特靈科技 (TT) 2008 Q4 法說會逐字稿

Good day, everyone and welcome to the Ingersoll-Rand fourth 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 to the Vice President of Strategy and Investor Relations, Mr. Bruce Fisher. Please go ahead, sir.

Thank you, Shawn. Good morning, everyone, and as Shawn said, welcome to Ingersoll-Rand's fourth quarter 2008 conference call. We released earnings at 7:00 am this morning and the release is posted on our website. I would like to cover the usual housekeeping items before we begin. This morning, concurrent with our normal phone-in conference call, we are broadcasting the call through our public website. There you will also find a slide presentation for the call. To participate via the web, go to www.ingersollrand.com. Click on the yellow icon or our home page. Both the call and the presentation will be archived on our website and will be available tomorrow morning at 10:00 am. I would also like to invite everyone to join us this Friday, February 13, for our analyst and investor day. Our Chairman and CEO Herb Henkel, our CFO Steve Shawley and our business leaders including Mike Lamach ,our new President and Chief Operating Officer will be there to discuss our businesses, our key strategies and programs. The session will begin at 8:00 am Eastern Standard Time and conclude at approximately 12:00 noon. You can access both the audio and the presentation charts through our website.

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 covered by our Safe Harbor statement. Please refer to our December 31, 2007 Form 10K and third-quarter 10Q for details on factors that may influence results. I would like to introduce the participants on this morning's call. We have Herb Henkel, our Chairman and CEO, Steve Shawley, our Senior Vice President and CFO and Joe Fimbianti, our Director of Investor Relations. We will start with a review of our results by Herb and Steve followed by a question-and-answer period. Herb will start with on overview. Now if you would, please go to slide number three.

Thank you, Bruce, and good morning, everyone and thanks to everyone who dialed into this morning's call. Fourth quarter reported earnings had a significant amount of noise from unusual items including impairment costs, restructuring and one time acquisition related costs. Stripping out the effects of these items, EPS from continuing operations was $0.53 per share, which was below our original forecasted range of $0.55 to $0.75; however, it significantly exceeded the revised EPS expectations we gave you in December at $0.20 to $0.30 primarily from better operating performance, lower currency losses and a lower tax rate. Steve will give you some additional details in his presentation later this morning. Revenues for the quarter were below our original forecast from October for both the historic Ingersoll-Rand businesses and both parts of Trane. Our margins were also negatively impacted by the lower volumes, unfavorable product mix and currency which offset productivity and acquisition synergy savings. For the quarter, reported revenues increased by 58% and declined about 11.5% on the pro forma basis including Trane. The rate of declines substantially exceeded our October forecast that called for flat year-over-year pro forma revenues. Order intake also slowed substantially and was off about 18% compared with last year on the pro forma basis. When we saw the slowdown coming in the third quarter, we initiated a $110 million restructuring program that will benefit all of our businesses in 2009. During the second half of the year, we have begun realizing the available cost synergies from the Trane acquisition. We realized about $105 million of savings in calendar 2008 which is about $30 million ahead of our plan. We have significant additional opportunities available, and we expect to add between $175 million to $185 million of synergy cost reduction benefits in 2009 and then add on top of that additional growth synergies. Now let me turn it over to Steve that will take you through fourth quarter results in more detail.

Thanks, Herb. This morning we are going to provide additional pro forma information to supplement the GAAP reporting data so that you can get a clearer view of our performance in the fourth quarter and understand our forecast guidance 2009. So before we get started, I wanted to cover some of the major unusual items that were in the fourth quarter results. Please go to slide number four. Three significant items impacted the $10.22 EPS loss from continuing operations that was reported for the quarter. The largest piece is an after tax impairment charge of $3.4 billion, creating an EPS loss of $10.56 per share. Restructuring costs incurred of $71 million equal to about $0.16 of EPS and one time acquisition related costs, primarily inventory step-up and in process R&D of $25 million or $0.03 per share. Excluding these items, fourth quarter EPS from continuing operations was $0.53 per share compared to interim guidance of $0.20 to $0.30 per share. There are a number of schedules attached to the press release that give additional details of how the unusual items impacted operating margins for our four business segments. Please go to slide number five.

Before we review the P&L, I wanted to discuss the impairment charge that we recorded in the fourth quarter in more detail. As we previously disclosed, the Company performed its annual impairment test on goodwill and indefinite life intangible assets during the fourth quarter of 2008 as required by US GAAP. The tests were performed at the reporting unit level to evaluate each unit's carrying value compared with an estimate of its fair market value. As a result of significant declines in macroeconomic market conditions, there has been a substantial decline in global equities valuations in general and IR's market capitalization in particular. Based on the results of our current evaluation, we recorded a $3.4 billion after tax non-cash impairment charge in the fiscal year end results which largely relates to the air conditioning and services business segment. We also had charges for the European operations of security and climate control technologies . This impairment charge is a non-cash adjustment and does not impact our existing debt covenants or our borrowing capacity under current liquidity agreements. Please go to slide number six. With that out of the way, let's look at the fourth quarter performance. This slide gives a quick summary of revenue and operating margins for the fourth quarter. As you can see on the upper right, reported revenues were $3.7 billion, up 58%. If we include Trane on a pro forma basis, revenues actually declined by 11.5% and down 8% excluding the impact of currency. Adjusted for the one-time Trane acquisition and restructuring costs incurred in the quarter, operating margins were 7.5%. These one time costs which total $94 million are detailed on the box on the lower left. Please note that this analysis also excludes the impairment charge. I will come back to the topic of margins and operating leverage in greater detail later in my presentation.

Please go to slide number seven. This slide entitled Year Over Year Revenue Growth provides a look at our segment growth rates, removing the impact of currency. After delivering consistent growth for 2007 and the first half of 2008, the momentum we had seen in key end markets tailed off in the third quarter. In the fourth quarter, we had a sharp decline in revenues as a result of significant softening in a number of our key end markets. Pro forma fourth quarter revenues were down about $475 million compared with last year, including the negative impact of currency. On a geographic basis, revenues declined by about 14% in North America, and about 7% in overseas markets excluding currency. Worldwide recurring revenues were off only by about 1% while equipment revenues declined by about 15% on a comparable basis with last year. Please go to slide number eight. This bridge represents the total of segment operating margin on a pro forma basis and excludes the impact of impairment, restructuring and one time acquisition costs. This look is given to better understand the true dynamics of our operating margins at the enterprise level.. Fourth quarter segment operating margins declined to 7.5% which is off about 1.7 percentage points compared with pro forma 2007. Favorable price realization and productivity improvements including the greater than expected Trane acquisition synergies were offset by the unfavorable impact of lower volumes, lingering material inflation and foreign exchange. Please go to slide number nine. This slide bridges the components of our fourth quarter adjusted EPS from continuing operations of $0.53 to our December 18 revised guidance of $0.20 to $0.30 per share. The results exclude the impact of impairment, restructuring and one time acquisition costs. The biggest differences between the guidance midpoint of $0.25 and actuals were about $0.11 from operations, $0.11 from lower than projected tax rates and $0.04 from currency. We also had slightly lower than expected interest expense. Added together, this comes to $0.53 per share.

Let us now move to a review of our reporting segments. Please go to slide number 10. Just a note, in order to provide a more meaningful basis of comparison, all of this morning's discussions of sector operating margins will exclude the impact of impairment charges. Slide 10 lists the highlights for air conditioning systems and services and represents the Trane business that was acquired on June 5, 2008. The results are on a pro forma basis compared with last year. Fourth quarter revenues were $1.65 billion, down 9% versus prior year on a reported basis and down 7% year-over-year excluding the effects of foreign exchange. Our commercial air conditioning revenues, which are the combination of commercial equipment and parts, services and solutions were down 5% reported and 2%, excluding FX. Total global commercial equipment systems, which represent about 55% of our commercial HVAC sales were off 10% in the quarter and 7% excluding FX. The global parts services and solutions business continues to perform reasonably well, growing 4% in the quarter and 6% excluding FX. This part of our business continues to expand steadily and represents about 45% of our commercial sales. For all of 2008, the service and related category represented 33% of total Trane sales, including the residential business.

Let's turn to the residential part of our business which represented about 20% of the total Trane revenues in the quarter. We estimate that industry shipments to new residential construction was down in the range of 25% to 30% in the quarter and replacement unit shipments showed a modest decline. For the quarter, our residential product sales were down 26% year-over-year, in line with the market. So to summarize, overall for the quarter, Trane commercial sales declined 5% reported and 2% excluding FX. But declines in all geographic regions for equipment, parts and services revenues were up about 6%, excluding FX. Residential sales declined by 26% driven by a continued weak housing market. If we turn to orders and backlog for the fourth quarter, we would find total global commercial orders to be off 6%, excluding FX. In the Americas, equipment order declined mid-teens, while orders for contracting parts, service and controls were up slightly. We ended the quarter with global backlog in excess of $900 million. Global backlog was down 5% reported and 3% excluding FX. Backlog in the Americas declined over 20% while international backlogs were up over 20%. To show meaningful comparisons to last year, this number excludes $18 million in one time acquisition related costs and $32 million of additional ongoing amortization costs and $16 million of restructuring costs. Excluding these items, operating margin was 4.5% compared with 8.4% in 2007. We realized pricing increases in commercial, and we achieved improved gross material productivity in the quarter. However, these actions were not enough to offset inflation, lower volumes and the investments we are continuing to make to grow the business long term. Please go to slide number 11.

Moving to climate control in slide 11, revenues in the fourth quarter were $751 million, down 18% on a reported basis and off 13% excluding currency. For global Thermo King transport business, revenues decreased by about 25% largely due to weak global truck and trailer markets. Currency translation had a full 5% negative impact on global Thermo King's revenues in the fourth quarter. Worldwide refrigerated truck and trailer volumes were down 29% compared to 2007. As you know, North America industry shipments for trailers have been decreasing the last eighth quarters due to declining truck ton miles and significant economic uncertainty. Looking at the North American refrigerated trailer industry as a whole, fourth quarter net unit orders were down approximately 40% compared with already depressed volumes in 2007. Full year 2008 industry shipments were 26,800 units, down about 17% compared with last year, after a 16% decline in 2007. Thermo King's North America fourth quarter trailer revenue were down 14% compared with last year, reflecting the market decline. Thermo King European trailer revenues declined over 40% compared with last year as the European market slowed substantially compared with the strong growth we had seen over the prior two years. Translation also had a strong negative impact on the year-over-year results. We expect a significantly weakened market condition to continue in Europe well into 2009. Thermo King global refrigerated truck revenues were down 25% reflecting significant weakness in Europe and a 9% decline in the US. Global bus HVAC shipments and marine container sales also declined substantially due to slowdown in end market activity. After market parts were down about 8% reflecting lower fleet capacity utilization and inventory management actions through the entire channel. Finally, we enjoyed a substantial growth in our Tri-Pack auxiliary power unit sales where fourth quarter sales more than doubled compared to last year. Unfortunately, we are not expecting this level of growth to continue in the APU market as lower diesel costs have extended the break even period for these products. Looking at stationary refrigeration, global sales were down about 10%. This was driven by a decrease in display cases for regional supermarket chains and a double digit decline in the installation business. Climate's operating margin for the quarter was 7.8% excluding restructuring costs. This compares with 13.3% in the fourth quarter of 2007. The margin contraction was driven by the decline of high margin truck and trailer revenues, lingering material inflation and the impact of currency which offset productivity improvements. Please go to slide number 12.

Let's go now to slide 12. In industrial technologies , fourth quarter revenues were $671 million, down 12% versus the prior year quarter and down 8% excluding currency. Revenues for the air and productivity business decreased by 11% due to lower volumes in all geographic regions and negative currency. Air and productivity revenues in the Americas declined about 5% during the quarter due to declines in major industrial process and fluid handling end markets. Recurring revenues were off about 3% from slower industrial production levels and some deferral of maintenance by customers. Air and productivity revenues in overseas markets declined 14% compared to 2007 primarily due to declines in industrial activity and a nine point drag from currency translation. Reported European volumes were down 19% and about 7% in cost of currency. Revenues in the Asia Pacific were off about 4% as declines in machinery volumes were partially offset by growth in the after market businesses. Club Car revenues decreased by about 22% compared with last year with declines in all geographic areas due to weakening economic fundamentals of key golf, hospitality and recreation markets. Club Car continues to gain market share in the declining golf and softening utility market vehicles. ITS's operating margin was 11.2% regarding restructuring, down from 13% in 2007 on a comparable basis. Improvements in price and productivity were more than offset in the quarter by lower volumes, material inflation and unfavorable mix. Please go to slide number 13.

Let's go to slide 13 to look at security technologies. Revenues were $596 million, down about 8%, 5% excluding currency compared with strong results last year. Commercial security revenues were down 7% resulting from slowing markets in the US and Europe. Currency accounted for three percentage points of commercial's revenue decline in the quarter. Americas revenues were down 5%, about a 10% decline in volume partially offset by 5% of price improvement. Security's European business was down 14% on a reported basis, but only 2% excluding currency. Asia revenues improved compared with last year, mainly due to strong sales of electronic solutions. America's sales in the residential segment declined 18% in the quarter. Residential's results were indicative of the continuing decline in domestic residential building and remodeling activity. Volume gains in South America and revenue gains from prior period price increases helped to partially offset the falloff in US residential activity. Excluding restructuring, margins improved by 0.5 percentage point to 19.8%. Accelerated productivity in prior period pricing actions more than offset lower volumes, unfavorable product and geographic mix and currency. Please go to slide number 14.

Let's go to the balance sheet. For this analysis, the numbers are on a comparable basis for the third and fourth quarters of 2008 and include Trane. As you can see, we have some deterioration in our fourth quarter working capital performance in our operations. The biggest issue was inventory turns which slowed because of a rapid falloff of our factory volumes. Total enterprise working capital as a percentage of revenues improved from the third quarter, but it did not reach the levels necessary to achieve the cash performance goals that we have set for ourselves in the quarter. As a result of our restructuring, we look for inventories to come more into line with market demand by the end of the first quarter. Given our 2009 cash performance goals, we are strongly focused on driving working capital reduction and to make it a significant cash source for 2009. Capital spending in the quarter was $110 million, about 3% of revenue of depreciation and amortization totaled $100 million. CapEx for all of 2008, including pro forma training was $376 million and we expect 2009 spending to be in the $320 million to $330 million range. Please go to slide 15. Since there has been considerable interest in our balance sheet liquidity, I wanted to give you some additional details this morning. Available cash flow for the year was $612 million, which was below our average performance for the past five years. We finished the year below our goal of $1 billion due to the sharper than expected revenue declines in the fourth quarter that reduced operating earnings and left us higher than planned inventory levels. Fourth quarter cash flow was also negatively impacted by restructuring spending and losses in currency hedging transactions. For 2009, we are targeting to generate $1 billion of available cash flow from operations, earnings and working capital reductions. Please go to slide 16.

Our total debt balance at the end of the quarter was about $5.1 billion. About $3.4 billion is long term with a $750 million bridge loan that comes due next -- this June and about $1 billion of commercial paper outstanding. During the fourth quarter, we maintained access to the commercial paper market and our rates have come down from their peak in October. We paid about $428 million of the acquisition debt during the quarter, and our total post acquisition debt paydown is about $900 million compared to our initial target of $1 billion. We finished the year with $550 million of cash on the balance sheet, which is consistent with our liquidity plans. We continue to maintain significant financial flexibility and liquidity with $3 billion of available untapped credit facilities giving us a liquidity cushion over our commercial paper outstanding of more than $2 billion. We have adequate commercial paper capacity and even more flexibility through our receivable security program. Obviously, managing for cash remains a very high priority. 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 2009 and considering normal financing requirements, we would expect to pay down about $675 million of additional debt in 2009. The majority of our current long term debt will mature after 2012. Additionally, we are preparing to refinance the bridge loan with a medium term bond offering in the first half of 2009. Please go to slide 17.

To sum up the quarter, we had significantly weaker end markets than our original expectations which anticipated fourth quarter revenues to be relatively flat year-over-year. Revenues were actually down 8% in constant currency and off 11.5% with the impact of foreign exchange considered. The lower volumes, unfavorable product mix, currency and lingering high commodity cost negatively impacted our margins. We exceeded our 2008 acquisition synergy target by $30 million by realizing $105 million of savings, giving us confidence in our 2009 synergy projections. We initiated $110 million restructuring program in the quarter and expect to generate $135 million of gross savings or a $100 million net improvement in 2009. We paid off $428 million of acquisition debt in the quarter for a total post acquisition debt paydown of almost $900 million, making good on our promises to deleverage the Company. We expect 2009 to be a challenging year, and we are focused on delivering unprecedented levels of productivity and cash flow in the face of this declining market environment. Herb will now take us through the forecast of

Thanks, Steve. Please go to slide number 18. The uncertainty related to the costs and the availability of credit has caused a notable decline in the tone of business over the last 90 days and our most recent order rate leads us to expect a sharp decline in business activity. We expect the rate of decline to continue into the first half of 2009. We also expect a less pronounced year-over-year deterioration in the second half with fourth quarter 2009 revenues at levels similar to those accomplished in 2008. This year, our forecast has considerable added complexity compared to previous years due to current deterioration in the world economy. Because our end markets are slowing and uncertain, we are actively reassessing what we believe the next few quarters are going to look like. We are operating with a conservative baseline plan for 2009, and we have developed additional contingency actions if markets perform worse than we expect. So let me start by reviewing the economic assumptions behind our 2009 forecast. Slide 18 summarizes the key economic and business metrics for 2009. For US construction, we assume residential building markets will show no upturn before 2010. Nonresidential construction will see about a 12% year-over-year decline in square footage terms with institutional activity off about 5% to 6%. The Reefer trailer market shipments in North America declined about 16% in 2007 and decreased by an additional 17% in 2008. Recent order rates indicate that the market will be down again in 2009. The ACT forecast is looking for about 18,000 unit shipments for the year. European truck and trailer markets had a sharp downturn in the fourth quarter after a strong first half of 2008. Demand for 2009 is forecasted to decline by approximately 40%. Industrial production and capacity utilization had a major drop off in the fourth quarter and we expect an additional decline in 2009. Finally, our forecast is based on a euro to dollar rate of $1.30, which accounts for about a two percentage point decline in year-over-year revenue from currency translation. Now we will go to slide number 19.

In summary for 2009, we expect to see declining activity at most of our major end markets. We assume the US and western European economies will experience negative comparisons for all of 2009 with the slowest period in the first half of the year. We also expect slow growth in the Middle East and in Asia. Based on this macroeconomic view, we expect pro forma revenues for full year 2009 to be down 6% to 7% compared to 2008, and down 8% to 9% including about two points drag from currency translation. We expect climate control, industrial and security to show declines in the high single digits, with somewhat lower declines at Trane. Additionally, our forecast is built on the following assumptions. We will benefit from lower commodity costs, especially non-ferrous medals and from $180 million of additional Trane acquisition synergies and $100 million of net restructuring benefits. Also importantly, our productivity programs should lower costs for 2009. Additionally, we expect to see a drag of about $125 million from additional pension costs. Finally, the forecast has pricing that is flat year-over-year for 2009 as carryover pricing for 2008 is offset by price erosion caused by lower commodity costs. Now please go to slide number 20.

I wanted to update you on our synergy action in the quarter. Integration planning began back in January 2008. We formed 14 integration teams, we staffed this effort with dedicated full time resources, both internal and external, to assure execution. With Vice President level internal sources bolstered with outside expertise as necessary. In the fourth quarter, we reached the six month mark for the combined Trane and Ingersoll-Rand Co. The prior planning and systemic changes we implemented showed strong momentum during the quarter. Fourth quarter savings were $75 million and totaled $105 million for the full year which exceed our prior target for 2008. These savings came from reduced headcount and implementing the first wave of indirect and direct material savings programs. For 2009, we are targeting $175 million to $185 million of additional cost synergies which would leave us at year end with between $280 million and $290 million in cumulative savings. We are in the early stages of making customer contacts through also realized growth synergies. We are focusing on cross selling, parts and service, controls and energy efficiency. We expect to generate incremental sales in 2009 which will yield at least $10 million to $15 million of operating income. In total, we are targeting to generate $300 million in benefits in 2009, which is about $100 million above our prior forecast. As we get further along in this process, we are finding more opportunities and we are executing well on them. Now please go to slide number 21.

Slide 21 bridges our pro forma 2008 performance with our 2009 forecast. Starting with 2008 at $3.34 per share from continuing operations, we expect to generate approximately $1.35 per share in benefits and cost savings from productivity, restructuring savings and the synergies from combining IR with Trane. Lower volumes and unfavorable mix, currency and higher pension costs are expected to put a drag on earnings. We also expect about $0.64 of headwind from the combination of higher interest expense and the loss of interest income along with a higher tax rate and share count. Total EPS for the continuing operations forecast excluding restructuring would be between $1.85 and $2.25 per share. Now please go to slide 22. Full year 2009 EPS forecast also includes about $0.07 of costs from discontinued operations. First quarter results will be negatively influenced by the turbulent economic conditions and our focus on reducing working capital to generate cash. First quarter revenues are forecast to be in the range of $3.1 billion to $3.2 billion which is flat on a reported basis and down approximately 17% on a pro forma basis compared with the first quarter of 2008. Reported EPS for the first quarter will be approximately break even to a $0.15 loss. Now please go to slide number 23.

To sum up our forecast for 2009, we expect a difficult 2009 with a turbulent environment and declining end markets. We are taking aggressive action to manage through this downturn. We are delivering cost synergies and expanding our growth synergies. We will realize savings from restructuring and we are stepping up productivity targets to the 5% level while working to capture material cost savings from commodities. We plan to solidify the balance sheet by refinancing our bridge loan and paying down additional debt with our focus on cash generation. We have contingency actions available to trigger if markets decline more than expected and will continue to fund high priority projects that focus on growth for future years. Thank you, and I would now like to open the floor to your questions.

( Operator Instructions ) .

Shawn, hello?

Yes sir?

Shawn?

Yes. Are you able to hear me now?

If you folks will bear with us a minute, I am sure we will be able to find our operator.

I am not sure why they are not able to hear me. But anyhow, in the interest of time, we ask that you limit yourself to one question and one follow-up.

We have done this for ten years and always exciting to have something new happen.

All right, our first question from David Raso --

I'm sorry (inaudible) action group here.

This is David, can you hear me?

Please bear with us while we try to find him.

Mr. Raso, I can hear you. It doesn't sound like the speakers can.

Maybe the audience can hear us and not the company.

Sounds like that is what is occurring. Everyone please stand by as we try to resolve this issue. It will be just a moment. Again, ladies and gentlemen, we apologize for the temporary interruption in today's teleconference. We are looking into the issue and apologize for the delay. All right, ladies and gentlemen, the speakers have been reconnected. Again, our first question comes from David Raso of the ISI Group.

Thank you very much. Question on Trane and the profitability. I am looking at the fourth quarter on a pro forma where your decremental margins, even if I exclude the ongoing amortization cost and of course, include all the savings, decremental margins of 50% and if you exclude that the cost savings, it actually lost money. And then I look at the '09 guidance you gave for housing starts, non-resi, blended together is not terribly different than what we saw the fourth quarter for Trane revenue. How should I be thinking about the profitability in '09 in Trane relative to what we saw in the fourth quarter?

David, thing that Trane -- we have said this a few times before, that Trane, particularly the Trane commercial group, Trane residential to some degree were the biggest -- had the biggest impact of the lingering material inflation. You look at the bridge on Trane commercial, it is significantly upside down with regard to material inflation relative to direct material productivity. That is largely due to steel, due to the non-ferrous metals. So in the fourth quarter, we saw a significant amount of commodities still coming out. Copper valued at $3.35 a pound. So the biggest single trend -- change that we are going to see between years is the deflation in the commodities that Trane uses.

When I think of the pro forma Trane margins, excluding your ongoing amortization, I look at it about 9.5% or 9.7% or so. For the full year '09 pre- the amortization costs, do you see the margins down materially from the 9.7%? How should I think about the core margins?

I think it would be close, David. (inaudible) nine to 10. That's the kind of numbers I think that we would look at.

Okay. One last quick one on the first quarter. The medium term note to term out the bridge loan, the bridge loan is actually at a pretty attractive rate, I think it's LIBOR plus 53 bips? Obviously, you need to term it out, and I appreciate the benefit that is going to provide just for security of looking at the balance sheet, but how are we thinking of the rate? Obviously, there will be a higher interest rate involved with the medium term. How should we model on that?

No question on that there will be a rate impact. I think if we were to put ourselves in the market today, that medium term rate for our company would be somewhere in the 7.25% range. But it has been changing so rapidly. Two weeks ago it would have been 8.25%. So we have it built in at about, I would say, 7.5% to 8% range in our planning.

That is helpful. Thank you very much.

All right. Our next question comes from Jeff Sprague of Citi Investment Research.

Thank you, good morning.

Good morning, Jeff.

Just on that topic, first, it sounds fairly matter-of-factly you are assuming you get a term deal done, but can you discuss kind of what the backup plan is if the market is not I amenable to that? Do you work on extending that's '09 piece of the credit facility that is expiring? Is there something else that you do with the bridge loan? Just kind of what the fallback plan might be.

Yes, Jeff, interesting enough, we have been working on the fallback plan a lot longer than we've been working on the term plan because of where things were October and November of last year. There is really two things going on. We are expanding our receivable securitization program significantly. We are just finishing all of that with the various banks and the audit process we go through, so we are expecting to pick up $300 million of incremental financing through that. That will help quite a bit. The other backup is very straightforward. We have already gone through credit committee with two of our relationship banks and effectively can refinance the bridge loan out of 2009. We have term sheets in front of us, we just have to negotiate and sign them. So we believe we have significant contingency at this point in time to handle that, but, again, it was in the paper yesterday. We're highly encouraged by what's happening in the corporate bond markets and we think that we have a great chance to get in and out here pretty quickly.

So we are optimistic, Jeff, but we also have contingency plans in place ready to go at least another full year thereafter.

Then on the Trane backlog, you indicated it was up Internationally. I believe that was a year-over-year comment. Could you comment on the sequential international book of business and how that's kind of playing out as you look into the first half of '09?

Hold on a second. We are looking up the -- I am sorry, Jeff. I'll have to get it back to you on the international piece. I have it totaled but not broken out.

And just on the -- on what happened in Q4. I under -- I certainly appreciate it is volatile and hard to predict, but I mean with the quarter basically over, you guys came to the conclusion that the midpoint of your range needed to come down some 60% or so from where you were at. And I am just -- it is unclear to me what would have changed. What would have driven such a change so late in the quarter and then in fact it coming in that much better than you thought.

I think there is probably really two areas. One was the fact that, as we mentioned, our achievement of the Trane synergies have outperformed. And I have got tell you, it probably surprised us a little bit because we took a look at this and we said volumes are decreasing, it is really the first time around, and let me give you an example. A big piece of the savings is what we call our indirect material. These will be things as mundane as rental car costs, okay? So we negotiate a contract at a corporate level, and people have to go use the new rates, okay?

And we have to see those savings coming back and expense reports, okay? So when you take a look at how all this works, we just -- to be honest with you, weren't as confident that we would see it all come back as we had teed up. I know it sounds a little lame, but we felt it would be better to stick with where we believed we could deliver the synergies absolutely as opposed to predicting on the upside. The other area, obviously, is for the reconciliation we gave you as the tax rate. Last year -- I don't know if -- those who remember last year, we had a significant surprise in the tax rate in the fourth quarter. The various adjustments that had to be made actually increased the effective tax rate in the quarter. This year, we are going exactly the opposite. All of the adjustments fell out pretty much in our favor. And those are the two big pieces.

Great. Thanks a lot.

Our next question comes from Alex Blanton of Ingalls and Snyder.

Hi, good morning.

Good morning.

Herb, could you comment on the following observation about the cyclicality of the business? I know you have made a lot of acquisitions and sold a lot of companies in an attempt to reduce it, but, when you look at your current product line, there seems to be a great deal of it that is going into buildings of some sort, mainly commercial, air conditioning products and security being the primary ones, but that tends be a lagging factor. So are you sure that you have included enough of a downside in 2009 for that? Because people tend to finish up projects, even after the economy has started to go down, which it has. And then very often, there is a derth of new projects for quite a while. So could you comment on that?

Sure, I think it is a very, very good question. When you look at our businesses, I think we have to go back into the pie chart that we talked about in the past as to how much of it comes from the recurring revenue stream versus how much comes from the new construction. And when do you the recurring revenue stream, you are talking about really two elements of it. Number one is the fixing of the install base that is there, and then (inaudible) there's the replacement cycle for the install base that is there. We took into account all three elements then is the continued reduction -- and you saw the numbers I plugged in. We took our whole goods for commercial and said, yes, it is going into new starts and going to be 12 months later on and down 12%, 5% to 6% institutional. We took the recurring base and we took the parts activity and collectively, when we put that all together, we come up with the picture that we laid out. The year itself is -- I wish it were the other way, but unfortunately, we are coming out of a very, very low point. We found ourselves, like many of our customers in the fourth quarter, under estimating what the downside activity was going to be like, and we actually had input and therefore produced inventories more than we needed to. That's what hurt our cash flow.

Now as we and many other companies are talking about cash is king and you are focusing on that, we're seeing activity levels that are exacerbated. So the market may be off 12%, but I'm seeing off 18% in the short term because I am making inventory adjustments whether at the distributor's inventory levels or whether candidly in my pipeline that I need to go and bring it back down. So I look at the issue being slightly different. My view is that in the first half of the year we are going to see slowing numbers as we described compounded by the impact of this inventory glut that is sitting out there in both channels as well as with manufacturers. Several of our factories are shut down, many of our customer's factories are shut down. But we then see in terms of it getting back to where by the second half the year, we actually expect that the run rates will be only 5% to 6% off of where we see the first 2008 numbers, and by fourth quarter, we actually expect to see run rates similar to 2008. Now remember, 2008 was not exactly a (inaudible) in the fourth quarter either, it was off 11.5%. So I don't think we are overly optimistic in that. I think we have laid in all the activity. To me, however, the biggest wild card is the credit availability and as what you are describing, would it continue to further deteriorate people being able to get financing for that new project you have got coming on> And that's why we also then build contingency plans that would be able to be pulled if we started to see that happening on the drawing boards going forward.

Second question. I was looking for your balance sheet, but then I noticed that you haven't been including the balance sheet in your quarterly reports of earnings. Correct?

Yes, we typically provide the full balance sheet, obviously when we file our Qs and Ks. We try to give selected information that would help you think about the company, though.

Yes, I see that, but you don't have -- you haven't had the balance sheet -- I don't know how long this has been going on, but -- I was looking for the amount of equity after the goodwill writedown.

It's right about $6.7 billion.

Okay. So you wrote off about a third of -- less than a third of the equity?

Yes, somewhere in that neighborhood.

Okay.

I think our debt-to-cap ratio ended up in the 43% range.

And so basically what you want -- what it says is that Trane was worth book value because you wrote off all of the goodwill.

No, that's not true. There is still remaining goodwill on Trane.

There is?

Yes.

Okay, so what percent was written off then? I thought it was the whole thing, but I didn't know what it was.

It looks like about 40% based on what we can see here.

Okay. Only 40%. All right. Thank you very much.

Thank you.

Our next question comes from Steve Tusa, JPMorgan.

Hi, good morning. On the stockholders equity question, does that reflect any kind of adjustment for pension underfunding with regards to weakness in the pension plan?

Yes, it does, Steve. There's about $500 million of adjust number for the pension under performance.

Okay. And when we think about the cash flow for next year, you said you are going to do about $1 billion in free cash flow. You did 600 and change this year. What are the big differences? I guess CapEx is one area that you benefit. I mean, how much working capital benefit do you expect to get given that earnings are going to be down 40%?

Yes. We will get a little benefit from CapEx. That's not where we have hung our hat. We have kind of took the approach, this is a balanced plan, and we are not going to burn the furniture and sacrifice the future, but we are prioritizing CapEx. I think if you look at the numbers in my report, on a pro forma basis, we will be probably be spending somewhere in the neighborhood of $40 million less in CapEx next year. But that's fully reflecting what we believe our needs are going to be we are not starving the company. The biggest impact is going to be in the area of working capital management. If you look at where we ended the year, our inventories have actually dropped from third quarter to fourth quarter, but they didn't drop as much as we had hoped. Inventories were actually down close to $200 million between the quarters. But we were looking for at least another $200 million or so on that in that category. Receivables behaved pretty well. We saw a slight degradation in receivables quarter-to-quarter a day or so, but again, we are focused on driving things the old fashioned way. The biggest issue that we are facing right now is adjusting production levels in the first first quarter to capture back as much as that inventory as we can. So if I had to sum it, actually if you look at the EBITDA between the years and you played in everything, played in all the one time costs and all the things that are going on, the EBITDA is fairly flat year-to-year. You might pick up maybe $80 million when you look at not having all the one time costs associated with the acquisition last year, but the big change has got to be in working capital. That is our focus.

Okay. And then on this very helpful earnings bridge that you guys have given us, what is the inflation number in there? What is the -- I guess I am just trying to get a picture of price costs. I guess you said price is going to be flat. Does that mean inflation is flat to down as well?

No, we have -- look at the -- our material inflation is kind of flat. We are -- which would be a great relief because we have been getting nailed with material inflation now for what seems like forever. But if you look at the total inflation that is in there, obviously we have accounted for wage inflation and other inflation, so we still have inflation in the plan. Look at -- probably running about 1% type of inflation numbers in this plan. So we still show well over -- plainly over $200 million of inflation as we go year to year.

Okay. And then one more question just on Trane. I guess two parts to it. When you think about the early '90s and Trane's margin that was kind of in the mid single digits, is that kind of ruled out with regards to all the restructuring and integration you are doing here? Is that a reason to think about it at just a higher base level of profitability even in a worse than expected downturn? And then secondly, as you are getting all this cost out and making these big moves, have you seen any attrition with regards to salespeople or key operating people given this is a pretty significant cut that you are taking to the cost structure?

Well, let me just address the numbers, okay, and then maybe Herb, you can make a comment about the organizational impact. The -- as I said earlier, the biggest -- the way we look at this, if we look at Trane's performance, Trane clawed back a lot of that margin and was performing at -- certainly at above high single digits type margins recently. If you take a look at what happened in the third and fourth quarter, and really, a big piece of it happened in the third quarter was this material inflation caught up with the group. I think if you take a look at the material productivity, there's a lot of new product line activity going on, so not being able to drive material productivity on the old product line. We are kind in this crunch period of higher commodity costs and not really being able to reduce our cost base in the old product line. We are going to be coming out with almost a completely new product line in 2010. So we have got this little bit of a time phrase going on relative to the ability to drive material productivity versus inflation. The biggest single thing, as I said earlier, what's going to swing the numbers on Trane is material inflation or the lack thereof. And we will see that kicking in, my guess that will start to show up in late first quarter, second quarter for sure, and that is sort of how we have the thing laid out. Herb, do you want to make a comment on the --

Right, so you expect a positive price cost through 2009.

Starting in probably the second quarter of 2009.

Great.

I think answering your question, Steve, on the people side of it. It is a tough economic environment in which we operate. But candidly saying that there is an awful lot going on at Trane, and I think it's very, very exhilarating and exciting for the people that are there working on it. We are changing out over 50% of the product in the next 12 months. I think you are going to see a lot of new things coming on on board, and I think both the sales organization and the operating people and the engineers working on that are doing their darndest to go through it, and we are not seeing any kind of what I call disproportionate amount of people leaving. As a matter fact, I find that this is a one heck of a great group of people that have Trane in their blood.

Great, thanks a lot, thanks for all the details.

Our next question comes from Terry Darling, Goldman Sachs.

Thanks. Herb or Steve, I wonder if you can take us through kind of a laundry list of items, building a bridge between 4Q and 1Q. Clearly, there is a lot of seasonality and the tax rate is going to go up. You have got maybe some -- where your restructuring costs are higher than your savings. I was wondering if you could take us through a little more detail there.

Yes, I can, Terry. Let me give you the macro part of it. As I described in our fourth quarter, our order rates were up about 18%, and that is the kind of numbers we're looking at translating into revenues during the first quarter on a year-over-year type basis. So we are expecting a continued very, very, very soft market on the revenue side. The second piece which compounds this problem is the fact that as Steve was alluding to beforehand, because we did not turn off manufacturing at the same level at which we saw orders dropping the fourth quarter, we are also looking at how we get $200 million of inventory out of our pipe which means we are obviously going to have a significant reduction absorption in our plants for the first three to four months. And then you add to that, now that I have this inventory sitting there on the gross margin side, I am going to get the whammy of the fact to have a lot of 2008 type commodity costs still in the product that I am selling off, so I'm going to be seeing a gross margin number that is going to be not better than what we saw in the 2008 that's there. You add into that then obviously, this whole issue of pensions that Steve was talking about.Then you get -- I'm going to try to get to the positive stuff there too, okay? Then you get done with that. Then you get into the fact that we continue to see what was for, as Steve described, pleasant, positive surprise for us. The rate at which we are able to get productivity as well as on the synergy side. So those are on the other side the ledger going forward. Our expectation is that we are going to start seeing pricing that will wind up eating into some of the carryover that we had from 2008. So I am zeroing that out already in my entire thinking as I will look at the first half of 2009. So the positive in addition to that obviously is really what we do wind up seeing as continued increase in productivity. We think we can now step it up from 4% to 5% and that's going to continue to improve as we go forward.

You are essentially assuming organic is down 18% in the first quarter or is that including currency?

No, no, that's -- because we -- frankly, we don't see the currency moving that much between Q4 and Q1.

Okay. And Steve, I wonder if you can maybe help us with ---

Let me make a quick correction, the 18% is including our expectations on currency.

Okay. And then Steve, I am wondering if you can help us a little bit with what our expectations should be on the kind of quarterly run rate balancing act between the restructuring savings? I am sort of focusing just on this $130 million or $135 million gross number relative to the benefits, which I think you called out at $100 million. Just sort of how that flow works as we move through the quarters.

Well, we -- it is actually going to be fairly off balance, because if you go back to the flow chart where we talked about it. When we saw the downturn coming, it was definitely in the third quarter. We had the benefit of having this business called Thermo King that is sort of the leading edge business that gives us an indication of what is happening in both the US and the European markets. So our restructuring program really started in earnest from a planning perspective in the third quarter. So you look at the work that has been going on, we have already announced and booked a significant piece of the $100 million or so. I think $77 million of the cost was already been taken in 2008, $71 million of that in the fourth quarter. So that is well underway. So I think we will probably see, a rough guesstimate, 40% of the savings in the first half, 60% in the second half, type of a split.

Okay. And in terms of the segments where you are more aggressive or less aggressive, does it sort of map back to the schedule on the back of the page in terms of how the fourth quarter weightings looked, or will that shift around on us?

It might shift a little bit, but where the bulk of the money is going is climate control and Trane commercial, quite frankly.

Okay.

In fact, some of the other questions about -- maybe I was a little remiss. But some of the questions of how to turn the Trane margins. A lot of the restructuring is targeted there.

Okay. And I confess I got a little confused between various commentaries on raw material expectations versus inflation, and wonder if we can just focus on what your expectations are on a year-over-year full end basis for just the raw material piece of the inflation. Seems to me that ought to be a benefit for you, but I just got confused with all the commentary.

When you get done with it, Terry, is that when you add it up between the steel and the copper pieces of it, we are looking at -- we believe that we will capture about $150 million worth in our 2009 numbers. We think there is another upside of $40 million beyond that, but candidly, we think that upside would be probably be negated by potentially some price pressure, so we don't count that extra $40 million. We clean that out with what we think would be price erosion. So think along the lines of about $150 million of captured commodity improvement.

Okay. And last question, Herb, just coming back to your pricing comment there. Maybe a little bit of history lesson for me on this. As we think of the pricing dynamic rolling into 2010, given an assumption that the economy is tepidly recovering at that point, would you expect to be back kind of under water from a price of raw material balance perspective, at least in the first half of the year as capacity utilizations remain pretty weak at that point. Obviously, raw material headwinds -- I'm sorry, tailwinds will probably have been realized with a lot of things in between. But just trying to think about whether pricing -- as we move into the first part of 2010 anyway, even if we have the early signs of recovery is a significant headwind at this point.

Actually Terry, what I see usually happening is that the pricing under raw material side is a lagging thing when it shows up into my gross margin by about six months, until it really shows up it'simpacting into what is actually out there. Because I've got to place the order, the guy has got to supply it to me, I've got to consume it. And so I look at things that raw material improvements that I just described to you in 2009 actually make me feel very good about at least the first half of 2010 because I think they'll be all the way through that. And if we have any (inaudible) it gets to be, at what point do you have the courage to lock it in longer term? If copper is a $1.40, do you think it will go to a $1, or do you think it's going to go to $2? For us, I think what we are going to be looking at doing this time which we had done the last time around is that if, let's say by the middle of the year, we start seeing that these things are pretty well stabilized, we will probably go longer on our hedge positions and wind up tying to go and secure it. So right now, my answer would be I would feel very good about continued low cost in my cogs for at least the first half of 2010, and if I can go and lock it up for 12, 18 months on some of these items, we can probably make it all the way through all of 2010. So that is actually a real upside for us. That is what I saw coming out -- dust off my old cobwebs. This is what I saw coming out of it going back 2002 same way.

And that favorable raw mats compares in the first half going to offset any continuing negative price picture?

That's my thinking, correct.

Okay. Thanks very much.

Sure

All right. Our next question comes from Andrew Obin, Bank of America.

Hi, it's Bank of America Merrill Lynch. Just a question in terms of your forecast for '09. You noted flat revenues in the fourth quarter, so should I assume that earnings will start showing positive comps some time in the third quarter? Are we going to see positive comps in second quarter already?

I think you are going to see positive comps in the third quarter.

Okay. And that's just driven by the savings from -- on the Trane side, right?

It's combining of all that. We think the combination of the restructuring synergies will pick up the volume is --

And just more of sort of the philosophical question. When you do accounting, I assume that you did the discounted cash flow test when you impaired Trane assets, is that fair?

Yes, we could spend two hours on this topic, but we employed an outside firm to help us value the goodwill and long life intangibles, and they use various techniques to do the valuation, including outside multiples on sales, EBITDA and other things to really hone this thing in.

Well the question I have, how do you internally separate the fact that we have significantly reduced our expectations for earnings from Trane, I assume because economic conditions have worsened. Do you really have a methodology internally from accounting standpoint to separate savings from impact of declining revenues or do you back into the savings number?

No, we can separate it out. In fact, we put together a very detailed five year look at all of our business segments in order to tee up the valuation work. And it was a significant amount of effort that went into that, to relook at the earnings cash flows based on where our current economic conditions put us, and we also used that with our outside valuation help firms to take a look at various aspects of our business on a competitive apples-to-apples multiplier. In other words, we break this down by reporting segment. The outside firm takes a look at not only our cash flows, discounted back to some present value. They take a look at what the competitive multipliers look like for various industry segments that we play in. They look at multiple of sales and come up with kind of a view, okay, of what each of the pieces of the business are worth.

Okay.

And then the only interesting piece behind it, Andrew, is that you only report the ones that are negative. The fact that the securities America business was $3 billion above book, you don't record that anywhere. So just remember, this is a one way adjustment only, and if things got better somewhere, again, six months from now, whatever it is, you wouldn't go back and redo this. So it is a one way valve that this thing operates on, and we do it at one level below which we reported. So that's why we saw in our security, we wound up doing the analysis in the Americas. We did the Americas, we did Europe and also did Asia Pacific, because that's how we run the company. So then we wound up looking at each of those. So what you are now seeing is a report out as to if if any of those at that level have any kind of impairment based on the approach that Steve was describing to you.

Thank you. And just a follow-up question. In terms of your statement that you think you can raise money at 7% in the market. Is that based on the conversations you have had with banks? Just one of my companies that is AA minus rated just raised money at 7%. You guys have ratings significantly below that. So is 7%, is that your estimate or is that based on the conversation you had with banks?

We talk to our banks every day, Andrew, about that topic. We get indicative pricing every time which is anybody that goes to the markets, and we update it liquid daily.

And you guys don't foresee a downgrade, right, based on the conversations you've had with the rating agencies, right?

No, we do not.

Thank you very much. I appreciate it.

All right. Our next question comes from Jeff Hammond, Keybanc Capital Markets.

Hi, guys.

Hello, Jeff.

Just wanted to get a little more granular on the business units. You are calling for a 6% to 7% core decline overall. Can you give us a sense either by business how you are thinking of revenue or just order of magnitude, what businesses you think are more or less resilient in that?

I think that you look at kind of across the board and look at climate control. Really two big pieces to climate control. You've got the stationary refrigeration gang which we see in our current look is going to be off -- I am talking about all of '09. These are end market discussions, not -- which we then translated into our plans, but if you look at -- we think that the stationary business is going to be better off than the transport piece, okay? So they would be off maybe mid single digits. Maybe a little bit less. And the Thermo King piece, when you add up all of the comments we just made about global truck trailer and what we think is going to happen with bus looking at aftermarket being relatively flat, you are going to be looking at mid teens, mid to high teens being off in Thermo King. So total climate, that's where we come up with the -- kind of the high single digit numbers being off organically. Okay?

And in terms of the other businesses?

When you look at the other businesses,security is going to go pretty much the rate that we see in terms of nonresidential construction. The res piece is going to be reflecting the residential -- the only thing I'd say that we would adjust a little bit is in the commercial business. About 60% of our securities markets is institutions and they are -- their rates of reduction are going to be less we believe than overall nonres construction. So that's where we come up with the security piece. If you look at industrial technologies , the industrial markets being off significantly which affect our air and productivity businesses. We would be in the roughly the 10% range. If you look at Trane, everybody focuses on the equipment side, but you got to remember, our parts, service solutions business, we actually believe is going to be up about 5% based on not only what we see in the marketplaces, but performance in the fourth quarter. And also kind of what we saw on the downturn between 2009 -- 2001 and 2002. That business actually grew about 5% to 6% in that -- maybe even 7% in that time

On the parts and services business.

On the parts and services business. So when you take a look at overall Trane commercial, we would expect them organically to be down about 3%.

We will actually go through this on in some depth on Friday, so --

Because if I look at your key economic indicators and just some of this discussion, it seems like you get to an organic revenue decline greater than 6% to 7%.

Let me, if I can, just sort of summarize this. What we said is that if you look at climate being off in the upper single digits and you also take -- you do the same thing with security and industrial, then you have the big swing really is with Trane commercial being off, what, just say a couple percent. Residential being off high single, so you come up with total ACSS being off less than 5%. So when you add those pieces altogether, you wind up coming up with an overall look that comes somewhere between minus 6 and minus 7.

Jeff, also those indicators primarily US domestic indicators. We have a substantial portion of the business outside of the US and it doesn't take into account things like remodeling in the aftermarket. So you would you expect that those end markets numbers would be worse.

I think your broad commentary was a little more favorable in Asia and South America and Eastern Europe. What are you seeing within your business in those markets? Are those proving more resilient or weakening in line with everything else?

I'd say that look at the Asia markets for instance, coming across the board, we are looking at about a 5% growth in those markets. Obviously, a lot less than we have seen in the past,, but still positive growth.

We used to see 20, we are now seeing single digits.

And you saw that in the fourth quarter and near term in the order rates?

Yes, I think it turned around, was probably closer to flat in the first quarter of this year, then picking back up a little bit again as we talk about going forward. There is an unbelievable amount of inventory. I heard numbers all sorts of numbers, but none were substantiated. But there is an awful lot of inventory in many, many businesses that people are going through in terms of first quarter. So I think you are going to see that's why this first quarter looks like, I think, an aberration, and I would be surprised from the people that I talk to and many of our customers and suppliers that you wouldn't see that on a very, very broad based basis.

Okay, thanks, guys.

Our next question comes from Rob Wertheimer of Morgan Stanley.

Hi, good morning, everybody. Two -- I guess two questions for you. The first one is just on the commercial orders. Have you seen a slowdown yet in office buildings, or is it more just the retail segment?

It's been most pronounced in retail, but there's been a slowdown in orders across the board.

Okay. Fair enough. Second on copper. I thought you guys bought around 100 million pounds of copper, and I thought it was around 343 or 340 or whatever average last year. Have you locked in copper well below $2? And are you expecting steel to be up, or is there a little bit of room for upside to your positive on commodities?

I think if you look at where we are locked in, the early part of the year, it is running right about $2, but in total, across all of our commodities, we are only about 35% hedged out. I use that word loosely because it is not a traditional financial hedge, it's -- we have got contracts out with suppliers. So if you take a look at what we have available to us, yes, there is upside. So if you take a look at what we have available to us, yes, there is upside. If you take a look at being able to take advantage of market conditions on another 50% to 60% of our buy, there is definitely some upside.

Perfect. And last question, is there a cash contribution on pension in '08 or '09?

Yes, there is. Kind of back and forth on that. Right now we are thinking that's somewhere in the neighborhood of $80 million.

Each year? -- or I am sorry ,'09?

Yes, it kind of averages -- it starts in '09 and the foreseeable future would be about $80 million, $90 million.

Okay. Thanks.

Our next question comes from Eli Lustgarten, Longbow Securities.

Good morning.

Morning.

Two clean up questions. One, what is the tax rate something we should use for '09 and the corporate overhead number -- I guess (inaudible) allocated dropped to -- reported $27 million, but it's $19 million adjusted, about half of where it's been. What should we use as an ongoing rate in that allocation?

I think you would be pretty comfortable with about 20% on the tax rate side.

What are your thoughts on corporate?

Corporate, I'm not sure what caused it to drop so much because it more than cut in half in the prior quarters in the fourth quarter, and what's an ongoing rate for that?. If you want, you can come back to me on that later.

Yes, I think we need to do that because there's a lot of moving pieces in the fourth quarter, and we don't want to give you a wrong answer.

Just trying to figure out what (inaudible). As far as the business goes, especially on Trane, if you look at nonres construction profiles, it starts off stronger in '09, gets weaker as you go through the year and weaker into 2010. The part I am more concerned about is that on January 1, 2010, we have a cooling conversion to R410A that takes place. When you talk about your costs -- are you going to be ramping up production in the second half of the year on the old coolant to have an inventory into the new year, or what are you going to be doing -- are you going to convert to the new coolant and how much of your product line has to be converted? There's a whole issue that has to takes place in the Trane business.

I am going to invite you the next time we go over to Clarksville -- you are absolutely right. We have at this point in time numerous new projects. I said is that I think it's over 50% if I add up in terms of the total product value for the holders that we sell in the US that are going through a 410N conversion. They will be implemented throughout 2009. What we are doing at this point in time -- it's interesting, because some of these wind up actually costing the customer efficiency. So we are providing to them the alternative. This is like when the guys -- remember changing over on the class A trucks? Same thing. So the question -- what we are trying to do is keep open as long as we can for the customer the option between using this system versus going and switching over to a new one. And we have two groups of people. Some would say, gee, I don't want to be stuck with an old one, the other one saying, well, I don't want to be stuck with a new cog. o we're looking to go through the year providing both products, so I don't expect to be building any kind of inventory. We are going to wind up obviously having to make a rational cutoff. As we know, we cannot be in production as of January 1. That is mandatory. So now we have got to make sure we don't get caught with a pipeline of stuff I have got to build which gets too close to that date. So as the year goes through, we will continue to monitor and see how far out we can make this a flexible solution available to the customer versus when we have to go hard and say, okay, I just can't do it anymore, because I don't want to be trapped with anything at year end. So this is no different than that class A truck story that you and I talked about a couple of years ago.

But this still goes through the problem of the second half improvement that we are sort of expecting for Trane and the problem of managing the business through all of these changeovers. I guess --

Actually I wouldn't consider -- I don't want to dilute it. It's a very large task, but think of it along the lines of that you have two SKUs to produce instead of one. The difference in terms of candidly one has got 5% or 10% more copper that the other one. A little bit taller, a little bit wider based on the amount of refrigerant you have got to go run through the darn thing, but it's not rocket science in terms of where you are producing something really dramatically different. It really is in terms of saying is that one modification versus the other.

All right, and one final question. Do you expect Thermo King to be profitable in the first quarter, the first part of the year at these levels of production?

Yes.

Marginally?

Yes, marginally profitable in the first quarter.

All right, thank you.

-- profitable in the fourth quarter, even with these volumes. So we should be fine.

All right, our next question comes from Robert McCarthy of Robert W Baird.

Good morning, guys.

Hey Rob.

I appreciate you taking the questions and extending the call the way you have. I have a couple of questions. First, about your revenue outlook for 2009. As I understand the combination of the formal outlook and your answer earlier, Herb, notionally, at least, you are looking at something like 15%, 16% organic decline in the first quarter averaging 5 to 6 in the second and third and being about flat in the fourth, which would imply, I believe, that your second half expectation would be something like down 2% for the entire company. And if that is going to be the average, then you've got certain businesses that you expect to be up in the second half, and I just wondered which ones those would be or if you could generally talk about how we make this math work.

Well, I think past of the math, Rob, works from what you are comparing it to from this year. Remember I said is that if you draw the graph, you are starting off with a -- if I use 2007 as the base, I wound up with 11.5% off in the fourth quarter. So I'm saying is that I expect the fourth quarter of 2009 to be really not much different then what we had in the fourth quarter of 2008. That is the way I would peg it out for you. The leading companies for us -- we talked before about where do we lag versus where do we lead. Obviously in security and training. That stuff goes in pretty late onto a particular project. Where we get into companies however, like in our industrial space, as soon as that first tick of activity left picks up, they wind up going and driving that. The same is true with our Thermo King. They have been by far our best leading indicator. Remember we had the conversation about when I said that back in May, when we have the first twitch happening in Europe and said oh, my gosh, this is an indicator of what's going to happen in six months. What -- unfortunately, it's great directionally, but it's not as good on the magnitude side. So we underestimated a drop-off. We expect in terms -- if you look like IPI and some of these other sources of insight, I think you start seeing in terms on it. Everyone sort of turning around somewhere in terms -- whether it bottoms out in the first quarter, second quarter based on the specifics you are dealing with, but overall, in terms of saying is that it is less negative in the third and then getting even better than that to almost being equal to 2009 -- 2008 in the fourth quarter.

So -- we are talking about tools, Thermo King, and then almost all of your recurring revenue business.

Exactly.

Okay.

Well we actually think -- if I look at the residential side, obviously, you see in my forecast, we are just taking numbers that show that housing was off another couple hundred-- like 100,000 or whatever, that is not the primary source. The real issue for us is look at the replacement of the existing units that are out there. That is the install base. And when we look at what we think has been deferred in 2007 and 2008, there is a significant pent up demand. We also know in terms of dip in deferrals on service work where people are just afraid of spending the cash. So those are going to be the ones that come out right up on the beginning part.

I am just curious, where does your industrial production forecast come from?

We use -- I go by two sources that I like based on the diversity of their background. We go by Maypie, and if you look you'll see they do it by region and by about 30 different industries (inaudible), so -- sounds like a commercial. But I go -- I use the IBI, and they do a pretty good job of regionally US, Japan, Europe, Asia Pacific and so on, and we lay those together and see what do we come up with.

Okay, Mike. My other question is I wonder if you can give us on a pro forma basis a geographic revenue split for 2008 the way you have traditionally, North America or ISA, South America, Asia Pacific?

Bear with me a second, I don't have that memorized. I have got to get to the book.

Two-thirds North America.

I think that's the way we'd probably say -- we are still at two-thirds, 65%, 66% geographically North America.

Okay.

Okay, so you have got 34% international.

Yes, and can --

And then of the breakdown behind that thing is Europe reflects about 23%, 24%. Asia Pacific then represents about almost the (inaudible). The rest we have in the Americas.

Yes, okay, thank you.

Sure.

Our next question comes from Nicole DeBlase of Deutsche Bank.

Hi, guys, good morning.

Good morning, Nicole.

A couple of quick ones for you. The write downs within Trane, does that imply that long term Trane margins trend lower than your expectations? And also, does that lower ongoing amortization within the segment?

No, well first of all, let me answer it backwards. This -- we wrote off goodwill predominantly, which was not being amortized, okay? So you take a look at the forward impact on P&L is really zero impact, okay? In terms of indications of margins, okay. If you take a look at -- not so much margin assumption, it's basically volumes, okay, was the biggest driver from an operations perspective, but also, a good half of the adjustments due to the fact that our market valuations are just significantly lower than they were back when we did the acquisition. I mean global market valuation. So the way they do this is look at theoretically what the outside value market is of each of your pieces, okay? And it hasn't -- quite frankly very little to do with your margins and projections of cash flows. It has a lot to do with what people would pay for the business theoretically, and that was the discussion we had earlier, and that's why we engaged the outside firm to help us do a very thorough job of getting that outside valuation view such that we can do this correctly.

This relates more to the RI stock price than Trane margins.

Okay. Got it. And then lastly, a lot of companies have been moving their domicile away from Bermuda. Are you guys assessing that?

Well, obviously we continue to look at what is the appropriate corporate structure for our company, and we have been very interested to see why people are moving and we obviously evaluate and see whether staying in Bermuda or going somewhere else is the right thing to do for our shareholders and we will be very, very active in continuing to look at that.

Okay, Thank you.

Next to Brian Jacoby of Goldman Sachs.

Hey, guys. Thank you for taking my question. Just a couple of quick ones on the pension side. If I heard right, is that correct, you are saying that the actual cash contribution will be roughly $80 million in '09 and roughly $90 million in 2010? That the right way to read it?

That's what we are planning on.

Okay. And are you -- I mean, what is the status of the the pension plan at year end, the funding status?

Let's see here. We will probably -- there was a big swing -- well, there was a fairly large swing. If you take a look at where the IR funds were at the end of '07, we were overfunded by about 5% and if you look at where we were wound up at the end of the year ,combined IR and Trane plans were underfunded by about 21%.

So what does that work out on roughly a dollar basis? Is that --

About $635 million.

Okay. And so there is no -- it sounds like there is no real major cash contributions unless things really change further in '09, but it looks like there is no big, big cash contributions over the next --

No, we plowed through that and I think the government's ruling on giving companies in general a break on the latter period for funding it helped, okay? So that's how we based our planning.

Okay, and then the other question was just around the funding strategy. You still have quite a bit of commercial paper outstanding. I guess if the appetite was there for a bigger deal from the credit markets, would you consider terming out any of the commercial paper just to bring it down? I realize you are balancing that goal of trying to repay $675 million in '09 and hence, you want to keep some CP outstanding I assume, but on the flip side is if things perhaps are worse, I mean, it's not always bad to have a little access liquidity. Is that at all something you guys are considering, or should we just look at it as the bridge is all you really want to repay and you are okay with $1 billion in CP.

No, no, no, we include CP in our definition of debt that we want to pay down. No question about that. We expect CP levels to drop by the end of the year by almost $200 million. And again, there's various pieces of this. The piece that we were putting in place relative to the receivables securitization program of about $300 million is critical. Doing the term offering in the early part of the year to take the bridge loan out is critical. The other thing we got into our plan is the fact that our cash flow is definitely seasonal. It's second half oriented. So when you look at rates even at 7% plus, some -- one of the gentlemen made the point earlier that there's going to be a big swing factor between the interest rates that we are paying on the bridge loan versus the term loans. We are sensitive to that. So the balancing act is we are going to be putting in for the term markets a reasonable number to keep the pressure off of CP, but taking advantage of the fact that our cash flow is going to be predominantly in the second half to continue to pay down the CP level. So that's how we fought through this, and it is a delicate balance act between the cost of capital and the liquidity flexibility we need.

Right, and the funding I assume is still going to be out of Ingersoll-Rand global holdings as well. You are going to do it out of that intermediate hold co?

Yes, that will be the plan, that would be the same structure as we had last time.

Okay, great, Thank you.

All right, our next question from Andrew Obin, Bank of America.

Yes, just a follow-up question. In terms of your outlook for revenue, and I apologize if I missed it. What is North America versus international, and it would be super helpful if you could do it by region.

Well, again, these are the kind of things we are going to talk in detail on Friday. But we will take you through the businesses and we will take you through each region. I think it may be more appropriate to do it there.

Okay. But just split -- just rough split, right -- let me ask you this question. Are you forecasting that North America in '09 is going to be worse than international, or is international going to worse than North America just that in terms of revenue decline?

I think the US and western Europe are going to be equally bad is the way I would describe it to you. And remember we said to you when we looked at it not improving and we said really is that we are going to have low single digit type growth and mid single digit type growth in the Asia Pacific and developing worlds.

I appreciate it. Thank you very much.

And we have another follow up from Alex Blanton, Ingalls and Snyder.

Herb, this is just short on this impairment charge. It is of course a non-cash charge and doesn't affect your covenants, but it does affect the borrowing power I would think since it reduces your equity in relation to your debt theoretically. But would you comment on -- I am just curious as what you think is the -- of the impairment charge as a procedure because you don't get that back if the stock goes back up, do you?

That's correct, that's a one way adjustment. Again, that is why I think not too many people use it in any of the evaluations when they determine as to your "credit worthiness" going forward.

But how does it work in over time to your borrowing power? Because a couple of years from now, are you going to still make an adjustment and say, remember we really had $3 billion more equity we paid for this company, and then we had to write it down a few months later.

I think you are looking at borrowing power. Really for companies certainly like us, our borrowing power is much more related to our future cash capability, okay? When you go to our rating agencies and talk about our capacities and how they give their ratings, we spend all day talking about cash, generation of cash and the ability to keep a certain leverage of your company that is reasonable. Even our debt covenants are very -- in fact, there's barely a mention of any ratios and the debt covenants are relative on to total cap type of numbers. So again, back to -- that's why we are focused on --

That's what I was talking about ,debt to total cap.

Again, you asked if it impinged our earning -- or borrowing capability. The answer is no. And it is based much more on our ability to drive cash flow.

I mean when I get into rating agency conversations, Alex, what they ask me is what is your EBITDA? I say, okay, it's $1.67 billion, last year it was $1.6 billion. Then they look an say what is the rest? Well I say, okay, I've got working capital this year is going to wind up being a source of cash. CapEx is minus 300, my interest is 300. Then -- the math really gets to being, okay, what you have left that the point in time you have got to pay taxes 100 -- we've got $1 billion of cash left. That coverage ratio, that's much more important to them. This frankly -- this sounds terrible, but I will say it anyway. This hocus-pocus about writing things down in one piece because my organizational chart is done at this level has nothing do with cash generating capability.

Absolutely not, that's why it is so strange a procedure.

I think it's also why everybody says -- I keep asking the question, who is going to do anything based on this number? I would really like to know, because I have no clue what the impact is.

I think the really salient point here is that we will continue to generate $1 billion plus of cash over the next -- each year over the next several years. We are going to continue to pay down some more debt and we are in a good position here.

Okay. Thank you.

We have no further questions on the phone at this time.

Okay, well, great. Thank you, Herb. If you would, just let me close by saying thank you for joining us in what became something of a marathon session. There will be an instant replay of the conference call if you would like to absorb it again starting at 1:00 today and will be available through February 18. If you have any other questions, you can call Joe Fimbianti or myself, and please don't forget to join us via the webcast this Friday the 13th beginning at 8:00 am for our analyst and investor day session. And that includes our call and again, thanks so much for participating.

Again, ladies and gentlemen, this does conclude today's conference. We thank you for your participation. You may disconnect at this time.