Trane Technologies plc (TT) — Q4 2015 Earnings Call Transcript

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'll be broadcasting, in addition to this phone call, through our website at ingersollrand.com, where you'll also find a slide presentation that we'll be using this morning. If you 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 filings for a description of some of the factors that may cause actual results to vary from anticipated. We are also using non-GAAP measures in this call, and they are explained in the financial tables attached to our news release. So 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.

Great. 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. So starting with full year 2015. It was a year that I could characterize best by one word, and that word is volatility: volatility in 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 ended exactly how we had forecast some 12 months ago, our headline results were essentially right in 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 actuals $3.73. That performance was significantly impacted by FX headwinds. We had included a $0.17 earnings headwind in currency and guidance and 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 that we couldn't control, and we made adjustments accordingly. 2015 demonstrated continued progress in the implementation of our multiyear strategy for growth, operational excellence and shareholder value. We invested in core businesses, matured in 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 in your coverage that have done this. I'm very proud of our team and the great people in our company that delivered another solid year. If I look back over a longer horizon over the last, say, 24 months, it's a similar story. With the exception of a single quarter almost five years ago, we met or exceeded our earnings commitments regardless of market conditions. For the year, our organic revenues, which exclude OpEx 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%. And Climate margins improved 60 basis points. We generated $985 million of cash flow. Our capital allocation strategy remains focused on maximizing shareholder value, and it's consistent with our overall financial strategy. We continued 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, and 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 delivered steady improvements in operating margins. Shown here are the last five years where operating margins were 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 has shown on a reported basis. It includes restructuring and inventory step-up costs, which were excluded from adjusted margins. We had a 20 basis points of higher restructuring year-over-year and also had a 20 basis point impact inventory step-up on acquisitions. 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 the 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 margin 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, and those collectively were 30 basis point investments year-over-year. So now, Sue will take you through the fourth quarter, and 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 over 5%. 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 a rolling in the first year of Cameron Centrifugal operating income and amortization. Finally, as Mike mentioned, given the impending closing of the sale of our Hussmann 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. For 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 geographic 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 reflect 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 acquisitions, was 55%. Now please go to Slide 10. Total fourth quarter revenues for the Climate segment were $2.5 billion. That is up 2% versus last year on a reported basis and up 5%, excluding currency. Acquisitions in 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 revenue 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. Climate's 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 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 adjusts 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. Our 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've 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 the HVAC businesses, 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 between value-accretive acquisitions and share repurchases, based on relative valuations and risk-adjusted returns. We will apply our same decision-making framework to the situation at that time and leave the door open to pivot to share repurchase or M&A as it makes best sense for our 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. And with that, I'll turn it back to Mike to take you through 2016 guidance.

Thank you, Sue. Please refer to Slide 15. As always, we aim to provide our best insight into current market conditions and how they influence our revenue expectations for 2016. We've outlined the information by main markets and regions. The varying colors and symbols illustrate the different trends we're observing; North American commercial and residential HVAC, as well as transport and commercial HVAC in Europe, are generally showing positive signs, while global industrial markets are still struggling. For transport markets in the Americas, we're anticipating a slight decline, mainly due to lower trailer volumes being countered by higher auxiliary power units, small truck refrigeration, and other products. The Asian HVAC markets are expected to be flat or declining, and industrial markets in Asia continue to face challenges. Golf and utility vehicle markets are relatively stable or slightly improving. The growth forecasts presented are based on organic metrics. We expect low single-digit growth in total commercial HVAC, mid-single-digit growth in residential HVAC—essentially a North American business for us—and flat revenues in Transport. Air and industrial products, which comprise our compression technologies, power tools, material handling, and fluid management business units, are projected to decline by low single digits, whereas we foresee Club Car increasing by low single digits. Moving to Slide 16, when we aggregate these market conditions, we anticipate our total reported revenues for 2016 to remain flat or increase by 2% compared to 2015. Overall, foreign exchange will negatively affect our figures by about 2 percentage points, considering we have completed a year of results from our Cameron centrifugal compressor division, and our organic revenue growth excluding foreign exchange remains consistent in this forecast. In terms of segments, we expect Climate revenues to increase by 1% to 3% on a reported basis and by 3% to 5% when excluding currency impacts. The Industrial segment is projected to decline by 2% to 4% reported and be flat to up by 1% excluding foreign exchange effects. Industrial has a larger proportion of its revenues from outside the U.S. compared to Climate, resulting in a more significant foreign exchange impact—3 points adverse for Industrial compared to 2 points for Climate. Regarding operating margins, which exclude restructuring costs for adjusted margin estimates, we project Climate's adjusted operating margins to fall between 13.25% and 13.75%. We expect Industrial adjusted margins to lie between 13% and 13.75%. For the enterprise as a whole, adjusted operating margins are anticipated to be between 11.5% and 12%, with EBITDA margins ranging from 14.2% to 14.7%. The overall operating leverage should be around 60%, and approximately 30% excluding currency effects. We expect margin expansion of 10 to 60 basis points on an adjusted basis. Moving to Slide 17 and discussing earnings, the estimated reported earnings per share will be in the range of $3.75 to $3.95. If we exclude restructuring, the range is $3.80 to $4, reflecting an increase of 2% to 7% compared to 2015. Important to note, for 2016, foreign exchange will be a headwind of about 2% to revenue and $0.19 to earnings. This forecast uses the consensus for foreign exchange rate expectations; for instance, the euro's average rate for the year is anticipated to be $1.03, yet for the first quarter, the expected rate is $1.06. This is based on a full-year tax rate between 24% and 25% and an average diluted share count of 260 million shares for the year. As Sue stated, for easier modeling, we have allocated all excess cash to share repurchases later in the year when we expect to be cash flow positive. This allocation doesn’t guarantee actual cash deployment but is intended to simplify our modeling. The EPS outlook does not factor in the impact of divesting our share in Hussmann, and we predict that transaction will close on April 1, resulting in a gain of approximately $400 million, which will be recognized in other income during the second quarter. We will revise our guidance in April to incorporate the closing but will remove the gain for comparable purposes. For the first quarter of 2016, we forecast revenues to remain flat to increase by 2% on a reported basis and by 3% to 5% after excluding currency effects. Reported earnings per share for the first quarter are projected to be between $0.28 and $0.33. Adding back $0.05 for restructuring will adjust the EPS range to between $0.33 and $0.38. EPS bridge details can be found in the appendix for both the full year and the first quarter guidance. For the full year 2016, we estimate generating adjusted free cash flow, excluding restructuring cash and proceeds from Hussmann, between $950 million and $1 billion. As mentioned earlier, we raised the dividend last week and have already completed $250 million in share repurchases, which will more than offset dilution from equity issuance. We had $143 million in commercial paper at the end of the year, and after settling that, we will have approximately $675 million available for cash deployment, which we may utilize for additional share repurchases or M&A activities. We are actively building a pipeline of acquisition opportunities related to our core businesses and will evaluate those against share buybacks in terms of returns and shareholder value. In conclusion, we are proud of having delivered a strong year, achieving top quartile performance in revenue and earnings growth. Our strategic focus on growth and operational excellence has led to a multiyear pattern of impressive operating leverage, margin, and earnings enhancement. We aim to continue increasing earnings and cash flow through these strategies, while also making judicious investments for the future. Our commitment to investing in new products and services, our IT systems, and our team development continues, alongside executing a consistent, value-driven capital allocation plan. We are pleased with the progress we've made and the results we've achieved, and we're confident in our position for 2016 to fulfill our commitments. With that, Sue and I are ready to answer your questions.

Just a couple of 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?

So 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 to a 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. And the revenues we expect in the first quarter and margins for industrial, we expect to be even lower than where we ended the year. So 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 regarding the industrial sector, it seems clear that the situation has deteriorated over the past year. I understand you're undergoing some restructuring, which isn't something you typically do frequently like other companies. Have you thought about potentially using this gain to tackle more significant restructuring now, rather than waiting a couple of years? This could help strengthen your ability to execute and deliver results like you have over the past year. Is there a possibility of a larger restructuring on the horizon?

Yes, Steve, going back to 2009, we've consistently focused on our factory footprint, which is currently very productive and well utilized. As we look ahead to 2016, we anticipate paybacks in the range of 5 to 8 years, which is slightly beyond what we initially thought was achievable in this environment. However, in certain areas of our business, especially in compression technology, we are undergoing restructuring, mainly related to headcount and other adjustments that we can implement without formal qualification processes. We are putting significant emphasis on corporate and operational costs across all divisions, and there’s a steady effort to pursue those improvements. Our footprint remains effective and efficient. Notably, as we deepen our engagement with Lean processes, it becomes increasingly challenging to achieve payback from facility closures, which is a positive development. We are open-minded about opportunities, especially if conditions worsen. If we identify viable prospects, we will explore them, but we prefer to focus on the specific actions and announcements we've made within the company so far.

First of all, congratulations on the excellent execution in the second half. It was certainly much better than many of your so-called high-quality peers. Well done on the third and fourth quarters. I wanted to follow up on Steve's point regarding the restructuring. It's clear that there are two areas of concern for the '16 plan: flat industrial and potentially flat TK. If those perform weaker throughout the year, to what extent do you have contingency plans in place to address the deleveraging that might occur if they do indeed underperform?

Yes, Nigel, I will address Steve's point about where we will reduce investments. Many of our investments are focused on both product and channel development, and we may also allow some attrition to work in our favor. We will continue to manage that. We have a plan to maintain a lower revenue outlook if necessary, which is included in the guidance we have shared. Our main focus is on the industrial segment, particularly on compression technology. Todd has been in his role for several months now and is aware of the opportunities ahead. He is being proactive in his approach, and I have confidence in Todd and the team as they prepare for various scenarios.

Okay, okay. Well, I'll pick up offline. And secondly, obviously, you'd be aware that there's a pretty fertile debate about non-residential 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 fundamentals are looking right now?

I think the noteworthy aspect of the fourth quarter, at least for me, was the solid performance we experienced in both applied and unitary sectors in North America. We achieved double-digit growth in applied bookings and mid-teens growth in unitary bookings during the same period. Looking ahead to the first half of the year, it seems we have sufficient visibility to maintain this momentum. Additionally, we enjoyed strong service growth, with a high single-digit increase in services. Controls also saw nearly double-digit growth. Overall, there appears to be a slight uplift in institutional markets. Commercial has not fully declined, which is contributing to the healthy performance of unitary, even as some unitary demand stems from K-12. Our investments in the service network and footprint are proving beneficial as well. Therefore, the fourth quarter presents a favorable outlook as we move into the beginning of the year.

Just a question around the Climate margin guidance. It looks like you're guiding for 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 residential growing so strongly, Thermo King and Trane Asia being flat to down. So just wondered what you're embedding for mix in Climate for the year ahead?

As we consider the direction of Climate in 2016, I agree with your observations about the key points. We continue to see strong trends in commercial HVAC in the Americas and an increase in EMEA, while Asia is slightly down. We anticipate mid-single-digit growth in residential. Latin America is also part of our business, where there is some growth, but Transport revenues are expected to remain flat in 2016. Overall, these various factors could result in a stronger commercial segment in North America and Europe, a slight decline in Asia, flat Transport in Latin America, and good mid-single-digit growth in residential.

Okay. So mix is sort of broadly neutral then, '16 versus '15, in Climate?

Yes, Julian, residential, if you look at sort of the peer group, we're right at the top of the pack in terms of profitability. I think it's a point often lost on investors is the amount of margin improvement we had in residential businesses. So good residential growth, it's 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 3:1 ratio. If we sell 3 APUs, it's equal to one North American trailer. So there is, between APU and some of the Air businesses and 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 to 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 a soft 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.

And then just a quick follow-up. Price material was a 30 basis points tailwind for the quarter and the year in 2015. Are you assuming something similar for the year ahead?

We ended the fourth quarter with a 30 basis point gap, and for the full year 2015, we also saw a 30 to 40 basis point range. In 2016, we expect to maintain a similar range of 30 to 40 basis points for the gap between price increases and direct material inflation. While material deflation numbers are higher now, we experienced inflation in the first and second quarters of 2015, which will provide some lift. Overall, we anticipate that the balance between price and material inflation will remain consistent in 2016, similar to the previous year. It's important to note that the Climate business benefits more from material deflation than the Industrial businesses, which have a positive but smaller spread. This year-over-year comparison highlights the absence of significant benefits from commodities and direct material deflation on the Industrial side.

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

Really, David, the strategy for us has been to look at all the SBUs, 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 of the U.S. for channel or even in the U.S. 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. So obviously, it's more attractive if we're buying anything that's euro-denominated or predominantly outside the U.S., and so we're pretty actively looking outside the U.S. for a lot of that, which can be then modified and brought into the U.S. with different power requirements and different efficiency ratings, but some of the technologies can be applied. So 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 breadbasket-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 breadbasket estimates. I think you can look at where we would end the year in terms of ratios, in terms of EBITDA to debt, we end the year around the 2.4x range. There's obviously some capacity within the current debt rating. We've got the cash. We talked about in the call the $675 million, that's unidentified. So there is an opportunity to do something a little bit larger. But what we're generally seeing are small to mid-size deals that just make great economic sense.

Okay. 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 '16, given the IRS settlement. But can you give us some guidelines how to model the next few years?

We may have been somewhat conservative with our guidance of a 24% to 25% effective tax rate for 2016. The IRS settlement alleviates the risk profile of the company and resolves issues concerning intercompany debt from 2001 to 2011. However, it does not significantly impact the overall effective tax rate. To influence that tax rate, we need to refine our strategy further. With those past issues resolved, we have a chance to explore new strategies, and we are actively doing that. We have a solid trading hub in Europe and are considering additional hubs in Asia and Panama. We're reviewing our intercompany debt to ensure balance as we approach 2016. However, we face a slight headwind regarding tax rates, especially since our revenue growth is primarily in North America, which affects the tax rate. In summary, we aim to find every opportunity to reduce the tax rate while remaining cautious about the decisions we make. We expect to identify some opportunities in 2016 and will keep working on our strategy while communicating updates. The revenue growth in North America, while creating some pressure on the rate, is still a positive aspect.

All right. 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% to $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've assumed.

It's not really rounding. Looking back to 2015, we started the year with guidance of about $235 million and ended at $210 million in corporate expenses. In 2016, we significantly reduced discretionary spending from 2015. There are necessary investments in areas like IT infrastructure and cybersecurity that we need to continue. Regarding pensions, while they remain roughly flat for Ingersoll Rand overall year-over-year, pensions are slightly higher on the corporate side in 2016. This isn't just a matter of rounding or readjusting figures; we're going to be very mindful about our spending and avoid making any financial commitments until we understand the market conditions. So, the $230 million to $235 million range is definitely more typical compared to $210 million, and we will closely monitor it to ensure that spending is effective and aligned with our needs.

If you take the run rate plus the pension, you're right, it leaves 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 little bit of flex in there that we would take if the markets are a little bit rougher than we think.

Mike, you've often talked about one of the characteristics distinguishing marks of the new Ingersoll Rand. It's how you hold decrementals when volumes are in the down part of the cycle. So 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, I guess, down low single digits in Air and Industrial products when it looks like booking are a bit worse than that and the broader environment is also a bit worse?

Yes. And Steve, look, a great example of that was what happened within a compression technology, if we take the legacy business, it ran almost flat on much lower volumes. So a great example of that. That was extraordinary effort by that team to really pull all the stops on productivity and discretionary spending, and really to win in the marketplace. It's a little bit tough to compare comps against competition, particularly denominated in different currencies. But we did fairly well there on the product and services 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're certainly looking to deleverage within the gross margin range of not to exceed 25% to 30%. So that would be sort of the essence of that. It could depend a bit on the business. I mean, TK has fundamentally, I think, more opportunity. It 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. And so 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. So a great example is TK, where we would look to certainly work inside of normal margins in that business.

Steve, to build on what Mike mentioned regarding the industrial sector, I see three major factors influencing that area. Firstly, it's important to acknowledge that decrementals should align with incrementals moving forward. The industrial sector is significantly affected by foreign exchange fluctuations, as more than 50% of its revenues come from non-U.S. sources. This poses a considerable headwind. Additionally, we are accounting for the amortization related to the acquisition of Cameron. We were aware of this when we proceeded with the acquisition, but it does affect our outlook for 2015. Moreover, it's worth noting that this segment does not greatly benefit from direct material deflation associated with commodity prices, unlike the air business, which does see some advantage. Therefore, considering the considerable foreign exchange effects, the limited material deflation, and the amortization from the acquisition, these elements play a significant role in our overall assessment.

Okay. 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 quarter saw 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. So we are still seeing positive price, albeit it's pretty thin in the quarter. So that's, I think, a good indicator from the pricing power, and just sort of the pricing structure within the industry holds pretty well through tougher times.

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

Just back to industrial for a moment, Mike. Just thinking about the margins sequentially, if Cameron hit its targets and with a 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 a 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 that. What I think a lot of folks don't recognize when we talk about industrial is impact that material handling and tools would have. Material handling is really exclusively oil and gas for us. It's 7% of that segment. It's been hit incredibly hard. In fact, the tools business was hit very hard by that business as well, the highest margin businesses 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 did 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. And so let's talk about the ECC business for just a little bit. And so I think the overarching point that we wanted to make when 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. So if you think about the revenue side of that business, you certainly have the four components of the business with the plant air side of the business being really hit by the weakened industrial market. And so that definitely, that book in term business differently 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 the same number of competitors. And so you've got some tough markets there and then you've got an aftermarket, 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, and 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 look to 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, there's been some really strong execution by the team in integrating it. It turns out that the synergy will account for about 15% of Cameron's revenues. That's double the synergies we initially expected, which is positive because the top line is significantly weaker. This is why it still contributes positively from an EPS and cash EPS perspective this 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? Looks like you did $233 million through 9 months.

I think it was in October that we mentioned we had spent between $233 million and $250 million by the end of that month. Did you catch that?

Not completely, no.

Sorry. We were talking in other 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 10b5-1 program that repurchased $250 million in January.

So $250 million in Q4 and $250 million in Q1, Jeff.

This is Andrew Krill on for Deane. So going back to residential HVAC, I was hoping you can give a little more commentary on the mix of new buying versus repair. And have you seen any change in behavior there? And I guess, any margin implications this might have?

Well, clearly, we're seeing more that's not so much new construction and repairs. 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 as compared to new construction where shares were lower. So when the market moves toward 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 '15.

Okay. And then just a quick follow-up. I was wondering if you could give little more color on China just by segment, and then also you touch on 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 did see it dip further in the quarter, in quarter 4. We saw great strength outside of China. So Singapore, Thailand, India really sort of, Hong Kong, kind of made the day for us relative to Asia. So nice to see those markets finally recovering on that front. VRF continues to do very well for us, continues to grow at or above pace of our unitary business. And we continue to have a very high share in North America, parts of South America in the VRF business. And 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.

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 can provide us the split of what that was for '15. 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 currency. Maybe help us with how those headwinds change?

It's split about 50-50. And in '15 it was about 1 point above. So translational and transactional would have been about 1 point and acquisitions would have had 1 point of headwind.

And for '16?

There are no challenges from acquisitions. Everything is based on the calendar, starting and finishing in 2015, so there are no issues there. However, the foreign exchange situation is likely to be quite difficult, potentially causing a four-point headwind on revenues, which we would expect to have a normal leverage effect. This could result in a 30 to 40 basis point impact from that side.

Right. 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 see the majority of what the decrement was in the overall operating margin percentage.

Okay. As you consider the future of this business, which will eventually move beyond the current emphasis on near-term industrial challenges, you have a target in mind that aligns with '17 and '19. With Todd now in charge of the air business, what are the main priorities, aside from cost reductions to address the difficult current volumes, that you believe are essential to achieve higher margins a few years down the line?

Well, 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 points 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 and the back half work once we saw the revenue outlook deteriorate for 2015. So it's not a productivity issue. It's, again, you look at a business like material handling, small business, that sort of an impact. You look at currency, which they get not only translational, but there's a much larger transactional component there where it just doesn't make sense for us to put too many factories at the machining and so on and so forth. So if you're putting 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. Hey, listen, I think that we'll update you when we're together in the Analyst Meeting. Todd will truly be in that seat and give you a point of view on that and then Robert Zafari will clearly tell you kind of the other pieces of this as well, which have a material impact as they are very high margin businesses.

I think that 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?

When you look at the 2009 and we saw customers abandoning equipment, shutting plants, we're not seeing that in '15. We're unlikely to see in '16. We'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, we're about 10% of the total business. Now we'll see parts and service probably in the mid- to high single-digit range next year as these older systems need to be maintained and serviced. And we even saw that begin to materialize in the back half of '15. So again, 10% of the compression technology business being big machines, 45-ish percent being services, and then, remember too, you've got Club Car, the tools and the fluid business, which would be a tailwind. However, material handling will continue to be a headwind, again, going into '16 there. So net that all out and the best view we have is that, that math works to about negative 1:1.

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

No. The Hussmann results in the 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 we'll follow back up if there's more to that question.

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 to that in the mid-20s? Is that what you guys are essentially guiding to? Or am I missing something?

No, I think that would be a good assumption.

Okay. Just a follow-up. We've discussed the industrial mega trend extensively. Regarding Cameron backlog, it seems likely to be somewhat lower entering 2016, especially in the first quarter since that business is more weighted toward the fourth quarter. Is this something reflected in the guidance? How should we consider this as a potential headwind against the broader context of easier comparisons in some resource industries, with the service sector offsetting that?

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 business is that the pricing and margins on that big stuff is not very good. It's really around the service and longevity of those systems over time as opposed to sort of the impact on sale on a quarter and in delivery. So 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 in markets, where it's more consumer-driven, say, than it would be through heavy industry.

Thank you, operator. I wanted to clarify that we completed the $250 million share repurchase in the fourth quarter, with $233 million completed by the end of September. The remaining amount was settled in October. I wanted to clear up any potential confusion regarding that. Joe and I will be available for any follow-up questions today. Have a good day, and thank you.