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Ingersoll-Rand PLC (NYSE:IR)

Q4 2010 Earnings Call Transcript

February 9, 2011 10:00 am ET

Executives

Janet Pfeffer – VP, Business Development & IR

Mike Lamach – Chairman, President & CEO

Steve Shawley – SVP & CFO

Analysts

Steve Tusa – JPMorgan

Robert Wertheimer – Morgan Stanley

Scott Gaffner – Barclays Capital

Steven Winoker – Sanford Bernstein

Nigel Coe – Deutsche Bank

Andrew Obin – Bank of America-Merrill Lynch

Josh Pokrzywinski – MKM Partners

Julian Mitchell – Credit Suisse

Jeff Hammond – KeyBanc Capital Markets

Deane Dray – Citi

Jeff Sprague – Vertical Research Partners

Operator

Good day everyone and welcome to the Ingersoll-Rand Fourth-Quarter 2010 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Ms. Janet Pfeffer, Business Development and Investor Relations. Please go ahead.

Janet Pfeffer

Thank you, Jennifer. Good morning, everyone. Welcome to Ingersoll-Rand’s Fourth-Quarter 2010 Conference Call. We released earnings at 7 A.M. this morning and the release is posted on our Web site. We’ll be broadcasting in addition to this phone call through our Web site at ingersollrand.com, where you will find the slide presentation that we’ll be using this morning. This call will be recorded and archived on our Web site and will be available tomorrow at 10 A.M.

If you would, please go to slide #2, I’d like to remind you that statements made in today’s call that are not historical facts are considered forward-looking statements and are pursuant to the Safe Harbor Provisions of Federal Securities Laws. Actual results may differ. Please see our SEC filings for a description of some of the factors that may cause actual results to vary from anticipated.

In addition, please refer to slide #20, which covers the use of non-GAAP measures to describe the company’s performance.

Now, I’d like to introduce the participants on this morning’s call. We have Mike Lamach, Chairman, President and CEO; and Steve Shawley, Senior Vice President and CFO; also Joe Fimbianti, Director of Investor Relations.

With that, please go to slide #3 and I’ll turn it over to Mike.

Mike Lamach

Thanks, Janet. Good morning, and thank you for joining us on today’s call. I’ll start out today’s call by giving you some perspective on our 2010 full-year performance.

Last year at this time, you might remember that we expected a slow recovery in developed markets, moderate growth in developing countries and mixed activity in our major vertical markets.

Full-year revenues were forecasted to increase in a range of 2% to 5%. As it turned out, most markets were somewhat better than expected. Our full-year revenues were up over 7%, primarily due to stronger than expected activity at our industrial businesses, Thermo King and our residential HVAC business.

Additionally, we saw strong acceleration of volumes in November and December. The increase in volumes and productivity helped to offset higher than expected material inflation. This resulted in a full-year EPS at the very top of our initial forecast range of a $1.95 to $2.35.

We increased operating margins 220 basis points, which exceeded our annual target of 200 basis points per year. Total productivity increased by 4.6% for the full-year, delivering $593 million of savings in 2010.

We realized the Trane cumulative synergy benefits of roughly $550 million, $250 million above the initial forecast. And we continue to implement a multi-year restructuring program which will reduce our manufacturing footprint, improve our cost base and greatly improve our operating margins. We also divested two small non-core loss generating businesses.

We generated available cash flow of $874 million, which was 136% of our 2010 after-tax income. This strong cash flow helped to greatly improve our balance sheet. We reduced total financing by $550 million and reduced the Trane acquisition related debt by $2.3 billion. We also contributed $444 million to fund our pensions in the second half of the year.

Additionally, we continue to increase product development, investment, introduced many significant new products during the year. Overall, we are building a stronger culture, innovation and continuous improvement and we’re demonstrating that we can execute well regardless of market conditions.

Full credit goes to the many dedicated Ingersoll-Rand employees around the world that made our cash productivity and share gain initiatives a success in 2010, while always assuring we continue to deliver outstanding value to our customers.

We had some bumps in the road in 2010, but we expect some periodic setbacks as an organization and processes continue to stretch and mature. Importantly, we are not backing off of our targets. We continue to target operating margin improvements of two percentage points per year, and we’re well positioned to generate continued productivity, growth and cash as our markets recover.

Now let’s talk about the fourth-quarter. And please go to slide #4. We continued our focus on driving top-tier operational performance and delivered strong revenue growth with three sectors or four sectors achieving double-digit top-line increases. We’ve expanded our margins, grew our earnings and generated strong free cash flow.

Fourth-quarter earnings from continuing operations were $0.62 per share, mid-range of our fourth-quarter earnings guidance range. For the quarter, revenues were $3.7 billion, up 13% versus prior year, 14% excluding currency, exceeding our guidance range of 7% to 10%. During the quarter, we continue to see strong bookings as most of our businesses are showing solid growth.

For the company overall, orders were up 9% and 10%, excluding currency. Order rates improved in each of our segments, except for commercial security, which was flat hampered by the ongoing decline in North American new commercial construction activity. Our backlog also increased by 8%.

Operating margin for the quarter was 8.4%, driven by higher volumes and productivity. All of our segments improved operating margins year-over-year and operating margins were up 150 basis points across the company.

We continue to drive disciplined cost controls and operational improvements. Unfortunately, the productivity benefit was eroded by the steep run-up in material cost in the quarter.

We’ve addressed our pricing to mitigate material cost increases. We also suffered some inefficiencies which held back productivity as demand in November and December came back significantly faster than what we had forecast.

This impacted the supply chain resulting in unplanned overtime and freight cost and delayed realization of some productivity savings is resourced from dedicated to meeting customer demand.

Please go to slide #5. This slide gives the summary of our quarterly order rates from 2008 through 2010. As you can see we hit the bottom for orders in the back half of 2009 and reported flat orders in the fourth-quarter 2009.

Reported orders for fourth-quarter 2010 were similar to the first three quarters of the year, up 9% overall, 10% excluding currency. All sectors except for commercial security enjoyed year-over-year gains and we had especially strong gains in industrial area in productivity and residential and commercial HVAC equipment.

Please go to slide #6. Please look at the revenue trends by segment and we think revenue excluding currency shown on the bottom chart give a better view of our organic sales performance.

As you can see on the bottom chart, the fourth-quarter was up 14% excluding currency. We had improvements in all of our sectors except security which was flat (inaudible) significant declines in the North American commercial construction market.

I’ll give you two other views of our fourth-quarter results, geographical split and a split between recurring revenue and equipment. On a geographic basis, revenues improved by about 13% in the U.S., was also up by 13% in the international markets, 15% excluding the impact of currency. Equipment revenues were up 14% and worldwide parts and service were up 9% compared with last year.

Go to slide #7. This bridge analyses the change in fourth-quarter segment operating margin year-over-year. Fourth-quarter operating margins were 8.4%, an increase of 1.5 percentage points compared with 2009. Volume price and mix and increased revenues added 2.1 points to our operating margins.

Productivity netted against inflation decreased margins by 30 basis points as commodity inflation increased in the quarter, particularly, related to metals. Investments combined with restructuring and other charges were unfavorable for last year by 30 basis points.

Please go to slide #8. This slide explains how we are compared versus EPS guidance range we provided in October. At that time, we indicated that we expected to be in the range of $0.56 to $0.66 per share continuing operations with the midpoint value of approximately $0.61.

Volume mix and currency were about $0.08 better. Pricing and inflation were about $0.04 of headwind, productivity was about $0.07 short of target, impacted by the volume ramp in November and December. The tax rate and other charges net to $0.01 favorable to earnings, timing of investments was a positive $0.03.

So overall versus our guidance we were above the top end of the guidance on revenue due to stronger than expected end market activity and delivered earnings just above the middle of the range.

Steve will now take you through a review of our reporting segments.

Steve Shawley

Thanks, Mike. Please go to slide #9. This slide covers the Climate Solutions segment which includes Trane commercial HVAC business and the Thermo King and Hussmann refrigeration businesses.

Total revenues of $2.1 billion for the fourth-quarter were up 16% and also 16% excluding currency effects.

I’ll talk first about the Trane commercial HVAC business. Trane’s global commercial HVAC fourth-quarter revenues were up 13% versus prior year on both the reported basis and excluding the effects of foreign exchange.

Global commercial equipment revenues increased 16% with year-over-year improvements in all regions. North American commercial equipment revenues were up 11%, marking the first positive growth we’ve seen since the second-quarter of 2008.

Global parts, services and solutions revenue increased by 10% excluding FX. This continues the momentum that we saw in both the second and third-quarter, which were up by about the same percentage.

Shifting to orders, our global commercial HVAC orders were up 10% on both the reported basis and excluding foreign exchange, driven by global equipment orders, which were up by over 20%.

For global Thermo King transport business, revenues increased by 25%, which is consistent with significantly improving markets compared with last year. Our worldwide refrigerated truck and trailer revenues grew at about a 30% rate, strength in all key regions. Global bus HVAC, APU and marine container shipments, sales all increased substantially due to easy comps and improved end-market activity.

Thermo King orders increased by about 3% in the fourth-quarter due to strong orders last year and what is usually a seasonally low quarter. Recent commentary from larger customers and apt industry projections indicate that strong activity levels should continue into 2011.

Looking at stationary refrigeration, global revenues were up 16%, primarily driven by North American display case revenues which were up 20%. The operating margin for Climate Solutions was 7.1% in the quarter, compared with 5.1% last year. This two point margin improvement was driven by volume gains, productivity and better mix, partially offset by higher commodity prices.

Please go to slide #10, Industrial Technologies fourth-quarter revenues were $692 million, up 17% on a reported basis and 19% excluding FX. Industrial markets are continuing to recover after stabilizing in the first-quarter.

Air and Productivity revenues increased 21% versus last year with increases in all geographic areas. Club Car revenues were up slightly in the quarter as increases in golf equipment were partially offset by weaker activity and utility vehicles.

Air and Productivity orders were up 22%, with strong improvements in the Americas and Asia. Industrial’s operating margin of 13.1% was up slightly compared with last year from higher revenues, pricing and productivity. Industrial’s margins have steadily improved throughout 2010 and the full-year operating margins increased by over four percentage points compared with last year.

Please go to slide #11, the Residential Solutions section which includes Trane and American standard HVAC product lines and the Schlage security residential business, fourth-quarter revenues of $510 million, were up 12% compared with last year. Excluding foreign exchange, revenues were up 14%, the fifth consecutive quarter of positive growth in residential.

Bookings were up 22% versus last year. Revenues for the residential security portion of the sector were down about 14%, and down 5% excluding currency. North American revenues declined 9% due to flat activity in the new builder channel and declines in Big Box customer volumes due to their reductions in stocking levels. South America was down over 40% primarily from significant negative currency translation related to the devaluation of the Venezuelan bolivar.

For the HVAC business, industry shipments of motor bearings units increased slightly versus prior year. Our residential HVAC sales were up 20%, principally from improvements in replacement sales helped by the expiration of the 2010 tax credits and the introduction of new products.

We gained about three points in market share and the residential HVAC portion of the sector expanded margins by four points in the quarter. HVAC bookings were up 32%.

Sector operating margins of 9.3% were up 1.8 percentage points compared with 2009, driven primarily by higher volumes which were partially offset by inflation and negative currency.

Please go to slide #12, revenues for Security Technologies were $448 million, down about 1% and flat excluding currency. Americas’ revenues in the commercial sector were up 2% in the face of significant year-over-year declines in commercial construction markets. The revenue improvement is mainly attributable to higher sales of electronic locking devices.

Our European Security business was down approximately 9% on a reported basis and 3% excluding currency. Asia revenues were up mid-single digits. Operating margin for the quarter was 17.9%, up over one percentage point despite the sales decline. Strong productivity in price realization drove the improvement in margins.

Please go to slide #13, we ended the year at 4.6% productivity or $493 million versus our target of just over $600 million. Material productivity where we have the most mature processes for project tracking and management was essentially on target for 2010. The majority of the short fall in the fourth-quarter was in the area of labor and overhead, mainly related to additional cost incurred and resources focused to satisfy higher than expected volumes in November and December.

As you know our goal is to increase operating margins by at least 200 basis points per year through a combination of cost reduction, price realization and leverage from volumes, while still investing in the future of the business.

For 2010 margins were up by 210 basis points. So while we are disappointed that price versus inflation and productivity in the fourth-quarter came in under our targets, the 2010 performance shows that our margin expansion goals can be achieved.

2010, we announced 13 manufacturing plant closures as well as reducing three plants with KOXKA and microturbine divestitures, bringing the total to 16 fewer manufacturing sites globally. We spent $26 million on restructuring and productivity initiatives in the quarter and $80 million for the year.

Please go to slide #14. In addition to our productivity programs, we continue to focus on developing and launching new products and services. About 17% or $2.4 billion of our 2010 revenues was generated from new products and services introduced in the last three years, with a number of new offerings in each of our businesses. This is up from approximately $1.8 billion or 14% of sales in 2009.

Actually, there are four of the new products that we launched in the fourth-quarter. Just to highlight two of them. With its seven inch interactive high definition color touch screen, the Trane ComfortLink II Thermostat is the ultimate home comfort connection, providing an intuitive user interface, the Thermostat serves as an easy to use, central planning center for the home, bringing year-around home comfort and control right to ones finger tips.

The ComfortLink II Thermostat has already won accolades towards innovative design. In the November this year, with Popular Mechanics, it was featured as One of The Year’s 10 Most Transformative Products and a winner of the publication’s 2010 Breakthrough Awards.

The ComfortLink II Thermostat is also named an International Consumer Electronics Show Innovations 2011 Design and Engineering Awards Honoree.

Trane applied fresh thinking to outdoor air and ventilation-related problems in designing the new Trane outdoor air rooftop unit. The Trane outdoor air unit resolves these challenges with the code compliance system to probably condition outdoor air, control humidity and deliver a safe comfortable environment. This product addresses a need of multiple vertical market segments including lodging, retail, restaurants, education and industrial markets.

In the fourth-quarter, Trane demonstrated the product’s capabilities and benefits to many key customers and Hilton and Marriott have adopted the Trane outdoor air unit product as their brand standard.

Please go to slide #15, we continue to strengthen our balance sheet during the fourth-quarter. We delivered available cash flow of $317 million in the fourth-quarter bringing full-year cash generation to $874 million. It was somewhat below our initial target for the year due to working capital requirements in the fourth-quarter from the higher than expected volumes.

We made a discretionary pension contribution of $201 million during the quarter. This was an addition to the $243 million we contributed in September.

These discretionary funding actions count heavily toward our efforts to leverage the company and they also are expected to offset any incremental pension expense that would otherwise be triggered in 2011 by the lower discount rates.

Cash balances ended the year at over $1 billion and we had no outstanding commercial paper at the end of the quarter. Assuming normal patterns of cash flow in 2011, our year-end cash balances are adequate to support debt maturities all the way through 2012, $510 million of maturing debt was paid down in 2010, and we have reduced total debt by roughly $2.3 billion since the completion of the Trane acquisition in June 2008.

Please go to slide #16, we finished the fourth-quarter with working capital at 2.6% of sales, only slightly up from last year. We expect to maintain working capital to sales in this range in the future through improvements that we have been made and are continuing to be made in manufacturing systems and processes, footprint restructuring and supply chain and logistics management.

With this, I will turn it back over to Mike for the forecast.

Mike Lamach

Thanks, Steve. Please advance to slide #17. Our forecast for 2011 is based on steady improvement in our markets. We continue to expect a slow recovery in the U.S. and European economies, growth in Asia and mixed activity levels in our major vertical end markets.

We believe recent activities indicate that we’re seeing stages of recovery in refrigeration, industrial, commercial HVAC parts, contracting and service as well as signs of improvements in commercial and residential HVAC equipment.

We expect to see a continuation of the challenging conditions in the U.S. non-residential and new construction market for at least the first half of the year, which will continue to primarily impact the commercial security in HVAC businesses. We are certainly encouraged, however by orders and backlog. We continue to focus on achieving productivity, continued investment and a long-term growth through innovation.

Based on this improving view of the world, our revenue range for full-year 2011 is $15 billion to $15.3 billion, up 7% to 9% compared with 2010. Climate Solutions revenues are expected to be up 6% to 8% with mid single-digit increases in HVAC equipment and high single-digit gains in both refrigeration, contracting parts and service

We expect industrial to show gains in the high single to low double-digits, residential is expected to be up 6% to 8% with HVAC up mid to high single digits while residential security will be up low to mid single digits due to continued stocking controls of Big Box retailers and a slow housing recovery.

Security Technologies is expected to show mid single-digit year-over-year improvement due to its exposure to non-residential building especially in North America. This results in a full-year forecast again of $15 billion to $15.3 billion equal to a 7% to 9% full-year growth for totaling Ingersoll-Rand.

Please go to slide #18. This slide briefs our 2010 performance with our 2011 forecast. Margins up the midpoint of this range would be of just over two points from 8.9% to 11%. Volume mix and FX add 1.2 points to margins; will be about 30 basis points negative on price increases versus material inflation.

We implemented price increases at the end of 2010 mainly effective at the beginning of 2011. However, commodities have continued to increase since that time, so although we continue to review our pricing levels versus materials costs, this guidance assumes only the current actions.

Total productivity at the 5% level offset by other inflation is 2.9 points accretive to margins and as we continue to invest for the future in innovation and in growth, this will have an impact of about 50 basis points.

We have a contingency of 120 basis points because when you set stretched targets across the company, some things may not go as planned. Inflation maybe higher or may decide to step up investments to drive growth or cost reduction. All in, this all translates to a total leverage of about 40% on the incremental volume and is essentially the same earnings growth model that we laid out last May.

Our tax-rate will be about 24% in 2011 which is a $0.23 negative year-over-year EPS impact and our share count will be 345 million shares which has a $0.04 negative impact year-over-year. We expect restructuring spend to be flat with 2010 and to be backend loaded in order to minimize disruption during peak seasonal demand.

That brings us to a total EPS for continuing operations in the range of $2.90 to $3.10. We expect to generate available cash flow of about $1.1 billion. This guidance does not reflect any redeployment of cash which we still expect to begin in the first half of this year.

Please go to slide #19. So in summary, we’re forecasting 2011 revenues up 7% to 9% and continuing EPS up about 30% at the midpoint. First quarter revenues are forecast up 6% to 9% as the economy continues to recover.

Reported EPS from continuing operations for the first-quarter are projected to be approximately $0.25 to $0.35 on a reported basis, up substantially from last year.

Operating income leveraged in the first-quarter at about 30% will be lower than the full-year average, since it is expected to be the toughest comparable quarter in terms of year-over-year inflation, as inflation was fairly low in the first half of 2010 and pricing has not yet caught up to rising commodities.

To sum up, we expect 2011 to demonstrate our continued and unrelenting focus on driving toward premiere performance across each of our businesses, while steadily increasing the delivery of customer focused innovation. We expect to see continued improvement in revenue growth and significant earnings growth as we deliver on these objectives.

So Steve and I’ll be now pleased to take your questions.

Question-and-Answer Session

Operator

(Operator instructions) We’ll now take our first question from Steve Tusa with JPMorgan.

Steve Tusa – JPMorgan

I just wanted to figure out a little more around the price material inflation number of negative point there. Could you break that out between and just talk about the dynamics around what you’re assuming for the raw material headwind and then I know you guys have done something in the kind of 4% to 8% in resi HVAC, how much of that you expect to capture in this guidance, so just a little bit on price cost in details, please?

Mike Lamach

Yes, Steve, I’ll start. This is Mike and then I’ll let Steve get his input as well. Across the company, we’ve had increased a range from 2% to 6% in terms of what we’ve announced and I would think about that more of it sort of an umbrella around what we put out in the market place

Depending on the business res HVAC and security being very quick in terms of price realization and large air and applied HVAC being very long in terms of realization, we would expect to phase in over the course of the year. So right now, pricing for the year we’re thinking to be about 1.5%, again 2% to 6% backdrop. We think inflation at the current levels in terms of material would be about 1.8% that gives us a 30% inversion on that relationship.

Steve Tusa – JPMorgan

Okay. That’s very helpful. You said that that guidance doesn’t assume any further action when it comes to price you could go back out with the mid-season type of increase, if you continue to see commodity rates move up?

Mike Lamach

Steve, the way it really works is, you put the increase out and there are some amount of realization that just happens I think with the ebb and flow competition during the year. I think it happened across all of the areas that we compete as our competitors have done the same thing and what you will tend to see is a higher realization within the umbrella that’s been announced. If things were really to dramatically increase from this level then I think you would see a secondary round of increase. I think there is a lot of headroom between the 2% and 6% across the portfolio.

Steve Tusa – JPMorgan

Great. My follow-up would be this contingency number. It just seems unusual to me that you’d have contingency that’s twice the size of your annual range. Why not just make the EPS range a little wider and have a little bit less of a contingency? I am just trying to get my hands around. Other than inflation, which another point and then change of inflation, net of any costs you might get, it just seems like a huge number. So other than inflation what are you really that worried about. Your end market seem to be going better-than-expected, so it doesn’t seem like it’s an end market thing, why such a big range on contingency and why didn’t you kind of wind that into the EPS forecast?

Mike Lamach

Steve, I think the first answer I gave you is every year we have a contingency. This is the first year we’re actually laying it out for you. And I really think that this is consistent with the offer we’re trying to make being a bit much more transparent around how we’re thinking about business and really allowing you to see that and apply that to where you might think there would be strengths and some weaknesses across the portfolio, whether the buyers would be toward productivity or pricing or excess material inflation, allowing you to adapt that, but as always, when we give guidance, we’re assuming middle of the range is where our performance would be at the time we get it.

Steve Tusa – JPMorgan

Is there something specific that jumps out, as you hear, hey, look we got these great longer-term targets, lot of opportunity, and there is always a little bit of hedge between the stretched goal, which is great, and the 200 bps of margin which is still pretty good on an absolute basis, is that kind of how we should think about this?

Steve Shawley

Absolutely, Steve. I can remember in the Spring last year when we got together, we talked about the model, and I think I even mentioned that when you go through the algorithm in the model, you’ll come up with the need to put some contingency in it, to satisfy the two points per year of margin improvement.

In other words, if you go through all the variables that we’ve given you in that model, you come up with more than two points a year, so this is just a contingency against, as Mike said, stretch goals we had out there. We’re going through this inflation versus price period of time, that’s probably the initial concern. But quite frankly, the push to drive productivity to the levels that we’ve got in our model, there’s a bit of hedge there. And also don’t forget, if you look at this model, we’ve included in here five points of investments back into the business.

Mike Lamach

50 basis points.

Steve Shawley

That’s an incremental increase in investments that we got in the model every year. So if we see things going our way, which we’d hope that that would happen, we’d not hesitate to take some of this contingency and plough it back into the business in a form of more productivity investments and possibly, more product launches pulling up programs we have in the pipeline, perhaps giving me even faster.

Steve Tusa – JPMorgan

All right, well, good luck, thanks.

Mike Lamach

Thanks, Steve.

Operator

We’ll take our next question from Robert Wertheimer with Morgan Stanley.

Robert Wertheimer – Morgan Stanley

Hi, good morning, everybody. You guys gave great detail on year-over-year, it’s really helpful. I wanted to ask a little bit if you can about sort of the quarter-over-quarter trends and gross margin, not margins as well, but SG&A maybe I know it’s complicated. Your revenues were kind of flattish from 3Q to 4Q and your gross profit was down. Are you able to maybe talk about what the non-revenue seasonal effects or the impact to that? And then just more broadly, what happen to gross margin?

Steve Shawley

Robert, I’d start with, if you look at root cause for us is the way they’re higher, it really gets down to, in the fourth-quarter, what was our forecast capability in the quarter and it’s an interesting problem, we haven’t had it in probably ten quarters where we’re surprised to the degree we were on the upside and some really amazing ways and I can give you some color on some different ways that happened during the quarter and during the year.

But that level of variability and demand and if you fix the fact that we’re always going to meet customer expectations around delivery and timing, then it put you into enormous (inaudible) around trying to get sort of quarter to happen with demand that occurred.

Examples, we launched a mid-size rotary air compressor in the late summer and we had a pretty aggressive launch plan in there and we achieved a whole year’s worth of results in one quarter based on that launch plan. Example, we had launched chiller platform and localized in a region, and expected 15% growth and the chiller platform had 70% growth in the chiller platform.

And then you come back to the res business and say, November, December were enormous bookings months for HVAC and surprisingly, even commercial unitary was up 20% bookings. We’d not planned on that, we’d not sort of forecasted that demand and so it was a very busy time for us and we didn’t miss the material productivity at all, we missed labor productivity through overtime and we missed logistics in order to make the supply chain work, so that’s a bit of a color on kind of what happened third-quarter to fourth-quarter from my point of view.

Robert Wertheimer – Morgan Stanley

That was really interesting. Thank you. Is there anything you’re seeing like and how you’re increasing productivity and restructuring the business that gives you if revenues are exceeding or slipping versus planned gives you less flexibility, are you running it tighter, so you’re going to have more margin variance when it goes outside, or is it just really this was a very strong revenue quarter?

Mike Lamach

If you go back and you look at lessons learned for us in 2010, one of the things that we want to apply in 2011 is really the timing of restructuring in investments relative to peak seasonal demand. And you go back to sort of Q2, Q3 issues we had, and the res businesses is an example and we wouldn’t want to repeat something like that with the demand that we’re seeing. So, I think, you’re seeing from our point of view when you imply this sort of come back in key markets, making sure that we don’t do anything to miss customer expectations or to lose the opportunity on the volumes that are coming through the door.

Robert Wertheimer – Morgan Stanley

That’s helpful. Thank you.

Operator

We’ll go next to Scott Gaffner with Barclays Capital.

Scott Gaffner – Barclays Capital

Good morning.

Mike Lamach

Hi, Scott.

Steve Shawley

Good morning.

Scott Gaffner – Barclays Capital

I was hoping maybe you could just give us a little bit more detail, I mean it is, I understand before you said you wouldn’t necessarily you hit the 5% productivity number on a quarterly basis, that makes sense to me, but here we are at 4.6% for the year, a little bit below plan. Can you just walk us through how much of the below plan was this unplanned labor cost and how much of it was still the freight cost, and on the freight cost are we still talking of electronics that you are having to ship in air freight, that kind of thing, maybe just a little more detail there?

Mike Lamach

Actually, I’d tell you, first of all, material productivity was in great shape and so you kind of take that off the table and you’re really down to labor and indirect productivity. I would say the majority of the productivity mix would have been in labor, where we were working significant overtime, really across the whole globe in November and December to meet demand, primarily that. The logistics piece of that would not be electronics, but it would, in fact, be a lot more the intercompany movement.

As an example, we have a Coil Center of Excellence in one part of North America serves coils for the balance or sheet metal is an example that we would move into operations from various other locations, so it would have been more intercompany related than it would have been historically with supply chain, outside the company would have been an impact more in Q2, Q3 of last year.

Scott Gaffner – Barclays Capital

So, on the labor side, would you have that issue if you hadn’t rationalized so many plans or was that directly related to taking out some of the footprints or you had to add some labor into some existing locations?

Mike Lamach

It was actually unrelated to the restructuring. It was related to the demand forecast in key plants. And so as an example, in security technologies, we had gone through around of downsizing, restructuring in a number of North American plants, right around November, very early December, only to get large spike in demand and that’s pretty quick stuff there, two days or three days in a lot of cases ended up working substantial over time across most the North American plants and security, all the way through December 31st as an example.

Scott Gaffner – Barclays Capital

Okay. And then just lastly, you mentioned $1.1 billion in free cash flow for this year. I think you mentioned that you would put that to work later in the year. Can you maybe just give us little more details on how you think you’re going to put that cash to work this year?

Steve Shawley

We’ve talked about this on a number of occasions and if we look at our priority list here, the first thing we want to do is go to our Board and suggest that we increase our dividends, in essence, start the path to get our dividend payout consistent with our peer group over a period of time. We wouldn’t do that all in one year, but we would certainly take significant steps towards getting to a much higher level of payout over the next two years to three years. We’d expect to begin that. That would probably be the first thing that we do. We hope to do that even some time in the second-quarter.

The second priority is share buyback to control the dilution. Some of you had questions about share count estimates for 2011. We’ve assumed no share buyback in that share count, but we’re fully aware of the fact that since we have put the converts out there in 2008, we’ve diluted the share count.

I think we started about 325 million shares and now we’re up to almost to 345 million, so we have targeted the next step to be buying back shares to start controlling that dilution bringing that dilution back down, that would be our second priority. And again, we would be petitioning the Board for establishing a share buyback authorization as early as the second-quarter.

Mike Lamach

Scott, I’d add, just to say, if you go back and listen through the last couple of years anyway, 2.5 years perhaps, there has been consistency around and we’re trying to be very predictable on how we’re ordering and thinking about things. First order of business for us was really repairing the balance sheet post-Trane acquisition and we think by all counts have got that well under control at this point in time.

Second piece of this was to come back and really put a competitive dividend out in marketplace relative to peer group. Third piece of this was to control dilution, as Steve mentioned, and we ordered that in our thought process before we move on to anything beyond that. So, just sequentially think about, it’s kind of moving through that order of priorities.

Steve Shawley

I’d just give you some examples there, numbers of shares, we haven’t targeted any number of shares to be bought back or any period of time at this point in time and we have a lot to discuss with our Board. We should be in a better position to talk about that when you are here for the meeting on the 2nd March.

Scott Gaffner – Barclays Capital

Understand. Look forward to seeing you then. Thanks a lot.

Operator

We’ll go next to Steven Winoker with Sanford Bernstein.

Steven Winoker – Sanford Bernstein

Good morning.

Mike Lamach

Good morning.

Steven Winoker – Sanford Bernstein

Just first quick question on the productivity number for the quarter. So my back-of-the-envelope just gets me to about backing out, maybe 4.1% for productivity, is that number correct, and if not, what is actual productivity number for the quarter?

Steve Shawley

That’s pretty close.

Steven Winoker – Sanford Bernstein

Okay. And then what do you have embedded in for actual copper pricing in your inflation expectations for next year, maybe copper, steel, aluminum, just give us a sense for what’s already baked in?

Steve Shawley

Yes, if you look at copper, obviously, that’s a big factor. What we’ve got factored in is, just what you see in the futures markets, we’ve updated that just several days ago, so I think if you look at the average copper price we’d be expecting in 2011, it’s like $4.35, that’s the market price, that’s open. We’ve got a third of our copper requirements locked.

So if you look at the weighted average between locked and market using $4.35 in market, we would be at about $4.25 something like that. Aluminum, similar kind of story. The current market projections, if you look at the average of futures is about a $1.17. We have locked it somewhere about the same number, same percentage, so we would be at about something slightly below $1.17 going into the year for aluminum.

Mike Lamach

One thing has gone well I think between copper and aluminum is that copper for us will probably buy say 10% less than the prior year. When you think about that in the face of 6% to 8% climate demand, you’d see less reliance on copper, conversely, you’d see about a 20% increase in the amount of aluminum we’re buying, again moving through the shift where we can from copper to aluminum.

Steven Winoker – Sanford Bernstein

On that shift, Mike, I think I’ve heard that you were covering something like 20% of your residential heat exchangers. Can you maybe talk little bit more about that? I met with the bunch of the heat exchanger guys that the HVAC show last week and seems like they almost seem overwhelmed with this move from all the OEMs on this front. So how are you doing competing for that resource? You’re obviously saying you’re hitting your material targets maybe give us some more color there.

Mike Lamach

Number one, I think that this has been no surprise to us and to our suppliers for two years. So we’ve been working at this for that long, around working with select suppliers around capacity and around long-term agreements, around that capacity and pricing, so, there’s no surprises relative to that.

For most of the residential HVAC business where we can is to move it to aluminum and in the commercial business, there’s obviously opportunities there, little slower to move just due to some of the size that we deal in terms of equipment and engineering changes to make that happen, but that in the commercial business is progressing, where res, I would say would be largely complete in 2011, commercial might be a quarter of the way along that process and there’s still opportunity in 2012 in that area.

Steven Winoker – Sanford Bernstein

And why not got to a 5-mil copper solution? Some of your competitors are approaching that…

Mike Lamach

Actually, we’ve had across most of our businesses, smaller diameter copper for a long, long time and that was a productivity item that was in 2009 and early 2010 for us. So I guess I’m not sure about if people told you anything different, but I can tell you that we’ve gone to center copper tubing and working with center copper tubing for a year and a half, two years.

Steven Winoker – Sanford Bernstein

You weren’t at the show. I think that was just cost savings there. All right. Thank you.

Mike Lamach

Sure.

Operator

Moving next to Nigel Coe with Deutsche Bank.

Nigel Coe – Deutsche Bank

Good morning.

Mike Lamach

Hi, Nigel.

Nigel Coe – Deutsche Bank

Before I kick off with questions, Steve, was there any LIFO reserve adjustments this quarter?

Steve Shawley

Very little, Nigel.

Nigel Coe – Deutsche Bank

Okay, so not material. Just going back to productivity, the 5% for 2011, how are we doing on that transition between what I’d say run rate productivity versus maybe temporary productivity? When I say, temporary, I mean restructuring, organizational restructuring and things like that. Where are we in that transition towards run rate productivity?

Mike Lamach

I’ve never thought about it the way that you’re expressing it, Nigel. I mean we think about it all as reducing the permanent cost structure and the permanent run rate in the business, so I am not sure I can give you an answer to that question. We believe we’ve seen utilization increase probably eight points to nine points. So if you take our fixed cost reduction component of productivity, as an example, we’re probably eight points to nine points kind of low-to-mid 40s overall utilization from a plant perspective and we would likely make that type of gain again in our expectations for 2011 on the fixed piece.

On the variable piece, there is obviously all the PO to PO [ph] reduction around material and material change relative to VA/VE. We see as permanent and that has gone and continues to go particularly well for us. So, the productivity miss in my mind has been really on the waiver side and real issue therefore isn’t that we’re missing pact or cycle times, it’s the fact that we are working overtime to a large extent based on the inability to have an accurate demand forecast.

Nigel Coe – Deutsche Bank

Yes. The reason I asked it that way is because I think last year you broke out the $600 million between I think synergies and then you had ongoing and organizational restructuring and the ongoing was a relatively small portion of that bucket, so I just wanted to know how that’s ramping because clearly as you get deeper into the plan the ongoing is going to have to pick up more slack?

Mike Lamach

I think it’s a good conversation, I will be sure that we really cover it March but the other learning I think from last year to this year and how we represent what we do is, we see a lot of what we’re doing across the sector is a tool kit, some have much greater opportunity relative to price or to cost take-out in a particular product or quality etcetera and so I think if you see by sector, variability in terms of how they tend to attack that.

Now, from a corporate perspective, raw material and what we’re doing there and around lean deployment across the company, that’s a standard across the company and what we expect to do there. But I think you’d see a little bit more maturity about how we would intend to do that by sector as opposed to a representation, just across the company and sort of a ubiquities format, that isn’t as helpful?

Nigel Coe – Deutsche Bank

And then just looking at 1Q revenue guidance, it certainly is a fairly conservative one when I compare the 4Q versus 1Q drop down and I think we are forecasting something at the midpoint of 15% drop down, so lot more severe than we saw last year. We’ve seen acceleration in ISM, particularly in the U.S., I’m just wondering that’s between ISM acceleration and yes, we’re seeing a pretty severe dropdown in 1Q, if anything that we should call out there?

Mike Lamach

We’re looking at operating leverage in Q1 Nigel, if I got it right, of around 31%.

Nigel Coe – Deutsche Bank

No, on the revenue line.

Mike Lamach

On the revenue line, okay. We’re looking there at about $0.15 drop, okay. I’m sorry we are not understanding your question exactly. Does it relate to the ISM?

Nigel Coe – Deutsche Bank

We hear now entirely from other companies that they are seeing reacceleration in order growth, just based, as you would expect from the ISM got about 60 and, so, therefore, it seems that 1Q is looking a bit brighter than maybe it would have two months or three months ago. But, yet, you are forecasting a big drop down relative to last year from 4Q to 1Q. I was just wondering if there is anything we should think about that?

Mike Lamach

No, I mean this is really a roll-up of what we get from the businesses with ranges. That is always expressed on risk and opportunity. So I mean could it be better? Sure. It depends a little bit about the Q4 booking for long lead items and what it is that we think we can pull if anything from Q2 to Q1.

Also, on the HVAC commercial business, there probably was a little bit of a pull up there as well with customers wanting shipments earlier, projects cycles happening earlier, we might have had $20 million, $25 million of pull forward in the commercial HVAC space.

Nigel Coe – Deutsche Bank

Okay, that is very helpful. Thanks.

Operator

Moving on, next we go to Andrew Obin with Bank of America Merrill Lynch

Andrew Obin – Bank of America-Merrill Lynch

Have you guys provided any outlook for your capital spending for 2011?

Steve Shawley

No, but we can. If you look at what we tee up in 2011 will be about a $0.25 billion, about $250 million.

Mike Lamach

That will be up a little bit from this year.

Andrew Obin – Bank of America-Merrill Lynch

Another question I have, as you guys think about the restructuring plan, the transformation and it does seem that the revenues the volumes are running ahead of your expectations and I just find it’s interesting that we’re talking about capacity utilization I guess I heard you right in the 40s and on at the same time, we are having issues with over time on labor. Given the faster pace of recovery, do you think you need to adjust your game plan in terms of how you think about capacity utilization, how you think about facility shutdown?

Mike Lamach

I think we’re doing that every day, Andrew, in terms of how we look at moving the footprint, I mean it’s not a static plan that we put in place and it’s dynamic literally, weekly at least we are discussing capacity. And what we think we need to do to do around restructuring and timing restructuring, so I don’t want to give you a sense that it’s a static plan at all.

Andrew Obin – Bank of America-Merrill Lynch

Sure. But at this point, you think that you’re fine in terms of the pace of restructuring, right? You don’t need to change anything?

Mike Lamach

I think you see in a comment I made earlier that I think the learning from us in 2010 applied to 2011 is not to potentially disrupt operations in peak seasons and there is a lot more thought around how do we really ensure that we preserve customer shipments and not have these sort of fire drills on demand as we’re restructuring operations. So you’d see a different order and thinking of timing based on seasonality.

Andrew Obin – Bank of America-Merrill Lynch

Just on inflation on price, should we expect the relationship to turn positive by the second half of the year and I apologize if you have answered that question already?

Steve Shawley

Before we go there, I just want to make sure maybe this is a little bit of a clarification. When we talk about capacity utilization, we go back and measure it at the low point. In other words, back in 2008-2009, we’re running about 30%. So Mike’s commentary about being up to 40% is on flat volume assumptions. We are actually running ahead of 40% or much more than 40% in capacity utilization right now because of volume, but what we hold out as the standard for ourselves in terms of the footprint program that we have is, we wanted to improve. In fact, we wanted to double capacity utilization at the beginning of 2009 capacity utilization levels.

Mike Lamach

Without volume.

Steve Shawley

Without volume. That’s very important, because when we give you these numbers, we’re working towards taking out fixed costs, so we’re running at much higher than 40% capacity utilization in our factories today but it’s being driven more by volume as opposed to the fixed cost targets that we’ve set for ourselves two years ago.

Andrew Obin – Bank of America-Merrill Lynch

So the point is on apples-to-apples basis. You’ve improved your efficiency to a point where you added 10 percentage points of capacity utilization using your methodology?

Steve Shawley

Eight points to nine points.

Andrew Obin – Bank of America-Merrill Lynch

And then just if you could answer the question on relationship between pricing and inflation, should we expect it to turn positive by the second half of the year? That would be my last question.

Steve Shawley

The spreads wider in Q1 were probably 40 basis points upside down. In Q1, we end the year. We think at this point 30 basis points upside down. So there is not a material flipping there, if you will, Andrew. It’s pretty much 1.5 points of price or so coming through the year each quarter with inflation probably being a little bit stronger in Q1 relative to the comparable we had in 2010.

Andrew Obin – Bank of America-Merrill Lynch

Terrific. Thank you very much.

Operator

Moving on, next we go to Josh Pokrzywinski with MKM Partners.

Josh Pokrzywinski – MKM Partners

Good morning, guys. Just on some of these better than expected demand in fourth-quarter and productivity getting pushed to the right on that. What’s the sensitivity in '11 guidance to the extent that there is revenue upside? I mean how much above the high end of the range could you deliver and still have productivity?

Mike Lamach

Josh, I’m going to give you probably a pretty simplified answer here is, if we see that kind of growth in Q1 we’re going to adjust guidance to that point in time, but right now, we are bounded here to what we think the reasonable outcomes would be. If we had increased demand beyond that, we’re looking for a forecasting process that’s going to be a little bit tighter for us to be able to see it and react to it sooner and then if you go back to bit of a root cause again in Q4, I would say the learning there is that, it was a good problem to have, but nonetheless, it’s a problem when you miss it like that. So we got to get better in 2011 around that and if we see stronger revenues, we certainly would be guiding towards, and we would be updating forecast to reflect that from a delivery perspective.

Josh Pokrzywinski – MKM Partners

And then just shifting over to the contingency, you mentioned earlier to the extent that everything goes as planned and you are able to realize that one point, two points that some of that would get redirected to investment. Maybe talk about, what’s the propensity to reinvest that versus what it drop through i.e., are we going to see investment go from half a point to a full point or does it go to half a point to point six or point seven?

Steve Shawley

Look, we want to grow the company profitably at 15% operating margins and higher consistent with our model. So if the best opportunities we had were to invest that and growth and we were seeing projects and opportunities that would be accretive in terms of product being replaced with higher margin products we’re in it for the long run. So, I would tell you that I sit here today looking out over a long period of time and want to make sure we are delivering this kind of gains, five, seven, ten years from now, so that’s how I look at it.

Josh Pokrzywinski – MKM Partners

Got you. Thanks, guys.

Operator

We’ll go next to Julian Mitchell with Credit Suisse.

Julian Mitchell – Credit Suisse

Yes, thanks. My first question was about the labor sort of productivity push outs that you mentioned in Q4, because of the steeper volume demand in November and December. What sort of assumption do you have for that in terms of 2011? That is how quickly do you think you can work through those labor specific issues and is that something that weighs on Q1?

And then based on your volume outlook for the year and your CapEx plans and so on, you think you sort of get through that by the time we get to the middle of the year. I would say that the labor and logistics and efficiency in Q4 were fixed the moment we responded with the demand forecast, which was accurate, which is now. So those things happen in the moment and as soon as you get the demand forecast right, it changes. So I don’t anticipate that issue recurring for us.

A little different than 2010 is the timing of some of the restructuring investments that we’ll do, which would be skewed a bit towards the back half of the year, and again we’re not going to initiate anything that’s going to cause disruption in the April through August, September timeframe and as an example, our climate businesses would be a great analysis for you there. So I think that in terms of how you would think about modeling out our productivity goals, probably relative to our 5% objective, if it’s lower in the first half of the year and a bit stronger in the back half of the year.

Julian Mitchell – Credit Suisse

And then on the price increases, I mean you mentioned your overall sort of firm-wide assumption and the range of price increases being push through. Can you talk a bit about based on last couple of months’ experience, which parts of the business you feel sort of most and least comfortable in terms of price increases being pushed through again or the existing ones sticky?

Mike Lamach

The industries move together here and so you’re not I think getting to seeing much in terms of outliers at this point in time around rising prices that need impact pricing. The parts of the business that work slower just by nature of the fact that you’ve got a big backlog are going to be the large air business and the applied business where you might have locked pricing in six months earlier around the delivery and so you’re going to see a mix issue there in terms of the realization.

Also those businesses work where every customer and every project is quoted and so there’s an iteration of activity in a competitive way to see prices beginning to materialize in the marketplace as opposed to businesses like security or Big Box retail, whether the price or price list and it goes off instantaneously.

Julian Mitchell – Credit Suisse

Great, thanks.

Operator

We’ll go next to Jeff Hammond with KeyBanc Capital Markets.

Jeff Hammond – KeyBanc Capital Markets

Hi, good morning, guys.

Mike Lamach

Hi, Jeff.

Jeff Hammond – KeyBanc Capital Markets

I just want to understand better, because it looks like in the presentation, you flush this out differently between the guidance and the actual fourth-quarter, but if you look at this four points of inflation in the fourth-quarter, can you break that out between other inflation and material commodity inflation? Or I guess ask another way, what was net price?

Mike Lamach

Well, get back to your inflation question, first, I mean, the bulk of it was going to be other inflation which is really where you’re going to see a lot of what I’ve talked about in terms of the inefficiencies coming through. So, out of the $150 million or so we had inflation, two-third, 70% of it would have been nonmaterial, less than $60 million of it would have been direct material inflation. Price would have been about 70 basis points or so a price. We had an expectation of a point, so we are right about 30 basis points in terms of price.

Jeff Hammond – KeyBanc Capital Markets

But your net price versus the 30 basis points you’re looking for in ‘11, like what would that number have been in the fourth-quarter?

Mike Lamach

We would have looked at net price realization of about 70 basis points. We would have looked at material inflation of about 160 basis points, other inflation probably 240 basis points, so, that gives you all the variables there.

Steve Shawley

With the prices kicking in, in the first-quarter we’d expect that 0.7% in the fourth-quarter and shift up to about 1.3% in Q1.

Jeff Hammond – KeyBanc Capital Markets

Okay. And then just quickly on res, your high single-digit growth, can you just talk about how you think about price, how you think about mix just given stimulus going away and does that incorporate any kind of additional market share gain?

Steve Shawley

Well, we had three points to share gain in the quarter. Again, that’s a heck of a surprise for us there. We’re running about a point a gain for the start of the year.

One data point I’ll give you is, when you look at the demand we had in November, December and you know we got a January one price increase, the logic question is how much by far happened and what happened there, so you’d see it in January. We had 10% bookings in January again in the HVAC res business. So I can’t tell you if that’s going to continue through February and March. I don’t know, okay.

But we would have expected to have seen a fallback in January in the res HVAC based on bookings in November and December that were 40%, 50% plus, and, in total, I think the quarter bookings were up 33% in the res HVAC business, so there has been some strength continuing on that. The mix is good. We would have I guess worried about the mix shifting down. We did plan a mix shift down, surprisingly, for the stronger perhaps than what we’re thinking in terms of the efficiency mix.

Jeff Hammond – KeyBanc Capital Markets

And then just as a follow-on to that, I mean you had a supply chain issue in 2Q in res, you had labor productivities and you’re surprised in the fourth-quarter, do you ultimately just need to carry in a more cushion and more inventory to manage kind of these quick shifts in demand?

Mike Lamach

I think it depends on situation. There are very different situations. One was a real forecast. We had everything we needed to achieve the forecast we put in place. If you miss the forecast then clearly, you’re going to go through (inaudible) to get things done. The supply chain issue we had in the second-quarter was specifically a supplier where we had an issue around getting parts and unfortunately those parts were coming out of Asia.

Steve Shawley

And Jeff, also, there was a big factor here. The biggest gorilla we have in the park here is the training commercial business. As we said that’s been down since 2008 and you see the kind of recovery we’ve seen in that particular segment of the business, it’s pretty bumpy, okay? That’s really kind of where we ran into. So when Mike said with these very different circumstances, the biggest area, the challenge that we had was in the training commercial areas and gearing up for the equipment that went out in the fourth-quarter. We go from being down to double-digit increase, quarter-to-quarter, that’s a pretty massive change.

Mike Lamach

Jeff, I guess to tell you the third part of your question would be, would we carry higher safety stock on a particular move? If you did it in season, which we’re not going to do, absolutely we would do that. If we do it out of season, I think we need to go back and see, do we have enough safety stock to be able to manage a move? Even it’s off season, we look at that. We’re looking at working capital in the 2.5 range and clearly, if we had to invest a bit more and get it right for our customers we’d do that. That’s not sort of throttling component of how we think about things

Jeff Hammond – KeyBanc Capital Markets

Okay, Thanks, guys.

Mike Lamach

Thank you.

Operator

We’ll go next to Deane Dray with Citi.

Deane Dray – Citi

Thank you. Good morning, everyone.

Mike Lamach

Hi, Deane.

Deane Dray – Citi

Wanted to go back to the question on the use of capital. And, Steve, I heard you’re increasing dividends longer term and buybacks, but we are in a pretty significant M&A cycle and I know we talked or we heard at the Analyst Meeting that there would be interest on bolt-on acquisitions, so where does that stand in terms of allocation of capital?

Steve Shawley

We certainly have not given up the concept of acquisitions. Hopefully, you’ve heard me say somewhere along the line that we’re also very, very interested in getting our return on invested capital up to at least our weighted average cost of capital.

The way to do that is improve margins, to run the business the old fashion way, and to drive the two points of margin improvement a year that we’re targeted on, that is a huge priority, because if you take a look about the history of the company, quite frankly, the capital employed in our acquisition efforts, you could question. There is the impact on our return on invested capital as a result of those decisions.

If we look at M&A going forward, quite frankly, it’s going to be the companies that can be accretive to our portfolio quickly. So what that translates to in any M&A environment? Expensive type of companies, if you were to go buy them, so I would say it’s our third priority at this point in time from a capital allocation perspective, because sorting through the type of company that we would be, type of enterprise, we would be interested in bringing into those portfolio to be accretive fairly quickly is sort of how we’re thinking about it at this point in time.

Mike Lamach

Deane, we’re not going to get the cart up in front of the horse here, right? I mean it’s going to go back to balance sheet, dividend, dilution, down the road sensible acquisitions and we’re not through the dividend and dilution aspect of our game plan at this point.

Deane Dray – Citi

Sure, that makes sense. How about on the other side of that equation? Are there any divestitures of significance being contemplated?

Mike Lamach

We’ll always evaluate things that will work in the portfolio going forward but I don’t have any updates for you here today. That’s something that when we get in March we can probably give you more of a sense of how we’re thinking about those things.

Deane Dray – Citi

That’s helpful. And then last one from me. Steve, the tax rate has been bouncing around a bit lighter this quarter, but little bit higher first-quarter for 2011, just give us an update what some of the dynamics are there?

Steve Shawley

What happened in the fourth-quarter was, we had some favorable audit settlements that occurred. Because of the increasing earnings in general, we were able to take advantage of certain tax assets that we previously could not, so would value those tax assets, that happened in the fourth-quarter of ‘10.

Going forward it’s very much a shift to earnings in higher tax and jurisdictions, including the US, so it’s a geographic mix question going into 2011. I think when we talked about our model, we also told everybody that, as we go through the next few years, we’ll be looking at tax rates in the mid-20s, we’re a seeing a little bit of a pop in that in 2011. Again ‘11 is driven by where the income will be earned.

Deane Dray – Citi

That’s helpful. Thank you.

Janet Pfeffer

Jennifer, we have time for one more question.

Operator

We’ll take our next question from Jeff Sprague with Vertical Research Partners.

Jeff Sprague – Vertical Research Partners

Thank you. Good morning, everyone.

Mike Lamach

Hi, Jeff.

Jeff Sprague – Vertical Research Partners

Just come back a little bit more on price and getting our arms around Q1, Mike, I think you said in your opening remarks you actually didn’t have quite what you wanted given the latest surge in raw mats but then Steve kind of said it’s all baked in, in that conversation about where spot prices are. Can you just clarify on are you where you need to be for Q1 and what kind of gap might still be outstanding there?

Steve Shawley

Jeff, want to make it sure I’m clear. The current spot prices of copper at 4.35, okay, is up from about 3.75, 3.80 in the fall of last year when we would have put together our annual operating plan, so it has moved on us, okay. So, yes, we’ve priced in a current look, but in terms of how we set the price increases, remember, those went out in September, October timeframes, so I want to make sure I’m clear on that, okay.

Jeff Sprague – Vertical Research Partners

Okay. So what kind of headwind should we think about relative to where you set price relative to where cost stands today? Is that fully reflected in the Q1 guide that you’ve given us?

Mike Lamach

Jeff, I go back to the umbrella that was set out there, 2% to 6% and for guidance purposes, if you assume, midpoint of that 4% right, and you say, half of it gets realized to 2%, our plan is for 1.5%. So I think we’ve got some room here within the umbrella that we’ve set around price increases and I think you’re hearing that from folks that are in the same businesses that we’re. So I don’t think we’re going to have much of an issue around folks working inside the net that they have got to the extent we see spot rates increase up, people working on higher realization with the pre-announced pricing.

Steve Shawley

Jeff, I’d say and again in another way, three, four months ago, we would have said that the price cost line of our chart here would have been no impact. Remember, that’s part of our financial model where we want price to offset the material inflation, so what we put in here is the additional inflation that we’ve picked up since late last year. So on a sense we have the inflation in here and price levels at about where we expect them to level out to be given the price increases we’ve already announced, okay? So there is still room for more price increases, but that’s going to be subject to what happens in the marketplace.

Jeff Sprague – Vertical Research Partners

Got it. And all the order strength that we saw in Q4 would have been booked at the pre-price increase levels?

Mike Lamach

No, HVAC would have been booked of res HVAC. Commercial has been working in real-time for six months, okay, so you are seeing it feathered down to just more internal [ph] process in which those industries and businesses work. I would say that industrial big areas has been doing the same thing. Security would have been more like res HVAC where the pricing would have been more of an event and you would have had sort of purchases at the lower levels. So Q1 in security and res, you would expect that bulk of what you see ought to be at the higher pricing levels.

Jeff Sprague – Vertical Research Partners

And just two last quick things, could you just give us what the Hussmann orders were in the quarter, percent change?

Mike Lamach

Hussmann had a good quarter.

Jeff Sprague – Vertical Research Partners

You didn’t seem to make the slide, so I was kind of curious.

Mike Lamach

Yes, actual revenue case was up about 9%.

Jeff Sprague – Vertical Research Partners

And orders?

Mike Lamach

Orders were probably down closer to 10.

Jeff Sprague – Vertical Research Partners

And then finally, Steve if you can, if you look at –

Steve Shawley

Jeff, that’s driven by some of the shifting in what’s going on with the big retailers buying like the Wal-Mart and Targets, in particular, remodeling programs.

Jeff Sprague – Vertical Research Partners

And then finally, for me, if you can, Steve, the walk from ‘10 to ‘11 on the margin bridge, if you exclude the contingency there’s four buckets, can you give us the actuals for those from ‘09 to ‘10?

Steve Shawley

We’ll have to call you back with that Jeff, okay? I don’t have that right on my finger tips, but we can give you this. We talked about the need to kind of as we talk about our model in the future putting in on this format, so Janet is prepared to talk about that, so she can give you a call back.

Mike Lamach

I can get close on the quarters, but if you had it, I’ll follow up with Janet.

Steve Shawley

It’s no problem. We just need to put in this format for you.

Janet Pfeffer

Thank you, everybody. And Joe and I will be around for follow-up calls, if you need it. Thanks.

Operator

This does conclude today’s conference call. We thank you for your participation.

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Source: Ingersoll-Rand CEO Discusses Q4 2010 Results - Earnings Call Transcript
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