Ingersoll-Rand Plc (IR)

Q3 2011 Earnings Call

October 20, 2011 10:00 am ET

Executives

Janet Pfeffer - Vice President of Business Development and Investor Relations

Michael W. Lamach - Chairman, Chief Executive Officer and President

Steven R. Shawley - Chief Financial Officer and Senior Vice President

Analysts

Robert F. McCarthy - Robert W. Baird & Co. Incorporated, Research Division

Joshua C. Pokrzywinski - MKM Partners LLC, Research Division

Nigel Coe - Morgan Stanley, Research Division

C. Stephen Tusa - JP Morgan Chase & Co, Research Division

Jason Feldman - UBS Investment Bank, Research Division

Julian Mitchell - Crédit Suisse AG, Research Division

Terry Darling - Goldman Sachs Group Inc., Research Division

David Raso - ISI Group Inc., Research Division

Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division

Presentation

Operator

Good day, everyone, and welcome to the Ingersoll-Rand Third Quarter 2011 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Janet Pfeffer. Please go ahead.

Janet Pfeffer

Thank you, Robert. Good morning. Welcome to our third quarter 2011 conference call. We released earnings at 7 a.m. this morning, and the release is posted on our website. We'll be broadcasting in addition to this call through our website at ingersollrand.com where you will find the slide presentation that we will be using this morning.

If you would, please go to Slide 2. Statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant Harbor Provisions of federal securities laws. Actual results may differ. Please see our SEC filings for a description of some of the factors that may cause results to vary from anticipated. In addition, please refer -- now I would like to introduce the participants on today'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 W. Lamach

Thanks, Janet. Good morning, and thanks to all of you for joining us on today's call. During the call today, I'll discuss our third quarter results as well as discuss the recalibration of our guidance as we continue to manage against the very real headwinds of this economy. Steve will dive deeper into some of the quarterly results as well.

In the third quarter, we delivered revenue growth of 5% and 7%, excluding the Hussmann refrigeration business that we sold on September 30. Third quarter earnings from continuing operations were $0.81 per share, that's $0.04 above our revised midpoint guidance range. The sectors were essentially on a revised forecast, and the positive variance above the revised range was principally from lower corporate costs and positive foreign exchange gains, and market activity was mixed across the business.

During the quarter, we continued to see strong bookings in Industrial, Air and Productivity. We had healthy bookings in commercial HVAC, although we did start to see equipment orders in Europe and North America tempered toward the end of the quarter. Transport demand moderated in the quarter.

Global Security orders in the quarter were up 4% led by strong bookings in Asia. However, North American Security orders were flat as the commercial construction recovery, which was expected originally to be in the back half of 2011, has clearly pushed out especially for our key institutional markets.

Residential orders, impacted by a stagnant U.S. housing market and lack of consumer demand. R-410A replacement systems were down year-over-year. The company orders were up 4% and 3%, excluding currency. Hussmann orders were down versus last year and depressed total order growth by almost 2 points.

Operating margin for the quarter was 11.3%. That's up 30 basis points. The improvement was significantly below the margin improvements we have achieved in the past several quarters and look to achieve in the future. While the margins improved from pricing and productivity, they were depressed by a year-over-year decline in revenues in Residential HVAC, Club Car and Hussmann and further by adverse mix in Residential HVAC and commercial security.

We continue to realize price across all businesses. In the third quarter, our pricing outpaced direct material inflation for the second consecutive quarter. On September 30, as expected, we closed the sale of a majority stake in Hussmann to CD&R for gross proceeds of $370 million. The proceeds are being used towards our share repurchase program, and available cash flow is expected to be about $1 billion for the year.

We continued our share repurchase program and have repurchased over 17 million shares as of September 30, and about 22 million shares as of yesterday. Revenue and profitability performance in Residential HVAC had a significant impact on the quarter, so I want to take a few minutes to update you on the market and our actions to address our market position and profitability.

The R-22 dry-ship loophole continues to have a significant impact on the residential HVAC industry. And as a result of the loophole, R-22 units made up 25% of the markets out or units shipped in the quarter. 410A demand softened significantly in the third quarter.

Industry motor-bearing unit 410A shipments were down over 15% in the quarter versus the prior year. Based on our discussions with the EPA, we believe the loophole will likely stay in place through 2012 and therefore, we began producing R-22 units in mid-August. We were able to quickly bring production to the needed run rate. Given the timing of the season, however, R-22 shipments will have a minimal impact on our revenue until we are -- through next year's cooling season.

The impact on our business was further exacerbated by the continued downward mix shift by consumers to lower SEER, lower cost, less-featured systems.

Our Trane business model has traditionally been built around providing premium products, customer support and efficiency levels. We believe this is a medium- to long-term shift in consumer behavior and are making the necessary adjustments to adapt our products and business model to this trend. Given lower 410A volumes, we made a conscious decision to bring down 410A inventory levels by more than 20 days by year end through reducing build rates in the factories, which resulted in unabsorbed costs, impacting margins in the third quarter. This will continue in the fourth quarter.

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