Janet Pfeffer – VP, IR and Treasurer Mike Lamach – Chairman and CEO Sue Carter – CFO.

Julian Mitchell – Credit Suisse Andrew Obin – Bank of America Joe Ritchie – Goldman Sachs Jeff Hammond – KeyBanc Capital Markets Steve Volkmann – Jefferies & Co Andy Casey – Wells Fargo Securities Jeff Sprague – Vertical Research David Raso – ISI Group Steven Winoker – Sanford C.

Bernstein Steve Tusa – JPMorgan Deane Dray – Citigroup Nigel Coe – Morgan Stanley.

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Ingersoll Rand Second Quarter 2014 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) Please note today’s conference is being recorded. I would like to hand the conference over to Janet Pfeffer, Vice President, Investor Relations and Treasury. Please go ahead..

Mike Lamach, Chairman and CEO; Sue Carter, 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..

Great. Thanks, Janet, and good morning and thank you for joining us on today’s call. In the second quarter, we delivered earnings per share of $1.13. There was a small amount of restructuring in the quarter less than a penny. This quarter’s reported and adjusted EPS are identical.

That’s at the top end of our adjusted earnings guidance range and a 22% increase versus the second quarter of 2013. Revenues were $3.5 billion, up 4.3% versus last year. Leverage were consistent with our guided revenue range of up 4% to 5% for the quarter. Orders were up 5% in the second quarter with Climate up 6% and Industrial up 2%.

Adjusted operating margin which excludes restructuring from the prior year was up 150 basis points. Climate margins increased 150 basis points and Industrial margins were up 30 basis points. Pricing exceeded direct material inflation as it has each quarter for more than three years. Operating leverage was about 50% with 43% leverage at the segment.

We repurchased 4 million shares in the second quarter. Overall a very good quarter with revenues about where we thought they would be, and excellent operating leverage on the revenue growth, particularly in HVAC businesses, both residential and commercial. Now Sue will walk you through in more detail on the second quarter.

I’ll then take you through the third quarter and 2014 outlook..

Thanks Mike. Starting at a high level, our bookings for the quarter were up 5%, revenues were up 4% and our operating margins without restructuring were up 150 basis points year-over-year. Reported earnings per share were $1.13 versus midpoint guidance of $1.10 we were little bit better on price and mix and a penny lower in restructuring.

Let’s move to Slide 4. Orders for the second quarter of 2014 were up 5% on a reported basis and excluding currency. Climate orders were up 6%. Global commercial HVAC bookings were up low-single-digits. Transport orders were up mid-teens. Orders in the Industrial segment were up 2% on both, a reported basis and excluding currency. Let’s go to Slide 5.

Here’s a look at the revenue trends by segment and by regions. The top half of the chart shows revenue change for each segment. For the total company, second quarter revenues were up 4% versus last year on a reported basis and excluding currency.

Climate revenues increased 4% with commercial HVAC revenues up low-single-digits and transport revenues up high-single-digits. Residential HVAC revenues were up high-single-digits. Industrial revenues were up 4% on a reported basis and excluding currencies. I’ll give more color on each segment in the next few slides.

On the bottom of the chart, which shows revenue change on a geographic basis, revenues were up 3% in the Americas, 16% in EMEA and Asia was down 2%, all excluding foreign exchange. The lower revenue in Asia was mainly driven by geography outside of China. China was about flat excluding currency. Now let’s go to Slide 6.

This chart walks through the change in operating margin from second quarter 2013 of 11.4% to second quarter of 2014 which was 13.1%, an increase of 170 basis points. This chart is on a reported basis. We’ve clearly strained down the impact of restructuring cost for you which was 20 basis points of tailwind year-over-year.

Volume mix and foreign exchange collectively were 60 basis points positive versus prior year. Our pricing programs continue to outpace material inflations adding 50 basis points to margins. As Mike said, we’ve been consistently positive on this measure for more than three years.

Productivity versus other inflation was a full margin point positive impact in the quarter. Productivity ramped up in the quarter as we got passed all the weather-related impacts of the first quarter and saw benefits from the restructuring done in late 2013 and earlier this year.

Year-over-year investments and restructuring were higher by 40 basis points in total. In the box, you can see that that was comprised of 60 basis points of headwind from investments, mainly in IT, channel expansion and new product investments, and there was a 20 basis point benefit from lower restructuring cost.

So if you prefer to look at this on an adjusted basis, adjusted margins increased a net of 150 basis points versus 170 basis points on a reported basis. Leverage in the quarter was excellent and almost 50% excluding restructuring from last year and 43% in the segment.

Climate’s leverage at 48% was led by the HVAC businesses particularly in North America. To Slide 7. The Climate segment includes Trane commercial and residential HVAC and Thermo King transport refrigeration. Total revenues for the second quarter were $2.7 billion. That’s up 4% versus last year on a reported basis and excluding currency.

Global commercial HVAC orders were up low-single-digits. Orders were up in the Americas and Europe and Asia. Commercial HVAC revenues were up low-single-digits. Revenues were up high-single-digits in Europe, up low-single-digits in the Americas and down in Asia.

Commercial HVAC new equipment revenues were down slightly, while HVAC parts, services and solutions revenues were up mid-single-digits versus prior year. Growth in worldwide unitary equipment revenues was more than offset by lower applied revenues.

Thermo King orders were up mid-teens versus 2014 second quarter led by increases in truck trailer and bus. Container orders were slightly lower in the quarter. Thermo King revenues were up high-single-digits with truck trailer revenue up low-single-digits and marine container revenues up significantly.

Residential HVAC revenues were up high-single-digits versus last year. Unit volumes were also up high-single-digits and mix was positive in the quarter. The adjusted operating margin for Climate was 14.2% in the quarter, 150 basis points higher than the second quarter of 2013, due to volume and productivity, partially offset by inflation.

Now let’s go to Slide 8. Second quarter revenues for the Industrial segment were $794 million, up 4% from last year’s second quarter. For the Industrial segment excluding Club Car, revenues were up mid-single-digits and orders were also up mid-single-digits versus last year.

Excluding Club Car revenues in the Americas and Asia Pacific were up while revenues in Europe, Middle East and Africa were up over 20%, part of which was positive currency impact. Revenues in the air compressor business were up mid-single-digits with strong gains in oil free products and parts and services.

Club Car revenues in the quarter were down low-single-digits while orders were down mid-single-digits versus prior year as golf markets were down in the quarter. Industrial’s operating margin of 16.4% was up 30 basis points on higher volume productivity and pricing, partially offset by inflation and investment spending. Turn to Slide 9.

Working capital as a percentage of revenue was 4% of revenue in the quarter. The increase versus prior year is from higher receivables in inventory, partially offset by higher payables balances. Days sales outstanding is up mainly due to mix of business. Delinquency is unchanged from prior year.

On inventory, we have been intentionally increasing stock inventory levels of key assemblies in order to ensure supply, particularly in the higher selling season. Year-to-date June free cash flow was $98 million. Working capital will come down in the second half to a level closer to 3% of revenues based mainly on timing of revenues.

May and June are our highest two month sales volumes and given our DSO is about 60 days. That drove higher working capital balance at the end of the second quarter. And let’s go to Slide 10. We’ve repurchased 4 million shares for approximately $200 million in the second quarter.

Year-to-date June, we have spent $1 billion in share repurchases and repurchased about 17 million shares. Our forecast for the year remains to spend between $1.375 billion and $1.475 billion on repurchase with $400 million to $500 million of that coming from free cash flow. And with that I’ll turn it back to Mike..

Great. Thank you, Sue. And please go to Slide 11. Before we review the forecast, I want to take a few minutes to mention some very important new products in Trane commercial introduced in Europe at the end of June. This is a milestone for Trane since we’re introducing five new chiller products at the same time.

Products included centrifugal air-cooled and screw chiller designs and cover a broad range of sizes and market applications including education, healthcare, lodging, large commercial buildings and fastest cooling in Europe.

All these new systems are available with advance controls and designed for cost effectiveness and optimal energy efficiency for both full load and part load performance. The chiller in the upper right side of the slide, Series E CenTraVac is truly a breakthrough technology.

These products are designed for cooling large commercial buildings and are up to 10% more energy efficient than the next best chiller available in this tonnage range. The true innovation is that the E Series is the first commercialized chiller used in ultra-low global warming potential HFO refrigerant.

The new refrigerant allows the E Series chillers to continue to utilize Trane’s highly reliable and efficient direct drive and low-pressure designs that have may Trane chillers the global leader in centrifugal chillers.

I believe we are gaining momentum and capabilities to introduce new products tying all of our businesses this will help to improve our growth rates as we see the slow recovery of our commercial construction in that market began. Now let’s move to the forecast, please go to Slide 12.

In the aggregate markets we’re about where we thought they would be, some a little better and some little weaker, but second quarter revenues were in line with our guidance. Dodge has put in place forecast for 2014. Did that change much in the latest update? In total, the 2014 Dodge forecast is still up about 8%.

Relate this to our North American business commercial and industrial buildings tend to use more unitary equipment, while the institutional markets use more applied equipment. The commercial and industrial forecast is unchanged at up 18% versus 2013, while the institutional forecast still is forecasted to be down 1% for the year.

Within commercial and industrial, the vertical of largest growth is still warehouses that are over 30%. They have little HVAC contact. Key verticals for Trane are office and bank, retail and manufacturing which are all up but at a more modest rate.

Within institutional, government is expected to be down over 20% while education and healthcare are forecast with slightly down in 2014. The only vertical in institutional forecast is to be up 2014 is amusement which is not a key vertical for Trane. We expect Europe, Middle East and Africa to be up mid-single-digits for the year.

Asian HVAC markets are expected to be up low-single-digits overall with China up low-to-mid single digits. Remainder of the region will be fairly flat. We’ve seen impact for example in Thailand from the political unrest there.

The full year outlook for residential HVAC markets is still for mid-to-high single digit growth in the unitary volumes, industry volumes. Transport markets had a good start for the year, particularly in Europe and in Marine. Bookings growth has been front-end loaded for both trailer and container. We expect booking rates to moderate in the second half.

We expect the full year North American trailer market to be flat to slightly up on a news basis but up high-single-digits on a dollar basis due to mix of car compliance products. Industrial markets were somewhat improved in the quarter. The latter half of course with some recovery in China.

Based on the first half results, our outlook for the second half, we are raising our full year revenue. We see revenues up about 4% from the prior guidance of about 3% to 4%. It’s really not much change in the aggregate to our Climate revenue outlook. The changes in Industrial where we are raising revenue expectation.

Our updated forecast is for Industrial to be up 2% to 3% versus the prior forecast with flat to up 2%. The increased outlook within our core Industrial businesses, the golf markets are expected to be flat down for the year. Please go to Slide 13.

The third quarter guidance refer to the middle column on this chart, although we’ve included quarter four on the chart to show you some math. Third quarter 2014 revenues are forecast to be up approximately 4%. We expect growth to be stronger in Climate than in Industrial but both should be in the low-to-mid single digit range.

Third quarter GAAP continuing earnings per share are forecast to be in the range of $1.00 to $1.04. Restructuring costs are expected to be about $0.01 in the quarter. So on an adjusted basis the EPS range is $1.01 to $1.05. The currency situation in Venezuela is evolving.

We are continuing to evaluate the impact but of inclusive about $10 million or about $0.03 per share foreign exchange losses related to Venezuelan currency in the third quarter forecast. We’re assuming an average share count of 273 million shares at tax rate of 25%.

There is an EPS bridge versus last year’s third quarter in the appendix for your reference. For the full year, as I said, we see revenue growth of about 4%. We are raising our full year 2014 earnings outlook to a range of $3.13 to $3.21 on a reported basis. Prior comparable range was $2.95 to $3.10 which includes $0.10 of restructure.

For the full year, we’ll now expect to spend about nickel in restructuring. So a nickel of a change in guidance is from change of restructuring outlook. Recall, the $0.03 foreign exchange that we have in for Venezuela in Q3 guidance which flows through to the full year. The core earnings forecast was going up by about $0.13 at the midpoint.

There is no change the full year average share count guidance of 275 million shares at a tax rate of 25%. So in closing, we’re pleased to have delivered above our earnings commitment in second quarter with excellent performance in the segments. I continue to feel good about our positioning and are focused we had in the latter half of the year.

With that, Sue and I will be happy to take your questions..

Thank you. (Operator Instructions) Our first question comes from the line of Julian Mitchell from Credit Suisse..

Hi. Thank you. I guess I had a quick question on the margin guidance by segment for this year. You’ve obviously updated the revenue assumptions. You talked about Climate 4% up, about 40 to 80 bps Industrial, flat to up 20 basis points.

How do those look now to you?.

So Julian, when we look at those, we’re leading the industrial segment at flat to up 20 basis points. And then on Climate as you pointed out, we were at 40 basis points to 80 basis points, and it now looks like about 80 basis points to 110 basis points. So we did take that up with the guidance increase..

Thank you. And then just within the margin bridge, sort of in aggregate, the productivity number was very good in Q2.

Do you see that as kind of a good, sort of ongoing rate balance of this year when you look out into sort of ‘15 and ‘16, just because I think you’re only half way covered on the value streams of the cost base and so on?.

Julian, the thing that is important there is the pipeline that we measure. And as I’ve in the past, we’ve tried to keep that pipeline between 110% and 150% of what’s required understanding that there is timing issues and some things don’t work that were planned.

So to help the pipeline looks like it’s still in fact both materials perspective as well as direct and indirect labor perspective. So I would say that we’re not forecasting any real changes in productivity, however it’s always subject to the pipeline timing of what project actually has..

Thank you. Our next question comes from the line of Andrew Obin from Bank of America..

Yes. So very pleasantly surprised on Industrial growth revision.

Can you give us a little bit more detail as to what’s really happening by region and North America, Europe?.

Well, the core Industrial markets which is non-golf are doing better than we anticipated. Europe clearly is better than we anticipated across the board. As Sue mentioned, we’re up 20%. In EMEA in the quarter and the orders booked there was looks great. North America, a little bit stronger but again stronger parts and services as well.

China, which showed a little bit more strength in the later two months in the prior quarter has a decent outlook for the balance of the year in terms of the pipeline, but there frankly Andrew, it’s a large equipment orders and typically that become more of a timing issue as to whether its fourth quarter or first quarter of next year, but all in all we’ve developed the core industrial businesses is bit of a fresh look..

And then just a follow-up.

How sustainable is the EMEA strength, and what’s driving the strength? Is it market share gain or any particular market because that looked very strong?.

Yes, it’s actually mostly in Western Europe as well too. So it’s combination of other things, Andrew. I wouldn’t just to pick one but clearly we’ve done well with the efforts to invest feet on the street in the region. We’ve got I think great product with a good price point in the region.

I think that oil free, it’s been a significant gainer for us there as well, and for that matter across the globe. So no, I don’t think that 20% growth rates are something to plan on when you are going forward, but we are pleasantly surprised to see that we have a great quarter..

And Andrew let me just add one thing on there. For 2014, we’re expecting revenues in EMEA to be mid-to-high single digits for the year..

Thank you. Our next question comes from the line of Joe Ritchie from Goldman Sachs..

Hi, good morning everyone..

Hi Joe..

Good morning..

So good quarter. It seems like pricing clearly has been strong for quite sometime, but may have surprised the upside this quarter. Europe was good but you didn’t really take up your growth expectations significantly. It seems like a lot of the guidance range is driven by the margins, particularly on the Climate side.

And so I guess just what gives you the confidence at this point in raising the guidance for the back half of the year?.

So Joe, as we think about the guidance and what we’re seeing in the markets in our performance, we’re obviously pleased with what we’ve seen through six months and we’ve seen actually gives us some confidence for the year. As you pointed out, we’re still in a low to moderate growth environment.

And so as we looked at the revenue, the outlook is only a little bit higher, and most of the earnings guidance is from higher operating performance. The enterprise leverage is in the mid 40s and the segment leverage in the mid 30s for the revised guidance.

And again as we looked across the businesses, the performance that we have, what we see on enterprising versus material inflation, productivity, etcetera we thought this was the right place to land..

Okay. That’s helpful. I guess one follow-up on the cadence for 3Q and 4Q, particularly as it relates to the incremental margins. It seems like there is a step-down implied in your guidance for the incremental margins for 3Q and then a step back up in 4Q.

I just want to make sure I am thinking about that the right way, and if so, what’s causing that 3Q versus 4Q?.

So I think as you look across the quarters, I think we’re still seeing in the third quarter that prices is going to offset direct material inflation but at a lower rate, also same for the fourth quarter in terms of the overall businesses.

And then one of the other things that you see in terms of that leverage is the amount of corporate expenses that are in the fourth quarter..

That corporate last year as we were really truing up half spend, there was stock-based comps, benefit changes that came out really in the fourth quarter higher than the normal run rate. So there is a pickup in the fourth quarter.

We also had a flood in China in our Industrial businesses which hopefully won’t repeat again this year, so that would be another reasons why the fourth quarter leverages looks so much higher than the normal..

Thank you. Our next question comes from the line of Jeff Hammond from KeyBanc..

Hi good morning guys..

Good morning, Jeff..

Good morning..

Just wanted to kind of focus on the applied market.

And I think you said that the Dodge date is still being pretty choppy but I am just wondering what you’re seeing in the quoting activity, any signs of inflection or accountability momentum into ‘15? And then what’s in that – if you could just kind of update us on your VRF strategy relationship with Samsung and how do you think VRF competes or doesn’t compete with the chiller-based systems?.

Lot there Jeff as always. So when you look at the applied markets in general, the market in quarter one, this is the North American market which is for the latest most available was down about 3%. Last year, it was down 4% total of the market. Second quarter was down a little bit lower.

The market was down 4%, but the market expectation third-party prognosticators here think that it will come back to zero for the full year, which implies a pretty sizable third and fourth quarter pickup. Conversely on unitary, the market last year was about 5%. First quarter was strong at 7%.

Second quarter was actually 5% again the prognosticators will call that down to 4%. I think it’s more likely that you’re not going to see the – you’re going to see a ramp up and improvement in applied markets in the back half of the year, probably not to the extent that is being prognosticated. And I think on the unitary side, those are very strong.

If you even take the first two quarters for us, our bookings in unitary were up double-digits for the first two quarters. And the momentum there certainly will slow, but not to the extent to bring it down to where the market is calling it. But I think that you will see more gradual turning it unitary and applied as we go forward.

Now specifically VRF, remember our strategy is multi-fold. We produce some VRF in our own factories. We have an arrangement with Samsung as well as two other VRF manufacturers that we utilize for components.

So all-in our unitary business was doing well across the world which includes VRF, and of course our VRF growth rates are going much faster than industry VRF growth rates because the fact that we’re working off smaller numbers there, but just has the ductless growth rates are increasing, so too is the ducted component globally for us.

So from a unitary perspective, we had really good growth across the world in unitary through the first two quarters both in ducted and ductless..

Okay, great. And then just, I don’t know if I missed this.

Can you give us an update on what you think corporate is and just maybe what the run rate is exiting ‘14, and is that kind of how to think about the go-forward run rate?.

So Jeff, what we’ve talked about for corporate spending was a range of around $200 million for the year. When we’re talking about today and what we’re thinking about is a range of around $200 million to $220 million, depending on how some of the things that Mike referenced earlier like the stock-based comp.

The benefit planned true-ups and investment spending comes in for the year, so that gives you sort of $50 million to $55 million quarter range for corporate expenses, but as we look at that and I talk about $200 million to perhaps $220 million, I want to be clear that the restructuring spend and the stranded cost that were taken off from the Allegion spin were taken out in late 2013 and early 2014, if the number was above the $200 million range, it would be – because we had decided to do more investments or we had items again in not stock-based comp or in benefit planned true-ups..

Thank you. Our next question comes from the line of Steve Volkmann from Jefferies & Co..

Hi, good morning.

I am wondering if we’re getting any better visibility into the next iteration of SEER requirements here in States, and how that might impact your business, whether we might see some pre-buy or perhaps an issue, just any update on that?.

Well, I think that your point has probably gotten more murky as opposed to less to more clear. The standards really at this point in time as you’re probably are aware are bit up in the air again.

We’ve got activity happening in the next couple of quarters, where DOE will lead some panels to go through the enforcement of changes to the standards in 2015, but those really won’t become rule sometime in 2015, so it’s very difficult to tell what the impact would be.

I would say probably what you won’t see is a quarter or two ago, thought those rules would be in place, you might see some last manufacturing of 13 SEER systems, and I think that that probably will not be the case, so it will be that you’ll see 13 SEER systems manufactured and sold throughout the country sometime into or through 2015.

That’s a bit more speculation on my part..

Okay, great. Thanks.

And then can you just comment on where you think channel inventory is, and whether it might need to be adjusted going forward?.

Are you talking about residential HVAC or what part of the business? Just assuming you’re on mute at this point, I am going to assume that’s residential HVAC. And they are at about normal levels at this point of time.

We’re running higher bookings in the first quarter, shipped a lot of those bookings in the second quarter towards fairly low at the beginning in the second quarter. So fairly normalized levels for us, which tends to be a little bit lower than some of what our industry competitors sold.

And if you go back over a long period of time, largely we’ve been trying to do better job on cycle times from the factories to the dealer to allow distribution to actually hold less inventory at different times during the year. So the answer to your answer, in short form, fairly normalized..

Thank you. Our next question comes from the line of Andy Casey from Wells Fargo Securities..

Good morning everybody..

Hi Andy..

Just a couple of follow-ups, a lot has been asked.

Within the Industrial order improvement, asking I think it was Andrew’s question a little bit different, are you seeing any specific pockets of strength like type of customer as opposed to region?.

Well, yes, we do see some. I mean even in China as you look through, as an example you wouldn’t see strength in areas like some of the heavy metals businesses in China, but you would see some in some of the verticals that we would play more into.

So of course food and beverage and nuclear would be a big market right now in China where we’re doing well in those markets, but staying away from a lot of the sort of heavy industry over capacity size places that China has outlined would be an example. And the UA [ph], it’s a bit broader based than that.

And then from the technology perspective certainly as we said, oil free parts and services are stronger.

And frankly the parts and services piece of that is consistent with some of the investments that we made earlier in the year, where I am putting some additional feet on the street both in terms of selling capability but also in terms of technical service strengths and filling some pockets out there..

Okay, great. Thanks Mike. And then returning to your prior question again, I think last quarter you called out some improvement in the applied unit order growth within the Climate orders.

Did you see that continue? I know what you said about the industry forecast, but I am just wondering within your orders, did you see that continue?.

Yes, we have and we actually have what we believe is the much more reliable part to review that which is a pipeline view which goes all the way from early conversation with the customer or the identification of the project, all the way through to following it through a pipeline percentage estimate of flow and so and so forth.

So you do see a large pipeline going through, but again I don’t see that there is sort of an immediate inflection point in applied that some of the third-party market data points would suggest I think some more gradual improvements through 2015 with some more gradual moderating in the unitary business in 2015, but yes, we’re seeing that as well..

Thank you. Our next question comes from the line of Jeff Sprague from Vertical Research..

Thank you. Good morning..

Hi Jeff..

Could you just give a little bit more granular first on kind of the price side, Mike.

Is there any real distinction where you’re seeing it, I would guess resi versus unitary and applied, but can you just put some perspective around what’s going on in pricing in general?.

So let me give a broad overview on pricing and what we’re seeing. So from the perspective of being overall, we still expect the pricing environment to be fairly modest in 2014, so about 50 basis points of price.

We still expect to be able to more than offset material inflation, but we think towards back half of the year, as I said earlier that the positive gap will look more like what we saw at the end of 2013, which is more in the 20 basis point to 30 basis point range as opposed to the 50 basis point range that we’re seeing.

And I think that across the segment we are seeing favorability, and but to your point resi was a little – was part of the stronger piece of price..

Jeff actually we had across the board, so if you put Climate, both resi and commercial and then split up, commercial by region, by product. We actually have positive price in all areas that as we did industrial as well.

So there weren’t any big gaps and that Sue just alluded to clearly one of the biggest surprises was the residential was actually price leaders for us in the quarter..

Great. And then, Mike, could you just address kind of the comment or perhaps Sue on inventory running higher to meet demand. It sounds a little counter to what we’ve been hearing on better flow to the factory and better reaction times and the like.

Are you hitting some diminishing returns there or is there something in particular in the outlook that you’re trying to prepare for?.

Well, it’s a very inexpensive insurance policy right now with working capital rates where they are in a company, and areas where we got long lead items. Great example might be a diesel engines for TK would be a perfect example. That was a really strong bookings backlog.

And although we expect it to moderate, but still I don’t want out of engines which can take 12 weeks to come across the water to get here. That would be a good example. And it’s selective throughout the business.

So if you go to our tools business, there is 25 tools that we just absolutely will not stock out of, and there has been great activity in that business particularly around some of the new product launches with our electric power tools that actually have electronic interface into customer production system, that’s been a big winner for us and that’s something we’re going stock out of.

So again it’s really building advance.

And also campaigns that we’re running certain areas of product growth team are spearheading, so we talked about the six product growth teams but in areas where they’ve got a deliberate plan, its spearhead, something into a particular vertical market or particular region, we’re making sure that to tie our order plans consistent with what we’re trying to do.

In other words, we’re trusting that those product growth teams are going to be able to action out what it is trying to do. The worst thing we want to do is have them do that not be able to support the product. So it’s selective, not across the board. It got nothing to do with the value stream.

It has got to do with where they are pockets of growth and where there is the unique opportunities, it is being able to take advantage of that. And certainly and really lead, 12 to 16 weeks items that commence from suppliers that we want to make sure that we’re not running out of those..

Thank you. Our next question comes from the line of David Raso from the ISI Group..

Hi good morning. Ex the corporate expense year-over-year, the incremental margins this year are – you are targeting around 30%, 31%. Can you give us some puts and takes to how to think about the incremental margin moving forward? Just trying to look out to ‘15. Just think about further productivity improvements.

I was happy to see the compressor business which is usually better incremental starting to show some life. Then also maybe Thermo King in North America, just trying to run up against some tough comps.

So just maybe just big picture get your thoughts on how we should think about the segment incremental margins moving forward?.

Yes, David, for five years we’ve been running somewhere in this 40% to 50% incremental margin range. I haven’t calculated likely but I don’t think we wrote it much last year. And at some point in time, logic prevails that you’re going to be normalizing back towards something that looks like gross margin of company.

Of course we’re trying to drive gross margin of the company up and of course we had higher rentals, but any time we do above 30%, we’re truly digging in beyond variable costs, we’re digging into the fixed cost base of the company. So we guided initially the 25% along with some breakage in the business, and pipelines that may not materialize.

In the first two quarters, the pipeline did materialize and we were able to take advantage of the opportunities and manage away the risks, but that’s not always the case, that’s why I caution you and listeners on the call that good number tends to be the gross margin of the company.

And really the safer number is the gross margin of the company less the breakage that normally is involved in these sorts of things..

Just trying to think a little bit that you have the lower share count exiting the year than your average share count.

When it comes to things like the tax rate for next years, still think of it 25 as a good base case?.

Yes, actually I’ll pass to Sue because I was talking specifically about segment operating leverage..

Sure. No absolutely I was as well. I was just trying to think of the other puts and takes..

Okay..

All right. So David as I think about share count and I think about tax rate is we’re looking at the – I’ll give you an example. We’re for the second quarter, we got about $0.10 benefit coming out of the share count and a headwind out of the tax rate of about $0.15. And for the full-year, you’re going to have the same story.

You’re going to have more of a headwind coming off of tax than the benefit from shares. So as I look to what happens next, I mean obviously we need to go through and do our operating plan.

We need to look at the areas where our income is going to come from in ‘15 and beyond, but I think from an overall basis, there isn’t a reason to think that it would be a lot different than sort of the mid 20s type of range which is sort of where we’ve been at for a while.

So again in ‘14 you’re going to have less benefit from shares than the headwind on taxes at around 25% for the year..

And in that same spirit, thinking about the repo for the next year, just again I know it’s only July but framework. This year roughly a $1.4 billion.

Just trying to think of a normal framework for ‘15 just given your cash flow and balance sheet? Is $800 million, $900 million kind of number the right way to think about, just framework for continuing repo going forward?.

I think as we think about it, I would say let’s hold on to somewhat about 2015 until we get later in the year, see more of the activity and continue to evaluate where we are..

Thank you. Our next question comes from the line of Steven Winoker from Sanford Bernstein..

Hi, thanks. Mike, nice quarter. Good morning. Could you comment on M&A Mike and consolidation? We’ve talked about it lot in the past.

What’s your current thinking on that and where we are at this point in time?.

Yes, well we always have the mirror we hold up which is share buyback. You can do something that’s more accretive on EPS, margin, ROIC.

We probably do it, if it fits right into the core business, meaning that it’s new technology, inter-related business that we can use our consistent distribution to do or vice-versa, we might have a gap in distribution and the distribution actually do more of what we do today.

So quite frankly if we found those things, we would them Steve, and I think that’s the key is there being selective as we have been and not paying [indiscernible]..

Okay. And then just to follow-up your answer to the other question on incremental and fixed cost reduction, it looks like your restructuring opportunity evidence ebbs and flows here, but given how much of the cost base you still have to address on the lean side as well.

Can you describe the sort of longer term restructuring these run way that’s left inside the existing portfolio?.

Yes, as it relates to factory utilization, just think as a bit where you’re going with lean. You could think about the fact that we’ve taken so much that physical footprint out which has given us that 40%, 50% operating leverage over these past five years, we feel pretty good about the factory footprint at this point in time.

And although it’s always a thing or two we might consider doing, it’s not like we’re doing any wholesale changes to that where we’re very well utilized across the business.

And so lean at this point in time, more about making sure that as we see business pick back up we have the capacity, we have the ability to handle more throughput through the fixed cost base, and that again will help ensure that we’re getting operating leverage at least equal to gross margins of business which would be the plan.

That’s how we think about it..

Thank you. Our next question comes from the line of Steve Tusa from JPMorgan..

Hi good morning..

Hi Steve..

Just on HVAC first. What percentage of your sale this year do you think are going to be 14 SEER and above, and using kind of rule of thumb, I don’t know, 15% to 20% higher priced 14 versus 13 SEER. Is that fair? And then just on HVAC, the commercial stuff you talked about the applied markets.

It doesn’t sound like anything in Climate is going to get worse in the second half or it actually sound like maybe things could get a little bit better, but you have a consistent growth rate there, maybe just talk about that dynamic as well?.

Yes, Steve, the first part of your question. 14 versus 13 SEER, the industry price is somewhere between 19% and 21% difference between 14 and 13 with the expectation I think that 13 saw decline probably more cost reductions on 14. And therefore probably a lower differential from what was 13, so what will then be 14.

I don’t have a breakdown in front of me Steve on 14 through. We had nice sure gain there, so it plays to our strong suit because we are seeing a mix up particularly as you’re looking at 16 and above for being nice actions there for us. And then to your point, we’re mildly optimistic.

Our forecast for applied, unitary or commercial HVAC in general would tell you that we expect stronger back half than first half. So it’s marginally strong but it’s a better second half than the first half. That’s again going back to this point that the market prognosticators show that happening. We see that happening.

Albeit we think that not be very steep inflection point that are more forecast to the industry data..

In any way to quantify that pipeline comment you made whether it’s bidding activity or any numbers, high level numbers to quantify that and help us understand how – because I think JCI made the same comments about how optimistic they were maybe carrier this morning as well in North America but it’s kind of hard for us to get our hands around it.

And any kind of high level data around that pipeline?.

Yes, Steve, actually interesting for us because there is two things going on.

One is the pipeline is improving but the second activity here is making that a little bit difficult to give you an exact answer which is that in most of our climate businesses, there is a market coverage initiative on your way which is looking to make sure that whether it’s by ZIP code or by country or by region or places we get our hands on it, what’s our coverage ratio of the market, how many projects are we finding, what’s the density of our revenue per available square foot of HVAC content.

And what that’s doing is driving investments into these markets, additional sales people for market coverage. So you’ve got a combination of market coverage and improved pipeline giving you a larger number than I think what’s actually going to be reported by some of our competitors. So I don’t want to give you a wild number on that.

A year from now, I think we’re bit more normalized there. That would be the number that I hope we could report to you bit more would be bit of a leading indicator on pipeline, but I would not be comfortable to throw out a big number at you today..

Thank you. Our next question comes from the line of Deane Dray from Citi..

Thank you. Good morning everyone. Mike, if we could stay in that residential mix topic. We did a survey earlier this quarter shows a pretty interesting demand characteristics, cluster demand both at the very low end, the 13 SEER but also a lot of intercept at the high end, and you just mentioned that the 16 SEER and above.

So how are you positioning the portfolio today towards that higher end? You have all of the SEER levels represented, and how do you expect that demand for both the highest and lowest end to play out?.

Yes, Deane, it’s mixing up which is good always for Trane and for American standards, good for us. Our strategy is always been to make sure that we’re shoring up sort of the13 and 14 which I kind of see as one bucket. And then really however you play 15, but 16 and above would be higher efficiency systems that always has been a strength.

It continues to be of strength, both in dealer base but also in the product portfolio. So the key there is we want to continue to have that historical Trane strength, American Trane strength in the higher SEER systems but we’re making a lot – we’re making a lot of progress in the 13, 14 as well and so it’s really playing both..

That’s helpful. And in showing us these five new chiller products makes the question.

What type of growth investment have these chillers – just broadly in terms of new product introductions, what type of growth investment has this involved and where do you stand on your product vitality?.

Yes, that set of investments there would be somewhere north of $100 million is what you’re seeing on that page [ph] there. That’s been part of what we’ve been talking about for four or five years. We started on that ECTV [ph] project I think when I was still running Trane commercial in 2009.

So it takes four, five years to be something like that, now they come out much faster than that, which is a good sign but vitality is good. The vitality for the Trane applied portfolio really kind of the off the charts in the next five years, won’t make any sense.

It won’t be meaningful, it will be almost a complete transition of the product portfolio. Unitary, we’ve been at that and kind of cycling through, so it’s a more normalized kind of 20% to 30% number that must be there, but applied will be 50% to 100% probably over the next say three to five years..

Thank you. And we have time for one more question today. Our final question comes from the line of Nigel Coe from Morgan Stanley..

Thanks for letting me in guys. Good morning. So I just wanted to switch to acquisitions. You addressed that question a little bit earlier, but obviously I’ve seen sometime since you did an M&A deal.

And obviously the bias is still towards buyback, but are you actively pursuing acquisition opportunities both on opportunities at this point, and if you are, what are you seeing in terms of pricing opportunities?.

Yes, Nigel, same old broken record with me. I can tell you it’s well over 100 things that we looked at in the five years since I’ve been here, in this job. I think it’s been three years maybe five tops that we’ve had a real interest in for various reasons. So it’s not as if we haven’t been looking at exercising that muscle all this time.

It’s just the longest time simply was not as good as the share buyback was. So we’ve made the right decisions there. So as we look in the future, we’re going to continue to hold up that mirror and understand which is more accretive and over what period of time. And that’s the same old answer I am out with..

Okay. And then just switching back quickly to Industrial, the ad business. I know we’ve kind of – I had a few questions upon that already, but just approaching it from a different perspective, you’re clearly outperforming Atlas Copco.

And I’m wondering, you mentioned share gains in air free and particularly in Europe but – sorry, oil free, but if we look at small systems versus larger systems, do you think that this outperformance was primarily in mix shift issue or do you sense you’re gaining the share in both smaller and larger systems?.

It comes back to basics. The feet on the street in the right places. It’s been a constant drum beat on the portfolio innovation there on change, as that continues it’s a similar story as our applied HVAC business in terms of what that roadmap looks like or a product portfolio going forward.

And when we launch those products, we in fact launch them feature that are superior to competition at margins that are superior to what the replacement product was. So the double effect when we launch products that we should have margin expansion and growth. That’s kind of what we’re seeing there. So there is no magic there.

It’s been – that group has been hard at it for five years like the Trane team has. They had a earlier market recovery when HVAC of course had much more supporting incremental margins for the first three or so years of that. And hopefully that’s what we’ll see in the HVAC business going forward..

Thank you. And that concludes our question and answer session for today. I would like to turn the conference back for any closing comments..

Thank you, Karen. Thank you everyone. John and I will be around for any follow-up that anyone has. Have a good day..

Thank you. Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may now disconnect. Everyone have a good day..