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Ingersoll-Rand PLC (IR)

Q4 2010 Earnings Call Transcript

February 9, 2011 10:00 am ET


Janet Pfeffer – VP, Business Development & IR

Mike Lamach – Chairman, President & CEO

Steve Shawley – SVP & CFO


Steve Tusa – JPMorgan

Robert Wertheimer – Morgan Stanley

Scott Gaffner – Barclays Capital

Steven Winoker – Sanford Bernstein

Nigel Coe – Deutsche Bank

Andrew Obin – Bank of America-Merrill Lynch

Josh Pokrzywinski – MKM Partners

Julian Mitchell – Credit Suisse

Jeff Hammond – KeyBanc Capital Markets

Deane Dray – Citi

Jeff Sprague – Vertical Research Partners



Good day everyone and welcome to the Ingersoll-Rand Fourth-Quarter 2010 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Ms. Janet Pfeffer, Business Development and Investor Relations. Please go ahead.

Janet Pfeffer

Thank you, Jennifer. Good morning, everyone. Welcome to Ingersoll-Rand’s Fourth-Quarter 2010 Conference Call. We released earnings at 7 A.M. this morning and the release is posted on our Web site. We’ll be broadcasting in addition to this phone call through our Web site at, where you will find the slide presentation that we’ll be using this morning. This call will be recorded and archived on our Web site and will be available tomorrow at 10 A.M.

If you would, please go to slide #2, I’d like to remind you that statements made in today’s call that are not historical facts are considered forward-looking statements and are pursuant to the Safe Harbor Provisions of Federal Securities Laws. Actual results may differ. Please see our SEC filings for a description of some of the factors that may cause actual results to vary from anticipated.

In addition, please refer to slide #20, which covers the use of non-GAAP measures to describe the company’s performance.

Now, I’d like to introduce the participants on this morning’s call. We have Mike Lamach, Chairman, President and CEO; and Steve Shawley, Senior Vice President and CFO; also Joe Fimbianti, Director of Investor Relations.

With that, please go to slide #3 and I’ll turn it over to Mike.

Mike Lamach

Thanks, Janet. Good morning, and thank you for joining us on today’s call. I’ll start out today’s call by giving you some perspective on our 2010 full-year performance.

Last year at this time, you might remember that we expected a slow recovery in developed markets, moderate growth in developing countries and mixed activity in our major vertical markets.

Full-year revenues were forecasted to increase in a range of 2% to 5%. As it turned out, most markets were somewhat better than expected. Our full-year revenues were up over 7%, primarily due to stronger than expected activity at our industrial businesses, Thermo King and our residential HVAC business.

Additionally, we saw strong acceleration of volumes in November and December. The increase in volumes and productivity helped to offset higher than expected material inflation. This resulted in a full-year EPS at the very top of our initial forecast range of a $1.95 to $2.35.

We increased operating margins 220 basis points, which exceeded our annual target of 200 basis points per year. Total productivity increased by 4.6% for the full-year, delivering $593 million of savings in 2010.

We realized the Trane cumulative synergy benefits of roughly $550 million, $250 million above the initial forecast. And we continue to implement a multi-year restructuring program which will reduce our manufacturing footprint, improve our cost base and greatly improve our operating margins. We also divested two small non-core loss generating businesses.

We generated available cash flow of $874 million, which was 136% of our 2010 after-tax income. This strong cash flow helped to greatly improve our balance sheet. We reduced total financing by $550 million and reduced the Trane acquisition related debt by $2.3 billion. We also contributed $444 million to fund our pensions in the second half of the year.

Additionally, we continue to increase product development, investment, introduced many significant new products during the year. Overall, we are building a stronger culture, innovation and continuous improvement and we’re demonstrating that we can execute well regardless of market conditions.

Full credit goes to the many dedicated Ingersoll-Rand employees around the world that made our cash productivity and share gain initiatives a success in 2010, while always assuring we continue to deliver outstanding value to our customers.

We had some bumps in the road in 2010, but we expect some periodic setbacks as an organization and processes continue to stretch and mature. Importantly, we are not backing off of our targets. We continue to target operating margin improvements of two percentage points per year, and we’re well positioned to generate continued productivity, growth and cash as our markets recover.

Now let’s talk about the fourth-quarter. And please go to slide #4. We continued our focus on driving top-tier operational performance and delivered strong revenue growth with three sectors or four sectors achieving double-digit top-line increases. We’ve expanded our margins, grew our earnings and generated strong free cash flow.

Fourth-quarter earnings from continuing operations were $0.62 per share, mid-range of our fourth-quarter earnings guidance range. For the quarter, revenues were $3.7 billion, up 13% versus prior year, 14% excluding currency, exceeding our guidance range of 7% to 10%. During the quarter, we continue to see strong bookings as most of our businesses are showing solid growth.

For the company overall, orders were up 9% and 10%, excluding currency. Order rates improved in each of our segments, except for commercial security, which was flat hampered by the ongoing decline in North American new commercial construction activity. Our backlog also increased by 8%.

Operating margin for the quarter was 8.4%, driven by higher volumes and productivity. All of our segments improved operating margins year-over-year and operating margins were up 150 basis points across the company.

We continue to drive disciplined cost controls and operational improvements. Unfortunately, the productivity benefit was eroded by the steep run-up in material cost in the quarter.

We’ve addressed our pricing to mitigate material cost increases. We also suffered some inefficiencies which held back productivity as demand in November and December came back significantly faster than what we had forecast.

This impacted the supply chain resulting in unplanned overtime and freight cost and delayed realization of some productivity savings is resourced from dedicated to meeting customer demand.

Please go to slide #5. This slide gives the summary of our quarterly order rates from 2008 through 2010. As you can see we hit the bottom for orders in the back half of 2009 and reported flat orders in the fourth-quarter 2009.

Reported orders for fourth-quarter 2010 were similar to the first three quarters of the year, up 9% overall, 10% excluding currency. All sectors except for commercial security enjoyed year-over-year gains and we had especially strong gains in industrial area in productivity and residential and commercial HVAC equipment.

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