the 17 to 18% range.

Now please go to slide number 10. Overall, we had an excellent second quarter, and we expect to enjoy a record year for revenues, earnings, and available cash flow. We continue to execute a sound long-term growth strategy and deploy our cash to generate greater value for shareholders. We also believe our diversified portfolio of businesses, our market-leading brands, and our lean business model will dampen the impact of future market cycles on our North American business.

Tim will now cover Ingersoll Rand's business unit performance in more detail. Tim?

Thanks, Herb, and good morning.

I would like to begin my discussion with the quarterly financial results. Please turn to slide 11. Revenues for the second quarter exceeded $3 billion up 10% from 2005. This increase is attributable to growth across all of our operating segments, with segment growth ranging from 9 to over 13%. The year-over-year impact of currency was neutral. Operating income for the quarter was $416.5 million, up 37.4 million, or 10% from 2005, driven by higher revenues, price increases, and productivity improvement actions. These favorable items were partially offset by approximately $40 million of higher material, energy, and transport -- transportation costs and increased investments. Second quarter operating margin of 13.7% was consistent with the second quarter of 2005. Moving down the income statement, interest expense was $30.4 million, which was $7 million lower than the second quarter of 2005. This decrease was attributable to lower debt levels as we paid down approximately $500 million of debt that matured in the quarter. Other expense for the quarter was $1.2 million compared with $10.2 million of income in 2005. The year-over-year difference was primarily attributable to increased minority interest expense due to higher earnings of joint venture companies and foreign exchange losses in 2006 compared with foreign exchange gains in 2005. Our second quarter tax rate was 16.3%, which included a catch-up adjustment for our revised full-year effective tax rate of 16.7% reduced by a one-time benefit of $2 million. The increase from our previously guided full-year rate of 16.5% is attributable to the non-renewal of the R&D tax credit in the United States and to improved earnings. Earnings from continuing operations for the second quarter were $322 million, or $0.97 per share, which is at the high end of our previous guidance range of $0.92 to $0.97. Discontinued operations reflects a cost net of tax of $8.5 million or $0.02 per share, which was consistent with our previous guidance. Our total net earnings for the quarter were $313.5 million, or $0.95 per share.

Please turn to slide 12. Second quarter EPS from continuing operations was $0.97, up $0.12, or 14% from the second quarter of 2005. $0.21 of the increase was driven by increased volume and improved pricing. This increase was partially offset by $0.06 of inflationary costs net of productivity improvements and $0.05 per share of increased investment to drive future growth. The remaining $0.02 of EPS increase is attributable to our reduced share count resulting from our on-going share buy back program, partially offset by $0.01 of cost associated with FAS 123-R stock option expense.

Please turn to slide 13. Our overall 10% revenue increase reflected solid growth in all of our major geographic regions. Revenues in the Americas were -- were up 9% and constituted approximately 68% of the total. International markets strengthened as European revenues were up 11%, while revenues in Asia and Latin America markets increased by 19% and 29%, respectively.

I would now like to take a few minutes to talk about the results of our businesses. Please turn to slide 14. Climate Control Technologies reported second quarter revenues of [$780] sic $789 million, up 10% from second quarter 2005. Climate Control America's revenues were up 13% over prior year, with growth across all of our businesses. Transport refrigeration increased in all major product categories, including the energy savings -- saving TriPac auxiliary power unit. Stationary refrigeration grew on increased case shipments and higher service and installation business. Climate Control international revenues for the second quarter were up 4% over last year. Revenues in Europe increased from last year, primarily driven by improvements in the trailer business, while Asia-Pacific revenues declined modestly. Climate Control operating income was $88.4 million, with an operating margin of 11.1% compared with 11.5% last year. The operating margin decrease was attributable to material inflation and one-time product costs related to inventory reserves and adjustments, primarily offset by higher volumes and improved pricing.

Please turn to slide 15. Compact Vehicle Technology segment generated second quarter revenues of $789 million, up 9% from 2005. Bobcat revenues increased by 7% over the prior year, due to strong international growth, new products, and the continued growth of the aftermarket parts and attachment businesses. Club Car revenues increased by 14% over 2005. The growth was driven by market share gains in golf carts, increased utility vehicle sales, and strong gains in the aftermarket and international markets. Second quarter operating income for the segment was $137.1 million for an operating margin of 17.4%. Year-over-year segment margins grew by 1.3 percentage points from growth leverage and productivity, offsetting material inflation.

Please turn to slide 16. Construction Technology reported second quarter revenues of $389 million, up 13% compared with 2005. Road Development revenues increased by 6% with gains in both pavers and compaction equipment. Revenues in the Utility Equipment and Attachment businesses were up a combined 25% compared with the prior year. The growth was well-balanced with strong complete unit and aftermarket growth across all geographic regions. Segment operating income for the quarter was $53.5 million. The operating margin of 13.8% was up 1.6 percentage points over prior year. The increase was from higher volumes, positive product mix, and productivity improvements, that were partially offset by material inflation and increased investments. As previously forecasted, segment margins improved sequentially from the fourth and first quarters to our targeted performance levels.

Please turn to slide 17. The Industrial Technologies segment produced second quarter revenues of $483 million, a 12% increase over prior year. Air Solutions revenues grew by 12% as continued strong demand in worldwide industrial markets supported higher revenues in all major geographic regions. Productivity Solutions revenues were up 14% from new products and increased recurring revenues with strong domestic and international growth resulting from expanding activity in traditional industrial and fluid handling markets. Segment operating income was $63 million, representing an operating margin of 13% compared with 13.7% in 2005. The margin reduction was caused by material inflation and a four-week work stoppage at an air compressor facility in India that was resolved within the quarter. This was partially offset by growth leverage and productivity improvements.

Please turn to slide 18. Second quarter Security Technologies segment revenues were $583 million, up 10% compared with $530 million in the second quarter 2005. Revenues increased in all regions during the quarter. Americas revenues were up 4% as strong commercial markets offset declining residential and retail markets. Revenues in the European region were up 10%, and Asia-Pacific revenues were up sharply due to bolt-on acquisitions. Excluding acquisitions and joint ventures, revenues were up 4%. Security's operating income for the segment was $98 million, representing an operating margin of 16.8% compared with 17.9% last year. Sharp material cost increases, primarily copper and zinc, unfavorable geographic revenue mix, and incremental growth investments offset productivity, pricing actions, and growth leverage.

Please turn to slide 19, and let's move on to the balance sheet. We finished the quarter with our investment and operating -- working capital at 12.1% of revenues, slightly unfavorable to the 11.8% in the second quarter of last year. Second quarter inventory turns improved slightly to 5.9 turns from 5.8 last year. Day sales outstanding increased to 62 days from 59 days in 2005 from increased international growth where terms are longer than the domestic average, and to the termination of a discount program in western Europe. Days payable outstanding increased by 4 days, helping to offset the receivables increase. At the end of the quarter, our total debt was $1.6 billion, a decrease of 535 million compared to second quarter of 2005, as we paid down approximately $500 million of debt that matured during this quarter. Our debt-to-capital ratio at the end of the quarter was 21.1% and 17.8% on a net basis. Capital expenditures for the quarter were $52 million, or 1.7% of revenues while depreciation and amortization expense was $48 million. Our solid balance sheet continues to provide a foundation to support the growth strategy of our Company.

Herb will now conclude our formal remarks with the outlook.

Excuse me. Thank you, Tim.

Please go to slide number 20. Over the last several years, we have demonstrated that our business model is working and that our strategy's on target. In 2006, we're continuing to build on momentum generated in recent years to improve operating performance across all of our businesses. As I noted earlier, activity in our end markets continued to experience solid demand, and our orders were up about 14% compared to second quarter of 2005. From our recent order pattern, we see continued growth in most of our worldwide markets for the balance of 2006. We expect revenues to increase 6 to 8% in the second half compared to 2005. This forecast excludes the impact of any acquisitions we may make during the remainder of 2006. Material and transportation costs will continue to be an issue throughout 2006. Second quarter costs were up about $40 million above last year's run rate. For the quarter, we continued to experience high prices for steel, copper, aluminum, and zinc, and higher energy-driven transportation costs. We now expect material inflation to add about 180 to $190 million to 2006 costs, which is approximately 50 million above our previous forecast of 125 to 140 million and almost double our original forecast for 2006 of $100 million. We continue to focus on minimizing the impact of these cost increases by making permanent reductions in our operating cost structure through productivity gains and by implementing lean processes throughout the organization. We're also increasing prices and surcharges to cover additional costs.

Please go to slide number 21. We have increased our forecast for continuing operations for full-year 2006 to a range of $3.57 to $3.67 per share compared to $3.09 per share in 2005. This forecast reflects a 16 to 19% increase in continuing operations compared with 2005. Included in our 2006 full-year estimate is $16 million or about $0.03 per share from the expensing of options. Excluding options, our actual year-over-year operating improvement is about 17 to 20%. We also expect discontinued operations to account for about $0.12 per share of cost for the year. That totals to $3.45 to $3.55 per share. We also expect full year available cash to be in the range of 850 to $900 million.

Now please go to slide number 22. For the third quarter, higher revenue, combined with pricing and improved productivity, will continue to drive year-over-year earnings growth. For the third quarter of 2006, continuing operations are expected to improve to $0.85 to $0.90 per share. This forecast reflects a 13 to 20% improvement in total continuing EPS compared to the third quarter of 2005. Discontinued operations are forecast to be about $0.03 per share of cost, the same as in 2005. Third quarter 2006 total EPS is expected to be $0.82 to $0.87 per share. Included in our forecast is option expense of approximately $0.01 per share.

Now please go to slide number 23. We're off to strong start for the year and we expect record revenues and earnings for 2006.

This ends our formal remarks. But before we open the floor to questions, we'd like to respond to questions that were raised in early morning commentaries related to our earnings release. First question, what was the one-time inventory adjustment in Climate Control? Tim?

During the quarter, we identified an unplanned upward movement in our Climate Control inventory levels. We then completed an off-cycle physical inventory and recognized a write-down of $11.2 million. We tracked back to the root causes, which were inaccurate bills of material and routing inaccuracies. We attribute this to new products and plant restructuring activities. The shortfall is equal to about 0.5% of Climate Control's cost of goods sold, and about 3% of their total inventory. We have implemented the necessary corrective actions and do not anticipate similar issues moving forward.

Thanks, Tim. Next question was, what's happening to Thermo King APU margins? As we commented, margins continue to improve in the second quarter as we realize manufacturing efficiencies. Pricing remains firm in the market.

Third question, how about pricing? Provide the details on volume and price. During the second quarter, we realized slightly less than 2% price increase effective across the Company. Price increases implemented in early July will increase the full-year price realization to slightly more than 2%.

Next, how is pricing holding in Construction? In general, we're able to recover material inflation in all of our Construction-related businesses. During the second quarter, however, we encountered more aggressive pricing in compact products. One competitor of yellow equipment has introduced 36-month no-interest financing for compact equipment. That's a recent event. Next, we're also seeing about a 5 to 10% price softening in used compact equipment. Pricing in road machinery and other large construction equipment remains firm.

Next question was, what's our forecast for China? During the second quarter, we realized over 30% revenue growth in China, reflecting market growth and the acquisitions we accomplished in 2005. We continue to forecast accomplishing our stated goal of 25% year-over-year growth in China for the foreseeable forecastable future.

Next question was, how about margins on air compressors? Overall, margins improved by approximately 0.3, as pricing and productivity slightly favorably balanced. In Naroda, India, the plant we had to shut down for four week in India cost us one full margin point. With those questions, I would now like to open the floor to your remaining questions. Thank you.

[OPERATOR INSTRUCTIONS]. Gary McManus, J.P. Morgan.

Good morning. With that -- just a clarification. 11.2 million write-down in Climate Control, is that a pretax, or how do I tax effect that?

That's a pretax number, Gary, and you would tax it at the -- kind of the 35 North American rate.

And the same thing with India. You said it cost you about -- if you said one margin point. That's about 4 million or so? Is that -- again, would I use the same kind of tax rate?

Yes, would you. It's about -- it's about $5 million, and you'd tax rate it the same -- about the same.

And with the -- with the work stoppage, would you -- would you make up some of that, or is that all gone? I mean, that 4 million.

Our first priority was to continue to serve our customers, and a lot of the costs associated with that shutdown had to do with expediting equipment and air freighting.

So, Gary, I don't believe we lost revenue. We gained incremental costs as a result of air freight and expedited shipments that we were making.

Okay. Okay. My real question I guess is, I look at your order growth. It was up 14% and that compares with 10% revenue growth, and this is like, I think, at least the third quarter in a row where order growth has slightly exceeded revenue growth, and you're -- you're forecasting 6 to 8% growth in revenues in the second half of the year. So square how -- how come order growth continues to exceed revenues and why you see a slowdown in the revenue growth unless you think orders are going to really -- I would think at some point, revenue growth should outpace order growth. And in fact, you're suggesting a slowdown in the revenue growth. So square all that up for me.

When we said the 14%, we expect that there were several percentage points included that would pulled forward of orders in anticipation of July increases we put into place in several of our business units. So as I look forward, the actual activity level for the second half of the year, we think that Climate Control will be running in the 8 to 10% revenue type level. We think Compact will slow all the way down to in the 4 to 5, which is why I said about mid single-digit type level. We believe that the Construction will run in the 5 to 7%. Industrial will also, we think, slow down to the 5 to 7%. And Security will run in the 8 to 10% as U.S. residential becomes flat offset by strong growth in commercial and rest of the world double-digit type numbers. That's how when you add those pieces all up with -- based on that type of activity level, we come in in the second half revenue level of about 6 to 8%.

Okay. Thanks.

Ann Duignan, Bear Stearns.

Hi. Good morning. It's Ann Duignan, and thank you for addressing our questions. Just a couple of clarification questions, Herb, please. I think you said that Safety and Security organic growth last quarter was 4%. If you could just clarify that for me.

That's correct.

And you expect revenues to grow 8 to 10% in the back half.

Correct.

Is that organic? Is that apples to apples or --?

No, that's total, Ann. I said that that [recludes] -- I said that's a total revenue growth, and so included were the five acquisitions we made last year in that number.

So what are you expecting organic growth rate in Safety and Security?

I think the organic growth in the second half will be close to what it was in the first. It'll be closer in terms of on it to like the -- again, remember, acquisitions actually showed up during the second half of the year, so they're now going to become organic to organic, and we have very few incremental acquisition dollars that we're counting in the second half of the year, because the acquisitions mostly were on board by this time of the year.

So am I correct, you're saying that back half organic growth would be about 4%? Is that --

I'd say 4 to 6.

4 to 6, yes.

Okay. And just on the margins in that business, what's changed in that business that you're now -- your goal is now 17 to 18% versus prior goal of 19 to 20, and I think before that it was 20 plus?

Now, I said -- remember, I was giving you the full-year margin number, and if you go back and you look you'd see the 17 to 18 is exactly where we were when we teed up what 2006 was going to look like. So we have not changed it. It is lower than what -- if you go back to 2003, 2004, as many of the acquisitions that we have introduced, all have lower margins than what we had at the core businesses. The introduction specifically of [Cisa], which is in the mid teens, then some of our integration type businesses, which are running closer to the 10% type level, that winds up giving us in terms of additional acquisitions, none of which are at the same profitability level as we had in the original Schlage/Von Duprin/LCN type products. And then, so this specifically, on a year-to-date and going forward for the rest of the year, we're seeing a very, very big impact obviously from the cost of raw materials. We believe that so far has cost us almost 3.5 margin points compared to 2005.

Okay. So that's the key driver of any incremental up- or downside in the near to midterm?

Well, no, I think there's two real key drivers. One, obviously, is saying is we work on our cogs and we keep looking at what we can do to hopefully get the material pricing lower by changing materials around and sourcing them efficiently from around the world. But I think the other piece really is the integration of the acquisitions that we have made. We have seen, for instance in Cisa, several points improvement. But there's still at this point in time a drag compared to 17 to 18% margins. We need to drive them to go forward. And I would tell you the other big thing that we are now realizing, we have implemented, effective in July, an approximately 3% price increase in big box. Up until now that had been 0. So those collectively, getting some pricing into residential big box marketplace, integration of acquisitions, and continuing to work on our raw material costs. That's what we need to do to get the pricing and the effective margins above 17 to 18. But for this year, with the head wind I was describing to you, we're still targeting getting full year, 17 to 18%.

Okay. Thank you. I'll get back in line. Appreciate it.

David Raso, Citigroup.

Hi. Good morning.

Hi, David.

Hi, David.

I appreciate the color you're trying to provide on -- on some of the areas of concern, Truck into '07 and the housing exposure at Security, and Bobcat. On that point, the comment you made about [refrs], the refrigerated trailers, the 7 to 8,000 that you felt are being undershipped this year, I mean, historically there is a bit of a lag between the truck OEM builds and a refrigerated trailer. So I can appreciate that, but that number just seems large, because if you look at the truck builds this year versus last peak, they'll be about 9% above last peak. But if I tack on the 7 to 8,000 that you're referring to for '06 as being undershipped, that would imply that the refrigerated trailers peak to peak would be running 15% above. I'm just not sure why the refrs, especially given the significance of this truck prebuy, that we're thinking the refr market's being undershipped at a level that would say refrs should be a lot further above last peak than even trucks are. I'm trying to understand where that number's coming from. I assume that this is based a bit off of orders that maybe you're not able to serve right now, or customers telling you that, hey, we would have put the order in, but we're going to do it in '07. The CapEx is going '06 to truck.

Actually, what the -- the data comes from, David, is the entire manufacturing of trucks multiplied by the 11.5 to 12% that have historically been refrs when they wind going and actually pulling loads in the future. What you then apply that range -- and generally it runs between 11 and 12%, when you apply that math you wind up coming out with number. Comparing that to what we actually see as shipped shows us that there are about 7 to 8,000 trucks that will be hauling refr-type loads that now are not yet in the numbers that we had forecasted. So that's where we're deriving it from. It's really off the total mix I think -- Joe, was it 360,000 trucks?

Yes. We expect 360,000 trucks, approximately, to get shipped this year. Historically, about 12.5% are going to have refrs. This year we've been operating at a level of about 11%. And this is -- 11% is about the same level it was at the last -- the last time there was a -- the last time there was a change in the emission standards. So if you figure next year you're probably -- I don't know what your forecast is probably 250,000, that's 12.5%, you'll probably find somewhere around 7,000 is going to be the expected undership.

So basically, you're doing 12.5 times he 360, which is 45,000, and right now this year's going to run at 38 or so for refrs.

Exactly.

[inaudible], we then take that number and multiply it by -- roughly by two-thirds to like three-quarters. And say that's what we do for Thermo King. Multiply that by an average price of about 20,000 and that gives you the market potential when we dollarize that for refrigerated next year.

And then in the same vein, Security, the homebuilder channel, the second half of last year, I don't recall -- and it definitely wasn't cited in the releases, per se, that that channel was weak for you at all. And it wouldn't really make sense that it was. So when we say the orders in the back half of this year in the home building channel, especially given you just gave them a 3% price increase, why would we think the orders'll be flat in the second half, given what's going on in housing?

We believe that on a year-over-year basis, the market itself is actually off about 5%. The activity level we're doing is taking from minus 5 to 0. That's our forecast.

So the down 5 sales in the second half in a way is the worst that we'll see, and then the orders being flat in the second half will flatten your sales out going forward?

Right, that's what we're forecasting.

Okay. And last issue on the housing with Bobcat, in the market, consistent with what you were saying about some competitors have been going from 24 months to 36. One, I believe, even went from 36 to 48. This quarter sounds like you've been a lot more focused on trying to get the margins up, and you saw it in the numbers. It was a good Bobcat margin. Given what's going on in the marketplace, how should I think about balancing getting revenue for Bobcat in North America versus trying to stick with simply being less willing to extend the financing terms that obviously get more expensive as rates go up? How should I think about Bobcat's strategy the next, say, two to four quarters?

I think that what we look at is that the pricing that we are realizing in our marketplace is probably at the upper end of the premium that we're going to be able to realize from our customer group. So I don't see incremental gains from pricing. I see us at this point in time having to continue to introduce new products and make sure that the value proposition is held. So look at it going forward as to ongoing, I think, more pricing pressure and our continue to go and to try to go and to demonstrate the value proposition we have but I don't see incremental pricing driving improved profitability for the next two to four quarters.

Okay. I appreciate it. Thank you very much.

Mark Koznarek, Cleveland Research.

Hi. Good morning.

Good morning, Mark.

I had a question about the Road machinery. A pretty sharp slowdown there. And I can recall that was the area that has been hit in the past with China-related issues. I'm just wondering if you can get into that, give us a little bit more color and what the specific outlook might be for Road for the second half.

We're continuing to improve our performance in China. That activity, I think -- and especially as we get into what was last year really ugly numbers in the second half of the year, you'll actually see year-over-year improvements, but that's because of easy comps there. The part that I am seeing, though, has to do with the cost of the materials, asphalt and obviously oil-based stuff. You're now talking about increases that are up significantly, and we actually believe that with the funding being a relatively fixed number, we think that there'll actually be 15% less Road mileage put in place, just reflecting the incremental cost that's out there. I think that will actually slowdown, and we've seen that, double-digit growth rates to the number that we were talking about being more in the 5 to 7% range year-over-year.

So 5 to 7%.

Year-over-year for second half. That's what we're seeing on it, Mark.

Okay.

It's similar to where it was in the -- in this past quarter, and European was a bit stronger than North America.

Okay. And then jumping back to China, what has been the dynamic there, if you can, say, start from the beginning of '05 in terms of how far did we collapse? How much have we corrected? Are we all the way back to where we were early '05 at this point, or how is that --

Are you thinking strictly of the Road machinery stuff, Mark, or are you thinking about all the businesses?

Just overall.

Overall?

Yes.

I would say to you that, if I do overall, let me so do them in alphabetical sequence. We're seeing in Climate Control a significant weakening for our proposition as it relates to bus air conditioning. We see more and more changes to what I would call local type bus content while we're more on up the upper end of the price and product type range. We deal with Volvos and not Shanghai bus companies. So we see transitions there that we are now having to introduce local design product, local manufactured product to meet the value proposition that's in place. So we see that kind of stuff slowing down. We're starting to see a improvement in the stationary refrigeration. I think we're going to see over the next year to two years a very, very strong increase in both India and China into that entire cold chain of activities.

If I move then over into Compact Equipment, that's just a very, very small rock that we need to go and really push hard on. It's a very, very small number, and we're not making significant head way. The primary issue is Bobcat has traditionally been a loader type company, and the activity level on Compact side in China has historically been that of mini-excavators controlled by many Korean and Japanese-type companies. So that's a activity we have to significantly improve on.

On the Construction side as it relates to Road, we're seeing at this point a rebound from the '05 levels, some of it because of our improvement in distribution, some because we're getting, again, more product that meets local needs rather than just the superhighway designs we've had. But overall, we're still about 5 to 10% less than what we were at its peak going back about 12 to 18 months ago.

If we move over on the Industrial side, we continue to see good, strong growth as it relates to our airtight businesses and we're starting to make inroads with our productivity.

And lastly in Security, this is probably where we have the biggest year-over-year improvement. And that reflects, really, the acquisitions that we made year and the products that these acquisitions now brings us enable to us to now start entering into the local marketplace. So the biggest growth we see is really in the Security side as we now make product which we wind up shipping to the U.S. and also product that we make for local entry into the market. So that's why all-in, I'd say we were north of 30. We're actually up over 40-some-odd percent, but again, relatively easy comps. And we believe that 25% going forward '06, '07, and frankly, even beyond that, are very realizable targets with the businesses we have in place and further upside coming as we implement both our micro turbine as well as our Climate Control strategies.

And China is what percent of revenue, roughly?

That's the part that's the tough part right now. China is only going to be for us full year a 500 million -- excuse me, about a $500 million-type business. So you're talking not even something that's 5%. That's why I need to take that and make that thing become 10, 15% over the next five years.

Okay. Thanks, Herb.

sure.

Andrew Obin, Merrill Lynch.

Yes. Hi, guys. Just one observation/question. As we go to this earnings -- hello? Can you hear me?

We can hear you fine, Andrew.

As we go through this earnings season, it seems that later cycle business are really struggling, while early cycle businesses are really driving upside for a lot of companies in my universe, and I was just wondering if you guys are seeing anything perhaps related to pricing or competitive markets that could explain this dynamic in the quarter?

Well, I guess I would say to you that on the Construction -- the Compact side, I told you that's where we probably have seen the most change on the relative pricing over the quarter as the second quarter starting to have some slowdown, but really have not seen -- in the rest, in general, pricing is sort of reflecting of what you see as material inflation.

Now, but the question is, if you and your competition, if I look at the [equity] markets, they're really struggling with pricing and passing out price increases, and it's part of the early cyclical ugly stuff, where you can commit to a price increase and then deliver it, and I was just wondering what are you guys thinking as we go into '07 the later cycle -- the later part of the industrial cycle? Are we going to run into trouble as you guys having difficulty with pricing, or can you fix the pricing over the next couple of quarters?

I think that we're able to position ourselves to have the pricing be a contributed rather than a drain going forward.

Okay. So what specific actions are we taking within specific segments? I mean, I understand the broad price increases. But, once again, it seems that most of the benefit is in the early cyclical businesses. Are we doing anything specific for later cycle businesses or it's just sort of product by product?

It's a product by product approach. And I would say to you is what we're really trying to do is to make sure that we keep introducing new products with better value propositions for our customers. That enables us to stay out of what basically would be a commodity basis. But that's really what the thing is. If I keep coming out with products that reduce energy costs, especially in today's world, by 20 to 25%, we're able to price that at a premium, and that's a value proposition we're continuing to push.

Can we go and -- a [literally just focus -- I'll] question, I guess -- Hussmann, can you just give us a little bit more color as to what the competitive dynamic is particularly with Hill Phoenix given that they seemed to have a very strong quarter?

Yes, what we see -- if you look through their forecast for the second half of the '84 and you look at ours, you can see the switch of the business. If you look at their revenues, if I remember right they were up 34%. That's on obviously $140 million type business. Their increase, if you now look at the bookings that we're claiming that we're seeing in ours, we're actually seeing orders up about 27% in the second quarter and orders were up over 30% in the third and fourth quarters.

Wow.

And that reflects really the switch predominantly, as the Wal-Mart business coming our way. So the way the dynamics would be is that they had, as part of the contract, they were making shipments under orders that Wal-Mart placed the end of fourth quarter last year and beginning first quarter this year, they made those shipments during the second quarter and then now we have the orders in-house and our shipment level will be going up more than what their quarter-over-quarter improvement was as we then get into the third and fourth quarter. So we're now realizing and the shipment levels they saw in the second quarter.

So we should be expecting some nice numbers from Hussmann in the second half?

That's correct.

I think it's important to point out, Andrew, that -- you've got a little bit of the law of small numbers here. When you're calculating percentage increases off of a relatively small base, we're considerably larger than that. The same dollar amount of increase in orders doesn't have the same percentage impact.

Well, fantastic. Thank you so much.

You'd have -- you'd have the same OI and cash impact, which is the important part.

Thanks a lot, guys.

Sure.

David Bleustein, UBS.

Good morning.

Hi, David.

Couple quick ones. How do you define light construction equipment? Which categories are you specifically talking about? And does it -- why don't I just stop there.

Yes. What we're doing is take every piece of Bobcat equipment, add to that from our utility business where you have light towers, portable air compressors, things of that nature.

How about, is tractor loader backhoes in there?

No, they would not be.

Okay. Terrific. And second question, the July price increases you mentioned, is there any price protection which is why the orders came quickly? Did the orders in the second quarter get shipped also in the second quarter? Just how does that dynamic work?

Yes, yes, yes. We actually receive the orders, and something about book and ship being a very large part of our business, and that's really what actually happened. And if you look right now today if you were to go -- I'm surprised Mark didn't ask the question before. I missed this inventory report that he had out there. We always compare notes. But I would say to you as we look today into our Compact Equipment inventories on, we're running between three and four months on hand compared to where it was a year ago where it was really much less than two. And so when we get into this entire dynamic, we now saw people taking advantage of what they thought was a good buy and put it into stock and we saw first three weeks of July a corresponding reduction in the order level.

Got you. Thanks a bunch.

Jamie Cook, Credit Suisse.

Hi. Good morning.

Good morning, Jamie.

Just a clarification. On the -- you mentioned in the second quarter that there were higher metals -- the material and transportation cost of 40 million, and then I thought another time you said that also included -- Herb said that, but then I thought, Tim, you said that also included the increased investment that you're doing this year, part of that 80 million?

No. The $40 million increase was just our commodity raw materials. Not the additional investments.

And what was that in the first quarter?

I think it was a little bit less than that. I want to say 35, 37, I believe.

Okay. Great. And then just back to -- on the acquisition front it still sounds like you're standing by the 400 million for the year. Have you done any in the second quarter? How comfortable are you with that? And are you assuming anything in the guidance?

No, in our guidance there are zero acquisition dollars reflected in either revenues and/or operating income. I said, when I did my forecast, everything is excluding that. I also would say to you that we continue to be very, very active, and we're finding in terms on it that the closing rates will be in the second half of the year rather than being spread throughout the year. Last year, frankly, we had more in the first half of the year. This year we're seeing more activity in the second half of the year, including some rumors that have been floating that you may have seen out there. And we're not commenting on rumors, but overall what we are commenting on is the fact that we are targeting to do our $400 million during the second half of the year.

Any third versus fourth quarter? Even? More on fourth?

I would -- I would be really hesitant to do that because my crystal ball when it comes to figuring out what attorneys have done with contracts is not a very clear crystal ball.

All right. And then just one last follow up. The skid steer in North America you said was down slightly in the first half of the year. Can just you help me with the split first quarter versus second quarter?

I would say to you is that the second quarter had a pronounced negative number compared to the first quarter.

Okay --

-- real significant change in the dynamics between the second quarter and the first quarter activity.

Okay. Great. Thank you.

Joel Tiss, Lehman Brothers.

Hey, guys. How you doing?

Hi, Joel.

One thing. It seemed like you stopped short of giving us the different growth rates between Thermo King and Hussmann. Can you give us a little clarity there please?

We said that we were going to see about a 5 to 10% increase in Thermo King for the second half of the year. And we said that overall Climate was going to be up about 8 to 10%.

Okay. I was talking about the second quarter, but that's fine. I can figure it out. And then on -- between Bobcat and Club Car, can you give us a sense of which one had a larger impact on the margins in the second quarter, on that margin improvement?

First of all, you do have to look at is that on a revenue basis, you clearly have Bobcat being more than three times the size, so you've got a three -- more than three-to-one swing that's there. The actual improvement in the OI is that actually Club Car, on a percentage-wise basis, again, not considered the math, though. On a percentage basis, they actually increased more than what we saw at Bobcat.

Their margins are reasonably comparable, but you're seeing more influence, obviously, because of the leverage of the Bobcat being three times the size. And the improvement was a little bit greater than -- in Club Car.

Okay. And anything -- anything sizable in your acquisition pipeline at this point?

Some of all of the acquisitions that are planned for the second half of the year we forecast to be about 400 million. So any rumors you're reading about us buying an 800 to $1 billion one, you'd have to do that math on that for me.

All right. Thank you very much.

Kevin [Fogerty], [Dew Point Capital]

Yes, hi. I was just wondering if could you expand on the basis of your 5% down orders for the skid steer market. It just seems like the home builders are really under some pressure. And I just wondering how you came up with that -- that outlook for the second half. Is there additional stability on aftermarket, or is there something else we're missing?

I said that we're looking for the commercial to continue to be strong, and that really is what will be offsetting some of the weakness that is very much there in the residential type side. So collectively, we're looking at for the second half, again, skid steers as a category, let's be careful now, this really large growing category of the track vehicles that's growing at 20 plus percent while the other stuff is off 5 to 10%. And we think that you're going to continue to see that kind of a swing of more going over towards the track vehicle. And I would say to you going forward, I really personally don't buy into this idea that it's a skid steer versus a track loader it's on. You're moving dirt from point A to point B, and the only question is how big a peace of equipment you want to go, how much you want to move. And I see more and more of it going towards the track because people want to go and make less trips and make bigger moves and they want to do it under a wider range of base materials, ground, or whatever. And so I think you're going to see that the overall industry will be changing more from the traditional skid steer to more of the track loader type product going forward. And therefore it'll decrease because of some of that substitution, in addition to the issue that we're currently facing under residential marketplace.

But overall, again, our expectation for the second half of the year within Compact at North America is generally pretty flat for all of the things that Herb identified, residential slowing, still strong on commercial. Rest of the world will pick up the slack on that to some degree, and as you point out, the aftermarket certainly is -- provides more stability.

And we expect to introduce, again, about $100 million of new products that were not in the portfolio a year ago. So if you take 100 million on roughly a 2-some-odd billion dollar company, you can see right there you're getting almost 5% swing just because of new product introductions.

Okay. If I could just follow up, and on the operating margin, you mentioned the slowdown, and you also mentioned the big yellow competitor. How do you feel like that's going to play out in the second half?

I think that'll keep margins closer to where they are rather than the typical improvement that we would see going forward.

It'll make pricing -- the pricing environment obviously more difficult, but we have that factored into our expectations going forward.

Yes. So going forward, I would expect to turn out to see margins more flat to up slightly rather than traditionally having a stronger increase in the second half of the year.

Okay. Thank you.

Sure.

Scott Macke, Robert W. Baird.

Good morning, gentlemen.

Good morning, Scott.

I'm just wondering -- couple of quick follow-ups. First, with respect to the North American Construction Technology business, do I gather, then, that you're saying in your order intake for asphalt pavers you are seeing a decline related to increased cost for asphalt?

I would say to you that -- I wouldn't describe it that way, Scott. I would say to you is that it has hindered the growth. We were expecting it originally to be up double digit, and we're now seeing it to be up more in the upper single digits. So it's restricting the growth. The activity level is still very strong and growing but nowhere near the double-digit rate we thought it would be.

The economics is there's about 15% costs related -- of the total costs related to asphalt, so if there's a slow down in the number of miles paved by 15% that causes some slow back to reduce the -- the order increase but not take it into negative territory. The other thing to point out is, you're clearly going to have a lag effect from the ordering of equipment to the short-term impact of the raw material increases.

Okay. Thank you. And just want to make sure my math's correct. So we're -- we actually took the incremental cost forecast up just by 10 million for the balance of the year. In other words, you've increased the full year forecast by about 50 million, but you incurred 40 million of that in the second quarter?

Are you talking -- oh, are you talking overall?

I'm talking overall. I'm sorry.

Overall. Okay. Our expectation is, is that overall raw materials, 2006, are going to be 190 to 200 million, and we had 40 of it this quarter. We add similar amount last quarter. So second half of the year we're looking at about 100.

Okay. And the final question, just -- so I understand that the Climate Control, the 13% North American growth, that -- on a year-over-year basis, we're not getting much of a bounce from the Wal-Mart business? That's something that's a second-half effect, or are we seeing growth from incremental Wal-Mart?

Wal-Mart, on a year-to-date basis, is virtually flat, and we find now that the strength is all really in the second half.

Okay. Thank you for the clarifications. Appreciate it.

Nigel Coe, Deutsche Bank.

Hello. Good morning there. Just a quick follow on to the previous question on the second half inflation. Looks like it's going to be about 50 million per quarter compared to 40 in second quarter. So when you factor in the July price increase, would you expect the net amount to be similar to 2Q?

Yes, that's why I said, Nigel, going in that we have a price effect so far slightly less than 1 -- excuse me, slightly less than 2%, and that during the full year we're actually going to be just slightly over 2% so the movement is relatively small.

Okay. And then you talked about the fact that the price increase pulled through some demand into second quarter.

Right.

Given the small delta in the price movement, it doesn't sound like it'd be that material. Is that the right way to think about it?

That's correct. What it does, it just reflects where the dollars are in which bucket, Nigel. It's whether they're in the second bucket or the third bucket.

Okay. And just to clarify on the second half Security growth, organic growth of 4% sounds like residential might be flat, slightly down, so commercial'll up, what, 5%?

That's a good number.

Okay. Great. And just -- just a quick one on the operating cash flow. Can you just call out that number, please.

Yes. We said we're going to be -- remain at 800 -- I'm sorry, I was just giving you free cash flow of 850 to 900. You were looking just for operating cash flow?

Yes. For second quarter.

We don't -- we don't report second quarter. It's a misleading number, by the way, because we have obviously seasonality and we have peak demand in the second quarter and the number is not going to be representative of the year. I think if you look at 850 to 900 is our expectation for full year.

Okay.

And we haven't reported cash flow. We'll report that with the Q, you'll see.

Okay. Thanks.

Barry Bannister, Stifel Nicolaus.

Hi, guys. How are you?

Good morning.

Hi, Barry.

The -- earlier you mentioned there was price discounting by one of the yellow competitors. Do you remember if that was bright yellow or light yellow?

I think it was like a -- I think there's a color called Moline yellow.

Oh, that's the color. Yes, I know that color. And then could you break out the utility/Toolcat and such versus the traditional golf cart business at Club Car?

Yes. When we talked about the utility business, we're talking about something which represents slightly more than 10% of the overall revenue. The balance is really strictly at this point in time the golf side, and then you add another less than 5% that would actually be Bobcat related type product.

Toolcat actually falls within the Bobcat business.

Yes, they don't -- the Toolcat is actually not produced by Club Car. It it's actually produced at Bobcat.

And within the traditional golf carts, do you remember what the precedent was as a percentage of the total?

Like 70%.

It's almost 70% of the revenue.

Up to 70 now. Okay. Thanks a lot.

70% of golf cars.

Of the golf carts.

Yes. Okay.

Jamie, we'll take one more question please.

Mark Koznarek, Cleveland Research.

Thank you. I'm just wondering if you think the big box inventory reset is behind us or whether there's still some pressure in 3Q.

I think that's behind us. It was amazing, there's a great guy out there who did a wonderful job of selling software to all of the big boxes, and they all implemented it during the second quarter. They all did their new stocking programs, and we saw a take-down of every one of those large big boxes in the third quarter, but as we look at that the retails and so on going forward, we think that we now have, if you will, the inventory level. We actually are hearing about holes that are in the shelves that may need to be somewhat replaced and that the system may be a little bit overaggressive. So I think we're done with the adjustments, Mark. We're now ready to go and I think just replace some and maybe even add a little back.

Great. Thanks.

Sure.

All right, everyone. Thank you for joining us this morning. We're going to be looking forward to seeing you next week at our analyst meeting, which is going to be next Thursday in northern New Jersey. Anybody who hasn't signed up yet please call me so we can get you on the roster. To finish up, there'll be an instant replay of today's conference call which will be available at approximately 1:00 p.m. and it will be available until August 5th. The call-in number is 888-203-1112, and the passcode is 5778400. The international is 719-457-0820. The audio and the slides of today's conference call will be archived on our website, and finally the transcript for this conference call will be available on the Ingersoll Rand website probably at the end of next week. If you have any additional questions, please call me. Again, I'm Joe Fimbianti. I'm at 201 -573-3113. I'm at the end of all these numbers. This concludes the call. Thank you very much.

Thank you. Ladies and gentlemen, that concludes today's call. Thank you for your participation. You may disconnect.