Good day, ladies and gentlemen, and welcome to the Ingersoll Rand Third Quarter 2014 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Janet Pfeffer, Vice President, Treasurer and Investor Relations. Ma'am, you may begin.

Thank you, Sam. Good morning, everyone. Welcome to Ingersoll Rand's Third Quarter 2014 Conference Call. We released earnings this morning, and the release is posted on our website. We'll be broadcasting, in addition to this call, through our website, ingersollrand.com, where you will find the slide presentation that we will be using this morning. This call will be recorded and archived on our website. If you'd please go to Slide 2. Statements made 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 actual results to vary materially from anticipated results. This release also contains non-GAAP measures, which are explained in the financial tables attached to our news release. Now to introduce the participants on this morning's call: Mike Lamach, Chairman and CEO; Sue Carter, Senior Vice President and CFO; and Joe Fimbianti, Director of Investor Relations. With that, please go to Slide 3, and I'll turn it over to Mike.

Great. Thanks, Janet. Good morning, and thank you for joining us today. In the third quarter, we delivered earnings per share of $1.10. There was a small amount of restructuring in the quarter. It was less than $0.01, so reported and adjusted EPS are identical. That's a 21% increase versus adjusted earnings per share in the third quarter of 2013. Revenues were $3.4 billion, up 5% versus last year on a reported basis. Revenue growth was about 1 point higher than our guide, which was to be up about 4% for the quarter. We saw somewhat stronger revenues in transport, particularly in auxiliary power units and marine equipment. And in commercial HVAC equipment in both North America and Europe, revenues were up 6%, excluding currency. Orders were up 7% in the third quarter and up 8% excluding currency. Climate orders were up 9%, led by auxiliary power unit, marine unit and commercial HVAC equipment orders. Industrial orders were up 3%. Adjusted operating margin, which excludes restructuring, was up 90 basis points. Climate margins increased 120 basis points, and Industrial margins were a headwind of 110 basis points. For the company, pricing exceeded direct inflation as it has each quarter for more than 3 years. Operating leverage was 31% on an adjusted basis. On a year-to-date basis, we have delivered 110 basis points of margin improvement. We repurchased 2.6 million shares in the third quarter. We have narrowed the range of our full year forecast at the midpoint of guidance for adjusted EPS at $3.22. It is unchanged and now includes diligence and transaction costs related to the Cameron acquisition that were not in our July guidance. I'll give you some more detail on the fourth quarter and the year in a few minutes after Sue walks you through more details on the third quarter. Sue?

Thanks, Mike. Starting at a high level again, our reported bookings for the quarter were up 7%, revenues were up 5%, and our operating margins without restructuring were up 90 basis points year-over-year. Reported earnings per share were $1.10. Versus midpoint guidance of $1.03, the $0.07 beat came from a few areas. As Mike said, revenue growth was about 1 point higher than midpoint guidance, which would be about $0.03 of earnings. The currency exchange impact from Venezuela, which we had spiked out as an estimate in our third quarter guidance of $10 million cost, or about $0.03, did not occur in the quarter. So that was $0.03 of the $0.07 difference plus the revenue. However, the risk in Venezuela remains, and we've rolled that now into the fourth quarter guidance. The tax rate and share count were each about $0.01 favorable. FX, excluding the Venezuela item, was about $0.01 unfavorable to guidance. So that gives you the full $0.07. Now if you'll go to Slide 4. Orders for the third quarter of 2014 were up 7% on a reported basis and up 8%, excluding currency. Climate orders were up 9%. Global commercial HVAC bookings were up mid-single digits. Transport orders were up over 20% and as Mike said, led by auxiliary power unit and marine unit orders. Orders in the Industrial segment were up 3%. So if you go to Slide 5. To look at the revenue trends by segment and regions, the top half of the chart shows revenue change for each segment. For the total company, third quarter revenues were up 5% versus last year on a reported basis and up 6%, excluding currency. Climate revenues increased 6% with commercial HVAC revenues up mid-single digits and transport revenues up mid-teens. Residential HVAC revenues were up low single…

Great. Thanks, Sue. Please go to Slide 11. In August, we announced our agreement to purchase the centrifugal compressor division of Cameron. This chart was shown during the webcast we held on the day of the announcement. It's a great fit with our Compressed Air business. It generates value for our shareholders and it's accretive to all of our key metrics. It adds to our core compression capabilities and it adds breadth and range to our Compressed Air business. Please go to Slide 12. There are no updates to the timing of the closure. Everything is progressing according to schedule. We still expect to close in the fourth quarter. The forecast, I'll go into next. It does not include any operational results from Cameron. And we'll update you once we know the closing date. Please go to Slide 13. Our full year revenue forecast for growth of about 4% is unchanged. There's been some movement within the Climate segment where transport is going to come in somewhat stronger given the orders we have in hand for marine containers and APUs that will ship this year, which is offset by somewhat lower HVAC revenues in Latin America and Asia and the impact of negative foreign exchange. Please go to Slide 14. For the full year, as I said, we still see revenue growth of about 4%. We are adjusting our full year 2014 earnings outlook to a range of $3.17 to $3.21 on a reported basis. For the full year, we now expect to spend about $0.03 in restructuring versus $0.05 in our prior guidance, so on an adjusted basis, in the range of $3.20 to $3.24. This includes absorbing some transaction costs related to the closing of the Cameron acquisition, which again were not in the July guidance. There is…

[Operator Instructions] Our first question comes from Jeff Sprague of the Vertical Research Company.

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

Sure. Applied equipment revenue was down low single digits, but Applied revenues were actually up in North America, kind of mid-single digits. So we saw the weakness really in all regions except North America. And so that really, Jeff, I think is the first quarter that we've seen kind of mid-single-digit growth. And I think if we were to see another quarter or 2 of that, we'd feel better, going into 2015, that there would be a moderate recovery in institutional construction.

And then secondly, just on Industrial, can you give us some color on the investment spend? And maybe more importantly, how does it continue going forward? Obviously, there's some spike out in your walk. But maybe give us some color on where that lays geographically between the segments? And do we see that tapering off into the new year?

Let me give that a shot, Jeff, and talk a little bit about Industrial. And I'll kind of broaden the question a little bit and talk about some of the things that we were doing. So when we think about Industrial and we think about where we are and where we are with the third quarter results, there's a piece of this that says as we've gone through 2014 and we've looked at this. The first quarter created quite a hole for us. And we knew that, and we knew it was going to take some aggressive actions to get back to the target on operating income margins for the year. In addition to that, as we've gone through the year, we've been looking at these businesses, sort of the new structure. And we've been looking at growth and the business has prioritized good payback investments that are going to support growth. They're going to support product development, service infrastructure investments, channel investments like I talked about in the script. And so as we were going through the third quarter, we looked at where we were. Again, Climate has been overachieving. We did accelerate some of the investment in Industrial. And again, looking at new products to prepare them for the upcoming technology efficiency standards, investments in channel and services. And in addition to that, as we thought about the back half of the year, we were expecting perhaps more recovery in Club Car than what occurred. So golf markets have really remained down as we've gone through the year. And so when we think about Industrial then going forward, nothing that we're seeing in the investments that we're making -- it's not going to change our longer-term margin opportunity for Industrial, and we expect them to have margin improvement in 2015.

Jeff, I'd probably add on here a little bit and say when you back up and look at the longer-term guidance we've given, around 15% to 20% EPS growth in '14, '15 and '16, we're tracking at about 21%, at the midpoint of the guidance we're giving right now. And with bookings being so strong in the third quarter and really setting up well for the fourth quarter in 2015, there's no reason, when we see a good idea here, not to act on it and pull it forward and really build and protect against that 15%, 20% EPS growth in '15 and '16. So I think that there are no surprises here. And I want to emphasize there's absolutely nothing wrong with this business. These are investments that we fully expect to have a return in '15 and '16, and we would expect that business to return to normal incremental margin expectation in '15 and '16.

Our next question comes from Nigel Coe of Morgan Stanley.

Just wanted to follow up on Jeff's point on the Industrial margins. And I just want to -- you called out 2 points, one was the investment spending, which you just went through. That sounds like that's going to taper into 4Q and '15. But you also called out inflationary pressures as well, so maybe just discuss that. And Mike, I couldn't help but to reiterate that you put out that 15% to 20% for '15. So do you still feel comfortable with that target for '15 right now?

Yes, Nigel, first of all, we've laid out a 15% to 20% '14, '15 and '16. '14 happened about how we thought relative to growth in the market: leverage, core share count, tax and buyback all being factors that are yielding a year that should be just a bit up top of that range. And again, we're looking at this thing a little longer term, not just quarter-to-quarter. And there's some opportunity particularly in the Industrial segment, where we think that we can accelerate growth much like we're seeing that acceleration right now in the Climate business. And it's going to take just a little bit of investment, and we want to be smart about that. But I have no reason to have any different expectation than 15%, 20% EPS growth in '15 and '16 as we see it now.

And then the piece, Nigel, on your question on the inflation that we referenced in the press release, so there is a bit of material inflation that happens on the Industrial side of the business. Again it's not something that is unexpected, but it is inflationary pressure. There is also inflation that occurs from our businesses with people, with compensation and different pieces of just year-over-year inflation. Again, none of that would be an unexpected event for the businesses. What you balance that with is that sometimes in the businesses, and this in particular occurred with the Industrial side, is that the productivity is a little lumpy, which means that we had some productivity that was better in Q2 versus Q3. But the inflation numbers were a little higher in Q3 than they were in Q2. So you've got some flips and -- puts and takes between the couple of quarters. But again, there is not an inflation that is something we wouldn't expect or that's unusual for the business. I mean, these are normal things that occur.

Our next question comes from Mark Douglass of Longbow Research.

Can you discuss -- you've talked about Applied, but Unitary must have been at least up high single digits. Can you discuss what's going on in commercial Unitary?

Yes, actually, a very successful quarter for us. Worldwide, Unitary equipment was up high teens in the third quarter, so that was a success. Trane commercial unitary revenues were up by low teens in the third quarter. That was certainly a positive for us as well, high single digit in the Americas, very strong growth in Europe and a decline in Asia. So again, high teens Unitary orders and then good revenue flow-through in the quarter across the Unitary business, again, low teens, good, continued success in the Americas, high single digits. EMEIA was really outstanding, again, sort of a high mid-teens in Europe -- Western Europe, I should say; a little bit higher than that in the Middle East. And all that brought down by the events of what was happening in Eastern Europe, so a good quarter.

And then can you talk about how you're approaching the regional standards in the U.S. in resi? Are you anticipating a significant prebuild, but not necessarily prebuy in fourth quarter? And how are you seeing that play out with your distributors in 2015?

Yes, I'd say, Mark, as of today, the impact is going to be very different for each OEM depending on what their channel structure is. So I think you're going to see different results that are going to phase in over the year. And actually, you're seeing some volatility in order and shipment rates between OEMs in the res business. As you probably know, we own part of the distribution, and part of it's independent. We have been talking to our distributors and our dealers. And even among them, it's not one size fits all. It depends on their liquidity, the stocking capacity and the strategy that they want to employ themselves for managing the transition. But as we see it today, we'll have some prebuy and we'll certainly have some prebuild in the fourth quarter. And so we're following the situation closely. We have plans in place for both, and we're flexible enough to adjust accordingly as it evolves within the quarter.

Our next question comes from Julian Mitchell of Crédit Suisse.

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

So I think, Julian, when we look at the full year of 2014 and at the midpoint level for the full year, what you see is an incremental leverage of about 33%. And then in the fourth quarter, what you have is a segment leverage of about 30%. So overall, when you look at first half, second half, they're pretty evenly weighted. And again, I think as we talk about going forward, we would continue to expect that sort of the threshold would be at the gross margin level for leverage expectation.

Yes, as I said, Julian, I think early in the year, prudent modeling would probably have us telling you something more like 25%, allowing for breakage. When things go right for us, like they've done a lot this year, we might see something closer to gross margins. And in fact, depending on where that business is coming in to us, there could be some leverage against fixed assets, depending on what we've done there at the time. So 30% is probably a good, more aggressive number, 25% more prudent, and there'll be some volatility. I think any -- in quarter-to-quarter, but again over the full year and then over a long period of time, now 4 or 5 years, we've been able to pretty consistently have those top quartile incremental margins. And that's a pretty important part of our commitment and strategy for how we'll run the business.

And then just on the Industrial business, yes, I just wanted to clarify that price/mix for you was about 0 in that business in Q2. Was it around 0 in Q3? Or it went negative?

No, it was around 0 in Q3 also.

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

Yes.

Our next question comes from Steven Winoker of Bernstein Research.

I just wanted to get a little more clarity on the $0.07 you called out for the Q4 reduction versus last guidance. So $0.03 on Venezuelan currency. And then is it fair to say the other $0.04 is all revenue related, and some mix of that that's FX and something else? Because it sounds like you're calling out continued strength in margins. So maybe just a little more clarity in terms of how you broke that out or how you're thinking about that. I'm looking at the bridge, but the bridge is just year-on-year and not your change in thinking from last quarter to this quarter.

Right. So what you would end up with, Steve, is you'd have the Venezuela, as we called it out, we also called out having some of the Cameron costs that were in there. And as we had said in August, when we announced the transaction, about $0.01 or $0.02 on the costs for the Cameron piece. And then as you think about it and as we talked about it today, we may have had some revenue that was pulled into Q3 versus Q4. So nothing again other than really sort of those raw components, but the biggest 2 pieces being Venezuela and also the addition of the expected Cameron transaction costs.

Yes, simply for me, Steve, you -- just to reiterate, 3 pretty much coming out of Venezuela, a couple coming out of Cameron, one currency maybe, even? And the balance of that is just being a little bit more sensitive to the volatility of what we're seeing with some of the order rates. And China is a great example where you're seeing volatility, one strong bookings quarter followed by a weak bookings quarter and then lagged, of course, to a revenue quarter and so on and so forth. And so there's some volatility here. Latin America is weaker, and I don't think it's going to change for the balance of the year, in addition to China. So it's a little bit of market, but I would say the market is -- it's probably $0.01, exchange is a $0.01, and then the balance is just Cameron and Venezuela.

What I would also say, though, for those on the call is we pegged Venezuela at $10 million as we went through the midpoint of the year, which is what we had in the third quarter numbers, and we've rolled that into the fourth quarter numbers. That's an extremely volatile situation. The number could be different than the $10 million. But we weren't going to play with making any changes in our overall guidance for what that might be doing because we just simply don't know. I mean, it is just going to continue to move. And if there is a negative impact from that, we'll balance it off of the $10 million, but that's not a known number. That's the piece that we've put into the guidance, and we'll continue to monitor that with things down there. And I just wanted to make sure that everyone is clear that that's the number that we arrived at and put into the guidance.

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

The -- I think it's [indiscernible], right? So the normal rates, so it wasn't the SICAD I or II rate.

Okay. And then for my second question, if I could, just the VRF, what are you seeing on VRF penetration? And how that's affecting you, good and bad, for the quarter?

I -- can you repeat it?

Yes, the variable refrigerant [ph] flow -- VRF penetration in the quarter?

We had really good growth in the quarter, Steve, really good growth in the quarter in all regions of the world. And as I always point out continued penetration of ducted and ductless markets as well. So it's a good balanced approach, but good success with VRF, excellent growth coming in all regions with the line.

Our next question comes from Steve Tusa of JPMorgan.

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

There's puts and takes in there, Steve. We would normally have, without a prebuild, sort of a wind-down and lower working capital we kind of add back on top of that. So it's not completely in that number, but the change in thinking, certainly, I think, would be attributable largely to our thoughts around a prebuild.

Okay. And then when you think about the transition, do you expect it to have -- there a lot of moving parts here, I mean, do you expect it to be kind of a net impact next year, if you think about the kind of mid-single-digit industry trend line that we're in right now? I mean, is -- given this is more of a prebuild than a prebuy? Any kind of impacts around margins or growth that you want to call out as you guys kind of plan for this thing here?

Well, it's a little too soon, Steve. We've got to see what happens with, certainly, 14 SEER pricing. And then just in terms of dynamics as it plays out with each OEM in its own strategy as to how much inventory they're prebuilding and holding. And again, that's a factor of how quickly does 14 come down to being -- a push against 13. And I would say that over time, and possibly a relatively short period of time, you're going to see some focus on cost reductions coming into the 14 SEER units across the competitive base. And so there's a lot of play there for us to make a call on that now. So the other point I would make, back to the working capital question, there was some other selective areas where there's quite a bit of order volatility. As an example, marine container, auxiliary power units, even the TK units that go on trucks. So it's the vehicle-powered and self-powered truck units. A lot of volatility in the order rates there. Those are nice businesses for us. And so you've got us holding and bringing in more component inventory of long-lead items to be able to build against that demand. And it's really a fine-tuning of the working capital to the upside to ensure that we've got the ability to take advantage of really good progress in order rates across those businesses.

What is your mix now -- the last question. What is your mix now of just the baseline 13 SEER? What will mix of 13 SEER be this year as a percentage of your volume?

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

Our next question comes from Robert Barry of Susquehanna.

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

Well, for the industry, our view of units in the industry has been something to the neighborhood of 5 points of normal growth and probably a couple of points of growth associated with prebuild and trip. So we end up with sort of a mid- to high-single-digit residential environment. That's the environment we think we're playing into and our plans would be commensurate with that.

That couple of points, is that for just the fourth quarter? Or is it for the year, so it'll be higher in the fourth quarter?

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

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

Yes, thanks. In Industrial, it is choppy. And so I think your question, you have the answer in it as well. It absolutely has been choppy -- large centrifugal air compressor orders are going to be a big swing factor there, and that was a difference for us as well. With TK, it's been, again, strong growth in Western Europe. Of course, marine container is strong. But very, very slow and weak growth in Eastern Europe. Or really no growth, I mean, really no business. It's really dried up until things normalize there. And then with smaller vehicles, again, small trucks, that's moderated somewhat as well. So TK is slowing down a little bit in Europe, but we're picking it up in other areas like in marine. And Industrial, I would expect to see some choppiness, but in essence, to be able to continue to move toward that kind of 1% to 3% sort of growth rate for the year and probably after a couple of quarters. I don't see any big shocks happening there.

Our next question comes from Josh Pokrzywinski of Buckingham Research.

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

Well, you've got one solid quarter, I think, of North American growth. And if you recall, we said last quarter that we felt like we're seeing an inflection point. And so you have the inflection point off the bottom. You've had one quarter of good kind of growth. We don't really subscribe to the McGraw-Hill data view that says that there's a sort of 10-point hop happening in 2015 institutional construction. I think that we're more likely to see a multiyear kind of mid-single digit, or on a given quarter or 2 it may touch high single-digit Applied rate. And many, many reasons for that, some of which include the availability of skilled trades and labor to work on these projects for institutional customers. So -- and that's very consistent with what we're seeing for inquiries and what we're seeing in the pipeline of projects that we're looking at. So I'd like to see another quarter or 2, Josh, before we'd say that not only is an inflection point, but is a trend that we would feel good about calling for 2015. But I think it's pointed in the right direction for a moderate year. And again, a stronger but more moderated recovery than what McGraw-Hill is projecting.

What were orders in Applied in the quarter?

Well, I think you're mostly thinking about North America Applied because that's where we would see typically the institutional recovery that we...

Right, right.

Yes, that was mid-single digit.

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

That's right.

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

I think it stays fairly narrow. And we've had very good success for some 3 or maybe more years now of driving price in excess of material inflation. It could invert a quarter or 2. I don't see that happening, but it could happen. But I would expect that over time, over 3 or 4 quarters of time rolling, you would see a slight premium to material inflation. And that's just what we've built into the operating system and into the expectations of product management and in the way that our people get compensated themselves.

Got you. And then, I guess, just underneath that, if I can squeeze in one more on the 13 SEER prebuild. Would there be any change in your view on industry pricing for that 13 SEER product versus what it's priced at today?

It's anybody's guess on that. So it's the Wild West, I think, as it comes to expectations around what really happens on that. But look, at some point, it's not the richest margin project -- product that anybody is selling. And so I think the sensitivity around price/cost is narrow enough that there's not going to be really anything crazy happening there. I mean, why go through the effort of prebuilding if in fact you're going to give it away as part of the 2014 equation? So -- or 2015 equation? So I don't really see that as being a significant problem. And then Steve, back to your question, I think it's about 60%, 6-0, on the 13 SEER mix for us.

Our next question is from Andrew Obin of Bank of America.

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

I think as we have looked at restructuring for 2014, Andrew, we started out with a forecast that said we had a lot of plans that we actioned in the fourth quarter of 2013, and sort of a normalized level would be in the $0.05 to $0.10 range in 2014. And as we've gone through the year, what we've done, as a natural part of the business, is we've looked for opportunities that made sense. But we did do some pretty heavy lifting on restructuring in the fourth quarter. And so as we've gone through the year, we sort of let this naturally fall out with things that we needed to do and things that fit the construct of how we were running the business. And it just happens to be $0.03 this year. That isn't a predictor of what the future will be. But we have put in basically a placeholder that said what was normal. And given the work that we did at the end of last year and actually the first couple of months of 2014, just wasn't as necessary throughout 2014, so we're at $0.03.

And the maintenance, Andrew, I think is sort of -- if you look back over a longer period of time, the sort of maintenance that we do around the footprint probably gets you to some sort of $0.05 that we would put in, to be prudent every year. But it's not the big story. We're generally always looking at, but generally happy with, where the footprint actually is, what utilization is and what the available capacity is, hopefully going into some growth coming into '15 and '16, particularly in the HVAC commercial businesses.

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

Well, I'm sure if they did, they'd be impairing their own profitability, so I'm not sure if that wins anybody's sort of affection in that regard. I would say that the investments that we're making are fewfold. One is there's been some efficiency rules put in place in China for air compressors. That's moving to Europe, and I think it will be adopted soon and that eventually in early conversations with the DOE, it will come to the U.S. and other countries as well. And so it's really getting in front of a lot of these 2017, '18 and '19 efficiency requirements. Our belief is that the brand promise has been around energy efficiency and around reliability. And so what we want to be able to do is be able to continue to sell the most efficient, most reliable products in the marketplace. And that's really what the investment is. Certainly, it's not indicative of some oil-free pressure that we're seeing around pricing. It's not the story that we had in Q3 or Q4 around the compression in margin. It really is we have not seen the golf recovery, although orders are up a little bit. We certainly haven't seen shipments improve across golf. That's hurt. And then we pulled forward a number of NPD and channel investments to set ourselves up into '15 and '16, particularly -- well, across all of the Industrial businesses x Club Car.

Our next question comes from Steve Volkmann of Jefferies.

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

Last question first. The incremental margins have been right at expectation and pretty consistent with past performance when the business is growing and leveraged. There's nothing unique or really remarkable about the leverage that we're seeing there. In fact, in the Climate segment, the remarkable leverage has come from the commercial and residential Trane businesses in particular. The growth that we're seeing is certainly highest in APUs. When you think about what our truck customers face, the #1 issue that they have is the availability of drivers. A couple of large customers told me that drivers only last about 9 months in that business. But some of the larger companies have found that by installing APUs in their cabs, they're able to significantly increase driver retention. And so that's one of the reasons we're seeing APUs really expand dramatically even though fuel prices have dropped. And it used to be that APUs increased as fuel prices increased, but this is a disconnect. Fuel crude [ph] prices are dropping and the driver is really around driver-retention more than anything. Marine container has been good, particularly gen sets into marine containers have been very strong for us. And we continue to leverage new product, which is more expensive with the tier 4 new CARB requirements coming into play, and that's driven a lot of, obviously, the revenue upside for us as well.

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

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

Our next question comes from Jeff Hammond of KeyBanc Capital Markets.

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

Well, mostly what's happening is just freight prices are really increasing, particularly flatbed. And so where you're moving really large pieces of equipment, so chillers or extremely large rooftop units, of which I think you know we've got a very high share of, those are moved typically over one or more flatbeds as opposed to closed-body trucks. And the theoretical utilization of flatbeds is like 106% right now in the marketplace, which isn't possible other than if you look at what's happening. You've got prices going up and trucking companies not really investing in new fleets because they can't find drivers. So that's the primary driver there is freight for us, and I think that our competitors are seeing the same thing. We probably, as a mix, have a higher degree of that just due to the mix of Applied versus Unitary and even the large Unitary mix that we have versus their Unitary. Some of our competitors only go up to 30, 40 tons, and of course, we go up to 150 tons of unitary, which can take 2 or 3 semis to move.

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

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

And our last question comes from Joe Ritchie of Goldman Sachs.

So my first question is really around the, I guess, the elevated investment that you talked about in Industrial. Clearly, it seems to make a lot of sense, given that you're tracking ahead of your 20% EPS growth target and you're looking to protect your investment in coming years. I guess my question, though, is how much has that incremental spending increased this year? I think you guys were talking about like a $60 million plus type rate for '14. So I'm just wondering how much that's changed.

So Joe, the -- if I'm going to add where we are in a full year now, we're probably adding $9 million to $10 million to that $65 million. So it now looks more like $74 million, $75 million on the incremental basis.

Okay, great. That's helpful, Sue. And just my one follow-up is really on just Industrial margins. I think, when we most recently spoke, I think the expectations were to at least kind of try to hold those margins flat. I fully understand that you're investing more in that business today, but what's the expectation now embedded in your 4Q guidance for Industrial margins? And then the corollary to that is how do you think about those margins moving forward into '15 on an organic basis? Clearly, Cameron is going to change things, but it'd be helpful to hear your thoughts there as well.

So one thing in particular, Sue gave you an absolutely true and factual corporate number, which is around circa $10 million of investment. But even if you look at the mix change of that $10 million, it's shifting much more toward Industrial than it is to Climate. Climate has been very efficient with their plans. And so we've shifted actually more of that than the 10 [ph] to Industrial and a little less in Climate. So that's a bigger impact to the Climate margin than just the absolute $10 million for the company. Incremental margins there should look to recover in 2015, probably certainly at the gross margins. And then depending on weather in Q1 and Q2 of next year, meaning we don't have multiple ice storms and the severity that we had, in Club Car, we should not have a repeat of the Club Car in golf environment Q1 and Q2. And that was a, I'm guessing, $20 million impact to us probably in the first quarter. So if you don't repeat that, you get back to the normal incremental margins in the business, hopefully, with a little higher growth rate, okay, which is something we're looking at, too, as what can we do through these investments to drive a little higher growth rates than what we were thinking. We should get incremental margins at or above gross margins for Air in 2015. So as we enter into that planning process and enter into guidance with you when we talk to you soon in the first quarter, we're going to tune that, but that would be a pretty good indicator of what -- at least my expectation and I know Sue's expectations would be going in.

Okay. That's helpful. Just one -- maybe one follow-up to that is the investment. What's the investment level expected in Industrial in 4Q? And what's that delta versus 3Q?

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

Thank you. And at this time, I'd like to turn the call back to management for any closing comments.

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

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