特靈科技 (TT) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ingersoll-Rand fourth-quarter 2011 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will be given at that time. (Operator Instructions). As a reminder this conference is being recorded. I would now like to introduce our host for today, Ms. Janet Pfeffer, Vice President of Business Development and Investor Relations. Ma'am, please go ahead.

Thank you, Karen. Good morning, everyone. Welcome to Ingersoll-Rand's fourth-quarter 2011 conference call. We released earnings at 7 AM this morning, and the release is posted on our website. We will 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 2. Statements made on today's call that are not historical facts are considered forward-looking and are made pursuant to the Safe Harbor provisions of federal securities law. Please see our SEC filings for a description of some of the factors that may cause actual results to vary materially from anticipated. Now I would 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 to 3 and I will turn it over to Mike.

Thanks, Janet. Good morning and thank you for joining us on today's call.

Before we dive into the fourth-quarter results I'd like to take a couple of minutes to put the full year 2011 in context. Then Steve will take you through the quarterly results, and finally, I will discuss our guidance for 2012.

In 2011 we experienced a challenging economic backdrop in some of our key markets. We are mindful of the performance challenges we faced in the residential business, hindered our ability to reach our original earnings goal for the year.

Notwithstanding significant hurdles, some from the market and some within our businesses that we have corrected, we are pleased with the progress we've made this past year in several important areas.

In 2011 despite a significant decline of revenues and profits at residential and slightly lower volumes in commercial security, and we achieved a revenue increase of over 8% including double-digit revenue growth in industrial, Thermo King, and Trane commercial HVAC equipment.

We also recorded significant growth overseas, helping us offset weakness in nonresidential and residential construction activity in North America. Our strategy to focus on innovation continued to deliver with the percentage of revenue from innovation jumping from 13% in 2008 to 23% in 2011.

Productivity gains combined with positive impact from our pricing strategy have led to improved operating margins which were up 1.3 percentage points. That includes significant progress in the operating margins of our climate and industrial segments, both up over 2 percentage points.

An essential component of that margin improvement is our focus on steadily improving operational excellence. To this end in 2011, we continued to enhance quality, and reduce our manufacturing footprint, the number of suppliers, cycle times and functional costs. Productivity savings added over $400 million to operating income despite almost no contribution from our residential business.

Full-year earnings per share from continuing operations were up 19% to $2.82. We are also making good progress in restoring the health of our balance sheet. We generated $944 million of available cash flow.

We are shaping our portfolio of businesses for improved growth and value creation with our action in Hussmann as an example of this. And our solid balance sheet and cash flow supported our buyback and dividend programs. We initiated share repurchases in June 2011, purchasing 36 million shares by year-end. And we increased our dividend by another 33%, following a 71% raise earlier in the year. Please go to slide 4.

Excluding Hussmann, we saw 130 basis points of operating margin improvement in the year. As you can see both climate and industrial expanded margins by over 200 basis points. We made substantial progress there, particularly in price, cost and volume conversion. Residential was a significant drag to our performance with margins down almost 600 basis points on lower volume, poor mix and operational inefficiencies, some self-inflicted, which are now fixed.

We have executed the program we laid out in mid-2011 for residential according to plan. We reentered the market with the R-22 product in August. Get-well action from the product launches have proceeded on schedule and we have met cost targets.

In fourth quarter, we took 410-A inventory levels down by almost $90 million, $10 million more than our original target in order to open 2012 with levels more aligned to the market.

And finally commercial security essentially held margins on flat physical volumes. Please go to slide 5.

We have steadily improved the flow of new products and services to the market and innovations crossed all sectors and regions. About 13% of our 2008 revenues were generated from products and services introduced in the last three years. Our initial target for 2011 was 20% of revenues, which we exceeded, ending the year at 23% of revenues, and our goal for 2012 is 25%. So innovation will continue to be an important part of our strategy going forward. Please go to slide 6.

In 2011 we advanced our operational excellence initiative, which is our long-term approach to a lean transformation in the company. This is a multi-pronged effort to reduce working capital, expand margins and ultimately increase market share across our businesses. We continue to restructure and decrease the size of our manufacturing footprint in 2011. Since 2009 we have reduced the number of facilities from 94 to 72.

Direct material makes up about 40% of our cost base. And we continue to make progress in our direct material cost reduction programs.

In November, we centralized the management of spend and consolidation of our vendor base to better leverage our strategic sourcing capabilities. We are also reducing costs and improving quality through value engineering activities in all of our businesses with regionally-based teams from engineering and strategic sourcing.

So starting our lean transformation, we have seen a separation in the performance of the initial 19 value streams versus the company average. The 19 value streams in 2011 have achieved a 35% reduction on average in cycle time, an increase on average of 2.5 percentage points of margin and a 19-point improvement in employee engagement scores.

As we have discussed over the next three to four years we will be systematically reducing our functional costs to move toward top quartile metrics from approximately 3% of revenues. The program entails many aspects. A key enabler is the implementation of common systems and processes across the enterprise, including common ERP platforms. That project is fully underway and the first wave of the implementations will be in early 2013 and this will continue through 2015.

And now I'll turn it over to Steve to take you through the quarter.

Thanks, Mike. Please go to slide number 7.

Adjusted earnings per share from continuing operations for the fourth quarter were $0.76 during the quarter, and we were able to more than offset the costs associated with the acceleration of the key factory consolidation in China and the absorption impact from the greater than planned inventory reduction in residential HVAC for a favorable tax rate.

In the fourth quarter we saw a revenue growth of 1%, excluding the Hussmann refrigeration business that we sold during 2011. We experienced a moderation in revenues in several businesses. Most notable was a double-digit decline in residential HVAC revenues against a tough comparison as expiring tax credits and buying in advance of announced 2011 price increases boosted volumes in the fourth quarter of 2010.

Revenues were up 1%, 2% excluding FX, with single-digit increases in climate and industrial; a single-digit decrease in security; and residential down double digits. Excluding Hussmann, orders as reported were down 2% and 1% excluding currency.

Operating margin for the quarter was 9.5%, up 100 basis points. If we exclude Hussmann from both years, margin in the fourth quarter were slightly higher at 9.6% and up 70 basis points from fourth quarter 2010. Although margins improved from pricing and productivity they were depressed by a year-over-year decline in revenues, adverse mix and unabsorbed costs in residential HVAC. We significantly reduced production levels in the fourth quarter in order to reduce (inaudible) inventory levels, which were taken down by about $90 million during the quarter.

All of our businesses continued to realize positive pricing. And in the fourth quarter our pricing outpaced direct material inflation for the third consecutive quarter.

Please go to slide number 8. Orders for the fourth quarter 2011 were down 2% overall and 1% excluding currency. During the quarter we saw moderating bookings and in the (technical difficulty) industrial air and productivity and in commercial HVAC.

In commercial HVAC we are up against a tough comparison as fourth-quarter 2010 equipment orders were up over 20%, partially due to customers placing orders before the effective date of announced price increases. Additionally fourth-quarter book and ship orders in the industrial segment were negatively impacted as we accelerated the consolidation of two facilities in China. This action suppressed the industrial orders improvement by 4 to 5 percentage points during the quarter.

Transport demand was strong in North America and in container, but European truck trailer was down slightly. Global security orders in the quarter were down 5%. North American security orders were up slightly. And international security orders were down low double digits, mainly due to lumpy order patterns in Asia. Residential orders were down 18% year over year, impacted by a stagnant US housing market and lack of consumer demand for the replacement systems. The decline was compounded by higher than normal volumes in the fourth quarter of 2010 from expiring tax credits and buying in advance of announced 2011 price increases.

Please go to slide number 9. Here is a look at the revenue trends by segment. We think revenues, excluding currency, shown on the bottom of the chart, give a better view of our organic growth. Note that the climate and total company data for the fourth quarter and full year excludes Hussmann from the comparisons.

Fourth-quarter revenues were up 2% excluding currency, fairly similar to the 3% growth we achieved in the third quarter. Industrial had strong but slightly moderating growth of 8%, again, partially constrained by that factory move.

Climate revenues increased 5% on top of a very strong fourth quarter 2010. Residential was down 13% against the high revenue level last year, driven by the expiration of the tax credits.

Commercial security revenues were down 3%. On a geographic basis, revenues were flat in the US and up 2% in the international markets. Please go to slide number 10.

This chart walks the change in operating margin from fourth quarter 2010 of 8.9% to fourth quarter 2011, which was 9.6%. This data excludes Hussmann for comparison purposes. Volume, mix and foreign exchange were a 1.6 percentage point headwind to margins. This was mainly attributable to lower margin residential HVAC mix. Last year's fourth quarter had a higher proportion of high efficiency units due to the $1500 tax credit, which expired at the end of 2010.

There was also some impact from lower volumes from the high-margin security sector. Our pricing programs continued to outpace material inflation, adding 190 basis points to margin. Productivity offset by other inflation added another percentage point. And year-over-year investments were higher, which impacted margins by 50 basis points. Please go to slide number 11.

This bridge analyzes fourth-quarter adjusted EPS from continuing operations of $0.76 versus our October guidance, which was $0.64 to $0.70, with the midpoint of $0.67. Our revenue guidance for the quarter had a midpoint of $3.575 billion versus our actual of $3.507 billion, a difference of $68 million.

There was one structural change since we issued guidance. On December 30, we divested our North American security integration business. Results of that business have been moved to discontinued operations for all of 2011 and in all prior periods.

Fourth-quarter 2011 revenue for that business of about $20 million with no OI was included in the guidance but is now in discontinued operations. The factory consolidation in China impacted about $30 million of revenue and is part of the $0.04 shown on the line below the volume and mix line. This leaves about $18 million of lower sales volume across mainly residential and security or about $0.01 of earnings.

The combination of foregone revenue and incurred costs for the China factory consolidation and the inventory take down at residential accounted for $0.04.

The favorable tax rate in the quarter was driven by three factors. One, a favorable geographic distribution of operating income; two, a discrete FIN 48 adjustment due to the final settlement of an open issue; and three, a positive impact from the annual reevaluation of our loss carry forward positions. This revaluation work is performed every year and also had a positive impact in the fourth quarter last year. In fact, the only real difference in the tax rate for the fourth quarter of 2011 than that of 2010 is the discrete settlement item I mentioned earlier. Share count was favorable, adding $0.02 due to the timing of repurchases during the quarter.

Please go to slide number 12. The climate solutions segment includes Trane commercial HVAC and Thermo King transport refrigeration. Total revenues for the fourth quarter, excluding Hussmann for comparability, of $1.9 billion, were up 4% and 5% excluding currency.

Global commercial HVAC orders were down 3% with global equipment orders down mid-single digits due to unusually high orders in the fourth quarter of last year as customers placed orders in advance of the effective dates for announced price increases.

Global commercial HVAC equipment orders were up over 20% in the fourth quarter of last year. Trane's global commercial HVAC fourth-quarter revenues were up 1% versus a very strong fourth quarter last year, particularly in HVAC equipment. HVAC revenues in North America were down slightly. Revenues in other regions were up mid-single digits.

Global commercial equipment revenues increased 1% against a tough comparison. Equipment revenues in the fourth quarter of last year were up over 15%. Global parts, services and solutions revenue was flat to prior year, with a decrease in contracting offset by an increase in parts and services.

For the global Thermo King transport business, revenues increased mid teens. Our worldwide refrigerated truck and trailer revenues were also up mid-teens with strength in North America and some moderation in Europe. Global APU, marine container and aftermarket revenue showed strong growth in the quarter. Thermo King orders were up approximately 20% in the fourth quarter, with increases in all regions. The operating margin for climate solutions was 10.2% in the quarter, a 270 basis point improvement versus fourth quarter 2010, driven by pricing, volume gains and productivity, partially offset by inflation.

Please go to slide number 13.

Industrial Technologies fourth-quarter revenues were $744 million, up 8% on a reported basis and excluding FX. Air and productivity revenues increased 7% versus last year. Air and productivity orders were up 5% with demand moderating in all regions. Revenue and orders in Asia were up negatively impacted by the facility consolidation decision that I mentioned earlier, which had as much as a 4 to 5 percentage point impact on total ITS revenue and bookings for the quarter. Club car revenues in the quarter were up 9% and orders were flat.

Industrial's operating margin of 15.3% was up 2.2 percentage points compared with last year from higher revenues, pricing and productivity, partially offset by inflation. Please go to slide number 14.

In residential business, fourth-quarter revenues of $443 million were down 13% compared with last year on both a reported basis and excluding foreign exchange. Bookings were down 18%.

Our residential HVAC revenues were down 21% as a continued sluggish housing market depressed the market for HVAC systems. Additionally the fourth quarter of 2010 was unusually strong, and revenues were up 20%, due to the timing of pricing announcements and the expiration of tax credits for higher efficiency units at the end of 2010.

Industry unit shipments in the fourth quarter were down 15% from last year. During the quarter we significantly reduced HVAC inventory levels, taking out approximately $90 million of revenue -- $90 million of inventory to better match demand going into 2012.

Revenues for the residential security portion of the sector were up high teens with increases in the new builder channel and in the big box customer volumes.

Sector operating margin of negative 1.2% was down 10.6 percentage points compared with 2010. Improved pricing was more than offset by lower volume adverse mix, the impact of significantly decreased production and inflation. Please go to slide number 15.

Revenues for security technologies were $415 million, down 3%, and also down 3% excluding currency. America's revenue were down slightly and overseas revenues were down mid-single digits. Global bookings were down 5%. Americas was up slightly. Overseas orders were impacted by lower orders in Asia due to the timing of booking on large projects.

Operating margin for the quarter was 19.1%, up 20 basis points from last year, as productivity and price realization were partially offset by volume and material inflation.

On December 30, we divested our North American security integration business. The results of that business had been moved to discontinued operations for all of 2011 and all prior periods. Full-year 2011 revenue was $72 million, and the business had an after-tax operating loss for the full year of $1 million.

Disposition resulted in an after-tax loss on sale of $5 million, also recorded in discontinued operations.

Please go to slide 16. Let's move to the balance sheet.

Our balance sheet remains in good shape, and in the quarter we continued buying shares under our share repurchase program. We ended the quarter with $1.2 billion of cash on the balance sheet and net debt of $2.5 billion. We purchased 19 million shares in the quarter and 36 million shares during 2011. We generated $944 million of available cash flow in 2011.

Let's go to slide 17.

We finished the fourth quarter with working capital at 1.6% of revenues, which we believe is a record for the company. We achieved this through excellent performance across the board. During 2011 we decreased days sales outstanding more than one day and increased inventory turns by 10 basis points. Inventories decreased by over $100 million in the fourth quarter with the majority of that reduction coming from residential.

With that I will turn it back to Mike to take you through the forecast.

Okay, thanks, Steve. With that let's go to slide 18.

Our revenue outlook for 2012 is based on varied levels of activity in our key end markets. These activity levels indicate moderating growth in industrial markets. We expect North American commercial HVAC equipment market, which is driven mainly by replacement, to grow but at a slower pace.

We continue to see solid growth in Asia and Latin America and a slight decline in Europe. We expect moderate growth in transport markets in North America with some contraction in Europe.

We see a continuation of the current conditions in residential markets. The single-family housing starts and consumer confidence remain at low levels. We expect R-22 and [low] SEER units to remain a significant portion of a flattish market in 2012.

For commercial security, we expect to see a continuation of challenging conditions in the US nonresidential new construction market for the next year, particularly in our key institutional markets. Foreign exchange will be a headwind in 2012, adversely impacting revenue growth by about 2 points.

Based on the strip backdrop, our revenue target for the full year 2012 was $14 billion to $14.4 billion, flat to up 3% compared with 2011 revenues up $14 billion excluding Hussmann. Excluding FX, the organic growth rate is 2% to 5%.

Our Climate Solutions top line is expected to be up 1% to 4% excluding Hussmann. Excluding foreign exchange, it will be up 3% to 6%. We expect industrial to show revenue gains of 2% to 4%, which excludes includes a 3-point drag from FX.

Based on a continuation of the current market conditions we expect residential solutions revenue to be flat to up 2%. Commercial security is expected to show revenues flat to 3% down versus 2011. Adjusting for foreign exchange, securities and organic growth will be in a range of down 1% to up 2%. Please go to slide 19.

Let's turn now to full-year earnings. There are some moving pieces in EPS, so let me take a few minutes to walk you through the mechanics and the outlook.

After removing Hussmann from the 2011 base, the starting point is $2.68 of EPS. Assuming organic growth, excluding currency of 2% to 5% and with continued good but somewhat moderating pricing along with productivity savings, then netting out inflation, operations will contribute $0.60 to $0.80 of higher earnings. At the midpoint that's about a 60% conversion on a fairly modest revenue increase. Foreign exchange will be a drag of $0.12.

As a result of our share repurchases, a lower average share count of 315 million in 2012 versus our 2011 average of 339 million shares adds $0.22. We estimate our tax rate will be 25% in 2012 and so that subtracts $0.12 of earnings.

Incremental investments and cost reductions and restructuring, along with some growth investments, net to $0.30. And we had some positive one timers in 2011 that we don't expect to recur, which totals $0.06. And that brings us to a range of $2.90 to $3.10 per share. We expect to generate available cash flow of about $1.1 billion.

Please go to slide 20.

Our first-quarter EPS will be lower than prior year due to the timing of restructuring and cost reduction investments. Additionally, revenue will be lower than 2011 as we run up against some hard comparisons, particularly in residential.

Recall in the first quarter of 2011 residential sales were up 10%. We had a significant amount of channel restocking in HVAC following the surge in the fourth quarter of 2010 from expiring tax credits.

We expect commercial HVAC volumes to start the year slightly down from very strong first quarter of 2011, and to improve at a comparable basis through the year.

Transport will be slightly down in the first quarter based on our opening backlog. First-quarter revenues are forecast to be $2.975 billion to $3.075 billion.

Revenue on a comparable basis, excluding Hussmann, are forecast down 3% to up slightly versus the first quarter of 2011. That includes FX, which will be a headwind of about 1 point. That means excluding foreign exchange revenues down 2% to up 1%.

Together, pricing, volume, mix, productivity, net of inflation will add $0.03 to $0.09 of earnings. FX negatively impacts earnings by $0.03. And given our revenue outlook, we have launched several cost reduction programs, including further restructuring that are front end loaded in the year in order to have some payback in the year. And that along with some modest growth investments will have an adverse impact in the first quarter of $0.16.

Restructure costs for the remainder of the year will be about flat with 2011. Share count and other items net to about $0.01 positive, bringing us to a range of $0.20 to $0.26 per share. Please go to slide 21.

We clearly have higher [launch from] aspirations for the company as economic conditions improve. We know this will take time in some key markets but we are intent on not waiting for a rising economic tide to raise the company. We're focused on continued change and improvement to ensure that we are managing our business optimally across the spectrum of economic conditions. Our focus for the next year ahead is on positioning Ingersoll-Rand to continue growing revenues, earnings and cash flow overall by employing tailored strategies across diverse markets.

As we look at both 2012 and beyond we feel good about our company, including our portfolio of outstanding market-leading brands; our ability to generate high levels of cash flow even in the face of a challenging backdrop; the longer-term attractiveness of the end markets in which we operate; and our competitive positioning which will allow us to benefit as those sectors of the economy improve; and our strong penetration and positioning in emerging markets with significant growth potential.

We realize that we can't rely solely on these fundamentals to achieve our goals. And our management team is committed to actively managing the company's businesses to generate sustainable profitable growth. Again we are not waiting for a macroeconomic lift to improve our business. Instead we're proactively working to reduce costs and invest in our growth markets.

Steve and I along with the rest of the leadership team look forward to talking with you in more detail about our company at our investor meeting on March 13 and 14 here in Davidson. And now Steve and I will be happy to take your questions.

(Operator Instructions). Steve Tusa, JPMorgan.

A question on the resi business. So you talked about I guess flat similar product mix, but I guess you're ramping up your R-22 product, and then I guess what does that mean for margins? How do we think about resi margins, given that you had the -- I guess you called it $50 million plus of unusual headwinds this year. So how do we think about the margin in resi?

Yes, first of all, Steve, on the market we think that the market will be relatively flat in terms of total motor bearing units. We think that we will actually see probably a 4% increase, which was a fairly modest share gain there. In total it is about 50 basis points really just by being in the market for the full year. So it would equate to something like 40,000 to 50,000 units that weren't in the market last year that will be in the market this year. And obviously that puts some pressure on margins there because that growth will come at a lower incremental margin.

So we look at that business overall as growing in the year flat to 2%. And margins there, probably growing about 200 basis points. So getting back from the mis-queues in 2011, certainly picking up the volume in the R-22 business but at a lower incremental.

Sorry; what was the 4% number you just mentioned? So if the market is flat and you're gaining share, so does that mean the security business is down that offsets that?

No, only HVAC. So we assume that the market for motor bearing units would be flat. We think that will actually be up about 4%, driven by the Unitary business.

Right.

Which is about a 50% market share gain for us. It is solely, though, as a result of actually being in the market with a product for a full year.

So then why are resi revenues flat to up 2% if you're growing resi HVAC 4%? Does that mean the resi security business is flat or down?

No; we look at furnace, we look at air handler, and we look at (multiple speakers)

Oh, okay, got you, got you.

Yes, sure. Okay.

Okay. And then that business, just as a follow-up, if that business is up 200 basis points, what is the total company kind of margin improvement target you are looking for in 2012? And then I guess I would assume that it's not 200 basis points and some of the other businesses are kind of more moderate margin increases?

Yes, Steve, at the midpoint of the range, ex Hussmann, it's about 50 basis points.

So then the rest of the businesses are really showing, what, kind of like in line with that to a little bit light of the 50 basis points?

Yes, Climate, you know you might be looking at 30 to 50 basis points. You know industrial probably still a little bit stronger there you know, 110 to 130 basis points. Res, we talked about, and security you could think about being fairly flat.

Great. Thanks for the detail. I appreciate it.

Nigel Coe, Morgan Stanley.

Yes, thanks. Steve took all my questions there. Could you maybe just talk about you know where you see the major upside and downside versus the new forecast? And I mean it looks like your resi forecasts are up, pretty conservative. Most of your comps are forecasting low to mid single digit growth. And maybe you can compare and contrast you know your view of the market versus your competitors?

Well I mean one thing, Nigel, I think in particular is we're all looking at the same data. We interpret it probably less optimistically in Europe, particularly our industrial businesses, we think, which would be probably first to see that, and we've seen some softening there. So we've got a view in Europe across the whole company as reported which would include currency of course to be say down 10%, 12% with currency. That's a bit more negative or less positive than it would be -- I think you're hearing from other companies at this point in time.

The other place where it is a bit of a wild card, but you look at North American HVAC equipment, and we look at a number of data points here, but one that's fairly reliable for us is the Dodge put in place number. And then the figuring from that the usage factors that we get from security product and HVAC product as applied to the specific markets that are being built. So it breaks it down by particular verticals in those businesses.

And that could imply kind of a negative 5%, negative 7% type equipment environment for next year, which again is a little bit more pessimistic than what we are seeing, but again, this has been a fairly accurate indicator for us in the past. So to the extent that those don't materialize, that there's more put in place quicker, that we are on-site faster, you know, it could have an impact the other way for us as well.

Sorry, the down 5% to 7%, would that be for the security business or the commercial HVAC equipment?

Both about the same. They kind of follow the same markets with HVAC typically leading security. But it would be the same outlook for both. Of course different usage factors and a different market mix based on what new construction is being built. So the institutional markets would hurt the security business more than it would hurt the HVAC business.

So we're swinging from a high single-digit growth in equipment to potentially a down 5% in the US. What is changing from year to year?

Well, I mean one thing if you look at fourth quarter last year and the first quarter of this year, if you go back to the fourth quarter last year as an example, we saw Unitary bookings in the fourth quarter up almost 40%. And we saw applied bookings in the quarter something like 28%.

The Unitary -- not all that shipped in the quarter but obviously some of it did. But the applied all shipped in the first quarter of last year. So you see a weaker first quarter against really tough comps. So we were way above sort of the market in the first quarter of last year for revenue and way above the market in 2010 fourth quarter for bookings. So we are lapping some very difficult comps there.

But if you look again at sort of just the proposal pipeline, if you look at the orders in hand, and look at the McGraw-Hill put in place and how that would relate to book and turn in the year and we get to a slightly recovering market in the year, so that for the full year, equipment globally would be fairly flat, we would see I think good growth again in contracting parts and service, probably up in the 8% range. And that would give us for the Climate Solutions business something closer to the full year 1% to 4% range that we are forecasting.

That's really helpful. And then so you said down 10%, 12% for Europe; I'm assuming that's mid single ex-currency. What are you baking in for China and emerging markets in 2012?

Good growth, Nigel, but slower, slower growth kind of across the board. It will still be good growth for us. If you look at Asia for the company we will probably still see mid-teens for the year; I think a slower first quarter but mid-teens for the year. Latin America still is exciting for us. Again, slower start to the year but a mid-teens rate in Latin America.

Thanks, Mike.

Andrew Obin, Bank of America.

Yes, good morning, guys. Just a question on profitability drivers in Climate Solutions. We saw a very nice pickup in profitability. I assume that a lot of it is Thermo King, which was pretty profitable, but could you just give us a sense of what is the Trane or cost savings versus Thermo King volume, if you could give us a sense for that? Thank you.

Well, volume overall in the quarter didn't have a huge impact for us in terms of the profitability there. So we had lower inflation. We had very good productivity across the board they are. We still invested in the business. We've got some new product launches that we're putting out the quarter. So really it's leveraging against some of the work that's been done over the past year or two around the cost base, around the manufacturing footprint.

I would also tell you that we're seeing a nice separation in the value streams that we've been working on from the lean portfolio. We are seeing 2.5 points of margin differential versus the average across the company in the quarter. So just to give you a sense there, I think it's really gaining traction in our climate businesses. Steve, I don't know if you want to add anything from your point of view?

The other thing that happened I think in the quarter, Andy, was our Trane commercial services business leveraged a bit better. And it was an area where we were investing a lot of money in last year. We potentially invested new money in our Trane commercial contracting service and parts business, so for most of the year there was actually a flat to maybe even a possibly negative leverage there, and then improved in Q4. And quite frankly we are looking forward to that piece of the business continuing to improve leverage going into 2012.

Terrific. And just a question on pricing -- if you look at the progression of pricing throughout the year we exited the year at a very nice run rate. But if I look at your guidance for 2012 we only have 1 percentage point of pricing. And looking at the numbers, it seems that at least for the first three quarters the comps would be fairly easy, so I'm just wondering what are we -- how should I be thinking about pricing progression throughout 2012? Thank you.

So, Andrew, for the first quarter, we think we would have about 170 basis points of price. We think it will moderate through the year and we'll probably end the year down a little over 0.1 or 1.1 as you said. We will see lower inflation, at this point, lower inflation throughout the year as well. So we'll maintain a positive spread you know in the first quarter versus material costs is probably about 90 basis points. And then over the course of the year, that moderates 70 or 80 basis points over the course of the year.

Right, but how does it average out to 1% or is 1% just an approximation and it could be a little bit better than that?

Well you're lapping pretty aggressive price increases, so it's getting tougher as you get toward the back of the year, right? I mean the fourth-quarter pricing was pretty strong for us, so fourth-quarter pricing was a margin of about 2.7 points of price on the margin so that was fairly strong for us. I think as we get into the back half of next year it is getting a little bit tougher.

Terry Darling, Goldman Sachs.

Thanks; hey Mike, wondering if you could expand a little bit on the view on industrial segment margin expansion in 2012, 110, 130 basis points on 2% to 4% organic, looks very strong there Wondering if you could talk about maybe the pieces there as well, club car versus the other part -- the compressor business?

Yes, I would say that most part we're talking about those gains coming really in the industrial businesses. Club car will leverage, but great growth out of the industrial businesses. And again it's really going back over a two- or three-year period, where it has been a constant drumbeat around new product introduction and launching better product, better cost position, higher quality, less warranty, aggressive on the consolidation, including the move in China, you know, really restructuring really paying off. So what you saw here is the 2000 -- 2009, 2010 and 2011 restructuring done there leveraging against those volumes. So any volume that I think we get there is going to leverage at a fairly substantial rate. They have done a nice job around their footprint over those years.

So it sounds like more company specific restructuring costs out (multiple speakers)

I don't know if you were at the Knoxville facility, but that's a great example for us. They've actually gained in that product line 3 points of share. And this is a [Cage I] reported number. So this wasn't our view; this was a market view -- 3 points of share there.

And the first thing we saw was really good working capital management. Then we saw that was sustained. We saw margin improvement. That has been sustained. And it's really turned now into much shorter cycle times. And that's all related to higher share there of 3 points. So they are doing a great job and I think it will continue through 2012.

That's great to see. And continued sluggish golf market -- do we interpret that as kind of flattish?

Yes, flat, maybe up slightly, up a couple of points. They're working at their version of restructuring. They've been working through some warranty issues on some battery problems that we've had over the last couple of years with that business. I think that will get better. So we'll see good leverage there as those warranty issues disappear. And they continue their own implementation down in Augusta, so that's going well too.

And then maybe a little more color, Mike, on the pieces within Thermo King? I think I heard you indicate you are expecting transport Europe down for the year? How much down? And then how much up on the US truck side maybe would be helpful.

I will let Steve go through a little bit of detail here but if you net it all out it will be flat to up real low single digits for the year. So the increase in North America, offset by almost an equivalent-sized business and Europe down the same level. So kind of a -- sort of a higher single digit North America; a lower negative single digit in Europe, offsetting just about a flat to low single digit market.

Okay. And then just lastly I wonder if you could just clarify on share count, take 19 million buyback off of the 312 million would get you to 293 million on the ordinary. And then the differential between ordinary and diluted looks like 13 million, which would take you to 306 million versus 315 million. What am I missing there in the pieces?

Yes, we count the ordinary at about 299 million, Terry. So you add back the dilution so it's more like 312 million for the diluted count at this point -- end of year diluted count.

Okay. And then some additional share issuance to get you to 315 million; is that the assumption?

Yes, in fact what will go on here is we'll pick up a few shares, because the share price has popped up a little bit. You remember the converts, so we may pick up a few shares there on the diluted count.

And also it seems like our share -- our options kind of come above water about mid 30s, $36 a share. It's just kind of an average number in the back of my head. So we'll pick up a few diluted shares because of share price.

And there's no incremental buyback assumed in the 315 million, then, right?

No.

Okay. Thanks very much.

I take that back. We do have we do have the possibility of buying back some shares in the second half to control that dilution, okay. So, we're not expecting a big number coming out of any share compensation programs this year. It will be mainly driven by options coming into the money. And so in the second half we do -- I wouldn't be surprised if we do spend some money buying back a few shares, not a lot, to control the dilution.

Terry, we would earmark $300 million to $400 million for buyback in the back half of 2012 just due to seasonality of the business, but if you think about that as a September kind of midpoint it's got very little effect on the average share count for the year.

So you do have $300 million or $400 million buyback in the 315 million assumption? Just to be clear.

Remember we are making is -- as we said relative to our capital allocation strategies is that we are committed to controlling that dilution. And we will do what it takes to maintain the 315 million.

Thanks, I will pass it on.

Jeff Hammond, KeyBanc Capital Markets.

Good morning, guys. This is [Brett Lindsay] stepping in for Jeff.

A question -- order rates don't suggest that there is an acceleration in US nonresidential. It feels like a lot of your peers are pointing to this as an area of optimism. Any signs of improvement in terms of quoting bidding activity to support a recovery here?

To make sure I understand your question, we are not optimistic around the first quarter; it's a very tough compress anyway. We were up 10% in the first quarter of last year. And this year we see that obviously being impacted heavily in the first quarter. We'll probably be down 6% and 9% in the first quarter in the residential business. So maybe take it from there as to your question.

Okay, great. And then just in terms of residential solutions, I know you guys had a significant inventory reduction in 4Q. How would you characterize inventory levels at the company level now, and then as you look and speak with distributors as we kind of start the year here?

Well, I mean first of all, I'm going to tell you, to get $80 million of the wrong product out of the channel and then exceeding that by $10 million to $90 million was a great achievement in the residential business. So I think that in terms of indication of that team executing, first of all, I would tell you, that's a heck of an execution on the commercial team getting that out of the channel itself. And then obviously I stated in the earlier part of the call that they're right on track with the cost reductions and all the get-well actions that were in place. So we're in a good starting position kind of coming into the year there.

We look a lot less now at weeks of inventory. In fact our game and the game we want to play with our independent distribution is to be able to stock less and build to a shorter and shorter and shorter replenishment cycle. And so we are looking at, what was it, 20 to 30-day replenishment cycle from order to arrival at the distributor to be something in the 12- to 20-day range this year. So we are taking it down you know by design across the channel and taking our cycle times down.

So I look at it really as just sort of sentiment coming from the channel. I look at it from sort of the order rates coming in, but not at the inventory, so weeks of inventory are less meaningful to us going forward.

Shannon O'Callaghan, Nomura.

Good morning, guys. Hey, so on the commercial equipment business were there any price increases there in this fourth quarter or first quarter? And when do they get implemented?

Well if you go back to when they were put in place last year it was a combination. You had price increases on some of the more cataloged equipment, but you didn't see that this year going in. But what you do see is a lot more systems and tools and sophistication being put into the policies and the implementation of the pricing policies across the various channels and the various segments. So it's not sort of that one time sort of across the board price increase that we would've seen in 2011. Much more targeted systematic approach. And that is the capability that we have been building over the last 18 months.

Okay, so it was the catalog dynamic that would drive more of the pull forward, whereas the stuff you're doing now doesn't really create that dynamic, right?

Yes, I mean if you recall last year we were sitting here actually fourth quarter 2010 we were surprised. We had a 40% increase in our Unitary order rate. And we were thinking 20%, 25% of the pull forward. So a lot of pull forward came through that price increase over a year ago.

Okay. And then maybe on the $50 million of restructuring and cost reductions, can you give us a little more feel in terms of within the segments or geographies how that breaks out and what you are targeting?

Yes. I mean first of all you would expect a lot of that to be in the climate business; it's the largest business. So out of the $50 million plus, it's roughly $30 million.

And here you have got the consolidation of two plants so there will be two fewer plants at the end of the first quarter than there were, starting. So that's one piece of it.

But we've also gone and really began to attack the front end of the business and to get I would say more synergy in the whole product management, program management areas of the company. So that's a significant piece for them.

The other sectors are doing a lot. You'll see industrial will finish the consolidation in China. They have also taken some action on the front end of their business as well as security taking a smaller action on the front end of their business as well, just sort of right sizing it. And it would be changing some of the go-to-market dynamics about how we are looking to go to market in those businesses.

And then finally what we're seeing is a investment into the information technology systems. And so one of the largest single investments here is in the ERP conversion. We have got 122 full-time people dedicated today in this transition as compared to last year at this time. And by the end of the year we'll be close to 240. And that will continue to 2015 as we deploy common ERP systems across the company.

We have also continued to invest centrally in supply chain and in OpEx. And so bringing in a lot of the lean expertise and really a lot of talent into the sourcing organization to get to the next level there in terms of capability. So that's the other investments we're making.

The investments we are making in terms of restructuring and the cost reduction investments are actually slightly accretive for the year. So we'll put $0.16, $0.17 into it in the first quarter and we will get say $0.20 out of it by the end of the year.

And that answers a little bit of the hockey stick question about how do you get from first quarter here of about 8% of your full earnings to the $3.00. You pull out restructuring of about 12% and that's exactly what we did in 2011. But if you compare it to 2010 we were about 3%. And in that year we were much more aggressive around restructuring.

And I would equate our approach to 2012 to much more akin to 2010 and taking aggressive actions in the front of the year to kind of counter balance some flattish markets.

Okay, got it. That helps. Thanks.

Julian Mitchell, Credit Suisse.

Thanks a lot. I guess my first question was I mean last year it was you know fairly sort of controversial or whatever and you guys had this contingency number in your bridge, and there was a lot of talking around that.

I mean is it fair to say that your guidance for 2012 has some contingency built into it; it's just for understandable reasons you don't want to put it in print in an EPS bridge?

Well, we based the guidance on what we are seeing in the markets for top line and more realistic pricing expectations. You can see from the guidance we are pretty bearish on Europe, believing we're going to see a mild recession there. We are really there and across the company began to execute the scenario plans that are associated with that outlook.

You remember, Julian, we talked a lot about building scenario plans across the businesses in the company at multiple levels. And so we're working that.

The euro at $1.30 versus the average in 2011 of $1.40 has an impact for us. So I would say the guidance reflects the level of operational performance that we have a line of sight to achieving based on the current capabilities of the organization and the action plans that we believe area actually solid for the year.

Now you would expect too that our internal plan is going to be set higher than that than the guidance range we gave you. But we feel that the current range is appropriate for what we are seeing today and appropriate for what the current execution capability is inside the company.

Okay, thanks. And then just to revisit the point on the balance sheet, there is this $1.1 billion of you know available cash generation and so on. So can you confirm there is no appetite or whatever to go for more M&A because obviously after dividends and the $300 million or $400 million you mentioned in the second half that still implies you know several hundred million of available cash after all that.

Yes, let me give you my thoughts on capital allocation for 2012. So you just said we've got $1.1 billion that we're planning for the year. We ended the year with $1.2 billion of cash on the balance sheet, so we are in good shape there.

The convertible bonds that mature in April are going to use about $350 million. When we raise the dividend by 33% with the March payout it will use in total about $200 million. So we have earmarked about $300 million to $400 million for buybacks, which will be in the back half of 2012. That is going to leave around $300 million to $400 million available for deployment.

As you know we have historically -- have used cash in the first half, so when we get to the second half, we'll see what share price is and we'll make the call. And if there are smaller acquisitions that are attractive and actionable at a reasonable valuation, we are going to pursue them. And again this is going to depend on where the share price is.

We would like to build on some of the core businesses, particularly overseas. But the valuation and profit of targets will have to be consistent with our goals and our commitments. And obviously even if all the excess cash went to M&A we're not talking about anything large in the context of a $14 billion enterprise, so --. And if we decide the best path is to put the money back into further repurchase then we will do that as well. But we will make that call on the last $300 million to $400 million based on the dynamics which are always moving. We will make that call in the back half of the year.

Thanks a lot. And then just one quick follow-up. You know it seemed like this year in the HVAC industry generally in the US there will be an abnormally sort of compressed supply chain effort to get stuff ready for the summer selling season. Obviously inventories are very lean; distributors are not in a rush to start ordering yet. So on the assumption that you have a very soft Q1 and then a sort of abnormal spike into Q2 to get everything ready for the summer, how do you guys feel about the ability of your kind of manufacturing plants and supply chain to cope with that? Because obviously when we have had demand spikes before in late '10, there were some issues around managing that.

Well I mean our suppliers are all in the same position looking at the same sequentials. I mean they're kind of track -- looking at how do they respond to the same potential in the marketplace. So we put for the major suppliers a lot of protection programs in place to be able to protect for increases.

Julian, of course, that all depends on how much the magnitude of an increase will be, but I don't see sort of according to the plan we have got you know here on the outlook that we're seeing for the next few months that that is going to be a significant risk for us at all.

Thank you. And we have time for one more question today. Stephen Winoker, Sanford Bernstein.

Thanks for fitting me in. Good morning. So you mentioned price inflation; you talk about 2.7 in price and 0.9 material inflation on the quarter. Just that 1% on productivity and other inflation, how are you -- how much was the other inflation and how much was the productivity? Just the same breakout you gave on price?

They actually -- exactly net it in the fourth quarter if that is what you are asking, the net. So productivity equaled inflation.

But it showed 100 basis points positive.

Productivity -- okay. I'm adding back material inflation into that, so I'm saying total productivity and total inflation, but netted.

But not including price, so productivity equaled total inflation.

Right.

Okay, all right. And that kind of run rate, when you sort of think about that going forward to get your 50 basis points, midpoint margin expansion next year, are you thinking about an acceleration therefore in the productivity, particularly as you ramp through the year, given the additional restructuring? And how might we dimensionalize it?

Yes, absolutely. The restructuring and the cost reduction investments being made now in the first quarter are all about that, Steve, so we would expect to ramp it up. And Q3 and Q4, we would expect to have the benefit of that. Q2, we're still going to be -- if you look at how we are spending that investment and restructuring for the year it's all Q1 and Q2. And the Q2 stuff will be fairly early in Q2, so we would expect the back half of the year.

And the 19 value streams, are those -- are you expanding those early in the year or just sticking to those, or --?

Yes, no; we actually expanded on what we have decided to do though is take the value streams -- an example -- we've got several that would've been ordered to ship and we've expanded them from a proposal to cash. So we've widened the value stream. We've had great success in taking it through the entire value stream. We will add a few to it but we're going to stick to our mantra, which is really to go a mile, a mile deep and inch at a time. So happy with the 19.

I think we are at or ahead of where we expected to be. I think it's a large transformational cultural change in the company. And the last thing we want to do is spread ourselves too thin.

And we will talk about this in March when we are together, but the resources and the capability building that has gone on over the last couple of years that have been added to this is really outstanding. And so I'm more encouraged every day, looking at the capability coming into the company and maturing in the company to be able to go an inch wider as we go. So we will expand some, we will add a couple of new, but we won't go so far as to spread ourselves too thin. And that is working for us.

And is the ERP benefit -- I know you're building cost there still -- but when do you start to ramp in benefits into that productivity number, or are you already doing it?

Yes, later in 2013. Another thing that happened -- another investment we are making is we outsourced a lot of the infrastructure for IP. And so we are in the middle of transitioning about 350 people through a third party to be able to do that for us. And so we are actually transitioning in quarter one -- actually quarter four, quarter one, quarter two, with duplication of resources there to handle that transition. That kicks in fully in 2013, as well as the initial phase of the ERP. But that's going to be a slow fuse all the way through 2016 in terms of when you really get the benefit.

We don't come to North America until 2015 with that ERP transformation. So we are doing Europe and Asia and then North America. So it will ramp up over time.

Okay. And then just a follow-up to your prior answers on a couple questions. The risk on the supply chain -- and we just heard yesterday Emerson state pretty strongly that they are -- that they have issues with -- potential issues in downsizing relative to the rest of their customer base. So I guess I would just note that you feel protected even on that front with those guys?

Well we have a number of sources, Steve, so you know it depends on what we're buying. Okay, so, we'll look at -- and if you think about sort of what's growing for us, it's really, on the residential side, '13 is here, so it's a quarter of the market, right? And what we are buying there necessarily isn't -- you know going to be an Emerson compressor; it could be, doesn't have to be. We are fairly agnostic around that. And we have designed to be agnostic around some of this.

So we will look to protect. We will look with great suppliers like Emerson to be able to handle our demand. And to Julian's question, it is always a matter of degree. So I think we're planning in some degree a sequential recovery here. We're not planning for a barn burner. And if we see that coming, we will look to pressure test that supply chain.

Great. And I will just follow up with the rest of the questions off-line. Thank you.

Thank you, everyone. And Joe and I will be available to -- have any -- answer any follow-ups the rest of the day. Thank you.

Ladies and gentlemen thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone, have a good day.