特靈科技 (TT) 2011 Q2 法說會逐字稿

Good day, everyone, and welcome to the Ingersoll Rand second quarter 2011 earnings conference. Today's conference is being recorded. At this time, I would like to turn the call over to Ms. Janet Pfeffer, Vice President, Business Development and Investor Relations. Please go ahead, ma'am.

Thank you, Christie. Good morning. We released earnings at 7.00 this morning, and the release is posted on our website. We'll be broadcasting in addition to this phone call through our website 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 website and will be available tomorrow morning.

If you would please go to slide two. I would 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 of the federal securities laws. 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 18, which covers the use of non-GAAP measures to describe the Company's performance. Now, I would like to introduce the participants on this mornings call. We have Mike Lamach, Chairman, President and CEO; Steve Shawley, Senior Vice President and CFO; and Joe Fimbiani, Director of Investor Relations. With that, please go to slide number three, and I will turn it over to Mike.

Thanks, Janet. Good morning, and thank you for joining us on today's call. In the second quarter, we delivered revenue growth of 12% as we saw improving end markets in most of our businesses. We expanded margins 180 basis points, and the industrial sector reached record operating margins. Second quarter earnings from continuing operations were $0.88 per share. For the quarter, revenues were $3.9 billion, up 12% versus prior year and 9% excluding currency. During the quarter, we continued to see strong bookings in industrial and climate. Security orders in the quarter were also up double digits led by very strong bookings in Asia. The one weak spot in terms of orders was residential, which was impacted by a stagnant housing market and lack of consumer demand for replacement systems.

For the Company, orders were up 9% and 6%, excluding currency. Operating margin for the quarter was 12.2%, up 180 basis points, primarily driven by volume, pricing and productivity. Margins were negatively impacted by a decline in residential margins, which I will talk about more in the next slide. As anticipated, we began our share repurchase program in late second quarter and repurchased 1.3 million shares as of June 30.

Please go to slide four. Three out of the four businesses had good to excellent performance in the quarter. Industrial reached record margins of 15.6%. We continue to realize pricing across all businesses, in the second quarter our pricing outpaced direct material inflation, which is a quarter or two earlier than we had anticipated. We continue to see good margin improvement in the majority of the businesses, and we are at our target of 200 basis points of margin improvement, year-to-date. We saw strong markets in industrial, transport and commercial HVAC, and in North American commercial security markets appear to be bottoming. We continue to see strong growth in emerging markets and cash generation is on track. The clear disappointment in the quarter was residential, but in terms and revenue and profitability as compared to our expectation, we were about $100 million off our prior revenue forecast as the market softened in the second quarter. The impact on volume and profitability in our business was further exacerbated by the continued downward mix shift in the market toward lower SEER units and the volume increase of new, R22 dry ship units into the market where we have very limited participation.

Cost performance. Our recent new product introductions negatively impacted residential's profitability in the quarter. Even though we've gained market share with these new products, the margins are lower than expected as material costs are above our target. We also incurred costs for factory inefficiency because we are running both old and new production lines during the residential product transitions. We've taken, and will continue to take significant actions to address these issues. We have a calendarized material cost and labor efficiency road map to get the business back on track, and some of the strongest people in the Company are leading these efforts. Turning to an update on Hussmann, in April we announced our intent to divest the Hussmann stationary refrigeration business, that we would close the deal by the end of the third quarter. Given that we remain engaged in the process, we are not going to comment further today regarding expected proceeds, participants in the process or more specific timing other than to say we remain on track to our initial timeline. Our plan for the proceeds remains focused on share repurchases.

Please go to slide five. This slide gives a summary of our quarterly order rates for the past six quarters. Orders for the second quarter of 2011 were up 9% overall, 6% excluding currency. We had especially strong gains in industrial air and productivity and transport refrigeration and solid gains a commercial HVAC equipment, services, and commercial security. Residential orders declined 6% in the quarter.

Please go to slide six. Here is a look at the revenue trends by segment and we think revenues, excluding currency shown on the bottom chart, give a better view of our organic growth. As you can see on the bottom chart, second quarter revenues were up 9%, excluding currency. Industrial had another strong quarter of growth of 20%. Climate also had double digit growth, residential was down 2%, and commercial security grew slightly at 1%. On a geographic basis, revenues improved by about 6% in the US and 22% in international markets. Global equipment revenue increased 11%, and parts and service revenue was up [13%] compared with last year.

Please go to slide seven. This bridge analyzes the changed second quarter segment operating margin year-over-year. Second quarter operating margins were 12.2%, an increase of 1.8 percentage points compared with 2010. Volume mix and FX added 50 basis points to our operating margins. About a quarter of our total revenue growth was from FX which flows through at a lower margin, and so it somewhat depresses our leverage. Price netted against direct material inflation turned positive in the quarter at 30 basis points as price increases continued to hold. Productivity netted against other inflation increased margins by 110 basis points, negatively impacted by the productivity shortfall at residential. Investments and other charges were slightly unfavorable to last year at 10 basis points. And Steve will now take you through a review of each of the segments.

Thanks, Mike. Please go to slide number eight. The climate solutions segment includes Trane, commercial HVAC and Thermo King transport refrigeration businesses. Total revenues for the second quarter of $2 billion were up 14% and 10%, excluding currency effects. Trane's global commercial HVAC second quarter revenues were up 12% versus prior year on a reported basis and 10% excluding the effects of foreign exchange. HVAC revenues in North America increased 10%. Revenues were up more than 10% in Europe, Middle East and Asia, was that more than 20%.

Global commercial equipment revenues increased 15% with double digit year-over-year improvement in all regions. Global parts services and solutions revenue increased by 8%. Shifting to orders, our global commercial HVAC orders were up 10%, driven by global equipment orders, which were up 13%. For global Thermo King transport business, revenues increased over 20%, which is consistent with significantly improving markets compared with last year.

Our worldwide refrigerated truck and trailer revenues were up about 30%, with strength in North America and Europe. Global bus HVAC, APUs and marine container revenues increased substantially due to improved end market activity. Thermo King orders were up over 20% in the second quarter. The operating margin for climate solutions was 12.2% in the quarter, a 260 basis point improvement versus second quarter 2010, driven by pricing, volume gains and productivity, partially offset by higher commodity costs. Climate's results were also favorably impacted from the disposition of assets from a business restructuring as part of our footprint reduction program. Normalized, climate's second quarter margins were up about 200 basis point over the prior year.

Please go to slide number nine. Industrial technology's second quarter revenues were $772 million, up 24% on a reported basis and 20%, excluding FX. Industrial markets continue to be strong in all regions. Air and productivity revenues increased more than 25% versus last year, air and productivity orders were up 17%, with strong improvements in all regions. Club Car revenues were up more than 10% in the quarter with growth in both golf and utility vehicles. Industrial's operating margin of 15.6% was up three percentage points compared with last year from higher revenues, pricing and productivity, partially offset by higher investments spending. This is a record margin performance from industrial.

Please go to slide number 10. The residential solutions sector, which includes Trane and American Standard HVAC product lines and the Schlage security residential business, second quarter revenues of $632 million were down 1% compared with last year. Including foreign exchange, revenues were down 2%. Bookings were down 6%. Revenues for the residential security portion of the sector were down 1% with declines in the new builder channel and in big box customer volumes. Our residential HVAC revenues were down 1% as the sluggish housing market resulted in soft replacement and new builder markets. Sector operating margins of 6.4% were down 4.2 percentage points compared with 2010 as improved pricing was more than offset by lower volume, adverse mix, inflation and increased spending on the new product launches.

Please go to slide number 11. Revenues for security technologies were $441 million, up 5% and up 1%, excluding currency. Americas revenues were up slightly from price improvements on flat volume. Revenues in our European security business, were up on a reported basis, but down slightly excluding currency. Asia revenues increased over 15%. Overall bookings were up 14% with increases in all regions, Asia orders were particularly strong as several large projects were booked in the quarter. Operating margin for the quarter was 20.8%, down slightly from last year as strong productivity and price realization were offset by flat volume and mix.

Please go to slide number 12. We continue to advance our operational excellence initiative which is a long-term approach to a lean transformation in the Company. We have over 50 Rapid Improvement Events, or RIEs, in the quarter. The RIEs are focused on making meaningful improvements in processes and activities within our 19 selected value streams. Each RIE involves four weeks of planning effort, 4.5 day event involving shop floor changes and four weeks of process sustainment. To highlight a couple of the RIEs, the bearing [cell] in Mocksville conducted an RIE in the quarter. The event yielded significant results in standard work flow, cycle time reduction from 10 days to one, 20 points of productivity and 40 minutes of setup time was removed.

In April, the Faenza team in Italy conducted their first RIE on the armored lock value stream. The focus was on feeding capacity -- I'm sorry, freeing capacity on a value stream constraint in the laser welding area. The event yielded a 27% increase in capacity, 75% reduction in overtime, improved ergonomics and 50% reduction in walking time. The Lynn Haven, Florida facility completed its first three rapid improvement events. The events focused on three specific areas of the value stream, incoming orders, parts replenishment and final product testing. The results were a 40% reduction in incoming order areas, a 60% improvement in parts availability, a more robust and efficient final product testing process and a $1 million finished goods inventory reduction.

Please go to slide number 13. We continue to develop and launch new products and services. About 17% of our 2010 revenues were generated from 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 second quarter. Just to highlight two of them, in early 2010, the industrial technologies Asia-Pacific team was challenged to develop a product to meet local market needs. In just eight months, they developed the SIRC V-Series air compressor that cost 17% less than similar products, is localized to meet market needs and generates less noise than higher cost compressors.

In Q2, we launched the 5 KW through 11 KW and the 90 KW through 160 KW versions of the SIRC V-Series air compressors. These are an extension of the product offering, with the launch of these products, we now can offer a complete range of locally designed products in China. The Trane Precedent 17 Plus rooftop holds the highest energy efficiency rating from the Air Conditioning, Heating and Refrigeration Institute, or AHRI. The product also exceeds the American Society of Heating, Refrigerating and Air Conditioning Engineers, or ASHRAE, minimum requirements by more than 30% and federal minimum standards by more than 35%. The product is offered by both climate solutions and residential solutions.

Please go to slide number 14. We finished the second quarter with working capital at 4.1% of revenues, down from 4.9% at the end of the first quarter. We expect to maintain working capital to sales in the 3% to 4% range on a full-year basis.

Please go to slide number 15. Our balance sheet remains in good shape, and in early June, we started buying shares under our share repurchase program. We purchased 1.3 million shares in the quarter, and we anticipate purchasing 18 million to 20 million shares by the end of year. This would put our average share count for the year at about 347 million shares. We generated $356 million of cash flow in the second quarter, well ahead of last year. We continue to target available cash flow of $1.1 billion for the year. With that, I will turn it back to Mike to take you through the forecast.

Thanks, Steve. Please go to slide 16. Our updated revenue forecast for 2011 is based on slow but steady movement in most of our markets. We believe activity levels indicate continued strength in transport refrigeration and industrial markets, as well as the service and replacement of commercial HVAC. We expect to see a continuation of challenging conditions in the US non-residential new construction market for most of the year given our commercial security business is more heavily weighted to new construction and our commercial HVAC business. And we have slightly decreased the revenue outlook for that business, as the new construction recovery forecast is pushed out. We also see a continuation of a challenging backdrop in residential markets as single family housing starts and consumer confidence remain at low levels. FX will have a slightly were positive impact of our revenues for the year.

Based on this generally improving backdrop, we are raising our revenue range for full year 2011 to $14.7 billion to $14.9 billion, up 11% and 12% compared to 2010 revenues of $13.3 billion. Climate solutions revenues are expected to be up 13% to 14%, an increase from 10% to 12% range in our last view. Based on continued strong bookings, we now expect industrial to show revenue gains of 17% to 18%, up from our prior estimate of 12% to 14%. Based on the reduced market forecast for lowering our residential revenue forecast for the year, now expecting the sectors revenue to be up 2% to 3%. Commercial security is now expected to show a 3% to 4% year-over-year improvement due to its exposure in non-residential building, especially in North America.

Please go to slide 17. We are maintaining our full EPS range of $2.90 of $3.10 per share. We also reaffirm our expectation to improve operating margins by 200 basis points this year. This EPS guidance reflects an average share count of 347 million shares and a tax rate of 23%. We expect to generate available cash flow of about $1.1 billion, which excludes proceeds from Hussmann. Third quarter revenues are forecast to be in the $3.85 million to $3.95 billion range, up 10% to 13%. Reported EPS from continuing operations for the third quarter are projected to be approximately $0.85 to $0.95. These earnings will continue to be negatively impacted by performance at residential.

In summary, we continue to be encouraged by the market recoveries and margin expansion at climate and industrial. Security has maintained margins in excess of 20% in spite of a slower recovery in its primary market, US non-residential construction. We are disappointed by the market and operational performance at residential and have taken, and will continue to take, aggressive action to get it back on track. Even with that setback, we've been able to maintain our full year EPS range and importantly, we are maintaining our overall target in expanding margins 200 basis points this year. Now, Steve and I will be happy to take your questions.

(Operator Instructions).

We'll go to our first one from Scott Gaffner with Barclays Capital. Your line is open.

Good morning.

Morning, Scott.

I just want to dig a little bit deeper on the guidance. So, you kept the EPS the same, sounds like you still have 200 basis points of operating margin improvement, but I'm of the share count came down a little bit, and we had a little bit of contingency built in there before. What's happened of the contingency? And, is it still there? And can you just refresh us on how much that was before?

Yes, I think that there's still some contingency in the numbers. We did use probably three quarters of the contingency we talked about earlier this year with what's going on with our residential business here. So, is still about $0.10 of contingency in these numbers, so it's kind of within the range, okay? Mid range of $3.00 to $3.10.

Okay. And then just as a follow-up on the residential HVAC equipment business, you did point out some executional issues, and I guess -- maybe it wasn't clear to me on the call what those operational execution issues? It sounded more like market issues? So, maybe could you just go back on that a little bit.

Yes, if you look at the performance in the quarter, I would say $20 million of the operating income mix would have been more volume and mix related. But if you back all the way up, this whole criticality of the minimum SEER efficiencies in Trane portfolio were well understood. We've known for some time that the market would mix down and that consumers would be looking, probably at minimum efficiency.

So, we have conducted, over the last couple of years, extensive development to launch the new 13 and 14 SEER platforms. So, the traditionally high SEER, or you can think about it as really a premium efficiency and reliability brand, it's always a cultural challenge to design lower SEER systems at lower price points. And I would really break it down into a few things that have happened here. One is the new product launch have really missed their build and material target costs, and we are now recovering that through material and design changes. And that process has already started to take place and it will continue to take place, certainly through the balance of the calendar year.

Second, the product was very, I would say well accepted by the market, and you can see that through the share data, but we didn't achieve the target build rates that we needed. That launch, although July is much better, and we were actually able to build at rate in July. But, as we are doing that and demand rates have been quite high, we kept both the old and the new lines running, which is very inefficient for us. The third point would be that the full R22 dry ship system phenomenon is, at this point, I am going to estimate we are going to see 900,000 to 1.2 million units shipped in the industry. So there is another 150,000 units at our share level where we haven't participated. Think about that as the opportunity cost making the new product launches even more difficult, right?

So, you are taking product that we've missed our target costs, the 410A competing against low cost R22 systems that's made it more difficult. And I think that when you think about overall volumes being down and the mix shift toward the weaker point of the portfolio along with the summation of my comments that I just gave, we ended up here with 400 basis point margin contraction over the prior year. So, that's a summary of what's going on in res.

And we'll go to our next question from Eli Lustgarten from Longbow Securities. Your line is open.

Thank you, good morning.

Hey, Eli.

A couple of questions. Can you talk about your expectations for operating profitability by segment? Why you did get 12.2% in climate, you do have a $23 million gain, I think you told us of about $0.05 a share in there, which means operating margins more like 11 -- a little over 11, which is a little bit disappointing. Can you give us some idea of what expectation we can have for the rest of year in profitability, particularly in climate and the rest of the segments?

Eli, let me address the $23 million climate gain first, because I want to bring that back into context. We, over the past eight quarters have been aggressively working on this whole manufacturing footprint optimization. Just as a reminder, we've gone from a starting point of 94 plants and we are down to 73. Every time we've done one of these we've had a disposition to make, numerous have been done at a loss, and we've been absorbing those into the income statement, and we don't use those as excuses from one quarter to the next.

Just in the spirit of transparency, we had one where the land underneath one of the plants that we had a consolidated was quite valuable, and so what you saw there was the sale of that land. I will tell you that there is more of this to come. We've got, again, a fair amount of real estate through these consolidations to sell. Some are going to come at probably a loss, some are going to come at a gain. But I would not think about that as being such an exceptional charge in the quarter. There would've been the same thing happening last year as well, both sides of the equation.

Steve, I don't have anything to that, or --

No, I think we have transactions like this back-and-forth all the time. In fact, if you look at the impact in this quarter on the enterprise whereas a number of other items that went the other way. So, it was largely offset by the enterprise level. It's just -- it's sitting in the climate solutions sector, and we had to break that out and talk about it. If you look at -- you go back and take a look at plusing and minusing even last year's second quarter, we feel very confident that on a real basis, climate's margins went up by 200 basis points in the quarter.

Okay, I guess my question really was, I understand what happened before, I was asking about what are you expecting for the rest of the year in profitability as you look across the various segments? I accept -- I have no problem with what you indicated, I was just really indicating what should we expect for profitability for the rest of year?

I think in climate you're going to see a full year 200 to 300 basis points margin expansion over the prior year. I think that they are on track to do that. Industrial, I think here you will see anywhere from a solid 200 to 300 points of margin improvement continue there as well. Running very, very well.

Res is going to be the sore spot for us. I think that the gap you saw in the second quarter, hopefully, is going to be the widest gap we are going to see against prior year performance. It's not going to dramatically get better in the third quarter, you're going to see improvement there if we execute on the plans that we've got.

You'll see further improvement in the fourth quarter. Fourth quarter we see a lot more of that improvement as those design and material changes have been tested through and go into production. But, we are going to be putting that against very low volume, okay? So, you're not going to -- obviously, we missed the season here on the big opportunity. So, here, I would tell you that we are probably going to be 300 basis points weaker than prior year on a full-year basis at res.

Security is going to continue to do well. They, on a year-over-year basis, I'd look for 100 basis points of improvement. They fell back about 20 basis points in the quarter, quarter two, but if you unpack that, you had a 16% or so gain in Asia which comes through lower margin. And we saw a spike in the US steel door market, which is the lowest margin, most competitive piece of the business that we've got. The nice part about that is, that it is always an early indicator of hardware coming in to the portfolio, and you saw that through bookings coming back in Q2.

So, still frames and doors get shipped in the quarter, hardware gets shipped in Q3, Q4. Again, look for 100 basis point improvement there during the year. With the security business, Eli, the more we can grow that business at those margins, I'd be delighted. So, even if we weren't growing operating margins year over year but growing the business overall, particularly outside of the US, it would be a great success for us.

And we'll go to our next question from Deane Dray with Citi. Your line is open.

Thank you, good morning, everyone.

Hi, Deane.

I was hoping to go back to the resi HVAC question on the mix shift because frankly, I've not heard of consumer moving back down towards minimum efficiency, and it just strikes me that this is more of a price sensitivity action by consumer. So, and I also know Trane has a 13 SEER offering. So, could it be a pricing issue, and how much of that latest price increase did you realize?

Well, Deane, we've always had a 13, 14 SEER offering. The point was the old products weren't very competitive, and it wasn't a focus of the organization to think about that. What you would see over the long haul is a trend over the years that increasingly, the market was moving the mix toward higher SEER, more energy efficient systems and during the downturn in the recession, you would see that shift back. And I believe that shift is going to stay that way for some time. Think about also the federal tax credits being eliminated and the incentives up to mix up didn't help either.

So, when you look at our 13 and 14 SEER offerings, we're doing those in 410A. And as I mentioned to you earlier, we haven't met the build of material cost targets that we want on the products. So, we're actually competing in the market with product that's been well accepted, but having to deal with that through margin.

So, we've got to get our cost position right. Our winning strategy here, frankly, is we've got the right product in the market. We understand from a competitive point of view what competitive margins should look like in this area through all the various tear down analysis that we've done, and we just need to get to that point. And, so that's the focus of the organization today.

How much of a price increase, the 2% to 6% that was put through, actually stuck the quarter?

They got 4% in the quarter.

Okay and then, how about it just broadly the -- how Trane did in the spring, the cooling season? Because we did start off, I know it's hard to recall this with the heat wave we all have right now, but cooler, wetter spring, and there were some questions about too much inventory in the channel, and how did Trane fare?

Yes, Trane gained, if you pull R22 out, they gained 60 basis points of share gain. When you put R22 back in, we lost 90 points of share. That is the impact of R22 coming back in. When you look at the 14 SEER product, which is the product where there's the most focused on, we gained 210 basis points of market share on that product.

When you look at the 13 SEER product you would have seen a shift in percentage toward 13 SEER. In 2010, it would've been something around 60% all the way to 72%. That kind of gets back to your earlier question, how much you didn't recognise there was a shift going on. But that's a very meaningful shift to go from 59% or 60% to 72% at the 13 SEER level.

So, what's happened is the market's moved to a place where we historically haven't completed. We've launched new product, and we're not as competitive as we need to be, and we haven't been able to run at the rates required when the demand was there, as exhibited by the share gains.

And we'll go to our next question from Jeffrey Sprague from Vertical Research. Your line is open. Jeffrey, you may be on mute, you may want to unmute your phone.

Thank you, good morning, everyone. Mike, just to follow-up on that last point, is that 72% to 59% your mix on 13 SEER, and that's over the last year?

That's the industry, Jeff.

But how did you guys --

13 SEER on the industry went from 59% to 72%.

And where did you guys go from?

We, gosh, I don't have the mix data right in front of me here. I could tell you a share basis, 130 basis points ex- R22. I can't tell you but other than to say we would have mix not as badly as the industry because we've still got our people out really, I think trying to sell the premium. But I will try to find that data for you here before the call concludes.

Appreciate it, thanks. Just wondering, if you could give us a little color on Hussmann, not the process so to speak, but the loss in disk ops was bigger than I was anticipating, not that I had any great way to really estimate it, and I'm sure there's some non-operational things going on there. Can you give us some color, Mike or Steve? Just kind of operationally how Hussmann did in the quarter? And kind of put in context the disk ops loss for us?

Yes, the -- Hussmann, in the quarter, Jeff, significantly better than Q1. They are going through a bit of a rough patch in that market as well. There was some share loss with Wal-Mart and Target that affected the first quarter significantly,but we have adjusted what we've got to do from a production perspective, headcount perspective. So the second quarter earnings came in about where we had forecast them to be.

The big issue in the quarter was a further impairment charge, okay, that was based on -- once you take a business and you put it into discontinued ops, the accounting rules on impairment sort of changes a bit because we now have allocated a piece of goodwill to Hussmann. We did that when we set up the discontinued ops. And when you have any type of market -- I'm sorry, any type of earnings multiple change, okay, you should be marking that business as goodwill every quarter. So, we took a further impairment charge to take the -- to align the goodwill on the books with the expected multiples of earnings we are seeing at this point in time.

And we'll go to our next question from Jeff Hammond with KeyBanc Capital Markets. Your line is open.

Hi, guys.

Hey, Jeff.

Hey, just kind of final, closing the loop on this residential. Do you expect a change your strategy around R22? It doesn't seem like the loophole is closing, and it's a bigger piece of the market.

Yes, Jeff, give me a second here, I want to go back on Jeff Sprague's answer, I just found that. Yes, we've gone from a 51% mix to a 58% mix, so you can say -- see that we don't mix with the industry per se. We kind of sell a higher mix of higher SEER systems. But even within our own poliofolio, it a 51 to 58 point move.

Relative to R22, Jeff, it's disappointing. I haven't seen the EPA step up into really regulating what has been put in place. I haven't seen AHRI and the members of AHRI step up into managing this. And, at the end of the day, if it is a 1 million unit plus market, it's not going to close, and we've got dealers that are disadvantaged from -- by this market. We are going to have to readdress it.

So, we've got a meeting with the EPA next week. We will continue to lobby to get things closed, but Jeff, at the end of the day, we're not going to put our dealers at a disadvantage and we are not going to cheat our shareholders on our fair share. So, that's where I'm at at this point in time.

Okay, and then just on the share count and share repurchase, does this 18 million to 20 million shares, does that take into account what you expect to get in proceeds or Hussmann? Or, would -- once that closed, that would that be additive to any share repurchase?

Jeff, we can get to the 18 million to 20 million, we believe with cash flow from operations. Again, we're -- it's just depending on the timing of when we close out the Hussmann deal. We are still expecting to do by the end of the third quarter. But, there is upside to that share count -- to the buyback. Not so much of the share count, because there's not enough time of the year to impact the 347, but we could see upside to the 18 million to 20 million shares that we would be buying back before the end of the year given the Hussmann proceeds by the end of the third quarter.

Okay.

And we'll go to our next question from Terry Darling with Goldman Sachs. Your line is open.

Thanks. Mike, wondering if you might talk a little bit about the mosaic on non-res as you're seeing it right now. I think the orders in commercial equipment, the revenue performance ex- FX there looks kind of in-line, but curious how you are looking at that going forward. But then, on the comments on security, it sounded like non-res, there you felt was a little weaker. Maybe that's a geographic issue, but say you flush all that out?

Well, come back to the climate piece for just a minute, and even within the quarter, there's a little bit of a mix change that we saw were we have the services business running a little bit north of 8%. We'd have liked to seen that growing somewhat north of 10%. Some of that is weather related, but -- so that was a little bit of a mix down for us. We always mix a few additional margin points higher when that happens.

Equipment really remains strong, and I'm talking about commercial HVAC, remains strong, both in unitary and applied and really throughout the world. Asia continues to boom, and we are seeing that in our business as we continue to localize the product and localize the portfolio there, that continues to do well for us. And bookings remain strong there. I can tell you, it is all replacement really, and it's all around energy efficiency, and that model is working well for us.

Security, it really follows a lot of what you see with the AVI. You'd see this teetering around the 50 point, but not quite at the 50 point. And what you see here when that happens for us is a little bit of lumpiness. You might see a weak quarter and a little stronger quarter as that materializes.

We saw a strong quarter in bookings in Q2, and it was sort of predated by strong bookings in delivery in the steel door, steel frame business. And that's just a little proxy we use to kind of look at the timing of bookings and shipments. And it's intuitive, as you are building a building issue, you want to hang hardware and hang access control into a building, you are doing that really while the building structure and frame and door typically are on. So, it ties out for us that we should see some more growth in Q3 in that business, relative to what we've seen.

But, we'd need to see a strong bookings quarter again to really claim any kind of an uplift. I do feel it is bottoming. We feel the same way today that we felt say three, four quarters ago around the commercial HVAC business bottoming. But, we were cautious then and I'm cautious now to really lay some tracks behind us here with some solid bookings.

And then shifting over to industrial technologies, solid margin expansion, as you said 300 basis points or so year-over-year. But are you satisfied with the flow-through at these kind of levels? Is there anything holding the flow-through back on those margins? Is maybe Club Car holding it back a little bit at the total segment level relative to what you were seeing on just the compressor piece?

Well, we are really throttling that by investing back into that business. It's always been a strategy that we want to refresh the portfolio. We talked about this two, three years ago. We've been launching new frames of rotary both under the Ingersoll Rand brand and our SIRC brand. We've been launching new tools, we've been investing in electronic capabilities across the business, we have made large investments into the service business that supports that business. And so what you see here is, the longer term view as to how do we get that business to 17% to 19% by 2013?

And as we look at the milestones here, we're happy with what we are seeing relative to the milestones that we've set. That long-range plan where we should be in terms of margins and investments and in the product portfolio itself. So, I think where we are right now, based on where we should be feels pretty good. A long way go from 15% to 17% to 19%, but I think that the product, the service portfolio is being built out, and it's being built out globally to accomplish that.

And we'll go to our next question from Steven Winoker with Sanford Bernstein. Your line is open.

Thanks, and good morning. Just want to come back to the overall margin progression for the company that you have on page 7 in the presentation. So, pricing you gave us, which was the 290 basis points and therefore, I guess material inflation was a headwind of 320. I know you're not breaking our productivity every quarter any longer on the gross side, but given the miss, at least to my numbers here, I'm trying to get some understanding for how to think about that productivity versus other inflation so that we can better assess it going forward and understanding of lot of the issues you had in resi.

In my numbers so far, if I look at other inflation impacts in prior quarters, you're sort of in that 250 to 300 basis point headwind range. I guess that question -- has there been a material change in the other inflationary component that you've been facing? Sort of wages and any other areas in this quarter?

Yes, that me start with that. I have to tell you that the reception here on our end is very weak, so you may need to ask a follow-up if we didn't get it right on the head here for you.

But from a pricing perspective first, I think you started there. Very pleased to see that what we've been working on for a year and a half, two years around pricing excellence in systems and tools into the marketplace, both leakage and the way we established price taking root. So, we thought we were going to run the year here and be negative 30 basis points or so for the full year, turning it around in the fourth quarter by forecast. And in fact, what happened is we turned it around in the second quarter which, we think it's the first time in at least 23, 24 quarters that we can record, we really built that in. And that's a hard thing to start and it's a hard thing to stop.

And so, as we look at Q3 and Q4, we would see modest expansion from those levels. Were thinking that there is a 10 basis type price improvement each quarter progressing. And I'm hopeful that if we push ourselves a little harder here that we might, in fact, hopefully do better, have some upside there.

On the productivity side, if you look at three of the four businesses, they are right on track. Absolutely on track. And it you look at the lean transformation, the rapid improvement events, the cadence around the Company for those things, it feels pretty good.

You can really isolate the productivity issue. You can almost walk the entire productivity issue that we've got back to the res business. And this is our focus, is on getting this thing, getting it right, getting it handled now. And by the end of the year, dramatically turning it around to being in a position for 2012 to hit the ground running in a better way.

Well, so, just as part of that same question, is the other inflation part of that piece, has there been a big increase in that at all? Or is a comparable to what you have seen in prior quarters?

No, inflation hasn't changed much. The only thing that would've been a little bit tougher for us is steel is creeping up again. But we've had reductions in zinc, we've had some stability in copper and aluminum, we continue to convert material from copper to aluminum. And in terms of other inflation, which is largely labor, there's no real surprises there. That number hasn't moved very much for us.

Okay, and then my second question on the volume mix currency impact, so there was, I guess 3% currency impact on the top line, I think. So, what was the margin impact of that 3% year-on-year? Is it comparable flow-through?

The currency piece of this, you're right, it's about 3%. The margin is going to be light on this, it's going to be 15%, 10%.

It's actually closer to 10%, Steve.

Okay, and looking at it that way, fine. And then therefore, the volume leverage -- again, I'm trying to get at the resi -- how much -- you're saying you can trace it all back to resi, so I'm trying to get at what the volume leverage impact here versus the productivity, and I think that will allow me to do the math.

The volume mix, I said earlier it is about 20 million. No doubt about it, the volume has pulled back in the quarter. But relative to where we should have been, which is the margin expansion off last year's 10.6%, you work the other way here, and the whole balance of that is net productivity. So, that's where we need to focus our attention in the business going forward, and that is where the attention is being focused right now.

And we'll go to our next question from Shannon O'Callaghan from Nomura Securities. Your line is open.

Good morning, guys.

Hey, Shannon.

Hey, just a couple numbers I guess. Corporate expense is tracking a little lower. What is happening in that line, of what are you expecting for the year?

We expect to see about $30 million -ish a quarter in that line and quite frankly, what's going on there, Shannon, is that we are still seeing benefit of the consolidation and synergies that we drove from the Trane acquisition. The employee benefits, pension costs, other things are improving, largely because of the efficiencies we have been in the drive with the larger volumes we are bringing to our suppliers. That's a long -- that's been going on for quite a bit, and we expect that to be about where we need to be, in that little over $30 million range for the rest of the year.

And, as you are think to the coming years, does that then start to track a little more normal with kind of a growth rate in the business? Or is there more you can get out of it?

Well, it's impacted by pension quite a bit, okay? So, I'm not going to sit here and predict pension discount rates for 2012, but if interest rates start to go up a bit and we see discount rates coming down, it could be more than enough to offset any inflation that my role to there, okay?

Shannon, I will put a little plug in here because I know a lot of our organization is listening in on the call, but we put a $250 million of capital request out to change all the ERP systems in the Company a year ago, and we are working towards that. And I will tell you that we are dead serious about that. It's going to take us multiple years to work that through with all the complexity of the systems that we have. But again, it would be indicative of what we are trying to do in terms of really running a lot more efficiently from a systems perspective across the Company. So, I would tell you that longer-term, we are going to get that done. It's going to take us as long as five years to come all the way through the Company and every single system that we've got, but it needs to be done, and we started that in the past quarter.

And we'll go to our next question from Julian Mitchell with Credit Suisse. Your line is open.

Thanks, I had a question just on pricing. Pricing was, as you say, it was up more in Q2, year on year than it was in Q1. And you sound sort of fairly confident about sort of holding that for the second half. The volume growth outlook I guess is slightly softer because of comps and everything else in the second half and obviously, everyone's been looking at what's been going on that in the macro recently. Are you confident that you can hang onto price, even in the context of volume deceleration, which I guess is the first volume deceleration we've had for several years. Do you think that will have an effect in terms of ability to push through price increases?

I've got a lot of confidence around climate, industrial and security with res. We lead another round here recently. Some have followed, some have not. Some have followed and pulled back in certain markets. So, I don't know what the stickiness with that second round is going to be. So, if there's any softness there, it's probably in the res business.

But if you look at the momentum of the other businesses, I feel good about that. It's a lot of hard work, finally paying off in new success that we think is a couple quarters early for us.

Okay, thanks. And then just secondly, on R&D, you mentioned in the slides a number of new products coming out. Can you give a sense of how much you're sort of R&D spend is going up this year and next year just in percentage increase on the dollar investment?

Yes, a couple of things. One, if I gave you an R&D percentage, and I've said this before, it's not going to match up to most of what you see in terms of peers. We tend to not put in -- we don't count the resources that are already with the company involved in the R&D expense. But if you look at what we've always set out, we've said that we are going to put about $50 million, incrementally every single year, back into R&D and product investments, and that is building off our a 2008 peak year. We never took it back in 2009 and in 2010, and we continue to add and increase it going forward.

So, if you look at where we are in terms of that full year, we are actually spending more than that. So, I can tell you that where we would have had a $50 million incremental in the original guidance that we gave, we are closer to $90 million in terms of how we think about spending the money this year.

And we'll go to our next question from Andrew Obin from Bank of America Merrill Lynch. Your line is open.

Yes, good afternoon, good morning I guess. So, have we -- so is it correct to understand that we have not adjusted productivity outlook for the year? Even what's happening with the residential business?

No, productivity has come down to the extent that it's come down by res. Price is up, and we are going to offset that productivity drop in res by pricing elsewhere in the Company, Andrew, would be the short answer to the question.

That's for the year, right?

Right.

So, what are we targeting for productivity for the year? I'm sorry if I missed it.

200 basis points of margin expansion. We've still got a clear line of sight to getting that. And, that would be the acid test, as far as I'm concerned, as do we drive 200 basis points of margin expansion? It's what the entire Company is lined up against in terms of its incentives and its goals and objectives.

Back in the fourth quarter, you highlighted a contingency in your guidance. How much is left of this contingency, given what has happened year-to-date?

We started with about $0.39 the beginning of year, we're somewhere right around the $0.10 range left, absorbing what we think would be the impact of the full year of the res business, which puts us right at sort of the top end of the range at about $3.10.

And we'll go to our next question from Steve Tusa with JPMorgan. Your line is open.

Hi, good morning.

Hey, Steve.

On the residential front, I think you've walked through a lot of the pieces. I'm not sure if you've given us any kind of numbers around this stuff, but I'm just curious as to -- can you maybe parse out a bit, just from a pure -- absolute dollar perspective. How much you think is kind of structural market as is, whether it's lost share, under absorbtion due to lost share for R22, which may be temporary, and what is just kind of like execution issue? I'm just trying to get a sense as to how quickly some of this stuff you can turn around. It would be very helpful if I think you give us all a little bit more granularity around that.

So Steve, last year Q2 reported $68 million in op income in that business, this year we're reporting $40 million, and if you lock the bridge down on that, $20 million of that is really volume and mix. And if we were living with that $20 million alone, clearly, it would be more explainable than the $40 million. What you see on the balance of that, okay, would be really the productivity misses that we've had.

It's not productivity in the sense that it is taking existing product and processes and reducing cost, it is actual different problem which is, as we have launched new product and it replaces old product, we've actually launched that product, not at the price -- sorry, not at the cost point and the labor efficiencies that we had planned in those programs.

And the labor efficiency piece of this is something that we have been addressing. I can tell you, I've been to a couple of factories in question about four times and the last four or five months and in July, we are running at rate on one of the shifts associated with one of the new product launches. So, it is not a complete victory, but you can see that we are actually running at the rates that we anticipated.

The material and some of the product changes that are required take a little bit longer. It takes a bit of engineering design, takes a bit of testing, in some cases, some tooling. So, I don't expect to see, on the material side, great improvement in Q3. I expect to see the needle moving in Q4. And what I can tell you about that is every part, every assembly going into these units is understood in terms of what the target is where we are at and what the schedule is to get that and whether that we've got a new supplier or new material coming in.

So, I can look month-by-month and understand what we should be doing relative to what we said we are going to go do. And it's going to take to the balance -- take to the end of the calendar year to get that right.

Now, if the end of the calendar year, we are going to have it about 80% right, okay? So, we are not going to be completely resolved on all the material cost, but the timeline won't stop there and the intent is by the time we go into the full season again next year, we will have the problem 100% soft.

Great, and when you guys bought this business, obviously, the commercial aspects of it, pretty attractive, you guys serve a lot of industrial customers. Do you guys have to be in the residential business? There is -- there may be some strategic value out there given foreign players wanting to enter the market. Would you ever consider selling this business?

Steve, we have a unique opportunity here with the residential businesses that we already had in the way that that plays out, both at the builder and retail level. I think would be exciting for us strategically is if you think about a recovery and the work and the ground we've laid over the last couple of years, continue to lay, it could be exciting as to what can be done around a residential market with brands like Schlage and Trane and American Standard for that matter as well. So, that's the number one.

Number two is, there's a fair amount of synergy around compressors and controls in this business. In fact we share some factories around compressor manufacturing that I think are advantage for us. And the channels that we go to market, even through the Trane residential channel, overlap on the light commercial channel up to about 25 tons which creates an opportunity for us to take two bites at the apple around share between 5 and 25 times.

So, it's a good business. It's a business we know we can make money with, and we need to execute against that, and this was a disappointment -- a clear disappointment for us, and we are going to get it on track. But the answer to your question is, we are going to run this business and get the value out of it that I think strategically is ours to go get.

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

Hi, good morning guys.

Hi, Josh.

Just go back to the resi one more time here, as the weather has picked up in July, and I would imagine that replacement activity is up modestly against that, are you guys seeing kind of a pro rata increase with the rest of the market? Like, I guess, maintaining share from here, or is incremental growth appearing -- appear to be coming from R22 only? If you have a sense of that thus far?

The share growth we've had has been good, Josh, that continues to track along. I don't see share changing for us in that regard. The earlier question around R22 remains a question for us as to whether or not this is going to be the new standard going forward in the industry at the ship -- dry ship R22 appears to be the case through eight months.

As it relates to weather, I don't get very excited about that because I think even the weatherman's got a hart time predicting that. So, forecasting it from our point of view doesn't help us much in that regard.

So, I think what we've got in the forecast going forward for the full year, at 2% 3% revenue growth, both the HVAC and our security business, is a more modest view. I think it's a good view of where the market should be. I wouldn't expect share to move a lot, one way or the other at this point in time. And from our point of view, it is a self-help situation around getting our cost structure right where the industry volumes are going, which is at 13 and 14 SEER.

Sure. And then if I could ask one follow-up on air and productivity. Are you seeing any benefit or hearing any chatter out there that this accelerated depreciation or, I guess bonus depreciation, is helping out at all? And that maybe we are in a bubble on reinvestment on the factory floor?

I can tell you I have yet to see any report or hear one anecdotal story coming in from our organization to say that that made a difference.

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

Hi, how are you guys doing?

Hey, Mark.

I got on a touch late, I wanted to catch up. What is the new currency outlook in the full-year revenue outlook?

Yes, the current forecast, if you look at where we were versus prior forecast, driven mainly by the euro, Mark, is -- currency is heading about almost 2% to the annual sales forecast, okay?

Okay.

We are using a rate now of about 140, 141. And that's up 6.3% from 2010.

Okay, great. What I really wanted to ask you about is the commercial HVAC business service versus equipment because the growth rate of service. Mike, I think you mentioned it to an earlier question, was a little bit below your expectations. But you said you were expecting 10 and good news was equipment was growing a lot faster than that, but that's only the second time in the last 14 quarters, which is how far I could easily go back. It might be longer that service under performed equipment. And to hit this team's kind of growth target for the full year, are you expecting service to pick up? Or is that going to be an equipment doing all the heavy lifting?

No, Mark I would look for that business to run 8% to 10% for the balance of the year and from this level, I would expect it to go up slightly to 10%. This is a business, when you think about mechanical HVAC service, nobody in the marketplace has got more than a point or two of share. This is still a very independent sort of business, and so there is an opportunity here to really organically begin to consolidate that business one market at a time.

So, I look at this as a great long-term growth story that in my mind, getting 10% compound growth is an entitlement. So, we also, if you go back too, Mark, we were booking some very large government contracts in Q3 of last year. If I recall, big state and local, one large agreement at a university in Missouri and some federal contracts. So, I would have to go back, but there could be a little bit of a comparability issue there. But again, I look at that and say, we are also looking at some big contracts now going forward and hopefully, we book some of those and great -- more growth momentum going into late in the year and next year.

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

Christy, this is our last question, okay?

Thank you.

It's very kind of you to take more questions. They've obviously been mostly asked and answered. The only thing I wanted to follow-up on at this point was whether the $0.05 gain that you had in the quarter in climate was something that you had visibility of when you issued guidance last quarter?

When we are doing these restructuring agreements and we are looking at these dockets that we are doing around the rationalization of the portfolio, we are considering the possibility gain and loss all the way back when we start these programs. You never quite know at that moment in time, particularly in China, as to the value of this property or buyers in the marketplace.

We've got a lot of real estate for sale, Robert, all over the world. And there's going to be some winners in there like this one. There is going to be some losers in there.

So, you get good visibility into that. We've gone from a little more than 18 million probably square foot of manufacturing space, we are down now probably right around 12.5 million, ex- Hussmann. We continued even last quarter to make further announcements on consolidating the footprint. So, I think that we've got another year or two left of dispositions.

Rob, just real quick. We were tracking this as we were putting the guidance together for the quarter. I think throughout the quarter, as we negotiated it, it became a little bit of a better deal for us.

But I want to reiterate what I said earlier, okay, we broke this out so we could be very transparent on the climate margins. There were other things in the quarter that offset the -- largely the net impact of that at the enterprise level.

I understood that, Steve, I just wanted to -- my takeaway is that someone knew that there was something coming, but you didn't explicitly have a $0.05 number penciled in anywhere that you specifically needed to beat guidance or something like that.

No, the only risk you would have is whether not something is going to close with all the government approvals required to do something, right? The only risk there would be that we didn't execute it within the quarter in which we had anticipated it.

And at this time, I would like to turn it back to Ms. Janet Pfeffer for any closing remarks.

Thank you, Christie, and thank you, everyone. Joe and I will be available the rest of the day if you have any follow-up questions. Thank you.

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