特靈科技 (TT) 2006 Q4 法說會逐字稿

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

Thank you, Jody. Thank you for the promotion. Good morning. This is Joe Fimbianti, Director Investor Relations for Ingersoll-Rand. Welcome to our fourth quarter 2006 conference call. We released our earnings at 7:00 this morning and I think all the information is currently posted to our website.

I would like to cover the usual housekeeping items before we begin. This morning concurrent with our normal phone-in conversation on the conference call we will be broadcasting through our public website. There you will also find a slide presentation for the call. To participate via the web go to www.ingersollrand.com, click on the yellow icon on the home page of the website. 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 would 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 September 30, 2006 Form 10-Q for the details on factors that may influence results.

Now I'd like to introduce the participants in this morning's call. We have Herb Henkel, Chairman, President, and CEO of Ingersoll-Rand; Tim McLevish, Senior Vice President and Chief Financial Officer; and Rich Randall, Vice President and Controller. We will start with the formal presentation by Herb Henkel, then we will go to Tim McLevish, then we'll go back to Herb to do the outlook, to be followed by a question-and-answer session. Herb will now start with the overview. Please go to slide number 3.

Thank you, Joe, and good morning, everyone. This morning we announced fourth quarter earnings of $0.72 per share which was within our previous EPS guidance range of $0.70 to $0.75. Fourth quarter results included about $8 million, or $0.02 per share from organizational realignment costs, and about $0.01 per share of costs from a higher than forecasted tax rate. Our overall performance was consistent with our prior expectations. We continued to see solid activity in our commercial construction, industrial, refrigeration, and golf markets in most areas of the world. Residential building activity continued to be very soft in North America, which has led to ongoing weakness in compact equipment shipments and has been slowing down our activity in the residential security markets.

Now please go to slide number 4. Revenue growth for the quarter was about 7%, which consists of 5% organic growth and 2% from our acquisitions. We were in the mid range of our 6 to 8% revenue growth forecast for the quarter. As in the third quarter, there was a wide disparity in results by business units. As you can see, we had double-digit revenue growth at climate control, construction, and industrial. Security and compact vehicle revenues were constrained by weak residential construction markets in North America. Tim will review the business unit performance in closer details in a few minutes.

Let's go to slide number 5. Our fourth quarter results completed another record earnings year. Full year earnings per share form continuing operations were $3.39 per share excluding the tax charge for the third quarter about 10% above our 2005 results. Our product and end market diversity are recurring revenue expansion, and our focus on Lean Six Sigma deployment helped us overcome strong head winds from the sharp decline of the U.S. residential building market and over $200 million of material cost inflation.

Please go to slide number 6. During 2006 we generated 762 million of available cash flow. This is the 9th consecutive year that we've generated over $600 million for a total that exceeded 6 billion over that same timespan.

Now please go to slide number 7. We also had record revenues. Full year revenue exceeded $11 billion for the first time to 11.4 billion, an 8% year-over-year increase. We had 7% organic growth which is above our annual growth target. Total revenue has grown about 55% or a compounded annual growth rate of 9% between 2001 and 2006. Since the recession of 2001 and 2002 we have consistently exceeded our 4 to 6% annual organic revenue growth goal. Over the last several years our focus on consistent revenue growth has been a key factor for creating value. During 2006, we continued to emphasize investments to develop innovative products and solutions for our customers, expanding highly profitable recurring revenues, and executing high return/low-risk bolt-on acquisitions.

Now please go to slide number 8. Our investment in innovative technologies and solutions has been a major contributor to continued revenue growth over the past several years. We introduced new products in each of our business sectors in 2006 which collectively generated approximately $225 million of revenue. During the last three years we have introduced new products that have generated approximately $1.3 billion of revenue in 2006. Innovation will continue to be one of the primary drivers of Ingersoll-Rand's ongoing growth strategy. We spent over $175 million on development and engineering for new products in 2006. We have new products in each business sector that will be introduced during our next five-year planning cycle.

Now let's please go to slide number 9. We also supplemented our organic growth during 2006 by completing several acquisitions that will add over $100 million to our annual revenues. In 2006 our total acquisition prospecting activity remained at a very, very high level. However, we did not reach our 400 million to $600 million target due to very high prices and unacceptable premiums being paid in the market. Going forward, bolt-on acquisitions remain a part of our ongoing strategy to complement organic growth. However, when we are unable to acquire businesses that fill a product or market void at acceptable prices, we are making the required internal investments necessary to capitalize on the identified opportunity. These investments would include incremental engineering and S&A for new product and market development activities.

Please go to slide number 10. Also during 2006 we expanded our recurring revenue stream, our market leading brands and large installed product base will provide significant opportunity to increase recurring revenues going forward. Recurring revenue exceeded 42.4 billion for the year, an increase of about 11% compared to 2005. Recurring revenue has more than doubled since 2000 and accounts for 21% of total revenues for 2006. All segments had excellent improvements in recurring revenue for the year. Compact vehicle, construction, industrial, and security all had double-digit year-over-year improvement and Climate Control Technologies increased by 7% compared to 2005.

Now please go to slide number 11. Additionally, during the fourth quarter we completed an $80 million program to fund growth initiatives in all of our business units. These new program investments are expected to add 200 million to 2007 revenues and 300 million to 2008.

Please go to slide number 12. Moving to operational excellent. During the year we continued to benefit from cost reductions related to productivity investments. Full year operating income improved by about 6% despite a $205 million increase in material costs. For the year, price increases and surcharges partially offset the burden of these material cost inflation. In 2007, we expect to see higher material costs and we will focus on protecting operating margins by increasing productivity and adding pricing actions where possible.

Please go to slide number 13. During 2006 we continued to improve our business operating system by expanding Lean Six Sigma and other continuous improvement programs throughout our operations. The early returns of these programs are having a positive impact on our operations. I'm confident that a sustained corporate-wide focus on these areas will help to significantly reduce operating costs going forward and reduce working capital requirements. In addition, we expect our operational excellence initiatives will minimize capital expenditure requirements for additional production capacity.

During 2005 and 2006, we formalized a business operating system that will deliver continuous improvement and consistent and repeatable results across major business processes, including operations planning, engineering, supply chain, manufacturing, services, SG&A, and human resources. Our objective is to optimize our major businesses using Lean methods and Six Sigma tools to reduce costs in all aspects of our operations while improving the quality and reliability of our products and services. In 2007, we expect this business operating system to proliferate across all of our sectors and geographic regions. The added costs from this rollout will have corresponding ongoing operational and financial benefits in future years. Indeed, we're talking about a significant change in our operating culture. And we look forward to providing updates on our progress in this area.

Now please go to slide number 14. During the year we continued to deploy cash to create shareholder value. In August 2006 the Board of Directors increased the quarterly dividend by 13%. The Company's dividend has increased by 90% over the past three years. During the month of October, we purchased 2.6 million shares for about $100 million to complete the $2 billion program first authorized by the Board of Directors in 2004. We purchased about 51 million shares since the inception of the program and have reduced our outstanding share count by about 14%. On December 7, 2006, the Board of Directors authorized a new share repurchase program for $2 billion. We expect to initiate this program in the first quarter of 2007.

Now please go to slide number 15. Going forward we expect to continue a balanced approach to cash deployment. Last year at this time we targeted to spend approximately $1.2 billion for 2006 between share buyback, bolt-on acquisitions, and internal development. High prices for acquisitions and low valuations for Ingersoll-Rand shares dictated we would get the greatest return to shareholders by investing less money in acquisitions and more in stock repurchase. We acquired $1.1 billion of share, there by increasing our spend to 1.5 billion in 2006.

We have a similar spending target range as we go into 2007. The eventual outcome for the year will depend on the common share price and the availability and valuation of suitable acquisition candidates. As I noted earlier, we have been stepping up R&D and engineering expenditures to fuel future growth. We're also stepping up our operational excellence investments. The make/buy valuation trade-off between acquisitions and internal product development will also enter into this integrated ongoing approach for creating value.

Now please go to slide number 16. Despite a more challenging business environment in North America the second half of the year there were many encouraging aspects of our 2006 performance. We delivered strong record earnings and strong overall revenue growth. We increased our investments in innovative products and completed an $80 million program to accelerate future organic growth. Recurring revenue growth in our expanded geographic footprint helped to offset a major downturn in the key end market.

Revenue growth and productivity improvement offset material inflation that added almost 3 percentage points to cost of goods sold. However, there were aspects of our performance for the year that were clearly unsatisfactory and disappointing to me personally. We are unable to fully leverage our strong revenue growth to higher operating margins in many cases and our working capital management negatively impacted our return on invested capital and cash flow. We are taking actions to improve these areas in 2007. Ongoing investments for Lean manufacturing implementation and restructuring activity will enhance productivity and expand margins. We're also accelerating product development investments to assure consistent organic revenue growth going forward. Tim will now cover the business unit performance. Tim.

Thanks, Herb, and good morning. I would like to begin my discussion with the quarterly financial results. Please turn to slide 17. Revenues for the fourth quarter were $2.9 billion, up 7% from 2005. This increase is attributable to growth in four of five operating segments offsetting a decline in Compact Vehicle Technologies. Organic revenue increased by 5%, or 3% after excluding the favorable impact of currency. The approximate 2% currency impact was consistent across all of our reported segments.

Operating income for the quarter was $325.5 million, down 20.2 million or 6% from the fourth quarter 2005. The decrease was attributable to volume declines in compact equipment, higher material costs, increased investments, and restructuring charges to improve our cost structure. This was partially offset by growth leverage in the remaining four segments and unfavorable one-time adjustments last year. Consistent with our previous guidance the Company invested approximately $8 million in restructuring in the quarter. Fourth quarter operating margin of 11.3% was lower than prior year's 12.7% primarily due to higher material costs and compact equipment end market declines.

Moving down the income statement interest expense was $35.6 million, which is $1 million higher than fourth quarter 2005. This increase is attributable to higher average debt balances for the quarter. Other expense for the quarter was $11.2 million compared with 13.4 million of income in 2005. The year-over-year difference was primarily attributable to decreased interest income, increased currency losses, and prior year favorable adjustments to previously established reserves. Our fourth quarter tax rate was 17.5% versus prior year fourth quarter rate of 15.9%. The difference is attributable to true-ups required to bring the full year rate up to 16.2%, excluding discrete items recorded during the year. This full-year rate is modestly higher than the previously estimated 15.8%.

Earnings from continuing operations for the fourth quarter were $229.9 million, or $0.74 per share. While discontinued operations reflect a cost net of tax of $7.9 million, or $0.02 per share. Total net earnings for the quarter were $222 million, or $0.72 per share.

Please turn to slide 18. In reviewing fourth quarter year-over-year revenue growth by major geographic region strong international gains accounted for all of the Company's 7% increase. Revenues in the Americas were down slightly as declines in Bobcat offset 7% growth from the rest of our business portfolio. Fourth quarter revenues in the European region were up 25%. Robust markets increased strategic focus on emerging markets in Eastern Europe, and favorable currency helped to drive double-digit increases across all of our operating segments. Asia Pacific revenues increased by 18% from strong organic growth and bolt-on acquisitions. China and India grew by 18% and 24% respectively. I would now like to take a few minutes to talk about the results of our businesses.

Please turn to slide 19. Before I walk you through Climate Control Technologies fourth quarter financial results I would like to first provide you with our view of the North American refrigerated trailer business activity. 2006 full year industry shipments were up about 7% and the industry build was up about 8% to approximately 38,800 units. We continue to believe that there was an undershipment of approximately 7,000 refrigerated units in 2006 that will roll into 2007.

Our current outlook for Thermo King in 2007 is positive. Conversations with customers in North America indicate that we will have a solid market in the first half of 2007 with some expected slowing in the second half. Our current expectation is for the North American market to build about 37,000 refrigerated units. Only 4% to 5% off of the 2006 level. For reference, a 5% decline in the North American trailer business would amount to about $20 million in lost revenues, or about 1% of total Thermo King volume.

We continue to expect ongoing strength in European truck and trailer market to help offset any slowing in North America in 2007. Significant expected growth in the TriPac auxiliary power unit in 2007 will also bolster Thermo King's revenues. TriPac sales exceeded $90 million for 2006, and are expected to increase in 2007. Our value engineering process has also substantially improved TriPac's operating margins. We currently expect solid growth for Thermo King worldwide in 2007 and a continuation of the high operating margins generated by this business.

Please turn to slide 20. Climate Control Technologies reported fourth quarter revenues of $864 million, up 13% from the fourth quarter of 2005. Climate Control Americas revenues were up 14% over prior year with growth across all of our businesses. Transport refrigeration increased due to continued strong activity in the truck and bus markets. Higher sales of aftermarket parts and increased shipments of the TriPac APU. Fourth quarter stationary refrigeration revenues increased significantly due to improving market conditions and market share gains. Climate Control international revenues for the fourth quarter were up 12% over last year. Strong European markets for trailers, higher shipments of display cases and favorable currency drove increased revenues. Asian revenues declined due to lower sales of display cases. Marine container volumes continued to grow despite the soft end markets.

Fourth quarter operating income for the segment was $94.7 million, with an operating margin of 11% compared with 11.7% last year. The operating margin decrease was attributable to growth leverage being more than offset by inflation and investments to improve our cost structure.

Please turn to slide 21. The sharp contraction in the North American compact equipment market continued as expected in the fourth quarter. Retail unit volume for compact motors was down about 25% in the fourth quarter. Industry sales for mini excavators were flat compared to last year. Bobcat shipments have lagged behind the total industry, partially due to our high share at independent rental companies. Bobcats relative success with rental companies helps our market share during most years. However, the rental channel reacts very quickly during market down turns. In the fourth quarter the decline in sales to rental companies was twice as severe as the overall market decline, in response to the declining market we also reduced shipments to dealers in the third and fourth quarters to balance field inventory levels. The decline in retail activity, coupled with dealer inventory destocking, caused a steep decline in Bobcat factory shipments, production levels and operating earnings.

Please turn to slide 22. Compact Vehicle Technologies segment generated fourth quarter revenues of $578 million, down 12% from 2005. Bobcat revenues decreased by 17% compared to last year due to a 34% decline in North America markets, partially offset by a 25% increase in international markets. The decrease was attributable to the previously discussed decline in North American markets, reduced shipments to dealers to adjust field inventories, and an unusually strong prior year comparison which was bolstered by hurricane cleanup activity.

Club Car revenues grew by 6% over 2005. The increase was driven by higher golf car sales, increasing transport utility vehicle shipments, and strong international growth. Fourth quarter operating income for the segment was $36.8 million, for an operating margin of 6.4%. The sharp drop-off in margin versus prior year was due to volume deleveraging in the highly profitable North American region, commodity inflation, unfavorable product and geographic mix, and restructuring investments.

As we look forward the following items will improve segment margins and are included in our 2007 outlook. Restructuring benefits from our fourth quarter program with additional actions as required in the first quarter. The now appropriate level of dealer field inventories, new product introductions in both the mini excavator and loader lines, and the opening of our new Czech manufacturing facility in the second quarter which will increase second-half margins on international revenues.

Please turn to slide 23. Construction Technologies reported fourth quarter revenues of $320 million, up 21% compared with 2005, and 17% on an organic basis. Road development revenues increased 9% with gains in international markets offsetting declines in the U.S. Higher costs for asphalt, which is oil-based, limited 2006 paving activity in domestic markets. As we look forward a sustained decline in oil prices and the introduction of our new paver and milling products will generate increased sales in 2007.

Fourth quarter revenues in utility equipment and attachments businesses were up a combined 35% compared with the prior year. Excluding the sales from this recent Heath acquisition organic growth was 27% with double-digit growth across all three geographic regions. Segment operating income for the quarter was $21.7 million. The operating margin of 6.8% was up 3.2 percentage points over prior year. The increase was from higher volumes and productivity improvements which were partially offset by unfavorable mix, material inflation, and increased productivity, and new product investments.

Please turn to slide 24. The industrial technology segment recorded fourth quarter revenues of $541 million, a 15% increase over prior year, and an 11% increase on an organic basis. Air solutions revenue grew by 21% and 15% organically as favorable worldwide industrial markets supported higher revenues in all major geographic regions. Recurring revenues increased by 14% over the prior year.

Productivity Solutions revenues were up 4% from new products and increased recurring revenue as strong international growth offset softening domestic markets. Segment operating income was $77.9 million, representing an operating margin of 14.4% compared with 12.2% in fourth quarter of 2005. The 2.2 percentage point gain is attributable to new product growth and productivity offsetting commodity inflation.

Please turn to slide 25. Fourth quarter security technologies segment revenues were $588 million, up 5% compared with 558 million in the fourth quarter of 2005. Americas revenues were up slightly as growth in the commercial segment was partially offset by slower residential markets where revenue decreased -- where revenue decreases were in part mitigated by market share gains in both the builder and big box channels. Revenues in the European region were up 14%, approximately 9% of the growth was due to favorable currency with the remaining 5% attributable to higher volumes and improved pricing. Asia Pacific revenues were up significantly due to bolt-on acquisitions and double-digit organic growth.

Fourth quarter 2006 segment operating income was $117.7 million which yielded a strong operating margin of 20% for the quarter and 17.5% for the year. Relative to last year, fourth quarter margins were down 60 basis points as a result of unfavorable geographic mix, nonferrous material inflation, growth investments partially offset by pricing gains and productivity.

Please turn to slide 26 and let's move on to the balance sheet. We finished the quarter with our investment in operating working capital at 11.8% of revenues compared with 9.6% in the fourth quarter of last year. Fourth quarter inventory turns declined to 5.4 times compared with 5.9 times last year but were improved from 5 turns at the end of the third quarter of this year. The year-over-year decrease is attributable to North American slow down in compact equipment as we continued to reduce inventory in line with demand. Day sales outstanding increased to 63 days from 57 days in 2005. Due to strong international growth, where terms are longer than the domestic average, and to the termination of a discounting program in Europe. This is partially offset by improved collection results.

Capital expenditures for the year were $212 million, or 2% of revenues, while depreciation and amortization expense was $191 million. The increase in CapEx from last year's 1.3% of revenues is attributable to major investments in our enterprise-wide integrated European CRM platforms, a manufacturing footprint that more effectively supports our growth in emerging markets, and investments in technical centers in the Czech Republic and India. As we continue to become a more global company driven by a common business operating system we expect that our capital expenditures will approximate 2% of revenues for several years to come.

At the end of the year our total debt was $2 billion, which is consistent with last year's $2.1 billion level. Our debt-to-capital ratio at the end of the quarter was 26.8% and 25.1% after excluding the impact of adopting FAS 158 at the end of this year. We continue to remain below our target range of 30 to 35%. Overall our strong balance sheet continues to provide us with significant flexibility to invest in initiatives that will maximize shareholder value. Herb will now conclude our formal remarks with the outlook.

Thank you, Tim. Please go to slide number 27. Our outlook as we go into 2007 is, I believe, appropriately conservative. We closed the year with solid revenue growth in most of our businesses and our bookings were up about 8% in the fourth quarter compared to relatively strong numbers last year. Our backlog at year end was also up about $300 million compared to 2005. However, the shape of the recovery in residential building in the U.S. for 2007 is uncertain and lingering inflation in key commodities will continue to impact our profitability, especially in the first half of the year.

We expect steady growth in most of our end markets in 2007 with the exception of North American residential construction. Commercial construction markets are solid in the U.S. and Europe, and industrial markets are expected to grow in all geographies. We're also expecting a slight decline in the North American refrigerated trailer business. That will be offset by growth in other Thermo King businesses and at Hussmann. The golf market will remain steady and Club Car will grow by share gains and sales on nongolf vehicles. We're also projecting steady ongoing growth in emerging markets.

Please go to slide number 28. Material costs will continue to be a concern as we enter 2007. Material costs in 2006 were substantially above our original forecast as key commodity costs increased more sharply than expected during the middle part of last year. Even though we expect to see some relief in copper prices, we're continuing to see high prices for key commodities such as zinc, nickel, and lead use for batteries. We currently expect 2007 material inflation of 50 million to $70 million with virtually all of the increase in the first half of this year. We're minimizing the impact of material cost increases through our sourcing partnerships and value engineering strategies.

Now please go to slide number 29. During the first quarter of 2007, we will be challenged by some of the same influences as the fourth quarter of 2006. Namely, high material prices and diminished year-over-year activity in North American residential construction markets. We are expecting overall revenue growth of 2% to 3%. This includes high single-digit growth for Industrial Technologies and mid-single-digit growth for construction and climate control. Compact equipment and the builder and retail channels and security technologies will continue to feel the effects of the diminished year-over-year activity in North American residential markets. The biggest single factor in our first quarter year-over-year revenue performance is Bobcat, which is expecting double-digit year-over-year revenue declines.

Please go to slide number 30. Year-over-year declines in Bobcats results along with net material inflation and restructuring costs will offset productivity gains, share repurchase and carryover pricing benefits. Earnings from continuing operations for first quarter 2007 are forecasted to be $0.68 to $0.73 per share. We expect discontinued operations to account for about $0.03 per share of costs consistent with first quarter 2006. This totals to our first quarter 2007 EPS outlook of $0.65 to $0.70 compared to $0.76 per share last year.

Now please go to slide number 31. This slide details our expected revenue growth by sector for full-year 2007. In general, we expect mid to high single-digit growth in four out of our five business units and a moderate decline in compact equipment. We are targeting revenue growth of 4% to 5% which includes revenues from our 2006 acquisitions.

Please go to slide number 32. The projected volume growth, carryover pricing and positive earnings from our 2006 acquisitions will be the key drivers of earnings growth in 2007. Also included in our outlook are incremental expenses primarily attributable to higher pension and retiree benefit costs, stock option expense, and stock-based liability costs. These additional costs should be offset by our share repurchase program.

As we are faced with high acquisition prices and slower U.S. growth, we are going to make incremental investments in innovation to drive dramatic growth and operational excellence. These programs include new product development, both innovation and localization of products for emerging geographies, channel development, and the implementation of a common business operating system. This will enable us to capitalize on market opportunities and drive enterprise efficiency to support our long-term financial goals.

Our full-year forecast is based on a tax rate of approximately 18%. After considering the above items, earnings from continuing operations for 2007 are forecasted to be $3.61 to $3.71 per share. We also expect discontinued operations to account for about $0.11 per share of costs consistent with 2006. This totals $3.50 to $3.60 per share, which is another record year, up 7 to 10% on a comparable basis after excluding the Q3 tax charge and 9 to 13% on a reported basis. We're also targeting to generate approximately $900 million in available cash flow for 2007. Overall, 2006 represented the first significant challenge to Ingersoll-Rand's diversified business portfolio, and we believe there will be additional challenges throughout 2007. In spite of these challenges, we're expecting record revenues and EPS in 2007, thereby demonstrating that our strategy is working and that our business execution remains solid.

Now please go to slide 33. This ends our formal remarks. And I'd like to open the floor to your questions. Thank you.

[OPERATOR INSTRUCTIONS] We will take our first questions from Alex Blanton from Ingalls Snyder.

Good morning. I was just wondering when will you be giving us the balance sheet for the quarter? It wasn't included in the press release or the 8-K filing this morning although it was included in your third quarter and also in last year's fourth quarter.

Right. Alex, in normal course we expect that we will file a balance sheet as a result of FAS 158 that was finalized by the FASB late last year. We adopted it as of 12/31/2006. We are still finalizing all of the elements of the changes that that new pronouncement will bring and we'll delay perhaps a week in filing of the balance sheet. I expect that we'll do an 8-K with the filing of it by the end of next week.

Fine. That's FASB which?

158 dealing with pensions. We do expect that there will probably be, as a result, as you will see with many or most companies, a change to the equity section that will probably reduce equity by about $500 million as a result of that change.

500 million. And that will go on the debt side, right?

It won't go on the debt side. It will be a deduction in the assets in the pension assets or an increase in the pension liabilities.

Well, the pension liabilities is what I meant.

Exactly.

Fine. On the compact equipment line, you mentioned that loaders were down 25%. I assume that's a worldwide figure. What was--?

North America, Alex.

That's North America?

Yes.

Well, what was the 34% that we saw then in the slide?

North America.

That was North America.

34% is our decline. The 25% was the industry decline at retail, Alex.

Oh, that's the industry. Okay.

That's industry.

We were hit a little bit harder because of our strong rental position.

Got you. Now, on the -- in -- of that you have rubber track and you have wheeled, so how did they do relative to one another, rubber track versus wheeled in the quarter?

We don't have specific relative to that, but I would say on balance they were probably approximately equal. The impact was probably balanced across.

Because I think last July when you reported the second quarter you said that you expected -- that the rubber track was taking share from the wheeled, and you expected that to continue. But if they were both down the same amount that really didn't--.

I can tell you from our own numbers on it that we continue to see track being the preferred drive vehicle, if you will, in terms of increases, but I don't have the data, Alex that would show if that was true across the entire marketplace. But for ourselves, we continue to see people making changes from wheeled vehicles to track vehicles for the extra maneuverability in what I would call wet terrain, plus also the load carrying ability. But overall that growth in that sector was not enough to offset any kind of dramatic growth, it just saw reductions in the rest of the marketplace.

Okay, thank you.

And our next question comes from Ann Duignan from Bear Stearns.

This is Ann Duignan, good morning. Can you talk a little bit -- I think you said during your presentation that you noted a slowing in demand from Productivity Solutions in North America, or a slowing in the environment. Can you just expand on what's going on out there in the industrial world and what you're seeing from industrial production?

Yes, overall we see general strength. What softening we saw in the North American market was within that, there are a couple of small segments, some of which is some auto dependent. We do some dispensing systems and some fluid handling that were impacted by softness in the auto. The tool part of it that's related to pneumatic equipment and the -- related to the Air Solutions part of the business continued strong. So generally we're seeing strength that was more isolated case there was a little bit of softening.

Thanks. That's helpful. Then could you just walk us through the progression of the four quarters? Your Q1 number looks significantly lower than our number in the Streets but yet the full number is in 9, then you take out about $0.10, that's tax rate. Can you just walk through the progression of your earnings through the four quarters and where we might be missing something?

Yes. What we're seeing is, we're generally seeing a solid year for 2007. The first half of the year is softer, softer particularly in the first quarter with the Bobcat continued, generally softness, and also from a year-on-year basis, we continue to see high commodity costs, particularly in the nonferrous area. So the ramp-up last year was particularly pronounced in the second half of the year. So the year on year comparison will show relative weakness.

I would look at it, Ann, is what you really have is that you have the opposite of 2006. We started off very very strong if you remember entering a year ago, and obviously therefore the comps go against that, then we saw material increases and reductions as a result of North American residential. So what we really are now seeing, the U-shaped curve where the first quarter of 2007 feels more like the fifth quarter of 2006, in that we wind up building back up again to where we see the third and fourth quarter really now going against relatively easy comps and actually doing better. So it's coming out, and I think we're being maybe somewhat conservative, but I think I said appropriately, so in truncating some of the growth that others have out there. We have forecasted into our numbers a 50 to $70 million material inflation increase, all of it incurring in the first half of the year because what we're really saying is that we see material costs overall with the possible exception of copper, really not much different in the first half of the year of 2007 as we saw the back end of 2006, and when you compare that, obviously, compared to where we were in the first half 2006 we're more than $150 million on a cost basis annualized higher than that. So it's really the sum of those activities which give us this U-shaped type curve coming out.

So the back half stronger revenue growth and significantly stronger operating leverage? Is that the way we should read it?

Yes, and if you think specifically of compact, if I use that as the example, then not only do we envision that we are going to see somewhat of an increase, although modest on the actual housing starts and that activity level what we have at this point in time then is really now realize -- I think we're about 95% of retails equal to shipment as it comes to our field inventories. I think we got them down better than maybe some other folks did. Then obviously as we go into the second half of the year I'm expecting therefore a slight increase in demand and I no longer have to deal with the two for one that basically was going out from the dealer inventories as well. We got new products, the Czech plant is going in. I continue to see real strength in Europe. I think we have really missed some growth opportunities in Europe just because of how long our pipeline is from North Dakota to get there. Now being right outside Prague I think we'll really do well there again for this year. The bills--.

The cost structure.

That goes in in May of this year. That's why you see is we're picking things up to where first half is continuation of basically the fourth quarter and then building back up to get to a much stronger back end of the year.

Okay. That's helpful. Thank you.

Sure.

Thank you, Ann.

Our next question comes from David Raso with Citigroup.

A question on the guidance. For the full year, what's the assumed share count in your guidance?

We assume we're repurchasing about 150 million of shares per quarter at an average price of $40 per quarter.

Right. And looking at the margins year-over-year, obviously they have been down of late, on that progression for the quarterly earnings, when do we expect the margins to be up year-over-year in the quarters?

I would say it to you this way, Dave. We expect that full year 2007, based on the assumptions we have with material inflation and everything else in there, that we still come out with around the same 12.6% that we had in 2006.

David, you can start to get into some seasonality when you look at margins. But the first quarter is always a weaker and we are going to still see some pressure on the Bobcat side and we're still going to see some commodity inflation. The first quarter will be relatively weak but we should come out of the second quarter, we start picking up seasonally, Bobcat should return, and we start to see some year-on-year better comparables from a commodities standpoint.

So margins second quarter, the bogey is maybe you can get the margins up by then?

Yes. Certainly second half but the second quarter we should see them tick up. Much of it seasonally, but we should see them go up 2 or 3 points.

In addition to the way it plays out for the year, obviously two keys besides the cost issue is the way climate control and Bobcat play out. How much does the Czech Republic help you in not having to produce product for Europe in North America? Just given the announcement of the layoff, some of the layoffs sound pretty material, at Guinar. It's about 13% of your hourly employees. So take out that many heads, but at the same time, say you expect improvement in that business maybe within four or five months, I'm trying to understand the consistency of those comments with the caveat of the Czech Republic might help explain why you can lay people off at Guinar.

Dave, what you have is that the transportation cost and the hourly rate cost difference between $3 in the Czech Republic and $20 some odd in North Dakota. That translates into a range of between $600 to $1,000 difference in costs in terms of the manufacturing costs of North Dakota versus what we have there. We expect that will continue to improve even more as we get more and more local content. We're really looking at the biggest improvement up-front being right away obviously the freight, which is the number I gave you, then you wind up getting into localizing and then also obviously the hourly time rates. So that's where the real improvement is going to come from.

Some of the layoffs that we did in the fourth quarter, we're looking at the first quarter, will position our cost structure and our requirements better for that plant coping on stream in May.

That's my question though, how much of the layoffs is related to the moves to the Czech Republic and how much is that demand response?

It's demand response that you see there so far. Our expectation is that during 2007 we will continue to introduce some very, very I think appealing new products in both the mini excavators, as well as the loader lines, those are going to be introduced directly into Europe for the European marketplace. That's where that goes. Then in the U.S. we also have some new products we're going to be produced at Guinar. So we are really going to wind up looking at new product introduction replacing, if you will the hours lost for product currently manufactured in North Dakota for shipment to European marketplace.

Is there anything out on the horizon in your order book to suggest Bobcat gets better after particularly the rental channel hurts right now? Is there anything suggesting -- again, to lay people off, but then assume we're going to get better in four to five months, I'm just trying to understand is there anything--?

Right. If you look at the industry data you saw in turns on the December retails were significantly up. Our initial feel for what we see in 2007 continues to support the kind of level that's there. The biggest wildcard for me at this point in time is looking at the large orders we generally see from the large national rental chains and those are frankly slow in coming. So that will be the wildcard that we see over next four weeks.

In the climate business it was good to see Hussmann give you some life in the quarter, but then again, for Thermo King I would be curious to see how those margins were. Because obviously Hussmann doing well does hurt the mix. That can explain part of the reason the margins were down, but obviously one bit of angst you could have is if Thermo King volumes turn down a bit as the year goes on and we're already seeing climate control margins down, what happened to total climate control margins in '07 becomes a concern.

Well, what I would say today the biggest thing, if I look at the fourth quarter for climate control on the OI side is that we lost 4 points due to inflation. We had direct increases in our copper and [Inaudible] type stuff that generated almost $34 million of OI.

I thought you were buying copper spot this quarter?

We were. I'm saying -- again, this is a whole issue of year-over-year comparisons is what the thing is all about. Right now as I look at the first quarter of 2007 we had contracts still out there to make sure we had supply that were probably running closer to $3 and what we had the $2.50 that you see right now on the spot market.

I appreciate it. I'll get back in queue. Thank you.

And as a reminder, if you could please limit yourself to one question and one follow-up question. We'll now take a question from Andrew Obin from Merrill Lynch.

Yes. Good morning. Just a question on margins for security technologies. It's sort of been all over the board over the past couple of years, and the fourth quarter margin was very, very healthy. Do you feel any differently about the sustainable margin for this business in '07 after a strong showing in 4Q '06, or what should we model it for?

Andrew, I wish I could be more optimistic, but if you keep looking modeling it out what you will see is that quite a bit of the seasonality winds up showing up because of the integration business specifically that we have now growing and that particularly in Europe with our Interflex and software type packages. So we always see this real increase in the fourth quarter. So when I look at going out to 2007 it's still in that 17 to 18% range for us overall. I just don't see it going higher than that. I always get this optimistic -- look you're talking about at the fourth quarter, but then I look back at the first three, and I see that reality is, it's a 17 to 18% type business going forward as well.

Which reflects the mix of the growth. We still have our North American mechanical hardware that has 20%-plus margins and it's the -- the biggest growth segment is in some of the others that don't command quite as good a margins. But as Herb said fourth quarter is seasonally always a strong quarter for us, but what you should always assume on an annual basis as we look at it reflecting some growth and reflecting the base, 17 to 18% margin for that business.

I guess what I'm driving at, is that when we were talking at the end of the third quarter the impact of the residential, applying a very strong decramental margin to Bobcat sales was a good bet. Yet, it seems that security and safety has done better than that just based on my calculations.

I would just tell you straight out, remember we talked about disappointments, and then I would tell you their are upsides. I think that security did a very, very good job in the fourth quarter of holding their margins. I would tell you a lot of that has to do with we didn't have the incremental inventory to deal with. If you have reductions -- we had slowdowns. We didn't say it was actually negative, we continue to get some good shelf space. We see our growth. Candidly, we now go after the Pulty's directly through distribution, but I mean, we approach them. We are starting to gather a lot of business, although the Pulty's at all of the world are off, when you start from 0 and they wind up doing 30,000 houses, you have positive upside that's there.

So I think overall what we have is we didn't have the inventory to take out, therefore we didn't have all the incremental costs associated with plant inefficiencies. And we also introduced some new electronic locks into the big boxes that give us more shelf space and upside to hopefully mitigate even further what we see as a downturn in that marketplace.

Let me -- just to follow-up on Bobcat, and I'll pass it on to somebody, could you -- the margin on the quarter was a little bit below my expectations. I was just wondering could you quantify any one-time charges that we had in the quarter related to layoffs, a strike, or whatever that are not going to occur going forward?

We take about $2 million worth of restructuring charges in those layoffs that were identified earlier. But if you look at the plant shutdowns of someone that's on her, I think you can very quickly get well north of 8 to $10 million of things that as a result of, people really have a tough time focusing on work when they are going through a strike, or thinking there may be one coming up, and there were some material movements taking place around there. So I'd say to you the magnitude I would just look at, and I'm ballparking this for you is in that 8 to $10 million as to costs associated with inefficiencies. It's similar if you go back and look at Andrew, as to when we had the shut down in Narona. That costs us about $4 million. So I look at this plant, and say this probably feels more like 8 to 10.

Thank you very much.

And our next question comes from Mark Koznarek with Cleveland Research.

Hi, good morning.

Good morning, Mark.

One clarification. Couple of the questions earlier were dealing with the seasonality of earnings, and you're already commenting that the first quarter will be down pretty substantially. Is it reasonable to assume the second quarter will still be down but by a narrower amount, or do you guys have an aspiration to try and get that to be flat?

On a margin basis?

No, I'm talking about earnings comparison year-over-year.

I'd say it's probably flat to maybe very modestly down, we'll probably still in the second quarter see some residuals.

But to use your term, the aspiration is that it's not less than. A lot of that will have to do frankly, with how we see the material stuff developing.

Okay.

So 0 to slightly down, sort of the bandwidth that Tim was giving you.

Okay. Then looking at Europe, the overall sales out of Europe really strong, 25%, do you have a sense of whether an appreciable amount of that was pre buy in Germany because of this VAT issue and in turn what the prospects are for that region for early '07 because of that tax increase?

Fortunately for us, if I look at our mix, that the German season is really not where we had the significant up side. It was really other places. A lot of our industrial activity has started to move into the more central European type piece and frankly we're not that impacted by the VAT changes. I don't think -- when we look at our order levels we don't see that as being a pre buy that's going to hurt us in the first quarter.

Okay. Then just a final one here, sort of a big picture thing when we met in August, I guess it was, for the analyst meeting, you outlined an aspiration there for '07 earnings up 12 to 15% just just consistent with the long-term earnings growth target, and now we're looking at 7 to 10, and that's around a delta of $60 million roughly is what it works out to be. Directionally is that really just the swing in the Bobcat outlook that is the difference?

Two pieces really, Mark. One is the swing in the Bobcat outlook, and the second is frankly, the cost piece. At the time we were there we had no clue that we were going to go see another $100 million in material. So when you look at the delta on revenue and the margin that contribution comes from Bobcat, and you look at what is in that box of material costs, that is I would actually tell you saying 150% to 200% of the delta that you are describing.

If you -- back then we didn't anticipate -- Herb commented we have 50 to 70 million worth of expected continued material inflation relative to last year embedded within our guidance, and that wouldn't have been anticipated back in August.

We didn't anticipate the last 75 million at that time. So really, if you take that and obviously the reduction in the residential, we foresaw, but there's a piece to that, Mark, that when we were talking at that time we thought we were running towards a reduction in residential in the second half of 2007. And we thought in terms that we would get certain things in place, including the plant in Europe, and all this other kind of stuff, and candidly that happened quicker than we had envisioned. That was number one cause. Number two is I think we really got surprised, I did personally, by the material impact that we saw. That's the difference, and I think more than that. Maybe the last piece I would say to you is that it's really been frustrating on this darn acquisition side of stuff, we came up with only 100 million. We thought we would have some organic growth, which, frankly, was more positive than we came out but we didn't get anywhere near clearly in terms of what our target was on the acquisition side. So as we look at 2007 I've got really very minimal income coming from acquisitions made in 2006. That would be the other delta for what my expectations were as of August of last year.

That's helpful. Thank you.

We now have a question from Nigel Coe with Deutsche Bank.

Quick question on Bobcat margins. Just looking at the Q on Q sales, 3Q we went from 540 to about 576, 578, but yet the margin fell from 11.7 to 6.4. I know you mentioned 8 to $10 million of inefficiencies but it doesn't get you back to the sort of margin you were in at 3Q. Just wondering if there's anything else in terms of product mix or raw material inflation we should be thinking about, and should we think that 11%, 12% margins are that kind of sales level. Is that that more consistent with the baseline we should use going forward?

We had probably in addition to what Herb commented, general inefficiencies with the shutdowns and the disruptions and the labor agreement, and so forth, but certainly a geographic mix. We don't have as good a margins in other parts of the world as we do in North America, so we have a -- we have a hit, a disadvantage because of the geographic mix.

Let me give you, Nigel, very, very specific. We do better on loaders than we do on mini excavators. And the North American marketplace is much more loader for us and the European marketplace is much more mini excavator. So really it's a double whammy when you look in terms of what we're on here.

So is it fair to say the product mix is at least as bad as the volume deleverage?

Particularly the North America piece and product mix.

Okay. And second, going to 2007 how does that play out in terms of product mix? Do we start to see a more favorable mix toward the second half of the year?

Remember, that's why it's so important that we wanted to getting the Czech plant up to be able to deal with the loader business which really is the growth engine for us over in Europe, the mini excavator part, so we need to get that part going. So our take is that we would wind up finishing up 2007 with the kind of margins we walked in in 2006. Our target for this to get Bobcat back to 15% business where it was at.

A follow-on in security. Can you just give us a bit more color on trends in nonrev versus rev channel?

The rev continues to -- actually continue to be quite strong. I think we see that all the way -- going forward for the rest of the year. We talked about the commercial overall activity level being somewhere up, almost 10%, as our thinking goes.

Okay. And [Spanny Works] they talked about weakness in their nonmechanical business in the fourth quarter '06. Did you see any of that and is that one of the reasons why maybe your margins are slightly higher -- than -- anyway?

No, we continued to see the same kind of activity level there. Ours -- really the slowdown that we talked about really came more on the residential side rather than the commercial or the integration business frankly, was up almost 10%.

Thanks a lot.

We'll take our next question from David Bleustein with UBS.

Good morning.

Good morning, David.

Herb, you mentioned a couple times high acquisition prices. I guess the question is where do divestitures fit into your thought process? Have there been any businesses or subsegments of businesses that surprised you with their cyclicality? Have your thoughts changed on what really makes sense to be part of your business portfolio?

I think that that would be a very difficult question to answer in this forum. But let me just keep saying it this way that we continue to look at what are the mid to long-range prospects for each of our businesses, and based on how we see their total contribution to the Company during that next five year horizon, we evaluate whether or not they are better as a source of cash on an ongoing basis or as a one-time event. We'll keep looking at that. We have a Board meeting coming up next week, and that continues to be one of the subjects that we will put on to that docket.

Does the level or does the cyclicality of the cash flow in the businesses play a small role in that process or a big role?

Well, let's put in the way, that if the peak to trough is very large obviously it has a significant overall impact on the well-being of the Company. So I think the amplitude change is important, but more important is really the prospects for total growth during that horizon and the kind of contribution they can make total profitability. So I look more like it's a total area under the curve rather than worrying about it it's up and down 5% or 20%.

Fair enough. And then, Tim, with the changes in accounting for pensions, have you thought about changing the debt to cap level you're comfortable with?

Sure.

Yes, naturally we think of the general levels on the old basis so to the extent that there's accounting changes, that really doesn't affect the underlying economics, we would expect that we would adjust it accordingly.

Non account would tell you 30 to 35, starts sounding more like 35 to 40.

Fair enough. Thanks a bunch.

We now have a question from Marty Pollack with NWQ Investment Management.

Certainly, looking at compact vehicles and on the performance in fourth quarter you seemed to certainly have a lot of operating leverage if you just turn that around. Let me focus if I may on Q1. Based on your guidance, it looks like compact vehicles would have revenues up 100 million, linked basis from Q4, just following essentially what you have got. I'm just wondering whether that suggests Q4 would be sort of the bottom in that business?

We certainly hope so.

Because in a sense, unless it's Q1 has got much more mix than Club Car, I don't know if that would be the case, it it just seems--?

I think your math is right. I view in terms of the fourth quarter is the ugliest part and from here the shape of the curve is just a question of how fast we dig our way back up again.

Would you also comment then on Q1 on Bobcat what is the sort of -- the year-over-year decline that's applied in here? For Bobcat.

We're talking about year-over-year--.

Q1. Obviously year-over-year.

Q1 year-over-year, we're talking about it being down somewhere about 10 to 12%.

But quarter to quarter, fourth quarter to first quarter that would represent up 10 to 15%.

Depends on what you're comparing to. Compared to first quarter last year we're down 10 to 12, and Tim said it shows the pickup from the fourth quarter. So I mean it seems that unless things really continue to unravel Q4 should be a defining bottom on margins for the business? I'd say the only, yes, but, that I would give you on that part would be to the degree that we keep reading that we have a lot of competitors with a lot of field inventory that's out there, and to the degree that that causes pricing pressure going forward. That's the only other yes, but, that I worry about there.

We certainly wouldn't expect margins to be as depressed as they were in the fourth quarter even with what Herb just said.

OpEx investments if I may, that's something we haven't seen before. What benefits do you expect to accrue in '07 while you -- are these expensed or capitalized?

These are largely expensed, or exclusively expensed.

Does that look like an '07, that's sort of a one-time spent? And any benefits in '07 from that?

Well, I'd say a couple things. There's a question asked earlier about the security margin and the pickup and so forth, and I would say some of the strength there is attributable 0 some of the investments we have made over the course of '07. You may recall that we invest in particularly growing the top line initiatives and we invested that and some of the benefits came through in that regard. In addition to that we are focusing then on improving on the OpEx side of the business to drive some of our cost structure there to make improvements as Herb identified earlier.

Last question. Just on the securities side, clearly the margin progression has tended to be weak first quarter considerably lower margins. I think last two years, Q1s were 15.2 in '06, 14 in '05. So clearly the margins would be lower Q1 this year, but with the weakness overall in these end markets, do you think it's -- in your forecast do you see margins going below the 15 or 14% range?

We see the same kind of consistent numbers that you're describing.

We're seeing some elements again some of the investments we have made over the course of last year, enabled to us pick up new business and new mark share, et cetera, so we would expect very comparable margins going into first quarter of this year to what we saw last year despite some continued residential softness.

Thanks so much.

Our next question comes from Jamie Cook with Credit Suisse.

Good morning.

Good morning, Jamie.

My first question, can you -- I understand what you're saying about material costs. I think if you listen to a lot of the other industrial companies most are saying that they expect material costs to be somewhat flat in 2007. I guess, as I look at the issues that you had in 2006, material costs is obviously an area where you guys underestimated. Would that be -- as you look at what you're saying for 2007, material costs, would you be that much more conservative, assuming costs are going up, just because that was an area where in 2006 you guys -- it just hurt you too much I guess?

I'd say there may be a little bit of conservatism in it. We're cautious. One thing I would point out, though, you need to subsegment, when you talk about general industrial, because we're particularly hit with the nonferrous material. So we're seeing copper and zinc and lead go up, and that's probably impacting other of the industry competitors less, if you compare us with a Stanley perhaps or with a Black & Decker we are very dependent upon some of those nonferrous materials. That would be a better comment.

But I think your question is a vary valid one, Jamie, as I said in my opening comment about the forecast, I think it's appropriately conservative and we mentioned we baked in another 50 to $70 million of material increases depending on some of the sources that we wind up looking at, people are saying [Taraliner] it could actually be an upside. But until we actually see it in our cost of goods, I think I would rather make sure that I've got a cost structure in our company that's going to deliver at least that 7 to 10% type increase with the forecast we have got and have upside opportunity rather than hoping and praying I'm going to be able to get something if it turns out as bad as we forecast. That's our approach to life.

That's fair. Then I guess, Herb, if you could just comment a little, I know the rental channels hurt Bobcat a little bit. Can you just talk about anecdotally what they are saying to you about 2007? You mentioned that some of the big orders didn't come through yet I guess. Are they saying that's it for the year or are they saying we're going to wait and see how the economy -- what happens with the economy and maybe just some of the bigger orders could get pushed out later in the year?

No, I'm thinking that where we saw orders generally coming in January, that is a result of the softness that there's probably a lot of CEO and Chairmen sitting and scratching their head and trying to figure out how large of an order to really place up-front. Our expectation and what's baked into our assumptions based on the numbers out there is that rental is off about 20% on their CapEx on the year-over-year basis and we think the orders will flow based on that, but we're seeing people still looking at some activity level. I think a lot of it had to do with the warmer than expected weather we had recently, I think more construction going on, and I think they're trying to figure out as to whether or not that was just earlier than forecasted and therefore shouldn't place orders, or do I really place more orders. So the info I'm getting right now anecdotally is not whether or not that volume I was talking about is in question, but whether or not there may be some upside based on the activity level that they have been seeing in the last six weeks.

And then just my last question to follow-up, you mentioned on the Bobcat side, because the North American is more -- has more loaders, versus sort of the mini excavators, the mix is unfavorable overseas, I guess as you look at the other segments of your business, and clearly the overseas markets are growing much stronger than North America. Are there any other segments that we look at where you could have just because -- where the margin mix would be unfavorable overseas?

Let me give you if I can, a quick rundown going through things. Is that climate control in Europe is not any degradation, so that would be a smiley face if you had growth in that part of it. If I look at it in construction it is somewhat lower than what we have here in the U.S. mostly because of the road paving and so on activity we see. If I get on over into the industrial side that's actually quite strong and very attractive when we get outside the U.S., so there's no degradation there. If I get over into the security side there I would tell you the mechanical security in the U.S. is higher, stronger margins than what we see so far in Europe, so security would be the second place of all the sectors where if they were a disproportionate growth in Europe compared to the U.S. where you see some degradation in margin.

Thanks for taking my question.

We have our next question from Eli Lustgarten from Longbow Research.

Good morning, almost afternoon I guess. Can I get three clarifications if I can? One, the share count, actually at the end of the year, you said he number was 310 fully diluted for the average. What was the actual share count at the end of the year?

We ended about 307 million.

307 and your 150 million is off that 307?

That's correct.

The growth investments were 80 million in '06 and flat it's going to be flat in '07 as opposed to coming down?

Right.

And the material -- what were the actual--?

Can I just give you a part -- what we're looking at, is that in that, obviously what I'm telling you is that my concern is that we're going to continue to have tough time with the acquisitions so what you are going to see is our growth initiatives coming through the income statement. So they are going to continue to show up as more -- we just hired an extra couple hundred engineers, our engineering centers over in India, in the Czech Republic, and frankly we're continuing to grow. The engineering workforce was nowhere impacted whatsoever in compact in spite of what was there. So I continue to see the requirement to keep driving the organic growth. I'm concerned about pricing on the marketplace for acquisitions. So as a result, what we had in there last year we are going to continue to drive that kind of activity level because if I do the math, if you look at saying if I spend, I think we said $77 million, if I generate this year $200 million, and let me be really conservative and say that it's incrementally because of start-ups and everything else in the 15 to 20% some odd range, if you do that, you're saying is that I'm getting anywhere between the 30 to $40 million OI impact for investment of 70 some odd million that's a pretty good return.

I'll take it any time.

Yes, that's what we're saying. So as a result -- and the good news really is that we're seeing, like we talked before, whether it's the APU generating $90 million of revenue and this year 120 something, we continue to see those kind of neat opportunities out there and so we are going to continue to do it, but unfortunately what that does obviously is put pressure on the SG&A side as well as it drives up some of the CapEx. So you are going to see it showing up there versus showing up as an acquisition asset.

Okay. And the actual material cost increase in '06 was what?

205.

205, which was the higher in that.

70 of which hit in the fourth quarter. Which is what the carryover is if you look at it into the first quarter. That's why we said the first quarter to first quarter comparison, you're dealing with that part of it.

Can we just -- final question -- talk about Hussmann in the fourth quarter and in 2007 Hussmann's outlook. Several times you said it looks like it's going to be down the second half versus the first half in the build?

Yes, Hussmann was up double digit in 2006 and will be even stronger in -- going into 2007.

Your outlook -- so therefore the mid single-digit number for climate control is because you're expecting Thermo King to be down in the second half of the year?

We're actually plugging in a minus 5% type number.

But the overall Thermo King business will be relatively flat or the year or up a little bit for the year or?

Flattish. That's right.

So its flattish for the year and double-digit Hussmann gives you an--. Thank you.

You're welcome.

We're going to take two more if we've got them.

Great. Our next question is a follow-up question from Alex Blanton with Ingalls Snyder.

I wanted to get a little more color on the European business, the 25% increase. You said that it's not in Germany. That's in which country?

We really cover -- our strength if you -- it varies by sector. If you look in terms of our industrial and into our security, much stronger in the southern part and then obviously into the Eastern Europe part. So Germany itself for us is not that large a particular piece.

As you know we have had a significant focus on the emerging market economies, particularly in Eastern Europe. We have seen probably 30% increase in that part of Europe.

30% in Eastern Europe.

Correct.

Okay. And was there any -- was there a significant contribution from acquisitions at all in that? I mean, that's really quite a stunning increase.

Yes, we did. We obviously took the acquisition we made of Dietz which was in the fourth quarter, has a piece on here, but even the organic part, if I look at just full year we were still up over 17% year-over-year.

17% organically.

Yes. And if I look at construction because of the acquisition was up, last I remember, 30. But if you look at our compact vehicle, remember, we said we really were making some inroads finally, with the Bobcat stuff in the marketplace, that was up over 20%. Climate was up double digit. Industrial was up double digit and security was up double digit. Collectively the weakest group that we had was up 12, 13%.

We did benefit by currency.

FX was a piece of it.

Okay. The other thing is this. We have talked a lot on this call about material cost increases but what about price? You have been passing those along in terms of price increases. So why aren't you -- is there a lesser ability to do that now than there was? You don't seem to be aggressively increasing prices at this time.

You sound like a CEO potential.

I learned that in business school. Raise your price.

I remember that, too. Price up, cost down is a good combination, not the other way around. What I would say to you, is that when we look at what we realized as full year price increase, it was again less than 2%, although if you were to add up the theoretical published pricing tracing, you'd find that we've published on average a minimum of 4 to 5% if not higher. So what you're really seeing in turns is continued competitive response pressure to what's out there and clearly it's saying is that we live in a world where we have a market leading position and we're able to get a 10%, 15% price premium over that, but if we try to make the gap bigger than that we find significant share erosion. I would tell you I see that happening at Bobcat very clearly. We saw [Inaudible] the market share drop off as we continue to try to hold pricing in line and there's a trade-off to that.

So I keep talking about how do we wind up continuing to get new product that winds up changing the proposition around so that the value proposition for the customer is not comparing my price to brand X, but talking about how much extra are they going to be doing with my product they can't do with anyone else's. So we have going into 2007 approximately a 1% price carry-over that goes in for the full year, and then we have couple of our businesses trying to do increases in the first quarter, but when I'm giving you the math, it's kind of hard to get confident that I am going to be able to do any significant Bobcat price increases when I know that there's going to be probably over $100 million worth of field inventory, my competitors are going to be trying to unload in the next quarter. I hope it happens but I think it would be foolish to make it into a financial forecast.

Where do you get the $100 million figure?

We're just going by how much we wound up seeing it going out and if you try to get back to 90 days worth of inventory in the field based on the number of units out there that's the kind of number you come out with.

Well, Bobcat is where you have a weakness so naturally you can't get much of a price increase there. But in other markets that are strong, it would seem to me that you'd be able to do a better job of -- I'm surprised that you only got 2% price increase with a 4 to 5% published price increase in markets that are pretty strong, and everybody else has the same kind of cost increase you do.

Let me give you the line that I hear when I ask that kind of question, Alex. You go with me next time down to Atlanta when we go to visit Home Depot and see what kind of price increase you can get through there. I mean that's unfortunate--.

Okay, through Home Depot and these large big box retailers.

Then go to national rental chains, and obviously rental coming into as to where the focus is, is clearly who has the strength, either the customer or the supplier. I would say to you that -- what I'd like to you take away from this conversation is the fact that we are not trying to roll over and play dead on this issue called price increase. What we're telling you is that in our forecast and going forward we are very concerned about being able to realize significant increases in prices over what we have in the numbers that are there. That's the only way I can describe it to you. Conversations, if you were in our operations reviews you'd probably think it turns out, gee, I think I've heard this somewhere before.

Price is a regular topic of conversation, and a regular focus. We do everything we can to realize price increases more than just to cover our costs but to improve our profitability, but it is a -- we have competition out there that have their own views of the world and we have to make the appropriate--.

I think it's a very valid point and it's one I think I would be critical of us as anyone else, that only gets what's out there, but that's what we're able to realize so far. We have to continue to try to drive that better so that we are not the ones getting squeezed in the middle.

Okay. Thank you very much.

Thank you.

Do we have anybody left?

No. It appears there are no further questions.

Okay. Well, thank you very much. We'll wrap up. Thank you for joining us. An instant replay of today's conference call will be available approximately 1:00, and we're almost there now. It will be available until February 7. Call-in number is 888-203-1112, the passcode is 2643414, international 719-457-0820. The audio and the slides for today's conference call will be archived on our website, and the transcript of the call will be available probably sometime next week. If you have any additional questions, please call me. Thank you very much, and this concludes our call.

Thank you. This concludes today's conference. Thank you for your participation.