Ingersoll-Rand plc (Ireland) (IR)

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Ingersoll-Rand Co. Ltd. (IR)

Q2 2010 Earnings Call

July 23, 2010 10:00 am ET

Executives

Bruce Fisher - VP, IR

Mike Lamach - Chairman, President and CEO

Steve Shawley - SVP and CFO

Analysts

Robert Wertheimer - Morgan Stanley

Jeffrey Sprague - Vertical Research Partners

David Raso - ISI

Longbow Securities Eli Lustgarten - Longbow Securities

Nigel Coe - Deutsche Bank Securities

Alex Blanton - Ingalls & Snyder

Bob Cornell - Barclays Capital

Jeffrey Hammond - KeyBanc Capital Markets

Steve Tusa - JPMorgan

Presentation

Operator

Good day and welcome to the Ingersoll-Rand second quarter 2010 earnings conference call. Today's conference is being recorded. At this time I'd like to turn the conference over to Bruce Fisher, Vice President of Investor Relations. Please go ahead sir.

Bruce Fisher

Thanks, Tom. Good morning everyone and as Tom said welcome to Ingersoll-Rand second quarter 2010 conference call. As you know, we released earnings at 7 A.M. this morning and we'll broadcasting in addition to this phone call through our website at ingersollrand.com where you'll also find the slide presentation that we'll be using this morning.

These materials from the call will be archived on our website and will be available tomorrow morning at 10:00 A.M.

Now if you would please go to Slide 2 in the slide presentation. And I'd just like to remind you that statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the Safe Harbor Provision with 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 materially from anticipated results. In addition, if you would please refer to Slide number 21, which covers the use of non-GAAP measures to describe the company performance.

Now I would like to introduce the participants on this morning's call. We have Mike Lamach our Chairman, President and CEO. Steve Shawley our Senior Vice President, CFO. Janet Pfeffer our Vice President, Business Development and Investor Relations. Who is taking over my role and Joe Fimbianti our Director of IR.

Before I turn it over to Mike and Steve, I'd like thank Joe for his support through the years. I'd also like to wish Janet all the best for her new role. I know our analysts and investors will enjoy working with her.

Also I would like to thank Mike, Steve and other leaders and people I've worked with over the years of Ingersoll-Rand, Trane and ASV. It's been a privilege to know all of you. And I'd like to thank the folks from the investment community, it's been a pleasure working with you sharing the ups and downs of the markets and together gaining a better understanding of our businesses. Thank for your energy, your intellect and your curiosity. You made my job much more interesting, rewarding and fun. And so with that, if you would please go to slide number three and I'll turn over to Mike.

Mike Lamach

Thanks Bruce. So we're talking last night. It was 41 quarters, I think we've had the pleasure of working with you for nine of those. So, yeah, we want to tell you thank you and wish you all the best for you.

So good morning to people on the call. Thank you for joining us today. In the second quarter, we continued our focus on driving top Tier operational performance. We delivered strong revenue growth with three or four sector achieving top line increases. We significantly improved our productivity for the sixth straight quarter and we expanded our margins, grew our earnings and generated strong free cash flow.

Second quarter earnings from continuing operations were $0.76 per share including $0.04 of restructuring and productivity investments. EPS exceeded the top end of our project second quarter earnings guidance range of $0.62 to $0.72. For the quarter, revenues were $3.7 billion, up 7% versus prior year and above the top end of our guidance range of 3 to 6%.

During the quarter, we continued to see strong bookings of a number of our early cycle businesses are showing good growth and the company overall, orders were up 10% and improved in each of our segments except for commercial security which continues to be hampered by the ongoing decline in North American commercial construction activity.

Our backlog also increased significantly, up 15%. Operating margins for the quarter was 10.3% driven by productivity and higher volumes. All of segments improved operating year-over-year and total segment margins were up 2.8 percentage points for the second consecutive quarter.

We also had a 49% leverage on our year-over-year revenue gains. We achieved a 4.4% increase in gross productivity as we continue to drive disciplined cost controls and operational improvements. This performance includes approximately $26 million of unplanned supply chain cost incurred primarily to expedite delivery of some key components to meet strong customer demand these additional cost caused an 80 basis point drag in our year-over-year productivity.

We also held or gained share in most of our business and our innovation agenda continues to gain traction as we 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 fuel our growth as the recovery fully kicks in.

We also remained focused on cash flow management, in retaining the benefits achieved through the operational attention we paid working capital improvements over the course of past 18 months. We built up cash in the quarter and are in a great shape to repay a $250 million of maturing debt in August and we are on track to deliver $1 billion of available cash flow for 2010.

Please go to slide four. This slide gives us summary of quarterly order rates from 2008 through the second quarter of 2010 as you can see we hit the bottom for orders in the back half of last year and reported flat orders from the fourth quarter, reported orders for the second quarter were similar to the first up 10% overall in all sectors except four commercial security enjoyed year-over-year gains. We had especially strong gains in industrial area and productivity club car transport refrigeration, and Asia commercial HVAC equipment.

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