特靈科技 (TT) 2008 Q3 法說會逐字稿

Good day and welcome everyone to the Ingersoll-Rand third quarter 2008 earnings conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Bruce Fisher, Vice President of Strategy and Investor Relations. Please go ahead, sir.

Thank you, Cecilia. And good morning everyone. Welcome to our third quarter 2008 conference call. We released earnings this morning and the release is also posted on our website. I'd like to cover the usual housekeeping items before we begin. This morning, concurrent with our normal phone in conference call, we will be broadcasting the call through our public website. There you will also find the slide presentation for the call. To participate via the web, go to our website, www.Ingersoll-Rand.com, click on the yellow icon on the home page of the website. Both the call and the presentation will be archived on our website and will be available tomorrow morning beginning at 10 a.m.

Now please go to slide two. Before we begin, I would like to remind everyone that there will be a forward-looking discussion this morning which is subject to our Safe Harbor statement. Please refer to our 2007 Form 10-K and our quarterly Form 10-Qs which detail factors that may influence results.

Now I would like to introduce the participants of this morning's call. We have Herb Henkel, our Chairman, President, and CEO, Steve Shawley, our Senior Vice President and CFO and Joe Fimbianti, our Director of Investor Relations. We will start with a formal presentation by Herb Henkel and Steve Shawley, followed by a question and answer period.

Herb will start with an overview. So if you would, please go to slide three and Herb, you get it started.

Thank you, Bruce. Good morning everyone. Thanks to everyone who dialed in to this morning's call. Today we reported third quarter EPS from continuing operations of $0.99 per share, which is consistent with our revised expectations. Revenues for the quarter were below our original forecast from July, for both historic Ingersoll-Rand businesses as well as Trane. Our margins were also negatively impacted by the lower volumes, higher than expected material inflation, and unfavorable product mix.

For the quarter, reported revenues increased by 93% and by 2% on a pro forma basis included Trane. Our growth rates declined considerably, compared to prior quarters. EPS from continuing operations was $0.99, excluding about $0.27 per share from one-time items. This was below our original forecast of $1.05 to $1.10 and we met the revised EPS expectations we gave you last week at $0.98 to $1. Steve's going to go over with you additional details later in his presentation.

During the quarter, we began the integration of Trane in earnest and we've begun realizing the available cost synergies. I'll cover more on the Trane acquisition later in my presentation. Plus I will give you some additional details on the restructuring activities under way.

Finally, we revised our full year EPS forecast at $3.35 to $3.55 per share, due to slowing end markets, and added uncertainty related to restrained credit availability for our customers.

Now what I'd like to do is turn it over to Steve who will take you through the third quarter details.

Thanks, Herb. This morning we're 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 third quarter and understand our guidance for the full year.

Please go to slide number four. This slide gives a quick summary of revenue and operating margins for the third quarter. As you see on the upper right, revenues were $4.3 billion, up 93%. Including Trane on a pro forma basis, revenues increased by about 2% and were flat excluding the positive impact of currency. Reported operating margins were 8.1% compared with 12.3% last year. Adjusted for the one time Trane acquisition cost incurred in the quarter, operating margins were 10.9%. These one-time costs are detailed in the box on the lower left and are primarily related to backlog and inventory step-up and in-process R&D. I'll come back to the topic of margins and operating leverage in greater detail later in my presentation.

Please go to slide number five. Let me now go to the slide entitled third quarter revenue growth. You can see the components of our sales gain in the upper right quadrant. Organic revenues declined in the quarter by 1% while foreign exchange added about 2%. Looking at the upper left, three of our operating segments had modest revenue gains in the quarter while security was slightly down. Trane revenue growth is shown as part of the air conditioning systems and services or what we call ACSS segment. The revenue change portrayed in the ACSS bar is on a pro forma basis.

The momentum we had seen in key end markets for most of the year slowed substantially in August and September. Total sales on a pro forma basis were up 2% but reflected contraction in North American equipment markets and softer conditions in Europe. Looking at the lower left, you can see growth rates by region. We experienced slowing growth in all of our geographic end markets, most notably in Asia where year-over-year revenues declined slightly. About 29% of third quarter sales came from markets outside the Americas.

Please go to slide number six. The next slide, entitled year-over-year revenue growth, provides a look at our segment growth rates during the last seven 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 year-over-year growth rates in all historical Ingersoll-Rand businesses tailed off in the third quarter, as a result of significant softening in a number of our key end markets.

Please go to slide number seven. Let's look at a bridge of the third quarter operating results. Reported operating income increased by 26% to $347.4 million, representing an operating margin of 8.1%. The quarter's operating income included $122 million of one-time costs from the Trane acquisition. Excluding these costs, third quarter operating margins were 10.9%, down about 140 basis points compared with 2007. Favorable price realization at 2.7% and moderate productivity growth at 3.1%, offset a major portion of the unfavorable impact of inflation, mix and foreign exchange.

Please go to slide number eight. Let's move now to the income statement. Moving down the page, interest expense increased due to higher debt balances from the Trane acquisition, and the recent upward movement of short interest rates on our floating debt rate. Other expenses for the quarter was $3.7 million, approximately $4 million better than last year. The lower expense was due to higher interest income which was partially offset by higher currency exchange losses.

Let's move down to the tax line. An expense of $26.3 million. The effective tax rate in the quarter was about 10.1% versus last year's 16.1%. And below our original forecast of 22%. The third quarter rate reflects a projected full year rate of approximately 20.6% adjusted for one-time discrete tax benefits.

Moving down the page to Discontinued Operations, you can see a cost of $6 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 third quarter from total operations were $227.7 million, or $0.70 per share on a GAAP basis.

Please go to slide number nine. Next two slides provide a bridge between the third quarter actuals and the forecast we gave you in July. Both exclude one-time costs. Revenue for the quarter was about $87 million below the initial forecast including both old Ingersoll-Rand and Trane. Margins were negatively impacted by the lower volume, unfavorable product mix and currency due the strengthening of the dollar during the quarter. Corporate costs were in line with our estimates as we hit the target acquisition synergies.

Interest expense was about $4 million higher than expected from the recent uptick in short-term rates. Other income was $14 million below forecast, primarily from higher than forecast foreign exchange losses related to the strengthening of the dollar versus the Euro in the quarter. The tax rate was about 12 points below forecast from a lower than forecasted rate adjusted for one-time discrete benefits.

Please go to slide number 10. This slide bridges the components of our actual EPS compared with our July guidance. Let's first review segment operating earnings. The biggest difference between forecast and actuals was about $0.12 from lower volumes and unfavorable mix. We were able to more than offset materials and other inflation with productivity and lower spending which netted to $0.03 positive. We also had $0.02 related to translation and $0.02 from other items.

Below the line, we lost $0.04 from higher interest expense and foreign exchange losses. And we had $0.08 of benefit from lower that forecast taxes, made up of $0.04 from a lower rate related to lower US earnings, and $0.04 from discrete items. Added together the pluses and minuses totaled $0.09.

Let's now move to a review of our reporting segments. Please go to slide number 11. Slide 11 lists the highlights for air conditioning systems and services and represents the Trane business that was acquired on June 5. Revenues in the third quarter were $2.051 billion, up 3% versus prior year, on a reported basis, and up 2% year-over-year excluding the effects of foreign exchange. Operating income was $89 million reported, and includes $108 million of acquisition related costs associated with inventory step-up, in-process R&D and $41 million of ongoing amortization. Excluding these items, operating income was $239 million.

Before reviewing the details of our sales orders and backlog, I'll first touch on the global HVAC equipment markets. The US equipment market contracted by 2% in the third quarter marking the first quarterly decline since the fourth quarter of 2003. Light commercial unitary markets continued to be soft and were down over 5%, while applied was flat and large commercial unitary markets were up strongly. International unitary in 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. The chart shows data as reported and as adjusted for foreign exchange. My comments relating to sales, orders, and backlog will focus on results excluding the impact of currency changes. Our commercial air conditioning revenues which are the combination of commercial equipment and parts, services and solutions, were up 6% reported, and up 4% excluding FX. Total global commercial equipment and systems representing 46% of our total HVAC sales contracted 1% in the third quarter.

I'll split that further into applied and unitary equipment. Applied global equipment sales were up 2% on top of tough comparables. Sales were up over 18% in the third quarter of 2007. The Americas region experienced a slight decline. Asia showed strength. And Europe Middle East regions were up single digits. Global commercial unitary sales declined 4%, with low to mid single digit declines in all key areas.

Let's switch now to our commercial global parts services and solutions business which continues to perform very well, growing 12% in the quarter, excluding FX. This part of our business continues to expand steadily and represented 42% of our commercial sales and 33% of total Trane sales in the third quarter. Last year the service and related category represented 29% of total Trane sales. We continue to grow at the high end of the 10% to 12% range we gave you in the second quarter. Americas and Europe, Middle East combined were up about 10%, and Asia continued its strong growth, up over 20% versus prior year.

We continue to capture more new service agreements on both existing and new equipment systems and controls. In the third quarter, we expanded a number of new service agreements by more than 10%, after increasing new agreements by 18% in the second quarter. We continue to broaden our service offerings to provide significant energy efficiency savings and create value by extending the life of HVAC equipment in the field. Our turnkey energy efficiency and renewal programs were all up 20% plus in the third quarter. We have a strong pipeline which will help us sustain good future growth in the face of tougher equipment markets. And we continue to get leverage on our field service organization. By expanding our service capabilities, and by helping our service techs be more productive and effective we have been able to support 10% plus sales growth by adding service techs at only a 5% rate.

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 our recurring revenue and continue to achieve significant growth independent of equipment markets.

Now let's turn to the residential part of our business which represented about 21% of the total Trane revenues in the quarter. We estimate that industry shipments to new residential construction were down in the range of 25% to 30% in the quarter. And replacement unit shipments showed a modest increase. Overall, we estimate that the market for motor bearing units which includes compressor bearing units, furnaces and air handlers was down 8% in the third quarter. For the quarter, our residential product sales were down 4% year-over-year. Volume declined high single digits, price was essentially flat and improved mix continued mid single digit sales growth as we continued to significantly outpace the industry on sales of high efficiency systems.

So to summarize, overall for the quarter, Trane commercial sales grew 6% reported and 4% excluding FX. With international equipment and system sales more than offsetting a modest decline in the Americas and continued double-digit in parts, services and solutions around the world. Residential sales declined by 4%, driven by a continued weak housing market.

Next looking at orders, total global orders were up 4%, or 3% excluding FX. Equipment orders declined in the Americas, continuing its recent sawtooth pattern of up one quarter, down the next. Orders for contracting, parts, service and controls remains strong, up 15%, continuing its strong growth pattern. International orders continue to show strength, up 13% on a reported basis and up 9% excluding FX. Commercial backlog continued to grow on a global basis. We ended the quarter with global backlog in excess of $1 billion, a new third quarter record for Trane. Global backlog was up 6% reported and up 5% excluding FX. Backlog in the Americas declined, low teens, while international backlog was up almost 30%, more than offsetting the Americas' performance. International backlog now represents more than one-half of our total equipment backlog.

So in summary, we would say that our orders and backlog are at levels that support continued but slowing growth on a global basis. In terms of income, Trane's operating income which is the way we report profits now with the business as part of Ingersoll-Rand, was $239 million for the quarter. In order to show meaningful comparisons to last year, this number excludes $108 million in one-time acquisition related costs and $41 million of additional ongoing amortization costs. We realize price increases of roughly 2% in commercial and we achieved improved material 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 commercial sales growth, although at slowing rates with strength in international and service, and we continue to weather the downturn in residential.

Please go to slide number 12. Moving to Climate Control on slide 12, revenues in the third quarter were $882 million, up about 1% and down about 2% excluding the benefit of currency. For the global Thermo King transport business revenues decreased by about 2%. Results significantly benefited from the growth in auxiliary power units in the US which offset some of the weaknesses in global truck and trailer. North America industry shipments for trailers have been declining for the last seven quarters, as you know, due to declining truck ton miles and higher operating costs.

Looking at the North American refrigerated trailer industry as a whole, third quarter unit shipments were down approximately 3% compared with depressed volumes in 2007. Full year industry shipments were now projected to be 26,500 units, down about 18% compared with last year. Thermo King's North American third quarter trailer revenues were down 6% compared with last year, reflecting the market decline and unfavorable sales mix.

Our European trailer revenues again exceeded that of North America. However, activity in Europe has slowed substantially compared with the strong growth we had seen over the prior quarters. Our third quarter trailer shipments declined slightly in Europe. And we now expect to see an overall market decline of 8% for the year, based on the current order trends. Global refrigerated truck revenues was down 8%, reflecting significant weakness in the US and flat markets in Europe. Global bus HVAC shipments were flat and marine container sales were off double digits.

Finally, we enjoyed a substantial growth in our TriPac auxiliary power unit where third quarter sales more than doubled compared to last year. This product continues to demonstrate how Ingersoll-Rand's innovations are providing customer value and driving sales growth in tough markets.

Looking at stationary refrigeration, global sales were up 5%. This was driven by an 8% increase in Americas' display cases and higher service revenues. Climate's reported operating margin was 11.5% in the quarter, or up 20 basis points versus last year. Margin expansion was driven by operational productivity improvement and price which together more than offset unfavorable product mix and ongoing inflation. This performance again clearly demonstrates that our investments in innovation, geographic expansion and productivity initiatives are paying off.

Please go to slide number 13. Let's go now to slide 13, Industrial Technologies. Third quarter revenues were $718 million, up 2% versus the prior quarter and flat excluding currency. Revenues for the Air and Productivity business increased by 5% from higher volumes outside the US and from currency benefits. Air and Productivity revenues In the Americas were helped by recurring revenue growth which was up 7%, and growth in Latin America.

US new equipment sales declined slightly in the quarter. Air and Productivity revenues in overseas markets grew by 8% compared with 2007, due to strong growth in Asia and favorable currency. Club Car revenues declined about 4% compared with last year. Club Car continues to gain market share in the declining golf and softening utility vehicle markets. ITS's operating income was $81.4 million, representing an operating margin of 11.3%, down from 13.3% in 2007. Improvements in price and productivity were more than offset in the quarter by unfavorable impact of inflation and mix.

Please go to slide number 14. Let's go to slide 14 to look at Security Technologies. Revenues were $649 million, down about 1% compared with very strong results last year. Commercial revenues were flat overall with 1% growth in the US and 9% increase in Europe. Americas' sales in the residential segment declined 15% in the quarter against strong comparisons from last year when we were significantly outperformed in North American residential construction market. You will recall that last year we benefited from substantial shelf space gains at big box and from new electronic security product introductions. Residentials results were indicative of the continuing decline in domestic residential building activity.

Volume gains in South America also helped to partially offset the fall in US residential activity. Operating income was $126 million, or an operating margin of 19.4%, up 2.2 percentage points from last year's margin. You will recall we had a strong year-over-year margin gain in the first half of the year. Accelerated productivity and pricing actions more than offset unfavorable product and geographic mix and material inflation.

Let's go to slide number 15. Taking a look at 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 receivables. Inventory improved slightly from 5.8 to 5.9 turns. Receivable days were down significantly and payables slipped a bit. 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 the balance sheet. Capital spending in the quarter was $56 million, about 2% of revenue, while depreciation and amortization totaled $39 million.

Please go to slide number 16. Since there has been considerable interest in our balance sheet liquidity, I wanted to give you some additional details this morning. Our total debt balance at the end of the quarter was about $5.5 billion. About $3.6 billion is long-term with a $950 million bridge loan that comes due next June, and about $960 million of commercial paper outstanding. During the third quarter we maintained access to the commercial paper market and have continued to be active in the market during the month of October including this week. The debt-to-capital ratio is 33.8% at the end of the quarter and we have about $740 million of cash on the balance sheet.

We paid down $443 million of acquisition debt during the quarter, and our cash flows are on track to allow us to pay down about $1 billion of debt in the second half of this year. This will reduce our commercial paper balances and facilitate the buyback of $248 million in putable debt in November. We continue to maintain significant financial flexibility and liquidity with $3 billion of available untapped credit facilities which give us a liquidity of cushion of more than $2 billion. We have adequate commercial paper capacity, and even more flexibility through our receivable securitization program. Obviously, managing for cash remains a very, very high priority.

Please go to slide number 17. Our bond maturity schedule is also well balanced with about $220 million coming due in 2009. Combined with the expiration of the bridge loan in June of '09, and considering normal financing requirements, we would expect to pay down about $800 million of additional debt in 2009. The majority of our current long-term debt will mature after 2012.

Now let me turn it back to Herb.

Thanks, Steve. Please go to slide number 18. I'll review our progress on the integration synergies, discuss restructuring actions we're initiating, and give you our outlook for the fourth quarter.

The third quarter marked the first full quarter that Trane and Ingersoll-Rand was a combined company and we delivered $30 million of cost synergies. These savings came from reducing headcount and implementing the first wave of indirect material savings programs. We're on track to achieve our 2008 full year savings of $75 million and we expect to gain about $200 million in synergies by 2009, and $300 million by 2010. Any benefits from revenue synergies would be in addition to $300 million of cost synergies. Growth in 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 our 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 4% and even higher.

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 19. We've also accelerated productivity improvement and cost reduction actions for the remainder of 2008 to deal with the slowing end market demand. In addition to these activities, we're initiating corporate wide restructuring actions to streamline our worldwide manufacturing footprint and general and administrative cost savings. The total cost for these programs is expected to be approximately $110 million. Activities will include plant closures, and product movements. We expect the majority of these costs to be incurred in 2008. These actions are expected to generate $100 million of pretax savings in both 2009 and 2010.

As the economy slows, we're paying strict attention to costs and investment spending and developing contingency plans as we go into 2009 to protect our earnings and our cash flow. We'll also be exploring additional actions that may be required in 2009 to balance our manufacturing capacity. During the next 12 months or so, cash flow will primarily be used to retire 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.

Now let's go to the forecast. Please go to slide number 20. In August and September, we saw a downward flex point in many of our major end markets. The uncertainty related to the costs and availability of credit has caused a notable decline in the tone of business over the last 60 days, and our most recent order rate leads us to expect sluggish activity for the balance of 2008, and probably into 2009. Because our end markets are slowing and uncertain, we are actively reassessing what we believe the next few quarters are going to look like. For the balance of 2008, we expect to see declining markets in North America and in Western Europe with moderate growth in South America, Eastern Europe and in Asia with enough products, service and geographic diversification to sustain flat year-over-year revenues in spite of particularly tough end markets.

Now, please go to slide number 21. Based on what we see today, we expect fourth quarter pro forma revenues including Trane to be flat compared with 2007. Slide 21 shows the fourth quarter forecast by business unit. You can see that the forecast calls for a significant decline in growth compared to the first half of this year. However, it's apparent that uncertainties related to global economic activity and the potential impact of restrained credit availability on the timing of customer orders could limit our visibility to demand levels and negatively impact our fourth quarter revenue projections.

Now please go to slide number 22. We expect the combined companies to have revenues that approximate $4.1 billion in the fourth quarter. Segment operating margins should be 9% to 10% with EPS from continuing operations at $0.55 to $0.75 per share. We expect fourth quarter material costs to remain at high levels and we will not benefit from recent reductions in commodity costs until early 2009. One-time items are expected to be approximately $0.09 per share and discontinued operations are expected to be about $0.02 per share of costs. This fourth quarter forecast is based on an average share count of 325 million shares.

As you can see in the right-hand column, this forecast shows expected revenue for the combined entity of approximately $13.7 billion, and the segment operating margin of about 11% to 12% for the full year. We expect to realize $75 million of synergy savings during 2008. Likewise, we assume purchase accounting charges will approximate about $0.52 per share, and restructuring charges will be about $0.17 per share. We show the interest expense and interest income associated with a total outstanding debt and the expected cash position for the year.

The effective tax rate for the year should be about 18% to 19%. Adding all of this up brings us to total EPS from continuing operations in the range of $3.35 to $3.55. Please note that this does not include about $0.69 of one-time charges, primarily backlog and inventory step-up, and the impact of restructuring costs. We retained about $0.16 per share of expense related to the costs associated with discontinued operations. This forecast is based on 304 million average share count during all of 2008.

The combined company is expected to generate available cash flow of $1.1 billion in 2008. However, this amount does not include about $600 million in 2008 tax payments we made related to the gain on the Bobcat divestiture.

Now, please go to slide number 23. As a final note in the fourth quarter forecast, we've provided a bridge between our prior forecast that we gave you in July and our current expectations. Because of weaker than expected end markets, we lowered the fourth quarter 2008 pro forma revenue forecast by approximately $200 million, compared to the previous version. You can see in the right-hand column that the main drivers for the EPS change are related to the lower volumes and unfavorable product mix. Changes in currency, and higher interest expense, which taken together account for the differences in our fourth quarter EPS forecast compared with our prior estimate.

Now, if you would, please go to slide number 24. I'd like to conclude with a few key points. First, Ingersoll-Rand's businesses have strong fundamentals. We have leading brands and strong market positions. We are expanding our global presence. We have a large and growing installed base of products which leads to increased service, parts and replacement equipment. We have a solid balance sheet with the strength to ride out this economic storm. We will continue to invest prudently in innovation and new products and services, to take advantage of opportunities to grow our recurring revenues and emerge in this downturn in an even stronger position.

In the meantime, our number one priority is to manage through this downturn. That means we will hustle even harder for business. Let me give you an example. Trane sales engineers work primarily on commission. And you can bet they will live up to their reputation of capturing more sales when the economy slows. It's what they've done in past downturns. We're reviewing every single operation as part of our operating plan process to identify and implement additional productivity programs and to manage our cost structure more closely. We're committed to achieving the Trane integration synergies and the restructuring programs we announced this month. We will pay very close attention to our cash position and look for ways to reduce working capital and improve our return on invested capital. Ingersoll-Rand is a Company with great long-term prospects and we're putting in a sound short-term game plan to make it to there.

Now we'll be happy to answer your questions. Thank you.

Thank you. (OPERATOR INSTRUCTIONS). Our first question comes from Andrew Obin of Merrill Lynch.

Yes, good morning.

Good morning, Andrew.

Good morning.

It's mostly a comment. I know over the past couple of quarters, you had a slide with a lot of macro data, and while appreciate the uncertainty that you guys face, it was a super useful slide as an analyst just to understand your framework. It's just a comment. Looking at slide five, as I look at organic growth, in Asia-Pacific and ESA, am I correct to assume that Asia-Pacific slowed from 19% organic growth last quarter to negative 1 and ESA went from positive 14 to 2? Is that the right read?

Yes, Andy, it is and taking a look at that, it's kind of a lumpy thing. Most of it was driven by the fact that our marine container shipments were off in the quarter, simply because of timing of orders and we count that as China sales. So that's affecting it to some degree. Also, we have a structural issue because of the change in supply point from some of our security equipment coming out of the JV in Fu Sheng. So I wouldn't say it's anything to be panicked over relative to market progression, it's just a kind of lumpy order issue with primarily marine container.

And so how much of this, if you could quantify, of that plus 19 to minus 1, how much of it was marine container?

Let's see. Marine container alone, Andy, was down 23% in the quarter. So I would say that's probably on a weighted basis, about 60% of the delta in China.

Okay. And does China explain most of the decline in Asia-Pacific?

Yes.

Okay. Got you. The second question, just how I should be thinking about inflation productivity and pricing going forward, because these are some of the things, at, least that you have some control. Looking at productivity, it seems that productivity has declined a little bit versus the previous quarter. Are we calculating it differently? Or what should I be thinking in calculating it for fourth quarter and going into '09?

Well, what you're really seeing, Andrew, is the fact that we have a reduction in the volumes. That is negatively impacting our ability to realize the synergies. That is why you see us putting in the restructuring program. What we talk about this, we're talking about significant reductions in headcount that had been added on with the anticipation of continued revenue growth. With the revenues now actually slowing down, what we find ourselves is not being able to absorb the cost structure and having to go and actually reduce headcount in those areas. That's really what you're seeing. When we put the restructuring back into place, we then think at the level that we're currently seeing we'll be able to run north of 3% productivity going into 2009.

Got you. I appreciate it. And pricing has improved. Should I continue to see improvement in the fourth quarter or is that something that's subject to the economic uncertainty here?

I think if you look at it, the entire pricing piece that we were looking at is we were running in about the 2 some odd percent range that we were halfway through the year, and we now continue to see in terms of net price realization as being north of 2%. So I think it continues to be year-over-year comparisons, continue to be about the same.

I appreciate it. Thank you very much.

We'll go next to Terry Darling of Goldman Sachs.

Thanks. Wondering if you could step us through the cash flow statement in the third quarter a little bit. Can you tell us what total depreciation for the company was, cash flow from operations, CapEx, take us through the free cash flow profile.

Yes, we also, just for your information, we try to add some data sheets to the release, okay? I don't know if you had a chance to look at the release but we had about three data sheets in the back that cover off on depreciation and amortization. Glad to take you through that. If you look at the Ingersoll-Rand piece I referred to in the comments, that's the $56.3 million of CapEx. And if you take a look at total, the CapEx expenditures for the quarter, there was another $35 million for Trane, so about $91 million, almost $92 million for the quarter. Depreciation, if you add Trane to the numbers I gave you for -- I'll give you both pieces. The total depreciation for the combined company was $63 million in the quarter. And amortization was $48.3 million. Now, a lot of that, I think $41 million of the $48.3 million comes from the purchase accounting revaluation and then amortization of the balance sheet going forward. kay.

And change in working capital?

Let's see here. I need to look that one up.

Or just total cash flow from operations, whatever's easier for you.

Just hold on a second.

Sure.

This is a bit of a round number, but $400 million is close enough.

Okay. So free cash of roughly, a little over $300 million. And, it looks like you paid down about $440 million of debt in the quarter and I think the slide suggested $600 million in the fourth quarter, which, based on your guidance, I think requires a pretty substantial generation of cash from working capital. Is that the way that the math should look there?

Yes, that will show up because if you take a look at what's happening to our top line, we'll be collecting a lot of receivables in the fourth quarter, and that's very consistent with even past seasonal profiles of cash flow.

Okay. And cash on the balance sheet at the end of the quarter, can you give us that one, the end of the third quarter?

Yes, about 740. And the way I like to characterize that, we have about $400 million of that trapped in various entities around the world. One of the things we're looking at in terms of helping us with the liquidity issues is looking at some opportunities to free up some of that cash. So we're shooting to try to take that cash balance on average down to about $500 million.

Okay. If I can just squeeze in one more. If we go to slide nine, I'm trying to understand the tax rate or the various moving pieces and components of the tax adjustments relative to the reported tax number. And if we look at slide nine, maybe I'm just not passed arithmetic here, but 10.9% operating margin on $4.3 billion of sales, I think is $470 million, less the $88 million from interest expense and interest, and other is $382 million or, plus or minus a million or so. Less $39 million which would be a 10% rate gets you 343, divided by 324 shares out is 106. I've got to be missing something because I think I need more like a 16% tax rate to get to $0.99. If you either want to address it that way or take us through the bridge from the $26.3 million of income tax reported to whatever the absolute dollar tax number you need to get to 99, that would be super helpful.

Again, as I've said, there's several piece to the tax rate. The biggest, there was a discrete credit in the quarter of almost $16 million, so if you take a look at that. That's included in the tax rate. I'm sorry -- the ongoing rate is higher than what's on the sheet because what we have is a blended rate including the discrete fees which was about a net of $16 million.

So the 20 some odd percent plus the 16 gets you to 10, is that what you're saying?

Right. The ongoing tax rate we expect is about 20.6 for the year. And of course we had to squeeze that into the third quarter because when we saw a drop in the US income, that, in essence, lowered our rate for the year and most of that benefit fell out in the third quarter.

Okay. Thanks.

If you look at that, there's another maybe 8 to 10 associated with the catch-up, so the total was about 22, I would say.

Okay. I'll follow up offline then, thanks.

(OPERATOR INSTRUCTIONS) And we'll take our next question from Mark Koznarek with Cleveland Research.

Hi, good morning.

Hi, Mark.

Question here on the Trane business. I was pretty surprised with the slowdown in the commercial orders to 4% because second quarter, pro forma they were 15% for the full period. And I had been under the impression that this business had a pretty modest degree of cyclicality and that seems like a pretty sharp slowdown. So is there a scenario where this business on the commercial side can go negative for a period of time? I know there's been restatements and things like that of historic financials so I'm just looking for some commentary about the cyclicality of the various parts of the business and what we might expect going forward out of this.

Well, Mark, a couple of points. First of all, yes, orders were higher in the second quarter but they were very low in the first quarter so that's why we've seen the up and down pattern that has more to do, I think, with the concerns around the credit markets than anything else, and that's influencing when customers place orders. So that's why you get this up and down pattern.

Second part of your question in terms of the cyclicality of the business, again, if you go back and look at the last downturn which was 2001 to 2003, we did see negative sales growth in the Americas on equipment, although the rest of the world continued to grow, and our service business continued to grow at high single digit rates. So, if you want to just crank in what you think is going to happen in these markets, I think you would get to a point where you would see a repeat of the pattern that we saw in the last downturn which was sales growing modestly.

Okay. And then on Climate Control, could you discuss the severity of the expected 4Q downdraft in revenues and whether that downward momentum is likely to continue for a period of time into 2009?

If you look at what's happening in Climate, the US markets have been falling off the last two years. The ACSS information started declining in 2007 and continued throughout '08 to the point where if you take a look at what's happening, ACSS information is now looking at about 28,500 units for the year. Based on order patterns we're seeing out there, we think that's probably a little bit high, so our information, where we're basing our forecast is on about 28,000 units, and that's a progression downward of another 18% to 19% this year over last year. It's slowing in the second half. We are definitely seeing low rates of order coming from the US markets and just a continuation of what we've been seeing for the last two years.

The new news that we've got is really coming out of Europe and we're seeing Europe markets starting to turn down in the last few months. I think if you look at what's going on in Europe with the credit crunch, transport businesses over there are highly leveraged, there's a lot of leasing companies that are involved in that market. So for the first time in a number of years, we're seeing a downturn there and it's all happening pretty much in the fourth quarter.

I think the new thing in the Climate Control that's showing up in the fourth quarter, other than transport, is we're starting to see some slide in projections of store builds. Again, it's credit crunch related. We see customers that are delaying projects, pushing projects out. This is affecting the stationary piece, the Hussmann piece. The fourth quarter is always a seasonally strong quarter for Hussmann so when that stuff starts to go out, that's an impact. So when you look at what's going on there, I think the new news is the fact that the European transport markets have definitely turned and we're seeing some credit related activity going on in stationary.

So Hussmann will go from up 5% this quarter to a negative. Europe will be a pretty sharp negative. And then North America continuing its decline. So it sounds like, at least the first two of those probably continues into 2009 for a period.

Yes, Hussmann is going to be closer to flat in the fourth quarter, so I would say that that's pretty good. By the way, I made a mistake. It's not 28,500, it's 26,500 ACSS units projected for this year. Sorry about that. And we're basing our forecast on about 26,000.

So I think the biggest difference, I'd say, Mark, from when we were together in July is that when we were at that point in time talking, we were talking about Western Europe slowing down. We saw it getting to where it was going to be relatively flat and what actually has transpired since then, it's actually now gone into the negative territory. That to me is the biggest change in what we've seen since that. The US, candidly, continues to be on that downward slope that we had thought, and guesses for next year run between 24,000, 26,000, all over that kind of place. We don't see that in terms of being a very big turnaround in next quarter.

Thank you.

We'll go next to Robert Wertheimer of Morgan Stanley.

Hi, good morning, everybody. I guess -- I'm going to apologize for this in advance --I have questions on the differences between the one timers. You expected $0.11 in the quarter and you had $0.27. And for the full year I think you expected 31 and you had 69. I assume some of the full year difference is the restructuring actions you announced for 4Q. But could you explain what the difference was in the quarter and then confirm that the full year does have the cost of the restructuring you just recently announced.

First of all, there was an increase in the one-time cost projections, and it was mainly due to the fact that the valuations are coming in and the step-ups are just higher. I mean, that's flat-out the reason for it. The restructuring is not in these numbers. The restructuring costs are going to start to occur in the fourth quarter, Robert.

Okay. So if I understand what you just said, you mean the valuations you placed on the actual assets you bought were lower and therefore the intangibles were higher? Is that what that means?

It's not the intangibles, it's the step-up associated with inventory, backlog, R&D. Mainly inventory and backlog. It's just that when we put the forecast together for the quarter we were estimating what the step-ups were. And throughout the quarter when we finalized the actual valuations, they come out to be much higher. And of course we had to write them down in the turnover period.

Okay, I'll think about that for a second. And did you say the restructuring, the cost of the restructuring that you're going to do that's going to benefit, the new stuff that's going to benefit, is that in the one time items for 4Q or no?

Well, we break it out. In the communications we've said that we expect 4Q one-timers to be about $0.09 and the impact of restructures to be about $0.18 to $0.19.

Okay. And if I can ask a real question. When you looked at these new restructuring actions, and I guess this is for Herb, did you cut capacity or are you cutting things or are you impacting future growth? Or was it you found more fat in some of the businesses?

Let me describe it this way, Robert. I think what happened in terms of it is we had, when we put the plans together for 2008, we expected a growth scenario, and unfortunately, as the second half of 2008 unfolds, it's not there. So what we had is we had laid in extra capacity and extra people doing work that we at this point in time find that we do not really have in terms of the work to do. So we're actually going to be looking at reducing several thousand people as a result of that and going and really going and redoing our manufacturing footprint. We actually have already announced on it, a consolidation in an area where we make compressors and putting it into one place instead of two. It really was a stronger growth expectation that has now had to be dealt with, as it's not realized.

Okay. I'll stop there. Thanks.

We'll go next to Nigel Coe of Deutsche Bank.

Thanks, good morning.

Good morning.

So I think you mentioned that Trane synergies were about $30 million during the quarter. Could you just guide us to where we see these. Is it primarily through corporate items or -- ?

Yes. Those that you're seeing there at that level on it, Nigel, are all the ones that would be related to the corporate and shared enterprise services center. The next wave you now see showing up in the fourth quarter, obviously those continue, plus you then expand and get into what is non-material. That's the other kind of stuff. I think by the first quarter what we're looking at is we'll be actually then getting into the direct material spend in addition to those categories.

Okay, great. Then within ACSS, should I say Trane, could you just remind us on the margin mix within that in terms of residential, commercial equipment and service. And the point is, if service continues to grow at this kind of rate for the next two or three quarters, what impact does that have on the margin mix?

Well, I think it's really a question of function of what happens with the equipment sales. If equipment sales decline, you have deleverage on that because we make a fairly good margin on that next large piece of equipment. Now, you can offset that with an increase in margin because of service, and those margins run around 15% incremental. On large equipment you're probably decrementing at a 30% rate.

That's good color. One more if I can. Security margins were up very nice. Can you talk about how expandable those margins are in light of the increase in volume pressures in that business?

I think what we're looking at there, Nigel, is what you're reflecting now is the cost structure that the businesses have put into place and we see that as being sustainable going forward. We have obviously finally caught up on some of the price stuff that we had been lacking and lagging in the past, that we're now seeing the productivity and the investments going up. We continue to see strength in the commercial side, which is a very, very profitable type business. We're optimistic about being able to sustain these kind of levels going forward.

In that light, herb, could you maybe give some color on what you're expecting for margins by segment for the 4Q.

I would say I don't think we put the detailed stuff that's out there but I think if I looked at in terms of the margins we were looking at from last year, I would be very disappointed if they weren't going to be very very comparable to those things that were there. Let me see if I can give you more specific as I look at my chart here.

If you look at Climate, we expect to see about 10.5% fourth quarter, again impact of the significant margins associated with the trailer business that we'll be seeing drop off. Industrial Technologies, actually we expect the fourth quarter margins to go up there, Nigel, and I think that that's more because of the fact that there was some one-time activity last year. So not quite comparable third quarter to fourth quarter, if you look at the serial roll forward. We expect Security to be about a little less than 19%, probably 18.6%, 18.7% range. Again, because what we're getting there is flow-through of price and, quite frankly, a little bit of improvement in some of the commodities, mainly zinc that they use there. And the Trane margins, they're going to stay in the 4% to 5% as reported. Of course, we've got to get through all the adjustments that we talked about, but I don't see the Trane margins staying on an as reported basis somewhere between 4% and 5%.

Okay. Thanks a lot.

We'll go next to Jeff Hammond of Keybanc Capital Markets.

Hi, good morning, guys.

Good morning.

Just back to the Trane margins in the fourth quarter, can you give us what apples-to-apples 4Q maybe X items would be versus 4Q '07 last year. I just want to understand the level of decrementals that you're planning for in the fourth quarter.

Well, let me see if I can give you, there's really two ways to go. Number one is if I compare it to the performance of 2007, is that where you would like to go?

Yes.

If you look at 2007, and if I look at it overall, we were talking like in commercial last year, fourth quarter, it was somewhere between 8.5% and 9%, if I remember the number right. And we see that dropping off probably somewhere more into the mid-7 type range as we continue to see material inflation being not completely offset by productivity. That's about a margin and-a-half point of it there.

The biggest degradation really that we're looking at is over in the residential side. When I look at the fourth quarter numbers last year, it was slightly above a 7% type number and then we look at it this year, it's going to be somewhere closer in probably the 4% to 5% range. The biggest impact there continues to be we have material inflation but we also have this thing called a LIFO and a mark-to-market. The good news is we do hedging. The bad news is materials move around. I'm looking at stuff of almost $9 million of non operating type of OI hit that impacts our margins. So that's outside of it.

What Steve went over before is that you also get back into, we have the inventory write-up and the backlog which is going to give us another $40 million impact by the time we get done. But overall when you get back, what we manage and so on, I think we ought to continue to make sure that we improve our productivity which is obviously what the restructuring is all about and we've got to make sure that we're able to go in and take advantage of the spot pricing that we're now starting to see show up in the marketplace for the coppers of the world, and make sure that while that goes into our cost structure we don't give it back on price.

And in residential, why didn't you realize any price in the quarter? I think you had put through some price increases and it sounded like--

We did, but it's a little less than 2%. I just didn't put that in, overall the number was somewhere shy of 2% that was there. But, again, it was relatively a small number compared to some of the other things that we had on the $9 million of non operating and so on.

Okay. Just a final question. On the balance sheet, you've got your bridge coming due in June. Have you had discussions with your lenders about refinancing that? And what's the dialogue been? Any kind of concerns there?

The answer is yes, we've had dialogue and no, there's not large concerns. I mean, we're watching credit markets like everybody else. Again, we believe that we have capacity in the form of commercial paper and other ways to address this. And if we have to go back to the markets when the time is right, we're not talking about massive amount of new funding that we would need. So I don't know if anybody can say that they're comfortable in these kinds of surroundings, but we at least don't have our backs to the wall.

Jeff, this is Bruce. If I could go back to the residential thing for just a minute because you're expressing some concern about the price item. Bear in mind, mix, improved mix contributed four points of growth for us, so where some companies may have realized more price because they were selling the same product for a slightly higher value, we actually upgraded people to a better part of our mix. And if you look at the overall market, we'd say the market was down 8%. Our volume was down around 8%. Our sales were only down 4% however, because we were able to get better mix. So we outperformed the market in that regard.

You just had said no price and that was relative to a significant price increase you had put through.

Right, but, again, you've got to also consider that we didn't get price on 13 series -- I'm making that as an example, obviously -- because we sold somebody a 14 series or 16 series instead.

Okay. Thanks, guys.

We'll go next to Steve Tusa of JP Morgan.

Hi, good morning.

Good morning, Steve.

I just have a question for you on Trane and looking at the dynamics of next year. What's your outlook on non-res construction? It seems like the McGraw Hill numbers have been out and they're talking about down and I don't know what your assumption is for new housing, it's probably down again. Is services really the key to that business growing next year given the fourth quarter is flattish. I know it's not seasonally that important but could you just talk about how you see that playing out, the dynamics for next year?

Yes, Steve. I think it's fair to say that we're not looking for any stellar performance out of the United States next year in terms of equipment. You've seen the dodge data and so one could imagine it's negative next year. If you look outside the United States, you could make your own assumptions about what you think equipment is going to do there. It's been growing nicely.

Perhaps it starts to flatten out next year and then you look at our service business which has been growing low teens. In the last downturn, which again was 2001 to 2003, our service business grew high single digits. Not as high as our traditional and typical sales growth but certainly good sales growth. I would also point out that it is now larger than our US equipment business. It's roughly $2.6 billion in sales this year, our service business, that is. So it has a big impact on what our sales growth is in the Trane business now.

So service is really the key?

It's a big key, for sure.

Okay and then one other question. I haven't covered your stock obviously for very long but reading in past transcripts there was some kind of high level commentary on the bridge to 2009, and understanding this is an unbelievably dynamic environment with limited visibility for many, do you care to refresh any of that commentary around, the math around 2009?

I would say to you, we are at this point in time very, very, very detailed reviewing what we think the revenue will look like, and it varies almost on a day by day basis. So I'm really not prepared today to give you what I think the total revenue number looks like as we're looking and working towards doing that for when we have the Analyst Day in December. When I look at the things we do have a feel for, one I said is whatever the top line is going to be, we know that in addition to that activity level on it we have a significant restructuring program we just talked about. We also have synergy from the acquisition that we talked about of about $0.30. Then lately, as we look and are putting together our cost structure for next year, clearly if I look at a for instance, 2008, our average for copper, which we buy over 100 million pounds of each year, our average cost there is 350. If I remember looking at the numbers last night, it was somewhere around about $1.60, something or other. So if you round it, that's $1.90 multiplied by 100 million, that if I can go and get that locked in, you could just see there's some really, really big numbers. Aluminum, for us, depends on the same, and lead and zinc. I would get myself very quickly to seeing hundreds of millions there, if I'm able to go lock that in.

That's obviously the task that we have at hand right now. I'm glad we didn't lock in two weeks ago when it was 260. For us the challenge is, over the next couple of week, making sure what we do is lock in place a cost structure that will help us to, quote, exceed whatever the number is. So the top number is the one that we're really struggling with the most and trying to get a good, firm grip on and I think it's going to take us until that December date to do that. What I want you to hear is that we, as a company, whatever that is, wind up having significant upsides coming from restructuring, from our synergies and from what we think is our cost structure. And we also think that with the restructuring we'll be able to renew what we're really going after which is productivity which runs in the 4% range.

And you think your price is going to hold in the face of these raw materials declines?

Yes, I think if I look at the thing, it's like the gasoline prices. Oil is at $75, last time I looked, I'm still seeing $2.90 for a gallon of gas. They're stickier in terms of going that way because, candidly, it took us a long, long time and, frankly, we never really fully realized the total cost of the material in our price increases anyway. So I'm optimistic. I'm not so optimistic about being able to go get incremental big price increases for the next year. I think it would be foolish to count on that. But I am much more optimistic about the fact that we'll be able to retain our current pricing in spite spite of seeing, and hopefully a reduction on the cost base.

Okay, and then one last quick one. Bruce, could you remind us how much of your commercial equipment business is unitary and how much is applied.

About half and half.

Thanks a lot, guys.

We'll go next to Andy Casey of Wachovia Securities.

Good morning, everybody. Question on your Q4 outlook slide, on the negative four from 4X. What is the base? I know you deal in a lot of different currencies. If you could choose Europe, or rather what would the vintage be? Is it October 14th or end of last quarter?

Yes, when we did the math on this Andy, we're really talking about something which was in the 142, 144 type range, and so this is why we say it's interesting when you look at this revenue type number. If I were to just take -- we were running this last night -- if you then took, and I think, what is it today? 126, 128 something like that? If you look at a 126 type number on it, that would impact our revenues by about $115 million, our operating income by about $17 million, so that's the kind of sensitivity we would still have sitting there, as well as downside.

If I could turn back, I think you may have answered it but I missed in response to I think it was Mark Koznarek's question, within Climate Control, transport refrigeration. What sort of year-over-year decline are your European divisions telling you to expect in Q4?

There's several pieces. In Q4, the trailer piece, which is probably half the European transport business, excluding container, is down about 1%. The truck business, which is a big piece of the transport business, in Europe there's a much bigger truck market than it is trailer market, will be down almost 20% based on what we can tell right now. The bus market, which is also a big market, is down about 17%. And container which rolls up to our European numbers will be about 2% down in the fourth quarter. So the ones that really hurt bad are the truck numbers because the margins there, that will also have a significant overall mix impact on the margins.

Okay. Thank you very much.

We'll go next to Brian Jacoby of Goldman Sachs.

Just a quick one. You said for 2009 that you're going to pay down around $800 million of additional debt. Is this in addition to the bridge balance or are you just saying -- ?

That would include the bridge paydown.

Okay. So I guess the way to look at it is is all the paydown will predominantly be the bridge, I assume. So maybe what you use for CP or -- ?

In the slide there, we showed the maturity of the term debt. We have about $220 million of term debt which is a small amount for '09, in addition to the bridge we have to care of.

Right. But I guess the way I was looking at it was you have 950 on the bridge and you're going to pay down 800 so I'm just wondering, the incremental difference, is there going to be maybe you use more CP or -- ?

Yes, that's where it comes from.

That's the tradeoff we have to look at, what the cost of is one, availability of the other. The numbers recently, guys are doing, when they were going out to get bonds, they were quite sporting in terms of their interest rates.

We wouldn't rule that out. We obviously look at the markets every day but, again, in terms of what we need, we're not talking about massive amounts.

Great. Okay. Thank you.

Sure.

We'll go next to Shannon O'Callaghan of Barclays capital.

Good morning, guys. Just a question on the Trane margins. It was previously thought under prior Trane management that there was a bunch of margin improvement opportunity in this business. Even if you adjust for the amortization and the $9 million of other one-time unusual things you're talking about next quarter, we're still at 6.5% or 7% margins which is lower than they typically were. How much of the restructuring you're about to do is going towards there, Is there anything structural going on there? Do you think there's opportunity to actually improve Trane margins or near term we're looking at pressure?

Let me back -- first of all, the answer to where are we spending a lot of the restructuring money, yes, the lion's share is in the Trane businesses. And that's overhead areas, that's also factory footprint areas and geographic component relocations. Okay, all of the above. So we think there's significant opportunities to address the cost base through the restructuring. Also, if I were to take a look at and just characterize what's happening with the Trane business, they're probably the most hard hit by the inflation that we've seen in the non ferrous metals and so is there opportunity? Yes, because if you look at -- you just went through the situation with the non ferrous metals. A lot of that benefits for '09 and we hope it's a benefit that will show up in the Trane numbers.

The other thing about what's happening at Trane, if you look at the realization on gross productivity, we think there's significant upside room for driving good old fashioned productivity, if you look at the track record that's gone on there. So a lot of restructuring focus, non ferrous impacts will be positive, and just saving money the old fashioned way is what we're focused on here.

Okay. And then just one on the fourth quarter guidance. On the pro forma revenue, it was flat ex currency this quarter. Next quarter you have currency flattish. So the pro forma guidance for flat looks like pretty much similar on an organic basis to what you have here. Given the uncertainty, that doesn't seem really that conservative but yet you have this wide $0.20 range. Is there a reason your revenue guidance is fairly tight and your margin -- your implicit margin guidance with the EPS range is so much wider?

I think if you look at what's happening, where we're losing, the mix impact of the markets that we're down in is heavy. In fact, if you take a look at the fourth quarter when we rolled out the numbers, you look at the leverage on the fourth quarter, when we precisely started talking about what do we have to do to restructure the cost base because if we're going to see a continuation of deteriorating in key markets like European transport, like some of our businesses that are producing significant margins, and back to the previous comment about, in essence, fixing the Trane margins, that's what you get. So that would produce a fairly tight -- I don't want to say fairly tight, I mean a tighter top line delta versus the operating income effect.

Okay. Thanks.

We'll go next to Daniel Dowd of Bernstein.

I just wanted to follow up on something Bruce had pointed to earlier. So you pointed that the service business in Trane grew 9% in the last -- or, revenues 9% in the last downturn. Was that 9% in North America as well, or was it much lower in North America and much stronger elsewhere?

Dan, as I recall, it was -- I said high single digits so it was approaching 9%. It wasn't quite 9%. And remember back in -- you probably wouldn't know, but back then, our service business was 80% to 90% US. So it was a US business for all intents and purposes back then. It's still focused in the US, it's probably 75% to 80% US today, but growing faster outside the US.

Clearly investor concerns are that you could have commercial construction in the US, Europe and Japan negative, and in other emerging markets much lower than probably was previously expected.

New construction I would agree with you. For replacement I'm not so sure I would agree.

So you think that even in the scenario where you have the major developed markets all go negative, you still see Trane revenues being significantly up, driven by replacement, service and then weakness in new?

Well, I mean, you can do the math. If you assume that 30% of our commercial business in Europe and the US is new construction related, 70% is replacement, you can do a weighted average on what you think the growth rates or declining rates are going to be, and you can crank in what you think is going to happen with service. So our equipment business is about a $3.6 billion business, globally. Our commercial service business is about a $2.5 billion business.

And I think if you look at the US, with new housing starts being at less than a million, and yet when we're all done with the replacements that we are adding on, our total revenue for the year is off 4% on the equipment side. I think that, again, just shows in terms saying the fact that you've got a large installed base that is more than 10 to 20 years old that's going to need to be replaced.

Right. And just to follow up on what Herb just said, in the residential business we did see a dip in the replacement, the replacement market for residential. People were clearly deferring replacing their units, residential units this year. But you can't defer that forever. They will have to be replaced. So, in a sense, we're building up a pent-up demand for replacement down the road.

All right. Thank you.

We'll go next to Steve [Surral] of Carney Asset Management.

Yes, a point of clarification with respect to your bridge facility. Do you have any availability to borrow under that or the availability goes down dollar per dollar as you pay it off?

It's pretty much dollar per dollar. It started I think at a billion. We used the money from the term offering we did back in August to pay it down so we started at like the 2.9 range, so it will dissipate as we pay it down.

The credit facility you refer to in your press release is strictly -- your other facilities, excluding the bridge?

Right, these are bank lines.

Can you talk about the maturity profile of your commercial paper and what kind of pricing you're paying?

Right now we're probably in the what I'll call the two week window market and we're an A2P2 company and that's about what you get these days and it is expensive. We're paying over 6%, probably approaching 6.5% for when we go into the markets. That's why we're very interested in getting it paid down as fast as we can.

Is there any scenario where you would cease using a CP and draw down on your bank line to cover that?

I hate to even think about that. Right now I don't see that. Obviously, with everything that's going on, you hate to say never but our policy or our financing position is is that drawing down on the bank lines is sa last resort.

Okay. Thank you.

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

Our final question comes from Marty Pollack of NWQ Investment Management.

Hi, just if we would again on Trane, I know lots of questions on this. But looking through the adjustment for the acquisition, the step-up and all that, if one was looking at next year and looking through the seasonal weakness, anyway, in the fourth quarter, what kind of margins would be considered targeted margins without the synergies and with the synergies included for next year? I realize you can't obviously call this on the revenue line but the historical margins for Trane have been certainly more on the low point of 9% or so. Are we going to violate that number next year significantly?

Marty, that's a good question. That's what we're working on right now on our annual operating plans, putting those together. We'll have a lot more to say about 2009 on December 4th.

Okay.

Okay, well, let me just close by thanking all of you for joining us and staying with us for what was almost a marathon session. There will be an instant replay of today's conference call available approximately at 1:00 p.m. today and it will be available through October 31st. And if you have a further questions, please by all means call Joe or myself. And that concludes our call and I want to thank you all again for participating. Thanks.

Again, this does conclude today's conference, ladies and gentlemen. We appreciate your participation and you may disconnect at any time. Have a good day.