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Ingersoll Rand Company Limited (NYSE:IR)

Q2 FY08 Earnings Call

August 01, 2008, 10:00 AM ET

Executives

Joseph Fimbianti - Director of IR

Herbert L. Henkel - Chairman, President and CEO

Steven R. Shawley - Sr. VP and CFO

Bruce Fisher - VP of Strategy and IR

Analysts

Terry Darling - Goldman Sachs

Andrew Obin - Merrill Lynch

Shannon O'Callaghan - Lehman Brothers

Eli Lustgarten - Longbow Research

Robert Wertheimer - Morgan Stanley

Jeff Hammond - KeyBanc Capital Markets

Ted Wheeler - Buckingham Research

Andrew Casey - Wachovia Capital

Operator

Good day everyone and welcome to the Ingersoll-Rand Second Quarter 2008 Earnings Conference Call. This call is being recorded. At this time for opening remarks, I would like the turn the call over to the Director of Investor Relations, Mr. Joseph Fimbianti. Please go ahead, sir.

Joseph Fimbianti - Director of Investor Relations

Thank you very much, Patrick. Good morning. This is Joe Fimbianti, Director of Investor Relations for Ingersoll-Rand. Welcome to our second quarter 2008 conference call. We released earnings at 7 A.M. this morning and the release should be posted on our website.

I would like to cover a couple of housekeeping items this morning before we begin. Concurrent with our normal phone-in conference call, we will also be broadcasting the calls through our public website. There you will also find the slide presentation for this call. To participate via the web, go to www.ingersollrand.com, click on the yellow icon in the homepage of the website.

Both this call and the presentation will be archived on the website.

Also we will be planning a day for analysts and investors in Davidson, North Carolina in the fourth quarter. You will have the opportunity to hear about our businesses and spend some time with our senior operating team. We will be sending out information details about this in the near future.

Now, if you would please go to slide number two. Before we begin I would 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 March 31, 2008 Form 10-Q for details on the factors that may influence results.

Now, I would like to introduce the participants for this morning’s call. We have Herb Henkel, the Chairman, President and Chief Executive Officer of Ingersoll-Rand; Steve Shawley, our Senior Vice President and Chief Financial Officer; and the newest addition to our team, Bruce Fisher, Vice President of Strategy and Investor Relations. Welcome, Bruce.

We will start with a formal presentation from Herb Henkel, Steve Shawley and with Bruce Fisher followed by a question-and-answer period.

Herb will start with the overview. So, if you would please go slide number three.

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

Thank you, Joe. Good morning and thanks to everyone who dialed in to this morning’s call. Overall, the second quarter exceeded our prior earnings projections. Revenues were about equal to our original forecast for both historic Ingersoll-Rand businesses and Trane and we were able to more than offset somewhat higher than expected material inflation with price, higher productivity, and good cost controls at our business units and at corporate. For the quarter… the quarter revenues increased by 38% and by 7%, excluding Trane, which we acquired on June 5th.

We had solid growth in all of our major businesses despite negative growth in North American residential construction and heavy truck markets and slowing industrial activity. EPS from continuing operations was $1.03, excluding about $0.13 per share from one-time items. This was about $0.15 above the mid point of our forecast range of $0.85 to $0.90 per share as Steve is going to go over with some additional details.

During the quarter, as you know, we completed the acquisition of Trane. We’ve begun realizing the available cost synergies. I’ll cover more on the Trane acquisition later this morning. Finally, we are holding our full-year EPS forecast at $3.80 to $3.90 per share. Despite our above forecast results in the second quarter, we believe it is prudent to be conservative in our outlook given recent times of slow growth in some of our key markets going forward and a volatile material prices.

Now, I would like to turn it over to Steve who is going to take you through the second quarter. Steve?

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

Please go to slide number four. Thanks, Herb. Those of you who have read our press release or reviewed our second quarter numbers, it is evident there are a lot of moving parts. This morning we are going to provide additional pro-forma information to supplement the GAAP reporting data so that you can get a clear view of our performance in the second quarter and understand our guidance for the full year.

This slide gives a quick summary or revenue and operating margin for the second quarter. As you see in the upper right, revenues were $3.1 billion, up 38%. Excluding Trane, revenues increased about 7%.

Looking to the lower right, reported operating margin was 11.7%, down 60 basis points from 12.3% last year. The box in the lower left of the chart details the $46 million of the one-time cost in the quarter related to the Trane acquisition, which was primarily related to inventory step-up and in-process R&D.

Excluding the one timers, operating margin would have been 13.2% or 90 basis points ahead of last year. I will come back to the topic of margins and operating leverage in a greater detail shortly.

Pleas go to slide number five. Looking out at the slide entitled Second Quarter Revenue Growth, you can see the components of the 38% sales gain in the upper right hand quadrant.

Organic growth in the quarter was a little over 3% with about 4% of growth coming from the impact of foreign exchange. The Trane acquisition added 31 points of growth.

Looking at the upper left, all four operating segments delivered solid revenue growth for the quarter. Trane revenue growth is shown as part of a newly created segment, Air Conditioning Systems and Services. Revenue change, portrayed in the bar, is on a pro-forma basis for the full quarter.

We continue to see momentum in key end markets outside of North America. Many of our North American markets registered sluggish year-over-year revenue comparisons with a notable exception of non-residential construction, which still demonstrated upward momentum, positively impacting several of our businesses.

Climate Control and Industrial were both up 8% and security revenue increased by 6%. Air Conditioning Systems and Services was up about 4%, up 10% in commercial and down about 12% in the residential.

Looking at the lower left, you can see growth rates by region. We continue to benefit from global diversification with a bulk of our top line growth coming from outside the Americas. Excluding Trane, we saw a 3% growth in the Americas for the quarter. The double-digit growth overseas is also strong in Asia, Latin America, and Europe across all reporting segments.

Please go to slide number six. Next slide entitled Year Over Year Revenue Growth provides a look at our segment growth rates during the last six quarters.

The old Ingersoll-Rand operating segments, delivered consistent year-over-year revenue growth throughout 2007 and the first two quarters of 2008. You can see that the growth rate in industrial and security have tailed of somewhat. In both cases, lower revenue growth is related to slower North American activity. Overall, we continue to see well-balanced sales growth in the second quarter.

Please go to slide number seven. Let’s look at the bridge of the second quarter operating results. Reported operating income increased by 32% to $361.6 million representing an operating margin of 11.7%. The quarter included $46 million of one-time cost from the Trane acquisition. Excluding these costs, second quarter operating margin was 13.2%, up about 90 basis points compared with 2007. Favorable price utilization of 2.4% and strong productivity growth at 4% more than offset the unfavorable impact of inflation, mix and investment cost.

Please go to slide number eight. Let’s move now to the income statement. Moving down the page, interest expense increased due to our higher debt balances from the Trane acquisition. Other income for the quarter was $26.2 million, up about $18 million compared with 2007. This increase was prior to higher interest income on the remaining post divestiture cash balances. We ended the quarter with $787 million in cash.

Let’s move down to the tax line. An expense of $80 million, up significantly from last year's $44 million. Effective tax rate from the quarter was 23.3% versus last year's 17.4%. The second quarter rate reflects a projected full year rate of approximately 22%. This rate was increased slightly by certain discreet items in the second quarter.

Moving down the page, discontinued operations you can see a cost of $6.4 million or about $0.02 per share, which we expect to be the quarterly ongoing run rate for discontinued operations. Finally, looking at the bottom line, reported net earnings for the second quarter from total operations were $256.1 million or $0.88 per share on a GAAP basis.

Please go to slide number nine. Next two slides provide a bridge between the second quarter actuals and the forecast we gave you on April, which excluded one-time costs. Revenue for the quarter was virtually right on forecast on both the old Ingersoll-Rand side and Trane. We exceeded our margin projections and the corporate costs were in line with our estimates.

Our below the line results for the interest expense and interest income were positive and the tax rate was somewhat higher than expected and finally our initial projection on the share count proved to be conservative and our quarterly average for diluted shares was about 291 million compared with initial forecast of 305 million shares. As you can see our quarterly EPS exceeded the mid point from our prior guidance by $0.15 per share.

Please go to slide ten. This slide shows the components of our above-guidance performance. About $0.07 came from higher operating margins mainly from productivity gains and cost containment programs. $0.04 was from lower interest expense and higher interest income, some of which was related to the timing of the Trane acquisition closing. Higher tax rate costs subtracted $0.01 and $0.05 was from lower share count primarily from sub period accounting and a drop in the value of outstanding options. This totaled $0.15.

Let’s now move to our review of our reporting segments. Please go to slide number 11. We are going to start with a newest addition to the Ingersoll-Rand business portfolio, the Air Conditioning Systems and Services segment, which represents the Trane results. Since many in the audience are probably not as familiar with this business, I have asked Bruce Fisher to provide extra detail on results. Bruce?

Bruce Fisher - Vice President of Strategy and Investor Relations

Thanks, Steve and good morning, everyone. As Steve mentioned, slide number 11 lists the highlights for Air Conditioning Systems and Services that represents Trane business that was acquired on June 5th. The left side of the chart shows Trane's results for the period June 6th to June 30th the time that it was part of Ingersoll-Rand. Revenues were $698 million. Operating income was $66 million reported and includes $45 million related to inventory step-up, in-process R&D and ongoing amortization as shown on the bottom left. The right side of the chart shows the pro-forma second results for Trane, excluding the $45 million of acquisition related items and also $2 million of restructuring that Trane undertook prior to the acquisition.

Revenues for the quarter increased 4% versus last year on a reported basis and were up 2% excluding the impact of foreign exchange. Operating income was $252 million. In the appendix, you will find charts of reconcile operating income to Trane's traditional approach of showing segment income. To facilitate year-over-year comparisons, we have included the first two quarters of 2008 and all four quarters of 2007.

Before reviewing the details of our sales, orders and backlog, I will first touch on the global HVAC equipment market. U.S. commercial equipment market grew low to mid single digits in the second quarter. Both applied and large commercial unitary markets had single-digit growth while light commercial unitary markets had a small decline. The international unitary and applied markets continue to grow mid single digits in aggregate.

Let's now look at the composition of our sales growth as shown on the chart. We showed data on both reported and ex foreign exchange basis. I will focus most of my comments relating to sales orders and backlog excluding the impact of currency change. We had a good quarter in commercial air conditioning where our combined equipment systems and services sale, which were the first two categories in the revenue table, were up 10% reported and up 7% ex foreign exchange.

Total global commercial equipment and system, representing 47% of our total HVAC sales, grew 4% in the quarter. I will split that further into applied and unitary equipment.

Applied global equipment sales were up 5% as the Americas achieved mid single digit growth, Asia showed strength, while Europe and Middle East was down slightly because of the tough year-over-year comparison.

Global commercial unitary sales grew 3%, excluding exchange, with strong performance in Europe, Middle East, modest growth in the Americas and a modest decline in Asia.

On a regional basis for the quarter, Americas equipment and systems sales were up 4% excluding exchange and sales for the rest of the world were also up 4% excluding exchange.

Let’s switch now to our commercial global part services and solutions business, which continues to perform very well growing 12% in the quarter ex FX. This part of our business represented 40% of our commercial sale and 31% of total Trane sales.

We continue to grow at the high end of 10% to 12% range we gave you in the first quarter. Americas and Europe, Middle East were both up about 12% and Asia growth was in the high teens. This continued strong performance as a result of successful execution of the expanded service initiative we began in 2006. We continue to capture more new service agreements on both existing and new equipment systems and controls.

In the second quarter, for example, we expanded the number of new service agreements by 18%. We continue to broaden our service offerings to provide significant energy efficiency savings and get paid to extend the life of HVAC equipment in the field and we continue to expand our capabilities to deliver more service and energy solutions globally by putting more sales and fulfillment people on the field and helping them to be more productive and effective.

So far this year, we've added a number of additional service tax, reduced our attrition rate and made significant progress in our fuel automation goals to improve service and contracting delivery efficiencies. We are also benefiting from favorable market condition primarily aging infrastructure and rising energy cost to deliver strong revenue growth in areas like performance contracting where [ph] sales were up mid double digits for the quarter. The global market for this part of our business broadly referred to as HVAC parts controls contracting and services, is significantly larger than equipment and offers us a real opportunity to expand and continue to achieve significant growth independent of the behavior of the equipment markets.

Now let's turn to the residential part of our business, which represented about 23% of the total Trane business. First let's review the residential market. We estimate that industry shipments to new construction were down in the range of 25% in the quarter and replacement unit shipments showed a net single-digit decline. Overall, we estimate that the market for motor bearing units, which includes compressor bearing units, furnaces, and air handlers, was down around 10% in the second quarter. Our residential product sales in the quarter were down 12% year-over-year. Volume declined mid teens, price was essentially flat, and improved mix contributed mid single digit sales growth as we continue to significantly outpace the industry on sales of high efficiency systems.

So, to summarize overall for the quarter, Trane commercial sales were strong growing 10% reported and 7% ex currency with good global equipment and system sales balance and continued double digit growth in parts, services, and solutions.

Residential sales declined by 12% driven by a continued weak housing market but we do see some sign that the downward trend would decelerate because year-over-year comparisons get easier both for us and the industry. Weather also helps. July is shaping up to be a good month and should be nice year-over-year.

Next, let's review orders and backlog. Order pace in the Americas picked up to 12% growth year-over-year, ex exchange. Americas equipment orders were 5% and orders for contracting, parts, service, and controls remained strong, up 15%. International orders continued to show strength of 23% on a reported basis and up 14% ex currency. So, overall global orders were up 15% reported and up 12% ex foreign exchange.

Commercial backlog continued to grow on a global basis. We ended the quarter with global backlog of $1.1 billion, a new record for Trane. Global backlog was up 13% reported and up 9% ex foreign exchange. Backlog in the Americas declined by close to 5% while international backlog was up over 20% more than offsetting the Americas performance. International backlog now represents just over half of our total equipment backlog. So, in summary we would say that our orders and backlog are at levels to support continued growth on a global basis.

In terms of income, Trane's operating income, which is the way we report profits now that business is part of Ingersoll-Rand, as I said was $252 million for the quarter excluding $45 million of acquisition related items and $2 million of restructuring. We realized price increases of roughly 3% in commercial and we achieved productivity in the quarter.

However, these actions were not enough to offset materials and other inflation, lower residential volume and the investments we are continuing to make to grow the business long term. So, in summary for the quarter, Trane had good commercial sales performance with strength in International and Service and we continue to weather the downturn in residential.

With that I will turn it back over to Steve.

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

Thank you, Bruce. Please go to slide number 12. Moving to Climate Control on slide 12, revenues in the second quarter were $912 million, up about 8%. The global Thermo King transport business, revenue increased by 12%, an excellent performance considering the depressed state of the North American refer trailer market. Declines in the North American trailer market were offset by growth in overseas markets especially in Europe and by the expansion of global truck, bus, and sea-going containers. Climate Control also benefited from significant growth in auxiliary power units in the U.S.

Looking at just to Truck & Trailer piece of Thermo King, revenues worldwide were flat compared to the last year. North American industry shipments for trailers have been declining for the last six quarters as you know due to decline in truck ton-miles and higher fuel costs. Looking at the North American refrigerator trailer industry as a whole, second quarter unit shipments were down approximately 22%. Thermo King North American trailer sales were down about 18% compared with 2007. The European trailer revenues again exceeded our North American trailer sales.

However, the rate of growth in Europe has slowed compared with a strong double-digit expansion we have seen over the prior-year quarters. We expect lower growth in Europe from the second half of 2008. Worldwide truck, bus, and sea-going container sales expanded significantly in the quarter and Thermo King recurring revenues increased by 7%.

Finally, we enjoyed a substantial growth in our TriPac Auxiliary Power Unit where second quarter sales more than doubled compared to last year due to high cost of diesel fuel. This demonstrates all Ingersoll-Rand innovations are creating demand in tough markets.

Looking at stationary refrigeration, global sales were up slightly in the quarter. This was driven by an 18% increase in the Americas despite bases, parts, and services, which more than offset lower sales volumes in rest of the world.

Climate’s reported operating margin was 12.6% in the quarter, up 80 basis points versus last year. Margin expansion was driven volume and price and also by operational improvements, which together more than offset unfavorable product mix and ongoing inflation.

The CCT leadership team is making fundamental improvements in reducing cost in the transport business in the phase of sharply lower U.S. volumes in trailer. This performance again clearly demonstrates that our investments in innovation, geographic expansion, and productivity initiatives are paying off.

Please go to slide 13. Industrial Technologies second quarter revenues were $806 million, up 8% versus the prior quarter. Revenues for the Air and Productivity business increased by 11%. Strength in the Industrial and process markets outside of the U.S. were again the key drivers of the second quarter growth.

Air and Productivity revenues in North America decreased slightly as recurring revenue growth, which was up 8%, offset declining U.S. activity for new equipment. The Air and Productivity revenues in Europe, Asia, and India grew by 25% compared with 2007.

Club car revenues declined over last year. However, they continue to gain market share in the declining golf and softening utility vehicle markets. Segment operating income was $104.4 million, representing an operating margin of 12.9% down from 14.6% in 2007.

Improvements in price and productivity were more than offset in the quarter by the unfavorable impact of inflation and mix. Additionally, investments in growth initiatives and one-time cost of approximately $12 million related to product liability and recurring... I'm sorry liability and restructuring negatively impacted second quarter margins.

Please go to slide number 14. Security Technologies revenues were up… were $665 million, up 6% compared with very strong results last year. Commercial revenues were up 6% driven by worldwide commercial construction markets, especially schools, Universities and health care facilities. Revenues from electronics access controlled products were up double digits year-over-year. Americas sales in the residential segment declined 7% in the quarter against strong comparisons from last year, when we significantly outperformed the North American residential construction market. If we recall that last year we benefited from substantial shelf space gains at Big Box and from new electronic security product introductions. The results were inductive of the continuing decline in domestic residential building activity.

Operating income was $122.4 million or an operating margin of 18.4%, up 120 basis points from last year’s margin. You will recall, we had a similar year-over-year margin gain in the first quarter. Accelerated productivity and pricing actions more than offset unfavorable product and geographic mix and material inflation.

Please go to slide number 15. Let’s go to the balance sheet. For this analysis the numbers are on a comparable basis for 2007 and 2008, both exclude Trane. And you can see that we made progress in working capital management especially in inventory. Inventory improved by close to one half of a turn from 5.7 turns to 6.1 turns. Receivable days were down almost two full days and payables improved by two and half days. Taken together, these working capital elements are definitely moving in a right direction and are indicative of management’s focus on improving the efficiency of our balance sheet.

Capital spending in the quarter was $53 million, about 2% of revenue while depreciation and amortization was $44 million.

The biggest change in the page was clearly our cash and debt position. Our net debt position changed by $4.2 billion year-over-year due to the acquisition of Trane.

Herb will now talk about realizing integration synergies. Please go to slide 16.

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

Thanks, Steve. On June 5th, with the completion of the Trane acquisition we took another major step in our transformation towards becoming a leading diversified industrial company. The combined company has a stronger growth potential, better earnings consistency and better critical mass around the world. We are also creating a culture of performance and collaboration.

Now please go to slide number 17. This morning I would like to cover very important topics of integration synergies and long term productivity improvement, which should be key drivers for IR going forward. Our focus for 2008 through 2010 will be, first and foremost, to keep the business running smoothly and to realize cost reductions in our overhead and builds of materials, while laying the groundwork for multi-year aggressive continuous improvement.

We have established aggressive 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, Information Technology and shared services. The total G&A cost base we’re working on is about $500 million a year. There should also be substantial procurement savings available in both direct and indirect materials considering the overlap of both companies builds of materials.

The process improvement activity will also lead to manufacturing cost and quality improvement. That’s a total $9 billion cost base. Integration planning began back in January. We formed 14 integration teams, we staffed this effort with dedicated, full-time resources, both internal and external, to ensure execution with Vice President level internal resources bolstered with outside expertise as necessary.

Additionally, we are in the early stages of making customer contacts to realize growth synergies in the future. We currently have focused on high profile areas such as parts and services, control systems and overall co-chain developments.

Now please go to slide number 18. As we continue to review the ongoing integration activity, we are confident that the savings for 2008 will be $75 million and we expect to gain about $200 million in synergies in total by 2009 and $300 million by 2010. Any benefits on revenue synergies would an addition to the $300 million of cost synergies.

Now let's... please go to slide number 19. Putting IR and Trane together will create some large-scale efficiencies and unlock a significant amount of cost synergies. As I noted, we are expecting to generate $75 million of benefits in the second half of 2008. About $50 million is related to corporate costs with $25 million to come from procurement savings. We will also be working to realize the growth synergies.

Growth and cost synergies will be driven by accelerated implementation of lean Six Sigma and productivity initiatives. Ingersoll-Rand business operating system that's been developed over the last several years will get a platform for driving continuous improvement across the enterprise. Our goal is to accelerate our annual productivity increases from the historical 2.5% to 3% range to more than 4%. Our productivity gains indicate we’ve got strong momentum going forward in accomplishing that goal.

Now let's go to slide number 20. As we look forward to 2009, we concurrently see an additional $125 million in integration savings, which leave us with a year-end run rate of $200 million. The savings for '09 will again be primarily related to corporate items and direct and indirect purchase costs. We should also enjoy growing revenue benefits from growth synergies. The additional benefits translate to about $0.30 per share of incremental EPS in 2009.

Now please go to slide number 21. As the Trane acquisition was finalized about eight weeks ago, we’ve begun to leverage our collective strength in a number of areas. Employees have accepted the job opportunities between sectors and we’re working on numerous cross-selling leads. A partial list presented on the right shows a few new sales opportunities and other important ways our sectors are working together to drive this performance. We expect to see continuing traction in future quarters.

As in the slide, the picture on the left covers two of our key themes, innovation and [inaudible]. Club car along with being the most well-known brand in the golf market is also the world largest manufacturer of electric vehicles. The picture portrays a new street legal, all-electric vehicle, which we call the LVS. The first sale was to a Trane dealer in a small town in Missouri who is going to use the LVS to make service calls.

Now please go to slide number 22. With the acquisition of Trane, the major heavy lifting of portfolio changes had 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 divestures over that time frame. For the foreseeable future, our focus will be on acquisitions integration, synergy execution and cash generation. We obviously remain very excited about this transaction and the strong new company that it creates. We will continue to update you on our progress going forward.

Now let me turn the proceeds back to Steve who is going to take you through the outlook for 2008.

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

Thanks, Herb. Please go to slide number 23. Let me start by updating the economic assumptions behind our 2008 forecast. Slide 23 summarizes the key economic and business metrics for 2008. Like many companies, we would seem softening in the U.S. in the second quarter, which implements our expectations of further weakening in many of our key end markets in the back of the year. We are also assuming slower growth in Western Europe in the last half of the 2008.

And you can see on the upper right, we assume residential new construction markets will show no upturn before 2009. Non-residential construction put in place measured in dollars and a leading indicator to the Trane commercial business is expected to increase by about 5%.

Domestic non-residential construction, measured in square footage, will see about 11% year-over-year decline with institutional activity down slightly year-over-year. Our market mix and our nine to 12-month lag from the indicators will provide our security business some cushion for the balance of the 2008.

The refer trailer market in North America declined 15% in 2007 and is expected to decrease by an additional 15% as the market bottoms in 2008. Refrigerated truck and trailer volumes in Europe increased [ph] to offset the declines in North America. However, we believe that the European truck market peaked in the second quarter and the significant growth we experienced over the last eight quarters will stall in the back half of the year.

Finally, looking at the lower rate, we expect industrial production and capacity utilization in the U.S. to continue to decline modestly. The influence of weak U.S. dollar will continue to stimulate exports.

In summary, for the balance of 2008 we expect to see slightly declining markets in North America, slower growth in Western Europe and strong growth in South America, Eastern Europe and Asia with enough products, service and geographic diversification to sustain growth in spite of a few particularly tough end markets.

Please go to slide number 24. With this macroeconomic view, we expect third quarter growth, excluding Trane, to be in a range of 2% to 4% and about flat in the 2007 excluding FX. Full-year revenues, excluding Trane, will be up 4% to 5% compared to 2007.

On a pro-forma basis, Trane revenues are expected to increase 5% to 7% in the third quarter. For full year 2008, Trane revenues are expected to increase by 4% to 5% with a 3% to 4% increase in commercial equipments and a 10% to 13% year-over-year improvement in commercial services. Residential equipment revenues are projected to decline by 5% to 7% compared with last year.

Please go to slide number 25. Slide 25 breaks out the components of our annual growth projection. Looking at the upper right, we expect about 1%… 1% to 2% growth in local currency terms and assuming the U.S. dollar stays where it is right now, about 3 points of benefit from currency translation.

Looking at the upper left, we expect our four segments to deliver growth in the low to mid single digits with somewhat higher growth in Industrial Technologies business. Looking at the lower left, as we saw in 2007, our revenue growth will come from overseas markets.

We also expect cost inflation to remain an issue in the back half of 2008. Excluding Trane, full year 2007 material inflation was approximately $150 million. We expect about $120 million in 2008. Our new 2008 inflation network is about $10 million above our guidance of a $110 million and $20 million above our initial full-year forecast given in February. Full year material inflation for Trane on a pro-forma basis for 2008 is expected to approximate $140 million.

Please go to slide number 26. The next slide, number 26, puts together the respective standalone forecasts for Trane and old Ingersoll-Rand. As you can see in the right hand column, the forecast shows expected revenue for the combined entity of approximately $14 billion and a segment operating margin of about 12.5% to 13% for the full-year. We expect to realize $75 million of synergy savings during 2008. Likewise, we assume one-time charges associated with the Trane acquisition to approximate $135 million, or about $0.31 per share.

The interest expansion and interest income associated with the total outstanding debt and expected cash position reflects the impact of the acquisition. The effective tax rate should be about 21% to 22%. Ending up all of this brings us to total EPS from continuing operations in the range of $3.80 to $3.90. Please note that this does not include the $0.31 of one-time charges, which we will incur throughout the year. We retained about $0.16 per share of expense related to cost associated with discontinued operations. This forecast is based on 305 million average share count during 2008.

The combined company should be a strong cash generator with available cash flow of $1.1 billion in 2008. However, this amount does not including about $600 million in tax payments related to the gains of Bobcat divestiture that was made in the first quarter of 2008.

Switching gears to the third quarter of 2008, we expect the combined companies to have revenues at approximately $4.4 billion. Segment operating margin should be 12.5% to 13% with earnings per share from continuing operations at $1.05 to $1.10 per share. One-time items are expected to be approximately $0.11 per share and discontinued operations is expected to be about $0.02 per share of cost. This forecast is based on an average share count of $325 million shares.

I'll now turn it over to Herb for the wrap up. Please go to slide number 27.

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

Thanks, Steve. We completed a very productive quarter. We finalized the acquisition of Trane, again achieving our planned synergies and we've exceeded our earnings guidance. Additionally, we're very mindful of the slowing macroeconomic environment and all of our businesses continue to make important ongoing strides in operating efficiency and cost reductions.

We believe, we've significant opportunities going forward to achieve earnings growth in sluggish markets through revenue growth from innovation products and services as well as recurring revenue expansion. We will bolster this growth of margin gains derived from continuous improvement and higher productivity from lean Six Sigma activities. And finally, there are significant synergies available from the Trane acquisition. I see a bright future for Ingersoll-Rand going forward.

Now, I would like to open up to questions that you have. Thank you.

Question and Answer

Operator

[Operator Instruction]. And we will go first to…[Operator Instructions]. And we will go first to Terry Darling with Goldman Sachs.

Terry Darling - Goldman Sachs

Thanks. Herb, I am wondering if you could take us through the drivers by segment of the change in the expected margins on the full year '08 forecast. I guess the first item is Trane going from 11% to 12% to 9.5% to 10%, maybe if you could take us through those, that would be helpful.

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

Shawley is first to that and I will do the rest for you.

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

Sure in that original guidance of 11% to 12%, there was some contingency baked in, I believe, that Ingersoll-Rand put in not in the Trane margin but down below and so what you see in the decline in the margin projection is really the combination of putting that contingency back up into the Trane margin number itself. That’s about half of it. The other half is, higher materials cost that we see in the second half of the year and some impact of business mix where we are trading commercial equipment sales for service sales and have a little bit of hurt in an incremental margin basis.

Terry Darling - Goldman Sachs

Okay. Do you want to speak about others?

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

Just a comment, start with Climate for the year, what’s driving Climate for the year is pretty much the same as the what's driven Climate year-to-date. Experiencing slower markets in the trailer segment as we talked about. Offsetting that was the revenues coming from the Auxiliary Power. Auxiliary Power units have seen significant sales up tick, in fact in second quarter we saw about 124% increase in that product line. So that's offsetting to a large the top line. The Hussmann business, particularly in the U.S. is improving nearly due to the fact that we are picking up a little bit of share plus making significant improvements in the operations there. That’s going to continue through the year and as we said the impact of Europe slowing will have a little bit of down ramp on the top line, particularly in the third quarter. But the productivity, pricing and cost focus is going to be enough to, we think, drive Climate to a situation where there will be about one full percent improvement in margins year-over-year.

Security, I think in the second half, is going to be significantly affected by the slowing commercial markets. As you all know that’s a significant piece of our security business. The drop off in the second half is [inaudible]. You can see on our charts that we have provided. Also continuing softness in the residential market, we have seen significant improvement in price in Security. That seems to be an opportunity there that will help us for the full year.

The net material improvements we’ve seen in the terms of this productivity has been very expensive in Security. So the operating margins are improving a bit for the year and I think the total improvement forecast for Security is one point to two points in this forecast. So, those are the main things there.

In Industrial Technologies, again the slowing industrial markets in the U.S., that was… not as much of a concern in the second half as we have for the residential and commercial markets, but we are seeing again productivity improvements in Industrial. Inflation in Industrial is probably hurting us a bit more because of the steel content there. So we are still looking for improvement year-over-year and if you back out the one-time issues that happened in the second quarter, we think... we see us being on track to improve margins and productivity as well.

So, the whole story rose up and I think if you had looked at the second half forecast, it's really built on the fact that we are making improvements in productivity, margin enhancements in all the three old sectors of Ingersoll-Rand and that's going to be critical for this forecast.

Terry Darling - Goldman Sachs

Helpful color there. I appreciate that. The… on the old Trane, hard for me to pin point from those comments exactly what sort of the primary driver is. Is it a little bit of slowing in Europe and a little bit of raw material pressure on Industrial?

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

I think we… Terry if I look at it this way, saying that on the Trane side of things what we see as, again compared to how we had forecasted when we did this back in April, what we see is more material price pressure than what we had seen before. We didn't expect the $100 plus million. We thought it was going to be less than that and a lot of that comes out of the steel and some from copper, but steel is really the big driver that comes out of that part. And I can’t leave you saying that I think we also saw in terms of we had thought we would do better on pricing on some of the residential side. We didn't see that coming through. If I move over them into rest sort of the IR type businesses, if you look at first half to second half, Climate Control continues to be frankly going from 12% probably up to 13%, the Industrial Technologies piece probably goes from 13% up to over 14% and then the security in second half is actually running close to 19% but that's because we always have a stronger second half margin in security than we do in the first half.

So, overall I would say to you is that it isn't the margin side that's different than what we talked back in April, it really is the revenue side. We did not see the slowing down. When I was talking to you back in April, I did not see, did not forecast, we didn't see in our numbers of the slowdown in Western Europe as much as we currently are forecasting it today. Maybe I am over conservative but that's really the change, more on the revenue side than it is on the margin side.

Terry Darling - Goldman Sachs

And lastly, I hope last quarter you were helpful with a kind of back on the envelope first sense of things for 2009. I am wondering if you could take us through an update on that.

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

Yes, I would get accused of doing this after I answer you, but the diversity of not disappointing my colleagues around the table, let me say this way that, again it's kind of interesting listening to what you see the outside grow. But if I look at it, I've seen more like a U, and I see in shape of coming down in… it could be the '08 and then going up again for '09. So, overall if I make just an assumption going in that '09 was in aggregate very similar to what you see in '08 overall, but may be being weaker in the first half and stronger in the second half. If I take that and put it all together the way I kind of look at it is that we wind up replacing in the first five months of the year, Trane income comparing it against obviously with ahead of interest income for the money that we had and then adding on to that obviously interest expense. When I take that and then I look at the synergies that we add in, we come up with a number, in my thinking on it, which just well north of the 415, 420 type thing, that’s if you assume the same kind of math in 2009 as we currently have in 2008. And I don't know if that's a conservative forecast now or not. So that's why we will give that to you later on in the year. So, all in when we look at the comparison between where we were as IR, add on Trane to track the cash that we had in the first part and then obviously the synergies that I told you about the $0.30, you add that all up and you come up with a number that’s well north of 415 to 420.

Terry Darling - Goldman Sachs

So, is that pretty much unchanged versus previous?

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

Yes that's pretty much in terms , but we were actually saying is that, I think if anything I was looking at to be higher than that. I am taking now off of the lower base in the second half on revenues than what I was thinking about three months ago and that's why this is Austrian math rather than a formal forecast that we are sort of giving you. But just overall, if you just sort of think of where we are today and if I think that the third quarter slows the way we put it in and the fourth quarter in turn comes pretty comparable to that to get through the numbers we have this full year that’s a lower base that I thought we would be coming and hopefully there is some upside there, but overall, I would say that I feel them going in for the next year, but takes us north of 415, 420, 425 number all based on what you guess on cost of material and obviously the ongoing issues of material costs in a big way.

Terry Darling - Goldman Sachs

Thanks very much.

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

How about our next question?

Operator

We will take our next question from Andy Junien [ph] with JPMorgan.

Unidentified Analyst

Hi, guys. [inaudible]

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

Hi. Good guess.

Unidentified Analyst

One question and one follow-up, I promise. Can we go back to the input cost again? You said that $120 million for Ingersoll ex Trane, just what you said Trane itself is going to be?

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

Trane was going to wind up being another $140 million on top of that.

Unidentified Analyst

Okay. And does that --?

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

Copper and steel being very, very big pieces of their’s, Andy, really they got hurt by it more than we did in some of our other sectors. So, their number is actually higher than ours on it. That's a full pro forma basis.

Unidentified Analyst

Sure. And then the procurement savings, the $25 million that you expect to achieve by year-end, is that saving embedded in this forecast of combined $260 million or whatever?

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

Yes, when we do the 380, 390 full year we said this is our operating results incorporating the $75 million of synergies and excluding obviously the one-time cost we had talked about.

Unidentified Analyst

Okay. And then my follow up is on pricing and you had about 2.4% pricing in second quarter. Can you walk us through your outlook for pricing by segment in the back half?

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

Yes, I think that a lot of the pricing is actually in. We are not looking too much extra above and beyond that. So, my expectation full year are fairly comparable to where we have been so far. If you look at Climate in terms of what it is running it can be less than 2% range, Industrial is close to that and Security is actually the highest because of what we've put in in the second half of the last year. They are actually running up almost up to 4%.

Unidentified Analyst

And Trane or ACSS?

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

Bruce, I think, it’s about 2 to 3 is sort of… the kind of number overall right? Is that right?.

Bruce Fisher - Vice President of Strategy and Investor Relations

Yes, about 2 to 3.

Unidentified Analyst

Okay, I will get back in line. Thanks.

Operator

We will take our next question from Andrew Obin with Merrill Lynch.

Andrew Obin - Merrill Lynch

Yes, good morning. Great quarter, just a question in terms of the guidance I am trying to reconcile, slide... I guess it’s slide 26 versus the slide 25 that you had in 1Q of '08, it seems that EBIT reduction is, based on my calculation, is somewhere like $0.35 over negative drag. Then higher… lower interest expense is a positive tend and I think share counts I am estimating is I don't know like $0.07 or $0.08. It all seems to add up to $0.18 of lower EPS. So can you explain how the flat EPS guidance even that you have taken down your EBIT significantly and the share count and interest expense is not enough to offset it?

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

Andy, let me take a shot at that. I think if you look at where we were three months ago with this whole thing we were anticipating some of the things you heard today. The slow mix volume in the commercial markets and the impact of inflation and just what was happening in the second half. So the guidance given three months ago and this is coming from a new guy, taking a look at this, okay…I would say that…that was fairly well hedged still. So, when you give a number calculation between the Trane piece of the guidance last year, for full year and what we are saying now, we have put that conservatism back up in the forecast. I think the fortunate realization that we are seeing, inflation we are seeing the impact for the markets impact us. So the short answer to your question is that some of these risks and some of these downsides were included in the overall guidance of $3.80 to $3.90 last quarter and now we are pushing them back of the individual pieces as we learn more about what's happening in the Individual segment.

Andrew Obin - Merrill Lynch

Got you. So basically a little bit of hedge has gone basically.

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

Yes, you got it. Yes.

Andrew Obin - Merrill Lynch

And as the second question, this is not a statement if more a request, for years we used to include discontinued ops in guidance, it seems that we stopped doing that. So and this is just trying to wonder how should I put my numbers on for first call, should we include discontinued ops? Or should we exclude discontinued ops and I am not it makes any difference, but just for consistency sake, have you changed your reporting?

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

Andrew, historically we have included discontinued ops as part of the discussion. We started to show the continuing part of it try to break things into pieces so you could track them, but I think the numbers in first call going forward should include discontinued.

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

Yes, Andrew, we tried this that if you could think what we were concerned were we... we throw into discontinued ops, you would always wind up seeing tremendous gains from the transactions that we had completed. We didn't want that to crowd it at all, but you were to go look at things going forward, the way I view it is that as you get into it, basically disc ops cost us about $0.02 a quarter. That will be like what I call more of the steady state for the foreseeable predictable type future and as soon as we wind up getting rid of all the noise in the disc ops, which totally distorts all the numbers, we plan on really continue to go back in and again and include this $0.02 number. So when you put your First call stuff in that's really we think you should put that in there, will get included in all forecasts.

Andrew Obin - Merrill Lynch

Gotcha. I appreciate it. Thank you very much.

Operator

We will take our next question from Shannon O'Callaghan with Lehman Brothers.

Shannon O'Callaghan - Lehman Brothers

Good morning.

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

Good morning.

Shannon O'Callaghan - Lehman Brothers

First, I guess a question what's one-time here with respect to the ongoing amortization of Trane, I am just trying to understand it looks like the 13.2% margin… operating margin ex items backs out the ongoing amortization of Trane. I mean is that…is that ongoing amortization in or out of the guidance at this point?

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

It is included.

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

The ongoing amortization piece Shannon is in the numbers, okay? It's a little bit confusing because if you take a look at how it's working here there is $46 million of one-time cost associated with the acquisition in the numbers for the quarter, $11 million of that falls out into unallocated corporate, okay? And you have to pull back about $10 million or so of ongoing amortization cost back up to the Trane segment. So what's in the Trane segment of the $46 million is about $35 million of one-time costs, okay. That's primarily inventory step-up write-down, R&D in-process write down and some other costs associated with the acquisition. So, a little bit confusing because the numbers happened to be the same, but I don’t know if that clears it up your analysis, we can certainly try to send you more information if you need it.

Shannon O'Callaghan - Lehman Brothers

Yes, maybe I will follow up, I mean... even just on the... on the basis of your slide... slide 9, I mean, we know $3.81 billion of revenue and a 14.4% segment margin guidance, and 46 of corporate doesn’t look like… looks like it gets 12.9% operating margin ex items and it looks like that 9.6 might have been the difference, but you are basically saying the one… so you are just saying 103 and a 380 to 390 for the year bake in the full amortization of Trane?

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

Yes, it does, Shannon.

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

Shannon, yes, we have the ongoing amortization reflected in the numbers we provided for a guidance going forward. It’s is not considered as a one-time event.

Shannon O'Callaghan - Lehman Brothers

Yeah, I mean, that's what I thought... I just having little trouble... again but I will follow up on you with that. In terms of… on price maybe Bruce can we dig in a little more to that? I mean... I think... you guys said you are not assuming sort of additional price in the second half and may be you didn't get as much as you thought in residential, I mean, is that matched out at this point? I mean if you basically hit a wall and figure assuming no further price?

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

No, no Shannon, I don't think it's true, I think... we want out first in residential with price increase and we took a couple of month for competitors to follow those results in that interim period and for the fourth quarter of 2000... of second quarter 2008. We didn't see as much prices perhaps we had hope to get. Now everyone has announced price increases, so there should be some more price going forward.

Shannon O'Callaghan - Lehman Brothers

Okay, I leave it at that. Thank you.

Operator

We will take our next question from Eli Lustgarten with Longbow Research.

Eli Lustgarten - Longbow Research

Good morning.

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

Hi, Eli

Eli Lustgarten - Longbow Research

Terrific performance in this environment. Just one quick clarification, I think you said the incremental material cost for Trane was $120 million. How much of above your planning was that?

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

When we started the year off Eli, I thought the number was going to be around a 100 and then the wound up, going up 10 in the first quarter and we just added another 10 now, so we are now around at about a 120 and as I said most of it candidly was, we did not in our forecast assume this steel piece going up as much as it has, we saw steel more like $700 to $900 and obviously it’s been running over a $1000 of what’s in there. So that has been really the biggest driver. Our copper has been pretty much in line with where we thought it would be, which is good news it’s just compared to forecast and zinc is a little down, but obviously the two big drivers for our company going forward with the combination with Trane businesses and the traditional IR businesses is going to be the copper and steel pieces, so that’s the one that we really need to keep focused on and those are the two as I said that collectively we took the number up about 20 million that we thought when we went into the year back of seven months ago.

Eli Lustgarten - Longbow Research

And is that the indication that the pricing to recover that $20 million maybe difficult to is that what you are trying to say?

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

No, I'd say to that, I think that increase is why we were able to realize the full 24. If you go back, remember we always talked about, I thought that was a number to have your increases less than 2% and now all of a sudden we are seeing, we are actually north of the 2% and I think we are able to put it through because that I think our customers realize when they are starting to see in terms of... the costs that we have there?

Eli Lustgarten - Longbow Research

And as a follow-up, can you give us some ideas how long does the backlog at Trane last, given that the softness we are seeing and Hussmann I think, you said European food service was down all of a sudden... that has been running middle to almost double-digit for a while, that just opens and [inaudible].

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

Bruce, do you want to…?

Bruce Fisher - Vice President of Strategy and Investor Relations

Sure, in Trane commercial the backlog typically you could think of it in the range of three months to nine months in duration.

Eli Lustgarten - Longbow Research

Does that set up a problem for next year because you are sort of late in the construction cycle where it is going down that we are into a problem looking into ’09 and --?

Bruce Fisher - Vice President of Strategy and Investor Relations

No, well [inaudible] is that what you have now in the backlog is something you're going to be shipping mostly by the end of this year into the first quarter and that obviously what you're looking at is, you don't get orders that far in advance. So, during the third quarter we'll be getting orders in, backlog in that we expect to ship everywhere from as early as the fourth quarter to as late as maybe the second half of the next year. For us the key part I would tell you, I think the focus on here is the increasing percent of the recurring risk to the revenue stream that's now over half of the revenue overall. And that's the one that I keep looking at where, again, [inaudible] acquisition part, that's been growing double digit and so that's where we're going to keep driving that, while we're looking at possibly in terms like tempering, if you will, the overall non-res construction stuff.

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

And let we have Steve speak to the decline in control, please.

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

Yes, Eli, you're about the case business outside of the U.S. really boils down to the... what we're seeing prices yielded Europe out predominant retailers over there and… expanding the region in Eastern Europe, seeing growing markets there and are driving the prices to the point where we've actually just said look our focus is on improving the profitability of Hussmann and we're not playing in those kinds of price levels. So, it’s not so much of market issue as more share and it is intentionally so, because of the profitability impact we have. We are responding to that by moving production to Central Europe, the Czech Republic, in order to try to combat the cost side of that and pretty much same thing is said about Asia and we're seeing similar kind of our pricing activity going on in Asia. So, we are evaluating our internal strategies to how to deal with that, in the mean time we are not in a business so that we lose money on.

Eli Lustgarten - Longbow Research

Thank you very much.

Operator

We'll take our next question from 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

Nice quarter. Just to clear, a question on the full-year guidance, so, essentially you had about $0.23 of contingency or buzz whatever you want to call it, off the books, and you now put that back in because of power inflation, lower volumes whatever, is that the way to think about it?

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

Yes, I try to use that what we've thought was going to happen is now happening and it's going to go and preclude are really going up higher unless we continue to see higher revenues, yes.

Nigel Coe - Deutsche Bank

Okay, great. And then secondly, on the target for synergy Trane obviously you've kept those unchanged there is still a bit of debate with investors about whether those targets are achievable? Could you maybe talk about your comments levels on those targets and what you might see as trap some of the down side risks to those numbers coming through in '09 and 2010?

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

Nigel, this is Steve. Let me just comment on this. We've spent an enormous amount of time focusing on each of these pieces of synergy. I'll take the pieces in 2008, if you look at the numbers it is about $50 million of corporate spend and we've that nailed down budget-by-budget, headcount-by-headcount. So, when we look at what we do month-to-month we track those profiles of spending. And I am talking about the total spend, both corporate entities and what was Trane and what was already us around. That piece, I'm very, very confident and if you take a look at next year, we're expecting another $50 million of corporate synergy, in another words, of full run rate, about $100 million overdone. And again that's the function of coming out of 2008. So, we feel very good about that piece. The procurement piece in 2008 is driven primarily by one of our indirect material savings. The things like partial freight, insurance premiums, legal fees, IP synergies. So, those are easier to get because those are negotiations with the vendors or suppliers. Okay. Those are ongoing and we are collecting those as we go so those are countable, those are visible, those are tractable. As we move into 2009, we are going to be more depend upon what I will call the direct material piece of the synergies and we are focusing right now on aligning our engineering organization, our procurement organization, our focus around the world as to what we have to do to drive those projects and it's simple as getting the drawings prepared to do fees in a timely fashion so we can realize the benefits. The packages we’ve send on direct material the returns are coming in very nicely. So I feel that we will see significant benefits on our direct materials. And since that's going to occur a little bit later in time out into the 2009.

Nigel Coe - Deutsche Bank

Okay. Okay. That's helpful. And then just a couple for modern questions. TriPac sales you said that that's good growth, can you just call out that number maybe what you are expecting the 2008 sales and what was D&A including Trane?

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

It's interesting I mean if you take a look at the dynamics of that thing it's, at $4.50 a gallon of diesel, it's a 12 month pay back and diesel is running higher than that so you just can do the math on what customers are seeing from a value opposition. We are expanding to drive fleet. If you look at promoting strength that was through the distribution network to refrigerated carriers, we are seeing a much greater expansion into drive fleets at this point in time and of course the ability to service and provide sales force from a dealer network is critical. So for the year, and for the quarter I mention we were more than double of 124%. And for the year we are looking to be up north of 60% in product line, which comes at a very, very good time relative to where we are in North American Trailer.

Nigel Coe - Deutsche Bank

And the sales?

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

Sales totaled about a $115 million for the year.

Nigel Coe - Deutsche Bank

Great. And then just finally just the D&A increase in Trane for the quarter?

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

$89.5 million if I have this correct here.

Nigel Coe - Deutsche Bank

Great, thanks a lot.

Operator

Okay. We will take our next question from Robert Wertheimer with Morgan Stanley.

Robert Wertheimer - Morgan Stanley

Hi, good morning, everybody. Two quick follow-ups. Can you give the... if you didn't already, I don't think I heard it. Can you give the materials cost for the first half versus second half of that $120 million?

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

Yes. We were looking so far for [inaudible]. We are talking honestly almost 50-50, we don't really see that’s being a lot different.

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

All right. Let met get the one [inaudible]

Robert Wertheimer - Morgan Stanley

Yes.

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

I don't think it really is that much different for the first half of the year, by the time we get done with the second half it is about the same thing, it’s about half up.

Robert Wertheimer - Morgan Stanley

That's actually interesting just given the way stuff is accelerating, is that?

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

No. Not really. So you have awful lot to do with what we saw and we were hedging before on the corporate side that what we weren't doing before and so when you really get done with that overall and saying that copper has actually comes slightly back down again from where it was in terms of metals. So we are seeing more like a… think if it is more like a bell shape curve as to what we have been looking and we don't think the back half is a lot different than that.

Robert Wertheimer - Morgan Stanley

Okay. And then on Trane, when you did the apples-to-apples, which is really helpful, you left them on LIFO, right?

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

Yes, we did.

Robert Wertheimer - Morgan Stanley

Perfect. And last question I guess one of the things that's surprising to me is just your pricing is pretty good in the toughening environment. I am wondering if you could break out may be it's for Thermo King U.S. versus Europe and I am trying to understand if you can get pricing in the slow environment or if its just you’re you are getting more on the ones that are hanging on so far. I mean, is it similar in the U.S. and Europe on Thermo King?

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

No. It's different. The U.S. is pretty flat, if you look at… that market trend started as we said really in 2007 where we were down 15%. So when you look at pricing availability in that market which really tough for '08. Pricing has improved in Europe because of the market conditions and we have also introduced new products over there. So, that’s really what’s driving… probably higher than expected price realization in Europe and lower than expected because of market conditions in U.S.

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

Let me go back and redo my Austrian math if I can… check out… I had only two other categories, while Steve was talking I have been doing the rest for you and when I add in all of the other miscellaneous what I missed in my numbers to you okay was a latter step we do in our [inaudible]. When added those pieces back up again and deduct the total number, what really comes out is that we are talking about somewhere along the lines of less that $50 million in the first half and over about $70 million in the second half when I go all there, not just copper or steel, which I was talking about but I got to add in my colleagues here who are kicking me in the meantime talking about adding in all of the other stuff that we had, it’s probably more oil related. So, all in with total inflation including not just steel and all that kind, we are actually, I said, it’s more like 50 to 70.

Robert Wertheimer - Morgan Stanley

70 perfect. Thanks for the…

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

The job I have done.

Robert Wertheimer - Morgan Stanley

Okay.

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

Okay.

Robert Wertheimer - Morgan Stanley

Thanks.

Operator

We will take our next question from Jeff Hammond with KeyBanc Capital Markets.

Operator

Jeff Hammond - KeyBanc Capital Markets

Hi, good morning guys.

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

Hi, Jeff.

Jeff Hammond - KeyBanc Capital Markets

You just… I mean you've been doing a nice job on productivity, hit that 4% bogie this quarter, how are you thinking about that within your guidance in the second half of the year?

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

More of the same.

Jeff Hammond - KeyBanc Capital Markets

Okay. And just to begin on commercially HVAC a little bit within Americas maybe, Bruce, you can speak to what you are seeing between unitary and applied within the Americas and if you could just speak qualitatively to the replacement market, are you seeing a benefit from because of higher utility cost or conversely are you seeing push outs as people extend their life in the tougher environment, may be just a little color there?

Bruce Fisher - Vice President of Strategy and Investor Relations

Sure Jeff. First let me talk a little bit about the vertical markets we see there. In the second quarter, we actually saw particular strength in four of the seven markets that we track lodging, government, healthcare, manufacturing and in an aggregate they were all of at least high single digits. Commercial office and education were relatively flat and retail was down double digits. So, as you can imagine since retail tends to be more towards the unitary side like commercial unitary that's why we saw a small decline overall in terms of the light commercial unitary. The large commercial unitary and the applied were actually up mid to high single-digits for the quarter.

Jeff Hammond - KeyBanc Capital Markets

Okay. And then just comment on the replacement market?

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

You mean for commercial or for residential?

Jeff Hammond - KeyBanc Capital Markets

For commercial, just in terms of… are people buying into higher energy efficiency.

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

Yes, I think so and I guess the one thing I would point to that would suggest that is when we look at the performance contracting work that we are doing and this is where we go and work with the customer and they can pay the upfront cost of the new equipment with... generally these are replacement jobs and they pay for the... the capital cost of the equipment out of the energy savings and as I mentioned that part of our business sales were up roughly 50%.

Jeff Hammond - KeyBanc Capital Markets

Great, thanks guys.

Operator

We will take our question from Dindle Doun [ph] with Bernstein.

Unidentified Analyst

Good morning.

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

Good morning.

Unidentified Analyst

Two things... it's one of the follow-up, so your unallocated corporate expense for FY '08 Q1 was about $150 million, you now guided to about $170 million to $180 million, what's in the $20 million to $30 million that you didn't you expect in that corporate expense?

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

Yes, let me take a shot at that, I think it goes back to the comment I made earlier. Three months ago we had a pretty good view of this total picture in terms of what if I was going to take to integrate this business and to do the things we had to do to affect the acquisition. As we have been enable to do a fine line forecast line-by-line planning out the things for this falling prices in different places than we expected. For example as some of the one-time costs we just mentioned about $11 million in the quarter was in the unallocated corporate line. Also I think that there is a bit of…and when we put the forecast together we didn't have a good projection of time line as to how long the some people are going to be still on the rolls to affect the actual transfer, and we have people on the retention deals we have those kind of things going on. So what we are seeing and we expect to see is that those costs even themselves out as we go into 2009 some of them disappear. We got a full run rate of corporate spend and we expect to be approaching the $150 million in 2009.

Unidentified Analyst

Okay. I guess that brings me to the next question which is, I guess for everyone expect to Bruce. So what do you know about Trane now that you didn't know before the deal closed?

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

Why I think what I know about is the fact that we have as much, if not more, opportunity both in synergies, revenue side as well as on the cost side. I also know more about what the different technology issues are that we probably have to go deal with going forward and the opportunity the present. I just came back last week. I was over in the China and we were meeting with those folks on the kind of things we are looking at how attractive is it to consider introducing a residential solution, where we currently are just commercial outside of North America. I mean, those are the kind of things I think that we are continue to focus on. I think that we found that there is some great practices that Trane has that we are going to be adding to our business operating systems and I think there is some that we can add to their part. So I think what we are learning about each other in terms on it really is a very, very positive overall and as I said before I think that I am even more optimistic than we were before. And if you saw that one chart that we showed about the revenues stuff, we do not have any of that yet included droller wise. We are still working it, initial numbers I will tell you up front that could be very, very significant we are talking about $100 million, $200 million, $300 million just the question of how fast we could realize it. So I am even more existed than when we started, and I think we’ve got some great people and we got a great brand and we got to work it.

Unidentified Analyst

Is there anything negative that you found out since the close?

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

I think the negative piece we found out in terms to saying is that the residential piece in terms going to be tougher to go through and we have to continue to work that far. But I don't… that’s just because frankly we haven't pay that much attention to beforehand because it wasn’t part of our business profile expect for what we had usually like residential stuff. So I think that to me in terms of this soberness of the replacement market with people making decision there that been frankly has been a challenge for us.

Unidentified Analyst

All right. Thank you.

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

And you see that there in the numbers when we talk about revenues being up 12%.

Unidentified Analyst

All right. Thank you.

Operator

We'll take our next question from Ted Wheeler with Buckingham Research.

Ted Wheeler - Buckingham Research

Yes, hi. Good morning. One kind of just housekeeping, on the amortization conversation we had a moment ago. I think I am interpreting it that the amortization on going is excluded in the $1.03 that we just… or reported and that it will be included here after, is that correct?

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

Ted, let me be real clear about this. Okay. The ongoing amortization is in the $1.03 and it’s in the guidance for the year.

Ted Wheeler - Buckingham Research

Okay, I interpreted that that was part of what was removed in the press release. The other…thank you… the other question I had was on the residential and the overall pricing issue at Trane, how much of the $140 million raw material headwind do you think you are going to end up recovering in '08 and do you think you can put pricing into ultimately recover it, I mean I know there re new things moving around in '09, but do you think, you can get pricing to recover the $140 million in '09?

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

Ted, I think the answer to that is yes although timing is always problematic because…

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

Lag.

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

Right. There is always a lag.

Ted Wheeler - Buckingham Research

How much do you think will be shortfall this year, just to get?

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

I don't… hard to put a number on that. I think we could be slightly behind.

Ted Wheeler - Buckingham Research

Okay, thank you.

Operator

We will go next to Andy Casey with Wachovia Securities.

Andrew Casey - Wachovia Capital

Good morning, thanks. Just a detailed question on slide 24 for Climate Controls, of forecasted growth is accelerating in Q4 from Q3 and I'm little confused if you could help me understand because the transport side seems to be getting a little bit kind of flattish if you will overview you have stepped away from business to avoid margin compression, is the acceleration all coming from North America in stationary side?

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

Yes. In fact, we look at the North American in the fourth quarter, Climate Control is very, very heavily depended upon the North American stationary piece. That's been a seasonal story for a long, long time. We picked up market share that will appear in the fourth quarter, I am not going to any specifics, but if you look at what will happen there it will be a significant, we believe more equipment shipments in the fourth quarter than the year, that's a big part of it. I think that the other piece is that they are continuing strength of the APU that's offset half of the trailer business in the U.S. and the other thing is that it goes with the equipment piece or Hussmann that is contracting quite frankly installation type businesses that help drive that. So, you are going to get a balance there, third quarter if you look at that piece, let's get the pretty hard comparable path, past years and that is going to be the tough spot for the year.

Andrew Casey - Wachovia Capital

Okay, thank you very much.

Operator

We have no additional questions in queue at this time. I'd like to turn the call back to over to the management for any closing remarks.

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

Thank you very much Patrick. We are going to wrap up now. Thank you for joining us. There will be an instant replay of today's conference call available at approximately 1 PM and will be available until August 8. Calling number is 888-2031-112 and the pass code is 230147. The audio and slides of today’s conference call will be archived on our website and finally the transcript for the conference call will be available at Ingersoll-Rand website next week. Thank you all very much. We are now concluding our call.

Operator

This concludes today's conference. We thank everyone for your participation. You may now disconnect your lines.

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Source: Ingersoll-Rand Co. Ltd. Q2 2008 Earnings Call
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