特靈科技 (TT) 2007 Q2 法說會逐字稿

Good day, everyone, and welcome to this Ingersoll-Rand second quarter 2007 earnings conference call. As a reminder, today's call is being recorded. At this time, for opening remarks, I would like to turn the call over to the Director of Investor Relations, Mr. Joseph Fimbianti, please go ahead, sir.

Thank you. Good morning, this is Joe Fimbianti, Director of Investor Relations for Ingersoll-Rand. Welcome to our second quarter 2007 conference call. We released earnings at 7:00 a.m. this morning and the release is posted on our Website. As usual, I'd like to cover our housekeeping items before we begin. This morning, concurrent with our normal phone-in conference call we will also be broadcasting this call through our public Website. There you'll also find the presentations for the call. If you go to our Website, click on the yellow icon on the home page. 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'd like to remind everyone that there will be forward-looking discussion this morning which is covered in our Safe Harbor statement. Please refer to our March 31, 2007 Form 10-Q for the details on the factors that may influence results. I'd like to introduce the participants on this morning's call. We have Herb Henkel, the Chairman, President and CEO of Ingersoll-Rand, Tim McLevish, our Senior Vice President and Chief Financial Officer, and Rich Randall, Vice President and Controller. We'll start with formal presentations by Herb Henkel and Tim McLevish, followed by a question-and-answer period. Herb will start with an overview so if you would please go to slide number three. Herb?

Thank you, Joe and good morning everyone. This morning, we announced second quarter earnings of $3.17 per share, which included $2.22 per share of the gain on the sale of the Road Development business. Total operating earnings of $0.95 per share were consistent with our prior forecast and within our target range of $0.93 to $0.98 per share, despite a higher than expected tax rate. Please go to slide number four.

During the quarter, we continued to see solid activity in many of our key end markets, including commercial building, industrial, and refrigeration throughout the world. Residential construction continued to be weak in North America, which impacted both the new home builder and big-box channels for our residential security business, and Bobcat equipment sales. The worldwide refrigerated transportation market has really been a mixed bag for the first half of 2007. North American shipments have been weaker than expected as declining truck ton miles and lower freight rate have caused our customers to delay placing recently purchased new equipment into service. Second quarter truck and [refrig] trailer industry shipments were down around 10% and full-year North American refrigerated trailer shipments are now forecasted to be down approximately 15%. This decline in North America has been offset by very strong growth in Europe and Asia. Overall, we expect our total full-year 2007 refrigerated truck and trailer volumes to exceed 2006, primarily due to strong year-over-year growth in Europe.

Now please go to slide number five. Reported revenue growth for the quarter was about 9%, which is well above our guidance range of 3 to 4%. Our previous guidance was based on the projected decline of about 10% in Bobcat for the quarter. Excluding Bobcat the forecast would have been 5 to 6% year-over-year growth. So clearly, we had a strong quarter in terms of revenue performance. Overall, climate was up about 6%, with an 11% year-over-year growth in worldwide stationary equipment, and a 2% increase in overall transport refrigeration. Industrial technology markets remain strong around the world, especially in Europe and Asia and segment revenues increased by 12%. Club Car revenues increased by about 10%, with market share gains in the soft U.S. golf market and higher sales of utility and off-road vehicles. Security revenues were up about 8%, with solid commercial building growth in North America and Europe, domestic residential revenues were up modestly as market share gains and new product sales offset declining end markets. The businesses we classified as discontinued operations in the second quarter also had solid operating results. The combined revenues of discontinued operations decreased slightly in the second quarter of 2007, compared with last year's results. Bobcat second quarter revenues declined approximately 9% compared with record 2006 results, as ongoing weakness in the new equipment market in North America offset market share gains, increased recurring revenues and growth from international markets. Despite the revenue decline, Bobcat operating margins approximated 15% and improved significantly compared with the fourth quarter of 2006. Second quarter orders increased by approximately 5% compared with last year, and backlog levels also increased. Bobcat dealer inventories remain well-balanced and consistent with current demand levels. Utility equipment and attachment revenues both increased significantly compared to the second quarter of 2006, with solid growth from all geographic regions. Second quarter operating earnings and margins also improved compared with last year.

Please go to slide number six. Our ongoing investments in innovation have been a key driver of our revenue growth for 2007. During the second quarter, we introduced several new innovative products that spanned all of our business sectors. For full-year 2007, we expect to generate over $1.3 billion of revenues from innovations introduced over the last three years.

Now, please go to slide number seven. We also continued to successfully grow our recurring revenues. Recurring revenues for the second quarter totaled $412 million an increase of 11% compared to last year, and equal to about 19% of total sales. Tim will review individual business unit performance in closer detail later this morning.

Now, please go to slide number eight. I want to address several topics of interest to investors and after Tim's presentation, I'll talk about the outlook for the third quarter and full-year 2007, and then go into Q&A. The first topic is corporate development activity in the second quarter. On April 30, we completed the sale of the Road Development business to Volvo for $1.3 billion. The sale generated net after tax proceeds of approximately $1.05 billion. Additionally, on May 15, we announced the initiation of a process to explore strategic alternatives for Bobcat, utility equipment, and attachments. The alternatives include an outright sale of the business, or a spin-off to shareholders. We expect to conclude the decision-making process during the third quarter. These businesses represent world-class operations with great people, products, and brands. However, they no longer fit Ingersoll-Rand's long-term strategy. The eventual outcome of this process will be a strategic repositioning of Ingersoll-Rand away from the cyclical heavy machinery profile of the Company's past and towards a true diversified industrial company with powerful growth platforms in Climate Control, Industrial and Security businesses. Our portfolio of businesses will be well-positioned to deliver consistent growth throughout the business cycle.

Now please go to slide number nine. This transition will also necessitate a change in our business reporting structure. Going forward, we'll be reporting three segments, Climate Control Technologies, Industrial Technologies, and Security Technologies. The compact equipment sector has been eliminated and Club Car results will be reported as part of the industrial segment.

Now please go to slide number ten. The second area I will cover relates to investment priorities for the redeployment of cash from our divestitures as well as our strong available cash flow. You may recall that in December 2006, the IR board of directors authorized a share buyback of $2 billion. On May 14, of this year, the board increased the authorization to $4 billion and we have targeted to have the first $2 billion completed by the end of the third quarter of 2007. During the second quarter, we repurchased 14.5 million shares for approximately $713 million. In July, we purchased about another 5 million shares. So year-to-date we've repurchased over 23 million shares for approximately $1.17 billion.

Now, please go to slide number 11. Going forward, we also remain committed to supplementing our organic growth with acquisitions that extend our product technologies, expand our product and geographic market reach, and increase our recurring revenues. We continue to expect to make accretive value-creating acquisitions in 2007 and beyond. However, we will not lower our investment criteria. We do not believe it is sensible to get larger from a revenue standpoint unless we can create additional shareholder value. In the interim, we will continue to repurchase our shares, which we believe are priced below their actual value. We continue to believe that there is significant growth potential in our portfolio of businesses and that there are acquisition opportunities available to supplement their organic growth potential.

Now, please go to slide number 12. We made great many changes in the first half of 2007 and we expect to continue to make constructive changes to improve our business mix as we go forward. Our portfolio will no longer reflect the cyclical capital-intensive heavy machinery profile of our past. The future Ingersoll-Rand is a multibrand commercial product manufacturer serving customers in diverse global markets.

Please go to slide number 13. We are continuing to execute our strategy, which has delivered solid results and improvements for the past seven years. We have become a truly global company, able to serve global markets. We've created a strong foundation for growth by expanding our recurring revenues and through our commitment to innovation across all of our businesses. We're demonstrating operational excellence and the benefits of our business operating system will be a base for ongoing future gains. I am confident we have delivered only the beginning of the long-term benefits that will accrue from our company's transformation. There is room for additional improvement. We have many significant opportunities ahead of us and we're well-prepared to manage the challenges ahead. Tim will now cover Ingersoll-Rand's business performance in more detail. Tim?

Thanks, Herb and good morning. Before I discuss our financial results for the quarter, I would like to remind you that as a result of our forthcoming divestiture or spin-off of the Bobcat utility and attachments businesses, we have reclassified their operating results, net of tax to discontinued operations for both the current and prior years. Additionally, we have included Club Car's operating results in the Industrial Technologies segment for both current and prior years. Reporting for all other segments is consistent with the first quarter.

Now, please turn to slide 14. Revenue for the second quarter was $2.2 billion, up 9% from 2006. With growth in all three operating segments. Industrial Technologies recorded double-digit growth while Climate Control and Security Technologies were up 6% and 8% respectively, compared with the prior-year. 6% of the Company's growth was driven by increased volume and price with the remaining 3% attributable to favorable foreign exchange and acquisitions. We experienced significant revenue growth in all major geographic regions, which is reflective of the investments we have made in our geographic diversification. Asia-Pacific revenues were up 21%. More specifically, China was up 12%, where strong gains in Industrial Technologies offset declines in Climate Control. India revenues grew 59% with gains in all segments. Revenues in the European region were up 17%. Robust end markets, favorable currency and acquisitions contributed to the growth across all of our operating segments. Revenues in the Americas were up 4% as stronger Latin American growth bolstered modest growth in the United States. Recurring revenues grew by 11% and accounted for 19% of total revenues. Our strong revenue growth despite softness in some end markets is a result of the investments we've made to diversify the sources and geographical breadth of our revenue, to sustain long-term growth through all market conditions.

Please turn now to slide 15. Our $2.2 billion of revenue for the quarter resulted in operating income of $274 million, which is an increase of 9% over prior-year. This increase reflects flat margins as volume leverage improved pricing and productivity were largely offset by unfavorable business mix and material price inflation. Interest expense was $31 million, consistent with the second quarter of last year. Moving down the income statement, other income for the quarter was $8.6 million, compared with $6.2 million of expense in 2006. The year-over-year difference was due to currency gains in the current year, as opposed to currency losses in the prior-year. Our second quarter effective tax rate for continuing operations was 17.4%. This rate reflects our full-year projection of 15.1%, in just a few minutes I'll take you through more detail to explain our tax rate change and composition. Earnings from continuing operations for the second quarter were $208 million, or $0.68 per share, an increase of $0.08 over 2006. Discontinued operations reflects income, net of tax of $756.1 million, or $2.49 per share. This consists of $2.22 per share from the gain on the sale of the Road Development of $676 million. The remaining $0.27 per share reflects a full quarter results of the Bobcat, utility equipment and attachments businesses, one month of Road Development, and ongoing costs from previously divested businesses. Total net earnings for the second quarter were $964 million, or $3.17 per share, including the gain on sale of Road Development. Excluding the gain on the sale, net earnings were $288 million or $0.95 per share.

I'd like to take a few minutes to walk you through the details of our tax rate and how our results compare to previous guidance. Please turn to slide 16. In our previous guidance we projected an 18.5% full-year tax rate. Due primarily to costs associated with intercompany cash movements to fund our share repurchase program, our full-year tax rate increased by approximately 2.4 percentage points. Removing the more highly taxed Bobcat utility equipment and attachments from continuing operations resulted in lowering the rate by 5.8 percentage points. This yields a new full-year projected tax rate for continuing operations of 15.1%. The upward revision to the full-year rate required a catch-up adjustment of 2.3 percentage points applied to the second quarter. As a result, the Company's effective tax rate for continuing operations for the second quarter of 2007 was 17.4%. The second quarter effective tax rate for discontinued operations was 32.3%, yielding a blended rate for all operations equivalent to the 18.5% previously reported, was 22.2%. The net effect of the tax increase in the second quarter was an unfavorable $0.05 earnings per share versus previous guidance.

Please turn to slide 17. Now, let's review second quarter EPS results versus our previous guidance range of $0.93 to $0.98 per share. Starting with the midpoint of the range of $0.95, revenue growth of 9% exceeded our guidance of 5% and added $0.04 per share. This volume increase and the effective currency gains would have taken us beyond our range. However, the higher effective tax rate and under performance of Road Development in April resulted in a second quarter EPS of $0.95. In line with the midpoint of the range.

I would now like to take a few minutes to talk about the results of our businesses. Please turn to slide 18. Climate control technologies reported second quarter revenues of $846 million, up 6% from the second quarter of 2006. Worldwide truck and trailer revenues were up 6% for the quarter as strong growth in Europe and Asia offset a decline in the domestic markets. Year-over-year revenue gains in bus and aftermarket parts helped to offset marine container declines. Stationary refrigeration remained solid as worldwide cases and contracting grew by 11% with double-digit growth in Europe and Asia. Second quarter operating income for the segment was $99.8 million, with an operating margin of 11.8% compared with 11.1% last year. The margin increase was attributable to price realization and operational improvements partially offset by unfavorable business mix.

Please turn to slide 19. Industrial Technologies segment recorded second quarter revenues of $750 million, a 12% increase over prior-year, or 10% on an organic basis. Air solutions revenues grew by 19%, 15% organically, as favorable worldwide industrial markets supported higher revenues in all major geographic regions. Recurring revenues increased by 16% over prior-year. Productivity solutions revenues were flat with prior-year as international growth in fluid and material handling offset softness in domestic markets, primarily in tools. Club Car grew revenues by 10% over prior year. The increase was attributable to growth in utility, four-by-four and aftermarket vehicles. The golf business was steady compared with the prior year as market share gains offset continued softness in golf markets. Segment operating income was $109.3 million, representing an operating margin of 14.6% compared with 14.3% in the second quarter of 2006. Growth leverage, favorable pricing and productivity were partially offset by inflation and increased investment spending to generate future growth.

Please turn to slide 20. Second quarter security technology segment revenues were $629 million, up 8% compared with $583 million in the prior year. The commercial segment recorded 10% revenue growth as strong worldwide markets drove increases, especially in schools, universities and healthcare. Electronic Access Control was up 11% while sales of Mechanical products increased 10% over the first quarter 2006 -- second quarter of 2006. Worldwide revenues were up 3% in the residential segment. Sales to Big-Box customers were up 7%, due to the newly introduced residential electronic security products in addition to new product designs and finishes in our core offering. Builder revenues were down only slightly as market share gains helped to offset the impact of declining domestic residential market activity. Second quarter 2007 segment operating income was $108.3 million, which yielded an operating margin of 17.2%, compared with 16.8% in the second quarter of 2006. Favorable pricing and productivity offset nonferrous material inflation, primarily copper and zinc and investment spending related to growth programs.

Now let's turn to the balance sheet. Please turn to slide 21. Before I discuss our second quarter performance, I'd like to remind you again that our current and prior-year metrics exclude the assets and liabilities of the Bobcat utility equipment and attachments businesses. The Company ended the second quarter with an investment of working capital of 11.5% of revenues; inventory and receivable metrics were consistent with prior-year while payables reflected an improvement. Capital expenditures for the quarter were $28 million or 1% of revenues, while depreciation and amortization expense was $35 million. Total debt at the end of the quarter was $1.6 billion, consistent with 2006. As was our debt-to-capital ratio at 21.1%. Debt-to-capital remained below our target range of 30 to 35%. The Company's solid balance sheet, strong cash flow, proceeds from the sale of Road Development and pursuit of strategic alternatives for Bobcat, utility equipment and attachments businesses will position us well to deliver increasing shareholder value in the future. Herb will now conclude our formal remarks with the outlook.

Thank you, Tim. Please go to slide 22. Our economic outlook for 2007 has not changed materially since our last forecast in April. We closed the quarter with solid revenue growth in most of our businesses and our continuing operations bookings were up about 9% compared to relatively strong numbers for last year. You may recall that both fourth quarter 2006 and first quarter bookings also increased by a similar amount at 8%. Discontinued operation bookings were also up around 10% for the quarter, with increased year-over-year activity at Bobcat, utility, and attachments. With the exception of the North American residential building and transport refrigeration markets we expect steady growth in most of our worldwide end markets for the balance of 2007. We expect moderate overall growth in our industrial markets, with low single-digit growth in North America and double-digit growth in international markets. The golf market will remain sluggish for the balance of the year and Club Car will grow modestly by share gains and sales of non-golf vehicles. Material costs continue to be a drag on our earnings. Second quarter commodity inflation was approximately $28 million, and will be $62 million year-to-date. We now expect full-year costs to approximate $85 million to $90 million, which is about $10 million above our previous full-year forecast. Nonferrous materials continue to be the major portion of the increased year-over-year cost problem. We're minimizing the impact of material cost increases through our sourcing partnership, value engineering strategies, and our product pricing. Additionally, our cost reduction and productivity initiatives have identified a number of restructuring opportunities that will create substantial value in 2008 and beyond. During the third and fourth quarter, we will implement these restructuring actions which in aggregate are expected to total around $23 million. These investments are expected to reduce reported full-year 2007 EPS by $0.07 per share with $0.06 in the third quarter, and $0.01 per share in the fourth quarter.

Now, please go to slide number 23. We expect total earnings per share in the third quarter in the range of $0.85 to $0.90, excluding restructuring costs and gains on the sale of businesses. Earnings from continuing operations for third quarter 2007 are forecast to be $0.67 to $0.70 per share. We expect discontinued operations EPS to be in the range of $0.18 to $0.20 as earnings from businesses held for sale offset ongoing costs. Our forecast is based on year-over-year revenue growth of 6 to 8%, and a share count of approximately 287 million shares.

Now, please go to slide number 24. Earnings from continuing operations for full-year 2007 are forecasted to be between $2.62 and $2.68 per share. This is based on an expected average share count of 295 million shares for the full year. Our full-year forecast is based on a tax rate of approximately 15.1%, for continuing operations. We also expect discontinued operations to account for about $0.83 to $0.87 per share of earnings. This totals $3.45, to $3.55 per share, excluding the $0.07 of restructuring costs and gains on the sale of businesses. This forecast includes the earnings of discontinued businesses for the entire fourth quarter. We will provide an updated forecast for the year in the event that the disposition of these businesses is completed before the end of the year. We're also targeting to generate approximately $850 million in available cash flow for 2007. So despite some continuing headwinds in 2007, Ingersoll-Rand's diverse business portfolio will produce record EPS in 2007, thereby demonstrating that our strategy is working and that our business execution remains solid.

Now, please go to slide number 25. This ends our formal remarks, and I'd like to open the floor to your questions. Thank you.

Thank you. The question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) Our first question will come from Ann Duignan with Bear Stearns.

Hi, good morning, it's Ann Duignan, Bear Stearns. My first question's around restructuring. Given that revenue this quarter was a little bit better than you had anticipated, which businesses are you looking at restructuring at this point? And why?

What we -- when we look at our manufacturing footprint around the world in both our Climate Control and our security, as well as our industrial, we look to see where we have opportunities to increase our profitability as a result of the shift geographically of where our customer group is, Ann. We've seen more and more shift in terms (inaudible) into Eastern Europe as well as Asia-Pacific and so on. So what we'll be focusing on is really our manufacturing footprint to reflect where we think the demand for 2008 is, and beyond, for all three of those sectors.

And the $0.07 is embedded in the operating EBIT of the businesses, not a separate line item?

That's correct.

Okay. And my follow-up question is on the IRS tax audit, is there any risk, Herb that if you lose or if the IRS defines your -- if they prevail, I guess, is there any risk that they could go back and expand their audit to '03 through '07, or how comfortable are you that this is only and solely a 2001 and 2002 tax filing issue?

Ann, let me, if I can, take the opportunity not only to answer your specific question but before I came into the room, I looked at my Bloomberg and I saw obviously that was one that was out there. I'd like to maybe put together the entire list if you will that we have. We received this letter from the IRS approximately a week ago. The notice of the proposed adjustments regarding our reincorporation was not unexpected. The IRS, I think this is very important, the IRS has not contested the validity of the reincorporation itself, they have, however, challenged the intercompany debt incurred in the transaction, and they've characterized some of it as equity. Based on our analysis of the IRS view, we are very comfortable that we are adequately reserved for these adjustments and that the ultimate outcome will not have a material adverse impact on our results of operations in the past, in the present, or in the future. We obviously do not agree with the IRS position and we intend to vigorously contest those adjustments, there is, as I'm sure you're aware, a long way to go before this matter will be resolved. And if you'll notice, we did not put any specific numbers out there because, candidly, we believe that the numbers the IRS are kicking around are not realistic and that under any circumstances, we would be required to pay anything near those. And so to put a number out there at this point in time would be misleading. But your specific question, the audit relates to 2001, 2002, and I do not want to speculate on behalf of the IRS what they would do with the rest, but obviously it would be surprising to me personally if they did not follow through suit for subsequent years. I hope I addressed not only yours but some of the other things that are out in the rest of the world.

Okay. Thank you. Just to clarify, you said it wouldn't surprise you that they would look at 2003 through 2007, then, is that how I interpret what you said correctly?

That's what I would say, I'm not trying to forecast for them but I would be personally surprised if they didn't look at those as well.

Okay. Thank you, I'll get back in line.

Thank you.

Our next question will come from JP Morgan, Stephen Volkmannn.

Hi good morning. Just to follow up real quickly on that, then we'll let it go, but in your release you said you thought you were adequately reserved. Does that mean that you have an idea about what this settling this matter will take or is it just too early to really get that?

It's really too early to do that. Based on as part of FIN48 this year, we had to take a hard look and support all of our tax related reserves, including what we though the potential outcome might be for the inversion related reserve. But it's very preliminary, as Herb mentioned, we received this notification late Friday afternoon last week and our tax folks and outside advisors are pouring through it. Next step is we will submit back to the IRS our protest of their findings. And we'll have to take it from there. But I would not want to speculate more on the specifics of the matter.

I think, Steve, the take away I want you to have from us is that we quoted in our release and we said in our announcement before, the tax rate for IR going forward this rest of this year is forecasted to be 15.1%. That is after we had this notification.

Okay. Good. And then it looks like just Tim, based on your fairly thorough tax discussion there, that maybe next year we should think it goes back up to the 20, 21 area, does that make sense?

No, it really doesn't, Steve. I would say there will be lots of changes as we pursue the strategic alternatives for the Bobcat construction or the Bobcat business and so forth. But I would say probably somewhere in the range of what we originally set out this year, the 17, 18% is probably more reasonable.

Okay. Great. And then Herb, as we think going forward now and getting a lot of this stuff behind us you have kind of what looks like 2 good platforms and maybe one, that the industrial, that we might think of as kind of other, I don't know if that's accurate or not, should we look at this as 3 platforms or 2.5? And as you look to grow the business going forward, I guess I'm assuming it happens in the 2 platforms more than the industrial, but maybe I'm wrong there. And then I guess even a step further back, do you need another platform? I mean, how do you think about where this thing looks in five years?

I count 3, not 2.5, Steve.

Okay, fair enough.

What I would say to you is that we start off, I think it's relatively clear, if I can spend a moment to elaborate on this, if I do them in reverse sequence the way we normally talk, security, I think it's relatively clear where we see global footprint, mechanical, electronic access control, that kind of technology, all those areas have both geographic reach opportunities as well as acquisition targets for us. In Climate Control really so far we have been focusing on transport as well as stationary. Geographically, we see tremendous upside, I'm really, really getting optimistic about what I start seeing going in in the Indias and the Chinas of the world, I think I see there more opportunity for us frankly organically than I do at a lot of acquisitions. I think there will be some bolt-on stuff we do ala the APU, but I think it will be more organically driven. If I then look into the industrial piece, what we started off there was really in two parts; we had an air business, and we had a tool business and we had now have a vehicle business with Club Car. There are many other industrial customers that we touch with a broad range of solutions that we could provide to them. So actually, I would tell you that I am more, I guess, looking forward to bolt-on acquisitions in that sector than probably the other two combined. If you start thinking as to where we touch the customer and their being more productive and more profitable, there are many ways that our technology would really fit in on a much broader base than those two product categories I described to you. So to me, think of it along the lines as the three areas growing globally with two having significant acquisition and the third one, the client one probably having more organic drive over the next couple of years.

We also have embedded within the tool business, we have a fluid handling business, and some other material movement businesses that provide good growth platforms for us. And additionally, we are investing in growing geographically, there's good opportunity for continued strong growth in all of those parts of industrial, particularly in emerging market countries, India, China, where we're realizing some nice improvement.

Great, thanks guys.

Moving on, we'll hear from David Raso with Citigroup.

Morning, David.

Good clarification on the tax rate issue. Just understand, you made the comment even after this letter you still felt 15.1 is the right tax rate for this year. But just understand, if they do alter and they prevail on changing how the Ingersoll-New Jersey debt level is treated or however they want to look at as equity or whatever it may be, how does that not affect the ongoing tax rate for the entity? Or should we take the comment even after the letter, it's still 15.1 is simply because this won't have a resolution until the end of the year?

Again, Herb's comment of the 15.1 is really reflective of our belief that we are appropriately reserved for any costs associated or any change associated with the inversion audit. That is not to suggest that that would reflect the full of what the IRS has assessed in their denial of the interest deduction, but we don't believe that's the outcome. So consequently, there is no related adjustment to our P&L nor our tax rate related to this inversion audit.

And again, we can talk off-line, Tim, but if they do prevail, doesn't that change the level of debt in IR New Jersey that is shielding your U.S. profits, and thus it does have an implication going forward on the inherent tax rate of the Company, correct?

Their position is, is that yes, it is either not debt or a reduced amount of debt. If they did prevail, then it would have an impact on our rate.

Okay. So let me clarify. Quick question about the asset sale, the process, with the credit markets, obviously a little bit disturbed to say the least the last few weeks, how would you assess the impact that's been so far on what you think you could sell the businesses for and the interest level of the potential buyers?

I think it would be fair to say that we have world-class businesses that, therefore, drive interest level when it relates to a sale from both strategic as well as from financial-type buyers. Obviously, if there are interest rate changes that would potentially impact the amount that a potential financial buyer would put out there. It does not impact what a strategic buyer puts out there. Secondly, we are still as we said before evaluating whether or not the shareholder is getting more value. If we complete a sale to either the parties we just described, or whether or not a spin-out is the right way to go. And that determination, as we said in my notes, is something that we will be advising you of we are certain, within the third quarter.

It would seem with the higher tax rate you cited for to the disc -ops, is it fair to say when you think there is spin versus sale, some of the spinning can be done tax free that higher rate has to be take into consideration and for the after tax proceeds, if you did sell it, is it fair to say, Tim, I should be using a higher tax rate than you ended up paying for road?

I would say that -- let me first say that assuming that the tax rate in discontinued operations for those businesses, what we would ultimately have to pay would not be fair; that business resides, or does business in many, many countries around the world and is taxed on their earnings in those countries at the prevailing rates. I would say relative to what we paid for road, probably is not a bad assumption. I think we can probably -- the mix of business would enable us to do a little bit better.

I appreciate it. Thank you.

Our next question will come from Dave Bleustein with UBS.

Good morning.

Good morning.

Two quick ones, first, given the potential Bobcat transaction, do you expect there will be any windows where you're out of share repurchase mode in the third quarter?

No.

And the second one, you didn't want to give us a size of the IRS's proposed adjustments, but of the tax benefits from moving to Bermuda, what percentage of the benefits are they attacking?

They are attacking the intercompany loan portion of the package.

I understand that. What I'm trying to get at is, of the --

I know what you're trying to get at, remember when I started the whole thing, I was saying before, that we believe that the amount that I would be talking to you about, what they're proposing, that it is a totally unrealistic number, that it would be totally misleading to put that out there because we don't believe it has anything to do with reality.

Remember, we in all likelihood will end up through an appeals process and probably in tax court, who knows how far up in the court system that we'll ultimately have to carry this. But revealing too much information of our reserves or our position on this would not serve us well in that process.

Fair enough. Fair enough. Thank you.

Anything further, sir?

I think he's done, can we move on?

Yes, our next question will come from Bernstein, Daniel [Dell].

Good morning, guys. I suppose I'll leave the tax issue for now.

Thank you.

Let me turn to a couple of things about the businesses. Things that were noticeable, Club Car was up substantially in a business that historically, that's been less the case. I'd be interested in some color there. You also had share gains in several of the businesses. I'd love for you to be able to characterize how you drove those share gains, particularly in some reasonably challenging markets.

Let me start it off, I think that -- remember that when we reported Club Car, when Bobcat was still in continuing operations, they were in the same sector. And so if you were to look back at the details, going all the way back for the last two years, even where Bobcat was falling off, Club Car continued to increase and revenues were up around the same 10%. So that actually has been a continuing trend. And they have done that even though golf course construction overall worldwide has been relatively flat. As a result of a new car introduced three years ago, called the [president], we are now getting more 2 out of 3, 3 out of 4, sometimes 4 out of 5 of brand-new courses as they're switching in new fleets, we're getting that kind of business. We're really seeing a significant market share to where we're now actually 1 out of 2 golf cars. The second piece we really were focusing on with Club Car had to do with getting them to be more than golf. There are many, many utility vehicles that are used, some which we tell through Bobcat channel and some which we sell through other four-by-four-type dealers. We view that as a real strong global growth platform for us. The other areas we found, where I think I was really really happy with our team's performance really had to do in the security area on the residential side. If you look at Big-Box, you listen to the kind of numbers you're hearing from them, it's whether it's off 5% off 8% or so on, we actually had significant increases while they were seeing those kind of same store type sales reductions. A lot of that I attribute to a lot of market leader getting more shelf space, as well as brand-new introduction of electronic residential type locks. So I think what we were talking about, the $1.3 billion of innovation. That's what's really driving the market share gains throughout all of the sectors.

Okay. And you would characterize the market share gains as virtually none of it driven by price decreases or those kinds of promotions?

No. As a matter of fact, I would say to you it's the first time I could remember, and I usually have a pretty good memory on these kind of things, this is the first time I can remember our net price increase for operations was actually over 2%, we did about 2.3%. We actually had more increase, I think every number I remember reporting was less than 2% for quite a few years. So actually I think we were even more aggressive, that was true, candidly, as it is in our security business. It was up the most; it was up over 4%. We also of course had more copper to deal with then that than anywhere else. I think, if anything what you're seeing is new product that are generating value propositions for the customer that actually allow us to increase pricing. The Club Car story I was telling you beforehand, that president sells for more than 15%, some cases 18% higher than what we had before with the older type product. I think it's the value proposition, not discounting that's getting us the market share.

You may recall that we've been talking about investing back in the business to enhance our channels and accelerate the new product development and so forth, and those investments are paying off and picking up market share and growing.

Okay. Thank you.

And our next question will come from Andrew Obin with Merrill Lynch.

Yes. Good morning. Can you hear me?

We can.

Just fine, thank you.

Yes. Just a question, great operating performance, just a question on could you just talk a little bit about the moving pieces in the guidance by segment? What has changed specifically, and as I said, if you could address also by segment?

Going forward into the third quarter?

Yes, just second half of the year. What is better, what is worse? And as I said, just go segment by segment if possible.

I guess I would say, if we start off on a sector by sector basis, we see that the growth in Climate Control probably flows down a little bit to more like mid single-digits to high single-digits at most because of the continuing slowing down on the transport refrigeration side in the Americas. That's probably the biggest thing. The rest, I think, continues to be very, very relatively strong. If you move over into the industrial side, we had our first signs of some potential weakening on the industrial in the North Americas, where we were talking about 12% increases the second quarter, we see that being closer to like 10%, high single-digit, low double-digit range going forward. If you get Security Technologies, that's probably the one where it is the biggest question mark as to how long can we outrun the residential side, by outperforming it. When we put in for the rest of the year here, we took the growth that we were running like 8-some-odd% we took it down more into the low to mid single-digits so we're talking more along the lines of 4% to 6% type numbers.

And just a follow-up question just on the restructuring, what is the payback period that you expect? When do you expect -- I apologize if you noted it, how fast do you expect to recoup you restructuring expenses.

In general, they run 1 to 1.5, and absolutely none of them go above 2 years.

Thank you very much.

Anything further, Mr. Obin?

No, thank you.

Our next question will come from Cleveland Research, Mark Koznarek.

(Inaudible) We've been doing this a long time, I don't think they've ever gotten your name right.

I'm used to it. As long as we were talking about this restructuring, how much benefit rolls into 2008?

We would expect, Mark, that the full payback is, as Herb said, between one and two years. So we would expect next year to get pretty much the full effect of it.

I would be disappointed if we didn't get about 20 million just from that alone out of the 23 we're talking about investing.

The net delta, we'd be talking about the delta between that 20 and what we capture this year?

Well, the majority of the expense will be taken in this year and so next year we will realize probably $20 million worth of positive benefit.

Okay. Great. Then another detail here is on the new business mix pro forma for just the continuing operations, what is the rough geographic split?

Of the -- I'd say we're probably 64, 65 -- I'm sorry, about 60% North America, 40% international. I'm not sure I'm going to give you a break-out between --

25% Europe and then about (inaudible) 15% Asia-Pacific would be the way, Mark, I would just do it as a ballpark number.

Shifted a little bit, Bobcat was more North America so it's going to shift our international up a little bit. To two or three points.

Okay. So not really a huge swing.

No.

And just final detail here on your -- in the security business, electronics, I used to see numbers in the teens kind of rates of growth or even higher, and it now seems to be growing more or less in line with the segment. I'm wondering if you believe that business has reached some level of maturity or expanded penetration enough that it's going to be more realistic to grow in line with the overall segment, or was there something unusual slowing things this quarter?

The electronic when we added really all the pieces together was up in the second quarter around 11%, so it really was growing faster than the rest of the pieces. And our third quarter outlook, I just remember the numbers I had, full-year, my expectation Mark, it's still going to be somewhere around 12%. So we're still running if I compare that to the mechanical side, which runs more 4, 5-type%, it's running significantly higher. So for us, what I keep thinking is more and more the idea of going and upgrading not only as new commercial construction takes place but people going back in and retrofitting electronic solutions for where they have mechanical ones. I would really in your thinking go along the lines of that, the electronic piece is still running at probably double, triple what I call the mechanical run rate.

Also we're going to have a classification change with regard to some of the residential as we introduce more electronic residential locks that gets characterized down in the Big-Box or in the residential space. So that would enhance that growth as well.

And if you think [about it], we introduced an electronic dead bolt, if you look at the Schlage dead bolt, your talking about something that's in the 50, $60 type range, we now introduce the electronic dead bolt and it goes for $125 for the same one unit. You can see in terms of value proposition, obviously is also significantly higher. On the revenue side you go up almost 100% just because of the price point versus the mechanical side.

Incidentally, we've got a break-out of the geographic split going forward. It's about 60% North America, 25% Europe, 10% Asia-Pacific and 5% Latin America.

Great. And finally, a minute ago when you were answering Andrew's question, was that your segment outlook for growth in the second half or full year?

That was second half I was talking about.

Okay, great. Thank you.

Our next question will come from Deutsche Bank, Nigel Coe.

Good morning. Just to follow-up on the pricing question, you said 4% in security. I'm assuming that was driven by mechanical pass-through; is that correct?

That's correct.

And I remember Herb last quarter you said there were signs of some softening in your nonres channels, is that continuing?

It's continuing at the rate that we were looking at; it's still running around the 8% type level, so it has not dropped off. We look at Dodge data and the question mark is really when you get out into the fourth quarter as to whether or not the slowdown happens. What we do is take the Dodge data and age it because of where we wind up in the construction cycle. So the data really for us would not really be significant until the end of the year.

Okay. So there would be no real change since last quarter in what you're seeing?

No.

Okay. Talking about the portfolio changes, it seems that the -- from what you said in the slides, was Bobcat doesn't necessarily mean the end of the asset disposals, it sound like you're looking to pursue more of an organic growth strategy within climate. Does that mean you're really not interested in any sort of residential HVAC acquisitions?

I would say that based on what I told you, that would be a very, very logical conclusion one would come to.

Residential is not a space, I mean, with the exception of our security business, we sell through the Big-Box and those channels, but residential, I mean, consumer space is not one that --

We would have a tough time leveraging that, Nigel, across the rest of the businesses. We're much more, as you know, let's face it, the best leveler, if you want to talk HVAC, I would see much more opportunity for us to fix the air conditioning in a Wal-Mart by the technician who's underneath taking care of the display case. We don't have a technician making a call at home anywhere, so that for us would be totally, totally in a different space whatsoever. So we'd really -- the residential side there does not bring anything, it would have to be such a tremendous idea, would be stand-alone excellence rather than synergies.

Nigel, I wanted to respond, I'm not quite sure, maybe I missed what you said, but I mean, I think we have been pretty clear that with the exception of maybe some small bits and pieces here and there, that this is the kind of the finish of our restructuring or recasting the portfolio. So I don't anticipate any large or significant divestitures going forward of any of our portfolio businesses.

Fair enough. And the last question is really on the corporate line. We've seen that big pickup year-on-year, I think we've seen this with ASD and also with Tyco as well. Would you expect that sort of trend rate to continue until the end of the year and would you expect that to -- where would you expect that to settle out?

Let me talk a little bit about the accounting of this. When there are corporate costs that are directly charged to the business for specific activities, they will go into discontinued operations with it. Those that are kind of general allocations of corporate costs cannot be allocated to businesses that are into discontinued operations. Therefore, what you see is the increase in corporate unallocated this quarter is reflected. Now, we are -- we have undertaken a zero-based budgeting process to make sure that we are sizing our corporate staff and shared services with the remaining business. We are reluctant to pull the trigger on that until we ultimately determine what the outcome of the divestiture or spin-off would be. Clearly, you can imagine that if we ultimately ended up with a spin-off, we would have to staff the spun company with corporate shared services resources. So we don't want to scale back until that's determined. However, we have undertaken and are well into the process and are targeting taking some $40 million of corporate costs out of the -- out of our cost structure.

So what we did in our forecast, we said for simplicity sake we included discontinued ops as though they were here throughout the rest of the year. And therefore the corporate charges if you will match up accordingly on that unallocated line for the rest of the year. As soon as we're able to come and say as to what the real disposition looks like then we'll talk about what that looks and as I said we are well on our way for a zero based plan to deal with the appropriate sized corporate and shared service staff.

Okay, that's clear, I think. I'll follow-up offline, thanks a lot.

Just as a reminder, that is "star 1" if you do have a question. Our next question will come from Credit Suisse, Jamie Cook.

Good morning.

Good morning, Jamie.

My first question, when we think about the climate and controls business, I guess it makes sense that Thermo King in North America is going down more than we thought. How does that sort of impact margins? Is there any big difference between the margins in Thermo King in North America versus overseas?

The difference in Thermo King Europe and North America is really very, very little. Both are equally very profitable. The real mix issue that we're dealing with is in the area where stationary refrigeration revenues are up, while transporter refrigeration revenues are down. The transporter refrigeration revenues on the upside carry gross margins that approach 40%, while the stationary are much more in the 20s. That's the biggest issue for us in the sector.

The stationary refrigeration growing in the double-digit rates and we're seeing the decline in transport particularly North America, but that whole mix, resulted in some pressure enlargement.

Thermo King is very nicely balanced profitability-wise around the world.

Okay. And then just, Herb a longer-term question, when you think about your portfolio after Bobcat and the road paving business and you think about potential acquisitions, how important is it to shift more of your business to higher growth opportunities overseas and using acquisitions as a tool to do that? And just a follow-up on that, we are hearing some data points that perhaps while Europe is good today, maybe '07's sort of the best, sort of the peak there. Does it follow the U.S. and just your thoughts on Europe longer-term.

Yes, I would say to you that my many years of doing this, that Europe follows the U.S. by anywhere from 12 to 18 months based on the kind of businesses that you're in. And so I would agree with you, saying that these are the best of times that are there, and probably as we look at our more '08, '09 type numbers we don't see a double-digit type increase, we see that more leveling off on a more sustainable rate in the single-digit level. For us, what you very, very accurately described (inaudible) is looking for acquisitions and/or opportunities, we really are developing double-digit type numbers. And so for us at this point in time, whether that's Eastern Europe or frankly for us, it's some of the Latin American countries of the world and clearly India, if I look at Climate Control, (inaudible) when I was just over there, we were talking with one customer, and their biggest concern is, can they really hire 5,000 store managers and can they really put in the 2,000 trucks they need to be able to deliver those kind of things. So I think those kind of tremendous developing market opportunities are ones that I'm excited about. When we met the folks with Beijing and Shanghai with Club Car, we're now the largest producer of nongas model-type product small people-type movers in the world. We're well-positioned to go in there, I just love to go and replace put-put's and deli, and all the other cities that are there or go to the world games. So I think those kind of opportunities, looking at acquisitions that enhance that kind of opportunity both security, industrial, and climate are what we're targeting. I can't believe the challenge we've had has been the price point. We haven't talked about it, but I would say to you, I can tell you I'm quietly cheering here on the side lines, private equity has real problems with this stuff because we've seen in terms of more deals that we've lost to them over the last year and a half that all of the other strategics combined. So as I think they wind up having to deal with money more along the way I do, they'll give us more of a shot to buy the kind of companies that meet the profile I was just describing to you.

I think I'll go back to Herb's prepared remark's and our focus for those acquisitions it would be, geographies, channels and technologies, the geographies certainly are focussed on the more rapidly growing emerging market economies, Eastern Europe, Russia, India, China and Asia. (Inaudible) We're actually seeing now that our market penetration throughout Europe is such that while North American transport stuff is off for Climate Control, we now are actually seeing the European marketplace that an absolutely dollar terms is equal to what we see in the U.S. That would really help us longer-term to be able to balance out the kind of cycles that we had experienced before hand where we weren't that strong there.

Okay, great. Thank you.

Our next question will come from Joel Tiss with Lehman Brothers.

Hi guys, how's it going?

Hi, Joel.

Can you just talk a little bit about the cash movement, the tax rate impact from moving the cash around? Is that done or is that going to continue as you buy back shares into the third quarter and into 2008?

Well, it gets into some -- a little bit more sophisticated tax explanation than I wanted to go into, but if you really step back from it, the majority of that still is ahead of us, but it is reflected in the rates. Remember, that was arrived at to determine a full-year rate. So consequently, while the cash -- we haven't actually incurred it, but it's embedded within the rate. So we clearly will finish the 2 billion authorization that we said we would finish by the end of this year with that amount. There will be no additional required for that.

The tax rate we described to you already includes the full 2 billion being acquired in shares by the end of third quarter. What we do not have in there, Joel, is beyond the third quarter. Because we do not, as of this point in time, have any guidance out there as to how robust our activity is in the fourth quarter.

Okay, great. And everything else has been answered. Can you just spend a couple minutes on the rental channel? I know, Bobcat is discontinued but can you talk a little bit about what you're seeing from those guys? Are they cutting their CapEx pretty strongly, hanging in there? Just a little characterization. Thank you.

Okay. What we find, and there's really two different answers. We're finding that the utilization of Bobcat-type compact equipment has resulted in very, very low levels of activity. Our activity level in the rental market for the first half of the year was less than half of what it was in 2006. Some of that, I think, has to do with new owners that probably are revisiting the cash flow line, I think some was more of a wait-and-see activity level. We just now received a couple of orders from one company that honestly we would have expected back in March or April. They really have cut back. On the other side, when I look at what we're doing on our utility type equipment more on the air compressor, these are obviously much lower cost units, that business has been very, very strong and continues to be very, very robust. But overall, I do believe that a change in ownerships has caused a delay and reduction in CapEx for the rental. I think the sale with United obviously put them out of the block for a while so I think there's been some ownership issues that delayed it even more. Overall, Joel it's been a significant negative for the Bobcat story.

Okay. Thank you.

Our next question will come from Eli Lustgarten with Longbow Securities.

Again, close, what can I say?

Hi.

One, we don't talk about Hussmann and the food market, up 11%, was that mostly Europe or was it balance, what's your outlook in that part of the business.

Balanced around the world.

Doing really really well, both in Europe as well as in the Americas. We're seeing strong growth. When we wound up getting into the Wal-Mart business, that went up, secondly we're starting to see a good rebound for more traditional larger chains. Pretty well balanced across the board and will be I think for the rest of the year.

Is there a big price component to that because of the material content? Unit volume?

There's just two issues that we have to struggle through there. Number one, has to do with the net price realization, in this one is only like 1.5%. While inflation is running north of 3%. So that one is tougher, it gets into almost like trying to get Big-Box type increases. So that's a challenge, if you will, that's on here. The other piece that's a big difference that has to do with the product mix, when you're doing more what we talked about, remember white Chevy that you wound up making for the Wal-Mart aisles, those do not have as attractive a gross margin to them as if you're making very fancy glass display cases that go to whole foods and so on. The shift to what I would call more traditional line stuff puts a little more pressure on the gross margin line as well. So those are the two debating factors.

A follow-up question is really how should we think about Ingersoll, you gave guidance is 350, which really 265 plus discontinued and most of the analysts had a 350 going -- the consensus was 392, 390 to $4, that 265 (Inaudible) $3 number for next year, is it philosophically that you intend to fully offset the dilution from these divestitures to have us thinking the closer to $4 range or when you think of the ongoing company, will you buy back enough stock to offset the dilution, if you can't make the acquisitions, do you feel the pressure to make the acquisition to offset the dilution, how should we think about Ingersoll over the next year?

I think I would go more along the lines of what we do is redeploy the assets that we get,cash or whatever it is, assuming we do not spin off, let's assume it's a sale, if you were to look at that part, I would be disappointed if we did not get very close to making that basically neutral. So that if you look at the share -- obviously, there's a lot which I don't know, this is one of these Tim and I were talking about this beforehand, when you talk about buying back $2 billion worth of business, our shares, you'd love the stock to be 30 bucks. But last time I look, I want a higher stock price rather than a lower. But you have to make all sorts of assumptions. If you look at the stock being 50 bucks and look in terms of what our expectations are, I would be disappointed if we were not able to go back to where we would be at least neutral. I'm not looking to replace all of the revenues with share buyback. We do think that we have some very attractive pieces that we'll be reporting out in the remaining part of this year, but for next year, I would go more along the lines of the full value for the IR rather than one that is based on the current continuing ops. I think that would be a real miss if you did that.

Is not to do with all share buyback, I assume.

That's correct. If you look at saying if I do the acquisitions we're targeting, I expect them to come at least in line with the kind of earnings and that we're going to be getting for businesses we're selling.

All right. Thank you.

And from Citigroup we'll hear from David Raso.

I'll be quick. Corporate expense, a little help with the full number? Obviously it dropped dramatically last year, second to third quarter and given the changes with the disc ops, can you give us some guidance full year? (Inaudible)

(Inaudible) was an anomaly. We had the stock based liabilities, our stock price dropped for the quarter. It provided a credit for us. We're probably looking at credit corporate unallocated on the restated basis somewhere in the 150 to 160 million level. Again, before any restructuring, zero based budgeting benefits that we would receive.

Okay. I'm just trying to think to the back half, obviously the first half the year EPS growth was negative 4, 3rd quarter you're looking for 3 to 4, the fourth quarter's got to be up 36%, you have a very easy comp, on Bobcat obviously in the disc op that quarter. There's some seasonality, security and safety get a little better profitability in the fourth quarter, Climate Control you should have an easy comp., but the question is, if Hussmann's doing better, fairly profitable part of Thermo King is down in North America, how should we -- it looks like Climate Control's going to be swing factor on the fourth quarter to get the number if everything else is reasonable. Can I expect Climates Control to have a big margin improvement in the fourth quarter to make up for last year's fourth quarter disappointment even with that mix?

Yes.

Okay. Thank you very much.

Operator, we'll take one more question, please.

Okay. And our final question will come from Andrew Casey with Wachovia Securities.

Good morning everybody. Most of my questions have been answered. It's been kind of long. Just a quick question on the CapEx in the quarter. Significantly down year-over-year, is that totally due in the removal of the machinery businesses or is there a comp issue there?

Those have been removed from both years so we are down considerably but you may recall last year we indicated that we had some significant investments, we're investing in R&D facility in Chek Republic and some other significant ones. So -- what we are doing now is continuing to invest in the business to provide to maintain our facilities and to meet our growth needs. But I would say this is more -- probably --

I think it's light, just because of what happened, didn't happen. But I think if you look at us going forward, 1.5, 2% CapEx type is pretty, I think on average, the kind of number you'll be looking at.

Great. Thank you very much.

Thank you, everybody, we're going to wrap up now. There will be an instant replay of today's conference call available at approximately 1:00 p.m., it will be available until August 3rd. The call in number is as follows, (888)203-1112, and the pass code is 8907146. International number, (719)457-0820. The audio and the slides from today's conference call will be archived on our Website and we're putting the transcript up probably sometime next week. Please call me, again, I'm Joe Fimbianti, if you have any additional questions. Thank you, and we're going to conclude the call now.

That does conclude our teleconference for today. We'd like to thank everybody for your participation, and have a wonderful day.