特靈科技 (TT) 2011 Q1 法說會逐字稿

Good day, everyone, and welcome to the Ingersoll-Rand first quarter 2011 earnings conference call. Today's call is being recorded. At this time I would like to turn the call over to Miss Janet Pfeffer, Vice President, Investor Relations and Business Development.

Thank you, Christie. Good morning, everyone. Welcome to Ingersoll-Rand first quarter 2011 conference call. We released earnings at 7 a.m. this morning and the release is posted on our web site. We'll be broadcasting in addition to this phone call through our web site at ingersollrand.com, where you will find the slide presentation that we will be using this morning. This call will be recorded and archived on our web site and will be available tomorrow morning.

Our release this morning included the announcement of our intention to divest the Hussman North American stationary refrigeration equipment business as well as the service, equipment and installation businesses in Mexico, Australia and New Zealand. Therefore the results of operations intended to be divested have been reclassified to discontinued operations for the first quarter 2011 and all prior periods presented. Earnings referred to in this call, unless specifically stated, will mean earnings from the continuing operations of the company.

If you would please go to slide two, I'd like to remind you that 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 and federal securities laws. Actual results may differ. Please see our S.E.C. filings for a description of some of the factors that may cause actual results to vary from anticipated. In addition, please refer to slide 18 which covers these as non-GAAP measures to describe the company's performance. Now I'd like to introduce the participants on this morning's call. We have Mike Lamach, Chairman, President and CEO; Steve Shawley, Senior Vice President and CFO; and Joe Fimbianti, Director of Investor Relations. With that, please go to slide number three, and I'll turn it over to Mike.

Thanks, Janet. 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 and delivered strong revenue growth, 13%. We expanded margins 240 basis points and more than doubled earnings per share. First quarter earnings from continuing operations were $0.35 per share, at the top of our first-quarter earnings guidance range. For the quarter, revenues were $3.1 billion, up 13% versus prior year, 12% excluding currency. During the quarter we continued to see strong bookings as most of our businesses are showing solid growth. For the company, orders were up 12% and 11%, excluding currency.

Order rates improved in each of our segments, except for commercial security, which was down slightly due to the timing of projects, orders in China. Our backlog also increased by 7%. Operating margin for the quarter was 7.4%, up 240 basis points, primarily driven by volume and productivity. In early April our board approved a 71% increase in our dividend and a $2 billion share repurchase program. These are both indications of our progress and strengthening our financial position, which has enabled us to move from a singular focus on debt reduction over the past three years to a more balanced capital allocation strategy.

Let's go to slide four. This morning we announced our intention to divest the Hussman stationary refrigeration equipment business, as well as the equipment, service and installation businesses in Mexico, Australia and New Zealand, which totaled about $800 million in revenue. During the past several months we have conducted a comprehensive study of the business and ultimately concluded that although the business has substantial margin potential, it was in the best interests of Hussman and of Ingersoll-Rand to look at strategic alternatives for Hussman. We implemented a rigorous and thorough review process which, in the end, came down to a prioritizing of our investments. We are in discussions with several parties and expect to close the sale in the third quarter.

We expect the reclassification of the business to discontinued operations to impact our previous guidance for full-year continuing earnings per share guidance negatively by $0.10 to $0.12. That amount includes the impact of actions we are planning to take once we close the transaction to offset and recover our stranded costs. I'll address this further when I cover full-year guidance in a few minutes. Understand that we won't know the exact numbers until a definitive agreement is signed and we close. What we're reflecting today is our best estimate as of now. Given that we are heavily engaged in the disposition process, we are not going to be able to comment or answer questions today regarding items such as expected proceeds, participants in the process or specific timing. Upon closing, proceeds will be used to accelerate our Share Repurchase Program.

Please go to slide five. This slide gives a summary of our quarterly order rates for the past five quarters. Orders for the first quarter 2011 were up 12% overall, 11% excluding currency. All sectors, except for commercial security, saw year-over-year gains. We had especially strong gains in industrial air and productivity, and transport refrigeration, and strong gains in HVAC equipment and services.

Please go to slide six. Here is a look at the revenue trends by segment. We think revenue, excluding currency shown at the bottom of the chart, give a better view of organic growth. And, as you can see on the bottom chart, the first quarter was up 12% excluding currency. We had improvements in all of our sectors, except security, which was down slightly due to the timing of projects in China. On a geographic basis, revenues improved by about 10% in the US and 20% in international markets. Equipment revenues were up 14%, worldwide parts and service were up by 10% compared with last year.

Please go to slide seven. This bridge analyzes the change in first-quarter segment operating margin, year-over-year. First quarter operating margins were 7.4%, an increase of 2.4 percentage points compared with 2010. Volume and mix on increased revenues added 110 basis points to our operating margins. Price, netted against direct material inflation, was a headwind of 60 basis points, as commodity inflation increased in the quarter, particularly related to metals, versus our forecast, price realization was slightly better, but was more than offset by higher inflation, mainly in metal-based components. Productivity netted against other inflation increased margins by 230 basis points. Investments and other charges were unfavorable to last year by 40 basis points. So, Steve will now take you through a review of our segments.

Thank you, Mike. Please go to slide number eight. The climate solutions segment not only includes the Trane commercial HVAC and Thermo King Transport refrigeration businesses, and the North American stationary refrigeration service businesses, which, if you remember, were integrated to the Trane branches post acquisition. Total revenues of $1.7 billion for the first quarter were up 17% and 15% excluding currency effects. I'll talk first about the Trane commercial HVAC business. Trane' s global commercial HVAC first-quarter revenues were up 14%, versus prior year, on a reported basis, and 12% excluding the effects of foreign exchange. HVAC revenues in North America increased 12%. Revenues were up 8% in Europe, and the Middle East, and Asia was up more than 30%. Global commercial equipment revenues increased 16%, with year-over-year improvements in all regions. Global parts, services and solutions revenue increased by 12%, continuing the momentum that we saw last year.

Shifting to orders, our global commercial HVAC orders were up 12% on a reported basis, and 10% excluding foreign exchange, driven by global equipment orders which were up 13%. For the global Thermo King transport business, revenues increased 25%, which is consistent with significantly improving markets compared to last year. Our worldwide refrigerated truck and trailer revenues grew almost 40%, with strength in all key regions. Global bus HVAC, APU and Marine container revenues increased substantially, due to improved end market activity. Thermo King orders increased by over 20% in the first quarter. The operating margin for climate solutions was 5.9% in the quarter, a 3.7 point margin improvement, versus first quarter 2010, driven by volume gains and productivity, partially offset by higher commodity costs.

Please go to slide number nine. Industrial Technologies first quarter revenues were $641 million, up 18% on a reported basis, and 17% excluding FX. Industrial markets continue to be strong after stabilizing in early 2010. Air and productivity revenues increased 22% versus last year, with increases in all geographic regions. Air and productivity orders were up 28%, with strong improvements in all regions. Club Car revenues were up slightly in the quarter as increases in golf equipment were partially offset by weaker activity in utility vehicles. Industrials operating margin of 13.3% was up 1.9 percentage points compared with last year, from higher revenues, pricing and productivity.

Please go to slide number 10. In the residential solutions sector which includes Trane and American Standard HVAC product lines, and the Schlage security business, first quarter revenues of $433 million were up 10% compared with last year. Excluding foreign exchange, revenues were up 9%. Bookings were up 2%, moderating from substantial increase in the fourth quarter, driven by expiring tax credits and impending price increases. Revenues for the residential security portion of the sector were up 2%, as slight declines in the new builder channel and in big box customer volumes were more than offset by increases in Latin America. The HVAC business, industry shipments of motor bearing units increased 8% versus prior year. Our residential HVAC sales were up 12% and we had a slight share increase in the quarter. Sector operating margins of 1.8% were down 2.6 percentage points compared with 2010, as volume and pricing were more than offset by increased spending, new product launches, mix and inflation.

Please go to slide number 11. Revenues for security technologies were $391 million, down about 1% on a reported basis and excluding currency. Americas revenues in the commercial sector were up 4% in spite of year-over-year declines in commercial construction markets. Revenues in our European security business were down slightly on both a reported basis and excluding currency. Asian revenues were down about 20% due to the timing of large projects. Overall, bookings were down about 2%, with increases in the Americas and Europe, offset by lower Asian bookings due the timing of those large projects. Operating margin for the quarter was 17.9%, up 1.4 percentage points, despite the sales decline. Strong productivity and price realization drove the improvement in margins.

Please go to slide number 12. Productivity in the quarter was in line with the forecast. We continue to advance our Operational Excellence initiative, and have 18 rapid improvement events, or RIEs, in the quarter. Each RIE involves four weeks of planning effort. The four-and-a-half day event, involving shop floor changes and four weeks of process sustainment. The RIEs are focused on making meaningful improvements in processes and activities within one of our 19 selected value streams. Two of the locations with events in the quarter were Wujiang, China, and Faenza, Italy.Wujiang, which is a facility shared by the industrial and climate sectors, RIEs in several areas of the facility have reduced assembly line inventory by 60% to 90%, reduced processing time by 30% to 50%, and increased machine sell throughput by 15%. The Faenza team conducted their first RIE on the armored lock value stream. The event yielded a 27% increase in capacity, 75% reduction in overtime and $50,000 of productivity. The results were obtained through the implementation of standardized work and the elimination of non value-add activities, resulting in a 75% reduction in setup time, improved ergonomics, and a 50% reduction in walking time.

In Climate, we have set a goal to reduce annual Copper use by 10 million pounds. There are over 180 projects in the pipeline which have identified 18 million pounds of potential opportunity. Events such as these, together with expanded programs to address areas such as strategic sourcing, value analysis, value engineering and capacity utilization continue to fill our pipeline in productivity projects.

Please go to slide number 13. We continue to develop and launch new products and services. About 17% of our 2010 revenue was generated by new products and services introduced in the last three years, with a number of new offerings in each of our businesses. Our target for 2011 is 19% of revenues. Pictured are four of the new products we launched in the first quarter. Just to highlight two of them, the V-520RT and the V-520RT Max, from Thermo King, are new roof line cooling solution for light commercial vans featuring a low-profile condenser that measures less than 7.5 inches above the roof and offers 50% greater capacity than similar units that are currently available. The air impact tool was designed and will be manufactured in China, to target the rapidly growing Chinese vehicle services market. It combines the legendary Ingersoll-Rand performance and costs 18% less than similar products in that market.

Please go to slide number 14. We finished the first quarter with working capital at 4.9% of revenues, up from last year due to additional working capital required to support higher volumes. We expect to maintain working capital for sales in the 3% to 4% range on a four-year basis. And, with that, I will turn it back to Mike to take you through the forecast.

Thank you, Steve. Please go to slide 15. Our updated forecast for 2011 is based on steady improvement in most of our markets. We continue to expect a recovery in the US and a slower recovery in European economies, growth in Asia, and mixed activity levels in our major vertical end markets. We believe that activity levels indicate continued recovery in transport refrigeration, industrial commercial HVAC parts, contracting and service, as well as signs of improvement in commercial HVAC equipment, and residential HVAC equipment, both driven by replacement volume. We expect to see a continuation of challenging conditions in the US non-residential new construction market for most of the year, which will continue to primarily impact the commercial security and HVAC businesses.

The announced intent to divest the described Hussman business removes about $800 million from our continuing revenues. Taking that into account, as well as reflecting favorable exchange rates and improved order rates for principally both industrial and climate, we're updating our revenue range for full year 2011 to $14.6 billion to $14.8 billion, up 10% to 11% compared with restated 2011 revenues of $13.3 million. Climate Solutions revenues are expected to be up 10% to 12% with high single digit increases in HVAC equipment in contracting, parts and service, and mid-teens gains in transport refrigeration. We expect industrial to show gains of 12% to 14%.Residential is expected to be up 6% to 8% with HVAC up mid to high single digits while residential security will be up low to mid single digits due to continued stocking controls in big box retailers and a slow housing recovery. Commercial security is expected to show mid single digit year-over-year improvements, due to its exposure to non residential building, especially in North America.

Let's go to slide 16. Let me take you through the changes for the full year earnings forecast since our February guidance. Depending on the exact timing and terms of the Hussman divestiture, removing that business from our continuing operations will have a negative impact of $0.10 to $0.12 per share, for the year, versus prior guidance. The largest negative impact for the balance of the year will be in the second quarter, about $0.06, as we will still be running the business and therefore we won't be able to mitigate stranded costs through restructuring or other actions until we complete the sale. We're raising our revenue range about $350 million at the midpoint, and earnings from the increased volume are essentially offsetting the gap from Hussman.

Note that about two thirds of the revenue increase is driven by movement in foreign exchange rates, which carries lower than normal earnings leverage. We are maintaining our operation margin out look for the full year at about 11%, up 200 basis points from 2010. We are reflecting a higher average share count at 350 million, before any buybacks. That's versus the prior 345 million, based on where we are through the first quarter, and a slightly lower tax rate of 23%. BPS impacts of these items about offset each other. So to summarize the moving pieces from our prior full year guidance, we're adding about $0.10 per share to guidance from additional volume, but that is being fully offset by $0.10 to $0.12 per share of net dilution from divestiture of Hussman. And, that brings us back to a full year EPS range of $2.90 to $3.10 per share. Once we have a definitive agreement on Hussman, we'll be able to more precisely estimate the impact on continuing operations, but based on the estimates we're making today, we essentially will be able to offset the earnings gap through the increased volume. We expect to generate available cash flow of $1.1 billion, which would of course exclude any proceeds from Hussman. This guidance does not reflect any share repurchase at this point, which we expect to ramp up in the second half of the year.

Please go to slide 17. So, in summary, we're forecasting 2011 revenues up 10% to 11%, maintaining our EPS range of $2.90 to $3.10. Second quarter revenues are forecast to be $3.85 billion to $3.95 billion, up 10% to 13% as the economy continues to recover and we enter the peak season in the HVAC markets. Reported EPS from continuing operations for the second quarter are projected to be approximately $0.85 to $0.95. Operating income in the second quarter will be adversely impacted by stranded costs from the impending divestiture of Hussman, as I explained earlier. Therefore, leverage in the second quarter will be similar to the first quarter at about 25%, and will recover to more normal levels in the back half of the year.

To sum up, we expect 2011 to demonstrate our continued and unrelenting focus on driving toward premier performance across each of our businesses while steadily increasing delivery of customer-focused innovation. We've made significant progress in improving the balance, sheet, which enabled us to substantially increase the dividend and authorize a significant Share Repurchase Program. Our announced intent to divest Hussman represents a major step to realign our product portfolio as we accelerate operational excellence initiatives in our core businesses. We expect to see continued revenue growth and significant earnings growth as we deliver on these objectives. And now, Steve and I will be happy to take your questions.

(Operator Instructions) We'll go first to Julian Mitchell from Credit Suisse. Your line is open.

Thanks. I wondered if you could give some clarity on the gross productivity? I think you gave the net number in the EBITD bridge, but you said, I think, it's in line with your expectations. Does that mean you're hitting the 5% fully at target already, or --

Julian, we're having a difficult time hearing you.

Okay, sorry, can you hear me now?

Julian, I think your question was to tell you how we're doing on gross productivity relative to 5% expectation?

Yes, exactly.

If you look at the chart that we provided in the presentation, which we now take a look at the waterfall of what impacted our margin growth, and first thing is that we did 240 basis points, and we said as long as we're within a range that's increasing revenue --I'm sorry, operating margin, by over 200 basis points, we're hitting our targets. So, if you look at that waterfall, we're on our target as we expected.

Right, but on the -- just to get there, I mean how-- so the gross productivity is -- you are hitting around 5%, are you already?

If you look at the total year guidance we gave last quarter, which took total gross productivity netted against other productivity, non-material productivity, we're right there. If you look at the amount of improvement driven by the net of productivity and other inflation, we're right on our plan.

Okay, great. And then on price, net of material inflation, you had quite a good narrowing of that negative from Q4 to Q1. Do you think that trend line continues through the year, or it stays where you are in Q1 for another couple of quarters? Or, do you think, drawing the trend from Q4-Q1, you can kind of extrapolate out to the second half?

Yes, good question. Actually, both pieces are moving We did better on price in the quarter than we expected, even with the guidance we gave a few months ago, because the prices are sticking, but we saw more inflation. In Mike's commentary, we expected to see the commodity inflation with copper and aluminum, etc., but steel is starting to stick its head up and it's also starting to create tier two type pressure on components pricing that we use to assemble into our products.

So, net-net, we're right about where we thought we would be in the first quarter. We're still upside down, price versus inflation, but we're not upside down any further than we thought going into the quarter. And we kind of maintained that gap, and if you remember the guidance we gave for the year, that we would be upside down about 30 basis points, so if you look at both numbers, because price is sticking, we're getting better price than we expected but we are also seeing more inflation. So, net-net by the end of the year, we're still upside down by that 30 basis points, but both price has improved and inflation has increased.

Thanks. And finally, just quickly, on security. I mean, you had weak revenues, orders don't look great, but you're guiding for an improvement in the second half. What's driving that assumption of an improvement?

Yes, if you look at the macro economic market information that we use, it's really to dodge put-in-place information, new construction, indices, etc., and what you'll see is that those things actually returned, almost parodied, zero growth in the first quarter of this year, but our security business lags those market indicators by almost a year, so what we're expecting to see-- And, also, if you remember last year, we outperformed those indices because of our aftermarket position and capability. So, what we're expecting for the rest of the year is, as we get toward the second half, just by tracking the lag associated with the comparables on the put-in-place new construction, plus our aftermarket strength, we expect to see a little pickup in the second half, and the market is actually determined early 2012.

Julian, I'd add that last year, in Q1, we were-- in Q2, for that matter-- we were really in the heavy throes of executing the Shanghai Expo security work, and of course that didn't repeat, and interestingly, there's a number of very large projects, rail related projects, that we're involved with now, as far as the security work goes there, and I would anticipate closing those in Q2-Q3, so a lot of what you're going to see is Asia coming back on with growth. But, that creates a little bit of a comp issue for us as well.

Great, thanks.

Thank you.

And our next question comes from Jim Lucas from Janney Capital Markets. Your line is open.

Hi, this is Mike Worley standing in for Jim. Good morning.

Hello, Mike.

I just wanted to follow up a little bit on the security. You said there was a timing issue of an Asian order. Was that the rail order you just mentioned?

Yes. It's more than one, Mike, but that would be a very large order and so, yes, there is a couple of infrastructure orders in China around airports and rail that would be meaningful contributors in Q2-Q3.

Do you see any broader impact of the government trying to slow things down there?

Not to this point. You know, it's subtle. The last, I guess the twelfth fifth-year plan puts agriculture at the top of the list, and frankly, from that point of view, it's favorable for things like our Thermo King business, which has got enormous upside to get that moving in China, as an example. So I think we may see a shift from some of the infrastructure projects and security, but I think it's also favorable in terms of what you're seeing with the focus that will be put on , as an example, agricultural yields and food transport.

Okay, thanks a lot. Then, the other question I had is, so the part of Hussman that you're not putting up for sale is the service part that was integrated into Trane, is that correct?

Correct.

And, was that about, I'm estimating about $400 million last year?

Yes, we don't break that out, Mike, but the point, I guess, is that it's so integrated that it doesn't make sense to pull it out and we can certainly provide service and transition services to a buyer.

Okay. But, was that ever discussed as something that might be sold as well, either with potential buyers, or that was off the table since it was so integrated?

Yes, at this point, Mike, I'm not going to get into the details of the strategy around that. I'll certainly be clear about that at the close.

Okay. Thanks a lot.

Thank you.

And our next question comes from Josh Pokrzywinski, from MKM Partners. Your line is open.

Hello, good morning, guys.

Hello Josh.

Just looking for an update on the contingency number that you put out there last quarter. And, then I guess as a follow up to that, against the backdrop of Q2 guidance, how should we think about that pre- and post-Hussman discontinued ops? What would that be, and what would that have been with Hussman?

Well, first of all on the contingency, we didn't have much contingency in the first quarter guidance. I'll just simply say that we still have contingency left in our year, okay? As regards the second quarter, the second quarter has the biggest impact of the disposition because we're carrying all the support costs that will be stranded in our continuing ops line, and what we're transferring into discontinued ops is the pure Hussman EBITD type of a number. And, that would have probably about a $0.06 impact on the quarter, in other words, we rolled this thing up due to the seasonality of the Hussman business. There's about a $0;06 dilution in our second quarter because of that.

Josh, I think maybe to answer your question, had we not taken Hussman to disc-ops, we would have been raising guidance by $0.12.

Got you. I just wanted to see how that shook out in the second quarter.(multiple speakers)

I appreciate the question because it gives us a chance to provide some clarity for any confusion, but clearly for the full year, had we continued, we would be raising guidance $0.10-$0.12 on that.

For the year that is. In the second quarter, Josh, it would have been $0.05-$0.06, okay?

Got you. Should we think of the bulk of what's left being in the fourth quarter, since seasonally that's one of the stronger quarters for Hussman?

Yes, it's kind of interesting. It's actually -- last year or so it's been in the third quarter, but we hope to have the restructuring in place and all the actions that we have to take to mitigate the stranded costs, largely under way by the third quarter.

Got you. All right, thanks very much guys.

And our next question comes from Eli Lustgarten from Longbow Securities. Your line is open.

Thank you. Good morning. Can I just get a couple of clarifications? In your guidance, you did --you touched on foreign currency impact. Can you go over what -- currencies aren't positive for most people. What is in the guidance at this point, for foreign currency?

Yes, again, the Euro is the big player for us. I need to turn away from the phone for a second here. You look at the Scot rate of Euro, mid-April is about 144.

To 145 today, but that's right.

Yes, and versus our 2010, that's off about 8.7%. So that has a big impact on our climate businesses, our industrial businesses, mainly.

I guess my question is; how much of that, if you were to [waive] guidance for the $0.10 to $0.12 impact, how much is coming from currency?

Well the currency is a pretty low leverage--

Yes, I know that.

It leverages about 10%, maybe slightly less. One other thing that's happened to us on currency is the yen has gone the other way. And yen is a counter quote currency for us, in other words we buy a lot of engines and Japanese product in yen, but that goes the other way, which kind of nets out to a pretty low leverage on that additional revenue.

Yes, but it's still saying that there would be a good third or something like that from the $0.10 to $0.12 improvement would have come from currency or some number like that, that's what I'm trying to drive at. And the other follow up question is, the tax rate has gone from 24% to 23%, that's abut $0.04 or something I guess. What's causing it to drop, and what's the implication for next year's tax rate, because that's something I feel a little concerned about?

It's actually kind of a technical change, because-- And, also I remind you the share count is up to 350 million from 345 million, so the tax and share count about offset each other.

Yes, I realize that.

The technical aspect of the tax thing is, the income we're losing with Hussman is all US income, and I think we talked about this before, about the fact that as we increase or decrease US income, we get a much bigger incremental effective tax rate. So, when you take Hussman out of the mix, and look at what's left in continuing ops, what's left is less US income, so that causes a drop in the tax rate.

Okay, so for that, so the tax rate for next year, do you have any sense where the tax rate would go? I mean, just getting a sense for what the increase looks like.

Yes, the guidance we've given repeatedly at various meetings, looking at long-range projections after 2013, we're guiding about mid 20s.

And nothing changes with this divestiture, correct?

It's really kind of splitting pretty fine hairs at that point in time, Eli.

Yes, I think the mid-20s guidance long term, Eli, is good for what you're doing, and then we're just going to have to tune that each year, based on how we see the year shaping up and where income is going to be earned.

Okay. And, can you talk a little bit about what's going on in industrial technologies, the strength of the marketplace, and growth. It looks like [actually you] could gain some momentum for the rest of this year, both in volume and profitability.

They continue to do a good job there, I think they're really approaching, at least in the air and productivity side, record margins there, where volumes are still not back to where they were. So, we're getting what we wanted to get. It's the first real indication we get of major restructuring that was done and major product launches and how those play out in a rising environment, and so the leverage there has been good. If you look at the guidance that we're giving long term around that business, 16% to 18%, very pleased with what we're seeing here in terms of the incrementals on that business. So, will the strength continue at that level? Obviously it's part of a cycle in recovery here, but from what I've seen to this point in time, we're feeling good through the guidance that we've given -- or the framework through 2013 about achieving long term margin rates of 16% to 18% in this business.

Okay, thank you very much.

Thank you.

And our next question comes from Jeffrey Hammond with KeyBanc Capital Markets. Your line is open.

Hello, good morning.

Hello Jeff.

Hello Jeff.

I just wanted to dive a little bit into the res HVAC margin, which you laid out a number of things, and just how might we see those issues play out going forward, and maybe more broadly, it sounds like the overall margins are the same in your guidance or a little bit better. I guess Hussman coming out maybe helps, but how are you thinking, maybe-- any changes, business by business, and in terms of how you are thinking about full year margins?

Let me take the res HVAC topic, and I'll let Steve do the second. But the res HVAC, in 2009 and 2010 was one of the major beneficiaries of a lot of the capital we put in around product, refreshed product improvement. And what you're seeing late last year and right now in this business is a lot of new product actually hitting our plants, hitting the consumer at this point in time, being received very, very well, so we've had about a 30 basis point market share gain for total motor bearing units, but when you break that out, it's about a 110 point gain in air handlers, which is exactly that product that you guys saw when you were down here visiting us, called the Hyperion. Now, what's happening is that product family is being launched. You're really building lots of mixed models going through the plant, old and new, coming through the same plant. I think that our expectation is you're going to see gradual recovery of margins in that business, and I think that margins will actually improve, year over year, by the end of the year, but we're going to go through this period of transitioning these plants and product portfolios, likely through late summer, in that business.

I think, Jeff, to answer the second part of the question, in terms of expectations of the margins in the rest of the portfolio, if you look at our current guidance for the year at midpoint, we're up a little bit from what we thought for the year in terms of margin performance. I think that's driven by the fact that we're seeing a better mix coming from more Thermo King truck-trailer volume than we had thought earlier in the year. We're looking at -- quite frankly, the biggest issue is we're sighing a big breath of relief about the realization of price. That's looking more solid. Even though we didn't increase the delta price cost, or reduce it, the fact that we're feeling much better about it gives us more confidence in the base plan. And, also, if you look at what Mike said, residential coming back to a more normal volume -- I'm sorry, more normal level of operating margins by the end of the year, and a little bit of help from security late in the year, all that makes us pretty confident that the margins we have in the midpoint are pretty solid.

Okay, and then just a quick follow-on on res. You had good growth in the quarter, orders kind of slowed. How would you characterize your view of sell in versus sell through, and how you're thinking about underlying demand as we moved into the selling season?

Yes, clearly if you look at it from the point of view of our independents, depending on whether it was the Trane or the American Standard brand, we would have had 17% or 19% growth through the independent wholesale distribution channel. As you look at the sell-through, which is our view from the company-owned distribution aspect, you're seeing something in the low single digits there. So, this is going to normalize, I think, toward -- as it always does between those two channels because of the lagging effect. And, again, I look for that mid to high single digit res number to really follow through for the year. If you remember last year, we had very similar dynamics. First quarter was very heavy with folks who sell onto the distribution channel.

Restocking

And it leveled out before the end of the year, and if you really look at the industry projections, we're still saying that the overall motor bearing unit market is only going to be up mid-ish single digits for the year.

Industry restocking levels probably have crawled back up into the high single digit week area. I think there is more of a new normal here, which is not what it used to be in terms of the weeks distribution would carry in terms of inventory. So, I'm not looking for major swings in demand coming from stocking programs. I think that what we're focusing on is really paying attention to the sell-through we're seeing, and that's how we're looking at our demand plans.

Great. Thanks, guys.

Thank you.

And our next question comes from Mark Koznarek from Cleveland Research. Your line is open.

Hello, good morning.

Hello Mark.

Could you guys review the margin outlook by segment?

Yes, full year probably would be the way I'd be comfortable doing that for you, Mark. Let me give you plus or minus 50 basis point type range. I think from a climate perspective, you'd be looking at something from the 9.5 on the low to the 10.5 on the high. Industrial is probably going to be something closer to 14 on the low and could go 14.5 plus on the high. Residential I think it's going to go probably 10 on the low, which is a point better than last year, maybe 50 basis points higher than that if we can move through the plant conversions effectively, very effectively. Security is going to grow margins again this year. I would tell you that here you're probably looking at something between probably 20.5 and 21.5.

Okay, great. And, then could you just touch briefly on what the current debt to cap is? You don't provide the full balance sheet. So, what is that at the end of the quarter, and what's the target range for the Company?

We'll call you back on that, Mark, okay?

Okay. That's it for me, thanks.

Thank you, Mark.

And our next question comes from Andy Casey from Wells Fargo Securities. Your line is open.

Thanks. Good morning everyone.

Hello Andy.

Hello Andy.

Just a question on industrially. You kind of touched on it, and I was hoping for a little bit more clarity. You've raised the revenue guidance approximately three points from the last time. Could you break out the change by currency and volume price?

Yes. Full year, I don't have it broken out that way Andy, so I'm probably going to have to get back with you on that as well.

Okay. Then--

Rather than I could give you a round number but I think that's just going to beat the trouble, okay, so let's get back with facts on that for you.

Sure. Then, in anticipation of that, you shifted the mix within the overall guidance from replacement growth to higher industrial activity from the previous guidance. Is that because the industrial activity started out faster than you expected, or are you expecting it just sustains at these levels?

Yes, Andy, we might have confused this but we're actually seeing great replacement businesses happening in both the HVAC and industrial, in terms of how that's working, and so I think the strength we're seeing here is certainly in the replacement market across both climate solutions and industrial technologies. And what we haven't seen come back in, is, of course, any kind of real new construction activity which would affect both climate solutions and security technologies.

Okay, I'll follow up with you guys later on that. And, then a shot at this new continuing operations portfolio. Would that have had a higher productivity performance in 2010? And I think what you reported was something like 4.6.

Yes, Andy. If you go back and you retrace the steps here, we were not making some of the larger productivity investments in the Hussmann business which led to some of the disconnects that we were having about not being able to discuss productivity in those quarters at the same level they had done until we had gone through this process. And so, early on, as we would have started this thought process, this framework two and a half years ago, we would have had certain cadence around phase II of that restructuring, including much more investment in the Hussman business. Didn't do that. As a result of going through the process that we were going through, and ultimately, clearly we would move on to utilizing those investments in what would be the core businesses going forward.

Okay. So, implied, it should be higher than the 4.6?

There is a lagging here, of course, which is what I'm say something that the investments that we had planned in that business, didn't happen. You saw that in Q3, Q4, the last year.

Right.

And are you seeing more of a refocus back on the course, so I wouldn't say it would be higher or lower, it's just that it's going to move towards the core businesses going forward.

Okay. Thank you very much.

And our next question comes from Robert McCarthy from Robert W. Baird. Your line is open.

Good morning, everybody. I wonder if I could come at Andy's question a little bit differently. I thought I had heard you earlier, Steve, say that something like two thirds of the increase in the revenue forecasts was due to currency. And I'm speculating that with improved expectations for price realization, there isn't really a lot of volume increase in your revised outlook. And, my further sense is that first quarter was a little better than what you were looking for, as seen in the delivery versus guidance. So, have you really changed your outlook for the balance of the year? And if you haven't responded to what appears to be favorable indicators, is that some measure of a hedge against potential issues surrounding Japan, and is that something that you can help put a -- some kind of a bread box around for us?

Well, again, as I said earlier, we still have contingency in the forecast, the guidance for the reminder of the year. And if you take a look at -- we're just more confident that the things that we see as increments to our original guidance will follow through at this point in time. So, that is kind of what you are getting. As far as Japan goes, maybe Mike can address how we see the Japan thing.

Well, you know from a business perspective, fortunate not much involvement there. We have daily calls relative to the supply chain and daily updates on that. But, had had no issues to date, don't foresee any issues to date, because we're really only affected by a few areas here and we have ample demand here. And so it would be in small diesel engines and we're in good shape there. It's on a few controller boards and we've found alternative sources there. I don't see any impact there at all. Long run, it is an opportunity as we get involved hopefully in the rebuilding of what is going on there, but no impact whatsoever in terms of the quarter or the outlook on what's happening in Japan. It is a very small business for us today. We only, in the market, have 150 in the market, so just to give you a sense for it.

No, that's very helpful. The other thing that I would like to do is to just clarify or recast something to make sure that I'm understanding it correctly. Your full-year guidance is unchanged, but would have gone up without the fact that you are taking Hussmann out, and that creates a $0.10 to $0.12 discontinued ops drag and you've -- I believe have indicated that you would seek to offset the impact versus -- on full-year basis, with share repurchases. Yet you didn't -- you are not going to speculate on a new share count number in the table of the various outlooks, the guidance that you provided?

Hey Rob--

Am I reading all of that correctly?

I don't think so. I think we need to recommunicate here.

Okay.

Everything we've given you is sans share buyback, okay?

Okay.

So, we're allowing $0.10 to $0.12 of improved earnings to fall through from the operations, all right? We talked about, yes, some of it's from foreign exchange, some of it's from price, some it's from maybe a little bit of volume, mix, impact of a richer mix is also helping that. That is the 10% to 12% -- or $0.10 to $0.12, I'm sorry, that we are using to offset the dilution of Hussmann in this guidance. We need to be very, very clear about this. This is very, very important. We chose not to guesstimate what the impact of any share buyback is, even though we're committed to starting the program in the second half of the year, as we said. Because, we just don't know what the timing of the closure of the Hussmann disposition is going to be, that will be a big factor in terms of how much cash that we have to put into the program and the timing of which we can employ that cash. And the timing is probably a bigger deal at this point in time because the later in the year we go, obviously, the less impact it's going to have on our total year earnings.

Sure.

So, that's why we chose to not say anything about that, because we would rather come back at you in the, as when we talk about the second quarter performance and give you a more definitive number there, than try to guesstimate something at this point.

Rob, also too, on currency, we're taking a relatively conservative outlook on the Euro, I think we're looking at maybe 141 outlook from here forward and a spot here today of 145 and so what actually is built into our plans is more volume, it is just not FX carrying it. Yes, it is one-third, two-thirds, but the FX piece of this is kind of predicated on a 141 Euro going forward, so just to give you some sensitivity around how we're thinking about the Euro.

A little bit different mix in the plan, and thanks for clarification, Steve. I think it was very--

I'm glad that you asked the question, because one of the things that we asked about this morning, is one thing that we have to communicate in this call is just that, okay? We want to make sure that everybody got it.

Okay. Thank you.

And our next question comes from Deane Dray from Citi. Your line is open.

Thank you. Good morning, everyone.

Hello Deane.

I joined a little bit late. I don't know if you covered this specific around price costs, I know, Steve you touched on it in Q and A. But the last update we had was pricing expectation increase of 2% to 6% and it sounds like the realization initially was 1.5 percentage points, but that you think is higher. Where does that stand today?

Yes, Deane, I'm going to give you a quick answer because I think we covered some of this on the call, but basically we would be increasing the price realization piece at the margin line, maybe 30 basis points, at the revenue line maybe 50 basis points, completely offset by an increase of the same magnitude in inflation so we're keeping a 30 basis point gap. And you are right, what we're seeing is higher realization on a spread of price increases out in the marketplace, you are getting out toward high realization within that umbrella of opportunity and that price spread.

Okay. That's helpful. And, then on the full-year forecast, the updated forecasts for 2011, the operating margin, that 50 basis points on the high end, is that all attributable to the taking the Hussmann equipment business out?

No. It's about a push, Dean. It's just, do the things that we said. And we have a little better mix, if you look at how the portfolio now looks versus what it did three months ago, the --

And you've got the volume impact as well, Deane, coming in. There is a piece of volume in this forecast, again, it's not just FX, it's a meaningful volume increase based on what we've got baked in and so you're getting a little bit more leverage on our fixed costs.

And, then if we were to take a guess at what the operating margins in the businesses that are being divested, obviously equipment less or lower than services, would it be sort of mid-single digits as a fair number run rate of the revenues that you're divesting?

Deane, we said at the beginning of the call, and if you weren't there it's unfortunate, because of the fact that we're heavily engaged in the process, we mentioned that we're not going to answer any specific questions about Hussmann.

Okay. Are there other divestitures being considered? I know that I asked this last quarter. Is this still an ongoing portfolio reshaping, or you think this is done?

Well, you look at the portfolio, Deane, and I think that a lot of the real heavy lifting has been done, so I would always say that we're always going to take a review of our portfolio, and understand what makes sense going forward, but I think this was one that has been on your and everyone's radar screens for some time, so there's nothing else that we've got at this point in time teed up that I think is certainly of this magnitude at all.

Great. That's helpful. Thank you.

Thank you.

And our next question comes from Andrew Obin from Bank of America Merrill Lynch.

Yes, good morning.

Hello, Andrew.

Can you hear me?

Yes we can.

I just want to clarify something. As I look at slide 18 of the fourth quarter presentation, we have productivity of 2.9% and 1 point, 2 points of contingency, and as of Q1 we are at 2.3 percentage points of productivity. Does this mean that we should see a meaningful ramp-up in productivity throughout the year?

I for one, Andrew, am not tracking your numbers here completely, so you are going to our guidance bridge?

Yes, I'm going -- I'm looking at slide 18 of the fourth quarter presentation, where productivity target for the year, where you are giving the productivity target of two point--

Andrew, I got it. I think what you are doing though is you're giving off the fly you are netting inflation against this. You are looking at productivity netted against other inflation, and you are looking to see if that spread actually increases, correct?

I'm just -- I'm sorry, maybe this is a very naive way of saying, but there was a productivity number in the bridge of 2.9% --

Yes, Andrew, that was netted against other inflation assumptions that we had for the total year.

Okay. And 2.3%, is that netted?

Yes. And, Andrew, first half, second half, I would see total productivity increasing slightly, and I would also see other inflation, probably flat to moderating and so yes, we would expect to see more margin expansion, greater leverage in the second half of the year. So whereas the first half of the year has been, let's call it the 25% range, 26% range in terms of leverage, we would expect the back half of the year, particularly the fourth quarter, to look more like the leverage that we're intending. So, yes, you are going to get that from the spread between productivity and other inflation increasing. Price -- as we said, price to direct material, that spread is going to be maintained.

And Andrew, the phenomenon that has been this way for a long time in our Company, is that--you look at the volumes that we get in the second and the third quarter, those are the highest of the year. If you look at the guidance that we've given for Q2 versus our revenue in Q1, you will see a fairly substantial increase in revenue, and, volume is somewhat -- I'm sorry, productivity is somewhat volume-related, particularly when you look at material productivity, so the more material that you use, the higher your productivity numbers are, and that sort of pins it together.

So we should see continuing improvements in that throughout the year.

The back half are better than the first half in terms of operating leverage. I think that's the essence of your question.

Yes.

You're correct around productivity being offset, with other inflation widening, yes, and price would be the spread maintained at about 30 basis points for the full year.

And just to follow up on -- what were write-downs on Hussmann related to? Could you give us several big buckets?

I'm going to probably put that into the bucket of not going through any detail here on that, Andrew and, again, I promise we'll be very transparent on that as we need to be, when the transaction is complete.

Sure. But does it -- am I correct in saying that write-downs imply that Hussmann is not performing in line with your expectations?

Well, I mean we're selling the business, Andrew, because we want to focus on businesses that we think are closer to our core, and that get us to our long range targets that we've set around $5 to $5.75 a share, 50% operating margin, so if we felt that the investment required to that was greater than what we were prepared to do relative to other investments, which is the case that we've got, then we decided to exit the business.

Terrific, thank you very much.

We have time for one more, Christie, one more question.

Okay. Our last question comes from Steven Winoker from Sanford Bernstein. Your line is open.

Thank you for taking the call and good morning. I, like Deane, was on another call, so I'm joining late. Apologies if I'm asking something you've already answered. But, first, can you actually give us a number on gross productivity for the quarter, did do you that already?

It's a great quarter to transition this to the fact that we want to focus this on two points of operating margin which has always been our goal. I can say that because we exactly hit the number that we were supposed to hit from a gross productivity perspective. I'm not taking a weak quarter here. But, I think that when you look at the mix between restructuring and investments, and how we intend to get our 2 points of margin expansion, clearly it's changing from a heavy emphasis on restructuring in the last year, year-and-a-half around the plant, [re-footprinting] work we've done, to a move toward, I would say, smarter investments going forward, and more surgical decisions around where we place plants and lines. So, again, I do not want to go through a quarter by quarter, blow by blow, and plus or minus 5%. I want to go through a full-year view of are you guys going to get your two points or not get your two points? That is how I want to try to transition this view from our point of view.

All right, Mike, so you are going to give us the gross productivity numbers annually, not quarterly, that is the bottom line, right?

We are going to give you an operating margin improvement goal and target annually, and that is what we're going to work toward.

You are saying that you may not give us the gross productivity number annually?

We gave you that waterfall bridge that Andrew was talking about earlier.

But that is not gross productivity, that is net inflation. The reason I ask, I understand trying to move the street off of a number that you put out there some time ago, but it does reflect real activity and value add in a lot of people's view of the business, so I just am trying to understand how we should think about that longer term.

What we're suggesting you should think about longer term is actual margin expansion.

All right, let me move on then. On Hussmann, without any specificity as you mentioned, but just strategically and maybe you hit this already, we finally have a consolidated industry, the 2.5 players now between you guys, Hill Phoenix and Kaiser going over to Lennox, the first chance that you might actually be able to hold on to some of that margin, I mean, was the investment to a different business model of, very basically, fewer plants, more modular, putting you in a position where that was the trade-off? Or was it still that you did not feel like the industry had become significantly more favorable?

Yes. Simply put, as you look at the opportunities we have in the company to drive margin expansion, and to focus management resources and attention, it leans toward the other side in the balance of the portfolio. And anything that we would do that would take, I would say, an inordinate proportion of time away from what that mission and goal is, we weren't prepared to do. So it's refocusing even tighter on what we now think to be the core business around HVAC, around both transport and our HVAC commercial business. And our other businesses in the portfolio, which I will not get into detail here, but clearly I have made the comment already that I do not see any portfolio change of the magnitude we're doing here with Hussmann.

And you mentioned last quarter that Syop was something that you thought might be a continued problem or issue into the first quarter doesn't-- I'm not seeing that as much. Did your side issues that you had in the fourth quarter ease going into this quarter?

Yes. In the fourth quarter I said that we had eased those issues because we solved problem in the fourth quarter and it did turn out that we did not have a problem in the first quarter at all. So yes.

Okay.

Yes.

And last -- sorry, but to sneak one more in-- the whole R22 issue and shipping it dry, I continue to hear it from your competitors, that that's happening in the marketplace, that you guys I think have still held firm to not doing that, and if that is true you are not experiencing any share loss on the ground there?

Well, listen, if you go to the number here again, we've got a 30 basis point improvement in share again, we've got 110 basis point improvement in the quarter on the product we're launching, which is 410A, and the reality is that we believe that as you're transitioning from the old product to the new, last thing that you want to do is to propagate this mixed model running through a plant in terms of the efficiency you gain in that plant. So, our focus is on converting the industry to its intention, which was the 410A fluid, so--

Yes. No, that's great, I think it is a great integrity decision, a high integrity decision, I was just wondering if you are seeing share loss, you are saying you are not.

No. It turns out we're getting share gain, it's a 30 basis point gain and specific to the product we're launching. It is 110 basis points of gain in the quarter.

Thank you.

Thank you.

Thank you, everyone. Joe and I will be around if you have follow-up questions. Have a good day.

That concludes the call for today. Thank you for your participation.