特靈科技 (TT) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ingersoll-Rand second-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded. Now I'd like to introduce your host for today's conference, Ms. Janet Pfeffer, Vice President, Treasurer, and Investor Relations. You may begin, ma'am.

Thank you, Earl, and good morning, everyone. Welcome. We released earnings at 7.00 AM this morning, and our release is posted on our website. We'll be broadcasting, in addition to this call, through our website at ingersollrand.com, where you will find the slide presentation we'll be using this morning. This call will be recorded and archived on our website also.

If you would, please go to slide 2, which is our Safe Harbor statement. Statements made on today's call that are not historic facts are considered forward-looking and are made pursuant to the Safe Harbor provisions of federal securities laws. Please see our SEC filings for a description of some of the factors that may cause actual results to vary from anticipated.

Our release also includes non-GAAP measures, which are explained in the financial tables that are attached to our news release. With me on the call this morning are Mike Lamach, Chairman and CEO, Susan Carter, 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.

Great. Thanks, Janet. Good morning, and thanks for joining us.

In the second quarter, our adjusted earnings per share were $1.20. We saw organic revenue growth of 3%, led by strength in the US and European transport and commercial HVAC businesses.

Industrial markets were weaker in the quarter, as distributors delayed restocking and some customers deferred purchase decisions. As a result, organic revenue in industrial was down 4%. Industrial revenue trends started out weak in quarter two but strengthened in the last few weeks of the quarter, not enough to fully recover within the quarter but giving us some more positive trends going into the second half.

Similarly, organic quarter rates softened in some markets but remained healthy overall in the second quarter at 4%. Adjusted operating margins were slightly down but increased 50 basis points, excluding the impact of currency and counting impactive, bring Cameron in through the black results into our financial statements through the first of the year.

Adjusted EPS for the quarter was at our guidance, mid-point, but there were some puts and takes and we did not perform to our expectation in terms of operating leverage and margin. Revenues were approximately $100 million lower than the mid-point of our guidance forecast. On a percentage basis, we are looking organic growth at 5% to 6% compared to the actual (technical difficulty) growth rate. Climate came in right on our revenue outlook. The difference was all in industrial.

For industrial, organic revenues in Europe were down low-single digits, including currency. Asia continued to be weak. The US seemed to take a pause in April and May and showed some signs of stabilization in June. North America was down 6% on an organic basis in industrial.

(Inaudible) of the lower volume was offset by corporate spend controls, lower compensation benefits as well as favorability in other income. We'll talk more about it in the outlook. We're taking aggressive and targeted cost actions so we'll see volume defense. US industrial trends improved in June and continue thus far in July, so we are partially reflecting that stabilization in our outlook.

Before I turn it over to Sue it take you through the quarter, we did reach an agreement with the IRS in mid-July to resolve all disputes related to the in-company debt and some other issues for the period 2002 to 2011. The details are in the 8-K we filed a week ago and Sue will take you through that in more in detail today.

With that, I'll turn it over to Sue and then I'll come back to take you through the outlook.

Thank you, Mike. Before I go into details on the quarter, I wanted to take you through the reported versus adjusted results, given the larger difference due to the impact of the tax agreement. On a reported basis, our continuing EPS was $0.31. To get to adjusted earnings per share, we're making three adjustments totaling $0.89, which we think are appropriate given the nature of the items.

First, the tax agreement resulted in a charged income tax expense equalling $0.84. Second, as we've guided all year, we were adjusting the inventory step-up component of acquisitions. This now includes both Cameron and in FRIGOBLOCK, but the great majority is Cameron. In total, that adjustment is $0.04 this quarter.

And finally, we had $0.01 of restructuring in the second quarter. So that's the breakdown of the $0.89 to get you from reported continuing of $0.31 to the adjusted earnings per share of $1.20.

Now let's go to slide four. Orders for the second quarter of 2015 were up 2% on a reported basis and up 6% excluding currency. On an organic basis, which excludes both currency and acquisitions, orders were up 4%.

Climate orders were up 3% and up 6% excluding currency. Orders in the industrial segment were down 1% on a reported basis and up 5% excluding currency. Organic orders for industrial were down 1%. We saw organic orders decrease by low-single digits in the air and industrial products and improve by high-single digits in club car.

Let's go to slide five. Here's a look at the revenue trends by segment and regions. The top half of the chart shows revenue change for each segment.

For the total Company, second-quarter revenues were up 2% versus last year on a reported basis and up 3% on an organic basis, which excludes both foreign exchange and acquisition. Climate revenues increased 2% on a reported basis and 5% on an organic basis.

Industrial revenues were down 1% on a reported basis and down 4% organically. I'll give more color on each segment in the next few slides.

The bottom chart shows revenue change on a geographic basis as reported in organic. Organic revenues were up 4% in the Americas, up 3% in Europe, Middle East and Africa, both led by strong HVAC and transport performance, and Asia was down 4%.

Let's go to slide 6. This chart shows the change in operating margin from the second quarter, 2014 of 13.1%, second quarter 2015, which was 12.6% on a reported basis, and 13% on an adjusted basis.

Volume, mix and foreign exchange collectively were a 70 basis point headwind, operating margin versus prior year. Within that, about 40 points was from currency, and about 30 points was from volume and mix. Price and direct material inflation contributed 20 basis points to margins, with positive price and very little direct material inflations.

Productivity versus other inflation was positive 90 basis points. Year-over-year investments and other items were 90 basis points. That breaks it into three pieces.

This is the first year in which Cameron has included in results and as expected, impacted margins by 50 basis points, due to inventory step up and intangible amortizations. In the box, you can see 30 basis points of headwind from investments and 10 basis points from higher restructuring costs. In the gray box at the top of the page, overall leverage on an adjusted basis was 10%. Backing out currency and acquisitions, organic leverage was approximately 30%.

Now let's go to slide seven. The climate segment includes Trane commercial and residential HVAC and Thermo King transport refrigeration. Total revenues for the second quarter were $2.8 billion. That is up 2% versus last year on a reported basis and up 6%, ex-currency.

Climate bookings were up 6%, excluding currency. Global HVAC orders, excluding currency, were up high-single digits, with growth in all geographic regions except Latin America, led by double-digit growth in North America. Thermo King orders were down slightly versus 2014's second quarter, excluding currency. Organic orders increased in North America and were down in Europe, Latin America, and Asia.

Second-quarter organic HVAC revenues were up mid-single digits, led by a mid-teens increase in the North America (implied) business. Excluding currency, HVAC revenues in North America increased by mid-single digits in the quarter, compared with last year, and increased by a high-single digit percentage in Europe and Middle East.

The North American residential HVAC market continued an orderly transition to new regional [sear] standard. Weather impacted end-market demand in part of the quarter, but we saw positive trends in June and they have been continuing in July. HVAC revenues, excluding currency, increased by a mid-single digit percentage in Latin America and revenues in Asia were down by a low-single digit percentage in the second quarter compared with last year.

Thermo King revenues were up high-single digits ex-currency, with strong gains in North America truck trailer and auxiliary power units. In Europe, organic revenue were up low-single digits. The adjusted operating margin for climate was 14.4% in the quarter, 20 basis points higher than second quarter of 2014 due to productivity and volume mix, partially offset by other inflation, currency, and a higher investment spending.

Let's go to slide 8. Second-quarter revenues for the industrial segment were $785 million, down 1% on a reported basis and down 4% organically, which excludes the Cameron acquisition and currency. Air systems and services, power tools, load management and material management organic revenues were down mid-single digits versus last year. Organic revenues in both North America and overseas markets were down mid-single digits.

As Mike noted, order and shipment trends in the US were unfavorable in the first two months of the quarter and strengthened in June, with the push-outs in customer requests moved some revenue out of the quarter, and impacted results. For the balance of the year, based on the backlog and order trends over the past several weeks, we see some recovery but are reducing our revenue and profit outlook for the second half in industrial to reflect the lower volume.

At the consolidated levels, that volume is potential offset by an improved volume outlook for climate. We are also taking appropriate actions to increase productivity in the impacted business to mitigate as much of the profit impact as possible. Mike will take you through the entire forecast in a few minutes.

Club Car organic revenues in the quarter were down slightly. Organic orders were up high-single digits versus prior year.

Industrial's adjusted operating margin of 13.3% was down compared with 16.4% last year. The Cameron acquisition, including known purchase accounting impact and negative currency account for 180 points of the decline. The remainder was due to lower volume, inflation, and investments, partially offset by price and productivity.

Let's go to slide 9. Let me take a few minutes to walk you through the agreement with the IRS.

On July 17, we signed an agreement with the IRS to resolve all disputes and litigations surrounding the treatment of inter-company debt. The agreement encompasses the years 2002 to 2011. We previously disclosed the IRS had asserted Ingersoll-Rand owed approximately $474 million in taxes, plus additional amounts for penalties and interest during the 2002 to 2006 tax years. And the Company expected the IRS to raise similar claims for the 2007 to the 2011 period.

We believe that this agreement is in the best interests of the Company and our shareholders. When final, it will provide greater certainty around the Company's tax structure, affective tax rate and financial position going forward and avoids the risk, expense, and time commitment inherent with litigation in a complex multi-year matter.

The agreement covers all aspects of the dispute before the US tax court, the appeals division and the examination division of the IRS. Under the agreement, no penalties will apply with regard to any of the tax years 2002 to 2011. The Company will pay $230 million in withholding tax, plus interest with respect to the 2002 to 2006 years. And no additional tax will be owed with respect to these inter-Company debt and related matters for the years 2007 to 2011.

The next step is for the agreement to be reported to the congressional joint committee on taxation, or the JCT, for review. The agreement cannot be finalized until the IRS considers the views, if any, expressed by the JCT about the agreement.

In connection with this agreement, we recognised a charge of $227 million to income tax expense in the second quarter of 2015. And expect to have a net cash outflow in the second half of 2015 of approximately $375 million, consisting of the $230 million in tax and $145 million of net interest. We will fund the payment from cash flow and commercial paper.

We've gotten some questions regarding how this will impact our capital allocations for the year and in the future. First, the amount of payment is manageable within our current leverage target. We expect no impact to our ratings. We still plan to repurchase $250 million of shares in 2015 as we've guided all year.

What has change is that, based on the pipeline we currently see, our M&A spend for the second half of 2015 will be pretty minimal. If opportunities emerge over the next few months, we'll evaluate them, but as of today, I don't see much usage of cash for M&A in the back half.

You may recall that we had a $350 million place holder for M&A. That reduction, in essence, funds the majority of the IRS tax payments. For the future, this does not change our balance capital allocation strategy, which includes investing in the businesses, paying out a competitive dividend, share repurchase to, at a minimum, offset share creep, and value-accretive M&A.

With that, let's go to slide 10. For the second quarter, working capital as a percentage of revenue was 5.8%. The increase versus prior year was primarily inventory. This includes some incremental inventory related to the regional standards change in residential HVAC. We have good collections in the quarter, with our days sales outstanding and our days payable outstanding both improving over the prior year.

Our balance sheet remains very strong. There is no debt maturities this year. Our cash balance is at normal level. We continue to expect adjusted free cash flow in 2015 to be in the range of $950 million to $1 billion, which excludes the IRS payment.

And with that, I'll turn it back to Mike to take you through guidance.

Thank you, Sue. Please go to slide 11.

In the aggregate, our EPS forecast has not changed since our last in April, but within the guide, we've made some adjustments based on markets and performance trends. Let me walk you through some of the geographic regions, as it's probably the best way to give you some color.

North American institutional markets continue the recovery in the second quarter. We are increasing our revenue forecast here. We also continue to see growth in commercial and industrial buildings and retrofit. Based on this, we expect mid- to high-single-digit growth in 2015 in North American and commercial HVAC markets.

The regional standards change in residential HVAC is going as planned. Monthly trends bounce around based on channel stocking levels and weather. At the end of June, channel inventory levels were at normal levels and distributors had begun restocking to maintain those levels. We expect motor-bearing unit shipments for the year to be flat, up low-single digits. To round out North America, we expect North American transport markets to be up high-single to low-double digits in 2015, reflecting good trends in trailer trucks and APUs.

North American industrial markets took a pause in the second quarter. Overall, we did see signs of stabilization in June, which is continued so far in July in most businesses, but we did bring down the industrial markets rough outlook to the year based on the trends. This particularly impacted some of our shorter-cycle businesses in industrial, small, medium compressors, power tools, material handling, fluid management.

(South) markets are expected to be up low single-digits. We expect Latin American, Asian, European, Middle East/Asian HVAC equipment market, in the aggregate, to be up low- to mid-single digits in constant currency, but flat down after considering currency. Within those regions, Europe and Middle East have been relatively strong for us, with flat to slightly up exceptions in Asia and a decline expected in Latin America.

We expect European transport markets to be down, including FX, but up at constant currency. Industrial markets in Europe, Middle East, Latin America and Asia are more challenging. We expect them to be flat to down for the full year.

Aggregating those market backdrops, we expect our reported revenues for full year 2015 to be up 4% to 5% versus 2014. Overall, foreign exchange will be a headwind of about 3 to 4 percentage points. We acquisitions to add 2to 3 points for the year, so for organic growth, we end up back at the 4% to 5% range. That's unchanged from the prior forecast at the consolidated level.

However, we did update the ranges of both segments. Based primarily on a stronger outlook in North American HVAC and transport, we now expect climate revenues to be up 3% to 4% on a reported basis and 6% to 7% excluding currency, which was up 4% to 5% in our prior outlook.

In the industrial segment, revenues are forecasting in the range of 6% to 7% on a reported basis and organic revenues up 1% to 2%, versus 4% to 5% in the prior quarter, reflecting the softness we saw in the second quarter and continued weakness of overseas markets. This forecast requires industrial to have roughly 2% to 2.5% organic growth in the second half versus about flat in the first half. We see a path to that based on the activity that's we've seen over the past several weeks in our booked backlog.

Also, the Cameron compressor revenue calendarization is heavily skewed to the second half, particularly to the fourth quarter, based on customer delivery dates that are already in the backlog. The orders are in for about 60% of Cameron's -- I'm sorry, about 60% of Cameron's revenues are in the back half, focused on the operational execution and coordination requires the customers needed to deliver on that schedule for those units.

For operating margins, we expect climate to be in a range of 13%, which was the mid-point of our prior guidance. We expect industrial adjusted margins to be approximately 14%. That's about a point lower than our prior guide, which was a rang of 14.5% to 15.5%.

Slower industrial markets, particularly in some of our shorter-cycle businesses in North America, Asia, Latin America, geographies and markets where we generate higher than average margins. The pressure on those margin targets, despite aggressive cost actions in the affected areas, does not see a pass in the prior range. This does not change our long-term view in the march of potential business, but given the demand environment, we are accelerating productivity and action to help mitigate the impact of lower volume.

Please go to slide 12. Transitioning to earnings, our adjusted earnings-per-share guidance range is unchanged at $3.66 and $3.81, an increase of 10% to 14% versus 2014. That excludes acquisition inventory step-up, restructuring, Venezuelan currency valuation, and the IRS agreement. Include those items, the range reported EPS of $2.59 to $2.74.

We are reconfirming our adjusted EPS range. The forecast for the second half of the years reflects some pluses and minuses versus our prior outlook which are not netted. Reflects lower material inflation, in fact, it's actually deflation, second half versus first half, and higher levels of productivity from cost control and reduction actions well as prioritization of higher return productivity products, particularly in the business where we have seen some weaker market trends.

We plan to fully use the top end of the restructuring range of $0.05 that we had guided for the year. In parallel, we are dilating addtional actions to trigger those needed to further adjust the cost base to market positions. The focus on the third-quarter guidance, see the right-hand column on the chart.

Third-quarter 2015 revenues are forecast to be up 4% to 5% on a reported basis and 5% to 6% on an organic basis. That compares to an organic growth of 3% in the second quarter. The higher growth rate comes from several areas, restocking the resident HVAC business, which we are seeing [the quarter rate] this far in July and correlates with channel inventory levels, delivery of scheduled backlog in the longer-cycle businesses, such as applied HVAC and centrifugal air compressors, some recovery in certain of the shorter-cycle industrial businesses, Club Car, smaller compressors, fluid management, parts, and at this point, we've seen improving order rate from the low activity in April and May continuing through July.

For the third quarter, earnings per share are forecast to be $1.13 to $1.17. That's about $0.02 restructuring's costs and adding these back gets you an adjusted basis -- adjusted EPS range of $1.15 to $1.19. We've provided EPS bridges for the third quarter in the appendix to the walk from year-to-year.

I'd conclude by reiterating that although we (technical difficulty) at the mid-point of range guidance in the second quarter, we didn't perform to our own expectation potential in terms of operating leverage and margin. We've already taken, and are going to continue to take, action to generate the growth in earnings that we've been communicating to you. Our strategies for growth and operational excellence have delivered a multi-year trend of excellent operating leverage, margin (technical difficulty) improvement and remain the right strategies for the future. Our focus is to continue to grow earnings and cash flow through further implementing these strategies.

Now Sue and I will be happy to take your questions. Earl, I'll turn it over to you.

(Operator Instructions)

Our first question comes from Nigel Coe from Morgan Stanley.

Thanks, good morning. Mike, you answered my first question a little bit in your closing remarks. The 5% or 6% organic for 3Q just feels, on the face of it, a little bit aggressive. You talk about the swing residential, you talked about the shipments and some of the backlog businesses and the commercial HVAC business, but there's still some, obviously, scene recovery in short cycle. I'm just wondering, what (technical difficulty) components do you have in that 5% or 6% and if you had to haircut that number, would you be comfortable with seeing some acceleration from the 3% we saw in 2Q?

Yes, Nigel, thanks, and I saw your note this morning. Q2 and Q3 are fairly flat and there's some question about the normal seasonality of the business. But there are a few things that go on here. First, third-quarter North American commercial HVAC bookings and Thermo King are going to continue at high levels and that really underpins the climate forecast there. We had excellent bookings in growth second quarter. A lot of that in the schools market. I'm pretty confident that we're not going to see a weakness at North American commercial HVAC in the quarter.

We also have seen the restocking of the res channel take place in late June and through July and believe it should match the sell-through we had in our direct models. So that goes well. We had a good quarter and res for Q2 and think that'll continue in Q3.

China is interesting, because it's a place you wouldn't expect for us to see a lot of growth, but if you go back to the fourth quarter of 2014, we had bookings of about 33% growth in the fourth quarter in China. A lot of that now shifts in Q3. Those projects are in markets where -- I'm sorry, those projects are being delivered into vertical markets that are growing, so we don't see any real risk in delivering those as planned.

Now the industrial segment moves from really negative revenue comparisons in the second quarter to a low-single-digit rate. And that's based on a couple things. First, Club Car had a strong June, plus 18%. That's really a delay, if you will, in Club Car business from Q2 to early Q3. So I think we'll see that tick up. We're seeing a tick up, in example, June's -- our compressed air business was up 22% in bookings, most of that being small- and mid-sized compressors, which we feel like we'll book in turn.

Then as you look at late Q3, and I know this goes now into Q4, this is where we get into just delivering on the backlog of large machines, whether the Cameron, or Ingersoll-Rand. So I think that it's a little bit maybe unusual from a seasonal pattern for us, but I think all the pieces make sense that we should be able to deliver that. We have put in place a lot of actions, but compressing the productivity schedule, looking at discretionary spend, looking at investment spend, triggering many things now if in fact things get weaker or it doesn't materialize in the top line, we're looking between the third and fourth quarter to make sure that we manage the bottom line.

So that's probably more than you asked for in your question. But that's the answer.

No, that's incredibly helpful. And by the way, 3% isn't too shabby compared to some of your peers. The follow-on would be the headwind from volume mix, the 30 BPs this quarter. A big swing from the plus-100s last quarter. It sounds to me a comment that that's more of a geographic mix than a product mix. Can you just confirm that, and maybe talk about the big swing that we're seeing Q-to-Q and what's caused that swing?

The mix, it's a bit of a worst case mix that we saw. You step back, it's your higher margin industrial segment that is just down everywhere, averaging at the gross margins of the business. If you unpack that, you end up with a very disproportionate growth rate and deleverage happening in the highest-margin businesses, which are going to be tool, fluid management, material handling. Then if you look at it on a geographic basis, it's particularly weak in Asia and Latin America, which historically have been very good profitable markets for us. So when you look at that sort of mix challenge, it's squarely into the industrial segment for us. In essence, climate did well and offset the mix with some extra volume and really hit expectations both for leverage and top line.

Okay. Thanks, Mike.

Thank you. Our next question comes from Jeff Sprague from Vertical Research.

Thank you, good morning.

First just to follow up on the industrial, Mike, again if you could and then a separate question. But in industrial bookings, that strength does sound quite remarkable, just given the general tone in industrial land out here this earnings season. Can you give a little color on kind of vertical markets where you're actually seeing that level of activity? And then as part of the industrial outlook, it does look like Cameron is actually coming down quite far. You mentioned it's typically seasonally back-end loaded, but certainly on a year-over-year basis it looks like it was very weak here.

Jeff, actually Cameron is not as bad as you would think. If you go back to the original idea that we had, we thought that it was a $350 million to $365 million business. Based on that, depending on which side of that you take, it's going to be $15 million to $25 million lighter overall. It's really coming across, heavily coming across smaller businesses, smaller compressors, which go into a small industrial customers across the board.

So it was really sort of a pause in the industrial economy in the US, which was quite unexpected. Most of these things are going to be stock products we rebuild and then turn them. They didn't build -- I'm sorry, they built didn't turn them in quarter, so it was pretty tough for that. It's also the business that in June was up 22%, largely in small compressors.

We also saw some improvement in the fluid business. I mentioned Club Car was up nearly 20% in June. Haven't seen quite the increase back yet in the tools business. The material handling for us is our only oil/gas-exposed business and that continues to be very weak there. So the backlog, as I think about big machines is at this point in time pretty well in the bag. The catch or the key for us here is being sure to deliver that.

I mentioned that Cameron's business is 40% skewed toward the fourth quarter. So that is actual customer request for delivery on the big machines and so it's more of an execution of the backlog question there for the full year.

And Mike and Jeff, I think we might have confused you just a tad with one of the slides in terms of Cameron, so let me try to add a little bit of color to what Mike has already said. In the second quarter, there were a mix of revenues in the Cameron business, but it was perhaps nearly 10% of the industrial mix. So it wasn't a big part of that. And some of that was actually revenue that shifted over to the third quarter in the back half of the year.

On this slide where, on slide 11, where we talked about organic reported revenues and we said 2% to 3% for acquisitions, and 3% to 4% for FX, our original guidance for the year, as you well know, was that we were going to have about 3% on acquisitions offset by 3% in FX. This is a little bit of the rounding in puts and takes. I do expect the acquisitions to be right about 3%, and FX maybe slightly over 3%, but we won't be at the outer margins of that guidance. So I would say, let's call it back to more of the 3% on acquisitions and maybe just slightly more than that on the FX side.

That's helpful. Thanks. And then I just on raw materials, Mike, you touched it a little bit as you were wrapping up your concluding comments.

But can you give us a little bit more color on how that plays? Obviously, we're in a pretty severe industrial metal deflation right now. Obviously, you've got hedging and other things, but can you give us a little bit of an update on how we think this should play through? How big of an impact do you see in the back half? And do you see that undermining any way your attempts on the other side on the pricing environment?

Jeff, let me give that a shot. As we look at commodities, first of all, we've said all year that the commodities would turn to a deflationary environment in the second half of the year. And so if we look at that back half, we've got about 70% of our copper bought and about 40% of our aluminum bought, so that deflationary environment is going to flow through what we've got in the back half. I don't see a big risk to that. And it does help us from a first half to second half comparison in terms of materials.

Now on the pricing side, and what we've talked about with pricing, we consider that we still want to have a positive spread between the direct material inflation end price of about 20 to 30 basis points for the year. That's where we were in the second quarter. We were roughly about 20 basis points. So I think the back-half material deflation is going to give us some -- a little bit wider gap or some more positives there, and we still expect to have some positive price. And the overarch on price in material inflation is that we build our pricing capabilities to get paid for delivering higher value to our customers, and to anticipate and react in movements in commodities and I think that's what we're doing.

Thank you.

Thank you. Our next question comes from Robert Barry from Susquehanna.

Hello. Good morning.

Robert.

A quick follow-up on the price cost. It was down [0.2] in 1Q and up [0.2] in 2Q, so call it neutral for the year. Does that imply to get to the [20 to 30] for the year it would be [40 to 60] in the back half? Is that order of magnitude?

I think it'll be in the [20 to 30] range or a little bit higher than that to get us to in our range, we said [20 to 30] for the full year. So just slightly higher than that. But again, that's really the material coming down. As you know, we had a slight amount of material inflation in the first quarter, very minimal in the second quarter. So that turns deflationary in the back half.

Yes, Robert, your rough math works. Fundamentally, as material's coming down fast, price won't come down as fast so you get a little bit bigger spread in the back half of year, unless something happens with pricing and it just destroyed the marketplace, I think that would be the case.

We would see that from a commercial perspective. Things have been weak in Latin America and Asia-Pacific for some time, so I don't see the pricing deteriorating further there. So I don't think the risk there is great. It does support falling commodities, prices moving slower, and spread widening in the back half.

Got you. And then a follow-up on the productivity actions if you put aside the price cost on materials. It sounds like those are stepped up. Could you quantify how much incremental productivity you now expect versus what you had been expecting? And maybe in that you can touch on, in particular, corporate. I think that was expected to be [230 to 235]. It looked like it really stepped down in 2Q. How is that tracking? Thank you.

Right now, Robert, it's probably 30 basis points more productivity in the back half versus the front half. And in addition to that, we're really putting together re-forecasts for the balance of the year, and reevaluating any sort of investment spend timing. Even some of the CapEx, just to go back through that and scrub it for the back half of the year, we're looking to not only get to 30 basis points second (inaudible), but really debt a good natural hedge built in through some productivity actions being built in to protect the EPS forecast we're giving you.

And the unallocated corporate, Robert, we're taking to [220 to 225] for the year.

Great, thank you.

Thank you. Our next question comes from Julian Mitchell from Credit Suisse. Question, please.

Hi, thanks. I just wanted a bit more color on what in Asia and China, specifically on the trade side. I guess your margins Q2 in the climate may be a little bit less than some people have thought. Was there a mix impact from Asian being down within that? And then maybe just give some color on the bookings you're seeing in Asia now. I think carrier was down very significantly in Q2.

Well, any sort of mix in climate, maybe to start there first, would be that on the res side, we're probably one of the few people that actually mix down to 13% and 14%. The more fill up a channel, the more we fill up the product range. We tend to mix down just a little bit there.

We also mix down a little bit when you look at European transport. There's this really weakness in Eastern Europe that is kind of pulling down some pretty good results in Western Europe, as an example. So there are minor things happening within that. Latin America has been a really soft market climate. A very profitable market for us. There's really no recovery happening in Latin America as we speak. So, those are the mixed drags you see to the climate and at present.

Now with China it's not unusual -- gosh I can think about the last couple of years where we got this see-saw happening between strong bookings, weak revenue and so on and so forth. Now granted, it might be weak two quarters, strong two quarters, but as an example, the fourth-quarter bookings we had last year coming through into strong revenue in Q3 and good revenue in Q4, when we look at Q3 bookings in China, of course based on a pipeline of real deals and real projects, we also expect a strong bookings in Q3 and in Q4 for China in the HVAC business. This happens to be some of the growth markets that we're working in. Would not be surprised to find it to be in the mid-teens in quarter three as an example in HVAC for bookings. But it's a see-saw there to a certain extent.

I think that industrial in China remains weak. I know the power consumption is an example, down 2% in China last quarter. Now compare that to the reported 7% growth in the quarter and you get a difference between what's happening on ground, where the proxy is power consumption and what's reported in terms of GDP growth, and obviously the more you focus on heavy industry, the worse off you're going to be. The more you're focused on health care, data centers, food, beverage, pharmaceuticals, probably the better you're going to be in that mix.

Thanks a lot.

And then just my follow-up would be with the IRS thing being potential out of the way, you talked about greater clarity or greater certainty in the release on the future effective tax rate. I just wondered if there could be any mechanism to think about bringing that down a little bit in the long run.

I think, Julian, we keep the range in our 24% to 26% range with that mid point at 25%. We haven't evaluated anything that would change that from a longer-term rate basis.

Okay. Thank you.

Thank you. And our next question comes from Josh Pokrzywinski, Buckingham Research. Your question, please.

Hi, good morning all.

Hey, Josh.

Just on some of this near-term improvement, Mike, that you've seen in the industrial business, I get the 22% bookings growth, and short cycle industrial. I would imagine that given some of the push-outs you saw in 2Q that there might be a little bit of a hedge to the second half.

Can you help us maybe outline the difference between what the backlog supports, what the orders are telling you and what you're baking in the guidance? The long way around there is that, do you have more push-outs baked in? From an industrial perspective, it doesn't feel like the type of environment where people are pulling in business, and it does seem like there's still a lot of reliance on those fourth-quarter bigger projects still shipping on time.

Josh, when you look at -- if you stand a month in front of the next quarter and look at the visibility that we have in that business, it might be somewhere between 45% and 60%. The other 40% to 55% really comes through those short cycles. Small compressors, tools, food management, businesses that -- Club Car, mature handling and larger compressors tend to have a bit more visibility in what we're looking at. What's a little bit unusual now as we think about how the Cameron business works, and this is really historical if you look at the profile of Cameron, they're a big back-half, big fourth-quarter type of company. If you think about their top 5 to 10 customers, their pattern every single year is delivery around that time of the year, and so that happens.

It's got the benefit of really improving visibility there. And of course we've always had good visibility in our big machines. So it's a pretty fair forecast looking ahead, because we can see that big machine. We can see the Club Car business out to the balance of the year. To a certain extent, you're guessing on the overall economy as it relates too the tools business and some of the small compressor business.

So if you had to sort of handicap all of this, there's probably, if you want to net it out further, more upside that could happen on the HVAC businesses, a little more weakness on the short-cycle industrials. But at the end of the day, I think we've cut it fairly close and fairly.

Got you. And then just a follow-up on the margin end of that on the industrial side. Can you dimension out maybe what was more of a surprise factor in Q2 on the margin versus what gets better by managing that in real time, and how that relates to the better backlog outlook. So how much of problems in Q2 just go away because you're now on top of things. There are no more surprises versus the revenue up?

Let me walk you from 16.4% last year to the 13.3% this quarter in big pieces and you can tell me, you can have an impression about what you can be more on top of and what you couldn't. The biggest piece of what we saw was volume and mix, which was 210 basis points of the difference. The FX piece is 110 basis points negative, and then Cameron, 70 basis points. But that's more mathematical, Cameron, of adding revenue and small OI. Now moving to the back of the year where they over-absorb Q3 and really absorb Q4, over-absorb Q4. So you balance that out.

You also end up with investments and other which were about a point. And almost, I'd say the majority of that, is just legal accrual on an old item. So the other way back, you had productivity over other inflation of 120 basis points and price over the direct translation of 60 basis points. So the good guys around productivity and price, 180 basis points.

I don't think the investments and others is a drag. I think Cameron turns itself around through absorption in the factories, and then volume and mix is what we've been talking about. You got to place a bet on some of that, both on short-cycle, high-margin businesses and some geographic spread on that.

But all in all, the plans we've taken to address this really are contingencies around if things remain weak. So I would look for productivity to then significantly be better than other inflation, and for price to be considerably than direct to inflation, in this fast-reducing direct material environment that we're in. The price material is deflating, basically.

Got you. That's helpful. I appreciate it.

Thank you. Next question comes from Joe Ritchie from Goldman Sachs. Question, please.

Good morning, everyone. Thank you. This is actually Evelyn Chow for Joe.

Maybe just returning a bit to your climate margin guide. I understand as ready fills the channel that impacts mix. But it seems like your second-half margin guidance implies a normalization of incrementals. Can you help us think about the puts and takes in margins as it relates to mix, investment spending and other items?

Well, leverage and climate just in the quarter was pretty good. It was right around 25%. If you take Frigoblock out it was right around 30%. If you start looking at Q3 and frankly Q4, it starts to look around 30% again. So there's really not much of a difference in the leverage that we're seeing and expecting around the climate business, even with the res mix. Maybe you want to fine-tune your question? I'm missing it a little bit but it's fairly flat and linear there.

Okay, understood. And maybe just returning to your comment on China HVAC bookings potentially being up in the mid-teens in the back half, it seems a little bit at odds from what we've heard in that region from your competitors, so what's driving the strength in your Business?

It's really not unusual for competitor A to have bookings in one quarter and B bookings in the second quarter just based on what they're working on and customer order profiles from major projects. We see it all the time when we're up 15%, 20%, that might look good compared to a competitor and you flip it around and it looks bad.

All in all, one-quarter, two-quarter differences in the competition really is what we're talking about. There is some differences, though, depending on what competitors you talk about. Clearly we don't have much of a presence in the residence business in China. And so I think we've been helped by that, somewhat insulated by that, and we tend to focus on markets again like pharma, healthcare, electronics, the data centers, food and bev where we've done better.

Okay, and maybe just returning to Cam briefly, could you provide maybe a little bit more color around what you've seen in the three main businesses there this quarter?

Evelyn, let me look at, take a look at where we are in market for the centrifugal compressor business. First of all, on the processed gas side, the -- we're really more exposed to gas than to oil and gas, so we're seeing a little bit of growth from natural gas and from LNG, particularly in the US. In the Middle East, we do have some project delays that are related more to oil prices. But, we see petrochemical doing okay, and we expect power generation to grow for the business.

On the engineered air side, we're seeing some of the industrial gas business, particularly in Asia, with air separation declining. That's really due to over capacity in that area. Lower steel demand also has an impact on the engineered air segment.

For plant air, we see a slow recovery in North America. So we've got some good markets in auto, in food and beverage, pharma, electric power. So North America is stronger, Europe and Asia is slight softer in the plant air side, and then the fourth really piece of the Cameron centrifugal compressor is the after market and the after market is stable. But we still have some more opportunities and synergies to gain on the after market side of that business.

Thank, I'll get back in queue.

Thank you. Our next question comes from Steve Tusa from JPMorgan. Your question, please.

Hey, good morning.

Steve.

Sorry. I might have missed this, but what did you say about the resi, how resi ended the quarter and started in July again on your independent distribution channel again? Did you give numbers around that?

Yes, so to go back to the beginning. We saw wholly owned up double digits and in the quarter we had independence down roughly the same; actually down double digits. Then if you look at that and break it apart further, April and May were incredibly slow. The first couple weeks were, frankly, a little bit of slow, and then the last couple weeks of June were record levels, record levels of shipments that we have seen and we're seeing that through July. My guess is that it's going to look a little bit more like the sell through that we had with wholly owned. Now all that, Steve, gets you to flat to low single digits on motor bearing markets for the year, but pretty strong last four weeks, five weeks.

So what do you think resi can do in the third quarter, assuming weather is stable? In total, your total resi revs.

Great question. Best case, you're probably looking at double digits, low-double digits.

That's good. And as far the margin dynamics there, are you starting to see -- I know you redesigned your 14 sear. What are you seeing on the margin front there? I would assume that's not fully reflected yet, because there was clearly some prebuy dynamic in your numbers. So talk about how you can convert that with the new 14 sears.

14% sear is good, Steve. 13% sear is what it's always has been. And I think that as that comes out of the market and I would assume for the most part it would be out of the market relative to AC units by August at this rate. This is the market. Heat pumps in the market a little bit longer than that. But I think that you see margins start to look better and mix back up.

I think that for the residence HVAC business this year for us you will see good growth, probably shared gain and margin expansion again. So I think they're playing it right, they're right on cue. Good launch is coming in the fourth quarter relative to the heating season, those are on track. That's more nice arrow that they've got to shoot in the third and fourth quarter.

Okay, and then lastly just on your 2016 margin targets for industrial. Are those off the table here now?

No, it's too soon to really tell on this. I think we need to get through and look at the delivery on Cameron for the year, look at the bookings going in, but structurally nothing changes for me. I just before coming out and shooting from the hip, I want to make sure we've had as much of 2015 as we can, look at the bookings, and the really big stuff, and make sure that we're giving you a number that we can live with for 2016. It's too early for me to do that.

Okay. Can you buy back stock here? Sorry, last one. Do you have the desire to buy back any stock here in the second half of the year? Do you know if the stock stays where it is today?

Yes, we're going to buy it all back that we talked about. So it's $250 million?

$250 million.

Yes, $250 million is what can expect.

Okay, great, thanks a lot.

Thank you. Next question comes from Steven Winoker, Bernstein. Your question, please.

Thanks, and good morning. Mike, could you comment on the inventory turn number? I guess it came down from 7 to just over 6, and climate versus industrial. What's going on there, a little more detail?

Yes, Steve, good morning. When you end up with getting an air pocket come through and you've build inventory and it's sitting a bit, particularly in those quick-turning stock businesses, you get caught a little bit sitting there. You also get caught needing to pull some production days out, because you've built the inventory and that even compounds some of the margin problems you see when you've over-built. So we've got that work that out in Q3, and then you're going to see, obviously, the res business start to really move in inventory levels down as you've got the independent restocking taking place late June, early July.

So no question in my mind that by the end of the year, we'd have turns in the right place at that point. And the teams are working on very detailed plans that are taken up by month by month on a glide path, certainly by December. And we're doing our best to put it forward into the third quarter, just to have a better chance to bill and collect it in the fourth quarter.

Okay. And it's not weighted disproportionately to industrial, the challenge on that one. Or it is?

Well, res HVAC would be a big part of it and the balance would be industrial, I think.

Yes, it's about 50/50. It's not over-weighted to industrial.

Okay, and on the IRS litigation, assuming that -- I'm sorry, the settlement, that's all finalized, you're just looking through the Q and your exposures that you had called out publicly before, looks like just adding all that up, you were closer to -- it looked like something like $1.8 to $2 billion, depending how you count the 2007 to 2011. But this gets rid of all of that and it also -- there's nothing else that's pending our there, right? So this completely removes the litigation as called out in the filings. Is that correct?

2002 through 2011, all of issues and items are addressed, so (inaudible). And then if you look at 2012 and on, these are just normal open audits that the IRS would normally be working with in any company. It's something where if you have gone from 2002 to 2011 and you haven't changed 2012 through 2015 in terms of how you're sort of looking at managing the taxes, it would be very hard to assume they would assert anything that was already agreed to between 2002 and 2011. So my guess would be although that 2012 through 2015 is not part of the agreement in writing. It would be logical to assume that you wouldn't see those same issues asserted, since we have settled that already.

Okay, great. And then maybe just one last one. On non-resi, a little more depth here. You are really -- it sounds like significant strength. You mentioned schools, but any place else where it's giving you confidence of a really long-lasting rebound, Mike?

Well, what's interesting for us, I would say, Steve, now is that the institutional markets were really strong, but we're pulling that with controlled performance on contracting. And the performance contracting projects we booked one in the mid-$30 million range for school this past quarter. We've got some very large ones booking in other verticals in Q3 and Q4 larger than that. They're a slow burn, 18 months, 2 years in terms of the project cycle they have to be managed.

They put a little pressure on the gross margin, because you end up with a lot of pass-through subcontracts, but they're accretive to the contribution margins because all of your costs are embedded in those projects, right? Everything down to the commissions for the sales people are embedded in project margins. I think you might see some larger numbers start coming out there. I think the nice part about it is these are 10-, 15-, 20-year yields where it's equipment, controls, service all bundled together. And it's a really nice project management business that's helping us from a energy retrofit perspective, just being able to take on and do really large projects effectively for customers.

Okay. Thank you.

Thank you. Our next question Jeff Hammond, KeyBanc Marketing.

Hey, good morning.

Morning.

It looks like you're coming up against some tougher order comps, and I think you mentioned China up 33 bps in 4Q. And I think you had some really good order growth in back-half Europe last year. As you look at quoting activity and thinking about that tougher comp, how should we think about order momentum into the back half?

Quoting activity, commercial HVAC in North America, very strong performance. In Europe, HVAC continues to be very strong, double digits, again strong, continues to go well. Middle East, same thing, double-digit teens type growth there. Low activity is in really Latin America. Choppy activity as we see relates through China but all of Asia-Pacific.

And really in industrial, big machines -- Sue highlighted for us there where the strengths were, so I won't reiterate that. Probably a little bit more of the choppiness comes back into some of the plant air, where you can see some air pockets from month to month, quarter to quarter, that I think just indicative of the overall economy.

Okay. And then just on residential, you mentioned mixing down, seems like the market is going the other way. So can you just talk strategically how you're positioning that business and how you feel like you're doing competitively? It seems like you have a little bit lower growth rates versus some of the competitors.

Q2, that wouldn't be the case, actually. The data we got from HR would say it was say it a really good quarter for us in Q2, and actually, year to date. It's a little tough with all the data you get and the reporting people do, but the benefit is at least in North America and the US via HR data, we're able to see that relative to the marketplace. We had a really good quarter and it's been a good six-month period there. It's hard for our business, trained in American standards, to do anything but mix down, because historically we only played at one end of the spectrum. So the whole strategy has been for years now to build a product line that runs the gambit so the dealer has the opportunity to use the product line across all aspects of the price points customers want to pay.

It would not at all be unusual for to us see motor-bearing units going up, and obviously as you sell 13%, 14% sear, the mix goes down a little bit. Nothing unusual or unplanned about that at all. In fact, I would say it reiterates that we're getting more of our channel base and our dealer business to use the products across their businesses.

Okay, thanks.

That feeds the parts business, it feeds everything down the road, including replacements too, so it's all good.

Thank you. And our last question comes from Deane Dray from RBC Capital Markets. Question, please.

Thank you. Good morning, everyone.

Morning, Deane.

Just had a follow-up on the IRS settlement, and Sue said there would be no change at this time to the tax rate. But would there be any change to how you're booking intra-Company debt? Is there a P&L effect and would we be able to see that?

No, Deane, there shouldn't really be that much of a change. Really, that change has already happened. So if you think back to the inversion debt, which was a big part of this settlement, that inversion debt was gone at the end of 2011, and then we've simplified the structure, even as we went throughout allegiance bin in 2013. And we've really been very conscious of making sure that we're using our Irish domicile in the right ways for moving cash around the globe, but not really being aggressive on any of the different items. We've said a number of times that we've been playing it right down the middle of the fairway, and that has been the case for the last few years, and so I don't expect any change to that at all.

Great. Just last question. With copper at a six-year low, I know you've always stayed very disciplined in term of doing your laddered purchasing, you've got 70% already purchased. But with copper at these levels, would you ever consider locking in or extending the duration of these hedges or advanced purchasing?

Yes, I think the -- we have a commodity team that looks at all of these different items, and a policy that gives us some flexibility when we do have prices that are at an all-time low, and so that's something that we continuously monitor and the sourcing group is doing a good job of making sure that where it makes sense, that we take advantage of that.

Has that happened yet?

We got about a quarter unlocked in Q3 and about a third unlocked in Q4, so there's a little more room there than we normally have to go take advantage of spot rates anyway, Deane.

That's helpful, thank you.

Okay.

Thank you. I would like to hand the call back over to Janet for closing remarks, please.

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

Thank you. Ladies and gentlemen, thank you for participation in today's conference. This concludes the program. You may now disconnect. Everyone have a wonderful day.