Feb 8, 2012
Executives
Janet Pfeffer – Vice President, Business Development and Investor Relations Mike Lamach – Chairman, President and Chief Executive Officer Steve Shawley – Senior Vice President and Chief Financial Officer
Analysts
Steve Tusa – JPMorgan Nigel Coe – Morgan Stanley Andrew Obin – Bank of America Terry Darling – Goldman Sachs Shannon O'Callaghan – Nomura Julian Mitchell – Credit Suisse Steven Winoker – Sanford Bernstein
Operator
Good day, ladies and gentlemen, and welcome to the Ingersoll-Rand Fourth Quarter 2011 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. (Operator Instructions) As a remainder, this conference is being recorded.
I would now like to introduce our host for today Ms. Janet Pfeffer, Vice President of Business Development and Investor Relations.
Ma'am, please go ahead.
Janet Pfeffer – Vice President, Business Development and Investor Relations
Thank you, Karen good morning everyone, welcome to Ingersoll-Rand's fourth quarter 2011 conference call. We released earnings at 7:00 a.m.
this morning and the release is posted on our website. We'll be broadcasting in addition to this phone call through our website at ingersollrand.com where you will find a slide presentation that we will be using this morning.
This call will be recorded and archived on our website and will be available tomorrow morning. If you would, please go to slide 2.
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 law. Please see our SEC filings for a description of some of the factors that may cause results to vary materially from anticipated.
Now, I'd like to introduce the participants on this morning's call. We have Mike Lamach, Chairman, President and CEO; Steve Shawley, Senior Vice President and CFO; and Joe Fimbianti, Director of Investor Relations.
With that, please go to Slide 3 and I'll turn it over to Mike.
Mike Lamach – Chairman, President and Chief Executive Officer
Thanks, Janet. Good morning and thank you for joining us on today's call.
Before we dive in on the fourth quarter results, I'd like to take a couple of minutes to put the full year 2011 in context and Steve will take you through the quarterly results and finally I'll discuss our guidance for 2012. In 2011, we experienced a challenging economic backdrop in some of our key markets, remindful of the performance challenges we faced in the residential business, hindered our ability to reach our original earnings goal for the year.
Notwithstanding significant hurdles some from the market and some within our businesses that we have corrected, we are pleased with the progress we made this past year in several important areas. In 2012, despite a significant decline of revenues and profits at Residential and slightly lower volumes at commercial security and we achieved a revenue increase of over 8% including double-digit revenue growth at Industrial, Thermo King, and Trane commercial HVAC equipment.
We also recorded significant growth overseas, helping us to offset weakness in non-residential and residential construction activity in North America. Our strategy to focus on innovation continued to deliver with the percentage of revenue from innovation jumping from 13% in 2008 to 23% in 2011.
Productivity gains combined with positive impacts from our pricing strategy have led to improved operating margins, which were up 1.3 percentage points. That includes significant progress in the operating margins of the Climate and Industrial segments, both up over two percentage points.
Essential component of that margin improvement is our focus on steadily improving operational excellence. To this end in 2011, we continue to enhance quality and reduce our manufacturing footprint, the number of suppliers, cycle times and functional costs.
Productivity savings added about $400 million to operating income, despite almost no contribution from our Residential business. Full year earnings per share of continuing operations were up 19% to $2.82.
We are also making good progress in restoring the health of our balance sheet and generated $944 million of available cash flow. We are shaping our portfolio of businesses for improved growth and value creation with our action in Hussmann is an example of those.
A solid balance sheet and cash flow supported our buyback and dividend programs. We initiated share repurchases in June 2011, purchasing 36 million shares by year-end.
We increased our dividend by another 33%, following a 71% raise earlier in the year. Please go to slide 4.
Excluding Hussmann, we saw 130 basis points of operating margin improvement in the year. As we can see, both Climate and Industrial expanded margins by over 200 basis points.
We made substantial progress there, particularly in price cost and volume conversion. Residential was a significant drag to our performance with margins down almost 600 basis points on lower volume, poor mix and operational inefficiencies, some self-inflicted, which are now fixed.
We've executed the program we laid out in mid 2011 for Residential according to plan, where we entered the market with an R-22 product in August. Get well action for the product launches have proceed on schedule and we have met cost targets.
In the fourth quarter, we took 410A inventory levels down by almost $90 million, $10 million more than our original target and had opened 2012 with levels more aligned to the market. And finally commercial security essentially held margins and flat physical volumes.
Please go to slide five. We have steadily improved the flow of new products and services to the market and innovations across all sectors and regions.
About 13% of our 2008 revenues were generated from products and services introduced in the last three years. Our initial target for 2011 was 20% of revenues, which we’ve exceeded ending the year at 23% of revenues and our goal for 2012 was 25%.
So innovation will continue to be an important product of our strategy going forward. Please go to slide six.
In 2011, we advanced our operational excellence initiative which is our long-term approach to a lean transformation in the company. This is a multi-pronged effort to reduce working capital, expand margins and ultimately increase market share across our businesses.
We continue to restructure and decrease the size of our manufacturing footprint in 2011. Since 2009, we have reduced number of facilities 94 to 72.
Direct material makes up about 40% of our cost base and it continue to make progress in our direct material cost reduction programs. In November, we centralized the management of spend and consolidation of our vendor base to better leverage our strategic sourcing capabilities.
We’re also reducing costs and improving quality through value engineering activities in all of our businesses with regionally based teams from engineering and strategic sourcing. Since starting our lean transformation we have seen a separation in the performance of the initial 19 value streams versus the company average.
The 19 value streams in 2011 have achieved a 35% reduction on average in cycle time and increase on average of 2.5 percentage points of margin and a 19 point improvement in employee engagement scores. As we’ve discussed over the next three to four years we will be systematically reducing our functional costs to move toward top quartile metrics of approximately 3% of revenues.
The program entails many aspects, a key enabler as the implementation of common systems and processes across the enterprise, including common ERP platforms. That project is fully underway in the first way of the implementation will be in early 2013 and this will continue through s2015.
And now I’ll turn over it to Steve to take you through the quarter.
Steve Shawley – Senior Vice President and Chief Financial Officer
Thanks Mike. Please go to slide number seven, adjusted earnings per share from continuing operations for the fourth quarter was $0.76.
During the quarter and we were able to more than offset the costs associated with the acceleration of the key factory consolidation in China and the absorption impact from the greater than planned inventory reduction and residential HVAC for a favorable tax rate. In the fourth quarter, we saw revenue growth of 1% excluding the Hussmann refrigeration business that we sold during 2011.
We experienced a moderation in revenues in several businesses. Most notable was a double-digit decline in residential HVAC revenues against a tough comparison as tax credits and buying in advance of announced 2011 price increases boosted volumes in the fourth quarter of 2010.
Revenues were up 1%, 2% excluding FX with single digit increases in Climate and Industrial, a single digit decrease at Security and Residential down double digits. Excluding Hussmann, orders as reported were down 2% and 1% excluding currency.
Operating margin for the quarter was 9.5%, up 100 basis points. If we exclude Hussmann from both years, margin in the fourth quarter was slightly higher at 9.6% and up 70 basis points from fourth quarter of 2010.
Although margins improved from pricing and productivity they were depressed by a year-over-year decline in revenues, adverse mix, and unabsorbed cost in Residential HVAC. We significantly reduced production levels in the fourth quarter in order to reduce 410A inventory levels, which we’re taking down by about $90 million during the quarter.
All of our businesses continuing to realize positive pricing and in the fourth quarter our pricing outpaced direct material inflation for the third consecutive quarter. Please go to slide number 8.
Orders for the fourth quarter of 2011 were down 2% overall and 1% excluding currency. During the quarter, we saw moderating bookings in Industrial, Air and productivity and in commercial HVAC.
In commercial HVAC we are up against a tough comparison as fourth quarter 2010 equipment orders were up over 20% partially due to customers placing orders before the effective date of announced price increases. Additionally fourth quarter book and ship orders in the Industrial segment were negatively impacted as we accelerated the consolidation of two facilities in China.
This action suppressed the Industrial orders improvements by four to five percentage points during the quarter. Transport demand was strong in North America and in container.
Our European truck trailer was down slightly. Global Security orders in the quarter were down 5%, North American Security orders were up slightly and international Security orders were down low double-digits mainly due to the lumpy order patterns in Asia.
Residential orders were down 18% year-over-year impacted by a stagnant U.S. housing market and lack of consumer demand for the 410A replacement systems.
The decline was compounded by higher than normal volumes in the fourth quarter of 2010 from expiring tax credits and buying in advance of announced 2011 price increases. Please go to slide number nine.
Here is a look at the revenue trends by segment. We think revenues excluding currency as shown on the bottom of the chart give a better view of our organic growth.
Note that the Climate in total company data for the fourth quarter and full year excludes Hussmann from the comparisons. Fourth quarter revenues were up 2% excluding currency, fairly similar to the 3% growth we achieved in the third quarter.
Industrial had strong but slightly moderating growth that 8%, again partially constrained by that factory move. Climate revenues increased 5% on top of the very strong fourth quarter 2010.
Residential was down 13% against the high revenue level last year driven by the exploration of the tax credits. Commercial Security revenues were down 3%.
On a geographic basis revenues were flat in the U.S. and up 2% in the international markets.
Please go to slide number 10. This chart walks a change in operating margin from fourth quarter 2010 of 8.9% to fourth quarter 2011, which was 9.6%.
These data excludes Hussmann for comparison purposes. Volume mix and foreign exchange were at 1.6 percentage point headwind to margins.
This was mainly attributable to lower margin residential HVAC mix. Last year's fourth quarter had a higher proportion of high-efficiency units due to the $1,500 tax credit, which expired at the end of 2010.
There was also some impact from lower volumes from the high margin Security sector. Our pricing programs continue to outpace material inflation adding 190 basis points to margin.
Productivity offset by other inflation added another percentage point. And year-over-year investments were higher which impacted margins by 50 basis points.
Please go to slide number 11. This bridge analyzes fourth quarter adjusted EPS from continuing operations of $0.76 versus our October guidance which was $0.64 to $0.70 or the midpoint of $0.67.
Our revenue guidance for the quarter at a midpoint of $3.575 billion versus our actuarial $3.507 billion, a difference of $68 million. There was one structural change since we issued guidance.
On December 30th, we divested our North American security integration business. Results of that business have been move to discontinued operations for all of 2011 and in all prior periods.
Fourth quarter 2011 revenue for that business of about $20 million with no OI was included in the guidance but is now in disc ops. The factory consolidation in China impacted about $30 million of revenue and is part of the $0.04 shown on the line below the volume and mix line.
This leaves about $18 million in lower sales volume across mainly Residential and Security or about $0.01 of earnings. The combination of foregone revenue and incurred cost for the China factory consolidation and the inventory take down at Residential accounted for $0.04.
The favorable tax rate in the quarter was driven by three factors, one a favorable geographic distribution of operating income, two a discrete FIN 48 adjustment due to the final settlement of an open issue, and three a positive impact from the annual revaluation of our loss carry forward positions. This revaluation work is performed every year and also had a positive impact in the fourth quarter last year.
In fact, the only real difference in the tax rate for the fourth quarter of 2011 and that of 2010 is the discrete settlement item I mentioned earlier. Share count was favorable adding $0.02 due to the timing of repurchases during the quarter.
Please go to slide 12. Climate Solutions segment includes Trane, commercial HVAC and Thermo King transport refrigeration.
Total revenues for the fourth quarter excluding Hussmann for comparability of $1.9 billion were up 4% and 5% excluding currency. Global commercial HVAC orders were down 3% with global equipment orders down mid-single digits due to unusually high orders in the fourth quarter of last year as customers placed orders in advance of the effective dates for announced price increases.
Global commercial HVAC equipment orders were up over 20% in the fourth quarter of last year. Trane's global commercial HVAC fourth quarter revenues were up 1% versus a very strong fourth quarter last year particularly in HVAC equipment.
HVAC revenues in North America were down slightly. Revenues in other regions were up mid single digits.
Global commercial equipment revenues increased 1% against a tough comparison. The equipment revenues in the fourth quarter of last year were up over 15%.
Global part services and solutions revenue was flat to prior year with a decrease in contracting offset by an increase in parts and services. For the global Thermo King transport business, revenues increased mid-teens.
Our worldwide refrigerated, truck and trailer revenues were also up mid-teens with strength in North America and some moderation in Europe. Global APU, marine container and aftermarket revenues showed strong growth in the quarter.
Thermo King orders were up approximately 20% in the fourth quarter, with increases in all regions. The operating margin for Climate Solutions was 10.2% in the quarter, a 270 basis point improvement versus fourth quarter 2010, driven by pricing, volume gains, and productivity partially offset by inflation.
Please go to slide number 13. Industrial Technologies fourth quarter revenues were $744 million, up 8% on a reported basis and excluding FX.
Air and Productivity revenues increased 7% versus last year. Air and Productivity orders were up 5% with demand moderating in all regions.
Revenue and orders in Asia were negatively impacted by the facility consolidation decision that I mentioned earlier, which had as much as a 4 to 5 percentage point impact on total ITS revenue and bookings for the quarter. Club Car revenues in the quarter were up 9% and orders were flat.
Industrials operating margin of 15.3% was up 2.2 percentage points compared with last year from higher revenues, pricing and productivity partially offset by inflation. Please go to slide number 14.
In Residential business, fourth quarter revenues of $443 million were down 13% compared with last year on both the reported basis and excluding foreign exchange. Bookings were down 18%.
Our residential HVAC revenues were down 21% as a continued sluggish housing market depressed the market for HVAC systems. Additionally, the fourth quarter of 2010 was unusually strong; revenues were up 20% due to the timing of pricing announcements and the expiration of tax credits for higher efficiencies units at the end of 2010.
Industry unit shipments in the fourth quarter were down 15% from last year. During the quarter we significantly reduced HVAC inventory levels taking out approximately $90 million of inventory to better manage demand going into 2012.
Revenues for the residential security portion of the sector were up high teens with increases in the new builder channel and in the big box customer volumes. Sector operating margin of negative 1.2% was down 10.6 percentage points compared with 2010.
Improved pricing was more than offset by lower volume, adverse mix, the impact of significantly decreased production and inflation. Please go to slide number 15.
Revenues for Security Technologies were $415 million, down 3% and also down 3% excluding currency. Americas' revenues were down slightly and overseas revenues were down mid single-digits.
Global bookings were down 5%. Americas was up slightly.
Overseas orders were impacted by lower orders in Asia due to the timing of booking on large projects. Operating margin for the quarter was 19.1%, up 20 basis points from last year as productivity and price realization were partially offset by volume and material inflation.
On December 30th, we divested our North American security integration business. The results of that business have been move to discontinuing operations for all of 2011 and all prior periods.
Full year 2011 revenue was $72 million and the business had an after tax operating loss for the full year of $1 million. Disposition resulted in an after tax loss on sale of $5 million, also recorded in discontinued operations.
Let’s go to slide 16, let’s move to the balance sheet. Our balance sheet remains in good shape and in the quarter we continued buying shares under our share repurchase program.
We ended the quarter with $1.2 billion of cash on the balance sheet and net debt of $2.5 billion. We purchased 19 million shares in the quarter and 36 million shares during 2011.
We generated $944 million of available cash flow in 2011. Let’s go to slide 17, we finished the fourth quarter with working capital of 1.6% of revenues, which we believe is a record for the company.
We achieved this through excellent performance across the board. During 2011, we decreased day sales outstanding more than one day and increased inventory turns by 10 basis points.
Inventories decreased by over $100 million in the fourth quarter, with the majority of that reduction coming from residential. With that, I will turn it back to Mike to take you through the forecast.
Mike Lamach – Chairman, President and Chief Executive Officer
Okay. Thanks, Steve.
And with that, let’s go to slide 18. Our revenue outlook for 2012 is based on various levels of activity in our key end markets.
We believe activity levels indicate moderating growth in Industrial markets. We expect North American commercial HVAC equipment market driven mainly by replacement to grow at a slower pace.
We continue to see solid growth in Asia and Latin America and a slight decline in Europe. We expect moderate growth in transport markets in North America with some contraction in Europe.
We think continuation of the current conditions in residential markets as single-family housing starts and consumer confidence remain at low levels. We expect of R-22 and lower SEER units to remain at significant portion of the flattish market in 2012.
For commercial security we expect to see a continuation of challenging conditions in the U.S. non-residential and new construction market for the next year, particularly in our key institutional markets.
Foreign exchange will be a headwind in 2012 adversely impacting revenue growth by about two points. Based on the strict backdrop, our revenue target for the full year 2012 is $14 billion to $14.4 billion, flat up 3% compared with 2011 revenues, up $14 billion excluding Hussmann.
Excluding FX the organic growth rate is 2% to 5%. Climate Solutions top line is expected to be up 1% to 4%, excluding Hussmann.
Excluding foreign exchange they will be up 3% to 6%. We expect Industrials to show revenue gains of 2% to 4%, which include the three point drag from FX.
Based on the continuation of the current market conditions, we expect Residential Solutions revenues to be flat to up 2%. Commercial Security is expected to show revenues flat to 3% down versus 2011.
Adjusting for foreign exchange, Security’s organic growth will be in a range of down 1% to up 2%. Please go to slide 19.
Let's turn now to full year earnings. He are some moving pieces in EPS, let me take a few minutes to walk you through the mechanics and the outlook.
After removing Hussmann from the 2011 base, the starting point is $2.68 of EPS. Assuming organic growth, excluding currency of 2% to 5%, unless continued good but somewhat moderating pricing along with productivity savings by netting out inflation, operations will contribute $0.60 to $0.80 of higher earnings.
At the midpoint, that’s about a 60% conversion and a fairly modest revenue increase. Foreign exchange will be a drag of $0.12.
The results of our share repurchases our lower average share count of $315 million in 2012 versus the 2011 average of $339 million shares adds $0.22. The estimated tax rate will be 25% in 2012 a direct tax $0.12 of earnings.
Incremental investments and cost reductions and restructuring along with some growth investments net of $0.30. And we have some part of one-timers in 2011 that we don’t expect to recur which total $0.06 and that brings us to a range of $2.90 to $3.10 per share.
We expect to generate available cash flow of about $1.1 billion. Please go to slide 20.
Our first quarter EPS will be lower than prior year due to the timing of restructuring and cost reduction investments. Additionally revenue will be lower than 2011 as we run up against some hard comparisons particularly in Residential.
Recall the first quarter 2011, residential sales were up 10%. We have significant amount of channel restocking in HVACs following the surge in the fourth quarter 2010 from expiring tax credits.
We expect commercial HVAC volumes to start the year slightly down from very strong first quarter of 2011 and to improve on a comparable basis through the year. Transport will be slightly down in the first quarter based on the opening backlog.
First quarter revenues are forecasted to be $2.975 billion to $3.075 billion. Revenue on a comparable basis excluding Hussmann are forecasted down 3% to up slightly versus the first quarter of 2011.
That includes FX, which will be a headwind of about one point. That means excluding foreign exchange revenues down 2% to up 1%.
Together, pricing, volume, mix, productivity net of inflation will add $0.03 to $0.09 of earnings. FX negatively impacts earnings by $0.03.
Given our revenue outlook, we have launched several cost reduction programs, including further restructuring that are frontend loaded in the year – no, they are from payback in the year. That along with some modest growth investments will have an adverse impact in the first quarter of $0.16.
Restructured cost for the remainder of the year will be about flat with 2011. Share count and other items that's about a penny positive bringing us to a range of $0.20 to $0.26 per share.
Please go to slide 21. We clearly have higher long-term aspirations for the company as economic conditions improve.
We know this will take time in some key markets, but we are intent and not waiting for a rising economic tide to raise the company. We're focused on continued change and improvement to ensure that we are managing our business optimally across the spectrum of economic conditions.
Our focus for next year ahead, is on positioning Ingersoll-Rand to continue growing revenues, earnings and cash flow overall by employing tailored strategies across diverse markets. As we look at both 2012 and beyond, we feel good about our company including our portfolio of outstanding market leading brands, our ability to generate high levels of cash flow even in the face of a challenging backdrop, the longer-term attractiveness of end markets in which we operate and our competitive positioning which will allow us to benefit as those sectors of the economy improve and a strong penetration and positioning in emerging markets with significant growth potential.
We realized that we can't rely solely on these fundamentals to achieve our goals and our management team is committed to actively managing the company's businesses to generate sustainable profitable growth. Again, we're not waiting for macroeconomic lift to improve our business; instead we're proactively working to reduce costs and invest in our growth markets.
Steve and I have one of the best leadership team, and we look forward to talking with you in more detail about our company at our Investor Meeting on March 13th and 14th here in Davidson. Now Steve and I will be happy to take your questions.
Operator
(Operator Instructions) Our first question comes from the line of Steve Tusa of JPMorgan
Steve Tusa – JPMorgan
Hey good morning.
Mike Lamach
Hi Steve.
Steve Tusa – JPMorgan
The question on the resi business, so you talked about I guess flat, similar product mix, but I guess you are ramping up R22 product and then I guess what does that mean for margins? How do we think about resi margins given that you had, I guess you called it, $50 million bucks plus of kind of unusual headwind this year?
So how do we think about the margin in resi?
Mike Lamach
First of all just given the market, we think that the market will be relatively flat in terms of total motor bearing units. We think that we'll actually see probably a 4% increase which is a fairly modest share gain there and totals about 50 basis points, really just by being in the market for the full year.
So, it would equate to something like 40,000 to 50,000 units that weren't in the market last year, it will be in the market this year, and obviously that put some pressure on margins there because that growth will come at a lower incremental margin. So, we look at that business overall is growing in the year flat to 2% and margins there probably grown about 200 basis points.
So, getting back on the miscues in 2011, certainly picking up the volume in the R22 business but at a lower incremental.
Steve Tusa – JPMorgan
What was the 4% number you just mentioned so if the market is flat and you’re gaining share, are you – does that mean the Security business is down that offsets that?
Mike Lamach
No, it’s only HVAC. So, some of the market for motor bearing units would be flat.
We think that we’ll actually be up about 4% driven by the unitary business.
Steve Tusa – JPMorgan
Right.
Mike Lamach
Which is about a 50% market share gain for us, it’s solely though as a result of actually being in the market with the product for a full year.
Steve Tusa – JPMorgan
So, then why are resi revenues flat to up 2%, if you’re growing resi HVAC 4%, does that mean the resi Security business is flat or down?
Mike Lamach
No, we look at furnace, we look at air-handler, and we look at…
Steve Tusa – JPMorgan
Okay. Got you.
Mike Lamach
Yeah sure.
Steve Tusa – JPMorgan
Okay. And just as a follow-up.
If that business is up 200 basis points, what’s the total company kind of margin improvement target you’re looking for in 2012 and then I guess that I would assume that it’s not 200 basis points in some of the other businesses or kind of more moderate margin increases?
Mike Lamach
Yeah, Steve at the midpoint of the range ex-Hussmann it’s about 50 basis points.
Steve Tusa – JPMorgan
So then the rest of the businesses are really showing kind of like in line with that to little bit late of the 50 basis points?
Mike Lamach
Yeah Climate, you might be looking at 30 to 50 basis points, Industrial probably still little bit stronger there, 110 and 130 basis points. res, we talked about and Security you could think about being fairly flat.
Steve Tusa – JPMorgan
Great. Thanks for the detail.
I appreciate it.
Operator
Thank you and our next question comes from the line of Nigel Coe of Morgan Stanley.
Nigel Coe – Morgan Stanley
Yeah, thanks. Steve, took all my questions there.
Could you maybe talk about where you see the major upside and downside risks in your forecasts, and it looks like your resi forecast a pretty conservative, mostly your comps are forecasting low-to-mid single digit growth, and maybe compare and contract reality of the market versus your competitors?
Mike Lamach
Well. I mean, one thing Nigel, I think in particular as well looking at the same data, we interpreted probably less optimistically in Europe, particularly in our industrial businesses, we think which would be probably first to see that and we’re seeing some softening there.
So we’ve got a view in Europe across the whole company as reported, which we include currency of course to be, say down 10% to 12% with currency. That’s a bit more negative or less positive than I think you’re hearing some other companies that at this point of time.
The other place where it’s a bit of wildcard, but you look at North American in HVAC equipment, and we look at our number of data points here, but one that’s fairly reliable for us is the dodge put in place number. And then, figuring from that the usage factors that we get from security product and HVAC product as it applies to the specific markets that are being built.
So it breaks it down by particular verticals in those businesses. And that could imply a kind of a negative five, negative seven type equipment environment for next year, which again is a little bit more pessimistic than what we’re seeing.
But again this has been a fairly accurate indicator for us in the past. So to the extent that those don’t materialize, that there is more put in place quicker that we’ll earn sites faster, it could have an impact the other way for us as well.
Nigel Coe – Morgan Stanley
Sorry. The downside seven, would that be for the Security business or the commercial HVAC equipment?
Mike Lamach
Both about the same, as they can’t follow same markets with HVAC typically leading security. But it’ll be the same outlook for both, of course, different usage factors and a different market mix based on what new construction is being built.
So the institutional markets would hurt the security business more than it would hurt the HVAC business.
Nigel Coe – Morgan Stanley
So we’re swinging from a high single-digit growth in equivalent to potentially down 5 in the U.S., what’s changing from year-to-year?
Mike Lamach
Well, I mean, one thing if you look at fourth quarter last year and the first quarter of this year, I mean if you go back to the fourth quarter of last year as an example, we saw unitary bookings from fourth quarter up almost 40% and we saw applied bookings in the quarter up something like 28%. The unitary not all that shipped in the quarter, but obviously some of it did, but the applied all shipped in the first quarter of last year.
So you see a weaker first quarter against really tough comps. So, we were way above sort of the market in the first quarter of last year for revenue, way above the market in 2010 fourth quarter for bookings.
So we’re lapping some very difficult comps there. But if you look again at sort of the just the proposal pipeline, you look at the orders in hand and look at the McGraw-Hill put in place and how that would relate to book in turn in the year and we get to a slightly recovering market in the year, so that for the full year equipment globally would be fairly flat.
We would see I think good growth again in contracting parts and service, probably up in the 8% range and that would give us for the Climate Solutions business something closer to the full year, one to four range that we are forecasting.
Nigel Coe – Morgan Stanley
Okay, that's very helpful. And then you said down 10 throughout the Europe, I am assuming that's mid single ex-currency.
What are you baking in for China and the emerging markets in 2012?
Mike Lamach
Good growth, Nigel, it might look slower, slower growth across the board. It will still be good growth for us.
If you look at Asia for the Company, we are probably still seeing mid-teens for the year, I think a slower first quarter, but mid-teens for the year. Latin America still is exciting for us, again, slower start to the year, but a mid-teens rate in Latin America.
Nigel Coe – Morgan Stanley
Thanks Mike.
Operator
Thank you. And our next question comes from the line of Andrew Obin of Bank of America.
Andrew Obin – Bank of America
Yes. Good morning, guys.
Just a question on profitability drivers in Climate Solutions. We saw very nice pickup in profitability.
I assume that a lot of it is Thermo King, which is pretty profitable, but could you just get us a sense of what is it Trane or cost savings versus Thermo King volumes, if you could give a sense for that?
Mike Lamach
Well, volume overall in the quarter didn't have a huge impact for us in terms of the profitability there. So, we had lower inflation.
We had very good productivity across the board there. We still invested in the business.
We've got some new product launches that we are putting out in the quarter. So really it's leveraging against some of the work that's been done over the past year or two around the cost base, around the manufacturing footprint.
I would also tell you that we are seeing a nice separation in the value streams that we have been working on from the lean portfolio. We are seeing the 2.5 points of margin differential versus the average across the Company in the quarter.
So, just to give you a sense there, I think it's really gaining traction in our Climate businesses. Steven if you want to add anything your point.
Steve Shawley
The other thing that happen I think in the quarter Andy was our Trane commercial services business leveraged a bit better and it was an area where we were investing a lot of money in last year. We intentionally invested new money in our Trane commercial contracting service and parts business.
So, for most of the year it was actually flat and might be even partially negative leverage there and that improved in Q4 and quite frankly, we are looking forward to that piece of the business continuing to improve leverage going into 2012.
Andrew Obin – Bank of America
Terrific and just a question on pricing, if you look at the progression of pricing throughout the year, we exited the year at a very nice run rate, but if I look at your guidance for 2012, we only have one percentage point of pricing and looking at the numbers it seems that at least for the first three quarters, the comp should be fairly easy. So, I'm just wondering what do we, how should I be thinking about pricing progression throughout 2012?
Thank you.
Mike Lamach
Yeah, so, Andrew for the first quarter, we think we'd have about 170 basis points of price. We think it will moderate through the year and we will probably end the year down a little over 1.1 as we said.
We'll see lower inflation at this point lower inflation throughout the year as well. So, we'll maintain a positive spread in the first quarter versus material costs is probably about 90 basis points.
And then over the course of the year it moderates the 70 or 80 basis points over the course of the year.
Andrew Obin – Bank of America
Right, but how does it average out to 1% or is it – or is 1% just on approximation could be a little bit better than that?
Mike Lamach
Well, it's you're lapping pretty aggressive price increases. So, it's getting tougher as you get towards back of the year.
I mean the fourth quarter pricing was pretty strong. The fourth quarter pricing was a margin about 2.7 points of price to margin, so that was fairly strong for us.
I think as we get into the back half of next year, it's going to be little bit tougher.
Andrew Obin – Bank of America
Terrific, thank you very much.
Operator
Thank you. And our next question comes from the line of Terry Darling of Goldman Sachs.
Terry Darling – Goldman Sachs
Actually Mike I'm wondering if you could expand a little bit on the view on Industrial segment margin expansion in 2012 110, 130 basis points on 2% to 4% organic, looks very strong there. One, have you talked about maybe the pieces there as well Club Car versus the other part, the compressor business?
Mike Lamach
Yeah, I would say that for the most we're talking about those gains coming really in the Industrial businesses, Club Car will leverage the great growth of the Industrial businesses. And again it’s really going back over two or three year period where it’s been a constant drum beat around new product introduction and launching better product, better cost position, higher quality, less warranty, aggressive on the consolidation including the move in China.
The early restructuring really paying off, so what you saw here is that the 2009, 2010 and 2011 restructuring done there leveraging against those volumes. So any volume that I think we get there is going to leverage at a fairly substantial rate.
They’ve done a nice job around their footprint over those years.
Terry Darling – Goldman Sachs
So this sounds like more company specific restructuring cost out…
Mike Lamach
Yes. I mean, I don’t know if you were at the Mocksville facility, but that’s a great example for us.
They’ve actually gained in that product line three points a share and this is the KGI reported numbers. So this isn’t our view, this is market view.
Three points a share there and the first thing we saw was really good working capital management then we saw that was sustained, we saw margin improvement that’s been sustained. And it’s really turned down into much shorter cycle times and that’s all related to higher share there of three points.
And so they’re doing a great job and I think it’ll continue through 2012.
Terry Darling – Goldman Sachs
It’s great to see. And continued sluggish Gulf market, do we interpret that as kind of flattish?
Mike Lamach
Yeah. Flat may be up slightly, up a couple of points.
They’re working at their version of restructuring. They’ve been working through some warranty issues on some battery problems that we’ve had over the last couple of years with that business.
I think that will get better. So we’ll see good leverage there as those warranty issues disappear and they continue – they are only an implementation down in Augusta.
So that’s going well too.
Terry Darling – Goldman Sachs
And then maybe a little more color, Mike on the pieces within Thermo King. I think I heard you indicate you’re expecting transport Europe down for the year, how much down and the how much up on the U.S.
truck side, maybe would be helpful?
Mike Lamach
I’ll speak that’s a little bit detail here but if you net it all out, it will be flat to up low single-digits for the year. So the increase in North America offset by almost an equivalent size business in Europe down at same level.
So kind of a – sort of a higher single-digit North America, a lower negative single-digit in Europe, offsetting just about a flat to low single-digit market.
Terry Darling – Goldman Sachs
And then just lastly, I wonder if you could just clarify on share count. I think $19 million buyback, off of the $312 million would get you to $293 million on the ordinary and then the differential between ordinary and diluted looks like $13 million, which would take you $306 million versus $315 million, what am I missing there other pieces?
Mike Lamach
Yeah, we can’t be ordinary about $299 million Terry. So you add back the dilutions, so it's more like $312 million for the diluted count at this point.
End of year diluted count.
Terry Darling – Goldman Sachs
Okay and then some additional share issuance to get you to $315 million, is that the good assumption?
Steve Shawley
Yeah, it will be..
Mike Lamach
Like we’ll go on here as we’ll pick up a few shares because the share price is popped up a little bit, remember to converts, so we pick up a few shares there on the dilute count and also it seems like our share, our options kind of come above water, about mid 30s, $36 a share. It’s just kind of an average number back of my head, so we will pick up a few diluted shares because of our share price.
Terry Darling – Goldman Sachs
And there is no incremental buyback assumed in the 350 in that, right?
Steve Shawley
No.
Terry Darling – Goldman Sachs
Okay. Thanks very much.
Steve Shawley
I’ll take it back, we do have the possibility of buying back some shares in the second half to control that dilution, okay. So, what I’m expecting a big – a big number coming out of any share compensation programs this year will be mainly driven by options coming into the money and so in the second half we do – I won’t be surprise if we do spend some money buying back a few shares not a lot to control the dilution.
Mike Lamach
Terry, we would earmark 300 million to 400 million for buyback in the back half of 2012, just due to seasonality of the business, but if you think about that as a September kind of midpoint, it’s got very little effect of the average share count for the year.
Terry Darling – Goldman Sachs
So you do have 300 million or 400 million buyback in the 315 assumption.
Mike Lamach
The comment we’re making is that we said relative to our capital allocation strategies that we’re committed to controlling that dilution and we will do what it takes to maintain the 315.
Terry Darling – Goldman Sachs
Okay, thanks. I’ll pass it on.
Operator
Thank you and our next question comes from the line of Jeff Hammond of KeyBanc Capital Markets
Unidentified Analyst
Good morning. This is (Brett Lindsey) stepping in for Jeff.
A question, order rates don't suggest there is an acceleration in U.S. non-res, it feels like a lot of your peers are pointing to this as an area of optimism, any signs of improvement in terms of quoting, bidding activity to support a recovery here?
Mike Lamach
I understand your question. We are not optimistic around the first quarter.
It's a very tough comp for us anyway. If we were up 10% in the first quarter of last year and this year we see that obviously being impacted heavily in the first quarter.
We could probably be down 6% to 9% in the first quarter in the res business. So, maybe take it from there as to your question.
Unidentified Analyst
Okay, great. And then just in terms of residential solutions, I know you guys had a significant inventory reduction in 4Q.
I mean how would you characterize inventory levels at the company level now and then as you're looking and speak with distributors as we kind of start the year here?
Mike Lamach
Well, let me first of all I'm going to tell you, to get $80 million of the loan product out of the channel and then exceeding that by $10 million to $90 million was a great achievement in res business. So, I think that in terms of indication of that team executing, first of all I'd tell you that's heck of an execution on the commercial team getting that out of the channel.
So, then obviously I'd say in the earlier part of the call that they're right on track with the cost reductions and all the get well actions that were in a place. So, we were in a good starting positioning kind of coming into the year there.
We look a lot less now at weeks of inventory, in fact our game and a game we want to play with our independent distribution is to be able to stock less and build to a shorter, shorter, shorter replenishment cycle, and so we're looking at what was a 20 to 30 day replenishment cycle from order to arrival at the distributor to be something in the 12 to 20 day range this year. So, we're taking it down by design across the channel and taking our cycle times down.
So, I look at it really as just sort of sentiment coming from the channel. I look at it from – so the order rates coming in but not at the inventory – so weeks of inventory are less meaningful to us going forward.
Unidentified Analyst
Okay, great. Thanks guys.
Mike Lamach
Thank you.
Operator
Thank you. And our next question comes from line of Shannon O'Callaghan of Nomura.
Shannon O'Callaghan – Nomura
Good morning guys.
Mike Lamach
Hi, Shannon.
Shannon O'Callaghan – Nomura
Hey, so on the commercial equipment business, I mean were there any price increases there in this fourth quarter or first quarter? And when do they get implemented?
Mike Lamach
Well, if you go back to when they were put in place last year, it was a combination. You had price increases in some of the more cataloged equipment, but you didn't see that this year going in, but what you do see is a lot more systems and tools and sophistication being put into the policies, the implementation of the pricing policies across the various channels and the various segments.
So it's not sort of one-time sort of across the board price increase that would've seen in 2011. Much more targeted, systematic approach and that's the capability that we have been building over the last 18 months.
Shannon O'Callaghan – Nomura
Okay. So, the catalog dynamic that would drive more of the pull forward where as the stuff you're doing now doesn't really create that dynamic, right?
Mike Lamach
Yeah. I mean if you recall last year, we've seen here actually fourth quarter 2010 we were surprised, we had a 40% increase in our unitary order rate and we were thinking 20%, 25% of the pull forward.
So lot of pull forwards came to that price increase last year over a year ago.
Shannon O'Callaghan – Nomura
Okay. And then just maybe on the $50 million of restructuring and cost reductions, can you give us a little more feel in terms of within the segments or geographies how that breaks out and what you are targeting?
Mike Lamach
Yeah, I mean first of all, you'd expect a lot of that to be in the Climate business, the largest business and so a lot of the 50 plus it's roughly $30 million and here you've got the consolidation of two plants. So there will be two fewer plants at the end of the first quarter than they were starting.
So that's one piece of it, but they also gone and really began to attack the front end of the business. And to get, I would say, more synergy in the whole product management – program management areas of the company.
So that's a significant piece for them. The other factors are doing a lot, you'll see industrial will finish the consolidation in China.
They've also taken some action on the frontend of their business as well as security taking a smaller action on the frontend of their business as well just sort of rightsizing it and even changing some of the go-to-market dynamics about how we're looking to go-to-market in those businesses. Then, finally, what we're seeing is an investment into the information technology systems and so one of the largest single investments here is in the ERP conversion.
We got 122 fulltime people dedicated today in this transition as compared to last year at this time. By the end of the year, we'll be close to 240 and that will continue to 2015 as we deploy common ERP systems across the company.
We've also continued to invest essentially in supply chain and in OpEX and so bringing in a lot of lean expertise and really a lot of talent into the sourcing organization to get to a next level there in terms of capability. So that's the other investments we're making.
The investments we're making in terms of restructuring and the cost reduction investments are actually slightly accretive for the year. So, we'll put $0.16, $0.17 into it in the first quarter and we'll get say $0.20 out of it by the end of the year.
And that – that answer is a little bit of hockey stick question about how do you get from first quarter here of about 8% of your full earnings to $3. You pull out restructuring of about 12% and that's exactly what we did in 2011, but if you compare it to 2010, we were about 3%.
In that year, we were much more aggressive around restructuring and I would equate our approach to 2012 to much more kind of 2010 and taking aggressive actions in the front of the year to kind of counter balance in flattish markets.
Shannon O'Callaghan – Nomura
Okay. Got it.
That helps. Thanks.
Mike Lamach
Yeah.
Operator
Thank you. And our next question comes from the line of Julian Mitchell of Credit Suisse.
Julian Mitchell – Credit Suisse
Thanks a lot. Yeah, I guess, my first question was, I mean last year it was fairly sort of controversial when you guys had this contingency number in your bridge and those are all talking around bad.
I mean is it fair to say that your guidance for '12 has some contingency built in just for understandable reasons? You don't want to put it in print in an EPS bridge?
Steve Shawley
Well, we base the guidance what we are seeing in the markets for a top-line and more realistic pricing expectations, you can see from the guidance we are pretty bearish on Europe. I believe we are going to see a mild recession there.
We are really there and across the company, we can execute the scenario of plans that are associated with that outlook. Remember Julian, we talked a lot about building scenario plans across the businesses in the company at multiple levels and so we are working that.
The euro at 1.30 versus the average in 2011 of 1.40 has an impact for it. So I say the guidance reflects a level of operational performance that we have a line of sight to achieving based on the current capabilities of the organization, and the action plans that we believe are actually solid for the year.
Now you would expect too that our internal plans are going to be set higher than that than the guidance range we gave, but we feel that the current range is appropriate for what we are seeing today and appropriate for what the current execution capability is inside the company.
Julian Mitchell – Credit Suisse
Okay. Thanks.
And then just to – it's a revisit to the point on the balance sheet, I mean there is this $1.1 billion of available cash generation and so on. So, can you confirm that there is no appetite or whatever to go for more M&A because obviously after dividends and the $300 million or $400 million you mentioned in the second half, that still implies several 100 million of available cash after all that?
Steve Shawley
Yeah, let me give you my thoughts on capital allocation for 2012. So, as you said we've got $1.1 billion that we're planning for the year.
We ended the year with $1.2 billion of cash from the balance sheet. So, we're in a good shape there.
The convertible bonds that mature in April, we're going to use about $350 million, when we raise the dividend by 33% with the March payout it will use in total in about $200 million. So, we here mark about $300 million to $400 million for buyback which should be in the back half of 2012.
That's going to leave around $300 million to $400 million available for deployments and as you know, we've historically used cash in the first half. So, when we get to the second half, with fewer share prices and we will make the call and if there are smaller acquisitions that are attractive and actionable at a reasonable valuation we're going to pursue them.
Again this is going to impact on kind of where the share price is. We would like to build on to some of the core businesses particularly overseas, but the valuation and profit of the targets will have to be consistent with our goals and with our commitments and obviously, even if all the excess cash went to M&A, we're not talking about anything large context of a $14 billion enterprise.
So as we've decided best path to put the money back into further repurchase, then we'll do that as well. But we'll make that call on the last $300 million, $400 million based on that dynamics which are always moving.
We’ll make that call in the back half of the year.
Julian Mitchell – Credit Suisse
Thanks a lot. And then just one quick follow-up.
It seems like this year in the HVAC industry generally in the U.S., there’ll be an abnormally sort of compressed supply chain effort against tough ready for the summer selling season, obviously inventories are very lean distributors and not in a rush to start ordering yet. So, on the assumption that you have a very soft Q1 and then a sort of abnormal spike into Q2 to get everything ready for the summer.
How do you guys feel about the ability of your kind of manufacturing plants and supply chain to cope with that because obviously when we’ve had demand spikes before in late ’10 there were some issues around managing that.
Mike Lamach
I mean our suppliers are all in the same position looking for same sequential and they’re kind of trying to look at how do they respond to the same potential in the marketplace. So we put for the major suppliers a lot of protection programs in place to be able to protect for increases.
Julian of course well it depends on how much the magnitude of an increase would be, but I don’t see sort of according to the plan we’ve got here on the outlook that we’re seeing through the new few months that that’s going to be a significant risk for us at all.
Julian Mitchell – Credit Suisse
Thanks a lot.
Operator
Thank you. And we have time for one more question today.
Our next question comes from the line of Steven Winoker of Sanford Bernstein.
Steven Winoker – Sanford Bernstein
Thanks for fitting me in.
Mike Lamach
Hi, Steve.
Steven Winoker – Sanford Bernstein
Good morning. So just you mentioned price inflation.
You talked about 2.7 in price and 0.9 material inflation on the quarter. Just that 1% on productivity and other inflation, how are you, how much was the other inflation and how much was the productivity just the same beak out you gave on price?
Mike Lamach
It’s actually exactly embedded in the fourth quarter, is that’s what you’re asking in that. So productivity equaled inflation.
Steven Winoker – Sanford Bernstein
But it showed 100 basis point positive.
Mike Lamach
Productivity. Okay, I’m adding back material inflation into of that.
So I’m saying total productivity and total inflation gotten added.
Steven Winoker – Sanford Bernstein
But not including price. So productivity equal total inflation.
Mike Lamach
Right.
Steven Winoker – Sanford Bernstein
Okay. All right.
And that kind of run rate when you sort of think about that going forward to get your 50 basis points, mid-point margin expansion next year. Are you thinking about in acceleration therefore in the productivity particularly as you ramp through the year given the additional restructuring and how might we dimensionalize it?
Mike Lamach
Yeah. I mean absolutely.
The restructuring and the cost reduction investments being made now in the first quarter are all about that Steve. So we would expect to ramp it up in Q3 and Q4.
We would expect to has benefit of that. Q2 – we’re still going to be – if you look at how we’re spending that investment restructuring for the year, it’s all Q1 and Q2, and the Q2 starts to be fairly early in Q2, so we would expect back half of the year.
Steven Winoker – Sanford Bernstein
And the 19 value streams, are those – are you expanding those early in the year or just sticking to those or…?
Mike Lamach
Yeah. No, we actually expanded on.
What we decided to do though is take the value streams and for example we’ve got several that would have been ordered to shaft and we have expanded them from a proposal to cash. So we’ve lived in the value stream.
We’ve had a great success in taking it through the entire value stream. We’ll add a few to it, but we’re going to stick to our mantra, which is really to go a mile, miles each and into the time and so happy with the 19.
I think we’re add or had where we expect it to be. I think it’s a large transformational cultural change in the company and the last thing we want to do is to bet ourselves too thin.
The – and we’ll talk about this in March when we’re together, but the resources and the capability building has gone out over the last couple of years they have been added to this is really outstanding and so I – more encouraged everyday looking at the capability coming into the company and maturing in the company to be able to go an inch wider as we go. So we’ll expand some, we’ll add a couple of new, but we won’t go so far as to spread ourselves too thin and that’s working for us.
Steven Winoker – Sanford Bernstein
Great and is the ERP benefit. I know you’re building cost there still, but that – when do you start to ramp in benefits into that productivity number, or you already doing it?
Mike Lamach
Yes, later in 2013 another thing that happened – another investment we’re making is we outsourced the lot of the infrastructure for IT and so we’re in the middle of transitioning about 350 people to a third-party to be able to do that for us. So we’re actually transitioning in quarter one, actually quarter four, quarter one, quarter two with duplication of resources there to handle that transition.
That kicks in fully in 2013, as well as the initial phase of the ERP. But that’s going to be a slow fews all the way through 2016 in terms of when you really get the benefit.
We don’t come to North America until 2015 with that ERP transformation. So, we’re doing Europe, then Asia and then North America.
So it’ll ramp up over time.
Steven Winoker – Sanford Bernstein
Okay. And then just a follow-up to your prior answers on a couple of questions.
The risk on the supply chain, we just heard yesterday Emerson state pretty strongly that they have issues – potential issues in downsizing relative to the rest of their customer base. So, I guess I would just note that you feel protected even on that front with those guys?
Mike Lamach
Well, we have number of sources to, in terms of what we’re buying. Okay, so yeah, we’re looking and if you think about sort of what’s growing for us, it’s really the res side 13 SEER, it’s a quarter of the market, right.
And what we’re buying there and that’s really isn’t, you’re going to be an Emerson compressor, it could be then have to be – we’re fairly agnostic around that and we’ve designed to be agnostic around some of that. So we’ll look to protect.
We’ll work with great supplier like Emerson to be able to handle our demand and to Julian’s question, it’s always a matter of degree. So I think we’re planning a some degree of sequential recovery here.
We’re not planning for a barn burner, and if we see that coming, we’ll look to pressure test that supply chain.
Steven Winoker – Sanford Bernstein
Okay great. And I’ll just follow up for rest of the questions offline.
Thank you.
Mike Lamach
Thank you, Steve.
Janet Pfeffer – Vice President, Business Development and Investor Relations
Thank you everyone. And Joe and I will be available to have any – answer any follow-up for the rest of the day.
Thank you.
Operator
Ladies and gentleman, thank you for your participation in today’s conference. This does conclude the program and you may now disconnect.
Everyone, have a good day.