Ingersoll Rand Inc. (IR) Q1 2019 Earnings Report, Transcript and Summary

Good morning. Welcome to the Ingersoll Rand’s 2019 Q1 Earnings Conference Call. My name is Tiffany and I will be the operator for the call. The call will begin in a few moments with the speaker remarks and then a Q&A session. All calls are on mute. [Operator Instructions] Thank you. Zac Nagle, Vice President of Investor Relations, you may begin your conference.

Thanks, operator. Good morning, and thank you for joining us for Ingersoll Rand’s first quarter 2019 earnings conference call. This call is being webcast on our website at ingersollrand.com, where you’ll find the accompanying presentation. We are also recording and archiving this call on our website. Please go to slide two. Statements made in today’s call that are not historical facts are considered forward-looking statements and are made pursuant to the Safe Harbor provisions of federal securities law. Please see our 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. With that, please go to slide three, and I’ll turn the call over to Mike. Mike?

Thanks, Zac. And thanks, everyone, for joining us on the call today. Our global business strategy is at the nexus of environmental sustainability and impact. The world is continuing to urbanize while becoming warmer and more resource constrained as time passes. We excel at reducing the energy intensity in buildings, reducing greenhouse gas emissions, reducing waste of food and other perishable goods, and we excel in our ability to generate productivity for our customers, all enabled by technology. Our business portfolio creates a platform for the Company to consistently grow above average global economic conditions aided by the strong secular tailwinds that I’ve outlined. This morning we announced the transaction to separate our Industrial businesses by way of a spinoff to Ingersoll Rand’s shareholders. And then combining it with Gardner Denver to create a leading global industrial company and to maintain our climate control assets to create a premier pure-play climate business. Our pure-play climate business squarely focuses 100% of our portfolio at the nexus of sustainability and impact where our products and services can have the most significant impact on the global challenges I outlined earlier. The press release and presentation outlining the transaction in detail is on the Ingersoll Rand website under the Investor Relations section. We also held a joint call with Gardner Denver management this morning at 8:00 a.m. and a replay of the webcast will be available on our website. So I’m not going to spend any time discussing the transaction further on this earnings call. We will, however, be taking Q&A related to both our Q1 earnings and this morning’s announcement during our Q&A session following our prepared remarks. Moving to slide four. We’re off to a strong start in 2019. Focused and consistent execution of our business strategy enabled us to deliver top tier revenue growth, margin expansion and EPS growth in the first quarter. We saw strong leverage from both top to bottom on the P&L with 8% organic revenue growth levering up to 27% EPS growth in the quarter. We delivered another quarter of robust revenue growth led by our climate segment despite tough growth comps from the prior year quarter. Climate’s 10% organic revenue growth in the quarter was as high as any quarter in the past 2 years and was compounded on 8% growth in the prior year. Industrial’s organic revenue growth was up 3% offsetting good growth against the tough 9% growth comp in the prior year. Headline bookings growth for the enterprise and for Climate of negative low single digits is driven by a significant year-over-year decline of bookings isolated to our Transport business, which I’ll lay out in more detail in a minute. In order to more fully understand the health of the portfolio, we believe it is constructive to look at the underlying bookings growth trends in each of our key business units. For example, our commercial HVAC North America, commercial HVAC Europe, residential HVAC and Compression Technologies North America business reach up in the mid- to high-single-digit range in the quarter. China had flattish bookings in the quarter but still healthy when you consider the growth comp in the prior year quarter was in the mid-20s growth range. As we expected, Transport bookings were significantly lower in quarter one after the extraordinary bookings growth we saw in every quarter of 2018. As an example, in 2018, we booked 1.5 years of North America trailer backlog and 2 years of auxiliary power unit backlog resulting in record Transport backlog at the beginning of 2019. With the record backlog and continued underlying market demand, our revenue outlook for Transport looks healthy into 2020 with the key constraint being trailer manufacturers capacity. As you’ve seen, the ACT data is consistent with this view showing very high levels of demand through the forecast horizon, which goes out to 2020. As I mentioned earlier, margin expansion was strong in the quarter with adjusted enterprise margins expanding 90 basis points. We’re very successfully mitigating tariff and inflation impacts through price with the price versus material inflation spread of 70 basis points. Operating leverage was healthy at 26% and slightly ahead of our guidance for 2019 of 25%. Overall, our end markets are healthy and performing largely as expected. As we discussed last quarter, we continue to monitor geopolitical uncertainties related to Brexit in Europe and tariffs and trade in China. In quarter one, we also continued to execute our balanced capital deployment strategy. After investing in the business, we deployed approximately $380 million between dividends and share repurchases. Lastly, while still early in the year and with the cooling season on deck, we haven’t seen anything through the first quarter that diminishes our confidence in our full year guidance. We’re bullish on the effectiveness of our strategy, bullish on our end markets and bullish on our ability to execute in 2019. As a result, we’re raising our annual guidance to the top end of our prior adjusted EPS range of $6.15 to $6.35 to approximately $6.35. Please go to slide five. As we discussed in the previous slide, we delivered robust revenue growth led by our Climate segment with organic growth across all business units. We also delivered strong bookings growth in virtually all of our key businesses with commercial HVAC North America, commercial HVAC Europe, residential HVAC and Compression Technologies all up mid to high single digits. These results reflect continued strong execution of our strategy, capitalizing on healthy end markets. Please turn to slide six. We’ve outlined a number of takeaways for each major business in the next two slides and you can read through those for some additional color. The most important thing I’d like you to take away from these slides, however, is that our outlook by key business is largely unchanged from when we gave guidance in January and we haven’t seen anything that will cause us to change our outlook for the year at this time. Turning to slide seven. Again, we’ve added some comments to provide additional color on the slides and you can read through those. The key takeaway remains that we didn’t see anything significant in quarter one that would change our outlook for the year at this juncture. And now, I’ll turn it over to Sue to provide more details on the quarter. Sue?

Thank you, Mike. Please go to slide number eight. I’ll begin with a summary of a few main points to take away from today’s call. As Mike discussed, we drove strong operating and financial results in the first quarter with adjusted earnings per share of $0.89, an increase of 27% versus the year-ago period. Our Q1 performance gives us increased confidence in our ability to execute against our full year growth and margin targets. As a result, though it’s still early in the year, we are raising our full year adjusted continuing earnings per share guidance to approximately $6.35 at the high-end of our prior guidance range. First quarter organic revenue growth was solid in both our Climate and Industrial segments. Bookings in healthy end markets grew 105% book-to-bill and generated record backlog for the enterprise. Climate organic revenues were very strong, up 10%, building on a Q1 2018 organic revenue growth of 8%. Organic revenues were particularly strong in commercial HVAC North America and Europe. Transport organic revenues were also strong. Residential HVAC and China HVAC were up low single digits and flattish respectively, against tough prior year comparisons of low-teens growth and greater than 25% growth, respectively. As Mike discussed, HVAC organic bookings were strong with mid-single to high single-digit growth rates for commercial HVAC North America and Europe and for residential HVAC. In our Industrial segment, we delivered healthy 3% organic revenue growth compounding on a 9% organic growth rate in the prior year. Organic bookings growth was healthy in the first quarter with Compression Technologies North America bookings up mid-single digits. China growth was flattish with demand strengthening throughout the quarter providing cautious optimism going forward. When we’re with investors, we often get questions around free cash flow timing for the year. Consistent with typical seasonality, we are building inventory in the first half of the year to support the expected growth during the cooling season and we expect cash flow improvement to ramp in the second half of the year. Our free cash flow targets remain unchanged. Leveraging our business operating system across the enterprise, we continue to manage direct material, tariff related and other inflationary headwinds in the quarter. During Q1, we expanded adjusted operating margins 90 basis points and delivered 26% operating leverage slightly ahead of our full year expectations. Importantly, we also delivered on our dynamic capital allocation strategy in Q1. We deployed $128 million in dividends and $250 million on share buybacks as our shares continued to trade below our calculated intrinsic value. Looking forward, we expect to consistently deploy 100% excess cash over time. Additionally, our offer to acquire Precision Flow Systems was accepted by the seller during the quarter. Expectations for regulatory approval for the pending acquisition remains unchanged by midyear, 2019. Please go to slide number nine. We delivered organic revenue growth of 8%, adjusted operating margin improvement of 90 basis points and adjusted earnings per share growth of 27%. We drove strong organic revenue growth across all businesses and in virtually all products and geographies. Continued disciplined focus on pricing and productivity actions enabled us to effectively manage inflation and tariff-related headwinds and drive margin expansion across the enterprise. Please go to slide number 10. Our Climate segment delivered another strong quarter of operating income growth enabling us to drive solid year-over-year earnings per share growth in the quarter. Our Industrial segment delivered solid results that were negatively impacted by a supplier disruption in our small electric vehicles business. Excluding the disruption, Industrial adjusted operating margins were up 50 basis points. Of note, our full year Industrial margin outlook remains intact. Although the operating income line other expenses included expected pension cost increases plus a legal settlement related to a legacy business, which negatively impacted results by approximately $0.05. All in, we delivered strong 27% earnings per share growth in the quarter. Please go to slide number 11. Strong execution drove 90 basis points of adjusted operating margin improvement in the quarter. Price versus material inflation was positive for the fourth consecutive quarter. Pricing expanded margins by 70 basis points, reflecting strong carryover price from 2018 and incremental pricing actions in 2019. Consistent with our full-year expectations, we delivered productivity to exceed other inflation. We continued to reinvest heavily in our business. Incremental Q1 investments of approximately 50 basis points were fairly evenly weighted between growth and operating expense reduction projects. Please go to slide number 12. Our Climate segment delivered another strong quarter with 10% organic revenue growth and adjusted operating margin expansion of 130 basis points. Consistent with our expectations, results were strong across the segment. Please go to slide 13. Our Industrial business delivered solid organic revenue growth of 3% against a tough comparison of 9% growth in Q1 of 2018. As I mentioned previously, our Industrial segment margins were negatively impacted by a supplier disruption in our small electric vehicles business. Excluding the disruption, Industrial adjusted operating margins were solid, up 50 basis points. We expect the supplier disruption to be resolved during Q2 with full year Industrial margin expectations unchanged. Please go to slide 14. We remain committed to a dynamic capital allocation strategy that consistently deploys excess cash to the opportunities with the highest returns for shareholders. We maintain a healthy level of business investments in high ROI technology, innovation and operational excellence projects, which are vital to our continued growth, product leadership and margin expansion. We have a longstanding commitment to a reliable, strong and growing dividend that increases at or above the rate of earnings growth over time. We continue to make strategic investments and acquisitions that further improve long-term shareholder returns like the pending PFS acquisition announced during the quarter. We are committed to maintaining a strong balance sheet and BBB rating that provides us with continued optionality as our markets evolve. We continue to see value in share repurchases when shares trade below their intrinsic value and in Q1, we deployed approximately $250 million. Please go to slide 16. With the extraordinary bookings in our Transport business in 2018, we thought it might be useful if we gave a bit of background on what drove the outsized orders and how to assess the impact to the overall enterprise. During 2018, high trucking capacity and the use of electronic driver logs drove strong demand for class 8 trailers throughout the year. Additionally, the tax law changes under the U.S. Tax Cuts and Job Act further incentivized trucking companies to invest in their fleets. With such strong demand, OEMs experienced capacity constraints driving trucking companies to place orders months in advance. As the trucking companies placed preorders for trailers, they also placed preorders with us for trailer refrigerated units and auxiliary power units. As Mike mentioned earlier, we booked 1.5 years of trailer unit orders and 2 years of auxiliary power unit orders resulting in record Transport backlog at the end of the year. With a record backlog and an underlying healthy market, our revenue outlook for Transport is healthy into 2020. Please go to slide 17. Since Q2 of last year, we’ve effectively managed both material inflation and tariffs delivering price cost margin expansions in each quarter. With that track record, we frequently get questions around our price cost outlook for 2019 and I’d like to give you some background to understand how we expect the price cost to play out. First of all, we’re off to a good start in Q1 with strong carryover price from 2018 and incremental 2019 pricing actions, price cost delivered 70 basis points of margin expansion in the quarter. As we move into Q2, our year-over-year pricing comps get tougher and by the time we get to the back half of 2019, we’ll be lapping our full pricing actions from the prior year. Any incremental price at that point will be mainly from 2019 pricing actions. For the inflation part of the equation, we expect continued commodity inflation in Q2. We expect moderating inflation in both Tier 1 materials and Tier 2 components in the second half of the year. During 2018, tariffs ramped throughout the year with the implementation of Section 232 tariffs followed by List 1, 2 and 3 Section 301 tariffs. As such, we won’t fully lap current Section 301 tariffs until Q4 of this year. All in, we have successfully managed inflation and tariffs and we expect to continue to do so through purposeful active use of our business operating system. Next, we continue to expect 20 to 30 basis points of positive price versus cost in 2019. And with that, I’ll turn the call back over to Mike.

Thanks, Sue. Please go to slide 18. In summary, we’re pleased with how 2019 is shaping up. We expect to deliver strong revenue, EPS and free cash flow in 2019. Looking forward, we believe the company is extremely well positioned to deliver strong shareholder returns over the next several years. Our global business strategy is at the nexus of environmental sustainability and impact. The world continues to urbanize. We’re becoming warmer and more resource constrained as time passes. We 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. We have been investing heavily for years to build franchise brands and to advance our leadership market positions to enable consistent profitable growth. We have an experienced management team and high-performing culture that breathes operational excellence into everything we do. And lastly, we’re committed to dynamic and balanced deployment of capital, and we have a strong track record of deploying excess cash to deliver strong shareholder returns over the years. And with that, Sue and I will be happy to take your questions. Operator?

[Operator Instructions] Your first question comes from the line of Jeffrey Sprague with Vertical Research Partners.

So, Mike, I was on the first half of the first call this morning and not the back half. I looked through some of the notes. But I was wondering if you could just spend a minute or 2 to kind of talk about the range of kind of strategic comparatives for kind of new Climate company and obviously, not mentioning things by name but where do you see the portfolio headed? What are some of the interesting opportunities maybe beyond the kind of excellent organic execution that you had?

Yes. Jeff, first, to you and all the folks on the call today, thanks. We’re occupying a lot your time today. So, thanks for the coverage and for following us. The answer to your question really the strategic comparatives don’t change for Climate. The strategic focus around being able to really pinpoint the strategy, the investments and really create the most agile structure that we can come up with from a customer perspective is critical. And then, we’ll continue to invest like we have in innovation and into the channel. So nothing changes. It’s just a sharper focus on running faster and being successful.

And just a quick nuance on the separation costs. It appeared when GDI was mentioning the $450 million costs to achieve, they mentioned a $100 million separation costs for IR? A little confused by that. Are they somehow eating or absorbing the stranded costs associated with your side of the equation? Could you clarify that?

Yes, Jeff. No. That’s not what they were intending. So the $450 million is the cost to achieve the synergies and then they have an additional $100 million that is their advisers and their cost to actually separate the Ingersoll Rand and include the Ingersoll Rand businesses and all their stuff. So in other words, they’ll have tax and all of those things as well and then it came out that way simply because they’re taking the name. But that is their cost, onetime cost of the transaction and the $450 million is the cost of achieving the synergies.

Your next question comes from the line of Nigel Coe with Wolfe Research.

Mike, I know you want to keep this kind of more in the quarter and the outlook. But, again, I wasn’t on the Q&A portion of the call this morning as well but a bit curious maybe I just want to see if -- when we look at the free cash conversion for the past 2 years, was there a significant difference between Climate and Industrial? And I guess, my question is, how does the standalone Trane free cash flow looks on a go forward basis?

So, the answer, Nigel, is there is not a significant difference between the Climate businesses and the Industrial businesses. So, what we challenged the businesses with and actually they deliver is achieving 100% of operating income as their operating cash flow. And then, as I look through that and convert operating cash flow into free cash flow, again, they’re both in sort of that 1% to 2% range on CapEx. From a tax rate perspective, I would call tax for Climate to be slightly on the lower end of our range and Industrial slightly higher. But what you end up with as I parse through all of that is that both of those businesses deliver about 100% of net income on free cash flow.

Nigel, I would say that once we get closer to the actual effect of the spend and ClimateCo giving some guidance, clearly, that quarterly working capital will change a bit because of the seasonality of the business but other than that, Sue’s exactly right on point with 100% or better conversion, which is the goal.

And then just switching to resi, you’ve maintained a low- to mid-single-digit growth. It sounds like 2Q is still not okay. But if we maintain this kind of weather pattern through the summer, would we expect to be more in the low mid-single-digit zone? And then on top of that, have you seen any market share shifts so far this year?

We’ve seen a good market so far this year and even with the weather being less supportive, it was still a good quarter for us. So good revenue growth in the quarter, good bookings, good margin expansion. New regulations I’m sure helping with that and also surprising opportunities on new furnished regs. In terms of share, really if you look at any rolling 12 month period, pretty much any quarter over the last 4 years, we’ve gained share and we would have gained share again over the last rolling 12 quarters. So I think it will be for the fifth year in a row that we’ll see pretty significant share gain again.

Your next question comes from the line of Steve Tusa with JP Morgan.

Just to -- I wasn’t -- also was not on the call this morning. I’m just curious as to the timing of this, I mean, I know that this is something that probably was evaluated several years ago when you split off Allegion. I don’t know if somebody already asked it earlier in the morning but what was kind of the mindset around why now?

Yes. I think that when you look at the company today, the dyssynergies that we see are about $150 million in terms of how we integrated the company from manufacturing and sourcing to engineering to shared services. And so spinning off a company without something of scale to merge with and develop synergies is a pure headwind. So when you find a situation like this, you got a $250 million synergy opportunity not including the growth side of this but $250 million on the cost side of this thing, it’s really fully offsetting any headwind we have on the dyssynergies also avoiding that public company duplicate startup cost around that and then allowing us to really streamline the way we go to market in the Climate space, Steve. So it takes some timing, some valuations that work, the math has to work and it takes a willing and a good partner. It takes confidence on both sides that the management team going forward can execute on the strategies so that is our confidence in Vicente and the go forward Industrial company team as well as our confidence in the management team at ClimateCo being able to execute that. So all things point to the right valuations, right timing and the right partner to be able to effect a net positive versus a dissynergy number in the math.

What’s the -- what’s your updated thoughts on the, I guess, the daily question around HVAC industry consolidation? I know that your view in the past has been you can’t kind of narrowly define it as just U.S. markets. Do you see kind of an open playing field here on that front? Or after further review, there aren’t a lot of opportunities?

Well, nothing’s changed in our view that we’ve been talking about for 2 or 3 years around this in terms of the market and consolidation and what could happen between willing partners that want to do that. But I will tell you that strategically, it’s the same place we were and we don’t need to do something, we could if it made sense for shareholders. I think, we’ve got great optionality either way it goes. But it does create a much sharper focus and ability for us to think about being just faster in everything that we do from a customer, and from an innovation perspective. And -- I mean to me, it’s really exciting to think about what’s possible going forward as a -- is a sharper focus to a Climate company.

Okay. So one last one. Can you just -- I know you don’t want to give quarterly orders guidance but just should we just think about like the comps for the rest of the year? And a model that out, I mean, it can be lumpy. Is there any unusual lumpiness that you want to get out in front of for the second quarter just to kind of set expectations? I know the negative 3% was a little bit weaker than I was expecting. But just curious as to how you see the pipeline kind of playing out over the course of the year, if there’s anything we should think about for second quarter on the Climate order front?

That’s why we try to give a bit more color this quarter around the other pieces of this because when you think about the North American business both res and commercial, it was really an excellent quarter again mid- to high-single-digit growth rates. North America unitary particularly strong. We saw strength in office. We saw a strength in Industrial and a subset of that is really data centers driving that component. We see the manufacturing warehouses, labs as well. Applied, no surprise there that continues to be running incredibly well with great backlog and great order rates. Even China sequentially, and this would apply both to the Industrial businesses and the HVAC businesses showed sequential progress in the quarter where we came out of March with strong bookings and some healthy optimism around that. Europe was a little bit weaker but there’s a lot going on and weaker -- I mean, Europe, and I think that from an HVAC perspective in Europe, we’ll continue to capitalize on the mega trends that are driving growth outside sort of the general economy. But it has impacted things around Transport and some of the Industrial economy in Europe as well. The Industrial markets seem to be doing okay, as well. There again is some moderation in China, which we felt was positive. U.S. Industrial productivity remained strong. Capacity utilization’s at record levels in the U.S. CapEx projections in the U.S. are low single digits so it supports our forecast there. In the EU, the PMI didn’t decelerate further so that’s I guess a bit of a win that had sort of plateaued, flattened. In China, PMI, it’s still down again but it was up sequentially so things are looking better I think in China.

And Steve, if I can add a broad comment on top of the excellent color that Mike gave. If you think about Transport orders throughout 2018, they got tough comps going in all of those quarters. I would also say that if you think about the enterprise and where our growth came from in 2018, the second quarter, I don’t care which business you have is a tough comp when you look at it. So again, that’s not to indicate that we’re not going to have great bookings growth but those tough Transport comps are going to be there and the second quarter was a particularly high enterprise type of growth in 2018. So tough comps.

Your next question comes from the line of Julian Mitchell with Barclays.

Maybe a first question on the incremental margins firmwide. I think you said they were around 26% in Q1. The year is 25%. Included in the guide though is the sort of moderation from price cost tailwind to margin. So maybe just explain what countervailing factors kind of step up through the balance of the year to offset that diminishing tailwind from a price cost?

So Julian, as you think about it, what is going to happen in actuality is you’re going to start lapping the price in the second quarter. So in other words, the great pricing that we saw carryover from 2018 into 2019, we should go throughout the year. And you’ve got tougher compares on the overall pricing dynamic, which is why we talked about that price cost really sort of moderates as you go throughout the year and gets you back more into that 20 to 30 basis points spread type of environment. And again, you’ve got a first quarter we’ll see what happens as we go into the cooling season but it really is the pricing comparisons and the material inflation sort of staying where it’s at.

Sure. But does the -- maybe the tailwind from volume mix or the tailwind from productivity, does that step up later in the year? And that kind of mitigates the shrinking tailwind from price cost?

Yes. It’s always the productivity. We’re going to get more ideas as we go throughout the year and it does ramp up. So it balances throughout the portfolio between price and material inflation and productivity and other inflation.

Yes, Julian, too. I guess, last thing I’d say is if there is place probably in the guidance where there could be opportunity, it’s certainly in price cost, which we continue to surprise ourselves with what we’re able to affect there and still continue to gain share in the process. So we’re careful about that but that’s going very well.

And then just the second topic. So you emphasized Transport order comps very tough throughout the whole year. That’s very clear. And just on the revenue side of Transport, just wondered how you were thinking about that this year, maybe just parse out kind of expectations around the Americas and then I think EMEA, you’d thought about a flattish market previously for this year.

Yes. So I guess I would start the conversation by saying that with the amount of backlog that we build in North America trailer and in APUs throughout 2018 and again in the first quarter of 2019, we’ve got really solid footing on revenues going into 2020. So the only point on the tough comps was that there wasn’t just one quarter of Transport bookings. So I would expect just as you said that we’ll see strong North America revenues coming off of the backlog that we have in North America and APUs. Europe is going to be slightly impacted by Brexit and perhaps not as strong with the backlog and the overall orders. So now you say Transport’s going to have a very good year in 2019 and 2020.

Yes. Julian, I think one way to think about it is, it’s a little bit like the Applied business. Right now, you’re booking this -- in this backlog. You’ve got great visibility into it, when you take out the noise of the compares on the bookings because of Transport, you end up with this mid-single-digit revenue stream, which looks pretty solid through 2020.

Your next question comes from the line of Joe Ritchie with Goldman Sachs.

So I want to piggyback on that price cost question, Sue. I just want to make sure I understand what’s embedded in the guide for this year. And so at 1 point, I think even last quarter, you guys were expecting a step up of 25% on the tariffs side. So I wanted to make sure that that was still part of the guidance. And then secondly, what are you anticipating from a pricing standpoint given moderating commodity inflation this year?

Yes. So, as you think about how we thought about price costs going throughout the 2019 period is we obviously, had some tailwind coming off of the 2018 pricing. And we obviously, have left the tariffs that we put in the original guidance in. So they might have moved out a month and that might have created a little bit of less material inflation, if you will, in that guidance but it’s not significant. So again, what we talked about when we gave the guidance and what we’ve continued to talk about is that if the tariffs don’t materialize, our pricing will adjust. If the tariffs materialize, or they’re greater or there’s more inflation we’ll adjust as needed, but the pricing that’s in there is our normal pricing for what we see. And again, if the tariffs don’t materialize, we’ll not do price increases to cover something that didn’t actually happen, if that makes sense.

Yes. No, that makes sense. So I appreciate the clarification. And if I could piggyback on some of the order discussion that we’ve had so far, Mike, you mentioned in your prepared commentary that China commercial strengthened through the quarter. I was wondering if you can maybe just provide a little bit more commentary around what commercial HVAC did regionally throughout the quarter as we exited.

Yes. I mean, starting with China, its demand strengthened throughout the quarter and it’s a maybe testament to what’s been happening with the direct sales strategy to drive those above market rates. In China, generally, we saw acceleration in even auto and pharma. So that was a positive. And it was less concern both in HVAC and in the compressor business around exporter activity. So it’s certainly a more positive constructive environment there. The rest of Asia with the exception of Taiwan is pretty good for HVAC. So India, Indonesia, Vietnam, all -- Thailand, all positive. Just Korea is a bit weak for us there. Europe continued to outperform the market. It’s not really so much connected to GDP as it is connected to the regulations and around some of the transformation there. We’re doing very well in Latin America but it’s difficult because if you think about the currency translation there, you get hurt in a lot of places but it’s a healthy business in Latin America from an organic perspective. And the U.S, continues to be strong and I think will stay strong for the balance of the year in all aspects of the HVAC business.

Your next question comes from the line of Andrew Obin with Bank of America Merrill Lynch.

Congratulations on the deal. Great quarter. Just a question on orders not to beat the sort of horse to death. But given how tough the comps get particularly in the second half, should we expect a couple of more negative comps on orders this year? Overall orders turning negative for the company bookings?

Again, first, it’s hard, Andrew. We don’t really forecast sort of that way around orders, it’s really around the pipeline. So Sue, I don’t know if you’ve done the math on that.

Yes. I think, Andrew, when you think about it. If you just did modeling with those comparisons, you’ve also got a large HVAC order that was in Q4. So if I pull that out as well as the Transport pieces, again, you’re going to get enterprise bookings that are going to average out. So I don’t really see an issue with that in the back half of the year. So what I pointed out to you is that Transport had heavy orders throughout the year in 2018 and tough comps but the overall business had a really excellent booking quarter in the second quarter but also the fourth quarter had the large commercial HVAC order. So if you take that noise out of there, I think we have very good bookings. And if you think about Q1, I mean, you had Q1 bookings that exceeded our revenue, the 105% ratio, that bookings ratio, book-to-bill ratio that I talked about so I wouldn’t get concerned about that. I think it’s just more color for your expectation.

Yes. Andrew, I think, to that point, add color, we’ll just need to provide more color, so I don’t think the story is going to be in the headline bookings, it’s going to be understanding the health of the components and HVAC in a totally different trajectory and globally, on a different by region trajectory than it would be for Transport North America. We’ve just gone through heck of a boom here in the ‘18 and early ‘19 timeframe. So we’ll give more color to help you understand that.

And as I said, I also missed the Q&A portion of the earlier call but can you talk about [technical difficulty] given the more concentrated portfolio from HVAC, what’s happening with the HVAC JV, and is there anything in your [technical difficulty] market in North America?

Well, it’s been a great success, the JV itself. So, it’s been something that I’m glad we did. In fact, I’m heading to Japan next week and look forward to sitting down with the CEO and going through the performance at this point but we couldn’t be any happier with what has transpired at this point in time. But really in our view number one in the market particularly where we participate together, we’re number one. And the dynamics are the same where you’re seeing good ductless growth in the U.S, slightly above the ducted revenues and you’re seeing ducted revenues outside the U.S. and typically ducted markets growing faster than ductless revenue. So it goes to the theory that at the end of the day, it’s going to be companies and channels that can sell a full suite of products and services that are going to win. So I’m very happy with that joint venture and I would say it’s exceeding expectations.

But effectively within this product category, you’re going to do everything within the context of this venture within that technology, right? You’re not going to do something by yourself?

Well, we do a lot of -- by our self today. I guess that probably helps to put some color on that. For really sort of the premium end of the market, Trane Mitsubishi is what we’re going with. For the entry-level point in the market, we’ve got everything from making it ourselves, doing both variable refrigerant and variable waterflow systems along with ducted offerings in Europe, that we produce ourselves all the way through to some source product we use in various applications around the world. But when we think about the premium offering, that’s going to be a Trane Mitsubishi offering for us. If there’s a lot of segmentation here, which I appreciate the question because that is an important factor is understanding the segmentation of the market and make sure we’ve got a product and a solution for every part of the world and every price point that we need to plan.

Your next question comes from the line of John Walsh with Credit Suisse.

Congratulations on the transaction announcement this morning. I guess, just thinking about the Industrial margin impact from the supplier disruption, should we put another $4 million in our model for Q2, or would you expect it to be less than that?

No. We killed that in quarter one. So no, we’re good to go. I wouldn’t put anything in the model that’s not -- that’s -- if that one’s complete. Run the ground.

Got you. And then, just thinking about the good growth we’ve seen in Climate last year, this year, over the last several years, I mean, how is the supply chain on the Climate side of the house? I mean, do you think -- are there pockets where things are stretched, or do you feel very comfortable that there’s -- you have all that taken care of?

Well, I mean, this has been a factor, I think, competitively and I think we’ve been able to win by being able to have the capacity or at least change the playbook and have the playbook with different tack times to be able to hit different customer demand patterns. And so this was played out well and I’m really proud of what our whole team has been able to accomplish there. And it’s been tremendous growth and we’ve wrecked the wall through that. With that being said, sure, I mean, you’ve got suppliers that are stressed and some situations where we’re needing to pay extra -- needing to pay extra close attention and in some situations where we’re needing where we can to be able to carry more inventory.

And to maybe just one last quick one. I didn’t hear any commentary around controls and what that did in the quarter and the trend you’re kind of expecting there?

Yes. Services and controls are actually -- continue in both the CTS business and in the HVAC business globally exceed equipment growth rates. And the strategies there are working. And our controls growth rate continues to be kind of that the double-digit growth rate. And it’s not unusual, I mean, everything you’re seeing in terms of products and systems today going as a system controls in our view is really part and parcel to a system that we sell.

Your next question comes from the line of Tim Wojs with Baird.

I want to extend my congrats on the deal as well. Just had a couple of cleanup questions here around Climate. So I guess, relative to overall segment margin expectations for ‘19, would you expect any of the sub businesses to have any sort of outsize margin performance in 2019, or do you think all 3 subsegments expand margins kind of similar to the overall segment? And then secondly, what was price realization in Climate in the first quarter relative to the 10% organic growth?

Yes. I think Tim, you’re saying for res, commercial, and TK, do we expect margins to increase? And we do across all 3 of the sub portfolios in Climate. To your second question, I think we’re looking for an answer on that.

On price realization?

Yes, I think price realization was good. We wouldn’t provide a specific breakout of what -- exactly what our price number is.

Okay. I guess, my first question was more of I think all 3 businesses will expand but is there any sort of outsize margin performance in any one of the businesses? Or should they all kind of expand at a similar level?

Well, it’s potentially, yes. If you ask the presidents running the businesses, they will tell you it’s really outsized but from our point of view, they’re all doing what they need to be doing and they’re doing a great job. So no, there’s nobody -- there’s 3 gold medals, that’s what we’re going to hand out at the end of the year.

Your next question comes from the line of Steve Volkmann with Jefferies.

Most of my questions have been answered but Mike, I’m wondering just a very big picture question around cyclicality of the global HVAC business. Obviously, some investors are thinking we might be toward the peak of the cycle, things continue to seem pretty good. You’ve mentioned a number of kind of secular changes whether it’s Energy or regulations or anything like that. But just how would you encourage us to think about cyclicality of the remainder co as we go forward now with the next iteration of your life?

Yes. Well, I’d say cycles are not telling the story anymore, I mean, you’ve got to look at the regulations and what’s happening in various parts of the world. You’ve got to think about 1 billion more people coming into the middle class and needing air conditioning and the demands on power in the grid and sustainability of all that. You’ve got to think that 15-plus percent of greenhouse gas emissions are happening through HVAC systems. And if you fast-forward and we do nothing about it, 25% would be through air conditioning in homes and buildings by 2030 on that larger population urbanizing. So the way to solve that I mean, is to do what we’re doing. I mean we alone with the technology we have today that can cut out 2% of the world’s greenhouse gas emissions just by doing what we’re doing today by 2030. And you can imagine if 50 other companies join that, you wouldn’t have a problem or at least the problem would be totally recast. So I think this is totally different. And then if I take it down to sort of ground-level today, I mean, this is why the services businesses are so critically important and wants to help counter these mini-cycles around what happens with office building or institutional in one part of the world or some geopolitical disruption in the part of the world. We’re left to deal with those but long term, whatever those sort of mini-cycles are, the trend is up into the right about what needs to happen in the world between now and say, 2050 for that matter.

Okay. That’s good color. And then just 1 real specific one maybe for Sue. Is there anything that happens with respect to this transaction? Is there any impact on free cash flow? Or your ability to repurchase shares as we go forward?

So, the answer is no, there is no impact on free cash flow and no, there is no restrictions on our ability to buy back shares if the price is below our intrinsic value going forward. No.

Your next question comes from the line of Josh Pokrzywinski with Morgan Stanley.

Just to follow up a little bit on some of the resi questions from earlier, understanding that there is a competitor out there who’s kind of fighting to reclaim some share. How does that color your view on what pricing does over the balance of the year? And Mike, how do you feel about inventories in the channel right now? I know some of that is company-owned and you manage that but maybe from the independent side, what’s your sense on loading levels versus normal?

Yes. I mean, it is normal for us. If anything you might have seen, well, it depends on what competitor is launching the furnace platform when and when their pricing increases go into effect and you can get some disruptions from quarter-to-quarter. But the right way to look at that is not quarter-to-quarter, it’s over a long period of time, a rolling 4 quarters makes a lot more sense on that. With all that being said, I continue to like our strategy. We’ve continued to penetrate the market with brands at various price points, with staying in front of regulations, with fully utilized, very efficient plant and supply chain structures. So, we’re going to keep on doing what we’re doing and competitors are going to do what they do. But frankly, through the first quarter, everything looked great. I mean, sort of price realization, cost position, bookings, revenue, there was nothing but positive news there from our point of view.

Got it. And then just shifting over to commercial. Obviously, some great order intake especially in 2018. I think some large projects you called out, particularly in the fourth quarter, if I remember right, should we think about those converting a little lower-margin -- at a little lower-margin this year just given there’s probably some third party source content, et cetera. And if so, what does that look like? When does that happen? Any color around what that margin mix when those hit, would be helpful.

Yes, the easiest way to think about that is those larger projects really have the kitchen sink costed into them. So on a contribution basis, we’re making sure it’s accretive with the margins that we’re trying to post from an op income standpoint. So the gross margins may be lower but you’re really -- talking about all-in costs stand to execute. So I don’t think you see any dip on operating margins.

Your next question comes from the line of Nicole DeBlase with Deutsche Bank.

So I guess, maybe starting off with Climate. I know you guys aren’t updating your organic growth outlook for the full year but obviously, organic growth came in really strong in the first quarter and so 5% to 6% is looking a little bit conservative for the full year, particularly since the comps don’t really get a whole lot harder. So if you could just comment on the potential for Climate just to price to the upside throughout the rest of the year.

Well, there’s a lot of the year left. When you’re talking about something less than 15% in the quarter, I think there’s a natural hesitation to go out on a limb. I think it’s given us the confidence to raise the top end of our guidance but I think we’d really need to see something more than the second quarter. You’re really looking to see July and August to dramatically change that, Nicole. But I think the first leg of this is a lot of confidence in the first quarter to go to high-end of the range. That’s not something we typically do.

Okay. Totally understood and definitely fair. And then I guess, the second one, just a tie-up question on the deal. So the synergy guidance that you guys have provided for the Industrial business, does that include PFS synergies? Or would those be separate?

It’s all in. It’s assuming that PFS with our Industrial portfolio is merged into Gardner Denver and the total of all of the combinations is $250 million.

Your next question comes from the line of Deane Dray with RBC Capital Markets.

Add my congratulations. I just wanted to follow up on the question on PFS. And maybe this got covered in the Q&A earlier in the first call this morning. But is it fair to consider that PFS was the missing piece of the puzzle in order to qualify for the RMT?

No. It wouldn’t have anything to do with the RMT structure. I mean, the way that 2 important issues that would be looked at, it had to be looked at independent. So when you think about PFS being something that for a long time, we thought was a great fit with our Fluid business. We had to be prepared in that process, in that process’ timing and to be successful. And then concurrently and somewhat in parallel as we are having discussions with GDI around the RMT structure, you’re thinking about, well, look, if I’m successful one way or the other depending on timing, does it make sense in combination, if you will, the 3 businesses, GDI’s business, PFS’s business and our Industrial segment and the answer is, yes. So we felt like, look, we need to get after that asset because there’s no guarantee that we come into an agreement with GDI and if that’s the case, we’re going to still build a bigger Fluid Management organization and go forward. And if we did, then it’s going to be even more productive in terms of putting that combination together, particularly with their Medical segment, which is a lot in common. So we figured we couldn’t really loose in that so we had to work within the processes we’re working in.

That’s real helpful. And then, is there -- are there any contingent liabilities or any encumbrances on Climate Remain-co and doing the RMT? I would imagine that if something were happen to the tax pretreatment, that would come back to the ClimateCo. Is there any -- are you restricted on any asset sales? Or just take us through some of those nuances?

Yes, it’s a -- the answer to your question is no, there’s no restrictions to us but it is complex and nuanced and to have a full sort of discussion on this would depend on the situation itself. And it’s probably best left toward the end of the transaction or maybe in some disclosures. But to answer your question broadly, no, there is no encumbrances or restrictions about how we run the company going forward.

Great. Just last one just sort of a structural question for Sue. Is it fair to say there will be 3 segments reported in the Climate company?

TBD, we’ll do some work on how we want to structure all of that going forward, Deane. So don’t have a definitive answer on that but we’ll come back to you as soon as we do have one of those. I’d also like to add on your previous question, the tax-free nature of the spin is really a condition of the actual transaction closing, not anything that would impact the Climate business. And if the tax-free nature didn’t happen, it would impact the transaction not ClimateCo. Just so you’re clear.

And Deane, maybe to piggyback on the segment question, I mean the way that we think about this is an opportunity to create an organization that is how we want to manage the organization, I mean how we want to lead the organization in an as efficient and agile a way as we possibly can. From that, some segmentation will pop-out of that but you’ve really got to go through the hard work of looking at all the designs going forward. Frankly, that’s the exciting part of what we’re doing. We really can take a clean sheet of paper and think pretty boldly about that and then however the segmentations spills out of that would be the way we run the business.

I will now turn the call back over to Zac Nagle for closing comments.

I’d like to thank everyone for joining today. And, as always, Shane and I will be available in the coming days to take any questions that you may have. So, have a great day.

This concludes today’s conference call. You may now disconnect.