Ingersoll-Rand plc (Ireland) (IR)

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Ingersoll-Rand Plc (IR)

Q2 2011 Earnings Call

July 21, 2011 10:00 am ET

Executives

Janet Pfeffer - Vice President of Business Development and Investor Relations

Michael Lamach - Chairman, Chief Executive Officer and President

Steven Shawley - Chief Financial Officer and Senior Vice President

Analysts

Joshua Pokrzywinski - MKM Partners LLC

Jeffrey Hammond - KeyBanc Capital Markets Inc.

Eli Lustgarten - Longbow Research LLC

Scott Gaffner - Barclays Capital

C. Stephen Tusa - JP Morgan Chase & Co

Shannon O'Callaghan - Nomura Securities Co. Ltd.

Steven Winoker - Sanford C. Bernstein & Co., Inc.

Terry Darling - Goldman Sachs

Robert McCarthy - Robert W. Baird & Co. Incorporated

Jeffrey Sprague - Citigroup

Julian Mitchell

Andrew Obin - BofA Merrill Lynch

Mark Koznarek - Cleveland Research Company

Deane Dray - Citigroup Inc

Presentation

Operator

Good day, everyone and welcome to the Ingersoll-Rand Second Quarter 2011 Earnings Conference. Today's conference is being recorded. At this time, I would like to turn the call over to Ms. Janet Pfeffer, Vice President Business Development and Investor Relations. Please go ahead, ma'am.

Janet Pfeffer

Thank you, Christie. Good morning. We released the earnings at 7:00 a.m. this morning and the release is posted on our website, we'll be broadcasting in addition to this phone call through our website at www.ingersollrand.com, where you'll find the slide presentation that we'll be using this morning. This call will be recorded and archived on our website and will be available tomorrow morning.

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 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 18, 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; 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.

Michael Lamach

Thanks, Janet. Good morning, and thank you for joining on today's call. In the second quarter, we delivered revenue of 12% as we saw improving end markets in most of our businesses. We expanded margins 180 basis points and the industrial sector reached record operating margins. Second quarter earnings from continuing operations were $0.88 per share. For the quarter, revenues were $3.9 billion, up 12% versus prior year and 9% excluding currency.

During the quarter, we continue to see strong bookings in Industrial and Climate. Security orders in the quarter were also up double digits, led by very strong bookings in Asia. The one weak spot in terms of orders was Residential, which was impacted by a stagnant housing market and the lack of consumer demand for replacement systems. For the company, orders were up 9%, and 6% excluding currency. Operating margin for the quarter was 12.2%, up 180 basis points, primarily driven by volume, pricing and productivity. Margins were negatively impacted by a decline in residential margins, which I'll talk about more on the next slide.

As anticipated, we began our share repurchase program in late second quarter and we put purchased 1.3 million shares as of June 30. Please go to Slide 4.

3 or 4 businesses had good to excellent performance in the quarter. Industrial reached record margins of 15.6%. We continue to realize pricing across all businesses. In the second quarter, our pricing outpaced direct material inflation, which is 1 quarter or 2 earlier than we had anticipated. We continue to see good margin improvement in the majority of the businesses, and we're at our target of 200 basis points of margin improvement year-to-date.

We saw a strong markets in Industrial, Transport and Commercial HVAC, and the North American commercial security markets appear to be bottoming. We continue to see strong growth in emerging markets and cash generation is on track. The clear disappointment in the quarter was residential both in terms of revenue and profitability. As compared to expectation, we're about $100 million off our prior revenue forecast as the markets softened in the second quarter. The impact on volume and profitability in our business was further exacerbated by the continued downward mix shift in the market toward lower SEER units, and the volume increase of new R-22 to dry-shipped units into the market, where we have very limited participation.

Cost performance on recent product introductions negatively impacted residential's profitability in the quarter. Even though we've gained market share with these new products, the margins are lower than expected as material costs are above our target. We also incurred costs for factory inefficiencies as we are running both old and new production lines during the Residential product transitions. We've taken and will continue to take significant actions to address these issues. We have a calendarized material costs and labor efficiency roadmap to get the business back on track, and some of the strongest people in the company are leading these efforts.

Turning to an update on Hussmann. In April, we announced our intent to divest the Hussmann Stationary Refrigeration business, that we would close the deal by the end of the third quarter. Given that we remain engaged in the process, we're not going to comment further today regarding expected proceeds, participants and the process or a specific timing, other than to say we remain on track to our initial timeline. Our plans for the proceeds remains focused on share repurchase.

Please go to Slide 5. This slide gives a summary of our quarterly order rates for the past 6 quarters. Orders for the second quarter 2011 were up 9% overall, 6% excluding currency. We had a especially strong gains in Industrial Air and Productivity and transport refrigeration, and solid gains in commercial HVAC equipment, services and commercial security. Residential orders declined 6% in the quarter.

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