特靈科技 (TT) 2008 Q1 法說會逐字稿

(OPERATOR INSTRUCTIONS) Good day, everyone, and welcome to today's Ingersoll-Rand first quarter 2008 earnings conference call. Just as a reminder, today's 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 you, Christina. Good morning. This is Joe Fimbianti, Director of In Investor Relations for Ingersoll-Rand. Welcome to our first quarter 2008 conference call. We released earnings at 7:00 a.m this morning and the press release is also posted on our website. I would like to cover some of the usual housekeeping items before we begin. This morning, concurrent with our normal phone-in conference call, we'll be broadcasting the call through our public website. There, you will also find the slide presentation for the call. Both the call and the presentation will be archived on our website and will be available tomorrow morning at 10:00 a.m.

If you would please go to slide number 2. Before we begin, I would like to remind everyone that there will be forward-looking discussion this morning, which is covered by our Safe Harbor Statement. Please refer to our December 31, 2007 Form 10-K for the details on factors that may influence results. In addition, please be aware that some of the subject matter discussed in the following presentation will be addressed in the final version of our proxy statement prospectus to be filed with the SEC relating to the acquisition of Trane.

Now, I would like to introduce the participants on this morning's call. We will have Herb Henkel, the Chairman, President, and CEO of Ingersoll-Rand, James Gelly, our Senior Vice President and Chief Financial Officer, and Rich Randall, Vice President and Controller. We will start with a formal presentation by Herb Henkel and James Gelly, followed by a question-and-answer period. Herb will start with the overview. Now, if you would please go to slide number 3. Herb?

Thanks, Joe, and good morning to everyone who dialed into to today's call. Let me get started this morning with a few introductory comments. Overall, the first quarter lived up to our expectations. Revenues were somewhat stronger than originally forecast, primarily in markets outside North America. We were able to offset higher than expected material inflation through price, higher productivity, and cost controls. For the quarter, revenue increased 9.5% and we had solid growth in all of our major businesses, despite declining North American residential construction, and truck and trailer markets. EPS from continuing operations was $0.77, excluding a $0.04 one-time tax benefit, our results are consistent with the previous guidance range for continuing operations of 72 to $0.77 per share.

We've also made considerable progress in the quarter relative to the completion of the acquisition of Trane and towards realizing the available cost synergies. I'll cover more on the Trane acquisition later this morning. Finally, based upon our thorough going-through discussion, which James will take you through later on in the call, we are in a position to confirm our prior guidance of $3.80 to $3.90 EPS from continuing operations for full year 2008. Now, let me turn it over to James who will take you through the first quarter. James?

Thanks, Herb. The first slide number 4, gives a quick summary of revenue and operating margin for the first quarter. As you can see on the upper right, revenues were about $2.2 billion, up 9.5%. Operating margin was 11.4%, up 0.8 from last year's 10.6. Please note that this quarter's results included about $3.8 million in restructuring charges, representing about 0.2. Excluding restructuring, margins would have been up nearly a full point year-over-year. I'll come back to the topic of margins and operating leverage in greater detail.

So let's now go to slide number 5, entitled first quarter revenue growth. As you can see on the upper right, currency-neutral growth in the quarter was a little over 5%, with about 4 points of growth coming from the impact of the weaker U.S. dollar. Going to the upper left, all three operating segments delivered solid revenue growth in the quarter. We continue to see momentum in key end markets outside North America. Most of our North American businesses registered modest growth in the first quarter with the notable exceptions of truck and trailer, and residential building, both of which I'll discuss in more detail. Security technologies was up 7%, while industrial and climate were both up double digits. Organic growth for industrial was 10%, with about a point coming from a small acquisition.

Looking at the lower left, you can see growth rates by region, which sort of tells the story of the quarter. We continue to benefit from global diversification, with nearly all of this quarter's top line growth coming from outside the U.S. We saw 1% domestic growth and an average of 21% outside North America. Results were strong in Asia, Latin America, and Europe, across all reporting segments. Let's go to slide 6, entitled year-over-year revenue growth, which provides a look at our segment growth rates during the past five quarters. All three operating segments delivered consistent year-over-year revenue growth throughout 2007 in the first quarter of '08. Industrial technologies delivered double-digit revenue growth for the last eight quarters.

Let's go to slide 7, which is a look at first quarter operating income, which was $247 million, representing a margin of 11.4, as I just mentioned, up 80 basis points from last year. As you can see, favorable price and productivity more than offset inflation, unfavorable mix, and the impact of discretionary investments. As a general statement, you can see from the 3.7% productivity that our businesses have been following through on our more aggressive productivity plans for this year.

Let's move now to the income statement, to slide 8, entitled first quarter 2008 results. And skipping right to the second row, operating income of $247 million was up 18% year-over-year. As I said earlier, this included about $3.8 million in restructuring. Moving down the page, interest expense declined due to lower debt balances, while other income was up -- was $39.4 million, up about $40 million year-over-year. And this reflects interest income generated on our large post-divestiture cash balance. We ended the quarter with about $4.1 billion in cash.

Let's move down to the tax line, which was an expense of $47 million, up significantly from last year's $16 million. The effective tax rate in the quarter was 18.2% versus last year's 9.4%. The first quarter rate also included $10.2 million of one-time tax benefits. So excluding those benefits, the quarterly rate would have been right on our guidance for this year of 22%. As Herb mentioned earlier, excluding this $0.04 tax benefit, EPS from continuing ops were consistent with our prior guidance.

Moving on and looking at the next couple of rows at discontinued ops, you can see an expense of $30.1 million, or about $0.11 a share. First quarter dis ops included about $0.02 of ongoing expense, about $0.07 of tax expense related to last year's divestiture of compact equipment, and about $0.02 related to an adverse judgment in a lawsuit in the quarter. And on this last item, we booked the financial impact of the judgment while we're working through the appeals process. Finally, looking at the bottom line, reported net earnings for the first quarter from total operations were $181.6 million, or $0.66 per share.

With that out of the way, let me now turn to a review of our reporting segments, starting with climate control on slide 9. Revenues in the first quarter for climate control were $798 million, up a strong 10%. For the total Thermo King transport businesses, revenue increased by 16%, which is no mean feat given the state of the North American truck and trailer market. Declines in North American truck and trailer were offset by strong growth in truck, trailer, and sea-going containers in overseas markets, especially Europe. Looking at just the truck and trailer piece of Thermo King, revenues worldwide expanded by about 6%. North American industry shipments have been declining for the last four quarters, as you know, due to declining truck ton miles and higher fuel costs.

Looking at the North American refrigerated trailer industry as a whole, first quarter unit shipments were down approximately 40%. North American Thermo King revenues were down about 20%, compared with 2007. It's interesting to note that European trailer revenues, again, greatly exceeded our North American sales. European trailer volumes were up close to 30% in the first quarter. Worldwide bus air conditioning and sea-going container sales also expanded significantly in the quarter. Worldwide Thermo King recurring revenues also increased by 12%. And finally, we enjoyed substantial growth in our highly energy-efficient TriPac auxiliary power unit for trucks driven by the ever-increasing costs of diesel fuel.

Moving down the slide and looking at stationery refrigeration, this business is up slightly in the quarter. This time revenue growth in Asia display cases and services more than offset lower sales volumes in Europe, and flat year-over-year North American revenues. Climates reported operating margin was 10% in the quarter, up 50 basis points versus last year. This is strong performance, particularly in view of the significant decline in high margin North American Thermo King sales over the past year. Operating margins were driven by volume and price, but also by operational improvement, which together more than offset inflation. The management of this segment continues to make a lot of fundamental operational improvements, including continued restructuring initiatives globally, which will drive future margin expansion.

Let's go now to slide 10. Industrial technologies first quarter revenues were $743 million, up 11% versus the year-ago quarter. As I said earlier, growth is 10%, excluding one acquisition last year. Strength in industrial and process markets were the key drivers of first quarter growth. Revenues for the air and productivity solutions business in North America increased by about 4%, primarily due to strong recurring revenue growth, which is up 13% and offset sluggish activity for air compressors and tools. Air and productivity solutions revenues in Europe and Asia grew approximately 30% compared with last year. In Club Car revenues declined slightly. Higher sales of utility vehicles and improved recurring revenues were offset by the ongoing decline of the U.S. golf market.

Segment operating income was $97.6 million, representing an operating margin of 13.1%, down 60 basis points from 13.7 last year. Improvements in price and productivity were more than offset in the quarter by the unfavorable impact of inflation, mix, and foreign currency losses. Restructuring represented a $2.7 million cost, or about 40 basis points of the margin contraction. So let's go to slide 11 to security technologies. Revenues at security technologies were $622 million, up 7% compared with very strong results last year. Commercial revenues were up 8%, driven by worldwide commercial construction, especially schools, universities, and healthcare facilities, and revenues from electronic access control products were also up year-over-year. Residential sales in the Americas declined 4% in the quarter versus tough comparisons last year. The results were indicative of continuing decline in U.S. residential building activity.

Operating income was $105 million, or a margin of 16.9%, up 120 basis points from last year's margin. Price realization and productivity actions offset unfavorable product and geographic mix, and material inflation. Let's go to slide 12 to the balance sheet. As you can see on this slide, we made some improvement in working capital management, especially in inventory. Inventory improved by one half a turn, from 5 to 5.5 turns year-over-year. Receivable days were up slightly by about a day, while payables improved by 2.5 days. Taken together, these working capital elements helped to offset the impact of higher sales on the balance sheet. As you can see on the slide, capital spending in the quarter was $37 million, about 1.7% of revenue, while depreciation and amortization were $38 million.

Available cash flow for the quarter was a use of $129 million. And of course the biggest change on the page was clearly our cash and debt position, which went from a net debt position last year of $1.8 billion to a net cash position of $2.6 billion this year, a favorable swing of $4.4 billion, which resulted from the divestitures executed in 2007. So with that out of the way, let me turn the proceedings back over to Herb.

Thanks, James. Please go to slide number 13. By any standard, one of the key transformational steps of the past decade has been the acquisition of Trane. Trane added to Ingersoll-Rand creates a leading diversified industrial company. As a result, the combination gives you a company with stronger growth, better earnings consistency, and much better critical mass around the world. I want to take a few minutes to update you on Trane's performance in the first quarter and how we're progressing towards completing this significant acquisition.

So if you would please go to slide number 14. Trane's performance in the first quarter, like Ingersoll-Rand's, was consistent with prior expectations. Revenues increased by 6.5% and EPS increased from $0.28 to $0.33, that's an 18% increase. Both measures were consistent with prior guidance. Revenues for global commercial equipment increased by about 6%, while global parts, services and solutions were especially strong, with year-over-year sales growth of about 21%. Global parts and services delivered double-digit growth in all geographic regions.

Residential sales in North America declined in the quarter, hampered by a substantial decline in new construction, and a softer renovation market. Commercial order growth for the quarter was a very solid 10%. Global backlog improved by about 7% over $1billion. The record backlog was driven by strong growth in markets outside the U.S. Now, if you would please go to slide number 15. During the last four months, we've made significant progress towards completing the Trane acquisition. We have completed all the required antitrust approvals and we believe that we're in the final stages of obtaining Securities and Exchange Commission approval of our proxy documents. The Trane shareholder meeting to approve the acquisition will be held approximately one month after receiving SEC clearance and we expect to close the transaction immediately afterwards.

Now please go to slide number 16. Also this morning, I would like to cover the very important topics of integration synergies, and long-term productivity improvement, which are going to be the key drivers for Ingersoll-Rand's profitability going forward. Our focus for the next few years will be first and foremost to keep the business running smoothly, and to attack the easily identified and controlled savings, like overhead reductions and supplier rationalization, while laying the groundwork for multiyear aggressive productivity improvement. We've established rigorous multiyear goals for key cost areas, and we're working to achieve lean administrative structures, including finance, legal, HR, and IT. The total headquarters cost base that we're working over is about $500 million. We're also pursuing substantial procurement savings across a $9-billion spend, which includes both direct and indirect materials and logistics.

Integration planning began back in January. We formed 14 teams and many, many more subteams. We staffed this effort with dedicated full-time resources, both internal and external, to ensure execution with senior-level internal resources, vaulted without that expertise when necessary. Both Trane and Ingersoll-Rand employees are actively engaged in the integration planning teams. Now, if you would please go to slide number 17. Additionally, we're in the early stages of developing a plan to capture growth synergies as we look towards our future. We currently are focused in the high profile areas such as parts and service, controls, and accelerating the development of whole-team growth on a worldwide basis.

Now, please go to slide number 18. As we continue to review the ongoing integration activity, we feel very confident that the annual run rate savings for the first 12 months will be $125 million, and we expect to gain about $300 million in synergies by 2010. Any benefits from revenue synergies would be in addition to this $300 million of cost synergies. Now, please go to slide number 19. Putting Ingersoll-Rand and Trane together will create some large scale efficiencies and unlock a significant amount of cost synergies. The Trane transaction will be a major catalyst for ongoing cost reduction and continuous improvement through the new, larger Ingersoll-Rand. Growth and cost synergies will be driven by accelerated implementation of lean Six Sigma and productivity initiatives. The Ingersoll-Rand business operating system that's been developed over the last several years will be the platform for driving continuous improvement across our enterprise. Our goal is to accelerate our annual productivity increases from the historical 2.5 to 3% range to 4% and more.

Now, please go to slide number 20. With the acquisition of Trane, the major heavy lifting of portfolio change has been accomplished. During the next 18 months or so, cash flow will primarily be used to retire Trane acquisition debt. For the foreseeable future, our focus will be on acquisition integration, synergy execution, and cash generation. We obviously remain very excited about this transaction and the strong new company it's going to create. We'll continue to update you on our progress going forward. Now, let me turn the proceedings back to James who can take you through the outlook for 2008.

Thanks, Herb. As we said back in February, this year's forecast has a little added complexity due to some uncertainty about the exact timing of the Trane acquisition closing, and the closing -- and with the closing taking place in a seasonally strong time of year. In addition, like most people, we're keeping a close eye on the economy. So if you would be good enough to go to slide 21, I can start by updating the economic assumptions behind our 2008 forecast, and this is for stand-alone Ingersoll-Rand, using the same chart we used in February. The chart summarizes the key economic and business assumptions, and we have noted any changes from the February assumptions in red.

Starting at the upper left, we have seen further deceleration in the U.S. and we have taken 2008 U.S. GDP growth down about half a point from our original outlook to 1.2%. Western Europe will probably be a bit slower, about a half a point below our February view. While the U.S. economy is clearly slowing, we built our 2008 revenue guidance based upon the lion's share of growth this year being generated outside North America. We expect this pattern to continue for sometime, but also expect to see some moderate deceleration in the developed world during the balance of the year. Looking at the upper right at U.S. construction, we assume residential building markets will show no upturn before 2009. Non-residential will see about a 7% year-over-year decline in square footage terms, with institutional activity roughly flat year-over-year, and commercial construction expected to decline about 10% year-over-year. Our market mix and the 9 to 12-month lag from these leading indicators give our non-residential security business some pretty good visibility into the back end of the year.

Moving down the right-hand side, you can see that the reefer trailer market in North America, which declined 15% in 2007, is expected to decline by an additional 15% this year as the market bottoms out about mid-2008. Expanding refrigerated truck and trailer volumes in Europe continue to help offset the severe declines in North America. However, we assume that growth in European truck deliveries is decelerating and will approach a peak around the same time. Looking at the lower right, you can see industrial production and capacity utilization in the U.S. have been marked down versus our original view. One strong mitigating force is the continued influence of a weak U.S. dollar, with the significant stimulus it provides to export growth, and this continues to counteract some of the decline in U.S. domestic demand.

In summary, we expect to see flat to down markets in North America, slower, but steady growth in Western Europe, and strong growth in the emerging world. With good product and geographic diversification, we are continuing to offset the particularly tough end markets we serve, but again, not too different than our plans for the year. Let's go to slide 22. Based on all that, we expect revenues for full year 2008 to be up 5 to 6%, about a point lower than our guidance in February. Looking at the upper right, we expect about 3 to 4% growth in local currency terms, and about 2 points of benefit from currency translation. Looking at the upper left, we expect our three segments to deliver growth in the mid to high single digits, but somewhat higher growth in our industrial technologies business. Growth in climate and security is projected to be a point or two below our original guidance for the year.

Going to the lower left of the geographic breakdown of sales, we expect the bulk of our revenue growth to come from outside North America, as we've seen over the past several quarters. Please go to slide 23 and we'll look at 2008 operating income, which is Ingersoll-Rand as a stand-alone business, prior to the Trane acquisition. We built the plan to expand operating margins this year by 1 to 1.5 percentage points. As you can see, we continue to realize favorable price, most of it from actions taken last year. We also expect cost inflation to remain an issue, about 2.5 to 3% across our cost base. Prices for metals, energy, and plastics have obviously spiked to pretty high levels, and if they remain at current levels for the rest of the year, we would have inflation at the high end of this range.

One of the cornerstones of this year's plan is 4% cost productivity, to be realized across all parts of the cost structure. Based upon first quarter productivity results, and on initiatives being worked across the Company, we're optimistic on this front. Let's go now to slide 24, to Trane's expected results. For the second quarter, Trane sales are expected to increase 2 to 4% to about $2.1 billion. The commercial business is expected to show continued strength and increase by about 8%, while residential markets will continue to decline and residential revenues expected to be down about 12%. Equipment sales in the U.S. have slowed, while international sales continue to be strong and services growth continues to be very strong. Trane's second quarter EBIT is expected to be flat versus last year in the range of 249 to $260 million. As the slide says, Trane also is focused on sharpening cost productivity and cost controls.

Looking at the full year, on the right, reported sales are expected to be up 4 to 5% at $7.8 billion. This is not too far from our original revenue growth assumption for the year. Full-year EBIT is now projected at 770 to $815 million, as Trane disclosed yesterday, about $15 million lower than their original guidance. Trane also communicated that they have used up about two-thirds of their contingency, or hedge for the year, about a $50-million reduction. But taken together overall, this would be solid performance and if executed, not too far from our expectations. I'll discuss the impact of Trane's new guidance on Ingersoll-Rand on the next slide.

In fact, if you would go to slide 25, which is the final slide. Here we put together the respective stand-alone forecast for Trane and Ingersoll-Rand. I should point out that there are going to be a number of differences, versus our February presentation, and this is how we'll show the new Ingersoll-Rand P&L going forward. For this analysis, we've assumed that the combination is consummated on May 31, and therefore that our second quarter results include all of Trane's seasonally-strong June month. As you can see on the right-hand column, our full-year forecast shows expected revenue for the combined entity of approximately $14 billion. This is about 1% below our February guidance of $14.2 billion.

Operating margin is projected at about 12.5 to 13%, basically in line with our February guidance of 12 to 13%. I should point out that this excludes any inventory stepup or restructuring charges, which I'll discuss in a minute. We continue to target first full-year synergies of $125 million pretax, and this forecast assumes about 7/12 of that amount will be realized during 2008. In the next year or so, a good portion of acquisition synergies should be visible in the corporate and unallocated line, as we reduce headquarters redundancies. The corporate and unallocated expense shown on the chart at $150 million for the full year, basically represents our estimate of Ingersoll-Rand and Trane corporate costs, net of corporate headquarters cost synergies we expect to realize this year. I should point out that in February, we presented Trane margins net of Trane corporate and other expenses, but now those costs are going to be combined with Ingersoll-Rand's and shown below the line.

As we've communicated previously, we assume purchase accounting charges will approximate $145 million per year and again, we prorate this amount for the period from June 1 through year-end. Margins for the Trane reporting segment will be shown net of amortization expense, as they are shown here. As you may recall, in February, we showed the amortization below the line and not in the Trane reporting segments. Moving down the page, we estimate interest expense of about $250 million, which is a bit lower than our February guidance, and this results from slightly lower expected debt balances and the potential for lower average interest rates. Our forecast for interest and other income has likewise been adjusted, and is now about $10 million better than prior guidance, at about $70 million for the year. The effective tax rate for the combined entity should be about 21 to 22%, a point or so better than we indicated in last quarter's call.

Adding all this up, as you can see, brings us to total EPS from continuing operations in the range of $3.80 to $3.90, reconfirming the numbers we communicated in February. Once again, this does not include about 30 to $0.45 of one-time charges, primarily inventory stepup, which we will incur post closing. We're still working to firm up the size and timing of these charges. And then finally, looking at the bottom, we expect about $0.15 per share of expense from discontinued ops for the full year. And all of this is based on a 310-million average share count during 2008.

Let me briefly switch gears to the center column, to the second quarter, where we expect the combined company to have revenues that approximate $3.1 billion. Second quarter segment operating margins at both Trane and Ingersoll-Rand should be similar at 13.5 to 14%. EPS from continuing ops for the second quarter's projected at 85 to $0.90 per share, and discontinued ops is expected to be an expense of about a penny. And this second quarter forecast is based on an average share count of 304 million shares.

In conclusion, there are a number of assumptions that underpin our earnings guidance for the full year. First, the Trane acquisition closing, taking place on or about May 31. Second, no further reduction in Trane's outlook or further reduction in their income hedge for the year. Third, the economic environment, specifically we assume the U.S. economy will remain just above stall speed, while international markets remain robust. And finally, execution of our productivity and acquisition synergy plans across the Company.

In constructing our plans for this year, we tried to incorporate some degrees of freedom, including a meaningful level of income hedge or contingency. Our efforts to expand the size of our hedge through cost productivity, synergies, and other actions have been met with some headwinds, like commodities inflation, more U.S. economic slowdown, and some modest reduction in Trane's income outlook versus our original expectations. And results outside the U.S., including currency exchange have been better than planned. Hopefully, we've been loose enough in our thinking to provide some visibility to the puts and takes for the year, and this concludes the formal part of this morning's presentation. If the operator would oblige, Herb and I would be happy to entertain your questions.

(OPERATOR INSTRUCTIONS) Our first question will come from David Russell with Citi.

Hi, good morning. The questions on the margin guidance for the full year, you maintained it. I'm just trying to walk through the pieces in a sense of you're taking the revenues down the most in your highest margin business, so the mix, just at first flush, would seem adverse as well as, of course, the cost inflation issue. Can you walk us through where the EBIT margins can stay similar to the prior guidance? Is it higher pricing assumed? Or maybe help us with a little more FX help on the top line, what does that drop into the bottom line?

Yes. I think you've identified the moving parts, David. The short answer is, you said it, a little bit better price realization, that's both the product of the pass-through from last year and additional actions that we take this year. You were correct in saying that currency is a help at the top line and at the operating income line. Productivity and other actions that we're taking are a benefit. I would say you're correct that the largest reduction in revenue from our last outlook was in the highest margin segment, but I would say a good deal of activity happening to take underperforming, either businesses or regions and move them up, are offsets that you can't see.

Jim, can you quantify some of those numbers? The FX help, obviously I'm talking margins, so if it helped this quarter roughly of $350 million of revenues, what was the EBIT benefit in the quarter from FX?

I guess the way to answer that question is, if you think about the businesses that benefited the most from currency translation, you would be looking at, for example, some very strong Thermo King revenues in Europe, which are well above the average for the, certainly for the reporting segment and for the Company as a whole. That would be margin accretive just from the translation effect of those higher margin businesses. Yes. I guess I would say you probably picked up, just looking at the quarter, 10, maybe $15 million of additional operating income just from currencies on a little -- yes, so your margins would be expanded just from the currency impact in the first quarter.

Not to beat a dead horse here, but that wouldn't help the margins. If you only brought in $15 million of EBIT on $350 million of FX revenues, it's actually a margin drag. So if your guidance has more FX help--

David, I was just talking about the quarter.

Well, that's what I'm talking about as well -- yes --- okay. For full-year, 350. Okay. So essentially FX helped. Security technologies is trying to go after the costs with the lower revenue outlook. And your pricing, where's the pricing coming and your cost inflation was raised a little bit less than I would have thought. Can you just walk through those last two pieces and I'll get back in queue.

Yes, David, I think there's two areas. Number one, we were successful in getting some higher than what we had originally forecasted prices through on security, that really happened latter part of the year, so we're obviously getting the benefit of them beginning of the year. And as you look at the material inflation, we were fortunate enough to guess right on our hedging. We took some stuff in the first quarter, where we were at copper at 2.90 versus where some of the forecasts were, so we didn't see the full impact of the increases that otherwise would have been out there, if we were out there bear and without them. And so for us, the challenge gets to be as James is saying, how much are we able to continue to control the increases in both steel, as well as copper? We've seen zinc go favorable for us. Those are things we have to go manage our way through, but the price increases overall, for the first time that I can remember in a long time, we actually got slightly above 2% in the first quarter of this year and we expect to continue to see that going through the rest of the year.

And if there's more increases during the course of the year essentially, correct?

That's right.

Okay, great. I appreciate the detail. Thank you.

Thank you.

(OPERATOR INSTRUCTIONS) Our next question will come from Ann Duignan with Bear Stearns.

Hi, good morning. It's Ann Duignan with Bear Stearns.

That's what we thought.

I think I should change my last name.

Is that like Fimbianti?

That's true. My questions are around security technologies. I mean it continues to deliver very strong performance. I'm assuming that that's being driven by the institutional sector, which although you're expected to slow, is still holding up pretty good. How much of that business is being driven by retro fits versus new builds? Is that an appropriate way to ask the question?

Yes. I think what you looked at, Ann, is that we are really continuing to benefit from strength in both of those areas. They are continuing to expand the size of existing hospitals while they are also building new ones. I don't think it's one or the other. I think it's a combination of those. And clearly, we're seeing that the overall commercial strength was still there in the quarter. But I would tell you, if you actually look, and I'm not knocking the results, commercial performance is excellent in terms of margins, but the real improvement we saw was on the residential side. Frankly, that's the one that probably surprised me the most, after the strength in both the margins, as well as outperforming the marketplace conditions that we saw out there. I think it's not just the commercial piece that we got to look at, it's really the combination of commercial, as well as outperformance by our residential team.

Okay, thank you. And follow-up question on your cost synergies. On the purchasing side, given what's happened to many of your major input costs or your commodities that you're purchasing since the beginning of the year, does this put any risk to your synergy goals in terms of what you can accomplish on the raw materials side?

Well, obviously that if copper's at $4 versus 3, what it will do, it will make it harder to go find the synergies on the bottom line. But clearly, we're saying that we continue to work through these items, and we're looking at not only the buy side, but an awful lot of the sourcing activity itself. It's not just the raw commodity we're going after. It's the supply base. When I looked through the suppliers, what I was very, very surprised, frankly, was how little overlap there was between the suppliers we have and the suppliers that Trane was using. As we wind up going now and approaching it as a combined company, I think we'll be able to really leverage that entire buy quite well, and having to deal with the headwind of raw material costs.

Okay. Then, you didn't name a successor to Mike Lamach, on the security technologies side. Is that something that we should be looking out for, or have you already named the person internally?

Well, what we said was in order to not create the lame duck situation, what we said is we're going to go announce the replacement for Mike at the time of the acquisition is completed. But, yes, we have some excellent internal candidates for the role, and we expect to announce it on the date of the closing of the deal, when Mike assumes his new role.

Okay, and best wishes to Mike in his new role. Thank you. I'll get back in queue.

Our next question will come from Merrill Lynch. We'll hear from Andrew Obin.

Good morning.

Morning.

First question, sort of more philosophical, historically analyst consensus and the Company's guidance included discontinued ops. Are we now going to exclude discontinued ops and one-time items when we provide guidance?

Well, certainly, Andrew, we are in a position to provide both.

No, but it's just, I mean just -- it creates confusion I think when the Company reports. Because for the past six years, as far as I recall, discontinued ops, you measured performance, including the discontinued ops and that's what the consensus was based on. And it seems that we -- other companies do it. It seems we are sort of now presenting earnings, and you want us to look at discontinued ops separately when we put numbers into things like first call and Bloomberg. How should I think about it?

I would suggest, and yours is a good point, the original guidance for this year is for $0.06 of discontinued ops, if I recall. We did have a couple of items in the quarter. I guess what I would say, we'll give you guidance for discontinued ops. That's probably where you should put your estimates in first call, and then we'll try and talk about the two pieces. But I think properly, we should talk about reported earnings. We just thought it would be clearer to give guidance on continuing ops, knowing that dis ops is going to be be $0.06. It it didn't work out that way, as you can see in the quarter, but, ye, why don't you just put into the system, including discontinued ops to aid the investor.

Thanks. Just what was the nature of the discontinued ops charge in the quarter? And what was the nature of the charge for product liability? Which product was it for?

It was actually for a Dresser-Rand product, that shows you how disconnected or discontinued it really is. It was for an installation that was done years ago that had something to do with the ongoing, quote, operation of that facility. Andrew, the whole subject, when we tried to do the guidance, going forward, once Trane is on board and we're into the, what I call the new Ingersoll-Rand, we'll obviously be looking at the overall performance. We were trying to now go into really demonstrate if you will, what's going on with the businesses versus what's going on with the cash I got in the bank, or all the other moving pieces as a result of gains and discontinued-type stuff. We're not trying to hide it. We're trying to really get into, how can you really manage, if you will, and measure the performance of the businesses themselves as they are, and going forward. As we wind up getting again, to have what I call a stable portfolio with Trane in we're going to be reporting out in four sectors, I think you'll see that in terms of the entire number becoming more meaningful, than with an awful lot of ups and downs that we've had as a result of the divestitures over the last two years.

No, I sure appreciate the complexity of what you're trying to accomplish, and certainly provide the disclosure. And just last question, I'll let it go. The restructuring expense, how should I be thinking about restructuring actions for the rest of the year? Obviously, we'll have positive impact on '09 numbers. Could you give some guidance, what you see second, third and fourth quarter?

Sure. Last year, just to remind everybody, we did about almost $30 million worth of restructuring. This year, it's probably excluding anything Andrew related to Trane synergies. This is just--

No, exactly.

Just the old Ingersoll-Rand, would be closer to 20 in the quarter. As you know, we did almost 4, and we would be talking about, for the balance of the year, a bigger second quarter. We got some projects under way, which could be 8 to 10 in total for the second quarter, and then that would level out to about 4 for each of the third and fourth quarters.

And I assume that going into '09, I should just reverse the restructuring actions, right? On top of whatever operating leverage you get.

That's correct.

Thank you very much.

Thanks a bunch.

Our next question will come from Terry Darling with Goldman Sachs.

I just had a couple quick questions. First, on foreign currency and revenue impact by segment in the first quarter, can you take us through those numbers?

Yes. Industrial was a benefit of 4 percentage points, climate 6, and security 3.

Okay. On slide 22, where you're not changing your '08 FX expected impact between the slide package and the one last quarter. Then therefore, I'm confused about the response to the first question about a greater FX benefit for the full year. What am I missing in that translation?

I think the question in the first --- the first question I think revolved around the income impact versus what we assumed for the full year. That answer was given about the effect on operating margin or income, not so much on revenue.

Okay. There's been no change on revenue impact, but you are expecting a bigger operating income benefit. Is that the way you're to translate that?

I'm here to say there's a little bit more currency benefit to revenue, not --- maybe we're dealing with rounding at this point, and the question really was does it help margins. And I said yes.

Okay. But again, just trying to square up what's changed with your margin guidance. That's not changed, your revenue has come down. FX was a big item there. I'm still confused as to what the other, I guess drivers of the -- essentially an uptick in absolute operating income dollars with the revenues coming down.

This is like the first question. Do you want to go back over the first question that was asked earlier?

If foreign currency is really not changed very much, are there other items? It would seem to be there would need to be some other items.

Yes. I think this is a repeat of the first question, which is, okay. So we have pricing realization, we have productivity, we have kind of better growth rate in certain businesses outside the U.S., which have higher income and there was some assumptions about inflation. We've had some better hedging that was done at levels that have created benefits. As you can see, there's a number of elements here that go into the margin calculation. But at the end of the day, it's going to be productivity, inflation, volume, and mix. I'm not trying to be cute. I'm just saying the mix was a little bit better, helped by growth in regions outside the United States, where businesses have higher than average margins. Productivity, we're working away at, which you can probably sense. We've got the benefit of some hedges, and we're seeing therefore, a little bit better commodities, performance. I think, I think that kind of squares the --

Okay. Did your price assumption go up?

Yes, a little bit.

Okay, and that essentially -- because you did take the raw material cost assumption up about I think 10% or so?

That's right.

So there is a little more price in here. Lastly, the unallocated expense guidance, if we take the first quarter actual, add in the second quarter guidance, and look at what that implies for the second half of the year, it actually assumes that the -- I think the numbers would suggest that the total company actually would be below what Ingersoll-Rand stand-alone would be from the first quarter. Is that correct? And if so, how do we get that? Is that just front-end loading, some of the corporate items for the year? Or is there something, something else that's moved there?

Yes. I'm glad you asked. The big, obviously the big thing is that we try to communicate, you take the Trane, corporate, and other, you take Ingersoll-Rand, and then you have what I described as corporate headquarters redundancies, which we sort of tried to say all the way along, are the earliest and most clearly identifiable synergies and acquisition of this type. You are correct. When you take the Trane corporate structure, add it to what we've got, drive synergies off of the combined number, you should come in at the order of magnitude that you've described. You are correct.

Okay. Thanks very much.

Thank you.

And our next question will come from Morgan Stanley. We'll hear from Robert Wertheimer.

Good morning, everybody.

Good morning.

I wanted to ask about hedging. You mentioned you got a favorable hedge in there. When did you learn of Trane's decision not to hedge this year in contrast to past years? Did you weigh in on that decision? And did you think about hedging it yourself?

Robert, we are unable to make any decisions that impacts the performance of the stand-alone company called Trane. Until we own it, we really do not have anything to say in managing it. We've been accumulating information and going through it. Yes, we heard about what their decision was in the first quarter, but candidly saying that that was their decision and not ours. I couldn't impact it.

Okay. That's helpful. Let me ask a second question. If materials do end up coming in higher than you expect, and I wanted to ask about accelerating the synergies or if get higher than your $300 million synergy goal, you had set some of your stretch goal. Can any of that come in the first 12 months, first 24 months. Or if you do beat your synergy target, is that more back-end loaded?

I think that our goal is really to do both. We expect that there are near-term objectives we can go after for both revenue as well as cost side, above and beyond what was in the target, while we're also working on those that are longer, so I don't think it's really at the exclusion of one or the other. It's really we're going to be trying to go after both. If you look at the existing levels of copper and steel, the increases that you're talking about there are measured in the tens of millions of dollars. We believe we have revenue opportunities and specifically, in areas such as service, and so we can go into --- to try to really combat that, offset that, and exceed that.

Thank you. Let me ask the last follow-up. The cost inflation, the material cost inflation, you went from $100 million to I think 110.

Yes.

I guess that's partly because you had hedged it. How long throughout the year do your hedges last, if it's possible to think about it that way?

It obviously varies by individual product line, but we have stuff that goes out all the way through August in some cases. And so it carries in terms on there from June through August for most that I recall.

Perfect. Thank you.

Thank you.

(OPERATOR INSTRUCTIONS) Our next question will come from Daniel Dowd with Bernstein.

Good morning.

Hey, good morning.

I actually want to talk a little bit about the revenue synergies that you talked about. You spent a good deal of time in the prepared remarks talking about that. Can you just walk us through, on slide 17, you talk about four different categories of revenue opportunities. And the way I'm used to thinking about this is that an existing sales force, the company buys a new company, they have a new product, so now you're pushing this product through this larger and more efficient sales force. In effect, you get higher sales force throughput. Is that what's happening here for the combined Trane and climate control sales operations? Is that how we should think about the revenue opportunity?

I would -- let me describe it this way to you. First of all, if you look at our parts business, both as they exist at Trane and as they currently exist in our own climate control, we believe that with the extra presence that we have, we now will have over 500 locations throughout the U.S. We believe that in terms of networking that's now available, the ability to go into find a product readily available, will encourage people to buy the products in places where they are going to be stored. We also expect to be able to take and to put IR-type products and parts into the existing Trane locations. So we really have seen in terms of availability of those items, on a convenience basis, will wind up increasing sales. When a person walks into a Trane facility, what we're into looking at is, introducing them into an awful lot of IRS updates, they heretofore would not have seen.

And those are actually different people than are walking into your IR facilities?

Yes. Exactly, right. And then second piece, on the service side, what we're really looking at there is that you have Trane has heretofore really focused on what I call large commercial, sophisticated, complex-type facilities, while in our Huffman-related service organization, and our security service organization, the integration group, we've been really focusing on more of the light commercial-type applications. We believe we're now going to be able to go and to expand the horizon, and go after the light commercial-type stuff. On the control side, what we really see is that whether you're controlling an air compressor or whether you're controlling an HVAC unit, or whether you're controlling a stationery refrigeration, the control pieces are very, very comparable. The asset tracking, the asset monitoring, they are all there.

The last one is obviously in the coal chain, we're talking about everything here from post harvest cooling, industrial refrigeration and getting again, into really a comprehensive service organization for the retailer. The best example I would tell you, I was personally over in China a couple weeks ago, and I met with the vice mayor of Shanghai. His number one object he wanted to talk to me about is how they have 350, what they call in terms of energy hog locations in Shanghai that he wanted us to get together, the Trane as well as the IR capability and go into an energy audit to reduce the energy, because it happened at retail locations. When you combine the stationery refrigeration, the HVAC, we're consuming over 90% or watching the consumption of 90% of the electricity that's there. Those activities now that we'll be able to go after collectively, I think will give us some real upside.

Okay, that's helpful. Let me just refer to page 19, where you talk about creating enterprise value. Is the shared services organization, is that already in place? Or are you going to be doing the Trane acquisition, looking for the other businesses to drive margins, while simultaneously putting in place the shared services operation?

We already have at Ingersoll-Rand a comprehensive enterprise services organization that focuses on everything that has to do with employees, their benefit plans, their payroll plans, as well as IT-type services. What we look at doing is leveraging that know-how across the entire Company, including the Trane pieces, where they have a much more limited scope of work. Our existing enterprise services organization, the shared service group, is already global in nature. They exist in the U.S. They are in Europe, as well as in Asia-Pacific.

Okay. What you -- really the organizational things you're focused on is really just the Trane acquisition.

That's correct.

Okay thank you.

And our next question will come from Mark Koznarek with Cleveland Research.

Hi, Mark Koznarek. Good morning.

Morning, Mark.

Couple details here. One on the tax line for James, the downward revision by a point for the full-year tax year, is that simply the first quarter here being at 18.2%?

Pretty much, Mark.

Okay. Then the second one for the second quarter outlook, you've got your operating margin estimate actually down from a year ago. And here in the first quarter overall for -- I'm talking legacy IR, first quarter here was up. Where do you think the swing is going to be? I think you already touched on part of it, that there's going to be double the amount of restructuring. But in what other segments are we expecting further margin compression from your first quarter levels?

Yes. I think the -- you've pretty much got it in the form of the restructuring that's going on in the quarter. The margins in our climate business and our security business, flat to down. The industrial technologies up, year-over-year in the second quarter.

What's the reason for that change? Is it raw material? Is it mix? Is it competitive pressure?

Well, I was going to give pretty much the list that you gave, which is we have some productivity, as you probably could guess, initiatives in motion. We've got restructuring going on. You're right. From a, call it a price-cost standpoint, we're still working to get a price pass-through to offset material inflation, other types of inflation. Then there is geographic mix, what in the second quarter is driving the top line growth and what's the, call it incremental margin. It does differ by segment, but I think the biggest callout here probably is the restructuring that we're doing.

Okay. Thanks very much.

Thanks, Mark.

Operator, we're going to take two more questions, please.

Okay, and our next question will come from Robert McCarthy with Robert W. Baird.

Good morning.

Hey, how are you?

I wonder if I could get you to follow up. I think it was Terry that asked you to give us the currency impact by segment. I wonder if you could do the same thing for the geographic split on slide 5.

That might be one more we'll give you a ring back. I have it, but I don't have it in the stack of stuff in front of me here.

Okay. I just want to make sure that I understand exactly what's being said about intermediate period post acquisition. Specific comment that you're going to focus cash on debt reduction for 18 to 24 months, in particular. I mean is that the same as saying that even bolt-on acquisitions are off the table for a period of time?

Let me start by-- I'll give one part of the answer and Herb can give the other part. Basically what we're saying in the short-term, this business is going to generate a lot of cash. We've put together a financial plan, which we think we can, from a cash generation standpoint, we think we can beat our ratings on the pro forma company are predicated on a certain amount of the cash that we generate, being used to delever some of the short-term debt. The sum and substance of our remarks, as the cash deployment have an element of -- people that we said we would pay down some short-term debt. We have flexibility. I guess the point is, I'll turn it over to Herb, but it really was just to remind people that we have to dedicate some in the short-term, cash generation to paying down some short-term debt.

Rob, what we said in our February call, which I repeat now, is that we had in our plans to spend up to as much as $500 million over the next 12 to 18 months, cumulative on bolt-on type acquisitions if they met certain hurdle rates. That was what we had put into police when we did our entire cash flow analysis. We are not walking away from bolt-ons that are very, very accretive, and I would give you an example. We have seen in terms of -- obviously at Trane, there are some distribution opportunities that we may want to look at. There are some really bolt-on areas, geographic expansions, and so on, that probably would be interesting for us. We right now are targeting things that are om the less than several hundreds of millions of dollars, rather than things that are bigger than that.

Okay. Thank you.

Thanks.

And our final question will come from Sarah Majors with Wachovia.

Let me see, just a clarification on the guidance for 2008. Does it include the approximate $0.04 of tax benefit that was called out in Q1? And if so, does that imply that the earnings guidance from continuing operations is actually lowered by $0.04?

Let me say that the $0.04 of tax benefit, which is in continuing ops, is incorporated in our guidance.

Okay.

Yes, it's in the guidance.

Okay. Since you maintained guidance from the end of Q4, then it actually came down a little bit?

The -- let's just say this. I didn't know of the tax benefit when I provided the guidance in February.

Okay.

It was a variance from what we said in February.

Okay, that's fair. And just to follow up, within the negative $0.15 contribution to '08 earnings from discontinued operations, are you including the 11 to $0.12 related to the charges from Q1?

Yes.

Okay. Just wanted to clarify that. Thank you.

Thank you.

And that's all the time that we have for the questions today.

Thank you very much. We're going to wrap up now. There will be an instant replay of today's conference call available at approximately 10:00:00 a.m. tomorrow. It will be available until May 7, 2008. The call-in number is 888-203-1112. The pass code is 8848491. Audio and slides from today's conference call will be archived on our website. Finally, the transcript of this conference call will also be available tomorrow morning. Please call me if you have any additional questions. I'm at 201-573-3113. This concludes our call. Thank you, again. Good-bye.

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