Ingersoll Rand Inc.

Good morning. Welcome to the Ingersoll-Rand 2019 Q4 and Full Year Earnings Conference Call. My name is Lindsay, and I will be your operator for the call. The call will begin in a few moments with the speaker remarks and then a Q&A session. At this time, participants are in a listen-only mode. To ask a question during the session, you will need to press star 1 on your telephone. Please limit yourselves to one question and one follow-up. I would now like to hand the call over to Zach Nagel. Vice President of Investor Relations.

Thanks, Operator. Good morning, and thank you for joining us for Ingersoll Rand's fourth quarter 2019 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 Mike Lemock, Chairman and CEO, and Sue Carter, Senior Vice President and CFO. Also joining today's call is Chris Kuhn, Vice President and Chief Accounting Officer, who we recently announced will be succeeding Sue Carter as Chief Financial Officer after her planned retirement post-closing of the reverse Morris Trust transaction with Gardner Denver in early 2020. With that, please go to slide three, and I'll turn the call over to Mike.

Thanks, Zach, and thanks, everyone, for joining us on the call today. Before we begin today, I'd like to take the opportunity to thank Sue for her many contributions to Ingersoll Rand over the past six years as CFO. She's been a terrific business partner and a leader of the finance organization. And while we'll miss her when she retires in the upcoming months, we certainly wish her well in her well-deserved retirement. I'd also like to welcome Chris Kuhn to the call as the future CFO of Trane Technologies. Chris has been a strong business partner and leader at Ingersoll Rand since he joined the company five years ago. Execution of this succession plan is well underway in order to ensure a smooth transition, and he is well positioned for the role. Sue will be with us through the close of the RMT transaction, and we're happy to have both Sue and Chris participate on the call today. Turning to slide three, I'd like to start out today's call with a brief overview of our global business strategy that's enabling us to consistently deliver strong financial results for our shareholders. As we continue to progress towards the close of the RMT transaction and prepare to transition to a pure-play climate company, our strategy remains unchanged. At its core, our strategy is at the nexus of environmental sustainability and impact, which are strong, secular tailwinds for our business. The world is continuing to urbanize while becoming warmer and more resource constrained as time passes. At our core, we are focused on and excel at reducing energy intensity in buildings, 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. Unless you think the world is getting cooler, less populated, and less resource constrained as time passes, these strong secular tailwinds will continue to provide opportunity for shareholders and purpose for our vision. As I look back over the past several years, these secular tailwinds are only growing stronger and have a greater sense of urgency. Moving to slide four. Fiscal 2019 was a great year for Ingersoll Rand with strong execution against all elements of our strategy. We delivered top quartile performance with organic revenue growth of 6%, 70 basis points of adjusted operating margin expansion, and free cash flow generation of $1.8 billion or 118% of adjusted net earnings. We established a leadership role in tackling the world's environmental and sustainability challenges by putting forth our aggressive 2030 sustainability commitments, and we issued this challenge to like-minded companies in order to amplify progress towards a more sustainable future. We invested heavily in our core business, acquired Precision Flow Systems, entered into a game-changing RMT transaction with Gardner Denver, We purchased $750 million in shares and continue to pay a strong dividend to our shareholders, executing against all elements of our capital allocation strategy. The RMT transaction creates a leading industrial company. It also creates a world-class pure play climate control business, which squarely focuses 100% of our portfolio on our sustainability strategy. Finally, we maintain very high employee engagement despite a rapidly changing environment with additional economic and geopolitical challenges, ensuring Ingersoll Rand remains a great place to work for our people. I'm very proud of our teams for delivering these strong results for our customers and our shareholders. In the fourth quarter, our global end markets largely continued to be healthy, with solid revenue growth across North America, Europe, and China. We've highlighted North America Commercial HVAC's growth as a standout all year long, and the fourth quarter was no exception. Year-over-year revenue growth was up high teens in the fourth quarter alone, despite very tough comps in 2018. We've talked about the extraordinary transport business bookings growth in 2018 and the normalization process that's been occurring in 2019 with steep rates of decline in transport bookings in every quarter. This has been a drag on top-line enterprise bookings all year, so we've been providing bookings growth numbers, excluding our TK business, to help you understand the real underlying bookings of the enterprise of the climate business. I hope this information has been helpful to the investment community. In the fourth quarter, enterprise bookings were extremely strong, excluding TK, up high single digits. Climate bookings, excluding TK, were even stronger, up low teens. Net, our underlying business remains very healthy. Our fourth quarter enterprise and climate leverage was lower than our guidance at the end of Q3. The lower leverage in the quarter was a result of three factors. First, revenue in our higher margin transport business declined high single digits in the quarter, or roughly $50 million, deleveraging in line with gross margin rates. In addition, the combination of very strong commercial HVAC growth coupled with transport declines drove incremental negative portfolio mix. The second impact is a good news, bad news story. On the positive side, we had exceptional free cash flow in the fourth quarter that well exceeded our forecast. So on the flip side, we needed to accrue a substantial increase to our full-year incentive compensation plans as a result, which impacted operating leverage. And lastly, we had some unplanned inventory adjustments in the fourth quarter. We know from your pre-call questions that the transport markets are on many people's minds, so we've devoted a fair amount of discussion to this topic throughout the presentation and on a slide near the end. Throughout the year, we've talked about the significant declines in order rates expected in 2019, balanced against the very strong backlog we carried into the year. We expected that the net of the two factors, combined with increasing cancellations in summer and fall, would lead to a mid-single-digit revenue growth for 2019, and year-end backlog that return to more normal levels. We highlighted that Europe was soft throughout 2019 and that we were largely in agreement with the ACT data, which was showing a correction in 2020 in North America trailer, and that November and December 2019 and early 2020 market conditions and order rates are going to be important to really understand how the end of 2019 and 2020 might play out. We closed out 2019 with 3% revenue growth for transport. Overall market demand in November and December did not pick up as much as we anticipated, and fourth quarter revenue is weaker than expected as a result. This knocked a couple of points off our full-year Thermo King growth. We believe the fourth quarter marked the first quarter of what ACT and others believe will be a relatively short-lived down cycle as the booking anomalies of 2018 and 2019 reset, positioning the market for a flat or slightly positive growth profile for 2021. Our industrial businesses continued to execute very well in the fourth quarter. Our leaders remained focused on running the business and employee engagement remained strong, a testament to our culture and the strength of the businesses that will combine with Gardner Denver. In the fourth quarter, our industrial business sought strong margin expansion and a low single-digit revenue decline. Good growth in small electric vehicles was offset by soft short-cycle demand and compression technologies and industrial product. We're seeing excellent payback on the restructuring, operational, and commercial investments we've made in the business over the past few years, as evidenced by our strong margin expansion in the quarter. We believe the business is well-positioned moving into 2020 and for the combination with Gardner Denver. We continued our balanced capital allocation strategy throughout 2019 and in the fourth quarter. The strong free cash flow we're generating continues to provide us with good capital allocation optionality moving forward. Please go to slide five. We exceeded or delivered towards the high end of the range against all of our guidance commitments for 2019 and delivered top quartile performance. Again, I'm extremely proud of the entire Ingersoll Rand team for their hard work and perseverance, navigating through a very dynamic economic in geopolitical landscape in 2019. Please turn to slide six. As we continue to move closer to the close of the RMT transaction with Gardner Denver, we're excited and well-positioned to debut as trained technologies. One hundred percent of our portfolio will be strategically focused on global megatrends and at the intersection of sustainability and advanced technology and innovation. All of our products and services are uniquely positioned to have a real and significant positive impact on reducing carbon emissions. We continue to compete in largely healthy end markets globally, and our strategy provides tailwinds to grow faster than GDP. While we expect the transport market to move through a short-term correction period, we believe this is a great business to be in over the long term. We expect the new train technologies to continue to drive top quartile performance, and we expect to deliver approximately 25% leverage in 2020, despite headwinds from our transport business. We're excited about the new train technologies business and expect to host an investor day in the fall to lay out our long-term strategy and targets. Please turn to slide seven. This slide provides a visual depiction of organic bookings and revenue growth in the fourth quarter. The underlying climate business remains very strong, with broad-based bookings and revenue growth in virtually all businesses and regions. Our compression technologies and industrial products businesses continue to be impacted by soft industrial short-cycle spending, while our small electric vehicle business has continued to deliver excellent growth. The headline enterprise bookings decline of negative 6% does not accurately reflect the underlying strength of the business. Enterprise bookings were up high single digits and climate bookings were up low teens, respectively, when you exclude transport and the very large Q4 2018 commercial HVAC order. Please turn to slide eight. This slide combines our Q4 growth performance with our preliminary view of our major end markets for 2020. I've covered the main points regarding fourth quarter growth on the prior slide, so I'll focus my comments on our preliminary 2020 market outlook. Our global commercial HVAC outlook continues to be positive. Leading economic indicators remain largely supportive of continued market growth in 2020, albeit slower growth than in 2019. We're expecting to see low single-digit market growth for global HVAC, with North American office, government, education, and industrial markets all healthy. In the residential HVAC market, which is a North American market for us, we're expecting to see low single-digit market growth led by continued growth in the replacement markets, which is approximately 80% of our business today. Economic indicators are also largely supporting continued growth. As I discussed earlier, ACT, other data sources globally, and our internal estimates point to transport markets moving through a relatively short-term down cycle in 2020 and a more stable market in 2021. I'll cover this in more detail later in the presentation. Relative to the industrial markets, we continue to see impacts of soft, short-cycle capex spending in the fourth quarter, partially offset by solid growth in small electric vehicles. We expect this to continue through the first quarter of 2020. Through focused execution of our business strategy, we expect our businesses to grow faster than each of the major market growth expectations just outlined. And now I'll turn it over to Sue to provide more details on the quarter. Sue?