特靈科技 (TT) 2009 Q1 法說會逐字稿

Good day. And welcome, everyone, to the Ingersoll-Rand first quarter 2009 earnings conference call. This call is being recorded.

For opening remarks and introductions, I would like to turn the call over to your host, Mr. Bruce Fisher, Vice President of Strategy and Investor Relations. Please go ahead, sir.

Thank you, Anthony. Good morning, everyone. Welcome to Ingersoll-Rand's first quarter 2009 conference call.

We released earnings at 7:00 a.m. this morning and the release is posted on our Web site. I would like to cover the usual housekeeping items before we begin. This morning, concurrent with our normal phone-in conference call, we're broadcasting the call through our public Web site. There you will also find the slide presentation for the call.

To participate via the Web, go to ingersollrand.com. (inaudible) Both the call and the presentation will be archived on our Web site and will be available tomorrow morning at 10:00 a.m. Now if you would, please go to Slide 2.

I would like to remind everyone that there will be a forward-looking discussion this morning which is covered by our Safe Harbor statement. Also, please refer to our December 31, 2008 Form 10-K for details on factors that may influence results. I would also ask you to please refer to Slide 25 in the back of the presentation, which covers the use of non-GAAP measures in describing Company performance.

Now I would like to introduce the participants on this morning's call. We have Herb Henkel, our Chairman and Chief Executive Officer; Mike Lamach, our President and Chief Operating Officer; Steve Shawley, our Senior Vice President and Chief Financial Officer; and Joe Fimbianti, our Director of Investor Relations. Herb and Mike will review our business results. Steve will cover our financial position and then we'll summarize our outlook for the second quarter and the full year by Herb. We'll then open the lines for your questions. Now if you would, please go to Slide 3 and I'll turn it over to Herb.

Thanks, Bruce, and good morning, everyone. Thanks to everyone who dialed into this morning's call. First quarter reported earnings from continuing operations excluding $0.02 of restructuring came in at a loss of $0.04 per share, which is at the upper end of our original EPS forecast from a $0.15 loss to breakeven.

Our actual results also exceeded the revised forecast we gave you at the end of March, which was for earnings to approximate the bottom end of our forecasted range. This improvement in EPS reflects better than expected operating performance in the month of March, partially offset by $0.04 of discrete tax item costs. For the quarter, reported revenues increased by 36% and declined about 24% on a pro forma basis, including Trane.

Excluding 4 points of currency, revenues declined by 20%. The decline exceeded our February forecast that called for a 19% decline year-over-year in pro forma revenues and was somewhat better than our most recent forecast revision where we forecasted revenues down about 25% to 27%. The volume declines we saw in the first quarter were unprecedented in recent memory and affected all of our vertical end markets and geographies simultaneously.

We saw significant deterioration in demand in all of our key end markets. Volumes were also negatively impacted as many of our direct customers and channel partners reduced their inventories. Order intake slowed and was off about 28% compared with last year on a pro forma basis and also about 23% excluding currency effects.

We offset some of the impact of this $900 million year-over-year revenue loss with tight cost controls, restructuring savings, synergies from the Trane acquisition, and focused productivity actions. These actions helped us exceed our most recent forecast and to achieve close to breakeven EPS, despite the severe volume drop.

We also held or gained market share in most of our businesses and continued to develop and introduce new products. We exceeded our cash flow forecast for the quarter, with improved working capital management and we completed a comprehensive financing program that addresses our short-term debt requirements and significantly enhanced our balance sheet liquidity.

Now what I would like to do is to turn it over to Mike Lamach who will take you through the first quarter in more detail. Mike?

Thanks, Herb. Please go to Slide 4. This slide gives a quick summary of revenue and operating margins for the first quarter. Reported revenues for first quarter 2009 were $2.9 billion, up about 36% on a reported basis. On a pro forma basis including Trane, revenues actually declined by about had 24% and were down 20% excluding the impact of currency.

The unprecedented volume drop caused a deep decline in operated earnings. Reported operating margins were 1.7% and were 2.1% excluding restructuring. This compares with 9.3% last year and I'll come back to the topic of margins and operating leverage in greater detail on a later slide.

Please go to Slide 5. The next slide entitled "year-over-year revenue change" provides a look at our segment sales change on both a reported basis and excluding the impact of currency. We think revenues, excluding currency, shown on the bottom of the chart give a better view of our organic sales performance and our comments will focus on this measure.

After delivering consistent growth for 2007 and the first half of 2008, momentum we had seen in key end markets tailed off in the third quarter. In the fourth quarter, we had a further decline in revenue as a result of significant softening of a number of our key end markets. That trend accelerated in the first quarter.

As you can see on the chart, all of the businesses had significant declines compared with last year and in total, declined 20%, excluding currency in the first quarter. On a geographic basis, revenues declined by about 20% in the U.S. and about 19% in overseas markets, excluding currency.

Equipment revenues declined by about 29% on a comparable basis with last year and worldwide recurring revenues held up a little better and were off about 11%. So our sales, like most industrial companies, declined significantly in the first quarter because of both lower end market demand and channel inventory reductions. It's probably too soon to say that the first quarter was the bottom, but for our planning, we would not anticipate future sales continuing to decline at the first quarter's pace.

Please go to Slide 6. This bridge represents the total of segment operating margin on a pro forma basis and excludes restructuring. This look gives a better view of the true dynamics of our operating margins at the enterprise level.

Reported first quarter segment operating margins declined to 1.7%, which is off about 8 points compared with pro forma 2008. The combination of declining volume, negative foreign exchange, and lingering material inflation hurt margins by close to 11 percentage points. We continue to invest in new product development and those activities, coupled with purchase accounting related costs and restructuring expenses further reduced margins by 1 point.

Productivity improvements, restructuring savings, Trane acquisition synergies, and carry-over pricing added about 4.3 margin points. So while we were unable to compensate fully for the significant volume decline in the quarter, we were able to offset about half of the decline and position ourselves for higher margins when our markets do begin to recover.

Please go to Slide 7. Slide 7 bridges the components of our EPS compared with our previous guidance range, which we updated on March 30. At that time, we indicated that we expected to be at the lower end of our original earnings range of minus $0.15 to breakeven.

As the chart shows, our revenue came in a bit better than expected, down 24% compared to down 25% to 27% and our March 30 revised forecast. This lower than expected sales decline contributed $0.04 to EPS versus our revised forecast. We also delivered higher productivity than expected as we accelerated our restructuring and implemented additional cost containment programs. These items contributed an additional $0.05 per share.

Lower than forecast commodity costs accounted for $0.06 of positive contribution and we had discrete tax items, which added $0.04 of costs to the quarter. So both external and internal factors drove our improved performance versus the March 30 guidance.

Let's now move to a review of our reporting segments, and please go to Slide 8. This slide lifts 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.

Trane first quarter revenues were $1.4 billion, down 18% versus prior year on a reported basis and down 15% year-over-year, excluding the effects of foreign exchange. Global non-residential HVAC markets declined 19% in the first quarter, with significant reductions in major markets. Our commercial air conditioning revenues, which are the combination of commercial equipment and parts, services and solutions, were down 15% reported and 11% excluding 4 points of foreign exchange.

Total global commercial equipment systems, which represent about 60% of our commercial HVAC sales, were slightly better than global markets, down 17% excluding FX. The global parts, service and solutions business, which represents about 40% of commercial sales, declined by about 3% excluding foreign exchange. We saw what we believe was a temporary pause by a number of our customers as they deferred some service and switch from preventive to fix-on-fail contracts.

We expect our service business to rebound beginning in the second quarter and we've seen a strong start to April and have been awarded several large service contracts. For the full year, we expect our service business to increase roughly 6% year-over-year.

Now 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 were down in a range of minus 20% to 25% in the quarter and replacement unit shipments showed a modest decline.

For the quarter, our residential product sales were down by 28%. Our channel partners reduced inventories during the quarter and we chose not to initiate any special incentives to fill our distribution channel. Our retail sales activity was in line with the industry and we expect to get the benefit of the better sell-through in the second or third quarters due to our lean channel inventories.

Next, looking at orders, total global commercial orders were off 15%, excluding foreign exchange, basically in line with revenues. Equipment orders declined midteens in the Americas and orders for contract, parts, service and controls were up slightly. We ended the quarter with a global backlog of approximately $900 million. Global backlog was down 15% reported and 9% excluding FX.

Backlog in the Americas declined over 20%, while international backlog was up 7%. Trane's reported operating loss was $14 million for the quarter, which includes $39 million of ongoing amortization costs and $24 million of Ingersoll-Rand corporate allocations. These items were not included in 2008 results, so on a comparable basis with last year, the operating margin would have been almost 5 points higher at 3.5%.

Please go to Slide 9. Climate Control revenues in the first quarter were $503 million, down 37% on a reported basis, and off of that 31% excluding currency. For the global Thermo King transport business revenues decreased by 45% largely due to weak global truck and trailer markets and declining freight rates.

Worldwide refrigerated truck and trailer volumes were down over 50% compared with 2008 due to ongoing declines in the worldwide trucking industry. We saw negative sales in all geographies with the most severe declines in the European trailer business, where comparisons were against record volumes in the first quarter of 2008.

Global bus HVAC shipments and marine container sales also declined substantially due to a slowdown in end market activity. Aftermarket parts were down about 14%, reflecting lower fleet capacity utilization, and inventory management actions through the entire channel. TriPac Auxiliary Power units volumes also declined compared with last year as lower diesel prices and declining fleet revenues has limited conversions in 2009.

Looking at stationery refrigeration, global sales were down about 24%, which was driven by a decrease in both display cases and sharp declines in the installation business due to lower supermarket capital expenditures. On a positive note, Hussmann gained market share with major national supermarket customers during the quarter, especially in higher margin reach-in display cases.

Amid this market upheaval, we gained share in trucks, trailers and display cases and continued to introduce new innovations and energy saving products into the marketplace. We also started to gain significant traction with Climate Control and realizing synergies with Trane. Climate's reported operating margin was about 1% in the quarter. This compares with 10% in the first quarter of 2008.

The margin contraction was driven by the significant decline of high margin truck and trailer revenues, lingering material inflation, and the impact of currency, which combined, caused a 14-point drop in margins. Productivity improvements offset some of the margin pressure and helped margins by about 5 points.

Please go to Slide 10. Industrial Technologies first quarter revenues were $538 million, down 28% versus the prior year quarter, and down 23% excluding currency. Revenues for the Air and Productivity business decreased by 23% due to lower volumes in all geographic regions and negative currency.

Air and Productivity revenues in the Americas declined about 25% during the quarter with a 28% drop in equipment volumes due to declines in major industrial process and fluid handling end markets. Recurring revenues were off about 20% from lower industrial production levels and deferral of maintenance by customers. Air and Productivity revenues in overseas markets declined by 21% compared with 2008, primarily due to declines in industrial activity and a 9-point drag on currency translation.

Reported European volumes were down 29% and about 15% in constant currency. Revenues in Asia-Pacific were off about 8%, with an 11% decline in machinery volumes and flat aftermarket comparisons. Club Car revenues decreased 45% compared with last year, with declines in all geographic areas due to weakening economic fundamentals in key golf, hospitality and recreation markets and customers deferring replacement of golf carts by extending their leases.

Market share, however, increased in an historically difficult market. Industrial's operating income was $19 million, representing an operating margin of 3.2%, down from 13.1% in 2008 on a comparable basis. The volume declines in unfavorable currency accounted for 12 points for the margin drop.

Industrial also had 2 points restructuring costs hit the margin in the quarter. Improvements in productivity had a 4-point favorable impact on margins.

Now go please to Slide 11. Revenues for Security Technologies were $492 million, down about 21%, and down 16% excluding currency compared with strong results last year. Commercial Security revenues were down 21%, primarily resulting from declining building and remodeling markets in the U.S. and Europe. Currency accounted for 6 percentage points of Commercial's revenue decline in the quarter.

Americas revenues in the Commercial sector were down 20%, with decline in volume partially offset by carryover pricing for 2008. Security's European business was down approximately 28% on a reported basis and 11% excluding currency. Asia revenues declined slightly compared with last year on a constant currency basis.

Americas sales in the residential segment also declined approximately 20% in the quarter. Residential's results continued to be indicative of the continuing decline in domestic residential building and remodeling activity. Volume gains in South America and revenue gains from prior period price increase helped to partially offset the falloff of U.S. residential activity.

Operating income for the sector was $78 million for an operating margin of 15.5%, representing a slight decline in margins from the volume loss. Accelerated productivity, strong cost control discipline, and prior period pricing actions added almost 6 points to the quarter's margin and helped to offset the loss of 7 margin points from volume declines and negative currency.

Please go to Slide 12. The top half of this slide shows the summary of our cost reduction and productivity actions for the quarter and the full year 2009. We set a long-term goal of delivering 5-plus percent productivity every year. This compares to our historic productivity performance of 2% to 3% a year.

For 2009, we've targeted total productivity savings of $650 million, almost double the productivity we achieved in 2008. We got off to a good start in the first quarter, with about $128 million in savings, which calculates out to a productivity improvement of about 4.2%, and exceeded our first quarter plan of 3.8%.

Since many of these program benefits are back end loaded, we're confident that we'll reach our $650 million goal. We also expect a benefit from commodities deflation in 2009. The savings on this chart represent the value to Ingersoll-Rand of the volumes of prices we've locked in and then buying the balance of our commodity needs at today's market prices. We continue to expect to realize roughly $150 million in savings this year, even with lower 2009 projected volumes.

Please go to Slide 13. This slide shows an update on our restructuring actions. Based on the economic slowing that we started to see in the third quarter of 2008 we began taking actions. We instituted a series of programs covering all of our businesses to streamline our manufacturing footprint and reduce our G&A base. So far, we've spent about $82 million.

We've reduced head count by 2,700 and we've closed 34 facilities in 2008 and 2009, which include 12 factories, 14 warehouses, and eight parts centers and offices. During the first quarter, we expanded the scope of the program and now expect to spend a total of $120 million. We'll realize about $160 million in gross savings in 2009 from these actions and about $200 million in 2010.

Please go to Slide 14. I'll spend some time drilling down into the specifics of our synergy savings. You might recall that we delivered $105 million of actual savings in 2008 versus our target of $75 million, exceeding our target by $30 million. We achieved that savings through better than expected savings in logistics, the costs of delivering healthcare benefits, corporate-wide contracts for indirect spending, and lower material costs.

As we get further along in this process, we're finding more opportunities and we're executing well. We'll continue to drive execution results in 2009. Our expectation is to deliver roughly $180 million of incremental savings in 2009 on top of the $105 million savings realized in 2008. That means our total benefit, including still the modest beginnings of our growth programs, will be about $300 million.

We've already had over 300 approved programs in the pipeline to deliver this projected performance. Through the first quarter of '09, we delivered an incremental $34 million in savings on top of the carryover savings from 2008.

In summary, it has been a very challenging quarter and we expect to have additional challenges through the year. We acted early to bring down our costs and we're continuing to fucus on driving productivity and minimizing costs to reach our cash flow forecast. Steve Shawley will now address our recent debt offerings, which substantially improved our liquidity position and our ash flow and debt reduction plans for the balance of the year. Steve?

Thanks, Mike, and good morning, everyone. Since there has been considerable interest in our balance sheet and ongoing liquidity, I wanted to give you some additional details this morning, especially related to our financing activity and liquidity position.

Please go to Slide 15. We addressed our short-term debt requirements and improved our liquidity position considerably during the first quarter by completing a comprehensive refinancing plan in early April. The major activities included a $1 billion debt offering and included a $655 million, five-year senior debt offering, and $345 million of senior convertible debt due in 2012.

We have already used the proceeds of the bond sales to pay off our bridge loan, which was scheduled to come due in June. We also expanded our receivable securitization program, which has provided additional financing of $164 million immediately and is expected to grow to around $200 million as a receivable portfolio increases through mid-year.

Additionally, we reduced our dividend by 61% starting in September, which will yield $70 million of additional cash for debt paydown in 2009 and $140 million in 2010. These actions, along with our cash generation from operations, should allow us to meet our debt reduction targets in 2009 and 2010, while maintaining a significant liquidity position as we deleverage the Company. As can be seen from this chart, we are confident that we can pay down $675 million of debt in 2009 and wind up the year with a liquidity cushion of our outstanding commercial paper of close to $1.8 billion, even after $750 million of credit lines roll off in June.

I would also remind everyone that this liquidity forecast assumes the paydown of approximately $300 million of the put bonds in late 2009 that have maturity dates in 2027 and 2028. To the degree that these bonds, these put bonds will not be (inaudible) our year end liquidity cushion would only be increased. We continue to have adequate access to commercial paper markets and potentially even more flexibility through our expanded receivables securitization program as we move into the second quarter.

Our bond offerings were well received and we are confident that we have now addressed our short-term debt requirements.

Please go to Slide number 16. As you can see on this slide, our bond maturity schedule is now relatively well balanced. With the new financing in place and the operating cash that we expect in the second half of the year, we are in very good shape to address the $220 million of Trane debt due in June and the $519 million of debt coming due in 2010.

Beyond that, we have essentially zero debt due in 2011 and only a modest amount in 2012. So barring any unforeseen circumstances, we believe that the new financing, combined with the strengthening cash flows, will give us the flexibility we need to effectively execute our financial policies and to invest in growth in the intermediate and longer term.

Please go to Slide number 17. At the core of our efforts to deleverage is the ability to generate cash from operations. This slide presents an update, the available cash flow forecast for 2009. It shows our 2009 plans, which is what I presented at our February 13 investor meeting, and our view now, assuming that the low end of our guidance range of $1.40 earnings per share for the year becomes a reality.

As you can see, we continue to expect to have $675 million to pay down financing for 2009, despite the significantly depressed sales and earnings that would constitute the bottom of our range. We have the ability to offset the earnings impact of this potential decline through improved working capital management, lower cash taxes, and lower dividends.

Now that the refinancing is complete, we expect our interest expense to be favorable to our original plan, although significantly increased from last year. Obviously, managing for cash remains a very high priority and we are intensely focused on generating cash from operations to drive the continuing deleverage of our balance sheet.

Please go to Slide 18. Since the worldwide economy started to slide in the third quarter of 2008, we have focused on reducing our working capital to make it a source of cash. This slide compares our 2008 working capital balances associated with receivables, inventories and payables with our 2009 plan and our current forecast. As you can see, working capital as of March 31 was relatively flat year end 2008 and was below our first quarter plan levels.

Given the seasonal aspects of our working capital usage and the rate of inventory reduction that we experienced in the month of March, we now expect to bring working capital down by $250 million in 2009, which is a $45-million betterment than our 2009 plan. Please note this working capital projection excludes any benefits from additional securitization.

Please go to Slide 19. Just a reminder of our key financial policies. We continue to focus on our long-term target of building towards strong single A rating cash flow and leverage metrics and we are working rapidly to deleverage our balance sheet to target levels.

We will maintain discipline regarding acquisitions and share buybacks until we achieve our leverage targets. We expect to hold our reduced dividends for at least the medium term and we will maintain ample credit facilities to give us a backstop for contingencies. With that, I will turn it back to Herb for the forecast.

Thanks, Steve. If you would please go to Slide number 20. Back in the third quarter of 2008, we saw a downward flex point in many of our major end markets. The uncertainty related to the costs and availability of credit caused a notable decline in the tone of business in the fourth quarter.

That rate of decline continued in the first quarter of 2009 from both reduced end market demand and some inventory destocking by many of our major customers and channel partners. Our forecast for the balance of 2009 had considerable complexity compared to previous years due to the current unknowns in the world economy.

Because our end markets have a higher degree of uncertainty, we continue to actively reassess on a monthly basis what we believe the next two quarters are going to look like. We're operating with what we believe is a conservative baseline plan for 2009 and we have developed additional contingency actions if markets perform worse than that.

Let me start by reviewing the updated economic assumptions behind our 2009 forecast. Slide 20 is an updated summary of the key economic and business metrics for 2009. The changes from our prior forecasts are all noted in red. For U.S. construction, we assume residential building markets will show another major decline in 2009. We believe non-residential construction will see about a 14% reduction in contract value and a 19% year-over-year decline in square footage with institutional activity off about 10%.

The refrigerated trailer market shipments in North America continue to be weak. Our forecast here has changed slightly. Recent order rates indicate that the market could be down by as much as another 35% in 2009. The ACT forecast is looking for a 17,500-unit shipment a year.

European truck and trailer markets had a sharp downturn in the fourth quarter and after a strong first half of 2008. Demand for 2009 is expected to decline by as much as 60%. Industrial production and capacity utilization had a major drop-off at the end of 2008 and we expect an additional sharp decline in 2009.

And finally, our forecast is based on a euro to dollar rate of $1.31. In addition to these industry-specific drivers, we assume the Americas and European economies will experience negative GDP comparisons for the first half of 2009, with slow growth in the second half, as inventory liquidation run their course and as government stimulus programs start to kick in. We're also forecasting slowing economic activity in Asia.

Now please let's go on to Slide number 21. Based on this macroeconomic view, we expect revenues for full year 2009 to be down 14% to 19% compared with 2008 on a pro forma basis, including a 3 to 4-point drag from currency translation. We expect Climate Control and Industrial Technologies to show declines in the 20% to 25% range with somewhat smaller declines both at Security and at Trane.

Now please go to Slide number 22. Additionally, our forecast was built on the following assumptions. We will benefit from lower commodity costs, especially non-ferrous metals. We expect to achieve $180 million of additional Trane acquisition synergy dollars and $110 million of net restructuring benefits.

Also, importantly, our productivity programs will continue to lower costs for 2009. Finally, our forecast assumes flat pricing year-over-year.

Please go to Slide number 23. Our outlook for EPS is shown on this slide. We're projecting 2009 EPS from continuing operations, excluding restructuring, to be $1.40 to $1.90 per share. Including $0.10 of costs associated with discontinued operations, total EPS is projected to be between $1.30 and $1.80.

Second quarter results will still be adversely influenced by the turbulent economic conditions. Second quarter revenues are forecasted to be in the range of $3.5 billion to $3.7 billion, which is flat on a reported basis and down about 18% to 23% on a pro forma basis compared with the second quarter of 2008. EPS from continuing operations is expected to be in the range of $0.30 to $0.50, excluding restructuring costs of approximately $40 million.

Additionally, in the second quarter, we are planning a special shareholder meeting to approve our reorganization in Ireland. We believe this will not have any material impact on our going tax rate.

Now please let's go to Slide number 24. To sum up the forecast of 2009, we expect 2009 to remain difficult with turbulent environment, pronounced activity declines in all of our major end markets. We remain focused on programs which will help mitigate the impact of these tough economic conditions.

We're delivering cost synergies and we're expanding our growth synergies. We will realize savings from restructuring and are stepping up productivity targets to the 5% level while working to capture material cost savings from commodities. We have solidified our balance sheet in April by refinancing our bridge loan and reducing our dividend.

We have triggered contingency actions due to market declines and have additional actions available. We're continuing to fund high priority projects that will focus on growth in future years. In summary, we're taking the necessary actions to manage both through this downturn and to deliver improved margins once the economy begins to recover.

I would now like to open up the floor to your questions. Thank you.

The question-and-answer session will be conducted electronically. (Operator Instructions) We'll take our first question from Jeff Sprague at Citi Investment Research.

Thank you, good morning, everyone. Herb, I was wondering if you could give us a little more color on how you expect Trane to kind of play out over the balance of the year?

You commented a little bit, or I guess Mike actually did, maybe the question's for Mike. Inventories being pretty lean, no promotional activity to fill, but what kind of ramp versus normal seasonality do you expect in Q2, and if you could give us a little color on what's going on on price?

Yes, maybe take it in reverse order. In price, it's slightly favorable in Q1 for us. We don't anticipate that to continue on the reduced commodity levels at this point. Most of that was carryover in the Middle East and in a few discrete areas.

Just in general, on sort of the back half of the year, we do see some modest improvement. Part of that's due really to the fourth quarter being as weak as it was last year. We're seeing strength in pickup in the service business. We had hoped that would be the case. It is very typical in past cycles, if that's been the case even through a deferral period.

You see reduced investment. We've geared up for that. We certainly have the capacity to perform against it. Whether it's releasing equipment, which we built up the lease fleet, all the way through to making sure the utilization and technicians around the world, that we've got the capacity to execute against those plans.

So that's looking as planned for us, more positive. Equipment, we're not really looking at seeing any dramatic increases here, not planning on that. Clearly if we were to see some sort of an uptick, we have obviously got the capacity to be able to respond to it.

Just a little more color on [wall mats] what percent of the buy this year is locked in and what's your spot, your spot exposure looking at the balance of the year?

Yes, if you look at the $150 million that we talked about in terms of commodity costs, we're really talking about copper, aluminum, steel and zinc are the main commodities for us, copper being the largest. We're about 45% locked in and so with the market on the balance, the 55%. So we ran, sort of ran the math last week and probably ran at a little higher copper price last week, but we would expect that we'd see $150 million overall with copper being about $80 million of that.

And could I just sneak a quick one in for Steve. Steve, this corporate expense run rate, is that indicative of what we should expect for the year?

I think it's close. Probably pop up a little bit for rest of the year.

Thank you.

We'll take our next question from Shannon O'Callaghan at Barclays Capital.

Good morning, guys.

Good morning.

In terms of Trane, typical seasonality, adjusting for the amortization and corporate allocations, but just sequentially typically would go up 400 or 500 basis points from the first quarter to the second quarter. I imagine you're expecting something better than that, but can you explain what the drivers of that would be?

I think you're, number one, you're on track with the logic of about 4.5 points really being attributed to amortization and some of the charges that we've had. The first thing is you look at this going forward.

We probably expect the full year to be in that sort of 4% to 6% range as we report it. And then if you kind of translate that back to the segment income the way Trane used to report, you probably under up with something in the 8.5% to 10.5% range based on the volumes that we're anticipating.

You say 8.5% to 10% for the second quarter?

No, I said that you look at the segment incomes that Trane used to report, then you back out the amortization and the allocation, probably end up with something closer to 4% to 6%.

But in second quarter, we're looking more along the 5% to 6% type level?

Right. We start to see the benefit, particularly of steel in the second quarter. That's a pretty big swing for us.

Actually there was inflation in Q1. We operate really on about a four-month lag. By the time we buy steel at spot, move it to the finisher, move it to the factory, typical slowdown, so we're really paying for last year's steel. That's a pretty big swing for us in Q2.

Yes, and, Shannon, then I think one other part which we haven't talked about this morning, is obviously Trane is going through a significant revision in coming up with refrigerant changes that are necessary to come up with COSA change effective January 1 of next year. So I think they are doing a great job.

We're going to be all out within the third quarter, but it's also driving some significant incremental costs as we wind up going and ramping up a lot of different programs over the next two quarters. So you'll see that have impact on the margins as well that we report out on.

Okay, thanks. As you think about Climate for the remainder of the year, coming up off of kind of a 1Q margin base, where do you see the more significant driver in the parts of that business?

I mean here, again, you're going to have significant improvements in commodities really across the board. You know, productivity, really at Climate Control and relative to Trane, they have been really hitting it out of the park and are up in the 6.5% range and I think that's going to largely continue for the balance of the year. Couple that with inflation and I would see an absolute recovery in Q2, again, in the neighborhood of up probably 5 to 7 points of operating margin in the second quarter from first quarter's performance.

And when you think of that in terms of the pieces of the segment, how do you expect the contribution to come?

Well, I mean part of that's got to do with how, you know, that really happens in the trailer markets in Europe, et cetera. There is where we've been impacted, I think, at the high points have been trailer and [Asa] very high margin work and that was off close to 80% in Q1.

So it's a matter of really looking at that high contributing business and how fast it comes back or doesn't come back. That's one of the wild card swings for us, is that particular factor.

But your current guidance assumes it would come back some?

Yes, we expect it to come back somewhere in the 55% to 60% range. Isn't that amazing when that's an improvement over what we saw so far in the first quarter, but from our overall numbers we look at, when we look at second quarter for Climate, look at it as being something that's going to go 6% to 8% in the OI range, and so when you go full year, I would be really disappointed if we didn't hit the 8% to 9% type level.

I would throw in, the other thing not to forget is that Hussmann's performance has been improving and we're seeing significant productivity gains there. Mike mentioned what's happening in the markets, don't forget, Hussmann has half billion dollars service contracting business, very much like Trane commercial system, so in the first quarter, that business was off by 20-plus percent, so as we see the seasonality come into play for refrigeration service, we expect that to be a significantly less of a drag on the revenue for the first, second and third quarter.

But it's clearly, this is the worst I can remember in terms of transport refrigeration, combining what's going on in Europe, plus what's going on in U.S. That's obviously a key driver for the overall operating margin.

Right, okay. All right. Thanks, guys.

And we'll take our next question from Eli Lustgarten at Longbow Securities.

Good morning.

Good morning.

One quick clarification. In the handout you have net interest of $315 million being forecast and I guess $67 million in the first quarter. Are we talking $80 million, $85 million a quarter for the rest of the year? Is that sort of how we should look at it?

Yes, the financing really didn't go into play until the first of April. The new financing is kicking in at a higher rate, for sure.

I realize that. Is the $80 million, $85 million the run rate we're expecting?

Yes, that's pretty close.

I would be remiss since you gave us OI outlook for the second quarter and full year and basically Trane and the Climate. Can you -- might as well go through for Industrial and whether it's sustainable or --

Yes, we had a bet here, Eli, how long it was going to take for you to ask that.

You gave two, might as well give the rest.

Might as well give the rest to you, right. Got your pencil ready? Second quarter, we think Security will be in the, somewhere between 17%, 19% range and I think we talked before, where it's getting up, we talked about the Trane stuff being somewhere in 5%, 6% type range. So when you add that all up, you come in where 6% to 8% type number.

Industrial is the one we're missing.

I'm sorry. How could I do that. Somewhere around 10%. 10% to 11%, I think.

10% to 11%.

Yes.

Can we talk a little bit more about Trane, as a follow-up, one, the outlook for [non-res] that we keep seeing continues to deteriorate going through 2009 and into 2010 both here and in Europe. Unless the Midwest is something different, I've seen a substantial number of Trane promotional ads in residential in the last three days all over the Midwest in the papers I've looked at.

And with the change of coolant going from R22a to 410, is that helping your production toward the end of the year to ramp up, or how is that impacting and what will that do in 2010?

I'm glad it's worked and I hope you're going to buy one through this whole thing.

Noted.

I looked at it. I saw it.

There's a modest improvement there as well and we have been working diligently. In fact, it's been a bit of a mix change, as you can expect from higher efficiency to lower efficiency units and so we've been working very diligently on the cost side of the lower efficiency side and looking for probably on the back half of the year to participate more fully in that.

So I think you'll see sort of improved performance on the back half of the year there. They were hit probably harder than anybody, probably that Climate Control just in terms of volume leverage in Q1.

I guess I'm looking at from the -- with the cooling change coming, are we seeing -- is that cooling change helping production in the second half of the year and into 2010 or hurting production? Seems like you need to do a little inventory, so it should help production towards the end of the year.

Yes, we're not really banking one way or the other on that. I think you're talking about switching R22 to 410a and that whole switch out. You're seeing definitely more movement toward less take rate, I should say, or more movement towards R22 in the last few months, clearly from a cost perspective it's a choice. We'll continue to build both. We'll build it right to the end and manage inventory down and (inaudible) to a very small extent. We're going to play that by ear, but really haven't counted on any major swing one way or the other as it affects productions. We're prepared to do both.

So far, we haven't seen -- remember when we had that truck conversion a couple years ago, how everyone was buying in like crazy before the new environmental standards went in. We're not seeing that type of a buy-in as a result of this change beforehand.

I see, all right. And there's no pricing. You haven't increased your incentive as far as residential, that's what it looks like happened in the second quarter, or is that just modest?

No. No, we haven't.

All right. Thank you.

And we'll take our next question from Andy Casey at Wachovia Securities.

Good morning, everybody. Question, could you give order changes by segment, please?

I think we're going to have to follow up with you on that one. We really don't have that kind of individual detail type thing here. I think we gave you the overall macro number on there.

Okay.

I don't have it off the top of my head either as to what the differences from sector to sector.

Okay, and then a question, Herb, on the Thermo King aftermarket being down, I think, 14% year-over-year in the quarter. Can you comment on what that looked like through the quarter, and did April get a little bit better?

There was a little bit of a pickup in March and April. I was out there in March and it was a glimmer of hope. The order rate in March was probably the highest they have seen in sometime, but I also think it's representative of just the channel being fairly dry. But I would say nothing remarkable there to talk about in terms of change or anticipated change there.

Okay.

Maybe just to understand your question, Thermo King aftermarket, could you clarify that, please?

Yes, I think in the slide, was down 14% year-to-year.

Okay.

And I was just wondering if through the quarter, and I think Mike just answered it, if the comps got a little bit better as some utilization improved. So thank you.

And we'll take our next question from Mark Koznarek at Cleveland Research.

Hi, good morning.

Good morning, Mark.

Just wanted to clarify that question Eli asked about the margins. Your answer, was that for the second quarter or was that for the full year?

No, he only dragged the second quarter out of me. Are you going to go for the rest?

Yes, I might as well.

While you're at it. Okay.

Yes.

The full year, so overall the things we're looking to get to our $1.40, $1.90 type number, overall we got to be somewhere between the 7% per month, 8% per month type range. That's the final number. And if you look at how that breaks down, we think you're going to see Climate Control will be upper single digits, somewhere in the 8% to 9% some-odd range.

I still think Industrial's going to wind up somewhere around 10% to 11%. I think Security's going to continue to really do well. They really got the game going and I think they are going to be talking somewhere in the upper teens, 17%, 19% range. And then when you look at what we said before, Mike was describing, if you take the Trane pieces, we're talking somewhere there, probably 4 some odd percent to 6 some odd percent. So when you add that all up that's how you wind up with the range that gets us from about $1.40 to $1.90.

Okay, thank you. And then when we're looking at the revenue outlook for both the Trane business and the Security business, could you talk about the outlook for the individual pieces underneath the overall?

Mark, as you look at it relative to what's happening with commercial construction as an example, what we saw in the Security side was a lot more wholesale sell-through probably in the first piece in the quarter and so you would see a little bit of a, less of a decline going out.

On the Trane commercial side, we've really allocated a lot of resources over to the aftermarket services and parts, et cetera, and that's where we're really seeing sort of the growth in the back half of the year, so Equipment's going to be down, as we mentioned. Service will be up 6%.

We had a record April, I mean an all-time record, so that's a good sign. And I think that that is probably going to continue to drive toward the 6% service number there.

So does that mean the commercial equipment will still be down in this teens kind of range?

Yes.

That's what you expect for the full year?

Yes.

So you really don't expect any recovery in that part in the back half?

Very modest, if any.

Okay.

Only as it relates against very easy fourth quarter comps.

Okay, got you. All right. Thank you.

We'll take our next question from Terry Darling at Goldman Sachs.

Thanks. Herb, I wonder if you can talk about how wide the range is on the second quarter and kind of what takes you to the high end, what takes you to the low end? Because we go out on precision on the pieces and I was trying to figure out the uncertainty on the total.

Well, obviously, what we're dealing with is what's happening in the global marketplace. To me, the biggest uncertainty at this point in time has been rapid rate of what we saw in deterioration in Europe, Western Europe. I've never seen the kind of numbers we talked about.

You could see in our -- if I use transport as probably the best leading indicator, we saw numbers that went from 20 some odd thousand down to 10,000, a 60% reduction. That's just dramatic. We have issues of price we're dealing with and, obviously, deflation that comes along with it.

So we're taking a look and saying second quarter activity level mirrors what we saw more of in the March timeframe. That's the best way I would look at it. Then you do your plus and minus off of that as to how pessimistic or how optimistic you want to be. That's why we come up with a couple hundred million of revenue range.

Just on the macro side, there's no big things you would call out from a Company-specific?

No, that's why I'm saying this it really has more to do with what your estimates are specifically in the areas of the geography that we're dealing with.

Okay, and on the restructuring discussion, $120 million of costs, $160 million of savings for 2009 off full year, wondering if you can give us a sense of how those will break down on a quarterly basis?

Probably -- let me kind of give -- we're pretty much at the end of the program. When we set the year up, it was $120 million. About $80 million was spent in 2008. So we have about $40 million left in 2009 and we did about $10 million, $11 million in the first quarter.

The rest of it's going to happen in the second quarter, so the shooting match is going to be over by the second quarter in terms of spend. And of course the benefits are going to spew out into the latter part of the year. So you'll see spend in the early part and then the benefits occurring in the second half.

What do we think the savings in the first quarter were?

If you take first half and back half first, you're looking more like $60 million in the first half, $100 million in the back half relative to the structuring and then if you look at the first quarter alone, it's in the low 20s.

Okay, great. And then the raw material, $150 million, did we get any of that in the first quarter? Is that really back half loaded?

Actually --

We saw a little bit of it in the first quarter, but don't forget, we were still taking inventory out of the system in the first quarter. My comment in the slide presentation about we saw inventories coming down significantly in the March period, and we were able to get a little bit of the benefit in the first quarter as a result of the reductions in inventory, but that's pretty much in front of us for the rest of the year.

In terms of steel and non-ferrous, the only place we got hurt was really steel and everywhere else we started to [shift the balance.]

Okay, and then I may have missed it, but did you give a tax rate expectation for the full year?

20%.

Thanks very much.

We'll take our next question from Steve Tusa at JPMorgan.

Hi, good morning. Just a little more color on the margin side. Trying to understand the restructuring dynamics a little bit. You guys raised your spending by about $10 million, but there was $25 million more in savings that you're getting this year relative to what you expected at your analyst day.

I'm just -- is that just better than expected performance on what you spent in 2008? And then the other question would be on the kind of price/cost dynamics, I think you got about 2% price in the fourth quarter. You got about 1.5% this quarter and you think price is going to be, I think, a negative through the rest of the year. So are you, are you net positive on raw materials this year? How much of that $150 million actually falls through to the bottom line after you adjust for some of these costs? And I have one more follow-up.

I guess start with--

We were really thinking about price in the back half of the year being relatively flat. And in terms of how commodities plays into that, you've got the good guy we talked about at about $150 million. You've also got some direct material, bad guys still coming in relative to things like engines, electric motors, those types of things.

You're probably talking about $80 million to $90 million direct material, really flowing through that way. Okay. Now, if we see an increase, certainly in commodity costs on the spot market paying more, I think the advantage that we have here from a timing perspective is we would be able to from a pricing perspective, kind of get in front of that or at least stay where we are.

And there's really not been a lot of heavy pressure in the industry and really at any of our businesses yet around pricing relative to commodity deflation. So, that's kind of holding up. But--

Okay. So -- I thought you meant the flat price was an average for the year. So if you start positive you're going to end in a negative. But you're saying for the rest of the year, price will be basically flattish?

That's right.

Okay. Sorry, on the restructuring question?

Yes, Steve, the delta really was probably better performance on both ends. We spent less than what we had anticipated and the benefits started accruing faster than what we had planned on.

The other thing that went on, as we added to the program, I think we talked about this before, that we were going to be adding incrementally to the program based on where we saw our revenues coming out. We pretty much drew the line and said that any new programs that we put in place had to be cash positive in the current year -- cash positive in the current year. So that led to the lower spend on an incremental basis versus the benefits.

Okay, and then one last question, I just wanted to make sure I was clear on this. You said that the working capital doesn't assume any further benefits from the securitization. Am I correct in saying the 250 doesn't, doesn't have any benefits from the, from what you did this quarter and then one last question on that is, what was free cash flow this quarter?

Yes, Steve, make sure that the 250 excludes any impact of securitization program.

Okay, great.

It's management 101.

Inventory, receivables, the basics.

Yes.

And the quarterly performance on cash was a slight usage -- we call it available cash. Everything before dividends was about a $26 million usage. Now, the significance of that is that in the past, we would have seen maybe as high as $200 million of cash usage in the first quarter.

So given that the depressed volumes and where we were with inventory, that performance has given us a lot of confidence that we can take even more working capital out for the year.

Right, so stronger performance in the context of the seasonality?

Absolutely.

Okay, great. Thanks a lot for all the details.

And we'll go next to Nigel Coe at Deutsche Bank.

Thanks, good morning.

Good morning, Nigel.

Just with respect to Trane, specifically on solutions, a bit of weakness in 1Q. You mentioned April was stronger. At least one of your competitors has talked about the stimulus is causing a bit of confusion in the markets -- some delays. Did you see some of that and was that a factor behind the decline?

Well, I mean there was just a general inability by a lot of customers, like give you an example, in education, even to pass bonds relative to doing capital improvements. And I think a lot of districts, as an example, went down a traditional procurement path, couldn't go there in the fourth quarter.

Kind of come back needing capital, renovation and have looked at things like performance contracting as a way to mitigate that. I also think that in some cases you saw some customers that maybe could afford to hold on a little bit and delay and see if they were going to get any funding.

It was a little bit of a mixed bag, Nigel. I kind of discount all of that as kind of being a good guy or bad guy, certainly in the quarter, and probably for the year. I mean, we're going to participate.

We're going to get hopefully more than our fair share of that, but it's not something that we're baking in as an expectation.

We have shifted a lot of resources over to the owner direct side versus equipment side of our business there in anticipation of really key vertical markets and what I would call owner direct selling versus through the traditional contracting channels. And so I think we're positioned to take advantage of that, not counting on it.

Okay. That's helpful.

And, I think, Nigel, too, the part you look at, I think it also carried on over into our Security business. We saw there, because remember, our real strength in Security commercial is in that entire institutional space.

And if you looked at the Dodge data, it would be a disconnect as to the activity level looked stronger there than what we saw and I think a lot of that has to do with the disruption on the purchasing side that you and Mike were talking about.

That was actually my next question, because the decline in the Americas, 20%, was much -- especially given your late (inaudible) so would you expect the growth in Security to improve and then maybe fade off towards the end of the year, within commercial?

Nigel, two things really happen there that were fairly dramatic. One was just in what happened to what traditionally was the cycle time between a start and when our equipment was on site. It used to be like clock work, about 10 to 11 months we could forecast it.

That's more like 14 months right now, so the whole process is delayed. The other thing that's happened through the wholesale channel, which fills about 35% of the market, really took inventories down dramatically to the point where the whole sell-through there would just indicate that in the earlier question about where is their potential upside?

Possibly if that channel came back faster in terms of its order rates, we would feel a little bit of an uptick there. But those two things really, I think, created that anomaly.

Okay.

We did not in the forecast that we put together with the revenues really take into account any type of an uptick as a result of any type of government programs that are implemented. That would be all upside if that happens.

One last thing, too, Nigel. You know we wouldn't have put through a price increase this year for the first time in that business. We used to get a pull-through on that, pull-forward on that as well as the fact that we didn't do anything to encourage either the residential Trane side or the Security side to kind of pull forward anything into the quarter. I think inventories there have really come down from distribution point of view.

Okay. Couple of quick ones, if I may. Within Hussmann, it sounds like maybe trends are, again, a little bit better. Could you just characterize how book-to-bill ratios are looking in North America?

You know, gosh, I'm going to give you, first of all, sort of a general answer. We just had our quarterly reviews last week and the book-to-bills in most of these businesses today are greater than 100%.

I mean really the lead times it takes us across all of our businesses, Hussmann, Schlage, are greatly reduced. So we've been 100$, 110% book-to-bill in most of our businesses.

That's across the board, not just in Climate's?

That's across the portfolio. I can't think of a single business that was really less than 95% anyway.

Is that for, is that for the quarter, or is that just for March-April?

That was the quarter.

That was the quarter, okay. Interesting. And then just finally, on the restructuring, you've taken out 2,700 heads, I think, as part of the current program. That's about 5% of your year end 2008 employees. Is that enough? Do you think that's about 5%, is that enough in light of the volume declines?

Well, couple things. One is, we set up a series of triggering actions beyond what we've already done in the event we don't get the volumes in the service contracting business or in some of our businesses. But we really, I think, placed a bet on our ability to drive that performance through those businesses and if we don't see that come the May-June timeframe, then we have actions planned to go further.

I think, Nigel, too, again, what we're talking there is fulltime employees. We actually reduced our temporaries by more than twice that number. We had over 5,000- temporaries who we do not report in this 2,700 type number. So if you're actually look at the number of people that were actually impacted by it, the number, frankly, is closer to like almost 8,000. But those people, because many of our businesses having the seasonality wind up having a temporary work force.

We do not reflect those in the numbers that they obviously are also impacted in this by more than 5,000 people.

Okay. That makes sense. Thanks a lot.

We'll take our next question from Rob Wertheimer at Morgan Stanley.

Hi, good morning, everybody. And thanks for taking the question. I know it's been a long call.

I just wanted to ask, if I can, a general sense on the leading commercial and [non-res] construction indicators are, obviously, very negative and I wanted to understand the lifecycle of an order just in a general sense, if we can walk through that and sort of think about the time frames. And also wanted to ask, I think something like 11% of global skyscrapers have been halted or are under sort of construction stoppage.

If we could talk about that lifecycle of the order in terms of that, some of these systems are fairly specialized per building and if you have seen any cancellations on things that have been in process? Thanks.

Great, great question, Rob. If you go all the way to the most forward leading indicator that we can think about in the construction business, it would probably be the architectural inquiry index, which for the frist time, I think, recently yesterday went up north of 50%, some positive feelings about that. The actual architectural building index, I think, went up into the low 40s, which was maybe just recall a 7 or 8-point move there.

That's got probably 70% correlation to our business. We've got a few other things that we can look at to maybe get us up into the 80% range when you kind of triangulate that whole thing. What's really happened though in addition to that just slowing down and hopefully now picking up just a tick is the cycles have really changed and very, very difficult to predict.

So in terms of the contracting business, you think about the burn rate, that you would earn revenue, those burn rates have really decreased on a monthly basis. In other words, it's the time has extended on those. There has been minimal amount of cancellations, we see more of a general slowdown than we would, say, a mothballing of construction site.

On the ABI comment or any of the leading indicator comments am I to understand -- so the correlation is one for one in timing with the ABI? It's obviously not, right, so --

No, in fact, from the architectural billing index, you're probably 10 months from the start and probably 10 months from the start in traditionally in Security you're probably 6 to 10 months to a start and in Trane commercial.

So if you take that billing index, take it out 10, 12 months, take out the cycle, 6 to 12 months, and then factor in anything that would happen with the stimulus to move it forward or anything relative to finance that would move it out, these are the difficulties we have kind of in a quarter to forecast and kind of one of the reasons the range has gotten lighter, it's very difficult to predict that.

That's--

The old methodologies just don't work and frankly, I'll tell you the thing we're most focused on is share and understanding specifically, order by order, business by business, where there's third party data we look at it. But if it's not third party data, we construct our own data and really managing, to look at share month in, month out.

Okay. That was actually helpful. Last point, is your quoting activity in commercial Trane sort of similar to the ABI? That also would lag by 10 months?

Well, the other phenomenon here is you're seeing multiple quotes on the same project as the same customer tries the value engineer the same building. So the actual answer to your question is, yes, it's absolutely exploded. But the reality is it's probably not up at all from relative to the basic opportunity out there.

Just a lot more activity about trying to make things work for the customer in finding solutions that are within their budgets. But in terms of really sort of the market opportunity, maybe only up slightly in March and April, but not so significantly that it would dramatically change our view for the balance of the year.

Very helpful. Thank you.

And we'll go next to Daniel Dowd at Bernstein.

Good morning. Let me just continue on that, the Trane issue. So you indicate that you think you're starting to gain share. What do you think the source of that share gain is?

Well, there's two things we look at. One is what we think about as order share and we've had really four consecutive upticks in order share growth, both in units (inaudible) and applied, it's across the board. Probably a delay of say six months before you see that through the shipping share, which would be kind of summer.

And this is something that happened in 2001 with Trane. A large part of the equipment model that we have is variable in terms of the compensation of the sales force. So I think where you see a lot of competitors pulling (inaudible) people off the street doesn't do us any good to do that. The other thing I'd tell you is the kinds of things that we're doing today are really focused on energy efficiency, operational efficiency and require kind of a high level of engineered system and sort of proof-of-concept customers and I think that historically has been a real sweet spot for Trane is the ability to really differentiate at the technical level. That, I think, is playing out and driving specifications and orders through as well.

How do you think competitors are likely to respond as you gain share on price? Is this likely to create a chain reaction here where people start to lose share and start to address that with price?

Well, we're not seeing any change in price, okay. I mean we had a little bit of carryover, in fact, positive carryover from Q4 and we're figuring flat for the balance of the year in that business. So we're not doing it on price.

It's really taking what I would consider to be the owner direct businesses, the businesses that you'd call and which you'd service, contracting, performance contracting, shifting a large part of our organization over to that activity when equipment is slow. And then doing a lot more unsolicited work with customers and unsolicited proposals around energy efficiency and operational improvements in their buildings, and that is the single greatest change.

And so I can't tell that in the open market we're seeing anything relative to price that, from any of our competitors that we would see to be kind of setting a tone in the market around reduction.

Just to expand on that, Dan. Remember this is a total cost of ownership approach where you're really selling value of efficiency. So it's not a sale necessarily on first cost, which is what you're thinking. It's really about how can I provide more value to the customer and so that he has value over the life of the whole, project of the whole building when you include the parts and service and all the rest of it that we offer.

Sure, let me just start on one other thing. You mentioned that the inventories in the channel were pretty lean, I think you said they were going down. Are they going down in dollar terms or are they going down in weeks of supply terms or both?

Both. We took about $100 million inventory out of our own inventories and we'd anticipate customers probably did the same across the board when you add it all up. So I mean I think we're in pretty good position there relative to the channel really being sent across each of our businesses.

Okay.

Even the Auxiliary Power Unit, we had quite a slug of inventory on the market in the fourth quarter. It was kind of bleeding through in the first quarter and that's down now to the point where we could, in the second quarter, we could begin to see reorders there as well. So that would have been an example of one of the more bloated inventory change that we had.

All right. Thank you.

And we'll go next to Jeff Hammond at KeyBanc.

Hi, good morning, guys.

Hey, Jeff.

Hey, in your last guidance you had $100 million of contingency and then at the February meeting you talked about a synergy upside of $35 million, salary management plan of $40 million, and I'm just wondering within the context of your new guidance do we have -- is there a contingency built in of a similar magnitude or has that kind of worked its way through?

Yes, there's a contingency of similar magnitude.

Okay, great. And then it seems like as you talk about productivity qualitatively you're exceeding your expectations, but within that $650 million gross productivity you're actually, the productivity component you're bringing down from $350 million to $310 million. What am I missing there?

Well, I mean the volumes are going down, one, an [applicate] excuse. But we're increasingly not trying to put too fine a line on how are people bucket synergy versus productivity. The object of the game here is we've got a cost structure that we think we can get about 5% out this year from all points of reference excluding deflation.

This is kind of how we're looking at it. Whether $350 million goes to $310 million or $180 million in synergy goes to $200 million isn't as important to us as we're trying to get our people to do the right thing. The other thing that I think we've got a heck of an opportunity to go after here is on the growth projects which really we've been working at. We've been doing them sort of one at a time, one-off, getting our sales people together.

We're starting to see a lot more work between the organizations around actual offerings built to go after a customer set, an industrial or residential or a commercial customer across more of our commercial, or residential product offerings. So you'll see some stuff coming out in terms of innovation in June, second quarter. You'll begin to see us working across these businesses with actual customer product offerings and market offerings.

Okay, great. Thanks.

We have time for one more, perhaps?

And we'll take our final question from Ted Wheeler at Buckingham Research.

Hi, good morning, everyone.

Hi, Ted.

I just wanted to go back a little bit on Trane even more. You talked about the market down, I think, in the first quarter 19%, orders down 15% and I think you're guidance for 10% to 15% for the year for commercial equipment -- am I right in saying that's a fourth quarter comp improvement and there's really no meaningful change in the trajectory of the outlook from first quarter to the end of the year?

That's pretty accurate.

Could you break down, please, the Commercial Unitary and Applied performance in the quarter and your outlook for the year?

Yes, I can just tell you that Unitary's impacted, of course, more severely due to really the commercial markets being office and retail. You would have been looking at Unitary numbers kind of down in the mid-20 range, okay. And you would have been looking at Applied numbers being down in sort of the mid-teen range.

And, again, do you think Commercial Unitary might be turning by the end of the year to improvement or do you think that's basically the same? Excepting the fourth quarter kind of comp.

No, the light Unitary is something that's stock, okay, and that got fairly thin in Q1 and we actually did see a little bit of a pickup in March around the light Unitary component of the Unitary business. The large Unitary, say, over 25 tons, I think will continue to be slow.

Okay.

You'll see sort of office rental rates and vacancies decrease and sort of lending a general freeing up around development.

Okay, and just lastly on the commercial side have you quantified yet or do have sort of -- well, what is your impression of the stimulus dollars that are flowing into the building market. It sounds like there's some contracts starting to at least be bid. Do you have any insights as to what you see there?

Well, we're in the mix and all that, I mean absolutely. Clearly we're going to get our fair share. And, obviously, I've read all the different things that have come out here recently and some folks are (inaudible) pretty big, anticipated some numbers into that.

We haven't really done that. I mean what we've learned over the last couple of years anyway is we really want to get our cost structure right. We really want to change culture around productivity, around share gain. We haven't done anything that would reduce our ability to respond from the capacity perspective in any way, shape or form.

It's all been through increased utilization that we're able to reduce to this point in time. And so that's sort of the upside that would bring us more to the top end of the range. But honestly, we're just not going get sort of lulled into thinking that that's something that's going to be a big pop in 2009. I do think it will be a factor. I don't know how much yet.

Great, thanks again.

Thank you.

Okay. Well, thanks, everyone. If we could just close by saying glad you could be with us for this near marathon session. There will be an instant replay of today's conference call. It will be available at about 1:00 p.m. this afternoon.

There will also be a transcript available and that will be available on the Ingersoll-Rand Web site. If you have any other further questions, if you would, call Joe Fimbianti or myself. And that concludes our call. And, again, thanks so much for joining us.

This concludes today's presentation. We thank everyone for their participation. You may disconnect your lines at any time and have a good day.