Ingersoll-Rand PLC Earnings Call INSIGHTS: Margin By Segment, Price Cost

On Friday, Ingersoll-Rand PLC (NYSE:IR) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Margin By Segment

Andrew Casey – Wells Fargo: Question on, in the past you have given us margin by segment could you help us with that. I’m just trying to see where the difference is in – kind of a modest second half decrease and most of it is probably what you described already, but if you could help with the margin that would be nice?

Michael W. Lamach – Chairman, President and CEO: Margin, Andy, in that business for the balance of the year?

Andrew Casey – Wells Fargo: Yes, please.

Michael W. Lamach – Chairman, President and CEO: Margin for the balance of the year?

Andrew Casey – Wells Fargo: Yes, please, Mike.

Michael W. Lamach – Chairman, President and CEO: Sure. Let me start. Climate again, we would look at ex-FX, let me do it all-in reported flat to 2% growth in Climate for the full year. I expect flat to modest improvements in margin in Climate for the full year. I think they are doing a nice job of offsetting some of the TK declines with improvements in train business. Industrial, I would think you’d see 2% to 4% growth for the full year and here I think you’ll see margin expansions similar to what you have seen in the first couple of quarters. So a good margin expansion there throughout the balance of the year, something in the maybe 120 to 150 basis point range for the full year. Residential, there is really no change (from) there, 1% to 3% growth and we are looking for a 200 basis points of growth here. Last year they did about 3.1%, this year they should be just little bit better than 5%. In Security, we would look to see revenues flat to perhaps minus 3, and margins to be essentially flat with last year.

Andrew Casey – Wells Fargo: Just a couple of follow-ups, in Residential did you realize any pricing as of July for the HVAC side?

Michael W. Lamach – Chairman, President and CEO: Did we realize price July. We realized pricing in the quarter. We had good pricing in the quarter. Then we had made some adjustments to price not across the board, beginning in July for certain products, which we’re pretty early in that process to see what will stick and what not.

Andrew Casey – Wells Fargo: Mike, is that included in the new 1 to 3?

Michael W. Lamach – Chairman, President and CEO: Yes.

Price Cost

Jeffrey Hammond – KeyBanc Capital Markets: Just on price cost, it seem like a pretty big positive in the quarter. Can you give a little more granularity on where that was coming from, where you might be seeing relief and how you see that playing out in the second half?

Steven R. Shawley – SVP and CFO: I think as Mike mentioned earlier, that we were pretty pleased with what the Climate Group was doing to offset some of the mix issues with TK. Climate was really kind of the stand out there. Good price realizations across the businesses in Climate. Security is continuing to do well there. Security has done a great job of maintaining their margins throughout pretty tough markets for the past – now coming up on full years. So, they have the price and productivity and so they’ve been able to realize pretty decent price as well. I would say this is kind of across the board. (ITS’s) price levels have held in there, they are contributing to the positive delta over direct material inflation. And then also as Mike said, we are starting to see some improvement in the Residential side. So, I would say, if you boil it down in sort of the Climate, Security, Industrial and then Residential kind of doing better.

Jeffrey Hammond – KeyBanc Capital Markets: So, it is more price traction than any kind of benefit from commodity deflation or…?

Steven R. Shawley – SVP and CFO: We are starting to see some benefit from commodity deflation. It is about on track with where we thought for the guidance for Q2, it is going to get a little bit better in Q3, but most of the delta here is on price side it’s really not coming from the – if inflation is abating, no questions about that, but if the delta margin is coming from just better price realization.

Jeffrey Hammond – KeyBanc Capital Markets: And then just quickly on Residential, I mean you had pretty good orders first quarter and now second quarter and the revenue growth continues to be muted. Can you just kind of talk through the disparity there and then can you also talk about mix within the bookings?

Michael W. Lamach – Chairman, President and CEO: Sure, Jeff. First, I got to tell you that we are really pleased with what we saw, the revenues were and margins both spot on the forecast that it gave us for the quarter. The new products went well. I think, they’ve addressed the issues they were facing. At this time last year very nicely, in fact, I would say is, we were – when you are looking at this couple of quarters ago, I had hope to be in a position in July to tell you, and I am at the disposition here in July to tell you, I think they’ve done an outstanding job, there will – I hope will be in terms of their progress. What we’re seeing here is that, the launch of the new price point product, the lower price point product, the brand and just the mix that we’ve had with R22 has caused unitary volumes to be up kind of higher single-digits for us, driving a much, much lower mix. So when you look at us on a total MBU or on a volume basis, we’re at line or maybe even above the market. We haven’t seen the market yet through the month of June. The actual data and reports, the third party reports, but I would expect we are at line or just above that, but on a revenue basis, of course it puts pressure on the fact that we’re really not selling from a mix perspective to higher efficiency systems that we were two years ago. The other thing about Ameristar, which I think is interesting too; we had a whole different approach to how we launched that product this year. We took it as a methodology of allocating the product in advance. We wanted to really create pull from distribution as opposed to pushing another low price point product out in the marketplace. So what it allowed us to do is, we were able to sort of exactly forecast the demand we wanted to see for the product, build to that demand and ensure that we sold exactly to that demand levels and so as we had demand that exceeded that, in some cases we did. We were sure to prioritize first with those that had taken the pre-allocation on the products, so that worked extremely well for us as a model entering the market.