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Ingersoll-Rand PLC (NYSE:IR)

Q1 2010 Earnings Call Transcript

April 23, 2010 10:00 am ET

Executives

Bruce Fisher – VP, IR

Mike Lamach – President & CEO

Steve Shawley – SVP & CFO

Analysts

Eli Lustgarten – Longbow Securities

Jeff Sprague – Vertical Research

David Raso – International Strategy and Investment Group

Nigel Coe – Deutsche Bank

Andy Casey – Wells Fargo Securities

Bob Cornell – Barclays Capital

Jeffrey Hammond – KeyBanc Capital Markets

Jeff Sprague – Citi

Steve Tusa – JP Morgan

Mark Koznarek – Cleveland Research

Robert McCarthy – Robert W. Baird

Scott Gaffner – Barclays Capital

Marty Pollack – NWQ Investment Management

Operator

Please standby, we're about to begin. Good day everyone and welcome to the Ingersoll-Rand first quarter 2010 earnings conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Mr. Bruce Fisher, Vice President, Investor Relations. Please go ahead sir.

Bruce Fisher

Thank you, Anthony, and good morning everyone. We released earnings at 7 am this morning and it's posted on our website. Concurrent with our normal phone and conference call, we're broadcasting the call through our website and they're you'll also find the slide presentation for the call. To participate by the web, go to 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 starting at 10 am.

Now if you would please go to slide number two. Statements made in today's call that are not historical facts are considered forward looking statements and are made pursuant to the Safe Harbor provisions of federal securities law. Actual results may differ. Please see our SEC filings for a description of some of the factors that may cause actual results to vary materially from anticipated results. In addition please refer to Slide 21, which covers the use of non-GAAP measures to describe company performance.

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

Mike will open our discussion. Then Steve will review our business results and then Mike will return to discuss our outlook for 2010. We'll open the lines for your questions after that. And f you would, please go to Slide three and I'll turn it over to Mike.

Mike Lamach

Thanks, Bruce. Good morning and thank you for joining us on today's call. In the first quarter, we continued our focus on driving top tier operational performance across each of our businesses while steadily increasing the delivery of customer focused innovation and products, systems, services and in our business models.

For the fifth consecutive quarter, we achieved our productivity targets and new product introduction schedules which are critical underpinning than our strategies to deliver long term shareholder value. First quarter earnings from continuing operations was $0.16 per share, excluding the $0.12 impact of a one-time tax change from the new healthcare bill and including $0.02 of restructuring and productivity investments.

Overall productivity contributed to our $0.22 year-over-year improvement and essentially flat volume. As a result we were able to achieve the top end of our projected first quarter earnings guidance range and lower than anticipated revenues. For the quarter, revenues were $2.9 billion, up 1% versus prior year on a reported basis and down about 1% excluding currency. First quarter revenues were roughly $100 million below the midpoint of our February guidance where we had anticipated a revenue range of $3 billion to $3.1 billion.

During the quarter we did see a notable pickup in our order intake and a number of our early cycle business are showing strong comparisons. In the overall company, orders were up 10% and improved in each of our segments. The backlog also increased significantly, up over 18%. If we review the make-up and timing we expect at second quarter deliveries on these new orders, coupled with our growing backlog, we have confidence that our revenue shortfall in the first quarter was timing related and that we can deliver within the range of our second quarter revenue forecast.

Operating margin for the quarter was 4.5%. All f our segments improved operating margins compared with the first quarter of 2009 and total segment margins were up 2.8 percentage points year-over-year despite the flat volumes. This again highlights the success of our productivity programs. We exceeded our 5% goal for gross productivity through a combination of disciplined cost control and operational improvements that included core productivity programs, restructuring savings and synergies derived from the new segment operating structure.

We also held or gained share in most of our businesses and our innovation agenda continues to gain traction as we continue to increase investment in the development and introduction of critical new products and services. We expect that these actions will help to mitigate some of the near term market choppiness and fill our growth as the full recovery kicks in. We also remain focused on our cash flow management and in retaining the benefits achieved to the operational attention we paid to work capital improvements over the course of the past 18 months.

We paid down $260 million maturing debt in the quarter and we are on track to deliver $1 billion of available cash flow for 2010. Please go to slide four, the slide gives the summary of our quarterly order rates from 2008 through the first quarter of 2010. As you can see we hit the bottom for orders in the back half of last year and reported flat orders in the fourth quarter.

Reported orders for the first quarter were up 10% overall and all sectors experienced year-over-year gain excluding the impact of currency orders increased 7.5%. We had especially strong gains at industrial, Club Car and transportation refrigeration.

Order trends for commercial HVAC and security also turned positive despite soft commercial construction markets in several key regions. We ended the quarter on a high note with a 13% year-over-year increase in March orders which will help drive our second quarter results.

Please go to slide five, this slide provides a look at the trends in our revenues by segment. We think revenues, excluding currency shown in the bottom of the chart gives a better view of our organic sales performance and our comments will focus on this measure.

As you can see on the chart it appears that we hit bottom in mid-2009 with some modest improvement in the rate of decline in the third and fourth quarters. We had modest positive improvements in all of our sectors expect for security which had a 5% decline in activity against the soft U.S. commercial construction market. I will give you two other views for our third quarter results. The geographic split and a split between recurring revenue and equipment: on a geographic basis revenues declined by about 1% in the U.S. and also down about 1% in the international markets excluding the impact of currency.

Equipment revenues declined by about 1% on a comparable basis for last year and a worldwide parts and service were up by 8%. Let's go down to slide six, this bridge analysis the change in first quarter segment operating margin year-over-year. First quarter operating margins were 4.5% which is an increase of 2.8 percentage points compared with 2009.

As you can see volume, currency and price had a minor impact, productivity was the key drivers and netted against inflation helped to increase margins by 3.5 percentage points. We continue to invest the new product development and those activities coupled with purchase accounting related cost and restructuring expenses had a minor impact in the quarter and reduced margins by 30 basis points.

Our focus on productivity which will reduce our fixed and variable cost structure and our innovation initiatives remain core elements of our strategy as we position ourselves for higher margins and share when our markets reach full recovery.

Please go to slide seven, on slide seven I will spend a minute bridging and the components of our EPS compared with our previous guidance range provided in February. At that time we indicated that we expect to be in the range of $0.10 to $0.15 per share from continuing operations with the midpoint value of approximately $0.30 per share.

Lower than expected volumes and negative mix equated to a $0.08 per share drag on earnings, price was up slightly in quarter compared to prior expectations which caused additional penny of EPS drag. We achieved our 5% productivity target for the quarter and we also had lower than expected material inflation. Lowering of interest in other cost contributed $0.03.

Forecast of the restructuring cost were favorable by approximately $14 million or about $0.03 per share. We have been able to execute some programs of lower than expected cost and we have some timing differences which will catch up during the year. So in aggregate internal drivers offset weaker than expected revenues and we were able to reach $0.16 in earnings compared to guidance of $0.10 to $0.15 per share.

Steve will now take you through a review of our reporting segments.

Steve Shawley

Thanks, Mike. Please go to slide number eight. The slide covers the decline in solution segment and includes the Trane Commercial HVAC business and the Thermo King and Hussmann refrigeration businesses. Total revenues of $1.6 billion were up 1% and down slightly excluding currency. First about Trane Commercial HVAC business and provide a quick look at the markets. Global non-residential HVAC equipment markets declined mid-teens with significant reduction in the Americas, Europe and the Middle East. Asia markets were up high-teens reflecting good growth in China.

Trane Global HVAC first quarter revenues of $1.0 billion were down 6% versus prior year on a reported basis and down 9% including the effects of foreign exchange. Total global commercial equipment revenues were in line with global markets down 16% excluding FX.

Americas equipment sales were down about 18%, Europe and the Middle East were down upper 20s and Asia was up in the low teens all excluding FX.

Global parts, services and solutions revenues increased by 4% excluding FX. This is the first year-over-year increase we have seen since the fourth quarter of 2008 and reflects both improving demand and our ability to sell directly to building owners. Excluding foreign exchange equipment orders declined approximately 6% in the Americas in the first quarter.

We continue to see increases in applied orders up 3%, but inventory orders declined single digits. Orders for contracting parts, service and controls were up mid single digits. We ended the quarter with a global backlog of equipment and contracts, service and parts of over $1.3 billion. Global backhaul was 14% on a reported basis.

Equipment backlog increased mid single digits while contracting backlog increased by over 40%. Geographically Americas was up high teens on the strength of the contracting performance, international backlog was up high single digits as strength in Asia more than offset weakness in Europe and the Middle East.

In summary we would say that the commercial equipment revenues remain weak, although we continue to see some modest improvements in the rate of decline and service and contracting are recovering in 2010. In addition our productivity and restructuring actions are continuing to improve margins and we continue to launch new products which will put is in a good position to leverage improving markets when they materialize.

For the global Thermo King Transport business revenues increased by 27% which is a significant improvement over last year. Our worldwide refrigerated truck and trailer revenues grew even faster, up 35% compared with 2009 with strength in all key regions. Global bus HVAC shipments and marine container sales both increased substantially due to easy comps and improved end market activity. TriPac Auxiliary Power Unit volumes increased significantly compared to last year following higher diesel prices.

Thermo King [ph] orders increased by 38% in the first quarter, setting the stage for continued improved sales and operating earnings in 2010. Looking at stationary refrigeration, global sales were up 6%, primarily driven by supermarket upgrades and remodeling projects at several of our major customers.

Bookings increased by 12% in the quarter. Climate Solutions reported an operating margin of 1.9% in the quarter. This compares with 0.3% in the first quarter of 2009. This 160 basis point margin improvement was driven by productivity and cost reductions on essentially flat sales.

Please go slide number nine. Industrial Technologies first quarter revenues were $545 million, up 1% versus the prior year and down 1% excluding currency. We believe that the industrial markets are stabilizing as first quarter orders for Air and Productivity were up 16% and double digit improvements on all geographies.

Club Car revenues increased by 21%, compared with last year as replacement demand picked up in the gulf market and our share improved in utility vehicles. Year-over-year golf cart market share held steady and we have seen a significant increase in first quarter orders which were 35% compared with last year. Industrials operating margin of 10.9% was up 7.7 percentage points as productivity, lower restructuring investments and price volume mix were all positive contributors.

Please go to slide number 10. The Residential Solutions sector which includes train and American standard HVAC product lines and the Schlage security residential business had first quarter revenues of $395 million, up 1% compared with last year. Excluding foreign exchange, revenues were up 3%. It appears that we have finally reached the inflection point of the long down cycle in the residential market and we expect improvements going forward, driven by a slow improvement in the residential construction and strengthening of the replacement market for Residential HVAC.

Total reported revenues for the Res security portion of the sector were down 7%. North America revenues were up about 5%, primarily due to an improving remodel market and bottoming of the U.S. new builder channel. This improvement was offset by South America's results which included significant negative currency translation related to the devaluation of the Venezuelan boulevard [ph]

For the HVAC business, we estimate that industry shipments of motor bearing units increased about 10% year-over-year. We believe this growth includes extra industry shipments of our 22 systems which are being phased out. Excluding those extra shipments, we believe the market was up in the mid single digits.

Our residential HVAC sales were up 3%, principally from higher volumes and mix. As we did not participate in the R-22 system loan in, nor did we see any favorable impact or general restocking in our channel during the quarter. Operating margins of 3.7% increased significantly compared with 2009, driven by five points of margin improvement from productivity and cost reductions.

Please go to slide number 11. Revenues for security technologies were $393 million, down about 2% and down 5% excluding currency. Americas revenues in the commercial sector were down 9%, nearing the decline in commercial construction markets. Securities European business was up approximately 7% on a reported basis and flat excluding currency. Asia revenues were up close to 20% from an increase in sales in China.

Operating margin for the quarter was about 16.5%, up about 40 basis points despite the negative mix effect from the North American sales decline and additional investments. Accelerated productivity, strong cost control discipline and currency gains drove the improvement in margins.

Let's go to slide number 12. Let's switch gears to talk about productivity. As you know we have set a long term goal of delivering 5% gross productivity every year. For 2010, our target of 5% total productivity translates into savings of approximately $650 million. In the first quarter we achieved $150 million in savings in line with our expectations which equates to gross productivity of 5.3%.

We are on track to deliver our full year productivity target. We spent 10 $10 million in the first quarter on productivity investments which is how we now go describe the cost associated with restructuring and synergy costs. We are changing our terminology to further emphasize that these cost are part of our online business activities.

Our productivity initiative is expanding to all aspects of our company and we are making it the foundation of our operating culture. Please go to slide number 13, this chart highlights one of our big productivity opportunities and that is to significantly improve our manufacturing overhead costs and to improve capacity utilization.

We have begun significantly improving our capacity utilization and fixed cost structure. This is not a short term program. It will be a center of focus until we drive capacity utilization and into the 60% to 65% range measured on flat volume. We believe that reaching this goal will put us in a position to see capacity utilization in a 75% range as our markets recover to mid-cycle levels.

Manufacturing overhead reduction initiatives will be a key element in our efforts to sustain annual gross productivity improvements of 5% over the next few years as we drive throughout our enterprise goal on achieving 15% operating margins.

Addition to the obvious productivity benefits these initiatives will also allow us to direct more capital in the future innovation and growth opportunities as opposed to production facilities and processes.

So for this year we have announced seven manufacturing plant closures and four product line movements. We spent about $7 million of our productivity investments in the quarter on these programs. Please go to slide number 14, in addition to our productivity programs we continue to sharpen our focus on developing and launching new products and services.

We expect about 18% or $2.5 billion of our 2010 revenues to be from new products and services introduced in the last three years with a number of new offerings in each of our businesses. This is up from approximately $2 billion or 15% of sales in 2009.

We are increasing our 2010 spending in innovation related investments by the equivalent to $0.15 to $0.20 per share over 2009. The slide shows four of the new products we launched in the first quarter just to highlight two of them the R-Series Air Compressor has the best energy efficiency in its class. Lower operating costs, lower sound and similar, smaller footprint.

The Visage club car system is an integrated system that allows the course manager to better regulate play and control where golf cars go resulting in higher revenue and lower cost for the club.

Reinvesting our business is critical to our future growth. We have a growing pipeline of products and service innovations. Many of which is synergistic and combined capabilities across our businesses much of what's in the pipeline is unique thing for Ingersoll-Rand and we will continue to strengthen our market position.

Please go to slide number 15, over the last year we have made substantial progress in de-leveraging the company in the face of very difficult economic conditions. We continue to strengthen our balance sheet in the quarter by paying off $260 million that matured in February. Total financing was reduced by $166 million, we have $70 million of commercial paper outstanding at the end of the March and long term government contract prepayments are classified as debt increased slightly.

Cash balances ended up just shy of $600 million. We have reduced our total financing by about $2.2 billion since the acquisition of the Trane acquisition since the completion of the Trane acquisition in June of 2008. So, we continue to deliver on our de-leveraging plans.

Please go to slide number 16, we finished the first quarter of working capital at 3.5% of sales roughly one third the level of a ago and we are at an unexpectedly high of 9.6%, a $124 million of working capital increase is typical for this time of year as production is ramping to meet seasonally high volumes in the second and third quarters.

We expect to maintain the working capital to sales in the range of 3% to 2% for the full year. Through improvements and have and are continuing to be made in manufacturing systems and processes, footprint restructuring and supply chain and logistics management.

Please go to slide number 17, this chart lays out how we expect to generate available cash flow throughout the year. Although there was a small usage of cash in the first quarter we are ahead of plan due to ongoing working capital management focus.

Based on first quarter performance we are on track to deliver the $1 billion of available cash flow plan for 2010. With that I will turn it back to Mike for the forecast.

Mike Lamach

Thanks Steve and please go to slide 18, our forecast for 2010 is based on mix but improving markets. We continue to expect slow recovery in the U.S. and Europe growth in Asia and mixed activity levels in our major vertical end markets.

A recent order rates indicate that we are seeing signs of recovery in refrigeration, industrial, club car, residential HVAC and security as well as commercial HVAC parts contracting and service.

We also expect to see a continuation of the challenging conditions from the U.S. non-residential construction market for the balance of the year. We are certainly encouraged by our orders in backlog and economy turns can be choppy and so we believe the best approach is to be conservative in our market outlooks and continue to relentlessly focus on achieving our productivity targets offsetting material inflation through higher price utilization and continued investment in our long term growth through innovation.

Please to go slide 19. Based on this mixed but improving view of the world, we are raising the lower end of our revenue range by 1 percentage point, now expect revenues for full year 2000 and will be up 3% to 5% compared with 2009. We expect Industrial to show gains in the mid single digit range and residential to show gains in the upper single digit range. Climate control revenues are expected to be up slightly with declines in HVAC equipment and gains in both refrigeration and contracting parts and service.

Security is expected to show a year-over-year decline due to its exposure of non-residential building, especially in North America. This results in a 3% to 5% full year growth for total Ingersoll-Rand. Second quarter revenues will be bit stronger than we previously expected and we continue working our programs to increase full year revenues above our projected range.

Please go to slide 20. As a result of an improving revenue outlook, we are now projecting full year 2010 EPS from continuing operations including restructuring and $0.12 of one time healthcare tax costs to be $1.88 to $2.23 per share with the lower end up $0.05 from last quarter's guidance.

Including $0.10 of costs associated with discontinued operations, total EPS is projected to $1.78 to $2.13. Additionally our forecast is built following assumption. Our full year forecast assumes 1% price realization year-over-year, a tax rate of about 18%, $0.25 per share of restructuring and productivity investments and EPS based on a 341 million share count.

Second quarter revenues are forecast to be in a range of $3.6 billion to $3.7 billion which is up approximately 3% to 6%, compared to the second quarter of 2009. EPS from continuing operations is expected to be in a range of $0.62 to $0.72 including $0.05 of restructuring and productivity investments.

To sum up the forecast for 2010 we expect 2010 to demonstrate our focus on driving top tier operational performance across each of our businesses while steadily increasing the delivery of customer focused innovation in products, systems, services and business models. We expect to see modest revenue growth and significant earnings growth as we continue to deliver on these objectives.\

And now, Steve and I will be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) We'll take our first question from Eli Lustgarten at Longbow Securities. Please go ahead.

Eli Lustgarten – Longbow Securities

Good morning and I have a clarification on your slides. The revenue forecast that you show on page 19 shows $13.2 billion. And you have a revenue forecast of $13.6 million to $13.8 million and I'm the difference, isn't once without currency or how are we looking at the difference between that?

Mike Lamach

I think if you look at our column, its labeled 2009.

Eli Lustgarten – Longbow Securities

Okay, I'm sorry. Yeah I misread it. I apologize for that. But one clarification that's on the tax rate. You had 19% in the first quarter. You're doing 18% for the year. You think tax rate is going down for the rest of the tax rate for 2011 which is probably, had more interest than most of us in 2010 at this point.

Mike Lamach

Yes, I think that we have a couple of small unfavorable discreet items in the first quarter. The PVT is, as well as it is, even a few bucks causes the rate to do weird things. So that's what happened in the first quarter. We still feel pretty good about 18% for the year.

Eli Lustgarten – Longbow Securities

And what would 2011 looking like?

Mike Lamach

It's kind of drifting more to 22% – 23%.

Eli Lustgarten – Longbow Securities

Okay and can we talk a little bit about the target profitability and profile that we can get from the major climate division at this point? We're down at very low levels. Can we get some idea of what kind of profile we could expect for 2010 and more importantly as you look at 2011, 2012 and how much of the capacity utilization and restructuring all of that is going to be focused on putting all those areas together to...

Mike Lamach

For 2010, we're looking at probably growth 3% to 4% in overall revenues and I would think that's sort of based, we're looking at operating margins probably in the 7.5% to 8% range. For the out years we're really not going to go there but I can tell you that, for each of the business we do continue to on the restructuring programs. Across the company we're really looking to try to get 2 points of net margin improvement over the couple of years, all right next few years.

Eli Lustgarten – Longbow Securities

All right, let me get back in queue. I still have more questions. Thank you.

Operator

We'll take our next question from Jeff Sprague at Vertical Research. Please go ahead.

Jeff Sprague – Vertical Research

Thank you. Good morning. Mike, I wonder if you could spend a little bit more time on what's left to do on cost. I believe Steve said the target is to get to 60% to 65% utilization so you'd be closer to 75% peak volumes. Maybe I didn't make sure I got that right but why wouldn't you want us – footprint the company to be in the 80s at peak utilization.

Mike Lamach

Well, first of all, I said mid cycle Jeff at 75%.

Jeff Sprague – Vertical Research

So, wouldn't you want mid cycle with eight handle on it also?

Mike Lamach

Absolutely, Jeff, we are looking really at this thing over multiple phases over multiple years. The plan that we got laid out here just as Steve had said. We talked a lot about the manufacturing cost structure but we will tell you that, we are looking at the cost structure of the entire company in a similar way. So, again as you look at all of the in terms of productivity as we see it we think about productivity against the fuller cost base of the company and how we are measuring it. So, then again we will see in state to been try to just sequentially march up a couple of points of operating margin each year in a very consistent basis.

Steve Shawley

This capacity utilization discussion is part of the total activity we have going on to drive productivity and really what we are focused on is trying to drive our manufacturing overhead structure down. Okay? We know that footprint activity capacity utilization is a big part of that but also kind of how we are deployed and other areas is part of that as well. We believe that one of the main reasons of putting businesses together like we did was to, to be able to drive not only growth opportunities but to focus on how they would want to organize all the overhead pieces that we need to drive operations. We know there is an opportunity there and the footprint is just part of it.

Jeff Sprague – Vertical Research

So, now, I would say in general the climate margins were lower than most people expect it obviously we are at low seasonal but with Thermo King turning apparently turning so hard in the quarter I would have thought there would be a little bit more of a list there in Thermo King. I guess probably was decent but if you look at the moving pieces underneath climate what really held it back was it Hussmann or was it Commercial Trane or was it something else?

Mike Lamach

One of the toughest environments we got right now is one in the unitary business within the chain side of things and so I think what you are seeing probably as corresponding offset coming in that business. So that continues to be really challenging.

Jeff Sprague – Vertical Research

And then, just finally I guess from me, just thinking about price obviously you are expecting a budgeting 1% for the year I guess the need to actually get that is probably rising as our math's grind their way higher here. Due to have explicit price increase that temps out in the market now, what is the early read on how pricing looks going into the peak season.

Mike Lamach

I will start by saying we have put in place, we have talked about it in the last quarter a very programmatic approach to, if you call it top line margin expansion which is not just pricing but pricing management across the company. Every sector is engaged, every business is engaged we have got demonstration projects set up across the company to do this and so there is a very programmatic approach to what we are taking.

Now, that being said, we have had sectors that have been able to initiate actual price increases under the market place the list prices. So the combination of list price management where we can do that and price management, in areas like sort of rebating gross from that distribution of how we look at discounting across various dealers are all its process and as we said last time a lot of that tends to be back end loaded to the nature of just studying this programs up which is pretty well timed to our expectation for inflation of the back half of the year as well.

Jeff Sprague – Vertical Research

Great. Thanks a lot.

Operator

We will take our next question from David Raso of International Strategy and Investment Group. Please go ahead.

David Raso – International Strategy and Investment Group

Yeah, I am trying to think through the progression here. You have sales growth going from 1% in the first quarter, 4.5% in the second quarter and over 5% in the back half of the year. The margins and I am speaking as restructuring, 4.8%, this quarter you just reported an it gets to your midpoint its 10% the second quarter and you are over 10% in the back half of the year.

Within that what is the progression of the Commercial Trane profitability these are the first quarter, looks like Trane I mean could have lost money in the first quarter. What do you have the business during the rest of the year before asking my question about '11?

Mike Lamach

Going back to climate solutions in the second quarter. Here we are looking for something in the 9% to 10% range and probably volumes in total which are about to 4%. We tend to leverage better in the summer months that's pretty fiscal for us. The applied business which typically kind a type fixed cost is where we are seeing strength as well relative to demand and Steve will give us an indication that sort of 2Q looks like and then if you look at the sequential revenues that we are looking after the back of the year it tends to make sense if you see back ended for our restructuring that we have done begin to kick in and particularly in Q3 and Q4.

David Raso – International Strategy and Investment Group

Obviously I am trying to digest the seasonality issue but when I think about the Delta's '10 and '11 you got the tax rate obviously working against you. What I am trying to think about what kind of pop can we get year-over-year in commercial with the other cyclical businesses continuing to grow because the back half of the year extra chargings [ph] if your margins are over 10%.

In 2011 if we get with commercial less of a drag get a 10% top line and you can run-rate those margins for the full year even digesting the seasonality the first quarter. We are talking about numbers near $3 of earnings for 2011. I'm just trying to get a feel for the delta I can see in commercial loan. Overall would you say the back half run rate and margins of 2010 is something you're looking to target for full year 2011?

Mike Lamach

We look for improved margins in Q3 and Q4 next year relative to this year's Q3 and Q4. I don't think that Q3 and Q4 this year is going to be an anomaly for us. I think it really is the benefit coming home of the restructuring work and the activity we put in to the consolidation of the businesses. So, again looking from [inaudible] improvements.

David Raso – International Strategy and Investment Group

Well, some sense figure that year-over-year deltas price versus cost for 2010, what is the net guidance, price versus cost for 2010?

Mike Lamach

Let me talk to you about the quarter here first. We'd expect price in the quarter continues to be roughly flat. We'd expect inflation to begin to pick up in the quarter but we also expect productivity to be in the 5.5% range in the quarter. For the back of the year, we expect inflation probably will be pretty close to 2.7% through the back of year. Expect productivity to continue, to be in a 5% plus range and price, arguably its back end loaded but that's the way we set up the plans, it\s quite to roughly to a point of total price management. That's how we're looking at the sort of model inside in the company.

David Raso – International Strategy and Investment Group

And quickly on the tax rate, can you help us understand why the big jump?

Steve Shawley

You're talking about those should be…?

David Raso – International Strategy and Investment Group

2010 to 2011. I assume it's with North American profits but just trying to understand being domicile in Ireland, I think through such a jump year-over-year.

Steve Shawley

Yes. We've always said income in the U.S. increases to a day, in fact we had to go up the inter-company loan interest is a fixed deduction every year. So as your income goes up and you clear in essence that deduction, then you're getting hit at the full U.S. That has the tendency to drive the rate up okay?

David Raso – International Strategy and Investment Group

Well the questions, both to you and Steve though is if in 2012, let's say non-res in the U.S is getting better, really showing some significant growth, Thermo King is still strong. U.S housing is up to, call it what you want, a million starts. Does the tax rate go to 25% in 2012?

Steve Shawley

This time the collections has come up for at least the last two years. We expect to see 25% levels at sort of peak cycle performance. So it's not unusual.

David Raso – International Strategy and Investment Group

All right, appreciate it. Thank you.

Operator

We'll take our next question from Nigel Coe at Deutsche Bank. Please go ahead.

Nigel Coe – Deutsche Bank

Good morning. So Mike, you mentioned the weak revenue performance in the quarter and you talked about some timing issues. Can you maybe expand on that and secondly, it looks that you underperformed on the revenue growth in a number of areas. Is there is a concern that the focus on restructuring is causing to particularly go [inaudible] in the market and what gives you confidence of the time issues can be rectified in 2Q in the balance of the year?

Mike Lamach

Yes, I think Nigel that we were disappointed frankly in the revenue for the quarter. It was $100 million less the midpoint and it was frustrating to all of us watching bookings grow, backlogs grow and customer shipment requests and requirements moving past the quarter. So we knew we had the book of business, we knew we had the capacity we were constrained somewhat with what we were able to do with that.

We also saw, what I would classify as the burn rate of our contracting business to be a bit slower than we anticipate at the size of the backlog, sort of the size of the contact and projects are so large now in the backlog that in some cases, customers have to weigh their own schedules to coordinate activity across multiple trades.

So I would tell you that really the bulk of the mess came out of what would be the train commercial business and I would say half related to your contracting and half related to equipment shipments. The plants particularly applied were extremely busy.

We had a record – shipments record bookings actually in China, bookings up over 30%. The factory was really humming there, with chiller productions, those are great sign. But it was certainly a timing issue and as we got through the backlog and got through all the operating reviews this quarter and with the teams we will get clarity about what the nature of the backlog is and we feel about Q2-Q3, sort of seeing that come through.

If you have a focus on productivity, it's something that we just have to do and great companies have got the balance to look at productivity versus innovation and growth and obviously last year I think every company was hyper focused on productivity and getting their variable costs right and reducing their fixed costs. We were no different. That I think had added urgency around debt reduction.

Since we've put a lot of investment and communication around innovation in the marketplace and when most people get out in the marketplace they sense that there is something happening inside these businesses around new product development launches. So there is a lot of momentum with the distribution base, with the employee base and I would even say that the competitors have taken notice of some of the launches in play. So we've got to balance it Nigel and I always would worry that we can't went up too far than the other and then trick for us is going to be to make sure we keep it in perspective.

Nigel there is one other issue that you should consider. I made a comment in the prepared remarks. We really did not see any up lift associated with stocking in our channels, even our Res HVAC business or securities businesses and that's where we lost lot of ground last year with the de-stocking in the first quarter.

So, there is a structural thing going on in here too in addition to what Mike just talked about which, now we believe the end markets as we said in the RES HVAC world we are growing single digits. Okay so we believe that we are seeing the pull through but we expect that to pick up throughout the year. So, that was another structural thing alone in the first quarter.

Mike Lamach

To give you a little more color on that Nigel we saw actually commercial security residential security and residential HVAC actually have lower inventory levels and part of that I give you the good example on the residential HVAC business, our cycle times are five to seven days. Lead times distributors have historically been for us 21 day. So, there hasn't been as much of need for a distributor to take the sack in position that they would have knowing they are going to be filled in a fairly short period of time.

So in some ways, some of the operating improvements of cycle time I think as compounded the fact that you are not seeing that the inventory build back.

Nigel Coe – Deutsche Bank

That's surprising because when you look at the strength of the shipments in December and January. The shipments are up 56% it looked like a lot that was due to channel restocking for residential HVAC. I am a bit surprised that you commented that the channels actually forms in the course of.

Mike Lamach

Yes, the sell-through though Nigel has been like 2%, 3% so stocking to a AHRIs Steve Eric last week at a meeting and you were commenting about the quarter sell through bidding 2%. Those things and some of the other releases yesterday again have trend 2% to 3% of sell through. You see a lot of your 20 key load in, you see some changes where the business model is changed from company owned to distribution and there is sore of kind of folding distribution changing the nature of from the balance sheet to the income statement and I think that caused for quite a few non-lease in the first quarter but the sell through I believe when you check it will be around 2%, 3%.

Nigel Coe – Deutsche Bank

And a quick follow on to that Mike, how is the sell through trended I guess in March and April?

Mike Lamach

Well, March has been the exciting, just a bit more color. The industry is kind of adopted historical practice of doing a place discounts for the seasonal load in. We didn't do that and toward the end of March when it become clearly we weren't going to do that, we got very late orders in March that have continued all the way through till now in April, well distributors realize that they need to carry 21 days of inventory going forward. So, we didn't any specify pricing mechanism this time around and hopefully that will change this ongoing forward. Certainly for us but across the industry as well.

Nigel Coe – Deutsche Bank

Great. Thanks, Mike.

Mike Lamach

Thank you, Nigel.

Operator

And I we will take our next question from Andy Casey at Wells Fargo Securities. Please go ahead.

Andy Casey – Wells Fargo Securities

Good morning, thanks. Just a follow up on timing issues Mike. First in residential HVAC when you are talking about the sell through been 2% to 3% and you had that acceleration in orders march through so far in April, is that the extent of the timing issue that you are talking about or is there something within the Commercial HVAC as well.

Mike Lamach

Well, you got to also remember you got a pretty big element of residential security here that is going to impact our forecast for Q2 and you have got some new products well a lots has been happened in Q2 which help support a bit of our forecast but in terms of the fundamentals industry we believe there is going to be kind of a mid-single digit higher single digit HVAC market they are performing. We are helped by through the residential locking and security portfolio, due launched electronic locks, communicating locks and load-ins from another product we will be introducing in Q2. We will talk about that next quarter that how those maybe deal a little bit better than that.

Steve Shawley

I think, Andy, that area for sure is I commented that our Trane Commercial contracting and service backlog was up 40%. I think Mike mentioned earlier in one of the areas that we were disappointed, was the burn rate of that backlog. So we have a lot of confidence that there is timing issue there because it's in the backlog and we know how those jobs were scheduled out at this point in time. So, that give us a lot of confidence that we will see the type of pick up in revenues in the second and third quarter that we need to see here.

Andy Casey – Wells Fargo Securities

Okay, thanks, Steve. Just on the contracting backlog not to say that it shouldn't have been better in the first quarter but was there any weather impact in the ability to work through that?

Steve Shawley

I didn't hear that; I mean I wasn't wanting the excuse; I think what we really did is we forecasted more of historical burn rate on medium and large size contracts where last year we booked some enormous contracts sort of $50 million individual contracts.

When you look at the burn rates of those contracts they are just slower and part of the exercise in Q1 was going through contract by contract, project by project in getting a real clear picture on that revised burn rate.

Andy Casey – Wells Fargo Securities

Okay so we should expect that better going forward.

Steve Shawley

I think you will see it better forecast from us going forward in that area. Again that's one of the areas we are looking back that's probably one we had some control over and then the guidance we gave.

Andy Casey – Wells Fargo Securities

Okay. So tying all that back to the margin in Climate Solutions, there's a lot going on in the quarter but as you said, you should get better leverage on some of the HVAC products specific stuff, better contract burn, forecast at minimum and then should we expect to see the leverage from Thermo King really start to impact that line Q2 and beyond.

Steve Shawley

The last Q2 was an operating margin of 7.3%. We take on 4% growth and look at the productivity that we've got built into the business and again you look for something around, margin expansions in that business. We think we can keep that up.

Andy Casey – Wells Fargo Securities

Okay, thank you.

Operator

We'll take our next question from Bob Cornell at Barclays Capital. Please go ahead.

Bob Cornell – Barclays Capital

Thanks. Good morning. Hello everyone.

Mike Lamach

Good morning.

Bob Cornell – Barclays Capital

A couple of questions. You put the order growth up 10% but could you structure that in terms of book-to-bill for mainly the orders because they're all over the place. Book-to-bill would help.

Mike Lamach

Yes, we don't have book-to-bill here in front of us.

Bob Cornell – Barclays Capital

Was it over one or below one?

Mike Lamach

Most businesses were over one, well over one in some cases.

Bob Cornell – Barclays Capital

A philosophical question to expand on some of the questions that have been answered already. On this program of capacity optimization, I get the opportunity and the upside but I wonder what's the gating factor in terms of how much is spent. Given the magnitude of the opportunity, you think maybe it'd be spending more now. I see the ramp to $56 million but how do you define that opportunity and the rate of spend versus the size of the opportunity.

Mike Lamach

Financially, Bob, your right. We would love it and get it done it. But it gets down to execution and the ability to really manage the pitching and receiving end of all that we're doing. So what looks like seven closures on the surface is probably more than 35 projects being implemented in the quarter at various levels. So it gets down to really the amount of risk you can take and the movement of the product, the pace of execution across those products and that's the pacing item for us in all companies is protecting the customer and handling it right at both ends.

Bob Cornell – Barclays Capital

I get that. Are you adding to the staff of people that's doing this to build that critical mass?

Mike Lamach

Yes, in fact, if you're out with us Bob and may you'll get a sense for that I think for sure…

Bob Cornell – Barclays Capital

Yeah, we'll be there.

Mike Lamach

...dramatically different organization which is now in place. We got in place since really December being added to with dedicated program and project managers coming from very, very big operational backgrounds, either our company or outside of our company, kind of in a central organization, working with each of the business that helps really keep track of the stuff. So it's been working pretty well.

Part of it is just as we got that team involved literally we were able to pick up a few million dollars in the quarter and just cost reduction moves. So the $14 million under spend there, largely a good portion of that was just due to better execution of the moves we planned.

Bob Cornell – Barclays Capital

Get it. Final question. No one asked this and it's a tough question. On the unitary train business, where do you guys see that business bottoming? That's part one of that question.

Mike Lamach

Well, I think it is sort of in the process of dropping. I'd like to see it through Q3 because before I state beyond that. If you look at our central billings and look at the typical lag you get of 10 to 12 months, particularly on unitary which tends to be a bit more speculative and often in terms of its look, it's spilt by developers and commercial, private construction companies and investors. You love to see that through Q3 before you really call bottom on that? But I think it feels like its dropping.

Bob Cornell – Barclays Capital

And I guess, final question from is, what does the pricing look like in that backlog relative to what the pricing is in shipments and how are you managing that relative to the costs?

Mike Lamach

We try to manage long lead deliveries with escalators that come into play on various commodities if you trigger a point that changes the invoice that applies to the customer. But there is a lag between sort of what's in the backlog and what comes out in the areas of unitary or HVAC for our security business which uses quite a bit of non-ferrous. We're able to price them fairly quickly because the cycle times are much shorter for both projects and orders.

Bob Cornell – Barclays Capital

Okay, thanks very much.

Mike Lamach

Hey, Bob, one of the – to your first question, if it helps okay. Backlog was up about 14% in the first quarter and as the end of December to the end of March. Our backlogs went up 14% and that was over – so that's over 1.0 book-to-bill across all of our businesses.

Bob Cornell – Barclays Capital

Yes, I got the backlog growth. Thanks very much.

Operator

And we'll take our next question from Jeffrey Hammond at KeyBanc Capital Markets. Please go ahead.

Jeffrey Hammond – KeyBanc Capital Markets

Hi, good morning, guys. Hey just to go after the revenue dynamics a little bit differently, so $100 million mentioned in the first quarter, does that all fall into the second quarter and I guess what gives you the confidence in raising your guidance, particularly given that FX seems to be going the other way. Is the missing piece here, orders are surprising you to the upside or just help me through that dynamic.

Mike Lamach

Yes. I'll do the first part and let Steve talk to you a bit more about the currency but a nice surprise in industrial technology to end the quarter. We have bookings up 20%. As we look out in the second quarter we see a similar trend continuing. Climate solutions bookings were up 11%. The nature of the industrial bookings would not lend itself toward all second quarter. It's going to tend to be a larger machine that will pop down Q2, Q3 and Q4. So you'll see that kind of balancing out over maybe three quarters.\

Climate solutions I think it will happen a bit quicker. The areas we saw transport across the world with significant bookings up in the high 30s that tends to be quicker shift perhaps in the quarter. The other big surprise for us was with climate solutions in Asia. We localized chiller production there last year. We have had great success with filling up that capacity and really hitting the market seeing great demand and sell through. That will tend to be Q2 through Q4 much like the big air product will be.

So, I look at it as coming through in Q2. We felt confident enough to take sort of a Q2 guidance up a little bit based on the backlog that certainly is not going to all spill through in Q2.

Steve Shawley

This projection is built on a €135 and actually when we put together the guidance several months ago for the first quarter in the year at that point in time we were looking at about a 140, 141. So, we got the FX built in.

Jeffrey Hammond – KeyBanc Capital Markets

So, how much revenue did you lose on FX either percentage or absolute basis as you swing the FX.

Steve Shawley

I will give you a rough number. Jeff, it was $11 billion in the past quarter.

Mike Lamach

Are you talking for the year or the quarter, Jeff?

Jeffrey Hammond – KeyBanc Capital Markets

For the year?

Mike Lamach

Let me give you.

Jeffrey Hammond – KeyBanc Capital Markets

And then, why are you looking for that, just can you comment on stimulus you didn't mention it all I think one of your competitors out today kind of saying hey it's starting to come through.

Mike Lamach

Yeah, Jeff, we are booking business it got to the point where it seemed like there is a big hype built on it. People talked about it, didn't see it come through. It's coming through some of the $80 million a quarter type numbers. I think if we did something in the neighborhood of $150 million during the fourth quarter last year. Yes it is but it's not such a meaningful deal here that I can't tie that to flight orders or actually up. I think it's being tied more towards, there was such a downturn in deferred spending and deferred capital in 2008. I think frankly a lot of our customers had reduced fresh budgets and significant needs and some of the most energy efficient critical equipment in their facilities had to be upgraded and I think that's got more to do with the thing that was tied to stimulus.

Jeffrey Hammond – KeyBanc Capital Markets

When is your fair share on the stimulus?

Mike Lamach

In China, I mean I would say probably well more than our fair share presence so that's been a good time but to U.S. is not something that's passing in our reviews, its being some sort of a windfall or accounting on a so significant way.

Jeffrey Hammond – KeyBanc Capital Markets

Okay. Thanks, guys.

Mike Lamach

Hey, Jeff, on your other question, it's about the impact of the currency is about $10 million unfavorable between previous guidance and current.

Jeffrey Hammond – KeyBanc Capital Markets

Thanks.

Operator

We will take our next question from Steve Tusa at JPMorgan. Please go ahead.

Steve Tusa – JP Morgan

Hi good morning.

Mike Lamach

Good morning.

Steve Tusa – JP Morgan

Just wanted to dig into this climate margin a little bit more. I think your guidance was for 3% to 5% for the quarter and I am not sure for how much of a surprise it was that unitary was down I mean is that basically what you are saying that unitary was even weaker than you were expecting at the beginning of the quarter?

Mike Lamach

I would say from the guidance we gave you Steve, if you looked at the $100 billion missed at the midpoint more than a 100 of it would have come from the TCS organization and that is going to be levered at very substantial rate. So, that will give you a little bit of insight that the whole math could be explained right there.

Steve Tusa – JP Morgan

Got you. When would the applied orders up 3%, what were they in China again and what were they in North America?

Mike Lamach

I can give you sort of orders looking at China would have been up north of 30%, okay? And that's largely going to be applied; the unitary business there is fairly small.

Steve Tusa – JP Morgan

So then, the applied orders in the U.S. were still – where they down more than your sales?

Mike Lamach

No, actually applied orders in the U.S. were up slightly.

Steve Tusa – JP Morgan

Were up slightly, okay. So, at what point does the applied business go positive Americas on RES, is that third to fourth quarter. I am sure your lead times are relatively short right now maybe depending on project timing they are little longer but when does that actually go positive?

Mike Lamach

Bruce, any idea? You get that.

Bruce Fisher

Yeah, I have to check I don't have this by quarter it's based on the orders that we are seeing it's, we will check on it. I will get back to you.

Steve Tusa – JP Morgan

And outside of Thermo King is that your highest leveraged business, does the revenues comeback?

Mike Lamach

It's a high leveraged business I wouldn't say it's the highest I mean security technology is going to be very high.

Steve Tusa – JP Morgan

I just meant, I guess, was in the climate.

Mike Lamach

Yes, you are right there.

Steve Tusa – JP Morgan

Okay. When we look at the earnings bridge that you guys gave us last quarter, can you just maybe walk through a couple of those parts and especially the inflation, the $1 to a $1.10 of inflation head when you are planning for on the fourth quarter report? How has that changed?

Steve Shawley

It hasn't changed a lot in fact we kind of keep hovering around about the same number when you take a look it, are you talking about the 12 year Steve?

Steve Tusa – JP Morgan

Yeah, just 12 year – the slide 23 from last quarter's report.

Steve Shawley

I would say that we are still seeing pressures from metals like everybody at this point in time but within a bandwidth of some of the guidance I gave last time.

Steve Tusa – JP Morgan

Okay. So there's no real change as to any of those moving parts, maybe a little bit in currency, a little bit on investments, tax a little more of a headwind but everything else pretty much the same?

Steve Shawley

Yes, that's a pretty good assessment.

Mike Lamach

I think inflation was lighter than we thought in the first quarter and its going to come back I think at the back half of the year. So we probably over-clubbed it in quarter one and I think we got it for the full year is pretty close to what we had when we gave guidance.

Steve Tusa – JP Morgan

Okay, and then one more question just on the resi HVAC markets. Clearly, you guys didn't stock and you said April started relatively well and you actually bumped up your growth forecast to high single digits – from mid to high single digits. Is that just what you're seeing in early April? I mean, do you see any kind of a change in behavior at the consumer? I mean, there's a lot of debate around what's driving all this volatility. Maybe if you could just comment on the sustainability of what we're seeing here in April?

Mike Lamach

Well, yes, we talked about security, the res solutions business. Again I want to make sure you guys realize that the security business had a pretty big impact in that. We're starting to see big swings at builder and big box as well as new product launches around electronics and that is another major factor for us in total. So that's what's actually probably pulling up the total more than the HVAC number being higher than the industry.

Steve Tusa – JP Morgan

Okay, thanks.

Mike Lamach

Thanks.

Operator

We'll take our next question from Mark Koznarek at Cleveland Research. Please go ahead.

Mark Koznarek – Cleveland Research

Hi, good morning.

Mike Lamach

Hey, Mark.

Mark Koznarek – Cleveland Research

A few comments on margin expectations have been tossed out there. I'm wondering if you could just step through the segments just to make sure that we've got them along the lines of the review that you gave last conference call.

Mike Lamach

Sure, Mark. You want it for Q2, for full year?

Mark Koznarek – Cleveland Research

Yes, both please.

Mike Lamach

Yes, I'd say climate operating margins Q2 are probably down to 9% – 9% full year, 7.5% to 8%. Industrial Q2 margins are probably 11% to 11.5%, full year probably 10.5% to 11%. Res margins are – they're probably going to be 9% – 9.5% in Q2 and probably around 9.5% for the full year. Security, pretty stable with margins in the quarter of roughly 20% for Q2 and for the year roughly 20%.

Mark Koznarek – Cleveland Research

Okay. Looks like you cut back a little bit on the top end of the climate margin guidance and then boosted security. Yet there doesn't seem to be much revenue change, a little bit in security but not much in climate. So what is that? Is it more productivity is it better pricing on the securities side and then the other end of that, the apparent modest revision down on the climate side, is that cost or price or what are those?

Mike Lamach

If you look at anything Mark, kind of cut quarter-to-quarter like this, it's changing mixes in the business. The Asia business spiking as fast as it did relative to U.S. business, changes in mix would have been a bit of a surprise for us. Probably, if you look at commodity cost coming back in and longer lead pricing that we've done with the backlog, that's the one area that you're going to get caught, sort of upside down for a period of time.

It's going to tend to be on the climate side, particularly in the applied side. So that's a subtle reasons for that but nothing sort of fundamental and structural about any major disappointments that we're seeing. Security has done some recent things around pricing, put in place a price increase that will take us back to the second quarter, pretty typical there for them to do that and they've had some favorability in steel prices for the first quarter, pretty aggressive on the top line margin expansion programs, probably more confident in security getting to the top end of the ranges. In tough markets security technology typically has had pretty high margins and they kind of buckle it down, tighten it up and that's what's we're seeing here.

Mark Koznarek – Cleveland Research

Just a clarification, Mike, on that climate applied comment, with regard to it. It sounded like you were saying, price might lag cost but I was under the impression on the applied side since there really isn't a price list every project has to be specked and negotiated individually. I thought you could respond to price – respond to raw material signals right away in that business, unlike, say, the residential part of HVAC.

Mike Lamach

Yes, Mark, we're going to write a spec on that business, we're going to give a budget quote, we're going to give a quote and the shipment of the product could be anywhere from three months to a year. And so you run the potential – unless you can index some of your costs to metals in the contact, you're going to run a risk that on some you're not going to be able to recover a upside down situation. The flipside of that, if you see it the other way, you're probably going to make a little bit of an extra margin to go the other way.

Mark Koznarek – Cleveland Research

Okay. Thanks. Finally, just a quick one for Steve. You mentioned that the change in FX for the revenue for the year but can you just clarify what was the assumption or what currently is the FX assumption in the 3% to 5% revenue, how much of that is currency and what was it before?

Steve Shawley

In our previous guidance and the euro is the impact of our revenue, okay? So as the euro goes, goes our revenue got calculations. So, in our original guidance we read about a buck 41 and our current projection, our current forecast is based on a buck 35 that's about a 3.6% delta.

Mark Koznarek – Cleveland Research

Okay, got that part. But, I am just wondering of the three to 3% to 5% revenue growth now expected for this year. How much of that is expected to be contribution from currency?

Steve Shawley

Well, in our previous report, there is about a two point impact and it is probably somewhere in the same range.

Mike Lamach

It's going to be decreasing because of the $1 situation currently.

Mark Koznarek – Cleveland Research

So maybe it's a point or point and half now? Something like that, would that be reasonable?

Steve Shawley

It's slipping because of what's happening a lot is described with the euro.

Mark Koznarek – Cleveland Research

Yeah, so currency now will contribute less more like a point and point and half?

Steve Shawley

Yes, slightly there.

Mark Koznarek – Cleveland Research

Okay, so your core revenues are actually improving more than your guidance, than your actual….

Steve Shawley

Yeah, you can make that conclusion.

Mark Koznarek – Cleveland Research

Yeah, that's what I am trying to dive in.

Steve Shawley

Yeah, you can get there.

Mark Koznarek – Cleveland Research

So, it's actually up like a point more than you're stating here in the way you guys state your guidance. Your cores are actually up perhaps half a point or a point.

Steve Shawley

I will give you half points.

Mark Koznarek – Cleveland Research

Half; I am sorry; was that a half?

Steve Shawley

Yeah I will give you half a point I said.

Mark Koznarek – Cleveland Research

Okay, great. Thank you.

Operator

We will take our next question from Robert McCarthy at Robert W. Baird. Please go ahead.

Robert McCarthy – Robert W. Baird

Morning, gentlemen.

Mike Lamach

Robert, morning.

Robert McCarthy – Robert W. Baird

I wanted to follow-up on the statistics that you have on revenues from products and services and introduced in the last three years, 18% in 2011 is your target. What would that be if we were talking about products only?

Mike Lamach

I can't give it to you off my head; we look at it collectively. We try to get everybody in the game run innovation So, I would probably tell you that it would be higher to proportion these products because all what worth we did in the Trane portfolio of last year and this year. We have also got a ton of it happening in the ITS business well the compressor renewals and platforms and tools that they are doing. So, my best guess it might be 80% product related.

Robert McCarthy – Robert W. Baird

Okay so if that's the case as we proceed into cyclical recovery does that mean that – because the products will grow faster than service all else equal than this number should also continue to grow as it did this past year from 15 to 18.

Mike Lamach

It's interesting too Robert. If you think about Visage we have put on a golf car business it before it didn't have a recurring revenue stream. Now we put something across management system on a car, sell it to a club and have a monthly lease fee associated with it, is it a service, is it a product I am not sure. Okay I have to go back and think about some of the works. I then you tend to see more systems development than you will products or services where the complete system above. I will have to think about your question and probably next time I see you kind of give you better answer to that.

Robert McCarthy – Robert W. Baird

Maybe you will need a third category. Well do you think about this aggregate number as something that you have a target for?

Mike Lamach

Absolutely. I mean, we are driving a hell out of this, I would like to see this getting to 25% in three years I mean we have had that goal saved internally. This gets to Nigel's question are you balancing productivity and growth. The answer is it's a high speed both ways, both gears trying to push hard as we can in the way we are measuring this up and investments and also penetration. We have follow a program launch even after its launch to see did we get the penetration we thought, did we get the margin we thought we would get so. There is rigger inside the company around there is much like you would see through productivity.

Robert McCarthy – Robert W. Baird

Thank you, that's helpful. And then, the other thing I want to ask about is not beat it dead for us and I have realized we have covered a lot of the ground related to Trane Commercial. I wanted to try and distillate it in a different way, bookings up 4% in climate solutions in the first quarter. Total year forecast of 2 to 4, so expect the comparison at TCS to get worse as we proceed through the year offsetting strong comps in the other business as we proceed or are we just saying that we don't have a lot of conviction that a positive bookings comparison could be sustain period.

Mike Lamach

Well, lot to questions, the way to answer that climate solutions was up 11% in terms of what gains. Largely we see the second quarter following a similar trend. In my view you would see the training organization probably picking up booking steam throughout the year as opposed to losing booking steam throughout the year but there is some truth in what you said I do think there is some challenging areas of the business and in particularly in unit areas I can back to that and say I would early want to early [inaudible] more than I have already until we see really the third quarter.

Robert McCarthy – Robert W. Baird

Which is another way of – we've talked in the past about this idea of having a cushion in your forecast or I don't remember the term that has been used but, is in a sense that's what we are doing here? We're sort of intentionally undershooting what current fundamentals say it could be because we're concerned about the direction of unitary?

Mike Lamach

Fundamentally, I'm just trying to give you guidance with the range that's going to embed risk on one end and potential upside on the other but what we're attempting to do here and perhaps we're going to get better at this is really staring into the guidance that we've got for these businesses. So the guidance we're laying out there for Q2 would have the Climate Solutions business at mid-point growing at about 4%. We've been looking for about 200 basis points of margin expansion. That's how we see it. Really not trying to be too conservative or too optimistic. We're trying to be realistic here.

Robert McCarthy – Robert W. Baird

And you've been very transparent. So thank you for that.

Mike Lamach

Thank you.

Operator

We'll take our next question from Scott Gaffner at Barclays Capital. Please go ahead.

Scott Gaffner – Barclays Capital

Good morning, gentlemen.

Mike Lamach

Good morning.

Scott Gaffner – Barclays Capital

Most of my questions have been answered but sort of wanted to hit on the R-22 to 410A conversion. I know you guys didn't participate in the quarter on the conversion there because you probably rolled your lines sooner than everybody else but you think R-22 is basically through the channel now and you start to grow back in line with the market or is there still some R-22 to be sold out there?

Steve Shawley

Well, I hear there might be as many as 160,000 units that are in the channel. So that's going to take a while to come through and I would imagine it will be bleeding out of the system through June, which June, July even through the season.

Scott Gaffner – Barclays Capital

And what sort of traction do you think you're getting on the new 410A units you've got out there?

Steve Shawley

I think where we targeted the refreshes we've targeted the investment around tier levels. We've seen share pick up. We've seen good margin performance, in the areas where the product is older and dated, where we've got product launching this summer and fall, yes, it's a little bit tougher and it's been a bit more competitive from a pricing perspective but all in all its behaving about the way you expect with the exception of a lot more 22 being stuffed than you would have originally thought.

Scott Gaffner – Barclays Capital

Okay. And then at Hussmann, anything on the competitive dynamics there? Are you continuing to take market share or did it become a little bit more competitive in the first quarter?

Mike Lamach

No, we believe we continue to take some share. The uptick at Hussmann is really focused on some of the large national accounts that are going through significant remodeling activity and the business is flowing through as we expected and not really any concerns there.

Scott Gaffner – Barclays Capital

And then, just one last question on the bookings and on the sequential trend, 9.7% and then 13% in March. Is that basically across all the segments? Are there any segments where you saw anything that was abnormal versus that kind of trend?

Steve Shawley

We saw really good trends across all of the businesses but clearly a big difference between security technologies which would have had bookings in the quarter of one point versus Industrial where you'd have seen 20 points of bookings growth. So good sequential pickup cost but varying widely between where they are in the cycle.

Scott Gaffner – Barclays Capital

Sounds good.

Mike Lamach

I would just add that we believe that looking at the industrial orders, if there was any upside in terms of our expectations, it was there. So that was all pretty good.

Scott Gaffner – Barclays Capital

All right, we'll see you in Davidson.

Mike Lamach

Thanks Scott. I think we probably have time for one more question Anthony.

Operator

And we'll take that question from Marty Pollack at NWQ Investment Management. Please go ahead.

Marty Pollack – NWQ Investment Management

Yes, just wondered if we can link Q1 to Q2. You're certainly suggesting revenues up, I think it was $650 million to $700 million range and at the same time you also responded Koznarek's margin questions about Q2. When you back into sort of that – try to back into that second quarter guidance, what are you seeing as an incremental margin because essentially that's going to be a big driver continuously for the story. Just wondering what that number would that suggest to get to your guidance of 62 to 72? Do we see that in incremental margin pickup overall?

Steve Shawley

Yes, Marty. If you look at just the math at the operating income level, roughly $700 million of additional revenue had about a 32% leverage okay. So it's very much within our targeted leverage, incremental leverage performance that we're looking for.

Marty Pollack – NWQ Investment Management

And that would be, would you see that incremental leverage continue at sort of that 30% rate or do we see even further acceleration to third quarter? I think third quarter is also strong usually and fourth quarter maybe backs off a bit.

Steve Shawley

Yes, I would say the leverage in the third quarter will be stronger and Mike alluded to that earlier because that's usually when our service businesses are most active and you see good margins out of there. So it's slightly stronger but not outlandish. So…

Marty Pollack – NWQ Investment Management

Okay, thanks so much.

Mike Lamach

Thanks.

Bruce Fisher

Okay, well, thanks everyone. We appreciate you joining the call. As was mentioned I would just like to remind you that we have our investor and analyst day on May 12th. We certainly hope that you'll join us either in person or via webcast and we thank you for joining us today. Thanks very much.

Operator

This concludes today's presentation we thank everyone for their participation.

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Source: Ingersoll-Rand PLC Q1 2010 Earnings Call Transcript
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