Ingersoll-Rand plc (Ireland) (IR)

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Ingersoll-Rand Plc (IR)

Q4 2011 Earnings Conference Call

February 8, 2012 10:00 ET


Janet Pfeffer – Vice President, Business Development and Investor Relations

Mike Lamach – Chairman, President and Chief Executive Officer

Steve Shawley – Senior Vice President and Chief Financial Officer


Steve Tusa – JPMorgan

Nigel Coe – Morgan Stanley

Andrew Obin – Bank of America

Terry Darling – Goldman Sachs

Shannon O'Callaghan – Nomura

Julian Mitchell – Credit Suisse

Steven Winoker – Sanford Bernstein



Good day, ladies and gentlemen, and welcome to the Ingersoll-Rand Fourth Quarter 2011 Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a remainder, this conference is being recorded.

I would now like to introduce our host for today Ms. Janet Pfeffer, Vice President of Business Development and Investor Relations. Ma'am, please go ahead.

Janet Pfeffer – Vice President, Business Development and Investor Relations

Thank you, Karen good morning everyone, welcome to Ingersoll-Rand's fourth quarter 2011 conference call. We released 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 where you will find a slide presentation that we will 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. Statements made in today's call that are not historical facts are considered forward-looking and are made pursuant to the Safe Harbor Provisions of Federal Securities law. Please see our SEC filings for a description of some of the factors that may cause results to vary materially from anticipated.

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.

Mike Lamach – Chairman, President and Chief Executive Officer

Thanks, Janet. Good morning and thank you for joining us on today's call. Before we dive in on the fourth quarter results, I'd like to take a couple of minutes to put the full year 2011 in context and Steve will take you through the quarterly results and finally I'll discuss our guidance for 2012. In 2011, we experienced a challenging economic backdrop in some of our key markets, remindful of the performance challenges we faced in the residential business, hindered our ability to reach our original earnings goal for the year. Notwithstanding significant hurdles some from the market and some within our businesses that we have corrected, we are pleased with the progress we made this past year in several important areas.

In 2012, despite a significant decline of revenues and profits at Residential and slightly lower volumes at commercial security and we achieved a revenue increase of over 8% including double-digit revenue growth at Industrial, Thermo King, and Trane commercial HVAC equipment. We also recorded significant growth overseas, helping us to offset weakness in non-residential and residential construction activity in North America. Our strategy to focus on innovation continued to deliver with the percentage of revenue from innovation jumping from 13% in 2008 to 23% in 2011.

Productivity gains combined with positive impacts from our pricing strategy have led to improved operating margins, which were up 1.3 percentage points. That includes significant progress in the operating margins of the Climate and Industrial segments, both up over two percentage points. Essential component of that margin improvement is our focus on steadily improving operational excellence. To this end in 2011, we continue to enhance quality and reduce our manufacturing footprint, the number of suppliers, cycle times and functional costs. Productivity savings added about $400 million to operating income, despite almost no contribution from our Residential business. Full year earnings per share of continuing operations were up 19% to $2.82.

We are also making good progress in restoring the health of our balance sheet and generated $944 million of available cash flow. We are shaping our portfolio of businesses for improved growth and value creation with our action in Hussmann is an example of those. A solid balance sheet and cash flow supported our buyback and dividend programs. We initiated share repurchases in June 2011, purchasing 36 million shares by year-end. We increased our dividend by another 33%, following a 71% raise earlier in the year.

Please go to slide 4. Excluding Hussmann, we saw 130 basis points of operating margin improvement in the year. As we can see, both Climate and Industrial expanded margins by over 200 basis points. We made substantial progress there, particularly in price cost and volume conversion. Residential was a significant drag to our performance with margins down almost 600 basis points on lower volume, poor mix and operational inefficiencies, some self-inflicted, which are now fixed. We've executed the program we laid out in mid 2011 for Residential according to plan, where we entered the market with an R-22 product in August. Get well action for the product launches have proceed on schedule and we have met cost targets. In the fourth quarter, we took 410A inventory levels down by almost $90 million, $10 million more than our original target and had opened 2012 with levels more aligned to the market. And finally commercial security essentially held margins and flat physical volumes.

Please go to slide five. We have steadily improved the flow of new products and services to the market and innovations across all sectors and regions. About 13% of our 2008 revenues were generated from products and services introduced in the last three years. Our initial target for 2011 was 20% of revenues, which we’ve exceeded ending the year at 23% of revenues and our goal for 2012 was 25%. So innovation will continue to be an important product of our strategy going forward.

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