特靈科技 (TT) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ingersoll-Rand first quarter 2013 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 now like to introduce your host for today's conference Ms. Janet Pfeffer, Vice President of Business Development and Investor Relations. Ms. Pfeffer, please begin.

Thank you, Janine. Good morning, everyone. Welcome to Ingersoll-Rand's first quarter 2013 conference call. We released earnings at 7.00 this morning and the release and slides are posted on our website. As Janine said, this call will be record and archived on our website.

If you could please go to slide 2. Statements made into 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 filing for a description of some of the factors that may cause actual results to vary materially from anticipated. This release also includes non-GAAP measures which are explained in the financial tables attached to our news release. A couple of things to note before I turn it over to Mike. We will be talking to adjusted margins during our comments this morning which exclude restructuring and spin related costs. Our news release and tables give you a reconciliation of GAAP to adjusted margins. This is consistent with how we gave guidance in February.

Also, earlier this year, we transferred a business line from Security Technologies to Residential Security. There was $18 million of revenue in the first quarter and about $80 million for the full year in 2013. There's not a meaningful impact on margins and no impact at the consolidated level. But in the charts and comments, we will focus on year-over-year change in revenue and orders to those businesses on a comparable basis so as to best represent underlying performance. The move is also now reflected in our sector revenue guidance for Residential Solutions and Security Technologies. Now to introduce the participants on this morning's call, Mike Lamach, Chairman 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 thanks for joining us on today's call. We're pleased with our ability to deliver above our earnings commitment in the first quarter with solid operational execution. Our revenues for the first quarter were down 1%, versus last year, both on a reported basis and excluding foreign exchange, reflecting top line performance pretty close to our view that the demand environment will start out tepid and improve somewhat as we move throughout the year. Orders were also down 1%. That $3.1 billion revenue was towards the bottom of our guidance range which was $3.1 billion to $3.2 billion.

We saw a slight decline in Climate and Industrial. Residential revenues were up 6% year-over-year on a comparable basis. And Security Technologies' revenue was down 3% on a comparable basis. We increased adjusted earnings per share from continuing ops by 14%. Adjusted earnings per share for the first quarter were $0.42. That's about $0.04 above the midpoint of our guidance range of $0.35 to $0.40. Better performance from operations delivered $0.02 above guidance assumptions, again, on a revenue base which was at the lower end of our guidance range.

The tax rate at 18.5% was about $0.04 positive to guidance. These were partially offset by the devaluation of the Venezuelan bolivar which occurred after we gave guidance. The bolivar devaluation resulted in a $0.02 negative impact on earnings which was booked in other expense on the P&L. Adjusted margin decreased 10 basis points. Operations before corporate unallocated costs increased adjusted margins by 30 basis points. Versus 2012's first quarter, adjusted operating margins were up in two of the sectors. Residential delivered a 390 basis point improvement and Industrial margin was up 110 basis points, despite slightly lower revenues. Lower revenues in mix were a headwind for both Climate and Security. Corporate costs were higher in the quarter due to the higher benefit costs and increased investments related to our IT transformation which had the first of six phases go live earlier this month.

This marks our eighth consecutive quarter of a positive gap between pricing and direct material inflation. Our lean focus again showed significant results in the implemented value strings. And we continue to invest in the future of the business, funding significant new product development, investing in a new IT platform, and building our services footprint. Spin-off and restructure costs were $0.11 in the quarter. You may recall that in our February guidance we had also called out a potential non-US discrete tax charge of $0.10 which did not occur.

Finally, we initiated our share repurchase program earlier this month and still expect to spend the current $2 billion authorization by the end of the first quarter of next year. In sum, good operational results in the quarter against a muted demand environment which we had expected in the quarter. Now Steve will take you through the first quarter results in more detail, and I'll be back with our outlook for the second quarter and the full year.

Thanks, Mike. Please go to slide number 4. Orders for the first quarter of 2013 were down 1%, both on a reported basis and excluding currency. Global commercial HVAC bookings were down low single digits. Transport orders were up mid single digits. Industrial orders were down 1% with order growth in Europe offset by lower bookings in Americas and Asia. Residential bookings were up low single digits on a comparable basis. Commercial security orders in the quarter were down mid single digits on a comparable basis.

Please go to slide number 5. Here is a look at the revenue trends by segment and region. The top half of the chart shows revenue change for each sector. The total company first quarter revenues were down 1% versus last year on both a reported basis and excluding currency. Climate revenues decreased 3%, with HVAC revenues down slightly and transport revenues down mid single digits. Industrial revenues were down 1%. Residential was up 6% on a comparable basis. Commercial security revenues were down 3% on a comparable basis. I'll give you more color on each sector in the next few slides. On the bottom chart, which shows revenue change on a geographic basis, revenues were up 1% in the Americas, while Europe and Asia were down mid single digits.

Please go to slide number 6. This chart walks through the change in adjusted operating margin from first quarter 2012 of 7.5% to first quarter 2013 which was 7.4%. Volume, negative mix and foreign exchange collectively created a 130 basis point headwind to margins. Our pricing programs continued to outpace material inflation, adding 90 basis points to margin. Productivity offset by other inflation was also 90 basis points accretive to margins. Year-over-year investments and other items were higher by 60 basis points. In the gray box at the top of the page, you can see the lower revenue deleveraged 11% in the quarter. That was good performance given an excellent revenue as well as higher incremental investments. The box in the middle of the page shows the revenue and adjusted operating margin by sector and in total. The operations, excluding corporate, increased adjusted margins by 30 basis points on lower revenues. Corporate costs were higher in the quarter. This increase in corporate costs is mainly due to a favorable stock-based compensation adjustment taken in Q1 2012 that impacted corporate costs by $6 million and had a total impact on operations of $13 million or $0.03. The remainder of the corporate cost increase is related to our IT transformation.

Please go to slide number 7. The Climate Solutions segment includes Trane, commercial HVAC, and Thermo King transport refrigeration. Total revenues for the first quarter were $1.6 billion. That is down 3% versus last year on a reported basis and down 2% excluding currency. Global commercial HVAC orders were down low single digits. Orders were down in the Americas and in Asia, but up in Europe. Trane's commercial HVAC first quarter revenues were down slightly. HVAC revenues were down in all major geographic regions. Commercial HVAC equipment revenues were down low single digits while HVAC parts, services, and solutions revenue was up low single digits versus prior year. Thermo King orders were up single digits versus 2012's first quarter with North American trailer orders being up 30%. Thermo King revenues were down mid single digits. The adjusted operating margin for Climate Solutions was 6.1% in the quarter, 20 basis points lower than the first quarter of 2012 due to lower volumes, unfavorable revenue mix, inflation, and higher investment spending, which were largely offset by productivity and pricing.

Please go to slide number 8. Industrial Technologies' first quarter revenues were $680 million, down 1%. Air and productivity revenues were down low single digits versus last year. Revenues in the Americas were up mid single digits, but were more than offset by declines in Europe and Asia. Air and productivity orders were down low single digits. Higher orders in Europe were offset by lower orders in Americas and Asia. Club Car revenues in the quarter were up mid single digits, and orders were flat versus prior year. Industrial's adjusted operating margin of 15.4% was up 110 basis points compared to last year, despite lower revenues. Pricing and productivity more than offset lower volumes, inflation, and higher investment spending.

Please go to slide number 9. In the residential business, first quarter revenues of $464 million were up 10% compared with last year. Adjusted for the product line move, comparable revenues were up 6%. Residential HVAC revenues were up mid single digits versus last year. Our HVAC unit shipments in the first quarter were up high single digits versus prior year. Revenues for the Residential Security portion of the sector were up low single digits on a comparable basis with increases in new builder channel in South America, partially offset by lower big box revenues. Sector operating margin of 1.5% was up 390 basis points compared with 2012, as pricing, volume, and productivity more than offset inflation and adverse mix.

Please go to slide number 10. Revenues for Security Technologies were $352 million, down 7%, on a reported basis, and down 3% on a comparable basis. Americas' revenues were down low single digits. Revenues were down mid single digits in Europe and flat in Asia. Bookings on a comparable basis were down mid single digits. Adjusted operating margin for the quarter was 18%, down 150 basis points from last year, as productivity and price realization more than offset by inflation, lower volumes, adverse mix, and higher investment spending.

Please go to slide number 11. We finished the first quarter with working capital at 4.3% of revenues. Working capital and cash flow levels were consistent with our historical seasonal performance. With that, I will turn it back to Mike to take you through our guidance.

Thanks, Steve. Please go to slide 12. Just as a reminder, for purpose of giving guidance for 2013, it's on an as-is basis. It assumes the current Ingersoll-Rand with the four current operating sectors is in place for the full 12 months of 2013. As we announced in December, we expect the security spend to take place in the fourth quarter. To be clear, this guidance does not reflect the spend given we have not yet had to carve out financials and specific data. The spin won't be known for several more months. Consistent with our February guidance, we have broken out spend restructuring costs from the core EPS guidance in order to give the best representation of the Company without the impact of the impending spend. There is no change or update to the information we gave you last on spend. It's proceeding according to our time line. We won't have pro forma financials for a couple more months. We expect to file the Form 10 in the June timeframe.

Based on our results in the first quarter and our visibility through the remainder of the year, we are reaffirming our consolidated outlook. Our revenue outlook for 2013 therefore is unchanged at $14.2 billion to $14.6 billion, which equates to 1% to 4% growth versus 2012. US non-residential construction starts and put-in-place trends have not changed significantly since our prior guidance. Institutional markets are expected to be down for the year by 3%. The 2013 outlook for commercial and industrial put-in-place was unchanged, up 8%. Increases in bank and office buildings and retail support our view of a stronger second half versus the first half in the unitary HVAC business. We continue to expect low single digit growth in North American commercial HVAC, and flat to low single digit decline in North American commercial security. We expect North American truck trailer markets to be fairly flat in 2013. Asian HVAC equipment markets are expected to be fairly flat in 2013. China HVAC is expected to be up low to mid single digits. Industrial Technologies expects markets to be fairly flat, slightly down in Asia, in 2013. In our Asian security business, which is more influenced by the timing of large infrastructure projects, should be up high single digits for the year. Overall, we expect revenues from Europe, Middle East, Africa, taken together, to be up slightly.

Translating that to our outlook by sector, we expect Climate Solutions revenue to be up 1% to 3%. Industrial Technologies revenues are forecasted to show more moderate growth than the past couple of years, with growth of 1% to 4%. Residential is expected to be up 8% to 10%. That compares to prior guidance of 4% to 6%, and the change there is purely due to the product line transfer that Janet mentioned in her opening. Security Technologies to be down 2% to 4% on a reported basis, again, reflecting the impact of the product line transfer. On a comparable basis Security would be up 1% to 3%.

Please go to slide 13. On the basis I discussed earlier our guidance for full year EPS from continuing operations remains at $3.45 to $3.65 per share. This includes one-time deal cost and restructuring of $0.40 to $0.60. The full year tax rate forecast for 2013 is still expected to be 23%. To focus on second quarter guidance, please refer to the right-hand column of this chart. Second quarter 2013 revenues are forecast to be $3.8 billion to $3.9 billion. That translates to a range of down 1%, up 2% versus the second quarter of 2012. Adjusted second quarter earnings per share are forecast to be $1.05 to $1.10. Security spin-off and restructure costs are expected to be about $0.06 in the quarter. We are assuming a share count of 300 million shares and an ongoing tax rate of 23%. For the full year 2013, we still expect to generate available cash flow of about $1.1 billion, excluding one-time and restructuring costs.

In closing, we're pleased to have delivered a solid first quarter. We continue to feel good about our company and our progress. Our focus is on positioning Ingersoll-Rand to continue to grow earnings and cash flow with very little help from markets. We have implemented a consistent, shareholder focused, capital allocation program. We have proactively worked to reduce costs and improve productivity, while still making prudent investments for the future. We continue to invest in new product and service offerings and our IT infrastructure, and further developing our people and our operating capabilities. In sum, I'm proud of the progress we're making, the results we've delivered, and we're looking forward to delivering on a successful 2013 for our shareholders, customers, and employees. Now, Steve and I will be happy to take your questions.

(Operator Instructions)

Nigel Coe, Morgan Stanley.

Just wondering on the share repo, you stated in the press release you started that off in April which is a bit sooner than we expected. Yet, I want to reconcile that to your share count assumptions which are I think 300 million for 2Q and 300 million for the full year. It would suggest that you're taking baby steps on the repo in 2Q. I'm wondering if you just have some thoughts on some of $2 billion, how much would be pre-spin and post-spin?

We haven't changed that view, Nigel. It is going to be around $900 million pre-spin through the end of the year. We're just stretching it out a little further, starting a little sooner in the 2Q than we had thought about before. So we haven't changed the total profile. $900 million pre-spin and then $1.2 billion or so post-spin.

Okay. And obviously you're still looking through the documentation, but do you have any more intel in terms of text domicile of the spin [curve]?

Nigel, the announcement for it to be an Irish domiciled company, we won't have anything back on that yet for a couple of months relative to SEC filings, conversations with the IRS, et cetera.

Steve Tusa, JPMorgan.

I think in a couple of these segments, the year-over-year revenue change on the low end was tweaked down by 1%, but it didn't change your -- the revenue, the $14.2 billion low end of the range. Is that just rounding and stuff like that?

Pretty much, Steve. It is just a rounding issue.

Okay. And then I guess that changed the share count even though you're kind of starting this buy-back a little bit earlier than expected?

Not significantly, no. It's still around 300 million for the average for the year.

Okay. And then just lastly, on -- I guess any commentary on Resi HVAC in April here -- in the first few weeks of April.

Steve, not into the new quarter. We wouldn't do that, obviously the most important quarter of the year, but no comments on second quarter as of yet.

Jeff Hammond, KeyBanc Capital.

It looks like your segment guidance is overall not really changing. I just want to -- maybe if you can give us a sense of shading where you kind of feel better or worse within the businesses versus your internal expectations as you kind of leave 1Q into 2Q? And maybe just kind of talk about trajectory into 2Q versus how you were originally thinking about it?

We're seeing really strong execution in our Industrial businesses, and that's really an emphasis on the long-term approach we've had toward product development and really coming to fruition there. So it's a great margin for the quarter. I think it's a record actually for us in the first quarter margin in the Industrial business and well on track. Also seeing good margin improvement in the Residential business. Of course, Q1 is the smallest, almost a meaningless quarter in the grand scheme of the year there, but good execution coming into the year. I think from an inventory position perspective, they've done much to ensure that we've got the right product at the right time for our customers there. So good momentum I think in that business going in.

Security actually had a pretty good quarter, but there is a bit of a mixed shift going on there, whereas the Climate business, Trane, would be a bit indifferent as to applied or unitary, institutional versus commercial. And it has a little tougher impact on the Security business. So in North America, we face much higher commercial activity -- banks, office buildings, and such versus institutional. But mix hurts a little bit. We also closed a factory in Q1 in China and merging that into an existing plant that we have in Mexico. And so the costs associated with that and the opportunity later in the year to sort of deal with the landfill there and other opportunities for us. So I think the margins there will certainly shape up to the back half of the year to be as what we forecasted all along, and that's roughly to be flat for the year.

And then really from the Climate side, the TK bookings were good, particularly in North America as it related to trailer. That's a solid sign going forward for us that the new product is up, it's looking great. We're ramping that up as quickly as we can to make sure we take advantage of it fully. And at HVAC, it's a bit of a mixed bag. We see growth in North America, growth in China. We see it certainly in North America to be on the office and retail side, and institutional markets will still be down about 3% in North America. So the growth will come mainly on the inventory side of the business. And in China, we're kinds of seeing what we expected there which is recovering book to bill. I want to say book to bill in China for the quarter was about 1.26. So we need that to continue, but it's a good start.

Shannon O'Callaghan, Nomura Securities.

Mike, just maybe a little more color on how you see these verticals playing out in the commercial HVAC side? The booking were down mid single, but it sounds like you're seeing some encouraging indicators on the non-institutional part. Can you just maybe give a little more color on how you see that playing out?

Yes, in fact, we're going to probably have to back you up to quarter on last year. Interesting, quarter one of last year, our unitary portfolio across the Company was up 29% quarter to quarter. It was just a phenomenal start to last year. So were' really coming against a pretty tough comp just for comparison. It was a pretty good applied quarter too. We're up 13%. So equipment orders were up 20% in quarter one of last year.

Now in the year, what we're seeing is that we'll continue see applied institutional, particularly k through 12, and down negative mid digits. Healthcare maybe a little bit better than that, but still negative. The real growth will come from office and retail and actually from bank buildings. We do fairly well there. We're the market leader there as it relates to share for the entire product that goes into that market. So and that's something again, if you look at the places that volume will hit, it will still hit us in places that we've had ongoing lien efforts and ongoing product development efforts over the last couple of years. So I feel pretty good about our ability to convert on that volume at relatively strong increment's.

Okay. And then just on the Resi side, I know it is early here, but in terms of what you've seen so far there, new versus replacement, any change in consumer behavior?

New is up about 30%. Replacement, up high single digits, maybe 10%. So clearly, the market is still sitting at 85% replacement. There's no real mix shift there. The only shift within that, that I would say continues to be the decline of R-22 in the portfolio, and as we said all along, that's a good thing.

Jeff Sprague, Vertical Research.

Just wondering if we could get a little more color, Mike, on price cost going forward? You indicated you got eight quarters under your belt now. But just how do you see the rest of the year playing in the context of maybe where your hedges are on copper and other [all mats]? And what kind of benefit you may have on the cost side relative to price pressure that you're expecting in the back half, if any?

Sure, Jeff. In the first quarter, we saw price costs, positive 90 basis points and I think that the material inflation environment will continue to be fairly tame, not only the market, but what we've locked in. So we've actually then lapped most of our larger price increases. So for the year, I think price will just be under -- maybe just under 1%. So I would expect the gap to material inflation to be close to 40 to 50 basis points which is a little better than we started -- we thought we would have at the beginning of the year. We're actually -- I'd have to check this, but I think we're probably now a larger buyer of aluminum than copper. Again, a multi-year effort to move away from copper to aluminum. The copper is becoming less important to us there. We're hedged out in Q2 about three-quarters of our demand, and for the full year, about two-thirds of our demand.

And then for aluminum here, we're typically buying that through finished product with suppliers. And so we're buying that not directly, but through purchases.

And just wondering on the share repurchase, you hit it a couple times already, and no apparent big change in your plan. But relative to kind of what you ultimately plan to do with leverage ratios, it does seem like you really could and perhaps should do more earlier. Your thought process on that and why kind of soft pedal it?

I think really what we're -- we've said the strategy this year was, Jeff, to devote pretty much all of our available cash after dividends to share repurchase. That's roughly the $900 million. And I think that when we talked about that, we said look, we feel pretty comfortable about doing that from operating cash flows worst case. So if we didn't -- able to -- wouldn't spend this year, we'd still be able to at least do that. And that's what comprises our current guidance. I think that as we go through the rest of the year, we'll try to take advantage of whatever we can. Timing and refinance, et cetera to try to continue to pull this thing up further as far into the year as we can. It's pretty tough when you start even in April and May to get a big impact on your average, but we'll certainly be opportunistic and take advantage of whatever we can there.

Andrew Obin, Bank of America Merrill Lynch.

Just a question in terms of looking at your outlook for the remainder of the year, given where the first quarter played out where you're guiding for the second quarter, it seems to hit the high end of your revenue outlook. We need to see some critical acceleration in the second half. Could you just talk us through the markets, what needs to happen to get to the upper end of your guidance?

You're correct, Andrew. We need second half revenues to be about $375 million, or about 5% higher than the first half of the year. We're starting in the second half of last year. And so we're looking at it this way, about a point we should get from price. Residential growth rate from the first half to the second half is only about a point higher in the second half. And given the momentum in housing, it seems reasonable. On a dollar basis, the largest increase would be in commercial HVAC. And within that, the majority of that growth will come from North America and Asia. In North America in particular, we project good growth in unitary equipment and in contracting parts and services. And we've made investments in contract and parts and services and had more feet in the street there than we've ever had in anticipation of being able to drive that business.

For unitary, we believe the growth in equipment is going to be in the retail and office and bank buildings verticals in particular. That supports the growth outlook we've got for the second half of the year there. For TK, revenue goes from negative in the first half to a positive in the second. It will end about flat, but most of the swing is in North America and we feel good about that given the bookings we saw in the first quarter. The commercial security outlook has always called for a stronger second half for nonresidential construction in our key institutional markets, and so we need for that to improve in the year. With that being said, the other actions we're looking at there to make sure we're protecting the profitability of the business in the event those markets don't recover, as an example, the integration of a plant in China into Mexico and the benefit that we should see in the back half of the year there.

So we also need all of our Asian businesses to accelerate as we go through the year. Again, the book to bill was good quarter one. We've seen that so far in our bookings, but we'll see [traps] there continue in that region to support the second half forecast.

Got you. And just a follow-up question. On Security revenue and profit, you had a very good fourth quarter, and we're seeing a sort of decline in sequential performance. Could you just give us more color as to what happened on a sequential basis on that business?

You're going to see fundamentally the shift we're talking about in office and retail markets. They are typically in the Security business. We're not selling the premium brands, we're selling sort of the next tier down and it's a more competitive environment. So when that business grows there, there was a comment earlier about the institutional markets are more important in the Security business. As those commercial markets grow, it's not the same effect that we have in Trane where we're fairly comfortable watching applied or unitary grow. In the Security business, it's much more beneficial for us to see institutional markets grow.

Steve Volkmann, Jefferies.

Curious if you have any comments about, I know this isn't a particularly important quarter, but some of the competitors seem like they had some positive order rates in HVAC both commercial and Resi, and I know mix is always an issue, but just curious if you think there are any trends with respect to market shares that we should be cognizant of?

When you look at commercial unitary and you look at that from large all the way down to lightest, remember that we sell the bulk of the light through our Climate business there. Again, reflect back on the quarter one last year, it was a plus 29% growth rate. I don't think anybody was close to that last year. I think one might have been 20%, one was 6%, and one didn't report it even. So it was a really good quarter last year for us there. When you look at the Res business, you don't want to draw conclusions to any one month or any one quarter for sure. Particularly not the first quarter, which as you said, it's the most unimportant quarter of the year for us.

So our 2013 forecast doesn't show share loss in any of the Sears ratings or efficiencies in the marketplace, any portion of the market. Just executing our multi-year product strategy, a channel strategy. We're extremely cognizant of the interaction between price and share and fixed cost leverage. And so we're going to make decisions there based on this type of analysis and doing what we think the optimal outcome is for the business based on that mix. So long story short, we're not forecasting a share loss in '13. We saw a nice share gain in 2012, kind of recovering from 2011. We see the continuation of that, particularly with all of the '13, '14 Sears products really now in the portfolio coming into the season.

Okay, great. That's helpful. And just maybe to finish up the same question on TK? Obviously, pretty strong orders there.

Yes, North American trailer revenues were actually right on for the first quarter. Market acceptance for the new Precedent product was a lot stronger than our original expectations. We had truck orders up 30% in the first quarter. I think the industry was down like 2% for total industry based on the app volumes. So good success there. We're ramping up the production of the new product to meet the increased demand. Saw actually nice growth in marine, although it is a very small business for us. All in all, I think it supports the back half of the year forecast for us.

A quick correcting comment here, it was the trailer business in North America that was up 30%.

We do define it between truck and trailer, but the trailer, the piece was up 30%.

Julian Mitchell, Credit Suisse.

If I look at the EBIT margin bridge on slide 6, the 130 BPs headwind you had from volume mix and FX, FX doesn't really do a lot for the rest of the year based on spot rates. Volume-wise, you've talked about an acceleration in some areas being built in. If you think about mix, you called that out as a headwind in three of the four segments. Security I guess carries on because of the institutional markets being weak, but if you focus on Resi HVAC and also Climate Tech -- I mean Climate Tech, you should see mix become a tailwind as Thermo King revenues recover. Is there any reason why mix therefore wouldn't snap back in subsequent quarters?

Yes, if you take a look at what we're expecting, really the Thermo King story is a positive mix story, Julian. If you look at the contracting service and parts story from the Trane commercial business, that's a positive mix story for us in the second half of the year for sure. So the thing that may be a little bit tough will be the Security mix through maybe even the second quarter because of the vertical market dynamics that Mike just went through. But there's no reason why we shouldn't see the mix come back to a more normal profile for certainly the second half. The other thing that Mike mentioned the expectations for China, and what happened with our China bookings in the first quarter, which were -- actually book to bill in China was well over 1, like 1.2. We get great margins out of both the commercial HVAC business there and also the Industrial business. So that should also serve us well from a mix standpoint in the second half, Julian.

Got it, thanks. And then just secondly, if we think about Securities specifically, you talked a little bit about the sequentially Q4, Q1, and so on. [Kamor] obviously had pretty bad numbers and [cut glide] since [yesterday]. What did this change exactly or change in your outlook? Is it simply just the institutional side coming down and you're not yet seeing a pick-up on commercial to offset it? Is there anything going on competitively or pricing-wise? Or is it just institutional volumes in the US and Europe is a bit worse?

Institutional volumes are down. Where we've seen actually growth in the HVAC business in Europe, we have not seen growth in the Security business in Europe. And so our hope there is that's a bit of a lag, and the back half of the year for Security actually shows a bit of an increase in Europe as well. So that should help us in the back half of the year there. But Europe has lower expectations. The mix in the Americas was a bit more skewed toward the commercial brands as opposed to the institutional brands there. But again, there is also a lot of activity spent in the quarter moving a very large plant closing it down and then costs of moving that to Mexico. And the benefit of that really shows up in the third quarter, fourth quarter relative to margins. So I think the top line makes sense. I don't think there's a lot of shifts going on there at the top line. And then from a margin recovery perspective, I feel pretty good about Security continuing to work to flat by the end of the year.

Thanks. And then lastly, just Residential mix, what are you expecting on Resi HVAC mix for this year?

Our unit volumes were actually up close to 10%.So you can tell from the reported numbers from the volume numbers we gave you that we're continuing to mix and grow in the opening price point section of the market. We'll continue to see that happen throughout the year, taking a larger share in that full product range as well. So that's sort of where the volume is Julian, and it's going to take us another year, year and a half, a couple seasons probably before I would tell you that, that mix shift down would impact the Res business. But as I said, the combination of price, volume, and fixed cost leverage really is the analytics that go into that decision. And any time you can run a business with an improvement of 390 basis points, it feels pretty good going into the next quarter. And we're going to continue what we're doing there and improve business from there.

Jamie Sullivan, RBC Capital Markets.

Just a follow-on, you talked about the mix in climate a little built. Can you just remind us what the mix of equipment versus services is in that business?

For Trane, call it say, maybe 35%.

In services?

Actually, closer to 60%-40%, 40% services.

Great, that's helpful. And what are you assuming this year for growth from those two pieces? Can you give us a little color there?

Yes, I think from a services perspective, we're going to continue to see services growing mid single digits. And for us, it's a function of technician support, service dollars, covering the market, building out the footprint. So we have been able to track to those headcount additions like clockwork in terms of volume growth. So I would consider mid single digit growth to be in the cards there for us.

Steve Winoker, Sanford Bernstein.

Just first specific question, margin impact of the product line transfer, I know you talked about the top line, what was the specific margin line impact for the two units?

Joint venture, so we were consolidated it and it was reporting a very low number there, almost negligible, maybe a 5% operating margin or less on the shift itself.

Okay. And then could you maybe speak to -- you mentioned it's the first of six phases on the ERP or the IT system to go live and the corporate cost impact. But if you look at that relative to your productivity expectations and benefits, maybe talk about how that is playing out, both through the rest of the year and into as you see going forward?

I think if you're talking specifically, Steve, on corporate cost structure, Steve kind of gave you a little bit of reconciliation between the $42 million unallocated this year and $32 million last year, and part of it was the stock-based comp that he talked about a second ago. But we would think 2013 would be $180 million and last year was about $163 million. And the largest investment we're making there is really around common systems. And we really don't get the benefit of that common system work until we crossed at least the midpoint of the implementation, kind of the fourth of the sixth phase before you start to lap the costs. So we've got another 1.5 years or so, maybe a bit longer, work of hill to climb before we get the recovery there. And we have no changed expectation. We believe it's a significant item in getting our overall IT costs down to what we believe are world class levels, and that there is as much as 50, 80 basis points of improvement when we're done just in the cost of the systems, let alone the cost of supporting the systems and of course the benefit of the information you get from better systems.

Deane Dray, Citi Research.

I was at the ISC West trade show last week in Las Vegas and there was a lot of new products for Ingersoll Rand Security. And was hoping you could comment on what the underlying drivers should be, especially regarding education? A lot of products on the lock side and doors and so forth, and how meaningful could that be for the business over the near-term?

It's probably the number one growth driver in that business really is the electrification of mechanical locks. And I would say the number one market for that would be all of education, k through 12 and higher ed. And it's really partially attributable to the unfortunate things that we're seeing around the world. And the thing about that lock is the ability to do that in a relatively, that whole system, a very inexpensive way of implementing the system in a wireless way with lockdown capability inside of 10 seconds. And I think some of our competitors would have that capability twice a day versus every 10 seconds. So there's a real advantage to that. We've got excellent organic capability with the product development. We're working on of course channels to market there, and have had great success with particularly colleges and universities adapting -- the system you saw, the electronic lock, you saw the wireless lock as well as the aptiQ card system.

That's the system that uses the smartphone's, correct?

It's one of the options that they can use with the aptiQ is using a smartphone, but yes, near field communications would certainly be one of the potential options that you could take, along with the ability to format with any other credential.

Great. And then just to switch over to the Trane Residential side, I was hoping to get some context about how this cycle could be playing out, and how might it differ? So there's not any efficiencies here '13 type of change going on. Maybe there's some of the equipment that's in the field has been fixed repeatedly as opposed to replaced. But just take us through in a normal setting how this cycle may play out in terms within that context? No regulatory boost, maybe what's out there is a bit more edged?

Yes, I mean we can get into the alga-rhythms to do that. I'm not sure that's really going to be useful for us here. But clearly, the systems that are there are aging and we're seeing less repair than we would have seen two years ago and that trend continues toward system replacement. R-22 is down 20%, so when we aren't seeing replacement, we're seeing [fourth and eighth] replacements. So without trying to modeling this totally out for you on the phone here, it lends toward I would say a slow release of the replacement demand over a three to five year period.

I am show nothing more questions in the queue, and I would like to turn the conference back for any further remarks.

Thank you, Janeen. Thank you, everyone. And Joe and I will be available for follow-up questions later today. Have a good day.

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