特靈科技 (TT) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ingersoll-Rand fourth-quarter 2014 Earnings Conference Call.

(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, Treasury and Investor Relations. Please go ahead.

Thank you, Kate, and good morning, everyone. Welcome to our fourth-quarter 2014 conference call. We released earnings at 7:00 this morning and the release is posted on our website. We'll be broadcasting in addition to this phone call through our website at ingersollrand.com where you will find the slide presentation that we'll be using. This call will be recorded and archived on our website.

If you'd please go to slide 2, statements made in today's call that are not historical facts are considered forward-looking statements and our 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 actual results to vary materially from anticipated results. This release also includes non-GAAP measures which are explained in the financial tables to our news release.

Now I'd like 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. Thank you Janet. Good morning and thanks for joining us on today's call. This morning I'll spend a few minutes recapping our full-year 2014 and our progress on the transformation that we've been working on in the Company for the past few years. Then Sue will take you through the fourth-quarter results and I'll end with our Outlook for 2015 before we open it up to your questions.

Starting with full-year 2014. The past year demonstrated continued progress in the implementation of our multi-year strategy for growth, operational excellence and shareholder value. We invested in our core businesses maturity and key strategic capabilities and delivered excellent financial results all while navigating shifts and changes in global markets.

For the year our revenues were up 4%, markets were uneven around the globe. Our growth in Europe, Middle East, and Africa was double-digits where I believe we outpaced the market in most or all of our businesses. Growth in North America was mid-single digits while revenues in Latin America and Asia were lower for the full year due to market and currency headwinds.

Adjusted earnings per share were $3.33, a year-over-year increase of 25%. Sue will take you to the bridge in a few minutes. So I'll leave that for Sue.

On the quarter, will be some puts and takes but the short answer is that volume and operational leverage were better than guidance, particularly in the Climate segment. We grew adjusted operating margins 140 basis points in 2014. Our lean focus again showed significant results in the implemented value streams. And we continue to invest in the future of the business by funding significant new product development, investing in IT platforms, and building our channel footprint and product management capabilities.

We generated $810 million of cash flow. Our capital allocation strategy remains focused on maximizing shareholder value and it's consistent with our overall financial strategy. We continue to increase our dividend with a 19% increase in 2014. We repurchased 22 million shares for $1.4 billion in 2014, funded by the remaining Allegion dividend and from free cash flow.

We announced two value-enhancing acquisitions during 2014: The purchase of the Cameron centrifugal compressor division which closed at the beginning of this month and is now part of our compressed-air business unit, and Frigoblock which we expect to close in the first half of 2015 which will become part of our Thermo King transport refrigeration business unit.

Our performance in 2014 where we outperformed the three-year glide path we laid out in late 2013 confirms our conviction to our strategy and positions us well going into a challenging global economic backdrop for 2015.

Please go to slide 4. We have delivered steady improvements in operating margins over the past three years. Climate margins are up 340 basis points over that period. Overall operating margins were up 230 basis points over the last three years despite a tough year in Industrial for 2014. And as I'll review when I go through 2015 guidance, we expect Industrial to recover and add 40% organic operating leverage in 2015.

Please go to slide 5. This chart walks through the change in operating margin from 2013 of 8.9% to 2014 which was 10.9%. This is shown on a reported basis but we spiked out restructuring view in the box. Overall margins expanded 200 basis points on a reported basis and 140 basis points on an adjusted basis. The margin expansion was delivered from a combination of organic growth, driven by our strategies to invest in new product and service offerings, maintaining a positive gap between pricing and material inflation through price analytics and value pricing, and productivity from strategic sourcing, implementing our lean operating systems and an overhead cost discipline, altogether outpacing other inflation.

We continue to invest in new products, IT infrastructure and systems and service and sales footprint underpin the future growth of the business. 2014's margin performance exceeded our annual goal of delivering 85 to 100 basis points of margin improvement. I've always said that most improvements are not typically linear but being ahead of the goal going into 2015 is a great place to be, given the sharp movements the world is seeing and exchange rates and oil and metals markets and the economic ripples that will create.

So now Sue will walk you through the fourth quarter and I'll come back to take you through 2015's outlook.

Thank you, Mike. Let's go to slide 6, please. At the high level our bookings for the quarter were up 5%, revenues were also up 5%. Foreign exchange was 2 percentage points of headwind to both, so excluding foreign exchange, both orders and revenues were up 7%.

Our operating margins without restructuring were up 230 basis points and operating leverage in the quarter was excellent at 61%. Adjusted earnings per share for the fourth quarter were $0.82, up 34% versus last year. And consistent with Mike's commentary for the full year, the fourth quarter was a very strong quarter, particularly in terms of margin expansion and earnings performance.

Let me start by taking you through a bridge to our guidance for the quarter. Let's go to slide 7. As you'll recall, we updated our guidance on October 24th to reflect the incremental interest expense from the bond issuance and early retirement of our 2015 notes. So our starting point on a reported basis is a range of $0.63 to $0.67 or a midpoint of $0.65.

I'll take it all the way to an adjusted basis since that seems to be where most of you were tracking. Volume and operational performance, particularly in Climate, delivered $0.11 incremental to guidance. Our financial statements continue to reflect the official rate in Venezuela and therefore we did not book the $0.03 charge which was included in our guidance.

Movements in currencies including the euro, Asian and Latin American currencies, resulted in a $0.04 negative versus guidance and there were $0.04 of other positive items, mainly in other income. That brings us to $0.79 of reported earnings per share. There were $0.03 of add-back in the quarter to bring you to the $0.82 on an adjusted basis.

So with that, let's go to slide 8 please. Orders for the fourth quarter of 2014 were up 5% on a reported basis and up 7% excluding currency. Climate orders were up 6% and up 8% excluding currency. Global commercial HVAC bookings were up mid-single digits. Transport orders were up high-single digits led by North American Trailer. Orders in the Industrial segment were up 3% on a reported basis and up 6% excluding currency.

Given that more of Industrial's revenues come from outside of the US, its foreign currency impact is larger than in Climate. We saw order growth in all regions in Air and Industrial products and a small decline in Club Car.

Please go to slide 9. Here's a look at the revenue trends by segment and region. The top half of the chart shows revenue change for each segment. For the total Company fourth-quarter revenues were up 5% versus last year on a reported basis and up 7% excluding currency. Climate revenues increased 5% on a reported basis and 7% excluding foreign exchange. Commercial HVAC and transport revenues were each up mid-single digits.

Residential HVAC revenues were up high-single digits. Industrial revenues were up 3% on a reported basis and up 6% excluding currency. And I'll give more color on each segment in the next few slides.

The bottom chart shows revenue change on a geographic basis with and without currency. Excluding currency, revenues were up 6% in the Americas, up 22% in Europe, Middle East, and Africa led by strong HVAC performance and Asia was down 3%.

Please go to slide 10. This chart shows the change in operating margin from fourth quarter 2013 of 7% to fourth quarter 2014 which was 10.7%. Consistent with prior quarters, this is shown on a reported basis, but we spiked out the restructure to give you adjusted margins as well. Volume mix and foreign exchange collectively were 70 basis points positive versus prior year. Pricing was slightly less than direct material inflation impacted by negative price in Asia, mainly China. Productivity versus other inflation was positive 210 basis points driven by strong productivity in the quarter.

Year-over-year investments in other items were lower by 100 basis points. And in the box you can see that this was comprised of 40 basis points from investments and 140 basis points from lower restructuring costs. In the gray box at the top of the page overall leverage on an adjusted basis was excellent at 61%.

Please go to slide 11. The Climate segment includes Trane commercial and residential HVAC and Thermo King transport refrigeration. Total revenues for the fourth quarter were $2.4 billion. That is up 5% versus last year on a reported basis and also up 7% excluding currency. Global commercial HVAC orders were up mid-single digits. Orders were up in all geographic regions.

Trane's commercial HVAC fourth-quarter revenues were up mid-single digits. Commercial HVAC equipment revenues were up low-single digits while HVAC parts, services and solutions revenue were up high-single digits versus prior year. Thermo King orders were up high-single digits versus 2013's fourth quarter with a significant increase in North American trailer orders.

Thermo King revenues were up mid-single digits with truck-trailer revenue down as increases in North America were more than offset by lower revenues in foreign exchange overseas. Residential HVAC revenues were up high-single digits versus last year.

The adjusted operating margin for Climate was 12.2% in the quarter, 210 basis points higher than fourth quarter 2013 due to volume and productivity partially offset by inflation. Climate's operating leverage was over 50% in the quarter.

Please go to slide 12. Fourth-quarter revenues for the Industrial segment were $795 million, up 3% on a reported basis and up 6% excluding currency. Air systems and services, power tools, fluid management, and material management revenues and orders were up low-single digits versus last year.

Revenues in the Americas were up mid-single digits while revenues in Europe and Asia were down low-single digits including impact of currency. Club Car revenues in the quarter were up mid-single digits and orders were down low-single digits versus prior year. Industrial's adjusted operating margin of 15.8% was slightly down compared with last year as volume and productivity was offset by the impact of inflation, investments and currency.

Please go to slide 13. For the full year, working capital as a percentage of revenue was 3.1%. The increase versus prior year is primarily inventory. This includes some incremental inventory related to the regional standards change in residential HVAC. Additionally we have been intentionally increasing stocked inventory levels of key assemblies in order to ensure availability of supply. We had good collections in the quarter with our day sales outstanding and days payable outstanding both improving over the prior year. Going forward, we expect our working capital to be in the 3% to 4% range.

Please go to slide 14. Cash flow was $810 million in 2014. Cash conversion was 87% for the year, held below our long-term target of 100% mainly by our strategy for working capital as I addressed on the last slide. As you will see when we look at 2015, we expect to be back at that 100% target this year.

Our balance sheet remains very strong. We have no debt maturities this year, given the financing we did in October and the early retirement of the 2015 notes. Our cash balance was unusually high at the end of December as we had the cash on hand to fund the Cameron acquisition on January 2, 2015. We expect free cash flow in 2015 to be in the range of $950 million to $1 billion.

And with that, I'm going to turn it back to Mike to take you through 2015 guidance.

Great, thanks, Sue, and please go to slide 15. It's certainly an interesting time to try to predict exactly what will happen over the next 11 months in order to give you guidance. In the past few months, the world has experienced discontinuities in oil markets and in foreign exchange rates, so I will give you the best view of what we see in our markets sitting here today and some more color on how we could be impacted from further movements in foreign exchange.

Starting with North American nonresidential, we anticipate the first positive year in institutional markets since 2008, albeit at a more moderate pace than the current Dodge forecast. We have started to see some positive signs in our [quoting] pipelines, particularly in K through 12 education. We continue to see growth in Commercial and Industrial, and based on this we expect mid-single-digit growth for 2015 in North America in commercial HVAC markets.

We expect Latin American, Asian, European and Middle East HVAC equipment markets in the aggregate to be up low- to mid-single digits at constant currency but flat down after considering currency. We expect North American transport markets to be up mid-single digits in 2015 and European markets to be down including FX. We expect residential HVAC industry motor-bearing unit shipments for the year to be up low-single digits in 2015, though revenues should be up mid-single digits due to favorable mix.

We expect Industrial markets to be up low- to mid-single digits and golf markets are expected to be up low-single digits. Aggregating those market backdrops, we expect our revenues for the full year to be up 4% to 5% versus 2014. Overall, foreign exchange will be a headwind of about 3 percentage points. We report the Cameron centrifugal business for the entire year and that's going to add 3 points, so for organic growth, excluding FX, we'll end back at the 4% to 5% range.

Translating back to our full-year outlook by segment, we expect Climate revenues to be up 2% to 3% on a reported basis and 4% to 5% excluding currency. The Industrial segment revenues are forecasted to be in the range of up 13% to 14% on a reported basis and 4% to 5% excluding Cameron and foreign exchange. As Sue noted, Industrial has a higher proportion of revenues outside of the US as compared to Climate so Industrial experiences more impact from FX relative to Climate.

Property margins, we expect Climate margins to be in the range of 12.5% to 13.5%. We expect Industrial margins, including Cameron operations and amortization but excluding the impact of the inventory step-up, to be 14.5% to 15.5%.

The inventory step-up will be recorded in the first and second quarters and is about $12 million per quarter. Since its non-cash and isolated to those two quarters, we felt it was more representative of ongoing earnings to spike out the step-up and should note that we are in the final validation stages for the purchase accounting for Cameron, so the amortization and step-up numbers might move around a little, but this is our best estimate as of right now. If you peel out the Cameron impact, the legacy Industrial business is leveraging at about 40%.

Please go to slide 16. Transitioning to earnings, the reported earnings-per-share range is estimated to be $3.60 to $3.75 per share. Excluding the Cameron inventory step-up, which is $0.06, the range is $3.66 to $3.81, an increase of 10% to 14% versus 2014. When you exclude the impact of bringing Cameron revenue and earnings in for the first time this year, the legacy company is leveraging at about 48%.

Given the outperformance in 2014, with full-year EPS growth of 25%, we are on a path for our articulated three-year CAGR growth target range of 15% to 20%, even in the face of headwinds from currency and uneven markets. As a note, for 2015, FX is a headwind of about 3% to revenue and $0.17 to earnings. This reflects a full-year tax rate forecast of 25% and an average diluted share count of 270 million shares.

To give you some more insight into the sensitivity to additional movement in currency, in 2014 about 63% of our revenues were denominated in dollars. 7% is in China; and of the remaining 30%, the euro was about 10%; Asia outside of China and Latin America were 6% to 7% each; and other currencies, such as the Canadian dollar, the British pound, make up the remainder.

So while much of the focus has been on the movement and outlook for the euro, currency movements in Asia and the Americas have been significant. For example, between August and December, the yen, Aussie dollar and Malaysian ringgit, all moved down 10% to 15%, and since half of our revenues in Asia are outside of China, this has an impact.

We built our guidance around the euro at $1.16. To give you some simple math to gauge sensitivity, a $0.01 move in the euro means about a $0.01 in earnings. And if all currencies move 1% versus the dollar, although it's very unlikely they would all move at the same magnitude, that would be about $0.02 of earnings.

Now to focus on the first quarter guidance, to the right-hand column on this chart, first quarter 2015 revenues are forecast to be up 4% to 5% on a reported basis. You can see the currency and acquisition impact on the slide. Reported first-quarter earnings per share are forecast to be $0.26 to $0.30. The inventory step-up all hits in the first and second quarter and impacts first quarter by $0.03. Adding this back to get to adjusted basis for the EPS range, is $0.29 to $0.33.

I've seen this morning there are some questions about first-quarter guidance, so let me give you some more color now in order to address that. At the midpoint, first quarter is about 8% of the total year adjusted earnings and historically it would be closer to 9% or 10%, so slightly less than normal.

There are a few things impacting the first quarter. First as a proportion of the full-year, Cameron's earnings are less in the first quarter due to the calendarization of their revenues. Second, benefit costs are higher in the first quarter than historical due to the timing of costs incurred relative to our healthcare programs and equity compensation brands.

Specifically, this year in the US for the first time our employees are all participating in a health savings account with their healthcare program. So employees earn credits through healthcare savings accounts through doing certain activities related to wellness. Those fund at the beginning of the year, but we'll see a benefit to us in the year from lower healthcare costs as we go along.

Third, we get more benefit later in the from lower copper because of our layering strategy. We entered the year with copper locked at about 70% for the first half, so copper movements won't have much impact in the first part of the year. And then finally, foreign-exchange, of course, is more negative versus prior year in the first quarter given the variance with rates from a year ago.

So we provided EPS bridges for both first quarter and full year in the appendix and that will help give you the walk from year to year. For the full-year 2015 we expect to generate free cash flow of $950 million to $1 billion, which is at our long-term target of 100% of net income. We intend to increase the dividend as appropriate to be consistent with the payout ratio in the [pure] range. We expect Frigoblock to close in the first half of this year and we'll utilize $100 million euros of cash to do that.

We anticipate a minimum of $250 million of spending for share repurchase which will offset dilution from equity issuances and will leave us about $350 million of cash that we see as a toggle between value, accretive acquisitions and share repurchase. We have a pipeline of acquisition opportunities related to our core business and we weigh those risk-adjusted opportunities against buyback in terms of returns and shareholder value.

So in closing, we're pleased to have delivered another solid year with 2014 margin improvement and earnings growth ahead of our targets. Our strategies for growth and operational excellence have delivered a multi-year trend of excellent operating leverage, margin and earnings improvement.

Our focus is to continue to grow earnings and cash flow through further implementation of those strategies. We have proactively worked to deliver productivity and make prudent investments for the future. Our new product line is the strongest it has been in decades.

If any of you were at the AHR show this week, you saw clear evidence of that. We continue to invest in new products and service offerings, our IT infrastructure and systems and by further developing our people and our operating capabilities. We continue to execute a consistent value maximizing capital allocation program. So I'm proud of the progress that we've made and the results we have delivered and believe that we are well-positioned as we enter 2015 and for the future.

And with that, Sue and I will be happy to take your questions.

Thank you.

(Operator Instructions)

Josh Pokrzywinski, Buckingham Research.

Mike, you talked a little bit about the differences between institutional and commercial and some of the momentum you're seeing in K through 12. Can you put that in terms of applied versus unitary for the year? I guess maybe starting off with what bookings were for each in the quarter and then how you're thinking about the difference between the two businesses?

Well, the unitary markets, global and worldwide and in North America were very strong. Low double-digit-teens-type growth there. So we're seeing that in Commercial, Industrial, and obviously some of that happening in smaller institutional projects where unitary would be applied.

You might see more unitary in the lower schools, K through 6. Maybe some smaller middle schools. You tend to see in the bigger high schools, perhaps more applied. So kind of the mix of K through 12 that happens, but we've worked hard over the last five-plus years that we've got relative parity in margins between applied and unitary, and we've got good utilization and capacity left for whatever that mix would swing.

So I think that from a Company point of view, we feel good about the contribution margin of applied or unitary and we feel good about the capacity upside that we've got in our facilities to build out. If we were potentially surprised by better markets, we would have the ability to execute against that.

Do you think that unitary still out paces applied in 2015?

Yes, I do. I actually do. I think that applied, you probably look at something more like a mid-single-digit growth rate. I do think that will sustain itself over a multi year period. If you look at what's required from an institutional infrastructure perspective, it would make sense that would be the case.

So as you get further out into that multi year view, you may see the mix change where unitary comes back into a more normalized low- to mid-single-digit-type growth pattern, but it could sustain that way for a while.

Andy Casey, Wells Fargo.

In the quarter it looked like productivity benefit really accelerated versus last quarter, and it was against a little bit easier comp, but that doesn't, by itself, explain it. Could you give a little bit more detail on what drove that and what you expect going forward?

Andy, when you think about what happened in the fourth quarter, overall, first of all, we talked about that the revenue side was up and the revenues that came through were good revenues that provided some additional leverage. When you look at the pieces of the business, we got some good productivity out of our cost base. We got some good productivity out of the direct material inflation.

And from some of our other components of cost, whether it be something like warranty or other items. So really when you take and you look at the quarter and all of the pieces, everything was just better than the way that we had looked at it, because people in our businesses did a great job of not only executing on the revenue side, but they also did a great job of executing on the cost side, which, like I say, across the board and all of the different categories gave us additional productivity. So there's not really one big thing that you can look at, but --

Andy, one thing to emphasize Sue's point is we would look normally at every quarter on a real detailed risk and opportunity assessment in the quarter and we'll update that through the last minute of the quarter. And it was a case, and I want to say hats off to the team. The whole team, business team, and functional team, because it was a function of executing all the opportunities and managing all the risks in a way where you get the best net out of that, that's possible. And it's just like that.

Okay. Thank you. Just a quick follow-up on that. So based on your description of a lot of things going right, it seems like that should be sustainable at least for the short term. Is that accurate?

I always say that you've got to leave room for breakage. Okay? That was a perfect quarter for us. Most companies, they don't tell you things aren't perfect. You allow room for breakage. So we'll continue to look at things on a risk-adjusted basis.

And I would suggest that's pretty good leverage that we had in the quarter, and I'd dial you back on something that looks a lot more like the gross margins of the business for us. Because that, over a very long period of time, which is what we done over five years and going multi-years into the future, if you are able to leverage that at your gross margins, it's phenomenal. It means there's no fixed-cost investment. Very hard to sustain.

Lean's a key part of doing that, but that would be a fantastic 10-year view and that's the emphasis on the operating system that we're building as we've had five good years of that. Would like to have at least five more before we call that something sustainable.

Nigel Coe, Morgan Stanley.

Obviously congratulations on closing Cameron. Maybe just if you can talk, Mike, about sensitivity of Cameron to the oil price and how the operating plan for Cameron has changed, if at all, since you announced the deal?

I'll give Sue a first crack at that. She's been very, very close to that team and particularly with sensitivity to oil and gas.

Right. Nigel, the way that I would start looking at that piece of the business is you divide it really into four almost equal categories, or pieces of the business. So you've got the engineered air piece of the business, which is largely the air separation and pieces. You've got the plant air piece, those two pieces.

So, again, let's call each of the pieces 25% of the business, for the sake of argument. Those two pieces of the business are really going to flex with just the ITR Industrial indices, so those are not going to be as exposed.

You've got the process gas piece of the business. Again, another 25% of the business, and that has some exposure that comes to the oil and gas side, but that piece of the business is going to look at a lot of things that are hydrocarbons. So while you have an impact from the oil and gas pricing, you also have the piece that says that there's some power generation.

So conversion from, say, a coal to a lower natural gas price, which is a good thing and something that, around the globe, that business has sold product into, which is not necessarily seeing as much impact, as well as petrochemical's, which have been strong. And so that's another 25% of the business. And then, of course, the other side is the aftermarket.

So, again, when you think about the business, the exposure directly to oil and gas is really in that one piece, but it's not the entire piece of the business and it's not just a negative. And one of the things that you had asked, Nigel, was impacts since we actually signed up the transaction.

So what we'll see is, if you recall the commentary when we bought the business, was this is the long lead bookings for the business so the things that you book in one year are going to sell the next year. We saw some lighter bookings in the back half of 2014, before we actually started operating the business, so we'll expect that some of the lightness that we talked about is more in the back half.

Mike talked about in his commentary that their first-quarter revenues were light. That's part of the normal cycle. That isn't anything to do with the markets or how we're seeing the business. So, like I say, not a lot of oil and gas exposure.

Truthfully, let me expand that out just a little bit and talk about the total Company, because that may be another question that you might have is for the total Company. I would say you could estimate the oil and gas piece at maybe 2% of revenues, something in that range.

So I think we're on solid footing with the Cameron business. We're looking at the synergies. We think we're going to continue to do a really good job of executing those. And the fourth piece of the business that I didn't mention was the aftermarket piece and the service piece, which is our intention to grow.

Thanks. That was really helpful. We definitely think you're more of a winner than a loser from the lower price.

Just follow-on, the investment spending was a hurt to Industrial margins in 2014. And I'm wondering, what is the investment outlook for 2015 overall for Ingersoll-Rand? What sort of rate has that grown at, and to what extent did some investment spending get pulled forward into 2014?

So again, Nigel, when I think about the investment spending and I think about 2015, so our incremental spending is going to be up on a year-over-year basis. It goes from something like $64 million up to an $82 million number with the investments for 2015.

And so here's how I would look at those actual investments is, when we start to look at them and we look at where we're investing money, so about 50% of the investment dollars in 2015 are going to be in product and product-related type of areas. So that would include any go-to-market type of pieces out of the investment spend. And then you're going to have the other pieces, which are going to be the business operating systems, so call that another 25%, and then the IT systems.

So when you think about that breakdown and think about it in terms of our overall strategy, we want to continue to grow the investments in our product and how we go to market with the products. We certainly want to continue to invest in the business operating system per the strategy. And those things are really paying off for us, so we think that those numbers in 2015 are good investments and something that is really going to be helpful for us.

Nigel, maybe to add the remaining piece with the IT systems and infrastructure piece. And we did beef up some of the infrastructure piece, particularly as it relates to security and making sure we're doing that. And largely from a headquarters basis, it's the best way to spend that as opposed to every business unit making a different decision about that, so that's a source of the other piece of the investment.

We probably flatten out here from an IT perspective through about 2018. And then we begin to roll off a lot of that depreciation in 2019, so that piece of it that Sue mentioned, I think probably flattens out here in 2015.

Joe Ritchie, Goldman Sachs.

My first question's on price cost. We did go to the HR show earlier this week, and it seems like you're getting really good pricing on your commercial HVAC products with all the new product [reaction], and clearly there is a cost tailwind as well this year. And so I'm just trying to understand what's embedded in your guidance in terms of the price cost tailwind that you should see in 2015?

Joe, let me try that one on and then Mike can add some color if he chooses at the end. So the way that I would think about our pricing versus the direct material inflation, which is how we talk about it, is we look to have a positive spread in the 20 to 30 basis-point revenue, so it looks a lot like 2014. So we built that capability in the pricing with our ability to anticipate and react, so we're focused on maintaining that spread, regardless of what's happening on the commodity side.

Now having said that, we're fully aware that copper has come down in price. Now, the impact to an Ingersoll-Rand, based on the way we buy copper, is really going to be more in the back half of the year. So we go into the front half of the year being we bought 70% of the copper that we're going to buy. So you're not going to have a direct impact in the earlier parts of the year based on that commodity spend.

And then we also have exposure on the aluminum and the steel side, which are more in the flat-ish. So overall in 2015, again, you've got the piece that you know of with the benefit coming out of copper, but we still think that, in total, direct material is going to have a slight headwind for us. And, again, we think we're going to have pricing that's 20 to 30 basis points above that direct material inflation overall.

That spread is an important concept there, because we look at scenarios that are 40 basis points of deflation, 40 of inflation. I would lean more toward the deflationary story than inflationary story, but, again, I was really testing ourselves around the ability to wrap the spread.

The only place where it's been difficult in the quarter for us was really China, where you've got just a lot of mainly local competitors pricing lower on anticipated costs. And so that was the one place where we didn't catch up with ourselves, but it actually was quite close. It wasn't like we really missed it out there.

So I think net-net, 20, 30 basis points positive spread. Pick your number on inflation and that's what we hope to do during the year.

That's really helpful color, guys. Maybe my one follow-up question here is really on the applied markets. Mike, you mentioned earlier that your expectation is that below were dodges for 2015. And when I take a look at your order trends for this quarter, it looked like you declined.

So I'm just curious, what are you seeing in that market today? What gives you the confidence that we will get some growth as we head into 2015? It does look like municipal spending has gotten better. I'm just curious to hear what you're thinking.

Actually total applied were actually up in bookings a little bit throughout the quarter. Low-single digits, but they were up. And then as we're talking to our people around the globe -- and we have the ability, of course, to see a little bit further out with the pipeline that we would look at, in our sales pipeline. And that's more positive reflecting some of the K through12 activity that I mentioned, which I think will translate into bookings in the year.

Being that K through 12 schools generally are a little bit smaller and typically have a lot of activity between April and September, possibility there that we would see some of that come through towards the middle or early fall in the year, and that would be a good indication for us that we're seeing momentum there. Our view about being a little bit lighter than dodge has been a view now for a long time, but particularly in the last year around how institutional recovery would really take shape.

It has a lot to do with industry capacity of trades people, about how funding flows through municipalities and states and just the ability to construct as much infrastructure -- frankly it's not going to snap back at that double-digit rate. It's our belief that you'll see a more sustained, that single-digit curve going forward.

Julian Mitchell, Credit Suisse.

Just a question on the Industrial guidance. Your sales and margins have been flat there for about four years. But your guidance today for 2015, you've got a decent organic growth rate of 4% to 5% dialed in. And I also think you're looking at close to 40% incremental margins on the underlying business ex-Cameron.

So maybe talk a bit about the confidence on the organic growth step-up? I saw you had one good quarter of orders. And also why the incrementals underlying suddenly take off?

So, Julian, when we think about Industrial and what's happening in those markets, you're right. As we look at 2015, we've got the revenue grows growth and on the legacy business, we're looking at that 40% leverage in 2015. We think that the business has got a good line of sight to the markets, to the orders that they were expecting. They've all been honing their strategies.

Again, if you think about what we were doing with the reorganization of the business and going to a business unit structure and focusing on growth, that gives us a lot of confidence, that we've got people that are looking at the right things in terms of their products and their revenue growth. They've also been looking and prioritizing some really good payback investments that support the growth.

Those include product development, service infrastructure investments for the business and other channel investments. So when you look at 2015, they're a larger percentage of the investment spend than they are of our revenue profile. But we think that those are the right things for those businesses to be doing.

So what we think is, as you put all of those pieces together with the teams focused on the businesses and growth, focused on their different markets and the focus on investments to really grow those businesses, that's what gives us confidence that the business will have the 2015 that we're projecting.

I'd say, mechanically, too, Club Car last year lost 10 days on an ice storm and about 10 days due to some system issues that were [knockdown] effects really right after that. So you don't have that repeating. So just by having a more normal low-single-digit Club Car business, leveraging at really good margins which it normally would do, plus not having to repeat last year's, let's hope, ice storm again.

It happened in February, so let's hope that we don't get one down there again. That ought to snap back even mechanically much better, just due to that alone.

Thanks. My follow-up would be on the Climate's adjusted operating margin. Looks like you're hitting the margin target there one year early., assuming you hit the guidance. So looking beyond that, given you're running at such a good rate, where are you targeting medium-term the margins that Climate can get to, assuming no major gyration in organic sales growth outlook?

Julian if you recall, our structural view was something in the 14% to 16% range for the Climate business. And so I think clearly we think there's a structural opportunity up into that area, so let's work on that probably next. But we're a ways away from that at this point in time.

I think they're going to continue to see that, But, again, it takes investment. We're investing heavily into product, channel, service footprint, all around a long-term view that that's really the structural opportunity in the business.

We are going to update that in May, talk about it at that point in time but we're really pleased to be where we are at this point. It's great execution by the entire global team, both res and commercial, and the service business. So all cylinders fired there early.

Stephen Volkmann, Jefferies.

I'm wondering about your comments about building a little bit of inventory in 2015. And I guess I'm just curious your thinking behind that? What areas would that be? And what gives you confidence that's a helpful strategy?

What we saw in some of the higher-margin businesses last year was, order volatility that could literally be 200% of an historical rate. And so the market volatility that we're seeing in the world is translating to order volatility on stocks and semi-assembled product. And we want to make sure is that where that stuff is very quick turn, somewhat discretionary in terms if you've got the product, you're going to sell it.

We don't want to be stingy on that. We want to make sure that we protect it against the possibility of that sort of volatility, so widening out the [con bons], widening out the stock rates. And we think about there's certain product in the Company that we say, it's a zero stockout product. Literally, we want 100.0% of the time, you want the product, you get the product right when you want it.

We really like that when those products -- the contribution is accretive to the overall margins of the Company. So margins accretive to the Company's overall margin profile, stock, semi-stock, we want to have the product when you want to buy it and there's no point with cost of capital being what it is, to be too stingy about that, so it's just straight economics.

Okay. Thanks. Maybe a quick follow-up. Are there any share changes in any of your product lines that you'd like to call out for us? Thermo King continues to look pretty good. And, in that vein, are you worried at all about competition in the compressor business with your competitor having a euro cost base?

If you've listened to me for long enough, I don't talk about market share one way or the other much, because I think that, over the long run, if you're growing margins and your growth rate's higher than your peer set, you must be doing a good job. Our approach is to be top quartile every single year around incremental margins and organic growth.

That's what we've done over the last five years on margins and last couple, three years on our organic growth profile Company. So that's our formula.

I could tell you that we feel like investment in product and service is working. And I feel like skewing more of that toward the compressed air side of our business, the tool side of our business, and the fluid side of our business on a pro rata, Sue mentioned that, is good for us as well. We see good growth opportunities.

We see some pockets of growth and some niche opportunities for the product that we've assessed. We've done a lot of strategic analytics behind the scenes to support that. So we feel good about that; we're going to poke in on those areas. So compressed air, tools, fluids are all big ideas that we've got to grow that disproportionately.

The product growth teams around the Company, you've heard me talk about that. We've doubled those in 2015. We've got outsides growth in share and margin performance in those last year for the six that we had. And feel like we've got the capacity to take on and do six more for 12 in total.

I'm excited about that going into 2015. Eventually really having that match the value stream of the Company. In fact, all of those product growth teams are actually value streams in the Company anyway, so that was a prerequisite for selecting those. So this is the next five years looking out, I think a really good model to grow the Company and focus our strategy.

Steve Tusa, JPMorgan.

I have one question and two parts. On the commodities side, first of all, what are you assuming on price? Was price realization the majority of that 20 basis points this year, and is that the same thing you're assuming on price?

Then assuming all other commodities like steel and aluminum are a wash, and you marked copper to where it is today, you said plus, minus 40 basis points. I'm not sure what you were saying, but we know it's not going to be a drag. So what would copper be?

My comment on the 40 basis points was, rather than trying to be so precise in our ability to predict the fluctuations in commodities, we've run cases to sensitize ourselves toward how quickly could we respond and react by business in different inflationary-deflationary environments? And could we sustain 20, 30 basis points of improvement?

A big part of that, though, is not just the relationship between the cost of commodity and pricing of a current product, it's making sure that there's an economic value estimation of new product at better value prices, what it's replacing, and when there's an opportunity to grow margins on the topline, relative to that economic value created, that's a big idea, obviously, that we're doing fairly well with as well.

So the introduction of new products for us is an enormous opportunity to raise the margin profile of the Company, even if we were to hold commodity and pricing flat on the legacy product, which is not our goal, of course. It's to get price there, too, but net all that out, that's how we come back to 20, 30 basis point positive on multiple scenarios.

So basically what you're saying is, that you are going to use some of the commodity tailwind to drive to get these new products out there?

No. Different thing. The commodity tailwind largely's going to get reflected in competitive pricing at some point in time. And so that's going to take its own competitive dynamics into consideration.

New products that we're launching. When you look at, as an example, the energy efficiency or the reliability of the product or the total cost of ownership, or other serviceability factors that could translate into a value to the customer, that's not something that you see a cost for.

You see a margin pricing opportunity. That's the kind of thing that we absolutely want to make sure that we're doing a good job understanding that as we launch products. So there are two different thoughts that both show up in the pricing column.

David Raso, Evercore ISI.

I just want to make sure that -- I want to give Steve another crack here to make sure that we got his question. So if you could make sure, Steve, if you could tell us we got it, I'll give you one more crack at it if we didn't. If not, we'll go on.

Steve, (Operator instructions)

David Raso, Evercore ISI.

My question is on Thermo King for 2015. You mentioned mid-single-digit growth in North America as a target. Is there a notable slowdown that you're looking for in the out quarters? I'm trying to understand at least the industry data seems to be far stronger than that, so I'm trying to understand how to read that guidance.

We're coming off a peak, Dave. And I think that as we look at even some of the changes that have made, in terms of driver stops, and the ability to create additional driver capacity through these and a number of mandatory stops, helps create and unlock a little bit of capacity to our customers.

With that being said, you're coming really off the peak. And so again, the new product lapping the old product is not that big sort of revenue price differential that we are going to get lapping now this year to last year. We'll get some but not much.

But early in the year -- and, again, this is an early read on the full year, you tend to lock in orders early or at least lock in customer intent. And there's a lot of sensitivity to marketing and capacity for these customers. So throughout the year, those intended order rates may change.

So that in particular, David, is a good reason for us to update guidance in April and in July, because that number can move around. So right now, that really is our best guess.

Just so I'm clear, is your current backlog or order trends up that modestly?

Backlog is up a little higher than that. Order trends are okay. Europe is slow. So it supports the forecast that we've got.

Real quick, just a clarification. When we spoke of 40% leverage on organic, that was pre-investments, just so I'm clear? Is that correct? Pre-investments?

(Overlapping speakers) 30% to 40% organic on industrial?

I thought it was a total Company comment. Making sure I understand the organic leverage comment.

David, this is Janet. It's just basically taking Cameron out. It's the kind of legacy parts of Ingersoll-Rand.

But it includes the incremental investments for this year?

What?

It includes the investments figure for this year?

Yes.

It does. Okay. Thank you very much.

Actually this morning, you're correct. You're bringing all of Cameron in this year at the beginning of the year, so the math is a little bit different. The true incremental for the Company are closer to 40%, and then Cameron is a historic [drag] in the one year.

While I have you here, the currency drag, what are you assuming on decrementals? To be fair, if you're looking for the whole Company to have about $145 million of EBIT growth, if you put 40% on organic, I'm already up at $230 million. So how much is the currency drag? I run the numbers on how you imply $0.17 and it would look like drag's only $60 million.

David, this is [Sandy], I think you're misunderstanding how we use -- legacy is the right word. It's a legacy Company. So that --

So it must be ex-investment?

So that - (multiple speakers) - would be the offset by FX.

But it must be ex-investments then, is that what we're saying?

No. It's all in.

Okay. We'll do the math off-line. I'm saying, you've got $230 million of EBIT growth just from organic growth at a 40% incremental? And the EPS comment on currency would suggest currency drag. Again the currency decremental must be rather significant.

David, why don't you give Joe or I a call and we'll take it from there.

Exactly. Okay. Thank you very much. I appreciate it.

Jeff Sprague, Vertical Research.

Just two quick ones. Just back to Cameron, looks like your guide would imply Cameron revenues are something like $360 million for 2015. 12% off to your industrial base. So that's down 10% or so from what the 2013 revenues were described as.

I don't know if that was just some kind of round numbers in the mix there, but are you actually looking for the business to be down that much? And maybe just tie -- your industrial orders actually look pretty good, right, up three in Q3 and up six in Q4. What is it about their business that their orders would have been soft in the second half?

Jeff, when we looked about valuing the business as we acquired it, we had given it a 10%, 15% haircut from where it was, just based on what we knew then. Glad we did, based on what we are seeing. So your math isn't too far off. We're somewhere between $350 million and $360 million in probably how we see that.

And I think, Jeff, when -- again, as Mike said, your math is right. And when you think about the business being down, and we went through all of the different pieces, one of the areas where my assessment is, that they missed on the booking side, in the back half of last year, was on the normal book and bill that goes on in the business.

Now, what causes that? I don't know because we weren't in control, but that's something that our team and the Cameron team, now part of Ingersoll-Rand, need to look at for 2015, and really focus on getting that book and bill back in. So I think the issue is it's not a fundamental issue with the business. It's getting it put into our operating system and our Management team, and focusing on the business and just operating.

I think the good news, Jeff, is that we've been really able to go back and look at the EBITDA and EBIT numbers and confirm we've got a line of sight for how to do it, based on the business case we put together, which to your point already was haircut 10% 15%, as we did the valuation for it.

I was just wondering on investment spending and coming around to that. The comment that it levels out, was that just the IT piece of it? I think it was. Can you just give us a view holistically on investment spend, when it might kind of normalize to sales growth, or something that is not a meaningful PNL headwind?

Correct on the IT spend, Jeff. That's the only one that flattens out. And relative to the business investments, it really depends on the pipeline of ideas. And there's an innovation review that we're conducting all the time.

There are multi-generation roadmaps that we're looking at for the product. And we think we've got a pretty good equation here.

And, again, if we could continue to get the same incremental margins and growth in the business, we would have no reason to tell you that we are going to ever change the investment profile of what we're doing. Having said that, we don't know beyond about 18 months, because it really does depend on what that multi-generation product plan might look like, or what acquisitions look like in terms of the footprint that we would be bringing onboard, to serve channel and footprint which is another big part of the investment.

So we're going to give you it to a year at a time, but what you see here is that we are investing in growth of the Company and in the OpEx performance of the Company at about the same rate, albeit larger absolute dollars year to year to year.

Steven Winoker, Bernstein.

You spent $200 million for shares, $3 million to $4 million in the fourth quarter, but you're holding share count flat at 270 million through 2015 and generating about $1 billion, you mentioned, of free cash flow? Just give us a sense for why you're guiding in that way for the rest of the year? And what you're thinking about capital deployment more broadly then?

So, Steve, I think the way that we thought about it and just modeled it for you was, if you take that $950 million to $1 billion, maybe a third of it goes to our dividend. We said that we would follow our long-term guidance, which is to, at a minimum, keep the dilution from occurring from option exercises and from programs that -- where things are maturing.

So we gave it to you in those two pieces, and then said the remaining, say, third of the cash flow, that we would toggle between M&A and share repurchases. And so we just broke it up that way so that you would say, okay, here's the minimum that they're going to do. And then the other piece, if we have good M&A candidates that follow along with our strategy for that, we would do it. And if not, we would look to return the cash to our shareholders.

Steve, I think your question, though, about share count and I'll bring of the experts here if I get off track, but we would be issuing shares in the first part of the year, equity programs, and we're buying back shares in the last part of the year, so you're going to see dilution in the first couple of quarters, and then you're going to see us coming back to neutral in the back half of the year.

Just the way that it averages for the share count for the full year. So 270 is an average share count. It's a beginning and ending, but it certainly is extremes of issuing in the first quarter and doing a lot of buybacks toward the fourth quarter.

Okay. And then, Mike, you talked about risks and opportunities, R&Os before in the fourth quarter and how -- I think you used the words perfect that was for their performance. Maybe just give us a bigger idea of how they Rs versus Os, or it looked like they're balancing out and what you have to believe, what you're most excited about on that list, and what you're most concerned about as you think about 2015 results?

Our philosophy in giving guidance has always been to give the net R&O that we see for guidance in [third] quarter. One of the things that you don't see in our numbers now is we haven't put anything in for Venezuela. It was noisy for us to forecast that. Didn't know if it was going to happen; at some point it probably will happen and we can update you when something like that actually happens.

You'll also notice that we didn't spend much really in restructuring last year. Rather than putting noise around that, if we see something that we need to be doing, we're going to do that and update you on that, but probably can manage that within the base that we've got.

The rest of the items that show up in here are typically commercial puts and takes. Win something, lose something. It's all based on pipelines that have typically four levels of commitment, everything from we've pretty much got it in the bag to pretty much the competition's got it in the bag.

Occasionally you get a swinger. We'll win one, whereas, long-shot, we'll lose one that we should have got. So we net those things out. The operational performance of the Company is becoming much more predictable in terms of how we're executing against that.

Again, this is big kudos to the bench strength around the Company, operationally, for getting it done, quarter-over-quarter for a long time now, and managing through that. They have their own unique set of R&Os between suppliers that are having floods and fires and suppliers that we're switching out, changing line moves, plant moves and running the day-to-day. So that's the kind of thing we look at on a at least monthly basis.

I'd now like to turn the call back over to Management for closing remarks.

Thank you very much. And everybody have a good day. Joe and I will be around for questions.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a good day.