特靈科技 (TT) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Ingersoll-Rand first-quarter 2012 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 follow at that time. (Operator Instructions).

As a reminder, today's conference is being recorded.

I would like to introduce your host for today's conference call, Ms. Janet Pfeffer. You may begin, ma'am.

Good morning. Thank you, Kevin. Welcome to our first-quarter 2012 conference call. We released earnings at 7 AM 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 we will be using this morning.

This call will be recorded and archived on our website.

If you would please go to slide 2. Statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the Safe Harbor provision of Securities law. Please see our SEC filings for a description of some factors that may cause actual results to vary from anticipated. This release also includes non-GAAP measures, which are explained in the financial tables attached to our news release.

Now I'd like to introduce the participants on this morning's call. We have Mike Lamach, Chairman, President, and CEO; Steve Shawley, Senior Vice President and CFO; and Joe Fimbianti, Director of Investor Relations.

With that, please go to slide 3, and I'll turn it over to Mike.

Thanks, Janet. Good morning, and thank you for joining us on today's call. Earnings per share from continuing operations for the first quarter were $0.31, $0.08 above the midpoint of our guidance range of $0.20 to $0.26. As is usually the case, there were some puts and takes in the quarter.

The tax rate and other income expense were unfavorable by about $0.01 each. We had a favorable stock-based compensation adjustment of $0.03 that was not in the forecast. Restructuring spend was about in line with our estimate. Higher-than-expected inflation was offset by favorable overhead spending. So the margin associated with the higher revenues was essentially the difference between the midpoint of our guidance and the $0.31 we reported.

Although somewhat better than our expectations, markets were generally in line with our outlook in a slow growth environment. In the first quarter we saw revenue growth of 3%, excluding the Hussmann refrigeration business from the 2011 comparison.

We experienced moderate growth in revenues in Industrial, and low growth in Climate and Security. Residential revenues were down year-over-year, as residential HVAC revenues declined high-single-digits while Residential Security revenues were up high-teens.

As a reminder, last year's first-quarter HVAC revenues were strong, up 12% from channel restocking. Excluding Hussmann, orders were up 6% and 7% excluding currency. Operating margin for the quarter was 6.7%, down 30 basis points versus prior year. If we exclude Hussman from last year, margins in Q1 were down 90 basis points from first-quarter 2011.

Although margins improved from pricing and productivity, they were depressed by higher planned restructuring and investment spending year-over-year, as we discussed in the February earnings call.

All of our businesses continue to realize positive pricing. And in the first quarter, our pricing outpaced direct material inflation for the fourth consecutive quarter. Please go to slide 4.

Those of you that attended our recent Investor Day are aware of our ongoing focus on investment and innovation to accelerate our revenue growth. We steadily improved the flow of new products and services to the market over the last several years. Our goal for 2012 is 25% of revenue to come from new products and services introduced in the last three years, which would equal approximately $3.6 billion in revenue. We are on track to reach this goal, and we expect to introduce new products in all of our businesses during the year.

The health and vitality of the portfolio is in excellent shape, and we'll continue to build our organizational capability and increase our investments to foster innovation over the next few years.

We also continue to make progress in our operational excellence initiative, which is our long-term approach to the lean transformation of the Company. This is a multifaceted effort that will reduce working capital; expand margins; and, ultimately, increase market share across our businesses. We've expended all 19 value streams to include the entire value cycle, from quote to cash, and will add five more value streams during 2012.

As we indicated in February, we have launched several restructuring programs. And, therefore, restructuring expenses are frontloaded in the first half of the year in order to accelerate the benefits during 2012.

Now, Steve will take you through the quarterly results in more detail.

Thanks, Mike. Please go to slide number 5. Orders for the first quarter 2012 were up 6% overall; 7% excluding currency. During the quarter, we saw positive year-over-year bookings in all sectors. Global commercial HVAC and residential HVAC bookings were up high-single-digits. Transport demand was up slightly, with strong demand in North America, offset by soft European truck trailer orders and significantly lower marine demand. Commercial security orders in the quarter were up 3%. Industrial orders were up slightly with strong growth in the Americas, offset by weaker activity in Europe and Asia.

Now please go to slide 6. Here's a look at the revenue trends by segment. Revenues excluding currency, shown on the bottom of the chart, give a better view of our organic growth. Note the Climate and total data for the first quarter excludes Hussmann from the comparisons. First quarter revenues were up 4% excluding currency. Climate revenues increased 4%. Industrial had a strong but moderate growth at 9%. Residential was down 3%, as lower HVAC revenues more than offset residential security revenues. Commercial security revenues were up 2%.

On a geographic basis, revenues were up 4% in the US and up 1% in international markets; up 4% internationally, excluding foreign exchange.

Please go to slide number 7. This chart walks through the change in operating margins for first quarter 2011 of 7.6% to first quarter 2012 which was 6.7%. This data excludes Hussmann for comparison purposes. The positive impact of volume was more than offset by negative mix --particularly in our residential HVAC business -- and foreign exchange, creating a 50-basis-point headwind to margins.

Our pricing programs continued to outpace material inflation, adding 140 basis points to margin. Productivity offset by other inflation was neutral to margins. Year-over-year investments and other items were higher by 180 basis points including a 70-basis-point impact from higher restructuring. In the box you can see incremental restructuring by sector, with most of the impact in Climate and Industrial as anticipated. Total investments includes other cost reduction and growth investments as well as restructuring.

Please go to slide number 8. The Climate Solutions segment includes Trane commercial HVAC and Thermo King transport refrigeration. Total revenues for the quarter were almost $1.7 billion. That is up 3% when excluding Hussmann from last year. Revenue was up 4% excluding foreign exchange. Global commercial HVAC orders were up 9%, with global equipment orders up mid-single-digits, and parts and services up mid-teens.

Trane's commercial HVAC first-quarter revenues were up 4%. HVAC revenues in North America were up mid-single-digits. Revenues in Latin America and Europe and the Middle East were also up, while revenues in Asia were down slightly. Commercial HVAC equipment revenues increased low-single-digits. HVAC parts, services and solutions revenues were up mid-single-digits versus prior year.

For the Thermo King transport business, revenues increased low-single-digits. Worldwide refrigerated truck and trailer revenues were up mid-single-digits, with strength in North America and flat volume in Europe. Thermo King orders were up slightly in the first quarter. Global APU and aftermarket revenues also increased during the quarter. The marine container business, however, was down significantly versus last year.

The operating margin for Climate Solutions was 5.7% in the quarter, a 40-basis-point decrease versus first quarter of 2011, excluding Hussmann. Pricing and productivity were more than offset by inflation, higher restructuring, and spending on investment initiatives.

Please go to slide 9. Industrial Technologies' first quarter revenues were $689 million, up 8% on a reported basis; and 9% excluding FX. Air and productivity revenues increased 9% versus last year. Air and productivity orders were up slightly. Club Car revenues in the quarter were up 2% and orders were flat for prior year. Industrials operating margin of 13.3% was flat compared to last year, as higher revenues, pricing and productivity was offset by higher restructuring and investment spending, inflation and mix.

Please go to slide number 10. In our Residential business, first-quarter revenues of $422 million were down 3% compared with last year, on both a reported basis and excluding foreign exchange. Bookings were up 10%, with increases in both HVAC and Security. Our residential HVAC revenues were down 8%, and the sluggish housing market depressed the market for HVAC systems. However, we did see an improving trend as we move through the quarter. We estimate that the first quarter industry unit shipments were down low-teens, versus the first quarter of 2011, with declines in all major equipment categories.

Revenues for the Residential Security portion in the sector were up high-teens, with increases in the new builder channel, big-box, and South American customer volumes. Sector operating margins of negative 2.5% was down 4.3 percentage points compared with 2011. Improved pricing and productivity were more than offset by lower volume, adverse mix and inflation.

Please go to slide 11. Revenues for Security Technologies were $379 million, up 1%, and up 2% excluding currency. Americas revenues were up slightly and overseas revenues were down slightly. Mobile bookings were up mid-single-digits. The Americas were also up mid-single-digits. Operating margin for the quarter was 18.5%, down 50 basis points from last year, as productivity and price realization were offset by inflation and unfavorable revenue mix.

Please go to slide 12. We finished the first quarter with working capital of 3.4% of revenues, an improvement of 1.9 percentage point versus the first quarter of 2011. Given the seasonality of our businesses, we normally used cash in the first several months of the year. Available cash flow in the first quarter was an outflow of $36.5 million, an improvement of $68 million versus last year's first quarter.

Please go to slide 13. We continue to execute according to our balanced capital allocation strategy. This is unchanged from what we discussed at the analyst meeting in March. This week, we paid off the maturing convertible bonds. We also issued shares to sell the convertible premiums that were attached to those bonds. The impact of the converts has been -- has been in our dilution calculation since issuance. The settlement merely moves the dilution impact to the basic share count.

So, with that, I'll turn it back to Mike to take you through the forecast.

Great, thanks Steve. And please go slide 14. Our revenue outlook for 2012 is essentially unchanged from the guidance that we gave you in February. Activity to date and our outlook continue to indicate low to moderate growth across our portfolio.

Europe has been weak, as expected. Asia has been somewhat softer than our expectations year to date. The US has been a little stronger in commercial HVAC. And, as expected, we saw moderate growth in transport markets in North America, with some contraction in Europe.

We see a continuation of the current conditions in residential markets, as 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 remainder of the year, particularly our key institutional markets. Foreign exchange will be a headwind in 2012, adversely impacting growth by about two points.

We are maintaining a revenue range for full-year 2012 of $14 billion to $14.4 billion, that's flat, up 3% compared to 2011 revenue of $14 billion excluding Hussmann. Excluding FX, the organic growth rate is 2% to 5%.

Please go to slide 15.

Summarily, we are maintaining our full-year EPS from continuing operations guidance range of $2.90 to $3.10. We continue to expect to generate available cash flow of about $1.1 billion.

Second-quarter revenues are forecast to be $3.8 billion to $3.9 billion. Revenues on a comparable basis, excluding Hussmann, are forecast flat, up 3% versus the second quarter of 2011. That includes FX, which will be a headwind of about 2 points. That means, excluding FX revenues, we'll be up 2% to 5%.

Earnings per share are forecast to be $0.85 to $0.90. In the second quarter, restructuring spend will be about $0.03 higher year over year, as we continue to implement cost reduction programs. Additionally, recall that in the second quarter last year, we had a $23 million gain from the sale of assets from a factory consolidation.

We are assuming a share count of 315 million shares and a tax rate of 25%.

Please go to slide 16.

We started 2012 slightly ahead of our forecast, delivering revenue and EPS above expectations. But, as you know, the first quarter is a seasonally low quarter for us. At $0.31, first-quarter earnings represent just a bit over 10% of our 2012 annual guidance range. So far, we've seen a few growth areas that were better than our expectations, though the others started the year a little lower. So on balance, things still look about how we expected.

We are focused on continued change and improvement to ensure that we're managing our business optimally across the spectrum of economic conditions. Our focus is on positioning the Company to continue growing revenues, earnings and cash flow by employing tailored strategies across diverse markets.

We continue to feel good about our Company and our progress. We have a portfolio of outstanding, market-leading brands. We continue to demonstrate our ability to generate high levels of cash flow, even in the face of a challenging backdrop. The long-term attractiveness of the end markets in which we operate and our competitive positioning will allow us to benefit as those sectors of the economy improve. And a strong penetration and positioning in emerging markets provide us with significant growth potential.

As said last quarter, we realized that we cannot rely solely on these fundamentals to achieve our goals. And our management team is committed to actively managing the Company to generate sustainable, profitable growth. As I said back in February, we're not waiting for macroeconomic lift to improve our business. Instead, we're practically working to reduce costs and invest in our growth markets.

With that, Steve and I will be happy now to take your questions.

(Operator Instructions). Jeff Hammond, KeyBanc Capital.

So, just to understand the moving pieces a little bit better in 2Q; so your share count is way down, and the offsets are the China gain and a higher tax rate. But how should we think about incremental margins on the modest revenue growth, relative to some of the negative leverage you saw in 1Q?

Jeff, maybe what I'll do is give you a bit more of a Q2 bridge here. And then we can talk about the pieces inside that. But last year's second-quarter, of course, was $0.92, and it included $0.07 from Hussmann and $0.05 from the gain on the sale we mentioned about the plant in China, which brings us to about an $0.80 starting point.

The share count, you're right; 350 million to 315 million is the share count, which adds back $0.09. The restructuring spend will be about $0.03 higher this year. And then if you add volume, price, mix; it adds about $0.05, assuming a 50% conversion on that. And then, if you look at higher investments; productivity and inflation; lower interest and taxes; and FX, it nets to about $0.03 negative. And that gets you back to the $0.88 midpoint.

When you pull out the one times last year and look at the leverage in Q2, we are estimating that about 20%.

Okay. That's helpful on the bridge. Then just quickly on residential, can you talk about what's driving some of the improvement? Is it weather-related? Or are you seeing some traction from R-22 and Ameristar?

Yes, our mix of entry-level systems is up quite a bit. We would have been running at about 62% in the past. We're running at about 66% today. So the strategy of trying to play across the whole portfolio is working in terms of unit volumes for us. Actually, January and February were very slow for us. March was a very big, important month for us. And so it's tough to look at a trend there, off one data point in March.

But there are some signs that you're seeing some progress here in the market. In addition, we're in the market with product at a price point that's competitive. And the factories and supply chain are working as they should. So that's really kind of where we're at right now in that business.

Okay. Thanks, guys.

Stephen Volkmann, Jefferies.

Wondering if you could just comment a little bit -- it sounds like the raw material cost inflation has been a little ahead of what you've been expecting, which surprises me a little bit. Can you just sort of flush that out, or maybe I'm just reading it wrong.

Yes, actually material inflation for us has been fairly well behaved so far this year. In fact, first quarter material inflation was actually somewhat below our original expectations. And our material forecast for the whole year 2012 was not significantly different from what we told you in February. What we're seeing is some other inflation, and that's going to be in areas like freight and logistics; fuel for our service vehicles; and then some benefit-related costs.

Okay, good. That's helpful. And then can you just sort of remind us the way that the restructuring is likely to kind of go through? I think most of it is coming in the first half. And do we expect it to still be a headwind in the second half, or actually turn and be a tailwind in the third and fourth quarters?

Our restructuring forecast for the full year is unchanged from what we said back in February; and the spend, you're right, will be front-end loaded. So versus prior year, it's about $0.07 higher for the full year, despite being favorable year-over-year in the second half. So we had come in about $0.07 in Q1. We essentially were on track with that. We've got a bit more to do here in Q2, and then we'll get favorable -- favorability in the back half of the year. So, in total, it's about $0.07 on the year.

And there's two forms of tailwind in the second half. It's the fact that we're spending it in the first half; we're also getting the productivity and cost reduction in the second half. So it's less spend and more savings in the second half.

Great, that's helpful. Thanks very much.

David Raso, ISI Group.

On the second-quarter revenue growth, ex-FX, ex-Hussmann, it's modestly slower than you saw in the first quarter. But your orders accelerated the year-over-year growth rate. Can you give us an update what you're seeing so far quarter-to-date, or square up why an acceleration in order growth in the first quarter is giving you slower core growth in 2Q than 1Q?

Yes, Dave. I'll give you some puts and takes on that, relative to what we were thinking last time we were on the call. One of those surprises for us in Q1 was the strength of the North American unitary business, and there we had bookings in the quarter by North America up 17%.

That's also one of the value streams we've been working on now for a couple of years, mainly around cycle times and quick ship on product. So, in a lot of ways, the orders that we took in January and February in that business, we were able to ship in the quarter. So the turn on that business was very quick for us.

We also had similar that happened with parts and service, where we saw parts and service booking and the Climate business up about 15%. Again, a very quick turn and ship on that, in terms of the ability to deliver services in that area of the business.

So some of what we saw, in terms of the high bookings in quarter one, are evidenced in the revenues in quarter one, where we were able to book and ship that pretty quick.

Probably the third one that comes to mind is the Security business in the Americas, where they actually had a quarter which was a little bit better than we expected in the Americas. And for a lot of that business, we were able to ship that in a matter of hours and a few days as opposed to weeks or months. So that's relatively quick ship as well.

So I think it kind of normalizes back down to the view that we had initiated initially for Q2. We -- on the flipside of that, saw slower activity in China, particularly in HVAC. We saw slower than a pretty negative outlook that we had in the container business globally, so that was a little bit of a slowdown for us beyond what we had anticipated. So net-net, we think it's a pretty realistic forecast for Q2 revenue.

Well, I guess that quick turn of order into shipment in the quarter begs the question -- would you mind giving us the backlog, year-over-year, March 31, versus the year-over-year backlog growth at the end of the fourth quarter?

Yes, Dave, I don't have the backlog numbers in front of me. But we can get you the backlog numbers here, probably off-line.

Okay, then. Last question -- is the back half of the year -- you touched on it earlier, about some of the tailwinds you'll have year-over-year. But, obviously, the implied second half year-over-year growth is also pretty modest. And you expect to turn that into some pretty big margin improvement.

Could you quantify the savings? Steve, you had mentioned some of the actions you're taking now; which businesses are they in? And how quick a turn -- I mean, can you quantify it? So I see it as, that's the only issue around the guidance is, maybe the revenue's conservative potentially, maybe not. It's debatable. Second quarter margins don't look that difficult. But the back half is asking for some expansion in margins that we haven't seen in 1Q nor we expect into 2Q. So I'm trying to get a little better clarity around the cost savings you expect in the back half from some of these first-half actions.

Yes, I think if you look at the productivity piece alone, Dave -- first half to second half, we would see at least a $60 million to $70 million pickup in additional productivity because of the early spending of restructuring, plus the fact that we're just getting traction on everything we're working on.

So we definitely see that type of a jump in just productivity or savings, first half to the second half. And if you look at the amount of restructuring spend, there's probably another, at least -- probably, probably about $20 million, $25 million less restructuring spend in the second half than the first.

Okay, so -- (multiple speakers). Yes, that's a big number, Steve. So the $65 million alone on the implied second-half sales would almost be 90 bps right there. And then the productivity -- the lower spend you just cited of $25 million, that's another 30 bps. So that's 120 bps right there. So really that's 65 of savings -- is, I mean obviously we will have to see it play out if you really can get it -- but that $65 million a big number. That's over 100 bps margin right there.

So the question I have -- but where is that? Which businesses do you expect that big of save off the first half?

Yes, Dave, it's Mike. One of the things you're going to see here is that what we'll do in the residential business -- essentially we'll have a planned process increase in the second half of $27 million more than last year on lower revenues there. So that is really working itself out over time here as well. Back half of the year as well, would have a couple hundred million dollars in revenue for us. So that would leverage up, particularly coming into the Climate business, I would assume.

That's really helpful. Thank you.

Deane Dray, Citi.

I was hoping to get more color, and how March actually played out. Because one of the surprises, at least to me at the Analyst Day, was how the last two weeks of March can really drive up to 40% of the quarter's sales. So how did that actually play out? And, longer-term, how might you change either the sales incentives to get a more level loaded quarter? Or is this just the nature of your end markets?

Really, the res HVAC -- Deane, I don't think that incentives are going to drive different behavior there. Although it's interesting to think about that from a dealer and distributor point of view. But the dynamics in the industry are pretty well set in that regard. Yes, that was the place that we really saw the most risk. And so we would've started in January down around 20%; would have seen February down around 7%; and then March is just the phenomenal month, up more than 40%, in terms of overall bookings.

So you get a feel for the kind of risk that goes into a quarter, particularly in the back half of the month of the final -- of March. And even the last week or so. So as we were together at the meeting, we were looking for a big March. And we got a little bit bigger March than we even thought. So that was a positive sign for us.

The other businesses are a lot more linear than that. The exceptions are going to be those that are either climate-related, which would be like commercial, office space, where we had unitary product going into that market, would be a bit more seasonal, as well as the construction cycles. For some of the institutional markets -- schools in particular, would drive a little bit of non-linearity for us in our outlook.

And then over on the Climate side, in the marine market this quarter you saw a high-profile competitor enter the marine controls market. Now, this is not a captive player, but does it change any of the dynamics from your perspective?

Yes, no, I'm very aware of that. They are a supplier to us in a few areas. I don't think it changes the dynamics much on that. We both have our own controls. And we partner with Emerson, or before that, JCI in that business. So I don't think it changes a whole lot.

Great, thank you.

Nigel Coe, Morgan Stanley.

So, I just wanted to dig in to the strength that you called out in the North American unitary market. To what extent do you think that's a fundamental turn in the market, versus a little bit of weather impact?

Yes, Nigel, that was really -- it's interesting because the Dodge even data would support in the non-institutional markets, that that was an area of growth in the quarter. I think it's a combination. It was really in office and retail. And that's going to have factors that include aging systems, much like you see in the res business; as well as some seasonal factors; as well as, of course, a warm winter and a little bit of early spring and summer. So I think all that kind of combined.

Our focus has been on really trying to look at some of that discretionary quick ship business. We've been targeting that. I think we have some success there, as well as being able to convert some of that business and compete a little bit differently on cycle times there, so I think that contributed as well.

And how would you characterize the applied markets?

Very interesting -- Americas was strong, in terms of bookings. EMEA was okay, about as expected. Asia was weak. And Asia for us -- we're about 50% China, 50% rest of Asia; rest of Asia was okay, but China was very weak. But I was in China and India a couple of weeks ago. I was in China, actually, early April. And we picked up an order there from a customer for 100,000 tons of cooling on a single order.

So, that spread over the course of a year or so. But that's -- this was these large orders that can swing you still therefore. So I think that the market is going to recover in China. I think by the end of the year we'll see sort of a recovery take place. But the first quarter was very weak.

But then, going from 1Q to 2Q, I mean some companies we cover are talking about visibility in China getting better, growth rates picking up in 2Q. Are you seeing that in your market?

Yes, as evidence, the order that we got when I was there, would be a good sign of that. But also just going through the reviews inside the Company, there was a lot of visibility about what's happening in the market. I didn't get a sense that the activity level was down. I walked away feeling good about the balance of the year.

And then, just quickly, digging into the operating leverage for 2Q. You talk about 20% underlying incremental margins in 2Q. If we take away residential, which I'm sure it will be impacted, how does that look for the rest of the businesses?

Well, res is a contributor, there's no question about that. But the security is the one where it probably got the most amount of restructuring going on there.

Yes.

So security -- that idea, I think if you pull out the restructuring that they are doing there, they're actually going in the right direction there, but that would be the one where we'll see the restructuring there take place. And, you know, of course the high margin business, that'll hurt.

Yes.

I think that -- and Climate will be a little less than you'd expect. Because of the mix shift, we'll see more, obviously, Trane commercial equipment in the quarter, which tends to mix it down a little bit.

Okay. And then just finally, residential margins in 2Q?

Yes, 2Q margins, I think are going to be kind of in that 7% maybe to 8% range in the quarter. We would look at some growth there of probably 1% to 4% for us. And that supports a little bit of what we saw in March, continuing through here to early April.

Okay. Thanks, Mike.

Jeff Sprague, Vertical Research.

Hey Mike, I'm wondering if the March order strength you saw constitutes any effort to rebuild inventory at this point, or if even this early warmth in April is sparking any kind of -- fear is probably too strong a word, but urgency around channel inventories, as we look into the season?

Jeff, I tell you, we've been now for about a year trying to work out a whole different inventory model for our wholesalers and for their dealers and for our wholly-owned wholesale teams. And so the replenishment rate that we've got is much faster than it ever used to be, and it's by design. So we are not a good judge of looking at channel inventories and being able to gauge the amount of restocking that's going to take place. Steve, I don't know if you have any additional comments on that.

Yes, what we do have though, Jeff is, if you look at our independent distributors -- and we looked at the inventory levels in that channel. It's fairly flat, so we think there was some pull-through in even March, for what sold through. Right now it doesn't look like there's any problem on the horizon, in terms of inventory build in the channel.

Right. And then, could you give us a little color on what you're seeing in the energy retrofit markets in Climate? I'm wondering if you've seen the public spending falloff, and if there's any pickup as it relates to more commercially-driven activity.

Well, the institutional markets in general have been weak. Federal markets have probably been the weakest, but healthcare and education aren't too fairly -- aren't too far behind. Interestingly, we've had a couple of large wins in the performance contracting area, in the area of education. So this is that dynamic that happens when funding gets a little tighter.

We do see some of the vertical markets, particularly education and healthcare, which tend to resort more to performance contracting to -- or energy services to pay for the retrofit. So we saw some of that in the first quarter. And it's some large, active proposals in those verticals, outstanding here in the second quarter.

So I do think that there is a little bit of a shock absorber in that, as it relates to performance contracting. And we did see a little bit of a pickup in the size and volume of proposals in that area relative to straight stick retrofits.

And just, finally, can you give us just a little more granularity on how weak Marine was, and kind of what was going on in US -- sorry, the Europe truck trailer market for Thermo?

Do you want to go, Steve?

No, you can go ahead.

The container was down, I think -- not sure I have a number here --

About 30%.

30?

Of revenue.

Truck and trailer were up a little bit better than we expected. [ESA] was about what we expected. Container was down, so it offset the favorability in the Americas.

Okay, thanks guys.

Terry Darling, Goldman Sachs.

Sorry for the confusion here. Did I hear you say that the quarter had $0.03 favorable from lower compensation expense than you expected?

Terry, stock-based compensation -- yes, so there was $0.03 of favorability that we not forecasted. You are correct.

Okay. And so we should not think of that as repeatable? Or is there some positive on a full-year basis that extends forward?

It actually just changes the run rate going forward. We were calculating it differently, and so we made the adjustment in the quarter, so going forward, just part of the run rate going forward. But no, it would not be an incremental pickup year-over-year.

Okay, that's helpful. Jumping back to the resi business on the down 8% for the HVAC piece -- wondering if you might break that out, unit versus price.

Terry, I missed the first part of your question. What particular part of HVAC?

Resi solutions, HVAC revenues, down 8% in the quarter. Just trying to get a feel for price versus units there.

Yes. Gosh, price is still positive. We're getting a couple of points of price across each of the businesses, still. I think volumes were down probably about 10%.

And I guess, you know, we're picking up --

That would be the total motor bearing unit market, okay. I'm sorry, that would be our piece of the total motor bearing unit -- in the whole thing, okay. All equipment lines, we were down about 10% in volume.

The market was down 13%, we were about down 10%, and we picked a couple points back up in price, so that's how got to the minus 8%.

Maybe you just answered my next question. But we are picking up that just on the resi side, that you're seeing some increased price discounting, or that some of the increases from last fall are not sticking here. Maybe it's just March reaction to the weaker volumes in January, February -- people hedging their plant load as you look into the second quarter. How do you guys feel about the price dynamics in that market right now? And is there a chance for some upside on the unit side as well, as you see what's going on in April so far? Or do you just not have an update on April so far, to go that far?

Okay. One thing I think that hopefully is going to play out well for us in Q2 is the fact that last year we didn't have a competitive product at 13, 14 SEER. And so what we were doing was dealing with that through some price. Nowadays, as we find these competitive situations out there, we've got competitive 13, 14 SEER products. So we're not having to switch a Trane brand or American Standard brand into the opening price point. We're able to do that with Ameristar. So there is an advantage there that I think we -- we've got in Q2 and how we deal with that. So the substitution that we would've had last year won't occur to the same extent this year.

Okay, and just how you're feeling about the approach competitors are taking with price?

Well, I'm not hearing a lot about people dropping price to the marketplace. It's been competitive for at least two, three years at this point, really. So, no new waves coming out, or waves of panic around anybody dropping price.

There's lots of price adjustments going on, I think, as people are fine-tuning what would have been a 2009, 2010, more of a blanket approach to pricing. So I have heard of particular models and combinations going up or going down based on just fine tuning now, that approach in the marketplace. Most everybody took more of a peanut butter spread around price, to move it quickly into the marketplace. And, again, you're seeing that fine-tuning take place now, I think.

Okay. And are you just using the Ameristar brand R-22, or are you using the Trane brand as well?

No, we've got Ameristar in both 410-A and R-22.

Okay, thanks very much.

Steven Winoker, Sanford Bernstein.

I'm just trying to make sure I understand the guidance question for the full year, since you didn't flow the beat through the quarter at all. You held your full-year guidance relative to the beat. Just help me understand, what again is either -- you're doing -- you're spending more on the investment side, where is the disconnect that I'm missing? Why didn't you flow it through?

Well, when the revenue is quite above the midpoint, $75 million above the midpoint, I see that moderating, Steve. I just don't see that really -- I don't see that as a trend. I wouldn't call the month of March a trend, here. We'd want to see more data points before we would go out on a limb and say that we're seeing a sustained recovery in either residential or in commercial HVAC. So, Steve, I'd really need to see at least another quarter of that sort of recovery and beat before I would really want to take the range up or change things.

Okay, so it's really the top line. It's not additional investment, additional restructuring, or additional -- or a lower conversion, or any of that?

No, everything pretty much stays the same. We felt like we saw a lot of volume. And we don't want to get carried away here that it's sustained recovery.

Okay, great. And then I'm just -- again, as always, trying to make sure that I have a handle on the beat of traction in productivity and how that's progressing across the business units. I know you do reference it in a couple of spaces in detail. But if I look at that chart again on page 7 and I've got zero, how big was the -- you talk about mostly just the other inflation side being a little bit bigger than you expect. By my view of the marketplace, I'm expecting that other inflation to be about 3% or so. Am I way off on that?

No, you're not.

Okay. And, therefore, that would sort of imply the same thing around productivity. Are there any other -- do you see accelerating -- but, Mike and Steve, are you seeing accelerating improvement on that productivity metric that we used to watch?

There's so much investment in Q1 and Q2 there, Steve, that absolutely have to accelerate Q3 and Q4. The restructuring that we signed up for, the investments we made, where they were specific to productivity -- all have paybacks that we expect yet, as late as the fourth quarter. But we expect to get them.

But even this past quarter, if you just take out the restructuring, all that, and just look at the value stream and look at the impact of those, are you seeing the financial impact?

Yes, I mean, we are seeing that we're operating within our capability here. We're pretty accurate at this point in time, without being able to forecast that. So there were no surprises in Q1 around, I would say, productivity, when you pull out the investments and the restructuring.

I think that we'll see additional material productivity toward the back half of the year. We just formed that team fully in November. They're getting their feet underneath them. Going forward, they've got planned strategies to impact. But that takes time to actually make those changes, both whether it's a supplier price or it's a supplier change itself. And that typically will be more back-end loaded, but -- no, I don't see any breakdown or surprise in Q1.

And that material productivity -- does it show up in the price material inflation segment or the productivity other inflation segment? In the --

Price material inflation.

Okay, great. And are your SIOP -- I know we've -- are you making progress in the SIOP side? And, for example, resi and ultra, when you talk margin -- the quick, or in the light commercial and quick ship, that means that your SIOP processes have got to be getting better also, is that your perspective or --?

Yes, I mean we've really, from a whole -- part of the process was sorting out the sourcing organization was to put in place an independent separate materials organization throughout the business, and then work on this whole SIOP planning with the materials organization. So we're definitely seeing that. We're seeing that in working capital. We're seeing that as well in just our days outstanding to customers, in terms of the ship and fill rates and days past due. We're seeing that as a benefit. It's a primary focus across all the businesses. Obviously the resi HVAC folks are working on that very diligently. Ameristar is a good sign for us. We began taking orders in March. We began shipping in April. And we were able to match that up fairly well.

(multiple speakers) If you look at the gross balance sheet statistics, our inventory turns in the quarter were 0.6 of a turn better than they were in Q1 of last year. So it's going all the way through to the enterprise.

Yes, I saw that. That's great. All right, thanks.

Andy Casey, Wells Fargo.

Just a couple quick questions. On the order data that you provide, are you including pricing in that? Could you remind me?

Yes, that would be as reported, yes.

Okay, thank you. And then within the resi solutions and your outlook, you kind of provided something. I forget who asked the question -- the 1% to 4% for the growth in Q2 and margins of 7% to 8%. Could you provide that for the rest of the units, business units?

Yes. Climate -- we look for growth of 1% to 3%. [All I], in the 10.5%, 11.5% range. Industrial -- I think you'll see a minus 1% to 2% in the quarter, some slowdowns there that we'll see. Full-year, there -- I expect we'll still see 110, 130 basis points of improvement in that business. The rest, we talked about Security -- flat to minus 3% for the full year; minus 3%, minus 5% for Q2. And then net of restructuring, all-in, it should be flat in terms of operating margin.

Okay. Thank you very much.

Josh Pokrzywinski, MKM Partners.

Wanted to follow up on Ameristar, and kind of early traction there. The way I understand that is, you guys actually use third-party manufacturing for that. Just correct me if I'm wrong. And I guess if that is the case, how is conversion on that versus the Trane models?

Yes, Josh, we use a combination, so there's parts and assemblies that we build, there's parts and assemblies that we outsource and we retained quite a bit of flexibility even in those outsource relationships to build the product, if we choose to do that. So it's very dynamic, in terms of how we want to do this. It's actually a little bit exciting, because we've been able to think outside the box, I think, about what's possible in terms of some of these relationships.

But so that's the way we're handling that aspect of it. It's pretty early, March opening orders and April shipments is a little too soon to tell, in terms of anything around real traction. The margins, gross margins, are lower than what we would normally see. The support costs are very low compared to what we would see. So the contribution is actually accretive to the full year margins that we've laid out, okay. But it's a different model. It's a lower gross margin; much lower support model; contribution, again, accretive.

Got it. Thanks, guys.

Shannon O'Callaghan, Nomura.

Can we just walk through -- you had the $0.07 of restructuring in the quarter that's -- and you talked about that, I guess, as the $23 million. But it was supposed to be a total of $16 million, with the cost reductions and the growth investments. Do you have the other numbers that roll up to the total?

I'm missing on the $16 million.

It was -- based on what we can tell, we were pretty close to what we expected to spend, Shannon.

All right. And then, in 2Q you had the $0.07. In 1Q you're going to have $0.03 in 2Q, right? What about the cost reductions and growth investments in 2Q?

Yes, there's definitely more, on top of restructuring in Q2 in the investments line, probably based on what I can tell here by the -- probably another $25 million, somewhere in that range.

Primarily two areas there, I guess the biggest pieces would be the systems component, getting that really moving now; and second, building out in our industrial business and continuing to build out in our Trane business the service organizations, particularly internationally.

Yes, the system spend is going to be picking up. So, as we talked about, putting in integrated systems around the world, that'll be a significant piece of that going forward.

All right. And then on the industrial piece, you just mentioned slowing down into 2Q and you see the orders have come in. What do you see there happening in 2Q? And then where does it go in the second half?

In ITS, in Europe, in their equipment business, Q1 was actually a pretty solid quarter for them, low-teens kind of a quarter because of the backlog. We saw that backlog change. We saw the bookings rate change. And so that see that going kind of negative-single-digit-type numbers in Europe as well. Club Car, it had a pretty good quarter. It was positive territory. I think that might go negative in the quarter, as well, for that group. So that's sort of the pressure there that we're seeing.

And then do you have any view to that changing in the second half after 2Q, or --?

Well, we think it's going to slow down and moderate. We've thought that the industrial business will probably see overall growth 2% to 4%; ex FX will be about 5% to 7%. So it would imply lower quarters. So I'd say quarter three, quarter four, we'd probably see more of a pickup again in Asia, and a bit more of a pickup in Latin America, which was a little soft for us as well. So that would kind of moderate you back up then from the Q2, very low kind of zero-ish number, flat number, up into something that would give us a full-year 2% to 4%.

Okay. All right. Thanks, guys.

Steve Tusa, JPMorgan.

I think what Shannon was trying to get out of you -- I just want to go from a higher level. So you guided to $50 million in the first quarter of restructuring and other investments, correct?

Right.

So, that number came in at what?

Very close to that.

Okay, so then what will that number be in the second quarter?

You've got restructuring at about $40 million -- 14, so the balance of that would be investments.

Okay so, it's in total about $40 million in the second quarter?

Yes.

Okay, and then that's what steps down as a move through the third and the fourth quarter? You're pulling that stuff into the first half here?

Right.

Restructuring flips positive, right.

Particularly restructuring.

So when you say the $65 million in productivity benefits that you highlighted in the second half of the year or whenever that was, does that include the favorable year-over-year impact from -- assuming you run your inventory at more of a normal level -- does that include that impact? Or is that kind of over and above what should see in the fourth quarter, from when you shut your plants down last quarter -- last year?

If I understand your question, the productivity that we would get in the fourth quarter in the res business would be in the productivity number. In other words, the loss absorption would be in the productivity number.

Right, so that would be -- it wouldn't be additive to that. Okay.

It's another reason why we think it's a reasonable way to look at it. Because you're right; that benefit from res is predominantly in the second half.

Right, right, right. And then just on the resi -- you're plus-40% in March. That's obviously an orders number, correct?

Right.

Okay. Because you talk about how quickly these orders turn into revenues. But 40% up in March obviously didn't convert, because your revenues in the quarter were still down 8%. So how can that not make you feel a little bit better as we kind of move into the season? Do you think that low-single-digits in the second quarter is maybe just a bit conservative? I mean, I understand all of a sudden we've gone from having no inventory to people concerned about us having too much inventory. I just can't imagine that the inventory dynamics are that dramatic, because sellthrough has actually been pretty good.

I hope you're right, Steve. But the bookings over the last week, 10 days of March, we saw how dry January and February were. The same thing happens here with June and July in this business. And so we really just need to see something more sustained here than a week's worth of bookings. But I hope you're right.

Okay. Now, one more question, how much of Thermo King now is Europe truck on a quarterly basis or (inaudible) or whatever, which ever works.

You just want the European truck numbers?

Yes, yes, because -- yes, European trucks. Whatever's levered to kind of the European economy there, I guess.

Yes Steve -- tell you what, rather than -- because we have global container in there as well -- rather than just kind of shoot from the hip here, why don't we follow up with you on that one?

It's not a predominant -- it's a driver of the business, but it's not a make or break part of the business, correct?

You're talking about a number that's in the $35 million to $40 million range, okay, every quarter.

(Inaudible) revenues?

That's for truck. Just truck.

Right, right. In revenues?

Yes, trailer is going to be more of that kind of $80 million range.

Right. So on a $3 billion quarterly revenue base, that kind of sounds like peanuts.

Profitable.

Okay. Yes, okay. Perfect. Thanks a lot for the color.

It's a good peanut.

This will be our last question.

Robert McCarthy, R.W. Baird.

Thanks for taking my question. Glad we got the investment spending question straightened out. I wanted to ask about price versus inflation again. You had talked, coming into the quarter, that you thought you'd get about 90 basis point spread; you got 140. But you're talking about not seeing any better relationship for the full year. Can you tell us what kind of the spread you expect to see in the second quarter? And can you talk about -- as this rapidly comes down, is this a function of the inflation comparison getting worse? Or is it that price realization declines dramatically, sequentially, as we go forward?

Yes, Robert, just maybe you set the pricing for some of the -- I'll turn to Steve for his comments -- the pricing, you know, we saw a full two points across the business on the quarter, which was a little bit above our initial forecast.

And then we would think, going forward, we expect realization in Q2 -- about a point and a half, and then it should moderate down to a point for the back half of the year. And of course you're starting to laugh now at pricing increases, so that's really obvious.

And material inflation was fairly subdued, so that was good news. But other inflation is higher for us. But if you're looking just at the relationship between price and material inflation, I think Q2 would be about 120 basis points positive.

But you're leaving other inflation out of that calculation.

Right. Because we normally talk about it as price versus direct material inflation. But, you're right, other inflation is where we get a surprise the other way.

Yes, okay. The 3% number that you talked about earlier.

Yes.

Okay, very good. Thank you.

Okay, thank you everyone. And Joe and I will be around for any follow-up questions. Have a good day.

Ladies and gentlemen, that concludes today's presentation. You may now disconnect and have a wonderful day.