特靈科技 (TT) 2010 Q1 法說會逐字稿

Good day, everyone, and welcome to the Ingersoll-Rand first quarter 2010 earnings conference call. Today's conference is being recorded.

At this time I would like to turn the conference over to Mr. Bruce Fisher, Vice President Investor Relations. Please go ahead, sir.

Thank you, Anthony, and good morning, everyone. We released earnings at 7:00 a.m. this morning and it's posted on our website. Concurrent with our normal phone-in conference call we are broadcasting the call through our public website and there you will also find the slide presentation for the call. To participate via the web go to ingersollrand.com, click on the yellow icon on our home page. Both the call and the presentation will be archived on our website and will available tomorrow morning starting at 10:00 a.m.

Now if you would please go to slide number two. Statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the Safe Harbor provisions of federal securities law. Actual results may differ. Please see our SEC filings for a description of some of the factors that may cause actual results to vary materially from anticipated results. In addition, please refer to slide 21 which covers the use of non-GAAP measures to describe Company performance.

Now I'd like to introduce the participants on this morning's call, we have Mike Lamach our President and CEO, Steve Shawley, our Senior Vice President and CFO and Joe Fimbianti, our Director of Investor Relations. Mike will open our discussion, then Steve will review our business results, and then Mike will return to discuss our outlook for 2010. We will open the lines for your questions after that and if you would please go to slide three and I'll turn it over to Mike.

Thanks, Bruce, good morning and thank you for joining us on today's call. In the first quarter we continued our focus on driving top tier operational performance across each of our businesses while steadily increasing the delivery of customer focused innovation and product system services and in our business models. For the fifth consecutive quarter we achieved our productivity targets and new product introduction schedules which are critical underpinnings in our strategy to deliver long-term shareholder value. First quarter earnings from continuing operations were $0.16 per share, excluding the $0.12 impact of a one time tax charge from the new health care bill and including $0.02 of restructuring and productivity investments, overall productivity contributed to our $0.22 year-over-year improvement on essentially flat volume. As a result we were able to achieve a top end of our projected first quarter earnings guidance range lower than anticipated revenues. For the quarter, revenues were $2.9 billion, up 1% versus prior year on a reported basis and down about 1% excluding currency. First quarter revenues were roughly $100 million below the midpoint of our February guidance where we had anticipated a revenue range of $3 billion to $3.1 billion.

During the quarter we did see a notable pickup in our order intake and a number of early cycle businesses are showing strong comparisons. For the overall Company orders were up 10% and improved in each of our segments. Our backlog also increased significantly up over 18%. As we reviewed the makeup and timing of expected second quarter deliveries on these new orders, coupled with our growing backlog, we have confidence that our revenue shortfall in the first quarter was timing related and that we can deliver within the range of our second quarter revenue forecast. Operating margin for the quarter was 4.5%, all of our segments improved operating margins compared with the first quarter of 2009 and total segment margins were up 2.8 percentage points year over year despite the flat volumes.

This again highlights the success of our productivity programs. We exceeded our 5% goal for gross productivity through a combination of disciplined cost controls and operational improvements that included core productivity programs, restructuring savings and synergies derived from the new segment operating structure. We also held or gained share in most of our businesses and our innovation agenda continues to gain traction as we continue to increase development in development and introduction of critical new products and services. We expect that these actions will help to mitigate some of the near-term market choppiness and fuel our growth as the full recovery kicks in. We also remain focused on cash flow management and in retaining the benefits achieved through the operational attention we paid to work capital improvements over the course of the past 18 months. We paid down $260 million of maturing debt in the quarter and we are on track to deliver $1 billion of available cash flow for 2010.

Please go to slide four. This slide gives a summary of our quarterly order rates from 2008 through the first quarter of 2010. As you can see, we hit the bottom for orders in the back half of last year and reported flat orders in the fourth quarter. Reported orders for the first quarter were up 10% overall and all sectors experienced year-over-year gains. Excluding the impact of currency, orders increased 7.5%. We had a specially strong gains at industrial, Club Car and transport refrigeration. Order trends for commercial HVAC and security also turned positive despite soft commercial construction markets in several key regions. We ended the quarter on a high note with a 13% year-over-year increase in March orders which will help drive our second quarter results.

Please go to slide five. This slide provides a look at the trends in our revenues by segment. We think revenues excluding currency shown in the bottom of the chart gives a better view of our organic sales performance and our comments will focus on this measure. As you can see on the chart, it appears that we hit bottom in mid-2009 with some modest improvement in the rate of decline in the third and fourth quarters. We had modest positive improvements in all of our sectors except for security which had a 5% decline in activity against the soft US commercial construction market. I'll give you two other views of our third quarter results. The geographics split and a split between recurring revenue and equipment. On a geographic basis revenues declined by about 1% in the US and also down about 1% in international markets excluding the impact of currency. Equipment revenues declined by about 1% on a comparable basis from last year and worldwide parts and service were up by 8%.

Let's go now to slide six. This bridge analyzes the change in first quarter segment operating margin year over year. First quarter segment operating margins were 4.5% which is an increase of 2.8 percentage points compared with 2009. As you can see, volume, currency and price had a minor impact, productivity was the key driver that netted against inflation, helped increase margins by 3.5 percentage points. We continue to invest in new product development and those activities coupled with purchase accounting related costs and restructuring expenses had a minor impact on the quarter and reduced margins by 30 basis points. Our focus on productivity which will reduce our fixed and variable cost structure and our innovation initiatives remain core elements of our strategy as we position ourselves for higher margins and share when our markets reach full recovery.

Please go to slide seven. On slide seven I'll spending a minute bridging the components of our EPS compared with our previous guidance range provided in February. At that time we indicated that we expect it to be in the range of $0.10 to $0.15 per share from continuing operations with a midpoint value of approximately $0.13 per share. Lower than expected volumes and negative mix equated to an 8% -- I'm sorry $0.08 per share drag in earnings, price was off slightly in the quarter compared to higher expectations which caused additional $0.01 of EPS drag. We achieved our 5% productivity target for the quarter and we also had lower than expected material inflation. Lower net interest and other costs contributed $0.03. Forecasted restructuring costs were favorable by approximately $14 million or about $0.03 per share as we have been able to execute some programs at lower than expected costs and we have some timing differences which will catch up during the year. So in aggregate, internal drivers have offset weaker than expected revenues and we were able to reach $0.16 in earnings compared to guidance of $0.10 to $0.15 per share. Steve will now take you through a review of our reporting segments.

Thanks, Mike. Please go to slide number eight. This slide covers the climate solutions segment it includes the Trane commercial HVAC business and the Thermo King and Hussmann refrigeration businesses. Total revenues of $1.6 billion were up 1% and down slightly excluding currency. I'll talk first about the Trane and commercial HVAC business and provide a quick look at the markets. Global non-residential HVAC equipment markets declined mid-teens with significant reduction in the Americas, Europe and the Middle East. Asia markets were up high teens reflecting good growth in China.

Trane's global HVAC first quarter revenues $1.0 billion were down 6% versus prior year on reported basis and down 9% including the effects of foreign exchange. Total global commercial equipment revenues were in line with global markets, down 16% excluding FX. Americas equipment sales were down about 18%, Europe and the Middle East were down upper 20s, and Asia was up in the low teens all excluding FX. Global part services and solution revenues increased by 4% excluding FX.

This is the first year -- this is the first year-over-year increase we have seen since the fourth quarter of 2008 and reflects both improving demand in our ability to sell to directly to building owners. Excluding foreign exchange, equipment orders declined approximately 6% in the Americas in the first quarter. We continue to see increases in applied orders up 3% ex FX but unitary orders declined single digits. Orders for contracting parts, service and controls were up mid single digits. We ended the quarter with a global backlog of equipment, contracts, service and parts of over $1.3 billion. Global backlog was up 14% on a reported basis. Equipment backlog increased mid single digits while contracting backlog increased by over 40%.

Geographically, Americas was up high teens on the strength of the contracting performance, international backlog was up high single digits as strength in Asia more than offset weakness in Europe and the Middle East. In summary, we would say that the commercial equipment revenues remain weak, although we continue to see some modest improvement in the rate of decline. And service and contracting are recovering in 2010. In addition, our productivity and restructuring actions are continuing to improve margins and we continue to launch new products which will put us in good position to leverage improving markets when they materialize. The global Thermo King transport business revenues increased by 27% which is a significant improvement over last year. Our worldwide refrigerated truck and trailer revenues grew even faster, up 35% compared with 2009 with strengths in all key regions. Global bus HVAC shipments and marine container sales both increased substantially due to easy comps and improved end market activity. TriPac auxiliary power unit volumes increased significant compared to last year following higher diesel prices. Thermo King orders instance creased by 38% in the first quarter setting the stage for continued improved sales and operating earnings in 2010.

Looking at stationary refrigeration, global sales were up 6% primarily driven by supermarket upgrades and remodeling projects at several of our major customers. Bookings increased by 12% in the quarter. Climate solutions reported operating margin of 1.9% in the quarter. This compares with 0.3% in the first quarter of 2009. This 160 basis margin improvement was driven by productivity and cost reductions on essentially flat sales.

Please go to slide number nine. Industrial technology's first quarter revenues were $545 million, up 1% versus the prior year and down 1% excluding currency. We believe that the industrial markets are stabilizing as first quarter orders for air and productivity were up 16% and double-digit improvements on all geographies. Club Car revenues increased by 21% compared with last year as replacement demand picked up in the Gulf market and our share improved in utility vehicles. Year over year golf cart market share helped study and we have seen a significant increase in first quarter orders which are up 35% compared with last year. Industrial's operating margin of 10.9% was up 7.7 percentage points as productivity, lower restructuring investments and price volume mix were all positive contributors.

Please go to slide number 10. Residential solutions sector, which includes Trane and American Standard HVAC product lines and the Schlage security residential business had first quarter revenues of $395 million, up 1% compared with last year. Excluding foreign exchange, revenues were up 3%. It appears that we have finally reached the inflection point of the long down cycle in a residential market and we expect improvements going forward. Driven by a slow improvement in residential construction and strengthening of the replacement market for residential HVAC. Total reported revenues for the res security portion of the sector were down about 7%. North America revenues were up about 5% primarily due to an improving remodel market and bottoming of the US new builder channel. This improvement was offset by South America's results which included significant negative currency translation related to the devaluation of the Venezuelan bolivar. For the HVAC business we estimate that industry shipments of motor bearing units increased about 10% year over year. We believe this growth includes extra industry shipments of our 22 systems which are being phased out. Excluding those extra shipments, we believe the market was up in the mid single digits. Our residential HVAC sales were up 3%, principally from higher volumes and mix. As we did not participate in the R22 system load-in nor did we see any favorable impact, a general restocking in our channels during the quarter. Operating margins of 3.7% increased significantly compared with the 2009 driven by 5 points of margin improvement from productivity and cost reductions.

Please go to slide number 11. Revenues for security technologies were $393 million, down about 2% and down 5% excluding currency. Americas revenue in the commercial sector were down 9% mirroring the decline in commercial construction markets. Securities European business was up approximately 7% on a reported basis and flat excluding currency. Asia revenues were up close to 20% from an increasing sales in China. Operating margin for the quarter was about 16.5%, up about 40 basis points despite the negative mix effect from the North American sales decline and additional investments. Accelerated productivity, strong cost control discipline and currency gains drove the improvement in margins.

Please go to slide number 12. Let's switch gears to talk about productivity. As you know, we have set a long-term goal of delivering 5% gross productivity every year. For 2010 our target of 5% total productivity translates into savings of approximately $650 million. In the first quarter we achieved $151 million in savings, in line with our expectation which equates to gross productivity of 5.3%. We are on track to deliver our full-year productivity target. We spent $10 million in the first quarter on productivity investments, which is how we now will describe the costs associated with restructuring and synergy costs. We are changing our terminology to further emphasize that these costs are part of our ongoing business activities. Our productivity initiative is expanding to all aspects of our Company and we are making it the foundation of our operating culture.

Please go to slide number 13. This chart highlight one of our big productivity opportunities and that is to significantly improve our manufacturing overhead costs and to improve capacity utilization. We have begun significantly improving our capacity utilization and fixed cost structure. This is not a short-term program. It will be a center of focus until we drive capacity utilization into the 60% to 65% range, measured on flat volume. We believe that reaching this goal will put us in a position to seek capacity utilization in the 75% range as our markets recover to mid cycle levels. Manufacturing overhead reduction initiatives will be a key element in our efforts to sustain annual gross productivity improvements of 5% over the next few years as we drive toward our enterprise goal of achieving 15% operating margins. In addition to the obvious productivity benefits, these initiatives will also allow us to direct more capital into future innovation and growth opportunities as opposed to production facilities and processes. So far this year we have announced seven manufacturing plant closures and four product line movements. We spent about $7 million of our productivity investments in the quarter on these programs.

Please go to slide number 14. In addition to our productivity programs, we continue to sharpen our focus on developing and launching new products and services. We expect about 18% or $2.5 billion of our 2010 revenues to be from new products and services introduced in the last three years. With a number of new offerings in each of our businesses, this is up from approximately $2 billion or 15% of sales in 2009. We are increasing our 2010 spending and innovation related investments by the equivalent of $0.15 to $0.20 per share over 2009. This slide shows four of the new products we launched in the first quarter.

Just to highlight two of them. The R series air compressor has the best energy efficiency in its class, lower operating costs, lower sound, and similar -- and smaller footprint. The Visage Club Car system is an integrated system that allows the course manager to better regulate play and control where golf carts go resulting in higher revenue and lower costs for the Club. Reinvesting in our business is critical to our future growth. We have a growing pipeline of products and service innovations, many of which are synergistic and combine capabilities across our businesses. Much of what's in the pipeline is unique to Ingersoll and we will continue to strengthen our market position.

Please go to slide number 15. Over the last year we have made substantial progress in deleveraging the Company in the face of very difficult economic conditions. We continue to strengthen our balance sheet in the quarter by paying off $260 million of debt that matured in February, total financing was reduced by $166 million. We had $70 million of commercial paper outstanding at the end of March and long-term government contract prepayments that are classified as debt increased slightly. Cash balances ended up just shy of $600 million. We have reduced our total financing by about $2.2 billion since the accusation of the Trane acquisition -- since the completion of the Trane acquisition in June of 2008 so we continue to deliver on our deleveraging plans.

Please go to to slide number 16. We finished the first quarter with working capital at 3.5% of sales, roughly one-third the level of a year ago when we were at an unacceptably high of 9.6%. $124 million of working capital increase is typical for this time of year as production is ramping to meet seasonally high volumes in the second and third quarters. We expect to maintain working capital for sales in the range of 3% to 4% for the full year. Through improvements that have and are continuing to be made in manufacturing systems and processes, footprint restructuring and supply chain and logistics management.

Please go to slide number 17. This chart lays out how we expect to generate available cash flow throughout the year. Although there was a small usage of cash in the first quarter, we are ahead of plan due to ongoing working capital management focus. Based on first quarter performance, we are on track to deliver the $1 billion of available cash flow plan for 2010. With that, I'll turn it back to Mike for the forecast.

Thanks, Steve and please go to slide 18. Our forecast for 2010 is based on mixed but improving markets. We continue to expect slow recovery in the US and Europe, growth in Asia and mixed activity levels in our major vertical end markets. Our recent order rates indicate that we are seeing signs of recovery in refrigeration, industrial, Club Car, residential, HVAC and security as well as commercial HVAC parts, contracting and service. We also expect to see a continuation of the challenging conditions in the US nonresidential construction market for the balance of the year. We are certainly encouraged by our orders and backlogs when economic turns can be choppy and so we believe the best approach is to be conservative in our market outlooks and continue to relentlessly focus on achieving our productivity targets offsetting material inflation through higher price realization and continued investment in our long term growth through innovation.

Please go to slide 19. Based on this next but improving view of the world we are raising the lower end of our revenue range by 1 percentage point now expect revenues for full year 2010 to be up 3% to 5% compared with 2009. We expect industrial to show gains in the midsingle digit range and residential to show gains in the upper single digit range. Climate control revenues are expected to be up slightly with declines in HVAC equipment and gains in both refrigeration and contracting parts and service. Security is expected to show a year-over-year decline due to its exposure to nonresidential building especially in North America. This results in a 3% to 5% full-year growth for total Ingersoll-Rand. Second quarter revenues will be a bit stronger than they have previously expected and we continue working on programs to increase full year revenues above our projected range.

Please go to slide 20. The results of an improving revenue outlook, we are now projecting full-year 2010 EPS from continuing operations including restructuring and $0.12 of one-time health care tax costs to be $1.88 to $2.23 per share with lower end up $0.05 from last quarter's guidance. Including $0.10 of costs associated with discontinued operations, total EPS is projected to be $1.78 to $2.13. Additionally, our forecast is built on the following assumptions, our full year forecast assumes 1% price realization year over year, a tax rate of about 18%, $0.25 per share restructuring and productivity investments, and EPS based on a 341 million share count. Second quarter revenues are forecast to be in the range of $3.6 billion to $3.7 billion, which is up approximately 3% to 6% compared to the second quarter of 2009. EPS from continuing operations is expected to be in the range of $0.62 to $0.72 including $0.05 of restructuring and productivity investments. To sum up the forecast for 2010 we expect 2010 to demonstrate our focus on driving top tier operational performance across each of our businesses. While steadily increasing delivery of customer focused innovation, products, system service and business models. We expect to see modest revenue growth and significant earnings growth as we continued to deliver on these objectives. Now Steve and I would be happy to take your questions.

Thank you. The question-and-answer session will be conducted electronically. (Operator Instructions) We will take our first question from Eli Lustgarten at Longbow Securities. Please go ahead.

Good morning and I have a clarification on your -- start with the revenue forecast that you show in your handout on page 19 shows $13.2 billion and you have, you know, the -- you really have, you know, revenue forecast at $13.6 billion to $13.8 billion, I'm assuming the differences is ones without currency or how are we looking at the difference between that?

I think if you look at that column, it's labeled 2009.

Okay. I'm sorry. Yes, I misread it. I apologize on that. One clarification, on the tax rate, you owe 19% in the first quarter, doing 18% for the year. You think tax rate is going down for the rest of the year and a tax rate for 2011 which is probably more interest in 2010 at this point.

Yes, I think that we had a couple of small unfavorable discrete items in the first quarter. In a PBT as low as it is even a few bucks causes the rate to do weird things so that's what happened in the first quarter. We still feel pretty good about 18% for the year.

What would 2011 look like?

It's probably drifting more toward 22%, 23%.

Okay. And can we talk a little bit about the target profitability and profile that we can get from the major climate division at this point we are down, at very low levels. Can we get some idea of what kind of profile we could expect for 2010 and more importantly as we go through 2011, 2012 and how much of the capacity utilization and restructuring and all that is going to be focused on putting all those areas together too?

Eli, for 2010 we're looking at growth 2% to 4% on overall revenues and I would think on that base we're looking at operating margins probably in the 7.5% to 8% range. For the out years we are really not going to go there but I can tell you that, across each of the business we do continue to focus on a restructuring programs and across the Company, we are really looking to try to get 2 points of net margin improvement over the next couple of years right in the next few years.

Let me get back in queue. A lot more questions. Thank you.

Thank you.

We will take our next question from Jeff Sprague at Vertical Research. Please go ahead.

Thank you, good morning.

Good morning.

Mike, I wonder if you could spend a little bit more time on what's left to do on cost. I believe Steve said the target is to get to a 60% to 65% utilization so you'd be closer to 75% at peak volumes. Maybe -- make sure I got that right but why wouldn't you want to footprint the Company to be in the 80%s at peak utilization?

First of all I said mid cycle Jeff at 75% so I want to clarify that.

75%. So wouldn't you want mid cycle with the eight handle on it also?

Absolutely, Jeff. We are looking at really this thing over multiple phases, over multiple years, the plan that we have got laid out here does exactly what Steve had said. We talk a lot about the manufacturing cost structure but we will tell you that we are looking at the cost structure of the entire Company in a similar way so, again, as you look at all of this in terms of productivity as we see it, we think about productivity against the total cost base of the Company and how we are measuring it, so, again, with the end state being to try to sequentially march up a couple of points of operating margin each year on a very consistent basis.

I think on that, Jeff, what we are -- this capacity utilization is a big part of that but also how we're deployed in other areas is a part of that as well. We believe that one of the main reasons of putting the businesses together like we did was to be able to drive not only growth opportunities but to focus on how they would want to organize all the overhead pieces that we need to drive operations. We know there's opportunity there and the footprint thing is just part of it.

I would say in general the climate margins were lower than most people expected. Obviously we're at the low seasonal ebb but with Thermo King apparently turning so hard in the quarter I would have thought there would be a little bit more of a lift there in Thermo King. I guess it probably was decent but if you look at the moving pieces underneath climate what really held you back? Was it Hussmann or was it commercial Trane or was it something else?

Yes, I mean, I think, one of the toughest environments we have got right now is on unitary business within the Trane side of things and so I think what you're seeing probably is corresponding offset coming in that business so that continues to be really challenging.

And then just finally, I guess for me, just thinking about price, obviously you're expecting or budgeting 1% for the year. I guess the need to actually get that is probably rising as raw mats grind their way higher here. Do you have explicit price increase attempts out in the market now? What is the early read on how pricing looks going into the peak season?

Yes, I would start by saying we have put in place and we talked about it last quarter, a very programmatic approach to top line margin expansion which is not just pricing but pricing management across the Company, every sector is engaged, every business is engaged. We have got demonstration projects set up across the Company to do this and so there's a very programmatic approach to what we are taking. With that being said, we have had sectors that have been able to finish an actual price increases into the marketplace through list prices. So the combination of list price management where we can do that and price management, in areas like sort of rebating gross to net, the distribution of how we look at discounting across various dealers are all a process and as we said last time, a lot of that tends to be back end loaded to the nature of just setting these programs up which is pretty well timed to our expectation for inflation in the back half of the year as well.

Great. Thanks a lot.

Take our next question from David Raso at the International Strategy Investment Group. Please go ahead.

Hi. I'm trying to think through the progression here. You have sales growth going from 1% in the first quarter, 4.5% in the second quarter and over 5% in the back half of the year. The margins and I'm speaking extra structuring 4.8% in this quarter just reported and get to your midpoint it's 10% in the second quarter and you're over 10% the back half of the year. Within that, what is the progression of the commercial Trane profitability? Because in the first quarter it looks like Trane, I mean could have lost money in the first quarter. What do you have that business doing the rest of the year before I ask my question about '11?

Again go back to climate solutions in the second quarter David, here we are looking for something in the 9% to 10% range on probably volumes in total which are about 4%. We tend to leverage better in the summer months, that's pretty typical for us. The applied business, which typically carries higher fixed costs is where we are seeing strength as well relative to demand. And so that would give us an indication that sort of Q2 looks right and then if you look at the sequential revenues that we are looking at for the back of the year, that tends to make sense as you see back ended for restructuring that we have done began to kick in, particularly in Q3 and '4.

Obviously I'm trying to adjust the seasonality issue but when I think about the delta '10, '11 you've got the tax rate obviously working against you but I'm trying to think what kind of pop can we get year over year in commercial with these other cyclical businesses continuing to grow because the back half of the year, ex restructuring if your margins are over 10%, in '11 if we can get with commercial less of a drag, get a 10% top line and you can run rate those margins for the full year, even digesting the seasonality of the first quarter, we are talking numbers near $3 of earnings for '11. I'm ust trying to get a feel for the delta I can see in commercial alone. Overall, would you say the back half run rate margins of '10 is something you're looking to target for full year '11?

We looked for improved margins in Q3 and Q4 next year relative to this year's Q3 and Q4. So I don't think that Q3 and Q4 this year are going to be an anomaly for us. I think it really is -- the benefit coming home with the restructuring work and the activity we put into the consolidation of the businesses so again look for continuous improvement.

I'm also trying to figure the year-over-year deltas. Price versus cost for '10. What is the net guidance price versus cost for '10?

Yes, let me talk to you about the quarter here first. We would expect price in a quarter to be roughly flat. We would expect inflation to begin to pick up in the quarter but we also expect productivity to be in the 5.5% range in the quarter. For the back of the year we expect inflation probably be pretty close to 2.7% for the back of the year. Expect productivity to continue to be in the 5% plus range and price, arguably it is back end loaded but that's the way we set up the plans, to equate roughly 1 point in total price management but that's how we are looking at the sort of model inside the Company.

And quickly on the tax rate, can you help us understand why the big jump?

You're talking about--?

'10 to '11. I assume it's North American profits but I am just trying to understand being domiciled in Ireland because you're seeing such a jump year over year?

We have always had income in the US increases it's actually going to go up because the intercompany loan interest is a fixed deduction every year. So as your income goes up and you clear in essence that deduction and you're getting hit at the full US rate, so that has a tendency to drive the rate up.

The question to ask, Steve, though is if in '12 let's say nonres in the US is getting better, really showing significant growth, Thermo King is still strong, US housing is up to call is what you want, a million starts, does the tax rate go to 25% in '12?

We have always had--.

What's the cap?

Every time this question has come up for at least the last two years we said that we expect to see 25% levels at sort of peak cycle performance, so it's not unusual.

All right. I appreciate it. Thank you.

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

Mike, you mentioned the weak converting performance in the quarter and you talked about some timing issues. Can you maybe expand on that and secondly, it looks like you have performed on the revenue growth in a number of areas. Is there a concern that the focus on restructuring is causing to go up in the market and what give you confidence that the timing issues could be rectified in 2Q and the balance of the year?

I think, Nigel that, we were disappointed frankly in the revenue for the quarter. It was $100 million less in midpoint and it was frustrating, I think, to all of us watching the bookings grow, backlogs grow and customer shipment request requirements moving past the quarter right. So we knew we had the book of business, we knew we had the capacity and, yet we were constrained somewhat with what we were able to do with that. We also saw what I would classify as the burn rate of our contracting business to be a bit slower than we anticipated the size of the backlog -- I'm sorry the size of the contracting projects are so large now in the backlog that in some cases, customers have delayed their own schedules to coordinate activity across multiple trades so I mean I would tell you that really the bulk of the mess came out of what would be a Trane commercial business and I would say half related to contracting and half related to equipment shipments.

The plants, particularly applied were extremely busy. We had a record, record shipments, record bookings actually in China, bookings up, over 30%, factory really humming there with chiller production, those are great signs. But it was certainly a timing issue. And so we got through the backlog and got through all the operating reviews this quarter and with the teams we really got clarity about what the nature of the backlog is and feel good about Q2, Q3, sort of seeing that come through. The focus on productivity is something that we just have to do and great companies got the balance look of productivity versus innovation and growth. And obviously last year I think every Company was hyper focused on productivity and getting their variable cost right and reducing their fixed costs. We were no different, in fact, I think that added urgency around debt reduction. Since we have put a lot of investment and communication around innovation in the marketplace and when most people get out in the marketplace, they sense that there is something happening inside these businesses around new product development and launches, so there's a lot of momentum with the distribution base, with our employee base, and I would even say that the competitors have taken notice of some of the launches in place, so we got to balance it Nigel and I always would worry that we get one up too far the other and the trick for us is going to be make sure we keep it in perspective.

Nigel, there's one other issue that you should consider and I made the comment in the prepared remarks and that is that we really did not see any uplift associated with stocking in our channels, either our res HVAC or our security businesses and that's where we lost a lot of ground last year with the destocking in the first quarter. So there's a structural thing going on here too in addition to what Mike just talked about which we believe the end markets as we said in the res HVAC world are growing single digits so we think we are seeing the pull-through but we expect that to pick up throughout the year so that was another structural thing in the first quarter.

To give you a little more color on that, Nigel, we saw actually commercial security, residential security and residential HVAC actually have lower inventory levels and part of that I'll give you a great example on the residential HVAC business our cycle times are five to seven days. Lead times distributors have historically been for us 21 days so there hasn't been as much of a need for a distributor to take the stocking position they would have had knowing they are going to be sold in a fairly short period of time so in some ways some of the operating improvements and cycle time I think have compounded the fact that you're not seeing that inventory build back.

That's surprising because, when we look at the strength of the shipments in December and January, we are up -- the shipments are up 50, 60% and it looked like a lot of that was due to channel restocking for residential HVAC so I'm just surprised that you comment that the channels have formed in the quarter.

The sell-through though Nigel has been like 2%, 3% so I was talking to AHRI Steve Eric last week at a meeting and he was commenting about the quarter sell-through being 2% noticing some of the other releases yesterday, again, it's around 2%, 3% as the sell-through, you see a lot of R22 load-in, you see some changes where the business model has changed from Company owned to distribution and they are sort of flooding distribution changing the nature from the balance sheet to the income statement and I think that that is cause for quite a few anomalies in the first quarter but the sell-through, I believe when you check will be about 2% to 3%.

Quick follow-on to that Mike how has the sell-through trended I guess in March and April?

March has been -- an exciting, a bit more color. The industry has kind of adopted a historical practice of doing a price discount for the seasonal load-in. We didn't do that and toward the end of March when it became clear we weren't going to do that, we got very late orders in March that have continued all the way through until now in April where distributors realize that they need to carry 21 days of inventory going forward. So we didn't participate in that pricing mechanism this time around and hopefully that will change the tone going forward. Certainly for us but across the industry as well.

Great. Thanks, Mike.

Thank you, Nigel.

We will take our next question from Andrew Casey at Wells Fargo Securities. Please go ahead.

Good morning, thanks. Just a follow-up on the timing issue, Mike. First in residential HVAC when you're talking about the sell-through being 2 % to 3% and you had that acceleration in orders March through so far in April, is that the extent of the timing issue that you're talking about or is there something within the commercial HVAC as well?

Well, also remember you've got a pretty big element of residential security here that's going to impact our forecast for you too and you've got some new product development load-ins happening in Q2 which helps support a bit of our forecast too but in terms of the fundamentals for the industry, we believe that it's going to be kind of a mid, single digit, maybe higher single digit HVAC, market performance. We are helped by sort of residential locking and security portfolio, new launch, electronic locks, communicating locks and load-ins from another product we will be introducing in Q2, we will talk about that next quarter, that -- help us maybe deal a bit better than that.

Andy, the other area for sure is I commented that our Trane commercial contracting and service backlogs are up 40% and I think Mike mentioned earlier one of the areas that we were disappointed about was the burn rate of that backlog, so we had a lot of confidence that there is a timing issue there because it's in the backlog and we know how those jobs are scheduled out at this point in time so that's what gives us a lot of confidence that we will see the type of pickup in revenues in the second and third quarter that we need to see here.

Okay. Thanks, Steve. On -- just on a contracting backlog, not to -- not to say that it shouldn't have been better in the first quarter, but was there any weather impact in the ability to work through that?

I didn't hear that, I mean, that wasn't one of the excuses I think what we really did is we forecasted more of a historical burn rate on medium to large sized contracts where last year we booked some enormous contracts, circa, $15 million to $50 million individual contracts when you look at the burn rates of those contracts, they are just slower and part of the exercise in Q1 was going through contract by contract, project by project and getting a real clear picture on that revised burn rate.

Okay. So we should expect it better going forward?

I think you'll see a better forecast from us going forward in that area. Again, that's one of the areas where looking back, that's probably one we had some control over in the guidance we gave.

Back -- tying that all back to the margin in climate solutions, there's a lot going on in the quarter, but as you said, you should get better leverage on some of the HVAC products, specific stuff, better contract burn forecast at minimum and then should we expect to see the leverage from Thermo King really start to impact that line Q2 and beyond?

Last Q2 was operating margin of 7.2%, we tack on 4% growth and look at the productivity that we have got built into the business and again you look for something around 2 point margin expansions in that business. We think we can keep that up.

Okay. Thank you.

We'll take our next question from Bob Cornell at Barclays Capital. Go ahead.

Couple of questions. You put the order growth up 10% but could you structure that in terms of a book to bill for me, the orders are all over the place. Book to bill would help.

Yes, we don't have book to bill here in front of us.

Was it over 1 or below 1?

Most businesses were over 1, well over 1 in some cases.

A philosophical question to expand on some of the questions that have been asked already. On this program of capacity optimization, I get the opportunity and the upside but wonder what's the gating factor in terms of how much you spend? Given the magnitude of the opportunity, you think maybe you would be spending more now. I see the ramp to $56 million but how do you define that opportunity and the rate of spend versus the size of the opportunity?

Yes, I mean financially, Bob, you're right, you love to do it all and get it done with but it gets down to the execution and the ability to really manage the pitching and receiving end of all that we are doing so, what looks like seven closures on the surface is probably more than 35 projects being implemented in the quarter at various levels, so it gets down to really the matter of risk you can take and the movement of the product, the pace of execution across those products and that's the pacing item for us and all companies is the -- protecting the customer and handling it right on both ends.

I get that. Are you adding to the staff of people that's doing this to build that critical mass?

Yes, in fact, if you're out with us, Bob, in May you'll get a sense for that I think for sure.

Yes, we will be there.

Dramatically different organization which is now in place. We have had in place since really December being added to with dedicated program and project managers coming from very, very big operational backgrounds, either in our Company or outside of our Company, kind of in a central organization working with each of the businesses to help really keep track of the stuff so it's been working pretty well. Part of it is just as we got that team involved literally we were able to pick up a few million dollars in the quarter on just cost reduction and the moves so the $14 million underspend there, largely a good portion of that was just due to better execution of the moves we planned.

Get it. Final question, no one asked this and it's a tough question. On the unitary Trane business, where do you guys see that business bottoming, that's part one of that question.

I think it is sort of in the process of troughing. I would like to see it through Q3 before I prognosticate beyond that. If you look at architectural billings and look at the typical lag you get of 10 to 12 months particularly on unitary which tends to be a bit more speculative and often in terms of what gets built by developers and commercial -- private construction companies of investors, you love to see that through Q3 before you really call a bottom on that but I think it feels like it's dropping.

I guess the final question for me is what's the pricing look like on that backlog relative to what the pricing is in shipments and how you're managing that relative to the costs?

We try to manage long lead deliveries with escalators that come into play on various commodities, if you trigger a point changes the invoice price of the customer. But there is a lag between sort of what's in the backlog and what comes out in the areas of unitary or HVAC or our security business which uses quite a bit of nonferrous we are able to price in fairly quickly because the cycle times are much shorter for both projects and orders.

Okay. Thanks very much.

Bob, one other -- to your first question if it helps, backlog was up about 14% in the first quarter, in other words, from the end of December to end of March, a backlogs went up 14% and that was over -- so it's over 1.0 book to bill across all of our businesses.

Yes, I got the backlog growth. Thanks very much.

And we will take our next question from Jeffrey Hammond at KeyBanc Capital Markets. Go ahead.

Good morning, guys. Just to go after the revenue dynamic a little bit differently, so $100 million miss in the first quarter, does that all fall into the second quarter and I guess what gives you the confidence in raising your guidance, particularly given that FX seems to be going the other way? I mean, is the missing piece here orders are surprising you to the upside or just help me through that dynamic.

I'll do the first part and let Steve talk to you a bit more about the currency. Nice surprise in industrial technologies, we are in the quarter, we have bookings up 20% as we look out in the second quarter we see a similar trend continuing. Climate solutions bookings were up 11%. The nature of the industrial bookings would not lend itself toward all second quarter. It's going to tend to be larger machines that will pop down Q2, Q3 and Q4 so you'll see that kind of balancing out over maybe three quarters. Climate solutions I think it will happen a bit quicker. The areas we saw transport across the world with significant bookings, up in the high 30s. That tends to be quicker shift perhaps in the quarter. The other big surprise for us was with climate solutions in Asia. We localized chiller production in our last year. We've had great success with filling up that capacity and really hitting the market seeing great demand and sell-through. That will tend to be Q2 through Q4 much like the big air product will be. So I would not look at it as coming through in Q2. We felt confident enough to take sort of the Q2 guidance up a little bit based on the backlog but certainly not going to all spill through in Q2.

Jeff, the FX question, this projection is built on a euro of 135 and actually when we put together the guidance, several months ago for the first quarter in the year, at that point in time we were looking at about a 140, 141. So we have got the FX built in.

So how much revenue did you lose on FX either percentage or absolute basis as you swing the FX?

I'll give you a rough, rough number.

Guidance, Jeff, it was about $11 million, in past quarter.

You're talking about for the year or for the quarter, Jeff?

For the year.

Let me give you that.

And then while you're looking for that, just can you comment on stimulus? You didn't mention it all. I think one of your competitors is out today saying, hey, it's starting to come through.

Yes, Jeff, we are booking business. It got to the point where it seemed like there was a big hype built on it, people talked about it, didn't see it come through. It's coming through $70 million, $80 million a quarter type numbers. I think we did something in the neighborhood of $150 million, third and fourth quarter last year, so, yes, it is but it's not such a meaningful deal here that that I can't tie that to why applied orders are actually up. I think it's being tied more toward there was such a downturn in deferred spending and deferred capital in 2008, I think frankly a lot of our customers had renewed and fresh budgets and had significant needs and some of the most energy efficient and mission critical equipment in their facilities had to be upgraded and I think that's got more to do with it than how we tie to stimulus.

Couldn't you have won your fair share on the stimulus?

Yes. In China, I would say probably well more than our fair share of presence so that's been a good sign. But the US it's not something that's popping out in our views as being some sort of a windfall or that we are counting on in some significant way.

Okay. Thanks, guys.

Hey, Jeff on your other question it's about -- the impact of currency is about $10 million unfavorable between previous guidance and current.

Thanks.

We will take our next question from Steve Tusa at JPMorgan. Please go ahead.

Hi. Good morning.

Good morning, Steve.

Just wanted to dig into this climate margin a little bit more. I think your guidance was for 3% to 5% for the quarter and I'm not sure how much of a surprise it was that unitary was down. Is that basically what you're saying that unitary was even weaker than you were expecting at the beginning of the quarter?

I would say from the guidance we gave you, Steve, if you looked at the $100 million miss at the midpoint, more than 100 of it would have come from the TCS organization and that is going to delever at fairly substantial rate so that gives you a little bit of insight as to -- the whole mix could be explained right there.

Got you. When -- the applied orders up 3%, what were they in China again and what were they in the -- in North America?

Yes. I can give you sort of orders looking at China would have been up north of 30%, okay, and that's largely going to be applied -- the unitary business is very small.

So then the applied orders in the US were still -- were they down more than your sales?

No. Actually, applied orders in the US were up slightly.

Were were slightly?

Yes.

So--.

Yes.

So at what point does the applied business go positive Americas on reds? Is that a third or fourth quarter? I'm sure your lead times are relatively short right now, maybe depending on project timing, they are a little longer, but when does that actually go positive?

Bruce, any idea? Have you got that?

Yes, I have to check. I don't have it by quarter. It's based on the orders that we are seeing, it's, -- we will check on your--.

Steve, I don't want to shoot from the hip here. We will get back to you.

And outside of Thermo King, is that your highest BNO leveraged business as the revenues come back?

It's a high leverage business. I wouldn't say it's the highest. Security technologies is going to be very high.

Yes, I just meant, I guess within climate?

Yes, you're right then.

Okay. When we look at the earnings bridge that you guys gave us last quarter. Can you just maybe walk through a couple of those parts and especially the inflation, the $1 to $1.10 of inflation had when you were planning for on the fourth quarter report, how has that changed?

It hasn't changed a lot. In fact, we kind of keep hovering around about the same number when you take a look -- you're talking about the total year, Steve?

Yes, just talking about the slide 23 from last -- from last quarter's report.

Yes, I would say that we are still seeing pressure from metals like everybody at this point in time but within a bandwidth of sort of the guidance we gave last time.

Okay. So there's no real changes to any of those moving parts, maybe a little bit in currency, a little bit on investments, tax a little more of a headwind but everything else pretty much the same?

That's a pretty good assessment.

I think inflation was lighter than we thought in the first quarter and it's going to come back I think in the back half of the year, so we probably overclubbed it in quarter one and I think we got it for the full year is pretty close to what we had when we gave guidance.

And then one more question just on the resi HVAC markets. Clearly you guys didn't stock and you said April started to -- started relatively well and you actually bumped up your growth forecast to high single digits, I guess, from mid to high single digits. Is that -- is that just what you're seeing in early April? I mean, do you see any kind of a change in behavior at the consumer? I mean, there's a lot of debate around what's driving all this volatility. Maybe you could just comment on the sustainability of what we are seeing here in April.

Well, we talk about security resolutions, business, again, I want to make sure you guys realize that the security business has a pretty big impact in that and we are starting to see pretty big swings at builder and big box as well as new product launches, electronics and that is another major factor for us in total. So just that's what's actually probably pulling up the total more than the HVAC number being higher than the industry.

Okay. Thanks.

Thank you.

We will take our next question from Mike -- or excuse me -- Mark Koznarek at Cleveland Research. Please go ahead.

Good morning.

Hi, Mark.

A few comments on margin expectations have been tossed out there. I'm wondering if you could just step through the segments just to make sure that we have got them along the lines of the review that you gave last conference call?

Sure, Mark, you want do it for Q2 for full year?

Yes, both please.

I would say climate operating margins Q2, probably banded 9%, 9.5%, full year, you know, 7.5% to 8%, industrial Q2 margins, probably 11% to 11.5% full year probably 10.5% to 11%. Res margins are -- you're probably going to be 9%, 9.5% in Q2 and probably right around 9.5% for the full year. Security, pretty stable. You look at margins on the quarter of roughly 20% for Q2 and for the year roughly 22%.

Okay. Looks like you cut back a little bit on the top end of the climate margin guidance and then boosted security, yet there doesn't seem to be much revenue change, a little bit in security but not much in climate. So what is that? Is it more productivity, is it better pricing on the securities side and then the other end of that, the -- apparent modest revision down on the climate side, is that cost or price or what are those?

If you look at anything, Mark, quarter to quarter like this, it's changing, it's changing mixes in the business, the -- the Asia business spiking as fast as it did relative to say the US business, changes in mix would have been a bit of a surprise for us, probably if you look at commodity, cost coming back in and longer lead pricing that we have done with the backlog, that's the one area that you're going to get caught sort of upside down for a period of time. It's going to tend to be on the climate side particularly in the applied side so subtle reasons for that but nothing sort of fundamental and structural about any major disappointments that we are seeing. Security has done some things around pricing put in place, a price increase that will take effect here in the second quarter pretty typical there for them to do that and they have had some favorability in steel prices through the first quarter pretty aggressive on the top line margin expansion programs probably more confident in security getting the top end of the range. In tough markets, security technology typically has had pretty high margins and they -- they kind of buckle it down, tighten it up and that's what we are seeing here.

Just a clarification, Mike on that climate applied comment. With regard to it sounded like you were saying, price might lag cost, but I was under the impression on the applied side since there really isn't a price list every project is -- has to be spent and negotiated individually. I thought you could respond to price -- respond to raw material signals right away in that business, unlike, say, the residential part of HVAC.

Yes, Mark, you're going to write us back in that business, you're going to give a budget quote, you're going to give a quote and the shipment of the product could be anywhere from three months to a year and so you're -- you run the potential unless you can index some of your costs to metals in the contract, you're going to run a risk that on some, you're not going to be able to recover upset down situation. Flip side of that, if you see it the other way, you're probably going it make a little bit of extra margin if it goes the other way.

Okay. Thanks. Finally just a quick one for Steve. You mentioned that the change in FX for the revenue for the year but can you just -- can you just clarify what was the assumption or what currently is the FX assumption in the 3% to 5% revenue, how much of that is currency and what was it before?

Our previous guidance and the euro is the biggest impacter of our revenue, okay? So as the euro goes goes our revenue calculations so in our original guidance we were at about a $1.41 and our current projection, our current forecast is based on a $1.35. Okay in that's about a 3.5%, 3.6% delta.

Yes, got that part but I'm just wondering of the 3% to 5% revenue growth now expected for this year, how much of that is expected to be contribution from currency?

Well, in our previous in our report there's about a 2 point impact. And it's probably somewhere in that same range.

It's going to be decreasing because of the dollar situation lately so--.

So maybe it's 1 point or 1.5 points now, something like that? Would that be reasonable?

And it's slipping because of what's happening what I just described with the euro.

Yes, so currency now will contribute less, more like 1 point or 1.5 points?

Yes, slightly less.

So your core revenues are actually improving more than your guidance than your actual--?

Yes, you can make that conclusion.

That's what I'm trying to drive at.

Yes, you can get there.

So it's actually up like 1 point more than your -- than you're stating here the way you guys state your guidance, your core is actually up perhaps a 0.5 a point or 1 point?

I'll give you 0.5 point.

0.5? I'm sorry. Was that a 0.5?

Yes, I'll give you 0.5 point, I said.

Great. Thank you.

And we will take our next question from Robert McCarthy at Robert W. Baird. Please go ahead.

Good morning, gentlemen.

Robert.

I wanted to follow up on the statistic that you have on revenues from products and services introduced in the last three years, 18% in 2010 is your target. What would that be if we were talking about products only?

Can't give it to you top of my head. We look at it collectively. We try to get everybody in the game around innovation so I would probably tell you that it would be higher proportionally to product because of all the work we did in the Trane portfolio of last year and this year. We have also got a ton of it happening in the ITS business with all the compressor renewals and platforms and tools that they are doing. So my best guess it might be 80% product related.

Okay. So if that's the case, as we proceed into cyclical recovery, does that mean that that -- because the products will grow faster than service all else equal, then this number should also continue to grow as it did this past year from 15 to 18?

Interesting too, Robert, when we think about Visage, we put it on a golf cart the business before didn't have the recurring revenue stream, now we put something, a course management system on a car sell it to a Club and have a monthly lease fee associated with it, is it a service? Is it a product? I'm not sure. Okay, I'd have to go back and think about how some of that works. I think you tend to see more systems development than you will products or services where it's a complete system of Club so I would have to think about your question and probably next time I see you kind of give you a better answer to that.

Yes, maybe you'll need a third category. Well, do you think about this in -- this aggregate number as something that you have a target for at some point?

Absolutely. We are driving the (expletive) out of this, I'd like to see us get to 25% in three years. We have had that goal stated internally. This gets Nigel's question are you balancing productivity and growth. The answer is, it's high speed both ways, both gears trying to push as hard as we can in the way we measure and assess investment and also penetration and we follow a program launch even after its launched, we get the penetration we thought and we get the margin we thought we would get so there's a rigor inside the Company around this much like you would see through productivity.

Thank you. That's helpful. And then the other thing I wanted to ask about is, not to beat a dead horse and I realize we have covered a lot of the ground related to Trane commercial. But I wanted to try and distill it a different way. Bookings up 4% in climate solutions in the first quarter, total year forecast up 2 to 4. So we expect the comparisons at TCS to get worse as we proceed through the year offsetting stronger comps in the other businesses as we proceed or are we just saying that we don't have a lot of conviction that a positive bookings comparison can be sustained period?

A lot of questions or ways to answer that. Climate solutions was up 11% right in terms of bookings and largely we see the second quarter following a similar trend. In my view, you would see, the Trane organization probably picking up booking steam throughout the year as opposed to losing booking steam throughout the year. But there's some truth in what you said. I do think there are some challenging areas of the business and particular unitary, I come back to that and say I wouldn't really want to investigate those more than I have already until we see really the third quarter.

Which is another way of -- we have talked in the past about this idea of having a cushion in your forecast or I don't remember the term that has been used, but is in a sense that's what we are doing here, we are sort of intentionally undershooting what current fundamentals say it could be because we are concerned about the direction of unitary?

Trying to give you guidance with the range that's going to embed risk on one end and potential upside on the other but what we are attempting to do here and perhaps we need to get better at this is really steering you to the guidance that we have got for these businesses, so the guidance we are laying out there for Q2 would have the climate solutions business at midpoint growing about 4%. We would be looking for that 200 basis points margin expansion. That's how we see it. Really not trying to be too conservative or too optimistic. We are trying to be realistic here.

And you've been very transparent so thank you for that.

Thank you.

We'll take our next question from Scott Gaffner at Barclays Capital. Please go ahead.

Good morning gentlemen. Most of my questions have been answered but sort of wanted to hit on the R22 to 410A conversion. I know you guys didn't participate in the quarter on the conversion there because you probably rolled your lines sooner than everybody else but you think R22 is basically through the channel now and you start to grow back in line with the market or is there still some R22 to be sold out there?

Well, I heard there might be as many as 160,000 units that are in the channel, so I mean that's going to take a while to come through and I would imagine it will be bleeding out of the system through June at which June, July even through the season.

And what sort of traction do you think you're getting on the new 410A units you've got out there?

I think -- I mean, I think where we have targeted the refresh is where we have targeted the investment around specific share levels we have seen share pick up, we've seen good margin performance in the areas where the product is older and dated where we have got product launching this summer and fall, that's a little bit tougher and it's been a bit more competitive from a pricing perspective but all in all, it's behaving about the way you would expect with the exception of a lot more R22 being stuff than you would have originally thought.

Okay. And then at Hussmann, anything on the competitive dynamics there? I mean, are you continuing to make -- take market share or did it become a little bit more competitive in the first quarter?

No. We believe we continue to take some share. The uptick at Hussmann is really focused on some o the large national accounts that are going through significant remodeling activity in the businesses flowing through as we expected and not really any concerns there.

And then just one last question on the bookings. And on the sequential trend, line 9.7% and 13% in March. Is that basically across all the segments? Are there any segments where you saw anything that was abnormal versus that kind of trend?

Saw really good trends across all of the businesses but clearly a big difference between security technologies which would have had bookings in the quarter of 1 point versus industrial where you would have seen 20 points of bookings so good sequential pickup cost but varying widely between where they are in the cycle.

Sounds good.

I would just add that we believe that looking at the industrial orders, if we were -- if there was any upside in terms of our expectations it was there, so that was pretty good.

Well, see you in Davidson.

Thanks. I think we probably have time for one more question, Anthony.

And we will take that question from Marty Pollock at NWQ Investment Management. Go ahead.

Just wondered if we could link Q1 to Q2. You're certainly suggesting revenues up, I think it was $650 million to $700 million range and at the same time you also responded because -- margins questions about Q2. When you back into sort of that -- try to back into that second quarter guidance, what are you seeing as an incremental margin? Because essentially that's going to be a big driver continuously for the story. Just wondering what that number -- what that would suggest to get to your guidance of 62 to 72.

Yes.

Do we see that in incremental margin pickup overall?

Yes, Marty. If you look at that -- just the math, okay, at the operating income level, roughly $700 million of additional revenue, about a 32% leverage. Okay. So it's very much within our targeted leverage incremental leverage performance that we are looking for.

And that would be -- would you see that incremental leverage continue at sort of that 30% rate or do we see even further acceleration to third quarter? I think third quarter is also strong usually and fourth quarter maybe backs off a bit.

I would say the leverage in the third quarter will be stronger and Mike alluded to it earlier because that's usually when our service businesses are most active and you see good margins out of there so it's slightly stronger but not -- not outlandish so--.

Okay. Thanks so much.

Thanks.

Okay. Well, thanks everyone. We appreciate you joining the call. As was mentioned, I would just like to remind you that we have or investor and analyst day on May 12th we certainly hope you'll join us either in person or via webcast and we thank you for joining us today. Thanks very much.

This does conclude today's presentation, we thank everyone for their participation.