Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Ingersoll-Rand Co. Ltd. (NYSE:IR)

Q2 2009 Earnings Call

July 24, 2009 10:00 am ET

Executives

Bruce Fisher - Investor Relations Vice President

Herbert L. Henkel - Chairman of the Board, Chief Executive Officer

Michael W. Lamach - President, Chief Operating Officer

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

Joe Fimbianti - Director of Investor Relations

Analysts

Alexander Blanton - Ingalls & Snyder Llc

Shannon O'Callaghan - Barclays Capital

Eli Lustgarten - Longbow Research

Stephen Tusa - J.P. Morgan

Mark Koznarek - Cleveland Research Company

Terry Darling - Goldman Sachs

Nigel Coe - Deutsche Bank Securities

David Raso - Isi Group

Andrew Casey - Wells Fargo Securities, Llc

Jeffrey Sprague - Citi

Andrew Obin - BAS-ML

Operator

Good morning ladies and gentlemen and welcome to the Ingersoll-Rand Second Quarter 2009 Earnings Results Conference Call. (Operator Instructions) At this time for opening remarks and introductions I would like to turn the call over to Mr. Bruce Fisher, Investor Relations Vice President. Please go ahead sir.

Bruce Fisher

Thank you, Chris, and good morning everyone and welcome to Ingersoll-Rand’s Second Quarter 2009 Conference Call. As you know we released earnings at 7:00 am this morning and they are posted on our website.

Concurrent with our normal phone in conference call we are broadcasting this call through our public website as well. There you will also find the Slide Presentation for this call. To participate via the web go to www.ingersollrand.com, click on the yellow icon on our home page. 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 No. 2. There will be a forward-looking discussion this morning which is covered by our Safe Harbor statement which is shown on this slide. Please refer to our December 31, 2008 Form 10-K and March 31, 2009 10-Q for details and factors that may influence results. In addition, please refer to Slide 24 in the back of the slide deck which covers the use of non-GAAP measures in describing company performance.

Now I would like to introduce the participants on this mornings call. We have Herb Henkel our Chairman and Chief Executive Officer; Mike Lamach our resident 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 Herb will summarize our outlook for the second half of the full year. We will then open the lines for your questions. Now if you would please go to Slide 3 and I will hand the call over to Herb.

Herb Henkel

Thank you, Bruce and good morning and thanks to everyone who dialed in to this mornings call. In the second quarter we continued to focus on performance, achieving better than expected results on our programs while facing continued weak markets.

Second quarter reported earnings from continuing operations, excluding $0.09 of restructuring, came in at $0.50 per share, at the top end of our EPS forecast of $0.30 to $0.50 per share. This improvement in EPS reflects better than forecasted operating performance while offsetting lower volumes driven by the weak global markets we’re facing. For the quarter revenues were $3.5 billion and they declined 23% on a pro forma basis including train. Excluding 4 points of currency revenues declined by about 19%.

Second quarter pro forma revenues were at the lower end of our April guidance which anticipated an 18% to 23% drop year-over-year. On a reported basis the second quarter revenues were up 13%.

Demand in our key end markets continued to decline year-over-year; however, revenues were up about $500 million higher than in the first quarter driven primarily by seasonal factors and a slowing in customer inventory destocking. The decline in order intake was in line with the revenue drop and was off about 23% year-over-year. Excluding currency affects orders were down 20%.

We exceeded our 5% goal for productivity through a combination of tight cost controls, restructuring savings, Trane synergies, and operational improvements we delivered 5.6% gross productivity. We also held or gained share in most of our businesses and continue to develop and introduce new products which would mitigate some of the weakness we see going forward. And our focus on cash is really paying off. We generated $605 million of available cash flow in the first half of this year. We used this cash to both increase our cash balances by almost $300 million in Q2 and we’re paying down our total financing by $241 million, which puts us well on our way to achieving our goal of reducing financing by at least $675 million by year-end.

Now let me turn it over to Mike Lamach who will take you through the second quarter in more detail.

Mike Lamach

Please go to Slide 4. This Slide gives a quick summary of revenue and operating margins for the quarter. As Herb mentioned reported revenues for second quarter 2009 were $3.5 billion, up about 13% on a reported basis. On a pro forma basis, including Trane revenues declined by about 23% and were down 19% including the impact of currency.

Reported operating margins were 7.2% and were 8.4% excluding $41 million of restructuring costs. On an apples-to-apples basis adjusted operating margin declined 300 basis points. I will come back to the topic of margins and operating leverage in greater detail on a later slide. Please go to Slide 5.

This next slide entitled year-over-year revenue change provides a look at the trends in our segment sales change on both a reported basis and excluding the impact of currency. We think revenues excluding currency, shown on 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 for 2007 in the first half of 2008 the momentum we had seen in key end markets tailed off in the third quarter of last year. As you can see on the chart, all of our businesses had increasing declines compared with last year through the first quarter. The second quarter declines look similar to those that we saw in the first quarter.

I will give you two other views of our second quarter results, the geographic split and a split between recurring revenue and equipment. On a geographic basis revenues declined by about 19% in the US and about 29% in International markets; Equipment revenues declined by about 27% on a comparable basis for the last year. Worldwide recurring revenues held up better and were off by about 10%. So our sales, like most industrial companies, declined significantly in the second quarter because of both lower end market demand and continuing channel inventory reductions. We believe the excess inventory was cleared out in the second quarter and for the rest of the year we anticipate a deceleration in the rate of revenue declines as we anniversary the end market declines that began in the second half of 2008. Please go to Slide 6.

This bridge represents the total of segment operating margin on a pro forma basis and excludes restructuring. This look gives a better view of the true dynamics of our operating margins at the enterprise level.

Before the second quarter segment operating margins declined to 7.2% which is off about 4.2% points compared to the pro forma adjusted 2008. The combination of declining volumes, negative foreign exchange, and material inflation hurt margins by 7.4% points. We continue to invest in new product development and those activities coupled with purchase accounting related costs and restructuring expenses reduced margins by 1.4 points.

Productivity improvements, restructuring savings, Trane acquisition synergies and carry over pricing added about 4.6 margin points. So, while we were unable to compensate fully for the significant volume decline in the quarter, we were able to offset more than half of the decline and position ourselves for higher margins when our markets do begin to recover. Please go to Slide 7.

Slide 7 bridges the components of our EPS compared with our previous guidance range from April. At that time we indicated that we expect to be in the range of $0.30 to $0.50 per share from continuing operations before restructuring with a midpoint value of $0.40 per share. As I mentioned, our revenue came in at the lower end of our forecast range. Our reported revenues excluding currency were about $120 million below the forecast midpoint of $3.6 billion which equates to a $0.14 per share drag on earnings.

We also delivered higher productivity than expected as we accelerated our restructuring, implemented additional cost containment programs, and realized additional deflation. These items contributed an additional $0.18 per share. Other than expected pricing and currency each added about $0.02 for a total of $0.04+ and finally, our increased [cap generation] allowed us to reduce borrowings and lower our interest expense by $0.02. So, in aggregate internal drivers offset weaker than expected revenues and drove our improved performance versus the April guidance.

Let’s now move to a review of our reporting segments. Please go to Slide 8.

This Slide lists the highlights for air conditioning systems and services and represents the Trane business that was acquired on June 5, 2008. Results from 2008 are on a pro forma basis.

Trane’s second quarter revenues were $1.8 billion down 16% versus the prior year on a reported basis and down 14% excluding the effects of foreign exchange. Global non-residential HVAC markets declined in the range of 20% in the second quarter, with significant reductions in the America’s, Europe and the Middle East. Asia’s decline was less down mid-single digits.

Our commercial air conditioning revenue, which is a combination of commercial equipment and parts, services, and solutions, were down 17% reported and 14% excluding 3 points of FX. Total global commercial equipment and systems, which represent about 55% of our commercial HVAC sales in the quarter, were in line with global markets down about 21% excluding FX. The global Parts, Services, and Solutions business, which represents about 45% of our commercial sales, declined by about 4% excluding FX. We saw some deferrals and some shifts from preventive maintenance to fix on failed contracts; however we expect our Service business to rebound in the second half based on current backlogs which are up 10% over prior year reflecting our increased capabilities selling to direct customers, an up tick in energy efficiency projects, and pent up service demand. For the full year we expect our Service business to be roughly flat to slightly positive year-over-year compared to 2008.

Now let’s turn to the Residential part of our business which represented close to 25% of the total Trane revenues in the quarter. We estimate that industry shipments to residential construction were down in the range of 30% in the quarter and replacement shipments declined high single-digits combining for an overall percentage decline of low to mid teens. For the quarter our residential product sales were down by 12% as improved mix partially offset lower volumes. Inventories continued to be lean in our channel and we expect to get the benefit of the better sell through in the third and fourth quarters. In addition, the US residential market may be approaching an inflection point driven by pent up demand and easier comps.

Next looking at orders, total global commercial orders excluding FX were off 18% slightly better than revenues. Equipment orders declined mid 20s in the America’s, orders for contracting, parts, service, and controls were down modestly. We ended the quarter with a global backlog of equipment, contracts, service of parts, at approximately $1.2 billion. Global backlog was down 13% reported and down 10% excluding foreign exchange. Backlog in the America’s declined roughly 13% while international backlog declined about 5% excluding FX. As I mentioned previously, our backlog for service was up 10% year-over-year.

Next let’s turn to air conditioning margins. For the second quarter of 2009 operating margin was 5.9% including $65 million of purchase accounting, restructuring, and incremental allocations negatively impacting margins by 3.7 points. Last year these items totaled $45 million and adversely affected margins by 2.2 points. The net additional $20 million reduced margins versus prior year by 1 point. Adjusting for these items margins were 9.6% and 11.5% for this year and last year respectively. This means that operationally margins declined less than 2 points with our productivity and cost containment actions offset more than half of the impact of lower volumes, FX and inflation.

In summary, we would say that the commercial markets remained weak around the world, except China, the US residential market may be bottoming out and the productivity and restructuring actions we have initiated are taking hold. Please go to Slide 9.

Climate Control revenues in the third quarter were $626 million down 31% on a reported basis and up 26% excluding currency. For the global Thermo King transport business revenues decreased by 43% largely due to weak global truck and trailer markets and declining freight rates. Worldwide refrigerated truck and trailer volumes were down over 45% compared with 2008 due to ongoing decline in the worldwide trucking industry. We saw negative sales in all geographies with the most severe declines in the European Trailer business where comparisons were against record volumes in the second quarter of 2008.

Global bus HVAC shipments and marine container sales also declined substantially due to slow downs in end market activity.

After market revenues were down reflecting lower fleet capacity utilization and inventory management actions through the entire channel. North American after market revenues increased slightly due to an increase in the reefer unit change outs driven by new stringent admissions regulations on transport refrigeration equipment entering the state of California.

Tri pack auxiliary power unit volumes also declined significantly compared with last year as lower diesel prices and declining fleet revenues have limited conversions in 2009.

Looking at stationary refrigeration global sales were down about 15%. This was driven by a decrease in both display cases and sharp declines in the installation business due to lower super market capital expenditures. On a very positive note, Hussmann had year-over-year sales increases and gained market share with major national supermarket customers during the quarter, especially in higher margin reach in display cases. Hussmann margins also increased significantly compared with last year as productivity and cost containment more than offset the volume decline.

Amid this market upheaval we gained share in trucks, trailers, and display cases in North America and continue to introduce new innovations and energy savings products in to the marketplace. We also started to gain significant traction on realizing synergies with Trane and are actively working to consolidate the North American field operations, service, and insulation businesses, which should bolster revenue growth and lead to higher margins going forward.

Climates reported operating margin was about 7.9% in the quarter and this compares with 12.6% in the second quarter of 2008.

The margin contraction was driven by the significant decline of high margin truck and trailer revenues and the impact of currency which combined caused an 11-point drop in margins. Productivity improvements offset some of the margin pressure and helped margins by about 7 points. Please go to Slide 10.

Industrial Technologies second quarter revenues were $540 million down 33% versus the prior year quarter and down 29% excluding currency. Second quarter revenues were also flat sequentially compared with the first quarter of 2009.

Revenues for the Air and Productivity business decreased by 31% due to lower volumes in all geographic regions and negative currency. Air and Productivity revenues in the America’s declined about 31% during the quarter with a 35% drop in equipment volumes due to declines in major industrial, process, fluid handling end markets. Recurring revenues were off about 25% from lower industrial production levels and deferral of maintenance by customers.

Air Productivity revenues in overseas markets declined by 32% compared with 2008 primarily due to declines in industrial activity, especially in Europe, and a 9-point drag from currency translation. Reported European volumes were down 40% and about 26% in constant currency. Revenues in Asia Pacific were off about 20%.

Club Car revenues decreased 38% compared to 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 carts by extending their leases. Market share increased in a historically very difficult market.

Industrial’s operating income was $38 billion representing an operating margin of 7.1% down from 12.9% in 2008 on a comparable basis. The volume declines and unfavorable currency accounted for 13 points of the margin drop. Industrial also had 1 point of restructuring costs hit their margin in the quarter and improvements in productivity, and an 8 point favorable impact on margins. Please go to Slide 11.

Revenues for Security Technologies were $532 million down about 22% and down 16% including currency compared with strong results last year. Commercial Security worldwide revenues were down 21% primarily resulting from declining building and remodeling markets in the US and Europe. Currency accounted for 5% points of Commercial’s revenue decline in the quarter.

America’s revenues in the Commercial sector were down 19% with declines in volume partially offset by carry over pricing from 2008. Security’s European business was down approximately 28% on a reported basis and 12% excluding currency. Asia revenues declined 15% compared with last year on a constant currency basis.

America’s sales in the Residential segment declined approximately 14% in the quarter. Residential results continued to be impacted by the decline in domestic residential building and remodeling activity, volume gains from South America, and from new electronic residential home security and energy management products revenue gains from prior period price increases helped to partially offset the fall off in US residential building and remodeling activity.

Operating income for the sector was $105 million or an operating margin of 19.7%. Excluding restructuring costs margins would have been about 2.5 points above 2008. Accelerated productivities, strong cost control discipline and prior period pricing actions added 8 points to the quarter’s margins and offset the loss of 6 margin points from the volume declines and negative currency. Please go to Slide 12.

I would like to switch gears and talk about an area of extreme focus for us which is productivity. The top half of this slide shows a summary of our cost reduction and productivity actions for the first half and the full year 2009. We have set a long-term goal of delivering 5% plus productivity every year. This compares to our historical productivity rate of 2% to 3% a year.

For 2009 we have targeted total productivity savings of $650 million which is almost double the productivity we achieved in 2008. We got off to a good start in the first quarter with about $128 million of savings which calculated out to a productivity improvement of about 4.2% and exceeded our first quarter plan of 3.8%.

In the second quarter we achieved $193 million of savings against our target of $155 million which equates to gross productivity of 5.6% and we’re confident that we’ll reach and perhaps exceed our $650 million goal for total productivity for the year despite lower than expected volumes.

We also expect to benefit from commodity deflation in 2009. The savings on this chart represent the value of Ingersoll-Rand to the volumes of prices we locked in and then buying the balance of our commodity needs at today’s market prices. So, we expect to realize roughly $150 million in savings this year which is in line with our forecast that we gave you last quarter. Please go to Slide 13.

This slide shows an update on our restructuring action. Based on that kind of exponent we started to see in the third quarter of 2008 we began taking actions then. We instituted a series of about 50 programs covering all of our businesses, streamlined our manufacturing footprint and reduced our G&A base. So far we have spent about $120 million and we continue to find additional opportunities and expect to spend an additional $20 million in the second half for a total of $140 million. These additional actions will generate $20 million more in savings for 2009 and another $35 million in savings for 2010. All told, we will realize about $180 million in growth savings this year from our restructuring actions and about $235 million of cumulative savings in 2010. Please go to Slide 14.

I will spend some time drilling down into the specifics of our synergy savings. You might recall that we delivered $105 million of actual savings in 2008 versus our target of $75 million exceeding our target by $30 million. We achieved that performance through better than expected savings and logistics, lower healthcare benefits delivery costs, corporate life contracts for indirect spending, and lower material costs. As we get further along into this process we are finding more opportunities and we continue to execute very well on these.

We will continue to drive execution and results in 2009 and our expectation is to deliver roughly $180 million of incremental savings in 2009 on top of the $105 million in savings that we realized in 2008. That means our total benefit, including the modest beginnings of our growth programs, will be about $300 million. We already have over 300 approved programs in the pipeline to deliver this projected performance. In the first half of 2009 we delivered an incremental $80 million of synergy savings on top of the carry-over from 2008.

In summary, this has been a very challenging quarter and we expect to have additional challenges for the year. We acted early to bring down our costs and we are continuing to focus on driving productivity and minimizing costs to reach our cash flow forecast. Please go to Slide 15.

In addition to our productivity programs, we continue to make significant investments in new products and services. Close to $2 billion of our 2009 revenues are from new products and services that we have introduced in the last three years, with a number of new offerings in each of our businesses. We will invest about $500 million this year in R&D, engineering, and CapEx, not including marketing and promotional expenses. This slide highlights three of these areas.

In Trane we strengthened our leadership position in integrated systems by introducing a number of new products. We launched our new global air-cooled chiller line, and are manufacturing the product now in each region of use. Simultaneously our new commercial air handling unit product line also went into production and we are seeing notable order share gains with both product families. Our fourth and a refrigerant transition remains ahead of schedule and we will be 100% complete by the end of Q3.

In summary we continue to execute on our new product development plans and we will emerge with an industry leading product line in terms of breadth, efficiency, and customer value.

In Climate Control we will launch 23 new products this year. For example our Hussmann display cases with LED lighting are both energy efficient for our customers and eye catching for consumers. One major grocery chain told us that sales of frozen foods have more than doubled when displayed in these new cases. We are also introducing a more energy efficient refrigerated trailer which will reduce fuel costs by 25% to 30%.

Our Schlage LiNK product hit the big box market in the second quarter and early results are very positive. We recently ran promotions over a weekend in four key markets and in those markets the products sold out completely. In addition we are very close to an agreement with a major electronics retailer to carry the product line and we will begin introducing additional products including a train thermostat which can control the home central heating and cooling system remotely. We will also begin to offer other products which can be linked such as lighting and security cameras as well.

Reinvesting in our business is important and we have a full pipeline of products and services, many of which are synergistic and combine capabilities across our businesses. Many of these offerings are very unique to us and will continue to strengthen our market positions.

Now Steve Shawley will talk to you about our improved balance sheet, cash flow and our success in taking down working capital, all of which substantially improved our liquidity position.

Steve Shawley

Thanks Mike. Please go to Slide 16. As we have discussed on many occasions, a key goal for the Company in 2009 is to reduce our total financing requirement by $675 million. I am very pleased with the progress we are making toward that goal. This chart lays out our liquidity and financing projections for 2009 based on the strong year-to-date available cash generation of$605 million. As you can see, the proceeds of the refinancing which we completed right at the end of the first quarter went toward paying off the bridge loan.

The securitization program increased total period to date financing by $161 million, but a net pay down of $241 million in total financing was made possible by the unprecedented level of cash generated in the second quarter. As evidenced by the $299 million increase in cash balances since March 31, 2009, the timing of our commercial paper maturities into July prevented an even greater amount of debt pay down to take place in the second quarter. $750 million of credit facilities roll off in June, but now with much lower levels of commercial paper outstanding our liquidity cushion remains more than adequate. This projection continues to assume that the $300 million of put bonds will be paid down in the fourth quarter. To the degree that these bonds are not put back to us, our liquidity cushion would increase accordingly. Our second quarter cash performance gives us a high degree of confidence that we will meet our $675 million debt pay down commitment this year. Please go to Slide 17.

Back in February at our investors meeting we laid out a plan to generate $920 million of available cash including the impact of incremental pension funding requirements in 2009. At the core of this plan was an operating income projection of $1.2 billion, and a working capital reduction of $205 million. Since then, as our markets have declined well below our original plan, we have continued to focus on what it would take to meet the $675 million debt pay down commitment, but on a lower earnings base. We have taken actions to optimize our CapEx, lower our dividend payments, and drive even lower levels of working capital.

This chart shows that these actions have been highly effective to date and have combined to produce over $600 million of available cash through June. Assuming that operating income comes in at the bottom of our earnings range we fully expect to exceed our original cash generation plan for the year. This performance will largely depend on our ability to manage working capital such that it remains flat for the remainder of the year. Please go to Slide 18.

This slide was put together to demonstrate how we expect working capital to behave in 2009 versus 2008 and to anticipate the seasonal impact of our businesses on the timing of cash flow. Earlier I used the word unprecedented to describe year-to-date cash flows. Our working capital profile for the first six months is the reason why. The $416 million of working capital reductions to date have been driven by an intense focus on operational cash management. Inventories have been reduced by over $250 million.

DSOs are holding or improving across almost all of our businesses and payables and imbeciles are being effectively managed relative to volumes. So the working capital as a percent of annualized revenue was reduced to 5.0% in the second quarter. We fully expect to sustain this reduced level of working capital through the remainder of the year.

Please note that the representations presented on Slide 17 and 18 exclude any impact of the receivables securitization program that was expanded in the second quarter.

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

Herb Henkel

Thanks Steve. Would you please go to Slide No. 19.

Back in the third quarter of 2008 we saw a downward flex point in many of our major end markets. The uncertainty related to the cost and availability of credit caused a notable decline in business in the fourth quarter when the US GDP dropped by about 6.3%. The rate of decline continued in the first half of 2009 from both reduced end market demand and inventory destocking by many of our major customers.

Our forecast for the balance of 2009 still has considerable uncertainty due to many current unknowns in the world market. Most economists are predicting that the US GPD won’t turn positive until the fourth quarter of 2009 and even then the recovery will remain hesitant.

We are operating with what we believe is a conservative baseline plan for 2009 and have additional contingency actions available if markets perform worse than what we expect.

Let me start by reviewing the updated economic assumptions behind our 2009 forecast.

Slide 19 is an updated summary of the key economic and business metrics for 2009. The changes from our prior forecast are the ones that are noted in red.

For US construction residential building markets appear to be bottoming at very low levels compared with the 2006 peak. We believe non-residential construction will see about a 19% reduction in contract value and a 24% year-over-year decline in square footage, with institutional activity off 12%. The outlook for non-residential building has continued to deteriorate as the slower economy and tight credit negatively impacts starts.

The refer trailer market North America continues to be weak, but our forecast here has improved slightly. Order rates have increased during each of the past four months. Recent order rates indicate that the North American market could reach a 19,000 unit shipment a year. That is about 1,000 units above our previous guidance last April, but still 29% below 2008 full year shipments. We find this increase in trailer activity very promising since in each of the previous business cycles this has been a very, very reliable early indicator of a pending economic recovery.

European truck and trailer markets had a sharp down turn in the fourth quarter after a strong first half of 2008. Demand for 2009 continues to deteriorate and we expect total European market volume to be down as much as 70%.

Industrial production and capacity utilization had a major drop off at the end of 2008 and into the first half of 2009. We continue to expect significant year-over-year declines in industrial production and capacity utilization for the balance of 2009, especially in North America and Western Europe.

Finally, our forecast is based on the dollar to euro ratio of 1.37 compared with our previous forecast of 1.31.

In addition to these industry specific drivers we assumed the America’s and European’s economies will experience weak GDP comparisons for the second half of 2009 as inventory liquidations run their course and as government stimulus programs start to kick in. We are also forecasting a recovery in China, but declines in the rest of Asia. Now please go to Slide No. 20.

Based on the macroeconomic review I just gave you we expect revenues for the full year 2009 to be down 16% to 19% compared with 2008 on the pro forma basis including a 2 to 3 point drag from currency translation. We expect climate control and industrial to show declines in the 24% to 27% range with low to mid teen declines at security and ACSS. This results in a 16% to 19% decline compared to our previous guidance range of down 14% to 19%. Now please go to Slide No. 21.

Additionally, our forecast is also built on the following assumption. We will benefit from lower commodity costs especially non-ferrous medal. We expect to achieve 180 million of additional Trane acquisition synergies and $111 million of net restructuring benefits. Our productivity programs will continue to lower costs significantly for 2009.

Finally, our forecast assumes flat pricing year-over-year which indicates we’re building in a modest decline in prices for the second half of the year. Now please go to Slide No. 22.

Our outlook for revenues and EPS is shown on this slide and adds some context by showing 2008 revenues by quarter and the average of 2006 and 2007 quarterly revenues. Second half results will still be adversely influenced by the difficult economic conditions in most of our end markets. As you can see on the chart, the current downturn began in the third quarter of 2008 after a strong first and second quarter.

Compared to this years forecast the percentage year-over-year changes get smaller in the second half of 2009, but not because demand is getting notably stronger, but because the comps get easier. It is also worth noting that 2009 revenues are still below the last three years results. Third quarter revenues are forecast to be in the range of $3.5 to $3.7 billion which is down approximately 14% to 19% compared with third quarter of 2008.

EPS from continuing operations is expected to be in the range of $0.55 to $0.70 excluding restructuring costs of approximately $17 million. We are projecting full year 2009 EPS from continuing operations and excluding restructuring to be $1.50 to $1.80 per share. Including $0.11 of costs associated with discontinued operations total EPS is projected to be $1.39 to $1.69. Now please go to Slide No. 23.

To sum up our forecast for 2009 we expect 2009 to remain difficult with activity declines in most of our major end markets. We remain focused on programs which make us a better performing company in both difficult and in the future good economic times. We are delivering cost synergies and expanding our growth synergies. We are organizing our business to take better advantage of market opportunities. We will realize savings from restructuring and are stepping productivity targets to the 5% level while working to capture material cost savings from our commodity.

We solidified our balance sheet in April by refinancing our bridge loan and by reducing our second half dividend. We are dedicated to generating increased levels of available cash and we are continuing to fund high priority projects that will focus on growth in our future years.

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

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Alexander Blanton with Ingalls & Snyder.

Alexander Blanton - Ingalls & Snyder Llc

I haven’t had a chance to fully check this out, but do you know whether the analysts consensus which was reported to be either $1.32 or $1.37 depending on who reported it for them. Yours includes or does not include these restructuring costs?

Herb Henkel

I think they compared to our $1.30 to a $1.50 so they were excluding the restructuring.

Alexander Blanton - Ingalls & Snyder Llc

Compared with the which?

Herb Henkel

The guidance that we had given in terms of $1.30 to $1.50 which was with that restructure; it excludes restructuring.

Alexander Blanton - Ingalls & Snyder Llc

What were the restructuring charges in per share for the year, $69 million is how much per share?

Steve Shawley

It is approximately 325 million shares.

Alexander Blanton - Ingalls & Snyder Llc

That is a pre tax number though.

Steve Shawley

Yes. It is $0.15 if you do the math.

Alexander Blanton - Ingalls & Snyder Llc

I want to ask a question about the destocking effect and other companies have had the same experience. Destocking in the supply chain, your customer chain has been very, very rapid this cycle compared with any other cycle that I know of, and it is probably due to the fact that so many companies have adopted lean manufacturing and lean techniques so they are able to respond much more quickly to cyclical downturns such as we’ve had. Employment has been reduced much faster also for the same reason.

But, if your customer reduces inventory by cutting orders below his demand level than just to meet demand he has to raise his orders in the next period if he stops reducing inventory. It doesn’t mean that he increases inventory, it just means that he has to raise orders to get back to the level of demand even though demand might still be falling. So, how much of that do you see out there? I mean is there going to be a period of recovery in orders and then followed by renewed weakness because of that? What to you think?

Mike Lamach

I think it will be cautious in terms of the bill back inventory at the distribution level, but by any comparison that we’ve got they’re at very, very low levels and we start to factor in the pent up demand, kind of latent demand and replacement cycle. We know from our forecast and talking with the distribution base of dealers that we will see a bit of an up tick in that regard and these are very, very low inventory levels in the channel today.

Alexander Blanton - Ingalls & Snyder Llc

Well yes. So they have to rebuild a little inventory as well you are saying? Even if demand continues to fall it could be, what I am saying is there could be some misleading increases that happen?

Mike Lamach

Think along the lines that most of the distributors, let’s assume they say I want to have 60 days worth of inventory on hand. If they wind up going through any period of time where obviously their revenues fall short of what they thought they were going to be, and if they see going forward the demand not increase, and they all of a sudden say, holy cow, I’ve got more than 60 days worth on hand then they start cutting your orders. A lot of this really as to what we expect going forward I think is when people start thinking that they’re going forward inventory level has to be raised because their sales level is going to be raised. I think that is where we are at, at this point in time.

Operator

Your next question comes from Shannon O'Callaghan with Barclays Capital.

Shannon O'Callaghan - Barclays Capital

I would like to get a little more color on your view of restructuring going forward and into next year. Is there more to do, where would that be, and is it something that you would be backing out next year including in the numbers? Just give us a sense of how you are thinking about how much more is left to be done.

Herb Henkel

We are going to continue to look at things that make sense for us to do and through the year this process has been such that we were able to, on a cash return basis for the year, have it really be accretive for us. So, it is okay to look at those going forward. We have a lot of opportunity in the area of capacity utilization. We have taken some actions. We are putting together some more detailed road maps and footprints around what it would look like going forward and just make decisions based on that once we are through with that plan. To date we feel good about what we’ve been able to do and hopefully we will look at that the same way going forward.

Shannon O'Callaghan - Barclays Capital

You mean in terms of a policy next year it would be backed out if you were going to do something?

Herb Henkel

The concept would be that we would identify incremental projects going into next year if they are there. Plus if they provide a return both at the P&L and of cash for the expenditures. As we identify more opportunities, as we become part of the process, I would hope that we could get out of a, shall we say, a timing disconnect between cash spend and cash benefits going forward. I would say as we identify new projects the benefits will offset the costs in the period. That is what we would be looking at.

Shannon O'Callaghan - Barclays Capital

Okay and give a little flavor, you mentioned some of the encouraging signs in truck. Non-rig you took your expectation down a little bit, but you also mentioned some pick up in services. Give us a feel for how you expect Trane commercial and security commercial to behave with kind of tougher new construction but some of these other positive offsets going on.

Herb Henkel

In the case of Trane on the HVAC side we are really seeing a lot more activity around proposals and the pipeline, around energy efficiency projects, around more complex solutions, turnkey contract things. We have quoted something in excess of $1 billion ready associated with the stimulus package. We have booked something probably greater than $50 million at this point and we will look to convert on some of that, probably $350 or so if our share will hold with the past.

China’s interesting for us. Backlogs there in the HVAC business are up over 20% and so there has really been direct confusion, kind of an immediate impact on what we’re seeing there as well.

Now on sort of the right side of the equation we have had 12 quarters of declining revenues and we start to see where fourth quarter this year, first quarter of next year, you really begin to round the corner here and very low levels; you start to see an up tick.

Security follows a bit of the Trane the HVAC cycle. It is a little longer lead from when a project is put in place to when we actually would use the product there maybe three or four months longer, but it really trends the same cycles.

Steve Shawley

I think for us going forward you want to look into the residential side in the HVAC. I think that if you look at the pent up demand as a result of the traditional replacement cycle that has really been under spent as a result of I think really poor customer confidence, it is a question of when the customer confidence gets back and we’re going to start seeing then that replacement cycle going back and I think that has got some tremendous upside. But it is going to be tied to when consumers feel confident in their investments.

Shannon O'Callaghan - Barclays Capital

Okay. Mike if I could just solve quick on the conversion of the 350. I mean are these things that are orders this year, but the revenues are really showing up next year. Can you give me just a little flavor for the timing of that?

Mike Lamach

Yes, absolutely. They are going to be early next year, so it is proposals that have gone out where construction is going to start. You are probably looking at anywhere from 8 to 14 months in a typical cycle where you would see revenue.

Where it is a contract thing or service deal it is going to really be on a percent complete basis, but you are going to see the bulk of that coming next year as well.

Operator

Your next question comes from Eli Lustgarten with Longbow Research.

Eli Lustgarten - Longbow Research

You talked about $150 million forecast for commodities this year and you said the first and second quarter is still identical. How much have you recognized, or have you recognized, any of it today and how much is in the second half and how does it break out?

Mike Lamach

There was about a $40 million dollar positive swing that we have seen already. We had locked in most of the second quarter, as you know, from the last call and didn’t have much risk on that.

Looking forward as we look at, again, the percent lock versus where we’d be on the market, we feel fairly confident about the $150 million at this point.

Eli Lustgarten - Longbow Research

Have you been locking in copper at this point, not only for this year, but for trying to protect the next year given some of the volatility we have seen over the last few weeks?

Mike Lamach

We have been locking in for this year, looking at through out the third and fourth quarter, but right now we are not locked in 2010 on copper.

Eli Lustgarten - Longbow Research

One clarification, in your forecast you assumed a re-order of 137, but you had been 140, 141, and it is probably going to be in that range for a year. Is there a big impact on your forecast or your bottom line if you wind up with a 141 and 145 year-over-year instead of a 137 year-over-year?

Steve Shawley

It would be upside above obviously what we have, but remember I said to you we were putting together what would be a relatively conservative time line.

Eli Lustgarten - Longbow Research

You were talking about the absolutely impressive margin performance of security and safety, to be almost 20% and in this kind of environment. My question is how sustainable is the kind of performance that we’re seeing for this year into next year?

Steve Shawley

I don’t think it’s a fluke.

Herb Henkel

They won the blue ribbon for productivity across the Company and we’re north of almost 6.5% productivity. They have got a very robust pipeline of activity going on. They have done an outstanding job and I think they will continue to do that. There is a methodology and a process we put in place across the whole company. A lot of the best practices really are coming from that organization. So that has been good news for us.

Eli Lustgarten - Longbow Research

They will be able to hold that even though buy ins and the other markets may be doing them over the rest of the year. That is the purpose of new products driving it?

Herb Henkel

Yes, I think so. That is our goal.

Operator

Your next question comes from Stephen Tusa with J.P. Morgan.

Stephen Tusa - J.P. Morgan

I have a question on the commercial HVAC side. Can you talk about the dynamics between applied and unitary within commercial?

Steve Shawley

You would look at unitary and our exposure and market share would be certainly around commercial office buildings. That is going to be sort of down mid-20’s kind of range, it has been our activity. We have launched some new product which is helping us in that regard, so a new air pool chiller range which is out would be helping that a little bit in terms of share.

The applied side is performing better, kind of off high teens and some of that is happening as a result of more owner direct complex solutions where we are driving an energy efficiency program and pulling through some of the applied equipment is part of that. So that would be sort of how that would line up.

All told you are looking at probably being off in the 20 range.

Stephen Tusa - J.P. Morgan

So when you look at that equipment order pace that you’re putting up it seems actually surprisingly good in the context of what we’re seeing in starts and non-res activity and I think most people think you guys took your guidance down thinking it is going to get worse. Do we see those order comps trend well north of 20 by the time we get into the back half of this year?

Steve Shawley

The orders are coming from the shift of resources that we’ve made over into the owner direct selling organizations. We have actually moved and increased headcount there, so a lot of this is being driven through direct to customer performance contracting and complex solutions businesses. Comps get easy in the fourth quarter, so that, to Herb’s point, is a little bit misleading. The volumes aren’t where we want them to be, but you did get some relief in the fourth quarter.

Stephen Tusa - J.P. Morgan

Do you get some relief on the commercial business in the fourth quarter?

Steve Shawley

Yes, absolutely.

Operator

Your next question comes from Mark Koznarek with Cleveland Research Company.

Mark Koznarek - Cleveland Research Company

I have a question about the assumption about price realization being neutral for the year. First quarter was up a point, half a point this quarter, so you are assuming it is going to tail off. Could you discuss that a little bit more and where that might be concentrated?

Herb Henkel

The pricing we got in the first half of the year it is positive across the organization. It is something less than 1 point. The types of declines we’re seeing are going to be something less than a -1 point. All told across operations we are going to be relatively flat for the year implying a back half which will be weaker. That is going to be moderated somewhat by what happens with commodity pricing. It is pretty fluid right now. If we see an increase I think we are going to have less pressure in pricing and obviously the inverse if we see for the reduction. So we are looking at flat and again plus or minus 1 point on both sides of the year.

Mark Koznarek - Cleveland Research Company

I guess the question is, is that concentrated in the businesses that are more commodity intensive like climate control and air conditioning or is it across the board?

Herb Henkel

It is really more so in the HVAC businesses than it would be in the others.

Mark Koznarek - Cleveland Research Company

Then I have a question on security. Could you split out the performance between new construction and retrofit activity and remind us of the business split between those two?

Herb Henkel

We haven’t done that in awhile, at least for this call, but historically it has run that we had 20% to 30% exposure to new construction, new square footage. About 1/3 of our exposure was towards replacement business through the wholesale channel and the balance really coming through more of the retrofit market which wasn’t new square footage in place, but it was retrofitting existing space.

Mark Koznarek - Cleveland Research Company

How did the performance during the quarter vary among those categories?

Herb Henkel

New square footage commercial markets followed exactly the conversation earlier about trends. Some stimulus spending and some money in the school and healthcare markets, coming in in that area around retrofits and upgrades, pretty consistent with the HVAC story.

Operator

Your next question comes from Terry Darling from Goldman Sachs.

Terry Darling - Goldman Sachs

On Trane, the parts and service business, I was wondering if you could take us through how that tracked through the quarter and when you might expect to see that business turn positive, and whether you think there is sort of a winding spring on that piece of the business at this point.

Herb Henkel

It is followed the historical trend where you are going to see lack of maintenance and deferral kind of pushing through to parts and service, so both scheduled and unscheduled labor and parts would be up in the back half of the year. But, the real mover for us has been in the area of contracting mainly around complex solutions or some would say performance contracting energy efficiency type contracts. That is where the big backlog has built. The burn rate on contracts of that magnitude are 10 to 14 months, so you really begin to see it on the contract side more early next year, but certainly contributing in the back half of the year and that is where we get this idea that it will be flat, but potentially slightly up depending on how much contracting we can push through during the year.

Terry Darling - Goldman Sachs

Did you see that you got a little more negative on an organic basis in the second quarter. Did you see that improving in June versus April/May at all?

Herb Henkel

The big bookings happened earlier in the quarter in June. It was a pretty good month for us. Last June was a big month for us, as you know, but it started earlier in the quarter. It has been fairly consistent. We are looking at the proposal pipeline initially in the first quarter and early in the second quarter we had, I would say, more untraditional delays with customers making decisions. That seems to be normalizing a bit and we are able to put in place a little bit better forecast relative to those businesses in the last couple of months.

Terry Darling - Goldman Sachs

On the residential side, looking at your numbers relative to some others, maybe you are getting a little bit of share there. I am wondering if you can talk about your approach to the residential market right now. You did mention a little bit of price weakness there as well. Just talk about where you think your residential business is heading here in the back part of the year.

Herb Henkel

The back half of the year we think it may round the corner in the fourth quarter. We have seen, like most others have reported, positive mix swing at the 14’s here and up. We think we are getting a little bit of momentum. The traction with putting our respective organizations and the residential business together around customer involvement, both at retail and builder, which historically haven’t been really big components of the train of story. We have done a lot of work on the value engineering component of our lower seer product to really go after and capture some of that share that I think got away from us a year or two ago.

Terry Darling - Goldman Sachs

The industrial business looked a little softer. Looking at the sequential drivers there America’s got a little weaker. It looks like the international business got a little weaker as well. Would you say in terms of this range on your forecast for the back part of the year that industrial is one of the bigger concerns that you have?

Herb Henkel

The driver there is going to be capacity utilization and if our customers aren’t busy we’re not going to be busy either. So, that has been, probably of all the businesses, the most difficult business to be able to really get a handle on when that will turn the corner at this point.

Terry Darling - Goldman Sachs

How do you feel about your share in that business? It did look like one of your competitors was not down as much. Do you think that’s an anomaly, or are you concerned about share at this point too?

Herb Henkel

From the data we saw in Q2 and Terry we have to look and compare notes here, but I think share might have been okay in the second quarter. First quarter might have been a little bit weaker, but we are always after share and we are working on three things this year, it is cash, productivity and share. I can tell you that that is a focus for all of our businesses and we’re monitoring it on a monthly basis with as much third party data as we can. I wouldn’t say that the share gain or loss in Q2 was significant in one direction or the other.

Operator

Your next question comes from Nigel Coe with Deutsche Bank Securities.

Nigel Coe - Deutsche Bank Securities

I want to go through the free cash flow walk through the rest of the year. It looks like you’re projecting $119 million of net debt pay down in the second half of the year. If I look at your low end of guidance I see $350 million in there for earnings. You have $45 million of dividends, so $3 million of available cash flow. You are keeping it kind of flat. Is there any other drain on cash I should think about?

Steve Shawley

As I said in the commentary we are planning on the puts bonds coming back in November. I think there is a lower probability of that happening now than it was three months ago.

Nigel Coe - Deutsche Bank Securities

That is not net debt though, right? I mean that is just between cash and debt.

Steve Shawley

Right, so the incline would be if we exceed the cash that we need to clear the $675 we have a maturity coming due in February of 2010 of $260 million so our first priority would be to keep the cash on the balance sheet to make that maturity payment.

Nigel Coe - Deutsche Bank Securities

I guess what I am trying to say is that typically your working capital you would build more capital in the second quarter. You have had a great quarter, if we do see again some good news on capital in the second half of the year I am assuming that you would maybe build better cash but pay a bit more debt down.

I guess my next question is if you do succeed on your debt reduction covenants on the short term and medium term, does that open up the possibility for second half 2010 to maybe widen your free cash allocation charge to maybe incorporate in some buy back activity?

Steve Shawley

Absolutely. I mean as we talked about before the fact that we can generate the cash and get the debt paid down the quicker the better, and certainly looking at where we sit today I personally believe that that time frame will be pulled up.

Nigel Coe - Deutsche Bank Securities

Okay good and on the guidance is there any share contribution from the exchange with bonds in your guidance, I mean given where the share price is right now?

Steve Shawley

No, there is not.

Nigel Coe - Deutsche Bank Securities

Okay and then finally, there is a big evolution towards metric cars going forward in vehicles. How are you thinking about the strategic value of that business going forward?

Herb Henkel

We looked at club car and really it is for us a potential player in the “energy conversation” mode for people’s transportation going forward. We clearly are, and have been for a while now, the market leader in golf, but I will grant you golf in my mind interprets a relatively flat business going forward. We don’t see a whole bunch of extra golf courses being built. So for us the real big potential is how do we wind up going and participating in the electric people mover concept going forward. Also then getting more into what I call recreational type vehicles; people using them who have large properties.

So our real bet on new products as we look at this going forward is in this whole area of people moving and to the degree we are able to realize that we will wind up having a company that continues to deliver good growth. If not then we have a company that is a cash cow and we have to decide whether that is good for a one-time source of cash or an ongoing stream of cash.

Operator

Your next question comes from David Raso with Isi Group.

David Raso - Isi Group

My questions are on climate control and potentially on Trane. I am intrigued with the potential operating leverage at climate control and maybe some upside to your sales forecast. When I think about your new refrigerated trailer forecast at $9,000, we have already had 9,700 year-to-date so you are basically implying the second half is weaker than the first. But we have in the back logs already 9,900 units and the orders have actually been strong, at least year-over-year, the last three months. So I am just intrigued by that forecast. If you can shed some color on how you get to 19,000.

Herb Henkel

What we are doing on that is not trying to take so much in second-guessing on the act data. We look at it and say that I would agree with you mathematically, if we go by our traditional trends, that there would be some upside. But remember how I started this whole conversation about our forecast going forward, let’s bake this in to make sure we have a cost structure and operational focus on what would be perceived as being pretty crummy outside market conditions. Any upside beyond that, believe me, we will cheer as we go and realize continued growth.

David Raso - Isi Group

One thing about the margins then is you are already at 8.8 and the greatest amount of restructuring you did late last year was in this business.

Herb Henkel

That’s right.

David Raso - Isi Group

You also mentioned what the reach in display cases of Hussmann were obviously at higher margin because you have the door on it instead of an open display case. It sounds like your backlog is towards that mix as well. What kind of operating across the margin are you thinking about climate control this year and especially if you get some continued [interposing] of 2010 close to the 12ish peak we saw just a couple of years ago?

Herb Henkel

Relative to ’09 I would tell you that certainly on a full year basis for climate control something that is 6.5% to 7% range is really what we are looking at there and clearly upside as you said exists if we were able to get stronger transport refrigeration. The trailer units would be up.

The other one is we have had good success with some of the engine change outs with some of the California based legislation. We will do something like 4,000 engine replacements this year, so we will have that upside if that continues to work as well. Clearly if we have favorability on both we could potentially be north of 7% for the full year.

Steve Shawley

The other thing I would add climate control is heavily impacted by what goes on in Europe. If you remember the saga here the European trailer volumes grew to a level that was almost at parity with the US a year ago. So with the European markets being so far off it is really hard to predict at what stage we would get back to the kind of margins you are talking about in the future. I think that is a wild card in addition to the return of the US trailer market.

David Raso - Isi Group

Okay, I mean just getting the 6.5 margins for the year, I know the first quarter was low, but it clearly seems like a…

Steve Shawley

It really is driven David. The downside comes from the 70% reduction year-over-year in Europe and if I would tell you that our margins in Europe are running into 17%, 18% type levels. So that kind of volume reduction really hurts. That is the biggest fight that we have at this point in time to overcome.

David Raso - Isi Group

On Trane, the amortization, the purchase accounting amortization went up this quarter sequentially from 39 to 46. How should we model that going forward? It isn’t a little steadier lately and obviously with that higher amortization it implies a more impressive core margin within Trane before the amortization. So, A) why did it go up and how to model the amortization going forward and B) if you can give us any color in the second quarter how profit margins differed between commercial, parts, and residential.

Steve Shawley

Let me do the technical piece. The purchase accounting probably took a bit of a jump because we finalized all of the purchase accounting actions in the quarter. One year from the acquisition we had to clean up everything. It was a true up of a number of items including foreign exchange activity on the purchase price. That probably accounted for the quarter.

I think that ongoing we should see ongoing amortization in the $40 to $43 million range.

Your question on Trane was?

David Raso - Isi Group

Then the core margins then with the higher amortization, obviously it implies the core business had a better margin than otherwise, so if you can help me between commercial parts and residential some feel between the margins. I am just trying to feel the first and second quarter where the big improvement was. Obviously it must be across all three divisions, but I am just trying to get a feel within in Trane the margin differentials commercial, parts, and residential.

Herb Henkel

One figure that is going to be, you are going to have rally deflation kicking in in a significant way in Q3 and Q4. I mean one of the draw backs inventories and revenues being lower was we had some higher cost products sitting in inventory, working its way through the income statement in Q2, so there is quite a change happening there in both businesses would be one area.

The second, probably the biggest area would be if I look at where does the productivity come from in Q3 and Q4 a lot of that is associated with the two Trane businesses and what they have done relative to the structuring of synergy projects toward the back half of the year. So there is an improvement that we see sequentially there as well.

David Raso - Isi Group

And to my question about the margin differential? Some parts are pre-amortization double digit and then the key question is commercial versus residential in the quarter. Which had the higher margin?

Herb Henkel

I guess the first question we probably don’t have an answer to. The second question you had the businesses fairly close. You had commercial, maybe a point above. In Q3 you’ve got the businesses that are literally tens of basis points away from each other so it is a crap shoot, but those businesses are fairly equal for Q3.

Operator

Your next question comes from Andrew Casey with Wells Fargo Securities, Llc.

Andrew Casey - Wells Fargo Securities, Llc

I would like to go back to the question on the energy efficiency projects. Your comment about quoting ability and do you have any updated idea about what the total potential pipeline that you haven’t quoted yet would be?

Mike Lamach

If you look at sort of the building related stimulus portion it is about $100 Billion and if you add sort of the education funding on top it is probably $120 billion. If you look at a usage factor for the kinds of things that we would do, I would tell you it would be in the 5% range which kind of gives you a $6 billion opportunity. I have heard it quoted as high as 10%. 10% tends to be all piping duct work, wiring etcetera, but for what we do with security and with HVAC 5% is a pretty good number; so, $6 billion probably over a three-year period. Add sort of the market shares that we hope to command or improve that would be sort of the positive view of that.

A lot has got to happen including the money getting spent efficiently and in the right way, so we are not putting all of that into our thinking going forward and clearly what you see here is a cost led productivity led plan for the balance of the year and we are still thinking about that going into 2010, is making sure we have structured our cost position as well as we could.

Andrew Casey - Wells Fargo Securities, Llc

On the residential parts business associated with that market did you see an unusual deferral and if so would that bode well for pent up replacement in 2010?

Herb Henkel

I didn’t see anything all that unusual in the quarter. Last year we were moving our warehouse from one location to the other and actually had some of that pushed out into the third quarter, so I didn’t see anything as an anomaly this quarter. I think you are seeing between some of the rebate money coming into the market place more of a push there than you are replacement parts. But if it follows historically you should see something as the summer progresses that you would expect to see a bit more than in the past.

Operator

Your next question comes from Jeffrey Sprague with Citi.

Jeffrey Sprague - Citi

Just a couple of loose ends, you covered a lot of ground already. I wondered if you could drill into Hussmann a little bit more. The comment that margins were actually up on a year-over-year basis, was that the total Hussmann franchise or just the America’s business?

Mike Lamach

The America’s was the strongest business there by and large kind of carrying the global business for certain as it relates to margin expansion.

Jeffrey Sprague - Citi

But the whole business was up on a year-over-year basis. Can you give us a sense of the order of magnitude of the change there on a year-over-year basis?

Mike Lamach

I don’t have it broken out that way Jeff. We will probably have to come back and help you with that.

Jeffrey Sprague - Citi

Then back to the stimulus comment for a minute, Mike. It’s kind of like you suggested some of it, maybe it’s not the majority, but some of it actually related to completely new construction. Did I interpret that right or is it really almost all retrofit and upgrade type activity?

Mike Lamach

It’s largely retrofit and upgrade, but it’s how you tell you classify a hospital adding a wing, a school adding an addition, so I can’t give you a very exact definition between the two. But it is more retrofit than it is new construction, although we have seen some new construction. We have seen some early inquiries and we have prepared some preliminary proposals on new construction related activity.

Jeffrey Sprague - Citi

Are you guys over the hump on 410-A in terms of actual cash spend and just kind of the internal work? It sounds like you said you were ahead of schedule, but the actual kind of negative drags may be on P&L and E&D spending?

Mike Lamach

Yes.

Jeffrey Sprague - Citi

Terrific, thanks a lot.

Operator

Your next question comes from Andrew Obin with BAS-ML.

Andrew Obin - BAS-ML

The question on restructuring which seemed to have made such a difference in the quarter in terms of operating performance, looking into 2010 how should I be thinking about the split of benefits between the segments i.e.; train versus the old historical Ingersoll. Just because the upside at least versus my model in the heritage Ingersoll businesses was quite a bit more significant than train.

Mike Lamach

In terms of where we exceeded in the quarter in the area of productivity, thinking about it in three buckets productivity, which would be indirect, and direct material and labor, and second synergy and third restructuring, really that $38 million DEIT we had $25 of it came out of productivity which was direct/indirect material and labor. So the restructuring, what we are finding there is that we are sort of spending better favorably to what we had anticipated in getting the benefits up a little quicker.

Synergy I think what the beat here was about $5 million. It is really in the area of just getting good momentum as we start to roll out further down with Latin America, ESA and Asia, so that is where the beat was there. I think in restructuring it has been fairly consistent in our story there and it certainly wraps up at the back end of the year. But it wasn’t the Q2 beat.

Andrew Obin - BAS-ML

I guess what I meant though is you are spending a lot of effort on operations and taking costs and I am just trying to get a sense, in your view, which segment is sort of the most successful. So we are thinking about margin potential for 2010.

Steve Shawley

First of all, I have a couple of concepts here. One the spend this year is pretty well distributed across the sectors evenly. If you remember the conversation we got into, it is that we are reacting to significant market reductions across the board. So these are actions that were put into place quickly. They were focused on returns this year from both the P&L and cash perspective, as we talked about.

So if you look at the future and we become a little more offensive in the way we think about restructuring, what we will be thinking about is increasing our capacity utilization in our factories and if you start taking a look at opportunities to share centers of excellence across multiple sectors I would tell you that our future spend plans would probably be equally distributed across the sectors as we go forward.

I don’t know what else to tell you, other than the fact that we are operating under capacity in all of our sectors and it is really an opportunity to better utilize corporate assets going forward.

Andrew Obin - BAS-ML

That was just a very impressive execution. Thanks a lot.

Operator

Your next question is a follow up from Mark Koznarek with Cleveland Research Company.

Mark Koznarek - Cleveland Research Company

I wanted to follow up on the comment a little bit earlier about the margin outlook for the HVAC business. I am wondering if you could review what the margin targets are for the remaining segments.

Mike Lamach

We did that last time so you are probably looking for Herbs round up again.

Mark Koznarek - Cleveland Research Company

I’m sorry was the climate control margin target you gave, but?

Mike Lamach

I think with ACSS the Trane business you are probably looking at a combined 5% type number for the full year. Okay? For security they have been wonderfully consistent. We have been consistent about saying where we thought that business would be and I think something in the neighborhood of 18% is a good number there.

Relative to industrial I probably just like climate would tell you it is kind of in the 6% to 7% range and again depending on what kind of activity we see, in the very belly end of our forecast is with our end customers in that business so it is probably the one that with a forecast we have more variability.

Steve Shawley

I would just add to make sure that we are connecting here, all of those numbers or all of those estimates that Mike just gave you include the impact of restructured spending this year, on an as reported basis.

Mark Koznarek - Cleveland Research Company

Thanks for the clarification. I appreciate that.

Operator

Your next question is a follow up from Stephen Tusa from J.P. Morgan.

Stephen Tusa - J.P. Morgan

I have a quick question on the residential side. You guys talked about being close to an end selection. Given that this is kind of a seasonal business and every year can be different on various factors, whether it is weather or consumer spending; which one of those factors lead you to believe we are close to an inflection. Are people replacing more than they have repaired? Maybe you could just talk about those fundamental dynamics. We all know what housing is doing, we all know what the weather is doing, but maybe those other things that are going on there that has driven such a lower placement rate over the last couple of years?

Mike Lamach

There are a couple of things. You are definitely seeing this latent demand, this curve having gotten wider and wider over the last 10, 12 quarters and ultimately getting to such a low point in terms of volumes that you begin to turn the corner anyway. Again, it is probably whether it is Q4 or Q1 when you begin to turn the quarter there. Just as a result of equipment failure and the need to replace and certain markets. That I think is a driver.

We are seeing some benefit of the rebates driving higher efficiency and a rationale to do something sooner, so that has been positive for us in Q2 and through the balance of the year as well.

Stephen Tusa - J.P. Morgan

What was pricing mix for revy in the quarter separately?

Steve Shawley

We don’t break that out separately.

Stephen Tusa - J.P. Morgan

So what you are saying is that people are beginning to replace more instead of fixing out there?

Herb Henkel

Yes, or just not doing either and just deferring. I think that is the piece we are starting to see.

Stephen Tusa - J.P. Morgan

Do you guys have a unit number off the top of your head as far as what has been either fixed or deferred over the last few years and how many maybe have been just deferred? Do you have a unit number off the top of your head that you guys have kind of worked into?

Mike Lamach

Yes, actually it is something we have presented in the past. We can probably get you a copy of that which looks at the historical trends over a longer period.

Herb Henkel

But we had shown that the Trane data showed that about 25% of the units would be replaced when it hit year eight. There as a really excellent write up done by one of your colleague analysts that showed that 42% wind up going out after year 12 to 14 and when you look at that data you just add that together and you see a tremendous upside in terms of 10s of 1,000s of units, but I think the comment that is very accurate in there is that if you then go and draw the consumer confidence curve with it you will see that the replacements were historically tied to the consumer confidence as well.

Steve Shawley

Steve I think that was your analysis.

I was hoping that was mine, otherwise there was a plagiarism issue going on.

Herb Henkel

Guys I didn’t want to (interposing). This is a true story. I personally read all 122 pages or whatever it was and I thought (interposing).

Stephen Tusa - J.P. Morgan

It was actually 150 pages but who is counting? Thanks a lot guys, I appreciate it.

Operator

Your final question is a follow up from Eli Lustgarten from Longbow Research.

Eli Lustgarten - Longbow Research

Most of the surveys we have done say that about 40% of the costs per savings have permanence and the rest are volume related. It seems like what is going on, the potential for permanency of the cost savings would be higher for you guys than what we are seeing at this point. Do you have any feeling for how much of the carry over is volume related and how much is permanent?

Steve Shawley

The numbers we give you on the restructuring, we only give you the information that is qualified restructuring, number one. Number two, the way we look at it is that only if it reduces fixed costs.

Herb Henkel

Yes, because the variable piece is totally out of our number, Eli.

Eli Lustgarten - Longbow Research

So that is all permanent savings you are effectively saying?

Steve Shawley

Yes.

Eli Lustgarten - Longbow Research

All right thank you.

Operator

At this time I would like to turn the conference back over to Mr. Fisher for any additional or closing remarks.

Bruce Fisher

Thanks, Chris and I would just like to thank everyone on the call and those who are listening in on the web cast. Thank you so much for participating with us. There will be a transcript available in 48 hours on our website if you would like to read the highlights of this call again.

Again, thanks so much and we will see you next quarter.

Operator

This does conclude today’s conference and we thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Ingersoll-Rand Co. Ltd. Q2 2009 Earnings Call Transcript
This Transcript
All Transcripts