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Ingersoll Rand Co. Ltd. (NYSE:IR)

Q3 FY08 Earnings Call

October 24, 2008, 10:00 AM ET

Executives

Bruce Fisher - VP of Strategy and IR

Herbert L. Henkel - Chairman, President and CEO

Steven R. Shawley - Sr. VP and CFO

Analysts

Andrew Obin - Merrill Lynch

Terry Darling - Goldman Sachs

Mark Koznarek - Cleveland Research Company

Robert Wertheimer - Morgan Stanley

Nigel Coe - Deutsche Bank

Jeff Hammond - KeyBanc Capital Markets

Steve Tusa - JP Morgan

Andrew Casey - Wachovia Securities

Shannon O'Callaghan - Barclays Capital

Mardy Pollock - NWQ Investment

Operator

Good day and welcome everyone to Ingersoll-Rand Third Quarter 2008 Earnings Conference Call. Today's call is being recorded. At this time for opening remarks and introductions, I would like the turn the call over to the Bruce Fisher, Vice President of Strategy and Investor Relations. Please go ahead, sir.

Bruce Fisher - Vice President of Strategy and Investor Relations

Thank you Cecelia. And good morning everyone. Welcome to our third quarter 2008 conference call. We released earnings this morning and the release is also posted on our website.

I'd like to cover the usual housekeeping items before we begin. This morning, concurrent with our normal phone-in conference call, we will be broadcasting the call through our public website.

There you will also find the slide presentation for the call. To participate by the web go to our website www.ingersollrand.com, click on the yellow icon on the homepage of the website. Both the call and the presentation will be archived on our website and will be available tomorrow morning beginning at 10:00 AM.

Now please go to slide 2. Before we begin I would like to remind everyone that there will be a forward-looking discussion this morning, which is subject to our Safe Harbor statement. Please refer to our 2007 Form 10-K and our quarterly Form 10-Q which detail factors that may influence results.

Now, I would like to introduce the participants for this morning's call. We have Herb Henkel, our Chairman, President and CEO, Steve Shawley, our Senior Vice President and CFO and Joe Fimbianti our Director of Investor Relations.

We will start with a formal presentation from Herb Henkel and Steve Shawley followed by question-and-answer period. Herb will start with an overview. So, if you would please go slide 3 and Herb, get started.

Herbert L. Henkel - Chairman, President and Chief Executive Officer

Thank you, Bruce. Good morning everyone thanks to everyone who dialed into this morning's call.

Today we reported third quarter EPS from continuing operations of $0.99 per share which is consistent with our revised expectations. Revenues for the quarter were below our original forecast from July for both the historic Ingersoll-Rand businesses as well as Trane.

Our margins were also negatively impacted by the lower volumes, higher than expected material inflation and unfavorable product mix.

For the quarter, reported revenues increased by 93% and by 2% on the performer basis including Trane.

Our growth rates declined considerably compared to prior quarters. EPS from continuing operations was $0.99 excluding about $0.27 per share from one-time items. This was below our original forecast for $1.5 to $1.10 and we met the revised EPS expectations we gave you last week at $0.98 to $1.

Steve is going to over with the additional details later in this presentation. During the quarter we began the integration of Trane in the earnest, and we begun realizing the available cost synergies.

I'll cover more on Trane acquisition later in my presentation. Plus I'll give some additional details on the restructuring activities well underway.

Finally, we revised our full year EPS forecast to $3.35 to $3.55 per share due to slowing end markets and added uncertainty related to restrain credit availability for our customers.

Now I'd like to turn it over to Steve who will take you through the third quarter details.

Steven R. Shawley - Senior Vice President and Chief Financial Officer

Thanks Herb. This morning we going to provided additional pro-forma information to supplement the GAAP reporting data. So you can get a clear view of our performance in the third quarter and understand our guidance for full year.

Please go to slide number 4. This slide gives a quick summary of revenue and operating margin for the third quarter. As you see on the upper right revenues were $4.3 billion up 93% including Trane on a pro-forma basis revenues increased by about 2% and were flat excluding the positive impact of currency.

Reported operating margins were 8.1% compared with 12.3% last year adjusted for the one-time Trane acquisition cost incurred in the quarter. Operating margins were 10.9%.

These one-time costs are detailed in the box on the lower left and are primarily related to the backlog and inventory step-up and end process R&D.

I'll come back to the topic of margins and operating leverage in greater detail later in my presentation.

Please go to slide number 5. I will go to the slide entitled third quarter revenue and growth. You can see the components of our sales gain in the upper right corner.

Organic revenues declined in the quarter by 1% and our foreign exchange added about 2%. Looking at the upper left, three of our operating segments had modest revenue gains in the quarter but security was slightly down.

Trane revenue growth is shown as part of the Air Conditioning Systems and Services or what we call ACSS segment. Revenue change portrayed in the ACSS part is on pro-forma basis.

The momentum we have seen in key end markets for most of the year slower the substantially in August and September.

Total sales on a pro-forma bases were up 2% that reflected contraction in North American equipment markets and the software conditions in Europe.

Looking at the lower left you can see growth rates by region. We experienced slowing growth in all of our geographic end markets. Most notably in Asia where year-over-year revenues declined slightly about 29% of our third quarter sales came from markets outside of the Americas.

Please go to slide number 6. Next slide entitled year-over-year Revenue Growth provides a look at our segment growth rates during the last seven quarters.

The old Ingersoll-Rand operating segments, delivered consistent year-over-year revenue growth throughout 2007 and the first two quarters of 2008. You can see that the year-over-year growth rates in all historical Ingersoll-Rand business, pay a lot in the third quarter as a result of significant softening in a number of our key end markets.

Please go to slide number 7. Let's look at the bridge of the third quarter operating results. Reported operating income increased by 26% to $347.4 million representing an operating margin of 8.1%.

The quarter's operating income included $122 million of one-time cost from the Trane acquisition. Excluding these costs, third quarter operating margins were 10.9%, down about 140 basis points compared with 2007.

Favorable price utilization of 2.7% and moderate productivity growth at 3.1% offset a major portion of the unfavorable impact of inflation mixed in foreign exchange.

Please go to slide number 8. Let's move now to the income statement. Moving down the page, interest expense increased due to our higher debt balances from the Trane acquisition. And recent upward movement of short interest rates on our floating debt rate.

Other expenses for the quarter was $3.7 million approximately $4 million better than last year. The lower expense was due to higher interest income which was partially offset by higher currency exchange losses.

Let's move down to the tax line, an expense of $26.3 million. The effective tax rate in the quarter was about 10.1% versus last year 16.1%. And below our original forecast the 22%.

The third quarter rate reflects the projected full year rate of approximately 20.6% adjusted for one time discrete tax benefits. Moving down the pages to discontinued operations you can see a cost of $6 million or about $0.02 per share which we expect to be the quarterly ongoing run rate for discontinued operations.

Finally looking at the bottom-line, reported net earnings for the third quarter from total operations were $227.7 million or $0.70 per share on a GAAP basis.

Please got to slide number 9. Next two slides put out bridge between the third quarter actuals and the forecast we gave you on July. Both exclude one-time costs. Revenue for the quarter was about $87 million below the initial forecast including both Ingersoll-Rand and Trane.

Margins were negatively impacted by the lower volume, unfavorable product-mix in currency due to the strengthening of the dollar during the quarter. Corporate costs were inline with our estimates as we hit the targeted acquisition synergies.

Interest expense was about $4 million higher than expected from the recent uptake in short-term rates. Other income was $14 million below forecast primarily from higher than forecast foreign exchange losses related to the strengthening of the dollars versus the Euro in the quarter. The tax rate was about 12 points below forecast from the lower than forecasted rate adjusted for one-time discrete benefits.

Please go to slide number 10. This slide bridges the components of our actual EPS compared with our July guidance. Let's first review segment operating earnings. The biggest difference between forecast and actuals was $0.12 from lower revenues on unfavorable mix.

We were able to more than offset materials and other inflation with productivity and lower spending which netted to $0.03 positive. We also had $0.02 related to translation and $0.02 from other items. Below the line we lost $0.04 from higher interest expense and foreign exchange losses and we had $0.08 of benefit from lower than forecast taxes made up of $0.04 from our lower rate related to lower U.S. earnings and $0.04 from discreet items. Added together the pluses and minuses total $0.09.

Let's now move to review of our reporting segments. Please got to slide number 11.

Slide 11, list the highlights for Air Conditioning Systems and Services and represents Trane business that was acquired on June. Revenues in the third quarter were $2.051 billion up 3% versus prior year on reported basis and up 2% year-over-year excluding the effects of foreign exchange.

Operating income was $89 million reported and includes $108 million of acquisition related cost associated with inventory step up, in process R&D and $41 million of ongoing amortization. Excluding these items operating income was $239 million.

Before reviewing the details of our sales, orders and backlog, I'll first touch on the global HVAC equipment markets. The U.S. commercial equipment market contracted by 2% in the third quarter marking the first quarterly decline since the fourth quarter of 2003.

Light commercial unitary markets continued to be soft and were down over 5%. While applied was flat and large commercial unitary markets were up strongly.

International unitary and applied markets continued to grow mid single digits in aggregate.

Let's now look at the composition of our sales growth as shown on the chart. Chart shows data as reported and as adjusted for foreign exchange. My comments relating to sales, orders and backlog will focus on results excluding the impact of currency changes. Our commercial air conditioning revenues which sort of combination of commercial equipment and products, spread services and solutions were up 6% reported and 4% excluding FX.

Total global commercial equipment and system representing 46% of our total HVAC sales contracted 1% in the third quarter. I'll split that further into applied and unitary equipment. Applied global equipment sales were up 2% on top of tough comprables.

Sales were up over 18% in the third quarter of 2007. Americas region experienced a slight decline, Asia showed strength and Europe, Middle East regions were up single digits.

Global commercial unitary sales declined 4% with low to mid single-digit declines in all key areas. Let's switch now to our commercial global part services and solutions business which continues to perform very well growing 12% in the quarter excluding FX.

This part of our business continues to expand steadily and represented 42% of our commercial sales and 33% of total Trane sales in the third quarter. Last year the service and related category represented 29% of total Trane sales.

We continue to grow at the high end of the 10% to 12% range, we gave you at second quarter. Americas and Europe, Middle East combined were up about 10% and Asia continued its strong growth up over 20% versus prior year. We continue to capture more new service agreements on both existing and new equipment systems and controls.

In the third quarter, we expanded the number of new service agreements by more than 10%, after increasing new agreements by 18% in the second quarter. We continue to broaden our service offerings to provide significant energy efficiency savings and create value by extending the life of HVAC equipment in the field.

Our time key efficiency and renewal programs were all up 20% plus in third quarter. We have a strong pipeline which will help us sustain good future growth on the basis proper equipment markets. And we continue to get leverage on our field service organization.

By expanding our service capabilities, and by helping our service techs be more productive and effective, we've been able to support 10% plus sales growth by adding service techs at only at 5% rate.

The global market for this part of our business, broadly referred as HVAC parts controls, contracts taking services is significantly larger than equipment and offers us a real opportunity to expand our recurring revenue and continue to achieve significant growth independent of equipment markets.

Now, let's turn to the residential part of our business, which represented about 21% of the total Trane revenues in the quarter. We estimate an industry shipments to new residential construction were down in the range of 25% to 30% in the quarter and replacement unit shipments showed modest increase.

Overall, we estimate that the market for motor bearing units includes compressor bearing units, furnaces and air handlers was down 8% in the third quarter. For the quarter our residential product sales were down 4% year-over-year, volume declined high single-digits price was essentially flat and improved mix continued mid single-digit sales growth as we continue to significantly outpace the industry on sales of high efficiency systems.

So to summarize overall for the quarter Trane commercial sales grew 6% reported and 4% excluding FX, with international equipment in system sales more than offsetting modest decline in the Americas and continued double-digit in part services and solutions around the world.

Residential sales declined by 4% driven by a continued weak housing market.

Next looking at orders, total global orders were up 4% or 3% excluding FX, equipment orders declined in the Americas continuing its recent saw tooth pattern of up one quarter down the next.

Orders for contracting parts service and controls remained strong up 15% continuing its strong growth pattern.

International orders continue to shows strength up 13% on reported basis and up 9% excluding FX.

Commercial backlog continue to grow on a global basis. We ended the quarter with global backlog in excess of $1 billion. A new third quarter record for Trane, global backlog was up 6% reported and up 5% excluding FX.

Backlog in the Americas declined low teens while international backlog was up almost 30% more than offsetting the Americas performance.

International backlog now represents more than one half of our total equipment backlog. So in summary, we'd say that our orders and backlog or had levels of support continued but slow in growth on global basis.

In terms of income Trane's operating income, which is the way we report profits now as the business is part of the Ingersoll-Rand was $239 million for the quarter.

In order to show a meaningful comparisons to last year, this number excludes $108 million in onetime acquisition related cost. And $41 million of additional ongoing amortization costs.

We realized price increases of roughly 2% in commercial and we achieved improvements here in productivity in the quarter. However these actions were not enough to offset materials and other inflation, lower residential volume and the investments we're continuing to make to grow the business long-term.

So on summary for the quarter Trane had commercial sales growth although it's slowing rates the strength in international and service. And we continue to whether the downturn in residential.

Please go to slide number 12. Moving to climate control on the slide 12, revenues in third quarter were $882 million up about 1% and down about 2% excluding the benefit of currency.

The global Thermo King transport business, revenues decreased by about 2%, result significantly benefit from the growth of auxiliary power units in the U.S. which offsets some of the weaknesses in global truck and trailer.

North America industry shipments for trailers have been declining for the last seven quarters as you know, due to decline in truck ton miles and higher operating cost. Looking at the North American refrigerator trailer industry as a whole, third quarter unit shipments were down approximately 3% compared with the test volumes in 2007.

Full year industry shipments are now projected to be 26,500 units, down about 18% compared with last year.

Thermo King's North American third quarter trailer revenues were down 6% compared with last year reflecting the market decline in unfavorable sales mix.

Our European trailer revenues again exceeded that of North America. However, activity in Europe has slowed substantially compared with the strong growth we've seen over the prior quarters.

Our third quarter trailer shipments declined slightly in Europe. And we now expect to see an overall market decline of 8% for the year based on the current order trends.

Global refrigerator truck revenues were down 8% reflecting significant weakness in the U.S. and flat markets in Europe. Global HVAC shipments were flat and marine containers sales were up double-digits.

Finally we enjoyed the substantial growth in our TriPac auxiliary power units. With third quarter sales more than doubled compared to the last year. This product continues to demonstrate how Ingersoll-Rand innovations are providing customer value and driving sales growth in tough markets.

Looking at stationary refrigeration, global sales were up 5%. This was driven by an 8% increase in Americas display cases and higher service revenues. Climate's reported operating margin was 11.5% in the quarter or up 20 basis points versus last year.

Margin expansion was driven by operational productivity improvement and price which together more than offset on favorable product mix and ongoing inflation. This performance again clearly demonstrates that our investments in innovation, geographic expansion and productivity initiatives are playing off.

Please go to slide number 13. Let's go now to slide 13. Industrial technologies third quarter revenues were $718 million up to 2% versus the prior third quarter is flat excluding currency.

Revenues for the air and productivity business increased by 5% from higher volumes outside the U.S. and from currency benefits. Air and productivity revenues in Americas were helped by recurring revenue growth which was up 7% and growth in Latin America.

U.S. new equipment sales declined slightly in the quarter. Air and productivity revenues in overseas markets grew by 8% compared with 2007, due to strong growth in Asia and favorable currency.

Club Car revenue declined about 4% compared with last year. Club Car continues to gain market share in the declining golf and softening utility vehicle markets. ITS's operating income was $81.4 million, representing an operating margin of 11.3% down from 13.3% in 2007.

Improvements in price and productivity were more than offset in the quarter by unfavorable impact of inflation and mix. Please go to slide number 14.

As seen in slide 14, we look at security technologies. Revenues were $649 million down about 1% compared with very strong results last year. Commercial revenues were flat overall with 1% growth in the U.S. and 9% increase in Europe.

America's sales in residential segment declined 15% in the quarter again strong comparisons from last year, and we were significantly outperformed the North American residential construction market.

You will recall that last year, we benefited from substantial shelf space gains at big box and from new electronic security product introductions. Residential results were indicative of the continuing decline in domestic residential building activity.

Volume gains in South America also helped to partially offset the fall in U.S. residential activity. Operating income was $126 million on an operating margin was 19.4%, up 2.2 percentage points from last year's margin.

You will recall, we had a strong year-over-year margin gain in the first half of the year. Accelerated productivity and pricing actions more than offset unfavorable product and geographic mix and material inflation.

Please go to slide number 15. Then you look at the balance sheet. For this analysis the numbers are on a comparable basis for 2007 and 2008, both exclude Trane. As you can see we made progress in working capital management especially in receivables.

Inventory improved slightly from 5.8 to 5.9 turns. Receivable days were down significantly and payables slipped a bit. Taken together, these working capital elements are definitely moving in a right direction and are indicative of management's focus on improving the efficiency of the balance sheet.

Capital spending in the quarter was $56 million, about 2% of revenue or depreciation and amortization totaled $39 million.

Please go to slide number 16. Since there has been considerable interest in our balance sheet liquidity. I wanted to give you some additional details this morning. Our total debt balance at the end of the quarter was about $5.5 billion about $3.6 billion was long-term with $950 million bridge loan, becomes due next June and about $960 million of commercial paper outstanding.

During the third quarter, we maintained access to the commercial paper market, and have continued to be active in the market during the month of October including this week. The debt to capital ratio is 33.8% at the end of the quarter and we've about $740 million of cash on the balance sheet.

We pay down $443 million of acquisition debt during the quarter and our cash flow are on track to allow us to pay down about $1 billion of debt in the second half of this year.

This will reduce our commercial paper balances and facilitate the buyback of $248 million in portable debt in November. We continue to maintain significant financial flexibility and liquidity with $3 billion of available untapped credit facilities which give us liquidity cushion of more than $2 billion.

We have adequate commercial paper capacity and even more flexibility through our receivable securitization program. Obviously managing for cash remains a very-very high priority.

Please go to slide number 17. Our bond maturity schedule is also well balanced with about $220 million coming during 2009. Combined with the exploration of the bridge loan in June of '09 and considering normal financing requirements, we would expect to pay down about $800 million of additional debt in 2009.

Majority of our current long-term debt will mature after 2012. Now let me turn it back to Herb.

Herbert L. Henkel - Chairman, President and Chief Executive Officer

Thanks, Steve. Please go to slide number 18. I'll review our progress on the integration synergies discuss restructuring actions we're initiating and give you our outlook for the fourth quarter.

The third quarter marked the first full quarter that Trane Ingersoll-Rand was combined company. And we delivered $30 million of cost synergies. These savings came from reducing headcount and implementing the first wave of indirect material savings programs.

We are on track to achieve our 2008 full year savings of $75 million and we expect to gain about $200 million in synergies by 2009 and $300 million by 2010. Any benefits from revenue synergies would be in addition to the $300 million of cost synergies.

Growth in cost synergies will be driven by accelerated implementation of lean Six Sigma and productivity initiatives. Ingersoll-Rand business operating system that's been developed over the last several years will be our platform to driving continuous improvement across the enterprise.

Our goal is to accelerate our annual productivity increases from the historical 2.5% to 3% range to 4% and even higher. The savings for '09 will again be primarily related to corporate items and direct and indirect purchase cost.

We should also enjoy growing revenue benefits from growth synergies. The additional benefits trends relate to about $0.30 per share of incremental EPS in 2009.

Now please go to slide number 19. We've also accelerated productivity improvement and cost reduction actions for remainder of 2008 to deal with the slowing end market demand.

In addition to these activities we're initiating corporate wide restructuring actions that streamline our worldwide manufacturing footprint in general and administrative cost base. The total cost for these programs is expected to be approximately $110 million. Activities will include plant closures and product movements.

We expect the majority of these costs to be incurred in 2008. These actions are expected to generate $100 million of pre tax savings in both 2009 and 2010. As the economy slows we're paying strict attention to cost and investment spending and developing contingency plans as we go into 2009 to protect our earnings and our cash flow.

We'll also be exploring additional actions that may be required in 2009 to balance our manufacturing capacity. During our next 12 months or so cash flow will primarily be used to retire acquisition debt and I don't expect many acquisitions or divestitures over that timeframe.

For the foreseeable future our focus will be on acquisition integration, synergy execution, and cash generation.

Now let's go to the forecast. Please go to slide number 20. In August and September, we saw a downward flip point in many of our major end markets. The uncertainty related to the cost and availability of credit has caused a notable decline in the tone of business over the last 60 days. And our most recent order rate leads us to expect sluggish activity for the balance of 2008 and probably into 2009.

Because our end markets are slowing and uncertain we are actively reassessing what we believe the next few quarters are going to look like. For the balance of 2008, we expect to see declining markets in North America and the Western Europe if moderate growth in South America, Eastern Europe and in Asia within our product, service and geographic diversification to sustain flat year-over-year revenue in spite of particularly tough end markets.

Now, please go to slide number 21. Based on what we see today, we expect fourth quarter pro-forma revenues including Trane to be flat compared with 2007.

Slide 21, shows the fourth quarter forecast by business units. You can see that the forecast calls for a significant decline in growth compared to the first half of this year. However, it's apparent that uncertainties related to global economic activity and the potential impact over restraint credit availability and the timing of customer orders couple of meet our visibility to demand level and negatively impact our fourth quarter revenue projections.

Now please go to slide number 22. We expect the combined companies to have revenues at approximate $4.1 billion in the fourth quarter.

Segment operating margin should be 9% to 10% with EPS from continuing operations at $0.55 to $0.75 per share. We expect fourth quarter material cost to remain at high levels and we will not benefit from recent reductions in commodity costs until early 2009.

One time items are expected to be approximately $0.09 per share and discontinued operations are expected to be above $0.02 per share of cost.

This fourth quarter forecast is based on an average share count of 325 million shares. As you can see in the right hand column this forecast shows expected revenue for the combined entity of approximately $13.7 billion and the segment operating margin of about 11% to 12% for the full year. We expect to realize $75 million of synergy savings during 2008, likewise we assume purchase accounting charges look approximate about $0.52 per share and restructuring charges will about $0.17 per share.

We show the interest expense and interest income associated with the total outstanding debt and the expected cash position for the year.

The effective tax for the year should be about 18%to 19%. Adding all of these up brings us the total EPS from continuing operations in the range of $3.35 to $3.55. Please note that this does not include about $0.69 of one time charges, primarily backlog and inventory step up and the impact of restructuring cost.

We retained about $0.16 per share of expense related to the cost associated with discontinued operations. This forecast is based on 304 million average share count during all of 2008.

The combined company is expected to generate available cash flow of $1.1 billion in 2008. However this amount does not include about $600 million in 2008 tax payments we made related to the gain of Bobcat divestiture.

Now please go to slide number 23. As a final note in the fourth quarter forecast we've provided a bridge between our prior forecast that we gave you in July and our current expectation.

Because of weaker than expected end markets we lowered the fourth quarter 2008 pro-forma revenue forecast by approximately $200 million compared to the previous version.

You can see in the right hand column that main drivers for the EPS change are related to the lower volume and unfavorable product mix. Changes in currency and higher interest expense which taken together account for the differences in our fourth quarter EPS forecast compared with our prior estimates.

Now if you would please go to slide number 24. I'd conclude with few key points. First Ingersoll-Rand business have strong fundamental. We have leading brands and strong market positions.

We're expanding our global presence. We have a large and growing installed base of product which leads increased service, parts and replacement equipments. We've had a solid balance sheet with the strength to ride out this economic storm.

We will continue to invest prudently in innovation and new product and services to take advantage of opportunities to grow our recurrent revenues and emerging this downturn and an even stronger position.

In the mean time our number one priority is to manage through this downturn that means we will hustle even harder even harder for business.

Let me give you an example. Trane sales engineers work primarily on commission. And you can bet they will live up to their reputation of capturing more sales when the economy slows its what they've done in past downturns.

We are reviewing every single operation as part of our operating plan process to identify and implement additional productivity programs and to mange our cost structure more closely.

We're committed to achieve in the Trane integration synergies and to restructuring programs we announced this month. We'll pay very close attention to our cash position and look for ways to reduce working capital and improve our return on invested capital.

Ingersoll-Rand is a company with great long-term prospects and we're putting in sound short-term game plan to make it there.

Now we'll be happy to answer your questions. Thank you.

Question And Answer

Operator

[Operator Instructions]. And our first question comes from Andrew Obin of Merrill Lynch.

Andrew Obin - Merrill Lynch

Yes, good morning.

Unidentified Company Representative

Good morning, Andrew.

Andrew Obin - Merrill Lynch

Its most of your comment I know over the past couple quarters you had a slide with a lot of macro data and well I appreciate the uncertainty that you guys face, so a super useful slide as an analyst. Just to understand your frame work it's just a comment. Looking at slide 5 as I look at organic growth in Asia-Pacific and USA am I correct to assume that Asia-Pacific slowed from 19% organic growth last quarter to negative 1 and USA went positive 14 to 2, is that the right read?

Steven R. Shawley - Senior Vice President and Chief Financial Officer

It is and taking a look at that the, its kind of a lumpy thing, most of it driven by the fact that the our marine container shipments were off in the quarter simply because of timing of orders and we count as there is China sales, so that's effecting it to some degree.

And also we have structural issue because of change in supply point for some of security equipment coming out of the JV in Fu Sheng, so I wouldn't say it's anything to be panic over relative to our market progression, it's just kind of lumpy order issue with primarily marine container.

Andrew Obin - Merrill Lynch

And so how much of this if you could quantify of that plus 19 to minus 1 how much of it with marine container?

Steven R. Shawley - Senior Vice President and Chief Financial Officer

The marine container was down... the marine container alone Andy was down 23% in the quarter.

Andrew Obin - Merrill Lynch

Okay.

Steven R. Shawley - Senior Vice President and Chief Financial Officer

So I would say that's probably on weighted basis about 60% of the delta in China.

Andrew Obin - Merrill Lynch

Okay. And this China expects most of the decline in Asia-Pacific?

Steven R. Shawley - Senior Vice President and Chief Financial Officer

yes

Andrew Obin - Merrill Lynch

Okay. The second question is how I should be thinking about inflation productivity and pricing going forward because there are the some of the things at least that you have some control, so looking at productivity. It seems that productivity has declined a little bit versus previous quarter. Are we calculating it differently or what should be I thinking in calculating for fourth quarter and going in to '09?

Herbert L. Henkel - Chairman, President and Chief Executive Officer

What we are just really seeing Andrew, in terms of entities the fact that we have a reduction in the volume and that debt is negatively impacting our ability to realize synergies that is why you see us putting in restructuring program.

What we talk about is, we are talking about significant reduction in head counts that had been added on with anticipation of continued revenue growth with revenues now actually slowing down. But we find ourselves in terms of entities not being able to absorb the cost structure and having to go and actually reduce head count in those areas, that's really what you are seeing.

When we put to restructuring back into place, we then think at that level that we're currently seeing, we'll be able to run most of 3% productivity going into 2009.

Andrew Obin - Merrill Lynch

Thank you, I appreciate. And pricing has improved, should I continue to see improvement in the fourth quarter or is that something that sort of subject to the economic uncertainty there?

Herbert L. Henkel - Chairman, President and Chief Executive Officer

I think, if you look at the thing is that the entire pricing fees that we were looking at is, we were running somewhere in about two somewhat percent range as we were half way through the year and we are now continuing to see in terms of our net price realization is being north of 2%. So I think it continues to be year-over-year comparison continue to be about the same.

Andrew Obin - Merrill Lynch

I appreciate it, thank you very much.

Operator

We'll go next to Terry Darling at Goldman Sachs.

Terry Darling - Goldman Sachs

Thanks... I'm wondering if you could step us through the cash flow statement in the third quarter a little bit. Can you tell us what total depreciation for the company was. Cash flow from operations CapEx take us through the free cash flow profile?

Steven R. Shawley - Senior Vice President and Chief Financial Officer

We also just for your information, we tried to add some data sheets to the release. And hope you had a chance to look at the release but we have about 3 data sheets in the back with cover off on and the depreciation and amortization, I'm glad to take you through that. If you look at Ingersoll-Rand fees I referred to in a comments that's the $56.3 million of CapEx, okay and if you take a look at total the CapEx expenditure is for the quarter $35 million for Trane so about $91 million almost $92 million for the quarter okay.

Terry Darling - Goldman Sachs

Okay.

Steven R. Shawley - Senior Vice President and Chief Financial Officer

Depreciation if you add Trane for the numbers that I gave you for I give both pieces the total depreciation or the combined company was $63 million in the quarter and amortization was $48.3 now a lot of that I think $41 million and $48.3 comes from the purchase accounting revaluation and then amortization of the balance sheet going forward.

Terry Darling - Goldman Sachs

Okay. And change in working capital?

Steven R. Shawley - Senior Vice President and Chief Financial Officer

See here and look that one up.

Terry Darling - Goldman Sachs

Or just total cash flow from operations whatever is easier for you?

Steven R. Shawley - Senior Vice President and Chief Financial Officer

Just a second, this is a bit of round number but $400 million is close enough?

Terry Darling - Goldman Sachs

Okay. so free cash of roughly little over $300 million and looks like you paid down about $440 million of debt in the quarter and I think the slide suggested $600 million in the fourth quarter which based on your guidance, I think requires a pretty substantial generation of cash from working capital. Is that the way that the map should look there?

Steven R. Shawley - Senior Vice President and Chief Financial Officer

And that's a little because it look like what's happening our top-line. We'll be collecting a lot of receivables in the fourth quarter and that's very consistent with even past seasonal profiles of cash flow.

Terry Darling - Goldman Sachs

Okay and cash on the balance sheet at the end of quarter. Can you give us, at the end of the third quarter?

Steven R. Shawley - Senior Vice President and Chief Financial Officer

Yeah about 740. Okay and well I could characterize that, we have about $400 million of that trapped and various entities around the world, like one other things we're looking at it, in terms of helping us the liquidity issues is looking at some opportunities to free up some of that cash. So, we're shooting to try to take that cash balance on average down to about $500 million.

Terry Darling - Goldman Sachs

And If I can just squeeze in one more, if we go to page, slide 9, I trying to understand the tax rate, the various moving pieces and components of the tax adjustments relative to the reported tax number. And if we look at slide 9, maybe, just you're not passed arithmetic here but 10.9% operating margin and $4.3 billion of sales, I think its $470 million less the $88 million from interest expense interest and others, $382 or plus or minus or $1 million or so.

We have $39 million which would be a 10% rate get to 343 divided by 324 shares out as 106 so I've got to be missing something because I think I need more like a 16% tax rate to get $0.99, so we either want to address it that way or just take us through the bridge from the $26.3 million of income tax reported to whatever the absolute dollar tax number you need to get $0.99 that would be super helpful?

Steven R. Shawley - Senior Vice President and Chief Financial Officer

Well. Again as I said there are several pieces for the tax rate, the biggest there was a discrete credit in the quarter of almost $16 million. So if you take a look at that-that's included in the tax rate okay I'm sorry the ongoing rate is higher than the what on the sheet because what we have is a blended rate including the discrete piece which was a net of $16 million.

Terry Darling - Goldman Sachs

Okay. The 20 some odd percent plus the 16 gets you to 10 is that what you are saying?

Steven R. Shawley - Senior Vice President and Chief Financial Officer

Right. Ongoing tax rate we expect this is about 20.6 for the year and of course we had squeeze that into the third quarter, because when we saw a drop in the U.S. income that's and that's what lowered our rate for the year and most of that benefit [ph] in the third quarter

Terry Darling - Goldman Sachs

Okay thanks.

Steven R. Shawley - Senior Vice President and Chief Financial Officer

If you look at that there is another maybe 8 to 10 associated with catch-up so the total debt was about 22 I would say

Terry Darling - Goldman Sachs

Okay I will follow up off line and thanks.

Operator

[Operator Instructions] And we'll take a next question from Mark Koznarek, with Cleveland Research

Mark Koznarek - Cleveland Research Company

Hi good morning.

Unidentified Company Representative

Hi Mark.

Mark Koznarek - Cleveland Research Company

Question here on the Trane business I was pretty surprised with these slowdown in the commercial orders to 4% because last second quarter pro-forma they were 15% for the full period and I had delivered the impression that this business had a pretty modest degree of cyclicality. And that seems like a pretty sharp slowdown. So is there a scenario where this business on the commercial side can go negative for a period of time. I know there has been restatements and things like that of historic financials. So I'm just looking for some commentary about the cyclicality or the various parts of the business to what we might expect going forward as it is.

Herbert L. Henkel - Chairman, President and Chief Executive Officer

Well I'll Mark a couple of points. First of all yes, orders were higher in the second quarter, but they were very low in the first quarter. So that's why we've seen a sort of up and down pattern that has more to do I think with the concerns around the credit markets and anything else. And that's influencing when customers place orders. So that's why you get this up and down pattern.

Second part of your question in terms the cyclicality of the business. Again if you go back and look at the last downturn which was 2001 to 2003, we did see negative sales growth in the Americas on equipment although the rest of the World continued to grow and our service business continued to grow at high single digit rates. So if you want to just crank in which you think is going to happen in these markets. I think you would get to a point where you would see a repeat of the pattern that we saw in the last downturn which was sales growing modestly.

Mark Koznarek - Cleveland Research Company

Okay. And then on climate control, could you discuss the severity of the expected 4Q down draft in revenues and whether that downward momentum is likely to continue for a period of time into 2009?

Herbert L. Henkel - Chairman, President and Chief Executive Officer

If you look at, what's happening in the climate well the U.S. markets have been falling off for last two years. That information started declining in 2007 and continued throughout '08 to the point where if you take a look at what's happening as that's information is now looking at about 28,500 units for the year.

Based on our order patterns we are seeing out there that's followed by a little bit high. So our information where we basing upward guess is all about 28,000 units. And that's the progression downward another 18% to 19% this year over the last year. It's slowing in the second half, we definitely seeing low rates of order coming from the U.S. markets and just continuation of what we have been saying for last years.

The news that we've got is really coming out of Europe and we're seeing Europe markets starting to turn down over the last few months. I think if you look at what's going on in Europe with the credit crunch transport business is only highly leveraged, there is a lot of leasing companies resolved in that market.

So for the first time in a number of years we're seeing a downturn there, this all happening pretty much in the fourth quarter. I think the new thing in the climate control it's showing up in the fourth quarter, I was in transport as we're starting to see some slide in the projections of store builds again it's credit crunch related, we see customers that are delaying projects, pushing projects out, this is affecting the stationary fees the Houston fees.

And the fourth quarter is always a seasonally strong quarter for Houston so when that stop products to go out that an impact. So what's going there in which I think the new news is in fact European transport market has roughly that return and we're seeing some credit related activity going on stationary.

Steven R. Shawley - Senior Vice President and Chief Financial Officer

Go from up 5% this quarter to a negative Europe would be a pretty sharp negative and then North America continuing its decline. It sounds like at least the first two of those probably continues at the 2009 for a period?

Herbert L. Henkel - Chairman, President and Chief Executive Officer

As par some of these closer flat in the fourth quarter so I would say there is that's pretty good my mistake it's not 28,500 it's 26,500 projected for this year sorry about that.

Mark Koznarek - Cleveland Research Company

Okay.

Herbert L. Henkel - Chairman, President and Chief Executive Officer

And we are basing our forecast on about 26,000.

Steven R. Shawley - Senior Vice President and Chief Financial Officer

So I think the biggest difference I see Mark from when we were together in July is that when we were at that point so I am talking we're talking about Western Europe slowing down we saw it sort of getting was going to be relatively flat and what actually has transpired since then it's actually now gone into the negative category, I mean that to me I think it's the biggest change in what we've seen since that. The U.S. candidly continues to be on that downward slope that we have got under and that was for next year run between 24,000 to 26,000 all the over I'm going to place. But, yeah, we don't see that in terms being abort they turn around the next quarter.

Mark Koznarek - Cleveland Research Company

Okay great, thank you.

Operator

We will go next to Robert Wertheimer of Morgan Stanley.

Robert Wertheimer - Morgan Stanley

Hi, good morning everybody. I guess and I want to apologize for this in advance. I have questions on the differences between the one timers. So you expected $0.11 in the quarter and you had $0.27 until the full year, I think you expected 31, you had 69. I assume some of the full year differences the restructuring actions for Q4, but could you explain what the difference was in the quarter and then confirm that full year does have the cost to restructuring industries in and out?

Herbert L. Henkel - Chairman, President and Chief Executive Officer

First of all the moderate increase in the one-time costs projection and mainly due to the fact with evaluations are coming in and the step-ups were just higher, okay. That's flat-out the reason for. The restructuring is not in these numbers, okay. The restructuring costs is going to start to incur in the fourth quarter, Robert [ph].

Robert Wertheimer - Morgan Stanley

Okay, so finally understand what you said to mean like the evaluations you placed on the actual assets you bought were lower and therefore the intangibles were higher is what that means?

Herbert L. Henkel - Chairman, President and Chief Executive Officer

Well the fact that it's not the intangibles, it's the step-up associated with inventory backlog, our R&D okay, mainly inventory and backlogs, is just that when we put the forecast together for the quarter, we were estimating what those step-ups were and throughout the quarter when we finalize the actual valuations they come out to be much higher. Of course we have to write them down in the turnover.

Robert Wertheimer - Morgan Stanley

Okay. I'll think about that for a second and then you said that the restructuring the cost for the restructuring that you're going to do that's going to benefit the new stuff that's going to benefit '09 and '10. Is that in the one-time items for 4Q I know?

Steven R. Shawley - Senior Vice President and Chief Financial Officer

Well we break it out in the communications. We have said that we expect 4Q one-time is to be about $0.09 in the impact of restructured to be about $0.18 to $0.19.

Robert Wertheimer - Morgan Stanley

Okay and if I can ask you real question. When you look at these new restructuring actions, I guess this is for Herb, did you I mean did you cut capacity or you're cutting things you're impacting future growth or there was found more facts in some other businesses and--

Herbert L. Henkel - Chairman, President and Chief Executive Officer

Well let me describe this. I think what happened in term is that we had when we put the plans together for 2008, we expected a growth scenario. And unfortunately as the second half of 2008 unfolds its not there. And so what we had is, we had laid in extra capacity and extra people doing work that we at this point in time find that we do not really have in terms of the work to do.

So we're up actually going to be looking at reducing several thousand people as a result of that going in and really going in redoing our manufacturing footprint. We actually have already announced on it, a consolidation in an area where we make compressors and putting it into one points to sort of two. So really was a stronger growth expectation that has now had to be dealt with as of not realized.

Robert Wertheimer - Morgan Stanley

Thanks, I'll stop there. Thanks.

Operator

We'll go next to Nigel Coe of Deutsche Bank.

Nigel Coe - Deutsche Bank

Hey, good morning. I think you mentioned that Trane synergies were about $30 million during the quarter, I think just kind of guidance to where we see this coming to corporate items though?

Herbert L. Henkel - Chairman, President and Chief Executive Officer

Yes, those that you're seeing at that level on it Nigel all the ones have would be related to the corporate and shared enterprise services center.

Nigel Coe - Deutsche Bank

Okay, great.

Herbert L. Henkel - Chairman, President and Chief Executive Officer

And the next wave that you now see shelling up in the fourth quarter obviously those continue plus you got an expanding, getting into what we said is non-material that the other kind of stuff and then I think by the first quarter what we're looking at is that we'll be actually then getting into the direct materials expanded addition to those categories.

Nigel Coe - Deutsche Bank

Okay, great. And then within ACSS, should I say Trane. Could you just remind us from the margin next within there in terms of residential, commercial equipment service and the point is that service continues to grow with this kind of rates for next two or three quarters. What impact does that have on the margin mix?

Steven R. Shawley - Senior Vice President and Chief Financial Officer

Well I think, it's really a question of function of what happens with the equipment sales. If equipment sales decline you have de-leverage on that because we make a fairly good margin on that next large piece of equipment. Now you can offset that with an increase in margin because of service and those margins run around 15% incremental on large equipment, you probably decrementing at 30% rate.

Nigel Coe - Deutsche Bank

Okay. And then just one more if I can, security margins were up very nice -- can you just talk about how to spend below those margins that I'd like to be the increasing volume pressures in our business?

Herbert L. Henkel - Chairman, President and Chief Executive Officer

Yes, I think were looking at their Nigel saying is that which you reflecting now is the cost structure that the businesses that's put into place. And we see that as being sustainable going forward or we have obviously finally caught up on some of the price stuff that we had that lacking and lagging in the past. And we're now seeing the productivity in the investments going up.

We continue to see strength in the commercial side which is a very, very profitable type business. So we're optimistic about that being able to sustained a kind of levels going forward.

Nigel Coe - Deutsche Bank

Okay and that last one. Could you maybe give some color on what you're expecting from margins by segments from the 4Q?

Herbert L. Henkel - Chairman, President and Chief Executive Officer

I would say that I don't seems to be put the details or stuff that's out there but I think if I look at in term on it if the margins we were looking at the last year and I'd be very disappointed if they wanted to be very, very comfortable to those kind of things there.

Let me discuss there in my debt of general but let me give you more specific as I look in my charge here.

Steven R. Shawley - Senior Vice President and Chief Financial Officer

If you look at -- we expect about that is 10.5% fourth quarter and impact of the significant margins associated with and the trailer business will be seeing drop-off. That's technologies actually expect to the fourth quarter margins that were up there, Nigel. I think that's more because of the fact that there were some one-time activity last year. So we're quite comfortable third quarter to fourth quarter as you look the serial go forward it's like the security to be about little less than 19% probably 18.6, 18.7 range again because what we're getting there is flow-through of price and quite frankly a little bit of improvement in some of the commodities mainly zinc that used there.

And the three margins, they're going to stay on 4% to 5% as reported okay and of course we got to get through all the adjustments that we talked about. I don't see the Trane margins staying as reported basis some between 4% and 5%.

Nigel Coe - Deutsche Bank

Okay. Thanks a lot.

Operator

We'll go next to Jeff Hammond of KeyBanc Capital Markets.

Jeff Hammond - KeyBanc Capital Markets

Hi, good morning guys.

Herbert L. Henkel - Chairman, President and Chief Executive Officer

Good morning, Jeff.

Jeff Hammond - KeyBanc Capital Markets

Just back to back to the Trane margins in the fourth quarter. Can you give us what apples-to-apples 4Q maybe extra items would be versus 4Q '07 last year I just want to understand the level of decrement that your planning for I guess in the fourth quarter?

Herbert L. Henkel - Chairman, President and Chief Executive Officer

There are two ways to go number one is that if I compare to the performance of 2007. Is that where you like to go?

Jeff Hammond - KeyBanc Capital Markets

Yes, yes.

Herbert L. Henkel - Chairman, President and Chief Executive Officer

If you look at 2007 and if I look at it overall, you're saying is that we were talking like in commercial last year fourth quarter was somewhere between 8.5% and 9% if I remember them the right.

We see that drop in that's probably somewhere more into the mid seven type range as we continue to see material inflation being not completely offset by productivity. That's about a margin in the half point that was there. The biggest degradation really that we're looking at is over in the residential side. I look at the fourth quarter numbers last year was slightly above 7% type number and then we look at this year is going to be somewhere closer and probably into 4% to 5% type percent range.

The biggest impact there continues to be -- we have material inflations but we hope to have this thing called a LIFO and a mark-to-market good news is we do hedging bad news is that materials and move around. So I'm looking at stuff like almost the $9 million of non-operating types of an OI hit until that impacts our margins.

So that's outside of it. What Steve went over before is that you also get back into the inventory write-ups from the backlog which are going to give us another almost $40 million impact by the time it get done.

But overall its saying is when you sort to get back, what we manage and so on. I think we continue to go make sure that we improve on productivity which is obviously what the restructuring is all about. We got to make sure in terms on it that were able to go into take advantage of the stock pricing that we now starting to see show us in the marketplace for the coppers in the world and make sure while that goes into our costs structure we don't get this back on price.

Jeff Hammond - KeyBanc Capital Markets

And then residential, why didn't you realize any price in the quarter I think you put there is some price increases and it sound it like.

Herbert L. Henkel - Chairman, President and Chief Executive Officer

To be about a little less than 2%. I just didn't put that in. Overall the number was somewhere almost 2% that was there but again as I guess that was relatively a small member compared to somebody else who thinks that we had on that $9 million from non operating return.

Jeff Hammond - KeyBanc Capital Markets

Okay, just final question on the balance sheet. I mean you've got your credit or your bridge coming do in June, have you had discussion with your lenders about refinancing that and what's kind of the dialogue then, any kind of concerns there?

Steven R. Shawley - Senior Vice President and Chief Financial Officer

The answer is yes, we've had dialogue and no there is not large concerns. We're watching credit markets like everybody else. Again we believe that we have capacity in form of paper other ways to address this. And [indiscernible] back to the markets when the time is right, they were not talking about massive amounts of new funding that we would need. So I know comfortable on this kinds of surroundings but we at least not go backs to the wall.

Bruce Fisher - Vice President of Strategy and Investor Relations

Hey Jeff this is Bruce. Can you go back to the residential thing for just a minute because you're expressing some concern about price item. That remind mix, improved mixing in contributive 4 points of growth for us. So where some companies may have realized more price because they were selling the same product for a slightly higher value we actually upgraded to people to a better part of our mix.

And if you look at the overall market we say the market was down 8%, our volume was down around 8%, our sales were only down 4% however because we're able to get better mix. So we are performing the market in that regard.

Jeff Hammond - KeyBanc Capital Markets

Yes just did say no pricing and that was relative to a significant price increase?

Bruce Fisher - Vice President of Strategy and Investor Relations

Right but again you've got also to consider that we didn't get price on our fear I'm making that's example obviously because we saw somebody at.

Jeff Hammond - KeyBanc Capital Markets

Okay thanks guys.

Operator

And we'll go next to Steve Tusa of JP Morgan.

Steve Tusa - JP Morgan

Hi, good morning.

Herbert L. Henkel - Chairman, President and Chief Executive Officer

Good morning Steve.

Steve Tusa - JP Morgan

I have just a question for you on Trane and I guess if we get in dynamics of next year. What is your outlook non-res construction. It seems like the McGraw Hill numbers have been out there. They're talking about down and I don't know your assumption is for new housing, it's probably down again. So is services really the key of that business growing next year given the fourth quarter is kind of flattish and I know it's not seasonally that important but can you just talk about how do you see that point up next year?

Steven R. Shawley - Senior Vice President and Chief Financial Officer

Yes, Steve, I think it's fair to say that we're not looking for any stellar performance that in the United States next year in terms of equipment. You've seen the... data and so one could imagine its negative next year. If you look outside the United States you can make your own assumptions about what you think equipment going to do there. Its been growing nicely perhaps it start to flatten out next year and than you look at our service business which has been growing low teens in the last downturn which again was 2001 to 2003 our services business grew high single-digit.

Not as high as our traditional and typical sales growth but certainly good sales growth. I'd also point out that, it is now larger than our U.S. equipment business. It's roughly $2.6 billion sales this year our service business that is. So it has big impact on what our sales growth is in Trane business now.

Steve Tusa - JP Morgan

So service is really the key?

Unidentified Company Representative

It's the key for sure.

Steve Tusa - JP Morgan

Yeah okay and than one another question... I haven't covered your stock obviously for very long but I'm reading in past transcripts there was... there was some kind of high level commentary on the bridge Q 2009 and understanding this is unbelievably dynamic environment where is a limited visibility from many. Can you refresh any of that commentary around kind of the mass around 2009?

Herbert L. Henkel - Chairman, President and Chief Executive Officer

I would say to what we are at this point of time very, very, very detailed reviewing what we think the revenue thing look like and it varies on with on a done a day-by-day basis, so I'm really not prepared today to give you sort of what I think the total revenue then the looks like as we looking and working towards doing that, for we look at the analyst day in December.

But when I look at the things that we do have code deals for one I said is that whatever the top line is going to be, we know that in addition to that activity level on it we have a significant restructuring program we just talked about. We also have synergy from the acquisition that we talked about $0.30.

And then lately I think is that as we look and are putting together our cost structure for next year, clearly if I look at this for instance 2008 our average for Copper which we buy over €100 million of each year our average cost there is 350.

If I remember looking at the numbers last night, it was somewhere along the buck 60 something or rather. So if you allow to around it that's a buck 90 multiplied by a $100 million and if I can go and get that locked in you transaction going to see there is some really, really big numbers Aluminum, about for us, let's think on the same and lead and zinc on the same.

So I would get myself very quickly to seeing hundreds of million okay there, if I'm able to go lock that in that's obviously the task that we have at hand right now, I'm glad we didn't lock two weeks ago when it was 260 because now it's the challenges over the next couple of weeks making sure that what we will do is lock in place a cost structure that will help us to go exceed whatever the number is, but the top number is the one that we really struggling with the most and trying to get a good firm [ph] and I think its going to take us till December day to do that, all I want you to hear in term saying is that how we as a company whatever that is wind up having significant and upsides coming from restructuring from our synergies and from what we think is our cost structure. And we also think that what the restructuring would be able to renew, what we're really going after which is productivity which runs in the 4% range.

Steve Tusa - JP Morgan

And you think your price is going to hold in the phase of these raw materials declines.

Herbert L. Henkel - Chairman, President and Chief Executive Officer

I think if I look and saying is that, it's like the gasoline prices. Oil that is 75 bucks or less to 94 for a gallon of gas. I think in terms of saying is that in terms of going that way because candidly difficult [indiscernible] on time and frankly we never really fully realized the total cost of the material in our price increases anyway. So I'm not so optimistic about being able to go get incremental big price increase to the next year. I think that will be foolish to comment on that but I am much more optimistic about the fact that we'll be able to retain our current pricing in spite of seeing in terms of hopefully reduction on the cost base.

Steve Tusa - JP Morgan

Okay. And one last quick one Bruce. Could you just remind us how much of your commercial equipment business is unitary and how much is bought?

Herbert L. Henkel - Chairman, President and Chief Executive Officer

Not happened [ph].

Steve Tusa - JP Morgan

Okay, perfect. Thanks a lot guys.

Unidentified Company Representative

Thank you

Operator

And we'll go next to Andy Casey of Wachovia Securities.

Andrew Casey - Wachovia Securities

Good morning everybody.

Unidentified Company Representative

Good morning

Unidentified Company Representative

Hi

Andrew Casey - Wachovia Securities

Question on your Q4 outlook slide. On the negative four from ForEx but what is base. I know you deal on a lot of different currencies if you could choose Europe or rather what would vintage be. Is it October 14 or end of last quarter?

Bruce Fisher - Vice President of Strategy and Investor Relations

Yes, but when we did the math on this Andy as we really talking about something which was into 14 to 144 type range. And to this is why we said kind of interesting when you look at this revenue type numbers so if just take we running to slide nine if then took and I think what do they, 126, 128 something out there. If you looked that 126th type number, that would impact our revenues by about a 115 million and our operating income by about 17 million. So that's the kind of sensitivities that we would still have [indiscernible] there as well as downside.

Andrew Casey - Wachovia Securities

Thank you. And then if I could turn back I think, you may have answered it but I missed in response to I think that was Mark [indiscernible] question, within climate control, transport refrigeration, what sort of did year-over-year decline of your European divisions telling you to expect in Q4?

Herbert L. Henkel - Chairman, President and Chief Executive Officer

Several pieces that in Q4 yeah, which is probably happy with the European transport businesses excluding containers that about by 1% to the bridge balance?

Unidentified Company Representative

That will include the bridge pay down.

Andrew Casey - Wachovia Securities

Okay so I guess the way to look at it is all the pay down will predominantly be the bridge I assume so maybe what use of CP or?

Unidentified Company Representative

We have a new slide here, we showed the maturity of the term debt and we have about $220 million term debt just fairly a small amount for 09, in addition to the bridge, take care of.

Andrew Casey - Wachovia Securities

Right I guess the way I was looking at it was you have 950 on the bridge and you are going to pay-down 800 just wondering the incremental difference is that you going to be maybe you use more CP or ?

Herbert L. Henkel - Chairman, President and Chief Executive Officer

That's what I want to......What the cost is of one availability to the other.

Steven R. Shawley - Senior Vice President and Chief Financial Officer

And numbers recently guys were doing when they were going out to get the bonds they were quite sporting in terms of there interest rates.

Herbert L. Henkel - Chairman, President and Chief Executive Officer

Okay so we went it all that out obviously looking the markets every day but again the terms what we need when I'll talk about massive amounts.

Andrew Casey - Wachovia Securities

Great, okay. Thank you.

Unidentified Company Representative

Sure.

Operator

We'll go next to Shannon O'Callaghan of Barclays Capital.

Shannon O'Callaghan - Barclays Capital

Good morning guys.

Unidentified Company Representative

Good morning.

Shannon O'Callaghan - Barclays Capital

Just a question on the Trane margins, I mean previously thought under prior Trane management that there is a bunch of margin improvement opportunity in this business and even if you adjust for the amortization in this $9 million another one time unusual things you're talking about next quarter. We're still at I don't know 6.5% or 7% margins which is lower than they typically were, is there and how much of the restructuring you're about to do is going towards there and is there anything structural going on there? Do you think that there is a opportunity it actually improve Trane margin or near term will it going to pressure?

Herbert L. Henkel - Chairman, President and Chief Executive Officer

Let me that... first of all the answer to the where we are spending a lot of restructuring, is yes, okay, it's lion's share is in the Trane businesses and that's overhead areas it's also factory footprint areas and geographic components relocations okay all the above, so we think there is significant opportunities to adjust the cost based through the restructuring, also if I had to take a look at the in this characterized what's happening with the Trane business.

They are probably that most hard hit by inflation that we've seen in the non-ferrous metals. And so is there opportunity, yes because if you look through the situation of non ferrous metal a lot of that benefit for '09 and we hope it's a benefit we'll we show up in the Trane numbers.

The other thing about what's happening at Trane if you look at realization of gross productivity we think transaction is significant upside room for driving old fashioned productivity if you look at track record this one on it. So lot of restructuring focus is in the Trane businesses. That's overhead areas it's also factory footprint areas and geographic components relocations I think all the above.

So we think there is significant opportunities to the cost base through the restructuring. Also fair to take a look at the in this characterized what's happening with the Trane business. Probably the most part hit by inflation that we've seen in the non ferrous metals. And as opportunity yes because if you look it's truly situation of non-ferrous metals, a lot of that benefit for '09 and focus have been hit we'll show up in the Trane numbers. I think what's happening at Trane if you look at the utilization of gross productivity we think there is significant upside room for driving just [indiscernible] productivity if you look at the [indiscernible].

Lot of restructuring focus on non-ferrous impact will be positive.

Shannon O'Callaghan - Barclays Capital

Okay. And then just one on the fourth quarter guidance. Pro-forma revenue it was flat current this quarter. Next quarter you say that currency kind of flattish so the pro-forma guidance were flat looks like pretty much similar on organic basis the way we have here. Given the uncertainty that doesn't seem really that conservative but you have this wide 27 range. And there is a reason your revenue guidance is fairly tightening the margin, you're in perfect margin guidance with the EPS range is so much wider.

Steven R. Shawley - Senior Vice President and Chief Financial Officer

I think if you look at kind of what's happening, we're loosing the mix impact of the markets were down and was heavy. In fact if you take a look at the fourth quarter and you roll up the numbers you look at the leverage on the fourth quarter. When we precisely started talking about what we have to do restructure to cost base, because of trying to see continuation deterioration on key markets like European transport and like some of our businesses producing significant margins. And back to the previous comment about fixing the Trane margins. That's what you get. So that would produce a fairly tight, I am sorry fairly tighter top line versus the operating income.

Shannon O'Callaghan - Barclays Capital

Okay. Thanks.

Operator

And we'll go next to [indiscernible].

Unidentified Analyst

Good morning. I just wanted a follow up on, something Bruce said, had planned too earlier. So you planned that the service business in Trane grew 9% in the last revenues, 9% in last downturn. Was that 9% in North America as well. Was it much lower in North America and much stronger elsewhere?

Herbert L. Henkel - Chairman, President and Chief Executive Officer

Dan, as I recall it was as said single digit so it was approaching 9% or wasn't quite nine. And remember back in or you probably would know but back then our service business was 80% to 90% U.S. So it was a U.S. business for our intensive purposes back there. Its still focus in the U.S. Its probably 75% to 80% U.S. today but growing faster outside the U.S.

Unidentified Analyst

So I mean clearing investors concerns of that. You could have commercial construction in the U.S. Europe and Japan negative and in other emerging market much lower than probably what's previously expected?

Herbert L. Henkel - Chairman, President and Chief Executive Officer

New construction I would agree with you. For replacement I not so sure I would agree.

Unidentified Analyst

Do you think that even in the scenario where you have the major developed market all go negative. You still see Trane revenues being significantly out driven by replacement service and then weakness and new.

Steven R. Shawley - Senior Vice President and Chief Financial Officer

Well I mean you can do the math. If you assume that 30% of our commercial business in Europe and U.S. is, 30% is new construction related 70% is replacement you can do weighted average on what you think those growth rates to the declining rates are going to be and you can crank in what do you think it's going to happen with service. So our equipment business is about $3.6 billion business globally. Our commercial service business is about at $2.5 million.

Herbert L. Henkel - Chairman, President and Chief Executive Officer

And I think if you look at the U.S. with the new housing starts being at less then $1 million and yet overall done that with the replacement that we're adding on our total revenue for the year is 4% on the equipment side. I think that again to shows in terms I think the fact is that you got a large installed base that is more than 10 to 20 years old. That's going to be to be replaced.

Steven R. Shawley - Senior Vice President and Chief Financial Officer

Great. And just a follow up on what Herb just said into residential business. We did see a difference in the replacement market for residential. People were clearly differing replacing their residential units this year you can't defer that forever. They will have to be replaced so in essence building of the kind of demand for replacement down the road.

Unidentified Analyst

Alright. Thank you.

Operator

And we will go next to Steve [indiscernible] Asset Management.

Unidentified Analyst

Yes a point of clarification with respect your bridge facility. Do you have any availability to borrow under that or is it availability goes down dollar for dollar as you pay at all?

Herbert L. Henkel - Chairman, President and Chief Executive Officer

It's pretty much dollar for dollar. It started I think in $1 billion, we use the money from return operating we did back in August to pay it down. So we started it like the 2.9 range so it will disappear as we pay it down.

Unidentified Analyst

$3 million in credit facilities as referred in your press release there is strictly either facilities excluding Bridge?

Unidentified Company Representative

Right, no bigger bank lines.

Unidentified Analyst

And can you talk about the maturity profile of your commercial paper and what kind of pricing you're paying?

Herbert L. Henkel - Chairman, President and Chief Executive Officer

Yes, we know and probably know what I call the two week, when the market was A2P2 company that's above what we get these day's and now its expensive we're paying over 6% probably purchase 6.5% or when we go into the markets, that's why we're very interested in getting a pay down as fast as we can.

Unidentified Analyst

Is there any scenario where you would seize using this CP low and draw down in your bank line, it's properly that?

Herbert L. Henkel - Chairman, President and Chief Executive Officer

I didn't even think about that. You know I don't see that, okay. Obviously if everything is going on I but our policy we're in financing position here is that going on with the bank line is sort of last resort.

Unidentified Analyst

Okay thank you.

Herbert L. Henkel - Chairman, President and Chief Executive Officer

Operator we'll take one more question please.

Operator

Okay our final question comes from Mardy Pollock of NWQ Investment Management.

Mardy Pollock - NWQ Investment

Hi just a few word again on train, I know a lots a questions on this but looking through the adjustments for the acquisition you know step up and all that. If what I was looking at next year and you know the sensible looking through the seasonal week, there's any way in the fourth quarter. You know what kind of margins would be considered you know targeted margins without the center. What end would the Synergies include in for next year, I realize you know you can't obviously call it revenue light but the historical margins we trying to have been certainly was low point of 9% or so, how we going to violate to that number in next year significantly?

Herbert L. Henkel - Chairman, President and Chief Executive Officer

Well, question now, that's we're working right now on our annual operating plans of putting those together, well it lot more to say about 2009 on December 4th.

Bruce Fisher - Vice President of Strategy and Investor Relations

Okay, well let me just close by thanking all of you for joining us and staying orders for with almost America in session. There will be an instant replay of today's conference call available at approximately 1:00 PM today, and will be available through October 31st. and if you've further questions please by I mean to call Joe or my self. And that concludes our call and I want to thank you all again for participating. Thanks.

Operator

Again that does conclude today's conference ladies and gentlemen. We appreciate your participation and you may disconnect at anytime. Have a good day. .

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Source: Ingersoll-Rand Co. Ltd. Q3 2008 Earnings Conference Call Transcript
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