Operator: Good day, ladies and gentlemen, and welcome to the Ingersoll-Rand Second Quarter 2013 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 be given at that time. As a reminder, today's conference call is being recorded.
I would now like to turn the conference over to your host Janet Pfeffer, Vice President, Strategy Business Development and Investor Relations. Please proceed.
Janet Pfeffer - VP, Business Development and IR: Good morning, Thank you, Sean. Welcome to our second quarter 2013 conference call. We released earnings at 7 o'clock this morning and the release is posted on our website. We'll be broadcasting in addition to this call through our website at ingersollrand.com where you can find the slide presentation that we'll be referring to this morning. This call be recorded and archived on our website. If you'd please go to Slide 2, statements made in today's call that are not historical facts are considered forward-looking and are made pursuant to the Safe Harbor Provisions of federal securities laws. Please see our SEC filings for a description of some of the factors that may cause actual results to vary materially from anticipated. This release also includes non-GAAP measures which are explained in the financial tables attached to our news release.
A couple of things to note before I turn it over to Mike, similar to last quarter, we will be talking to adjusted margins during our commentary, which excludes restructuring and spin-related costs. Our news release and tables give you a reconciliation of GAAP to adjusted margins. This is consistent with how we gave guidance in both February and in April.
And to remind everyone, also, earlier this year, we transferred a business line from Security Technologies to Residential Security. That was about $20 million of revenue in the first quarter and it's about $80 million for the full year 2013. There's no impact at the consolidated level. In the charts and comments, we'll focus on year-over-year change in revenue and orders for those businesses on a comparable basis, so as to best represent the underlying performance.
Now, to introduce the participants on this mornings' call, Mike Lamach, Chairman 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.
Michael W. Lamach - Chairman and CEO: Okay. Thanks Janet. Good morning and thanks for joining us on today's call. We delivered growth and profitability above our earnings commitment in the second quarter with solid operational execution across the Company. On top of this, we completed several key milestones related to the securities spin as well as a successful debt offering. I'm proud of all the great people in our Company for this accomplishments and thank them for their personal and collective commitment for the success of Ingersoll-Rand and ultimately in the successful launch of a new security company, Allegion.
Our revenues for the second quarter were up 3% versus last year, both on a reported basis and excluding foreign exchange, reflecting topline performance just above the top of our guidance range. Revenues were up in Climate, Residential and Security technologies but we saw a decline in Industrial. Orders were up 2%.
Adjusted earnings per share for the second quarter were $1.14. That's $0.06 above the midpoint of our guidance range of $1.05 to $1.10. Better performance from operations essentially delevered all of the upside to guidance.
Adjusted margin increased 20 basis points. Operations of four corporate unallocated cost increased adjusted margins by 80 basis points, versus 2012 second quarter adjusted operating margins were up in three of the sectors, Residential delivered a 330 basis points improvement. Climate margin was at 90 basis points, and security margins were up 50 basis points. Lower revenues were a headwind for industrial. Corporate costs were higher in the quarter as expected due to higher benefit costs and increased investments related to our IT transformation.
This marks our ninth consecutive quarter of a positive gap between pricing and direct material inflation. Our lean focus again shows significant results in the implemented value streams and we continued to invest in the future of the business, funding significantly product development, investing in the new IT platform and building our services footprint. Spin-off and restructured costs were $0.11 in the quarter.
We continued our share repurchase program, repurchasing approximately 9 million shares in the quarter.
We still expect to spend the current $2 billion authorization by the end of the first quarter next year.
We continue to be on track for the spin and have completed several key milestones. We filed the Form 10 in mid-June right on schedule. We named five excellent outside directors as well as the Chairman and CEO Dave Petratis. And we announced the name for the new company Allegion.
In June we completed a successful debt offering for Ingersoll-Rand securing $1.55 billion at attractive interest rates and maturity profiles. So it was a quarter with many accomplishments and milestones to take note of.
Now Steve will take you through the second quarter results in more detail and I'll be back with our outlook for the third quarter and full year.
Steven R. Shawley - SVP and CFO: Thanks Mike. Please go to Slide 4. Orders for the second quarter of 2013 were up 2% on a reported basis and up 1% excluding currency. Climate orders were up 4% global commercial HVAC bookings were up low single digits. Transport orders were up mid-teens, industrial orders were flat, with order growth in the Americas offset by lower bookings in Europe and Asia.
Residential bookings were down 3% on a comparable basis. We believe that residential bookings performance to be a result of the significant improvements made in the HVAC product delivery cycles over the past year. Improved lead times have allowed customers to place orders much closer to required delivery dates which is hurting a temporary shifting orders to later dates compared to last year. Commercial security orders in the order were up 3% on a comparable basis.
Please go to Slide 5. Here is a look at the revenue trends by segment and the region. Top half of the chart shows revenue change for each sector. For the total Company, second quarter revenues were up 3% versus last year on both a reported basis and excluding currency. Climate revenues increased 5% with HVAC revenues up low single-digits and transport revenues up high single-digits. Industrial revenues were down 3%, residential was up 7% on a comparable basis. Commercial security revenues were up 3% on a comparable basis. I’ll give you more color on each sector in the next few slides.
On the bottom of the chart, which shows revenue change on geographic basis, revenues were up 4% in the Americas, while Europe and Asia were each down 1% excluding foreign exchange.
Please go to Slide 6, this chart walks through the change in adjusted operating margin from second quarter 2012 of 12.8% to second quarter 2013, which was 13%. Negative mix and the foreign exchange collectively created 50 basis points headwind in the margins. Our pricing programs continue to outpace material inflation adding 70 basis points to margin. Productivity offset by other inflation was 50 basis points accretive to margins. Year-over-year investments and other items were higher by 50 basis points.
On the gray box at the top of the page, overall leverage was 21%, leverage in the sectors was 40% partially offset by higher corporate investment spend. The box in the middle page shows the revenue and adjusted operating margin by sector and in total. Operations excluding corporate increased adjusted margins by 80 basis points, corporate costs were higher in the quarter due primarily to higher benefit cost and increased investments related to our IT transformation.
Please go to Slide number 7. The Climate Solutions segment includes Trane Commercial HVAC and Thermo King transport refrigeration. Total revenues for the second quarter were $2.1 billion. That is up 5% versus last year on a reported basis and up 5% excluding currency. Global Commercial HVAC orders were up low single digits. Orders were down in the Americas, but up in Europe and Asia. Trane Commercial HVAC second quarter revenues were up low single-digits. HVAC revenues were up in the Americas, Europe, Middle East and Asia.
Commercial HVAC equipment revenues were up mid-single digits, while HVAC parts, services and solutions revenues was down slightly versus prior year, impacted by lower contracting revenues, which had a benefit of a large contract in last year's second quarter.
Thermo King orders were up mid-teens versus 2012 second quarter, with Americas trailer orders up over 40%. Thermo King revenues were up high single digits.
The adjusted operating margin for Climate Solutions was 13.4% in the quarter, 90 basis points higher than the second quarter of 2012 due to volume, productivity and pricing, partially offset by inflation and higher investment spending.
Please go to Slide number 8. Industrial Technologies second quarter revenues were $763 million, down 3% on a reported basis and 4% excluding currency. Air and Productivity revenues were down mid-single digits versus last year. Revenues in the Americas were down slightly, while Europe and Asia were each down low teens. Air and Productivity orders were down low single digits. Higher orders in the Americas and Asia were offset by lower orders in Europe.
Club Car revenues in the quarter were up mid-single-digits and orders were up mid-teens versus prior year. Industrial's adjusted operating margin of 16.3% was down 100 basis points compared with last year. Pricing and productivity were more than offset by lower volumes and inflation.
Please go to Slide 9. In the residential business second quarter revenues of $713 million were up 9% compared with last year. Adjusted for the product line move comparable revenues were up 7%.
Residential HVAC revenues were up mid-single-digits versus last year. Revenues for the residential security portion of the sector were up low teens on a comparable basis, with increases in the new builder channel and South American partially offset by lower big box revenues.
Sector operating margin of 11.2% was up 330 basis points compared with 2012 as pricing, volume and productivity more than offset inflation and adverse mix. We continue to execute our deliberate strategy to improve product depth and channel performance while increasing margins.
As the second quarter margins would indicate we are pleased with the progress and the team's ability to balance those objectives.
Let's go to Slide 10. Revenues for security technologies were $399 million down 3% on a reported basis and up 3% when adjusted for the product line move. America's revenues were up mid-single-digits. Revenues were down mid-single-digits in Europe and up double digits in Asia.
Bookings on a comparable basis were up in low single digits. Adjusted operating margin for the quarter was 21.6% up 50 basis points from last year, as productivity, price realization and favorable mix were partially offset by inflation and higher investment spending.
Please turn to Slide number 11. We finished the second quarter with working capital at 3.5% of revenues. Working capital on cash flow levels are consistent with our historical seasonal performance. Year-to-date, available cash flow is $100 million higher than last year's first half.
With that, I'll turn it back to Mike to take you through the guidance.
Michael W. Lamach - Chairman and CEO: Okay, thanks, Steve and please go to Slide 12. As a reminder for purposes of giving guidance for 2013, it's on an as-is basis that assumes the current Ingersoll-Rand with the current four operating sectors is in place with full 12 months of 2013. As we announced in December, we expect the Security spin to take place in the fourth quarter but to be clear, the guidance does not reflect the spin. Consistent with our April guidance, we've broken out spin and restructure cost from the core EPS guidance in order to give you the best representation of the Company without the impact of the impending spin.
To give you an update on our market news, let's start with U.S. non-Residential. Construction starts put in place trends have shifted a little since our prior guidance. This total put in place outlook was slightly lowered in the mix change. Commercial and industrial expected growth got a little stronger, more than offset over by a lower institutional outlook. Institutional markets are expected to be down for the year by 5% versus down 3% in the prior market forecast.
The 2013 outlook for commercial and industrial put in place was raised from 8% to 9%. Increases in bank and office buildings and retail support, our view of a stronger second half versus first half in the unitary HVAC. Over the applied forecast was lower based on the lower institutional outlook, so our overall Trane Commercial outlook is just slightly lower than it was last time. We continue to expect low single-digit growth in North America Commercial HVAC overall, and flat to a low single-digit decline in North American commercial security. We expect North American truck trailer markets to be fairly flat on a unit basis in 2013.
U.S. Residential new construction markets continue to show good growth. We expect industry motor bearing unit shipments for the year to be up high single digits for 2013, driven largely by new construction. We expect the R-22 to be a lower percentage of the market probably down over 20% versus last year. Asian HVAC markets are expected to be fairly flat in 2013. China HVAC is expected to be up, low to mid-single digits. We saw good HVAC bookings progression in the quarter, which as we said, was needed to underpin the balance of the year forecast in Asia and specifically China HVAC.
Industrial Technologies, saw a softening in most markets in the quarter. In China, in particular, we have spoken about the need to see acceleration in Industrial bookings in quarter two to support the prior forecast. That did not occur as the government has tightened credit and support to address over-capacitated industries, so we adjusted our second half outlook accordingly.
Our Asian Security business which is more influenced by the timing of large infrastructure projects should be up high single digits for the year. Overall, the outlook for Europe, Middle East and Africa taken together should be up slightly across the Company.
Based on our result from the second quarter and our visibility for the remainder of the year, we are updating our revenue outlook and tightening our earnings guidance range for the year.
Our revenue outlook for 2013 is now $14.2 billion, to $14.4 billion, which is $100 million reduction to the midpoint of our prior guidance which equates to 1% to 3% growth versus 2012.
Translating our outlook by sector we expect Climate Solutions revenue to be up 1% to 3% which is the same as the prior guidance. We are adjusting our outlook for Industrial Technologies. Industrial revenues are now forecasted to be in the range of up 1% to down 1%. Residential still expected to be up 8% to 10% on a reported basis and 4% to 6% on a comparable basis and for Security Technologies we are adjusting the top end of the revenue range down slightly to reflect the lower upside forecast in the second half.
We expect security to be down 3% or 4% on a reported basis and up 1% to 2% on a comparable basis. Please go to Slide 13.
We are maintaining our full year EPS mid-point, but tightening the range of our guidance for full year EPS from continuing operations to $3.50 to $3.60. The full year tax rate forecast for 2013 is still expected to be 23%. This excludes one-time costs and restructuring of $0.65 to $0.75, updated to include $0.15 the cost of early retiring the 2013 and 2014 debt which was not in the prior forecast and bringing up the bottom end of the range for spin related costs and restructuring tapes on our latest estimates.
We'll continue to update our estimates as the spin date gets closer and we finalize the remaining restructuring plans.
To focus on the third quarter guidance refer to the right hand column on this chart. Third quarter 2013 revenues are forecast to be $3.65 billion to $3.75 billion. That translates to a range of up 2% to 4% versus the third quarter of 2012.
Adjusted third quarter earnings per share are forecast to be of $1.07 to $1.12. We are assuming a share count of 295 million shares in an ongoing tax rate of 23%.
One-time costs are expected to be about $0.25 in the quarter and that includes $0.15 with the cost of retiring the 2013 and 2014 debt. For the full year 2013 we still expect to generate available cash flow of about $1.1 billion excluding one-time and restructuring cost.
In closing, we’re pleased to have delivered a solid second quarter. We continue to feel good about our progress. Our focus is on positioning our company, continued to grow earnings and cash flow with or without help from markets. We've implemented a consistent and shareholder focused capital allocation program. We proactively work to reduce cost and improve productivity while still making prudent investments for the future. We continued to invest in new products and service offerings in our IT infrastructure and further developing our people and our operating capabilities. The spin of Allegion is on track and I’m pleased to have Dave on board as of August 5th as its leader. I'm proud of the progress we made and results we delivered and I'm optimistic about the opportunities that lie ahead for us.
Now Steve and I will be happy to take your questions.
Operator: Julian Mitchell, Credit Suisse.
Julian Mitchell - Credit Suisse: Yeah, so, I was just looking at the EBIT bridge and if you sort of look at the productivity net above with the inflation that was running at about 50 bps tailwinds and margins in Q2, that’s lower than the sort of 90 bps effect in Q1. What do you think the full year there, is that’s just something on the timing of projects quarter-to-quarter and the run rate is more like sort of a first half blended number or how you think about that for the second half?
Michael W. Lamach - Chairman and CEO: Yeah, I think so, Julian, we said right along that we expect to see about 50 bps coming from difference between – you're talking about pricing versus direct material inflation I assume, right?
Julian Mitchell - Credit Suisse: Well, productivity.
Steven R. Shawley - SVP and CFO: Productivity in general?
Julian Mitchell - Credit Suisse: Yeah, the productivity, net of other inflation line.
Steven R. Shawley - SVP and CFO: Okay, we'll address that.
Julian Mitchell - Credit Suisse: Just that, that was 50 bps contribution, I think in Q2 and it was more like 90 in Q1, just – is that just lumpiness in the full year is going to be somewhere in between the two, 70 or so?
Michael W. Lamach - Chairman and CEO: Actually, if you look at the second half, it's more of a blended rate, the second half compared to the – if you look at the first two quarters, it's a blended rate, that's not what you have for the second half. You'd see a little increase in gross productivity in the back half of the year. You do have a little bit of – sort of that tame inflation environment. So, you do get a little bit better in that productivity, other inflation in that regard. Steve was kind of going down the path of answering the pricing question, which has been good to us halfway through the year and I think as we look at the back half of the year, just to kind of maybe ramp the question there, I think we'll do something on the order of 40 to 60 basis points in Q3 and Q4, in that price to material inflation component as well. So, I do think it supports Q3 forecast. The Q4 forecast with operating leverage between 40% and 50%, kind of in the mid-40s and that supports, I think what we've done in the past. It also supports the forecast that we have for both productivity and pricing.
Steven R. Shawley - SVP and CFO: The other thing about the other inflation, that includes all salary increases and we're on a pretty much of an April 1 salary merit increase schedule. So, the first quarter is always going to look a little better than the rest of the year because of that factor.
Julian Mitchell - Credit Suisse: Then just on the – mix was a big issue in Q1, that you highlighted in the three of the four segments. You said it would get better in Q2, clearly it's got a little better. How you think about mix to the second half.
Michael W. Lamach - Chairman and CEO: I think mix for the second half is going to be generally better than what we have seen in the first. Couple of reasons one the residential mix down here seems to be leveling out. We are definitely seeing sort of a bottoming of the average (indiscernible) there which was a big, big factor in our mix issues up through the first quarter. We are also seeing a good mix of Thermo King business through the middle part of the year here which is going to help the mix certainly in the third quarter. I would say we still have a mix problem that’s probably somewhat in the industrial sector because in addition to just general volume issues in the industrial sector. Shifting away from tools to more complete air compressors, so we have a little bit of a negative mix there offsetting some positive developments in some of the other sectors.
Operator: Andrew Casey, Wells Fargo Securities.
Andrew Casey - Wells Fargo Securities: First on EU commercial HVAC order commentary. That’s consistent with what some other companies have said kind of recently. But it's still kind of surprising what's going – that order commentary against what seems to be going on over there. What do you think is driving that and is there any regional concentration that you are seeing?
Michael W. Lamach - Chairman and CEO: We play across the entire region including the Middle East as well and so I think we have low expectations for Western Europe and they are better than what we have thought we are continuing to see good growth and solid bookings coming out of the Middle East as well. Which is in those numbers our unitary business in EMEA is really up nicely and that has to do in some regards with new products and plan now producing those products for us in Eastern Europe as well and I think we're more competitive on that product, but yeah, I mean, so Western Europe is a little bit better than we would have thought coming off a real low. Middle East is a pretty strong and India, which is in that number as well is about where we expected.
Andrew Casey - Wells Fargo Securities: Then, on the Climate Solutions in general the segment margin performance specifically the strong 36% incremental contribution surprised me and it was very positive, is that we should expect from this segment with top line benefit or was there something special going on in this quarter?
Michael W. Lamach - Chairman and CEO: Well, if it was special for the last three or four years, is Trane Commercials has made new and new sort of leverage highs, in fact, if you go all the way back through the really the history of American standard, Trane back as far as we can really look back, we've probably added 10 to 12 points to the average operating leverage in that business, and I think that's got to do with a lot of hard work around plant consolidations, the colocation of some manufacturing with their Industrial business, a lot of new product developments, product at higher margins coming out of the business, focus on the service business and what we've been able to do there. So, interestingly, when you look at the operating leverage between Trane and TK in the quarter, both business were over 30%. So, I would actually expect Trane to continue a good run. I think that we're wanting obviously that to be the new normal at Trane and the last three years they've proven they can do that and then we would expect a little bit better operating leverage actually out of TK in the back half of the year, again supporting more of that fourth quarter structure that we have.
Operator: Nigel Coe, Morgan Stanley.
Nigel Coe - Morgan Stanley: So, just wanted to dig into your climate outlook for the full year, Mike. You gave some good color in terms of expectations by applieds and unitary, et cetera, but the 13%, that's decel from what you did in 2Q, comps get a little bit easier, all of them grew sequentially. So, I'm just trying to understand why we wouldn't be at the high end of that range or even a little bit better, maybe just a bit more color in terms of the second half outlook versus what we saw in 2Q?
Michael W. Lamach - Chairman and CEO: Yeah, we'll first talk about kind of where there's strength and where we need to see it. We were placing a bet on China and that was rewarded. So, unlike the Industrial businesses where there – it's more of a government policy reaction, the commercial and businesses that we're playing in, healthcare, hotels and non-over capacitized industries in China, we saw nice bookings growth there and nice revenue relationship there. So, that was good for us and we talked about Europe and we've seen strength there. Really, it's all about the applied market now in North America, taking another notch down in a lot of the readings that we're getting and although we are seeing great performance coming out of the unitary business in bookings and growth in share, it's just not enough – the mix to overcome that institutional base. So, Nigel, it only really drops a little bit. When we think about the $100 million drop from the midpoint to the midpoint revenue guidance, the bulk of that comes out of the industrial business, a small piece comes out of Trane, largely the applied business in North America, and a small piece comes out of our Security business, largely in Europe, but for Climate Solutions, we need to have second half growth of 3% versus first half growth of 1.2%. So, it really is an acceleration, back half to first half.
Nigel Coe - Morgan Stanley: The strength you just referenced in China and Asia HVAC it stands in contrast to what we saw in security. I'm just wondering do you view the (bulk) strength in HVAC and Asia as a good lead for security or are there different mixes that we should take into consideration there?
Michael W. Lamach - Chairman and CEO: The biggest businesses that we have in China are very infrastructure related, there are going to be airports, rail stations so on and so forth. But the fastest growing business that we have is the hardware and more traditional mechanical electronic security business. So when we talk about sort of order growth in China and that being lumpy it's always associated with the timing of the large infrastructure projects. But we are happy with the progression of growth in our I would say our core mechanical electronic security hardware business there that’s growing nicely and we are still relatively optimistic around the book of business you have to close for the balance of the year that was our larger integration business there.
Operator: Stephen Tusa, JPMorgan.
Stephen Tusa - JPMorgan: Can you maybe just talk about the absolute price that you got and then maybe just price cost by the segments.
Steven R. Shawley - SVP and CFO: So price was just about a point for the company 90 basis points, from there we would have lost 20 basis points to inflation. So that was the net currently there.
Michael W. Lamach - Chairman and CEO: It was across the board we actually had positive relationship across the board in each of the businesses. So probably on the residential its typically that’s kind of I know you are very focused on that. We would have seen price there in point and a half range Tier 1 inflation there that actually would have been very sedate. So, we got good pricing happening in residential. Security probably a little low as price increase will slow the margin impact of 30 basis points and a slightly positive spread there in material inflation. Climate was running on the average amount of point with 20 points negative material inflation, it’s always industrial and industrial we had about 70 points of price. Little more inflation there 50, 60 basis points there, so, all businesses were positive across the board.
Operator: Andrew Obin, Bank of America Merrill Lynch.
Andrew Obin - Bank of America Merrill Lynch: Just a question on Climate Solutions margin outlook, a little bit more color given how strong TK orders are and that's very good for the mix. I’m just wondering are you being are you being overly conservative here or how conservative are you being for the second half?
Michael W. Lamach - Chairman and CEO: Just to comment about TK first Andy, the first half is really being influenced by the (secured) for engine conversion. So, if you look at the trailer market forecast for North America for the year, (Act) is saying that the market is going to be up about 8% if I remember correctly. So, the market would suggest that the trailer activity is going to slowdown in the second half and that’s what we got reflected in our forecast. Our North American trailer forecast is that we would maintain kind of historical market shares and we see sort of upper single-digit type growth there for the year. So, it's skewed forward because of the Tier 4 engine conversion, I think if you look at TK outside of North America we were surprisingly strong in the trailer, truck trailer in Europe in the quarter and are expecting that to moderate a bit in the second half, and everything else, bus and container for Q2 was fairly flat. If you look at the second half, based on everything that's going on in worldwide shipping, container for sure is expected to be, actually negative comps in the second half. So, there's a moderation of the TK revenue growth in the second half, built into our forecast. Just color wise, if you look at what we got left to do for the back half of the year, I mean, clearly Industrial here, we're looking to see sort of what's going to happen, looking to the next couple of quarters and particularly both concerned business. So, if it's a place where we were to find more risk to that, it's the Industrial and if you look at a place you'd see that we'd find perhaps more net opportunity it would be Residential, maybe Climate, just because they're executing for a while. Security should come in right about on the number. I don't see much risk in what we're reporting there. So, I think in aggregate, it nets out to the forecast we've got with probably a bit more concern around Industrial momentum and a bit more optimism around Res and Climate.
Andrew Obin - Bank of America Merrill Lynch: I understand you sort of highlighted that operational beat in the quarter, congratulations on that but can you just put it into buckets for us, was it better than expected pricing versus productivity, versus you guys controlling investment? What went well in the quarter relative to your expectations?
Michael W. Lamach - Chairman and CEO: We had more volume than we expected and we converted on it, right. So, nothing that would drive you more crazy than actually seeing volume and not getting leverage on the volume because weren't prepared to execute against that. So, you look at the sort of incremental leverage on the positive gap between actual and the midpoint of guidance. We had very nice operating leverage on the incremental and that really to me is encouraging that our ability to deal with additional volumes should it present itself here by the end of the year but I would tell you look you did really nice job around price, really nice job around productivity. Investments are launching, generally we are getting all we wanted out of that in terms of on time and in fact in the marketplace more to come in Q3, Q4 there has been no curtailment investments in fact climate continues year-over-year to be a net investor, incremental investor year-over-year as always because of the climate in particular. So they are really firing on all cylinders here.
Steven R. Shawley - SVP and CFO: I just want to reiterate the investment side if you look at the corporate spend it was up in the quarter versus prior year. Primarily due to the fact that investments that are going on with the It technology transformation we have gone through. So we did not skip on investments in the quarter. I'll just add to Mike's commentary the thing that’s probably going a little better than we expected and it's very pleasant to have it going this way would be the leverage we are seeing on the training and commercial business. That I think is truly remarkable achievement that we have seen now starting late last year and really showing up here in Q2, with any kind of volume we would expect to see that type of leverage to continue.
Operator: Stephen Volkmann, Jefferies & Company.
Stephen Volkmann - Jefferies & Company: I think most of the quarter questions have probably been answered. I'm curious I guess as you look out sort of post spin, you've had a chance to get a lot of that together now have you changed or evolved your expectations for the segment margins for the remaining companies in the sort of two to three year time frame assuming we have some kind of reasonable recovery?
Michael W. Lamach - Chairman and CEO: Well certainly not for Industrial in fact, I commented multiple times now that, at industrial I'll tell that the margin potential is greater than what we originally thought and I think we're executing well against that. With our Climate business, as its organized TK and Trane, no, I think we're good there as well. The issue we've had and we're clearly addressing is from the Res business, we're showing great, great progress there, but we've got a long way to go to get to that target. So, we're going to try to update you more on kind of what we think the potential is based on outcome ranges for growth when we're together late this fall and perhaps be more specific about where we see it, but certainly not on Climate, not on Industrial, the fact is, Res we're working on, and great, great progress there, and we'll see that continue.
Stephen Volkmann - Jefferies & Company: Then, can you just remind me the sort of the elevated investment spending, IT, et cetera, what's the timeframe on that? When does that sort of normalize again or does it?
Steven R. Shawley - SVP and CFO: It's got a bit of pattern throughout the year, if you look at what happened this quarter. In April, we went live with the first phase of the transformation to the common systems across the Company. So, the whole team, the whole cost structure we have employed to make this transformation work, really fell onto an expense category because they were in an implementation mode in Q2. What goes on because of the accounting rules, we have to expense all that money when entering in an implementations mode. As we move into the third quarter, we shift back into design phase for the phase two. So, some of the expense in Q3 will be capitalized and then amortized later once the systems come up and running. So, you're going to see the spiking throughout the year depending on when we go live in the various phases. I would say that if you look at 2014, we expect the expenses to peak out in '15, some slight incremental increases in '14 and '15 from this point, but certainly start to abate in 2016.
Steven R. Shawley - SVP and CFO: Then you've got depreciation from the first systems going live in 2013, all the way through to the last systems going live in 2016. So, then we're going to be looking at some higher depreciation of amortization. By the time you get past 2016, into '17 and '18, we ought to see a pretty remarkable decline in what we're spending in IT but more importantly as it relates to the G&A across the Company and the value of information that we're putting across the Company and the speed by which we're acting on it, I think would be remarkably different.
Operator: Josh Pokrzywinski, MKM Partners.
Joshua Pokrzywinski - MKM Partners: Just wanted to dig in a little bit on the Residential business, clearly some great operating leverage there and Steve, I think you talked a little bit about mix in your prepared results. Then Mike, I think you followed on with the price cost commentary. I just want to understand more, how much of this is mix and then how should we think about the margin potential in that business as we shift more towards those higher steer units, I think, both yourselves and some of the other guys in the business out there have been talking about some of this mean reversion away from 13 SEER away from R-22 into some of that more premium product, which obviously is more realized.
Steven R. Shawley - SVP and CFO: Yeah, Josh I think this is why this is a good business going forward. I mean, everything from the basics of pent up demand at some point in time, working its way over multiple years through the system through to regulations and regulatory requirements around efficiency and the fact that with somewhat more expensive systems moving into the market all very positive competitively for us broadening the product range and really working on the consumer and the dealer experience. Dealer experience everything from the improvements we've had and our ability to order and ship and fulfill I mean I think these are really getting to be sort of industry best-in-class at that level showing up across the board. So I think that when you think about the structural parts of the business coupled with the improvement opportunity that we have playing across the formation of the product. New product development and really taking the whole value stream to the dealer and naturally consumer is a lot of opportunities. So again I think for us getting to a double digit op margin getting to a 15% EBITDA margin are in the cards for us in the next couple of years and so from there we'll figure out where it goes. But look we like this business structurally going forward in this part of the cycle.
Joshua Pokrzywinski - MKM Partners: I assume you mean that double-digit op margin ex-resi security?
Steven R. Shawley - SVP and CFO: Absolutely and what we also do this is little bit of important detail but we analyze that residential HVAC, little bit. Because all our light unitary if you think about it really is looking up through with a majority of that through our commercial HVAC business really nice margins on that. And all of our parts business fundamentally slipped out into the climate business. So what you are looking at really is the provision of residential HVAC without light commercial and without parts coming into that. So if you really start to do a benchmark in an apples-to-apples against res competitors. These op margins are pretty much in line and should get a lot better.
Joshua Pokrzywinski - MKM Partners: Actually and then, one follow-up there, how much of your businesses 13 SEER today?
Steven R. Shawley - SVP and CFO: Let me see if I can try to get that for you, Josh and if I have to come back I will do that maybe in the answer to another question, okay. So, let me think about that and come back.
Operator: Jeff Sprague, Vertical Research.
Jeffrey Sprague - Vertical Research: Just a couple of things lot of grounds been covered, I wonder if you could just on the HVAC climate side commercial specifically address a little more what’s going on in parts and services you talked about the comps. But other's kind of energy retrofit and upgrade look into the back half do you have any visibility on that and any geographic color around that?
Michael W. Lamach - Chairman and CEO: It’s a great question, Jeff because when we talk about the service and parts business, the service business has lots of tentacles to it. If you think about services being scheduled and unscheduled service and parts that business is growing nicely. We think about the part of this which is lower its actually the performance contracting and the turnkey contracting business which makes sense just at a macro level because what you’re finding is just a lot more customers opting for more traditional approaches to procuring equipment, which we’re seeing and the (unitary) results for sure as opposed to using financing or guarantees to your purchase for the equipment and that the performance contracting into some extent the turnkey contracting business often runs inverse to sort of sense in so if we get more negative around your ability to finance and need to do capital improvement performance contracting goes up. People feel little better about it, you see a kind of shift more towards traditional avenues to fill it.
Jeffrey Sprague - Vertical Research: Then just on Industrial margins, Mike, you expressed confidence on kind of the out-year look, near-term obviously you've got some pressure, can you give us a view on how industrial margins actually play over the balance of the year and do you have any restructuring or other actions aimed at addressing that?
Michael W. Lamach - Chairman and CEO: Well, I mean, we're actually bullish on what's going to happen here, year-over-year, if you look at a full year of Industrial compared to 2012, I would still be looking for margin improvement, some 50 basis points would be I think really doable, in light of and including sort of all the discussion we've had around slowing markets. So, we will get great leverage. So your question about restricting and so and so forth, that is so much a part of what's going on here. Just day to day lean productivity, constantly thinking about the cost structure business, thinking about pricing, new product development. So, they're looking within the Industrial business for ways to sort of attack that 50 basis points margin expansion. We've evaluated those plans and you think it's a good plan, think that as you look at sort of protecting the Company in terms of the VPS plan, and we clearly have opportunity in Climate and Res to fill that risk potential.
Operator: Jamie Sullivan, RBC Capital Markets.
Jamie Sullivan - RBC Capital Markets: Just a quick follow on the performance contracting. Is that still around a third of the service business? I'm curious how big that business is.
Michael W. Lamach - Chairman and CEO: Yeah, I'll probably have to come back and answer that one as well, but I can tell Josh about your question about 13 SEET it's about 60% of our mix today and if you put 13, 14 here and there it's about 75% of our mix. So, if you think about the evolution of what we have been able to do and to be positive at that low end where it's now 75% of our business. We're pleased with the team's opportunity to navigate that. Coming back to your performance contracting business, it would be down year-over-year and the mix percentage we'll try to get you a number here. (indiscernible) it's going up as we got.
Jamie Sullivan - RBC Capital Markets: I think on Thermo King you mentioned margin expansion in the back half of the year I think, but growth also slowing due to a number of factors there. Just wondering if you could speak to that dynamic a little bit, whether there is some mix benefit or how we should think about it?
Michael W. Lamach - Chairman and CEO: We got great bookings coming through the production here in terms of the matrix of factory absorption fact that we'll continue to, we continue to tune the line for the new product line. We are optimistic that sort of the best leverage days are ahead in 2013 in that business versus the first six months, which haven’t been bad at all. In fact TK's overall op margins are going to be up year-over-year no matter what.
Operator: Deane Dray, Citi.
Deane Dray - Citi: I had some cleanup questions on the residential HVAC business and I know you guys have been praying for hot weather but you just ought to be careful on what you wish for here? On this topic, if you have any color on the sensitivity the business has to degree cooling days. Because we've obviously had a huge spike there and maybe some comments on inventory and the channel?
Steven R. Shawley - SVP and CFO: I'm the one that’s looked back 25, 30 years on this and I can tell you that the normalized was relatively short period of time, quarter-to-quarter, I guess you could certainly see a spike at the end of the quarter, but pretty tough to recommend or trade stock on that. I'm sure some people pay attention to that but in our business it's not going to move the needle. All of that much around really hot weather at a particular point in time. So, I'm not right guy to get on the track of telling you that this hot weather is going to create some huge upside to the Company in quarter three.
Deane Dray - Citi: Inventory in the channel?
Michael W. Lamach - Chairman and CEO: This is a good story, inventory is down by design. We are serving dealers from order to receipt, 33% faster than we were, this time last year, that's by design. So, the strategy has been to have our dealers need to sort of inventory less, that's down, we think it makes it more competitive for dealers, and more competitive for us. So, we're purposely working that down and working on speed and fulfillment. All the good things lead to higher profitability in share when cycle times and fill rates are higher and we're really doing a great job on both of those.
Operator: (Chris Valciore, Nomura Securities.)
Shannon O'Callaghan - Nomura: It's Shannon O'Callaghan. In terms of this restructuring and spin costs, what's the split between I guess the spin cost and restructuring I don't know if you can separate that, but I'm trying to get a sense of how much of that is restructuring that you feel you're going to have to continue to do post-spin?
Steven R. Shawley - SVP and CFO: A place holder, maybe $50 million would be the restructuring that we would need to know, that would not be related to all the other fees involved in cost, breakage costs to do this, and we're going to adjust that as we need to. I mean, we're really committed to getting the go forward cost structure right and a place holding out $50 million seems like a decent place hold to put out there.
Shannon O'Callaghan - Nomura: Across the two entities essentially right? Combined?
Michael W. Lamach - Chairman and CEO: Well no, this would be sort of what we think when you do from an IR go forward basis.
Shannon O'Callaghan - Nomura: For the remaining quarter, okay. How about Security or I guess, would you speak to that or not?
Michael W. Lamach - Chairman and CEO: Well, what they're doing is, you're designing something ultimately from scratch right. I mean, you're designing a stand up company. So, you're creating an organizational model there, that you think would work going forward and when you think about a standalone company being set up it's an incremental add to the structure and the headcount there. So, they're looking about how to do that in a lean way but clearly they're going to be adding people and necessary functional capabilities throughout the standalone company, but I don't think it's any more than the costs being allocated from the Company to them. We've managed to sort of work that down now, so that I think that will be fairly neutral, allocated costs to stand up costs.
Operator: Eli Lustgarten, Longbow Securities.
Eli Lustgarten - Longbow Securities: Just a couple of clarifications. One, with the refinancing of the debt you said it was $30 million savings, when will we begin to start seeing that flow through the income statement. Two, you updated a little bit on margins for the year. You said you saw what looks like a 50 basis points improvement in Industrials. Can you give us some guidance about the rest of the group, any changes and what you're thinking?
Steven R. Shawley - SVP and CFO: Let me take the first part of the question. We actually paid off the 2013 and '14 (indiscernible) this past week. So, we'll start to see the improvement in the interest expense through the second half here, starting in late July through the end of the year just a small impact in 2013.
Eli Lustgarten - Longbow Securities: And for the profitability I think you still indicated 50 basis points attractive improvement you still expected in industrial despite the volume change. Have you got any changes in the outlook for a new regulatory (rules). So much you are thinking at this point.
Michael W. Lamach - Chairman and CEO: We talked about 50 bps. Security I think goal there is to run the business and remain relatively flat after we couldn’t improve margins but that’s not much the issue there as it is around growth. So look for flat margins there and investment around growth. I look at the res business and see that we are on track or expect it to get two full points I think it will be that and climate no reason even with the modifications we have made with some of the mix between industrial and commercial that we wouldn’t see 50 basis points improvement there again just I think the steady improvement, sustainable improvement I think done the right way with right investments and too good about 50 basis points there.
Eli Lustgarten - Longbow Securities: Could you explain what you are talking about residential?
Steven R. Shawley - SVP and CFO: Climate and industrial 50, residential 2, security flat.
Operator: I am not showing any other questions at this time I would like to turn it back over for closing comments.
Janet Pfeffer - VP, Business Development and IR: Thank you everyone. Joe and I will be available for follow-up later today. Have a nice day.
Operator: Ladies and gentlemen thank you for your participation in today's conference. This does conclude the conference you may now disconnect. Good day.