Good day, everyone and welcome to the Ingersoll-Rand Second Quarter 2011 Earnings Conference. Today's conference is being recorded. At this time, I would like to turn the call over to Ms. Janet Pfeffer, Vice President Business Development and Investor Relations. Please go ahead, ma'am.

Thank you, Christie. Good morning. We released the earnings at 7:00 a.m. this morning and the release is posted on our website. We'll be broadcasting in addition to this phone call through our website at www.ingersollrand.com, where you'll find the slide presentation that we'll be using this morning. This call will be recorded and archived on our website and will be available tomorrow morning. If you would please go to Slide 2. I'd like to remind you that statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the Safe Harbor Provisions of Federal Securities Law, actual results may differ. Please see our SEC filings for a description of some of the factors that may cause actual results to vary materially from anticipated results. In addition, please refer to Slide 18, which covers the use of non-GAAP measures to describe the company's performance. Now I'd like to introduce the participants on this morning's call. We have Mike Lamach, Chairman, President and CEO; Steve Shawley, Senior Vice President and CFO; and Joe Fimbianti, Director of Investor Relations. With that, please go to Slide #3 and I'll turn it over to Mike.

Thanks, Janet. Good morning, and thank you for joining on today's call. In the second quarter, we delivered revenue growth of 12% as we saw improving end markets in most of our businesses. We expanded margins 180 basis points and the industrial sector reached record operating margins. Second quarter earnings from continuing operations were $0.88 per share. For the quarter, revenues were $3.9 billion, up 12% versus prior year and 9% excluding currency. During the quarter, we continue to see strong bookings in Industrial and Climate. Security orders in the quarter were also up double digits, led by very strong bookings in Asia. The one weak spot in terms of orders was Residential, which was impacted by a stagnant housing market and the lack of consumer demand for replacement systems. For the company, orders were up 9%, and 6% excluding currency. Operating margin for the quarter was 12.2%, up 180 basis points, primarily driven by volume, pricing and productivity. Margins were negatively impacted by a decline in residential margins, which I'll talk about more on the next slide. As anticipated, we began our share repurchase program in late second quarter and we purchased 1.3 million shares as of June 30. Please go to Slide 4. 3 or 4 businesses had good to excellent performance in the quarter. Industrial reached record margins of 15.6%. We continue to realize pricing across all businesses. In the second quarter, our pricing outpaced direct material inflation, which is 1 quarter or 2 earlier than we had anticipated. We continue to see good margin improvement in the majority of the businesses, and we're at our target of 200 basis points of margin improvement year-to-date. We saw strong markets in Industrial, Transport and Commercial HVAC, and the North American commercial security markets appear to be bottoming. We…

Thanks, Mike. Please go to Slide #8. The Climate Solutions segment includes the Trane, commercial HVAC and Thermo King transport refrigeration businesses. Total revenues for the second quarter of $2 billion were up 14%, and 10% excluding currency effects. Trane's Global, commercial HVAC second quarter revenues were up 12% versus prior year on a reported basis and 10% excluding the effects of foreign exchange. HVAC revenues in North America increased 10%. Revenues were up more than 10% in Europe, Middle East, and Asia was up more than 10%. Global commercial equipment revenues increased 15% with double-digit year-over-year improvement in all regions. Global parts services and solutions' revenue increased by 8%. Shifting to orders, our global commercial HVAC orders were up 10% driven by global equipment orders, which were up 13%. For global Thermo King transport business, revenues increased over 20%, which is consistent with significantly improving markets compared with last year. Our worldwide refrigerated truck and trailer revenues were up about 30% with strength in North America and Europe. Global bus HVAC, APUs and marine container revenues increased substantially due to improved end market activity. Thermo King orders were up over 20% in the second quarter. The operating margin for Climate Solutions was 12.2% in the quarter, a 260 basis points improvement versus second quarter 2010, driven by pricing, volume gains and productivity, partially offset by higher commodity costs. Climate's results were also favorably impacted from the disposition of assets from a business restructured as part of our footprint reduction program. Normalized, Climate's second quarter margins were up about 200 basis points over the prior year. Please go to Slide #9. Industrial Technologies' second quarter revenues were $772 million, up 24% on a reported basis, and 20% excluding FX. Industrial markets continue to be strong in all regions. Air and…

Thanks, Steve. Please go to Slide 16. Our updated revenue forecast for 2011 is based on slow but steady improvement in most of our markets. We believe the activity levels indicate continued strength in transport refrigeration and industrial markets as well as the service and replacement of commercial HVAC. We expect to see a continuation of challenging conditions in the U.S. nonresidential new construction market for most of the year given that our commercial security business is more heavily weighted to new construction than our commercial HVAC business, and we have slightly decreased throughout our outlook for that business as new construction recovery forecast is pushed out. We also see a continuation of the challenging backdrop in residential markets. The single family housing starts and consumer confidence remain at low levels. FX [ph] will have a slightly more positive impact to our revenues for the year. Based on this generally improving backdrop, we're raising our revenue range for full year 2011 to $14.7 billion to $14.9 billion up 11% to 12% compared with 2010 revenues of $13.3 billion. Climate Solutions revenues are expected to be up 13% to 14%, increased from the 10% to 12% range in our last view. Based on our continued strong bookings, we now expect Industrial to show revenue gains of 17% to 18%, up from the prior estimate of 12% to 14%. Based on the reduced market forecast, we're lowering our residential revenue forecast for the year. We now expect from the sector's revenue to be up 2% to 3%. Commercial security is now expected to show a 3% to 4% year-over-year improvement due to its exposure to nonresidential building, especially in North America. Please go to Slide #17. We are maintaining our full year EPS range of $2.90 to $3.10 per share. We also…

[Operator Instructions] We'll go to our first one from Scott Gaffner with Barclays Capital.

I just wanted to dig a little bit deeper on the guidance. So you kept the EPS the same. It sound like you still have 200 basis points of operating margin improvement, but the share count came down a little bit and we had a little bit of contingency built in there before. What's happened to the contingency? And is it still there? And can you just refresh us on how much that was before?

Yes, I think there still some contingency in the numbers. We did use probably 3/4 of the contingency we talked about earlier this year with what's going on with our Residential business here. So it's still about $0.10 of contingency in this numbers so it's kind of within the range, okay? Midrange of $3 to $3.10.

Okay. And then just as a follow-up on the Residential HVAC equipment business, you did point out some executional issues. And I guess, maybe it wasn't clear to me in the call, what those operational execution issues that sounded more like market issues, so like, maybe could you just go back on that a little bit?

Yes, if you look at the performance in the quarter, I would say $20 million of the operating income that would have been more volume and mix related. But if you back all the way up, this whole criticality of the minimum SEER efficiencies in the Trane portfolio were well understood. We've known for some time that the market would mix down and that consumers would be looking probably at minimum efficiency. So we have conducted, over the last couple of years, extensive development to launch the new 13 and 14 SEER platforms. So the traditionally high SEER or you can think about it as really a premium efficiency and reliability brand, it's only the cultural challenge to design lower SEER systems at lower price points. And I would really break it down into a few things that have happened here. One is the new product launches have really missed their bill of material target costs, and we're now recovering that through material and design changes. And that process has already started to take place and it'll continue to take place, certainly, through the balance of the calender year. Second, the product was very I would say very well accepted by the market, and you can see that through the share data. But we didn't achieve the target build rates that we needed at launch, although July is much better and we're actually able to build that rate in July. But as we are doing that, the demand rates have been quite high, we kept all the old and new lines running, which is very inefficient for us. But the third point would be that the full R-22 dry-shipped system phenomenon is, at this point, I'm going to estimate we're going to see 900,000 to 1.2 million units shipped in the industry. So there is another 150,000 units at our share level, where we haven't participated. Think about that as the opportunity cost making the new product launches even more difficult, right? So you're taking a product that we have missed our target costs, the 410A competing against low-cost R-22 systems, that's made it more difficult. And I think that when you think about overall volumes being down, the mix shift toward the weaker point of the portfolio along with the summation of my comments that I just gave, we ended up here with the 400-basis-point margin contraction over the prior year. So that's a summary of what's going on in Res.

And we'll go to our next question from Eli Lustgarten from Longbow Securities.

Couple of questions, can you talk about your expectations for operating profitability by segment? I mean, while you did get 12.2% in Climate, you do have a $23 million gain, I think you told us about a $0.05 a share in there, to -- which mean the operating margin is more like 11% -- a little over 11%, which is a little bit disappointing. Can you give us an idea of what expectations you have for the rest of the year in profitability, particularly, in climate and the rest of the segments?

Yes. Let me drop the $23 million Climate gain first. Because I want to bring that back into context. We, over the past 8 quarters, have been aggressively working on the total manufacturing footprint optimization. Just as a reminder, we've gone from a starting point of 94 plants and we're down to 73. Every time we've done one of these, we've had a disposition to make. Numerous have been done at a loss and we've been absorbing those into the income statement, and we don't use those as excuses, as for one quarter to the next. Just in the spirit of transparency, we had one where the land underneath one of the sort of plants that we had consolidated was quite valuable. And so what you saw there was the sale of that land. I would tell you that there is more of this to come. We've got again a fair amount of real estate through these consolidations to sell. Some are going to come at, probably, a loss, some are going to come at a gain, but I would not think about that as being such an exceptional charge in the quarter. It would have been the same thing happening last year as well on both sides of the equation. Steve, I don't know if you want to add anything to that or if you want to...

No, I think, we have transactions like this back and forth all the time. In fact, if you look at the impact in this quarter on the enterprise, there was a number of other items that went the other way, so it was largely offset at the enterprise level. It's just that it's sitting in the Climate Solutions sector, and we had to break that out and talk about it. If you look at -- if you can go back and take a look at plusing and minusing, even last year's second quarter, we feel very confident that on a real basis Climate's margins went up by 200 basis points in the quarter.

Okay. I guess my question, really, was I understand what happened before, I was asking that what are you expecting for the rest of the year in profitability as you look, of course, the various segments? I accept what -- I have no problem with what you indicated. I was really indicating what should we expect for profitability for the rest of the year?

Yes, I think in Climate you're going to see a full year 200 to 300 basis point margin expansion over the prior year. I think that they're on track to do that. Industrial, I think, here you'll see anywhere from a solid 200 to 300 points of margin improvement, hanging there as well, running very, very well. Res is going to be the sore spot for us. I think that the gap you saw in the second quarter, hopefully, it's going to be the widest gap we're going to see against prior year performance. It's not going to dramatically get better in the third quarter. You're going to see improvement there if we execute on the plans that we got. You'll see further improvement in the fourth quarter. The fourth quarter we'll see a lot more of that improvement, as those design and material changes have been tested through and go into production. But we're going to be putting that against very low volumes, okay? So you're not going to -- obviously, we missed the season here on the big opportunity. So here, I would tell you that we're probably going to be 300 basis points weaker than prior year on a full year basis at Res. Security is going to continue to do well. I mean they -- on a year-over-year basis, I'd look for 100 basis points of improvement. They fell back about 20 basis points in the quarter, quarter 2, but if you unpack that, you had a 16-or-so percent gain in Asia, which comes through at a lower margin. And we saw a spike in the U.S. steel door market, which is the lowest margin, most competitive piece of the business that we've got. The nice part about that is that is always an early indicator of hardware coming into the portfolio, and you saw that through bookings coming back in Q2. So there are steel frames and doors. It shipped in the quarter, hardware gets shipped in Q3, Q4. And again, I'll look for 100-basis-point improvement there during the year. With the Security business, Eli, I mean, the more we could grow that business at those margins, I'd be delighted. So even if we weren't growing our operating margins year-over-year but growing the business overall particularly outside of the U.S., it'd be a great success for us.

And we'll go to our next question from Deane Dray with Citi.

I was hoping to go back to the resi HVAC question on the mix shift because frankly, I have not heard of consumer moving back down towards minimum efficiency and it just strikes me that this is more of a price sensitivity action by consumer. So -- and I also know Trane has a 13 SEER offering, so just -- it -- could it be a pricing issue and how much of that latest price increase did you realize?

Well, I mean, Deane, we've always had the 13, 14 SEER offering. The point was the old products weren't very competitive and it wasn't the focus of the organization to think about that. I mean what you'd see over the long haul is a trend over the years is that increasingly, the market was moving the mix toward higher SEER and more energy-efficient systems. And during the downturn, in the recession you'd see that shift back, and believe that shift is going to stay that way for some time. Think about also the federal tax credits being eliminated and the incentives up to mix up, it didn't help that either. So when you look at our 13 and 14 SEER offerings, we're doing those in 410A. And as I mentioned to you earlier, we haven't met the bill of material cost targets that we wanted in the products. So we're actually competing in the market with products that's been well accepted, but having to deal with that through margin. So we've got to get our cost position right. Our winning strategy here, frankly, is we got the right product in the market. We understand from a competitive point of view, what competitive margins should look like in this area through all the various teardown analysis that we've done, and we just need to get to that point. And so that's the focus in the organization today.

How much of the price increase, the 2% to 6%, that was put through actually stuck the quarter?

They got 4% in the quarter.

Okay. And then, how about just broadly, the -- how Trane did in the spring cooling season? Because we did start off, I know it's hard to recall this with the heat wave we all have right now, but cooler wetter spring, and there were some questions about too much inventory in the channel, and how did Trane fare?

Yes, Trane gained, if you pull R-22, Deane, they gained 60 basis points of share gain. When you put R-22 back in, we lost 90 points of share. That's the impact of R-22 coming back in. When you look at the 14 SEER product, which is the product where there's the most focus on, we gained 210 basis points of market share on that product. When you look at the 13 SEER product, you would have seen a shift in percentage toward 13 SEER. In 2010, it would have been something around 60% all the way to 72%. That kind of gets back to your earlier question, how much I didn't recognize there was a shift going on. But that's a -- it's a very meaningful shift to go from 59% or 60% to 72% at the 13 SEER level. So what's happened as the markets move to a place where we historically haven't competed, we've launched new product and we're not as competitive as we need to be and we haven't been able to run at the rates required when the demand was there as exhibited by the share gains.

And we'll go to our next question from Jeffrey Sprague from Vertical Research.

Mike, just a follow-up on that last point is that 72% to 59% year mix on 13 SEER? And that's over the last year?

That's the industry, Jeff.

But how do you guys...

13 SEER in the industry, went from 59% to 72%.

And where did you guys go from?

We -- gosh, I don't have the mix data right in front of me here. I can tell you in a share basis, 130 basis points, that's R-22. I can't tell you, but other than to say we would have mixed not as badly as the industry, because we still got our people out really trying to sell premium. But I'll try to find that data for you before the call concludes.

Just wondering if you could give us a little color on Hussmann, not the process so to speak, but the loss in disc ops was bigger than I was anticipating, not that I had any great way to really estimate it and I'm sure there's some nonoperational things going on there. Can you give us some color, Mike or Steve, just kind of operationally, how Hussmann did in the quarter and kind of put in context the disc ops loss for us?

Yes, the Hussmann in the quarter, Jeff, significantly better than Q1. They're going through a bit of a rough patch in that market as well with some share loss with Wal-Mart and Target that affected the first quarter significantly. But we have adjusted what we got to do from a production perspective, headcount perspective. So the second quarter earnings come in about where we have forecasted them to be. The big issue in the quarter was a further impairment charge. Again, it was based on -- see, once you'd pick a business and you put it into discontinued ops, the accounting rules on impairments sort of changes a bit, because we now have allocated a piece of goodwill to Hussmann. We did that when we set up the discontinued ops. And when you have any type of market -- I'm sorry, any type of earnings multiple change, okay? Literally, you should be marking that business as goodwill every quarter. So we took a further impairment charge to take the -- to align the goodwill on the books with the expected multiples of earnings we're seeing at this point in time.

And we'll go to our next question from Jeff Hammond with KeyBanc Capital Markets.

Just kind of final closing a loop on this Residential. I mean do you expect to change your strategy around R-22? It doesn't seem like the loophole is closing and it's a bigger piece of the market.

Yes. Jeff, give me second here. I want to go back on Jeffrey Sprague's answer. I just found that. Yes, we've gone from a 51% mix to a 58% mix, so you can say that -- see that we don't mix with the industry per se. We kind of sell a higher mix of higher SEER systems, but even within our own portfolio, it's a 51% to 58% point move. Relative to R-22, Jeff, it's disappointing. I haven't seen the EPA step up into really regulating what has been put in place. I haven't seen AHRI and the members of the AHRI step up into managing this. And at the end of the day, if it's 1 million units plus market, it's not going to close. And we've got dealers that are disadvantaged from -- by this market, we're going to have to readdress it. So we got a meeting with the EPA next week. We'll continue to lobby to get things closed, but, Jeff, at the end of the day, we're not going to put our dealers to disadvantage, and we're not going to cheat our shareholders on our fair share. So that's where I'm at, at this point in time.

Okay. And then just on a share count and share repurchase, does this 18 million to 20 million shares, does that take into account what you expect to get in proceeds or Hussmann? Or would -- once that close, that would be additive to any share repurchase?

Jeff, we can get to the 18 million to 20 million, we believe with that cash flow from operations. Again, we're -- it's just depending on the timing of when we close out the Hussmann deal. We're still expecting a deal by the end of the third quarter. But there is upside to that share count -- to the buyback, not so much to the share count because there's not enough time left in the year to impact the 347 million, but we could see upside to the 18 million to 20 million shares that we would be buying back before the end of the year, given the Hussmann proceeds by the end of the third quarter.

And we'll go to our next question from Terry Darling with Goldman Sachs.

Mike, wondering if you might talk a little bit about the mosaic on nonres as you're seeing right now? I think the orders in commercial equipment, the revenue performance x FX there looks kind of in line but curious how you're looking at that going forward. But then on the comments on Security, it sounded like nonres, there you thought it was a little weaker, and maybe that's a geographic issue, but how do you flush all that out?

Well, I'll come back to the Climate pieces in just a minute, and even within the quarter, there's a little bit of a mix change that we saw, where we have services business running a little bit north of 8%. We'd like to have seen that growing somewhat north of 10%. Some of that is weather related but -- so that was a little bit of a mix down for us. We always mix a few additional margin points higher. And when that happens, equipment really remains strong and I'm talking about commercial HVAC remain strong both in unitary and applied, and really, throughout the world. I mean Asia continues to boom and we're seeing that in our business as we continue to localize the product and localize the portfolio there. That continues to do well for us, and booking remains strong there. I can tell you, it's all replacement really, and it's all around energy efficiency and that model is working well for us. Security, it really follows a lot of what you see with the ABI. You'd see this teetering around the 50 point but not quite at the 50 point, and what you see here when that happens for us is a little bit of lumpiness. You might see a weak quarter, and a little stronger quarter as that materializes. We saw a strong quarter in bookings in Q2, and it was sort of predated by strong bookings and delivery in the steel door, steel frame business. And that's just a little proxy we use to kind of look at the timing of bookings and shipments. And it's intuitive as you're building a building issue. You want to hang hardware and hang access control into a building, you're doing that, really, while the building structure and frame and door typically are on. So it ties out for us that we should see some more growth in Q3 in that business relative to what we've seen, but we need to see a strong bookings quarter again to really claim any kind of an uplift. I do feel it's bottoming. We feel the same way today that we felt say, 3 or 4 quarters ago around the commercial HVAC business bottoming. But we were cautious then and I'm cautious now to really lay some tracks behind us here with some solid bookings.

And then shifting over to Industrial Technologies. Solid margin expansion, as you said, 300 basis points or so year-over-year, but are you satisfied with the flow through at these kind of levels? Is there anything holding the flow through back on those margins? Is maybe, Club Car holding it back a little bit at the total segment level relative to what you're seeing on just the compressor piece?

Well, we're really straddling that by investing back into that business. It's always been the strategy that we want to refresh the portfolio. We talked about this 2, 3 years ago. We've been launching new frames of rotary both under the Ingersoll-Rand brand and our SIRC brand. We've been launching new tools. We've been investing in electronic capabilities across the business. We have made large investments into the service business that supports that business. And so what you see here is a longer term view as to how do we get that business to 17% to 19% by 2013. And as we look at the milestones here, we're happy with what we're seeing relative to the milestones that we've set, that long range plan, where we should be in terms of margins and investments and in the product portfolio itself. So I think, where we are right now based on where we should be feels pretty good, a long way to go from 15% to 17% to 19%. But I think that the product and service portfolio is being built out, and it's being built out globally to accomplish that.

And we'll go to our next question from Steven Winoker with Sanford Bernstein. Steven Winoker - Sanford C. Bernstein & Co., Inc.: Just want to come back to the overall margin progression for the company that you have on Page 7 in the presentation. So pricing, you gave us which was the 290 basis points, and therefore, I guess, material inflation was a headwind of 320. I know you're not breaking out productivity every quarter any longer on the growth side. But given the miss, at least, to my numbers here, I'm trying to get some understanding for how to think about that productivity versus other inflation so that we can better assess it going forward and understanding a lot of the issues you had in Resi. And my numbers so far, if I look at other inflation impacts in prior quarters are sort of in that 250 to 300 basis points headwind range. I guess that question therefore, has there been a material change in the other inflationary component that you've been facing, sort of wages in any other areas in this quarter?

Yes, let me start with that. I have to tell you that the reception here on our end is very weak so you may need to ask a follow-up if we didn't get right on the head here for you. But from a pricing perspective, first, I think you started there. Very pleased to see that what we've been working on for 1.5 years, 2 years around pricing excellence and systems and tools into the marketplace, but leakage and the way we establish price, taking root. So we thought we were going to run the year here and be negative, 30 basis points or so for the full year, turning it around the fourth quarter by forecast. And in fact, what happened as we turned it around in the second quarter, which we think it's the first time in at least 23, 24 quarters that we can record, we've really built that in. And that's a hard thing to start and that's a hard thing to stop. And so, if we look at Q3 and Q4, we would see modest expansion from those levels. We're thinking that there's good -- a 10-basis-type price improvement each quarter progressing. And I'm hopeful that if we push ourselves a little harder here that we might, in fact, hopefully do better, have some upside there. On the productivity side, if you look at 3 to 4 businesses, they're right on track, absolutely on track. And if you look at the lean transformation, the rapid improvement events, the cadence around the company for those things, it feels pretty good. You can really isolate the productivity issue, I mean you can almost walk the entire productivity issue that we've got back to the Res business. And this is our focus, it's on getting this thing, getting it right, getting it handled now. And by the end of the year, dramatically turning it around and being in a position for 2012 to hit the ground running in a better away. Steven Winoker - Sanford C. Bernstein & Co., Inc.: Well, so just as part of that same question is the other inflation part of that piece. Have you -- has there been a big increase in that at all or is it comparable to what you had seen in prior quarters?

No, inflation hasn't changed much. I mean we -- the only thing that would have been a little bit tougher for us is steel. It's creeping up again, but -- we have reductions in zinc. We've had some stability in copper and aluminum. We continue to convert material from copper to aluminum. And in terms of other inflation, which is largely labor, I mean there's no real surprises there, that number hasn't moved very much for us. Steven Winoker - Sanford C. Bernstein & Co., Inc.: Okay. And then my second question on the volume mix currency impact. So there was, I guess, 3% currency impact on the top line I think, so what was the margin impact of that 3% year-on-year? Is it comparable flow through?

Yes, I mean the currency piece of this, you're right. It's about 3%. Margins going to be light on this. It's going to be 15%, 10%.

It's actually closer to 10%, Steve. Steven Winoker - Sanford C. Bernstein & Co., Inc.: Okay. And that -- looking at that way, fine. And therefore, the volume leverage again, I'm trying to get at the Resi, how much -- you're saying you can trace it all back to Resi. So I'm just trying to get it with the volume leverage impact here versus the productivity, and I think that will allow me to do the math. Okay [indiscernible]

The volume mix, as I said earlier, it's about $20 million. I mean, no doubt about it. The volume has a pullback in the quarter. But relative to where we should have been, which is the margin expansion of last year's 10.6%, you work the other way here and the whole balance of that is net productivity. So that's where we need to focus our attention in the business going forward and that is where the attention is being focused right now.

And we'll go to our next question from Shannon O'Callaghan from Nomura Securities.

Just a couple of numbers I guess. Corporate expense is tracking a little lower. What's happening in that line and what are you expecting for the year?

We expect to see about $30-ish million a quarter in that line. And quite frankly, what's going on the, Shannon, is that we're still seeing benefit of the consolidation and synergies that we drilled from the Trane acquisition. I mean the employee benefits, pension costs, other things are improving largely because of efficiencies we've been able to drive with the larger volumes we're bringing to our suppliers. That's a long -- I mean, that's been going on for quite a bit, and we expect that to be about where we need to be in that little over $30 million range for the rest of the year.

And I mean, as you think into the coming years, I mean, does that then start to track a little more normal with kind of a growth rate in the business or is there more you can get out of it?

Well, it's impacted by pension quite a bit, okay? So I'm not going sit here and predict pension discount rates for 2012 but if interest rates start to go up a bit and we see discount rates coming down. It could be more than enough to offset any inflation that might roll through there, okay?

Shannon, I'll put a little plug in here because I know a lot of our organization is listening to the call. But we put $250 million capital request out to change also the earpieces of the company a few months ago and we're working toward that. And I'll tell you that we're dead serious about that. It's going to take us multiple years to work that through with all the complexity and the systems that we have. But again, it would be indicative of what we're trying to do in terms of really running a lot more efficiently from a systems perspective across the company. So I will tell you, at longer term, we're going to get that done. It's going to take us as long as 5 years to come all the way through the company and every single system that we've got, but it needs to be done and we've started that in the past quarter.

And we'll go to our next question from Julian Mitchell with Crédit Suisse.

I had a question just on pricing, I mean pricing was as you say it was up more in Q2 year-on-year than it was in Q1. And you sound sort of fairly confident about sort of holding that for the second half. The volume growth outlook, I guess, is slightly softer because of comps and everything else in the second half. And obviously, everyone has been looking at what's going on in the macro recently. Are you confident that you can hang on to price even in the context of volume deceleration, which I guess is the first volume deceleration we've had for several years? Do you think that will have an effect in terms of ability to push through price increases?

I feel a lot of confidence around Climate, Industrial and Security. With Res, we lagged another round here recently. Some have followed, some have not. Some have followed and pulled back in certain markets. So I don't know it's stickiness or that second round is going to be. So if there is any softness there, it's probably in the Res business. But if you look at the momentum of the other businesses, I feel good about that. It's a lot of hard work, finally are paying off. Then there was success that we think is a couple of quarters early for us.

And then just secondly on R&D. I mean you mentioned in the slides a number of new products coming out. Can you give a sense of how much your sort of R&D spend is going up this year and next year just in percentage increase on the dollar investment?

Yes, a couple things. One, if I gave you an R&D percentage, and I said this before, it's not going to match up to most of what you see in terms of peers. We tend to not put in, we don't count the resources that are already what the company involved in the R&D expense. But if you look at what we've always set up [ph], we've said that we're going to put about $50 million incrementally every single year back into R&D and product investments, that's building off a 2008 peak year. We never took it back in '09 and '10, and then we continued to add and increase it going forward. So if you look at where we are in terms of that full year, we're actually spending more than that. So I can tell you that where we would have had a $50 million incremental in the original guidance that we gave, we're closer to $90 million in terms of how we think about spending the money this year.

And we'll go to our next question from Andrew Obin from Bank of America Merrill Lynch.

So have we -- so is it correct to understand that we have not adjusted productivity outlook for the year even what's happening with the Residential business?

No. I mean, productivity has come down to the extent that it's come down by Res. Price is up and then -- and we're going to offset that productivity drop in Res by pricing elsewhere in the company, Andrew, will be the short answer to the question.

But that's for the year, right?

Correct.

So what are we targeting for productivity for the year? I'm sorry, if I may.

200 basis points of margin expansion. We still got a clear line of sight to getting that, and that would be the acid test, as far as I'm concerned is, do we drive 200 basis points of margin expansion? It's what the entire company has lined up against in terms of its incentives and its goals and objectives.

Back in the fourth quarter, you highlighted a contingency in your guidance. How much is left of this contingency given what has happened year-to-date?

We started with about $0.39 the beginning of the year. We're somewhere right around the $0.10 range left, absorbing what we think could be the impact of the full year of the res business, which puts us right at the sort of the top end of the range at about $3.10.

And we'll go to our next question from Steve Tusa from JPMorgan. C. Stephen Tusa - JP Morgan Chase & Co: On the Residential front, I mean, I think you've walked through a lot of the pieces. I'm not sure if you've given us any kind of like numbers around this stuff. But I'm just curious as to -- can you may be parse out a bit, just from a pure dollar, absolute dollar perspective how much do you think is kind of structural market as is, whether it's loss share, under absorption due to loss share for R-22, which may be temporary and what is this kind of like execution issue? I'm just trying to get a sense as to how quickly some of this stuff can turnaround. It would be very helpful if I think you gave us all a little bit more granularity around that.

Yes, so Steve, last year Q2 report $68 million. And I think in the net business this year we're reporting $40 million. And if you walk the bridge down on that, $20 million of that is really volume and mix. And if we were living with that $20 million alone, I mean clearly, it would be more explainable than the $40 million. What you see on the balance of that, okay? It would be, really, the productivity misses that we've had. It's not productivity in the sense that it's taking existing products and processes and reducing costs, it actually a little different problem, which is as we have launched new product and it replaces old product, we've actually launch that product not the price -- sorry, not cost point and the labor efficiencies that we have planned in those programs. And the labor efficiency piece of this is something that we have been addressing. I can tell you I've been through a couple of factories and questioned about 4 times in the last 4, 5 months. And in July, we're running at rate on one of the ships, associated with one of new product launches. So it's not a complete victory, but you can see that we're actually running at the rates that we anticipated. The material and some of the product changes that are required take a little bit longer. It takes a bit of engineering, design, takes a bit of testing, in some cases, some tooling. So I don't expect to see on the material side great improvement in Q3. I expect to see the needle moving in Q4. And what I can tell you about that is every part, every assembly going into these units is understood in terms of what the target is and where we're at and what the schedule is to get that, and whether or not we've got a new supplier or new material coming in. So I can look month-by-month and understand what we should be doing relative to what we said we're going to go do. And that's going to take to the balance -- take to the end of the calendar year to get that right. Now at the end of the calendar year, we're going to have about 80% right, okay? So we're not going to be completely resolved on all the material costs, but the timeline won't stop there and the intent is by the time we go into the full season again next year, we'll have the problem 100% solved. C. Stephen Tusa - JP Morgan Chase & Co: Great. And when you guys bought this business, obviously, the commercial aspects of it are pretty attractive. You guys served a lot of industrial customers. I mean, do you guys have to be in the Residential business? I mean, there is -- there maybe some strategic value out there given foreign players wanting to kind of enter the market. I mean would you ever consider selling this business?

Steve, we have kind of unique opportunity here with the Residential businesses that we already had and the way that, that plays out, both at the builder and retail level. And I think what would be exciting for us strategically is if you think about a recovery in the work and the ground we've laid over the last couple of years continue to lay. It could be exciting as to what could be done around a residential market with brands like Schlage and Trane and American Standard for that matter as well, so that's number one. Number two is there is a fair amount of synergy around compressors and controls in this business. In fact, we shared some factories around compressor manufacturing that I think are advantageous for us. And the channels that we go to market even through the Trane and residential channel, overlap on the light commercial channel up to about 25 tons, which creates an opportunity for us to take 2 bites at the apple around share, between 5 and 25 tons. So it's a good business. It's a business we know we can make money with, and then we need to execute against that, and this was a disappointment. I mean, a clear disappointment for us and we're going to get it on track. But the answer to your question is we're going to run this business and get the value out of it that I think strategically is ours to go get

And our next question comes from Josh Pokrzywinski from MKM Partners.

Just to kind of go back to the Resi one more time here. As the weather has picked up in July, and I would imagine that replacement activity is up modestly against that, are you guys seeing kind of a pro rata increase with the rest of the market? Like, I guess, maintaining share from here or is incremental growth appearing to -- appear to be coming from R-22 only, if you have a sense of that thus far?

Well, the share growth we've had has been good, Josh. I mean that continues to track along. I don't see share changing for us in that regard. The earlier question around R-22 remains a question for us as to whether or not this is going to be the new standard going forward in the industry, if the ship -- dry-shipped R-22 appears to be the case through 8 months. As it relates to weather, I don't get very excited about that because I think even the weatherman has got a hard time predicting that, so forecasting it from our point of view doesn't help us much in that regard. So I think what we've got in the forecast going forward for the full year 2%, 3% revenue growth about HVAC, and our Security business is a more modest view. I think it's a good view of where the market should be. I wouldn't expect share to move a lot one way or the other at this point in time. And from our point of view, it's a self-help situation around getting our cost structure right, where the industry volumes are going, which is at 13 and 14 SEER.

And if I can ask one follow-up on Air and Productivity. Are you seeing any benefit or hearing a chatter out there that is accelerated depreciation or I guess, bonus depreciation is helping out at all and that maybe we're kind of in a bubble on the reinvestment on the factory floor?

Yes, I could tell you, I've yet to see any report or hear one anecdotal story coming in from our organization to say that, that made the difference.

And our next question comes from Mark Koznarek with Cleveland Research.

I got on -- in touch late, I just wanted to catch up, what's the new currency outlook in the full year revenue outlook?

Yes, the current forecast if you look at where we were versus prior forecast driven mainly by the euro, Mark, is -- currency is adding about almost 2% to the annual sales forecast, okay? We're using a rate now of about 1.40%, 1.41%. And that's 6.3% from 2010.

Okay. Great. The -- what I really wanted to ask you about is the commercial HVAC business service versus equipment because the growth rate of service, Mike, I think you mentioned it to an earlier question, was a little bit below your expectations. But you said you're expecting 10% and couldn't and Ducze [ph] equipment was growing a lot faster than that, but that's only the second time in the last 14 quarters, which is how far I could easily go back, it might be longer that service underperformed equipment. And to hit this teens kind of growth target for the full year, are you expecting service to pick up or is that going to be equipment doing all the heavy lifting?

No, Mark. I would look for that business to run 8% to 10% for the balance of the year. And from this level, I would expect it to go up slightly to 10%. This is a business, when you think about mechanical HVAC service, nobody in the marketplace has got more than 1 point or 2 a share. This is still a very, very independent sort of business. And so there is an opportunity here to really, organically, begin to consolidate that business one market at a time. So I look at this as a great long-term growth story that in my mind getting a 10% compound growth as an entitlement. So we also, if you go back too, Mark, we were booking some very large government contracts in Q3 of last year. I recall, big state and local, one large agreement at a university in Missouri and some federal contracts, so I'd have to go back, but there could be a little bit of comparability issue there. But again, I look at that and say, we're also looking at some big contracts now, going forward. And hopefully we'd book some of those and create more growth momentum going into late in the year next year.

And our next question comes from Robert McCarthy with Robert W. Baird. Robert McCarthy - Robert W. Baird & Co. Incorporated: The only thing I wanted to follow-up on at this point was whether the $0.05 gain that you had in the quarter in Climate was something that you have visibility of when you issued guidance last quarter.

When we're doing these restructuring agreements, and we're looking at these dockets that we're doing around the rationalization of the portfolio, we're considering the possibility, gain and loss, all the way back when we start these programs. You never quite know at that moment in time, particularly in China, as for the value of this property or buyers in the marketplace. We've got a lot of real estate for sale all over the world. And there's going to be some winners in there like this one. There are going to be some losers in there. So you get good visibility into that. We've gone from a little more than 18 million, probably, square foot of manufacturing space. We're down now probably right around 12.5 million, x Hussmann. We continued in the last quarter to make further announcements on consolidating the footprint. So I think that we've got another year or 2 left of dispositions.

Certainly, Ron, just kind of real quick. We were tracking this as we were putting the guidance together for the quarter. I think throughout the quarter as we negotiated it, it became a little bit of a better deal for us. But I want to reiterate what I said earlier, okay? We broke this out so we can be very transparent on the Climate margins. There were other things in the quarter that offset the -- largely, the net impact to that at the enterprise level. Robert McCarthy - Robert W. Baird & Co. Incorporated: I understood that, Steve. I just wanted to -- I mean my take away is that someone knew that there was something coming, but you didn't explicitly have a $0.05 number penciled in any where that you specifically needed to beat guidance or something like that.

No, I mean the only risk you'd have is whether or not something is going to close with all the government approvals required to do something, right? The only risk there would be that we didn't execute it within the quarter in which we had anticipated it.

And at this time I'd like to turn it back to Ms. Janet Pfeffer for any closing remarks.

Thank you, Christie, and thank you, everyone. Joe and I'll be available for the rest of the day if you have any follow-up questions. Thank you.

That concludes our call for today. Thank you for your participation.