特靈科技 (TT) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ingersoll-Rand Third Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Janet Pfeffer, Vice President, Treasurer and Investor Relations. Ma'am, you may begin.

Thank you, Sam. Good morning, everyone. Welcome to Ingersoll-Rand's Third Quarter 2014 Conference Call. We released earnings this morning, and the release is posted on our website. We'll be broadcasting in addition to this call through our website, Ingersollrand.com, where you will find the slide presentation that we will be using this morning. This call will be recorded and archived on our website.

If you'd please go to Slide 2. Statements made on 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 laws. Please see our SEC filings for a description of some of the factors that may cause actual results to vary materially from anticipated results. This release also contains non-GAAP measures which are explained in the financial tables attached to our news release.

Now to introduce the participants on this morning's call: Mike Lamach, Chairman and CEO; Sue Carter, Senior Vice President and CFO; and Joe Fimbianti, Director of Investor Relations. With that, please go to Slide 3, and I'll turn it over to Mike.

Great. Thanks, Janet. Good morning, and thank you for joining us today. In the third quarter we delivered earnings per share of $1.10. There was a small amount of restructuring in the quarter. It was less than $0.01, so reported and adjusted EPS are identical. That's a 21% increase versus adjusted earnings per share in the third quarter of 2013.

Revenues were $3.4 billion, up 5% versus last year on a reported basis. Revenue growth was about a point higher than our guide, which was to be up about 4% for the quarter. We saw somewhat stronger revenues in transport, particularly in auxiliary power units and marine equipment. In commercial HVAC equipment in both North America and Europe, revenues were up 6% excluding currency.

Orders were up 7% in the third quarter, and up 8% excluding currency. Climate orders were up 9%, led by auxiliary power unit, marine units, and commercial HVAC equipment orders. Industrial orders were up 3%. Adjusted operating margin, which excludes restructuring, was up 90 basis points. Climate margins increased 120 basis points, and industrial margins were a headwind of 110 basis points.

For the Company, pricing exceeded direct inflation, as it has each quarter for more than three years. Operating leverage was 31% on an adjusted basis. On a year-to-date basis, we have delivered 110 basis points of margin improvement. We repurchased 2.6 million shares in the third quarter.

We have narrowed the range of our full-year forecast. The mid-point of guidance for adjusted EPS at $3.22 is unchanged, and now includes diligence and transaction costs related to the Cameron acquisition that were not in our July guidance. I'll give you some more detail on the fourth quarter and the year in a few minutes, after Sue walks you through more details on the third quarter. Sue?

Thanks, Mike. Starting at a high-level again, our reported bookings for the quarter were up 7%, revenues were up 5%, and our operating margins without restructuring were up 90 basis points year over year. Reported earnings per share were $1.10. Versus mid-point guidance of $1.03, the $0.07 beat came from a few areas.

As Mike said, revenue growth was about a point higher than mid-point guidance, which would be about $0.03 of earnings. The currency exchange impact from Venezuela, which we had spiked out as an estimate in our third-quarter guidance of $10 million cost, or about $0.03, did not occur in the quarter. So that was three of the $0.07 difference, plus the revenue. However the risk in Venezuela remains, and we've rolled that now into the fourth quarter guidance.

The tax rate and share count were each about $0.01 favorable. FX, excluding the Venezuela item, was about $0.01 unfavorable to guidance, so that gives you the full $0.07.

Now fill go to slide 4, orders for the third quarter of 2014 were up 7% on a reported basis, and up 8% excluding currency. Climate orders were up 9%. Global commercial HVAC bookings were up mid-single digits. Transport orders were up over 20%, and as Mike said, led by auxiliary power unit and marine unit orders. Orders in the industrial segment were up 3%.

If you go to Slide 5, to look at the revenue trends by segment and regions, the top half of the chart shows revenue change for each segment. For the total Company, third-quarter revenues were up 5% versus last year on a reported basis, and up 6% excluding currency.

Climate revenues increased 6%, with commercial HVAC revenues up mid-single digits, and transport revenues up mid-teens. Residential HVAC revenues were up low-single digits. Industrial revenues were up 3% on a reported basis, and excluding currency. I'll give more color on each segment in the next few slides.

For the bottom chart, which shows revenue change on a geographic basis, revenues were up 6% in the Americas, 9% in EMEA, and Asia was down 2%, all excluding foreign exchange. Within Asia, China revenues were down mid-single digits in the quarter, with climate revenues down low teens, and industrial revenues up slightly.

Now go to Slide 6. This chart walks through the change in operating margin from third quarter 2013 of 11.8% to third quarter of 2014, which was 13%, or an increase of 120 basis points. This chart is on a reported basis. We've clearly spiked out the impact of restructuring costs for you, which was 30 basis points of tailwind year over year. Volume mix and foreign exchange collectively were 80 basis points positive versus prior year.

Our pricing programs continued to outpace material inflation, adding 10 basis points to margin. We have been consistently positive on this measure for more than three years, although as we foreshadowed in each earnings call this year, the gap has narrowed as we move through 2014. Productivity versus other inflation was 60 basis points of positive impact in the quarter.

Year-over-year investments in restructuring were higher by 30 basis points in total. In the box, you can see that was comprised of 60 basis points of headwind from investments. Those are new product investments, channel expansion, and also IT. There were a 30-basis-point benefit from lower restructuring costs.

If you prefer to look at this on an adjusted basis, adjusted margins increased a net of 90 basis points versus the 120 basis points on a reported basis. Leverage in the quarter was 31% excluding restructuring from last year, and 27% in the segment. Climate's leverage at 34% was strong across both the HVAC and transport businesses, particularly in North America and Europe.

Now if you'll go to Slide 7, let's talk about the climate segment. The climate segment includes Trane commercial and residential HVAC, and Thermo King transport refrigeration. Total revenues for the third quarter were $2.6 billion. That is up 6% versus last year on a reported basis, and excluding currency. Global commercial HVAC orders were up mid-single digits. Orders were up mid-single digits in the Americas and Asia. HVAC orders were up more than 20% in Europe, Middle East, and Africa, with strong increases in both applied and unitary products.

Commercial HVAC revenues were up mid-single digits. Revenues were also up mid-single digits in the Americas, up low single digits in EMEA, and down in Asia. Commercial HVAC equipment revenues were up mid-single digits. HVAC parts, services, and solutions revenue were also up mid-single digits versus prior year. Growth in worldwide unitary equipment revenues more than offset lower applied revenues.

Thermo King orders were up over 20% versus 2013 third quarter, led by increases in marine equipment, auxiliary power units, and North American trailer. Thermo King revenues were up mid-teens, with truck-trailer revenue up low teens. Bus, APU, and marine equipment revenues were all up over 20%.

Residential HVAC revenues were up low single digits versus last year. Unit volumes were also up low single digits, and mix was positive. The adjusted operating margin for climate was 14.3% in the quarter, 120 basis points higher than the third quarter of 2013, due to volume and productivity, partially offset by inflation.

Now let's go to Slide 8. Third-quarter revenues for the industrial segment were $741 million, up 3% from last year's third quarter. For the industrial segment excluding Club Car, revenues were up low single digits, and orders were also up low single digits versus last year. Excluding Club Car, revenues in the Americas and Asia-Pacific were up mid-single digits, while revenues in Europe, Middle East, and Africa declined. Club Car orders and revenues in the quarter were up slightly. Growth in utility vehicles offset a decline in golf markets in the quarter.

Industrial's operating margins of 14.8% was down 110 basis points due to inflation and investment spending, partially offset by higher volume, productivity, and pricing. We have increased investment spending in industrial versus prior year, to fund product development in advance of upcoming regulatory changes, and infrastructure investments to support channel and services.

Let's go to Slide 9. Working capital as a percentage of revenue was 4% of revenue in the quarter. The increase versus prior year is from higher receivables and inventory, partially offset by higher payables balances. Days sales outstanding was up mainly due to mix of business, and higher terms in certain geographies such as China. On inventory, we have been intentionally increasing stocked levels, inventory levels, of key assemblies in order to ensure availability of supply.

Year-to-date September free cash flow was $417 million. Our full-year cash flow forecast is $800 million to $850 million, versus prior guidance of $850 million to $900 million. The change mainly reflects investment we are making in inventories to support key stocking levels, and to support the regional standards change in residential HVAC. That translates to free cash flow of 90% to 95% of net income.

Please go to Slide 10. We repurchased 2.6 million shares for approximately $160 million in the third quarter. Year-to-date September we have spent $1.2 billion in share repurchases, and repurchased about 20 million shares. Our forecast for the year remains to spend $1.375 billion on repurchase. With that, I'll turn it back to Mike.

Great. Thanks, Sue. Please go to Slide 11. In August we announced our agreement to purchase the centrifugal compressor division of Cameron. This chart was shown during the webcast we held on the day of the announcement. It's a great fit with our compressed air business. It generates value for our shareholders, and it's accretive to all of our key metrics. It adds to our core compression capabilities, and it adds breadth and range to our compressed air business.

Please go to Slide 12. There are no updates to the timing of the closure. Everything is progressing according to schedule. We still expect to close in the fourth quarter. The forecast I'll go into next does not include any operational results from Cameron. We'll update you once we know the closing date.

Please go to Slide 13. Our full-year revenue forecast for growth of about 4% is unchanged. There has been some movement within the climate segment, where transport is going to come in somewhat stronger, given the orders we have in hand for marine containers and APUs that will ship this year, which is offset by somewhat lower HVAC revenues in Latin America and Asia, and the impact of negative foreign exchange.

Please go to Slide 14. For the full year, as I said, we still see revenue growth of about 4%. We are adjusting our full-year 2014 earnings outlook to a range of $3.17 to $3.21 on a reported basis. For the full year, we now expect to spend about $0.03 in restructuring, versus $0.05 in our prior guidance. On an adjusted basis, the new range $3.20 to $3.24. This includes absorbing some transaction costs related to the closing of the Cameron acquisition, which again were not in the July guidance.

There was no change to the full-year average share count guidance of 275 million shares and the tax rate of approximately 25%. Fourth-quarter 2014 revenues are forecast to be up approximately 3% to 4%. We expect mid-single-digit growth in climate, and low-single-digit growth in industrial. Fourth-quarter GAAP continuing earnings per share are forecast to be in the range of $0.68 to $0.72. Restructuring costs are expected to be about $0.01 in the quarter. On an adjusted basis, the EPS range is $0.69 to $0.73.

The difference between the prior fourth-quarter guidance and current guidance is from the negative Venezuelan currency impact estimate of $0.03; just timing moving from Q3 to Q4, as Sue discussed; some timing of shipments between Q3 and Q4 versus the July view; and transaction costs related to the closure of the Cameron acquisition, which were not included in our prior guidance. We are assuming an average share count in fourth quarter of 270 million shares and a tax rate of about 25%. There is an EPS bridge versus last year's fourth quarter in the appendix for your reference.

In closing, we're pleased to have delivered above our earnings commitment in the third quarter, with solid performance against some macro headwinds. I continue to feel good about our positioning and our focus as we head into the final quarter of the year. With that, Sue and I will be happy to take your questions.

Thank you.

(Operator Instructions)

Jeff Sprague, the Vertical Research Company.

Mike, can you give us a little bit more color on what's going on in the applied market, whether you're seeing any signs of a turn there? Maybe if there's any geographic color to put around that, as the first part of the question?

Sure. Applied equipment revenue was down low single digits, but applied equipment revenues were actually up in North America, mid-single digits. So we saw the weakness really in all regions except North America. That really, Jeff, I think is the first quarter that we've seen mid-single-digit growth. I think if we were to see another quarter or two of that, we'd feel better going into 2015 that there would be a moderate recovery in institutional construction.

Secondly, just on industrial, can you give us some color on the investment spend? Maybe more importantly, how does it continue going forward? Obviously there's some spiked out in your walk, but maybe give us some color on where that lays geographically between the segments? Do we see that tapering off into the new year?

Let me give that a shot, Jeff, and talk a little bit about industrial. I'll broaden the question a little bit and talk about some of the things that we were doing. When we think about industrial and we think about where we are, and where we are with the third-quarter results, there's a piece of this that says as we've gone through 2014, and we've looked at this, the first quarter created quite a hole for us, and we knew that. We knew it was going to take some aggressive actions to get back to the target on operating income margins for the year.

In addition to that, as we've gone through the year, we've been looking at these businesses, the new structure, and we've been looking at growth. The business is prioritized -- good payback investments that are going to support growth. They're going to support product development, service infrastructure investment, channel investment, like I talked about in the script. As we were going through the third quarter, we looked at where we were. Again, climate has been over-achieving. We did accelerate some of the investments in industrial. Again, looking at new products to prepare them for the upcoming technology efficiency standards, investments in channel and services.

In addition to that, as we thought about the back half of the year, we were expecting perhaps more recovery in Club Car than what occurred. Gulf markets have really remained down as we've gone through the year. When we think about industrial then going forward, nothing that we're seeing in the investments and we're making -- it's not going to change our longer-term margin opportunity for industrial. We expect them to have margin improvement in 2015.

Jeff, I'd probably add on here a little bit and say when you back up and look at the longer-term guidance, we've given around 15% to 20% EPS growth in 2014, 2015, and 2016. We're tracking at about 21% at the mid-point of the guidance that we're giving right now. With bookings being so strong in the third quarter and really setting up well for the fourth quarter in 2015, there's no reason, when we see a good idea here, not to act on it, pull it forward, and really build and protect against that 15%, 20% EPS growth in 2015 and 2016.

I think that there are no surprises here. I want to emphasize there's absolutely nothing wrong with that business. These are investments that we fully expect to have a return in 2015 and 2016. We would expect that business to return to normal incremental margin expectations in 2015 and 2016.

Nigel Coe, Morgan Stanley.

I just wanted to follow up on Jeff's point on the industrial margins. I just wanted -- you called out two points. One was the investment spending, which you just went through. That sounds like that's going to taper in 4Q in 2015. But you can also called out inflationary pressures, as well. Maybe you could discuss that. Mike, I couldn't help but reiterate that you put out that 15%, 20% for 2015. Do you still feel comfortable with that target for 2015 right now?

Yes, Nigel. First of all, we've laid out a 15% to 20% 2014, 2015, and 2016. 2014 happened about how we thought relative to the growth in the market leverage. Of course share count, tax, and buy-back all being factors that are yielding a year that should be just a bit up top of that range.

Again, we're looking at this thing a little longer term, not just quarter to quarter. There's some opportunity, particularly in the industrial segment, where we think that we can accelerate growth much like we're seeing that acceleration right now in the climate business. It's going to take just a little bit of investment. We want to be smart about that. But I have no reason to have any different expectation than 15%, 20% EPS growth in 2015 and 2016 as we see it now.

Okay.

The piece, Nigel, on your question on the inflation that we referenced in the press release, there is a bit of material inflation that happens on the industrial side of the business. Again, it's not something that is unexpected, but it is inflationary pressure. There is also inflation that occurs from our businesses with people, with compensation, and different pieces of year-over-year inflation. Again, none of that would be an unexpected event for the businesses.

What you balance that with is that sometimes in the businesses -- and this in particular occurred with the industrial side -- is that the productivity is a little lumpy, which means that we had some productivity that was better in Q2 versus Q3, but the inflation numbers were a little higher in Q3 than they were in Q2. You've got some clips and puts and takes between the couple of quarters. But again, there is not an inflation that is something we wouldn't expect or that's unusual for the business. These are normal things that occur.

Okay. Thank you very much.

Mark Douglass, Longbow Research.

Can you discuss -- you've talked about applied. But unitary must have been at least up high single digits? Can you discuss what's going on in commercial unitary?

Yes. Actually, a very successful quarter for us. Worldwide, unitary equipment was up high teens in the third quarter, so that was a success. Trane commercial unitary revenues were up by low teens in the third quarter. That was certainly a positive for us, as well. High single digit in the Americas. Very strong growth in Europe, and a decline in Asia. Again, high teens unitary orders.

Then good revenue flow-through in the quarter across the unitary business -- again, low teens. Good continued success in the Americas, high single digit. EMEA was really outstanding again, sort of a high mid-teens in Europe - western Europe, I should say. A little bit higher than that in the Middle East -- all that brought down by the events of really what's happening in eastern Europe. So a good quarter.

Thank you. Can you talk about how you are approaching the regional standards in the US in resi? Are you anticipating a significant pre-build, but not necessarily pre-buy in fourth quarter? How are you seeing that play out with your distributors in 2015?

I'd say, Mark, as of today the impact is going to be different for each OEM, depending on what their channel structure is. I think you're going to see different results that are going to phase in over the year. Actually, you're seeing some volatility in order and shipment rates between OEMs in the res business.

As you probably know, we own part of the distribution, and part of it's independent. We have been talking to our distributors and our dealers, and even among them it's not one-size-fits-all. It depends on their liquidity, their stocking capacity, and their strategy if they want to employee themselves for managing the transition. But as we see it today, we'll have some pre-buy, and we'll certainly have some pre-build in the fourth quarter. We're following the situation closely. We have plans in place for both. We're flexible enough to adjust accordingly as it evolves within the quarter.

Julian Mitchell, Credit Suisse.

I just wanted to follow up on the overall segment incremental margin. I think you talked in July that it should be in the mid-30%s this year. If that's still the case, that would imply maybe mid- or high 20%s for Q4. I just wanted to check that was still correct. Related to that, should we see that number pick up into next year, more akin to the gross margin level of 30%, 31%?

I think Julian, when we look at the full year of 2014 at the mid-point level for the full year, what you see is an incremental leverage of about 33%. Then in the fourth quarter, what you have is a segment leverage of about 30%. Overall, when you look at first half, second half, they're pretty evenly weighted. Again, I think as we talk about going forward, we would continue to expect that the threshold would be at the gross-margin level for leverage expectations.

As I said, Julian, I think early in the year prudent modeling would probably have us telling you something more like 25%, allowing for breakage. When things go right for us, like they've done a lot this year, we might see something closer to gross margins. In fact, depending on where that business is coming into us, there could get some leverage against fixed assets, depending on what we've done there over time. So 30% is probably a good, more aggressive number, 25% more prudent.

There will be some volatility, I think, in quarter to quarter. But again, over the full year and then over a long period of time, now four or five years, we've been able to pretty consistently have those top-quartile incremental margins. That's a pretty important part of our commitment and strategy for how we're running the business.

Thanks. Just on the industrial business, I just wanted to clarify that price mix for you was about zero in that business in Q2. Was it around zero in Q3, or it went negative?

No, it was around zero in Q3, also.

Great. Thank you.

Julian, the price would have been just a touch higher than material inflation, but so close that Sue's rounding it correctly to about flat.

Steven Winoker, Bernstein Research.

I just wanted to get a little more clarity on the $0.07 you called out for the Q4 reduction versus last guidance. $0.03 on Venezuelan currency, and then is it fair to say the other four is all revenue related, and some mix of that's FX and something else? Because it sounds like you're calling out continued strength in margins. Maybe just a little more clarity in terms of how you broke that out, or how you're thinking about that? I'm looking at the bridge, but the bridge is just year on year, and not your change in thinking from last quarter to this quarter.

Right. What you would end up with, Steve, is you'd have the Venezuela, as we called it out. We also called out having some of the Cameron costs that were in there. As we said in August when we announced the transaction, about $0.01 or $0.02 on the cost for the Cameron piece. Then as you think about it and as we've talked about it today, we may have had some revenue that was pulled into Q3 versus Q4. Nothing again other than really those raw components, but the biggest two pieces being Venezuela and also the addition of the expected Cameron transaction costs.

Simply for me, Steve, just to reiterate Sue. $0.03 pretty much coming out of Venezuela, $0.02 coming out of Cameron. $0.01 currency, maybe, even?

Yes.

The balance of that is just being a little bit more sensitive to the volatility of what we're seeing with some of the order rates. China's a great example where you're seeing volatility, one strong bookings quarter followed by a weak bookings quarter. Then lags, of course, to a revenue quarter and so on and so forth. There's some volatility here. Latin America is weaker. I don't think it's going to change for the balance of the year, in addition to China. It's a little bit of market. But I would say the market is probably a $0.01 exchange of the $0.01. The balance is just Cameron and Venezuela.

What I would also say, though, for those on the call, is we pegged Venezuela at $10 million as we went through the mid-point of the year, which is what we had in the third-quarter numbers. We've rolled that into the fourth-quarter numbers. That's an extremely volatile situation. The number could be different than the $10 million, but we weren't going to play with making any changes in our overall guidance for what that might be doing, because we just simply don't know. It is just going to continue to move.

If there is a negative impact from that, we'll balance it off of the $10 million. But that's not a known number. That's the piece that we put into the guidance, and we'll continue to monitor that with things down there. I just wanted to make sure that everyone's clear that's a number that we arrived at and put into the guidance.

Sue, which exchange rate did you use to get to that?

The [Cenotext]. The normal rate, so it wasn't the CCAB 1 or 2 rate.

For my second question, if I could. The VRF, what do think on VRF penetration, and how that's affecting you good and bad through the quarter?

Can you repeat it?

Yes, variable refrigerant flow. VRF penetration in the quarter?

Really good growth in the quarter, Steve. Really good growth in the quarter, all regions of the world. As I always point out, continued penetration of ducted and ductless markets, as well. It's a good balanced approach, but good success with VRF. Excellent growth coming in all regions with the line.

Okay, great. Thank you.

Steve Tusa, JPMorgan.

On the resi stuff, should we basically think about the difference in free cash flow as your best estimate of the type of inventory you're going to build for this transition?

There's puts and takes in there, Steve. We would normally have without a pre-build, a wind down and lower working capital, and you've got to add back on top of that. It's not completely in that number, but the change in thinking certainly I think would be attributable largely to our thoughts around a pre-build.

Okay. When you think about the transition, do you expect it to have a lot of moving parts here? Do you expect it to be a net impact next year if you think about the kind of mid-single-digit industry trend line that we're in right now? Given this is more of a pre-build than a pre-buy, any kind of impacts around margins or growth that you want to call out, as you guys plan for this thing here?

It's a little too soon, Steve. We've got to see what happens with certainly 2014 CERA pricing, in terms of dynamics as it plays out with each OEM in its own strategy as to how much inventory that we're pre-building in holding. Again, that's a factor of how quickly does 2014 come down to being a push against 2013? I would say that over time, and possibly a relatively short period of time, you're going to see some focus on cost reductions coming in to the 2014 CERA units across the competitive base. There's a lot at play there for us to make a call on that now.

The other point I would make back to the working capital question, there was some other selected areas where there's quite a bit of order volatility. As an example, marine container, auxiliary power units, even the TK units that go on trucks, so it's the vehicle-powered, self-powered trucks units -- a lot of volatility in the order rates there. Those are nice businesses for us. You've got us holding and bringing in more component inventory of long-lead items to be able to build against that demand. It's really a fine-tuning of the working capital to the up side, to ensure that we've got the ability to take advantage of really good progress and order rates across those businesses.

What is your mix now -- last question -- what is your mix now of just the baseline 2013 SEER? What will mix of 2013 SEER be this year as a percentage of your volume?

I don't even know if I have that handy, Steve. I'll tell you what. We'll look for it, take the next question, and I'll answer that as we go here.

Sure. Okay, great. Thanks a lot.

Robert Barry, Susquehanna.

Just a quick follow-up. First on the resi HVAC impact, how much are you factoring from that in the 4Q outlook?

Well, for the industry, our view of units in the industry has been something to the neighborhood of five points of normal growth, and probably a couple of points of growth associated with the pre-build and ship. We end up with sort of a mid- to high-single-digit residential environment. That's the environment we think we're playing into, and our plans would be commensurate with that.

That couple points -- is that for just the fourth quarter, or is it for the year so it will be higher in the fourth quarter?

I think in the industry it's started already.

Yes.

Competitively, one large OEM that had an ERP system conversion, and put about 30 days of extra inventory into the channel. We've had a couple of other OEM competitors that have had more aggressive campaigns against moving into the channel. So some of it happened in Q3. I think more of it will happen in Q4. But in total I think it's a couple of points probably to MBU volumes, which would put you somewhere in the neighborhood of a range in the low end of 700,000, on the high end maybe 1 million units in the market being pre-build.

Yes. Finally, could you update us on what you're seeing changed in Europe since the last quarter -- in particular, industrial? I know it was particularly strong in 2Q. I think it ended up being down a little bit in this quarter. I know that's lumpy. In TK in particular, just what you're seeing in the Europe environment? Thank you.

Yes, thanks. In industrial it is choppy, so I think your question had the answer in it, as well. It absolutely has been choppy. Large centrifugal air compressor orders are going to be a big swing factor there, and that was a difference for us as well.

With TK, it's been again, strong growth in western Europe. Of course, marine container is strong. Very slow and weak growth in eastern Europe -- or really no growth. I mean really no business. It's really dried up until things normalize there. With smaller vehicles -- again, small trucks -- that's moderated somewhat, as well. TK's slowing down a little bit in Europe, but we're picking it up in other areas like in marine. Industrial I would expect to see some choppiness, but in essence to be able to continue to move toward that 1% to 3% growth rate for the year, and probably out for a couple quarters, I don't see any big shocks happening there.

Josh Pokrzywinski, Buckingham Research.

First, on the applied side, you talked about strong revenue growth there. I think you have a really tough order comp from last year on a new product line. Can you talk about what orders did, and then prospectively, how those are coming along, either in quote log, or conversations with your customers?

Well, you've got one solid quarter, I think, of North American growth. If you recall, we said last quarter that we felt like we were seeing an inflection point. You had the inflection point off the bottom. You've had one quarter of good growth. We don't really subscribe to the McGraw-Hill data view, which says that there's a 10-point pop happening in 2015 institutional construction. I think we're more likely to see a multi-year, mid-single-digit -- or on a given quarter or two it may touch high-single-digit applied rate.

There's many reasons for that, some of which include the availability of skilled trades and labor to work on these projects for institutional customers. That's very consistent with what we're seeing for inquiries, and what we're seeing in the pipeline of projects that we're looking at. I'd like to see another quarter or two, Josh, before we say that's not only an inflection point, but it's a trend that we would feel good about calling for 2015. But I think it's pointed in the right direction for a moderate year, and again, a stronger but more moderated recovery than what McGraw-Hill is projecting.

What were orders in applied in the quarter?

Well, I think you're mostly thinking about North America applied, because that's where we would see typically the institutional recovery that we've all been --

Right.

That was mid-single digits.

Okay. I do recall, right, that it was a tough comp from last year from that new product?

That's right.

Then just a follow-up question. As you see raw mats playing out here, obviously the war on copper has taken down exposure to that over time. How do you feel about that price-cost gap that has been narrowing through the year as we get into next year? Should that stay narrow? Is there an opportunity for that to widen out, or could it actually go negative if demand stays choppy?

I think it stays fairly narrow. We've had very good success for some three or maybe more years now of driving price in excess of material inflation. It could invert a quarter or two. Don't see that happening, but it could happen. But I would expect that over time -- over three, four quarters of time, rolling -- you would see a slight premium to material inflation. That's just what we've built into the operating system, and into the expectations of product management, and in the way that our people get compensated that sell.

Got you. On a need to if I can squeeze in one more on the 2013 SEER pre-build. Will there be any change in your view on industry pricing for that 2013 SEER product versus what it's priced at today?

It's anybody's guess on that. It's the wild west, I think, as it comes to expectations around what really happens on that. But look, at some point it's not the richest margin project product that anybody is selling. I think the sensitivity around price cost is narrow enough that there's not going to be really anything crazy happening there. Why go through the effort of pre-building, if in fact you're going to give it away as part of the 2014 equation -- or 2015 equation? I don't really see that as being a significant problem.

Steve, back to your question. I think it's about 60%, six zero, on the 2013 SEER mix for us.

Andrew Obin, Bank of America.

Just a question on restructuring. We lowered it from $0.05 to $0.03. Are we doing less? Are we changing the timing? Are we being more effective?

I think as we have looked at restructuring for 2014, Andrew, we started out with a forecast that said we had a lot of plans that we actioned in the fourth quarter of 2013, and sort of a normalized level with would be in the $0.05 to $0.10 range in 2014. As we've gone through the year, what we've done as a natural part of the business is we've looked for opportunities that made sense, but we did do some pretty heavy lifting on restructuring in the fourth quarter.

As we've gone through the year, we've sort of let this naturally fall out with things that we needed to do, and things that fit the construct of how we were running the business. It just happens to be $0.03 this year. That isn't a predictor of what the future will be, but we had put in basically a placeholder that said what was normal. Given the work that we did at the end of last year and actually the first couple of months of 2014, it just wasn't as necessary throughout 2014, so we're at $0.03.

The maintenance, Andrew, I think, is as you look back over a longer period of time, the maintenance that we do around the footprint probably gets you to some sort of a $0.05 that we would put into be prudent every year. But it's not the big story. We are generally always looking at, but generally happy with where the footprint actually is, what utilization is, and what the available capacity is, hopefully going into some growth coming into 2015 and 2016, particularly in the HVAC commercial businesses.

A follow-up question on the industrial. As you are pushing into oil-free compressor space with more capacity, should we be concerned that one of your European competitors would push back, and would somehow impair the structural profitability of the market space?

Well, I'm sure if they did they'd be impairing their own profitability, so I'm not sure that wins anybody's affection in that regard. I would say that the investments that we're making are a few fold. One is, there's been some efficiency rules put in place in China for air compressors that's moving to Europe. I think it will be adopted soon, and that eventually in early conversations with DOE, it will come to the US and other countries, as well. It's really getting in front of a lot of these 2017, 2018, 2019 efficiency requirements.

Our belief is that the brand promise has been around energy efficiency and around reliability What we want to be able to do is be able to continue to sell the most efficient, most reliable products in the market place. That's really what the investment is. Certainly it's not indicative of some oil-free pressure that we're seeing around pricing. It's not the story that we had in Q3 or Q4 around the compression in margin. It really is we have not seen the golf recovery, although orders are up a little bit. We certainly haven't seen shipments improved across golf. That's hurt. Then we pulled forward a number of MPD and channel investments to set ourselves up into 2015 and 2016, particularly -- well, across all of the industrial businesses ex-Club Car.

Steve Volkmann, Jefferies.

Just a quick follow-up on Thermo King. I know you guys have had some new product there -- seems like it's going fairly well. What's going on? What's driving the strength? Is it an upgrade cycle? Do you think you're taking any share? Then I'm curious if there's been any move in the margins in that business with the new product, as well?

Last question first. The incremental margins have been right at expectation, and pretty consistent with past performance when business is growing and leveraged. There's nothing unique or really remarkable about the leverage that we're seeing there. In fact, for the climate segment, the remarkable leverage has come from the commercial and residential Trane businesses, in particular.

The growth that we're seeing is certainly highest in APUs. When you think about what our truck customers face, the number one issue that they have is the availability of drivers. A couple large customers told me that drivers only last about nine months in that business, but some of the larger companies have found that by installing APUs in their cabs, they're able to significantly increase driver retention. That's one of the reasons we're seeing APUs really expand dramatically, even though fuel prices have dropped. It used to be that APUs increased as fuel prices increased, but this is a disconnect. Fuel prices are dropping, and the driver is really around driver retention more than anything.

Marine container has been good. Particularly, gen sets into green containers have been strong for us. We continue to leverage new product which is more expensive with the Tier 4 new carbon requirements coming into play. That's driven a lot of -- obviously the revenue up side for us, as well.

Great, thanks. Mike, any thoughts as we get into 2015 about capital allocation? I know you're in the process of obviously a big acquisition here, but how do we think about things like share repurchases next year, or your appetite for further M&A?

Nothing's changed in terms of wanting to be smart and practical, pragmatic users of capital. In terms of how we're thinking about it, we have said that the dividend needs to be 30% to 35%, and we're going to continue to keep pushing on that, to make sure that we're competitive in the peer group. We're going to control any share dilution, so share buy-backs will continue to be a part of the story. Then depending on what's best from there, which would probably toggle between share repurchase and acquisitions that are accretive to us, accretive in the short term. We'll see where that goes. But we'll guide more in 2015 on that. But wouldn't expect anything different than what we've been saying over the last couple, few years.

Jeff Hammond, KeyBanc Capital Markets.

Just to follow on Josh's question on pricing, it looks like in late September you put through a 2% to 5% price increase in North America commercial. Can you talk about what's driving that, and what are you seeing from your competitors?

Mostly what's happening is just freight prices are really increasing, particularly flat bed, where you're moving really large pieces of equipment -- chillers or extremely large rooftop units, which I think we've got a very high share of. Those are moved typically over one or more flat beds, as opposed to closed-body trucks. The theoretical utilization of flat beds is like 106% right now in the market place, which isn't possible, other than if you look at what's happening, you've got prices going up, and trucking companies not really investing in new fleets because they can't find drivers. That's the primary driver there is freight for us.

I think that our competitors are seeing the same thing. We, probably as a mix, have a higher degree of that, just due to the mix of applied versus unitary, and even the large unitary mix we have versus their unitary. Some of our competitors only go up to 30, 40 tons. Of course, we go up to 150 tons of unitary, which can take two or three semis to move.

Okay, that's helpful. Just back to Europe commercial HVAC orders being up 20. Can you just -- is there any kind of good lumpiness in there? Is there share gain? It just seems kind of an outlier versus what we're hearing in Europe.

Well, we've had that outlier happening now for a while, so I probably can't hide -- can't look past the results there. We're doing really well in Europe. New product launches have gone extremely well. We've got a great Management team on the ground that's very energized. I don't know how long it will persist, but we're enjoying it for the time being.

Joe Ritchie, Goldman Sachs.

Thanks for squeezing me in, and good morning, everyone. My first question is really around the elevated investment that you talked about in industrial. Clearly, it seems to make a lot of sense, given that you're tracking ahead of your 20% EPS growth target, and you're looking to protect your investment in coming years. I guess my question, though, is how much does that incremental spending increase this year? I think you guys were talking about like a $60-million-plus type rate for 2014. Just wondering how much that's changed?

Joe, if I look at where we are on a full year now, we are probably adding $9 million to $10 million to that $65 million, so it now looks more like $74 million, $75 million on the incremental basis.

Okay, great. That's helpful, Sue. My one follow-up is just on industrial margins. I think when we most recently spoke, I think the expectations were to at least try to hold those margins flat. Fully understand that you're investing more in that business today, but what's the expectation now embedded in your 4Q guidance for industrial margins? The corollary to that is how do you think about those margins moving forward into 2015 on an organic basis? Clearly, CAM is going to change things, but it would be helpful to hear your thoughts there, as well?

One thing in particular. Sue gave you an absolutely true and actual corporate number, which is around circa $10 million of investment, but even if you look at the mix change of that $10 million, it's shifting much more toward industrial than it is to climate. Climate has been very efficient with their plans, and so we've shifted actually more of that than the $10 million to industrial and a little less in climate. That's a bigger impact to the climate margins, than just the absolute $10 million for the Company.

Incremental margins there should look to recover in 2015, probably certainly at the gross margins. Depending on weather in Q1 and Q2 of next year -- meaning we don't have multiple ice storms and the severity that we had in Club Car -- we should not have a repeat of Club Car in golf environment in Q1, Q2. That was, I'm guessing, $20 million impact to us, probably in the first quarter. If you don't repeat that, you go back to normal incremental margins in the business -- hopefully with a little higher growth rate, which is something we're looking at too. What can we do through these investments to drive a little higher growth rate than what we were thinking. We should get incremental margins at or above gross margins for area in 2015.

As we enter into that planning process and enter into guidance with you, when we talk to you soon in the first quarter, we're going to tune that, but that would be a pretty good indicator of what at least my expectations, I know Sue's expectations, would be going in.

Okay, that's helpful. Maybe one follow-up to that is the investment -- what's the investment level expected in industrial in 4Q? And what's that delta versus 3Q?

I'm trying to look. I probably don't have that broken out exactly where you can see it. It's probably 50 basis points.

Okay.

Yes.

Okay, great. Thanks, guys.

Thank you. At this time I'd like to turn the call back to Management for any closing comments.

Thank you, Sam. Thank you, everyone. I'll be available for follow-ups. Everyone, have a good day. Thank you.

Thank you, ma'am. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a wonderful day.