特靈科技 (TT) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ingersoll-Rand fourth-quarter 2015 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, Ms. Janet Pfeffer. Ma'am, you may begin.

Thank you, Crystal. Good morning, everyone, and welcome to Ingersoll-Rand's fourth-quarter 2015 conference call. We released earnings this morning at 6.30, and the release is posted on our website. We will be broadcasting in addition to this phone call through our website at Ingersollrand.com where you'll find the slide presentation (technical difficulty).

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 are made pursuant to Safe Harbor provisions of federal securities law. Please see our SEC filing for a description of some of the factors that may cause actual results to vary from anticipated. We also are using non-GAAP measures in this call, and they are explained in the financial tables attached to our news release. Now to introduce the participants in 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.

Thanks, Janet. Good morning and thanks for joining us on today's call. This morning I'll spend a few minutes recapping our full-year 2015 results and our progress on the transformation we've been working on in the Company since 2010. Then Sue will take you through the fourth-quarter results and I'll end up with our outlook for 2016 before we open it up to your questions.

Starting with full year 2015, it was a year that I would characterize best by one word, and that word is volatility. Volatility in the energy markets, in foreign exchange rates, in industrial markets, in emerging markets and, of course, in the stock market. During this period of volatility, while the individual pieces might not each have yet ended exactly how we had forecast them 12 months ago, our headlines results were essentially right on the forecast we gave you a year ago. The 2015 forecast we gave you a year ago was for 4% to 5% organic growth, and we came in at 5%.

Our adjusted EPS forecast was a midpoint of $3.74 or actual $3.73. That performance was with significantly more FX headwind. We had included a $0.17 earnings headwind for currency and guidance. It ended up being over $0.30. Our free cash flow forecast was $950 million to $1 billion and we delivered $985 million.

We focused on executing within our business operating system and on the things that we can control while doing our best to anticipate the things we couldn't control, and we made adjustments accordingly. 2015 demonstrated continued progress in the implementation of our multi-year strategy for growth, operational excellence and shareholder value. We invested in core businesses, maturity and key strategic capabilities and delivered on our financial commitments, all while navigating shifts and challenges in global markets. We have consistently delivered on our commitments, even in volatile times, and we hope that you agree that there are very few companies near coverage that have done this. I'm very proud of our team and the great people in our Company that delivered another solid year.

I look back over a longer horizon of the last, say, 24 months it's a similar story. With the exception of a single quarter almost five years ago, we've met or exceeded our earnings commitments regardless of market conditions. For the year, our organic revenues, which excludes FX and acquisitions, were up 5%. Markets were uneven around the globe. Growth in North America was in the mid single digits while revenues overseas, taken collectively, increased low single digits.

Adjusted earnings per share were $3.73, a year-over-year increase of 12%. Within our diversified industrial peer group we achieved top quartile performance in EPS growth again in 2015. We grew adjusted operating margins 40 basis points in 2015. Our organic operating leverage, which excludes the impact of foreign exchange and M&A, was 35% which is above our target range of 25% to 30%. Climate margins improved 60 basis points. We generated $985 million of cash flow. Our capital allocations strategy remains focused on maximizing shareholder value and is consistent with our overall financial strategy.

We continue to increase our dividend, with a 16% increase in 2015, and we announced an additional 10% increase in the dividend last week. We repurchased 4.4 million shares for $250 million in 2015. More recently, we took advantage of some of the volatility in the stock market and accelerated our share repurchases this year, repurchasing 4.9 million shares for $250 million in January of this year. We finalized an agreement with the IRS for the years 2002 through 2011. In December we announced an agreement to sell our remaining stake in Hussmann and we expect that to close in April. Our performance in 2015 gives further conviction to our strategy and positions us well as we go into a challenging global economic backdrop in 2016.

Please go to slide 4. We've delivered steady improvements in operating margins. Shown here are the last five years, where operating margins are up 270 basis points since 2011, despite tough years in industrial in 2014 and 2015. During this same period, our adjusted operating leverage has averaged over 35%.

Please go to slide 5. This chart walks through the change in operating margin from 2014 of 10.9% to 2015, which was 11%. This chart is shown on a reported basis so it includes restructuring in inventory step-up costs, which are excluded from adjusted margins. We had 20 basis points of higher restructuring year over year and also had a 20 basis point impact in inventory step up on accusations. Adjusted margins, which exclude those items, expanded 40 basis points from 11% to 11.4%. The 40 basis points of margin expansion was delivered from a combination of organic growth, maintaining a positive gap between pricing and material inflation through value pricing and pricing analytics and productivity from strategic sourcing, implementing our lean operating system and overhead cost discipline together outpacing other inflation.

Foreign exchange was a drag to margins of 50 basis points. We continued to invest in new products, IT infrastructure and systems and service and sales footprint to underpin the future growth of the business. Those collectively were a 30 basis point investment year over year. Now Sue will take you through the fourth quarter and then I'll come back to take you through 2016's outlook.

Thank you, Mike. Please go to slide 6. At the summary level, our organic bookings for the quarter were up 2% and organic revenues were up 3%. Residential and commercial HVAC organic revenues were each up 5%-plus. Adjusted earnings per share for the fourth quarter were $0.94, up 15% versus last year. Consistent with Mike's commentary for the full year, the fourth quarter was in line with our earnings guidance. A slightly lower tax rate was offset by slightly higher compensation and benefit costs.

Our adjusted operating margins were up 50 basis points. Operating leverage in the quarter was excellent at 34% on an adjusted basis and 55% on an organic basis. Climate margins increased 70 basis points in the quarter. Adjusted industrial margins were down 200 basis points but were only slightly down on 2% lower organic revenues when excluding the impact of currency and of rolling in the first year of Cameron's centrifugal operating income and amortization. Finally, as Mike mentioned, giving the impending closing of the sale of our Hussmann's stake expected on April 1 and to take advantage of market volatility, we repurchased 4.9 million shares in January 2016 for $250 million.

Please go to slide 7. Orders for the fourth quarter of 2015 were up 1% on a reported basis and up 4% excluding currency. Organic orders were up 2%. Climate orders were up 5% organically. Organic global commercial HVAC bookings were up low single digits with a high single-digit increase in North America and declines in Asia and Europe. Organic transport orders were up low single digits with increases in global trailer, truck and auxiliary power units, partially offset by lower marine container orders. Orders in the industrial segment were down 4% on a reported basis and down 7% organically. We saw high single-digit order decline in air and industrial products and a mid single-digit increase in Club Car.

Please go to slide 8. Here's a look at the revenue trends by segment and region. The top half of the chart shows revenue change for each segment, where the total Company fourth-quarter revenues were up 3% versus last year on a reported basis and also up 3% on an organic basis. Climate revenues increased 2% on a reported basis and 5% on an organic basis.

Organic commercial HVAC revenues were up mid single digits with increases in all major graphic regions. Residential HVAC revenues were up mid single digits. Organic transport revenues were down low single digits as higher truck and trailer revenues were more than offset by lower revenues in marine and APUs. Industrial revenues were up 5% on a reported basis and down 2% organically. Air and industrial products organic revenues were down low single digits and Club Car was up slightly. The bottom chart shows revenue change on a geographic basis as reported and on an organic basis. Organic revenues were up 3% in the Americas, up 2% in EMEA, and Asia was up 9%, with strong growth outside of China.

Please go to slide 9. Operating margin on a reported basis was up 10 basis points from fourth quarter 2014 to fourth quarter of 2015. We've spiked out the restructure impact to get you to adjusted margins as well. Adjusted margins increased 50 basis points, from 10.8% to 11.3%. Volume, mix, and foreign exchange collectively were flat, with 40 basis points of positive margin from volume and mix being offset by foreign exchange.

Net pricing versus direct material inflation was favorable by 30 basis points, driven by commodity deflation. Productivity versus other inflation was positive 80 basis points, driven by strong productivity in the quarter. Year-over-year investments and other items reduced margins by 100 basis points. In the box you can see that it was comprised of 20 basis points from investments, 50 basis points from higher restructuring costs, and 30 basis points from acquisitions. In the gray box at the top of the page, overall leverage on an adjusted basis was 34% and if calculated on an organic basis, which excludes foreign exchange and accusations, was 55%.

Please go to slide 10. Total fourth-quarter revenues for the climate segment were $2.5 billion. That is up 2% verses last year on a reported bass and up 5% excluding currency. Acquisitions and climate do not change that rounding so organic revenue is also up 5%. Organic commercial HVAC fourth-quarter revenues were up mid single digits and were up in all geographic regions. North America was up mid single digits while EMEA and Latin America were both up low single digits. Asia was up low teens. The growth in Asia was led by some large HVAC projects in southeast Asia.

Commercial HVAC equipment organic revenues were up low single digits while HVAC parts, services and solutions were up high single digits versus prior year. Thermo King organic revenues were down low single digits with truck trailer revenue up high single digits, with growth in both North America and Europe. Marine and APU revenues declined against difficult comparisons to the fourth quarter of last year. Residential HVAC revenues were up mid single digits versus last year. The adjusted operating margin for climate was 12.9% in the quarter, 70 basis points higher than fourth quarter of 2014 due to volume and productivity, partially offset by currency and other inflation. Climates operating leverage was over 50% in the quarter.

Now please go to slide 11. Fourth-quarter revenues for the industrial segment were $834 million, up 5% on a reported basis but down 2% on an organic basis. Compression technologies and services, power tools, fluid management, and material handling organic revenues were down low single digits versus last year. Organic revenues in the Americas were down high single digits while revenues in EMEA were down low single digits and were up high single digits in Asia due to some large project deliveries. Club Car revenues, excluding foreign exchange, were up slightly versus prior year.

Industrial's adjusted operating margin of 13.8% was down 200 basis points compared with last year. When excluding the impact of acquisitions and currency, adjusted margins were down 20 basis points year over year on lower organic revenues. The engineered centrifugal compressor business, or ECC, which we purchased from Cameron in January of 2015, executed well and came in essentially on forecast in the fourth quarter. In 2015 revenues were impacted by weakened industrial markets. However, synergies were above our acquisition model and EBITDA and cash EPS were both accretive.

Please go to slide 12. For the full year, working capital as a percentage of revenue was 4.2%. We have strong collections in the quarter, with our DSO improving over the prior year. Going forward, we expect our working capital to be in the 4% range.

Now go to slide 13, please. Adjusted cash flow generation was excellent at $985 million in 2015. Cash conversion as a percent of adjusted net earnings was 101% for the year. As you can see when we look at 2016, we expect adjusted free cash flow in the range of $950 million to $1 billion. That range excludes the proceeds from the sale of our stake in Hussmann. Our balance sheet remains very strong. We have no debt maturities until 2018.

Please go to slide 14. Over the last five years we've returned over $6 billion to shareholders through dividends and share repurchases. We employ a dynamic model for capital allocation, which adjust based on market conditions to put our strong free cash flow to the right use for shareholder value. Last week we announced a 10% increase to our dividend. Dividend increases over the last five years has been a 24% CAGR. Our payout ratio is in line with peers.

We've repurchased 103 million shares in the past five years from 2011 to 2015. As we said earlier for 2016, we anticipated some market volatility in January and were able to accelerate our minimum share repurchase of $250 million to the beginning of the year. We repurchased 4.9 million shares in January. To remind you, our free cash flow generation is heavily weighted to the second half due to the seasonality of our businesses, namely our HVAC business, so our normal timing for share repurchases would have been in the second half, but given we have the proceeds from the sale of our Hussmann stake coming in April, we thought it was opportunistic and still within our leverage range to accelerate the minimum repurchase and get that done earlier in the year.

For the balance of 2016, we will use the same approach as the last couple of years, applying a toggle switch through value accretive accusations and share repurchases based upon relative valuation and risk-adjusted returns. We will apply our same decision-making framework to the decision at that time and leave the door open to pivot to share repurchase or M&A as it makes best sense for shareholders. For ease of modeling purposes you'll see that for the 2016 share count, we've applied excess cash to repurchases in the second half of 2016 as we turn cash flow positive. With that, I'll turn it back to Mike to take you through 2016 guidance.

Great, thanks, Sue. Please go to slide 15. As always, our intention is to give you our best view of what we're seeing around markets sitting here today and how that translates to our revenue outlook for 2016. We've broken it down by major end markets and geographies. As you can see by the variation of colors and symbols, red marks a single wide variations in trends. North American commercial HVAC and residential HVAC as well as transport and commercial HVAC markets in Europe are generally positive while global industrial markets remain weak.

Transport markets in the Americas will be down -- flat to down as lower trailer volumes will be largely offset by higher auxiliary power units, small truck refrigeration and other products. Asian HVAC markets are expected to be flat to down, and industrial markets in Asia remain under pressure. Golf and utility vehicle markets generally flat to slightly up. All the growth forecast shown are on an organic basis. We're forecasting low single-digit growth in commercial HVAC in total, mid single-digit growth in residential HVAC, which is essentially an all North American business for us, and flat revenues in transport. We expect air and industrial products, which includes our compression technologies, power tools, mature handling and fluid management SVUs to be down low single digits and we expect Club Car to be up low single digits.

Please go to slide 16. Aggregating those market backdrops, we expect our reported revenues for full year 2016 to be flat, up 2% versus 2015. Overall, foreign exchange will be a headwind of about 2 percentage points. Since we've now completed a full year of Cameron centrifugal compressor division in our results, organic revenue growth and excluding FX are the same in this forecast. Translating that to the segments, we expect climate revenues to be up 1% to 3% on a reported basis and 3% to 5% excluding currency. The industrial segment revenues are forecast to be down in the range of 2% to 4% on a reported basis and down 1% to up 1% excluding foreign exchange.

Industrial also has a higher proportion of revenues outside of the US than climate, so industrial experience has more impact from FX as compared to climate, 3 points adverse impact versus 2 points in climate. Property margins, we're excluding restructuring costs to get to adjusted margins. We expect climate adjusted operating margins to be in the range of 13.25% to 13.75%. We expect industrial adjusted margins to be in the range of 13% to 13.75% and for the enterprise we expect adjusted operating margins of 11.5% to 12% and EBITDA margins of 14.2% to 14.7%. Operating leverage would be about 60% all in and about 30% excluding currency. Margin expansion would be 10 to 60 basis points on an adjusted basis.

Please go to slide 17. Transitioning to earnings, reported earnings per share range is estimated to be $3.75 to $3.95. Excluding restructuring, the range is $3.80 to $4, an increase of 2% to 7% versus 2015. As a note for 2016, FX is a headwind of about 2% to revenue and $0.19 to earnings. For this forecast we've reflected consensus foreign exchange rate forecast. For example, the euro average rate for the year is $1.03 but for the first quarter the euro forecast rate is $1.06. This reflects a full-year tax rate of 24% to 25% and average (inaudible) share count of 260 million shares for the full year.

As Sue explained, recent modeling allocated all excess cash to share buyback and phased it had to the back half of the year when we turn cash flow positive. This does not necessarily mean that this will be the actual deployment for the cash but was done to simplify modeling. The EPS outlook does not include the impact of the divestiture of our stake in Hussmann. We expect that transaction to close April 1 and result in a gain of approximately $400 million, which will be recorded in other income in the second quarter. We'll update our guidance in April to reflect the closing but will adjust out the gain for comparability.

First-quarter 2016 revenues are forecast to be flat, 2% on a recorded basis and 3% to 5% excluding currency. Reported first-quarter earnings per share are forecast to be $0.28 to $0.33 adding back $0.05 restructuring. To get to an adjusted basis, the EPS range is $0.33 to $0.38. There are EPS bridges in the appendix for both the full year and the first quarter's guidance. For the full year 2016 we expect to generate adjusted free cash flow, which excludes restructuring cash and proceeds from Hussmann, of $950 million to $1 billion.

As I said earlier, we increased the dividend last week and have already completed $250 million in share repurchases which will more than offset dilution from equity issuances. We had $143 million of commercial paper at year end. After paying that down, it leaves about $675 million of cash for deployment that we utilized (technical difficulty) additional share repurchase or towards M&A. We continue to build a pipeline of acquisition opportunities related to our core businesses and we weigh those risk adjusted opportunities against buyback in terms of returns of shareholder value.

In closing, we're pleased to have delivered another solid year with top quartile performance in revenue and earnings growth. Our strategies for growth and operational excellent have delivered a multi-year trend of excellent operational leverage, margin and earnings improvement. Our focus is to continue to grow earnings and cash flow through further implementation of these strategies. We practically work to deliver productivity and make prudent investments for the future. We continue to investigation in new product and service offerings, our IT infrastructure and systems as well as further developing our people and their operating capabilities. We continue to execute a consistent value-maximizing capital allocation program.

So I'm proud of the progress we've made and results we've delivered and I believe we're well positioned in 2016 to again deliver on our commitments. With that, Sue and I will be pleased to take your questions.

(Operator Instructions)

And our first question comes from Steve Tusa from JPMorgan. Your line is now open.

Hey, guys, good morning.

Good morning, Steve.

Just a couple questions. On the first-quarter dynamics, you have a decent organic growth rate, but it doesn't look like there's much contribution from operations on EPS. What's going on there?

Steve, good morning, first of all. As we start to look at the first-quarter bridge that you can actually see in the slides, what we're looking at is we've got restructuring costs that are in the first quarter. Our operating results are really going to be in the range of -- and this includes the restructuring negative $0.01, $0.02, to positive $0.04. We've got a little bit of lower share count. But when you think about what's happening in the headwinds, the first quarter is going to be part of that currency headwind that we talked about, particularly on the industrial business. In the revenues, we expect in the first quarter and margins for industrial, we expect to be even lower than where we ended the year.

In other words, we're looking at a low revenue base. We're looking at headwinds from currency and so I think the first quarter is just going to be tough compares, and then I think we get better as we go through the remainder of the year.

Okay, so industrial, that makes a bit of sense. On this gain you guys are going to take, Mike, given the environment has clearly gotten worse over the course of the last year, you guys are doing some degree of restructuring, but as -- and you don't typically do this over time like other companies, but any thoughts to maybe using this gain to perhaps take a bigger swipe at things and get out in front of some restructuring that you may have planned for a couple years into the future just to kind of solidify that ability to kind of execute and deliver like you've been doing over the last year?

Yes, Steve --

Is there a bigger restructuring out there, I guess, is potential for that?

Yes, I think, Steven, you go back through 2009, we've been really consistent about particularly the factory footprint, and that at a place right now where I think it's very productive. It's well utilized. When we looked at ideas around this coming into 2016, pay backs were in the in the range of say five to eight years, which was just outside the range of what we thought in this environment was doable.

That being said, when you look at areas of the business, particularly around compression technologies, there is restructuring taking place there and largely it's in the areas of head count and things that we can do in a non-qualified way. So tremendous focus on both corporate and cost within each of the businesses. There is sort of a drum beat over time of doing that. That it's an effective, efficient -- relatively effective and efficient footprint. One of the things that we find is the better we've gotten at lean, the further we've gotten into that, the longer and harder it is to get a payback on a closure, which is a good thing.

We remain, I think, open minded, Steve, if in fact things deteriorated further, if in fact we saw an opportunity, we certainly would look at that. We'll keep an open mind on that. But rather than putting a big place holder out there with no specifics, we wanted to just keep it to the known actions and the announcements that we've made internally inside the Company at this point.

Okay. Great, thanks a lot.

Thank you. Our next question comes from Nigel Coe from Morgan Stanley. Your line is now open.

Yes, thanks, good morning. Just wanted to -- first of all, congratulations on great second half execution, certainly a lot better than many of your so-called high quality peers. So well done on 3Q, 4Q. Just wanted to maybe pick up on Steve's point about -- very clear answer on the restructuring, but I guess the two areas of pushback for 2016 plan be flat industrial and maybe flat TK. I'm wondering if those come in weaker through the year, to what extent do you have contingency plans in place to mitigate the deleverage that you would see if those did come in weaker?

Yes, Nigel, this is again, picking up on the point with Steve, this is where investments would be metered down, a lot of the investments we're making not only in product but in channel and also letting attrition at times work for you, so we would continue to work that down. We certainly have a plan that sustain a lower revenue outlook if we see that. It's baked within the guidance that we've provided, the range that we've provided, and our focus really is on the industrial segment, and it's fundamentally on the compression technologies piece. Todd's all over it. He's well into, several months now, into the role. I think he's got his eyes wide open around the opportunities. He's optimistic around what he's doing, and I've got confidence in Todd and the team that they've got the plans hard wired for lots of different scenarios at this point.

Okay. Okay. I'll pick up offline. Secondly, obviously you'll be aware that there's a pretty fertile debate about non-ressie in North America, given the broader weakness in the industrial complex. The high single-digit growth in bookings during the quarter suggests that you're still seeing relatively fertile end markets but maybe just pick up on where you stand and perhaps maybe comment on how the front (inaudible) is looking right now.

Well, I think the surprise in the fourth quarter, at least to me, was the strength that we had both in applied and unitary in North America. We had double-digit applied bookings in the fourth quarter and we had mid-teens booking in unitary in the fourth quarter. So as a backdrop going into the first half of the year, it feels like we've at least got enough out there for us to see in terms of visibility to see that. Also, we had really good service grid, kind of high single-digit growth in services. Controls was up nearly double-digits there, so it feels like we've caught a little bit of a lift in terms of institutional markets. Commercial hasn't turned down fully, that's why we're seeing good unitary although some unitary spills in through K through 12 as well, so that continues. As you'd expect, just the investments in the service network, the service footprint have been good for us. So it's a pretty good backdrop from the fourth quarter going into the first part of the year.

Okay. I'll leave it there. Thanks, Mike.

Thank you, Nigel.

Thank you. Our next question comes from Julian Mitchell from Credit Suisse. Your line is now open.

Hi, thank you. Just a question around the climate margin guidance. It looks like you're guiding for a sort of [40]-plus incremental margin in climate for 2016 overall. Maybe looking at slide 15, you might have some mix headwinds in that segment this year with ressie growing so strongly, Thermo King and Trane Asia being flat to down. Just wondered what you're imbedding for mix in climate for the year ahead.

Julian, as we think about where climate's going to go in 2016, I think you're right. You hit some of the high points. We still see the continued trends in what we talked about in terms of commercial HVAC in the Americas being strong, in EMEA being up and on the Asia side being down a little bit. We called residential up mid single digits. You also have the factors of Latin America as part of the business and while you have some growth in those signs, you've also got the transport revenues being flat in 2016. I think it's all of those mix pieces with good strength on the commercial side in North America and Europe, a little down on the Asia side, flat transport down on Latin America and good mid single-digit growth in RES.

Okay, so mix is sort of broadly neutral then 2016 versus 2015, in climate.

Julian, residential, if you look at the peer group, we're right at the top of the pack in terms of profitability. I think that's a point often lost on investors is the amount of margin improvement we've had in the residential business, so good residential growth is good for us. It's fine. On the transport side, if you look at transport North America trailer, the industry being down 10%, our guidance embeds more of a 15% decline. We look at APUs, we had good growth in the year. We had 16% growth in APUs over the full year. We had good growth in bookings in the fourth quarter.

We've got a strategy for a higher attachment rate to non-refrigerated trailers, about a 3 to 1 ratio. If we sell three APUs it's equal to one North American trailer. There is, between APU and some of the air businesses and the other businesses that we have within TK the ability to offset that decline. And then I point you back to the fact that European trailer was up nicely and as that moves up, that's actually even more helpful than North American trailer. So net-net, we're good.

Actually what's down for us pretty big is container. We had a big year last year in container. Container is soft, the market in general. We're against a tough comp but container is an area where, frankly, less container is helpful on the mix. So net-net, we think we can grow margins.

Thanks and then just a quick follow-up. Price mix -- or sorry price material was a 30 BPs tail wind for the quarter and the year in 2015. Are you assuming sort of similar-ish for the year ahead?

We are. If -- again, you're absolutely right with we ended the fourth quarter with 30 basis points and full year 2015 at 30 to 40 basis points. For 2016, we're going to expect a 30 to 40 basis-point range for that gap or that spread between price and direct material inflation. You do have higher material deflation numbers. As you recall, we had inflation in the first and second quarters of 2015, so you do get a lift out of that, but I think as we think about the push and take between price and direct material inflation, we think all in all, it's going to come back to about that same 30 to 40 basis-point range in 2016 is what we saw.

One of the other points, and you didn't ask this but I think it's relevant when we're having this discussion about price and direct material inflation, when we think about the differences between climate and the industrial businesses, the largest pieces of the benefit on material deflation do go to the climate business. There is some, and there still is a positive spread in the industrial businesses, but it's much less than what you would see in climate, and so as you're trying to compare year over year, you also don't have that nice benefit coming out of commodities and the direct material deflation on the industrial side.

Very helpful. Thank you.

Thank you. Our next question comes from David Raso from Evercore ISI. Your line is now open.

A couple quick questions. First, acquisition pipeline. Can you give us little feel from where you're feeling the opportunities are presenting themselves most, be it graphic, end market, however you want to address the question?

Really, David the strategy for us has been to look at all the SVUs, core businesses across all markets and so there's a pipeline that would reflect all that from that perspective. There are two fundamental areas that we see for investment. One is channel. We continue to see opportunities, whether it's geographically outside the US for channel or even in the US in terms of buying back commercial distribution. That's a continued emphasis for us.

We also find that when we can take a product, it might be a technology that we don't have and sell it through our existing channel, particularly on the Trane commercial side, we do very, very well with that. Obviously, it's more attractive if we're buying anything that euro-denominated or denominated outside the US and so we're pretty active looking outside the US for a lot of that, which can be then modified and brought into the US with different power requirements and different efficiency ratings, but some of the technologies can be applied. We're seeing an active pipeline there as well.

And given the balance sheet power and the cash flow, would you care to give us any sense of bigger-than-a-bread-basket type sizing of what kind of size deals are you looking at currently?

Yes, probably, David, truthfully that would only get us into trouble, I think, to do any bread-basket estimates. I think that you can look at where we would end the year in terms of ratios, in terms of EBITDA to debt, we end the year in the 2.4 range. There's obviously the capacity with some of the current debt rating. We've got the cash we talked about on the call, the $675 million that's unidentified. There is an opportunity to do something a little bit larger. What we're generally seeing, though, are small- to mid-sized deals that just make great economic sense.

Okay. A couple quick things. Tax rate, with the IRS settlement now behind us, can you give us some guidance on how you think about the tax rate, be it this year, next year. I saw the tax rate guidance. I must admit I was looking for a little lower tax rate in 2016 given the IRS settlement, but can you give us some guidelines how to model the next few years?

Sure, so we were probably a little conservative on the 24% to 25% effective tax rate guidance for 2016. I think that when you think about the IRS settlement, what the IRS settlement really does is it takes the risk profile off the Company, and it puts to bed all of the issues around inner-Company debt and any issues that would have been in the 2001, 2002 through 2011 range. What it really doesn't do is it doesn't really affect the overall effective tax rate. So what you have to do in order to make that tax rate move is you have to continue to refine your strategy.

Now, having all of those issues off the table certainly does give you an opportunity and we are certainly involved in looking at that strategy in terms of the different areas that we're looking at. We have a good trading hub that is in Europe. We're looking at Asia and Panama for trading hubs. We're looking at all of our inner-Company debt and making sure that we're as balanced as we go into 2016 as we would like to be. But we do also have a slight headwind, if you will, on tax rate, and that is when you look around the globe and you think about our revenue growth in 2016, the areas that are growing the most are in North America, which does pressure the tax rate.

That's a long way around saying we absolutely have a goal of looking at every opportunity to bring that rate down. We're still going to be just as conscientious about the items we take on as we've always been, but I do think we'll see some opportunities in 2016. We'll continue to work that strategy and continue to communicate, but like I say, it's also a good thing that we have a little pressure on that rate coming out of the North America growth.

All right. Sorry, and speaking quickly on cushions, just making sure, the corporate expense, I know there's rounding and you have to give ranges on segments and so forth, but it does seem to be implying your corporate expense goes up 10%, $230 million versus $210 million last year. Is that a rounding issue or should we really think the corporate expense is going up that much? Because if you back from the total EBIT, so it's implied by the segments, it is a larger number than I would have assumed.

Right, so it's not really rounding but as we look at corporate expenses, and so if you think back to 2015, where we started the year with our guidance was about $235 million, may sound familiar, and we ended the year at $210 million on the corporate side. When we look at 2016, we took a lot of discretionary spend out of 2015. There are some investments that we need to continue to make around our IT infrastructure, around cyber security, and we also have on the corporate side. We talked about pension in total for Ingersoll-Rand being about flat year over year. However, with a lot of puts and takes in elements of pension, pension is a little higher on the corporate side in 2016.

So it's not just rounding. It's not just putting things back in, but I'll also tell you that we're going to be very conscientious about what that spend is and in looking at not getting ahead of ourselves on any spend before we see what's going to happen in the different markets. It's a long way of saying that the $230 million, $235 million range is a lot more normal than Q10 but we're going to watch it closely and we're going to do everything we can to make sure the money is spent very well and to the level that we need to.

If you take the run rate plus the pension, you're right. It leaves a little bit of a gap there which we would normally apply to things like IT infrastructure and security that we're on a program to refresh. But look, if the markets turn down, we would just look to pull back from a discretionary standpoint in other areas in corporate, so there's a flex we would take if the markets are a little rougher than we think.

Thank you.

(Operator Instructions)

Our next question comes from the Steven Winoker from Bernstein. Your line is now open.

Thanks and good morning, all.

Good morning Steve.

Mike, you've often talked about one of the characteristics distinguishing marks of the new Ingersoll-Rand is how you hold decrementals when volumes are in the down part of the cycle. We're obviously witnessing that inside of industrial or about to. Can you maybe talk about what decrementals you really think you're going to be able to achieve here if things do go a little bit further south and what's giving you the confidence on just down low single digits in air and industrial products when it looks like bookings are a bit worse than that and the broader environment is also a bit worse?

Yes and, Steve, look, a great example of that is what happened with compression technologies. If you take the legacy business, it ran almost flat on much lower volume. So a great example of that. That was an extraordinary effort by that team to really pull all the stops out on productivity and discretionary spending and really to win in the marketplace. It's a little bit tough to compare comps against competition, typically denominated in different currencies. But we did fairly well there on the product and service side of the business so that's a great example.

I would say that where we try to leverage in the gross margin range of 25% and 30%, we'd certainly be looking to deleverage within the gross margin range not to exceed 25% to 30%. That would be sort of the essence of that. It's going to depend a bit on the business. I mean, TK has fundamentally, I think, more opportunity. If doesn't leverage up nearly as high as people think. It doesn't deleverage nearly as poorly as people think, largely because the distribution base of that business is independent. We're really turning on and off sort of factory production and we've got very flexible plants and labor forces that work with us on that. A great example is TK, where we would look to certainly work inside of normal margins in that business.

Steve, just to add on to what Mike said on the industrial side. When I step back and think about industrial, I kind of think about three big buckets that impacted that -- again, no excuses, the decrementals need to be at the same levels at the incrementals when we go forward, but industrial has an outsized impact from foreign exchange. Over 50% of the revenues are impacted or they're non-US and are impacted by foreign exchange. So you have that headwind going against them We do have the amortization and the -- from the accounting on the acquisition of Cameron. Again, took that on, knew we took that on but it does impact what we're looking at in 2015.

And then as I pointed out earlier, when you think about they don't get the benefit, or the big benefit, coming out of direct material deflation with commodity prices because that's just not how that segment works, the air business gets a benefit out of some of that, but the other businesses within the segment do not. So when you say you've got outsized foreign exchange, less direct material deflation and we put in an acquisition in there with some additional amortization. So I'd think about that in the total equation, too.

Okay, thanks. And then as a follow-up to an earlier question, you talked a lot about the price versus material deflation and range spread, but a little more on the pricing environment itself, absent material. What are you seeing in your big businesses in pricing? What kind of behavior are you seeing?

Well, both businesses in the fourth quarters are positive price, which is pretty outstanding, frankly, across the board, and that's with pressure in climate in Asia and it's, of course, with industrial pressure all over the world, still able to get price in that business. We are still seeing positive price, albeit it's pretty thin in the quarter. That's, I think, a good indicator of some of the pricing power and just sort of the pricing structure within the industry. It holds pretty well through tougher times.

And that same would hold for 2016 with both segments projecting positive price for 2016.

Okay. Thanks.

Thank you. Our next question comes from Jeffrey Sprague from Vertical Research Partners. Your line is now open.

Good morning, everyone.

Hey, Jeff.

Hey. Just back to industrial for a moment, Mike. Just thinking about the margin sequentially, if Cameron hit its targets and with the sequential revenue that you just had seasonally, I would have thought the margins would have been a little bit better there. Can you just kind of walk us through that and then just help reconcile us a little bit how we get comfortable with kind of flattish industrial for the year coming off this Q4 order number. Is there something in particular that you see in the pipeline that gives you some confidence in that number?

Jeff, I'll start and then I'll let Sue finish. What I think a lot of folks don't recognize when we talk about industrial is the impact that material handling and tools would have. Material handling is really exclusively low on gas for us. It's 7% of that segment. It's been hit incredibly hard and frankly, the tools business was hit very hard by that business as well. Highest margin business is in the portfolio and so when those go down, you feel it. It's a substantial headwind buried inside the segment numbers that's independent of what's happening with Cameron or compression in general.

The other thing, if you go back to compression technology specifically, is we do very well from a margin perspective historically in Asia and in Latin America, and so from a mix perspective when those markets are down, and they've been absolutely clobbered, we feel that as well from a mix perspective.

Right. Let's talk about the ECC business for just a little bit. I think the overarching point that we wanted to make room, we were talking about that business is that it was EBITDA and EPS accretive, which is where we had hoped to go. However, I would say that as you look at that business from the time that we looked at the acquisition until we completed 2015 I would say that, that road map, just like we talked about with the entire Company, has a few different components. If you think about the revenue side of that business you certainly have the four components of the business with the planned air side of the business being really hit by the weakened industrial markets and so that definitely, that book and turn business definitely took a downturn in 2015.

You also have tough, tough markets with oil prices and so on the processed gas side and on the engineered air side, you've got fewer projects. You've got same number of competitors and so you've got some tough markets there, and then you've got an after market which is an opportunity. Having said all of that, what we did with the business in 2015 with a top line that wasn't perhaps as strong as what we wanted is we accelerated some of the synergies in the business and in fact overdrove the operating synergies, not revenue synergies but the operating synergies in the business. We're going to continue to do that. So the point wasn't that it's operating exactly as we would have called it a year ago, but I think as we looked at the business and with what we were going to do with it, we ended up with a pretty good result on the acquisition.

Yes, Jeff, too, lost maybe in this is some really strong execution here by the team integrating it. It will turn out that the synergies in this thing will be about 15% of Cameron's revenues. That's double the synergies we thought we would have, which is a good thing, because obviously the top line was much weaker. That's the reason it was still accretive from a cash EPS perspective in the year.

Just one housekeeping item. The release says there's $250 million of repo in Q4 and $250 million in January. That $250 million in Q4 is really referring to a full-year number, correct? Or is there some settlement issue with -- or something else that I'm missing there? It looks like you did $233 million through nine months.

(Technical difficulty) October and we had some settlements (technical difficulty). Late October we said we had spent I think $233 million to $255 million end of October. Did you catch that?

Not completely, no.

Okay. Sorry. We were (inaudible) the response in the room and I apologize for that. So we did do the $250 million in the fourth quarter. We talked about that roughly in the third quarter call, and then we had a separate 10B51 program that repurchased $250 million in January.

$250 million quarter one.

All right. I'll follow-up. It says $233 million in the Q3 10-Q. That's why I'm confused.

That's right. Yes, so what happened there, Jeff, you're absolutely right. At the time we released earnings for the third quarter, which would have been the third weekend in October, we had not settled out the entire $250 million, so there was a little bit of leakage that was over into the remainder, but it was an October event. In other words, we were announcing that we had gone into the market just like we are now. We're not talking about the first quarter but in the first quarter we repurchased the $250 million. We had repurchased $233 million in October, and the total was $250 million for the fourth quarter.

Okay. Got it. Thank you for clarifying.

Thank you. Our next question comes from Deane Dray from RBC Capital Markets. Your line is now open.

Thank you and good morning. This is [Andrew Krill] on for Deane. Going back to residential HVAC, was hoping you'd give a little more commentary on the mix of new buying versus repair. Have you seen any change in behavior there and I guess any margin implications this might have?

Well, clearly we're seeing more -- it's not so much new construction and repair, it's largely new construction and replacement, and so it's moving back now toward replacement. Replacement is a very good place for us. We've got really good shares there as compared to new construction where shares are lower. So when the market moves towards replacement, we generally do much better and you saw that in high-teens bookings in the fourth quarter and the overall good performance that we had in 2015 where we had really excellent performance in 2015.

Okay. Thank you. And then just a quick follow-up. If one of you could giver a little more color on China just by segment and then also touch on the VRF trends?

Yes, China, it's still rough. We're not seeing great progress in China in either business. Having said that, we're somewhat in a trough and we didn't see it really dip further in the quarter, in quarter four. We saw great strength outside of China, so Singapore, Thailand, India really sort of -- Hong Kong king of made the day for us relative to Asia market. Nice to see those markets finally recovering on that front.

VRF continues to do very well for us. Continues to grow at or above the pace of our unitary business and we continue to have a very high share in North America, parts of South America in VRF business. I think as you know, we don't play a big role outside of those territories. We play a small role in China, largely in commercial VRF or in hybrid systems.

Okay. Thank you. That was it.

Thank you. Our next question comes from Shannon O'Callaghan from UBS. Your line is now open.

Good morning.

Hey, Shannon.

Hey, Mike, in terms of the acquisitions and the currency impact on industrial this year, I think it seems like every quarter they've been almost 200 basis points. Maybe Sue could provide us the split of what that was for 2015. How much was the acquisition impact? How much was currency? And then next year I'm assuming the acquisition kind of impact year over year goes away but you still have some currency. Maybe help us with how those headwinds change.

It split about 50/50 in 2015. It was a point -- translational and transactional would have been about a point, and acquisitions would have been about a point of headwind.

And for 2016?

No acquisition headwind because everything is based on the calendar. It was all 2015 start and finish, so there's nothing there. On the FX side it's going to be, again, a pretty tough road to hoe, probably 4 points of headwind coming into revenues and we'd see sort of normal leverage against that. It's probably 30, 40 basis points coming at us on that front.

Okay.

And to your question on the full year of 2015, so the overall operating margins were down 140 basis points, and the math would work out roughly the same if you took out the foreign exchange and the acquisitions that, that would be the majority of what the decrement was in the overall operating margin percentage.

Okay. And then as you think about eventually getting this business, let's get past -- a lot of the focus obviously currently on this call about the near-term industrial weakness, but you do have this target you want to eventually get to of the [17 and 19] and now Todd's in place in the air business. What are the -- other than kind of cost take outs that deal with the tougher current volumes, I mean, what are the key things you think you need to clear in order to get this to be a higher margin business a few years out?

Well the material handling piece, Shannon, probably hit for 1.5 point, maybe up to 2 points right there. So I think really an underestimation as to what the impact would be across the segment of the material handling business. So add 1.5 point there, figure currency at least stops moving against us at some point, and flattens out. That's going to be helpful to us. And then any kind of volume we see there, we'd be leveraging that at 30%, 35% on that front, so there's been very solid productivity in that business as, I mentioned, particularly as it relates to the integration work in the back half work once we saw the revenue outlook deteriorate through 2015.

So it's not a productivity issue. It's again, you look at a business like material handling, a small business with that sort of an impact, you look at currency, which they get not only translation but there's a much larger transactional component there or it just doesn't make sense for us to have too many factories that do machining and so on and so forth. If you're putting those in the wrong part of the world, it's hard to move those, and you're going to absorb some of that headwind for a while.

Okay. Great, thanks.

Hey, listen, I think that will update you when we're together for the analyst meeting. Todd will fill you in, in that seat and give you a point of view on that and then Robert Zafari will clearly tell you the other pieces of this as well, which have material impact as they are very high margin businesses.

All right. Thanks a lot.

Thank you. Our next question comes from Robert Barry from Susquehanna. Your line is now open.

Hey, guys. Thanks for taking the question. Good morning.

Good morning.

I think this has been asked a little bit already but maybe just to put a finer point on some of the earlier questions about the industrial assumption for flat growth given the orders have been decelerating, just maybe some color there on what's driving that expectation?

Well, you look at 2009 and we saw customers abandoning equipment, shutting plants. We're not seeing that in 2015. We're not likely to see it in 2016. You're seeing customers that are just reducing CapEx, and so you're not seeing large machines, as an example. Now large machines, both Cameron and existing Ingersoll-Rand, were about 10% of the total business. Now we'll see parts and service probably in the mid to mid to high single-digit range next year as these older systems need to be maintained and serviced. We even saw that begin to materialize in the back half of 2015.

So, again, 10% of the compression technology business being big machines, 45%-ish being services. And then remember, too, you've got Club Car, the tools, and the fluid business, which should be a tail wind. However, material handling will continue to be a headwind again going into 2016 there. So net that all out and the best view we have is that, that math works to about negative [1 to 1].

Got you. That's very helpful. And maybe just kind of a quasi housekeeping question on the Hussmann adjustment. I think you talked about a $55 million from Hussmann and asbestos. I think those two items through third quarter were just under $30 million. Is there like a big Hussmann 4Q? Maybe you can just unpack that a little bit. That would be helpful. Thanks.

No, the Hussmann results into fourth quarter were fairly normal with what they've been throughout 2015, so that really didn't have an impact. It was right on where we would have guided at the end of October.

We'll look at what you're talking about, though, and follow back up if there's more to that question.

Great. Thanks.

Thank you. And our final question comes from Josh Pokrzywinski from Buckingham Research. Your line is now open.

Hi, good morning, guys.

Good morning.

A lot of my questions have been answered, so maybe just the first one. On the price cost spread that you laid out there Sue, if I think about how that pertains to climate and throw the majority in there, am I to assume kind of normal volume leverage of that in the mid-20[%]s? Is that what you guys are essentially guiding to or am I missing something?

No, I think that would be a good assumption.

Okay. And then just a follow-up, I know we've kind of beaten the industrial mega-trend discussion to death, but thinking about Cameron backlog, presumably coming into 2016, that's a little bit lower, probably particularly low in the first quarter given that the -- that it's more of a 4Q weighted business. Is that something that's contemplated in guidance? How should we think about that as maybe a headwind to the broader reading out of just comps getting easier in some of the resource industries and the service piece being an offset?

Yes, Josh, no doubt we're going to see weaker big machine revenues that's forecast into what we're doing. What we found here and as an operator of the businesses that the pricing in the margins on that big stuff is not that good. It's really around the service and longevity of those systems over time as opposed to sort of the impact on the sale in the quarter and delivery. Really what we need to make up there in the weakness is service, parts and some of the smaller machines, including oil free and segments of the market, that will continue to grow like pharmaceutical food and beverage and markets where it's more consumer driven, say, than it would be through heavy industry.

Got you. All right. That's helpful. Thank you.

Thank you. And I'd now like to turn the conference back over to Janet Pfeffer for any closing remarks.

Thank you, Operator. One thing I wanted to just clarify. I was a little far away from the mic and so on share repurchase, we completed the $250 million buy in the fourth quarter, $233 million of it was in completed as of the end of September. The remainder completed out and settled in October just so -- to avoid some folks any confusion on that, I wanted to clarify that. Joe and I will be around for your follow-up questions today. Everybody have a good day. Thank you.

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