Ingersoll-Rand plc (Ireland) (IR)

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Ingersoll-Rand PLC (IR)

Q1 2010 Earnings Call Transcript

April 23, 2010 10:00 am ET

Executives

Bruce Fisher – VP, IR

Mike Lamach – President & CEO

Steve Shawley – SVP & CFO

Analysts

Eli Lustgarten – Longbow Securities

Jeff Sprague – Vertical Research

David Raso – International Strategy and Investment Group

Nigel Coe – Deutsche Bank

Andy Casey – Wells Fargo Securities

Bob Cornell – Barclays Capital

Jeffrey Hammond – KeyBanc Capital Markets

Jeff Sprague – Citi

Steve Tusa – JP Morgan

Mark Koznarek – Cleveland Research

Robert McCarthy – Robert W. Baird

Scott Gaffner – Barclays Capital

Marty Pollack – NWQ Investment Management

Presentation

Operator

Please standby, we're about to begin. Good day everyone and welcome to the Ingersoll-Rand first quarter 2010 earnings conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Mr. Bruce Fisher, Vice President, Investor Relations. Please go ahead sir.

Bruce Fisher

Thank you, Anthony, and good morning everyone. We released earnings at 7 am this morning and it's posted on our website. Concurrent with our normal phone and conference call, we're broadcasting the call through our website and they're you'll also find the slide presentation for the call. To participate by the web, go to ingersollrand.com, click on the yellow icon on our home page. Both the call and the presentation will be archived on our website and will be available tomorrow morning starting at 10 am.

Now if you would please go to slide number two. Statements made in today's call that are not historical facts are considered forward looking statements and are made pursuant to the Safe Harbor provisions of federal securities law. Actual results may differ. Please see our SEC filings for a description of some of the factors that may cause actual results to vary materially from anticipated results. In addition please refer to Slide 21, which covers the use of non-GAAP measures to describe company performance.

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

Mike will open our discussion. Then Steve will review our business results and then Mike will return to discuss our outlook for 2010. We'll open the lines for your questions after that. And f you would, please go to Slide three and I'll turn it over to Mike.

Mike Lamach

Thanks, Bruce. Good morning and thank you for joining us on today's call. In the first quarter, we continued our focus on driving top tier operational performance across each of our businesses while steadily increasing the delivery of customer focused innovation and products, systems, services and in our business models.

For the fifth consecutive quarter, we achieved our productivity targets and new product introduction schedules which are critical underpinning than our strategies to deliver long term shareholder value. First quarter earnings from continuing operations was $0.16 per share, excluding the $0.12 impact of a one-time tax change from the new healthcare bill and including $0.02 of restructuring and productivity investments.

Overall productivity contributed to our $0.22 year-over-year improvement and essentially flat volume. As a result we were able to achieve the top end of our projected first quarter earnings guidance range and lower than anticipated revenues. For the quarter, revenues were $2.9 billion, up 1% versus prior year on a reported basis and down about 1% excluding currency. First quarter revenues were roughly $100 million below the midpoint of our February guidance where we had anticipated a revenue range of $3 billion to $3.1 billion.

During the quarter we did see a notable pickup in our order intake and a number of our early cycle business are showing strong comparisons. In the overall company, orders were up 10% and improved in each of our segments. The backlog also increased significantly, up over 18%. If we review the make-up and timing we expect at second quarter deliveries on these new orders, coupled with our growing backlog, we have confidence that our revenue shortfall in the first quarter was timing related and that we can deliver within the range of our second quarter revenue forecast.

Operating margin for the quarter was 4.5%. All f our segments improved operating margins compared with the first quarter of 2009 and total segment margins were up 2.8 percentage points year-over-year despite the flat volumes. This again highlights the success of our productivity programs. We exceeded our 5% goal for gross productivity through a combination of disciplined cost control and operational improvements that included core productivity programs, restructuring savings and synergies derived from the new segment operating structure.

We also held or gained share in most of our businesses and our innovation agenda continues to gain traction as we continue to increase investment in the development and introduction of critical new products and services. We expect that these actions will help to mitigate some of the near term market choppiness and fill our growth as the full recovery kicks in. We also remain focused on our cash flow management and in retaining the benefits achieved to the operational attention we paid to work capital improvements over the course of the past 18 months.

We paid down $260 million maturing debt in the quarter and we are on track to deliver $1 billion of available cash flow for 2010. Please go to slide four, the slide gives the summary of our quarterly order rates from 2008 through the first quarter of 2010. As you can see we hit the bottom for orders in the back half of last year and reported flat orders in the fourth quarter.

Reported orders for the first quarter were up 10% overall and all sectors experienced year-over-year gain excluding the impact of currency orders increased 7.5%. We had especially strong gains at industrial, Club Car and transportation refrigeration.

Order trends for commercial HVAC and security also turned positive despite soft commercial construction markets in several key regions. We ended the quarter on a high note with a 13% year-over-year increase in March orders which will help drive our second quarter results.

Please go to slide five, this slide provides a look at the trends in our revenues by segment. We think revenues, excluding currency shown in the bottom of the chart gives a better view of our organic sales performance and our comments will focus on this measure.

As you can see on the chart it appears that we hit bottom in mid-2009 with some modest improvement in the rate of decline in the third and fourth quarters. We had modest positive improvements in all of our sectors expect for security which had a 5% decline in activity against the soft U.S. commercial construction market. I will give you two other views for our third quarter results. The geographic split and a split between recurring revenue and equipment: on a geographic basis revenues declined by about 1% in the U.S. and also down about 1% in the international markets excluding the impact of currency.

Equipment revenues declined by about 1% on a comparable basis for last year and a worldwide parts and service were up by 8%. Let's go down to slide six, this bridge analysis the change in first quarter segment operating margin year-over-year. First quarter operating margins were 4.5% which is an increase of 2.8 percentage points compared with 2009.

As you can see volume, currency and price had a minor impact, productivity was the key drivers and netted against inflation helped to increase margins by 3.5 percentage points. We continue to invest the new product development and those activities coupled with purchase accounting related cost and restructuring expenses had a minor impact in the quarter and reduced margins by 30 basis points.

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