Good day, ladies and gentlemen and welcome to the Ingersoll-Rand Second Quarter 2012 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, today's conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Janet Pfeffer. Ma'am, you may begin.

Thank you, Mary. Good morning, everyone. Welcome to Ingersoll-Rand second quarter 2012 conference call. We released earnings at 7 am this morning and the release is posted on our website. We will be broadcasting, in addition to this call, through our website at ingersollrand.com, where you will find the slide presentation that we will be using this morning. If you would please go to slide two. Statements made in today's call that are not historical facts are considered forward-looking statements and are pursuant to the Safe Harbor provisions of Federal Securities Law. Please see our SEC filings for a description of some of the factors that may cause actual results to vary from anticipated. This release also contains non-GAAP measures, which are explained in the financial tables attached to our news release. Now, I would like to introduce the participants on this morning's call. We have Mike Lamach, Chairman and CEO; Steve Shawley, Senior Vice President and CFO; and Joe Fimbianti, Director of Investor Relations. Please go to slide three, and I’ll turn it over to Mike.

Thanks, Janet. Good morning and thank you all for joining us on today. Adjusted earnings per share from continuing operations for the second quarter were $1.15. That's $0.27 above the midpoint of our guidance range of $0.85 to $0.90. I'll breakdown the outperformance in the next slide, but it was about $0.12 from operations, with remainder related for the free tax items. Particularly given the uneven market environment during the quarter, we were very pleased with our ability to navigate the situation and to deliver above our commitments based on solid operational performance in all the businesses. Markets were generally in line with our outlook with slow growth environment although we saw deterioration in several overseas markets and somewhat better than expected growth in North America. U.S. revenue, excluding Hussmann were up 4% in the quarter. The revenues from international operations were up 1% when excluding foreign exchange. Foreign exchange negatively impacted international revenues by 6%. Focusing on a couple of reasons that I'm sure are of interest to you. Revenues in Western Europe, were down high teens, revenues in China were on a reported basis with increases in industrial offset by lower revenues a Climate and Security. The lower revenues from securities are dependent on the timing of large projects. In aggregate for the second quarter, we saw flat revenues excluding Hussmann refrigeration business from the 2011 comparison. Revenues excluding foreign exchange were up 3%, excluding FX. We experienced moderate growth in revenues and industrial and low growth Climate and Security. Residential revenues were up 3% year-over-year. Excluding Hussmann, orders were up 1% and up 3% excluding currency. Operating margin for the quarter was 12.4%, up 20 basis points versus prior year. If we exclude Hussmann and the property of sale gain from last year, margins in the second…

Thanks Mike. Please go to slide number five. Orders for the second quarter 2012 were up 1%, overall and 3% excluding currency. Excluding currency, we saw positive year-over-year bookings in all sectors except security, which continues to face challenge markets. Global commercial HVAC bookings were up low single digits. Transport demand was down, high single digits with a slight increase in North America more than offset by soft European truck trailer orders and lower marine demand. Industrial orders were up 2% with order growth in all regions partially offset by currency. Residential HVAC and security bookings were up low teens. Commercial Security orders in the quarter were down 10% impacted by the timing of large project orders in Asia as well as slower activity in currency in Europe, while North America was down only slightly. Please go to slide six. Here is a look at the revenue trends by segment. Note that that the Climate and total data beginning in the fourth quarter of last year excludes Hussmann from the comparisons. Second quarter revenues were flat versus last year and were up 3% excluding currency. Revenues excluding currency shown on the bottom of the chart gives a better view of our organic growth. Climate revenues increased 2%. Industrial had moderating growth of 6%. Residential was up 3% and Commercial Security revenues were up 1%. I'll give you more color on each sector in a few slides. On a geographic basis, revenues were up 4% in the U.S. and down 5% in international markets, up 1% internationally, if you exclude foreign exchange. Please go to slide number seven. This chart walks us through the change in operating margins from second quarter 2011 of 12.3% to second quarter 2012, which was 12.4%. This data excludes Hussmann for comparison purposes. Volume, negative mix…

Okay. Thanks, Steve. Let's go to slide 14. Our revenue outlook for 2012 is $14 billion to $14.2 billion, $100 million lower at the midpoint versus our prior guidance due to currency and softer markets in Europe and Asia. We had a very subdued view of Europe entering into the year. We expected it to be down even that constant currency for the year. It's gotten marginally worst in the past couple of months which caused us to reduce our forecast for Western Europe. We have seen improved results in the Middle East and Eastern Europe, which should be helping to offset that softness. We've seen increases in our Climate, Security and ITS. Overall, we now expect revenues from Europe, Middle East, India and Africa taking the go to be down in the low to mid-teens including currency impact. Asia specifically, China has been somewhat softer than our prior forecast. Although we still expect Asia to be out for the year, we had trimmed the revenue growth expectations by about 5 percentage points for the mid-teens to the high single-digits. Activity in the U.S. has been little stronger in commercial HVAC and industrial refrigerator transport markets are expected to have moderate year-over-year growth in North America and the decline in Western Europe. We see continuing slow growth in residential markets, where we have had some positive movement in replacement systems. As Steve said, we expect R-22 and low-SEER units to remain a significant of the portion of the market in 2012. For commercial security, we expect to see a continuation of challenging conditions in the U.S. non-residential new construction market for the next year, particularly in our key institutional markets. Additionally, foreign exchange will continue to be a headwind in 2012 adversely impacting growth by about two points. In total,…

(Operator Instructions). Our first question comes from Andy Casey with Wells Fargo. Your line is open.

Thanks, good morning, everybody. Question on, in the past you have given us margin by segment. Could you help us with that? I am just trying to see where the difference is in modest second half decrease. Most of it's probably what you described already, but if you could help with margin that would be nice.

Margin, Andy, by business for the difference for the balance of the year?

Yes. Please.

Andy, you want margin for the balance of the year?

Yes. Please, Mike.

Sure. Let me start. Climate again, we will look at axe FX. Let me do it all in reported flat to 2% growth in Climate for the full year, and I expect flat to modest improvements in margin in Climate for the full year, but I think they're doing a nice job from the T.K. declines with improvements in Trane business. Industrial, I would think you would see 2% to 4% growth for the full year and in here, I think, you will see margin expansions similar to what you have seen in the first couple of quarters, so, good margin expansion there throughout the balance of the year. Something in the maybe 120 to 150 basis points range for the full year. Residential has really no change for me there, 1% to 3% growth and we are looking for a 200 basis points of growth here. Last year, they did about 3.1%. This year they should do little better than 5%. Security, we would love to see revenues flat to perhaps minus 3% and margins to be essentially flat with last year.

Okay, and thanks for that. Just a couple of follow ups. In residential, did you realize any pricing as of July for the HVAC side?

Did we realize pricings? Well, we realized pricing in the quarter. We had good pricing in the quarter and then we had made some adjustments to price, not across the board, beginning in July for certain products which we're pretty really in the process to see what was taking that long.

Okay, and Mike, is that included in the new 123?

Yes.

Okay. Thank you very much.

Thank you. Our next question comes from Jeff Hammond from KeyBanc Capital Markets. Your line is open.

Just on price cost, it seems like a pretty big positive in the quarter. Can you give a little more granularity on where that was coming from? Where you might be seeing release? How do you see that playing out in the second half?

Mike mentioned earlier that we were pretty pleased with what the climate group is going to process some of the next issues with T.K. Climate was really the standout there, the price realization across the businesses and climates. Security is continuing to do well there. The Security has done a great job of maintaining their margins throughout pretty tough markets now coming up on four years, so they've been able to deal with price and productivity and so they've been able to realize pretty decent price as well. Just across the board, IPS is price levels have held in there. Now they are contributing to the positive delta over direct internal inflation and also as Mike said, we're starting to see some improvement on the residential side. So I would say, the balance for the climate, security, industrial and then residential are going better.

Okay, so it's more price fraction than any kind of benefit from commodity deflation?

We are starting to see some benefit from commodity deflation. It's about on track with what we thought for the guidance for Q2. It is going to get a little bit better in Q3, but most of the delta here is on the price side. It's certainly not coming from the inflation is abating. There is no question about that, but the delta margin is coming from just better price realization.

Okay. Great, and then just quickly on residential. You had pretty good orders first quarter and now second quarter and revenue growth continues to be muted. Can you just kind of talk through the disparity there and then can you also talk about mix within the bookings?

Sure, Jeff. Firstly, I have got to say that we are really pleased with what we saw. The revenues and margins, both were spot on the forecast that they gave us for the quarter and the new products went well, I think they have addressed the issue they were facing at this time last year very nicely. In fact, I would say as we were looking at this a couple of quarters ago, I had hoped to be in a position in July to tell you as I am in this position here in July to tell you I think that they have done an outstanding job and they are where I had hoped would be in terms of their progress. What we are seeing here is that the launch of the new lower price point product, both the brand and just the mix that we've had with R-22 has caused unitary volumes to be up higher single digits for us driving a much, much lower mix. So when you look at us on a total MBU or on a volume basis, we are outline and maybe even above the market. We haven’t seen the market yet through the month of June. The actual data and reports, the other third-party reports but I would expect we are at line of just above that, but on a revenue basis, of course puts pressure on in fact that that we were not selling from a mix perspective to a higher efficiency systems that we were two years ago. The other thing about Ameristar, which I think is interesting too; we had a whole different approach to how we launched that product this year. We took it as a methodology of allocating the product in advance. We wanted to really create pull from distribution as opposed to pushing another low price point product out in the marketplace. So what it allowed us to do is we were able to sort of exactly forecast the demand we wanted to see for the product build up that demand and ensure that we sold exactly to that demand levels and so as we had demand that exceeded that and in some cases we did. We were sure to prioritize first with those that had taken the pre-allocation on the product, so that worked extremely well for us as a model of entering the market.

Okay. Thanks a lot.

Thank you. Our next question comes from Mike Wherley from Janney Capital. Your line is open.

I was just wondering if you could give a little bit more color on Thermo King and what you are seeing in the truck market, both in Europe and China.

Yes. Thermo King, in general I got to talk a bit about that. We saw in the quarter, T.K. down, of course, high single digits. North America, mid-single digits. Europe, when you exclude marine, it was down high teens in marine, itself was down over 20% and all those, of course, pre-currency. Excluding currency, T.K. revenues were down low single digits. T.K. orders were down about 10%, including currency in the second quarter and North America was about flat. Europe excluding marine was down over 20%, and marine orders were down somewhere in the mid-teen, so outlook for T.K. for the full year is down mid-single digits in total with North America up, mid-single teens and Europe and marine down mid-teens. I just want to add the latest ACT information that came out on refrigerator trailer's market for North America. They called their forecast down by 2,100 units at least for the year of their previous forecast. Our forecast has been below ACT for some time, but you can kind of get what's happening here in terms of second half of the year.

Okay. The other question I had was just on the residential security side of things. You said that the revenue is up mid-teens and that seems pretty strong. Do you think you are taking share there or, has there been some promotional items there or what do you think is the reason for such strong residential security?

It's a combination of new product launches, little more strength in the builder market and then just more activity at retail in terms of sell-through, so just across the board last couple of quarters for us have been pretty good. I think the first was stronger, high teens. Second quarter kind of mid-teens and low-teens, so continued growth, but we would launch some new product in the marketplace that's done quite well in addition.

Okay. Thanks a lot guys.

Thank you. Our next question comes from Eli Lustgarten from Longbow Securities. Your line is open.

Thank you. Good morning, everyone. One clarification question. I mean, you dropped ongoing tax rate from 25% to 23% for this year. Can you give us any insight of what you think might happen in 2013? Do we stay at 23% or go up with strong U.S. business or get some sense that how we should model this thing.

Well, it's sensitive to U.S. income? Sure, and we've put longer range guidance out there at 25%. I think we continue, Eli, to do tax planning all over the world. Okay? Some of these discrete tax items are showing up, because we've been able to consolidate entities in foreign jurisdictions, so we're going to have one business that's making money take advantage of cumulative losses from other businesses in the past. That's exactly what happened to the Spain. So, we would expect to continue to do those kind of planning things throughout the perpetuity, so I think that at this point in time, we're looking at the rate of about 25%. I would say that from a modeling perspective, I would keep that 25% for the future years.

Okay.

Again, to Steve's point we actually just in last couple of years all the integration that we've been doing across the company, we've reduced the number of entities across the company by net 80. And that said, statutory benefit to us in terms of the cost associated with that, but real value comes particular we are now able to value from the NOLs that we couldn't through the entity consolidation, so it's very difficult to project that on a by country, by entity basis. 25% it is good modeling number for you and as we get more visibility into tax plans for next year, what they did accordingly?

Just keep in mind. It is highly sensitive to U.S. income and of course. Now, your guess is as good as anybody's as to what the U.S. markets will look like next year, so if we don't see the type of growth year-over-year that maybe we've expected in the past that would rather help the rate, but again what we know at this point in time is 25% is probably still pretty good number.

During your commentary you talked about security some large projects as you are quoting the decline, one thing you quantify the size. Have you put any of those projects in the second half of this year or they will be postponed and determined whether how we should we look at that?

Yes. Eli. They are business. They've done a great job with capturing most or all of the airport business there, the big airports. They've done a lot with the rail, the rail stations and quite a bit with city traffic monitoring systems. Of course that's been pinched in last few quarter with some of the infrastructure containment going on in China, but it does pick up in the back half of the year and we do see it recovering, but every year we seem to get that lumpiness associated with rather big order in security books in Q2 and Q3. It is one of the lower margin contributors for the business for us in that regard, so timing has been as critical, but we are much more focused on how the Americas will do and what sense we are getting for recovery in Europe, but I think bookings in Asia, particularly China will recover in the back half of the year, probably the fourth quarter as these infrastructure projects become real. Now they are already in terms of the quotes and the proposals, we are really waiting for government approval to proceed with some of that.

What's the magnitude of these kind of things that didn't happen? I mean, there were $20 million, $30 million or $100 million can you give us some idea?

We haven't booked as large as say $50 million, but $20 million or $30 million would be sort of the variety of what we are taking about right now.

You had record profitability in the industrial businesses. Even though if I wanted to began to slow a bit. Is there anything preventing, holding this record profitability even if things get a little bit sloppier, particularly overseas?

I think we continue to drive it similar to what we did in North Carolina around putting all of our compression around the company together. All of our machining operations, we are doing the same thing right now in Asia, in China specifically and doing a similar body work in our German facility, so I think that this is great. We are able to take a slowdown in the HVAC, large rotor business that would go into big rotary chillers. Same equipment, same machine in use to be able to produce the rotors that go into our large air ends. So actually what we are seeing here is a nice balance between the two. We're able to keep that operating. So I think we can. That's one big example, but a compressor like that could be 10% to 30% of the cost of the system and so you can absorb that year around and any up point of cycle. There is an opportunity there that can keep those margins going. We do all that work actually in industrial plant, so industrial gets the benefit about absorption as opposed to climate.

And I have got one final question on Climate. At what point would weakness in Thermo King begin to affect the ability of the sector to show improved profitability? Is there some concern about? We know overseas will show up and we see a lot of it the U.S. market being somewhat questionable in growth in the truck sector.

Well, I think we have taken a conservative, but realistic forecast for the year in what we have looked out taken down here, so I can tell you that we can move margins up slightly based on the mix that we have seen and total climate minus one to one, that is kind of very flat for the full year. So if we work inside that range with the outline we have given you for the forecast, we would be able to marginally improve our profitability, but if you back out that China factory sale there. Actually it is pretty impressive that the point of margin expansion when the mix has really went wrong way on us.

Okay. Thank you very much.

Our next question comes from Steven Winoker from Sanford Bernstein. Your line is open.

Thanks, good morning. Just seemed like pretty impressive productivity in the quarter. if you maybe talk a little bit about what are some of the maybe biggest actions you are seeing coming through, Mike, that are continuing to give you this buffer to the volume?

Well, I think Steven, it is just not one thing, I would be concerned if it was one thing or one big event, but it’s the pipelines across the company and the various ways that we track them whether it’s the centralized organization or it’s the increased number of value streams that we've put out, are all sort of stepping up to higher level of productivity pipeline and frankly that’s coming true in the actual results, so we are resourcing those pipelines aggressively to make sure that we are looking at productivity and ensuring that we have got resourcing to be able to get it done. We are including the engineering and sourcing organizations into a VAVE work that we are doing across the company and that’s helping because we are now making bigger changes across the country that might sell across different product lines so we might look at electrical motors across both, industrial and HVAC as we deal with largely the same suppliers and so we are able to make modifications there on a system level across those businesses. Res operations, is another big one for us. We are not seeing the negative there. In fact, we are seeing very good productivity there. They had all their rates, all their operating metrics they had for the quarter with the new re-launch of the products. So that’s been a plus for us. I think that that will actually be even a bigger plus for us in Q3 or Q4, so we feel good about the fact that the Q3, Q4 leverages are fairly high when you look at it for the balance of the year for us but when we look at the source for that leverage coming from what I have talked about including residential, there is a clear path to it.

Okay, and so I know you have put down the 1.1percentage point's difference versus other inflation. Can you give us just maybe a little bit more color? I know you keep those internal numbers but maybe a little more color about just how that productivity was or how small the other inflation was?

Well, when you think about the $0.08 to productivity inflation, only about $0.02 of that come from deflation. The balance of it came from better productivity.

Okay. Then in restructuring sense, you guys have mentioned a few times and maybe a little bit more color on what you are doing on that front. Are you accelerating it? How are you thinking about that?

Well, we like continuity. I think you know us long enough that, as long as I have been talking anyway, nine or ten quarters, we have had a continuous string of restructuring and starting with the big plant consolidation is all the way through to some of the function of lean work we are doing in the company. We have been asked that fairly consistent basis and I think we will stay at that on some consistent basis going forward, so I don’t think we are doing anything dramatically differently. We've got plans for what we like to see happen, but don’t think we would spiking out anything particularly unusual for you. I guess, really embedded into what we have been doing every quarter for the last nine or ten quarters.

Okay. The $0.7 reduction in the back half of the year on the volume, FX, everything all in, operationally, so given on this productivity commentary and the restructuring commentary how might I think about how much of that is pure volume versus the offset in some of those other areas. How are you thinking about the mix of that in the back half?

I think that you have to remember, FX is an issue in the back half which is also in that number, so we saw a weakening of FX between last guidance and this guidance for sure.

Right, but I know this is volume FX, but there obviously has got to be a between the last midpoint and the new midpoint. Are you just saying that you are holding your productivity assumptions and all your other assumptions constant, so there is no improvement in those other areas to offset the FX and volume side here?

But what you are seeing is too, Steve. Is a mix issue too, because they start taking T.K. volumes down further as an example. We're fighting that next issue as well, so you are actually saying. productivity got very similar to what we had forecast last quarter still going through fighting bit more of a mix issue with some of the higher margin businesses.

Okay. All right, so it must be consistent otherwise. All right. Great. Thank you.

Thank you. Our next question comes from Deane Dray from Citi. Your line is open.

Thank you. Good morning, everyone. Two questions on the HVAC side. We understand that the business is fairly lumpy in terms of seeing surge in orders at the tail end of the first quarter and second quarter, so I'd be interested how that played out this quarter? Can you just also happen to coincide with some scorching heat, and so the expectation was that you may have benefitted from that right towards the tail end, but seasonal standpoint, how does that play out?

HVAC?

Yes.

We saw strong March, strong April, then subsided a bit May, subsided a bit in June, picked up a little towards the back half of June. Feeling it's more sort of inventory related than it is sort of heat related at this point in time. I don't know if I can comment any deeper, Steve, maybe if that's.

If you look at just the bookings versus the revenue for the quarter, the bookings were up. Mid-teens were. The res HVAC business and I came pretty much as a result of seasonality you just described. We are entering third quarter with a pretty good backlog in the res business as a result of that. I don't have money to played out for some of the other guys in the industry, but we feel pretty good about the fact that order has come in strong in June, and we are going into the third quarter in pretty good shape.

You got to mid-teen and low-teens kind of revenue for us (Inaudible) imply kind of mid-higher teens, volumes or as this relates to the next down to the lower SEER equipment. Just want to make sure I am hearing you correctly regarding some comments on, because it's important for this business. We know, so the pace in June, carried into July, but how would you characterize it?

Actually the bookings towards the end of June picked up giving us a backlog that we carried over into July, so no commentary yet on July, but the back part of June provided increased bookings, which we're carrying forward into Q3.

Okay. That's helpful. Then just last question for me. On the security side, we know seasonally, this is real important in terms of institution psychologists to do switchovers or upgrades on the lock installations and just what's the expectation this year? How do you expect that to play out?

Well, it takes a lot more demand creation than that is around retrofits in the marketplace that are planning stock, and so I think the activity process shifted towards electronic locking, retrofits with major universities and hospitals as opposed to expectations with major innovations that they are going to be conducting, so we are adapting, the sales force and adapting our go-to-market strategy for that reality which kind of really you for this flat minus 3 for the year and a key which is probably going to be down low single digits year-over-year, so we're suffering from that institutional slowdown. We are doing what we can in terms of trying our own demand.

But you've seen a mix, the take rate on electronic walks becoming a greater share of your business.

It's the fastest growing part of our business. Wish it was larger, but yes. Absolutely, you see it going up.

Thank you.

Welcome.

Thank you. Our next question comes from Stephen Volkmann from Jefferies Securities. Your line is open.

Thanks. Hi, guys. I maybe beating a little bit of a dead horse here, but I just want to make sure I understand the bookings obviously impressive in residential. The forecast for revenues up very modestly only, the whole difference there is mix or are you being a little bit conservative regarding sort of bookings in the second half.

Look. If you look at Q3, expectations the Res business, we would look for revenue growth in that kind of 3% to 7% range in the business. We know that our volumes of unit is going to be much higher than that because of the mix. It's become a relatively short cycle business, so when we see Q2 sort of late June bookings up 13%, it's good. I don't get wildly excited about that, because we are able to execute that very quickly with the plants sort of capacities today, so we're going to have to just go month-to-month and see what happens in Q3, but our expectation would be revenue growth of 3% to 7%, unit growth higher than that.

Okay. Great. That's helpful. Then just to switch gears here with respect to use of cash. Obviously sort of more share repurchase here and I guess Steve kind of intimating that we'll see some more dividend and maybe some more share repurchase going forward. Does this mean that you sort of abandoned the idea of paying down this pretty large tranches of debt. I think you have here next year and kind of headed towards that A-rated credit. Is this kind of secular change in your view of how cash should be used?

Hopefully, we've been intimating for a long time that we want to get the dividend rate up, so I would look in 2013 for us to take a meaningful step towards that, and it was this dividend payout something closer to the 25% range and moving closer to 30% in 2014. As it relates to your question about A ratings in that. I think the bigger question really is what do we believe the optimal capital structure of the company should be? What should it look like, and in that regard, we have studied it, we are going to continue to study the question and the variables that go into that are very dynamic. I will say that one thing for sure though, as we do believe that the important strong balance sheet is clear. We know that an investment grade is absolutely reviewed favorably. We know our peer universe maintains that investment grade rating, so we also know that's an important in downturn to have a strong balance sheet, so we're going to raise the dividend, we're going to talk to the board about reauthorizing share repurchase, we are going to continue to study and determine what the optimal structure of the company should be going forward and once we really have sort of that nail down in detail we are going to be back out to you and all shareholders.

Just one clarifying comment. Just want to make sure. We have always said that the range of share buyback this year is going to be between 300 and 800 and it is pretty kind of where we are at this point in time saying economy is pretty much high end of that range. I am going to clarify those is that our payout ratio today is about 20% of available cash on the dividend side. So, we would be looking for an increase in that somewhere around 25% in 2013. I am not sure that still I got those numbers right.

That's very helpful. Thank you, guys.

Thank you. Our next question comes from Andrew Obin from Bank of America. Your line is open.

Yes. Good morning. Just want to make sure that in terms of your earnings outlook, did you make any negative adjustments for the slowdown in truck orders in North America and Europe?

Yes, Andrew. Certainly. What we look at is we are dropping the second half forecast by about $0.07 and what's causing that fundamentally is that we've had a different outlook, more negative outlook, particularly in Europe and in Asia along with the currency headwinds that we are seeing. So we see weaker markets in Europe and China in FX, volume reductions were mainly in European transport, Asian HVAC equipment and to a lesser extent in industrial, in both Europe and Asia. Now we are offsetting part of that with a slightly higher forecast in North America HVAC, industrial and residential, and obviously it’s a negative mix impact from those volume changes when you take them together, so you are essentially correct.

No, but I’m specifically referring to Thermo King, just because it's one of your high profit businesses. Truck OEMs, there has been a significant slowdown in order activity in the truck market in North America and as we talk about your earnings adjustment, operating earnings adjustment for the second half. I’m trying to understand, what are the major buckets the key buckets just more specifically and within that I'm wondering, just how big of a negative drag was TK?

Andrew, if you look at like this, we factored in a slower TK second half. When we started the year, we did not have as much optimism in our forecast for that market as you would have seen in some of the outside markets. I just said a few minutes ago, the ACT guys dropped the North American trailer market forecast by 2,100 units here in mid-June. It's still not down to the point where we would have planned the year for that market, so we took it down a bit to reflect primarily weaker container activity in Europe and the big impact of foreign exchange, so Europe is a factor, foreign exchange is a factor in TK, but we're looking at not having as big as impact on our numbers as what you would see in the outside world when you look at some of the market indicators that are coming through.

No. That's exactly what was I asking. The second question, could you just rank order the biggest negative drivers for the second half? What were the biggest headwinds? If you could just give us more clarity, quantify them on rank order them or just to give you a little bit more color than the broad statements you guys have provided?

The headwinds is really second half mid-point forecast from the outlook in April, reduces by about $0.09 just on the revenue side of the thing.

That's Climate control mostly right?

I mean, the Climate is always a big part of this, but we would see a slowdown in Security as well in the back half of the year. I think Industrial will be okay, and we think Res were taken up a little bit. But yes, big part would be climate and security would be the other big part.

Okay. Thank you very much. I'm taking off. Thank you.

Thank you. Our next question comes from Julian Mitchell from Credit Suisse

Thanks a lot. Yes. Firstly just to focus on the Security business. You talked about margins being flattish for the year. I mean Q1 was down about 50 bps, Q2 down 180, and I guess when you talked in the past you have made it clear any revenue drops, it would all will be spent on product introductions and sort of refreshing the overall business? So, what's behind the confidence that Security can rebound on the margin side in the second half?

The biggest thing, Julian, was the restructuring we did Q1 and Q2. We didn’t do that in Q3 and Q4, so I think they've got this restructuring alone answers the bulk of your question there.

The restructuring was primarily in Europe, Julian, which is pretty expensive, so that's behind us as we get through the first half.

Okay. Good. If we think about the overall, sort of margin bridge that you guys have on Page 7 in the slides. When you think about the second half for those four main items, it sounds like price, material inflation and productivity and other are fairly similar to what you had in Q2, volume, mix FX little bit worst maybe. What's happening with that investment/other line just for the overall company? I think in Q2 it is 80 bps, 90 bps, maybe 80bps headwind the gain. What's the headwind expected from that portion in the second half please?

It is about the same. We have about 100 million of incremental investments in the year and it is pretty well divided by quarter, Julian. What's going to change is the restructuring piece. This investment piece is proactive spending that we are doing on productivity initiatives such as when we talked about this before from the common systems initiative we have the centralization of our procurement supply chain folks worldwide and some very, very key product development programs that are going on, so that spending is pretty well spread through the year, so we will expect the same roughly 70 bps type of the number for both, Q3 and Q4.

Good. Thanks. Lastly, could you just remind me your free compressor upgrade in Industrial, when do you expect that product to really start having a commercial impact?

Julian, it has been the share gain for us in growth, so I think you are talking about when does the capacity come online is that what you are asking?

Yes. When do you see your ability to take market share, I guess, from new capacity start to affect your revenues in that business?

Yes. We have been able to increase capacity and revenue already and we've got the capacity for Asia coming on later this year, so we will be in good shape at the end of this year beginning of next year.

Thank you. Our last question comes from Terry Darling from Goldman Sachs. Your line is open.

Thanks. I just had a couple of clean up items. First, on the share count assumption Steve, presumably there is a bunch of share issuance related to stock compensation in the back half of the year. Can you help us with that number or?

The $315 million was our original estimate of the average share count for the year, so to drop it to $311 million means that there is a significant share buyback going on in the second half of the year. We think it's going to be a little bit of pressure but not enough being to talk about on stock option issuances in the second half.

Okay. So, $750 still a goal even if you assume stock price much higher from here. You are looking at $17 million down from 314 that gets you sub-300 by a significant amount. Obviously, timing I guess can influence all this, but there is not a significant share issuance to offset that?

Yes. We have to take you through the math of when the buybacks occur relative to the average count here. You are right, by the end of the year it’s going to be down below probably $300 million, but the averaging catches up with you because you can't buy them back fast enough in the second half to move the average much.

Okay. Then just trying to get little perspective as you try to think about industrial margins for 2013. Mike maybe this is a question for you. Just looking at the strong year-over-year improvement implied in the forecast, I guess, I kind of want to remember that there was some heavy restructuring going on at least in 3Q last year that impacts that comparison, but I think you called out 120 or 150 basis points year-over-year margin improvement gets you close to 16. Is 2013, thought process and a preliminary basis more in the traditional 25% or 35% incremental range, or is there more structural things going on that can carry sharper leverage in '13 off of whatever kind of growth, mid singles or whatever you might want to assume?

Terry I appreciate the question. I can’t give you good answer now. I mean, we’re going to be sitting down here, gosh before we know it in the next 10 weeks with these guys working through for that month long period in October as to what the plan will be for the year, depending on how much investment do they want to do, how much restructuring and then we’ll net it all out. But they are doing a great job, they are hitting records, no reason to believe, they won’t hit a new record next year but I don’t have the details yet. We're putting those plans together in another month or so.

Okay. Then just lastly, can you update us with regards to conversation with Trane to any extent. I mean implicit in the capital allocation guidance for the second half, perhaps there is something there, but just to kind of clear the air on that, anything else you can add for us?

The conversations with Trane have continued, the 13D that you are seeing really outlines the ideas that Trane has. So we’re really in the process of taking higher level ideas that have been expressed in 13D and then in the conversations that we’ve had with Trane and working through the detailed analysis required in order to run these ideas to ground actually and evaluate the impact on what that would mean to shareholder value, so we’re in that process now. It's been a lot of good work by a lot of people inside and outside the company to put that together. It's a considerable progress, but it’s a very comprehensive analysis to run that stuff down and we know we are near completing that. The capital allocation piece, just talking to shareholders over the last year have told me, hey, listen can you guys go revisit this. What you are doing on the dividend, what are doing on share buyback and how are you thinking about capital structure so we've been thinking about the capital structure and we have been modeling what an optimal structure would look like and that work also continues and of course that's something that's been Trane's ideas as well, so we are working through that, but what we have communicated in the past is an aggressive, the balanced capital allocation program and we have always said we are going to get dividend up to 30% of payout, we think we got another couple of year to do that coming up on that. We have really hit this buyback last year hard. We are hitting it hard this year. We will be consuming all that $2 billion communicated. We are going to go out and talk to the Board about authorizing a new repurchase there, so we know that we want to return as much as we can to shareholders. That's always been the plan. Basically to focus some of the organic growth of the company, the product development of the company and integrating the company together to raise margins as opposed to thinking we are going to acquire growth and take on more acquisition. That’s never been in the cards for me as to where we are in our strategy.

That's great color. Just one follow-up. On the piece that you referenced there in terms of the analysis that's not nearly closed to being done, what is the timetable for that piece of the analysis?

Well, it’s when the work is done and complete. Terry, I can’t tell you that we've got a definitive date. We intend to keep working through the ideas, making sure that data and the analysis is complete and expansive, and when we feel like we are in a position to understand it and communicate, talk to our board about it, we’ll get a better feeling. As well as what questions the board might have and how they might want to proceed, so it's hard to put a timeline on something like this.

Understood. Thanks very much.

You're welcome.

Thank you, everyone. Joe and I will be available for any follow-up questions for today Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect at this time.