Ingersoll Rand Inc. (IR) Q1 2015 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to the Ingersoll Rand First Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder this conference call is being recorded. I would now like to introduce your host for today's conference Joe Fimbianti, Director of Investor Relations. Please go ahead sir.

Thank you Danielle, good morning, welcome to Ingersoll Rand's first quarter 2015 conference call. We released earnings at 7:00 AM this morning, and the release was posted on our website. We'll be broadcasting in addition to this phone call through our website at ingersollrand.com, where you will find the slide presentation that we'll be using this morning for the call and this call will also be recorded and archived on our website. If you would, please go to slide 2, which is our safe harbor statement. Statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the Safe Harbor provisions of Federal Securities laws. Please see our SEC filings for a description of some of the factors that may cause our actual results to vary materially from our anticipated results. This release also includes non-GAAP measures, which are explained in the financial tables to our news release. With me this morning on the call are Mike Lamach, Chairman and CEO and Sue Carter, Senior Vice President and CFO. So if you will please turn to slide number 3, I’ll turn the call over to Mike. Mike?

Great, thank you, Joe, good morning and thanks for joining us. In the first quarter, our adjusted earnings per share was $0.38, an increase of 31% versus last year's quarter. We closed two acquisitions in the quarter, the acquisition of Cameron’s Centrifugal Compression division closed on January 1, so results were included for the entire quarter. We also closed the acquisition of FRIGOBLOCK in early March, so that has a very minimal impact to quarter given that less than one month of results were reported. Both integrations are going very well, Cameron compressor achieved our forecast for bookings, revenue and operating income. We are seeing some early traction on cross-selling and synergies and we expect continued progress for the balance of 2015. Currency had a significant impact throughout the results, so in our comments today, we will mainly focus on organic growth, which excludes currency and acquisitions, but you can get a better view of end market trends. In the first quarter, we saw solid organic revenue growth of 8%, let by strength in the US, and Europe, particularly in the Climate Segment. Order rates remain healthy in the first quarter at 5%, excluding currency and acquisitions. Adjusted operating margins increased 40 basis points and increased 100 basis points, excluding the impact of currency and bringing Cameron results into our financial statements for the first time. Adjusted EPS for the quarter was $0.07 above our adjusted EPS guidance, mid-point of $0.31. The improvement primarily came from higher than expected volumes, mainly in North America and good cost control and execution to our plans. Foreign exchange translation negatively impacted the quarter by about $0.01 compared with guidance. However, this was more than offset by FX gains recorded in other income. Now, Sue will walk you through the first quarter in more detail and then I'll come back to take you through our outlook.

Thank you Mike, we are very pleased with our performance and our execution in Q1 and as Mike talked about, you're going to see a lot of moving pieces with currency and purchase accounting and we're trying to provide you with a lot of details to facilitate your understanding of the quarter in both the slides and in our comments. So if you would go to slide 4. Orders for the first quarter of 2015 were up 3% on a reported basis and up 7%, excluding currency. Orders were up 5%, excluding both FX and acquisitions. Climate orders were up 2% and up 6%, excluding currency. Global commercial HVAC bookings were up mid-single digits on a reported basis and by high-single digits ex-currency. Transport orders were up low-single digits and up high-single digits ex-currency. Organically, Thermo King had strong order growth in North America and high teens growth in Europe. Orders in the Industrial Segment were up 3% on a reported basis and up 9%, excluding currency. Orders for Industrial were up 2%, excluding currency and acquisitions. We saw organic orders increase by low-single digits in air and industrial products, and improved by high-single digit in Club Car. So if you would go to slide 5. Here's a look at the revenue trends by segments and regions. The top half of the chart shows revenue change for each segment. For the total Company, first quarter revenues were up 6% versus last year on a reported basis and up 8% on an organic basis, which excludes both foreign exchange and acquisitions. Climate revenues increased 6% on a reported basis and 9% ex-currency. Commercial HVAC was up high-single digits and transport revenues were up mid-teens, both ex-currency. Residential HVAC revenues were up high-single digits. Industrial revenues were up 7% on a reported basis, up 13% excluding currency and up 4% excluding currency and acquisitions, and I'll give more color on each segment in the next few slides. Bottom chart shows revenue change on a geographic basis with and without currency. Excluding currency, revenues were up 10% in the Americas, 22% in Europe, Middle East and Africa, led by strong HVAC performance and Asia was down 3%. If you back out acquisitions as well as foreign exchange, the primary changes in Americas, which would be up 8%. Please go to slide 6. This chart shows the change in operating margin from first quarter 2014 of 5.7% to first quarter 2015 which was 5.9%. Consistent with prior quarters, this is shown on a reported basis, and we've spiked out the restructuring to get you to adjusted margins as well. Volumes, mix and foreign exchange collectively were 40 basis points positive versus prior year. Price was positive but was slightly less than direct material inflation. Pricing was most competitive outside of North America. Productivity versus other inflation was positive 80 basis points, driven by strong productivity in the quarter. Productivity favorability was in direct materials, G&A and solid executions including the third phase of our ERP implementation in the first week of April. Year-over-year investments and other items were 80 basis points. This was the first quarter which included results from Cameron and as expected, impacted margins by 50 basis points due to inventory step-up and intangible amortization. In the box, you can see 60 basis points of headwind from investments and 30 basis points positive from lower restructuring costs. In the green box at the top of the page, overall leverage on an adjusted basis was 12%. Backing out currency and acquisition results, leverage was approximately 20%. Please go to slide 7. The Climate Segment includes Trane commercial and residential HVAC, and Thermo King transport refrigeration. Total revenues for the first quarter were $2.2 billion. That is up 6% versus last year on a reported basis and up 9% ex-currency. Global commercial HVAC orders were up mid-single digits on a reported basis and up high-single digits ex-currency. Organic orders were up in all geographic regions, with notable strengths in North America and Europe. Trane's commercial HVAC first quarter reported revenues were up mid-single digits and up by high-single digits ex-currency. Commercial HVAC equipment revenues and HVAC cards, services and solutions revenue were both up high-single digit versus prior year ex-currency. We saw year-over-year gains in both applied and unitary ducted and ductless equipment. Thermo King reported orders were up low-single digits and high-single digits versus 2014's first quarter ex-currency. Organic orders increased in all regions except Latin America. Thermo King reported revenues were up high-single digits and up by mid-teens ex-currency, with strong gains in North American truck and trailer and auxiliary power unit. In Europe, organic revenues were up high-single digits. Residential HVAC revenues were up high-single digits with volume gains in all major residential product categories as well as in light commercial products, which were up low-double digits for the quarter. The adjusted operating margin for Climate was 7% in the quarter, 40 basis points higher than first quarter 2014 due to volume and productivity, partially offset by inflation, currency, and higher investment spending. Please go to slide 8. First quarter revenues for the Industrial Segment were $729 million, up 7% on a reported basis and up 4% organically, which excludes the Cameron acquisition and currency. Air systems and services, power tools, fluid management and material management organic revenues and orders were both up low-single digits versus last year. Organic revenues in North America were up low-single digits, while revenues in overseas markets were flat. Club Car organic revenues in the quarter were up high-teens from improved sales of golf car and utility vehicles. Organic orders were up high-single digits versus prior year. Industrial's adjusted operating margin of 11.9% was slightly down compared with last year, as we're in the early days of the Cameron acquisition, including heavy purchase accounting impacts and negative currency. For the segment, price offset direct material inflation and productivity offset other inflation in the quarter. We achieved our Q1 plan for the Cameron acquisition and the business will continue to add benefits as we continue the integration process. Industrial's organic operating margin at constant currency was 13.9% for Q1, an increase of 180 basis points over prior year. Please go to slide 9. For the first quarter, working capital as a percentage of revenue was 6.3%. The increase versus prior year is primarily inventory, this includes some incremental inventory related to the regional standard’s change in residential HVAC and additionally, we have intentionally increased stock inventory levels of key component assemblies in order to ensure availabilities of supply as we enter the prime selling season for commercial and residential HVAC products. We have good collections in the quarter with days sales outstanding and days payable outstanding both improving over the prior year. Our balance sheet remained very strong. We have no debt maturities this year given the financing we did last October and the early retirement of the 2015 notes. Our cash balance is at normal levels. We expect free cash flow in 2015 to be in the range of $950 to $1 billion. Before I conclude, you saw that we devalued our assets in Venezuela in the first quarter due to the ongoing decline of the Venezuelan currency, this charge was reported in other income and expense and we've adjusted it out of earnings per share given its unusual nature. And with that, I'll turn it back to Mike to take you through our guidance.

Great, Sue thank you, and please go to slide 10. So overall, our forecast has not changed materially since the last call in January. North American institutional markets were up in the first quarter and we expect to have a positive year albeit at a more moderate pace than the current Dodge forecast. We also continue to see growth in commercial and industrial buildings and retrofits. Based on this, we expect mid-single digit growth in 2015 in North American commercial HVAC markets. We expect Latin American, Asian and European and Middle East HVAC markets in the aggregate to be up low-to-mid single digits at constant currency but flat to down, after considering currency. We expect North American transport markets to be up mid-single digits in 2015 and European markets to be down including FX. We expect residential HVAC industry motor-bearing unit shipments for the year to up low-to-mid single digits and revenue should be up mid-to-high single digits due to favorable mix. We expect industrial markets to be up low-to-mid single digits. Gulf markets are expected to be up low-single digits. Aggregating those market backdrops, we expect our reported revenues for full year 2015 to be up 4% to 5% versus 2014. Overall, foreign exchange will be a headwind of about 3 percentage points. We expect Cameron centrifugal business to add three points for the year. So, for organic growth, excluding foreign exchange, we end up back at 4% to 5% range. Translating that to our full year outlook by a segment. We expect climate revenues to be up 2% to 3% on a reported basis and 4% to 5% excluding currency. For the industrial segment, revenues are forecasted to be in the range of up 13% to 14% on a reported basis and 4% to 5% excluding Cameron and foreign exchange. Industrial has a higher proportion of revenues outside of the US than climate. So, industrial experience has more impact from FX as compared to climate. For operating margins, we expect climate margins to be in a range of 12.5% to 13.5%. We expect industrial margins, including Cameron operations and amortization, but excluding the impact of the inventory step-up to be 14.5% to 15.5%. The inventory step-up will be reported in the first and second quarters is about $12 million per quarter. Since it’s non-cash and isolated to those two quarters, we felt it was more representative of ongoing earnings to spike out the step-up. If you remove the Cameron impact, the legacy industrial segment has operating leverage over 50%. Let’s go to slide 11. Transitioning to earnings, our reported earnings per share guidance range is $3.42 to $3.60. Excluding the Cameron inventory step-up, restructuring, and the Venezuela currency devaluation, the range is $3.66 to $3.81, an increase of 10% to 14% versus 2014. When you exclude the impact of bringing Cameron revenue and earnings in for the year and currency, the legacy company leverages at approximately 30% and including acquisitions and currency, we should be in the 25% range. The $0.07 per share outperformance for the first quarter largely offsets the additional currency headwind for the strengthening of the dollar against overseas currencies in the quarter. For example, we built our original guidance at a euro rate of $1.16 and our current forecast is at $1.08. Just as a reminder, the information we gave you last quarter, to give you some simple math to gauge our sensitivity to currency movements, $0.01 movement in euro means about a $0.01 in earnings. If all currencies moved 1% versus a dollar, that would be about $0.02 of earnings. To focus on second quarter guidance, see the right hand column on the chart. Second quarter 2015 revenues are forecast to be up 4% to 5% on a reported basis. You can see the currency and acquisition impact on the slide. Reported second quarter earnings per share is forecast to be $1.14 to $1.18. The inventory step-up, all hits in the first and second quarters and impact second quarter by $0.03. We also expect about $0.01 of restructuring costs, adding these back to get to adjusted basis, the EPS range is in $1.18 to $1.22. We have provided the EPS ranges for the second quarter in the appendix to give you the walk from year-to-year. For the full-year 2015, we expect to generate free cash flow of $950 million to $1 billion, which is at long-term target of 100% of net income. We increased the dividend by 16% to be consistent with payout ratio in the peer range. We also utilized the EUR100 million of cash to pay for FRIGOBLOCK. We anticipate a minimum of $250 million of spending for share repurchase, which will offset dilution from equity issuances. That leaves about $350 million of cash that will be put to either value accretive acquisitions or share repurchase. We have a pipeline of acquisition opportunities related to our core businesses and we weigh those risk-adjusted opportunities against buyback in terms of returns and shareholder value. Our strategies for growth and operational excellence have delivered a multi-year trend of excellent operating leverage, margin and earnings improvement. Our focus is to continue to grow earnings and cash flow through further implementation of those strategies. We have practically worked to deliver productivity and make prudent investments for the future. We continue to execute a consistent value maximizing capital allocation program. In closing, we’ve given you a lot of data and analysis on our operations this morning. There are lot of moving parts for this year’s numbers and it’s likely to continue as we go through the year. Filtering out all the noise, I hope it’s obvious that our overall business fundamentals are strong. Our investments are fueling our revenue growth and our productivity improvements are on plan. Our two new acquisitions are on forecast and we believe we have purchased two very sound businesses. There is still a lot of work to do, but I’m very pleased with our steady operations, improvements and a growing maturity in our operations. Part of the progress we’ve made, results we’ve delivered and believe we’re well positioned for 2015 as well as for the future. With that Sue and I’ll be happy to take your questions. Danielle I’ll turn it over to you.

Thank you. [Operator Instructions] And our first question comes from Nigel Coe from Morgan Stanley. Your line is now open, please go ahead.

Thanks. Good morning, Mike and Sue. Just wanted to -- just kick off first of all with the margin bridge from the slides and little bit surprised to see 20 bps impact from price rolls [ph] this quarter, especially given the [indiscernible] we’ve seen in the raw materials. So, I’m just wondering, can you make some commentary on price and why those negative?

Yeah, we had positive price in the quarter. We had a little bit of carryover, material inflation, just due to some of the assemblies that we’re working on, but essentially the price would come into the Asian market, particularly China, a bit into Latin America, which really in the last quarter or two, those markets have struggled and we’ve got some local competitors I think with some capacity to utilize and so, that’s been a bit more pressure there. We also had bit of a rebate timing from Q4 to Q1 and if you sort of add that back to Q1 and normalize it, we were pretty close to being flat, which -- it is 20 basis points less than what we had hoped for, but it was fairly flat.

Are we still looking for about 23 bps benefit for the full year?

Yeah, we’re challenging ourselves to do that. That’s probably one of the challenge points in the forecast, but our plans, the road maps we’re building, the countermeasures that we got to realize price would have us doing about 20 bps, 30 bps in material inflation gap.

Thank you. And your next question comes from Mark Douglass from Longbow Research. Your line is now open, please go ahead.

Hi, good morning.

Good morning.

There is still little bit of conservative in guidance on the organic growth expectations. I suppose some of that’s because 1Q is really seasonally weak, don’t want to read too much into the year, but your trend seem pretty good and certainly outpacing the 4% to 5% organic growth expectations.

Yeah, I mean, the optimism in the quarter was the strong growth, but as you pointed out, it’s seasonally such an insignificant quarter to the full year for us that we typically go back and fine-tune in July and we’ll do that again this year, but your question and Nigel’s earlier question where we might see potentially some upside to volume, mix was not particularly favorable in the quarter for us. Currency is still quite a bit of headwind if you look at the euro at $1.08 and currencies where we are today, it’s about $0.11 of headwind, we offset about $0.07 in the first quarter, but we’ve got more room to work for the balance of the year and then again the pricing question, we’ve got more aggressive view on pricing for the balance of the year. So, you net it all out, I think it nets out to a balanced view on guidance, but specifically on your question, if we were to see stronger markets and by July, we would probably make a little higher call there at that point in time.

Okay. And then you mentioned industrial had better than 50% incremental margin in the legacy business. Can you describe what’s really driving such strong incremental leverage?

Well, I think it goes back to Mark when I talked about -- when I talked about the segment is that, if you save a higher impact from currency, right, so, if you take that out, that’s a piece of it and then if you take out the Cameron acquisition that it’s in its early days and it’s got all that purchase accounting, the business for the segment itself actually had positive price versus direct material inflation. They actually had productivity that offset inflation and so, they actually had a very nice quarter in terms of operational performance that underlie the basics of that. So -- and also investments were in line with the revenue percentage in the first quarter of 2015. So, you take out some of that noise that we talked about, they actually leveraged very, very well for the quarter.

Club Car did a great job too, doing what we expected against a very easy comp from last year, but Club Car did a nice job in the quarter.

Thank you. And your next question comes from Deane Dray from RBC Capital Market. Your line is now open, please go ahead.

Thank you, good morning. Couple of questions. I was hoping you could give some clarity on that whole inventory situation with residential HVAC and the new SEER requirements and has that inventory been sorted out and then secondly, some commentary on the strength you saw in EMEA, that up 22% FX?

Deane, on where we sit with 13 SEER just for competitive reasons, we’re not going to talk much about that. We really don’t want to discuss our position at this point in time. The main thing we’re trying to do is, we saw across the business a lot of order volatility starting last summer and I commented on that in the third and fourth quarter and frankly, that volatility was broader than even the min/max requirements we would have for stocking key components and so, rather than trying to guess the volatility of the markets, we will expand it those min/max’s for key material for components and assemblies, particularly in high margin businesses, where cycle times were very short and there was some discretionary opportunities with customers that wanted to buy what was on hand. And so, we took that up and I think that’s an important point because we’re looking at fulfillment rate and cycle times to be balanced with inventory levels and the net of that really is strong growth in the quarter and improved customer delivery rate. So, I’m not sure where working capital will really end for us exactly, but frankly, if we can continue to get strong growth rate fulfillment, it’s an inexpensive investment in terms of the EPS growth for the company. Europe just continues in the HVAC business, but I would also say, across all the businesses to perform very well. The standout was the HVAC business, as it has been for probably more than a year now. And it’s the combination I think of -- just the winning combination is having right management team on the ground, a lot of new products hitting the markets at the right time and combination of that really coming together with some great results. I think they were probably north of 20% before currency in that business.

Thank you.

You’re welcome.

Thank you. And your next question comes from Jeff Sprague from Vertical Research. Your line is now open, please go ahead.

Thank you, good morning everyone. Mike, could you give us a little more color on what’s going on in the institutional markets, institutional applied, in particular, and it does sound like commercial unitary was robust also? Is there any particular verticals there that are standing out?

Yeah, it is interesting, Dodge is calling for 11% increase in institutional, so that’s still 25% off its peak and we’ve contended that you are more likely to see an extended sort of mid-single digit institutional recovery perhaps over two or three years. Education is probably a little better than 5%. Healthcare is looking at probably a little less than 5%, those are two important markets for us. I commented that, we needed to see some education orders moving to the pipeline. We are seeing that, so that’s a positive and we would expect healthcare, which typically are going to be a bit more complicated, a bit more applied work going in there, applied engineering and applied product going in there probably late this year, early next year. So that’s shaping up. We are seeing strong still commercial and manufacturing construction going on. That vertical as it relates to HVAC, I am talking about industrial buildings being built, the commercial buildings being built continues to be strong, but we’ve had great success with light commercial. That is the product growth team for us, they’ve done an excellent job. Sue commented that we’ve seen double digit growth year-over-year there. So, we are very pleased with what’s happening across that business.

And just a quick one for Sue to follow-up. So you had FX gains I guess in other. Can you just describe what – where you are at on hedging for the year and kind of what the strategy is and how hedged you might be?

Right. So, Jeff, when we think about what goes into the other income and expense and the favorability that you see in Q1, that whole line is going to be a couple of different items, one of which is the foreign exchange that I will get to. What’s also in there is earnings from some of our equity affiliates, some interest income and as you might expect the other cats and dogs on the P&L, but don’t fit into another line item. In general, that line item is going to be somewhere between $2 million and $6 million favorable. And if you think about looking back to the fourth quarter, it was actually $6 million favorable. So you’ve got the $10 million in the first quarter, not unheard of, but the big drivers for the first quarter, to answer your question, were better earnings out of our equity affiliates. And then also the foreign exchange gains and losses outside of the Venezuelan currency devaluation. Now what happens with the foreign exchange gains and losses is the only thing that we do cash flow hedging on is of balance sheet position and things that are known to us. So when we put those hedges on, if the dollar is strengthening when you close down those positions, you get a gain and that’s part of what we saw in the first quarter. It doesn’t mean then it’s repeatable because as you role those hedges, you are resetting the rates. And if you look at Q1, this is the biggest change quarter-over-quarter in terms of foreign exchange rates, particularly on the euro that would have been on average for $1.33 last year and $1.09 this year. So again, some nice gains that are in there from a transactional point of view and we try – there isn’t a direct percentage that I would say is hedged, but we are looking at things with intercompany loans and things that are known that don’t have a lot of volatility and risk for those. And that’s just a routine for us that we are putting cash flow hedges out for that.

Thank you. And your next question comes from Robert McCarthy from Stifel. Your line is now open. Please go ahead.

Hi, good morning, everyone. How are you?

Good morning.

I just wanted to talk about the trajectory for the US non-residential construction in terms of how you are seeing and in terms of the exit rate, in terms of orders coming into March and April. How are you feeling about the year? And then, maybe we can talk about operating margins throughout the back half.

I think that mid-single-digit view is a good view. Again, I think that you will see education maybe a bit north of 5%, healthcare a bit less than 5%. We will still have a good unitary business for office and manufacturing. So really sticking to that kind of mid-single-digit and to your early point that things continue to shape up, maybe it’s to the high end of that range and we will come back and adjust in July.

And just given the cadence of the year and all the noise you are seeing and obviously some of the incremental headwinds with FX, how should we think about the cadence for incremental margins at climate throughout the back half of the year?

In general, for the company I would start, you would look sort of all-in reported about 25 and if you take out acquisitions, you are probably closer to 30 to gross margins in the company. Climate, we do about the same. Interestingly, when you see translation in our company, obviously it’s going to impact businesses like industrial that have higher exposure to foreign currencies, which is the higher margin business in our climate business, you also find in there that TK is one of the most global businesses we have and so obviously the operating leverage, the deleverage on currency there is higher coming back in. So it’s obviously more difficult to offset translation per se, so we have to drive harder with productivity to be able to do that. And that’s the roadmap that we are building. And so a lot of companies I know have taken down guidance as a result of currency. I thought, A, it was too early in the year for us to do that, and B, we’ve had good success with productivities and good volume in the quarter and feel like the leverage should support staying with the range that we’ve got at this point.

And the other part of that, Robert, is going to be that the direct material inflation. So we talked about we’ve got some inflation in the first quarter and a bit in the second quarter some of that tier 2 carry over in the back half of the year. We see that that levels out and we are not getting material inflation, so that also helps the leverage in the back half of the year for actually both of the segments.

Thank you. And your next question comes from Julian Mitchell from Credit Suisse. Your line is now open. Please go ahead.

Hi, thank you. Just a question on the industrial margins. You’ve got the target for the year of 14.5% to 15.5%. I just wonder if you think you will be able to get into that in Q2 or it’s really about a big sort of second half move.

No, I think that as we look at it, Julian, our projections would say that we are going to continue to grow and the second quarter will be stronger than the first. So I don’t want to – not allow for any breakage, but I think we will start to see things get close to that range in the second quarter for industrial. And when we think about what’s happening there, they are still going to have the big FX impacts, they are still going to have the Cameron step up, but there is productivity in the additional volume that is going to help them. So the short answer to your question is, yes, we should get close to that in the second quarter.

Thanks. Then my second question, your Asia revenues organically were down sort of four quarters now. Just maybe give a bit of an update on that. I understand there has been a price [indiscernible] HVAC for sort of six months or more and do you think that your Asia business can get back to organic growth in the next six months?

Well, the overall market is down, so it’s not actually any sort of a share issue and it’s somewhat choppy and we’ve seen this before in China in terms of the choppiness and the shortness of the cycles that we’ve had years of two quarters down, two quarters up, net up. And I think that you are looking at that here. The pipeline there would support back half of the year which is stronger than the front half of the year. So even for the second quarter, we are likely to see sort of flat for the overall company down in terms of bookings, but for climate I would expect to see an uptick in Q2, potentially high single digits or maybe even better if bookings – timing – bookings comes in as we would expect. Then for the full year we should have I think pretty strong growth there in HVAC.

Thank you. And your next question comes from David Raso from Evercore. Your line is now open. Please go ahead.

Good morning. My question is on Thermo King. The strength is obviously the North America for a while, but seeing some improvement in Europe, can you flush that out for us? What’s the order growth rates you are seeing in Europe? Just trying to maybe find a little offset if Thermo King is down in ‘15 domestically, do we have some international offsets?

Yeah, I don’t think we’ve seen the order growth rates were coming back in Europe, although I think there is more optimism in general in Europe and if you take currency out, obviously just look at the market for itself, is more sort of optimism around Europe, but we didn’t really see that in the first quarter. The growth we had in TK there was largely North American truck and trailer, but across the world, we would have seen great container growth. Again, we saw APUs with really strong growth, something near 50% in that regard. Also air, rail and bus combined were up as well, David. So those businesses are becoming more significant. It’s a total part of the mix at PK. North America is performing about where we thought it would be. Europe hasn’t quite recovered, but we think we will a bit towards the end of year on a constant currency basis, and we expect the ancillary products around rail, bus and APUs and containers to continue to have good run. Overall, kind of a mid-single-digit view.

And for this year, at least Thermo King domestically has a pretty healthy backlog. How far does it extend into? Does it cover now pretty much the majority of the rest of ‘15?

We’ve got a pretty good view of ‘15, we are slightly less than act of [ph] looking at 43,000 units I think in the last forecast and we would be something a bit less than that at this point in time. So where X calling for, say, 10%, we are calling for kind of more of a muted mid-single-digit growth rate there. Again if there was some optimism, if we chose to view that, hopefully act is right. Again, this is where we’ve got inventory in place in case it is right. That typically could be some longer lead items on diesel engines and that’s one of the positions we said could be a stronger backlog of components and inventory there.

Thank you. And your next question comes from Joe Ritchie from Goldman Sachs. Your line is now open. Please go ahead.

Thank you. Good morning, everyone. My first question is on Cam. Now you have had Cam in the full for a quarter, just wanted to see if you can give us an update on your outlook for that business and specially whether you’ve seen any pricing pressure particularly on the oil and gas side of that business.

So let me try to walk you through the business and the different markets that they are participating. As we told you, they met our revenue and operating income expectation for the first quarter and we are on track with generating the synergies and doing the things that we are planning to integrate the business. So everything is going along as we would expect with the business at this point in time. If I divide and go into the individual markets for them, process gas, again a piece that does have some exposure on the oil and gas side, we are actually seeing some strength in the business with natural gas and with LNG. There is some project delays that are happening in perhaps the Middle East side, Petrochem is holding up as well as power generation in some of the pieces. So all in all, process gas is holding up well. Plant air, we are seeing good activity there with business and the book and turn activity was good in the first quarter. Engineered air which is a piece that is exposed to air separation and some of those markets, it’s showing a little bit of a pull back. And that’s really more of an across the industry type of pull back, particularly in Asia where there was a lot of building and lot of overcapacity in air separation. And on the aftermarket side, the aftermarket is stable for us, but we, of course, have plans to grow that as we talked about when we did the acquisition. So all in all, we are seeing what we expected to see out of the businesses, the markets haven’t really let us down in any big way, and again our exposures being more on the gas side than the oil side of this are keeping us on track with what plan was for the business.

Thanks, Sue, it’s really helpful. And a follow-up I guess just on the incremental margins just being slightly lower this quarter for a variety of different reasons, lots of moving parts. It seems given that you have got an expectation that you’re going to get a little bit more price cost leverage as the year progresses, I mean is it fair to say that as we get into the second half of the year, you should – could you see incremental margins that are closer to the type of incremental that you experienced last year?

Well, If you go back to the first quarter guidance, we are probably just maybe a point or two better in terms of operating leverage than we had guided, so we are pretty close on that, it’s got there a little bit differently that – it’s factored little bit weaker price, little inflation, little stronger productivity, little better volume, little worse mix, but bottom line, it was a solid execution to get to the leverage that we have planned. When you look at getting that 25% reported op leverage or 30% ex-acquisition op leverage, it would imply a better back half than front half and I think we are at this point all of the productivity pipeline, all the plans we have, price realization are in place, so it’s a matter of executing on that, but again our forecast would be 25% reported, 30% ex-acquisitions on leverage for the full year.

Thank you. And your next question comes from Shannon O'Callaghan from UBS. Your line is now open, please go ahead.

Good morning.

Good morning, Shannon.

Hey, just quick question on the acceleration in the Americas HVAC bookings up to the high-single digits, I think it’s been a while since we have been there. You know, does that feel like sort of achieving lift-off for you guys, or is there something sort of keeps you in check, whether it’s – because it’s 1Q or something else you’re seeing out there that doesn’t want to extrapolate that.

I think we are getting great lift-off on the product growth teams we have put in place and again, I couldn’t be more happy with the efforts of that entire team, which is a very broad team of product management engineers, operational people and selling organization doing a fantastic job with that. So I am more pleased with the execution of product growth team than I would be to call anything more than what I have, which is a decent institutional market, which believe me, we are delighted to see after years of negative, it will be a positive. And I think that the commercial and industrial building and retrofit markets have some lives left as well too, but again, we are all in all – even dodge would say, we are 25% off the peak, so we have got a long way to go.

All right. And then just on the M&A versus buyback with the discretionary cash, maybe just a little more color on what you’re seeing out there in terms of the M&A environment and what kind of things you’re looking at sort of which segment sort of size we might view as possible?

We have taken the philosophy to – across all of our businesses to look for the best opportunities. And so, I think the filtering that we do and the balancing that we do would be at the corporate level, but as it stands right now, we have really got all of our businesses looking for the right tuck-in opportunities at markets we know well, either channels that we can use to exploit the new products and services or the other way around, we have got products that we need to channel for. And so those are the typical acquisitions we are looking for. Obviously, we are trying to balance toward 15% overall operating margin target for the company, so that pushes us to looking for good businesses where the synergies are clear and that’s a tough threshold obviously to look out there for us. But look, it’s competitive out there in terms of acquisitions still today, a lot of these pipelines take a long time to develop, a lot of these are based on historical relationships, relationships we are building with companies that we would have an interest in. In some cases, they maybe partners suffice to us in other areas. So it’s across the board, Shannon, and I wouldn’t highlight or isolate one particular interesting business for you.

Thank you. And your next question comes from Steven Winoker from Bernstein. Your line is now open. Please go ahead.

Thanks, Mike, Sue, Joe, thanks for getting to me. Couple of questions, I’d like to you to put a finer point on. The first one is on your material inflation assumptions for the rest of the year, copper, steel, particularly seems to me like there is a lot more opportunity than what I am hearing in your commentary. Can you just help me understand how you are thinking about your raws?

Yeah, cooper and steel are moving in the right direction, Steve, we buy a lot more component and assemblies. That is two-fold. One is, in some cases you are paying more for overall general wage inflation or freight inflation and some of those commodity, that’s not always just a material commodity decrease as a part of the assembly. But we are working with suppliers to make sure we are getting our fair share of that back, and where that’s not happening, we will clearly resource that to a supplier with the better price points and that will take some time as well. So I think we are on top it. We do see a sort of a flattish to down overall inflationary environment in certainly steel and copper and zinc. Our factors that are positive in that as well as freight for that matter.

I think you would be in a pretty good negotiating position right now on those. And the other question, the final point on volume mix, so 8% core growth and volume mix 100 basis points of expansion. Mix must have been really bad or just help me understand the trade-off between those a little bit given the very, very strong core growth you had?

Well, climate grew specifically in HVAC much -- sort of it was the largest contributor to the overall absolute in the company and it was largely equipment. It has a long service tail on that and that takes a while to materialize over time. So look, when you are mixing higher climate versus industrial and higher HVAC versus TK, it’s a bit of a challenge into the mix, that’s really the sum of it.

Thank you. And your next question comes from Steve Tusa from JPMorgan. Your line is now open. Please go ahead.

Yeah, good morning.

Good morning, Steve.

I think you guys are – the majority of inventories are what -- 50% is LIFO, is that right?

Yes, something like that.

We can let you know, Steve.

Is there a dynamic there on how the raw material benefits are going to kind of run through given the more pronounced seasonality in your business, that’s the first question, and what kind of impact that may have. And then just on the buyback, just remind us where you guys stand on your authorization for the buyback, and do you need a new one to kind of -- if you are going to do more in the back half, do you need a new one?

So, let me take the share buyback, because that’s probably easier than LIFO, but I will come back to LIFO. We had the $1.5 billion authorization in 2014 and as of the end of the year, we had utilized about half of that. So given the minimum of $250 million that we had set for 2015, that still will carry us through the year, so no problems on the share buyback authorization. On the LIFO side with prices going down, and volumes, there was no impact as I looked at the financials really in the first quarter from LIFO and I woudn’t expect that to change as we go through the latter part of the year, Steve.

Okay, great. And then one last question just on the non-resi stuff, you know, JCI also out there saying things are pretty positive. On the institutional front, I believe the dodge forecast have gotten a lot better, maybe if you could just – just with the sales guidance, I mean, it just seems like things are getting better, not worse out there. How much kind of visibility do you have into the back half of the year now for commercial HVACs?

I mean, we had great performance in the quarter revenue, great performance in terms of orders, applied, the books are filling out through the fall, education, little less applied, health care a little bit more applied, so it’s more of a move up there. Unitary continued strong, Steve that I don’t think is going to slow down much for the year. So yeah, we are optimistic in kind of a mid-single digits growth rate. Dodge has been optimistic for a long time and so we have generally used our own pipeline and triangulation of all the data that we have and have had a fairly accurate estimate over the last say four, five years around that I don’t see any reason to change from that. With that being said, look if there is some sort of a boom we’re missing here, once again, it’s this sort of component inventory, particularly on the applied side that we are going to make sure that we are not cutting ourselves too thin in terms of inventory. We have plenty of capacity, that’s not an issue for us at all on the capacity front.

Operator, we will take two more please.

Thank you. And you next question comes from Robert Berry from Susquehanna. Your line is now open. Please go ahead.

Hey guys, good morning. Thanks for taking the question. I wanted to start by just clarifying what the message was on the commodities, I don’t want to mince words too much, but I think on the 4Q call you talked about commodities still being a modest net headwind for this is year, and I know Mike you just mentioned it being flat to down. So I just wanted to clarify what the bottom line message is there.

It’s so close to flat, that I couldn’t call it either way frankly, but it’s certainly not going to be to my mind, much of a headwind, if any headwind at this point time the things continue as they are continuing, it would be a slight tailwind for us.

Okay. So that sounds a little better than what the message was last quarter, which…

That’s also part of why pricing probably isn’t as strong too, again, it’s about this gap between price and some of the commodities, which drive some of the pricing in the market place.

Fair enough. And then also just wanted to follow-up on the answer to a prior question about TK in Europe and clarify the outlook. I think you had guided to low-single digit decline in Europe, in the first quarter you’re seeing high-single growth, I don’t know if one of them is with currency and one is without, but maybe you can clarify that. And if you’re seeing high-single now and expect low-single for the year, does that imply a meaningful deceleration through the year? Any color there would be helpful?

Yeah, European revenues were actually up high-single digits organically and if you take FX against that, obviously you get a story, which –

Yeah, the low-single digit with currency. Operator Thank you. And our last question comes from Jeff Hammond from KeyBanc. Your line is now open, please go ahead.

Hey, good morning, guys.

Hi, Joe.

Mike, you mentioned kind of be a more confident in your product groups in the way you’re going to market in commercial versus say, optimism about demand side. Can you just give us a little more color on what they are doing right, what you are excited about from a new product or how is it going to market differently that’s driving that?

The market analytics and the segmentation we’re doing around some of the customer segments has been really critical, both in understanding about what we will grow and why, what competitors are doing or likely to do, scenario of planning around that, economic value estimation of the products we’re launching and make sure valuing sort of products versus looking at it on a cost plus basis, all that really consummating and having an operations team and engineering team and a product management team having the same goals and objectives. This is an example. If a plant manager is looking to maximize the inventory turns and a product manager is looking to maximize product availability, they are obviously in conflict when these people all agree on what it is as being the number one and number two things to grow market share and margins, great things happen. We have got those teams totally aligned on how to grow margin and how to grow market share and if you talk to anybody on that team, sort what stripe they wear from ops, engineering, sales or product management, they are going to give you the same exact answer. And that’s where the investments are going and they are not going anywhere else, and this is why we got three, four times growth in the overall portfolio last year, this is why I am excited about doubling that this year, and ultimately that’s why I am excited about next say, five years, because we will build this thing out all the way. People are having a great time doing this, they feel like they are winning and we are going to keep going as fast as we can.

Great. Thanks a lot.

Thank you. I would now like to turn the conference back to Joe Fimbianti for any further remarks.

Hey, thank you all very much for this morning. Hope to see you at our Investor Day in May. I will be around for the rest of the day, so please call me if you have any additional questions.