Welcome to the Ingersoll-Rand 2018 Q4 Earnings Conference Call. My name is Tiffany, and I will be your conference operator today. The call will begin in a few moments with the speaker remarks and a Q&A session. [Operator Instructions] Zac Nagle, Vice President of Investor Relations, you may begin your conference.

Thanks, operator. Good morning, and thank you for joining us for Ingersoll-Rand's Fourth Quarter and Full Year 2018 Earnings Conference Call. This call is being webcast on our website at ingersollrand.com, where you'll find the accompanying presentation. We are also recording and archiving this call on our website. 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 law. Please see our SEC filings for a description of some of the factors that may cause our actual results to differ materially from anticipated results. This presentation also includes non-GAAP measures, which are explained in the financial tables attached to our news release. Joining me on today's call are Mike Lamach, Chairman and CEO; and Sue Carter, Senior Vice President and CFO. With that, please go to Slide 3, and I'll turn the call over to Mike. Mike?

Thanks, Zac, and thanks to everyone for joining us on the call today. Please go to Slide 3. Before discussing our fourth quarter and full year 2018 results, I'd like to begin with a brief review of the fundamental elements of our business strategy that underpin our financial performance and create value for our shareholders. First, our global business strategy is at the nexus of environmental sustainability and impact. The world is continuing to urbanize while becoming warmer and more resource-constrained as time passes. We excel at reducing the energy intensity in buildings and industrial processes, reducing greenhouse gas emissions, reducing waste of food and other perishable goods, and we excel in our ability to generate productivity for our customers, all enabled by technology. Our business portfolio creates the platform for the company to consistently grow above-average global economic conditions aided by the strong secular tailwinds I've outlined. Second, our business operating system is designed to excel at consistently delivering strong top line growth, incremental margins and free cash flow. And lastly, over the years, we've built an experienced management team and a high-performance winning culture that makes our performance sustainable. When combined with our dynamic capital allocation strategy, we have a differentiated business model that drives strong shareholder returns over the long term. Turning to Slide 4. Focused and consistent execution of our business strategy enabled us to deliver top-tier financial performance in 2018. We delivered top quartile organic bookings and revenue growth in each quarter and closed out full year 2018 with 13% organic bookings growth and 9% organic revenue growth for the enterprise. Adjusted earnings per share growth was also top quartile, up 24% for the year and up 29% in quarter 4. Despite persistent material and other inflation and tariff-related headwinds, our team successfully developed and…

Thank you, Mike. Please go to Slide #9. I'll begin with a summary of a few main points to take away from today's call. As Mike discussed, we drove solid operating and financial results in the fourth quarter with adjusted earnings per share of $1.32, an increase of 29% versus the year-ago period. Our earnings growth in Q4 closed out a strong year in which we delivered adjusted earnings per share growth in excess of 20% in each quarter. Organic bookings and revenue growth was strong in both our Climate and Industrial segments. In our Industrial segment, we delivered 6% organic bookings and revenue growth. Organic bookings growth was healthy in the fourth quarter despite a difficult comparison of 12% organic growth in the fourth quarter of 2017. On the Climate side, organic bookings were exceptional, up 20%, including a large Commercial HVAC order that will provide revenue over the next 3 to 4 years. Excluding this order, organic bookings growth was still outstanding, up 13%. These exceptional organic growth rates accelerated despite difficult comparisons with very strong growth rates of 7% in the fourth quarter of 2017 and 10% in the fourth quarter of 2016. Organic revenue growth was also exceptional, up 9%, and was broad-based across all of our Climate businesses and across both equipment and services. As Mike discussed, free cash flow was 82% of adjusted net income, primarily due to funding higher working capital to support our exceptional bookings and revenue growth and funding additional CapEx for strong projects in the fourth quarter. We continue to drive high-quality earnings and expect to deliver free cash flow in excess of 100% of adjusted net income in 2019. Leveraging our business operating system for operational excellence across the enterprise, we continued to manage direct material, tariff-related and other…

Thanks, Sue. Please go to Slide 22. We believe the company is extremely well positioned to deliver strong shareholder returns over the next several years, and our 2018 financial results bolstered our confidence. We'll be the first to recognize that 2018 was, by no means, a perfect year, that we have room for further improvement. However, our ability to solve complex problems and overcome escalating headwinds to drive continuous improvement in our results through 2018 is encouraging and gives us confidence our business operating system and high-performing teams are prepared to successfully navigate the evolving landscape ahead. I want to extend my full appreciation to our talented people throughout the world that are committed to delivering excellent results for our customers and shareholders. Our strategy is firmly tied to attractive end markets that are healthy and growing profitably. Our products and services portfolio is at the nexus of global energy efficiency and sustainability mega trends, which provides a tailwind for growth, above-average economic conditions over the long term. Unless you believe the world is getting less populated, cooler and less resource-constrained, these secular mega trends will continue to create growth opportunities for Ingersoll-Rand. Successful execution of this strategy enabled us to deliver exceptional bookings and profitable revenue growth in every quarter of 2018. We have an experienced management team and a high-performing team culture that incorporates operational excellence into everything we do. Our business operating system and our culture are a differentiated and sustainable competitive advantage. And lastly, our business model generates powerful cash flow, and we are committed to dynamic deployment of capital. We have a strong track record of generating free cash flow and deploying excess cash to shareholders over the years. And with that, Sue and I will be happy to take your questions. Operator?

[Operator Instructions] Your first question comes from the line of Scott Davis with Melius Research.

Boy, there's not much to pick on in this quarter at all. But you made a couple of comments I just wanted to dig into a little bit, in particular, really, about the push to the right on some of the commercial projects in China. Is it the opinion of your local guys that this is just more of a delay or maybe something a little bit more -- or something more tied to the tariff outcome? Or what's really the color behind some of those comments?

Yes. You have to separate the business a bit, Scott. So take HVAC, where we saw, again, a really strong bookings growth and continued momentum there in services as well. And in those markets, I think it's less susceptible, particularly on the government, commercial side involving infrastructure institutional work, that there's more of a bias toward reducing greenhouse gas emissions. And as I've said hopefully a thousand times, if you're going to go attack the greenhouse gas emissions problem anywhere, you're going to hit HVAC, whether it's stationary or transport first because it's 15% to 25% of most economies' global house -- greenhouse gas emissions. So I don't think that China lets its foot off the gas around codes, compliance and regulations that would improve air and water quality. That being said, you look at the Industrial business, and here, I think the trends are largely the same. Interestingly, we saw good growth in some of the smaller compressors, some of our Contact Cooled Rotary and certainly in our air -- in our rotary compressor lineup in general. But certainly, all 3 would have been part of that. So that continues. What I get mostly from our suppliers and from our customers that are in China, exporting outside of China particularly to the U.S. is they are waiting to see. However, some of them are moving more rapidly to put incremental capacity in Asia outside of China. So Vietnam is a favorite spot for that right now. So I think that you're already seeing sort of actions taken by Chinese companies that export. I think you'll continue to see that going forward. And by the way, it's a positive, Scott, for us because it doesn't matter sort of where they set up shop. We're going to be able to support them.

Yes. That's going to be my natural follow-on is that are you a net winner or a net loser? I mean, you have critical mass in China and some those other regions, maybe you don't or do you, I guess, is kind of...

Yes. We have strong footprint throughout Asia, so you really can't get to a part of Asia where we don't have a team on the ground, a sufficient capacity of supply. So it would be good. So long as that capacity is unlocked somewhere, we would have opportunity.

Your next question comes from the line of Steve Tusa with JPMorgan.

Can we just dig into the bridge, the margin bridge a little bit? What was exactly an investment in other? And then could you maybe just give some color on how you see kind of that price material number kind of trending? And I think you said no windfall if the tariff doesn't go through, but like you're already 40 bps ahead of the game here, definitely better than we expected in 4Q. I would think that can get better on its own, ex tariffs, next year maybe. Just give a little bit more color on how you see both of those parts of the bridge broadly trending in the 2019 guidance.

Yes. Steve, so you say sort of walk through the bridge. Are you thinking about the 2019 bridge or the 2018 fourth quarter bridge?

Yes. In the context of what happened in the fourth quarter, I guess, 2019. So maybe just explain the 60 bps, what was in there in the 4Q and then moving beyond to 2019, how you'd see that play out.

Yes. I would start and let Sue finish. The price over material inflation was something that we had hoped to get back to, say, 0 for the full year. We got to 10 basis points, so roughly at our expectations there. That worked out, materialized as we hoped it would. One of the questions going into '19, then, is why is there not more positive price versus cost given some of the carryover. And what I would say there is you got to remember that the 232 tariffs were implemented in April and May, and the 301 were implemented in October. So the first half still sees headwinds from tariffs that didn't exist last year at the same time. We also would see commodity inflation in quarter 1 and quarter 2 still. See -- still see steel as being the largest, copper as being next. And of course, the Tier 2 knock-on effect that contains these metals would be inflationary in the first half of '18. But by quarter 2, you start to lap the majority of price from '18. Materials begin to get perhaps deflationary, but tariffs remain in our model. So you might see a wider spread in Q3 or Q4, but it's pretty early to call out how that looks. But our plan is laid out, as I've just expressed, in that regard. Sue, any of the bridge items?

Yes. So if you think about, Steve, your question on investments in the fourth quarter and going into 2019, so the investments in the fourth quarter were as we had planned them throughout 2018, and they're primarily investments in operational excellence and new product development and some of the footprint optimization that we were doing. And those actually do carry over, and we continue to invest in the business as part of our capital allocation strategy in 2019. So nothing terribly unusual or unexpected as you think about either the fourth quarter of 2018 or where we're going in 2019. It's that overall strategy of really providing for projects that make us operationally better, increase productivity and allow us to manage the business.

Sue, I'd probably add one point, which is when you think about the productivity over a long period of time creating higher utilization and really opening up new capacities, we've taken the decision over the years to slowly as projects emerge and you can consolidate, reduce footprint, we've done that. But you've seen in 2018 and 2019 a more aggressive view toward that. There was a step-up in '18, not quite as high a step-up in '19. That's, at this point, sort of the last of what we see as the larger projects would entail for us. And we want to be clear that we're not thinking about a recession in 2019, but we wanted to get, really, in front of that final large restructuring now. And just really in the event that something would happen into the future around recession, we're just going to be that much more resilient around that. So that's another part of what the investments involved through '18 and certainly in the fourth quarter of '18.

Historically, that investment number is kind of a modest negative. Is that what we should think about for '19, a more modest negative?

Well, the total investment number on the bridge itself is always right around 40, 50 basis points, and that's exactly what we'll be modeling in '19.

Got it. And then one last one. Normal seasonality, first half to second half next year. How should we think about seasonality for 1Q and the rest -- and next year?

Steve, I love you're adapting your question because I was expecting the one about quarter 1, and so let me answer that one actually first because I appreciate you're taking a longer view on that. Quarter 1 is usually the part that I think creates the most confusion around investors. But historically, if you look at the 3-year average, we've been around 12.4%. If you go to a long-term average, it's been around 11.1%. So I think that when you think about the seasonality for us, it largely comes into the first quarter. And for models that are between 11% and 12.5%, you're kind of in a safe range. If you're north of that, you're probably figuring out something that we don't know about. So that's how I would kind of give you some thoughts around quarter 1. The rest of the year sort of works itself out. I don't think there's been that many situations where there's been confusion around the back half of the year or even quarter 2.

Your next question comes from the line of Julian Mitchell with Barclays.

Maybe a first question around the free cash flow within that step-up of conversion in 2019. I think you're guiding for CapEx to drop almost 20%, but you're still guiding for operating cash flow to grow about 25%, so double the EBIT growth guide. Maybe just spell out, is that mostly coming from receivables, for example? And how quickly through the year do you think we see that improvement given your cash flow tends to be pretty seasonal?

Yes. Julian, it should be a good story for us in 2019. We really do expect to have greater than 100% of net income and free cash flow. And so as you take apart those pieces, let's talk about CapEx for a second with the approximately $300 million guide for 2019. That is lower than 2018. That was $366 million, and there's a couple of components to that. We made a couple of decisions on projects in 2018. We had some carryover where we had a warehouse facility where we were doing a warehouse consolidation, absolutely a good project. We made a decision to lease versus buy. So long story...

That will be around owned versus leased.

All right. Owned versus -- sorry, sorry, Mike. The -- so as you think about the CapEx, it sort of normalizes back into our more 1% to 2% of revenues range in 2019. So that's helpful. As you think about working capital, working capital isn't going to change from an overall strategy viewpoint, which is that you're always going to be looking to balance out your customer terms and your supplier terms. So DSO and DPO, always looking to balance those out. And on inventory, you're looking to make sure that you have enough product to meet the demand that we have, which has, of course, been quite strong, and at the same time, meet your on-time customer delivery. What I would expect to see in the free cash flow guide in 2019 is that as we move through 2019 that the working capital as a percentage of revenue is also going to normalize back more into our 3% to 4% range of the long-term guide. So we're moving back into more of the longer-term metrics in the 2019 statistics, and that's what gives us the additional bump in free cash flow for next year.

Great. And then my second question, maybe a bit more color on what you're seeing in Europe overall. I think you'd mentioned that in Thermo King, you have some specific watch items, which are understandable. But anything interesting changing in Trane or on the Industrial side in terms of customer spending appetite and so forth and maybe split anything on Western Europe versus the Middle East.

Well, we've had a very strong HVAC year in quarter 4 in Europe and so that continues. And again here, this is this bifurcation between economies very focused on energy efficiency, greenhouse gas emissions and making the regulatory changes to make that happen. So the growth rates there are outstanding. And then you're looking at sort of the Industrial side of Europe is slower than that, of course, as you -- I think factoring in sort of a sloppier Brexit, and I think the economy is a little bit in a slower mode there. But all in all, it's not -- it's certainly not that in Industrial and Europe for us, and it's been great in HVAC. Middle East has been choppier with the way orders come in there. Generally, you're talking about district cooling plants that are extremely large and whether they build them or not or modify them or not can make a difference quarter-to-quarter. So I think the environment there is good for us. It's just a matter of lumpiness in the orders. So we're relatively optimistic on Europe and certainly the Middle East as well. In terms of transport refrigeration in Europe, it's a little bit mixed. You've got a slowdown in Western Europe. You've got continued growth in Eastern Europe. You see a little slower European trailer market and you see a little stronger European truck market. And again, I think this is just really working through some of the general economic concerns, largely Brexit. And clarity on Brexit, frankly sort of a good outcome there. Clarity would be sort of a baseline outcome, I think, is a positive for the market and for our businesses.

Your next question comes from the line of Nigel Coe with Wolfe Research.

Gee, Mike, it sounds like you had that Q1 answer prepared.

I didn't want to disappoint Steve on that one, so I got it.

12.4%, that was pretty specific. So the large commercial order, I don't think I've ever seen you call out an order of that size and such a long cycle. So maybe just a bit more color in terms of that and how that progresses. And what's the market like for that kind of size of order? I mean, are you seeing, are there opportunities that are of scale out there?

Yes. We actually had one in 2016 that I wish we would have called it out in 2016 because that created a little bit of confusion in '17 when it lapped. I think it was in the $120 million range. This one's closer to $200 million. So I think that we're going to see more of these where it's a holistic approach toward reducing energy use in facilities, campuses, buildings, reducing the energy intensity, maybe even getting some grid flexibility moving toward alternative power. We're seeing more of that. And so for us, we're seeing that it involves design, equipments, lots of controls, service moderating over time and then some subcontracts that will go along with that. So they're lumpy. I've been quite talking about this for 3 or 4 quarters. So that's one of the larger projects that we thought we would close, and I think these things will get spotted in over time. This particular project will last about 40 months, and it will burn revenue in a pretty linear fashion. And we like that. We like the -- again, the resiliency over 4 years of having a nice base of business to build on. The margins are pretty good, and so it shouldn't really affect what we expect to be good leverage for the business going forward.

Okay. That's really helpful. And then I think you mentioned your share is below intrinsic value for, I think, 3 or 4 times during the call. You also mentioned M&A opportunity. So I'm actually wondering, given that you consider your share price too cheap right now, is the needle for incremental dollars still towards buybacks? Or do you see opportunities out there to deploy M&A more accretively than share buybacks? Any comment there would be helpful.

Yes. It's both, Nigel. I mean, you can expect that it would be both for us. And it's really looking at the actionability, affordability, the ROICs of the M&A that's out there based on what we think we could do that for and then comparing that toward intrinsic value. Of course, the benefit on the acquisition is building a compounding base of cash over time, particularly if they're good businesses, strategically fit the core of the company. So that's the focus. But as you know, we're not going to let cash sit around for long, and we're going to deploy it somewhere. And that's what certainly happened in the fourth quarter where you saw us actually stepped up the buyback in the fourth quarter. Balance sheet is in great shape, so plenty of capacity there and flexibility to work with the balance sheet going forward.

Your next question comes from the line of Joe Ritchie with Goldman Sachs.

So just to clarify a couple of points on the cash flow, Sue. So obviously, nice step-up expected in 2019. You guys are expecting roughly 40% growth. Get the CapEx point, it seems like the delta is -- half of it seems to be coming from working capital improvement, half of it coming from earnings growth or EBIT growth, core EBIT growth. And so on the working capital side, are you assuming the turns get a turn better? Or how should we be thinking about that working capital piece?

Yes. If I think about, Joe, and I go back a little bit with the working capital as a percentage of revenue, where we would have called that at year-end would have been probably 3.4%, 3.5%, somewhere right in the middle of our 3% to 4% range. And it ended up at 4.3%. So you actually do get, to your point, about a full point of that coming out of there. And again, it is a process where it is not just making a decision of whether you're going to have inventory there or not. I mean, there's a series of levers that happen. As you see the demand forecast, as you plan what's going to happen in the factories and you plan how you're going to actually efficiently manage those factories going through time to meet the on-time customer delivery. So your point is the right one. The inventory will probably come down over time, and everything else remains balanced. But it does go back into that 3% to 4% of revenue range, which is what gives you the uplift.

And of course, Joe, we delivered really outsized cash and a slowdown, so it's kind of a good problem to have as we're funding growth here. And it's not a worry in terms of what we think about every day. Cash would be not a worry in terms of our ability to deliver that. We've done it historically. We'll do it in 2019, and there was good reason in '18. The plan we always have is to increase turns. We usually plan it about half a turn, but we always throttle it back. The trump card there is always on-time shipment, on-time delivery. And when you've got sort of volatile order rates particularly biasing upwards, we want to make sure we've got plenty of safety stock or increase Kanban sizes just to be able to handle particularly hard-to-get components and parts. And so we're just going to make sure that we're making hay while the sun is shining. So Sue's point is exactly right, but we want to make sure to fulfill the growth and do it on time.

Okay. So maybe -- and said another way, if the order book looks good as the year progresses and you may have to build inventory again next year, and that's just a good problem to have.

Well, our growth rate's -- the forecast is probably half of what it was last year. So I think, to Sue's point, you're going to see working capital come down anyway there a little bit. I think we comfortably get above 100%, just based on that. But it's a 12-round fight, so you need to think about how this is going to evolve over the year. And if we've got a good outcome on some of the stuff that's out there, whether it's the debt ceiling negotiations or Brexit or China-U.S. tariff discussions. If it's a blue sky scenario there, we're going to adjust, as necessary, to go fulfill that.

Yes. No. That makes sense. And, Mike, just to follow on your question -- your comment earlier around talking about these large projects for several quarters. I recognize the lumpiness, but it'd be helpful if you can maybe talk about the pipeline, whether you see like the pipeline as being pretty robust today or you are certain to see some of these projects come through and maybe a little bit less full than maybe what you saw over 12 months ago.

Yes. Look, I think that these projects kind of go in sort of 2 to 5 at a time that are out there on the horizon. They take often 2, 3 years to develop. We'll often put $10-or-more million into the development of the project, you can imagine. And so as we get closer and closer toward thinking we've got something, we can certainly do that. This year we knew that we had 1 or 2, turned out to be the one really large one. There's a couple of smaller but in the magnitude of $50 million to $125 million that are out there.

Your next question comes from the line of Andrew Kaplowitz with Citigroup.

There continues to be some concern that resi HVAC, for you, will slow down at some point given weakened housing. But we know you're projecting low to mid-single-digit growth for the resi market in '19 based on replacement demand. Did your resi growth in Q4 match overall Climate growth in the high single digits? And do you think 2019 could be another year of share gains for Ingersoll? Or should we think Ingersoll grows more in line with the market in '19?

Are you talking about resi, Andy?

Yes, yes.

Yes. So resi, really, from 2013 to the present, and I would say, 18, for sure, of consecutive quarters in a row, we had share gain. And we really changed the strategy in '13, product distribution, the model, investments in digital. And so for 18 straight quarters without a hiccup, we've had share gain there. It was the same in the fourth quarter of this year, and the markets there remained strong. You have to realize that 85% of what we do is going to be in the replacement market, not the new construction market. So think about the context of Ingersoll-Rand, you think about Residential HVAC as being less than 10% of our revenue, so you can think about -- obviously, you're talking about a really small number, 1% to 2% being new construction. And if that fell up, even 20%, would be a negligible dip for us. We're really built towards the replacement market, and I think that's going to continue to be strong.

Okay. And maybe, Mike, if I can ask you about the U.S. Commercial HVAC market. Obviously, a lot of questions on the large projects. But even after that, 13% organic bookings growth in the quarter was very strong. Looking to 2019, I think you mentioned in the prepared remarks that you have better visibility here than you've had. Some people still question how we're late cycle. But if you look at the strength that you've seen, is it still broad-based between institutional/applied markets, the unitary markets? Is institutional going to lead the way in 2019? And does this backlog that you have really start kicking in 2020 at this point?

Well, a couple of things, Andy. One is certainly the Applied business remains strong, but I have to tell you the strength of the unitary, commercial unitary market was really strong as well. And so this just gives us a general sense about the sort of underlying economic conditions in the U.S. are still pretty positive. It's got long legs to have had that kind of growth for this long, particularly the results we had in the fourth quarter in commercial unitary. The applied and institutional work continues to move along nicely. Education and health care, about 50% sort of that mix, and we think that education continues to be strong. We think that the health care continues to be strong. No outliers there that we're seeing on that front, so we think we've got a solid backlog built for '19. And as I mentioned earlier on the question regarding the larger contract that we booked that Nigel asked, that thing is a 4-year [ span ]. So I think this thing has got legs through '19, for sure. Now recognize, too, Andy, for people that needed -- just to kind of keep it in context, when you think about our Commercial HVAC business, you got to think about 50% equipment, 50% service. You get to the equipment piece of this thing, it really breaks down pretty quickly between institutional and commercial. But the large component of what we do there is still replacement buildings in the U.S., and so I think there's always an opportunity for us to have more energy-efficient, more environmentally friendly ideas going into customers, and so there's a demand-creation opportunity here as well.

Your next question comes from the line of John Walsh with Crédit Suisse.

Maybe just to circle back to the margin bridge into 2019 for Climate, I was just wondering if there's anything to call out in terms of mix. You obviously gave us the market growth rates for some of the sub-businesses, but is there anything Ingersoll-specific there and then anything as it relates to the different growth rates between equipment and service as you think about the margin impact?

So nothing remarkable jumps out to me at all on the year. It's pretty straight stick. I think that we're right -- you're right in the ballpark there, too, of 25% leverage. That will continue to improve throughout the year. The mix, if anything, I mean, perhaps a little bit on the res side or the TK side because we continually expand more of the opening price point for the product line. With TK, there could be some mix with Europe being a little bit weaker and a bit more profitable than North America, a bit more maybe toward truck versus trailer in Europe. So little things on the edges, but I think it's a pretty straightforward year. The visibility around the backlog for TK, particularly around North American trailer units and around, obviously, power units, is the most visibility we ever had in that business. I think we feel that way about the backlog in HVAC entering the year as well, too. So a relatively straightforward plan here, I think.

Got you. And then as we think about these restructuring benefits rolling through from the $94 million in 2018, you obviously call out the $0.25 and them having a 4-year here payback. I mean, how should we think about what's actually carrying over from earlier actions into '19 and then even starting to think about '20? And what kind of tailwind some of these restructuring actions could have? Or is it going to be later than that?

So, John, the way I would think about it is the bigger pieces of the restructuring that we've been talking about in the footprint optimization arena between 2017, 2018 and what we're projecting into 2019 is sort of in the range of the 5 to 7 factories and those less than 5-year paybacks over time. So you're going to continue to build. We started that process in 2017, and so you're going to build savings as you go through each of the years going out into -- there will be savings, obviously, in 2019, but there will be increasing savings in 2020, 2021 from these projects. And again, it is really about optimizing the footprint, building capacity and building a better Ingersoll-Rand in the catching locations that's there. But it does provide a good return, and it does have a great payback.

I'd say, John, once we make these announcements into '19 and as we think about extending the next round of long-term plan and guidance that we do, this is something that will factor into improved margins and costs, of course, lower fixed costs in the company going forward. And I think we can probably help recast that sometime later in the year for all investors to understand the benefit of what's happened. And so we'll make a note to do that once we are -- have announced our intentions.

And I think, Mike, you made the point earlier and part of the discussions is that we're not looking at these opportunities as a way to get ahead of an economic environment. We're actually looking at these opportunities to actually operate really well regardless of the economic environment. And so the fact that you can get a great return off of that, in addition to making the company stronger, is terrific.

Your next question comes from the line of Josh Pokrzywinski with Morgan Stanley.

Just on the Industrial business. Not that anyone should necessarily operate with a hard landing scenario, but thinking back to '15 and '16, I think some of the shorter-cycle elements of that and Tools and other Industrial Products caught you by surprise, and some of the decrementals there were a bit abrupt. How are you thinking about inventory levels, customer tone and kind of distance from prior trough in the context of 2019? It seems like everything's fine, and I'm not being overly alarmist here. Just trying to gauge what maybe the sensitivity looks like.

Well, first, I mean, back to John's question, when you think about sort of where all this restructuring spend has gone, the bulk of it, to this point, has gone into the Industrial business, particularly in the compressor business. And so I think building a higher margin, more resilient business is certainly what they've been doing. The other piece of it is that service orders continue to outpace equipment growth, certainly again in Q4, too. And that there's both service penetration and it's share-of-wallet strategies for our CTS business. We believe that from what we're seeing here, there is certainly a balanced view toward what could happen. I mean, clearly, if there is some certainty around China-U.S. tariffs, we think certainty, no matter what the outcome of that could be, is probably going to lock a little bit of growth there. So I think it's a balanced view at this point in time, but I think we planned for a lower fixed cost base, restructuring through a higher service mix. And they've -- and that business has been prolific around investing back into the business. I want to say it was a full 50 basis points going back into Industrial, and I think that, that is always a sign of healthy business investing. In a downturn, you can take share. And we want to make sure if that happens, we're taking share in a downturn, too.

Got it. That's helpful. And then just thinking about some of these larger projects in Climate, I would imagine as the cycle wears on, you see more and more large projects show up. How should we think about that in terms of operating leverage when those ship? I would imagine some of that, especially in performance contracting, is some pass-through revenue, not just all your equipment. Is there a margin hit that comes in with that or a lower incremental? Or does it kind of feel like normal equipment?

Yes. It can be, Josh. Not particularly in this case, right? I don't think this one's going to be something that spikes out materially anything with leverage or incrementals. So the margins on those projects are not bad. As we've talked in the past, you've got to look at the contribution margin to the entire business. Usually, those projects have everything, from an SG&A perspective, loaded into the contract as well. It's very little between contribution margin and operating income there left to look at. So I feel positive on that. Again, they're hard to forecast. We don't put them into base plans. And when we think we've got something that's got a high probability of closing, we might start to talk about it. And certainly when they're the magnitude of what we've booked, we'll have to spike those out so we get everything straight from a comp perspective. So I hope that answers your question.

Your next question comes from the line of Andrew Obin with Bank of America Merrill Lynch.

Yes. Can you guys hear me?

Good morning.

Just a question. A lot of questions have been answered. But just can you give us visibility on the institutional side because I know you guys look at state and local funding as foundations. How much visibility do you have for funding on the institutional side in HVAC in North America because it is a key market for you guys?

There's a lot of metrics to look at there, Andrew. I mean, certainly, you all can look at ABI, GDP growth, non-resi fixed construction, all those look good. We've got the benefit of looking at...

I'm -- I was more interested in -- yes. You guys track bond issuance and sort of longer-term metrics from the local government and state government. Those tend to be useful, sorry.

Yes. We do as well, and you guys certainly can look at that. The most important thing we can track, though, is we've put a lot of investment into the systems we use in the front end of the commercial process. And so the ability for us to understand pipelines better really supports strong institutional growth going forward, and I could just tell you the number of and size of projects from the institutional perspective are very healthy. And this goes back to the question around 2019 in Climate, what confidence do you have. Or maybe even to the larger Ingersoll-Rand question, what kind of confidence do you have in the guidance you put out. And I've got a high degree of confidence on what we put out today on all of that. But I would say at the heart of that is because I feel very strongly about what's happening globally around HVAC compliance and certainly greenhouse gas emission visibility, around institutional growth in North America and around the visibility we have in the TK business. Those are all very strong indicators that I look back over 10 years of doing this, and I probably haven't had at least the visibility I've got now into the backlog.

That's a great answer. And just to follow up on the industrial compressors, how much of a headwind is automotive for you? And if it is a headwind, which industries are offsetting this in North America because the orders are quite good as well?

Yes, sure. Andrew, when you go back and you look at some -- sort of the pie charts that the business produces, one we do at Investor Day, and it shows the end markets that we serve, you run out of colors and slivers on the pie chart. So automotive is a piece, but it's probably not more than 2% or 3% of what we do. Electronics is a piece. It's not 2% or 3% of what we do and pharma and food and beverage and so on and so forth. So automotive per se is not critical, but it is indicative of a broader slowdown at times. It's indicative of the spending in the economy. So we watch automotive. And we see -- when we see automotive slow down, it could be a leading indicator for us, for sure.

But what's strong in North America? Are there any end markets that stand out as strong to you guys on the Industrial side?

Industrial markets that remain strong would be food and beverage. Pharma would be -- anything oil-free would certainly be strong for us. And then some of the weak to moderate markets are still going to be larger compressors where customers might be waiting on capacity to understand what's happening with trade.

I will now turn the conference back over to Zac Nagle for closing comments.

I'd like to thank everyone for joining today's call. As always, Shane and I will be available over the coming days and weeks to take any questions you may have. So certainly reach out to us, if you'd like to chat. And we look forward to seeing you all at the upcoming conferences in February, and we'll be on the road in March as well. Thank you.

This concludes today's conference call. You may now disconnect.