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Executives

Joseph Fimbianti - Director, IR

Herbert L. Henkel - Chairman, President and CEO

James V. Gelly - Sr. VP and CFO

Analysts

Ann Duignan - Bear Stearns

Alexander Blanton - Ingalls & Snyder

Andrew Obin - Merrill Lynch

Joel Tiss - Lehman Brothers

Terry Darling - Goldman Sachs

Nigel Coe - Deutsche Bank

Eli Lustgarten - Longbow Research

David Raso - Citigroup

Robert Mccarthy - Robert W. Baird

Mark Koznarek - Cleveland Research

Ingersoll Rand Company Limited (IR) Q4 FY07 Earnings Call February 14, 2008 10:00 AM ET

Operator

Good day, everyone, and welcome to the Ingersoll-Rand Fourth Quarter 2007 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like the turn the call over to the Director of Investor Relations, Mr. Joseph Fimbianti. Please go ahead, sir.

Joseph Fimbianti - Director, Investor Relations

Thank you, Rimi. Good morning. This is Joe Fimbianti, Director of Investor Relations for Ingersoll-Rand. Welcome to our fourth quarter 2007 conference call. We released earnings at 7 a.m. this morning and the release is posted on our website.

I would like to cover some of the usual housekeeping items before we begin. This morning, concurrent with our normal phone-in conference call, we'll be broadcasting the call over our public website. There you will also find the slide presentations for the call. To participate via the web go to www.ingersollrand.com and click on the yellow icon on the home page. Both the call and the presentation will be archived on our website and will be available tomorrow morning at 10 a.m.

Now, if you’d please go to slide number two, before we begin I’d like to remind everyone that there will be forward-looking discussion this morning, which is covered by our Safe Harbor statement. Please refer to our December 31, 2006 Form 10-K for the details on the factors that may influence results. In addition, please be aware that some of the subject matter discussed in the following presentation will be addressed in our proxy statement prospectus to be filed with the SEC relating to the acquisition of Trane Company.

Now, I’d like to introduce the participants in this morning's call. We have Herb Henkel, Chairman, President and CEO of Ingersoll-Rand; James Gelly, our Senior Vice President and Chief Financial Officer; and Rich Randall, our Vice President and Controller. We will start with the formal presentations by Herb Henkel and James Gelly to be followed by the customary question-and-answer session.

Herb will start this morning, so if you would please go to slide number three. Herb?

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

Thank you, Joe, and good morning, and thanks to everyone who dialed into this morning's call. By any standard, 2007 was a transformational year for Ingersoll-Rand. During the year, we divested our Road Development, Bobcat, Utility Equipment, and Attachments businesses for a combined $6.2 billion in gross proceeds. And then in December, we announced a definitive agreement to acquire Trane, a global leader in indoor climate control services and solutions, for about $9.5 billion.

In so many words, this year marks the substantial completion of an eight-year transformation of our portfolio from deep cyclical to Class A diversified industrial company. The new Ingersoll-Rand portfolio will have scale, global reach, diversification, inherent growth potential, and the potential for significantly higher margins and returns. As we execute on the potential of this new company, investors will experience consistently rising EPS and cash flow with the potential for significant upward revaluation.

In a minute, we will take you through the details of our fourth-quarter and full-year 2007 results. The key message today is we maintained operational focus and discipline while executing what has been the most fundamental portfolio transformation in the company's long history.

For the year, revenue increased 9% and we had solid growth in all of our major businesses, despite soft North American residential construction and heavy truck markets. Despite many one-time items, the fourth quarter result capped an excellent year in which we made significant progress in many areas. Full-year EPS from continuing operations was $2.48. Total EPS excluding one-time gains and charges was $3.33, up 4% despite a significantly higher tax rate. Available cash flow was $714 million, even after a prior-period tax payment of $217 million. Excluding this tax payment, we comfortably met our targeted 90% conversion rate.

Now, let me turn it over to James who will take you through the fourth quarter and full-year performance. James?

James V. Gelly - Senior Vice President and Chief Financial Officer

Thanks, Herb. If you’d please go to slide number four, the slide gives you a quick summary of revenue and operating margin for the fourth quarter. As you can see on the upper right, sales were $2.3 billion, up 8.4%. Looking at the lower right, operating margin was 12.9%, effectively flat versus last year's 13%. Please note that this quarter's results included $12.9 million in restructuring charges. Excluding these charges, margins would have been 13.4%. I'm going to come back to the topic of margins and operating leverage in much greater detail shortly.

Let me now go to the slide entitled fourth quarter revenue growth. As you can see on the upper right, currency neutral growth within the quarter was 4%, with about 4 points coming from the impact of a weaker U.S. dollar. Looking at the upper left, all three operating segments delivered solid revenue growth and we continue to see good momentum in our key end-markets apart from the North American residential building and transport refrigeration markets, both of which I'll discuss in more detail. Climate control was up 6%, while industrial and security were both up double-digits. Organic growth for industrial was 9% with a small amount of acquisition-driven growth.

Looking at the lower left, you can see growth rates by region. We continued to benefit from global diversification with about 6 percentage points of topline growth coming from outside the Americas. We saw 4% domestic growth in the quarter with an average of 16% growth outside North America. Results were strong in Asia and Europe across all reporting segments. Revenues in the Americas were up 4% despite residential construction and transport refrigeration markets, which… both experienced double-digit year-over-year declines. Latin American sales were up over 20%.

Go to the next slide entitled to 2007 revenue growth, which provides a look at our segment growth rate during the four quarters of 2007. All three operating segments delivered consistent year-over-year revenue growth throughout the year with Industrial and Security delivering double-digit growth in nearly every quarter.

Let's move now to the income statement, slide number seven, entitled fourth quarter 2007 results. Skipping right to the second row, operating income, which was $298.8 million, up 7% year-over-year. As I said, this included about $13 million in restructuring charges. Moving down the page, other income for the quarter was $15 million, up about $20 million compared with 2006. This increase was [ph] effectively higher interest income on our large post-divestiture cash balances. We ended the year with about $4.7 billion in cash.

Let's move right to the tax line, which is an expense of $106.4 million, up significantly from last year's $28.1 million. As you can calculate for yourselves, the effective tax rate in the quarter was 38.4% versus last year's 11.8%. The fourth quarter rate obviously reflects some significant non-recurring tax charges taken in the quarter. As you'll see in a minute, these charges drove the full-year effective tax rate to 21.8%, considerably higher than our prior guidance.

There are a couple of key elements in this quarters tax charge. The first relates to a downward revaluation of tax assets, now that we've sold off a big chunk of Bobcat and Road income. In so many words, we found that our post-divestiture business mix and cash flows in the future are such that it will be less likely to realize the future benefits of things like foreign tax credits and net operating losses. The second piece relates to a more pessimistic judgment on our part about some tax liabilities that date back to the late 1990s. Based upon information received in the quarter, we increased our existing reserves for tax penalties and interest related to the 1998 to 2000 tax years. This is essentially the same matter that let us to make $217 million cash deposits with the IRS in August of 2007. So taken together, the combined impact of the fourth quarter tax charges is an unfavorable $50 million or $0.18 hit to earnings from continuing operations. Adding back these one-time items and the $0.03 of restructuring, we think the representative continuing ops earnings power for the company is closer to $0.82 per share rather than the $0.61 reported this quarter.

Moving on and looking at the next couple of rows, at discontinued ops, you can see a loss of $237.1 million and a separate gain of about $2.58 billion. In EPS terms, this breaks down to a discontinued operation loss of about $0.85 a share and a $9.30 gain. The $9.30 gain is the after-tax gain on the Bobcat divestiture. The loss of $0.85 is the net of two things; first, $1 non-cash charge for future asbestos claims, which I'll cover in more detail in just a minute; and a positive $0.15 of earnings from discontinued businesses. Finally, looking at the bottom line, reported net earnings for the fourth quarter from total ops were $2.5 billion or $9.06 a share.

With that out of the way, let me now turn to a review of our reporting segments. If you please go to slide number eight, which discusses Climate Control, sales on the fourth quarter were $915 million, up 6%. For the total Thermo King transport business, revenue increased by 9%. Declines in North America were offset by strong growth in overseas markets, especially Europe and Latin America.

Looking at just Truck & Trailer, revenues worldwide expanded by approximately 6%. North American shipments have been weak for much of the year, as you know, due to declining truck ton-miles and lower freight rates.

Looking at the North American refrigerated trailer industry as a whole, fourth quarter shipments were down approximately 35%. For the full year, industry shipments were down approximately 15% to about 32,000 units. It's interesting to note that for the quarter and the year, our European trailer revenues exceeded our North American trailer sale. European trailer volumes were up 24% in the fourth quarter and up over 35% for the full year. Worldwide bus and sea-going container sales also expanded nicely in the quarter. Looking at stationary refrigeration, this business was up 3% in the quarter. This time, growth in the Americas, especially in services and installation, more than offset lower sales volumes in Europe.

Climate’s reported operating margin of 12.4% in the quarter, up 140 basis points versus last year. This business generated some impressive leverage in the quarter. Margin expansion was driven by volume and price, but also by operational improvements, which together more than offset inflation, unfavorable mix, and $8 million in restructuring costs. The management of this segment has made a lot of fundamental improvement including a proactive approach to cost reduction in the face of sharply lower U.S. volumes. We also continue to execute restructuring initiatives globally, which will drive margin expansion in future periods.

Let's go now to slide nine, which discusses Industrial Technologies. Fourth quarter revenues were $758 million, up 10% versus the year-ago quarter. As I said earlier, minus acquisitions, growth was 9%. Air Solution's revenue grew by 12%, that’s 11% organically, as favorable overseas industrial markets combined with new product introductions drove higher revenues. Recurring revenue increased 10% versus prior-year.

Productivity Solutions delivered 6% growth, as international growth in material handling and industrial offset challenging domestic markets, primarily in tool. Club Car revenues grew 7% over last year. The increase was attributable to higher sales of utility and 4x4 vehicles, higher aftermarket sales, and continued market share gains, and an otherwise lackluster golf market.

Segment operating income was $97.7 million, representing an operating margin of 12.9%, down 80 basis points from 13.7% in 2006. Favorable price and productivity were more than offset in the quarter by the unfavorable favorable impact of inflation, mix, and investment costs.

Let's go to slide 10 to look at Security Technologies. Revenues were $650 million, up 11% compared with last year. Commercial revenues were up 7%, driven by worldwide commercial construction, especially schools, universities, and healthcare facilities. Revenues from the electronic access-control products were up 21%. North American sales in the residential segment increased a very impressive 14% in view of the precipitous decline in domestic residential activity. This was accomplished through recent pricing actions, market share gains at Big Box customers and in the new homebuilder channels. We also saw strong sales of newly introduced residential electronic products, which helped drive these impressive results.

Operating income was $121.7 million or an operating margin of 18.7%, down a 130 basis points from last year's very strong 20% margin. About half of this decline was due to $4 million in restructuring charges. Other than that, unfavorable product and geographic mix, inflation, and growth investments more than offset price and productivity.

Let's go to the next slide entitled fourth quarter EPS, which is intended to present in cartoon... simple cartoon form all the moving pieces we've discussed so far. Starting on the left, EPS from continuing operations was $0.61. Adding back the $0.18 hit related to tax charges and $0.03 of restructuring charges taken in the quarter, brings you to the normalized continuing ops earnings power in the quarter, about $0.82 a share.

Next on the right, you can see the earnings from discontinued ops excluding the divestiture gains and asbestos charge, which was $0.15 per share. Adding up these three pieces brings you to $0.97, which is in line with our prior guidance. Moving to the right, you can see the negative $1.00 impact on discontinued operations from the $277 million after-tax charge take into cover expected future asbestos costs. For the record, reported EPS excluding the divestiture gain was a loss of $0.24. And finally on the right, we recognized a book gain of $9.30 on the Bobcat utility and Attachments business, leading to the EPS of $9.06 a share.

Before we move onto the full year, let me take a minute to remind you of the fourth quarter charge we recorded for future asbestos claim, that's chart 12. As I just said, we took a $277 million non-cash charge in the quarter, which represents our projected liability for all pending and estimated future asbestos claims going out the next 45 years through the year 2053.

Historically, we had recorded a liability for anticipated settlement costs projected seven years into the future because we were unable to make reasonable estimates beyond that period of time. But in the fourth quarter, we conducted an exhaustive review of our historical asbestos-related litigation. This involved looking at litigation developments, trends, in terms of claims, mix, and judicial treatment, and now our extensive cumulative experience and resolution of asbestos claims. Based upon this review, we determined that we could in fact make a reasonable estimate of the total liability for all pending and future claims. We estimated the incremental net liability at $277 million after tax, almost exactly $1 per share, and recorded the liability in the quarter.

Let's go now to the full-year 2007, which is slide 13. Revenues were up 9.1% for the quarter, with double-digit growth in Industrial and Security. For the full year, our non-North American revenues were up 18% versus 4% in North America. Operating margins for the year were 12.1%, down 30 basis points from last year. Excluding restructuring of $28.7 million pre-tax, margins were roughly flat year-over-year.

Let's go to the full-year income statements shown on slide 14. Moving directly to line two, operating income for the year was $1.58 billion, up 6% year-over-year. Excluding restructuring, operating income was up 9%. Hitting the high spots, other income increased $23 million year-over-year, primarily due to lower foreign exchange losses and higher interest income from increased cash balances. The tax rate we've already talked about was 21.8%, up from 10.8% last year. Continuing earnings per share increased by approximately 5% to $2.48.

I've just given you a lot of information about operating leverage. So let me take it one step further on slide 15. In so many words, Ingersoll-Rand did not produce any operating leverage during 2007. Excluding restructuring, operating income grew at fundamentally the same rate as revenue, about 9%. Starting on the left, you can see 2006 operating income of $998 million or a 12.4% margin. Moving to the right, you can see the impact of revenue growth, which is primarily price realization, and a small benefit from foreign currency. During 2007, the impact of 3.5% cost inflation across the company's $7 billion cost structure represented about $250 million of unfavorability and is shown in red. We also made investments for restructuring and growth of $50 million to $60 million during the year. Our 2007 cost productivity was about 3%, not enough to offset inflation and investment spending.

In summary, the low leverage on incremental volume for the quarter and the year was the result of heavy inflationary pressure and discretionary investments, which together outweighed our cost productivity. A key element of cost inflation was of course material spend, which continued to be a drag on profitability as late as the fourth quarter.

Let me now turn to cash flow, shown on slide 16. Our full-year 2007 cash generation was $714 million, which included a $217 million tax deposit related to the 1998 to 2000 tax audit period. As you can see, the company is capable of strong cash generation. Excluding the tax deposit, which relates to prior periods, cash flow exceeded 90% of net earnings in 2007, mainly due to some improved working capital management.

In fact, let's go to the next slide to look at some balance sheet metrics. As you can see, we made some improvements in working capital management, especially inventory. Inventory improved by half a turn from 6.1 turns to 6.6 turns. Receivable days improved slightly by half a day, and taken together these working capital elements help to offset the impact of higher sales on the balance sheet. Capital spending in the quarter was $33 million, about 1.5% of revenue, while depreciation and amortization were $40 million. The biggest change on the page was clearly our cash and debt position, which went from a net debt position last year of $1.6 billion to a net cash position this year of $3.3 billion, a favorable swing of $4.9 billion.

With that out of the way, let me turn the proceedings back over to Herb.

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

Thanks, James. Please go to slide number 18. By any standard, one of the key transformational steps of the past decade has been the recently announced acquisition of Trane. Since we have many new and prospective investors on this call, I wanted to take a few minutes to step back and to discuss Ingersoll-Rand's portfolio transformation in more detail. For those of you who have followed Ingersoll-Rand over the years, it should be clear that this is just another step in the strategy we laid out back in 2000.

In the last eight years, we have significantly reshaped our portfolio by selling off slow growth or deep cyclical businesses and by reinvesting in targeted growth platforms. We had primarily focused on bolt-on acquisitions, making more than 60 of them since 2000. These have strengthened our three segments, Climate Control, Industrial Technologies, and Security Technologies. Now please go to slide number 19.

The acquisition of Trane is a major step in our transformation strategy. Trane plus Ingersoll-Rand trades a leading diversified industrial company. As a result, the combination gives you a company with stronger growth, better earnings consistency, and much better critical mass around the world. Please go to slide number 20.

I'm sure you recall that Trane was part of American Standard, which went through a lot of significant portfolio reshaping of its own over the past year. This was the opportune time to complete this transaction. As you'll see, there is a powerful industrial logic inside this deal. From every perspective, customer, employee, and shareowner, this deal creates a lot of value. You combine premium brands, a broad customer base, a huge installed base, which drives future demand, and a big proportion of parts and service revenues. All of this adds up to a very diverse revenue base with very limited exposure to new U.S. housing starts. It also has very broad geographical coverage, and that means especially strong growth potential in emerging markets. Additionally, with 60% of Trane's commercial revenues coming from replacement and 80% of residential coming from replacement demand, it delivered consistent earnings over time.

Probably the most valuable part of Trane's business model is the distribution network, not just excellent product technology and engineering depth, Trane has cultivated and invested in what is without a doubt the leading distribution network in the world. Now please go to slide or 21.

Trane is present in over a 100 countries. It has a proprietary distribution network with more than 7500 sales engineers and service technicians, more than 500 company-owned locations worldwide offering sales, service, and distribution. There is a lot of excitement on both sides of our combining this distribution network with Ingersoll-Rand's global footprint. This will offer customers and employees a significant opportunity for value creation. We plan to use this muscle to drive revenue growth.

Now, please go to slide number 22. The combination of Trane with Ingersoll-Rand gives us a group of very, very strong worldwide brands. Looking at this next slide to get a reminder of the high-quality brands in the Ingersoll-Rand portfolio, Trane is a perfect addition. They are number one in the U.S. and number two worldwide in commercial HVAC and have a major market share in U.S. residential.

Looking across the top row, you can see the Climate Control line-up, number one and number two positions across-the-board. The bottom row shows the market positions and brands in our Industrial and our Security segments. As the takeaway box says at the bottom, a portfolio of iconic brands. With $16 billion of 2007 revenues, we will also create an $11 million climate control giant with global critical mass, a tremendous installed base, distribution strength, and more advanced technologies than any of the player.

Now, please go to slide number 23. With the acquisition of Trane, the major heavy listing of portfolio change has been accomplished. During the next 18 months or so, cash flow will primarily be used to retire short-term acquisition debt and I don't expect many acquisitions or divestitures over that time frame. For the foreseeable future, our focus will be on acquisition integration, synergy execution, and cash generation. The key operating principle is, keep the businesses running smoothly without disruption to our customers. We'll be intensely focused on operational excellence and continuous improvement.

Now, please go to slide number 24. Growth and cost synergies will be driven by accelerated implementation of Lean Six Sigma and productivity initiatives. The Ingersoll-Rand business operating system that has been developed over the last several years will be the platform for driving continuous improvement across our enterprise. The Trane transaction will be a major catalyst for ongoing cost reduction and continuous improvement throughout the new larger Ingersoll-Rand. We obviously remain very excited about this transaction and this strong new company that it will create. We will continue to update you on our progress going forward.

Now, please go to slide number 25, and let me turn the proceedings back over to James who will take you through the outlook for 2008.

James V. Gelly - Senior Vice President and Chief Financial Officer

Thanks, Herb. This year, our forecast has a little added complexity compared to previous years due to exact timing of the Trane acquisition closing. Let me start by reviewing the economic assumptions behind our 2008 forecast, starting with standalone Ingersoll-Rand, if you’d go to slide 26.

The slide summarizes the key economic and business metrics for 2008. Like many companies, we’re aware of the likelihood of a U.S.-driven economic slowdown in 2008, but do not have evidence of a meaningful impact on our businesses as we enter the year. In fact, momentum as we exited 2007 looks solid. However, here are the key assumptions starting on the upper left. We assume the U.S. economy has slowed, but like this quarter the bulk of our revenue growth in 2008 will be generated outside North America. We expect this pattern to continue for sometime, but we do assume some slowing in Europe and the rest of the developed world in 2008.

On the upper right, looking at U.S. construction, we assume residential building markets will show no upturn before 2009. Non-residential will see about a 5% to 6% year-over-year decline in square footage terms with institutional activity roughly flat year-over-year. Moving down the page, the refr. trailer market in North America declined 15% in 2007 and is expected to decline by an additional 15% as the market bottoms in the first half of 2008. Expanding refrigerated truck and trailer volumes in Europe will help offset the decline in North America.

Finally, looking at the lower right, we expect industrial production and capacity utilization to continue at levels not dissimilar to 2007. The continued influence of a weak U.S. dollar and the significant stimulus that’s provided to export growth will continue to be felt. In summary, for 2008, we expect to see overall stable growth in most major product and geographic markets with enough product and geographic diversification to mostly offset the few particularly tough end-markets that we serve.

You please go to slide 27, based upon the macroeconomic view I just set out, we expect revenues for full-year 2008 to be up 6% to 7% compared with '07. Looking at the upper right, we expect about 4% to 5% growth in local currency terms, and assuming the U.S. dollar stays right where it is now, about 2 points of benefit from currency translation. Looking at the upper left, we expect our three segments to deliver growth in the high to mid-single digits with somewhat higher growth in our Industrial Technologies business. Looking at the lower left, as we saw in 2007, the bulk of our revenue growth will come from non-North American market, since overseas growth will be much stronger than growth in the U.S.

Go to slide 28 and look at 2008 operating income, looking at Ingersoll-Rand as a standalone business. We expect to expand operating margins by about 1 percentage point to 1.5 percentage points in 2008. We expect this to happen through carryover pricing gains that we realized in 2007 and through higher cost productivity closer to 4% of total cost in 2008. We also expect inflation to moderate somewhat in 2008, with full-year 2007 material inflation of about $150 million, we expect about $100 million in 2008.

Let's go to slide 29 to Trane's results. On January 29, Trane reported outstanding results for the fourth quarter and full-year 2007. Trane's fourth-quarter revenues hit record levels at $1.8 billion, with organic growth of 13% compared to 2006. The order intake at global commercial air conditioning was very strong, up 24%, with an 8% increase in backlog. Fourth-quarter EBIT was $120.4 million, up 8% versus last year. Operating margins were 6.6%, down modestly from last year. Revenue and margins improved significantly in commercial, while residential dealt with ongoing difficult market conditions and incurred additional cost associated with inventory drawdowns, logistics, and marketing expenses.

For the full-year 2007, revenues of $7.5 billion increased about 10% compared with '06, with double-digit growth in both commercial equipment and parts and services, and they more than offset a year-over-year 3% decline in residential products. Full-year 2007 EBIT increased by 12%, despite approximately $35 million in one-time costs related to warranty and inventory reductions in the residential business.

Moving to the right to 2008, Trane is entering the year with strong momentum. It had 13% organic growth in the fourth quarter and double-digit growth in orders. Revenues are projected to be up 5% to 6% to about $7.9 billion. Commercial equipment systems growth, which is about half of total Trane business, is projected up about 6% in 2008. Growth in the Americas is expected in the 6% range, based upon the strong replacement business and solid backlog entering the year. Europe, Middle East, and Africa will also grow at a steady 6% to 7% rate.

Commercial parts and services and solution, which is about 30% of total Trane business, is expected to continue its strong momentum at 15% organic growth it had last year, but with revenue growth of about 10% in 2008. And due to the momentum entering the year and strong growth focus, this business is believed to have some upside potential.

And finally, residential equipment sales are projected to be flat. Housing starts are expected to decline further. However, 80% of this business is replacement. Also, channel inventories are low and the inventory drawdowns that we saw in channel in 2007 are not expected to recur. Looking at EBIT, Trane is expecting to deliver 10% to 15% EBIT improvement in 2008 to a range of $785 million to $830 million. Please note that this includes about $75 million of contingency, and all told this would be about a 70-basis point margin expansion to 10.3%.

The next slide, slide 30, puts together the respective standalone forecast for Trane and Ingersoll-Rand. For this analysis, we've assumed that the combination is completed on May 31, not March 31 as we communicated a couple of months ago. As you can see, this forecast shows expected revenue for the combined entity in 2008 of approximately $14.2 billion and an operating margin of 12% to 13%. We continue to target first full-year synergies of about $125 million pre-tax, and this forecast assumes about seven-twelfths of that amount that we will realize during 2008. Likewise, we assumed purchase accounting charges of approximately $845 million per year and again we prorate that annual amount for the period from June 1 through year-end.

As you can see, below the line we show interest expense and interest income assumptions associated with the total $6.5 billion worth of debt outstanding for the last seven months of the year. The effective tax rate for the combined entity should be about 22% to 23%. And adding all of this up brings us the total EPS from continuing operations in the range of $3.80 to $3.90. Please note that those numbers do not include about $0.40 to $0.45 of one-time charges, primarily inventory step-up, which we expect to occur… incur post closing. As always, we'll retain about $0.06 per share of expense related to the cost associated with discontinued ops. This forecast is based upon a 312 million average share count during 2008. And I should make it clear that the only real difference since our December 17 announcement is that we've assumed a closing that's two months later, and therefore we'll lose a big part of Trane's seasonally strong second-quarter and that causes the drop from $4 to the $3.80 to $3.90 that I showed you.

Finally, the combined company should be a strong cash generator with available cash flow exceeding $1.1 billion in 2008. However, this amount does not include about $1.1 billion in 2008 tax payments related to the gain on the Bobcat divestiture, and we expect to make that tax payment in the next month or so.

Go to slide 31, we'll switch gears for a minute and talk about the first quarter of 2008, which is much less complicated because it only includes the current Ingersoll-Rand business. We expect earnings per share from continuing ops in the range of $0.72 to $0.77, which is an increase of over 40% compared with last year. This improvement is based upon revenue growth of 6% to 7%, operating margins at least a point higher than the prior-year, and a significant increase in interest income due to our substantial cash balances. These improvements will be partially offset by a higher tax rate, which we expect to approximate 22%. The forecast is based on 279 million outstanding shares. EPS from discontinued ops will be about $0.02 of cost. So in total, we expect reported first-quarter EPS in the range of $0.70 to $0.75.

After all of that, let me hand back off to Herb for some concluding remarks.

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

Thanks, James. Please go to slide 32. I wanted to finish off this morning with the very important topics of integration synergies and long-term productivity improvement, which are going to be key drivers for Ingersoll-Rand going forward. As I noted earlier, our focus for 2008 through 2010 will be first and foremost to keep the business running smoothly and to attack the easily identified and controlled savings, like overhead reductions and supplier rationalization, while laying the groundwork for multi-year aggressive productivity improvement.

We're establishing rigorous multi-year goals for key cost areas, while working to achieve functional excellence through a lean administrative structure for key functions like, finance, legal, HR, IT, and shared services. The cost base we're working over is about $500 million. There should also be substantial procurement savings available in the both direct and indirect materials, considering the overlap of both companies those of materials. The process improvement activity will also lead to manufacture cost and quality improvements. That's a $9 billion cost base we are working on.

Integration planning has already begun and we’ve formed 14 teams in six areas. We've staffed this effort with dedicated full-time resources, both internal and external, to ensure execution with 20 Vice President level internal resources, bolstered with outside expertise when and where necessary.

Both Trane and Ingersoll-Rand employees are actively engaged in this integration planning team process. Putting Ingersoll-Rand and Trane together will create some large-scale efficiencies and it locks a significant amount of cost synergies. After our initial reviews, we feel very comfortable that the annual run rate savings of $300 million for tax is highly doable. The savings are pretty evenly divided between gross margins and G&A.

Cost of goods will be lowered by supplier rationalization and procurement leverage, and other manufacturer initiatives. Long-term, there's lots of overlaps and synergies in the areas of engineering, manufacturing, and supply chain. We see cost efficiency to be gained across the combined entity’s $3 billion SG&A structure. Both companies come into this merger with heavy SG&A due to recent divestiture activities. For example, total corporate cost of the combined entity approximates $300 million. Our updated look at a rationalized cost structure suggests SG&A as a percentage of revenues can be lowered by 1 percentage point to 2 percentage points. We remain very excited about this transaction, and the stronger new company it creates.

Please go to slide 33. Finally, let me wind up the prepared remark portion of today's call. By this time next year, we will be entering 2009 as a $17 billion company with some of the best, most widely recognized commercial and industrial brands, all of which have leading market positions. The combined companies have stronger growth prospects going forward, as well as significant opportunities to improve margins and returns. We'll be rounding the bend on $300 million of annual cost synergies at that time. Much of our time and resources will be focused on margin expansion and cash generation, through continuous improvement and disciplined program management.

I appreciate that our investor base has had to deal with a very, very tumultuous 2007. The changes during the year have extracted a toll, and I take full responsibility for that. I would be remiss if I did not conclude my remarks by saying that I'm very confident that Ingersoll-Rand has never been better positioned, has never had a better portfolio, and has never had greater opportunity to drive higher income, cash flow, and shareowner returns.

I thank you for your time and patience. And that concludes the formal part of our presentation. I would now like to open the floor for your questions. Thank you.

Question and Answer

Operator

Thank you. [Operator Instructions]. We'll go first to Ann Duignan with Bear Stearns.

Ann Duignan - Bear Stearns

Hi. Good morning, guys. This is Ann Duignan.

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

Hi, Ann.

Ann Duignan - Bear Stearns

I would like to start off by asking why is the delay in the closure of the deal? I thought it was going to be pretty straightforward. And then any changes to the funding of the deal given that you are… you have initially said you would issue 54 million shares. That would have delivered about 2.6 billion back then, but obviously your share price is much lower today. Is there any change to the way you'll finance the transaction?

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

If I can let me answer that piece of it first, and then give you the timing. First of all, we have a firm price, cash plus 0.23 shares of IR stock, that has not changed in our financing, and so that has also really not changed whatsoever. Secondly, regarding the timing, unfortunately this continues to be an estimate on our part. While we went through our process back in the beginning of December, we thought that we would be getting through as we said at the end of the first quarter, beginning in the second quarter. Now, as we find ourselves in mid-February with still completing the case, still having to do the S4, and expecting the review by the SEC, we say [inaudible] that the "average” of those dates turns out to be May 31. But I will you candidly, it could be as much as a month earlier, it could be as much as a month later. It really is dependent more on the time it requires for the SEC to review the documents we submit. But outside of that, really nothing else has changed.

Ann Duignan - Bear Stearns

Okay, thank you. And my follow-up then is around your outlook for organic growth for Climate Control. That’s higher than I would have anticipated, given the outlook for [inaudible] in North America. Can you just give me a little bit of color on the market outlook for that business segment?

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

Yes, I would say to you, I think when you look at the Climate Control for the full year going across… and first quarter frankly is not all that much different. It really looks, in terms of saying, that Climate Control in the Americas when we lump it all together is good to be relatively flat category with the real driver continuing to be what's happening over in our European operations. As the Eastern European part of the market continues to be very, very robust, we're seeing mid-teens on the revenue side. And then if you take Asia-Pacific for us, and this does not include any upside that we're hoping we could realize from coal chain initiatives we're working on, but from the core businesses we have in place, we also expect close to 10% growth, so that when you add those pieces together I would tell you we’ll end up at 6 or 7. So the real key piece is, as we said in the comments, it was incredible for me when I think back to what we had experienced back in nearly 2000 time, that 2007 to now see the trailer and truck markets in Europe, both being larger than the trailer and truck markets in the U.S. and both having upward potential that really to this point of time, somewhat capacity constraint, yet that really is helping to significantly offset the again continued forecast of slower 15% somewhat reduction we see in trailer in North America.

Ann Duignan - Bear Stearns

Okay. Thanks, Herbert. I will get back in line in the interest of time.

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

Thank you, Ann.

Operator

We will go next to Alex Blanton with Ingalls & Snyder.

Alexander Blanton - Ingalls & Snyder

Good morning.

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

Good morning, Alex.

Alexander Blanton - Ingalls & Snyder

I wanted to talk about the tax rate for a minute. When you gave your guidance for this quarter, tax rate increase was not anticipated?

James V. Gelly - Senior Vice President and Chief Financial Officer

That's correct.

Alexander Blanton - Ingalls & Snyder

And you said something about the tax increase in the fourth-quarter being non-recurring, and yet the tax rate that you are forecasting for this year is actually higher than last year's full-year tax rate. So it is recurring, is it not?

James V. Gelly - Senior Vice President and Chief Financial Officer

Let me say that the effect on the fourth quarter and calendar year '07 are items that we described as one-time in nature and relate to the thing that I described in my remarks, increasing reserves and reducing foreign tax credits and net operating losses in the wake of the Bobcat and Road divestitures. Those adjustments I try to characterize as charges that were one-time in nature. Now, as for the 2008 effective tax rate guidance, which we've have given you, you pretty much do one year at a time when you develop your tax rate, and as a separate matter and unrelated to the items that you found in the fourth quarter, we're looking at a 22% rate in 2008.

Alexander Blanton - Ingalls & Snyder

The 22% rate in 2008 is not related to what happened last year?

James V. Gelly - Senior Vice President and Chief Financial Officer

No, in fact the rate that you calculate for the coming year 2008 has a whole bunch of things in it like the amount of inversion debt, the amount of overseas income, tax rates, etcetera, and you kind of roll them up one year to time, but I did not raise 2008 rate in any way connected with the items that ran through the fourth quarter rate. It is a coincidence that they got the same price. I know it's confusing, but hopefully that's helpful.

Alexander Blanton - Ingalls & Snyder

Also, restructuring charges you broke out for this year, but did you have any last year?

James V. Gelly - Senior Vice President and Chief Financial Officer

Nothing of this magnitude.

Alexander Blanton - Ingalls & Snyder

Okay. Now on this... let me just finish by asking why was the tax rate increase not anticipated, because that does lower the earnings?

James V. Gelly - Senior Vice President and Chief Financial Officer

It's a good question, you're right. It's a significant increase, and the answer is when you get to the end of the year and in a year where you divested almost a third of your revenue base and you changed in some fundamental fashion the amount of income you have inside the U.S. and outside the U.S. and the... until you look at it legal entity by legal entity, country-by-country, business-by-business, I am afraid to say you can't reach some of the determinations that we reached. And I hate to say it is impossible to forecast, but it certainly wasn't in our mind when we give guidance 90 days ago or even back in May when we announced the divestiture of the compact equipment business.

Alexander Blanton - Ingalls & Snyder

Okay. Thank you.

James V. Gelly - Senior Vice President and Chief Financial Officer

Thank you.

Operator

We will go next to Andrew Obin with Merrill Lynch.

Andrew Obin - Merrill Lynch

Yes, good morning.

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

Hi, Andrew.

Andrew Obin - Merrill Lynch

Just a question on the margin patterns in Industrial and Security and Safety. As I look at the results there were leased by your European competitors, I am just struck by the fact that their margins went up and yours have declined, and I'm just trying to understand is there a structural explanation or you’re just in different markets? Are you trying to gain market share? Could you comment on that?

James V. Gelly - Senior Vice President and Chief Financial Officer

Yes, now that's a great question. And we look at it the same way and reach more or less the same conclusion. So number one, if you take the Industrial Technology's competitor, there I think you have better, in their case more favorable geographic mix and product mix, so higher margin product in better markets. I think we have more work on our hands where it comes to productivity and price realization, but we come to the same conclusion you did, which is we under-performed from a margin standpoint verses that competitor.

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

I think what we do want to add on to it though, Andrew, is that remember when we reported last year in terms on it the charge that we would incurred for the oil for food, those charges ran for the sectors numbers in the fourth quarter. So that is about almost the margin point right there. So that's not an excuse, I am just trying to give it a difference on this. So we clearly have more that we need to do in getting a better share on the oil free, which has got profit margins, we need to do more on getting non-US based income in this business, and we need to avoid those kind of stupid extra charges.

Andrew Obin - Merrill Lynch

And a question I guess on Security, I mean you've done fantastic job growing I guess the residential business in this market, but does it come at a substantially lower margin or is lower margin Security and Safely primarily due to the fact that electronics is growing so fast?

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

I think it’s not an either or. Again, what you have is clearly the most profitable of our businesses are in the commercial hardware side. And as we said that we had a significant growth element that came on the residential, which as you deal with Big Box and so on does not have the same margin level as we have on the commercial side. If you then add on to it the strong growth that we had on the electronics side, the electronic piece in turn [inaudible] again is more or like in the mid-teen level rather than the 20% plus. So collectively, the addition of the growth in residential as well as what we had on the electronic build side, that's what made the difference between what we normally look at in 18% to 19% level margin.

Andrew Obin - Merrill Lynch

Got you. And then just on another subject, when you note this $0.40 to $0.45 charge, how much of the charge is cash and how will this cash flow over the next year or two?

James V. Gelly - Senior Vice President and Chief Financial Officer

The vast majority of it, Andrew, is inventory step-up. So I would say no cash.

Andrew Obin - Merrill Lynch

Okay. Thank you very much.

James V. Gelly - Senior Vice President and Chief Financial Officer

Thank you.

Operator

We'll go next to Joel Tiss with Lehman Brothers.

Joel Tiss - Lehman Brothers

Good morning. How is it going?

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

Hi, Joel. Sorry we were not able to be there the other day.

Joel Tiss - Lehman Brothers

Yes, so the sun finally came out. I guess that coincided with your earnings. I wonder if you could just... you enumerated like the reasons why the operating leverage wasn't the structure... whatever the numbers, but can you give us a sense of anything inside the businesses or the mix or anything from a structural standpoint? And can you tie that together a little bit about with the actions you are taking on the restructuring charges?

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

Yes. I think there is really several pieces to it. Number one is that as we look at our European footprint specifically, we continue to look to see in terms on where we can have the same type of productivity improvement that we realized in the U.S.-based manufacturing back five to six years ago. So that continues to be an area where we are looking at how to drive in terms of the cost reduction.

And I think the second piece is we said that we keep looking and saying is that on material inflation, we have just not been able to go and to get between that and the salary increases to be able to totally get enough productivity. What James said is that, we know that we need to do is we need to step up our productivity from the 3% to 4% to 4.5% on the year-over-year basis, and that is why really the addition of Trane at this point in time gives us the ability to combine and leverage two overhead structures into one to go after the G&A side, that we have a lot of manufacturing footprints, things we can go look at in the future to improve. Where we're currently outsourcing things right now, we could probably bring them in and increase our productivity. So that's why I’d say it really is throughout the builds and material, manufacturing footprint, and I am looking in terms on the total G&A structure.

Joel Tiss - Lehman Brothers

Okay, and then sort of a similar kind of question. Your CapEx have been low historically during the last couple of years. Is there anything that you are seeing that would cause that to be re-evaluated in the future?

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

Well, the only... if I look at the… the biggest part of the differences is that as we wind up looking at more of our growth being outside the U.S., what is the effectiveness of manufacturing at our current locations versus to be more regional. So included in our plans this year is another very large plating facility down in Mexico to take care of some of the production we're doing here. Then I think the other part that we clearly are looking at is our IT spend. We continue to look at how do we wind up going and really getting at some of these costs that we have. We’ve got to drive our hundred some odd different programs and different structures and so on and really implement an ERP. So many of the ERP dollars wind up going and running through the balance sheet. So you will somewhat of an increase that probably takes us close to 2% rather than the more or less 1.5% we have been running in the past.

Joel Tiss - Lehman Brothers

Okay. Thank you very much.

Operator

Thank you. We will go next to Terry Darling with Goldman Sachs.

Terry Darling - Goldman Sachs

Thanks. I had a question on the slide 28, where you were talking about the IR standalone operating income bridge. And I guess just looking for more detail pursuant to the last question, you’ve got inflation 2.5% versus 3.5% in '07. Can you take us through where you see fewer inflationary pressures this year to start off?

James V. Gelly - Senior Vice President and Chief Financial Officer

Yes, well, we had a… first of all, if you go back and look over the last, call it, two or three years, then as you know, some pretty rapid rates of inflation in commodities. Almost in every regard, you're still seeing some push… pass-through the system of higher resource costs, metal costs. What we are looking at as a kind of outlook for 2008 is there will still be inflation, but instead of taking $150 million, we can sort of trace to more like $100 million of projected inflation, and that's everything… commodity is to some degree, but across-the-board looking at a slight deceleration in total input, so that would be across-the-board people cost, services cost, professional services cost, as well as materials and other things like commodities.

Terry Darling - Goldman Sachs

And if I'm thinking correctly about the delta relative to your initial expectations in '07, copper was a big component of that. Can you correct me if I'm wrong there, and can you tell us what your copper price assumption for '08 is, please?

James V. Gelly - Senior Vice President and Chief Financial Officer

Yes, copper increased in '07, you're right. In fact, the numbers that you saw were… in the latter half of the year… middle part of the year, some $3.5 a pound. And we have a slight reduction in the cost per pound as you go into 2008.

Terry Darling - Goldman Sachs

Okay, and then on the productivity side. You talked about 4% versus 3%. Where do you see the incremental… what's driving that incremental improvement in productivity?

James V. Gelly - Senior Vice President and Chief Financial Officer

Yes, well, first of all, if you take a big company like this, obviously a big part of it is continued work on the procurement front to work on the commodities, teams, and applying more leverage in the supply base, that's before the acquisition of Trane. I think the big delta will probably be moving into non-material productivity in a more aggressive way Herb talked about, leveraging the overhead structure better, driving more efficiently to get incremental dollars of revenue without adding to the SG&A layer. In many cases, we're making growth in investments. I think the trick here is to take more time and attention to drive productivity in the overhead, if you will, in the administrative parts of the company, and to get a better balance of incremental dollars with less heavy investments in SG&A. That’s a different set of strategies, different type of resource than necessarily has been brought to bear here over the trailing two, three, four-year time frame, where a lot of the productivity focus has been up on material cost. We continue to restructure, you alluded in your question… all of the benefits for the $28 million, $29 million of restructuring that we took in '07 will be found in our results in 2008. So you fund productivity at least in part through productivity. This second half of '07 was a relatively healthy year in terms of productivity investment, and the returns on those types of projects are very good.

Terry Darling - Goldman Sachs

And the uptick in the restructuring and growth investments, is that on the restructuring side or the growth investment side?

James V. Gelly - Senior Vice President and Chief Financial Officer

Well, of the amounts that we called out for the year of $50 odd, $60 million worth of "investments," about half was the restructuring dollars that I cited, so $28 million, $29 million of restructuring. I would say the growth investments have been maintained around here for quite some time. That's a pretty representative level, but the restructuring is slightly heavier than you'd see in last couple of years.

Terry Darling - Goldman Sachs

Okay, and lastly on the ERP implementation, can you just square us up as to where you are in that process, if you want to use the baseball analogy that might be helpful, and what is the spending expected on that in '08 versus '07?

James V. Gelly - Senior Vice President and Chief Financial Officer

Yes, well in baseball terms, we were pretty far along in businesses that we divested. So if you think about the history of putting in integrated ERP systems in the company, we got very, very good at it by putting it into Bobcat and Road. Those businesses were divested and what remains were probably in the second innings.

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

We really have much more of a footprint clearly there at Climate Control than we do at Industrial and in Security. And the full... going forward, we are taking about... things are going to be… let me get the dollar number for you, so I am just looking here as well while I’m talking.

Terry Darling - Goldman Sachs

Thank you.

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

I think we are talking about somewhere along the lines of $70 million to $80 million was the total number of dollars that we were looking at spending. So maybe this is not a net number against what we are obviously also doing then is stopping work on some of the existing legacy system costs that we have in place. So ours is not to go into increment by that much, but really to go and to wind up, stopping to do the rewriting and reprogramming of a MRP and go... instead go do it into the Oracle-based stuff we are doing.

Terry Darling - Goldman Sachs

Yes, that was [inaudible] '08 or over the life of...?

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

For '08

Terry Darling - Goldman Sachs

And that will tail off in '09 or...?

James V. Gelly - Senior Vice President and Chief Financial Officer

No, this is going to take... this is probably two or three years, that's without considering the business case of putting in more integrated systems in the Trane businesses, we haven't even considered that. We were thinking as a standalone Ingersoll-Rand it would be '08, '09, a little bit into 2010?

Terry Darling - Goldman Sachs

Thanks for the help.

James V. Gelly - Senior Vice President and Chief Financial Officer

Thank you.

Operator

We will go next to Nigel Coe with Deutsche Bank.

Nigel Coe - Deutsche Bank

Thanks. Good morning.

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

Hi, Nigel.

Nigel Coe - Deutsche Bank

Herb, you talked about the synergy on the SG&A side being maybe 1% or 2% of combined sales, if you’ve got 2% that would get you a little bit more than $200 million, which is your combined synergy target as it is. Would it be fair to say that now you’ve had two months to look Trane in a bit detail that you may be more bullish on the opportunities for [inaudible]?

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

Well, I think that the way I'd say to is that, well, we have done our homework. We are at this point in time very confident in the $125 for the first year and the $300 million that we will deliver in 2010. But in the spirit of continuous improvement, your and I both know that what we wind up trying to do is continue to see if we cannot go beyond that. But as we are… now we are planning for more, we are working on more, but right now the number that I'm giving you is the $125 million to $300 million, and your math… that is why I said to you it’s 1% to 2%. You get to 2%, you clearly go by that, I am not there yet. Where I'm today's is 125 the first year and 300 by 2010, and I want you to know that we're working diligently to see if I can change that by the time we talk in the next couple of calls.

Nigel Coe - Deutsche Bank

Okay, great. And secondly, James, on the tax front, the 22%, 23% combined tax rate is maybe a bit low than expected. There were maybe some concerns that Trane might mix up the tax rate, at least in the short term. It doesn't sound like that's going to happen. Can you maybe comment on that?

James V. Gelly - Senior Vice President and Chief Financial Officer

You’re right. The blended rate would be higher. One of the areas of opportunity we've identified when you put two big global companies together and you have a chance to look at tax as one of the synergy strategies, we think we’ve found some. We... I think for obvious reasons haven't spelt them out or talked too much about them, but we do think that there is structurally some opportunities here to keep the blended rate down to the low-20s.

Nigel Coe - Deutsche Bank

Right. And then finally, on the cash flow, I think if I'm not mistaken, you talked about $1 billion for 2008, now it’s about $1.1 billion. Is that coming from just better working capital management? And going forward, is there any structural reason why Ingersoll-Rand can't convert 100% or more of earnings into cash flow?

James V. Gelly - Senior Vice President and Chief Financial Officer

Let me say... let me answer the second question first, which is, no. There's no reason, in fact if you look at the slug of amortization that we're going to have around here, it's simply additive to the, call it, positive cash generation as a percentage of net income. And to your point, you get there through, as Herb described, lean capital spending, you get there through better working capital management, but there's nothing inherent in the business model here that indicates less than 100% of net income. Now, when you grow rapidly, you grow outside the United States, you go through changes of the kind that we've gone through sometimes on manufacturing or putting more material on the water. That all kind of comes and goes, but there's nothing in the business model that says you can't do a 100%.

Nigel Coe - Deutsche Bank

Great. Thanks a lot.

James V. Gelly - Senior Vice President and Chief Financial Officer

Thanks, Nigel.

Operator

Thank you. We'll go next to Robert Warsammer [ph] with Morgan Stanley.

Unidentified Analyst - Morgan Stanley

Hi. Good morning, everybody. You've been pretty helpful on the materials costs. Well, I just wanted to see if I could narrow it down a bit. Is materials costs getting worse or better into 4Q and then I guess into the first part of 1Q?

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

We actually see it continuing to go up slightly in terms of the inflation continuing to be a number that’s going to be driving, let’s say, the first quarter probably somewhere between $15 million $20 million on an incremental basis.

Unidentified Analyst - Morgan Stanley

Okay. And then... thank you. And then on... the second question would be just on the inventory step-up charges. I understand that happens and I know that you are very clear that, that estimate was not precise last time we talked. But I think that you had said that you thought the $4 number included a little bit of inventory step-up, and now you got $0.40 to $0.45 that's not in that. So the question is, am I correct and did that end up coming up higher than you thought, and why?

James V. Gelly - Senior Vice President and Chief Financial Officer

Well, first of all, when we gave the $4, we did not include... we could not have included meaningful amounts of inventory step-up. So that is the primary change going in doing a more thorough job of what would need to be the impacts on step-up. We are not including in the number known areas of restructuring, which are not heavy. So I don't think we… we were very imprecise if I can say so back in December about given the shortness of time and the amount of detail that we had at that point, and we didn't attempt to give an estimate of the step-up.

Unidentified Analyst - Morgan Stanley

No, that... I understand that and... but I just wanted to make sure. So there really wasn't much of a step-up, if any, in the $4 number, right?

James V. Gelly - Senior Vice President and Chief Financial Officer

That's right.

Unidentified Analyst - Morgan Stanley

Okay. Perfect, thank you.

James V. Gelly - Senior Vice President and Chief Financial Officer

Thank you.

Operator

We'll go next to Eli Lustgarten with Longbow Securities.

Eli Lustgarten - Longbow Research

Good morning.

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

Hi, Eli.

Eli Lustgarten - Longbow Research

Yes. Thank you for giving a though on a confusing year. With '08 being as complicated as it is going to be because of the time of the acquisitions. I hate to go back to the tax rate, but can we talk a little bit about the 2009 tax rate looks like? Does it stay in the same range or some parameters of it? And in the big charges in '07, you had... there were some penalties and interests for pre-2001. Now there is another big claim by the IRS for 2001 and ‘02, 2002 post I believe that you’re negotiating or you’re in discussion with. Can you talk a little bit about that... the impact of that claim against the Ingersoll-Rand?

James V. Gelly - Senior Vice President and Chief Financial Officer

Sure. Let me start with the second part, which relates to the 2001 to 2003 audit period. As you pointed out, Eli, correctly, it is in that audit period that the… Bermuda inversion was examined, and as such I think everyone on the call knows the IRS has disallowed any of the inversion debt to be treated as debt and therefore the interest deductible, that's the area where the company has strongly disagreed with the IRS’ position. And as you rightly pointed out, that's an area to say the least, that we're in discussions with. And we are really not talking about that process. It's not something that we do get into or can get into. It's outside of any of the guidance or consideration. And I'll just say for now, Eli, that remains a pending item and could be quite sometime before there is any resolution of that matter.

You asked about 2009 tax rate, I'll just say that based upon what we know now, sitting in 2008 and looking at the income mix and, I will call it overseas versus domestic tax rates, other structural things that we're working on, I don't have any indication now that 2009 is going to be very different from 2008 in terms of tax. The only thing that I would say is, as income continues to grow at Ingersoll-Rand and if income were to continue to grow in United States high-tax jurisdiction, you could be see upward creep in the effective tax rate, but I'm not signaling that I think that's a big number. And then, I'll just say the imponderable about additional settlements or assessments are also not in our guidance beyond what we've already said. You want to ask a follow-up question?

Eli Lustgarten - Longbow Research

Yes. The other comments you talked about is material guidance of 100 million versus 150 million. And I guess… and I know the Trane guidance also assumed a stable cost price relationship between material and price. Can you talk about… you indicated in your first quarter we are seeing tremendous cost pressures on commodity prices, big scale increases, average copper price is higher at this point. Can you talk about whether you are comfortable with that 100 million? It looks that's going to be a conservative number. We have seen everybody raise that forecast. And to what degree do you expect higher price? And what kind of pricing assumption are you putting into 2008 at this point, given the pressures existing in the business?

James V. Gelly - Senior Vice President and Chief Financial Officer

Yes. Okay, so realization of price during 2007 across all of Ingersoll-Rand ran at about 2% favorable. And so, as I mentioned in my comments, a big part of what we do is we continue to look for areas where we can realize price and we will continue to do so. And we will realize the carryover of what we got in 2007 for all of 2008. I think it's fair to say that you are right, we still see inflation pressures. I think what we're really debating here is the rate of increase year-over-year. So if I pick out certain things like, I'll just pick lead as an example. Lead went from $0.50 a pound in 2006 to $1.5 a pound in 2007 and is assumed around $1.5 in 2008. Now, I don't have a decline baked in there nor do I have it going from $1.5 to $2.

If you take, for example, copper, which we’ve talked a lot about, it went from $2 to $2.50 to $3.50, and it's kind of in the plan in 2008 at $3.50. So what we're getting at here is, what was the aggregate increase in 2007, and the answer was very heavy if you take these metals, steel being another example. And what is the further increase from here as a percentage when you look at all of '08 versus all of '07, I guess what we're saying is, yes, there is a huge inflation. The question is whether '08 is another barnburner commodity inflation year the way '07 was, or do you nearly continue to face the cost structure that you had when you kind of got to the fourth quarter of '07. So what we're not projecting is another big year in '08 like '07, but we have no relief from the levels that you hit in '07.

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

So think of it, Eli, along the lines of full-year pricing at fourth-quarter 2007 throughout 2008 and the delta between that and the sub-year stuff we had in 2007 collectively adds up in our math to being about $100 million.

Eli Lustgarten - Longbow Research

And let me just clarify, you did indicate that you are showing a positive cost price relationship. You’re able to pass on your cost at this point. So that's not an issue at the moment.

James V. Gelly - Senior Vice President and Chief Financial Officer

That's right.

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

Right.

Eli Lustgarten - Longbow Research

Thank you.

James V. Gelly - Senior Vice President and Chief Financial Officer

Thank you, Eli.

Operator

We'll go next to David Raso with Citigroup.

David Raso - Citigroup

Hi, two questions. One on Thermo King and also on Security and Safety non-resi. First on Thermo King domestically, can you tell us what Thermo King was down domestically in the fourth quarter?

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

It was about... I think it was about 12%.

David Raso - Citigroup

Given what the industry builds have been, does that mean we have that pain to come the next quarter or so or are you just taking that much share?

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

I think what the difference we always get into, David, is conversation about how many trailers are sold and put to distribution versus how many of them are sitting there and we put things into the hole that is in it. So we saw a couple of thousand trailers that we put things into that's different than what you saw in term of trailers being manufactured in the fourth quarter. So that's why our numbers are higher, if you will, than what you would take from the ac data just talking about trailers being built and then shipped to a distributor. So we actually wind up having some units that we already have distribution that we want to putting units into. That's why our number was not as the low as what you get. And I think now going forward for 2008, as we said, we think that our volume overall is going to be down about another 15%.

David Raso - Citigroup

And for Europe, I noticed on the economic sheet where you had… GDP was labeled Western Europe, but your refrigerated trailer was Europe. So I assume you have the strength in Eastern Europe in that European and refrigerated trailer number?

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

Yes, exactly right. We are talking increases there that are well north of 20% plus and we'll continue to see that strength. Right now, as I said, I think when we talked about our focus over there, we hear more conversation about capacity constraint and the ability to build them out rather than in terms of customer demand, that's where we're pretty optimistic. I think things are firm all the way out thought halfway in the year as we are in the second month of this year.

David Raso - Citigroup

And then regarding Security Technologies, you did not provide the mechanical, commercial revenue number because obviously third quarter commercial revs were up 16, they're only up 7 in the fourth quarter. I don’t think electronic access… didn't change a ton, it went from up 24 to up 21. Did mechanical flatten out in the fourth quarter?

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

Yes. I would say in terms of [inaudible] the rate of increase was no lower double-digit, it was now getting into more of the upper single-digit type increase. And again I think a key part when we look that our profitability on this has got to do with the mix between European versus U.S. Our U.S. business is much more profitable on the mechanical side than is the European business.

David Raso - Citigroup

No, I appreciate that. But the mechanical business, it was up 13 in the third, did that flatten out already in the fourth? I'm just trying to...

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

That's why I said, that we talked about it being really closer to the 10% debt level.

David Raso - Citigroup

The 10% was total commercial, the mechanical flattish to get total to up high-single. There is no way mechanical could be to 10% and electronic up 21% and all commercial up 7%. I'm just trying to understand, did we see non-electronic commercial revenues flatten out?

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

I think I have to get back

James V. Gelly - Senior Vice President and Chief Financial Officer

Yes. Let us check on that one. That's a good question.

David Raso - Citigroup

Yes. The math doesn't make...

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

[inaudible] memory on this one.

James V. Gelly - Senior Vice President and Chief Financial Officer

Yes. We don't have that data.

David Raso - Citigroup

No. I'm not trying to… just the math doesn't work. I mean obviously mechanical must have got close to somewhat flat already. These kind of dovetails into '08, if I'm guiding Security Technologies up 5 to 6, right, meaning your guidance, obviously the economic data you threw out there for square foot is down 10% commercial and so forth. How am I getting 5 to 6? It’s a business, I know [inaudible] gave you a good Southern Europe lag a couple of years back, but it’s still a majority U.S. business. I’m trying to understand how you get a 5 to 6?

James V. Gelly - Senior Vice President and Chief Financial Officer

You ask… just in general to make sure people understand the consistency of the data, the information we've shown about square footage, which as you point out shows a decline in the commercial space ex-institutional, we have got in here a lag from the time that the construction has started to the time that things like Security equipment are implied and it gives you pretty good visibility through a significant portion of 2008, but you're right. I mean, there is… we are looking at the headwind in that non-residential piece, actually towards the end of the year.

David Raso - Citigroup

Okay. I appreciate it. Can you just get back to us on the mechanical for the fourth quarter? Thank you very much.

James V. Gelly - Senior Vice President and Chief Financial Officer

Okay. Thank you.

Operator

We will go next to Robert Mccarthy with Robert W. Baird.

Robert Mccarthy - Robert W. Baird

Good morning, gentlemen.

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

Hey, how are you?

Robert Mccarthy - Robert W. Baird

Quite well, it’s still morning. I will start with a central question. I know that it’s not a big number. You have been at pains to make that point, but in the restructuring charge that you've combined with the inventory step-up that you are excluding from your guidance, is it simply that you really don't have a point estimate for the restructuring charge yet? And does it not feed into the synergies that you're expecting to recognize in the year?

James V. Gelly - Senior Vice President and Chief Financial Officer

That's exactly right. So as Herb said, we are still working and confident about the level of acquisition synergies that we originally talked about. The planning phase that we are right in the thick of right now would directly pertaining to the amount of required restructuring, and in particular the amount of charge that you would take, let's say, on one side of the acquisition or the other is also an area of focus. These are areas that a lot of teams are at work on. We are not just far enough along to call it book-keep with accuracy enough to disclose externally anyway what the kind of restructuring benefits are and timing and amount.

Robert Mccarthy - Robert W. Baird

Okay, that's… Thank you. That's…

James V. Gelly - Senior Vice President and Chief Financial Officer

You got it exactly right. We are not far enough along to get that kind of detailed point estimate.

Robert Mccarthy - Robert W. Baird

Okay, that's fine. And then the other thing, I would like some help and maybe some other people would, if you could, on slides 5 and 27, the bar charts on the left-hand side in both cases, segments and regions, these growth numbers of course include the currency effect and rather than make wild guesses as to how much of it occurs in Asia versus Europe or how to allocate it among the segments, I'm wondering if you could tell us simply what the growth rates… or what the currency contribution is to each of those six bars on those two slides?

James V. Gelly - Senior Vice President and Chief Financial Officer

Now, we are talking about… well, okay, so let me say this, the answer is, yes, I can. But no, I'm not in a position to do it right now. In other words, I don't have in front of me the breakdown by the six bars, but yes, of course we have them.

Robert Mccarthy - Robert W. Baird

Okay. I will follow-up with you then. Thank you.

James V. Gelly - Senior Vice President and Chief Financial Officer

Great. Thank you.

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

I figure we have time for one more question, please.

Operator

And we have one question left in the queue. We will go next to Mark Koznarek with Cleveland Research.

Mark Koznarek - Cleveland Research

Thank you. Way back when we began the Q&A, there was discussion about Climate Control and you describe the outlook geographically. I'm wondering if you could go through it again and just describe transport versus stationary, and especially stationary, you know what the outlook is across the geographies?

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

Yes, what I said before when I was doing it, I was doing it on a macro basis, Mark. I said that for instance the Climate Control in Americas for us, when we added up the stationary plus the transport obviously being off, we said, transport is going to be off somewhere along the lines of 15%. We then add back into that our contracting business and our stationary stuff and we are all done. We are at flat to up slightly. If we wind up again going over into Europe, what we said there is collectively we are up into the double-digit growth for 2008 and then that… most of that growth, the double-digit side of it, is going to be winding up coming from the transport with the stationary side being really more of a modest single-digit type growth. And if you wind up moving over into Asia Pacific, the growth there really is pretty much across-the-board. And now, all of a sudden similar growth because of the size of the numbers, bus, air conditioning actually winds up also showing up is being one of the areas for some growth, but pretty well consistent across-the-board at about 10%, not much difference between transport or stationary types there.

Mark Koznarek - Cleveland Research

So back to North America, the stationary, you think it's going to the strong enough positive to pull the overall America's business up to flat to slightly up?

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

One of these interesting things that we find if there is a slowdown and we saw this in the previous times that when there is a slowdown in the economy, people start going to the supermarket more to buy food to bring it home versus going out. And so if you actually looked at same-store revenues for the retail side in the end of last year, it had actually gotten stronger to, what was it like, 4% or something… 3% higher. So that's… and then they are actually obviously picking up land that is now relatively inexpensive. And so we actually see the activity level at this point in time being strong. And obviously, the biggest difference for us at this time, Mark, is the fact that we are significantly participating in all of the key players. We have the contracts at Target, we have the contract at Wal-Mart, and we have it at the more traditional national type chains. So unlike what we faced in the downturn where it was driven by Wal-Mart being strong and everything else being weak, we now see the ability to participate in all of it. We are doing much better of the service now, double-digit profitability. So collectively, yes, we really see in terms [inaudible] balance now between stationary and transport for next year in the U.S.

Mark Koznarek - Cleveland Research

Okay. And then just one quick follow-up on the price discussion that occurred a little earlier, I just… it was unclear what the pricing assumption is across the company for 2008?

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

For 2008, we are seeing price increases will be somewhere about the 1.5% type range is our estimate.

Mark Koznarek - Cleveland Research

And you said 2007 was roughly 2%?

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

Rounded up, it’s about 1.9%, 2%.

Mark Koznarek - Cleveland Research

Okay. Thanks very much.

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

Thanks, Mark.

Joseph Fimbianti - Director, Investor Relations

All right. Thank you very much. We’re going to wrap up now. Thank you all for joining us for this marathon session this morning. We’ll have an instant replay of the conference call will be available tomorrow at 10:00 a.m. and will available until February 21. Call-in number is 888-203-1112 and the pass code is 5497177. The audio and slides for today's conference call will be archived on our website. And finally, the transcript of the conference call will be available on the Ingersoll-Rand site tomorrow. So you can read about what you heard today. Please call me, Joe Fimbianti, if you have any additional questions at 201-573-3113.

That concludes our call. Thank you again.

Operator

Thank you. We do thank you for your participation, and you may disconnect at this time.

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Source: Ingersoll-Rand Co. Ltd. Q4 2007 Earnings Call Transcript
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