IR
#Please go to slide number 6. I'd like to begin with a summary of main points to take away from today's call
As <UNK> discussed, 2016 was a very strong year for Ingersoll-Rand and marked another year of continued top tier performance on free cash flow, organic revenue growth, operating margin improvement and earnings per share growth
While we recognize the fourth quarter contained more one-offs and noise than any of us would have liked and distorted our fourth quarter earnings report, fundamentally, it was still a strong quarter for the company relative to our core businesses
There shouldn't be any significant read through to our go-forward results
Free cash flow was more than $350 million in the quarter, bringing our 2016 free cash flow to $1.35 billion, which is up 37% versus 2015 or more than 120% of our adjusted net income
From a segment perspective, the combined Climate and Industrial segments' adjusted operating income results were solid and a bit better than our expectations for the quarter
Our bookings performance was very strong, with commercial and residential HVAC leading the way, with both at low teens growth
Residential revenues increased low teens
Operating margins also expanded in both businesses
We were pleased with our Industrial business performance which showed slow but steady adjusted margin improvement after hitting a low in the first quarter
We continued to take additional actions on operational excellence initiatives, increased commercial focus on aftermarket parts and service offerings, and took additional cost reduction activities to improve operating results going forward
EPS in the quarter was negatively impacted by discrete items in G&A, negative other operating income and taxes, as I'll discuss on the next slide
Please go to slide 7. We've provided a bridge from the fourth quarter guidance range we provided on our Q3 earnings call to our actual Q4 results
As I noted earlier, our segment operating performance was in line with our expectations, actually about $0.01 better
We incurred higher than expected corporate costs, primarily due to stock based and other incentive based compensation, given our strong cash flow performance and stock performance in 2016 and from increased information technology, infrastructure and security expenditures
These items combined for a negative impact of about $0.04. We expect our corporate G&A expenses to come back down to a more normalized run rate of about $60 million per quarter in 2017. We also incurred higher than expected non-operating cost as a result of foreign exchange losses related to the balance sheet, given the strengthening of the US dollar, which had a non-cash impact of $0.01. Lastly, we had a higher than expected mix of earnings from high tax jurisdictions which impacted us by about $0.03. While this was a significant negative in the fourth quarter, our adjusted tax rate for the year of 21.4% was on the low side of the 21% to 22% range we updated on our second quarter call
I feel good about the effective tax rate
And more importantly, we expect the rate to remain in the 21% to 22% range for 2017 as well
Please go to slide number 8. Top-line organic growth of 2% was solid, highlighted by our North America HVAC businesses
Operating margins and adjusted operating income plus depreciation and amortization were both down, primarily driven by Industrial segment margin declines and the higher than expected costs we previously discussed
Please go to slide 9. Organic orders were very strong in the fourth quarter, up 7%, led by our Climate segment and partially offset by modest declines in our Industrial segment
Climate bookings were up in every region in business globally and up 10% overall
Organic commercial HVAC bookings were up low teens in equipment, with strong results from both unitary and applied products
We also continued to drive excellent growth in service, controls and contracting with low teens growth in the quarter
Residential bookings continued to be exceptional, up low teens
Organic transport orders were up mid single digits, primarily driven by growth in Europe, partially offset by declines in marine equipment and auxiliary power units
We also had mid single digit increase in North America trailer orders in the fourth quarter
On balance, the Industrial businesses bookings were flat to down slightly in the quarter, reflecting some stabilization in end markets
Please go to slide number 10. This slide provides a directional view of our segment revenue performance by region
In our Climate segment, revenue was strong in North America, flat in Asia and down in Europe, Middle East and Africa and Latin America
In our Industrial segment, overall performance was down low single digits, primarily due to difficult comparisons with 2015 on large air compressor shipments in North America and Europe, Middle East and Africa
Revenues improved in Latin America and Asia
Overall, North America revenues were up mid single digits and international revenues were down mid single digits, netting a positive 2% organic revenue growth rate for the enterprise
Please go to slide number 11. Q4 operating margin declined 50 basis points, primarily due to headwinds resulting from material inflation in steel and higher corporate costs in the quarter
On a year over year basis, lower Industrial margins also contributed to the decline
Volume and mix was positive in the quarter
Please go to slide number 12. Overall Climate performance was strong in the quarter with organic revenues up 4% and adjusted operating margins up 70 basis points to 13.6%
Strong revenue growth in both commercial and residential HVAC was partially offset by transport revenues, which were down mid single digits in the quarter, primarily due to weak auxiliary power unit and marine markets partially offset by growth in aftermarket and in Asia
Climate operating margins expanded 70 basis points year over year
Favorable volume, mix and productivity was partially offset by material inflation headwinds and continued investments in the business
Please go to slide 13. Fourth quarter industrial margins declined by 220 basis points compared with 2015, while organic revenues declined 3%
Revenues were down mid single digits in compressors with growth in aftermarket
Other industrial products were down by high single digits with material handling showing the largest decline, more than 50%, owing to its significant oil and gas exposure
Small electric vehicles were up slightly in the quarter from growth in golf
Industrial's operating margin of 10.5% was down 220 basis points versus the prior year, but in line or slightly ahead of our expectations for the quarter
Looking forward, we expect margins to improve in 2017, given ongoing margin improvement actions, although we do expect some quarterly variability due to cyclicality
Please go to slide 14. Excellent full year 2016 free cash flow of $1.3 billion improved 37% versus the prior year and was over 120% of net income
Strong operating income and working capital improvement were the primary drivers of the improvement
For the quarter, working capital as a percentage of revenue was 3.4% versus our 2016 goal of 4% and improved 80 basis points versus 2015. We have a proud history returning cash to shareholders
Since 2011, our free cash flow as a percentage of net income has averaged 100%
Over the same timeframe, we've returned more than $6.5 billion in cash to shareholders through dividends of $1.5 billion and share buybacks of $5.1 billion
Please go to slide 15. Our strong cash performance in 2016 will enable us to, one, invest in our business as our number one priority
These include investments in innovation and in strategic growth programs as <UNK> outlined earlier
In addition to the core strategic investments, we're also investing in long-term growth through innovative and differentiated products in areas such as wireless, controls for buildings as a resource, intelligent monitoring and self-healing systems, just to name a few
Two, we've paid an annual dividend for 106 years and have consistently raised this dividend over time
Over the past five years, we've raised our annual dividend at a 20% compound annual growth rate
In 2016, we raised our annualized dividend from $1.16 to $1.60 per share or nearly 40%
Three, we also spent $250 million repurchasing sweeping shares sufficient to offset dilution
Four, additionally in 2016, we continued to develop and vet a pipeline of potential acquisition targets
And five, lastly in 2016, we strengthened our balance sheet, which provides stability and optionality as our markets evolve
We also maintain a BBB credit rating, which at this time we believe is appropriate for the company
We will continue to create long-term value for our shareholders through a dynamic capital allocation strategy as we have consistently done for years
And with that, I will turn it back to <UNK> to discuss our market outlook as we begin our guidance conversation
Thanks, <UNK>
Please go to slide 18. Moving on to our guidance, we expect total organic revenues to be up approximately 3% in 2017. We expect the Climate segment to continue to show good growth of approximately 4% organic
For the Industrial segment, we expect the markets overall to be pretty flat, but for our organic revenues to be down slightly given the high volume of large compressors we shipped out of backlog in 2016, which will make for tougher compares in 2017. The difference between our organic and reported revenue contemplates about 1 percentage point of negative foreign exchange from a strengthening US dollar outlook
For the enterprise, we expect adjusted operating margins of between 12.2% and 12.6%
We expect adjusted operating margins for the Climate segment to be in the range of 14.5% to 15%, and in the range of 11% to 12% for the Industrial segment
Please go to slide 19. We expect continuing adjusted earnings per share for 2017 to be in the range of $4.30 to $4.50 excluding about $0.15 of restructuring
The company also provides the following guidance
Share count is expected to be approximately 262 million shares
Target free cash flow is 100% of net income
The tax rate is expected to be between 21% and 22%
Corporate, general and administrative expenses are expected to be approximately $240 million and capital expenditures are expected to be approximately $250 million
Please go to slide 20. Relative to the company's plans for capital allocation investing, in the business is our highest priority, so we continue to make investments in innovation and growth in things like wireless and digital and connected capabilities, productivity, sustainability and in our employees just to name a few areas
Paying a highly competitive dividend is also a key priority for us and based on our most recent dividend raise last October to $1.60 per share, we expect to spend approximately $420 million on dividends in 2017. In 2017, we're also targeting spending approximately $1.5 billion between a combination of share buybacks and acquisitions
Maintaining a strong balance sheet also remains a priority and provides us optionality as our markets continue to evolve
Let's go to slide 21. And now, I'd like to turn the call back over to <UNK> to discuss a few of the key topics we know are on the minds of investors as we enter 2017.
Good morning
Shannon, that's a great question for us
Free cash flow was really strong in 2016 because we really focused on all of the basic fundamentals
What we wanted was we wanted our operating income to flow through to cash flow
So, we were very focused on making sure that on the accounts receivable side that our terms for our customers were balanced with our terms for our suppliers
We went after disputes
We went and talked to our customers that had past-dues
We worked with the supply base on accounts payable terms, and we also did a lot of work on our inventory processes as part of the business operating system
So we really, really focused on getting the operating income to drop through, getting the working capital to a level that was not only good, but also sustainable
And then our spending on other items, we didn't limit anything on CapEx, to your point
We didn't do anything like that
We asked for good investments as a part of the business
So, we actually used free cash flow in a very good way in 2016 and we had a very good result
And I think another point to give you on – not only was free cash flow excellent based on the performance of each of our businesses and the corporate folks, but it was also pretty evenly measured throughout 2016 as opposed to being a very lumpy free cash flow
So, I think everything came together for that in 2016.
No
There was really nothing that was unusual about the 2016 performance, <UNK>
What I did as I looked at 2017 is I did a couple of things
One, on working capital, I was really allowing working capital to go back up to around the 4% level, and I'll tell you why
As our markets are a little bit lumpy, choppy, some of them recovering, I want to make sure that our businesses have the option to have inventory on hand so that not only can we meet customer requirements, but that we can meet on-time delivery requirements
So, I'm giving us room for a little more working capital and really I'm primarily talking about inventory in terms of 2017. The other part of that is our capital expenditures are actually going up a bit year over year
I gave you a guide of $250 million
And really the majority of the increase in the CapEx year over year is really in our factories, in productivity producing projects and things like primarily precision machining and in the factory
So, I gave a little room for all of that and that really takes it down to the $1.1 billion to $1.2 billion level
Sure, <UNK>, let me start out and give you some basic parameters around this
So we knew going into Q4 that we were going to be in an inflationary environment for steel
Pricing did not offset the inflation in the fourth quarter, so we were down 40 basis points as you saw on the slides and heard from our commentary
As we look at 2017, we've got that currently pegged at price over material inflation at about 10 basis points
Really working towards trying to get back to our norm of 20 to 30 basis points
But let me talk a little about what's happening in 2017. So if you think about what drives the material inflation, it's really all around steel, the nonferrous, so the copper and the aluminum
First of all, we're locked about 68% on copper going into 2017, but those should be relatively flat, so neither inflationary or deflationary as we see it right now
Steel has two components to it, one of which is just the raw commodity that's there
And then an even bigger part of that is actually the Tier 2 materials that contain steel that become inflationary
And one of the questions that I ask our group and wanted to pass on as we think about that is, my question was can we just really negotiate with the supply base
And part of this is really on how we've done contracts and written in escalation clauses
So long story short, steel and components that contains steel are going to be inflationary in 2017. And like I say, we'll continue to work price as we go throughout the organization
Now, when you think about price and you think about different areas, we've been successful at getting price in both of our segments in 2016. And I think we'll get price in both segments in 2017. Asia is going to be tough
That one's an interesting market
Some of the others, again price is not for us just a catalog and a price on a particular item
We're baking price into every engineered to order type of project as we go along
So again, pricing is going to be a work in progress
I think there is going to be a little pressure on that as we go into 2017, but inflation comes from steel
And I would add just a little bit to that, <UNK>, in terms of if you look at the full year of 2016, we started out the year, and we obviously talk pretty regularly to all of the teams around the company
And we really said, don't let our costs get out ahead of what the revenue profile is
So if you looked at corporate costs for really the first three quarters of 2016, you would see that our run rate was actually under what would be typical for a $240 million year
That doesn't mean that because you're under, you should go out and do some things
But it also adds to part of the thinking, when you get to an area where you have some items that you need to spend money on, you go forward and say for the year, our costs, whether it's in IT, whether it's in legal, HR, finance, whatever part of our functional spending are actually flat from 2015 to 2016 and actually will be flat into 2017. So, there's also a little bit of a timing element that is a part of that too
Doesn't explain the difference in the guidance, but I also wanted to give you some context of what we were thinking as we went into the fourth quarter
No, <UNK>
I think the comment that we were actually making, and perhaps we didn't make it as well as we thought, was that what we didn't want anyone to do was to take and draw a straight line on margin improvement each and every quarter in the industrial business
We were saying that it could be a little bit lumpy from quarter to quarter, and would follow its typical pattern
So we just didn't want anybody to get concerned if there was some variation there
So, it was a pretty simple comment that might have been confusing
And I think, <UNK>, from you asked the question on SEER
So as we went through 2016, the 14, the 13 and 14 SEER kind of combined for roughly about 50% of our revenues, and then the 15 SEER and greater was a smaller percent
So really, what you saw was the 13 SEER go into the 14 SEER product and the 15 SEER and above sort of stay the same
Cash flow
