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Executives

Bruce Fisher - Investor Relations

Herbert L. Henkel - Chairman and Chief Executive Officer

Michael W. Lamach - President, Chief Operating Officer and President of Trane Commercial Systems

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

Analysts

Jeffrey Sprague - Citi Investment Research

Shannon O'Callaghan - Barclays Capital

Eli Lustgarten - Longbow Research

Andrew Casey - Wachovia Securities

Mark Koznarek - Cleveland Research Company

Terry Darling - Goldman Sachs

Stephen Tusa - JP Morgan

Nigel Coe - Deutsche Banks Securities

Robert Wertheimer - Morgan Stanley

Daniel Dowd - Sanford Bernstein

Jeffrey Hammond - KeyBanc Capital Markets

Ted Wheeler - Buckingham Research

Ingersoll-Rand Co. Ltd. (IR) Q1 2009 Earnings Call April 22, 2009 10:00 AM ET

Operator

Good day and welcome everyone to the Ingersoll Rand First Quarter 2009 Earnings Conference Call. This call is being recorded. For opening remarks and introductions, I would like to turn the call over to your host, Mr. Bruce Fisher, Vice President of Strategy and Investor Relations. Please go ahead, sir.

Bruce Fisher

Thank you, Anthony, and good morning everyone. Welcome to Ingersoll Rand's first quarter 2009 conference call.

We released earnings at 7:00 am this morning and the release is 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're broadcasting the call through our public website. There you will also find a slide presentation for the call. To participate via the web, go to ingersollrand.com, click on the yellow icon on our homepage. Both the call and the presentation will be archived on our website and will be available tomorrow morning at 10:00 am.

Now, if you would please go to slide two. I'd like to remind everyone that there will be a forward-looking discussion this morning, which is covered by our Safe Harbor statement. Also please refer to our December 31, 2008, Form 10-K for details on factors that may influence results. I'd also ask you to please refer to slide 25, in the back of the presentation, which covers the use of non-GAAP measures and describing company's performance.

Now, I'd like to introduce the participants on this morning's call. We have Herb Henkel, our Chairman and Chief Executive Officer; Mike Lamach, our President and Chief Operating Officer; Steve Shawley, our Senior Vice President and Chief Financial Officer and Joe Fimbianti, our Director of Investor Relations.

Herb and Mike will review our business results. Steve will cover our financial position, and then we will summarize our outlook for the second quarter and the full year by Herb. We'll then open the lines for your questions.

Now, if you would please go to slide three. And I'll turn it over to Herb.

Herbert L. Henkel

Thanks Bruce, and good morning everyone. Thanks to everyone who dialed into this morning's call.

First quarter reported earnings from continuing operations excluding $0.02 of restructuring, came in at a loss of $0.04 per share which is at the upper-end of our original EPS forecast from a $0.15 loss to breakeven.

Our actual results also exceeded the revised forecast we gave you at the end of March, which was for earnings to approximate the bottom end of our forecasted range. This improvement in EPS reflects better than expected operating performance in the month of March, partially offset by $0.04 of discrete tax item cost.

For the quarter, reported revenues increased by 36% and declined about 24% on the pro forma basis including Trane. Excluding four points of currency, revenues declined by 20%. The decline exceeded our February forecast that called for a 19% decline year-over-year in pro forma revenues and with somewhat better than our most recent forecast provision fully forecasted revenues down about 25 to 27%.

The volume declines we saw in the first quarter were unprecedented in recent memory and affected all of our vertical end markets and geographies simultaneously. We saw a significant deterioration in demand in all of our key end markets. Volumes were also negatively impacted as many of our direct customers and channel partners reduced their inventories.

Order intake slowed and was off about 28% compared with last year on a pro forma basis, and off about 23% excluding currency effect. We offset some of the impact of this 900 million year-over-year revenue loss with tight cost controls, restructuring savings, synergies from the Trane acquisition and focused productivity actions. These actions helped us exceed our most recent forecast and to achieve post to breakeven EPS despite the severe volume drop.

We also held or gained market share in most of our businesses and continued to develop and introduce new products.

We exceeded our cash flow forecast for the quarter with improved working capital management and we completed a comprehensive financing program that addresses our short-term debt requirement and significantly enhance our balance sheet liquidity.

Now, I'd like to do is to turn it over to Mike Lamach, he's going to take you through the first quarter in more details. Mike?

Michael W. Lamach

Thanks Herb. Please go to slide four. This slide gives a quick summary of revenue and operating margins for the first quarter.

Reported revenues for the first quarter 2009 were 2.9 billion up about 36% on a reported basis. On a pro forma basis including Trane, revenues actually declined by about 24% and were down 20% excluding the impact of currency.

Unprecedented volume drop caused a deep decline in operating earnings. Reported operating margins were 1.7% and were 2.1% excluding restructuring. This compares with 9.3% last year.

And I'll come back with the topic of margins and operating leverage in greater detail on the later slide.

Please go to slide five. Next slide entitled Year-over-year revenue change provides a look at our segment sales change on both reported basis and excluding the impact of currency.

We think revenues, excluding currency shown in the bottom of the chart give a better view of our organic sales performance and our comments will focus on this measure.

After delivering consistent growth to 2007 and the first half of 2008, momentum we had seen in key end markets tailed off in the third quarter.

In the fourth quarter, we had a further decline in revenues as a result of significant softening in a number of our key end markets. That trend accelerated in the first quarter.

As you can see on the chart, all of the businesses had significant declines compared with last year, and in total declined 20% excluding currency in the first quarter.

On a geographic basis, revenues declined by about twice that in the U.S. and about 19% in overseas markets excluding currency.

Equipment revenues declined by about 29% on a comparable basis with last year, and worldwide recurring revenues totaled about little better and were off about 11%.

So our sales like most industrial companies declined significantly in the first quarter because of both lower end market demands and channel inventory reduction. It's probably to soon to say, first quarter was the bottom of our planning. We would not anticipate future sales continuing to decline in the first quarter's pace.

Please go to slide six. This bridge represents the total of segment operating margin on pro forma basis and excludes restructuring. This looks gives a better view of few dynamics of our operating margins at the enterprise level.

Reported first quarter segment operating margins declined to 1.7%, which was off about eight points compared with pro forma 2008. The combination of decline in volume, negative foreign exchange and lingering material inflation hurt margins by close to 11 percentage points.

We continue to invest in new product development and those activities coupled with purchase accounting related costs and restructuring expenses further reduced margins by one point. Productivity improvements, restructuring savings, Trane acquisition synergies and carryover pricing added about 4.3 margin points.

So, while we were unable to contemplate -- always a significant volume decline in the quarter, we were able to offset about half of the decline and position ourselves for higher margins when our market began to recover.

Please go to slide seven. Slide seven bridges the components of our EPS compared with our previous guidance range which we updated on March 30th. At that time, we indicated that we expected to be at the low end of our original earnings range of minus $0.15 breakeven.

The chart shows revenue came in a bit better than expected, down 24% compared to down 25 to 27% in our March 30th revised forecast. This lower than expected sales decline contributed $0.04 to EPS versus our revised forecast.

We also delivered higher productivity than expected, as we accelerated our restructuring and implemented additional cost containment programs. These items contributed an additional $0.05 per share.

Lower than forecast commodity cost accounted for $0.06 of positive contribution, and we have discrete tax items which added $0.04 of costs to the quarter. The both external and internal factors drove our improved performance versus the March 30th guidance.

Let's now move to a review of our reporting segments and please go to slide eight. This slide lifts the highway through Air Conditioning Systems and Services (ACSS) that represents the Trane business that was acquired on June 5, 2008. The results were on a pro forma basis compared with last year.

Trane first quarter revenues were 1.4 billion, down 18% versus prior year on a reported basis and down 15% year-over-year excluding the effects of foreign exchange.

Global non-residential HVAC markets declined 19% in the first quarter with significant reductions in major markets.

Our commercial air conditioning revenues versus the combination of commercial equipment and parts, services and solutions were down 15% reported and 11% excluding four points of foreign exchange.

Total global commercial equipment systems, which represent about 60% of our commercial HVAC sales, was slightly better than global market, down 17% excluding FX.

Global parts, services and solutions business which represents about 40% of commercial sales declined by about 3%, excluding foreign exchange.

We saw what we believe was a temporary pause by a number of our customers as they deferred some services and switch from preventative to fixed on sale contracts.

We expect our service business to rebound, beginning in the second quarter and we've seen a strong start to April and have been awarded several large service contracts. For the full year, we expect our service business to increase roughly 6%, year-over-year.

Now, let's turn it to the residential part of our business which represented about 20% of the total Trane revenues in the quarter.

We estimate that industry shipments, the new residential construction were down in the range of minus 20 to 25% in the quarter, and replacement unit shipment showed a modest decline.

For the quarter, our residential product sales were down by 28%. Our channel partners reduced inventories during the quarter and we chose not to initiate any special incentives to fill our distribution channel.

Our retail sales activity was in line with the industry, and we expect to get the benefit that a sell-through in the second and third quarters due to our lean channel inventories.

Next, looking at orders, auto global commercial orders were off 15% excluding foreign exchange, basically in line with revenues.

Equipment orders declined mid-teens in the Americas, and orders for contract and parts, service and controls were up slightly. We ended the quarter with a global backlog of approximately 900 million; global backlog was down 15% reported and 9% excluding FX. Backlog in the Americas declined over 20%, while international backlog was up 7%.

Trane's reported operating loss was 14 million for the quarter, which includes 39 million of ongoing amortization cost and 24 million of Ingersoll Rand corporate allocation. These items were not included in 2008 results. So, on a comparable basis with last year, the operating margin would have been almost five points higher at 3.5%. Please go to slide nine.

Climate control revenues in the first quarter were 503 million, down 37% on a reported basis and off about 31% excluding currency.

The global Thermo King Transport business revenues decreased by 45%, largely due to weak global truck and trailer markets and declining freight rates.

Worldwide refrigerated truck and trailer volumes were down over 50% compared with 2008 due to ongoing declines in the worldwide trucking industry. We saw negative sales in all geographies with the most severe declines in European trailer business, where comparisons were against record volumes in the first quarter of 2008.

Global bus HVAC shipments and Marine container sales also declined substantially, due to a slowdown in end market activity. The aftermarket parts were down about 14%, reflecting lower fleet capacity utilization and inventory management actions through the entire channel.

TriPac Auxiliary Power Unit volumes also declined compared with last year, as lower due to prices and declining fleet revenues has limited conversions in 2009.

Looking at stationary refrigeration, global sales were down about 24% which was driven by a decrease in both display cases and sharp declines in the insulation business due to lower supermarket capital expenditures.

On a positive note, Hussmann gained market share with major national supermarket customers during the quarter, especially in higher margin refrigerated display cases.

Mid this market of people (ph), we gained share in trucks, trailers and display cases, and continued to introduce new innovation and energy saving products into the marketplace. We also started to gain significant traction with climate control in the light of synergies to Trane.

Reported operating margin was about 1% in the quarter, this compares to 10% in first quarter of 2008. The margin contraction was driven by a significant decline of high margin truck and trailer revenues, lingering material inflation and the impact of currency, which combined causing a 14 point drop in margin.

Productivity improvements offset some of the margin pressure to help margins by about five points.

Please go to slide 10. Industrial Technologies first quarter revenues were 538 million, down 28% versus the prior year quarter, and down 23% excluding currency.

Revenues for the air and productivity business decreased by 23%, due to lower volumes in all geographic regions and negative currency. Air and productivity revenues in the Americas declined about 25% during the quarter, was a 28% drop in equipment volumes due to declines in major industrial process of fluid handling end markets.

Recurring revenues were off about 20% from lower industrial production levels and deferral of maintenance by customers.

Air and productivity revenues in overseas markets declined by 21% -- with respect to 2008, primarily due to declines in industrial activity, in a nine point drag in currency translation.

Reported European volumes were down 29% and about 15% constant currency. Revenue from Asia-Pacific were off about 8% with an 11% decline in machinery volumes and flat aftermarket comparisons.

Club Car revenues decreased 45% compared with last year with declines in all geographic areas due to weakening economic fundamentals in key golf, hospitality and recreation markets, and customers deferring replacement of golf cars by extending the leases.

Market share, however, increased in historically difficult market. Industrials operating income was 19 million, representing an operating margin of 3.2%, down from 13.1% in 2008 on a comparable basis.

The volume declined in unfavorable currency accounted for 12 points for the margin drop. Industrial also at two points of restructuring cost hit the margin in the quarter. Improvements in productivity and a four point favorable impact on margins.

Now go please to slide 11. Revenues for Security Technologies were 492 million down about 21% and down 16% excluding currency compared with the strong result last year.

Commercial security revenues were down 21%, primarily resulting from declining building and remodeling markets from the U.S and Europe.

Currency accounted for six percentage points in commercials revenue decline in the quarter. Americas revenues in the commercial sector were down 20% with decline of volume partially offset by carryover pricing for 2008. Securities European business was down approximately 28% on a reported basis and 11% excluding currency.

Asia, revenues declined slightly compared with last year on a constant currency basis. America sales in the residential segment also declined approximately 20% in the quarter. Residential results continue to be indicative of the continuing decline in domestic residential building and remodeling activity.

Volume gains in South America and revenue gains from prior period price increase helped to partially offset the fall off in U.S. residential activity.

Operating income for the segment was 78 million or an operating margin of 15.5% representing a slight decline in margins from the volume loss.

Accelerated productivity, strong cost control discipline and prior period pricing actions had almost six points of the gross margin and helped to offset the loss of seven margin points from volume decline and negative currency.

Please go to slide 12. The topic for this slide shows a summary of our cost reduction and productivity actions for the quarter and the full year 2009. We set a long-term goal delivering five plus percent productivity every year. This compares to our historic productivity performance of 2 to 3% a year.

For 2009, we targeted total productivity savings of 650 million, almost double the productivity we achieved in 2008.

We get off to a good start in the first quarter with about a 128 million of savings, which calculates out to a productivity improvement of about 4.2% and exceeding our first quarter plan of 3.8%. As many of these program benefits are backend loaded, we're confident that we'll reach our $650 million goal.

We also expect the benefits in commodities inflation in 2009. Savings on this chart represent the value of Ingersoll Rand of the volumes to prices, we've locked in and buying the balance of our commodity news at today's market prices. We continue to expect to realize roughly 150 million of savings this year, even with lower 2009 projected volumes.

Please go to slide 13. This slide shows an update on our restructuring actions. Based on the economic slowdown that we started to see in the third quarter of 2008, we began taking actions. We entered into series of programs covering all of our businesses, to streamline our manufacturing footprint and reduce our G&A base. So far we spent about 82 million.

We've reduced head count by 2700 and we closed 34 facilities in 2008-2009, which includes 12 factories, 14 warehouses and eight parts centers and offices.

During the first quarter, we expanded this goal for the program and now expect to spend a total of 120 million. We realized about a 160 million in gross savings in 2009 from these actions at about 200 million in 2010.

Please go to slide 14. Our sense of time (ph) is drawing down into the specifics of the synergy savings, might recall that we delivered a 105 million of actual savings in 2008 versus our target of 75 million, exceeding our target by 30 million. We achieved that savings to better than expected savings in logistics, the cost delivering healthcare benefits, open-wide contracts into that spending and lower material cost.

As we get further along in this process, we're finding more opportunities and we're executing well.

We continue to drive execution results in 2009, our expectations delivered roughly a 180 million of incremental savings in 2009, on top of the 105 million savings realized in 2008. That means our total benefit including still the modest beginnings of our growth programs will be about 300 million.

We've already have over 300 approved programs in the pipeline delivered projected performance.

For the first quarter of '09, we delivered an incremental 34 million of savings on top of the carryover savings from 2008.

So in summary, it has been a very challenging quarter. And we expect to have additional challenges for the year. We acted really to bring down our cost and we're continuing to focus on driving productivity and minimizing cost to reach our cash flow forecast.

Steve Shawley will now address our recent debt offerings which substantially improved our liquidity position and our cash flow in debt reduction plans for balance of the year. Steve?

Steven R. Shawley

Thanks Mike and good morning everyone. Since there has been considerable interest in our balance sheet and ongoing liquidity, I wanted to give you some additional details this morning, specially related to our financing activity and liquidity position.

Please go to slide 15. We addressed our short-term debt requirements and improved our liquidity position considerably during the first quarter by completing a comprehensive refinancing plan in early April. Major activities included a $1 billion debt offering that included a 655 million, five year senior debt offering and a 345 million of senior convertible debt due in 2012.

We have already used proceeds from the bond sales to payoff our bridge loan (indiscernible). We also extended our receivable securitization program which has provided additional financing of 164 million immediately as expected to grow to around $200 million as receivable portfolio increases through the year.

Additionally, we reduced our dividend by 61% starting in September which we owe 70 million of additional cash for debt pay down in 2009 and $140 million in 2010. These actions along with our cash generation from operations should allow us to meet our debt reduction targets in 2009 and 2010, while maintaining a significant liquidity cushion as we de-leverage the company. That's can been seen from this chart, we're confident that we can pay down 675 million of debt in 2009 and wind up the year with a liquidity position of our outstanding commercial paper are closed to 1.8 billion even after 750 million of credit lines from a loss in June.

I'll also remind everyone that this liquidity forecast assumes a pay down of approximately 300 million of the book bonds in late 2009, and their maturity date is in 2027 and 2028.

So if you read these bonds, these book bonds were not be put back to us, our year-end liquidity cushion will only be increased. We continue to have adequate access to commercial paper markets and potentially even more flexibility through our extended receivable securitization program as we move into the second quarter.

Our bond offerings are well received and we are confident, we have now addressed our short-term debt requirements.

Please go to slide number 16. As you can see on this slide, our bond maturity schedule is now relatively well balanced. With the new financing in place and the operating cash that we expect in the second half of the year, we are in very good shape to address the 220 million of Trane debt due in June, and the 519 million of debt coming due in 2010.

Beyond that, we have essentially a zero debt due in 2011 and only a modest amount in 2012. So borrowing in any unforeseen circumstances, we believe that the new financing combined with the strengthening cash flows will give us the flexibility we need to effectively execute our financial policies and to invest in growth in the intermediate and longer-term.

Please go to slide number 17. At the core of our efforts to de-leverage, the ability to generate cash from operations. This slide presents an update, the available cash flow forecast for 2009. In terms of our 2009 plans, which is when I presented that our February 13 Investor Meeting, and our view now, assuming that the low end of our guidance range of $1.40 earnings per share for the year becomes a reality.

As you can see, we continued to expect to have 675 million to pay down financing for 2009, despite the significantly differ sales and earnings that we constitute at the bottom of our range.

We have the ability to offset the earnings impact for this potential declines to improve working capital management, lower cash taxes and lower dividends.

Now as the refinancing is complete, we expect our interest expense to be favorable to our original plan, although significantly increased from last year. Obviously, managing for cash remains a very high priority and we are intensely focused on generating cash from operations to drive the continuing de-leverage of our balance sheet.

Please go to slide 18. In terms of worldwide economy started the slide in the third quarter of 2008. We are focused on reducing our working capital to make it a source of cash. This slide compares our 2008 working capital balances associated with receivables, inventories and payables with our 2009 plan and our current forecast.

As you can see, working capital at March 31, was relatively flat the year-end 2008, was below first quarter plan levels.

Given a seasonal aspects of our working capital usage, and the rate of inventory reduction that we experienced in the month of March, we now expect to bring working capital down by 250 million in 2009, which is a $45 million betterment than our 2009 plan.

Please note, this working capital projection, it excludes any benefits from additional securitization.

Please go to slide, 19. Just a reminder of our key financial policies. We continue to focus on our long-term targets of building towards strong, A rating cash flow and leverage metric. And we are working rapidly to de-leverage our balance sheet to target levels. We will maintain discipline regarding acquisitions and share buybacks until we achieve our leverage targets.

We expect to hold our reduced dividends for at least the medium term, and we will maintain ample credit facilities to give us a backstop for contingencies.

With that, I will turn it back to Herb, for the forecast.

Herbert L. Henkel

Thanks Steve. Would you please go to slide number 20?

Back in the third quarter of 2008, we saw a down reflex point in many of our major end markets. The uncertainty related to the cost availability of credit caused a notable decline in the tone of business in the fourth quarter. A rate of decline continued in the first quarter of 2009 for both reduced end market demand and some inventory destocking by many of our major customers and channel partners.

Our forecast for the balance of 2009 had considerable complexity compared to previous years due to current unknowns in the world economy. Because our end markets have higher degree of uncertainty, we continue to actively reassess on a monthly basis, what we believe the next few quarters are going to look like.

We're operating with what we believe is a conservative baseline plan for 2009, and we have developed additional contingency actions if markets performed worse than that.

Let me start by reviewing the updated economic assumptions behind our 2009 forecast. Slide 20 is an updated summary of the key economic and business metric in 2009. The changes from our prior forecast are all noted in red.

For U.S. construction, we assume residential building markets will show another major decline in 2009. We believe non-residential construction will see about a 14% reduction in contract value and a 19% year-over-year decline in square footage with institutional activity off about 10%.

The REIT per (ph) trailer market shipments in North America continued to be weak. Our forecast here is changed slightly. Recent order rates indicate that the market could be down by as much as another 35% in 2009. The ACT forecast is looking for a 17,500 unit shipment year.

European truck and trailer markets had a sharp downturn in the fourth quarter and after a strong 2008. Demand for 2009 was expected to decline by as much as 60%.

Industrial production and capacity utilization had a major drop off at the end of 2008 and we expect an additional truck decline in 2009. Finally, our forecast is based on a Euro to dollar rate of 1.31.

In addition to these industry specific drivers, we assume the Americas and European economy will experience negative GDP comparison for the first half of 2009 with slow growth in the second half as inventory liquidation run their course and as government stimulus programs start to kick-in. We're also forecasting slowing economic activity in Asia.

Now please go on to slide number 21. Based on this macroeconomic view, we expect revenues for full year 2009 to be down 14 to 19%, compared with 2008 on a pro forma basis, including the 3 to 4 point drag from currency translation. We expect Climate Control and Industrial Technologies to show declines in the 20 to 25% range with somewhat smaller declines both at Security and Trane.

Now please go to slide number 22. Additionally, our forecast is built on the following assumptions. We will benefit from lower commodity costs, especially non-ferrous metals. We expect to achieve 180 million of additional Trane acquisition synergy dollars and a 110 million of net restructuring benefits. Also importantly, our productivity programs will continue to lower costs for 2009.

Finally, our forecast assumes flat pricing year-over-year.

Please go to slide number 23. Our outlook for EPS is shown on the slide. We're projecting 2009 EPS from continuing operations, excluding restructuring, to be $1.40 to $1.90 per share. Including $0.10 of costs associated with discontinued operations, total EPS is projected to be between the $1.30 and $1.80.

Second quarter results will still be adversely influenced by the turbulent economic conditions. Second quarter revenues are forecasted to be in the range of 3.5 to 3.7 billion, which is flat on a reported basis and down about 18 to 23% on a pro forma basis compared with the second quarter of 2008.

EPS from continuing operations is expected to be in the range of 30 to $0.50, excluding restructuring costs of approximately $40 million. Additionally, in the second quarter, we are planning a special shareholder meeting to approve our reorganization in Ireland. We believe this will not have any material impact on our growing factories.

Now please go to slide number 24. To sum up the forecast of 2009, we expect 2009 to remain difficult. The turbulent environment pronounced activity declines in all of our major end markets. We remain focused on programs which will help mitigate the impact of these tough economic conditions. We're delivering cost synergies, and we are expanding our growth synergies.

We will realign savings from restructuring and are stepping up productivity targets to the 5% level while working to capture material cost savings from commodities. We've solidified our balance sheet in April by refinancing our bridge loan and reducing our dividend. We've triggered contingency actions due to market declines and have additional actions available. We're continuing to fund high priority projects that will focus on growth in future years.

In summary, we're taking the necessary actions to manage both through this downturn and to deliver improved margins once the economy begins to recover.

I would now like to open up the floor to your questions. Thank you.

Question-and-Answer Session

Operator

The question and answer session will be conducted electronically. (Operator Instructions). We'll take our first question from Jeff Sprague at Citi Investment Research.

Jeffrey Sprague - Citi Investment Research

Thank you, good morning everyone.

Herbert Henkel

Good morning Jeff.

Jeffrey Sprague - Citi Investment Research

Herb, I was wondering if you could give us a little more color on how you expect Trane to kind of play out over the balance for the year. So, you commented a little bit or, I guess, Mike actually did and maybe a question for Mike. Inventories being pretty lean, no promotional activities still but what kind of ramp versus normal seasonality do you expect in Q2? And if you could give us a little color on what's going on price?

Michael Lamach

Yeah, maybe take it in reverse order. Price was slightly favorable in Q1 for us. We don't anticipate that but to continue on reduced commodity levels at this point, most of that was carryover in the Middle East and a few discrete areas. Just in general on sort of the back half of the year, we do see some modest improvement, part of that is related to fourth quarter being as weak as it was last year.

We're seeing strength and pickup in the service business. We had hoped that would be the case; it's very typical in past cycles; that's been the case for the full period, we see with investments, we gear up for that. And we certainly have the capacity to perform against it whether it's leasing equipment which we built up recently all the way through to making sure innovation and technicians around the world that we got capacity of executing on those plants.

So that's what's going as planned for us with positive equipment. We're not really looking at seeing any dramatic increase and we're not planning on that clearly if we were to see some sort of an uptick, we obviously got capacity to be able to respond to it.

Jeffrey Sprague - Citi Investment Research

And just a little more color on raw math, what percent of the buy this year is locked in and what's your spot exposure looking at the balance of the year?

Michael Lamach

Yeah. If you look at the 150 million that we talked about in terms of commodity cost, we're really talking about copper, aluminum, steel and zinc makes commodities work, copper being larger. We're about 25% locked in, and so with the market on the balance was 55%. So, we sort of ran the math last week and we ran a little higher copper price last week, but would expect that we see a 150 million overall with copper being about 80 million of that.

Jeffrey Sprague - Citi Investment Research

And can I just sneak a quick one in for Steve, Steve this corporate expense run rate, is that indicative what we should expect for the year?

Steven Shawley

I think its close; it's probably top, up a little bit or less in the year.

Jeffrey Sprague - Citi Investment Research

Thank you.

Operator

And your next question is from Shannon O'Callaghan at Barclays Capital.

Shannon O'Callaghan - Barclays Capital

Good morning, guys.

Herbert Henkel

Good morning.

Michael Lamach

Good morning.

Shannon O'Callaghan - Barclays Capital

In terms of Trane, typical seasonality adjusting for the amortization and corporate allocations, but just sequentially, typically would go up 4 or 500 basis points from the first quarter to second quarter. I imagine you're expecting something better than that, but can you explain what the drivers of that would be?

Steven Shawley

I think you're, number one you're on-track logic off about 4.5 points really being attributed to amortization and some of the charges that we've had. So, I mean the first thing we should look at those going forward, we probably expect the full year to be in that sort of 4 to 6% range, as we reported. And then as we kind of translate that back, the segment incomes the way Trane used to report, you probably end up something in the 8.5 to 10.5 range, based on the volumes we're anticipating.

Shannon O'Callaghan - Barclays Capital

You're saying 8.5 times for the second quarter?

Steven Shawley

No, so that if you look at segment income, the Trane used to report, right when you back out at the amortization and the allocation, you probably end up with something closer to 4 to 6%

Herbert Henkel

But in second quarter we're looking more along the 5 to 6% times level.

Steven Shawley

Right. We expect the benefit, particularly at steel in the second quarter. That's a pretty big swing for us, actually there was inflation in Q1. We operated about four months lag. By the time we buy steel spot, leave it to the finish, or leave it to factory, expect a slowdown, we really were able to pertain for last year's steel. That's a pretty big swing for us.

Herbert Henkel

Shannon, and I think one other part which we haven't talked about this morning is that obviously Trane is just going through a significant revision in coming up with refrigerant changes that are necessary to come up with hold the change effective January 1st of next year. So I think they're doing a great job; we're going to be all out within the third quarter. But it's also driving some significant incremental cost as we wind up going and ramping up a lot of different programs over the next two quarters. So you'll see that have some impact in the margins as well that we hold down on (ph).

Shannon O'Callaghan - Barclays Capital

Okay, thanks. And then as you think about climate for the remainder of the year coming up off of kind of a 1Q margin base. Where do you see the more significant driver in the parts of that business?

Steven Shawley

Here again we are going to have significant improvements in commodities really across the board. Productivity, really a climate control relative to Trane these are really hitting it out of the park, and they're up in the 6.5% range and I think that's going to largely continue for the balance of year. Couple that with inflation and it would be an absolute recovery in Q2 again in the neighborhood of about probably five to seven points of operating margin in the second quarter from first quarter's performance.

Shannon O'Callaghan - Barclays Capital

And when you think of that in terms of the pieces of the segment, how do you expect the contribution to come?

Steven Shawley

Well, I mean, part of that's got to do with how that really happens in the trailer markets in Europe et cetera. There is, where we've been impacted, I think at the higher points been trailer and it's a very high margin work and that was off close to 80% in Q1. So, it's a matter where we're looking at that high contributing business, and how fast it comes back or doesn't come backs -- that's when the law occurred swings versus that separate factor (ph).

Shannon O'Callaghan - Barclays Capital

But your current guidance assumes that it would come back some.

Herbert Henkel

Yeah, we expect it to come back to somewhere in the 55 to 60% range. It's not amazing when -- that's an improvement over what we saw so far in the first quarter. But for our overall numbers that we look at -- when I look at like second quarter for climate, look at and think, something is going to go 6 to 8% in the OI range and so when you got full year, I'd be really disappointed, wouldn't hit the 8 to 9% type level.

Steven Shawley

I'll just roll in. Do you think not to forget as the customer performance is improving, and we're seeing significant productivity gains there. Mike mentioned what's happening in the markets. Don't forget Hussmann has $0.5 services contracting business, very much like Trane commercial system.

So, in the first quarter that business was off by 25 plus percent, so as we see the seasonality come into play from refrigeration service. We expect that to be a significantly less than the drag on revenue for the first, second and third quarter so

Herbert Henkel

But clearly this is the worse I can remember in terms on in the transfer refrigeration combining what's going on in Europe, of what's going on in the U.S. And that's obviously a key driver for the overall operating margin.

Shannon O'Callaghan - Barclays Capital

Right. Okay. All right, thanks guys.

Operator

And we'll take our next question from Eli Lustgarten at Longbow Securities.

Eli Lustgarten - Longbow Research

Good morning.

Herbert Henkel

Good morning, Eli.

Michael Lamach

Good morning.

Eli Lustgarten - Longbow Research

Yeah one quick clarification. In the Appendix you have net interest of 315 you forecast and 67 in the first quarter. Are we talking 80, 85 million a quarter for the rest of the year? Is that sort of how we should look at it?

Michael Lamach

Yeah because financing really didn't go into plants of the 1st of April. So the new financing is taking in at a higher rate.

Eli Lustgarten - Longbow Research

I realize that -- that 80, 85 million in run rate that we're expecting?

Michael Lamach

Yeah, it's pretty close.

Eli Lustgarten - Longbow Research

Okay. It will be re-missing to give us OI with the second quarter and the full year for basically Trane and in the Climate, can you, Michael -- industrial and whether it's sustainable?

Michael Lamach

Yeah we had a bad year, but how long it was going to take you to ask that?

Eli Lustgarten - Longbow Research

Actually you gave too. Michael, give the rest of the year.

Steven Shawley

Mike would give the rest of the year. Okay you got -- that's where you get now. Second quarter, we're looking -- as we think Security is going to be somewhere between 17, 19 somewhat percent range. And I think we talked before -- before we talked about Trane stuff being somewhere in 5 to 6% type range. So when you add that all up, you come somewhere in 6 to 8% type number.

Eli Lustgarten - Longbow Research

Industrial is the one we are missing on --

Steven Shawley

I'm sorry. How could we do that. Somewhere around 10. 10 to 11, I think.

Eli Lustgarten - Longbow Research

10 to 11.

Steven Shawley

Yeah.

Eli Lustgarten - Longbow Research

On that. And can we talk a little bit more -- Herb, as a follow-up. One, the outlook for non-res that we could see continues to deteriorate going through 2009 and into 2010, both here and in Europe.

Unless in Midwest there's something different, I see a substantial number of Trane promotional ads in residential in the last three days, all in the Midwest in the papers that I looked at. And with the change of coolant going from R-22A to 410, is that helping your production toward the end of the year to ramp up or how is that impacting and what would that do in 2010?

Steven Shawley

Glass work, and I hope you're going to buy one through this whole thing, so.

Michael Lamach

Maybe noted.

Eli Lustgarten - Longbow Research

I'll look at it. I assure you.

Michael Lamach

I mean there is a modest improvement there as well. And we have been working diligently. In fact, there's been a bit of a mix change you can expect from higher efficiency to lower efficiency units. And so we've been working very diligently on sort of cost-to-cost side of the lower efficiency side. And looking, probably in the back half of the year to participate more fully on that. So, I think you will see sort of improved performance on the back half of the year. The year head is probably harder than anybody probably that Climate Control just in terms of volume leverage in Q1.

Eli Lustgarten - Longbow Research

I guess I'm looking at from the -- with the cooling change come in, are we seeing, is that cooling change helping production in the second half of the year into 2010 or hurting production? Do we see like any dual inventory, it should help production so far toward the end of the year?

Michael Lamach

We're not really thanking, I would say one way or the other on that. I think you talked about switching our 22 reports (ph) and that'll switch out. You're seeing a definitely more movement toward less intake or I should say more movement toward our 22 and in the last few months, clearly from a cost prospective it's a choice. We'll continue to build both, we'll build it right at the end and manage inventory down and ask me to a very small extent. So we're going to play that by year but really haven't encountered on any measure swing one way or the other that affects production. We're ready to do both.

Herbert Henkel

So far we haven't seen -- remember when we had that truck conversion couple years ago, how everybody was just buying in, crazy before the new environmental status we're in. We're not seeing that type of a buying as a result of the change before hand.

Eli Lustgarten - Longbow Research

And there is no pricing -- you haven't increased your incentive as far as residential, looks like a drop in the second quarter. Was that just modest?

Michael Lamach

No, we haven't.

Eli Lustgarten - Longbow Research

All right. Thank you.

Operator

And we'll take our next question from Andy Casey at Wachovia Securities.

Andrew Casey - Wachovia Securities

Good morning, everybody. Question, could you give order changes by segment, please?

Herbert Henkel

I think we'll have to follow-up with you on that one. We really don't have that kind of individual details, I think, here. I think we gave you the overall macro number on there. I don't really -- I don't have it off the tongue either as to what the difference is from sector to sector.

Andrew Casey - Wachovia Securities

Okay. And then a question, Herb, on the Thermo King aftermarket being down I think 14% year-over-year in the quarter. Can you comment on what that look like through the quarter and did April get a little bit better?

Herbert Henkel

There was little bit of pick up in March and April like I was out there in March and just a glimmer of hope that the order rate in March was probably the higher, highest we've seen in some time but they also think it's a representative of just a channel being fairly dry, but I would say nothing remarkable there to talk about in terms of change or anticipated change there.

Andrew Casey - Wachovia Securities

Okay.

Herbert Henkel

Maybe we just didn't understand your question. Thermo King aftermarket. Could you clarify that, please?

Andrew Casey - Wachovia Securities

Yeah, I think in the slide it was down 14% year-to-year. I was just wondering if through the quarter, and I think Mike just answered it, if the comps got a little bit better as some utilization improved. Thank you.

Operator

And we'll take our next question from Mark Koznarek at Cleveland Research.

Mark Koznarek - Cleveland Research Company

Hi, good morning.

Herbert Henkel

Good morning, Mark.

Mark Koznarek - Cleveland Research Company

I just want to clarify those questions Eli asked about the margins. Your answer, was that for the second quarter or was that for the full year?

Herbert Henkel

No, he only dragged the second quarter out of me. You're going to go for the rest?

Mark Koznarek - Cleveland Research Company

Yeah, I might as well go for that.

Herbert Henkel

I'm sorry, while you are at it, okay.

Mark Koznarek - Cleveland Research Company

Yeah.

Herbert Henkel

The full year, so overall things what we're looking to get to our $40, $90 type number overall we got to be somewhere between the 7 somewhat, 8 somewhat percent type of range. That's the final number.

And if you look at how that breaks down, we think that you're going to see quality controls and be upper single digits somewhere in the 8 to 9, somewhat percent range. I still think industrial is going to wind up somewhere around 10 to 11%. I think security is going to continue to really do well. They really because the gain was going and I think they're going to be stopped somewhere in the upper teens, you know, 17, 19% range and then when you look at, we said before, Mike was describing on that, you take the Trane pieces, we're talking somewhere there, that will be 4 somewhat percent to 6 somewhat percent. And when you add that all up, that's how you wind up with the range that gets somewhere $1.40 to a $1.90.

Mark Koznarek - Cleveland Research Company

Okay. Thank you. And then when we are looking at the revenue outlook for both the Trane business and the Security business, could you talk about the outlook for the individual pieces underneath the overall?

Herbert Henkel

I mean, Mark as you look at it, relative to what's happening with commercial construction, as an example, what we saw in the Security side was a lot more wholesale sell-through, probably in the first piece of -- in the quarter. And so, you can see a little bit of a less of a decline going out.

On the Trane commercial side, we've really allocated a lot of resource over the -- for the aftermarket services parts, et cetera. And that's where we're really seeing some of the growth in the back half of the year. So equipment's going to be down, as we mentioned service will be up 6%. We had a record April, I mean an all time record. So that's a good sign. And I think that's probably going to continue to drive further 6% service number there.

Mark Koznarek - Cleveland Research Company

So, does that mean the commercial equipment will still be down in this some teens kind of range?

Herbert Henkel

Yes.

Mark Koznarek - Cleveland Research Company

That's what you expect for the full year?

Herbert Henkel

Yes.

Mark Koznarek - Cleveland Research Company

So you really don't expect any recovery in that part in the back half?

Herbert Henkel

Very modest.

Mark Koznarek - Cleveland Research Company

Okay.

Herbert Henkel

Only against the really easy fourth quarter time.

Mark Koznarek - Cleveland Research Company

Yeah. Okay got you. All right, thank you.

Operator

And we'll take the next question from Terry Darling at Goldman Sachs.

Terry Darling - Goldman Sachs

Thanks. Herb, I wonder if you talk about the how wide the range is on the second quarter and kind of what takes you to the high end, what takes you to the low end, because we go out of precision on the pieces. I'm just trying to figure out the uncertainty on the total.

Herbert Henkel

Well, obviously, we said what we're dealing with is what's happening in the global marketplace. To meet the biggest uncertainty at this point in time has been the rapid rate of what we call the deterioration in Europe. Western Europe. I've never seen the kind of numbers. We talked about, you can see in our -- if I use transport is probably the best leading indicator. We saw numbers that went from 20 somewhat thousand, down to 10,000, 60% reduction. That's just dramatic.

We have issues of price dealing with -- now the deflation that comes along with it. So, we're taking the look and saying that second quarter activity level, there is what we saw more up in the March timeframe. That's why we'd look at it. And then you do your plus and minus off of that to help estimate of course, how optimistic you want to be. That's why we come up with the couple hundred millions of revenue range.

Terry Darling - Goldman Sachs

Just on the macro side, there's no big things you'd call out from a company specific?

Herbert Henkel

No. That's what I am saying is that it really has more to do with what your estimates are specifically in the areas of the geography that we're dealing with.

Terry Darling - Goldman Sachs

Okay. And then, on the restructuring discussion, 120 million of costs, 160 million of savings for '09 or full year, wondering if you can give us a sense of how those will break down on a quarterly basis?

Michael Lamach

Probably Terry, let me kind of get into that. We're pretty much at the end of the program. We said that Europe was a 120 million, about 80 million was spent in 2008. So we have about 40 million left in 2009 and we did about 10, 11 million in the first quarter. The rest of this will happen in the second quarter. So the shooting match is going to be over by the end of the second quarter in terms of spend. And of course the benefits are going to spew out into the latter part of the year. So, you spend in the early part and then the benefits occurring in the second half.

Terry Darling - Goldman Sachs

And what do we think the savings from the first quarter were?

Michael Lamach

Well, if you take first out the back half first, I think you're looking more like 60 million in the first half, 100 million in the back half relative to restructuring and then if you look at the first quarter, a lot of it's in the low 20's.

Terry Darling - Goldman Sachs

Okay, great. And then the raw material, 150 million. Did we get any of that in the first quarter? Is that really back half loaded?

Michael Lamach

Actually --

Herbert Henkel

Well, we saw a little bit of it in the first quarter. But don't forget that, we were still taking inventory out of the system in the first quarter. My comments in the slide presentation about, we saw inventories coming down significantly in the March period. And we were able to get a little bit of benefit in the first quarter as result of reduction in inventory. But that's pretty much in front of us the production there.

Michael Lamach

In terms of steel and that was -- the only place we got hurt was really steel and Herb already (ph) referred to you about that.

Terry Darling - Goldman Sachs

Okay. And then I may have missed it, but did you give a tax rate expectation for the full year?

Michael Lamach

20%.

Terry Darling - Goldman Sachs

Thanks very much.

Operator

And we'll take our next question from Steve Tusa of JP Morgan.

Stephen Tusa - JP Morgan

Hi, good morning. Just a little more color on the margin side. I'm trying to understand the restructuring dynamics a little bit. You guys raised your spending by about 10 million. But there is $25 million more in savings that you are getting the share relative to what you expected at your analyst day. I'm just -- is that just better than expected performance on what you spent in 2008? And then the other question would be on kind of price cost dynamics, I think you got about a 2% price in the fourth quarter, you got about 1.5% this quarter and you think prices are going to be -- I think a negative through the rest of the year. So, are you net positive on raw material this year? How much of that 150 actually you know fall through to the bottom line after you adjust for some of these costs? I have one more follow up.

Michael Lamach

I'm sorry. And I guess I'll start with -- we were really thinking about price in the back half of the year being relatively flat. And in terms of how commodity is placed into that, you've got a good guy we talked about 150 million. You also got just some (inaudible), bad guys will come again in relative to things like the engine, the electric motors those types of things. You're probably talking about 80 to $90 million direct material probably flowing through that way.

Okay, now if we see an increase certainly in commodity cost and the spot market, seeing more I think the advantage that we have here from a timing perspective is that we will be able to from a pricing perspective kind of get in front of that where we stay where we are. And there's really not been a lot of heavy pressure in the industry in any of our businesses yet around pricing relative to commodities inflation. So that's kind of holding that but...

Stephen Tusa - JP Morgan

The flat price was an average for the year; so if you start positive you're going to end in the negative. But you're saying for the rest of the year price will be basically flattish?

Steven Shawley

That's right.

Stephen Tusa - JP Morgan

Okay, and then so in the restructuring question?

Steven Shawley

Yes, Steve, the deltas really was probably better performance on both ends. We spent last in what we had anticipated, and the benefits started accruing faster than what we had planned on. Nothing it went on as we added to the program. I think we talked about this before that we were going to be adding incrementally in this program based on what we saw our revenues coming out. We pretty much drew the line and say that any new programs we put in place had to be cash positive in the current year, cash positive in the current year. So that led to the lower spend on an incremental basis versus the income (ph).

Stephen Tusa - JP Morgan

Okay. And then one last question, I just wanted to make sure I was clear on this. You said that the working capital doesn't assume any further benefits from the securitization? Am I may correct in saying the 250 doesn't have any benefits from what you did this quarter. And then one last question on that is, what was free cash flow this quarter?

Steven Shawley

Yeah, Steve, make sure that the 250 excludes any impact to securitization program.

Stephen Tusa - JP Morgan

Okay, great.

Steven Shawley

This management want...

Herbert Henkel

Inventory receivables basis.

Stephen Tusa - JP Morgan

Yeah.

Herbert Henkel

In the quarterly performance on cash was, it was a slight usage; we call it available cash; everything before dividends. There's about a $26 million usage. Significant to that is, is that in the past, we were between maybe as high as $200 million of cash usage in the first quarter. But given that the period in depressed volumes and where we were with the inventory, that performance has given us a lot of confidence so we can think even more working capital as of the year.

Stephen Tusa - JP Morgan

a stronger performance in the context of the seasonality?

Herbert Henkel

Absolutely.

Stephen Tusa - JP Morgan

Okay, great. Thanks a lot for the details.

Operator

And we'll go next to Nigel Coe, Deutsche Bank.

Nigel Coe - Deutsche Banks Securities

Thanks. Good morning.

Herbert Henkel

Good morning, Nigel.

Nigel Coe - Deutsche Banks Securities

So, just wanted to see like Trane, specifically on solutions, bit of weakness in one key. You mentioned April stronger. At least one of your competitors has talked about the symbiosis (ph) caused a bit of confusion in the market, some delays. Did you see some of that or was that a fact behind the decline?

Michael Lamach

Well, I mean it was just a general inability lot of customers, for example education, even the past bonds relative to building capital improvement. And I think a lot of districts as an example went down, a traditional impairment past couldn't go there in the fourth quarter, kind of come back needing capital renovation and we look at things like performance contract as a way mitigate that.

I also think that in some cases you saw some customers that may be could afford with a hold on a little bit the way the three of they're going to get refunding. So, it was a little bit of a mix bag, Nigel. I kind of discount all of that is being kind of a good guy or a bad guy, certainly in the quarter and probably for the year.

I mean we're going to participate; we're going to get hopefully more of this share that, but it's not something that we're baking in as an expectation. We have shifted a lot of resources over to in the order direct side versus the equipment side of our business there. Anticipation of really key vertical markets and while owner direct selling versus to the traditional contracting channels. And so I think we're positioned to take advantage of that not counting on it.

Nigel Coe - Deutsche Banks Securities

Okay. That's helpful. And then...

Herbert Henkel

Another thing Nigel through the party, you look at -- I think that also carried on over into our security business. We saw there because remember our real strengths and security commercial is in that entire institutional phase. And if you looked at the dodge (ph) data, it would be a disconnect as to the activity level looks stronger there than what we saw and I think a lot of that has to do with the assumption on the purchasing side that you and Mike are talking about.

Nigel Coe - Deutsche Banks Securities

Well that was actually my next question because the decline in the Americas 20% much -- especially given that you're late -- building. So, would you expect the gross spend security to improve and that maybe paid off towards the end of the year, within commercial?

Michael Lamach

Nigel, two things really happened there that were fairly dramatic. One was just in what happened to what traditionally was cycle times between the start and when our equipment was on site. It used to be like clockwork about 10 to 11 months. We could forecast -- that's more like 14 months right now. So the whole process since the way.

The other thing that's happened through the wholesale channel, which were filled about 35% of the market. I mean really took inventories down dramatically. After the point where the whole sell-through there, we just indicate that -- question about where is their potential upside. Positive of that channel came back faster okay, in terms of order rates. We feel a little bit of an uptick there. But those two things really I think created...

Nigel Coe - Deutsche Banks Securities

Okay.

Herbert Henkel

We did not in the forecast that we put together with the revenue is really taking into account. Any type of an uptick as a result of any type of code (ph) program, government programs are implemented and that would be all upside to that.

Michael Lamach

One last thing to you Nigel, we wouldn't have put through a price increase this year for the first time and that does obviously get a pull through on that, pull forward on that. In spite of the fact that we didn't do anything to encourage you in the residential Trane side or in the security side to kind of pull forward anything into the quarter. So, I'd like the inventories there, it really come down from distribution point of view.

Nigel Coe - Deutsche Banks Securities

Okay. And then couple of quick ones if I may. Within Hussmann, it sounds like maybe trends again -- can you just characterize how book-to-bill ratios are looking in North America?

Herbert Henkel

First of all, sort of general answer. We just had a quarterly review last week and cost of those industries businesses were there greater than 100%. I mean, really the lead times it takes us across all over the Hussmann, Schlage are greatly reduced. So we've been 100 or 110% book-to-bill for most of our businesses.

Nigel Coe - Deutsche Banks Securities

That's across the portfolio and just in climates?

Michael Lamach

That's correct portfolio. And I can't doing a single business that was less than 95

Nigel Coe - Deutsche Banks Securities

Is that for the quarter or is that just for March, April.

Michael Lamach

That was for the quarter

Nigel Coe - Deutsche Banks Securities

For the quarter. Okay I understand. And then just finally, on the short -term, you've taken a 2700 -- I think as part of the term program. As about 5% of your year-end 2008 employees is that enough do you think, that's about 5%, is that enough --

Michael Lamach

No. I mean couple things. One is we set up series of triggering action, beyond already gone. Beneath that, we don't get the volume in the service contract of business or in couple of businesses, but we really, I think plays that in our ability to drive that performance through those business. And if we don't see that, come to May June timeframe, we have actions planned to go further.

Herbert Henkel

I think Nigel, what we're talking there is all-time employees. We actually reduced our temporary by more than twice that number. We had over 5,000 temporary. We do not record in this 2700 number. So, if you actually look at the number of people that were actually impacted by that number frankly is closer to like 8000. But those people, could many of our business having the seasonality, point of having a temporary workforce, we do not reflect those in the numbers, but they're all this year also impacted by more than 5000.

Nigel Coe - Deutsche Banks Securities

Thanks a lot.

Operator

We'll take our next question from Rob Wertheimer at Morgan Stanley.

Robert Wertheimer - Morgan Stanley

Hi, good morning everybody. And thanks for taking the question. I know it's been a long call. I just wanted to ask if I can at general sense on the leading commercial and non-res construction indicated obviously very negative. And I wanted to understand the lifecycle of an order, just in a general sense, if you can walk through that, so we can sort of think about the timeframe. And also wanted to ask, I think something like 11% of global skyscrapers have been halted or under sort of construction stoppage. If you could talk about that lifecycle the order in terms of that, some of these systems are very specialized for building and have you seen any cancellations on things that are in process? Thanks.

Herbert Henkel

Great question, Rob. People all the way for the most forward-leading indicator you need to think about only in the construction business. It would be probably the architectural building index which first time I think just recently yesterday when I got 50% (ph) from positive feelings about that.

The actual architectural building index went up into the low 40s which was maybe just across seven or eight points move there. That's got probably 70% correlation to our business. We've got a few other things that we can look at and maybe get us something of the 80% range when you kind of triangulate that whole thing. What's really happened though, in addition, so that's just slowing down and hopefully not picking up is the cycles have really changed and very, very difficult to predict.

Though in terms of the contracting business you think about the burn rate that you would earn revenue. Those burn rates really decrease on a monthly basis as the time is extended on them. There has been little more amount of cancellations. We can see more of a general slowdown than we would be, say, mothballing of a construction sight.

Robert Wertheimer - Morgan Stanley

On the -- comment or any other leading comment, I might understand sort of the correlation is one-for-one in timing with the AVI (ph)? It's obviously not, right?

Michael Lamach

That from the architectural building index probably 10 months from the start and then you probably 10 months from the start in traditionally and security you probably 6 to 10 months to start in Trane commercial. So if you take that billing index and take it out 10, 12 months; take out the cycle 6 to 12 months and in fact when anything that will happen with the stimulus from the four or anything relative to finance, move it out. This is the difficulty we have kind of in the floor there is a forecast in one of the reasons range it's got rider (ph) which is very difficult to predict that.

Herbert Henkel

Your methodologies just don't work. And, I tell you, the thing we're most focused on this year and understanding specifically order by order, business by business whether it's third party data we look at it, not third party data, we construct around data and really managing that's look share months in months out.

Robert Wertheimer - Morgan Stanley

Okay, that was actually helpful. Last point, is your coating activity in commercial trains similar to the AVI that also would lie by 10 months?

Michael Lamach

Well, the other phenomena here is you're seeing multiple closures on the same projects as same customer tries to value engineer on the same building. Okay, so the actual answer to your question is, yes. It's absolutely exploded. But the reality is it's probably not up at all from relative to the basic opportunity out there. There's a lot more activity about trying to make things work for the customer and finding solutions that are within their budget. But in terms of really sort of the market opportunity, may be only up slightly in March and April. But not so significantly that would dramatically change our view for the balance of the year.

Robert Wertheimer - Morgan Stanley

Very helpful, thank you.

Operator

And we'll go next to Daniel Dowd at Bernstein.

Daniel Dowd - Sanford Bernstein

Good morning. Let me just continue on that Trane issue. So you indicated that you're -- you think you're starting to gain share. What do you think the source of that share gain is?

Herbert Henkel

Well. There are two things we look at. One is when we think about order share and we've had really four consecutive upticks in order share, but units aren't applied across the board, probably a delay of say 6 months before you see that through the shipping share which is the kind of summer. And this is something that happened in 2001 with Trane. A large part of the equipment model, that we have is variable in terms of the compensation of the sales force.

So I think where you see a lot of competitors, 440 people off the street doesn't do us any -- good to do that. The only thing I will tell you is the kinds of things that we're doing today are really focused on energy efficiency, operational efficiency and require kind of high level of engineered system and sort of proof of concept to customers. And I think that that historically has been -- a real sweet spot for Trane is the ability to really differentiate the technical level. That I think is playing out in driving specifications and in orders through as well.

Daniel Dowd - Sanford Bernstein

How you think competitors are likely to respond as you gain share on price? Is this likely to create a chain reaction here where people start to lose share and start to address that with price?

Herbert Henkel

We're not seeing any change in price. Okay. I mean we had a little bit of carryover, in fact positive carryover to Q4. And we're figuring flat for the balance of the year that business. So we're not doing it on price. It's really taking what I would consider to be the owner direct businesses -- the businesses that you call which can service contract and performance contract and shipping a large part of our organization over to that activity when equipment is slow. And I think that -- and then doing a lot more unsolicited work with customers and unsolicited proposals around energy efficiency and operational improvements in the building. And that is a single greatest change.

And so I can't tell you in the open market, we're seeing anything relative to price that from any of our competitors that we would see to be kind of setting a tone of the market around reduction.

Herbert Henkel

Just to expand on that Dan, remember this is a total cost of ownership approach where you're really selling value of efficiency. So, it's not a sale necessarily on first cost which is what you're thinking. It's really about how can I provide more value to the customers. And so that he has value over the life for the whole project in whole building, when you include parts and service and all the rest that we own.

Daniel Dowd - Sanford Bernstein

Sure, one other thing. You mentioned that the inventories in the channel were pretty lean. Are they -- I think just going down? Going down in dollar terms or are they going down in weeks of supply terms or both?

Herbert Henkel

Both, we take about 100 million inventory out of our own inventories. And we anticipate customers probably did the same across the board when you add it all up. So, I mean I think we're in pretty good position there relative to the channel really being spent across each of our businesses.

Daniel Dowd - Sanford Bernstein

Okay.

Herbert Henkel

So, even the Auxiliary Power Unit, we had quite inventory on the market in the fourth quarter. It was kind of leading through in the first quarter. And that's down now to the point where we could in the second quarter continuously reorder that as well. So that would have been an example of one of the more broader inventories change that we had.

Daniel Dowd - Sanford Bernstein

All right. Thank you.

Operator

We'll go next to Jeff Hammond at KeyBanc.

Jeffrey Hammond - KeyBanc Capital Markets

Hi, good morning guys.

Herbert Henkel

Hey, Jeff.

Jeffrey Hammond - KeyBanc Capital Markets

In your last guidance, you had $100 of contingency and then at the February meeting you talked about synergy upside of 35 million, salary management plan of 40 million. And I am just wondering within the context of your new guidance, do we have -- is there a contingency of built in of a similar magnitude or has that kind of worked its way through?

Herbert Henkel

There is -- yes, the contingency built in a similar magnitude.

Jeffrey Hammond - KeyBanc Capital Markets

Okay. Great. And then, it seems like as you talk about productivity qualitatively, you're exceeding your expectations. But within that 650 million gross productivity, you are actually -- the productivity component you're bringing down from 350 to 310. What am I missing there?

Herbert Henkel

Well, the volumes are going down -- That was the excuse (ph). We work reasonably not trying to put too far in a line, how our people pocket synergies versus productivity. The object of the game here is we've got a cost structure that we think we can get about 5% out this year from all our, all points of reference, excluding deflation. So, this is kind of how we are looking at it. Whether 350 goes to 310 or 180 synergy goes to 200, isn't as important to us as we're trying to get the people do the right thing.

The other thing that I think we've got an heck of an opportunity to go after here is on the growth projects which really we've been working at, we've been doing them sort of one at a time, one off to get our sales people together. We're starting to see a lot more work between the New York organizations around actual offering -- go to -- go after a customer side in industrial or residential or commercial customer across more of a commercial or residential product offering.

So you will see some stuff coming out in terms of renovation in June, second quarter. We'd begin to see -- I was working across these businesses with actual customer product offerings and market offerings.

Jeffrey Hammond - KeyBanc Capital Markets

Okay, great. Thanks.

Unidentified Analyst

We have time for one more perhaps.

Operator

And we'll take our final question from Ted Wheeler at Buckingham Research.

Ted Wheeler - Buckingham Research

Hi, good morning everyone.

Michael Lamach

Hi, Ted.

Ted Wheeler - Buckingham Research

I just wanted to go back a little bit on Trane even more. You talked about the market down I think in the first quarter, 19% orders down 15. And I think your guidance for 10 to 15 for the year for commercial equipment, am I right in saying that's the fourth quarter comp improvement and there's really no meaningful change in the trajectory of the outlook from the first quarter to the end of the year?

Michael Lamach

That's pretty accurate.

Ted Wheeler - Buckingham Research

Could you break down please the commercial unitary and applied performance in the quarter and your outlook for the year?

Michael Lamach

Yeah, I can just tell you that -- unitary is impacted course more severely due to the really the commercial markets being offered to retail. You would have been looking at unitary numbers kind of down in the mid 20 range. And you'd be looking at applied numbers being down in sort of the mid teen range

Ted Wheeler - Buckingham Research

And again, do you think commercially unitary might be turning by the end of the year to improvement? Or do you think that's basically the same, except in the fourth quarter kind of comp?

Michael Lamach

No, we are -- there is a live unitary or something that's stock. Okay. And that got fairly a sense in Q1 and we actually did see a little bit of a pick up in March around the wide unitary exponent of unitary business. The large unitary sort of sale over 25 times, I think will continue to be slow.

Ted Wheeler - Buckingham Research

Okay.

Michael Lamach

And so you're seeing here sort of office rental rates, vacancies decreased and sort of lending and general freezing up around development.

Ted Wheeler - Buckingham Research

Okay. And just lastly on the commercial side, have you quantified yet or do you have sort of -- what is your impression of the stimulus dollars that are flowing into the building market? It sounds like there's some contracts starting to at least we did. Do you have any insights as to what you see there?

Michael Lamach

Well, we're in the mix in all that. I mean absolutely, clearly you're going to go for a share. I mean we, obviously we're doing all of this to report (ph) sort of -- recently and obviously it's pretty big, anticipated numbers into that.

We really haven't done that. I mean what we've learned over the last couple of years, anyway as will I get a cost structure right. We really want to change culture around productivity, around share gain. We haven't done anything that would reduce our ability to respond, capacity perspective in anyway, shape or form.

It's all been through piece utilization that we're able to reduce at this point in time. And so that's sort of the upside bring us more to the top end of the range. But honestly, we're just not going to get sort of lowered in the thinking that that's going to be something, that's going to be a big part in 2009. I do you think it'll be a factor. I don't know how much.

Ted Wheeler - Buckingham Research

Great. Thanks again.

Michael Lamach

Thank you.

Bruce Fisher

Okay. Well, thanks everyone. We could just close by saying, glad you could be with us for this near marathon session. There'll be an instant replay of today's conference call that will be available at about 1 o'clock this afternoon. There'll also be a transcript available. And that will be available on the Ingersoll Rand website.

If you have any other questions, you can call Joe Fimbianti or myself. And that concludes our call. And again thanks so much for joining us.

Operator

This does conclude today's presentation. We thank everyone for their participation. You may disconnect your lines at anytime. Have a good day.

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Source: Ingersoll-Rand Co. Q1 2009 Earnings Call Transcript
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