特靈科技 (TT) 2007 Q1 法說會逐字稿

Good day, and welcome, everyone, to the Ingersoll-Rand first quarter 2007 earnings conference call. This call is being recorded. At this time, for opening remarks, I would like to turn the conference over to the Director of Investor Relations, Mr. Joseph Fimbianti. Please go ahead sir.

Thank ,Anthony. This is Joe Fimbianti, Director of Investor Relations for Ingersoll-Rand, welcome to our first quarter 2007 conference call. You're probably aware we released earnings at 7:00 this morning and the release is posted on our website, and I'd like to cover a few housekeeping items before we begin. Obviously this morning concurrent with our normal call we'll be broadcasting the call through our public website and you will also find the slide presentation for the call there. 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 two. Before we begin, I would like to remind everyone there will be forward-looking discussion this morning covered by our Safe Harbor statement please refer to our December 31st, 2006 Form 10-K for the details and factors that may influence results. I'd like to introduce the participants for this mornings call. We have Herb Henkel, Chairman, President, and CEO of Ingersoll-rand. Tim McLevish, Senior Vice President and Chief Financial Officer, and Rich Randall, Vice President and Controller. We'll start with formal presentation by Herb Henkel, then Tim McLevish, followed by question-and-answer period. Herb will start with the overview. Now, if you would please turn to slide three. Herb.

Thanks, Joe, and good morning, everyone. Today we announced first quarter earnings of $0.70 per share which is at the upper end of our guidance range of $0.65 to $0.70. The mix of the earnings between continuing and discontinued is different than our prior forecast due to reclassification of Road Development's results into discontinued operations. Our overall earnings performance was consistent with prior expectations as we began 2007 we continue to see solid activity in our commercial construction, industrial, refrigeration, and golf end markets in most areas of the world. Residential building activity continued to be weak in North America which has led to lower year-over-year revenues in Bobcat and reduced builder channel activity in the residential security markets. Overall, international markets, especially Europe, were stronger than North America in the first quarter.

Please go to slide number four. Revenue growth for the quarter was about 6%, which was significantly above our previous guidance range of 2 to 3%. The revenue growth has been fueled by our stepped up investment spending on product development and to improve our market coverage around the world. Climate Control had a solid 7% growth. Security and industrial revenues were up by approximately 10% each. Compact equipment was flat year-over-year. Note that this segment now includes utility equipment and attachments in anticipation of the sale of our Road Development business as I will detail later. For this segment, revenue growth was constrained by weak residential construction markets in North America, especially for Bobcat. However, Club Car, utility equipment, and attachments had strong year-over-year gains.

Now please go to slide number five. We also continue to successfully grow our recurring revenue stream. Recurring revenue for first quarter totaled $582 million, an increase of 12% compared to last year and comprising 22% of total sales. Tim will review business unit performance in closer detail later on this call.

Now please go to slide number six. This morning I want to address some topics of interest to our investors. Later I will talk about the outlook for the second quarter and for full year 2007. The first topic is the sale of Road Development. At the end of February we reached an agreement to sell our Road Development business to AB Volvo for approximately $1.3 billion. We expect to net about $1.05 billion in cash when the sale is completed next week. This sale represents another important step in our transformation to become a diversified industrial company. In pursuing this goal over the past seven years, we have divested cyclical, capital-intense heavy machinery businesses. We've also completed over 65 bolt-on acquisitions of businesses whose market and operational characteristics offer the prospect of more consistent financial performance over the long term. The prospective sale of Road Development will result in elimination of Construction Technologies as a separately reported business segment. The financial results of the utility equipment and attachments business will be reported in the new segment named Compact Equipment Technologies, which also includes Bobcat and Club Car. Prior year results have been restated to reflect this change.

Please go to slide number seven. The second area relates to the investment priorities for the redeployment of the cash from the transaction as well as our strong annual available cash flow. We will continue to employ a disciplined and balanced cash redeployment strategy. We remain committed to supplementing our organic growth with acquisitions that extend our product technologies, expand our product and geographic markets, and increase our recurring revenue stream. In 2006, we reviewed many acquisition candidates. We closed only six deals which will add approximately 125 million to 2007 sales, or about 1% to our growth. The vast majority of the deals we reviewed were priced at an unacceptable premium relative to our hurdle rates and cost of capital. We continue to expect to make accretive value creating acquisitions in 2007 and to, over time, redeploy the proceeds from the sale of Road Development. However, we will not relax our investment criteria. We do not believe it makes sense to get larger from a revenue standpoint and not create additional shareholder value.

I also want to reaffirm that we are not interested in buying unrelated businesses. We believe through sustainable organic growth and acquisitions we can create significant value. During the first quarter, we purchased 3.1 million shares for approximately $134 million. This represents only about one month's worth of purchase activity since we were out of the market in both January and February, due to impending announcement on the sale of Road Development. That leaves over $1.8 billion available under our current authorization. With our strong cash balances and cash flow and our belief that the shares are undervalued at current levels we are increasing our share buyback and acquisition target spending for 2007. We are targeting to invest a minimum of $2 billion on the combination of acquisitions and share buybacks. The mix of investment spending will be contingent on our ability to identify and execute acquisitions that will produce superior economic value. Also, as I noted last quarter, we have been increasing R&D and engineering expenditures to fuel future growth.

We're are also stepping is up our operational excellence investments to reduce costs and increase productivity. 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 eight. Moving to Bobcat, their performance in the first quarter was consistent with our expectations. Overall, revenues were down about 12% compared with last year. Bobcat's first quarter north American revenues were down about 24%, and coincidentally, Europe was up 24% compared to last year. The North American retail activity for compact loaders continues to suffer from the deteriorating residential building markets. North American total industry retail unit sales for compact loaders in the first quarter declined by approximately 10% compared to last year, and industry loader shipments declined by approximately 29%. Industry retail sales of mini excavators declined about 5%. You may recall that in the second half of 2006, Bobcat reacted quickly to the declining retail market by substantially reducing shipments to balance dealer inventory levels.

During this period, dealer stocks were reduced by about 30% totaling approximately $100 million. The deterioration in industry retail activity coupled with dealer inventory destocking caused a steep decline in Bobcat factory shipments, production and operating earnings in the second half of 2006. Despite the continuing difficult environment, Bobcat's first quarter operating earnings improved substantially. U.S. market share was tracking up compared to fourth quarter and margins increased by about 6 percentage points compared to the fourth quarter of 2006. During the first quarter, factory shipments were similar to retail demand and dealer inventories were well balanced and consistent with expected end market demand. Bobcat has executed quickly to right-size for current market conditions. We rebalanced factory output to regain some of the efficiency lost during the back half of 2006. Restructuring activities including workforce reductions and the fourth and first quarters and ongoing efficiency actions will also bolster earnings for the balance of 2007.

Additionally, first quarter order rates were above original expectations and were down only slightly compared to robust levels in 2006. In fact. Bobcat had strong double-digit order growth in March compared with last year. We expect Bobcat operating margins to reach the mid teens for the balance of 2007. We're also continuing to invest in Bobcat geographic footprint expansion and new product development to propel consistent long-term future growth. During the second quarter we will begin production of Bobcat products in the Czech Republic for sale in Europe. This new facility has a low-cost manufacturing structure and would also save us about 750 to $1,000 per unit on freight and duty costs. The production off loading to this facility will also help to rationalize and balance U.S. manufacturing which was badly stretched in 2005 and the early part of 2006. We expect the Czech plant to ramp up production in 2007 and eventually produce over $400 million of Bobcat products by 2009. Those of you who visited the Bouma Fair in Munich earlier this week saw the continuation of Bobcat innovation. At the fair, Bobcat displayed three newly introduced loaders and two mini excavator models.

Bobcat will introduce a total of 11 new products during the year which are expected to generate approximately 13% of 2007 revenues. Now please go to slide number nine. Final topic, the impact of the North American heavy truck cycle on Thermo King. Even though the North American trailer market is projected to decline by 8 to 10%, we expect total Thermo King worldwide revenues to increase about 5% for full year 2007. Let me start out by reminding you that North American trailer revenues totaled about $400 million in 2006, which makes up about 25% of Thermo King total volume and less than 4% of total Ingersoll-Rand revenue. During the first quarter, activity in the refrigerated trailer market in North America was somewhat below previous expectations with shipments declining slightly. However, order cancellations are less than 2% of backlog and the industry backlog was equal to about five months' worth of projected industry demand. Order rates, which are always volatile, were very disappointing, which we believe was caused by falling freight volumes and declining trucking company profits. We are forecasting that the industry will build and ship between 35,000 and 36,000 units in North America which would be down about 8 to 10% compared to last year.

Overseas markets should provide additional sales opportunities for transport refrigeration in 2007. Orders and shipments of refrigerated units for trailers and trucks in Europe improved in the first quarter and should provide the base for solid performance for the full year. Our capabilities and market penetration in Europe have improved significantly in recent years. In 2007, truck and trailer new equipment sales in Europe will equal North American volumes. Let me repeat that for you In 2007, truck and trailer new equipment sales in Europe will equal North American volumes. This new balance was obvious in the first quarter. Worldwide trailer and truck revenues were both up over 10% despite declining revenues in North America. Additionally, revenues from the TriPac auxiliary power unit is expected to help offset slowing heavy truck sales. Looking forward we also have begun to open new markets for Thermo King in Asia.

One very notable prospect is an investment to develop the coal chain in India. We are currently working with a number of local Indian companies to provide both transport and stationary refrigeration products to reduce spoilage of agricultural commodities. The ultimate potential is difficult to determine. We believe it could provide considerable upside in the future and further diversify the geographic revenue coverage of this business in the future. During the last two quarters, we've made some real positive strides. In summary, we're looking for solid year for total transport refrigeration despite declining revenues in the North American trailer market. We're taking aggressive steps to minimize the impact on our revenues and earnings by diversifying our product and our geographic coverage. There's a great deal of additional detail on these topics that we can't cover due to time constraints on our call. We'd be happy to discuss these topics with you off-line.

Now please go to slide number ten. Overall we had a solid first quarter where we demonstrated the benefits of our transformed business portfolio. Our improved productivity, market and geographic diversity and recurring revenue growth offset several sluggish domestic markets. 2007 will be a challenging year, however. We expect to achieve record earnings. Tim will now cover Ingersoll-Rand's business unit performance in more detail. Tim.

Thanks, Herb, and good morning. Before I discuss our quarterly financial results, I would like to remind you once again that as a result of our fourth coming divestiture of the Road Development business we have reclassified Road's operating numbers as a single line item, net of tax, to discontinued operations for both current and prior years. Please turn to slide 11. Revenue for the first quarter was $2.7 billion, up 6% from 2006. This increase is attributable to growth in climate control, industrial, and Security Technologies as revenues from compact equipment were flat with prior years. A favorable 2% currency impact on year over year revenue gains was consistent across all of our operating segments. Recurring revenues increased by 12% and accounted for 22% of the total. First quarter S&A as a percent of revenues was 15.6% versus last year's reported 14.1%. This difference equates to a $40 million year-over-year increase. 20 million of the increase is due to last year's favorable change in our allowance for doubtful accounts reserve. $10 million is attributable to one-time regulatory and compliance costs with a final $10 million increase attributable to investments and acquisitions supporting future growth.

Operating income for the quarter was $300 million, down $17 million or 5% from the first quarter of 2006. The decrease was primarily attributable to volume declines in compact equipment, material inflation and increased investments. This is partially offset by improved pricing and productivity actions. First quarter operating margins of 11.2% was lower than the prior year's 12.6%. Moving down the income statement interest expense was $35.6 million, consistent with the first quarter of last year other expense for the quarter was $3.3 million compared with $3.9 million of income in 2006. The year-over-year difference was due to a prior year favorable adjustment to an acquisition-related reserve. Our first quarter effective tax rate was 17% which reflects our full-year projected rate of 18.5% offset by a one-time benefit of $3.8 million. Earnings from continuing operations for the first quarter were $216.5 million, or $0.70 per share. Discontinued operations reflect income, net of tax, of $1 million. Road Development income of 17 million offset $16 million in ongoing costs associated with previously divested businesses. Total net earnings for the quarter were $217 million, or $0.70 per share, which met the high end of our previous guidance range.

Please turn to slide 12. In reviewing first quarter year-over-year revenue growth by major geographic region, strong international gains offset an overall flat North American market where residential softness was offset by growth in other markets. Revenues in the Americas were down slightly as declines in Bobcat offset 7% growth from the remainder of our business portfolio. First quarter revenues in the European region were up 23%. Robust end markets increased strategic focus on emerging markets in eastern Europe, favorable currency and acquisitions helped to drive double-digit increases across all of our operating segments. Asia Pacific increased by 10% from strong organic growth and bolt-on acquisitions. We saw double-digit or greater growth in the compact equipment, industrial and security technology segments while climate control revenues declined as a result of a weak marine container market. I would now like to take a few minutes to talk about the results of our businesses.

Please turn to slide 13. Climate Control Technologies reported first quarter revenues of $729 million, up 7% from the first quarter of 2006. Worldwide truck and trailer revenues were up 12% for the quarter as strong growth in Europe and Asia offset slower domestic markets. Year-over-year revenue gains in bus and aftermarket parts helped to offset marine container declines. We continued to see strong growth in stationary refrigeration as worldwide cases and contracting grew by 13% with double-digit growth in all three major geographic regions. First quarter operating income for the segment was $69.4 million with an operating margin of 9.5% compared with 10.1% last year. The margin decrease was attributable to growth leverage and favorable pricing being more than offset by unfavorable business mix and net material inflation.

Please turn to slide 14. The compact equipment technology segment generated first quarter revenues of $875 million, flat with last year. Worldwide Bobcat revenues decreased by 12% with a 20% gain in international markets offset by a 24% decline in North America. The decrease was attributable to the soft residential construction market. During the quarter, the North American Bobcat team partially offset the market decline by successfully gaining market share in both loaders and mini excavators. Also, first quarter North American dealer inventories were flat with the fourth quarter 2006 and were well balanced and consistent with demand levels. Despite a flat domestic golf market Club Car revenues grew by 17% over the first quarter 2006. This increase was driven by ongoing market share gains in golf cars, continued recurring revenue growth, and growth in utility and off-road vehicles. International growth was also strong with double-digit revenue gains in all major geographic regions. Utility equipment and attachment revenues were up a combined 31%, 21% organically. In utility equipment, international and recurring revenue growth drove the business unit's increase over prior year. North American shipments were up modestly while bookings were up 8%.

Attachments revenues were up sharply in all geographic regions as markets continue to expand and new product lines from the (Inaudible) acquisition are being well received by our customers. First quarter operating income for the segment was $111.4 million with an operating margin of 12.7%. Sequentially, Compact Equipment Technologies operating margin improved 580 basis points from the fourth quarter reflecting benefit of improved revenues and cost reductions actions implemented at Bobcat in the past two quarters. Relative to the prior year, the prior year, margin decreases attributable to volume de-leveraging associated with lower North American Bobcat revenues, year-over-year commodity prices, unfavorable product and geographic mix, and increased investments to drive future growth and productivity.

Please turn to slide 15. The Industrial Technologies segment recorded first quarter revenues of $485 million, a 10% increase over prior year, and a 7% increase on an organic basis. Air Solutions revenues grew by 15%, 9% organically, as favorable worldwide industrial markets supported higher revenues in all major geographic regions. Recurring revenues increased by 10% over the prior year. Productivity Solutions revenues were up 2% as increased recurrent revenues and growth in the fluid and handling markets offset flat sales in the industrial tool markets. On a regional basis, double-digit international growth offset modest declines in domestic markets. Segment operating income was $64.6 million, representing is an operating margin of 13.3% consistent with the first quarter of 2006, as gross leverage, favorable pricing, and productivity were offset by inflation, unfavorable product mix and channel and engineering investments to drive future growth.

Please turn to slide 16. First quarter Security Technologies segment revenues were $580 million, up 10% compared with 525 million in the first quarter of 2006. Strong worldwide markets drove a 15% revenue increase in commercial segment with growth in all geographic regions. Integration revenues and shipments of electronic and biometric products were up a collective 32% while sales of mechanical products increased 10% over first quarter of last year. Worldwide revenues were up 2% in the residential segment. Sales to big box customers were up 8% on the strength of the newly introduced residential electronic security product and new product designs and finishes on our core offering. Market share gains and international expansion caused builder channels to be down only 4% despite a sharp year-over-year drop in domestic housing starts. Our new product introductions and share gains are minimizing the impact of residential slowdown and are setting the stage for a strong growth when residential markets recover. First quarter 2007 segment operating income was $90.7 million, which yield an operating margin of 15.7% compared with 15.2% in the first quarter of 2006. Gross leverage, favorable pricing, and productivity offset year-over-year material inflation primarily in copper and zinc.

Please turn to slide 17. Before I discuss our balance sheet metrics I would like to point out that as a result of our pending Road divestiture our current and prior year metrics exclude the assets and liabilities related to that business. Additionally, I would like to note that due to final determination of the FIN 48 adjustments, we have not included a balance sheet in the release materials but we'll have it in our 10-Q filing on May 10th. We finished the quarter with investment in operating working capital at 12.4% of revenues compared with 10.5% in the first quarter of last year. First quarter inventory turns declined to 5.3 times compared with 5.7 last year. The year-over-year decrease is attributable to increased inventory to support an expanded international footprint, new product and new factory ramp-up, and the 12% drop in Bobcat volumes not allowing the supply chain to catch up.

We expect improvement over the remainder of the year and year end turns to be favorable to 2006 levels. Days sales outstanding increased to 64 days to 62 days in 2006 primarily due to strong international growth where terms are longer than the domestic average. While days payables outstanding were favorable by more than a day. Capital expenditures for the quarter were $52 million, or approximately 2% of revenue, in line with our expectations, while depreciation and amortization expense was $44 million. At the end of the first quarter, our total debt was $2.1 billion, consistent with first quarter of last year. Our debt-to-capital ratio at the end of the quarter was 27.5%. We continued to remain below our target range of 30 to 35%. Overall, our strong balance sheet, good cash flow, and the proceeds from the road divestiture provide us with significant flexibility to invest in opportunities that will maximize shareholder value. Now I will turn it over to Herb to conclude and remark on our outlook.

Thank you, Tim. Please go to slide number 18. Our economic outlook for 2007 has not changed materially since our last forecast in January. We closed the quarter with solid revenue growth in most of our businesses and our bookings were up about 8% compared to relatively strong numbers last year. You may recall that fourth quarter bookings were also increased by 8%. With the exception of North American residential markets and North American transport refrigeration, we expect steady growth in most of our worldwide end markets for the balance of 2007. Commercial construction markets are solid in the U.S. and in Europe, and industrial markets are expected to grow in all geographies. We also expect that the decline in the North American refrigerated trailer business will be offset by growth in other Thermo King businesses and at Hussman. The gold market will remain steady, and Club Car will grow by share gains and sales of non-golf vehicles. We are projecting moderate ongoing growth in emerging markets and in Europe.

Overall we expect full-year revenue growth to be 4 to 5%. Material costs will continue to be a concern in 2007. Lingering inflation and key commodities will impact our profitability. First quarter commodity inflation was about $34 million, and we expect full-year costs to approximate $75 to 80 million. Nonferrous materials continue to be the major portion of the increased year-over-year costs. For minimizing the impact of material cost increases for our sourcing partnerships, value engineering strategies and pricing. Now please go to slide number 19. During the second quarter of 2007, we will be challenged by some of the same influences as during first quarter of 2007. Namely, high material prices and diminished year-over-year activity in North American residential construction markets. We're expecting overall revenue growth of 3 to 4%.

The biggest single factor in the second quarter year-over-year revenue performance is at Bobcat, which is expecting double-digit year-over-year revenue declines compared to record revenues in 2006. However, even though Bobcat's second quarter operating margins will decline compared to last year, they will improve compared to the first quarter of 2007. Despite these pressures, earnings from continuing operations for second quarter 2007 are forecasted to be $0.93 to $0.98 per share. We expect discontinued operations to net to 0 as earnings from Road Development offset ongoing costs. This is 5 to 10% above last year's second quarter EPS of $0.89 per share from continuing operations. This second quarter projection does not include the substantial gain from the sale of the Road Development business.

Now please go to slide number 20. Earnings for full-year 2007 are forecasted to be in the range of $3.45 to $3.55 per share. This is approximately $0.05 per share below the prior range adjusting for the net impact of the road development divestiture. We plan to largely offset $0.15 of previously forecasted Road Development earnings and $0.05 worth of stranded costs through share buy backs, acquisitions, and interest generated from cash balances. In 2008 the impact of the sale of Road Development will be accretive to earnings based on a share buyback scenario. Additionally, our share buyback will significantly enhance 2008 EPS.

Now please go to slide number 21. Earnings from continuing operations for full-year 2007 are forecasted to be between $3.52 and $3.62 per share. Our full-year forecast is based on a tax rate of approximately 18.5%. We also expect discontinued operations to account for about $0.07 per share of costs. This totals $3.45 to $3.55 per share which is another record year. Continuing earnings are expected to be up 10 to 13% on a comparable basis after excluding the 2006 third quarter tax charge and 13 to 16% on a reported basis. We're also targeting to generate approximately $850 million in available cash flow for 2007. Despite continuing head winds early in 2007, Ingersoll-Rand's diverse business portfolio will produce record EPS in 2007, demonstrating that our strategy is working and that our business execution remains solid. Now please go to slide number 22. This ends our formal remarks. I'd like to now open the floor to your questions. Thank you.

(OPERATOR INSTRUCTIONS) Due to time constraints, we ask that you limit yourself to one question and one follow-up. Once again, please press star one on your touchtone telephone at this time to ask a question. We'll pause for just a moment to allow everyone a chance to signal. And we'll take our first question from David Raso of Citigroup.

Hi, good morning. A quick question about capital redeployment. The tax rate for the full year at 18.5, we usually speak about 18, given the first quarter tax rate that means the rest of the year runs at about 19?

No, actually, 18.5 is the annualized normalized rate. It will actually -- based upon the reduction in the first quarter, 18.2% will be effective rate for the year. The new accounting regulations make that quite complicated. You have to calculate an ongoing, that's our 18.5, then any discrete items will be added or subtracted. So the lower one in the first quarter, the $4 million worth of discrete benefit will bring the full-year rate down to 18.2 on an effective basis.

With that said, given the issue with the A-shares and the B-shares and the limit on how much you can do the share repo before the tax rate goes up, can you take us through the $2 billion deployment for repo, acquisitions? At the moment how do you believe you're going to handle the situation with the repo butting up against the billion and a half dollars of repo you can do before it begins to challenge the tax rate?

Sure. Well, as Herb mentioned, we have between strong cash flows and the proceeds from the divestiture of Road at $2 billion and still retaining a strong balance sheet for continued flexibility. You're right, historically we have talked about a billion and a half as available for share repurchase before we have to do something different. When we can buy back B shares it costs us probably 5% withholding tax to do so, but it is certainly a possibility to do.

Also, Herb's comments suggest that we've got $2 billion between acquisitions and share repurchase. We believe that we can identify and conclude acquisitions that are value-added greater than what we can in share repurchase and expect to pursue that. Again, he pointed out we're not going to lower our standard of expectation, but we will continue to increase our share repurchase program until such time that we're able to identify good value-added accretive acquisitions that become of greater value. And we think that over the course of the year we will identify those and conclude them, at which time we will scale back from the $2 billion of available share repurchase.

Is it fair to say that the guidance is based off the idea you do repos, generally speaking, up to the point where it begins to impact the tax rate, not really beyond that, and then the '08 comment that Road can be accretive, based off of share repo assumption, at this stage that would imply a tax rate hit, or we're just saying generically '08, it's just off of a scenario of doing a repo, it can be accretive, though that's not necessarily the situation.

That's correct. Hypothetically, if we were to use the proceeds from the divestiture for share repurchase, it would be an accretive transaction. It would be accretive to earnings.

Is it the billion dollars coming in from Volvo next week, obviously I mean you have a lot of firepower the next nine months with a billion and a half of repos not that big a number, the 2 billion in general is not that big a number so is the idea of having to address that tax rate issue, either you do a billion and a half in repo and a lot more acquisitions that we're talking about, or you have something, you know, you have something that fell through already on the tax rate. Is that something you can discuss?

Again, David, our expectation is that we will, over the course of the year, identify good acquisitions. Our intent at this point, we've modeled in for planning -- for guidance purposes just share repurchase in our guidance range. However, our intent and desire is to identify and consummate good value-added accretive transactions over the course of the year. So we wouldn't expect that we would run into that limitation. We think we will find those and pursue those before we bump up into any constraints in share repurchase.

That's helpful. Thank you very much.

And we'll go next to Ann Duignan with Bear Stearns.

Hi, good morning.

Good morning Ann.

First of all, could you just clarify what the stranded cost business impact of $0.05 is?

Yes, actually, we've got -- it's not $0.05, it's actually- We've got business impact of $0.03. You can imagine that over time between the old infrastructure sector and the Construction Technologies, we have a fair amount of integration, particularly in the channels with our IR equipment stores and through independent distributors in that business, that with the sale of some of those stores to Volvo, thy will be representing us on some of the utility equipment. We will be representing them on some of the road machinery equipment and so forth that. Will result in some channel disruption and probably some lost sales. So we anticipate about $0.03 worth of costs there. And then an additional $0.02 between the sector, the previous sector, overhead structure, and unabsorbed corporate overhead, about $0.02 additional worth there. Our intent is to --

What is your strategy for the remaining businesses, the utility business and the attachments business longer term? I mean, based on just what you said that would have been my first question. Very different channel strategy, very different sales strategies than perhaps the Bobcat business.

That's not actually the case, Ann. It turns out that the biggest distribution channel that we have in both utility as well as the attachment is Bobcat channels. What we have at this point in time is that about 60% of the revenues go through the Bobcat channel. What we have with the acquisition of (Inaudible) products that do not fit into just compact equipment so we're looking at this as also enabling us to go and add it to what we have with the other business and stuff that we have over in Europe to actually go into large equipment. So the strategy that we look at is that we believe that attachments are the recurring revenue stream for both compact equipment plus for larger pieces of equipment that we currently do not sell.

Many of the large equipment manufacturers are not primary providers of these attachments so for us we see Bobcat as channel for selling Bobcat product then we also look at other AED-type distributors, that's why we're running it as a separate business, so we don't lose out on the other AEDs where we're branding it as Ingersoll-Rand and selling to a broader range. The former Volva or the now to be Volvo channels will also be a chapter that we're going to go visit. So the game plan really is how do we wind up continuing to augment our compact equipment model by going and putting in attachments and utilities or a broadening of the line for especially the Bobcat dealer as well as other AED dealers.

It will take us a little time, Ann to sort out that whole distribution channel but our long-term strategies, as Herb laid out. One other,I mean It's an important consideration, and that is that the terms of the transaction have transferred all of those utility equipment and attachments that sit in the IRES stores at standard cost, and historically we would have realized the dealer margin on those. So it's foregone dealer margin that's also reflected in that $0.03 that I talked about.

So just a lot of complexity and moving parts as you separate the businesses..

exactly.

Just a follow-up, then, on the climate control business. You noted a negative impact from mix. That because Hussman is growing at a faster pace, or how should we think about that?

You're right on. What we have is we know that the contribution margin from trailer is north of 40%, and the contribution margin from Hussman is significantly less. So aus waned up having a reduction in trailer Americas of being in the 10-plus percent range, while you're seeing a double-digit increase, a (Inaudible) and that's what you're really seeing.

Should we think about that as we look through the rest of the year? Is that mix going to stay similar to Q1?

I think-- Two different -- the answer is yes and no. Yes, in the fact that obviously we will not enjoy the 40% contribution margin as you have the reduction in transport refrigeration. But, no, we don't expect the same number. It will get better because as we continue to see improvement in the stationary refrigeration we expect to see upward movement in margins at climate control on a year-over-year basis going forward. Even at this point in time the APU unit is now running north of 10%. We expect to the get north of 15 to 18% as we really get the manufacturing honed down. So I'm very, very optimistic about the margin improvement we see in front of us at climate control, even with the mix of businesses that we're seeing.

Later in the year, naturally, the retail side, the Hussmann side, has improved margins. It's a very seasonal business with a third quarter peak. So we'll see some improvement just seasonally. (Inaudible) the margins of that business.

Thank you very much. I'll get back in line.

And we'll take our next question from Andrew Obin with Merrill Lynch.

Yes, good morning. Not to take anything away from good numbers, but you noted that top line was about expectations, and also the margin in the compact vehicles was better than single digits you were forecasting, yet you still reported results within your range so I'm wondering what was worse than expected and why?

Well, there was a little disruption. Naturally when you announce a business for sale, Road, despite being discontinued operations, kind of gets a little buried and don't get margin disclosure and so forth but Road certainly lost something from what we would have expected, and so did the rest of some of the utility as well as what we saw on the attachment business.

There is some repercussions as people start thinking about it, I would say to you then in the rental channel, we saw and turned on a significant question as to whether or not people would continue on compaction side since Volvo since rental so we did see significant slowdowns that had impact in the construction activity related. I think I was pleasantly surprised in certain areas but overall I think that the other piece of disappointing was that we saw the full $34 million of material costs get through in the first quarter. We were hoping it was actually going to be a little less than that, only 50 to 70. For the full year, as we've now had to revise our forecast we now see that more like 75 to 80. Those are the basic changes.

Let me just ask a follow-up question. Could you comment about pricing and how much success you're having passing on those extra cost to customers. Thank you.

I'd say to that you if I look at it, actually in climate control we're able to cover our inflationary costs. The problem areas really in compact equipment. We're finding that with field inventories being as high as they are that we're seeing a lot of, I guess I would refer to them as aggressive pricing activity. in the marketplace, that is actually causing downward pressure on pricing rather than giving upward. Industrial Technologies again is somewhere in the 1.5-1.8% type range, and then the highest of all of them is in Security Technologies where we're realizing numbers that are about 3 (Inaudible) percent of increases year over year

We're getting a lot of pressure on the cost side with the copper and the zinc. Well the inflations go before so by the time you get done you net out again to actually a negative number, just balancing those two out

But just to understand, so the negative margin impact that you had from high raw material costs was actually in compact equipment and it seems all the other segments were actually able to cover their costs, right?

No what I said to you is that in security, the raw material costs alone was 9%, okay, and we're only getting 3 some back. So if I look at industrial, 7%, we got 1.9 back. So when you net out the entire number, if you go back on it, Andrew, our target is to gain 100 to $150 million a year in terms of productivity improvement. That's a net number we've always had set out there Now what we're saying is that it takes significant activity just to break even and cover the inflationary pressures coming from raw material plus obviously also the salary increases. We're netting out price increases running less than 2% on an ongoing basis

Got you. Appreciate the clarification. Thank you very much.

And we'll go next to David Bleustein with UBS.

Good morning. Couple quick follow ups. In answer to -- David raso's question on the $0.15 benefit from cash proceeds for the purposes of calculating $0.15 you assumed share -- only share buyback and no acquisitions? Is that what you told him?

That's the assumption.

all right. What would the stranded business costs in the quarter?

In the first quarter?

Yes.

Maybe a penny or so. It's hard to separate what stranded cost. The transaction is not completed, so there's still the overhead absorption from both the sector and the corporation still reflected in their results. But, you know, there's a little bit of what we talked about the slowdown, the divestiture related slowdown, the channel disruption, the dealers not sure where they're going to commit and so forth. That probably cost us, I don't know, a penny or two.

Okay. Let me go at it a different way what. I'm looking for is the costs of the -- the costs that you retain relative to businesses that you divest. What will those be, those -- on an ongoing basis.

Our discontinued operations. Yes, I mean, for what we're anticipating, the first quarter we had about a $6 million higher charge in discontinued operations ongoing, than we normally do. Usually we run about $0.03 per quarter. This quarter, I mean, we netted about, what, $0.05, $0.04 worth of Road operating earnings against a similar is amount of ongoing operations. On a normal basis we should go back to the 3 and maybe $0.04 a quarter.

Even with Road building now gone. Wait a minute that would add to it, right?

I'm sorry, say it again David.

With Road building gone that would add to the -- any cost you retain from Road building would add to that normal $0.03.

That's correct. It may go from the historical kind of $0.03, maybe it'll go up a penny. Some of that is related to Road, M is just an adjustment to would we normally see in the previous --

David, some of the challenging challenging we're doing, part of the agreement in the sale to Volvo we will be continuing to provide services throughout the rest of the year so we'll be still running for all those employees their payroll, healthcare, and so on. So we're still in the process of sorting out in terms of as to what kind of recoveries we wind up getting on that kind of activity. That's why you have the bumping around of the $0.02 to$0.03. I think that, at this point in time is still a-- to be totally discussed and seeing when we wind up absorbing costs versus when they wind up continuing to get services from us.

Okay. That's fair. Then on the copper, do you have a ballpark number for how many million pounds of copper you buy per year?

I'm afraid I don't keep track in the millions of pounds. I can't -- I can divide by three. (Inaudible) If we look at the total amount that we're looking at (Inaudible) copper -- hopefully I've got data here. and we'll run through it. I'm afraid the only number that I look at (Inaudible) is the Delta on a year-over-year basis. I would say, if I just making a total wag at this would be somewhere around $100 million a year.

Ok, so thats 30 million pounds, give or take.

I think so.

Perfect. Thanks a bunch.

And we'll go next to Mark Koznarek with Cleveland Research.

Hi, good morning.

Good morning Mark

Hey, just a couple clarifications. Maybe I'm just not following things closely, but we were just talking about the legacy costs, you know, those discontinued operations that's $0.03 a quarter for $0.10 or $0.12 a year. On slide 20, where do those appear?

I need to take out my slide first.

They were included in previous outlook.

We haven't carved those out as a result of that. The previous outlook was 350 to 360 all in. That's the bottom line. So those pieces would be above that where we break out between continuing operations, discontinued operations, to get to that $3.50 to $3.60.

Ok, I got you. Ok thanks. Then the other thing that I'm looking for clarification on is that $0.15 accretion in the cash proceeds. You said that's re-purchase.

It's assumed repurchase. We just do that hypothetical calculation we assume that we would repurchase that kind of somewhere between $45.00 and $50.00 a share over the course of the remainder, going forward, and assuming we did it immediately. So it wasn't a projection of what we were going to do. It's -- that would be a break-even analysis from an accretion-dilution standpoint.

that's what I was after. It would assume that upon closing you'd take the entire proceeds and buy back shares.

Exactly.

Got it. Here's my question, which is last quarter, you were gracious enough to provide us an outlook, kind of a rough revenue growth outlook by business unit for the year, and I'm wondering if you could just update what's presented back in January.

For the full year (Inaudible)?

Yes, by the business.

let's look at in the way. When I look at climate control what we see with the conditions we're talking about is stuff that's in the mid single-digit level, 5 to 6% type level. When you net out compact equipment with the strengthening of Bobcat in the second half of the year, Club Car continuing to do well, utility and so on, we think that's also going to be in about the low single digits, probably close to 3 to 4. If I look at industrial, I think that's one that we target at this point in time in the high single digit level closer to the 8 to 9% range. And in security, we see a potential more clouds on the horizon there , so maybe we're conservative, maybe we're cautious. I wish I would tell you I hope we're wrong but we're expecting that to come into mid single digits compared to where we are now, and come in at 4 to 5% as we see more of a weakening in the North American side of commercial and so on in the fourth quarter of this year, that's our forecast. When you had a that all up you come one the 4 to 5% I gave you during my comments.

Okay. So looks like the swings are a little softer here in security, also a little softer in industrial. Last time you talked double digits.

Right. What we do is we look and talk to our suppliers and same kind of surveys you do, Mark, and we find that we look at that, probably a little more of a downward arrow as it gets into the second half of the year, and North American industrial side. We continue to see relatively strong stuff in the rest of the world.

Okay. And then sort of from an overall perspective, given that you're absorbing more raw material pressure and the revenue growth is expected to be the same, why isn't there more of a negative revision to the full-year outlook, just based on operations?

Yes, that's really what you're -- you're right. What I said beforehand, what we see, that's why we really made this big push. We're in the worst part of the world right now. We're really going and spending a lot of time and effort and money on a lot of operational excellence activities with many of those -- I was just involved in a three-day (Inaudible) event we did two weeks ago and we see the benefit of that rolling out for the rest of this year. So, yes, my expectation is that you'll see operational improvements in the second half of the year to more than offset what we see as ongoing pressure from cost side of things, and candidly not a lot of optimism on my part relative to what we see to the ability to do pricing in the marketplace.

OK. Alright Herb, thank you.

And we'll go next to Joel Tiss with Lehman Brothers.

Good morning

Good morning Joel

Just two quick ones. Can you talk a little bit about big box where, they are? are you expecting them to restock for the rest of the year? Just sort of where they are and would they're thinking.

I think that big box is one of those pleasant surprise when we talked about as to what the revenues were in the first quarter compared to plan. We saw that they were actually rising in our numbers high single-digit-type increases as they really restocked. I think they had pretty empty shelves. I don't know about you, but when I went to the big boxes I noticed that there were a lot of gaps. We saw some increases and he we also, as we said, had new product going through. So we got some share gains as a result of that I expect in terms of that activity is going soften as we wind up now going forward for the rest of the year. I don't expect that to continue to be as robust directionally. We have that as a somewhat slightly down arrow to the degree that activity level is in that department. We're looking to offset that with new product we introduced in electronic lots that are doing well as we finish out the rest of the stores-hopefully the take-off rate from those will more than offset that but for right now I consider that as being one of the areas that has probably more downside than hat up side in the future.

Okay. Can you spend a second to help us understand the break down inside compact, just sort of directionally, so we can figure out the individual pieces and come one our own numbers? Thank you.

Are you talking about revenue, or are you talking margin-wise, Joel?

Well, I didn't think you were kind enough to give us the margin, so I was just asking for revenues, but if you'd give us the whole thing, I'd love it.

Directionally, if I look at things -- and I was actually talking to Mark before -- if we look at Bobcats for full year we're talking about revenues on a year-over-year basis being relatively flat to down slightly. When we look at Club Car, we see them being in the mid single digits by the time the year is all done. We see utility being probably more in the high single digits. And then Attachments is -- a very, very significant increase but that's because of the acquisition stuff that's in there. But again relatively (Inaudible) small numbers. It's considered that is going well over 30%. So when you had a that all in that's where the compact equipment, obviously because of size of Bobcats compared to the rest, winds up more into the low single digits, 3 to 4% range. Our overall expectation margin-wise is that the business is somewhere in the -- I'd say 13, 14% margin range.

And I was looking for more like, you know, is Bobcat 60% of the mix and Club Car 25?

Well, if you look at things, I think there's a breakdown. Did we provide that yet, Joe?

Joel, the way it breaks down, we'll give you last year, Bobcat was about $2 billion last year. Club Car was a little over 600 million. The attachment business, because of the growth, is probably going to be about 200 million, so you're probably between 500 and 600 in utility. Does that work four?

Perfect. Thank you.

And we'll take our next question from Nigel Coe with Deutsche Bank.

Thanks., good morning.

Good morning Nigel.

Basically I wanted to understand the B-share buyback a little bit more. You mentioned 5% withholding tax payable on that -- on any transaction there. Since -- you (Inaudible) funds from the Bermuda, why wouldn't you pay a full tax on this?

Well, we're getting a fair amount into a lot of tax detail that I'm not quite prepared to go in on this call, and there are other solutions to address. I mean, we have 300 and change worth of million A shares, 270 million B shares, 35 million available before we would run into any issues. There are a variety of things that we were exploring to solve that problem, one of which is certainly we can bay back some of the B shares without tax gains initially on the first -- until we use up the basis in it, and past that, as we move cash back and forth between various jurisdictions, you know, there is probably some withholding tax associated with it. But I think that's a little bit more sophisticated than to go in on the phone call here.

Yes, way over my head probably. Secondly, you talked about North American growth being 6% ex Bobcat. How do you see that progressing through the year? Because you know, this is the toughest quarter for North America. Where does that go to over the balance of the year, ex Bobcat?

As I said, I think what we're expecting at this point in time is that we certainly do not see an improvement. If anything what we saw is a back end of the year actually having more pressure as we are more concerned about industrial and commercial type applications potentially also slowing down.

Okay.

Directionally, you have to put a downward arrow on that one, Nigel.

Yes, and finally, you mentioned some concerns on commercial construction toward the back of the year. Was that based on (Inaudible) data we all get or is that based on what you've seen in your channels?

Yes, yes what. We do is we look at ours and we wind up taking the dodge put in place and we lag it based on the project side and the businesses that we're in specifically so we wind up coming and catching it later on. So that's why I say we're looking at that data actually starting to impact us toward the latter part of the year.

Thanks. Good quarter.

(OPERATOR INSTRUCTIONS) We'll go next to Marty Polluck NWQ Investment Management.

Hi guys. Very nice results. Couple questions. One, wonder if you might just talk a little bit more about Bobcat. The trends you were seeing, not only on the OE sales but on parts, attachment services, is any of that responsible for improved margins? That's question one. Second one, if I may, just -- in a sense, the strategic imperative in terms of, you know, what you might do with some of the excess cash. theres talk about there's rumors out there maybe selling Bobcat and divesting heavily in HVAC which suggests much more than a bolt-on acquisition. If you would, just kind of up front discuss that.

Let me deal with the first part. The change in profitability at Bobcat is really not a result of the mix. It really has to do with operational improvements and going in now having a business that's more sized to reflect the volumes that we're putting through. We've had to go through obviously dramatic 30% reductions in hours earned and so on the second half of the year. We now have, in terms of right-size business operating under normal hours, I thinks thats the piece, and that's why what we see as going forward why that should even continue to improve. So it's not really dependent on mix. The second area -- what I said during my comments before handy, Marty, was the fact that we are looking at spending a minimum of 2 billion in 2007, as a combination of, A, dividends, which the board will review, I'm sure, very shortly.

B, in terms of (Inaudible) share buyback, and C,the bolt-on type acquisition what. I said in my comment, is the fact that I'm not looking at making extraneous acquisitions. We want businesses that really support, that really leverage what we already have in place, so they have to be something that's contiguous, adjacent, and not something that's far off. we are looking at this point in time at several businesses that, frankly, are attractive both from climate control as well as industrial as well as into the security-type sector. They give us technology, they give us some geographic reach in all those areas but the criteria that we continue to apply to them and walk away from if they do not meet is that they actually to have generate more value than share buyback would. Why would you go spend money on acquisition if a share buyback would wind up getting you a better return for the shareholder? So that's the criteria. So we're not focusing on any one particular type company.

I think it would be inappropriate for me to comment on company A versus company Z. What I do want to point out to you is that the criteria you saw over the last 7 years, we know when it's time to walk and we know when it's time to invest. and with the share price there's no doubt in my mind that we should be aggressively continuing to buy back shares. If acquisitions then come up which provide even greater than that value to the shareholder we think that they can be executed because I don't want to get into buying this great deal and having it not be done well. If we can do that we'll pursue that part of it. But nothing is changing, Marty, in terms of our assessment of how it has to be accretive and how hat to wind up providing long-term shareholder value.

At the time we identify those acquisition candidates we'll make a judgment as to whether we will need to slow back our share repurchase or whether we continue it .

Or whether we wind up looking at the balance sheet because if long term is still available at 4%, 5%, that may wind up even changing the leverage position thats there so I will continue to go to work that the same way we have frankly for the last seven years.

One can assume then that any larger acquisitions really are not in the plan, unless something unusual happens?

Whether they be very, very small or large, depending on what large definition is, Marty, they have to meet the financial criteria or else they just don't make any sense to do.

Okay. Thank you.

We'll take two more questions, please.

(OPERATOR INSTRUCTIONS)

Well, thank you very much. We'll wrap up the call then. Anybody who is left, thank you for joining us. There will be an instant replay of today's conference call available at approximately 1:00 P.M., and it will be available until May 4th, 2007. The call-in number, 888-203-1112, and the passcode is 5976448. International passcode is 7194570820.

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