Good day, ladies and gentlemen, and welcome to the Ingersoll Rand Second Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. I would now like to turn the conference over to your host, Janet Pfeffer, Vice President of Strategy, Business Development and Investor Relations. Please proceed.

Good morning. Thank you, Sean. Welcome to our Second Quarter 2013 Conference Call. We released earnings at 7:00 this morning, and the release is posted on our website. We'll be broadcasting, in addition to this call, through our website at ingersollrand.com, where you can find the slide presentation that we'll be referring to this morning. This call will be recorded and archived on our website. If you 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 actual results to vary materially from anticipated. This release also includes non-GAAP measures, which are explained in the financial tables attached to our news release. A couple of things to note before I turn it over to Mike. Similar to last quarter, we will be talking to adjusted margins during our commentary, which exclude restructuring and spin-related costs. Our news release and tables give you the reconciliation of GAAP to adjusted margins. And this is consistent with how we gave guidance in both February and in April. And to remind everyone also, earlier this year, we transferred a business line from Security Technologies to residential security. That was about $20 million of revenue in the quarter, and it's about $80 million for the full year 2013. There is no impact at the consolidated levels. In the charts and comments, we'll focus on the year-over-year change in revenue and orders for those businesses on a comparable basis, so as to best represent the underlying performance. Now to introduce the participants on this morning's call: Mike Lamach, Chairman and CEO; Steve Shawley, Senior Vice President and CFO; and Joe Fimbianti, Director of Investor Relations. With that, please go to Slide 3, and I'll turn it over to Mike.

Okay. Thanks, Janet. Good morning, and thanks for joining us on today's call. We delivered growth and profitability above our earnings commitment in the second quarter, with solid operational execution across the company. On top of this, we completed several key milestones related to the security spin, as well as a successful debt offering. I'm proud of all the great people in our company for these accomplishments and thank them for their personal and collective commitment to the success of Ingersoll Rand and ultimately, in the successful launch of the new security company, Allegion. Our revenues for the second quarter were up 3% versus last year, both on a reported basis and excluding foreign exchange, reflecting top line performance just above the top of our guidance range. Revenues were up in Climate, Residential and Security Technologies, but we saw a decline in Industrial. Orders were up 2%. Adjusted earnings per share for the second quarter were $1.14. That's $0.06 above the midpoint of our guidance range of $1.05 to $1.10. Better performance from operations essentially delivered all of the upside to guidance. Adjusted margin increased 20 basis points. Operations with 4 corporate unallocated costs increased adjusted margins by 80 basis points. Versus 2012's second quarter, adjusted operating margins were up in 3 of the sectors. Residential delivered a 330 basis point improvement, Climate margin was up 90 basis points and Security margins were up 50 basis points. Lower revenues were a headwind for Industrial. Corporate costs were higher in the quarter as expected due to higher benefit costs and increased investments related to our IT transformation. This marks our ninth consecutive quarter of a positive GAAP between pricing and direct material inflation. Our lean focus again showed significant results in the implemented value streams. And we continue to invest in the future of the business, funding significant new product development, investing in the new IT platform and building our services footprint. Spin-off and restructure costs were $0.11 in the quarter. We continued our share repurchase program, repurchasing approximately 9 million shares in the quarter. We still expect to spend the current $2 billion authorization by the end of the first quarter of next year. We continue to be on track with the spin and have completed several key milestones. We filed a Form 10 in mid-June, right on schedule. We named 5 excellent outside directors, as well as the Chairman and CEO, Dave Petratis. And we announced the name for the new company, Allegion. In June, we completed a successful debt offering for Ingersoll Rand, securing $1.55 billion at attractive interest rates and maturity profiles. So it was a quarter with many accomplishments and milestones to take note of. And now, Steve will take you through the second quarter results in more detail, and I'll be back with an outlook for the third quarter and full year.

Thanks, Mike. Please go to Slide #4. Orders for the second quarter of 2013 were up 2% on a reported basis and up 1%, excluding currency. Climate orders were up 4%. Global commercial HVAC bookings were up low-single digits. Transport orders were up mid-teens. Industrial orders were flat, with order growth in the Americas offset by lower bookings in Europe and Asia. Residential bookings were down 3% on a comparable basis. We believe the residential bookings performance could be a result of the significant improvements made in the HVAC product delivery cycles over the past year. Improved lead times have allowed customers to place orders much closer to required delivery dates, which is creating a temporary shifting of orders to later dates compared to last year. Commercial security orders in the quarter were up 3% on a comparable basis. Please go to Slide #5. Here's a look at the revenue trends by segment and region. Top half of the chart shows revenue change for each sector. For the total company, second quarter revenues were up 3% versus last year on both a reported basis and excluding currency. Climate revenues increased 5%, with HVAC revenues up low-single digits and transport revenues up high-single digits. Industrial revenues were down 3%, Residential was up 7% on a comparable basis. Commercial and Security revenues were up 3% on a comparable basis. I'll give you more color on each sector in the next few slides. On the bottom of the chart, which shows revenue change on a geographic basis, revenues were up 4% in the Americas, while Europe and Asia were each down 1%, excluding foreign exchange. Please go to Slide #6. This chart walks through the change in adjusted operating margin from second quarter 2012 of 12.8% to second quarter 2013, which was 13%.…

Okay. Thanks, Steve, and please go to Slide 12. As a reminder, for purposes of giving guidance for 2013, it's on an as-is basis. It assumes the current Ingersoll Rand with the current 4 operating sectors is in place for the full 12 months of 2013. As we announced in December, we expect the security spend to take place in the fourth quarter. But to be clear, the guidance does not reflect the spend. Consistent with our April guidance, we've broken out spin and restructured costs from the core EPS guidance in order to give you the best representation of the company without the impact of the impending spend. To give you an update on our market views, let's start with U.S. nonresidential. Construction starts and Put in Place trends have shifted a little since our prior guidance, with total Put in Place outlook was slightly lowered and the mix changed. Commercial and industrial expected growth got a little stronger, more than offset over by a lower institutional outlook. Institutional markets are expected to be down for the year by 5% versus down 3% in the prior market forecast. The 2013 outlook for commercial and industrial Put in Place was raised from 8% to 9%. Increases in bank and office buildings and retail support our view of a stronger second half versus first half in unitary HVAC. Over the Applied forecast, it's lower base on the lower institutional outlook, so our overall Trane commercial outlook is just slightly lower than it was last time. We continue to expect low single-digit growth in North American commercial HVAC overall, and flat to a low single-digit decline in North American commercial security. We expect North American truck trailer markets to be fairly flat on a unit basis in 2013. U.S. residential new construction…

[Operator Instructions] Our first question comes from Julian Mitchell with Crédit Suisse.

Yes. So just looking at the EBIT bridge and if you sort of look at the productivity, net of other inflation, that was running at about a 50 bps tailwind to margins in Q2. That's lower than the sort of 90 bps affecting Q1. What do you think is the full year there? Is there just something on the timing of projects quarter-to-quarter and the run rate is more like sort of a first half blended number? Or how are you thinking about that for the second half?

Yes, I think so, Julian. The -- we said right along that we expect to see about 50 bps coming from a difference between -- you're talking about pricing versus direct material inflation, I assume, right?

Well, productivity.

Productivity in general?

Yes, the productivity net of other inflation line.

Okay. We'll address that. The...

I guess that was a 50 bps contribution, I think, in Q2, and it was more like 90 in Q1. Just -- is that just lumpiness in the full year is going to be somewhere between the 270 or so?

Actually, yes, if you look at the second half, it's more of a blended rate, the second half compared to the -- if you look at the first 2 quarters and the blended rate, that's lower than you have in the second half. You can see a little increase in productivity, gross productivity in the back half of the year. You do have a little bit of sort of that tame inflation environment. So you do get a little bit better in that productivity to other inflation in that regard. But Steve was kind of going down the path of also answering the pricing question, which has been good to us halfway through the year. And I think as we look at the back half of the year just to kind of maybe ramp the question there, I think we'll see something in the order of 40 to 60 basis points in Q3 and Q4. I mean, that price to material inflation component as well. So I do think that it supports Q3 forecast. The Q4 forecast would put our operating leverage between 40% and 50%, kind of in the mid-40s. And that supports, I think, what we've done in the past and also supports the forecast that we have for both productivity and pricing.

And the other thing about the other inflation, that includes all salary increases. And we have -- we're on a pretty much of an April 1 salary merit increase schedule. So the first quarter is always going to look a little better than the rest of the year because of that factor, Julian.

Got it. And then just on the -- mix was a big issue in Q1 that you highlighted in the 3 of the 4 segments. You said it would get better in Q2. Clearly, it's got a lot better. How are you thinking about mix to the second half?

Well, I think mix for the second half is going to be generally better than what we've seen in the first. A couple of reasons. One, the residential mixdown of SEER seems to be leveling out. We're definitely seeing sort of a bottoming of the average SEER rating there, which was a big, big factor in our mix issues up through the first quarter. We're also seeing a good mix of Thermo King business through the middle part of the year here, which is going to help the mix certainly in the third quarter. And I would say that we still have the mix problem. It's probably somewhat in the industrial sector, because in addition to this general volume issues in the industrial sector, it's shifting away from tools to more complete air compressors. So we have a little bit of a negative mix there, offsetting some positive developments in some of the other sectors.

Our next question comes from Andrew Casey with Wells Fargo Securities.

First, on the EU commercial HVAC order commentary, that's consistent with what some other companies have said kind of recently. But it's still kind of surprising what's going -- that order commentary against what seems to be going on over there. What do you think is driving that? And is there any regional concentration that you're seeing?

Well, we play across the entire region, including the Middle East as well. And so I think we have low expectations for Western Europe, and they're better than what we have thought. We're continuing to see good growth and solid bookings coming out of the Middle East as well, which is in those numbers. Our Unitary business in EMEA is really up nicely. And that has to do, in some regards, with new product. And a plant now producing yellow [ph] products of course [ph] in Eastern Europe as well, and I think we're more competitive on that product. But yes, I mean, Western Europe is a little better than we would've thought, coming off a little low. Middle East is pretty strong. And India, which is in that number as well, is about what we expected.

Okay. And then on the Climate Solutions in general, the segment margin performance, specifically the strong 36% incremental contribution surprised me, and it was very positive. Is that what we should expect from this segment with top line benefit or was there something special going on this quarter?

Well, I'd say what's special for the last 3 or 4 years is Trane commercial just made new and new sort of leverage highs. In fact, if you go all the way back through the related history of American Standard and Trane, back as far as we can really look back, we've probably added 10 to 12 points to the average operating leverage in that business. And I think that's got to do with a lot of hard work around bank consolidations, the co-location of some manufacturing with our Industrial business, a lot of new product development, product and higher margins coming out of the business, focus on the service business and what we've been able to do there. So interestingly, when you look at the operating leverage between Trane and TK in the quarter, both businesses were over 30%. So I would actually expect Trane to continue a good run. I think that we're wanting to obviously have to give a new normal at Trane. And last 3 years, they've proven that they can do that. And then we would expect a little bit better operating leverage actually coming out of TK in the back half of the year, again, supporting more of that fourth-quarter stretch that we have.

Our next question comes from Nigel Coe of Morgan Stanley.

Yes. So I just wanted to dig into your Climate outlook for the full year, Mike. You gave some good color in terms of expectations by Applied and Unitary, et cetera. But the 1% to 3%, that's a decel from what you did in 2Q. Comps get a little bit easier, orders increased sequentially. So I'm just trying to understand why we wouldn't be at the high end of that range or even a little bit better, maybe just add a little bit more color in terms of the second half outlook versus what we saw in 2Q?

Yes. Well, I mean, let's first talk about kind of where there's strength and where we need to see it. We were placing a bet on China, and that was rewarded. So unlike the industrial businesses where there -- it's really more of a government policy reaction, the commercial and businesses that we're playing in, health care, hotels, the non-overcapacitized industries in China, we saw the nice bookings growth there and a nice revenue relationship there. So that was good for us. And we've talked about Europe, and we've seen strength there. Really, it's all about the applied market now in North America, taking another notch down and a lot of the readings that we're getting. And although we are seeing great performance coming out of the Unitary business and bookings and growth in share, it's just not enough, the mix growth, the common institutional days. So now it only really drops a little bit. When we think about the $100 million drop from the midpoint to the midpoint revenue guidance, bulk of that comes out of the Industrial business. Small piece comes out of Trane, largely the Applied business in North America and a small piece comes out of our Security business, largely in Europe. But for Climate Solutions, we need to have second half growth of 3% versus first half growth of 1.2%. So it really is an acceleration first half -- back half to first half.

Okay. That's helpful. And then the percent you just referenced in China and Asia HVAC, it stands in contrast to what we saw in Security. I'm just wondering, do you view the bulk strength in HVAC in Asia as a good lead for security? Or are there different mixes that we should take into consideration there?

The biggest businesses that we have in China are very infrastructure-related. They're going to be airports, rail stations and so on and so forth. The fastest-growing business that we have is the hardware and more traditional mechanical electronic security business. So we'll be talking about sort of order growth in China, and that being lumpy, it's always associated with the timing of the large infrastructure projects. But we're happy with the progression of growth in our, I would say, our core mechanical and electronic security hardware business there. That's growing nicely. And we're still relatively optimistic around the book of business yet to close for the balance of the year that would support our larger integration business there.

Our next question comes from Steve Tusa with JPMorgan.

Can you maybe just talk about the absolute price that you got and then maybe just price/cost by the segments?

Yes. So price was just about 1 point for the company, 90 basis points. So from there, we would have lost, say, 20 basis points to inflation, so that was in that 70 there.

It was across the board. We actually have a positive relationship across the board in each of the businesses. So probably on the side of residential, typically, that's kind of -- I know you're very focused on that. We would've seen price there in the 0.5 [ph] range. Material inflation there actually would've been very sedate, so we got good pricing happening in residential. Security, it's probably the lowest price increase, but still at a margin impact of 30 basis points and a slightly positive spread there to material inflation. Climate was right on the average, about 1 point, with 20 points negative material inflation. In industrial, we had about 70 points to price, a little more inflation there, 50, 60 basis points there. So all businesses were positive across the board.

Our next question comes from Andrew Obin with Bank of America Merrill Lynch.

Yes. Just a question on Climate Solutions margin outlook. A little bit more color given how strong TK orders are, and that's very good for the mix, I'm just wondering, are you being overly conservative here? Or how conservative are you being for the second half?

Just a comment about TK, first, Andy. The first half is really being influenced by this Tier 4 engine conversion. So if you look at the Act, the trailer market forecast for North America for the year, Act is saying that the market is going to be up about 8%, if I remember correctly. So the market would suggest that the trailer activity is going to slow down in the second half, and that's what we've got reflected in our forecast. Our North American trailer forecast is that we would maintain kind of historical market shares, and we would see sort of up or single-digit-type growth there for the year. So it's definitely skewed forward because of the Tier 4 engine conversion. I think if you look at TK outside of North America, we were surprisingly strong in the trailer -- truck trailer in Europe in the quarter. We're expecting that to moderate a bit in the second half. And everything else, bus and container for Q2 was fairly flat. If you look at the second half, based on everything that's going on in worldwide shipping, container for sure is expected to be actually negative comps in the second half. So there's a moderation of the TK revenue growth in the second half built into our forecast.

You're looking -- just color-wise, if you look at what we've got left to do for the back half of the year, I mean, clearly, industrial here, we're looking to see sort of what's going to happen, looking to the next couple of quarters and particularly the booking turn business. So it's a place where we would apply more risk to that with the industrial. And if you look at a place or 2 that we assigned, perhaps more in that opportunity, it would be Residential, maybe Climate just because they're executing so well. In Security, it should come in right about on the numbers. I don't see much risk in what we're reporting there. So I think in aggregate -- and that's after like the forecast we've got with probably a bit more concern around industrial, momentum and a bit more optimism around Res and Climate.

I got you. And just -- I understand you sort of highlighted that operational deit [ph] in the quarter, and congratulations on that. But can you just put it into buckets for us, was it better-than-expected pricing versus productivity versus you guys controlling investment? What went well in the quarter relative to your expectations?

Well, we had more volume than we expected, and we converted on it, right? So nothing that would drive you more crazy than actually seeing volume and not getting leverage on the volume because you weren't prepared to execute against that. So if you look at the sort of incremental leverage on the gap -- the positive gap between actual and midpoint of guidance, we had very nice operating leverage on the incremental. And that really, to me, is encouraging about our ability to deal with additional volume, should it present itself here by the end of the year. But I would tell you, look, really nice job around price, real nice job around productivity. Investments are launching. Generally, we're getting all we wanted out of that in terms of on time and impacting the marketplace. More to come in Q3, Q4 within no curtailment investments. In fact, Climate continues year-over-year to be a net investor -- incremental investor year-over-year as well because of the climate in particular. So they're really firing on all cylinders here.

Yes. And I would just want to reiterate the investment side. If you look at the corporate spend, it was up in the quarter versus prior year, primarily due to the fact of investments going on with the IT technology transformation we're going through. So we did not skimp on investments in the quarter. And just to add to Mike's commentary, the thing that's probably going a little better than we expected, and it's very pleasant to have it going this way, would be the leverage we're seeing on the Trane commercial business. That I think it's a truly remarkable achievement that we've seen now, starting late last year and really showing up here in Q2. With any kind of volume, you'd expect to see that type of leverage to continue.

Our next question comes from Stephen Volkmann of Jefferies.

I think most of the core questions have probably been answered. I'm curious, I guess, as you look out sort of post the spin and you've had a chance to get a lot of that together now, have you changed or evolved your expectations for the segment margins for the remaining companies in the sort of 2- to 3-year timeframe, assuming we have some kind of reasonable recovery?

Well, certainly not for Industrial. In fact, I've commented multiple times now that Industrial I'll tell you that the margin potential is greater than what we originally thought, and I think they're executing well against that. With our Climate business, as it's organized today TK and Trane, no, I think we get there as well. The issue we've had and we're clearly addressing it has been the Res business, and we're showing great, great progress there. But we've got a long way to go to get to that target. And so we're going to try to update you more on kind of what we think the potential is based on outcome ranges for growth when we're together late this fall and perhaps be more specific about where we see it. But certainly not on Climate, not on Industrial. In fact, it's up. Res, we're working on and great, great progress there. We'll see that continue.

Okay, great. That's helpful. And then can you just remind me the sort of the elevated investment spending, IT, et cetera? What's the timeframe on that? When does that sort of normalize again, or does it?

It's going to a bit of a pattern throughout the year. If you look at what happened this quarter, in April, we went live with the first phase of the transformation to the common systems across the company. So the whole team, the whole -- the cost structure we have employed to make this transformation work really fell on to an expense category because they were in an implementation mode in Q2. What goes on -- because of the accounting rules, we have to expense all that money when they're in an implementation mode. As we move into the third quarter, we shift back into design phase for the Phase 2. So some of the expense in Q3 will be capitalized and then amortized later once the systems come up and running. So you're going to see a spiking throughout the year depending on when we go live in the various phases. I would say that if you look at 2014, we expect the spend to peak out in '15, some slight incremental increases in '14 and '15 from this point. But certainly, start to abate in 2016.

And you've got depreciation from the first systems going live in 2013, all the way through the last systems going live in 2016. So then we're going to be looking at some higher depreciation and amortization. But look, net-net, by the time you get past 2016 and into '17 and '18, we ought to see a pretty remarkable decline in what we're spending in IT, but more importantly, as it relates to the G&A across the company and the value of information that we're putting across the company and the speed by which we're acting on it, I think, would be remarkably different.

Our next question comes from Josh Pokrzywinski with MKM Partners.

I just wanted to dig in a little bit on the Residential business. Clearly, some great operating leverage there. And Steve, I think you talked a little bit about mix in your prepared results. And then, Mike, I think you followed on with the price cost commentary. I just want to understand more how much of this is mix and then how should we think about the margin potential in that business as we shift more towards those higher SEER units? I think both yourselves and some of the other guys in the business out there have been talking about some of this meaner version away from 13 SEER, away from R-22, into some of that more premium product, which obviously is more of your wheelhouse?

Yes. I mean, Josh, I think this is why this is a good business going forward. I mean, everything from the basics of pent-up demand at some point in time, working its way over multiple years through the system, through to regulations and regulatory requirements around efficiency and the fact that we get somewhat more expensive systems moving into the market, are all very positive. Competitively, for us, broadening the product range and really working on the consumer and the dealer experience, everything from the improvements we've had and our ability to order and ship and fulfill, I mean, I think these are really getting to be sort of industry best-in-class at that level showing up across the board. So I think that when you think about the structural parts of the business, coupled with the improvement opportunities that we have playing across the full range of the product, new product development and really taking the whole value stream to the dealer, and that's with the consumer, is a lot of opportunity. So again, I think for us, getting to a double-digit op margin, getting to a 15% EBITDA margin are in the cards for us in the next couple of years. And so from there, we'll figure out where it goes. But look, we like this business structurally going forward in this part of the cycle.

I assume you mean that double-digit op margin x Res and Security?

Yes. Yes, absolutely. And what we also do -- and this is a little bit of an important detail. But we analyzed that residential HVAC, but it's a little bit, because all our light units here, if you think about it, really is looking up through -- the majority of that through our commercial HVAC business. Really nice margins on that. And all of our parts business fundamentally flipped up to the Climate business. So what you're looking at really is a provision of residential HVAC without light commercial, without parts coming into that. So if you really start to do a benchmark in an apples-to-apples against res competitors, these op margins are pretty much in line and should get a lot better.

That's helpful, actually. And then one follow-up there. How much of your business is 13 SEER today?

Let me see if I can try to get that for you, Josh. And if I have to come back, I will do that, maybe in the answer to another question, okay? So let me think about that and come back.

Our next question comes from Jeff Sprague of Vertical Research.

Just a couple of things, a lot of ground has been covered. I wonder if you could, just on the HVAC Climate side, commercial specifically, address a little more what's going on in parts and service? You talked about the comps. But how does kind of energy retrofit and upgrade look into the back half? Do you have any visibility on that and any geographic color around that?

Really, it's a great question, Jeff, because when we talk about the service and parts business, the service business have lots of tentacles to it. If you think about services being scheduled and unscheduled service and parts, that business is growing nicely. If you think about the part of this which is lower, it's actually the performance contracting and the turnkey contracting business, which makes sense just at a macro level because what you're finding is just a lot more customers opting for more traditional approaches procuring equipment, which we're seeing in the unitary results for sure, as opposed to using financing or guarantees to purchase the equipment. And the performance contracting, and to some extent, the turnkey contracting business, often runs in verse to sort of sentiment. To put a more negative around their ability to finance, they need to do capital improvement, performance contracting goes up. People feel a bit better about it. You'd see it kind of shift more towards traditional avenues to fulfill it.

Interesting. Okay. And then just on industrial margins, Mike, you expressed confidence on kind of the out-year look. Near term, obviously, you've got some pressure. Can you give us a view on how industrial margins actually play over the balance of the year? And do you have any restructuring or other actions aimed at addressing that?

Well, I mean, we're actually bullish on what's going to happen here. Year-over-year, if you look at a full year of Industrial compared to 2012, I would still be looking for margin improvement. Some 50 basis points would be, I think, really doable, in light of and including sort of all the discussion we've had around slowing markets. So we will get great leverage. So your question about restructuring and so on and so forth, that is so much a part of what's going on here. Just day-to-day lean productivity, constantly thinking about the cost structure of the business, thinking about pricing, new product development. So they're looking within the Industrial business for ways to sort of protect that 50 basis point margin expansion. We've evaluated those plans, and I think it's a good plan. And I think that as you look at sort of protecting the company in terms of EPS plan, we clearly have opportunity in Climate and Res to fill that risk potential.

Our next question comes from Jamie Sullivan of RBC Capital Markets.

Just a quick follow-on on the performance contracting. Is that still around 1/3 of the service business? Curious how big that business is.

Yes. I'd probably have to come back and answer that one as well. But I can tell you, Josh, regarding your question about 13 SEER, it's about 60% of our mix today. And if you put 13, 14 SEER in there, it's about 75% of our mix. So if you think about the evolution of what we've been able to do and to be competitive at that low end, where it's now 75% of our business, we're pleased with the team's opportunity to navigate that. Coming back to your performance contracting business, it would be down year-over-year. At the mix percentage, we'll try to get you a number here. If you ask Janet, Janet's just got 1/3, about as good an estimate as we've got.

Sure. And then on -- I think on Thermo King, you mentioned margin expansion in the back half of the year, I think, but growth also slowing due to a number of factors there. Just wondered if you could speak to that dynamic a little bit, whether there's some mix benefit or how we should think about it?

We've got great bookings coming through the production here. So in terms of the basics of factory absorption and the fact that we'll continue to tune the line for the new product line, we're optimistic that sort of that's the leveraged days are ahead in 2013 in that business versus the first 6 months, which haven't been bad at all. In fact, TK's overall margins are going to be up year-over-year no matter what.

Our next question comes from Deane Dray of Citi Research.

I had some cleanup questions on the residential HVAC business. And I know you guys have been praying for hot weather, but you just ought to be careful on what you wish for here. And on this topic, if you have any color on the sensitivity the business has to degree cooling days, because we've obviously had a huge spike there and maybe some comments on inventory in the channel.

I'm the one that's -- look back 25, 30 years on this, and I can tell you that the normalized is over a relatively short period of time quarter-to-quarter. I guess, you can certainly see a spike at the end of the quarter, but pretty tough to recommend a trade stock on that. I'm sure some people pay attention to that. But in our business, it's not going to move the needle all that much around really hot weather at a different point in time. So I'm not the right guy to get on the track of telling you that this hot weather is going to create some huge upside for the company in quarter 3.

Inventory in the channel?

This is a good story. Inventory is down by design. We are surveying dealers from order to receipt, 33% last year, faster than we were last time with this year -- this time last year. That's by design. So strategy has been -- have our dealers need to sort of inventory less. That's down. We think it makes it more competitive for our dealers, more competitive for us. So we're purposely working that down and working on speed and fulfillment, thinking that all good things lead to higher profitably and share when cycle times and fill rates are higher, and we're really doing a great job on both of those.

Our next question comes from Chris Belfiore with Nomura Securities.

It's Shannon O'Callaghan. In terms of this restructuring and spin costs, what's the split between, I guess, the spin costs and restructuring? I don't know if you can separate that but I'm trying to get a sense of how much of that is restructuring that you feel like you're going to have to continue to do post-spin.

Yes, placeholder, maybe $50 million would be the restructuring that we would need to do, that would not be related to all the other fees involved and costs [indiscernible] to do this. And we're going to adjust that as we need to. I mean, we're really committed to getting a go-forward cost structure right, and a placeholder now of $50 million seems like a decent placeholder to put out there.

Across the 2 entities essentially, right? Combined?

Well, no. This would be sort of what we think we need to do from an IR go-forward basis.

For the Remain-co, okay. And how about Security or, I guess, would you speak to that or no?

Well, what we're doing is you're designing something ultimately from scratch, right? I mean, you're designing a standup company, so you're creating an organizational model there that you think would work going forward. And when you think about standalone company being set up, it's an incremental add to the structure and headcount there. So they're looking about how to do that in a lean way. But clearly, they're going to be adding people and necessary functions and capabilities to run a standalone company. But I don't think that's any more than the cost being allocated from the company to them. We've managed to sort of work that down now, so that I think that'll be fairly neutral allocated cost to standup cost.

Our next -- our final question comes from Eli Lustgarten with Longbow Securities.

Just a couple of clarifications. One, with the refinancing of the debt, you said there's a $30 million into the savings. When will we begin to start seeing that flow through the income statement? And two, you updated a little bit on margins for the year. You said you still expect 50 basis point improvement in Industrial. Can you give some guidance about the rest of the group, certain changes in what you're thinking?

Well, let me take the first part of the question. The -- we actually paid off the 2013 and '14 securities this past week. So we'll start to see the improvement in the interest expense through the second half here, in late July through the end of the year. So it's a small impact in 2013.

Okay. And as far as operating profitability, I think you still indicated 50 basis points attractive improvement you still expected in Industrial despite the volume change. Have you got any changes in the outlook for any of the 3 groups or you want to update us on what you're thinking at this point?

Yes. I mean, so Industrial, we talked about 50 bps. Security, I think, the goal there is to grow the business and remain relatively flat. Actually, we could have improve margins, but that's not the -- so much of the issue there is around growth, so look for flat margins there and investment around growth. And I look at the Res business and see that they're on track and they're expected to get 2 full points. I think we'll do that. And in Climate, no reason. Even with the modifications we've made with some of the mix between Industrial and Commercial that we wouldn't see 50 basis points improvement there again. Just I think a steady improvement, sustainable improvement, I think done the right way with the right investments, and I feel good about 50 basis points there.

You're talking about Residential?

Both Climate and Industrial, 50; Residential, 2; Security, flat.

I'm not showing any other questions at this time. I'd like to turn it back over for closing comments.

Thank you, John, and thank you, everyone. Joe and I will be available for follow-up later today. Have a nice day.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the conference. You may now disconnect. Good day.