Ingersoll Rand Inc.

Welcome to the Ingalls Sol Rand 2018 Q4 Earnings Conference Call. My name is Tiffany, and I will be your conference operator today. The call will begin in a few moments with the speaker remarks and the Q&A session. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. We ask that you please limit yourself to one question and one follow-up. Thank you. Zach Nagel, Vice President of Investor Relations. You may begin your conference.

Thanks, Operator. Good morning, and thank you for joining us for Ingersoll Rand's fourth quarter and full year 2018 earnings conference call. This call is being webcast on our website at IngersollRand.com. where you'll find the accompanying presentation. We are also recording and archiving this call on our website. Please go to slide two. 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. Please see our FCC filings for a description of some of the factors that may cause our actual results to differ materially from anticipated results. This presentation also includes non-GAAP measures which are explained in the financial tables attached to our news release. Joining me on today's call are Michael Mach, Chairman and CEO, and Sue Carter, Senior Vice President and CFO. With that, please go to slide three, and I'll turn the call over to Mike. Mike?

Thanks, Zach, and thanks to everyone for joining us on the call today. Please go to slide three. Before discussing our fourth quarter and full year 2018 results, I'd like to begin with a brief review of of the fundamental elements of our business strategy that underpin our financial performance and create value for our shareholders. First, our global business strategy is at the nexus of environmental sustainability and impact. The world is continuing to urbanize while becoming warmer and more resource constrained as time passes. We excel at reducing the energy intensity in buildings and industrial processes, reducing greenhouse gas emissions, reducing waste of food and other perishable goods, and we excel in our ability to generate productivity for our customers, all enabled by technology. Our business portfolio creates a platform for the company to consistently grow above average global economic conditions, aided by the strong secular tailwinds I've outlined. Second, our business operating system is designed to excel at consistently delivering strong top-line growth, incremental margins, and free cash flow. And lastly, Over the years, we've built an experienced management team and a high-performance winning culture that makes our performance sustainable. When combined with our dynamic capital allocation strategy, we have a differentiated business model that drives strong shareholder returns over the long term. Turning to slide four, focused and consistent execution of our business strategy enabled us to deliver top-tier financial performance in 2018. We delivered top quartile organic bookings and revenue growth in each quarter and closed out full year 2018 with 13% organic bookings growth and 9% organic revenue growth for the enterprise. Adjusted earnings per share growth was also top quartile, up 24% for the year and up 29% in quarter four. Despite persistent material and other inflation and tariff-related headwinds, our team successfully developed and delivered pricing and productivity actions that enabled us to effectively manage these costs and drive improved leverage and solid margin expansion throughout the year. Importantly, at the end of quarter two, we set out to achieve significantly improved leverage of 25 percent in the second half of 2018. And the team delivered against that objective, while at the same time delivering record organic bookings and record revenues. Additionally, we achieved 10 basis points positive price cost for full year 2018, with six city basis points of enterprise adjusted operating margin expansion, while at the same time continuing our healthy pace of incremental business investment, which is core to our ongoing differentiated operational and financial performance. Pre-cash flow for the year was 82% of net income, which lagged our 100% conversion target. The largest component of the shortfall is related to funding working capital above normal levels through the end of the year in order to meet growing customer demand for our products and services. We also funded additional CapEx for high ROI projects beyond what we expected when we entered the fourth quarter. We've delivered an average of 110% free cash flow to net income conversion over the past four years, and we expect to return greater than 100% in 2019. Lastly, in 2018, we also continued to execute our balanced capital deployment strategy. After investing in the business, including $366 million in capital expenditures, largely related to footprint optimization and plant consolidation, we deployed approximately $1.7 billion between dividends, share repurchases, and mergers and acquisitions. Turning to slide five, our performance against our initial guidance expectations was strong, with the exception of free cash flow, which I discussed earlier. We significantly beat on both the top and bottom lines and delivered strong margin expansion while managing inflation and tariff-related headwinds and making healthy investments in the business. Turning to slide six, the focused execution of our business strategy is delivering differentiated results in the marketplace and for shareholders, and we will maintain this focus going forward. Looking at 2019, we see the fundamental ingredients for another strong year. First, Our end markets generally remain healthy, and I'll address that in more detail on the next couple slides. Second, we're entering 2019 with record backlog in multiple business units after achieving exceptional bookings throughout 2018. This provides us with improved visibility into what to expect for 2019 revenues relative to where we'd have traditionally been at this stage in the year. Third, in 2018, we demonstrated our ability to effectively manage inflationary and tariff-related headwinds through pricing and productivity. Combined with higher expected volumes, we expect this to enable us to continue to deliver solid leverage, improving margins, and strong EPS growth in 2019 as we did in 2018. For 2019, we're expecting free cash flow to exceed adjusted net income. We will continue to execute a dynamic capital allocation strategy that deploys capital where it earns the best returns. This includes organic investments, dividends, mergers and acquisitions, and share repurchases. On the M&A side, we have an active pipeline of attractive opportunities that would be a strong fit with our core business strategy. If or when these become actionable and affordable, we're in a strong position to execute any transactions. We also continue to see value in our own shares, which are trading well below calculated intrinsic value. Lastly, based on our performance in 2018 and our guidance for 2019, we're firmly outpacing the glide path to achieving our 2020 investor day revenue growth, EPS, and free cash flow guidance that we laid out during our mid-year 2017 investor day. Given the tremendous amount of inflation and tariffs the industry has endured over the last two years, We're moving along that glide path a bit differently than what we expected in 2017, but we're well ahead of the curve nonetheless. Turning to slide seven, our end markets continue to show strength throughout the fourth quarter, and 2019 appears to be shaping up as another solid year. In commercial HVAC, the markets remain strong in virtually all geographies, and we delivered strong bookings growth and revenue growth across the product portfolio. Europe has shown mixed economic signals over the past few months, but HVAC activity remains healthy there as well. China had a solid quarter in HVAC with good growth in both equipment and services. Our direct sales strategy in China continues to progress well against our expectations, and we're making good inroads at a number of verticals, including infrastructure, which has been a key focus for us and continues to be one of the strongest verticals. The situation remains fluid with trade war uncertainty, But at this point in the year, we're still expecting to see modest market growth and market share expansion opportunities in China. Outside of China, the Asian markets are mixed. In total, our global outlook for the commercial HVAC market continues to be positive with low single-digit to mid-single-digit market growth expected. Turning to residential, quarter four was another very strong quarter for us with continued share gains. Growth was primarily driven by replacement demand, and we expect the majority of the market growth to come from the replacement market in 2019 as well. This plays well into our business mix, which is about 85% replacement. Economic indicators have softened modestly, but are still healthy and supportive of growth for the year. Turning to slide eight, our transport business continues to be a globally diversified and resilient business with good growth opportunities across multiple areas. In 2018, we saw exceptional order growth for North American trailers and auxiliary power units, and we've built a healthy backlog as a result. In 2019, a strong backlog position for these businesses gives us solid visibility into revenue growth for the year as we work to convert this backlog to revenue over time. The European transport markets are mixed with trailer a bit weaker and truck a bit stronger as Brexit uncertainty is impacting these markets. We think additional clarity around this topic would be a positive catalyst. Overall, we're expecting low single-digit to mid-single-digit market growth for transport refrigeration in 2019. Our compression technologies business had good growth globally in the fourth quarter, with North America and Europe healthy. We continue to see trade war uncertainty impacting projects in China. Global services growth continued to outpace equipment growth in the fourth quarter, which is a positive and is well supported by multiple service initiatives focused on increasing attachment rates of services to equipment and increasing our share of wallet of total services provided within accounts. All things considered, we expect to see low single-digit, mid-single-digit growth in the compression technologies market in 2019, with China being the main area to watch closely. Small electric vehicle growth continues to be powered primarily by our consumer and utility businesses. We expect to see healthy growth in 2019. Our industrial products businesses, including fluid management, tools, and material handling markets remain healthy, and we expect to see continued solid growth in these businesses in 2019. And now I'd like to turn it over to Sue to provide more details on the quarter and discuss our 2019 guidance. Sue?