特靈科技 (TT) 2008 Q2 法說會逐字稿

Good day, everyone and welcome to the Ingersoll-Rand second quarter 2008 earnings conference call. This call is being recorded.

At this time for opening remarks I would like to turn the call over to the, Director of Investor Relations, Mr. Joseph Fimbianti. Please go ahead, sir.

Thank you very much, Patrick. Good morning. This is Joe Fimbianti, Director of Investor Relations, for Ingersoll-Rand. Welcome to our second quarter 2008 conference call. We released earnings at 7:00 a.m. this morning and the release should be posted on our website. I'd like to cover a couple of housekeeping items this morning before we begin. Concurrent with our normal phone-in conference call we'll also be broadcasting the call through our public website. There you will also find the slide presentation for this call. To participate via the web going to www.ingersollrand.com click on the yellow icon on the home page of the website. Both the call and the presentation will be archived on the website.

Also we'll be planning a day for analysts investors in Davidson, North Carolina in the fourth quarter. You'll have the opportunity to hear our-- about our businesses and spend some time with our senior operating team. And we'll be sending out information and details about this in the near future.

Now if you would please go to Slide number 2. Before we begin, I'd like to remind everyone that there will be forward-looking discussion this morning which is covered by our Safe Harbor Statement. Please refer to our March 31, 2008, Form 10-Q for detail on the factors that may influence results.

Now I'd like to introduce the participants for this morning's call. We have Herb Henkel, the Chairman, President and CEO of Ingersoll-Rand, Steve Shawley, our Senior Vice President and Chief Financial Officer, Rich Randall, Vice President and Controller, and the newest edition to our team, Bruce Fisher, Vice President Strategy and Investor Relations. Welcome, Bruce. We will start with the formal presentation from Herb Henkel, Steve Shawley and with Bruce Fisher, followed by a question-and-answer period. Herb will start with the overview so if you would please go to Slide number 3. Herb.

Thank you, Joe. Good morning and thanks to everyone who dialed into this morning's call. Overall the second quarter exceeded our prior earnings projections. Revenues were about equal to our original forecast for both historic Ingersoll-Rand businesses and Trane. And we were able to more than offset somewhat higher than expected material inflation with price, higher productivity and good cost control at our business unit and at corporate. For the quarter reported revenues increased by 38% and by 7% excluding Trane, which we acquired on June 5th. We had solid growth in all of our major businesses despite negative growth in North American residential construction and heavy truck markets and slowing industrial activity. EPS from continuing operations was $1.03, excluding about $0.13 per share from one-time items. This was about $0.15 above the midpoint of our forecast range of $0.85 to $0.90 per share. Steve's going to go over with you some additional details.

During the quarter, as you know, we completed the acquisition of Trane. We begun realizing the available cost synergies. I'll cover more on the Trane acquisition later this morning. Finally, we are holding our full year EPS forecast at $3.80 to $3.90 per share. Despite our above forecast results in the second quarter, we believe it is prudent to be conservative in our outlook given recent signs of slower growth in some of our key markets going forward and volatile material prices. Now I'd like to turn it over to Steve, who's going to take you through the second quarter. Steve.

Please go to Slide number 4. Thanks, Herb. For those of you who have read our press release or reviewed our second quarter numbers it's evident there are a lot of moving parts. This morning we are going to provide additional pro forma information to supplement the GAAP reporting data, so you can get a clearer view of our performance in the second quarter and understand our guidance for the full year. This line gives a quick summary of revenue and operating margin for the second quarter. As you see in the upper right, revenues were $3.1 billion, up 38%. Excluding Trane revenues increased about 7%. Looking to the lower right, reported operating margin was 11.7%, down 60 basis points from 12.3% last year. The box on the lower left of the chart details the $46 million of one-time costs in the quarter related to the Trane acquisition, which was primarily related to inventory step-up and in process R&D. Excluding the one-timers operating margin would have been 13.2% or 90 basis points ahead of last year. I will come back to topic of margins and operating leverage in greater detail shortly.

Please go to Slide number 5. Looking here at the Slide entitled second quarter revenue growth. You can see the components of the 38% sales gain in the upper right hand quadrant. Organic growth in the quarter was a little over 3%, with about four points of growth coming from the impact of foreign exchange. The Trane acquisition added 31 points of growth. Looking at the upper left, all four operating segments delivered solid revenue growth in the quarter. Trane revenue growth is shown as part of a newly created segment, air-conditioning systems and services. The revenue change portrayed in the bar is on a pro forma basis for the full quarter. We continue to see momentum in key end markets outside North America. Many of our North American markets registered sluggish year-over-year revenue comparisons with a notable exception of nonresidential construction, which still demonstrated upper momentum, positively impacting several of our businesses.

Climate Control and Industrial were both up 8% and Security revenue increased by 6%. Air-conditioning systems and services was up about 4%, up 10% in commercial and down about 12% in residential. Looking at the lower left you can see growth rates by region. We continue to benefit from global diversification with the bulk of our topline growth coming from outside the Americas. Excluding Trane, we saw 3% growth in the Americas for the quarter with double-digit growth overseas. Results were strong in Asia, Latin America and Europe across all reporting segments.

Please go to Slide number 6. Next slide entitled year-over-year revenue growth provides a look at our segment growth rates during the last six quarters. The old Ingersoll-Rand operating segments delivered consistent year-over-year revenue growth throughout 2007 and the first two quarters of 2008. You can see that the growth rate in Industrial and Security have tailed off somewhat. In both cases lower revenue growth is related to slower North American activity. Overall we continued to see well balanced sales growth in the second quarter.

Please go to Slide number 7. Let's look at a bridge of the second quarter operating results. Reported operating income increased by 32% to $361.6 million, representing an operating margin of 11.7%. The quarter included $46 million of one-time costs from the Trane acquisition. Excluding these costs, second quarter operating margin was 13.2%, up about 90 basis points compared with 2007. Favorable price realization of 2.4% and strong productivity growth at 4% more than offset the unfavorable impact of inflation, mix and investment costs.

Please go to Slide number 8. Let's move now to the income statement. Moving down the page, interest expense increased due to our higher debt balances from the Trane acquisition. Other income for the quarter was $26.2 million, up about $18 million compared with 2007. This increase was tied to higher interest income on the remaining post divesture cash balances. We ended the quarter with $787 million in cash.

Let's move down to the tax line. An expense of $80 million, up significantly from last year's $44 million. The affected tax rate in the quarter was 23.3% versus last year's 17.4%. The second quarter rate reflects a projected full year rate of approximately 22%. This rate was increased slightly by certain discrete items in the second quarter. Moving down the page to discontinuing operations you can see a cost of $6.4 million or about $0.02 per share, which we expect to be the quarterly ongoing run rate for discontinued operations. Finally looking at the bottom line, reported net earnings for the second quarter from total operations were $256.1 million or $0.88 per share on a GAAP basis.

Please go to Slide number 9. Next two slides provide a bridge between the second quarter actuals and the forecast we gave you in April which excluded one-time costs. Revenue for the quarter was virtually right on forecast on both the old Ingersoll-Rand side and at Trane. We exceeded our margin projections and the corporate costs were in line with our estimates. Our below the line results for the interest expense and interest income were positive and the tax rate was somewhat higher than expected. And finally our initial projection on the share count proved to be conservative and our quarterly average for diluted shares was about 291 million compared with an initial forecast of 305 million shares. As you can see, our quarterly EPS exceeded the midpoint of our prior guidance by $0.15 per share.

Please go to Slide number 10. This slide shows the components of our above guidance performance. About $0.07 came from higher operating margins, mainly from productivity gains and cost containment programs. $0.04 was from lower interest expense and higher interest income, some of which was related to the timing of the Trane acquisition closing. Higher tax rate costs subtracted $0.01 and $0.05 was from lower share account primarily from subperiod accounting and a drop in the value of outstanding options, this totals $0.15.

Let's now move to a review of our reporting segments. Please go to Slide number 11. We are going to start with the newest edition to the Ingersoll-Rand business portfolio, the air-conditioning systems and service segment which represents the Trane results. Since many in the audience are probably not as familiar with this business, I have asked Bruce Fisher to provide extra detail on results. Bruce.

Thanks, Steve and good morning, everyone. As Steve mentioned Slide number 11 lists the highlights for air-conditioning systems and services and represents the Trane business that was acquired on June 5th. The left side of the chart show's Trane's results for the period June 6th to June 30th, the time that it was part of Ingersoll-Rand. Revenues were $698 million. Operating income was $66 million reported and includes $45 million related to inventory step up in-process R&D and ongoing amortization, as shown on the bottom left. The right side of the chart shows the pro forma second quarter results for Trane excluding the $45 million of acquisition-related items and also $2 million of restructuring that Trane undertook prior to the acquisition. Revenues for the quarter increased 4% versus last year on a reported basis and were up 2% excluding the impact of foreign exchange. Operating income was $252 million. In the appendix you will find charts that reconcile operating income to Trane's traditional approach of showing segment income. To facilitate year-over-year comparisons we have included the first two quarters of 2008 and all four quarters of 2007.

Before reviewing the details of our sales orders and backlog, I'll first touch on the global HVAC equipment markets. The US commercial equipment market grew low-to-mid single-digits in the second quarter. Both applied and large commercial unitary markets had single-digit growth while light commercial unitary markets had a small decline. International unitary and applied markets continued to grow mid single-digits in aggregate.

Let's now look at the composition of our sales growth as shown on the chart. We show data on both the reported and ex-foreign exchange basis. I'll focus most of my comments relating to sales orders and backlog excluding the impact of currency changes. We had a good quarter in commercial air-conditioning where a combined equipment, systems and service of sales, which are the first two categories in the revenue table, were up 10% reported and up 7% ex-foreign exchange. Total global commercial equipment and systems representing 47% of our total HVAC sales grew 4% in the quarter.

I'll split that further into applied and unitary equipment. Applied global equipment sales were up 5% as the Americas achieved mid single-digit growth, Asia showed strength, while Europe/Middle East was down slightly because of a tough year-over-year comparison. Global commercial unitary sales grew 3% excluding exchange with strong performance in Europe/Middle East, modest growth in the Americas and a modest decline in Asia. On a regional basis for the quarter Americas equipment and systems sales were up 4% excluding exchange and sales for the rest of the world were also up 4% excluding exchange.

Let's switch now to our commercial global parts services and solutions business, which continues to perform very well growing 12% in the quarter ex-FX. This part of our business represented 40% of our commercial sales and 31% of total Trane sales. We continue to grow at the high-end of the 10% to 12% range we gave you in the first quarter. Americas and Europe/Middle East were both up about 12% and Asia growth was in the high teens. This continued strong performance is the result of successful execution of the expanded service initiative we began in 2006. We continue to capture more new service agreements on both existing and new equipment systems and controls. In the second quarter for example, we expanded the number of new service agreements by 18%.

We continue to broaden our service offerings to provide significant energy efficiency savings and get paid to extend the life of HVAC equipment in the field. And we continue to expand our capabilities to deliver more service in energy solutions globally by putting more sales and fulfillment people in the field and helping them be more productive and effective. So far this year we have added a number of additional service tax, reduced our attrition rates and made significant progress in our field automation goals to improve service and contracting delivering efficiencies. We're also benefiting from favorable market conditions, primarily aging infrastructure and rising energy costs, to deliver strong revenue growth in areas like performance contracting whose sales were up mid double-digits for the quarter. The global market for this part of our business broadly referred to as HVAC parts, controls, contracting and services is significantly larger than equipment and offers us a real opportunity to expand and continue to achieve significant growth independent of the behavior of the equipment markets.

Now let's turn to the residential part of our business which represented about 23% of the total Trane business. First let's review the residential market. We estimate that industry shipments to new construction were down in the range of 25% in the quarter and replacement units shipments showed a mid single-digit decline. Overall we estimate that the market for motor bearing units, which includes compressor bearing units, furnaces and air handlers, was down around 10% in the second quarter. Our residential product sales in the quarter were down 12% year-over-year. Volume decline mid-teens, price was essentially flat and improved mix contributed mid single-digit sales growth as we continue to significantly outpace the industry on sales of high-efficiency systems.

So to summarize overall for the quarter, Trane commercial sales were strong, growing 10% reported and 7% currency with good global equipment and system sales balance and continued double-digit growth in parts, services and solutions. Residential sales declined by 12% driven by a continued weak housing market, but we do see some sign that the downward trend will decelerate because year-over-year comparisons get easier both for us and the industry. Weather also helps. July is shaping up to be a good month and should be up nicely year-over-year.

Next let's review orders and backlog. Order pace in the Americas picked up to 12% growth year-over-year ex-exchange. Americas equipment orders were up 5% and orders for contracting parts, service and controls remained strong, up 15%. International orders continued to show strength of 23% on a reported basis and a 14% ex-currency. So overall global orders were up 15% reported and up 12% ex-foreign exchange. Commercial backlog continued to grow on a global basis. We ended the quarter with global backlog of $1.1 billion, a new record for Trane. Global backlog was up 13% reported and up 9% ex-foreign exchange. Backlog in the Americas declined by close to 5% while international backlog was up over 20%, more than offsetting the Americas performance. International backlog now represents just over half of our total equipment backlog. So in summary, we would say that our orders in backlog are at levels that support continued growth on a global basis.

In terms of income, Trane's operating income, which is the way we report profits now that the business is part of Ingersoll-Rand, as I said was $252 million for the quarter excluding $45 million of acquisition-related items and $2 million of restructuring. We realized price increases of roughly 3% in commercial and we achieved productivity in the quarter. However, these actions were not enough to offset materials and other inflation, lower residential volume and the investments we are continuing to make to grow the business long-term. So in summary for the quarter, Trane had good commercial sales performance with strength in international and service and we continued to weather the downturn in residential. With that, I'll turn it back over to Steve.

Thank you, Bruce. Please go to Slide number 12. Moving to Climate Control on Slide 12, revenues in the second quarter were $912 million, up about 8%. For the global Thermo King transport business revenue increased by 12%, an excellent performance considering the depressed state of the North American reefer trailer market. Declines in the North American trailer market were offset by growth in overseas markets especially in Europe and by expansion of global truck, bus and seagoing containers. Climate Control also benefited from significant growth in auxiliary power units in the US. Looking at just the truck and trailer piece of Thermo King revenues worldwide were flat compared to last year. North American industry shipments for trailers have been declining for the last six quarters as you know due to declining truck ton miles and fueler-- higher fuel costs.

Looking at the North American refrigerated trailer industry as a whole, second quarter unit shipments were down approximately 22%. Thermo King North American trailer sales were down about 18% compared with 2007. The European trailer revenues again exceeded our North American trailer sales. However, the rate of growth in Europe has slowed compared with the strong double-digit expansion we have seen over the prior year quarters. We expect lower growth in Europe for the second half of 2008. Worldwide truck, bus and seagoing container sales expanded significantly in the quarter and Thermo King recurring revenues increased by 7%. Finally, we enjoyed a substantial growth in our TriPac auxiliary power unit. Where second quarter sales more than doubled compared to last year due to the high cost of diesel fuel. This demonstrates how Ingersoll-Rand innovations are creating demand in tough markets.

Looking at stationary refrigeration, global sales were up slightly in the quarter. This was driven by an 18% increase in the Americas, display cases parts and services, which more than offset lower sales volumes in the rest of the world. Climates reported operating margin was 12.6% in the quarter, up 80 basis points versus last year. Margin expansion was driven by volume and price and also by operational improvements, which together more than offset unfavorable product mix and ongoing inflation. The CCT leadership team is making fundamental improvements at Hussmann and reducing cost in the transport business in the face of sharply lower US volumes in trailer. This performance again clearly demonstrates that our investments in innovation, geographic expansion and productivity initiatives are paying off.

Please go to Slide 13. Industrial Technology second quarter revenues were $806 million up 8% versus the prior quarter. Revenues for the air and productivity business increased by 11%, strength in the Industrial and process markets outside of the US were again the key drivers of the second quarter growth. Air and productivity revenues in North America decreased slightly as recurring revenue growth, which was up 8%, offset declining US activity for new equipment. Air and productivity revenues in Europe, Asia and India grew by 25% compared with 2007. Club Car revenues declined over last year. However, they continued to gain market share in the declining Gulf and softening utility vehicle markets. Segment operating income was $104.4 million representing an operating margin of 12.9%, down from 14.6% in 2007. Improvements in price and productivity were more than offset in the quarter by the unfavorable impact of inflation and mix. Additionally, investments in growth initiatives and one-time costs of approximately $12 million related to product liability and recurring -- I'm sorry liability and restructuring negatively impacted second quarter margins.

Please go to Slide number 14. Security Technologies revenues were up -- were $665 million, up 6% compared with very strong results last year. Commercial revenues were up 6% driven by worldwide commercial construction markets, especially schools, universities and healthcare facilities. Revenues from electronic access control products were up double-digits year-over-year. Americas sales in the residential segment declined 7% in the quarter against strong comparisons from last year when we significantly outperformed the North American residential construction market. You'll recall that last year we benefited from substantial shelf space gains at Big Box and from new electric security product introductions. The results were indicative of the continuing decline in domestic residential building activity.

Operating income was $122.4 million or an operating margin of 18.4%, 120 basis points from last year's margin. You will recall we had a similar year-over-year margin gain in the first quarter. Accelerated productivity and pricing actions more than offset unfavorable product and geographic mix in material inflation.

Please go to Slide number 15. Let's go to the balance sheet. For this analysis the numbers are on a comparable basis for 2007 and 2008, both exclude Trane. As you can see, we made progress in working capital management especially in inventory. Inventory improved by close to one half of a turn from 5.7 to 6.1 turns. Receivable days were down almost two full days and payables improved by two and a half days. Taken together these working capital elements are definitely moving in the right direction and are indicative of Management's focus on improving the efficiency of our balance sheet. Capital spending in the quarter was $53 million, about 2% of revenue. While depreciation and amortization was $44 million. The biggest change in the page was clearly our cash and debt position. Our net debt position changed by $4.2 billion year-over-year due to the acquisition of Trane. Herb will now talk about realizing integration synergies. Please go to Slide 16.

Thanks, Steve. On June 5th with the completion of the Trane acquisition, we took another major step in our transformation towards becoming a leading diversified Industrial Company. The combined Companies of stronger growth potential, better earnings consistency and better critical mass around the world. We're also creating a culture of performance and collaboration.

Now please go to Slide number 17. This morning I'd like to cover a very important topic of integration synergies and long-term productivity improvement, which will be key drivers for IR going forward. Our focus for 2008 through 2010 will be first and foremost to keep the business running smoothly and to realize cost reductions in our overhead and build the material while laying the groundwork for multi-year aggressive continuous improvement. We have established aggressive multi-year goals for E cost areas while working to achieve functional excellence through a lean administrative structure for key functions like finance, legal, HR, information technology and shared services. The total G&A cost base we're working on is about $500 million a year.

There should also be substantial procurement savings available in both direct and indirect materials considering the overlap of both Companies build of materials. The process improvement activity will also lead to manufacturing costs and quality improvement. That's a total $9 billion cost base. Integration planning began back in January. We formed 14 integration teams. We staffed this effort with dedicated full-time resources both internal and external to ensure execution with Vice President level internal resources moted with outside expertise as necessary. Additionally, were in the early stages of making customer contacts to realize growth synergies in the future. We currently are focused on high profile areas such as parts and service, control systems and overall co-chain development.

Now please go to Slide number 18. As we continue to review the ongoing integration activity, we are confident that the savings for 2008 will be $75 million and we expect to gain about $200 million in synergies in total by 2009 and $300 million by 2010. Any benefits from revenue synergies would be in addition to the $300 million of cost synergies.

Now let's please go to Slide number 19. Putting IR and Trane together will create some large scale efficiencies and unlock the significant amount of cost synergies. As I noted, we're expecting to generate $75 million of benefits in the second half of 2008, about $50 million is related to corporate costs with $25 million to come from procurement savings. We'll also be working to realize the growth synergies. 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 the enterprise. Our goal is to accelerate our annual productivity increases from the historical 2.5% to 3% range to more than 4%. Our first half productivity gains indicate we've got strong momentum going forward in accomplishing that goal.

Now let's go to Slide number 20. As we look forward to 2009, we concurrently see an additional $125 million in integration savings, which leaves us at a year end run rate of $200 million. The savings for '09 will again be primarily related to corporate items and direct and indirect purchase costs. We should also enjoy growing revenue benefits from growth synergies. The additional benefits translate to about $0.30 per share of incremental EPS in 2009.

Now please go to Slide number 21. Since the Trane acquisition was finalized about eight weeks ago, we've begun to leverage our collective strength in a number of areas. Employees have accepted job opportunities between sectors and we're working on numerous cross selling leads. A partial list presented on the right shows a few new sales opportunities and other important ways our sectors are working together to drive this performance. We expect to see continuing traction in future quarters. As on the side, the picture on the left covers two of our key themes: Innovation and dual citizenship, Club Car along with being the most well-known brand in the Gulf market is also the world's largest manufacturer of electric vehicles. The picture portrays a new street legal, all electric vehicle which we call the LVS. The first sale was to a Trane dealer in a small town in Missouri who's going to use the LVS to make service calls.

Now please go to Slide number 22. With the acquisition of Trane, the major heavy lifting of portfolio changes have been accomplished. During the next 18 months or so cash flow will primarily be used to retire short-term acquisition debt and I don't expect many acquisitions or divestitures over that time frame. 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 that it creates. We'll continue to update you on our progress going forward. Now let me turn the proceeds back to Steve who's going to take you through the outlook for 2008.

Thanks, Herb. Excuse me. Please go to Slide number 23. Let me start by updating the economic assumptions behind our 2008 forecast. Slide 23 summarizes the key economic and business metrics for 2008. Like many companies, we have seen softening in the US in the second quarter which influenced our expectations of further weakening in many of our key end markets in the back half of the year. We are also assuming slower growth in Western Europe in the last half of 2008. As you can see on the upper right, we assumed residential new construction markets will show no upturn before 2009. Nonresidential construction put in place measured in dollars and a leading indicator for the Trane commercial business is expected to increase by about 5%. Domestic nonresidential construction measured in square footage will see about an 11% year-over-year decline with institutional activity down slightly year-over-year. Our mark and mix in our nine to 12-month lag from the indicators will provide our Security business some cushion for the balance of 2008.

The reefer trailer market in North America declined 15% in 2007 and is expected to decrease by an additional 15% as the market bottoms in 2008. Refrigerated truck and trailer volumes in Europe have helped to offset the declines in North America. However, we believe that the European truck market peaked in the second quarter and the significant growth we experienced over the last eight quarters will stall in the back half of the year. Finally, looking at the lower right, we expect industrial production and capacity utilization in the US to continue to decline modestly. The influence of a weak US dollar will continue to stimulate exports.

In summary for the balance of 2008, we expect to see slightly declining markets in North America, slower growth in Western Europe and strong growth in South America, Eastern Europe and Asia. With enough product, service and geographic diversification to sustain growth in spite of a few particularly tough end markets.

Please go to Slide number 24. With this macroeconomic view we expect third quarter growth, excluding Trane, to be in the range of 2% to 4% and about flat with 2007 excluding FX. Full year revenues excluding Trane will be up 4% to 5% compared with 2007. On a pro forma basis Trane revenues are expected to increase 5% to 7% in the third quarter. For full year 2008 Trane revenues are expected to increase by 4% to 5% with a 3% to 4% increase in commercial equipment and a 10% to 13% year-over-year improvement in commercial services. Residential equipment revenues are projected to decline by 5% to 7% compared with last year.

Please go to Slide number 25. Slide 25 breaks out the components of our annual growth projection. Looking at the upper right, we expect about 1% to -- 1% to 2% growth in local currency terms, and assuming the US dollar stays where it is right now, about three points of benefit from currency translation. Looking at the upper left, we expect our four segments to deliver growth in the low-to-mid single-digits with somewhat higher growth in our Industrial Technologies business. Looking at the lower left as we saw in 2007, our revenue growth will come from overseas markets. We also expect cost inflation to remain an issue in the back half of 2008. Excluding Trane, full year 2007 material inflation was approximately $150 million. We expect about $120 million in 2008. Our new 2008 inflation outlook is about $10 million above prior guidance of $110 million and $20 million above our initial full year forecast given in February. Full year material inflation for Trane on a pro forma basis for 2008 is expected to approximate $140 million.

Please go to Slide number 26. The next Slide, number 26, puts together the respective stand alone forecast for Trane and old Ingersoll-Rand. As you can see on the right hand column, this forecast shows expected revenue for the combined entity of approximately $14 billion and a segment operating margin of about 12.5% to 13% for the full year. We expect to realize $75 million of synergy savings during 2008. Likewise, we assume one-time charges associated with the Trane acquisition to approximate $135 million or about $0.31 per share. The interest expense and interest income associated with the total outstanding debt and expected cash position reflects the impact of the acquisition. The effective tax rate should be about 21% to 22%.

Heading up all of this brings us to a total EPS from continuing operations in the range of $3.80 to $3.90. Please note that this does not include the $0.31 of one-time charges which we will incur throughout the year. We retain about $0.16 per share of expense related to the cost associated with discontinued operations. This forecast is based on 305 million average share count during 2008. The combined Companies should be a strong cash generator with available cash flow of $1.1 billion in 2008. However, this amount does not include about $600 million in tax payments related to the gains of Bobcat divesture that was made in the first quarter of 2008.

Switching gears to the third quarter of 2008, we expect the combined Companies to have revenues that approximate $4.4 billion. Segment operating margins should be 12.5% to 13% with earnings per share from continuing operations at $1.05 to $1.10 per share. One-time items are expected to be approximately $0.11 per share and discontinued operations is expected to be about $0.02 per share of costs. This forecast is based on an average share count of 325 million shares. I will now turn it over to Herb for the wrap-up. Please go to Slide number 27.

Thanks, Steve. We completed a very productive quarter. We finalized the acquisition of Trane, began achieving our planned synergies and we exceeded our earnings guidance. Additionally, we're very mindful of the slowing macroeconomic environment and all of our businesses continue to make important ongoing strides in operating efficiency and cost reductions. You would believe we have significant opportunities going forward to achieve earnings growth in sluggish markets through revenue growth from innovation products and services as well as recurring revenue expansion. We will bolster this growth with margin gains derived through continuous improvement and higher productivity from lean Six Sigma activities. And finally, there are significant synergies available from the Trane acquisition. I see a bright future for Ingersoll-Rand going forward. Now I'd like to open up to questions that you have. Thank you.

(OPERATOR INSTRUCTIONS) And we'll go first to Terry Darling with Goldman Sachs.

Thanks, Herb. Wondering if you could take us through the drivers by segment of the change in the expected margins on the full year '08 forecast? I guess the first item is Trane going from 11% to 12% to 9.5% to 10%. But if you could take us through those, that'd be helpful.

Sure. Let me ask Bruce to do that part and I'll do the rest for you.

Sure. In that original guidance of 11% to 12%, there was some contingency baked in, I believe, that Ingersoll-Rand put in not in the Trane margin but down below. And so what you see in the decline in the margin projection is really the combination of putting that contingency back up into the Trane margin number itself. That's about half of it. The other half is higher materials costs that we see in the second half of the year and some -- some impact of business mix where we're trading commercial equipment sales for service sales and have a little bit of a hurt in an incremental margin basis.

Okay.

Steve, do you want to speak to the others?

Just a comment, I'll start with Climate for the year. What's driving Climate for the year is pretty much the same as what's driven Climate year-to-date. Experiencing slower markets in the trailer segment as we talked about. Offsetting that truthfully was with revenues coming from the auxiliary power. The auxiliary power units seeing significant sales up, in fact the second quarter we saw about 124% increase in that product line, so that's offsetting to a large degree the top line. The Hussmann business, particularly in the US, is improving mainly due to the fact that we're picking up a little bit of share plus making significant improvements in the operations there. That's going to continue through the year. And as we said, the impact of Europe slowing will have a little bit of a downdraft on the top line, particularly in the third quarter, but the productivity, pricing and cost focus is going to be enough to we think drive Climate to a situation where there'll be about a one full percent improvement in margins year-over-year.

Security I think in the second half is going to be significantly affected by the slowing commercial markets. As you well know that's a significant piece of our Security business. The drop-off in the second half is noticeable as you can see on our charts that we provided. Also continuing softness in the residential market. We've seen significant improvement in price in Security. That seems to be an opportunity there that will help us for the full year. The net material improvements that we've seen in terms of this productivity has been very extensive in Security, so the operating margins are improving a bit for the year. And I think the total improvement forecast for Security is one point-- two points in this forecast. So those are the main things there.

Industrial Technologies, again, the slowing industrial markets in the US have us not as much concerned in the second half as we have for the residential and commercial markets, but we're seeing, again, productivity improvements in Industrial. Inflation in Industrial is probably hurting us a bit more because of the steel content there, but we're still looking for improvement year-over-year. And if you back out the one-time issues that happened in the second quarter, we see us being on track to improve margins in productivity as well. So the full story rolls up and I think if you'd look at the second half forecast, it's really built on the fact that we're making improvements in productivity, margin enhancements in all the three old sectors of Ingersoll-Rand and that's going to be critical to this forecast.

So there's was a lot of helpful color there, appreciate that. The-- on the old Trane though hard for me to pinpoints from those comments exactly what are the primary drivers. Is it a little bit of slowing in Europe and a little bit of raw material pressure on Industrial?

I think maybe Terry, if I look at it this way saying that on the Trane side of things what we see as, again, compared to how we had forecasted when we did this back in April.

Right.

What we see is more material price pressure than what we had seen before. We didn't expect the $100 million plus. We thought it was going to be less than that and a lot of that comes out of the steel and some copper, but steel is really the big driver that comes out of that part. And then candidly saying is that I think we also saw in terms on it, we had thought we would do better on pricing on some of the residential side, we didn't see that coming through. If I move over then into the rest I said of the IR type businesses, if you look at first half to second half, Climate Control continues to be frankly going from 12% probably up to 13%. The Industrial Technology piece probably goes from 13% up to over 14%. And then the Security in second half is actually running close to 19% but that's because we always have a stronger second half margin in Security than we do in the first half.

So overall I would say to you is that it isn't the margin side that's different than when we talked back in April, it really is the revenue side. We did not see the slowing down. When I was talking to you back in April, I did not see, did not forecast, we didn't see in our numbers, the slowdown in Western Europe as much as we currently are forecasting it to be. And maybe I'm overconservative, but that's really the change. It's more on the revenue side than it is on the margin side.

And lastly, Herb last quarter you were very helpful with a kind of a back of the envelope, first sense of things for 2009. I'm wondering if you could take us through an update on that?

Yeah I always get accused of doing this Austrian math for you, but at the risk of not disappointing my colleagues around the table, let me put it this way that, and again, it's kind of interesting listening to what you see in the outside world, but if I look at it, I see more like a U and I see in shape of it coming down in 80-- excuse me, the '08 and then going back again for '09. So overall if I make this on assumption going in that '09 is an aggregate very similar to what you see in '08 overall, with maybe being weaker to first half and then stronger in the second half. If I take that and put it all together, the way I kind of look at it is that we wind up replacing in the first five months of the year Trane income comparing it against, obviously, what it had as interest income for the money that we had and then adding onto that obviously interest expense. When I take that and then I look at the synergies that we add in, we come up with a number, and my thinking on it which is well north of the 415, 420 type thing. That's if you assume the same kind of math in 2009 as we currently have in 2008.

And I don't know if that's a conservative forecast now or not, so that's why we'll give that to you later on in the year. But so all in when we look at the comparison between where we were as IR add on Trane, subtract the cash that we had in the first part and then obviously the synergies that we told you about, the $0.30, you add that all up and you come up with a number that's well north of 415 to 420.

So is that pretty much unchanged versus previous?

Yeah. That's pretty much in terms of [inaudible] where we were -- actually the thing that is I think if anything I was looking at it to be higher than that. I'm taking now off of a lower base in the second half on revenues than what I was thinking about three months ago and that's why this is Austrian math rather than the formal forecast that we're sort of giving you. But just overall if you just sort of think of where we are today and if I think that the third quarter slows the way we put it in and the fourth quarter in terms of audit comes pretty comparable to get to the numbers we have as full year, that's a lower base than I thought we'd be coming from and hopefully there's some upside there. But overall I'd say that I feel then going in for next year that takes us north of the 415, 420, 425 number all based on what you guess on cost of material and, obviously, the ongoing issues of material costs is a big one.

Thanks very much.

How about our next question.

We'll take our next question from Ann Duignan with JPMorgan.

Hi, guys, it's Ann Duignan here.

Hello, Ann.

We guessed.

One question and one follow-up, I promise. Can we go back to the input cost again. You said $120 million for Ingersoll ex-Trane. I missed what you said Trane itself was going to be.

Trane was going to wind up being another $140 million on top of that.

Okay. And does that --

Copper and steel being very, very big pieces of theirs, Ann, they really-- they got hurt by it more than we did in some of our other sectors. So their number is actually higher than ours on a -- that's a full pro forma basis.

Sure. And then the procurement savings, the $25 million that you expect to achieve by year end.

Yeah.

Is that saving embedded in this forecast of combined $260 million or whatever?

Yeah. Well, we did the $380 million to $390 million full year. We said this is our operating results incorporating the $75 million of synergies and excluding obviously the one-time costs we had talked about.

Okay. And then my follow-up is on pricing. You had about 2.4% pricing in the second quarter. Can you walk us through your outlook for pricing by segment in the back half?

Yeah, I'd say to you that a lot of the pricing is actually in, we're not looking too much extra above and beyond, so my expectation is full year are fairly comparable to where we've been so far. If you look at it, Climate in terms of [inaudible] is running in the less than 2% range, Industrial is close to that and Security is actually the highest because of what we put in in the second half of last year, they're actually running up almost to 4%.

And Trane or ACSS?

Bruce was that I think it's about two to three as sort of the kind of number overall, right, in there?

Yeah, about two to three, Ann.

Okay, okay, I'll get back in line. Thanks.

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

Yes. Good morning. Great quarter. Just a question in terms of the guidance. I'm trying to reconcile Slide -- I guess it's Slide 26 versus the Slide 25 that you had in 1Q of '08. It seems that EBIT reduction is worth, based on my calculation is somewhere like $0.35 over negative drag than higher -- lower interest expense is a positive 10 and I think share count I'm estimating is I don't know like $0.07, $0.08. So it all seems to add up to $0.18 of lower EPS. So can you explain how the flat EPS guidance works given that you've taken down your EBIT significantly and the share count and interest expense is not enough to offset it?

Andy, let me take a shot at that. I think if you look at where we were three months ago with this whole thing, we were anticipating some of the things you heard today, the slowing of the commercial markets, the impact of inflation and just what was happening in the second half. So the guidance given three months ago in -- this is coming from a new guy taking a look at this, okay, I would say that that was fairly well hedged. So when you do the numbers calculation between the Trane piece of the guidance last year from the full year and what we're saying now, we have put that conservatism back up in the forecast. I think the unfortunate realization is that we're seeing inflation, we're seeing the impact of the markets impact us. So the short answer to your question is that some of these risks and some of these downsides were included in the overall guidance of $3.80 to $3.90 last quarter, and now we're pushing them back to the individual pieces as we learn more about what's happening in the individual segments.

Got you. So basically a little bit over hedge is gone, basically?

Yeah. You got it. Yes.

And the second question, this is not a statement, it's more a request. For years we used to include discontinued ops from guidance. It seems that we stopped doing that. So -- and this is just -- just trying to wonder how should I put my numbers up for First Call. Should we include discontinued ops or should we exclude discontinued ops? And I'm not sure it makes any difference, but just for consistency sake, have you changed your reporting?

Andrew, historically we have included discontinued ops as part of the -- as part of the discussion. We started to show the continuing part of it, try to break things into pieces so you could track them. But I think the numbers in First Call going forward should include discontinued.

Yeah, Andrew. We tried to but if you can think what we were concerned when we would throw in the discontinued ops you'd always wind up seeing these humongous gains from the transactions that we had completed. We didn't want that to cloud it all up. But if you were to go look at things going forward the way I'd view it is that as you get into it, basically disc ops cost us about $0.02 a quarter. That will be like what I call more of the steady state for the foreseeable, predictable type future. And as soon as we wind up getting rid of the noise in the disc ops, which totally distorts all the numbers, we plan on really continue to go back in again and include this $0.02 number, so when you put your First Call stuff in that's really we think you should put that in there. We're going to include it in our forecast.

Got you. I appreciate it. Thank you very much.

We'll take our next question from Shannon O'Callaghan with Lehman Brothers.

Good morning.

Good morning.

First is I guess a question on what's one time here with respect to the ongoing amortization at Trane? I'm just trying to understand, it looks like the 13.2% margin-- operating margin ex-items backs out the ongoing amortization at Trane. I mean is that, is that ongoing amortization in or out of the guidance at this point?

It's included.

Well the ongoing amortization piece, Shannon, is in the numbers. Okay? It's a little bit confusing because if you take a look at how it's working here, there's $46 million of one-time costs associated with the acquisition in the numbers for the quarter. $11million of that falls out into unallocated corporate. Okay? And you have to plug back about $10 million or so of ongoing amortization cost back up into the Trane segment. So what's in the Trane segment of the $46 million is about $35 million of one-time costs. Okay? That's primarily inventory step-up, write-down, R&D, in-process write-down and some other costs associated with the acquisition. So it's a little bit confusing because the numbers happen to be the same, but I don't know if that clears it up for you or not. But we can certainly try to send you more information if you need it.

Yeah. Maybe I'll follow up. I mean even just on the, on the basis of your slide, like on Slide 9. I mean you have $3.81 billion of revenue and a 14.4% saving on margin guidance minus 46 of corporate doesn't look like it gets-- it looks like it gets to like a 12.9% operating margin ex-items and it looks like that 9.6 might have been the difference but you're basically saying the 10-- so you're saying the 103 and the 380 to 390 for the year bake in the full amortization of Trane?

Yes, it does, Shannon.

So, Shannon, so yeah we have the ongoing amortization reflected in the numbers we provided for the guidance going forward. It's not considered as a one-time event.

Yeah. I mean, that's what I thought. I just -- I'm having a little trouble getting those numbers to fit, so I'll follow-up on you with that. In terms of this issue on price, maybe Bruce, can we dig in a little more to that? I mean, I think you guys said you're not assuming sort of additional price in the second half and maybe you didn't get as much as you thought in residential. I mean, is that maxed out at this point? I mean, have you basically hit a wall and so you're assuming no further price?

No, Shannon. I don't think that's true. I think we were-- we went out first in residential with a price increase and it took a couple of months for our competitors to follow. So as a result in that interim period and for the full quarter of 2000 -- of the second quarter of 2008, we didn't see as much price as perhaps we had hoped to get. Now everyone has announced price increases so there should be some more price going forward.

Okay. I'll leave it at that. Thank you.

We'll take our next question from Eli Lustgarten with Longbow Securities.

Good morning.

Hi, Eli.

Terrific performance in this environment. Just one quick clarification. I think you said the incremental material cost for Ingersoll ex-Trane was $120 million. How much above what your-- your planning was that?

When we started the year off, Eli, I thought the number was going to be around a hundred and then it wound up going up $10 million in the first quarter and we just added another $10 million now so we're now running at about $120 million. And I said most of it candidly was we did not in our forecast assume the steel piece going up as much as it has. We saw steel more like $700 to $900 and, obviously, it's been running over $1000 what's in there, so that's been really the biggest driver. Copper has been pretty much in line with where we thought it would be, which isn't good news, but that's-- it's just compared to forecast. And zinc is a little bit down. But obviously the two big drivers for our Company going forward with the combination with Trane businesses and the traditional IR businesses is going to be the copper and the steel pieces, so that's the one that we really need to keep focused on. And those are the two as I said that collectively we took the number up about $20 million of what we thought that when we went into the year back seven months ago.

And is that the implication that the pricing to recover that $20 million may be difficult? Is that what you're --

Well no actually I would say to that I think that that increase is why we were able to realize the full 2-4. If you go back, remember, we always talked about I thought that it was [inaudible] number to have increases of less than 2% and now all of a sudden we're seeing we're actually north of the 2% and I think we're able to put it through because then I think our customers realized when they're starting to see in terms of on it in the costs that we have there.

And can you--- follow-up, can you give us some idea how long does the backlog at Trane last given that the [inaudible] we're seeing? And Hussmann I think you said European food service was down all of a sudden. That had been running up middle to almost double-digits for a while. Does that just all the sudden fall off a cliff?

Bruce, do you want to do it?

Sure. In Trane commercial, the backlog typically is-- you could think of it in the range of three months to nine months in duration.

Does that set up a problem for next year because you're sort of late in the construction cycle with square footage going down? Do we run into a problem of looking into '09 in that picture?

No what that says, Eli, is that what you have now in the backlog is stuff you're going to be shipping mostly by the end of this year into the first quarter. Now obviously what you're looking at is you don't get orders that far in advance. So during the third quarter we'll be getting orders in, backlog in that we expect to ship everywhere from as early as the fourth quarter to as late as maybe the second half of next year. For us the key part I would tell you to I think to focus on here is the increasing percent of the recurring revenue stream. That's now over half of the revenue overall. And that's the one that I keep looking at where the -- again, why you thought this was just a logical acquisition for us, that's been growing double-digit. And so that's where we're going to keep driving that while we're looking at possibly in terms of like tempering if you will in the overall nonres- construction stuff. And then let me have Steve speak to the Climate Control piece.

Yeah Eli, your comment about the case business out the U.S. really boils down to the-- what we're seeing with prices. If you look at Europe, the predominant retailers over there, [inaudible[ to care for is our extending their region to Eastern Europe, they're seeing growing markets there, and are driving the prices to the point where we've actually just said, look, our focus is on improving the profitability of Hussmann and we are not playing in those kind of price levels. So it's not so much a market issue. It's more share and it's intentionally so because of the profitability impact it would have. Now, we're responding to that by moving production to the Central Europe, the Czech Republic in order to try to combat the costs out of that. And pretty much same thing can be said about Asia. We were seeing similar kinds of pricing activity going on in Asia. So we're re-evaluating our internal strategies on how to deal with that, but in the meantime we're not going to take business that we lose money on.

Thank you very much.

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

Thanks. Good morning.

Hi, Nigel.

Nice quarter. So just to clear up the question on the full year guidance. So essentially you had about $0.20, $0.30 of contingency or buff or whatever you want to call it, off the books and you've now put that back in because of higher inflation, lower [inaudible] volumes, whatever. Is that the way to think about it?

Yeah. I'd say to you is that what we thought was going to happen is now happening and it's going to go and preclude our really going up higher unless we continue to see higher revenues, yes.

Okay. Great. And then secondly on the synergy targets of Trane, obviously you've kept those unchanged. There's still a little bit of debate with investors about whether those targets are achievable. Could you maybe talk about your comments levels on those targets and what you might see as perhaps some of the downside risk to those numbers coming through in '09 and 2010?

Nigel, this is Steve. Let me just comment on this. We have spent an inordinate amount of time focusing in on each of these pieces of the synergy. I'll take the pieces in 2008. If you look at the numbers it's about $50 million of corporate spend and we have that nailed down budget-by-budget, headcount-by-headcount. So when we look at what we do month-to-month, we track those profiles of spending. I'm talking about the total spend both corporate entities of what was Trane and what was old Ingersoll-Rand. That piece I am very, very confident in. And if you take a look at next year, we're expecting another $50 million of corporate synergy, in other words a full run rate, $100 million when we're done and again that's a function of coming out of 2008. So I feel very good about that piece.

The procurement piece in 2008 is driven primarily by what I'll call indirect material savings, things like parcel, freight, insurance premiums, legal fees, IT synergies. So those are easier to get because those are negotiations with the vendors and suppliers. Okay. Now those are ongoing and we're collecting those as we go. So those are accountable, those are visible, those are trackable.

As we move into 2009 we're going to have to be more dependent upon what I'll call the direct material piece of the synergies. And we're focusing right now on aligning our engineering organization, our procurement organization, our folks around the world as to what we have to do to drive those projects. And it's as simple as getting the drawings prepared to do the RFPs in a timely fashion so we can realize the benefits. The packages we've sent out on direct material, the returns are coming in very nicely. So I feel that we'll see significant benefits that are direct material. It's just that that's going to occur a little bit later in time out into 2009.

Okay, okay, that's helpful. And then just a couple of modeling questions. TriPac sales, you've said that that's good growth. Can you just call out that number, maybe what you're expecting for 2008 sales? And what was D&A including Trane?

Yes, it's interesting. I mean if you take a look at the dynamics of that thing, it's $4.50 a gallon in diesel, it's a 12-month payback. And diesel is running higher than that, so you can just kind of do the math on what customers are seeing from a value proposition. We're expanding to drive fleets. If you look at Thermo King's strength, it was through the distribution network to refrigerated carriers. We're seeing a much greater expansion into drive fleets at this point in time and of course the ability to service and provide sales support from our dealer network is critical. So for the year -- for the quarter I mentioned we were more than double, up 124% and for the year we're looking to be up north of 60% on that product line, which comes at a very, very good time relative to where we are with North American trailer.

And the sales?

Sales total about $115 million for the year.

Great. And then just finally just the D&A including Trane for the quarter?

$89.5 million if my math is correct here.

Great. Thanks a lot.

We'll take our next question from Robert Wertheimer with Morgan Stanley.

Hi, good morning, everybody. Two quick follow-ups. Can you give the, if you didn't already I don't think I heard it, can you give the materials cost for the first half versus second half of that 120?

Yeah. Well we're looking so far for [inaudible] let me pull the sheet up here a second. We're talking honestly almost 50/50. We don't really see it as being a lot different. Let me get the, one second, Robert. [Inaudible]. I don't think it really is that much difference. First half of the year, by the time I get done with the second half, it's about the same thing. It''s about half in, half out.

That's actually interesting just given the way stuff is accelerating. Is that--?

No, not really. It has an awful lot to do with what we saw and where we were hedging before on the copper side and what we weren't doing before. And so when you really get done with it overall, I'm saying is that copper has actually come slightly back down again from where it was in terms of the middle so we see more like a-- think of it as more like a bell-shaped curve as to what we've been looking at and we don't think the back half is a lot different from the front half.

Okay. And then on Trane when you did the apples-to-apples, which is really helpful, you left them on LIFO, right?

Yes we did.

Perfect. And last question. I guess one of the things that's surprising to me is just your pricing is pretty good in a toughening environment, I'm wondering if you could break out, maybe if it's for Thermo King US versus Europe and trying to understand if you can get pricing in the slow environments or if it's just that you're getting more in the ones that are hanging on so far. I mean is it similar in the US and Europe on Thermo King?

No, it's different. The US is pretty flat. If you look at that market trend started as we said really in 2007 when we were down 15%. So when we looked at pricing availability in that market it was really tough for '08. Pricing has improved in Europe because of the market conditions and we've also introduced new products over there. So that's really what's driving a -- probably a higher than expected price realization in Europe and a lower than expected because of market conditions in the US.

Hey Robert, let me go back and redo my Austrian math for a second. I checked, I had only two of the categories. While Steve was talking I've been doing the rest for you. And when I add in now all of the other miscellaneous, what I missed in my numbers to you, okay, was the lighter stuff believe it or not like [motors and son]. When I added those pieces back up again and got to total number, what really comes out is that we're talking about somewhere along the lines of less than $50 million in the first half and over about $70 million in the second half, when I go all in. Not just copper, steel, which I was talking about, but I got to add in, my colleagues here were kicking me in the meantime talking about adding in all the other stuff that we had in there that's probably more oil related. So all in with total inflation, including not just steel and all that kind of junk, we're actually I said it's more like $50 million to $70 million.

$70 million. Perfect, thanks for the --

[Inaudible] off by 10.

Great.

Okay.

Thanks.

We'll take our next question from Jeff Hammond with KeyBanc Capital Markets.

Hi, good morning, guys.

Hi, Jeff.

Just-- I mean you've been doing a nice job on productivity, hit that 4% bogey this quarter. How are you thinking about that within your guidance in the second half of the year?

More of the same.

Okay. And then just to dig in on commercial HVAC a little bit within Americas, maybe Bruce you can speak to what you're seeing between unitary and applied within the Americas? And if you could just speak qualitatively to the replacement market. Are you seeing a benefit from -- because of higher utility costs or conversely are you seeing pushouts as people extend the life in a tougher environment? Maybe just a little color there.

Sure, Jeff. First let me talk a little bit about the vertical markets and what we see there. In the second quarter we actually saw particular strength in four of the seven markets that we track, lodging, government, healthcare and manufacturing and in aggregate they were all up at least high single-digits. Commercial office and education were relatively flat and retail was down double-digits. So as you can imagine, since retail tends to be more toward the unitary side, like commercial unitary, that's why we saw a small decline overall in terms of the light commercial unitary. The large commercial unitary in the applied were actually up mid-to-high single-digits for the quarter.

Okay. And then just comment on the replacement market.

You mean for commercial or for residential?

For commercial, just in terms of are people buying into higher energy efficiency or --

Yeah, think so. And I guess the one thing I would point to that would suggest that is that when we look at the performance contracting work that we're doing, and this is where we go in, work with a customer and they can pay the up front costs of the new equipment, with-- generally these are replacement jobs, and they pay for the capital costs of the equipment out of the energy savings. And as I mentioned, that part of our business, sales were up roughly 50%.

Great. Thanks, guys.

We'll take our next question from Daniel Dowd with Bernstein.

Good morning.

Good morning.

Two things. I just wanted to follow up. So your unallocated corporate expense for FY '08 Q1 was about $150 million. You've now guided to about $170 million to $180 million. What's in the $20 million to $30 million that you didn't expect in the corporate expense?

Again let me take a shot at that. I think it goes back to the comment I made earlier. Three months ago we had a pretty good view of this total picture in terms of what we thought it was going to take to integrate this business and to do the things we had to do to affect the acquisition. As we had been able to do a finite forecast, line-by-line for planning out, the things were just falling quite frankly in some different places than we had expected. A good example is that some of the one-time costs we just mentioned about $11 million in the quarter was in the unallocated corporate line. Also I think that there's a bit of-- when we put the forecast together we didn't have a good projection of time line as to how long some people were going to be still on the rolls to affect the actual transfer, and we have people on the retention deals, we have those kind of things going on. So what we're seeing and expect to see is that those costs will even themselves out as we go into 2009, some of them will disappear, we get a full run rate of corporate spend and we expect to be approaching the $150 million in 2009.

Okay. So I guess that brings me to the next question, which is I guess for everyone except Bruce, so what do you know about Trane now that you didn't know before the deal closed?

Why I think-- what I know about it is the fact that we have as much if not more opportunity, both in synergies revenue side as well as on the cost side. I also know more about what the different technology issues are that we probably have to go deal with going forward and the opportunities they present. I just came back last week. I was over in China and we were meeting with those folks and the kind of things we're looking at, how attractive is it to consider introducing a residential solution where we currently are just commercial outside of North America. I mean those are the kind of things I think that we're continuing to focus on. I think that we found that there's some great practices that Trane has that we're going to be adding to our business operating systems, and I think there are some that we can add to their part.

So I think what we're learning about each other in terms on it is really very positive overall and as I said before, I think that I'm even more optimistic than we were before. And if you saw that one chart that we showed about the revenue stuff, we do not have any of that yet included dollarized. We're still working it. Initial numbers I would tell you up front could be very, very significant. We're talking about $100 million, $200 million, $300 million just a question of how fast we can realize it. So I'm even more excited than when we started and I think we got some great people and we got a great brand and we got to work it.

Is there anything negative that you've found out since the close?

Yeah, I think the negative piece we found out in terms of saying is that the residential piece and turns can be tougher to go through and we're going to have to continue to work that part. But I don't-- that's just because frankly we hadn't paid that much attention to it beforehand when it-- because it wasn't part of our business profile except for what we had with Schlage residential stuff. So I think that to me in terms of the soberness of the replacement market, what people making decisions there, that's been frankly has been a challenge for us and you see that in the numbers when we talk about revenues being off 12%.

All right. Thank you.

We'll talk our next question from Ted Wheeler with Buckingham Research.

Yes, hi, good morning.

Hi, Ted.

One kind of just housekeeping on the amortization conversation we had a moment ago. I think I'm interpreting it that the amortization ongoing is excluded in the $1.03 that we just, or were recorded and that it will be included here after. Is that correct?

Let me be real clear about this. Okay. The ongoing amortization is in the $1.03 and it's in the guidance for the year, the three --

Oh, okay. I interpreted it that that was part of what was removed in the press release.

No.

The other, the other-- thank you. The other question I had was that on the residential and the overall pricing issue at Trane, how much of the $140 million raw material headwind do you think you're going to end up recovering in '08? And do you think you can put pricing in to ultimately recover it? I mean, I know there will be new things moving around in '09, but do you think you can get pricing to recover the $140 million in '09?

Ted, I think the answer to that is, yes, although timing is always problematic because --

Blank.

Right. There's always the like --

Well how much do you think will be shortfall this year just to get --

I don't -- it's hard to put a number on that. I think we could be slightly behind.

Okay. Thank you.

Go next to Andy Casey with Wachovia Securities.

Good morning, thanks. Just a detailed question on Slide 24 for Climate Control, the forecasted growth is accelerating in Q4 from Q3 and I'm a little confused. If you could help me understand, because the transport side seems to be getting a little bit kind of flattish, if you will, over in the-- you've stepped away from some business to avoid margin compression. Is the acceleration all coming from North American stationary side?

Yeah. In fact if you look at the North American-- in the fourth quarter Climate Control is very, very heavily dependent upon the North American stationary piece. That's been a seasonal story for a long, long time. We've picked up market share that'll appear in the fourth quarter. Only one of the specifics but if you look at what will happen there, it'll be significant, we believe more equipment shipped in the fourth quarter than was last year. So that's a big part of it. I think that the other piece is that it's a continuing strength of the APU helps offset the-- buffer the trailer business in the US. And the other thing is that goes with the equipment piece or Hussmann, is contracting and quite frankly installation-type businesses that help drive that. So you're going to get a balance there. Third quarter if you look at that piece, that's against a pretty hard comparable to past years and that's going to be the tough spot for the year.

Okay. Thank you very much.

And we have no additional questions in the queue at this time. I'd like to turn the call back over to Management for any closing remarks.

Thank you very much, Patrick. We're going to wrap up now. Thank you for joining us. There'll be an instant replay of today's conference call available at approximately 1:00 p.m. and will be available until August 8th. Call in number is (888)203-1112 and the pass code is 230147. Audio and slides from today's conference call will be archived on our website, and finally the transcript for the conference call will be available at the Ingersoll-Rand website next week. Thank you all very much. We are now concluding our call.

This concludes today's conference. We thank everyone for their participation. You may now disconnect your lines.