Good morning. Welcome to the Ingersoll Rand 2019 Q4 and full year earnings conference call. My name is Lindsey 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. [Operator Instructions]. I would now like to hand the call over to Zac Nagle, 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 will 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 SEC 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 Lamach, Chairman and CEO and Sue Carter, Senior Vice President and CFO. Also joining today's call is Chris Kuehn, 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 will turn the call over to Mike.

Thanks Zac and thanks everyone for joining us on the call today. Before we begin today, I would like to take the opportunity to thank Sue for her many contributions to Ingersoll-Rand over the past six years as CFO. She has bee a terrific business partner and a leader of the finance organization and while we will miss her when she retires in the upcoming months, we certainly wish her well in her well-deserved retirement. I would like to welcome Chris Kuehn 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 are happy to have both Sue and Chris participate on the call today. Turning to slide three. I would 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 toward the close of the RMT transaction and prepare a 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 the 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.…

Thank you Mike. Please go to slide number nine. I will begin with a summary of a few main points to take away from today's call. As Mike discussed, fourth quarter organic revenues were particularly strong in our climate segment with consistent focus on sustainability and energy efficiency for our customers. Our climate segment delivered organic revenue growth of 7%, compounding on 9% growth in 2018. Climate orders were also strong, up low teens, when excluding our transport business that saw outsized order growth throughout 2018 and the approximately $200 million large commercial HVAC order that we specifically called out in the fourth quarter of 2018. In our industrial segment, organic revenues were down 2% on a tough year-over-year comp of 6% in 2018. Small electric vehicles delivered continued revenue growth, which was offset by revenue declines in the soft industrial short cycle markets we mentioned previously. Our team delivered exceptional free cash flow in 2019, up 118% of adjusted net earnings. We have delivered free cash flow in excess of adjusted net earnings consistently over time with a five year average of 107%. Adjusted earnings per share was up 6% versus the year ago period building on 29% growth in 2018. EPS growth was driven by operational performance in both our climate and industrial segments. Importantly, we remain focused on deploying excess capital on our best ROI investments for our shareholders. After reinvesting in our core business through expense in capital in 2019, we deployed $510 million in dividends, $750 million in share repurchases and entered into or completed four acquisitions totaling more than $1.5 billion including Precision Flow Systems and the pending RMT transaction with Gardner Denver. Moving into 2020 and beyond, we expect to continue to generate powerful free cash flow and execute on our balanced capital…

Thanks Sue. Please go to slide 21. The last topic of interest is related to transport refrigeration. While this is a preliminary view based on available forecast and our internal estimates, I will cover both what we are currently anticipating for the major end markets for the transport business and what we expect to see for our Thermo King business specifically. Given the complexity of this topic, we have significantly expanded the level of disclosure on our TK business for the purpose of this discussion. We hope this will be useful in better understanding our outlook for the market and for our TK business. We expect the transport markets to move through a short-term correction period in 2020. We are expecting to see steep declines in North American trailer and APU and mid single digit declines in truck. These businesses account for approximately 40% of our TK business. We currently expect the decline to be most significant in the first quarter where the market faces tougher comparisons to solid growth in the first quarter of 2019 which remains challenging throughout 2020. We are also expecting to see a high single digit decline in our European, Middle East and Africa trailer business with a steep decline in the first half of the year and recovery in the second half. The truck business in EMEA is expected to be lumpy but flat for the overall year. What's shown as the all other market for TK reflects aftermarket parts, marine, bus, rail, air in a few of the relatively smaller regional markets where market forecasts are not as robust as North America or Europe. However, for these markets, we are currently expecting modest growth of low single digit to mid single digit growth in 2020. We believe we have the opportunity to outperform…

[Operator Instructions]. Our first question comes from Steve Tusa with JPMorgan. Your line is now open.

Hi. Good morning guys.

Good morning Steve.

Good morning.

Good morning.

Just a question on the kind of timing of everything that's happening here. I think you might have touched on an update but when would you expect to kind of have a little bit of a deeper dive on the new TT business, from an Investor Day perspective?

So Steve, it's Sue. And Chris can join in with that. The first thing we are going to do is, finish off the very detailed work that's going on right now on the separation of the industrial businesses and then start building off of the base that we have got. We will have to go through and issue some historical financial statements and then transition into that. But Chris, your phone?

Sure. Hi Steve. Good to meet you here virtually over the phone. To Sue's point, I think there is a fair amount of effort still left to get done. We are on track for the RMT closure to be completed here in early 2020. But right after we do complete separation, we have got some requirements to restate some prior year financial statements and I would expect around that time, we would provide more information around the historical view of Trane Technologies at that point. I think from Investor Day perspective, we are targeting kind of that September timeframe with respect to giving us a chance of having a couple of quarters of closes under the new Trane Technologies structure and then be ready to walk with a little more details here in the fall.

Steve, this is Mike here. Just one second, Steve. I would say that just from an internal planning perspective, once we filed all that we need to file around the restated financials, targeting something like a five to 10 day period after that, after you have digested it, to come back and provide more guidance. And so, we will likely structure our call, put a presentation together and lay out the 2020 guidance. And then we will reserve until the Investor Day, report back on the last three years and then restate going forward likely another three-year view for Trane Technologies through 2023.

Okay. And thanks for the color on all the TK moving parts. When will you expect the orders comp to get easier? Is that kind of a -- just remind us when you would think these order should bottom out?

Yes. Steve, the way our revenue bottoms out, first I would say that you are probably just going to see the bottom in both Europe and North America in the first quarter and then it's going to still be negative obviously as you can see from the graphs we have on slide 21 of the deck for the balance of the year. But from a bookings perspective, you recover obviously a little bit quicker than that. Although there is a fair amount of book in turn, I think that will happen in the business and so the comps get easy third, typically fourth quarter. So second, third and fourth quarter, you get to see bookings. I think, improving. Revenue progressively improves throughout the year in both regions.

Okay. Great. Thanks for the color.

Sure.

Our next question comes from Julian Mitchell of Barclays. Your line is now open.

Hi. Good morning and thanks Sue for all the help. Maybe just a question around the climate revenue growth. Just wondered, within that low single digit commercial HVAC market assumption for 2020, what are you assuming for Asia given orders were down through most of 2019? And how much of a jump in the U.S. do you think you will have this year after such a good 2019?

Yes. Julian, I want to be very careful not to mix market expectations versus our internal businesses. So the market, I think that North America remains very healthy. We will see growth across the board equipment, parts and services. I think that we feel good about what will happen in institutional, particularly education and healthcare. We expect industrial and commercial also remain healthy. And then if I translate to our internal view in North America as an example, we end the year at 17% high teens kind of backlog over the prior year. So the setup for us and the setup for the market look pretty good. In Europe, where you have got the sort of flattish expectation in 2020 and still some lingering Brexit execution uncertainties, we will continue to outgrow the market as we have been really based on the whole sort of sustainability focus and the go-to-market strategy that we have had there. So we expect to grow the market at least a multiple of two or three there, I would assume, off a very slow growth in the underlying market in Europe. Middle East, Africa HVAC is going to be positive but the patterns are always lumpy because particularly in the Middle East, these orders tend to be large district cooling plants. And so they are very large orders when they come and so you get a little bit of an anomaly there. And then actually healthy growth in China and for the AP region in general. And again here, the backlog that we have got in China, fourth quarter versus prior fourth quarter, is up low double digits. So a good set up for us coming into 2020. So we feel pretty good about what's happening in the commercial HVAC space. And residential, similar view, 80% of the market for us is replacement. Underlying markets still look good. Consumer confidence still remains relatively high. U.S. economy remains relatively healthy. Unemployment is low. GDP is stable. So pricing remains healthy. I think the market there appears to be pretty solid going into 2020.

Thanks, Mike, for all the color. And then just my second question around climate margins. Just looking at your margin guide for the segment for 2020, backing out what you are saying for Thermo King or transport, it implies the non-transport piece margins are up maybe 80 basis points or so in 2020. Just wanted to check that was roughly in line with what you were thinking and to what degree you think that number is backend loaded, again excluding transport?

Yes. I mean, at starting point I will let Sue and Chris chime in, but you really end up with a pretty low quarter four to comp that we just completed when you think about most of those impacts really were center hit on the commercial HVAC markets. And so the roadmap we have got here is still a strong pricing environment, probably a moderating materials environment. Our productivity pipeline looks robust. It should cover all inflation. Volume should drop through to gross margins. We don't see anything there. And we don't see a repeat issues that would done in the fourth quarter. I mean obviously we talked about the silver lining perhaps and the cash conversion, but some of the inventory adjustments were partially result of just an immense amount of the factory consolidations that were done starting in 2018 and through 2019 and those don't repeat. That smoothes out as well. So I feel like we are in great shape on commercial. I think residential continues to hum along. A good data conversion there. I don't see any changes there. And even in a market like Latin America, we had great success in 2019. It appears to be recovering, particularly Brazil I would highlight. Margins there are good for us and I think that can help contribute as well.

Great. Thank you.

Our next question comes from John Walsh with Credit Suisse. Your line is now open.

Hi. Good morning.

Good morning John.

Good morning.

And I will echo the sentiment. I thank you too, Sue, for all the help.

Thank you John.

Sure. I wanted to maybe get a mark-to-market on where we stand with kind of the controls and the connected buildings platform. You know, I know last time I think we got update on that revenue base. It was north of $1 billion and you guys used to throw out some metrics around the number of connected buildings or the portfolios of buildings that you are monitoring. Can you kind of mark-to-market us on that?

Yes. John, I would start with the caveat that if a company can actually tell you the revenue generation from a digital business, they probably don't have a digital strategy because the whole strategy really hits every bit of the value stream from the way that you design and develop systems to not fail all the way through to the way you monetize offerings in the service business through to the way that you utilize fixed service contracts, fixed service agreements to deliver service in more creative and better ways for the customer. So you put that all together and it's in everything that we are doing. So it continues to be the norm. I would say, 100% of what we are shipping out in the applied space today is absolutely communicating. If not inside the customers' firewall, it's coming across to us with important data. We are acting on it. At last count, I think we monetized in our commercial space alone about 20 different offerings that we put together in that space that use digital to monetize. Same thing will hold through to TK. Interesting with TK, I am just going to kind of maybe skip to this as there is a little bit of a story here. When you look at ACT's 2020 forecast of 37,500 units, we look at the replacement of units on the road today in North America and we get to a number of about 35,000 units. I mean you can think about more than 90% of the market ACT is representing could be counted just through replacing units. Well, natural part of the reason that we know where these units are and whether or not they are a candidate for replacement would be through things like the telematics that would tell us how systems are operating. And so that's is a great example of how the game really changes when you have a got a complete digital strategy across these businesses.

Got you. Thanks for that color. And then, you know, just looking at the investment in other line, obviously you covered a little bit in the prepared remarks. But you know that's been a long time since we have seen that flat. You have the comment saying gross investment spending remains at high levels. As we think about 2020 and beyond, does that flip back to be a headwind? Or are you kind of plateauing right now on how you are thinking about your investment spending?

Well, we are coming through some really major platform investments and a multiyear investment for Thermo King, let's just say in particular. That's going to tend to kind of flatten out there but likely not in the Trane business, particularly with some of the regulatory changes that will happen between now and 2023. So it's at a very high rate. A good estimate for 2020 is probably you know as low as 20 bips of incremental and maybe as high as 50 bips of incremental that will go into the Trane Technologies portfolio for 2020.

John, I will also add that as you think about those investments, that's such a huge part of the capital allocation strategy and what we do with the business that we are a great generator of cash. We have processes throughout the company with investment review boards looking at various and sundry things. We want our businesses to bring us great ROI projects that continue our growth and continue the great capital allocation strategy that we have got. So as you think about Trane Technologies going forward, I see that great cash generation as an opportunity and a way to really do great capital allocation with investing in the businesses. And I think that should continue and I think you would want that to continue.

I will just affirm here, Sue, this is Chris, that it will continue that way knowing that we have a strong free cash from generator in Trane Technologies and we will be following those similar priorities for capital deployment.

Great. Thank you for the color.

Our next question comes from Jeff Sprague with Vertical Research. Your line is open.

Thank you. Good morning everyone and thanks and good luck, Sue.

Thank you.

I appreciate all the help. Two questions on TK. First, just aftermarket in general. Has it been your experience historically that when you get into OE equipment downdrafts that aftermarket actually does grow? Certainly we have seen in machinery and equipment markets that aftermarket doesn't turn out to be quite as countercyclical as people would have hoped. So I would imagine, it would typically decline less, but as a question is, does it actually tend to grow in those down cycles?

Yes. Jeff, there is a number of things that I think that we can count on and in some ways try to control even with a trailer decline forecast for 2020 and that's one of them. So if the standard aftermarket growth rates would be something kind of in the normalized 3% to 5% range, as an example, if all 35,000 North American units that are probably up for replacement wouldn't be replaced which would be an extreme view, you would likely see something in the high single digits. Our experience has been something maybe 8% to 10% if that were to be the case. So that tends to always pan its way out. The other thing that is interesting, when you look auxiliary power unit bolt-on rate, I think in 2016 we were talking about something in the 10% to 11% bolt-on rate there. And we said, look, we think we can move this thing and for every 2.4 units of APUs we sell, it equates to one trailer unit. That was a strategy to help us through 2016 and 2017. We actually have increased that bolt-on rate by 10 points. So we ended the year in the low 20s. The remarkable thing about that is that's with the denominator, right, increasing dramatically in terms of the what was built in terms of OEM tractors put out into the marketplace. Other interesting thing there is the replacements factor that we see out there for APUs going into 2020 is roughly 102,000 units that are available. That's compared to a 99,000 unit market. So here you have got a replacement rate opportunity that's actually bigger than a new complete. So you know by taking the same experience we have around bolt-on rates moving three, four points a year, with even a more aged APU fleet out there, that's an opportunity for us. The NPD launch as I have I talked to the new platforms should be good and we have worked three years to get these things ready for the market. And as I said in my remarks, truck, bus, rail, those will all grow too. Small truck in particular. Bus, rail, all will grow too. So those are sort of factors that we can count on I think in 2020.

Great. And then just a follow-up on slide 21. I appreciate you trying to help us here and that you are noting the scale isn't exact. But the position of the plus 20 and the minus 40 looks pretty proportional to where the zero is, right. And so everything on that chart with the exception of APU looks like it's down less than 20% with all other actually positive. So just a little unclear how or why you would be guiding Q1 down 20% in aggregate?

I can't speak of the scale. Maybe Zac or Shane, who drew the scale can talk to that.

Yes. I mean, Jeff, the market will be down close to 30% for trailers in the first quarter, North America trailers. Europe trailers, a similar number. APUs would be down 35% to 40% range. So that's really how you get there. Balance of the market being the other 40%. So it's really the decline in the areas that really outgrew in the fourth quarter of 2018, which were trailer and APUs. And those are down right now. That's the reason

All right. Thank you.

Our next question comes from Andrew Kaplowitz with Citi. Your line is open.

Good morning guys. Sue, thanks for all your help.

Thanks Andy.

Mike, you have been talking about your focus on sustainability and improving efficiency for a long time now. But given the continued strong bookings, especially North American commercial HVAC, are you just seeing more awareness and acceptance of your HVAC systems capability, especially in markets like office and education to help meet your customers' sustainability goals as they look to replace their equipment? And is that allowing the business to increasingly look better than the macro data that we see, like construction starts?

Yes. I mean first of all, it's a passion inside the company. What I am telling around company purpose is something that gets deeply ingrained and even how investments and projects get evaluated because that's how we think we are going to win the marketplace. And so it's very tied out in terms of how we deploy goals and how we look at products going forward. So that, for sure, I think is a critical factor in all of this. When you look at some of the Dodge data as an example and the Put-in-place which people look to, it's interesting and I am just going to talk obviously about North America here which is where the Dodge data is more relevant. You take our commercial business and you split it right down the middle 50-50 between equipments and services, the 50% that's equipment you get 60% to 70% of that which is replacement which generally is not ever going to be reported on Dodge Put-in-place because we are negotiating service agreements, service contracts, retrofits. So that really only has the Dodge Put-in-place data addressing about 15% to 20% of the business. And so as folks try to read through that to our commercial business on Dodge data or ABI data, you are probably only predicting 15% to 20% of what that looks like.

Mike, thanks for that. And then just following up on some of the comments you made on China commercial HVAC. If I look at the bookings, they look like they turned down a little in Q4. But you mentioned backlogs up low double digits. So was it just kind of timing? Can you give more color on China? I assume you continue to grow service penetration. What particular end markets are helping you in China?

Well, first of all, when we talk about Asia in particular, we have to remember that China sort of half of the business and the rest is the rest of the region. China was actually relatively strong. Bookings looked okay. Backlog, as I mentioned, up double digit year-over-year. And so a lot of weakness was outside of China and I think in some ways you see those markets recovering. You can think about electronics in South Korea. You can think about those sorts of markets which were pretty tough. But we expect healthy growth in China and for the region in 2020. Strength in healthcare and we think a rebound in some of technology segments, where we have been a big player historically.

Thanks Mike.

Our next question comes from Joe Ritchie with Goldman Sachs. Your line is open.

Thanks. Good morning, everyone and congratulations to both Sue and Chris. Sue, you will be missed for sure.

Thank you Joe.

Thank you.

So maybe just my first question just following up on that China question. Mike, clearly you guys have done a great job growing into Tier 3, Tier 4 cities and the attachment rates. Obviously a lot of concern right now, given the virus outbreak. I am curious, as you look forward and you think about like previous times, whether it's SARS impacting your business. Have you seen any impact at all at this juncture from the virus? And how has this kind of played out for you guys historically?

Well, first of all, we have no impact yet to employees, which is fortunate. I think we have sent 650,000 masks, is what I saw, to China. So we are trying to do our part there on that. I would tell you that what we believe, we know today is that best case would be China essentially going back to work on February 10. This is sort of the market in general and sort of our business as well. So if that's the case, I mean you are talking about really a week of production and that's just going to get pushed. I mean that demand is there. It will get pushed out. Maybe it will get absorbed in the quarter if it's possible to do, if not it will get pushed to the second quarter. So it's fluid. We are watching it closely. We are looking at the supply chain as well. We generally have strong supply chains. We generally tend to work in region for region. But to the extent we have got any Chinese components being imported, say, into the U.S. or Europe, we are generally keeping those cases eight to 10 weeks of inventory on hand. So again, a one week or two week issue is not going to be a problem for us with regard to that. But Joe, it's fluid and I am hoping that this thing contained and best case looks to be people are back to work February 10.

Got it. Okay. That's helpful color, Mike. And then maybe just my follow-up here. Slide 21, super helpful. So nice job, Zac and Shane. Just curious, as you kind of think about the climate business ex-transport, is there anything we need to be aware of from either growth and margin standpoint as you think about cadence for 2020?

None that I can think of. Guys, anybody have any color on that?

No. The way I was thinking about, Joe, is as think about the markets, when you think about HVAC with commercial and residential, it's going to follow the same cadence that it has historically followed with Q2 and Q3 being our stronger quarters. So I think that stays in line with what we are doing. We do think that Q1 is going to be a quarter where the volume is tough in buildings. So I think that one is an area where you can think about Q1 maybe not quite being at historical levels of contribution. The other thing that I would say and I sound like I just think about cash, but I think as you think about climate in Trane Technologies, we talked about this at the time of the standup, we believe that we are still going to generate 100% or greater than net income over time in the climate business. It does tend to be a little more back half loaded than what we have seen. Although I am sort of laughing because we did have such a huge fourth quarter for cash flow this year. But I think that's one of the impacts that you might see. So revenue sort of following normal patterns other than the TK guide that we have already talked about and cash flow more backend loaded.

Yes. And I will say, Joe, is that, going back to commercial with North America which has been just incredibly strong and it's strong across the board meaning that even the unitary and services growth have been double. Units have been in the teens. But the applied growth has been extraordinary. The winter rates there, the pull-through of systems has been excellent. Now that does initially book and ship at generally lower margins than the unitary business, but of course you get the long service tail on the applied business. So in the long run, it's a great business. It's a win. But it does put a little bit of mix pressure within train and commercial and that again as one is those mix pressures we saw in quarter four as well. And so historically I usually get the question and I didn't it so far. But I will talk about it. We end up historically something in the 15% range of Q1 EPS for the total year and last three years has been that. Six years has been a little bit lower than that. I would tell you, sort of a safer guide here would be something between 14% and 15% just as a result of that strong mix differential between applied unitary and between the TK and Trane.

Yes. Twosome must have been caught off guard. So thanks for all the color.

Yes. Just to add to that, since we are guiding OI at this point, I would say, the average for OI for climate as a percentage of the year has been in the 15% range. It will probably be in the 14% to 15% range this year. So a little lighter in the first quarter.

Thanks Zac. I am so used to EPS after all this time that we are going to get to talk about OI.

Thanks guys.

Our next question comes from the line of Andrew Obin with Bank of America. Your line is now open.

Yes. Good morning.

Hi.

Good morning.

Sue, it was such a pleasure working with you, I think, actually with multiple companies. So congrats and good luck.

Thank you Andrew.

Just a question, you know, residential construction, can you just walk us through your framework? How much visibility do you think on resi conception cycle over the next several years? And what gives you confidence that they will continue sort of to be positive?

Andy, it's such a small part of kind of what drives our business that we would far from be the experts on giving you a forecast there. And if you think about the res equipment business being probably 10% of the company going forward and you think about 80% of our business there being replacement, new construction doesn't move the needle one way or the other for us really in a residential market. So I would probably defer to some of better forecast that are out there on that one than tell you that we have got a good read on that.

Yes. I was just asking more as a leading indicator for non-res. Another question I have for you, how should we think about the Trane's market share over the next couple of years? You have done a fantastic job. So how sustainable it is? And what are the headwinds?

Well, I mean, when we guide, we are generally guiding on, we think the market is going to be pricing, some sense of volume, some sense of mix. We always target our teams with market share and margin expansion. So the goal there is always higher than what you see and I think that's a healthy thing for us do. I feel really good about what's coming out in the marketplace. I feel good about a lot of the training and development we have had around the company in terms systems, sales and some of the more sophisticated offerings that we do around services. So I feel like it's lot of ways to win. It's not always on the product technology, although we are a leader there and that's a heavy part of the investment but it's also in the way that you go to market in a way that the expertise gets played out in the channel. And as you think about, I have always said in the commercial space, these are always going to be people that are 100% dedicated on behalf of the company. This is not something where you see distributors doing for us. That's such an important thing when you are trying to drive an overall system strategy and trying to sell total cost of ownership over the long run, it's a sophisticated sale generally done by very technical people and we have been it for a long time. And that's something that's very difficult to replicate and something we always invest in that capability. That's a big part of the secret sauce, I guess, of the business.

Thank you very much.

And that's all the time we have for questions today. I will turn the call back over to Zac Nagle for closing comments.

I like to thank everyone for joining on today's call and to remind everyone that we will be available for questions as always today and in the coming days and then we look forward to connecting with you soon on the road, in upcoming conferences and roadshows. Thank you very much.

That concludes today's conference call. You may now disconnect.