Ingersoll-Rand plc (Ireland) (IR)

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Ingersoll-Rand plc (IR)

Q3 2010 Earnings Call Transcript

October 22, 2010 10:00 am ET

Executives

Janet Pfeffer – VP, Business Development and IR

Mike Lamach – Chairman, President and CEO

Steve Shawley – SVP and CFO

Analysts

Steve Tusa – JPMorgan

Nigel Coe – Deutsche Bank

David Raso – ISI

Robert Wertheimer – Morgan Stanley

Steven Winoker – Sanford Bernstein

Jeff Sprague – Vertical Research Partners

Bob Cornell – Barclays Capital

Julian Mitchell – Credit Suisse

Andy Casey – Wells Fargo Securities

Mark Koznarek – Cleveland Research

Shannon O’Callaghan – Nomura

Presentation

Operator

Good day everyone and welcome to the Ingersoll-Rand’s third 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, Vice President of Business Development and Investor Relations. Please go ahead.

Janet Pfeffer

Thank you, Ben. Good morning everyone, welcome to Ingersoll-Rand’s third quarter 2010 conference call. We released earnings at 7 am 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 ingersollrand.com, 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 morning at 10 am.

If you would please go to slide two. 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 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 number 21, which will cover 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; Steve Shawley, Senior Vice President and CFO and Joe Fimbianti, Director of Investor Relations.

With that, if you would please go to slide number three 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’d like to start by thanking our employees and customers for their continued dedication and support in the third quarter.

We continued our focus on driving top-tier operational performance and delivered strong revenue growth with three of our four sectors achieving top line increases. We expanded our margins, grew our earnings and generated strong free cash flow. We have generated significant productivity averaging 5% over the past seven quarters.

Third quarter earnings from continuing operations were $0.80 per share at the top end of our third quarter earnings guidance range of $0.70 to $0.80. For the quarter, revenues were $3.7 billion, up 8% versus prior year, 9% excluding currency and near the top end of our guidance range of 5% to 8%.

During the quarter, we continued to see strong bookings, as a number of our businesses are showing solid growth. For the company, overall, orders were up 8%, 10% excluding currency 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 by 17%.

Operating margin for the quarter was 10.9% driven by productivity and higher volumes. Three of our four segments improved operating margins year-over-year and total segment margins were up 150 basis points. Leverage on our year-over-year gains was 31%.

We achieved 4.7% gross productivity, as we continue to drive disciplined cost controls and operational improvements. Our innovation focus continued to result in introduction of new products and services in key areas of the portfolio and in emerging markets. These actions will help to fuel our growth in both revenue and profit in the years ahead.

We also remain focused on cash flow management and in retaining the benefits achieved through the operational attention we paid to working capital improvements over the course of the past two years.

As expected, we repaid $250 million of maturing debt in August, as well as making a pension contribution just shy of $250 million in September. We are on track to deliver $1 billion of available cash flow for 2010.

Let’s go to slide four. This slide gives a summary of our quarterly order rates from 2008 through the third 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 third quarter were slightly below the first two quarters of this year, up 8% overall; 10% excluding currency. All sectors except for commercial security enjoyed year-over-year gains. We had especially strong gains in industrial area and productivity, stationary and Transport Refrigeration in Asia, commercial HVAC equipment.

Please go to slide five. Just look at the revenue trends by segment. We think revenues excluding currency shown on the bottom of the chart gives a better view of our organic sales performance.

As you can see on the bottom of chart, the third quarter was up 9%, excluding currency. We had improvements in all of our sectors except for security, which was down 4% in a phase of significant declines in the domestic commercial construction market.

I’ll give you two other views of our third quarter results, the geographic split and a split between recurring revenue and equipment. On a geographic basis, revenues improved by about 5% in the U.S., and we’re up by 16% in international markets, excluding the impact of currency. Equipment revenues were up 7% and worldwide parts and service were up by 11% compared with the last year.

Please go to slide six. This page analyzes the change in third quarter segment operating margin year-over-year. Third quarter operating margins were 10.9%, an increase of 1.5 percentage points compared with 2009.

As you can see, volume, price and mix, and $270 million of additional revenue, added 2 points to our operating margins. Productivity, netted against inflation, increased margins by 50 basis points as commodity inflation increased in the quarter, particularly related to metals.

We continued to invest in new product developments and those activities coupled with restructuring investments, reduced margins by 1 point. Our focus on reducing our fixed and variable cost structure and our innovation initiatives remain core elements of our strategy as we position ourselves for higher margins and faster than average growth as our markets fully recover.

Please go to slide #seven. This slide explains how we compare versus the EPS guidance range we provided in July. At that time, we indicated that we expected to be in the range of $0.70 to $0.80 per share from continuing operations with the midpoint value of approximately $0.75. Revenue was about $30 million over our midpoint, all of that due to FX.

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