Good day, ladies and gentlemen, and welcome to the Ingersoll Rand Second Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this 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's Second Quarter 2012 Conference Call. We released the earnings at 7:00 a.m. 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 2. 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'd 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 3, and I'll turn it over to Mike.

Thanks, Janet. Good morning and thank you, all, for joining us 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 break down the outperformance on the next slide, but it was about $0.12 from operations with the remainder related to discrete tax items. Typically, 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 a deterioration in several overseas markets and somewhat better-than-expected growth in North America. U.S. revenues, 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 of interest to you, revenues of Western Europe were down high teens. Revenues in China were down, on a reported basis, with increases in Industrial, offset by lower revenues at Climate and Security. The lower revenues of Security are dependent in the timing of large projects. In aggregate, for the second quarter, we saw flat revenues, excluding the Hussmann Refrigeration business from the 2011 comparison. Revenues, excluding foreign exchange, were up 3% excluding FX. We experienced moderate growth in revenues in Industrial and low growth in 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 sale gain from last year, margins in the second quarter…

Thanks, Mike. Please go to Slide #5. Orders for the second quarter of 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 challenging 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 that's 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 lower activity in currency in Europe, while North America was down only slightly. Please go to Slide 6. Here's a look at the revenue trends by segment. Note 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, give a better view of our organic growth. Climate revenues increased 2%, Industrial had moderating growth at 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 the international markets, up 1% internationally if you exclude foreign exchange. Please go to Slide #7. This chart walks us through the change in operating margin from second quarter of 2011 of 12.3% to second quarter of 2012, which was 12.4%. This data excludes Hussmann for comparison purposes. Volume, negative…

Yes. 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 at constant currency for the year. It's gotten marginally worse in the past couple of months, which caused us to reduce our forecast for Western Europe. We have seen improved results for the Middle East and Eastern Europe, which have been helping offset that softness with some increases in Climate, Security and ITS. Overall, we now expect revenues from Europe, Middle East, India and Africa, taken together, 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 up for the year, we had trimmed the revenue growth expectations by about 5 percentage points from the mid-teens to the high single digits. Activity in the U.S. has been a little stronger in Commercial HVAC and Industrial. Refrigerated transport markets are expected to have moderate year-over-year growth in North America and to decline in Western Europe. We see continuing slow growth in residential markets, where we have had some positive movement replacement systems. And as Steve said, we expect R-22 low SEER units remain a significant 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 our revenue growth by about 2 points. In total, we expect…

[Operator Instructions] Our first question comes from Andy Casey from Wells Fargo.

Question on -- in the past, you've given us margin by segment. Could you help us with that? I'm just trying to see where the difference is in kind of a modest second half decrease. Most of it's probably what you described already but if you could help with margin, that'd be nice.

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

Yes, please.

Andy?

Yes?

Margin for the balance of the year?

Yes, please, Mike.

Yes, sure. Let me start -- Climate, again, we will look at x 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 and climate for the full year. But I think they're doing a nice job. We're offsetting some of the TK declines with improvements in Trane business. Industrial, I would think, you'd see 2% to 4% growth for the full year. And in here, I think you'll see margin expansion similar to what you've seen in the first couple of quarters so a good margin expansion there throughout the balance of the year, something in the maybe 120- to 150-basis-point range for the full year. Residential has really no change for me there, 1% to 3% growth, and we're looking for a couple of hundred basis points of growth here. Last year, it is about 3.1%. This year, it's just a little bit better than 5%. And Security, we would look to see revenues flat to perhaps minus 3 and margins to be essentially flat with last year.

Okay, just a couple of follow-ups. In Residential, did you realize any pricing as of July for the HVAC side?

Did we realize pricing -- 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 early in that process to see what will stick and what will not.

Okay. And Mike, is that included in the new 1 to 3?

Yes.

Our next question comes from Jeff Hammond from KeyBanc Capital Markets.

Just on price cost, it seemed 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 relief and where you see that -- how do you see that playing out in the second half?

Yes, I think, as Mike mentioned earlier, that we're pretty pleased with what the Climate group is doing to offset some of the mix issues with TK. Climate was really kind of a standout there, the price realization across the businesses and Climate. And Security is continuing to do well there. Security has done a great job of maintaining their margins throughout pretty tough markets for the past, now coming up on 4 years. So they've been able to deal with price and productivity, and so they've been able to realize a pretty decent price as well. I would say it's kind of across the board. ITS' price levels have held in there. They're contributing to the positive delta over direct material inflation. And also as Mike said, we're starting to see some improvement in the Residential side. So I would say, if you boil it down, it's sort of Climate, Security, Industrial, and then Residential kind of doing better.

Okay. So it's more price traction than any kind of benefit from commodity deflation or...

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

Okay, great. And then just quickly on Residential. Can you -- I mean, you had pretty good orders first quarter and now second quarter, and the 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. First, I got to tell you that we're really pleased with what we saw. The revenues were -- the margins both were spot on the forecast that they gave us for the quarter. And the new products went well. I think they've addressed the issues 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 this, and I am in a position here in July to tell you that I think we've -- that they've done an outstanding job and they're where I had hope we'd be in terms of the progress. What we're seeing here is that the launch of the new price point product -- lower price point product, the brand, and just the mix that we've had with R-22 has caused unitary volumes to be up kind of 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're at line or maybe even above the market. We haven't seen a market yet through the month of June, the actual data in the reports, the third-party reports, but I would expect we're at line or just above that. But on a revenue basis, of course, it puts pressure on the fact that we're really not selling, from a mix perspective, higher efficiency systems that we were a few 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 of 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 to that demand and ensure that we sold exactly to that demand levels. And so as we had demanded 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 products. So that worked extremely well for us, as a model, entering the market.

Our next question comes from Mike Wherley from Janney capital.

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

Yes. Thermo King, in general, I would talk a little bit about that. We saw in the quarter TK down of course high single digits, North America up mid-single digits. Europe, when you exclude Marine, was down high teens. And Marine, itself, was down over 20%. And all those, of course, include currency. Excluding currency, TK revenue is down low single digits. TK 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-teens. So our outlook for TK 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 -- Mike, I want to add, the latest ACT information that came out on refrigerated trailers market for North America, they called their forecast down by mostly, what was it, 2,100 units, I believe, for the year off their previous forecast. Our forecast had 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. And then the other question I had was just on the Residential Security side of things. You said that it was -- the revenue was up mid-teens and that seems pretty strong. And I'm wondering, are you -- do you think you're 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 resell -- I'm sorry, 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 quarter a little stronger, high-teens; second quarter, kind of mid-teens or low-teens. So continued growth there. We've launched some new product into the marketplace that's done quite well in addition.

Our next question comes from Eli Lustgarten from Longbow Securities.

One clarification question. I mean, you dropped the 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 because of the strong U.S. business, to just get some sense at how we should model this thing.

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

Again, related to Steve's point, we actually, just in the 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 a net 80. And that's had statutory benefit to us in terms of the costs associated with that. But and the real value comes in, particularly where we're now able to value from the NOLs that we couldn't before through the entity consolidation. So it's very difficult to project that on a sort of by-country, by-annuity basis. 25% has been a -- is a good modeling number for you. And as we get more visibility into tax plans for next year, we'll update that accordingly.

I think, just keep in mind, it is highly sensitive to U.S. income. And of course, your guess is as good 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 help the rate. But given what we know at this point in time, the 25% is probably still a pretty good number.

Now in -- during your commentary, you talked about Security, some large projects in Asia causing the decline. One, can you quantify the size of it? And two, do you -- have you put any of those projects in the second half this year? Or have they've been postponed indeterminately? Or how should we look at that?

Yes, Eli, they - their 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 rail, the rail stations, and quite a bit with city traffic monitoring systems. And of course that's been pinched the last few quarters 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 whether a big order in security books in Q2 or Q3. It is one of the lower-margin contributors to the business for us in that regard. So timing isn't as critical. We're much more focused on how the Americas will do and what sense we're 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 the infrastructure projects become real. Now they're real already in terms of the quotes and the proposals, we're really waiting for government approval to proceed with some of them.

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

Yes. We booked them as large as, say, $50 million. But $20 million or $30 million would be sort of the variety of what we're talking about right now.

And you've had record profitability in the Industrial businesses, even though its orders begin to slow a bit. Is there anything preventing you 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're 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're able to take a slowdown in the HVAC, large rotor business that will go into big rotary chillers. Same equipment, same machine in use to be able to produce the rotors that go into our large [indiscernible]. So actually, what we're seeing here is a nice balance between the 2. 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-round and regardless of any particular point in the cycle, there is an opportunity there that can keep those margins going. We do all that work actually in industrial plants. So Industrial gets the benefit of that absorption as opposed to Climate.

And one final question in Climate. At what point would weakness in Thermo King begin to affect the ability of the sector to show improved profitability? Because there's some concern about -- we know the overseas markets have been slow up, and now we see a lot of the U.S. market being somewhat questionable in growth in the truck sector.

Well, I think we've taken a conservative, but I think realistic, forecast for the year and what we've looked at and taken down here. So I can tell you that we can move margins up slightly based on the mix that we've seen in total Climates minus one to one, that kind of -- I'm sorry, flat to 2 for the full year. So if we work inside that range with the outline we've given you for the forecast, we'd be able to marginally improve profitability. But if you back out the China sort of factory sale there, actually, it's pretty impressive. That's the point of margin expansion when the mixes really went the wrong way on us.

Our next question comes from Steven Winoker from Sanford Bernstein.

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

Well, the nice thing, Steven, it's not just 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 control organization or it's the increased number of value streams that we've put out, are all sort of stepping up to a higher level of productivity pipeline, and, frankly, that's coming through in the actual results. And so we're resourcing those pipelines aggressively to make sure that we're looking at productivity and ensuring that we've got resourcing to be able not -- to get it done. We're including the engineering and sourcing organizations into a lot of the VA/VE work that we're doing across the company. And that's helping because we're now making bigger changes across the company that might go across different product lines. So we might look at electrical motors across both Industrial and HVAC. We deal with largely the same suppliers, and so we're able to make modifications there on a system level across those businesses. Res operations is another big one for us. We're not seeing the negatives there. In fact, we're seeing very good productivity there. They hit all their rates, hit all their operating metrics they had for the quarter with the new relaunch of the product, so that's been a plus for us. And 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 you look at the source for that leverage, coming from what I've talked about, including Residential, there's a clear path to it.

Okay. And so I know you put down a 1.1 percentage points difference versus other inflation. I mean, give us maybe just a little bit more color. I know you keep those internal numbers, but maybe a little more color about just how large that productivity was or how small the other inflation was.

Well, if you think about the $0.08 beat [ph] to productivity inflation, only about $0.02 of that came from deflation. The balance of it came from better productivity.

Okay. And then restructuring expense, you guys had mentioned a few times. Maybe a little bit more color on what you're doing on that front. Are you accelerating it? How are you thinking about that?

We've been continuous, Steve. I think you know us long enough that -- as long I've been talking anyway, that 9, 10 quarters, we've had a continuous stream of restructuring, and starting with the big plant consolidations all the way through to some of the functional Lean work we're doing in the company now. We've been at that in a fairly consistent basis, and I think we'll stay at that in some consistent basis going forward. So I don't think we'll do anything dramatically differently. We've got plans for what we'd like to see happen, but don't think we'd be spiking out anything particularly unusual for you. Again, it's really embedded into what we've been doing every quarter for the last 9, 10 quarters.

Okay. And the $0.07 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 sort of pure volume versus the offset in some of those other areas? I mean, 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 it says volume FX, but there's obviously got to be a -- between the last midpoint and the new midpoint, are you just saying that you're holding your productivity assumptions and all your other assumptions constant? This is really -- so there's no improvement in those other areas to offset the FX and the volume side here?

Well, what you see is a mix issue, too. Because you start taking TK volumes down further as an example, we're fighting that mix issue as well. So you're actually seeing productivity that's very similar to what we had forecast last quarter still flowing through, fighting a bit more of a mix issue with some of the higher-margin businesses.

Okay, all right. So mostly consistent, otherwise.

Yes.

Our next question comes from Deane Dray from Citi.

Some questions on the HVAC side. Just, we understand that the business is fairly lumpy in terms of seeing a surge in orders at the tail end of the first quarter and the second quarter. So I'd be interested on how that played out this quarter because it just also happened to coincide with some really scorching heat and so the expectation was that you may have benefited from that right towards the tail end. But from a seasonal standpoint, how did that play out?

About Res HVAC, Deane?

Yes.

We saw a strong March, strong April. And then it subsided a bit May, subsided a bit June, picked up a little toward 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 you've got some thoughts on that.

Well, if you look at just the bookings versus the revenue for the quarter, Deane, the bookings were up mid-teens for the Res HVAC business, and that came as about -- pretty much as a result of that seasonality that 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 know how it might have played out for some of the other guys in the industry, but we feel pretty good about the fact that the orders come in strong in June. And we're going into the third quarter in pretty good shape.

Yes, Deane, you got to think, too, mid-teens -- or low-teens kind of revenue for us is still going to apply kind of mid-higher teens volumes for us as it relates to the mix down to the lower SEER equipment.

Just want to make sure I'm hearing you correctly regarding some comments on July because that's -- 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 toward the end of July picked up giving us -- June, I'm sorry, June, Deane, June, giving us a backlog that we carried over into July. So no commentary yet on July. But the back part of June that provided increased bookings, which we're carrying forward into Q3.

Okay, that's helpful. And then just last question for me. On the Security side, we know seasonally, this is real important in terms of institutions like colleges that do switch-overs 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 it is around retrofits in the marketplace that are plant and stock. And so I think the activity for us is to shift it toward electronic locking, retrofits with major universities and hospitals, as opposed to expectations of major renovations that they're going to be conducting. So we're adapting it to the sales force and adapting our go-to-market strategy to that reality, which kind of really gets you to this flat minus 3 for the year in Q3, which is probably going to be down low single digits year-over-year. So we're suffering from an institutional slowdown. We're doing what we can in terms of trying to create our own demand.

But you're seeing the mix, the take rate on the electronic locks becoming a greater share of your business.

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

Our next question comes from Stephen Volkmann from Jefferies Securities.

I may be 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?

Well, look -- if you look at Q3 expectation in the Res business, we would look for revenue growth in that kind of 3% to 7% range in the business. We know that our volume of unit was 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're able to execute that very quickly with the plant's sort of capacity is today. So we're going to have to just go month-to-month here 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. And then just to switch gears here with respect to use of cash. Obviously, sort of more share repurchase here, and I guess Steve is kind of intimating that we'll see some more dividend and maybe some more share repurchase going forward. Does this mean that you've sort of abandoned the idea of paying down this pretty large tranches of debt, I think you had to do this here next year, and kind of headed toward that A-rated credit, is this kind of a secular change in your view of how cash should be used?

Well, hopefully, we've been intimating for a long time that we want to get the dividend rate up [indiscernible]. And so I would look to 2013 for us to take a meaningful step towards that, in other words a dividend payout something closer to the 25% range and moving closer to 30% in 2014. As it relates to your question about A rating from [indiscernible], 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're going to continue to study the question as the variables that go into that are very dynamic. So I will say that the one thing for sure, though, is we do believe that the importance of a strong balance sheet is clear, we know that an investment grade is absolutely viewed favorably. We know our peer universe maintains that, the investment-grade rating. So we also know it's important in a 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're going to continue to study and determine what the optimal structure of the company should be going forward. And once we really have that nailed down and detailed, we're going to be back out to you and all shareholders at that point in time.

Just one clarifying comment. To be sure, we've always said that the range of share buyback this year is going to be between 300 and 800 and we are really kind of just -- where we are at this point in time, saying it's going to be pretty much at the higher end of that range. The second thing I want to clarify, though, is that our payout ratio today is about 20% of available cash from the dividend side. So we would be looking for an increase in that somewhere around 25% in 2013, to make sure that I got those numbers right.

Our next question comes from Andrew Obin from Bank of America.

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?

Well, yes, Andrew, I mean -- sure. If you look at the -- what we look at is we're dropping the second half forecast by about $0.07. And what's causing that fundamentally is that we've had a different outlook -- a more negative outlook, particularly in Europe and in Asia, along with the currency headwinds that we're seeing. So we see weaker markets in Europe, in China in FX. The volume reductions were mainly in European transport, Asian HVAC equipment, and, to a lesser extent, Industrial in both Europe and Asia. Now we're offsetting part of that with a slightly higher forecast in North America HVAC, Industrial and Residential. And obviously, there's a negative fixed impact from those volume changes when you take them together. So you're essentially correct.

No, no, but I'm specifically referring to Thermo King just because it's one of your high-profit businesses. And truck OEMs, there has been a significant slowdown in order activity in the truck market in North America. And as we talked about your earnings adjustment -- operating earning 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.

I think, Andy, you can look at it like this. We factored in a slower TK second half. But when we started the year, we did not have as much optimism in our forecast with that market as you would've seen in some of the outside markets. I just said a few minutes ago, the ACT guys dropped their North American trailer market forecast by 2,100 units here in mid-June. And it's still not down to the point where we would've 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 an impact on our numbers as what you had seen on the outside world, when you look at some of the market indicators that are coming through. I don't know if it makes sense.

That's exactly what I was asking. And 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 and rank order them, or just to give a little bit more color than the broad statements you guys have provided.

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

And that's Climate Control mostly, right?

I mean, it's -- Climates is always a big part of this, but we would see a slowdown in Security as well, okay, in the back half of the year. I think Industrial will be okay, and we think Res will take it up a little bit. But yes, a big part would be Climate, and Security would be the other big part.

Our next question comes from Julian Mitchell from Credit Suisse.

I guess, 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've talked in the past, you made it clear that any revenue drop-through 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 they did in Q1 and Q2. They don't do that in Q3 and Q4. So I think they have got, just restructuring alone, answers the bulk of your question there.

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

Okay, got it. And 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 4 main items, it sounds like price material inflation and productivity and other are fairly similar to what you had in Q2. Volume mix, FX, a little bit worse maybe. But what's happening with that investment/other line just for the overall company? I'm mean, is that sort of -- I think in Q2, it was maybe a 80 bps, 90 bps -- maybe 80 bps headwind x the gain. What's the headwind expected from that portion in the second half, please?

It's about the same. We have about $100 million of incremental investments in the year. It's pretty well divided by quarter, Julian. What's going to change is the restructuring fees. This investment piece is proactive spending that we're doing on productivity initiatives, such as -- and we talked about this before, 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'd expect the same, roughly, 70 bps type of a number for both Q3 and Q4.

Good. And then lastly, can you just remind me the oil-free compressor upgrade in Industrial, when do you expect that product to really start having a commercial impact?

Julian, it has been, it's been a share gain for us in growth. So I think you're talking about when does the capacity come online, is that what you're asking?

Yes. So when do you see your ability to take market share, I guess, and new capacity start to affect your revenues...

Yes, we've been able to increase capacity in Germany already, and we got the capacity for Asia coming on later this year. So we'll be in good shape at the end of this year, beginning of next year.

And our last question comes from Terry Darling from Goldman Sachs.

I just had a couple of clean-up items. First, on the share count assumption, Steve, presumably there's 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's a significant share buyback going on in the second half of the year. We think there's going to be a little bit of pressure but not enough to talk about on stock option issuances in the second half.

Okay. So I mean, 800 million or so, 750 million still a goal. I mean, if you assume a stock price much higher from here, you're 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's 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 account here. You're 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 back fast enough in the second half to move the average much.

Okay. And then just trying to get a little perspective as we 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 were some heavy restructuring going on, at least in 3Q last year, that impacts that comparison. But 100 -- I think you call that 120 or 150 basis points year-over-year margin improvement, gets you close to 16. Is 2013 thought process in a preliminary basis more in the traditional 25% or 35% incremental range? Or is there the 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 a good answer now. I mean, I -- we're going to be sitting down here, gosh, before we know it, 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 that they want to do, how much restructuring, and then we'll net it all out. But they're doing a great job. They're hitting records. No reason to believe they wouldn't hit a new record next year. But I don't have the details yet. We're putting those plans together in a month or so.

Okay. And then just lastly, can you update us with regards to conversations with Trian to any extent? I mean, implicit in the capital allocation guidance for the second half, perhaps there's something there. But just to kind of clear the air on that, anything else you can add for us?

Yes. The conversations with Trian have continued. The 13D that you're seeing really outlines the ideas that Trian has. And so we're really in the process of taking some of these higher-level ideas that have been expressed in 13D and then the conversations that we have with Trian in working through the detailed analysis required in order to run these ideas to ground, actually, and evaluate the impact on what that would mean for 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. So considerable progress, but it's a very comprehensive analysis to run that stuff down, and we're nowhere near completing that. Yes, the capital allocation fees, just talking to shareholders over the last year have told me, "Hey, listen. Can you guys go revisit this? What are you doing on the dividend? What are you doing on that share buyback? And how are you thinking about the capital structure?" So we've been thinking about the capital structure, and we've been modeling what an optimal structure would look like. And that work also continues. And of course, that's something that's in Trian's ideas as well. So we're working through that. But what we've communicated in the past is an aggressive but balanced capital allocation program. And we've always said we're going to get the dividend up to 30% of payout. We think we've got another couple of years to do that, coming up on that. We've really hit this buyback last year hard. We're hitting it hard this year, really consuming all that $2 billion communicated. We're 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. It's always been the plan. And basically, to focus on 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're going to acquire growth and take on more acquisitions. 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 referenced there in terms of the analysis that's not nearly close 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 the data and the analysis is complete and expansive. And when we feel like we're in a position to understand it, communicate and 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.

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.