Ingersoll-Rand Co. Ltd Q3 Earnings Call Transcript

| About: Ingersoll-Rand plc (IR)
This article is now exclusive for PRO subscribers.

Ingersoll-Rand Co. Ltd. (NYSE:IR) Q3 2009 Earnings Call October 23, 2009 10:00 AM ET


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

Michael W. Lamach - President, Chief Operating Officer

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

Joe Fimbianti - Director of Investor Relations

Bruce Fisher - Investor Relations Vice President


Nigel Coe - Deutsche Bank Securities

David Raso - Isi Group

Jeffrey Sprague - Citi Investment Research

Stephen Tusa - J.P. Morgan

Jeff Hammond - Keybanc Capital Market

Mark Koznarek - Cleveland Research Company

Shannon O'Callaghan - Barclays Capital

Eli Lustgarten - Longbow Securities

Ted Wheeler - Buckingham Research

Robert Wertheimer - Morgan Stanley

Daniel Dowd - Sanford C. Bernstein

Robert Mccarthy - Robert W. Baird

Andrew Casey - Wells Fargo Securities


Welcome to today’s Ingersoll-Rand Third Quarter 2009 Earnings Conference Call. Today’s conference is being recorded. At this time I’d like to turn the call over to Bruce Fisher, Vice President of Strategic Planning and Investor Relations. Please go ahead sir.

Bruce Fisher

Thank you Teresa, and let me add my good morning to everyone as well. We released earnings at 7 A.M., this morning and the release is posted on our website.

Concurrent with our normal phone-in conference call we are broadcasting the call through our public website. There you'll also find a slide presentation for the call. To participate via the web please go to, click on the yellow icon on our home page. Both the call and the presentation will be archived on our website and will be available tomorrow morning beginning at 10:00 A.M.

Now if you would please go to Slide 2 of the presentation. Statements made in today’s call that are not historical facts are considered forward-looking statements and are made pursuant to the Safe Harbor provision with federal securities law.

Actual results may differ. Please see our SEC filings for a description of some of the factors that may cause actual results to vary materially from anticipated results. In addition, please refer to Slide 26, which covers the use of non-GAAP measures to prescribe the company’s performance.

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

Herb and Mike will review our business results, Steve will cover our financial position, and then Herb will summarize our outlook for the rest of the year and our preliminary framework for 2010. We’ll then open the lines for your questions.

So if you would please go to Slide number 3 and I will turn it over to Herb.

Herb Henkel

Thanks Bruce and good morning and thanks to everyone who dialed into this morning’s call. In the third quarter we continued to focus on performance, achieving better than expected results on our productivity, new product programs, while facing continued market challenges.

Third quarter reported earnings from continuing operations were $0.68 per share. Adjusted EPS $0.70 a share, excluding $0.02 of restructuring and including $0.04 of discreet tax benefits. This improvement in EPS reflects better than forecast at operating performance which offsets from lower volumes.

For the quarter revenues were $3.5 billion which is down 19% and versus prior year and down 17% excluding currency. Third quarter revenues were at the low end of our July guidance where we anticipated revenue ranges of $3.5 to $3.7 billion.

The decline in order intake was in line with the revenue drop and was off 20% year-over-year excluding currency effects, orders were down by 17%. All of our segments improved operating margins compared to the second quarter and total segment margins were up 1.5 points sequentially adjusted for restructuring.

We also hit our 5% goal for gross productivity through a combination of tight cost controls, restructuring savings, train synergies, and operational improvements. We also held or gained share in most of our businesses and continue to develop and introduce new products which had helped mitigate some of the weaknesses we see going forward.

Our sharp focus on cash flow management continues to really pay off. We generated $1.2 billion of available cash year-to-date well ahead of our annual target. We used this extra cash to pay down our total financing by $850 million and particularly full year target, a quarter early.

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

Michael Lamach

Thanks Herb. And with that please go to slide 4. This slide gives a quick summary of revenue and operating margins for the quarter. As Herb mentioned, the full year revenues for third quarter 2009 were $3.5 billion down about 19% on a reported basis, down 17% excluding the impact of currency.

Reported operating margins were 9.1% and were 9.4% excluding $10 million restructuring cost. On an apples-to-apples basis, adjusted operating margin declined only 150 basis points despite $830 million drop in revenues highlighting the success of our productivity actions.

I'll come back to the topic of margins and operating leverage in a greater detail on a later slide. Please go to slide 5.

This slide provides a look at the trends and our revenues by segments. We think revenue excluding currency (inaudible) performance and our comments will focus on this measure.

As you can see on the chart we've been bouncing along the bottom since the second quarter of this year with some modest improvement in the rate of decline in the third quarter.

I'll give you two other views of our third quarter results, a geographic split, and a split between recurring revenue and equipment. On a geographic basis revenues declined by about 15% in the U.S. and about 22% international market excluding the impact of currency.

Equipment revenues declined by about 3% on a comparable basis for last year. Worldwide recurring revenue was better and was offset by 8%. So our sales like most West side industrial companies decline significantly in the third quarter albeit accelerating space.

Let's go to slide 6. This bridge represents the total of segment operating margin on a proforma basis and excludes restructuring. This look gives a better view of three dynamics of operating margins at the enterprise level.

Third quarter segment operating margins were 9.4%, which was off about 1.5 percentage points compared with profroma adjusted 2008. The combination of declining volumes, negative effects, and marginal lower price improved margins by 5.6 points.

We continue to invest in new product development and those activities coupled with purchase accounting relating costs and restructuring expenses had a minor impact on the quarter and reduced margins by 30 basis points.

Productivity improvements, restructuring savings and Trane acquisition synergies added about 4.4 margin points. So, while we were unable to compensate fully for the significant volume decline in the quarter, we were able to reduce our detrimental margins to 17% an $830 million yearly revenue decline.

For comparison (inaudible) in Q2, 22% on $1 billion and lower sales and reducing our fixed variable cost structure and focusing on productivity, positioning ourselves for higher margins when our markets do begin to recover.

Slide 7 bridges the components of our EPS compared with our previous guidance range from July. At that time we stated that we expected to be in the range of $0.55 to $0.70 of the share and continuing operations before restructuring with the mid-point value of approximately $0.63 per share.

As I mentioned our revenue came in slightly below the lower end of our forecast range. Our reported revenue excluding currency were about $120 million below the forecast mid-point of $3.6 billion, which equates to a $0.09 per share drag in earning.

We also delivered higher productivity than expected as we accelerated our restructuring activities, implemented additional cost containment programs and realized additional deflation. These items contributed an additional $0.08 per share.

Discrete tax items were a $0.04 benefit as was a lower tax rate from operations. As in sign, our year-to-date earnings of $1.17 per share still includes a cumulative $0.02 back from discrete tax items.

Our increased cash generation allowed us to reduce borrowings and lower our interest expense by $0.01 offsetting a higher share count. So on aggregate controlled drivers offset weaker than expected revenues, drove our improved performance for the July guidance.

Lets now move to a review of the operating segments, we will go to slide 8. This slide lists the highlights for air-conditioning systems and services, represents the Trane business that was acquired in June of last year.

Trane’s third quarter revenues were close to $1.8 million, down 14% verus prior year on a reported basis and down 12% including the effects of foreign exchange.

Global nonresidential HVAC equipment markets declined more than 20% in the third quarter with significant reductions in the Americas, Europe and the Middle East. Asian markets were flat reflecting growth in China.

Our commercial air conditioning revenues, which are the combination of commercial equipment and parts, services and solutions were down 16 (inaudible) reported and 14% excluding 2 points of FX.

Total global commercial equipment systems which represent (inaudible) of our commercial HVAC sales in the quarter where aligned with global markets at about 23% excluding FX.

Global parts, service and solutions business represents about 48% of our commercial sales declined by about 1% excluding foreign exchange. We continue to see deferrals in smaller retrofits, but also have now had year-over-year growth on our service agreement base as customers have increased the level of outsourcing service they do with us.

Cooler than normal, late summer temperatures especially in the densely populated Northeastern US also hurt repair activity. We expect our service industry to be flat in the fourth quarter compared to last year.

Current contracting and service backlogs are up 15% over the prior year reflecting our increasing ability to sell to owner-direct customers and an uptick in energy efficiency projects as well as in our service agreement base.

Now lets turn to the residential part of our business, which represented close to 23% of total Trane revenues in the quarter. We estimate that industry shipments and new residential construction were down in the range of 30% to 35% in the quarter.

And replacement and shipments declined low single-digits combing (inaudible) decline in the range of 10%. For the quarter our residential product sales were down by 6% as improved mix offset lower volumes.

Inventories continued to get lean in the channel and we are getting the benefit of the better sell through. In addition, the US residential market may be approaching an inflection point driven by pent up demand and easier comps.

Next looking at orders, total global commercial orders excluding FX were off 11%, significantly better than revenues. Excluding foreign exchange, equipment orders declined approximately 15% in the America’s, much better than the high 20's decline seen in the second quarter.

Orders for contracting, parts, service and controls were close to flat. We ended the quarter with a global backlog of equipment, contracts, service and parts of approximately $1.2 billion. Global backlog was down 6% as reported and excluding FX.

Equivalent backlog declined 12% while contracting and services backlog increased by 15%. Geographically America’s and international backlogs were both down mid single-digits.

Now let’s turn to air conditioning margins. For the third quarter of 2009, operating margin was 8.6% including purchase accounting, restructuring and incremental allocations all totaling (inaudible) million. These items negatively impacted margins by 3.1 points. Last year these items totaled $122 million and adversely affected margins by 7.3 points.

Adjusting for these items, margins were 11.7% for the last year. This means that operationally margins were flat despite a $280 million drop in revenue because our productivity and cost containment actions offset active lower volumes, FX and inflation.

In summary, I would say that commercial equipment revenues remain weak, service and contracting a placed to recover and the residential markets maybe on the verge of turning positive.

In addition, productivity, (inaudible) product launches and restructuring action (inaudible) results will put us in position when the markets improve. Please go to slide 9. Climate control revenues (inaudible) million down 27% quarter basis (inaudible) 6% (inaudible).

The global Thermo King Transport revenues decreased by 30% largely due to weak global truck and trailer markets and low freight rates. Worldwide-refrigerated truck and trailer volumes were down about 30% compared with 2008 due to ongoing decline in the worldwide trucking industry beside negative sales in all geographies with the most severe declines in the European trailer business.

Both our HVAC shipments and (inaudible) sales also declined substantially due to slowdowns in net market activity. Aftermarket revenues were down reflecting lower fleet capacity utilization and ongoing inventory management actions in overseas markets.

North American aftermarket revenues increased slightly due to the increase in refer unit change out driven by emissions regulations and transport equipment entering the State of California.

Tri-pack auxiliary power unit volumes also declined significantly compared with last year as lower diesel prices and decline in fleet revenues have continued to limit conversions in 2009.

Looking at stationary refrigeration, global sales were down about 25%. This was driven by a decrease in display cases and a sharp decline in the insulation business due to lower supermarket capital expenditures in deferral of expected fourth quarter remodeling projects of 2010.

On a positive note Hussmann had year-over-year sales increases and gained market share with major national supermarket customers during the quarter especially in higher margin reach in display cases. Hussmann margins also increased significantly compared with last year as productivity and cost containment more than offset the volume decline.

Amid this market upheaval we gained share in trucks, trailers, and display cases in North America and continue to introduce new innovations and energy savings products in to the marketplace. Climates reported operating margin with 9.3% in the quarter, this compares with 11.5% in the third quarter of 2008.

Margin contraction was driven by the significant decline of high margin truck and trailer revenues and the impact of currency, which combined to cause a 9-point drop in margins. Productivity improvements offset much of the margin pressure and helped margins by about 7 points.

Let's go to slide 10. Industrial Technologies third quarter revenues were $512 million down 29% versus the prior year quarter and down 27% excluding currency. Revenues for the Air and Productivity business decreased by 29% due to lower volumes in all geographic regions and negative currency.

Air and Productivity revenues in the Americas declined about 33% during the quarter with a 38% drop in equipment volumes due to declines in major industrial, process and fluid handling end markets. Recurring revenues were off about 26% from lower industrial production levels and deferral of maintenance by customers.

Air and Productivity revenues in overseas markets declined less significantly down by 24% compared with 2008 primarily due to declines in industrial activity especially in Europe and a 3-point drag from currency translation. Reported European volumes were down 29% and about 24% in constant currency. Revenues in Asia Pacific were off about 18%.

Club Car revenues decreased 29% compared with last year due to weak economic fundamentals in key golf, hospitality and recreation markets, and customers deferring replacement of golf cars. Year-over-year market share has helped study in a historically difficult market.

Industrial's operating income was $43 million, representing an operating margin of 8.4%, down from 11.3 in 2008 on a comparable basis. Volume declines in unfavorable currency accounted for 7 point for the margin drop, industrial also had 1 point of structuring hit the margin in the quarter.

Moving to other businesses improvements and productivity offset much of the volume decline and an industrial scarce contributed 5 points. Let's go to slide 11.

Revenues for security technology were $550 million, down about 15% and down 13% excluding currency. Third quarter revenues were up 3% in the second quarter. Commercial security worldwide revenues were down 17%, primarily resulting from decline in building and remodeling markets in the U.S. and Europe.

Currency accounted for three percentage points of commercial revenue decline in the quarter. America's revenue in the commercial sector were down 19%, decline of volume partially offset by carry over pricing from 2008.

Securities European business was down approximately 16%, on a reported basis and 7% excluding currency. Asia revenues were up slightly on constant currency basis. America sales in the residential segment declined approximately 7% in the quarter, residential results continued to be impacted by the decline of domestic residential building and remodeling activity.

Volume gains from new electronic residential home security and energy management products and revenue gains from prior period price increases helped to partially offset for fall off in residential market activity.

Operating income for the sector was $117 million or an operating margin of 21.3%. Excluding restructuring cost, margins would have been over 2 percentage points above 2008, accelerated productivity, strong cost control discipline, and prior period pricing actions added 8 points to quarter’s margins and offset the loss of 6 margin points for volume decline and negative currency. Let's go to Slide 12.

Let's switch gears and talk about the areas with lot of focus for us, which has been productivity. The top half of this slide shows the summary of our cost reduction and productivity actions for the first three quarters and the full year 2009.

We have set a long-term goal of delivering 5% gross productivity every year. This compares to our historic productivity performance of 2% to 3% a year. For 2009 we've increased our target, total productivity savings to $670 million, almost double the gross productivity we achieved in 2008.

In the third quarter, we achieved $172 million in savings, $14 million better than our guidance, which equates to gross productivity of 5.2%. We have revised our 2009 productivity projection to $670 million, despite lower than expected volumes.

We also expect to benefit by roughly $120 million in 2009 from commodity deflation, which is about $30 million less than perviously projected. We expect that savings will be offset by the additional productivity just mentioned in improved non-commodity deflation. Let's go to Slide 13.

This slide shows both the cost and benefits of our productivity programs in 2008 through 2010. The incremental annual savings of our productivity, synergy and restructuring programs are shown in the top right.

We expect gross material and labor productivity to reduce our cost by 2.5% to 3% per year in 2009, 2010 and beyond. We have raised our target for Trane acquisition synergies saving to a cumulative $500 million, including growth synergies through 2010.

Breaking this down further, ongoing cost reduction programs will contribute $390 million through 2010 and our recently announced organization restructures will add $90 million in addition next year.

Restructuring program saving should add another $360 million cumulatively as the complete actions begun in 2008 and initiate new ones associated with improving capacity utilization, consolidating current skills into focus centers of excellence and accelerating our use of low cost country strategic sourcing and region of use manufacturing.

We expect to now achieve an incremental restructuring benefit of $145 million in 2010 up from my previously communicated guidance of $55 million in benefit.

Cumulative benefits of $360 million in the restructuring category and a $90 million shown in the organizational restructuring portion of the synergy category which has an asterix on the slide require that $277 million of spending to achieve cumulative benefits shown of $450 million in the period 2008 to 2010.

We show the key programs in each of the categories out of half of the chart. As you can see, we are expanding our productivity activities and we are committed to making a foundation of our operating culture. Please go to slide 14.

On October 8th we announced the formation of the new climate solution sector which will align our Trane Commercial systems, Hussmann and Thermo King businesses under one sector offering integrated solutions to customers to improve the energy efficiency and sustainability of the products, facilities and the services they provide to their end customers.

Climate solution sector has broad capabilities to help customers reduce energy use and carbon emissions along proven sustainability performance on both economic and in environmental levels.

By pulling together HVAC and refrigeration the climate solution sector can have a very large impact on our customer’s businesses by addressing more than 50% of the energy use and improving the quality of their own operations.

The sector has an accredited energy services company, employs more than 500 lead certified engineers and offers a wide variety of energy efficient products, services and solutions and stationery in refrigeration and transport refrigeration many of which are the industrial leaders in that categories.

The formation of the climate solution sector and the previously announced formation of residential solution sector an important milestone event, the overall integration of the former Trane business with Ingersoll-Rand.

These organizational changes are consistent with Ingersoll-Rand strategy become a more customer focused enterprise, capable of driving higher organic growth rates into the future. At the same time these changes create a more efficient and integrated operational footprint, designed and deliver sustained 5% growth gross productivity improvement.

Effective with reporting fourth quarter 2009 results, the company's four segments will be climate solutions, which again includes Trane commercial HVAC systems, Hussman, and Thermo King businesses.

Residential solutions which includes residential HVAC and the residential security business, security technologies which includes commercial security businesses and industrial technology which includes air and productivity solutions in Club Car.

We are excited about these changes and the opportunities; we will have serve customers better at lower cost. Please go to slide 15.

In addition to our productivity programs we continue to make significant investment in new products and services close to $2 billion of our 2009 revenues are from new products and services introduced in the last three years with the number of new offerings for each of our businesses.

We'll invest over $500 million this year in R&D, engineering and CapEx not including marketing and promotional expense, which drives both innovation and value engineering programs.

This slide highlights three of the areas, in Trane, we strengthened our leadership position in integrated systems by introducing a number of new products.

We launched our new global air cooled chiller line and are manufacturing the product in each region of the U.S. Simultaneously our new commercial air handling unit product also went into production and we’re seeing notable order share gains in both product families.

Our 410A refrigerant transition for unitary residential products is now 100% complete as of September. We will emerge from this downturn with an industry leading, new and refreshed product line in terms of breadth, efficiency and customer value.

In climate, we launched 23 new products this year. Our new Hussmann display cases are both energy efficient for our customers and eye-catching for consumers. We’re also introducing a more energy efficient refrigerated trailer which reduced fuel costs by 25% to 30%.

Our Schlage LiNK hit the big box market in the second quarter and early results are positive. In the third quarter we launch programs with other major retailers to carry the product line and have also introduced products, including a train thermostat, which can control the whole central heating and cooling system remotely.

We’re also offering other products which could be linked such as lighting and security cameras. Commercial security, we’re now launching a new modular electronic locking platform.

The AV series by Schlage is designed on an open architecture platform, which can seamlessly integrate into existing access control systems. The patented modular design allows building owners to select them on seven different credential standards by simply swapping out a single module without losing any hardware or installation investment.

Reinvesting in our business is critical to our future growth and we have a full pipeline of products and service, many of which are synergistic and combine capabilities across our businesses. Many of these offerings are unique to Ingersoll-Rand and will continue to strengthen our market leadership positions.

This investment will continue in the fourth quarter as we expect increased spending by $15 million over the third quarter with commercialization of new product lines and solution offerings.

Steve Shawley will now talk about our improved balance sheet, cash flow and our success in reducing working capital, all of which substantially improved our liquidity position. Steve?

Steve Shawley

Thanks Mike. And please go to Slide 16. As we have discussed on many occasions, the need to delevarage to the company in the phase of a very difficult and economic conditions has been and will continue to be our top financial priority.

I am again extremely pleased to report that due to the unprecedented $1.2 billion of available cash generated through September 30, we’ve been able to reduce global financing by $850 million or maintaining cash balances of around $750 million at third quarters end.

The outstanding commercial paper balance has been reduced to zero. And our liquidity cushion of $2.25 billion is at the highest level that we have seen all year long.

Current economics suggest that it is unlikely that any material amount of puttable bonds will come back to us in the fourth quarter. Accordingly, this chart projects what are cash and financing levels would look like assuming that we will generate another $150 million of available cash in the fourth quarter.

We fully expect to end the year with zero receivables in the securitization program, enough cash in the balance sheet to meet our February 2010 debt maturities $261 million.

Therefore whatever reason, the puttable bond show up in the fourth quarter, we will have more than adequate liquidity to handle the maximum that could come back and to retire the early 2010 maturity.

In any event, we anticipate ending the year with total financing requirements of $4.1 billion, which points to a total reduction of $1 billion for the year. A number that is well above our $675 million delevarage goal for 2009.

Please go to slide 17. This chart provides a lot of detail on the make up of our available cash flow. We showed this analysis back in February at our analysts and investors meeting.

It’s a roadmap of how we were going to generate $920 million of cash necessary to meet our deleverage goal of $675 million. This analysis shows what has been done in the face of lower than planned earnings to drive the generation of cash.

To date working capital has been reduced by $577 million. This focus on the working capital and efforts to effectively manage our cash taxes has produced available cash of almost $1.2 billion to date with more to come in the fourth quarter.

We are forecasting the rate of working capital reduction to slow in the fourth quarter but we now expect to achieve the total working capital reduction of $650 million for the year.

CapEx will be close to depreciation for the year and we will see some tax pay outs in the fourth quarter. All in we expect total available cash generation for 2009 to be in the $1.3 to $1.4 billion range.

Please go to slide number 18. At the beginning of the year, we were confident that working capital reductions could be achieved given the soft markets. But really we are not counting on creating a whole new standard of performance to bring this all in.

The management's focus on cash generation has been intense and we believe that the results will not only allow us to outperform our cash targets this year but to also raise the bar for working capital performance in the future.

We finished the third quarter with working capital at 4% of sales, less than half the level a year ago. The biggest performance improvements that come in inventory terms and payable days. Receivable DSOs are more than holding their own and (inaudible) have actually been a drag.

Underlying improvements that have been made in manufacturing systems and processes, footprint restructuring and supply chain and logistics management are paying off in the form of lower working capitals as a percentage of sales.

We believe that these improvements are sustainable and will help maintain future working capitals to sales ratios in the 4% to 5% range even those volumes improve over the next few years.

Please go to slide number 19. A lot of our cash performance, I thought it appropriate to remind everyone of our key financial policies. These policies were established prior to the Trane acquisition and were reviewed at our analyst and investor meeting in February.

We have demonstrated that we are well on track to over deliver on our de-leverage plans. This performance ensures that will stay focused on liquidity and balance sheet improvements, simply because we believe it has already made us a better company.

With that I'll turn it back to Herb for the forecast.

Herbert Henkel

Thanks Steven. Would you please go to slide number 20. A year ago, we saw a downward flex point in many of our major end markets. Our forecast for balance of 2009 continues to call for weak activity in most of our major end market.

Most economists are predicting the U.S GDP will begin to positive on the year-over-year comparison in the first quarter of 2010. But even then the recovery will remain hesitant. We are operating with what we believe is a conservative baseline for the fourth quarter of 2009 consistent with our most recent readings on our end markets.

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

For U.S construction, residential building markets appeared to be bottoming out at very low levels compared with the 2006 peak. Non-res construction will see about a 26% reduction in contract value and a 35% year-over-year decline in square footage with institutional activity off about 17%.

The outlook to non-residential building has continued to deteriorate throughout 2009 as the slower economy and tight credit negatively impacts starts. The refer trailer market in North America continues to be below replacement levels, but our forecast has improved since July. Order rates have solidified over the past six months.

Recent order rates indicate that North American market should reach about 23,000-unit shipments this year. This is 4,000 units above our previous guidance, but still 14% below full year 2008 shipments.

We find this increase in trailer activity very promising since in each of the previous business cycles this has been a reliable early indicator of the pending economic recovery. European truck and trailer markets had a sharp down turn in the fourth quarter of 2008 after a strong first half of the year.

Demand for 2009 continues to be very weak and we expect total European markets to be down as much as 70%. Industrial production and capacity utilization had a major drop off at the end of 2008 and in the first half of 2009.

We continue to expect stagnant year-over-year industrial production and capacity utilization for the balance of 2009 especially in North America and Western Europe. Finally, our forecast is based on the dollar to euro ratio of 1.39 compared with our previous forecast of 1.37.

In addition to these industry specific drivers, we assume the Americas and European economies will experience weak GDP comparisons for the rest of 2009. We are also forecasting the recovery in China, but declines in the rest of Asia. Now if you would please go to Slide 21.

Based on this macro economic view, we expect revenues for full year 2009 to be down 19% to 20% compared with 2008 on a pro-forma basis, including a two point drag from currency translation.

We expect climate control and industrial to show declines in the 24% to 29% range, with low to mid-teen declines at security and our ACSS business. This result in a 19% to 20% full year decline compared to our previous guidance range of down 16% to 19%. Now please go to Slide number 22.

Additionally our forecast is built on the following assumptions. We will benefit from lower commodity costs, especially in the fourth quarter and we expect to achieve our productivity target of 5% as our productivity, synergy, and restructuring programs continue to lower costs significantly for the remainder of 2009.

Finally our fourth quarter forecast assumes flat pricing year-over-year, a 14% tax rate, $15 million of additional investment spending compared with the third quarter, and EPS based on a 332 million share count. Please go to Slide 23.

Our outlook for revenues and EPS is shown on this slide and adds some context by showing 2008 revenues by quarter. As you can see on the chart, the current downturn began in the third quarter of 2008, after a strong first and second quarter.

Compared to this year’s forecast, the year-over-year declines gets smaller in the fourth quarter of 2009 not because demand is getting notably stronger, but because the comps are getting easier.

Fourth quarter revenues are forecasted to be in the range of $3.2 to $3.4 billion which is down approximately 7% to 13% under properties forma basis compared with the fourth quarter of 2008. Mid point of $3.3 billion is also $200 million below our prior forecast for the fourth quarter.

EPS from continuing operations is expected to be in the range of $0.44 to $0.54 excluding restructuring cost reflecting both weaker sales and our increased new product investment.

We are projecting full year 2009 EPS from continuing operations and excluding restructuring to be between the $1.60 and $1.70 per share. Including $0.10 of costs associated with discontinued operations, total EPS is projected to be between $1.50 and $1.60.

Please go to slide number 24. We've not yet completed, finalized our annual operating plans, but we thought it would be useful to show you a framework thinking about 2010.

For Ingersoll Rand, the key drivers of performance will be end market demand levels in pricing, the success of our new product introductions, our productivity programs, and external cost changes driven by inflation or deflation.

This chart shows that even with flat markets and flat prices in 2010, we are confident we can deliver substantial improvements in our earnings versus 2009. For the purposes of this framework, we’ve assumed that 2010 growth of roughly $200 million is due solely to the absence of the significant de-stocking we saw customers undertake in the first half of 2009.

This $200 million in sales revenue is worth roughly $70 million of additional operating income. Also taking a simple view of productivity and cost we would expect that our gross productivity of 4% to 5% will yield a 1% to 2% improvement after all cost escalations including commodities.

This spread between productivity and cost is worth approximately $130 to $260 million of operating income to us. Using the mid point of our 2009 guidance as a base the additional $200 to $330 million of operating income converts to an incremental $0.50 to $0.83 per share on top of our 2009 guidance mid point of $1.65.

Again to keep the framework simple, assume that all other major drivers, interest expense, share account, tax rate and FX net to a zero impact. Add some cushion and this approach would deal EPS before restructuring of between $2 and $2.40 per share and flat in market.

This should be enough information for you to construct and synthesize your scenario for Ingersoll 2010 earnings. We'll have more to say about next year's sales earnings and cash generation during our fourth quarter earnings call.

So now please go to slide number 25. To sum-up the forecast, we expect 2009 to remain difficult with activity declines in most of our major end markets. We remain focused on programs, which make us a better performing company at both difficult and good economic times.

We’re delivering cost synergies and expanding our growth synergies. We’re organizing our business to take better advantage of market opportunities. We will realize savings from restructuring and are stepping up productivity targets to the 5% level or working to capture material cost savings from commodities.

We've solidified our balance sheet by reducing our debt balances by $850 million, dedicated generating over $1.3 billion of available cash, and will continue to fund high priority project that will focused on our growth in future years.

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

We’d now be happy to take your questions. Thank you.

Question-and-Answer Session


(Operator Instructions). Your first question is from Nigel Coe - Deutsche Bank.

Nigel Coe - Deutsche Bank Securities

Yes. So just want to take it a little bit deeper into some of the margin trends here. First of all security, you're getting 8 points of productivity benefits in the business line that’s your highest margin by far.

Just a little bit curious about that. Could you just maybe come from that space?

Herbert Henkel

Nigel, interesting even in how the security team does this just to give you a little bit of color on security.

They're actually rolling prices back to 2007 before they account productivity, so they’ve got a very aggressive approach to working within our suppliers that around their own, our GAAP to excellent implementations and it is a little leading the path across the company and driving that.

So, what we saw there was great performance again, like two quarters in a row in productivity there. Quarter four for them, part of the investments for making across the business.

They had quite a few product launches, they are launching now commercial like which I discussed earlier, and are also doing a major national advertising campaign which some of you may have seen around this Schlage LiNK product.

So, as you look out to quarter four, maybe the margins will moderate just a little bit in quarter four as a result of the investments. So we continue to see strong productivity up in that group.

Nigel Coe - Deutsche Bank Securities

So, you feel pretty good about keeping margins, about to say 20%.

Herbert Henkel


Nigel Coe - Deutsche Bank Securities

Turning to I guess Industrial Tech in particular but FX, in certain of your margins in particular within that segments. Could you just explain why and then as we transition to your FX become the positive, does that going to help your margins?

Herbert Henkel

Well, there's more of the transactional element within IPS business space to say, and have a fairly significant business in India and buy some of the products out of Europe is an example. So you see both the translational and the transactional elements there.

I mean, increasingly I think the answer there is to localize as much of the products and in the regions that we are going to use the products, that sort of a mid run, long run, answer to that question.

Steven Shawley

I would say, Nigel, just to add, where we are, we are probably getting heard about one point in margin FX across the board. Possibly, full swing but, we haven’t seen that yet.

Nigel Coe - Deutsche Bank Securities

Okay. Can you just remind us well within industrial, within that capacity, what is your exposure to mining and commodity products? I know (inaudible) is a quite big market.

Steven Shawley

It's really quite small for us Nigel, thing is that we don't really have that larger presence to meet with the oil or gas or into the mining side of things we're really much more into a more traditionally industrial type applications.

Nigel Coe - Deutsche Bank Securities

Okay, the tax, you commented about the tax next year, it is basically neutrality to the -- you and your comps, that suggests probably a mid-teen (inaudible). Can you say a comment where you see the structural going forward?

Steven Shawley

Yeah, I would say so Nigel. I would say that again way we look at this thing obviously the top in the range, the rate would be a little bit higher because of the way the company loans are structured, but yeah mid-teens would be a pretty good number.

Nigel Coe - Deutsche Bank Securities

Structural (inaudible) going forward, a steady state range going forward.

Steven Shawley

Yeah, I would say as we go forward and we see an increase in our earnings will creep up to the 20%. We said in the past that sort of peak earnings levels we would expect to see a rise in the mid 20s as a peak I would say mid range we're looking at the 20 to 22 type 5%.


Your next question comes from David Raso - Isi.

David Raso - Isi Group

If you can indulge me for a second some numbers here, setting back you just put up revenue growth of about $9 million, but your profit grew $37 million. You were saying for '10 on flat revenues you can grow profit $265 million.

So clearly earnings power without revenue help, but the fourth quarter guidance, first I would say go back into the fourth quarter from the full year revenue guidance by segment it's actually $3.4 billion for mid point not 33, but still it appears to 33 what is so different about the fourth quarter besides $50 million of new product, its 3 or 4 pennies.

And opposite tax rate, sure up a bit, but I'm just trying to understand why is the fourth quarter that unique. Is there something about price versus cost? You did allude to some commodity savings in the fourth quarter. Can you help me understand that discrepancy and what you just did, what you're saying for full year ’010 versus the fourth quarter guidance?

Steven Shawley

Yes I mean we do it on a business-by-business basis. Some of the weakness we’re seeing in the top line really is around the climate businesses and in particular we talk about the unitary business at HAVC both the residential and commercial portion of that.

David Raso - Isi Group

No I'm not asking actually why the revenue is down. But why would the performance on EBIT be so terribly different than a company that just put up $37 million of EBIT growth sequentially in only nine revs ‘ 010 you can do flat revs but still grow profit over $200 million?

Why would the fourth quarter sequential revenue decline be such a significant profit decline? Because that’s what you are implying, you’re implying roughly EBIT of 272 for fourth quarter to get the $0.49?

Steven Shawley

Yes I was going to say just as you finished David, that I thought that the businesses are down, most have hit higher de-leveraging and the business that were knocked down. So one of the factors there is just the mix of business, the fixed costs associated with those businesses are greater.

David Raso - Isi Group

It can't just be the share count, but I assume you add another 2 million of shares to the fourth quarter because the stock is above $35. When you said 332 million shares, was that a fourth quarter number?

Because obviously for a full year, that would mean the fourth quarter share count for the whole year average would be 332. It would be like 350? I see nothing on what you are implying. It’s not a 332 average for the year with the fourth quarter at 350. Is that correct?

Steven Shawley

It going to run about 330 on average.

David Raso - Isi Group

In the fourth quarter?

Steven Shawley

Yes because we’re up to almost that right now. So that is the information we sent out.

David Raso - Isi Group

You have 331.8 shares above the $35, kicks in another two million shares. That means it's 333 in the fourth quarter, the full year average is only 327.6? Okay, basically the fourth quarter would be maybe a mixed issue and a little new product cost.

Steven Shawley

They are not going to sort of the think on the onset there, I remember what we are saying too is we are going to go and increase.

Again we are going to add an additional 5% productivity so our margins for next year are going to wind up going up another one to two points based on what the full year impact is which we are not seeing obviously yet in the fourth quarter of this year.

For the sequential improvement in profitability, as a result of the ongoing productivity piece is going to put next year’s margins up one to two points above where we are in the fourth quarter of this year.

David Raso - Isi Group

Yes. I’m with you. But the fourth quarter just seems very low, EBIT guidance on that revenue change given how the company just performed and what you said about ‘010.

Steven Shawley

Well, what we did on it Dave—let me just counter and maybe anticipate one of the questions here. What we looked at is, that we got roughly something and I am going by what we talked about the last time around.

The guidance we gave the last time. So we are up by about $228 million of revenue and most of that, I would say, half of it comes Trane Commercial, then we got some coming out of climate, we got some coming out of our security type business.

And collectively, we see that actually increasing by over 30% because of the mix of the businesses we are in. We are able to offset some of that because of productivity and spending controls.

Then you kick in the $15 million investment that we make and we’ve got about $20 million of inflation that we are breaking in our numbers. So by the time we get down to adding all of that in, that’s how you come up at a 3, mid-point type range and you come up with the kind of earnings that we are talking about.

David Raso - Isi Group

And the last related question for ‘010 and you stated here, I am just making sure I am reading it right. You are saying 3% inflation is going to hit you, but you are saying 3% inflation is going to hit you, but you are not going to get any pricing?

Herbert Henkel

What we said is difficult to framework of trying to got put out there a -- so what would be a base case. That's what for me the framework is all about and so just assuming this that when you are all done what you have is about 3% inflation. I didn't give you (inaudible) everything else I zeroed it out.

The price is zero and all the rest, it's just that it’s a base case, assuming no price going in there, assuming no increased revenues expect for making up to $200 million of inventory de-stocking piece on it, those are the numbers that you're going to go see in there.

If I see commodities going up obviously would I want to volunteer to be the guy caught in the middle between no pricing and higher cost. We would clearly go forward. So again consider this as a base case assuming no price and 3% inflation all the way across.

David Raso - Isi Group

If we get 3% back that's $400 million of rev growth right there just on inflation being captured.

Herbert Henkel

And that's why I'm saying, consider what I just gave you as a base case, like a benchmark thing to work from and you can have the pieces all the way from there as you construct the model, you are right.


Your next question comes from Jeffrey Sprague - Citi Investment Research

Jeffrey Sprague - Citi Investment Research

Just to come back to the idea of energy retrofit and what you might be saying there. You guys talked about bidding on a billion dollar worth of stuff in the second quarter.

I'm just wondering what the bidding proposal activity is looking like now and how much business you've actually booked and when you think you might convert some of that to revenue?

Michael Lamach

This is Mike I assume you are talking about the billion as relative to stimulus?

Jeffrey Sprague - Citi Investment Research


Michael Lamach

Okay, yeah hopefully this won't be a complicated answer. But just to give you a little bit of insight as to what we see happening, as we go down through each state, each project, what the teams are rolling up we believe that about 15% of what we believe to be the total $6 billion opportunity is in some phase of play, meaning anything from us working with school districts to help lay grants, all the way through to about $100 million in booked business for the year.

So there is a - it’s a $900 million sort of left out there. We’re going to win our 30%, 35% of that. I’d assume it's going to be 2 to $300 million of bookings for us out there on what's happened to date. But long story short, I think about 15% of the total is in some phase of play.

Jeffrey Sprague - Citi Investment Research

Just coming around to kind of the commodities question, a subset of where David was at. Can you just give us an update on kind of what you see if we watch commodity cost right here today, is that kind of 3% all in where you're running and are there any particular hedge dynamics we should think about as we try to model that number?

Herbert Henkel

Jeff for 2009 for the fourth quarter first, our practice has been that when we give you the range we talk about the lock that we've got, plus the current stock rate for the unlocked portion.

As it relates to 2010 and the framework Herb gave you, for now we should leave it there and January will be clear on the specifics around how we see each individual commodity playing out and probably that will give you more of a sense about how price plays into that.

Steven Shawley

Right now remember we said Jeff is that we’re taking down full year reduction from what we had said was $150 million when we did the second quarter call to now being $120 million for what we see as full year commodity price impact on our 2009 numbers.

That would reflect that what we thought is the copper of the world going back up again and where we were for a period of a couple of months we were talking about copper less than $2 all in this year we're in like about 215 to 220, but clearly if you look at the spot is going back up again much closer to the $3 level.

So when we laid in then the rest of the year what we said is the 120 rather than 150 that's part of the drag on the earnings we have to overcome with productivity and then going forward next year in our assume base case, we just take another 3% on top of the overall numbers for entire copper base.

I remember saying its at only about 10%, 12% of our total cost is really raw commodity you get much closer 90% being where somebody has done something with the commodity to turn into a motor or whatever else it is.

So when we collectively look at that 90% where we put - just again benchmark base is put into 3%, we felt that was pretty I think conservative for what you would expect in the environment we would be looking at.

Jeffrey Sprague - Citi Investment Research

Just one final one from me just thinking about the balance sheet Steve if the put bonds don't come back, you guys are going to actually run out of debt to pay back just based on maturing debt pretty early in 2010 it looks likes to me.

Is it economic to early retire some of that later maturity debt or would we consider progressing to some share repurchases as a bridge, just how do you think about that if we actually end up having more flexibility sooner than you thought you would?

Steven Shawley

How we think about it Jeff is, obviously we want to have the cash on the balance sheet at the end of the year to meet that February maturity. The reason for that is that prevents us from tapping to the back in the CP markets and we can run in the reduced financing level throughout.

The second thing we are looking at is the volumes that we would see in the early part of 2010 and right now the framework we gave you showed a flat assumption that if f we do get lucky, we see some uptick in markets, we would expect working capital to start building a bit in 2010.

Now, you don’t expect it to run back up to 7%, 8% of revenues, but certainly even at 4% to 5%, it would be an upward pressure on working capital in the first half. So the second priority would be to meet that need, if it comes, without having to go to the - into the well in terms commercial paper.

I think once you get beyond that, we’re looking at is, quite frankly continuing to manage towards the coverage metrics that we've promised the rating agencies that we would achieve post acquisition.

And the way we think about that is, is that we continue to see EBITDA levels in 2010 that certainly would be even the framework that we would give you, would be less than what we thought 2010 was going to be two years ago before we did the acquisition.

So we will continue to try to de-leverage the company until we go to a point where EBITDA growth, i.e., market viability returns and EBITDA growth starts helping us meet the coverage ratios that we need to see to improve our ratings as we go.

That’s how we’re looking at it. I think that if I were to characterize where we are today, yes we are in a position that we could see an expedited time for the more strategic use of our cash.

I would say based on what I see at this point in time, it would, going into 2010 with the assumptions that we have, I would say that by late 2010, then we’d start taking a look at what's in our 2011 plans I would say late in the year we will be much better positioned to shift to, shall we say a much more strategic discussion on capital allocation.

And I will add one thing to your inflation thought process, don’t forget that the first part of this year we were still taking high cost inventory off the books. So in the first quarter we actually had a significant level of inflation, right around 2%.

So when you start looking at going in the next year and you’ve seen the commodities increasing pretty rapidly in the last few months, on average when you start looking across the year we still think that the 3% is fairly good estimate and would add that above that kind of level then we would have to start talking about pricing as a fix on that.


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

Stephen Tusa - J.P. Morgan

Just want to get into the commercial HVAC out a little more. Your orders over the last few quarters have been down, low double digit mid teens. Your organic sales were down 23% this quarter. Is that basically just a difference between the applied and unitary business?

Steven Shawley

Yes, it is. The applied is hanging in there pretty well, mid to low teens. The unitary is up in the high 20s and the light commercial at some point might have been a little higher than.

Stephen Tusa - J.P. Morgan

So when we look at the orders down 11% that should be an indicator for the applied business that actually improved relative to last quarter. What do you see in there that’s driving that because given the fundamental data, you'd expect out to get worst?

Steven Shawley

Yes, first thing don't forget we saw the downturn right in the fourth quarter last year. So it's a bit of an easier, comp number one. Number two we got some pretty good visibility through to two channels, one being the residential light unitary channels and the second things are commercial light unitary channel.

And, I got to tell you, between those two, is that we seems to see more opportunity right now with the residential (inaudible) than the commercial contractor. So there's a little bit of a difference between the rates decline where the commercial contractors are a little harder hit than the residential contractors at this point.

Stephen Tusa - J.P. Morgan

Okay, and then the other question, I guess lead-time. Your services, backlog you say has up for the last couple of quarters and you keep talking to us about this services growth, but it’s just not coming.

I mean is backlog in services less meaningful as an indicator or is there a timing lag between when we start to see some of the backlog translated into sales?

Steven Shawley

Number one, for the first quarter now that we've seen all year, we've seen our service agreement base, our planned service agreement base go positive. So that’s a great trend for us.

Back in the biggest part of our service business, the growth in backlog has come through contracting and actually hasn’t been small retrofit. It’s been large contracting projects that go between in the short run six months, on the long run 18 months.

And those are booked, they are in-house, they're mobilizing and beginning, but the bulk of that occurs in 2010 in terms of executing that backlog. So that’s us acting as a contractor, for often times multi-million dollar mechanical installations.

Stephen Tusa - J.P. Morgan

Right. So it’s certainly a time issue?

Steven Shawley


Stephen Tusa - J.P. Morgan

To just hide the big picture questions. With regards to giving 2010 guidance, I don’t think you guys gave that last year. I'm just curious as to, with the lack of visibility out there really across the economy.

What's the rationale on putting something out there that is above most people’s expectations and probably getting towards the high end, towards a little more of the aggressive level and this carries such a rational, I would say putting that out there this early one?

Steven Shawley

Over the last couple of months we’ve- we’ve been out there dealing with many shareholders and many perspective shareholders and what we found is that because of the number of moving pieces that we had, about the addition of train, what has got to do with synergies, what about this productivity and all the rest.

We found in turn that people were having a very difficult time in putting together an accurate assessment of what our company would be like going forward the next year.

So we felt it was really required for us to put a stakeout there which said really was sort of a benchmark to set a goal again so that people would be clear as to what was included in synergies what was included in productivity, what kind of commodity pressures we were under.

So it was really as I said, we found people who had such a wide range and their expectations for next year, we felt conservative was really required to go and to put something out there, put a stake in the ground and said here is sort of a baseline where we saw next year going.

Stephen Tusa - J.P. Morgan

Okay great and one last thing just on the strategic, you know talking about having cash back to Jeff’s question, when you say strategic, did you really feel the need to go out and get more acquisitions.

I mean you guys seem to have a decent amount of runway organically you got a lot of costs coming through and a little bit of revenue is going that is going to translate, did you guys feel after you know what happened with the train deal that your confident and ready enough to go out and kind of push the button on another transaction or should we think about you guys being a little more conservative here over the next of years?

Steven Shawley

I don’t know if I would consider this more conservative, what I would say to you is that when we made the train acquisition, we completed the transition from being a construction machinery type company to being a diversified industrial.

What we said is for the next couple of years, our number one priority is operational excellence, to take advantage of and deliver on the promise of the result that the new portfolio businesses we have could take place.

What Steve was talking about is rather than just looking at the traditional, how do you wind up going and taking care of debt, are there other things we should be looking at and really included in that thinking was not so much large acquisitions in resilient much more along the lines of so how do we wind up going back and thinking along the line of priority for dividends.

What are we going to do with the dividends side of it and what do we are going to do as what Jeff was asking, we got some longer term debt out there, how much of that should we look at pulling in because it's that in attractive (inaudible).

So I don't feel the urge or necessity or someone to go have to go doing acquisition, if a meaningful one comes up and make sense we'd look at it, but right now the thing is its really focused on delivering on the portfolio we have.


Your next question comes from Jeff Hammond - Keybanc Capital Market.

Jeff Hammond - Keybanc Capital Market

I just wanted to dig in a little bit about on this new $90 million reorg restructure I guess synergies related Trane. Can you just kind of dig in on what falls in there, where you are getting the savings extra?

Steven Shawley

You want to talk just about the 90 or you want to talk about the whole the larger package maybe just give some contacts, what we were trying to do here?

Jeff Hammond -- Keybanc Capital Market

I mean I guess the $100 million was out there, so I just wanted to kind of dig in on that new piece.

Steven Shawley

Right, so the $90 million that we put out there around the integration of the businesses, in June we announced the residential solutions integration. We also at the same time put together the field organization between Trane and Hussman that's been operating for five months that way in a combine field organization.

So this was really putting together if you will the two headquarters or the two sort of sectors, which really three businesses into one business and one sector. So when you think about sort of the opportunity in SG&A, I want to be clear it’s really around the G&A portion of this thing.

Selling has gone well, no intentions of changing the way brands go to market, changing the way that our people represent in the marketplace, no changes to the commission structure to the people.

More opportunity probably to cross-sell and linking to the parts of the company, that’s really on the G&A basis okay. And there is lot to detail below that, to know that between those three actions, they total $90 million.

Jeff Hammond -- Keybanc Capital Market

Then just as you look at your new products, particularly on the Trane side, where do you see the most opportunity to move the needle on share?

Steven Shawley

Jeff I'd say, I probably - it’s like kids in a candy shop, because I haven’t felt this good of anything in a long time. I was at Clarkesville last week I guess it was and we've celebrated the 410A launch, but we also had with us out there almost all the new product that we've launched throughout the year on a parking lot out there, pretty big parking lot.

Will tell you that it’s refreshed, it’s new, its best in class. We have the luxury over sometimes 20 years to take a look what everybody else was doing and figure out for the best in class in all the different product line together. We literally with the exception of centrifugal chillers, which is still the most efficient in the world, we've got the whole product portfolio replaced by the end of 2010.

That’s exciting when you put that in the hands of the trained sales force, those of you guys who know that, the trained sales force, I could tell you that putting great product and systems in their hands is a good opportunity for us across the board.


Your next question comes from Mark Koznarek - Cleveland Research.

Mark Koznarek - Cleveland Research Company

Just a question on 2010 the flat revenue outlook, I'm just wondering given a lot of the late cycle businesses that you are exposed to within Trane and certainly the capital spending stuff industrial and commercial security.

What if, thought that revenues could conceivably be down a couple of points next year rather than flat and I'm wondering if you could conceptually walk us through sort of the your thoughts on the mix of your sectors what is likely to be a little bit up next year and what some offsetting that in the negative sense to get to flat?

Michael Lamach

Mark this is Mike and I'm in the spirit of the framework I'm just going to give you a broad strokes on the framework to let you know what our thinking is, but clearly we see increase in services and contracting and the backlog there, stronger supports that.

We see up tick, an increase in the Russ HVAC and the Russ Security business. We really see an up tick pretty well across the board with a little bit of the uncertainty being geared up at across the board in whole transport refrigeration business.

So those are, all sort in the plus side of the column force. Now clearly on the negative side of the column we've got commercial construction and as an offset to that we do expect in the tendency increases as it relates to some of those stimulus money flowing through.

We also expect to see increased activity around some of the new product launches that are geared toward the retrofit markets.

So the wildcard that's out there for us and the reason we are clear on our framework at this point of time is really trying to get a sense for what the really bottom of the commercial construction market and how much can we pull off that bottom with the stimulus and new product launches.

But when you net that all out. I mean the framework would say that we should be able to run the company pretty well flat.

Steven Shawley

I think Mark, you got to add industrial, I think directionally, there is more probability of it being up rather than it being down for the next year, that would be another positive side to add to it.

That would be just as well including for the golf car stuff because there has been lot of deferrals I think for next year.

Mark Koznarek - Cleveland Research Company

Industrial compressors, do you think has a chance of being up?

Steven Shawley

Yes just because of the amount that has been avoided, the work that has not been done. Remember over half of our work at this point in time is service related, not new goods.

I'm talking about we’ve seen significant deferral as we saw with the HVAC side also happening on the industrial air side, so I'm thinking that there is more upward opportunities there rather than downward pressure.

Mark Koznarek - Cleveland Research Company

Okay and then a question on the cost reduction actions in the productivity. Has there been a significant amount of temporary cost reductions such as (inaudible) or absence of retirement match or something like that it comes back next year. That’s some?

Steven Shawley

No Mark, now we’ve been really clear internally and externally through that. No we didn’t do any of that, we didn’t do any of the non 401(k) matching or the gains there, this -- we’ve taken costs out we’ve looked at and separated the volume metric cost out from the fixed cost out.

Herbert Henkel

We did postpone increases for our salaried associates and that’s why as when I wound up telling about what we baked into the 2010, that’s why we put in a 3% inflation type number for all of our costs including compensation. That’s the only difference really between activities in 2009 and 2010 when it comes to the benefit side.


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

Shannon O'Callaghan - Barclays Capital

Just a question on the treatment of restructuring going forward. I think we had talked about this last time and there was a thought that maybe these things could offset. You are backing out the restructuring in 2010.

I'm just wondering when do we start including that? Why not now? I mean you pretty much have an offset from these organizational restructures to offset it at this point, it seems like ongoing stuff. What's the thought process?

Herbert Henkel

Well want to try to keep apples-to-apples Shannon at this stage of the game. And again, as we said, this is a framework of how to think about our company. We put our plan together and rally out the specific timing.

Although, I do think the timing of the restructure is going to be front-end loaded as opposed to later in the year 2010. We will weigh all that out, in terms of how it effects, we expected this effect, we always add the gross earnings and the net.

Since this year we’re giving guidance without the restructuring in it, we wanted to make sure there was no confusion around this framework instead of the output for 2010. There is no question that we will have more restructuring expense in 2009 that we talked about in the fourth quarter and also early 2010. And we will lay the 2010 out when we give guidance next time around.

Shannon O'Callaghan - Barclays Capital

And then continue to go through again, I you started to before, it’s probably another question, but for the fourth quarter, I mean relative to when you gave the $0.50 to $0.65, what were the real moving parts in the businesses that changed for the worst to cause you to set the new guidance for 4Q?

Herbert Henkel

Yes I mean the biggest changes would have been in the climate control business where you had stationery refrigeration particularly contracting and the capital installations for customers get the third out of the fourth quarter.

So, that cost 45% of the difference, the other 45 or so percent would have the Trane commercial business and here is where you are seeing the unitary business in particular. We are still trying to find its bottom or at least begin to bounce a bit off of bottom.

Then the last peak we had was a very small peak, really it was just the commercial security business, which was say 10% of the drop and that's just related to again commercial construction.


Your next question comes from Eli Lustgarten - Longbow Securities

Eli Lustgarten - Longbow Securities

One clarification in the quarter day that you gave us, you had €139 and we are sitting at €150 at this point. What is the impact? Is that baked into the bottom end of the range already, should we assume that you don’t have to worry about that at all?

Herbert Henkel

Eli, when we gave you the 139, that's the full year number. The fourth quarter that's included in order to get there, I think is about 146, if I remember right, is that right.

Steven Shawley

I think it's 146 is actually, so the 139 is how you go from 137 to 139 is with the 146 in the fourth quarter. So, if I look at 146 compared to what's out there today.

Herbert Henkel

It won't be much of an effect.

Steven Shawley

Seems pretty close to me, I think.

Eli Lustgarten -- Longbow Securities

I appreciate it, I mean I think you are doing a marvelous job in profitability. When we talk about 2010 and the gain, should we assume as we spread it out over the year, that it would be back-end loaded.

It just seems that the big declines that we keep running into in the commercial businesses and just went through it and these stationary refrigeration in the unitary business to commercial security.

Those businesses probably have much top of first half 2010 comparisons they maybe full year comparisons. So, we’re sort of looking at a back-end loaded kind of scenario to get to the $2 plus kind of numbers that we’re looking at?

Steven Shawley

Eli, we haven’t really gone at this point and weighed it out quarter-by-quarter in that way. I mean clearly with the amount of capacity utilization work we’re doing as part of the new restructuring, that’s going to be more back-end loaded, that portion would be more back-end loaded.

But in terms of your organization consolidation and any of the volume metric sizing, that’s going to be front-end loaded. In fact, it’s going to be pretty well happening quarter one.

Eli Lustgarten - Longbow Securities

And how much of your commodity have you hedged for 2010 and what is the impact of substituting aluminum for copper on the business? Is that material or is that just sort of a minor fit, it helps at a time of the material in the overall numbers?

Steven Shawley

Well it’s a big deal. In terms of aluminum substitution as well as usage of material as well. So, three-to-one basically is the conversion if you can move a copper coil to aluminum coil. I’d probably at this point stay away from telling you kind of what we've done for 2010 at this point.

Eli Lustgarten - Longbow Securities

We do have hedging going into next year? It’s fair to say correct?

Steven Shawley

We have a process that we've been using and we intend to keep using, which got us to this point, which is, we’ll layer in multiple hedges over a period of time, latter it out and keep some flexibility till the deal expires.

Eli Lustgarten - Longbow Securities

Can you give me some idea of what the savings of aluminum instead of copper like in the fourth quarter and what is that saving you. And the technical performance doesn’t change I assume?

Steven Shawley

Well I mean, the fourth quarter is an example, we’ll probably face something closer to $0.94 for a pound of aluminium and if you go over copper, we’re going to paid something more like $2.60, $2.70 at that point. So, again you can see that there is a significant sign of (inaudible) to aluminum.

Eli Lustgarten - Longbow Securities

Is there no performance change or perception change by using aluminum instead of --

Steven Shawley

Not at all, because you are talking about really a coil, typically a credential coil, it's going to be shrouded. Actually, the efficiency for some of the micro-channel technology in particular may actually improve efficiency and probably the other sort of added effect of this is you might find that using 28% less refrigerate charge or more in those new coils. So, you get kind of knock down benefit of refrigerate use and all that as well.


Your next question comes from Ted Wheeler - Buckingham Research.

Ted Wheeler - Buckingham Research

I wonder if you could comment on the trend during the quarter and maybe in October as well if you care to share it with us. On the pace of revenues and activity in the service businesses for air conditioning, for transport refrigeration I guess I would like to hear about the services activities in stationery refrigeration as well. Has the quarter evolved and again into October if you could?

Steven Shawley

Ted, I won't go to October, but I'll tell you what kind of happened in the quarter here is, what we saw was steady improvement with the scheduled service base where throughout the year, the retention rate was always very high, in fact it had historically high rates of retention.

What happened in the third quarter is the actual dollars per account grew. And I think at the function of a lot of our customers having less staff, tighter operations and the scopes got larger of the work that we were doing in those service agreements. So that was the first time since this downturn that we've seen an increase in that particular area.

Ted Wheeler - Buckingham Research

And it moved forward positively through the quarter?

Steven Shawley

That’s right, that’s right. And then contracting, we talked a lot about, and that’s been a strong story for us where performance contract the very largest complex contracting that we do is up at historical records of both volume bookings and backlog. Those are the good things.

The small retrofits if you can weigh on those, customers are deferring. We also have some customers that give you multiple proposals to extend equipment rather than replace it or maybe even to take something out of service and repair, suction chiller is an example as opposed to balancing between two.

Those are kind of things we’re seeing there. Parts as well, we haven't had any help this year with weather of course. So far it's kind of mid single-digits down in the HVAC business. I'd assume your question was around HVAC but if it's -

Ted Wheeler - Buckingham Research

Well, we’re interested to hear about transport refrigeration and stationary refrigeration, the after market activity?

Steven Shawley

What I would tell you is in the quarter, customer interest levels and communications around opportunities seem to be increasing, and we'd expect to see that show up in the container business in the fourth quarter around bookings and actual shipments.

I do think we are seeing and will see an increase and have seen in transport, with the exception of Europe, transport, truck and trailer business that will show up in bookings I think in Q4, but I don’t think we will convert that in Q4 over to buildings.

So it’s a positive trend there. The only thing that’s been not showing sign to life to this point is really been European truck and trailer. Even the box, HVAC does most of the increasing, and actually in terms of the order activity and customer input.

Herbert Henkel

And I think the activity level in the stationary refrigeration probably is the other one that’s on the downside, on the service side as people are postponing opening up or doing work on supermarkets, which traditionally has been a (inaudible) going into Thanksgiving and the Christmas holiday season.

Ted Wheeler - Buckingham Research

So really nothing changing there?

Herbert L. Henkel



Our next question is from Robert Wertheimer - Morgan Stanley.

Robert Wertheimer - Morgan Stanley

My first question was on the reorganization that you’re going to do for 4Q reporting. Could you just talk about what was the driver behind that? I understand some of the links you’re trying to build or starting to build between HVAC and the home side and Schlage link and all that. But was the real driver in terms of either channel or managerial leverage or cost leverage?

Steven Shawley

On the rev side it was around how we see technology in the home evolving and how key systems can play together. Beyond that we found that two of the three channels were in common, where the builder and retail channel, was an opportunity to leverage great relationships and grow.

So that’s right into it. And finally on the commercial side, it was again the same, where some markets for HVAC refrigeration are shared. But there really are not any large national refrigeration companies out there.

So a real opportunity to change the game utilizing an HVAC footprint to grow a national or even global refrigeration business, and the technology plays a huge role there around compressors and around controls, so there’s opportunity to put together terms of excellence there in the technology space.

And then finally as you get into a lot of these plans and operations you find that you can talk about things in terms of welding, bracing, and bending, irrespective of some of the products and so there’s an opportunity from a capitalization standpoint there as well.

It just made more sense to put those together and then the last point gaining management efficiencies in doing that.

Robert Wertheimer - Morgan Stanley

Then just a quick follow up, you addressed this one, but the security margin I think was the highest, if not ever in the 12 years I got quarters, so it really - is really very very strong and it has been good lately.

Was there any one-off material benefit in this quarter where you mentioned the materials are going up and maybe next quarter, was that a non-abnormal margin?

Steven Shawley

Their productivity has been outstanding and the difference here - by the way if you were to go back to 2001, they would have been at this level, a little bit higher in fact, but they’ve been there before and they’ve been there in tough times in fact.

But what really happened here was just from number of productivity and its goes deeper into sort of judged material productivity since the usage of material has been through (inaudible) work we do around the product itself just across the board.


Your next question comes from Daniel Dowd - Bernstein.

Daniel Dowd - Sanford C. Bernstein

Wanted just quick follow up on the (inaudible) structure. So is the sales force in this new climate solutions business or is the same individual selling the entire suite of products or you still have like separation between the sales organizations for the Thermo King, Hussmann and the former Trane?

Steven Shawley

We have separate sales organizations for the three. And there were accounts used more than one. We put together an account scheme, but if you talk about everyday, how do you get out of bed and go call on your customers, you go call on them relative Trane, Hussmann and Thermo King and then when you need leverage across, we would put back in essence in place to make that easy to do.

Daniel Dowd - Sanford C. Bernstein

Okay so there was no merging of the incentive structure of the sales force that was -- you really have left the after part of this completely alone?

Steven Shawley

Alive and well and kicking and thriving. So instead of the G&A move on it, really Dan that’s what it was.

Daniel Dowd - Sanford C. Bernstein

There was some talk earlier about acquisitions. Another way to think about this is as markets recover, do you view Club Car as the strategic part of your portfolio?

Steven Shawley

I would say to you that Club Car is undoubtedly the market leader when it comes to golf cars. The ROIC that we see from them and turn around during times is the triple digits.

Our real bet with Club Car is that they could be more than golf cars and what we are thinking is that they can be electric vehicles in a world that’s really looking to electric vehicles.

To a degree, we can go and realize that opportunity, I think this has got a real growth potential for the company. It would definitely fit into what we see as an opportunity as we get into energy efficiency.

To a degree that we are not able to do that, then management has to go review it as whether or not Club Car is better as a one-time source of cash or an ongoing stream of cash.


Your next question comes from Robert Mccarthy - Robert W. Baird.

Robert Mccarthy - Robert W. Baird

Also following up on this odd structure discussion. I mean as you interact with shareholders over the next year, is part of your message here going to be that we are developing now a platform for residential product that in the future might include several other businesses with some products that don’t have anything to do with HVAC or security products?

Herbert Henkel

If you look at the way we’re trying to depict the company, what we kept saying is that we really believe that our core value that we can bring to our customers, in such things as the residential space you’re talking about, is in the areas of safety, it’s got to do with comfort, it’s got to do with efficiency.

And so we believe that anything that we can add as a solution to either or any of those three pieces will be something that’s clearly within scope of what we will be looking at.

Steven Shawley

Rob, I think you build off the strength of those brands and then you try to create technology in the middle, but you have got some great ideas on what to do and how to do that, from a home-owner’s perspective, really empower you to take more control over your energy bills and the management of your home infrastructure.

Robert Mccarthy - Robert W. Baird

And so in the spirit of this discussion, is the security platform a security platform or is it a commercial platform in search of an identity?

Steven Shawley

It’s a security platform that we’ve always felt there is plenty of opportunity to grow globally in that business as well. It’s related to the commercial construction business but the channels and the even the way the product is specified to architects versus engineers is a little bit differently.

So it comes together across certain institutional and office building customers but there was not enough there, that as you put the thing together, you have extracted a whole lot of synergy from that, that we could not get by just organizing a selling activity across the enterprise level.

So what I would tell you is we’re really trying to find the place in the company that we can do two things. One is, have real customer driven innovation around logical and markets. And two, is just drive the heck out of operational efficiency and productivity.

And we try to find where we can get the maximum impact on those two things to the restructuring and that’s what we did. That’s fundamentally how we get $93 million in synergies through this new action and obviously just about that much through capacity utilization in our first (inaudible) in 2010.

Robert Mccarthy - Robert W. Baird

No I think on phase of it, it makes terrific sense. Just a question of where it goes strategically over the next three to five years. The other thing along the same lines I wanted ask about is recurring revenue and recurring revenue specifically within the industrial segment.

This has been presented over time as the strategic objective and a revenue stabilizer if you will, but over the last three quarters, we’ve seen increasing year-over-year declines in recurring revenue in that space and these are big - 25, 26%. I suggest a bigger decline than most people would associate with something that is recurring revenue.

Do you find yourself questioning your own definition of it and maybe looking for a little -find a distinction between some of these large contracting projects and the process is simply to sell the spare parts.

Steven Shawley

When we talk about the industrial, we really do not do large - we don’t do the contract type work, in general what I'm saying is that the third party does an inflation if that they have a large piece of equipment. When we really do get into this service in the installed base.

And what I would say to you is that if I think to - quite a few of our larger industrial customers, they have multiple air compressors in their facility. Their plant utilization is such that they’ve actually shut down half of them.

That we actually have at this point in time idle machines sitting there and so I think what this has caused me to think that recovering is not as bulletproof as I personally had hoped it would be, because in my thinking I did not take into account the fact that half of these (inaudible) things are going to be turned off, that they really don't consume parts when they are not running, okay and so on.

And I think that has been the terrible (inaudible) at this magnitude of reduction in utilization (inaudible) and I was thinking true with probably more loan to (inaudible) go down 5 or 10% you're still going to need to run it, but we are actually at such level that we're actually being shut off.

Herbert Henkel

Probably that being said I tell you, you are right, there is such an opportunity here to grow and build a different kind of service business and Trane products a lot of that in terms of what we might think about doing. We have those conservations internally and I think it's a great area for growth going forward for us. So we're onto your point here with real thinking inside the company for how to -- how to grow with servicing and contracting business.

Robert Mccarthy - Robert W. Baird

I really I think I want to ask about is with the fourth quarter re-segmentation of the company and given that the fairly big deal are you going to be able to get restated numbers to us in advance of the actual fourth quarter report.

Steven Shawley

Yeah, Robert we're trying to figure out how to get the history of the segments out before their report.


Final question will come from Andrew Casey - Wells Fargo Securities.

Andrew Casey - Wells Fargo Securities

The first on demand assessment, have you, I just want to clarify some comments I think I heard earlier that is there any sequential increase in non-government funded energy retrofit interest and then on the European version of Thermo King has there been any sequential order uptick at all?

Steven Shawley

Well, on the first part the answer is yes it's just not government related stimulus it's every customer with equipment age to the point where you can go in and make viable two-year less (inaudible) pay back.

So that's just happening, government get lot of retention obviously to the funding mechanisms but the business is pretty balanced across that.

As it relates to that the business in Europe with the exception of the comment you made around the container business, I would tell you that truck and trailer the answer would be no, there really hasn't been any recovery at all at this point.

Andrew Casey - Wells Fargo Securities

Okay, and then just again a clarification with leaner working capital investment and revenue that you've accomplished and expect to you maintain going forward. How should we view kind of incremental consolidation opportunities or is that really all encapsulated in some of the capacity utilization work you identified?

Steven Shawley

I think clearly an impact on working capital as we -- consolidation no questions about that. So what we would believe as this volume starts to pick up, when we start to improve our capacity utilization that will also affect inventory levels in particular and that will help us to keep about the 4% to 5% level.

Herbert Henkel

Well, thanks everyone we really appreciate you hanging in there with us and participating. And there will be a transcript of this call available on our website beginning next week. And please contact if you have any other additional question. Thanks again.


This concludes today’s conference call. We thank you for your participation.

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


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