特靈科技 (TT) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ingersoll Rand third-quarter 2012 earnings conference call. (Operator Instructions). As a reminder, today's conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Janet Pfeffer, Vice President of Business Development and Investor Relations. Ma'am, you may begin.

Thank you, Mary. Good morning, everyone. Welcome to Ingersoll Rand's third-quarter 2012 conference call.

We released earnings this morning at 7 AM and the release is posted on our website. We'll be broadcasting, in addition to this phone call, through our website at IngersollRand.com, and that is where you will also find the slide presentation that we will be using this morning.

If you'll please go to slide two, 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 security laws. Please see our SEC filings for a description of some of those factors that may cause actual results to vary materially from anticipated.

This release also includes non-GAAP measures, which are explained in the financial tables attached to our news release.

Now I'd like to go ahead and introduce the participation in this morning's call. Mike Lamach, Chairman and CEO; Steve Shawley, Senior Vice President and CFO; and Joe Fimbianti, Director of Investor Relations. With that, please go to slide three, and I'll turn it over to Mike.

Thanks, Janet. Good morning, and thank you for joining us on today's call.

Earnings per share from continuing operations for the third quarter were $1.07. That's $0.09 better than the midpoint of our guidance range from July. About half the beat came from operations and the remainder was from other income. Versus our prior guidance, revenues were slightly below the low end of our revenue guidance range.

We were pleased with our ability to navigate a challenging market environment and to deliver above our earnings commitment with solid operational execution in all the businesses. Margin increased 110 basis points, despite a slight year-over-year decline in revenues on a reported basis. Versus last year's third quarter, operating margins were up in each of the sectors.

Markets were somewhat softer, [below] our outlook, particularly in China, which continues to show slower than expected growth. We also saw a swelling in international industrial markets.

Foreign exchange negatively impacted revenues by 2%. Revenues excluding foreign exchange were up 1%. Excluding FX, we saw a moderate growth in revenues in Industrial and single-digit declines in Climate and Security. Residential revenues were up 11% year over year.

Excluding Hussman, orders were down 1%, but up 2% excluding currency. Operating margin for the quarter was 12.5%, up 110 basis points versus prior year. Margins improved for pricing and productivity, partially offset by unfavorable mix, currency, and investment spending year over year.

Steve will give you more details in a few minutes, but to highlight a few areas, Residential delivered 430 basis points of margin improvement and gained share in the quarter. Industrial improved margins 140 basis points on 1% revenue growth. Climate increased margins 100 basis points on a comparable basis in the face of a challenging mix between Trane and Thermo King. And finally, Security delivered 20 basis points of margin improvement, despite continuing soft markets.

All the businesses continue to realize positive pricing, and in the third quarter our price realization outpaced direct material inflation for the sixth consecutive quarter. Our focus on operational excellence and innovation delivered excellent results in the quarter and enabled us to effectively navigate global market conditions. I'm very encouraged by our execution performance in the face of generally slowing market conditions, which we expect to continue to present challenges in the last quarter of the year.

Now Steve will take you through the quarterly results in more detail.

Thanks, Mike. Please go to slide number four.

Orders for the third quarter of 2012 were down 1% overall and up 2% excluding currency. Global commercial HVAC bookings were up slightly. Transport orders were flat with a double-digit increase in North America offset by soft European truck and trailer orders and lower marine demand. Industrial orders, excluding currency, were up 2% with order growth in the Americas and Club Car partially offset by weakness in Europe. Residential bookings were down 1%. Commercial security orders in the quarter were down 3%, excluding currency, mainly impacted by the timing of large project orders in Asia, as well as slower activity in Europe.

Please go to slide five. Here's a look at the revenue trends by segment and region. Note that the Climate information on this slide excludes Hussman from the comparisons.

The top half of the chart shows the third-quarter revenue change for each sector. For the total Company, third-quarter revenues, excluding Hussman, were down 1% on a reported basis versus last year and were up 1%, excluding currency.

Focusing on organic revenues, which exclude the impact of foreign exchange, Climate revenues decreased 1% and offset -- with an increase in North American transport revenues more than offset by declines in Europe and Asian transport revenues. Global HVAC revenues were flat, excluding currency. Industrial had moderating growth at 4%. Residential was up 11% and commercial security revenues were down 4%. I'll give you more color on each sector in a few slides.

As you can see on the bottom of the chart, on a geographic basis, organic revenues were up 4% in the Americas, while Europe and Asia were both down in the quarter mid-single digits, excluding currency.

Please go to slide number six. This chart walks through the change in operating margin from third-quarter 2011 of 11.4% to third-quarter 2012, which was 12.5%. This [native] excludes Hussman for comparison purposes.

Volume, negative mix, and foreign exchange collectively created a 120 basis-point headwind to margins. Our pricing programs continued to outpace material inflation, adding 150 basis points to margin. Productivity, offset by other inflation, was 110 basis points accretive to margins. Year over year, investments and other items were higher by 30 basis points.

In the gray box at the top of the page, you will see that the revenue by region was excellent in the quarter, with operating income increasing despite a decline in revenues. As the box in the middle of the page details, we saw margin improvement at every sector, even with revenue declines in Climate and Security.

Please go to slide number seven. The Climate Solutions segment includes Trane commercial HVAC and Thermo King transport refrigeration. Total revenues for the third quarter were $1.9 billion. Excluding Hussman, that is down 3% as reported and down 1% excluding foreign exchange.

Global commercial HVAC orders were up 1% as reported and 2% excluding FX. Orders were down slightly in the Americas and up low teens in Europe, but were down in Asia. Trane's commercial HVAC third-quarter revenues were down 2% and flat when excluding currency. HVAC revenues in North America and Latin America were down slightly on a reported basis and up slightly excluding foreign exchange. Revenues in Europe and the Middle East were down mid-teens on a reported basis and down low teens went excluding currency. Revenues in Asia were up slightly.

Commercial HVAC equipment revenues were down mid-single digits. HVAC parts, services, and solutions revenues were up mid-single digits versus prior year.

Thermo King orders were flat versus last year's third quarter. Revenues were also down high single digits -- down low single digits when excluding currency. Worldwide refrigerated truck and trailer revenues were down low single digits with an increase in North America more than offset by declining volume and currency in Europe. The marine container business was down significantly versus last year.

The operating margin for Climate Solutions was 12.7% in the quarter, a 100 basis-point improvement versus third-quarter 2011, excluding Hussman. Pricing and productivity more than offset inflation and higher spending on investment initiatives.

Please go to slide number eight. Industrial Technologies' third-quarter revenues were $702 million, up 1% on a reported basis and up 4% excluding FX. Air and productivity revenues were down slightly versus last year on a reported basis and were up mid-single digits excluding currency.

Revenue in the US was up high single digits. International revenues were down mid-single digits on a reported basis and flat excluding currency. Air and productivity orders were down mid-single digits on a reported basis and flat excluding currency. Club Car revenues in the quarter were up mid-single digits and orders were up low teens versus prior year.

Industrial operating margin of 15.2% was up 140 basis points compared with last year as higher revenues, pricing, and productivity were offset by inflation and higher investment spending.

Please go to slide number nine. In the Residential business, third-quarter revenues of $559 million were up 11% compared with last year on both a reported basis and excluding foreign exchange. Our Residential HVAC revenues were up low teens versus last year. Our HVAC unit shipments in the third quarter were up mid-teens, while market unit shipments were up mid-single digits. AHRI industry data show that market unit shipments in September were down nearly 10% versus last year.

For the first nine months of 2012, the 13/14 SEER segment of the market was higher than prior year as mix continues to shift to the low end of the efficiency range. This further validates our strategy to add products to address the lower SEER range more effectively. With the new products introduced in the past year, our market share in the 13/14 SEER range has now recovered back to our share from 2010.

We continue to see the market mix move towards 410a systems. Although R-22 units remain a significant portion of the unitary market, we now believe the R-22 market unit shipments will be down about 20% for the year.

Revenues for the residential security portion of the sector were up low teens with increases in the new builder channel, big box, and South American customer volumes. Sector operating margin of 8.1% was up 430 basis points compared with 2011 as pricing and productivity more than offset inflation and adverse mix.

Please go to slide number 10. Revenues for Security Technologies were $391 million, down 7% on a reported basis and down 4% excluding currency. Americas revenues were down low single digits. Overseas revenues were down mid-single digits, excluding currency.

Global bookings were down 6%, 3% excluding FX, impacted by slow activity in the US and Europe and the timing of large projects in Asia. Operating margin for the quarter was 21.5%, up 20 basis points from last year as productivity and price realization offset unfavorable revenue mix, higher investment spending, and inflation.

Please go to slide number 11. We continue to maintain our focus on working capital. We finished the third quarter with working capital at 3.9% of revenues, similar to our levels in the third quarter of 2011.

Slide number 12, please. We resumed our share repurchase in June. We repurchased 7.6 million shares in the third quarter and have purchased 10.8 million shares year to date through yesterday. We still expect to spend approximately $840 million on share repurchases this year.

With that, I will turn it back to Mike to take you through the forecast.

Okay. Thanks, Steve. Please go to slide 13.

Our revenue outlook for 2012 is $13.95 billion to $14.05 billion, about $100 million lower at the midpoint versus our prior guidance, due to softer markets in Asia and Europe, partially offset by a somewhat stronger euro.

Asia, specifically China, has been softer than our prior forecast. Although we still expect Asia to be up for the year, we have trimmed our revenue growth expectations for the region by about five percentage points from the mid-single to low single digits. We believe China bottomed in Q3, but given current customer request dates for many of our products there, namely large chillers and air compressors, we won't see a rebound in revenues until next year.

Revenues in Europe were somewhat below our expectations, including some favorability from currency. We continue to see good growth from the Middle East and eastern Europe, which has been helping to offset the softness in western Europe. Overall, we still expect revenues from Europe, the Middle East, and Africa taken together to be down in the low teens for the year, including currency impact.

Activity in the US continues at moderate growth rates in commercial HVAC and industrial. Refrigerated transport markets are expected to have moderate year-over-year growth in North America and to decline in western Europe.

We see continuing moderate uneven growth in residential markets. We have seen some positive movement in replacement systems. For commercial security, we expect to see a continuation of challenging conditions in the US nonresidential and new construction market for next year, particularly in our key institutional markets.

Although the euro has strengthened since our July forecast, foreign exchange will continue to be a headwind in 2012, adversely impacting our revenue growth by about two points.

In total, we expect the annual revenue to be flat to up 1%, compared with 2011 revenues of $14 billion, excluding Hussmann. Excluding foreign exchange, the expected organic growth rate is 2% to 3%.

Please go to slide 14. We are narrowing our guidance for full-year EPS from continuing operations to a range of $3.17 to $3.23 per share. It's unchanged at the midpoint from our July guidance. Our forecast for the average share count for the year is also unchanged at 311 million shares, and the full-year tax rate forecast remains at 19%. We expect to generate available cash flow of about $1 billion.

Fourth-quarter revenues are forecast to be $3.4 billion to $3.5 billion. Revenues on a comparable basis, excluding Hussmann, are forecasted to be down 2% to up 1% versus the fourth quarter of last year. That includes FX, which will be a headwind of about one point. That means including foreign exchange, revenues will be down 1% to up 2%.

Fourth-quarter earnings per share are forecast to be $0.64 to $0.70. We are assuming a share count of 306 million shares and a tax rate of 29%, both of which are the same as we guided in July for the fourth quarter.

Please go to slide 15. We are pleased to deliver a solid third quarter. We had strong overall operational leverage and margin gains in all sectors. For the balance of 2012, we see mixed demand patterns with slowing growth in North America, declining markets in Europe, and slow growth in Asia.

Currency translation, adverse revenue mix, and incremental investments will continue to impact our fourth-quarter results. However, this will be more than compensated for by the ongoing benefits from price realization, productivity, and lower inflation.

We are focused on continued change and improvement to ensure that we are managing our business optimally across the spectrum of economic conditions. Our focus is on positioning our Company to continue to grow earnings and cash flow with very little help or possibly no help from markets.

We continue to feel good about our Company and our progress. We have a portfolio of outstanding market-leading brands. The longer-term attractiveness of the end markets in which we operate and our competitive positioning will allow us to benefit as those sectors of the economy improve.

Our management team is committed and is actively managing the Company to generate sustainable, profitable growth. We have continued to invest in innovation and to introduce new products across the enterprise. For example, in August Thermo King launched the Precedent platform to address new Tier 4 regulations for engine emissions. Precedent, which is available across a range of options to suit specific customer needs, sets a new industry standard in both fuel efficiency and emissions control by delivering double-digit fuel savings, best-in-class performance, and lower lifecycle costs. Initial customer reactions have been very favorable.

And overall, we are on track this year to achieve our goal of delivering 25% of revenue from products introduced in the past three years.

Our operating philosophy has been to not wait for a macroeconomic lift to improve our businesses. We have proactively worked to reduce costs and improve productivity while still making prudent investments for the future. At the start of the year, we expected flat to slow growth in our markets and we built our plans for that environment. That's proven to be the correct call for this year, enabling us to deliver double-digit EPS growth with essentially flat revenue.

I'm proud of the focus our team has maintained and the results we have delivered, even in the midst of choppy markets and uncertain macroeconomic currents. Now Steve and I will be happy to take your questions.

(Operator Instructions). Nigel Coe, Morgan Stanley.

Thanks a lot. Good morning. Just, Mike, you made an interesting comment that you're confident that China bottomed last quarter, in 3Q. What gives you that confidence?

Yes, Nigel, we actually saw a progression from Q1, Q2, and Q3 in bookings, high negative kind of teen bookings in Q1, negative mid-teens Q2, slight low digit, almost flat in Q3, and then just sort of orders in hand in Q4 would give us a sense of fourth-quarter bookings in total being up for the year. So we feel pretty good about that.

Now if you go beyond China, Asia has actually been fairly healthy as well. So we are about equally divided between China and Asia. So in general, I think we are rounding the corner in China.

That's great color. And then, if we could just switch to margins, obviously another great quarter year over year. Price inflation was a big factor. How does price inflation look as we go from 3Q into 4Q and perhaps into 2013, and could you maybe comment on pricing by segments?

Yes, inflation moderates Q3 to Q4 sequentially. Price moderates from Q3 to Q4 sequentially. We think this will be the seventh quarter in a row that we'll still see a positive spread between the two.

Okay. And then, just finally, Thermo King, the flat bookings surprised me a little bit. Obviously revenues were down the high single digits, but how does that business look as we go into 4Q?

Nigel, one of the reasons why bookings were pretty flat is that, I mentioned in my remarks, that the marine business is down significantly.

So if you take marine, which shows up in our European pile, it's down quite a bit from prior year. So the -- and when I say quite a bit, it's double digits plus type of a number.

So if you look at truck and trailer bookings in Q3, the Americas were actually up double digits. We're still seeing some pressure on bookings in truck trailer in Europe. But quite frankly, the bookings in truck trailer Europe, they're not down as far as we kind of expected.

So what you've got here is we are continuing to hold our own in what I'll call the core of our business within TK, the truck and trailer, globally. But the marine container piece is having a big impact on it.

But in your plan, do you have Thermo King down mid to high single digits in 4Q?

Well, the outlook for TK for the full year is flat, slight down in total, so North America would be up mid-single digits; Europe, excluding marine, down mid-teens; and marine down over 20%. So I think the math works out, Nigel, for it.

Okay. That's helpful. Thanks.

Mike Wherley, Janney Capital Markets.

Just looking at the Climate, you said that the orders in Europe were up in the low teens in the HVAC part of that business. I was wondering if you could talk about that strength and where it might be coming from, geographically.

Yes, it's in the applied business, and we're seeing really strong bookings throughout the year and in fourth quarter in the Middle East. That continues to bode well.

A combination of new product introductions, I think, are helping to support that. And we are seeing actually a little bit better performance in southern Europe than we would have thought coming into the year. So actually, the weakest part relative to our own forecast would have been northern Europe, particularly Germany. But the Middle East and India are really strengths for us.

And then on the Residential business, I was just wondering if you're getting a sense from the builder market or the big boxes. Is this pretty controlled demand or do you think that there might be some inventory sort of stocking up going on?

Well, I think from a retail perspective at the big box, you'll see the typical fourth-quarter destocking that goes on. So I think just in terms of their patterns for the last seven, eight years that I've been involved, you'll see some destocking there across the board.

From an HVAC perspective, I think inventories are largely in check with where they should be. So I don't particularly see any anomaly happening between inventory levels in the season there.

Okay. And then, just following up on residential, when you're looking at those 13 SEER and 14 SEER products, do you have any sense as to whether or not, now that you have them back into the market, whether or not you can continue to gain share in that part of the market in 2013?

We feel good about it. If you look in the course, really, of just this season, we've been able to not just get 2011 back, but really kind of gain on 2010.

And I think that as next year, we come into the season and we continue to sharpen our cost position on those entry-level products and our distribution system across those products, I feel pretty good about our odds. We're still -- if you think about sort of the Trane brand in terms of brand recognition, it's just roughly twice our share, and I think that's really the entitlement going forward for us is to continually eat into that entitlement in the years ahead. So I feel good about what we've done and I feel good about actually next year. I wish it was summer at this point.

All right. Thanks a lot.

Thank you.

Jeff Sprague, Vertical Resources (sic).

Thank you. Good morning. It's Jeff Sprague.

Jeff, (multiple speakers) we knew who you were.

I almost wasn't sure if that was me, you know. Thank you. Good morning. Could you just provide a little bit of color, Mike, on what you're seeing kind of in any energy retrofit markets? We've heard from someone today they're actually seeing some slippage going on there in the commercial side. Are you seeing that at all and just a general kind of retrofit versus new activity in commercial?

Well, specifically, Jeff, in performance contracting, we had some larger bookings in Q3 there, which always lends itself toward larger applied sales.

And again, if you look at even a shift between unitary and applied, Q3 and Q4, you are seeing that -- what we are seeing the unitary down sort of mid-single digits, applied is up mid-single digits. So all that is really getting more toward large retrofits that are driven by energy savings, energy efficiency. So we're actually, I would say, seeing more of a shift toward energy efficiency.

And if you look at sort of the customer base, whether it's institutional or it's commercial or manufacturing customers that buy applied cooling products from us, or, for that matter, applied air compressor products from us, they are looking at the same sort of markets that we are, which are largely flat markets. And for a lot of these units that are coming out, particularly the newer units we're putting out in the marketplace, you're seeing two-, three-year paybacks. And that's sort of a sweet spot.

So I would probably differ from the view you heard and say that we are seeing probably more of a shift there.

It's also true that we shifted resources, you know, feet in the street, really, from looking at some of the, I would say, sort of the plan and spec market over to the retrofit market toward energy conservation. So you've also got more feet in the street for us, pursuing owner direct negotiations that are energy efficiency motivated. So that could be part of it. It's just the focus that we've had on trying to find some growth in pockets where we think growth can be had, which isn't in the plan and spec institutional construction market.

And then, additionally, different topic. Very early days, but do you see or expect to see any kind of behavior change in the channel, kind of with the Goodman-Daikin deal, and just any high-level thoughts on the competitive landscape?

You know, we've been living with Daikin McQuay for a while now, so we've seen that on the commercial side. And on the residential side, it's just way too soon to have seen anything or to comment on it. So nothing to this point.

Great. Thank you very much.

Jeff Hammond, KeyBanc Capital.

Just on -- I was a little surprised by the industrial resiliency, given what we're hearing from some other just kind of industrial manufacturing companies. Can you just talk about the trend through the quarter, what you saw into September, and where there is maybe more resiliency versus weakening?

Jeff, probably the starting point would be to say that the new product launches that we've had the last couple of years there continue to bear fruit.

We've got an excellent oilfree product out in the marketplace, gaining share. We've gone through systematically and have gone through all but a couple of the larger-frame centrifugal machines that are out there. Lead times have continued to be cut in half through the lean work going on inside the company. I've used as an example on a couple previous quarterly calls where it's an example where the lean work starts with working capital improvement, it goes into margin improvement, it goes into share gain, and I think all that really is coming to bear.

The other thing is that the largest investment that we've made this year in that business has been really a move toward the server side of the house and in putting in place incremental resources to move toward, similar to the HVAC story, a service retrofit based on efficiencies there. And so, that's been successful to date as just growing the service business at a higher rate than the equipment business, actually in both HVAC and in the air side of the business.

Okay. So you think the resiliency is more a function of maybe share gains and what you are doing?

I'd say share gain and shift to sort of the service businesses and shift to the markets that are growing, frankly. Shift to focusing on the pockets of growth for us.

Okay. And then on buyback, you said you're going to wrap up your buyback program by the end of the year. How should we think about buyback going forward beyond that and just capital allocation focus going forward?

We intend to talk to the Board in December and really lay that out for you for 2013, Jeff. But as we said last time, we intend to go back and take a meaningful step in the dividend and to go back and re-authorize share repurchase going forward, so we'll be able to size that up for you in December.

Okay. Great. Thanks.

Deane Dray, Citi.

Thank you. Good morning, everyone. Just over on the residential HVAC side, any updates on the rollout of the Ameristar brand?

It was a success. You know, the season is largely over, if you think about it from a cooling standpoint, moving into the heating season here. I think we are in great shape, really, with regard to the furnace platform and work we've been doing there to get all price points, including the highest-efficiency 95% efficiency furnaces ready for the market.

So it was a success, and I think we'll build on it, Deane, next year. We'll expand capacity there and expand distribution and continue to make sure that we've got an effective product at that point in the product range.

And then, with respect to the differences we're seeing in the applied versus unitary, my experience has been that on the unitary side that you tend to see a bit more price competition. On the applied, these are bigger systems, more engineering content, and you often get a bit more pricing power. Is that playing out now?

Yes, generally, Deane, I'd say it even splits a little finer than that. Applied, yes, and unitary, I was just talking about larger unitary, so particularly at 25 tons and maybe even 50 tons and larger, it starts to really almost look like an engineered system itself with controls packages that go along with that.

So I think, with that regard, it's much more of an applied sale than it would be for the smaller unitary, up through 25 tons, maybe up through 50 tons. And what you saw in the first couple quarters of the year was that light unitary and smaller unitary markets were really growing. There was a bit of a commercial surge with commercial office buildings at that point in time, and of course we participated in that with a very high share.

That color is helpful. And then on -- I might have missed this, but I know you called out some help from the other income line. Sometimes you have hedging in there. Is there anything that you would call out?

Nothing abnormal, Deane. It was a one-time issue relative to an old legal suit, legal claim.

Great. Thank you.

Steven Winoker, Sanford Bernstein.

Great, thanks, and good morning. Mike, maybe you could start off a little bit on the productivity side and cost reduction in terms of how that is playing along. I mean, obviously, we can see the good results, but how is it playing along against the implementation plan that you've got, particularly with timing and rollout across the portfolio? And are you looking in -- are you seeing additional cost-reduction opportunities that are increasing, rather than decelerating in the portfolio, particularly as you look out against headwinds in 2013?

Steve, yes, to answer that, we have to look at all the levers we have to pull there because we manage them really independently.

And if you think about the lean work going on, we are on track there with what we've set out to do with a number of value streams. More importantly, since those value streams are widening, we are looking at this more as a percentage of the costs under transformation, particularly the conversion costs of labor and overhead. So that continues as planned, and we are still seeing the nice separation between results, but now over a little bit bigger base than we had last year.

We're also applying it to the SG&A side of the business, a project we internally refer to as Agile, where we are redefining the SG&A structure -- really, the G&A structure of the Company, and we've been working through that as well. That had productivity for us in Q3, and I think we're still in the early innings there. I think that that still is a 2013 major opportunity for us. It really begins to be an opportunity in 2014 and 2015 as the systems in the implementation takes hold.

We're generating net productivity on the G&A side in spite of the fact that we're investing heavily in the systems component there, so that's a good story going forward.

The sourcing team has been in place now for a few quarters. That's gaining traction. We've gotten material productivity, which was greater than last year's material productivity, and we've invested in supplier quality and supplier development resources coming into the organization, just a whole new talent base around that. That's largely a 2013 and 2014 opportunity around cost to [pour] quality for us, which is an area we haven't really attacked to the same degree as we have in other areas of the business. So that, I think, is a positive for us as well. Steve (multiple speakers)

Okay.

No, I would just reiterate the comment about SG&A. I think the opportunity we have in 2013 is to really focus there, pull up the targets we have for reducing the G&A piece of our cost structure (multiple speakers)

Yes, Steve, I would say the restructuring that we've have done is the last piece. We've done a lot of that. We've got a little bit more to do there, but that has played well.

I'll give you an example. For Trane commercial North America, they were able this past year, year to date and forecast, to achieve 45% operating leverage in the business. And we've got a little bit of volume coming into the unitary and applied business there. Again, it's really what's been a very effectively restructured cost base and an integrated cost base in several factories, now that we've merged with industrial. So this is very positive for us in terms of just what we're seeing with volume and leverage in the Trane commercial business.

So I would tell you that I'm still very optimistic about it. It's been a long haul. We've had to add a tremendous amount of resources and talent into the Company. And when it all works, like it has in Quarter 2 and Quarter 3, we get the numbers that we are entitled to get.

Great. And quick question. Could you call out compressor bookings specifically because I might have missed those? Industrial.

When you say compressor, you're talking about air compressor bookings?

Yes. Yes.

Yes, if you look at North America, we've got to blend it with service here. My guess would be it's relatively flat, okay, and you're seeing exactly what you think you'd see in Asia-Pacific, which is more or less a down for us there. Europe, about as expected, a little bit less than expected.

Okay. And then, just a different topic, but I know you mentioned obviously the Board is going through all of the review now and we'll hear about that in December, as you mentioned. But as you look at the industry, and I've just been -- as you look at the broader industry, do you believe that in general that there is still room for additional consolidation in HVAC? And obviously, the Daikin move with Goodman was sort of continuing to get people thinking about that, but just broadly speaking.

On the res side, I think there probably is. On the commercial side, you're really dealing now with two or three major players that have got large shares in the marketplace, so it's more difficult there.

Our chiller shares are up 40%, as an example. And if you go to number two, it's probably 30%. Number three is probably 20%. So there's not a lot there to be sweating. If you see consolidation there, it's going to be fairly small players.

Frankly, I would say the competitive base doesn't need distribution on the commercial side, generally speaking. So anything you can see there would be a small distribution network, perhaps. But on res, yes, there's a lot of fragmentation of small suppliers out there where it would have to be really a cost play. It really wouldn't be a distribution play. It would be a cost play.

And when you say res, do you include light commercial, like rooftops, in there?

Well, the danger there is because that goes through, in our case, multiple channels, and so it's really effective for us because we manufacture all the light commercial in our commercial factories.

And we actually have equal share between our res channel and our commercial channel, which is we double up on that and we get something north of 30% share in light commercial because of that. So there are some anomalies there when you think about the channels to market, which you really are able to manage those two channels with not a high degree of tension and overlap in the marketplace. I would say a fair amount of it, but appropriate channel tension. So you have to be careful that you consider that as well.

I'm just separating RLC versus applied. That's all.

Yes, and I'm saying, yes, you probably could see some more of that, but it really runs through the same channel that you sell applied, for half of the share.

Right. Got it. Okay. Thanks, guys.

Josh Pokrzywinski, MTM Partners.

[Particularly] dig in a little bit more on residential. I understand that given the order cycle there, maybe the orders that you called out in the slide deck, might not be the best way to look at it. So if you could just give us a sense, early read on the furnace season, what are you guys seeing? Obviously, it's an easy comp last year with some of the warmer weather.

And then, maybe a sense around the profitability of residential into this year. Or I'm sorry, into the fourth quarter. So do you expect resi to make money this year? Just some detail around that into the fourth quarter.

Yes, Josh, we're still holding to we'll see a couple hundred points of margin expansion in the res business this year. So that kind of folds just the way it did before.

And you are correct on the bookings. That's probably the one bookings number I don't pay a lot of attention to because it fundamentally comes down to -- you know, it's sort of like a week's worth of the bookings versus a week's worth of bookings the prior quarter, and so you don't really get a sense for anything there, particularly with cycle times being much, much shorter than they were.

Generally when we think about the full year in the res HVAC business for the industry, it's probably going to be relatively flat. That's what the industry data really shows, and we're thinking we're going to be up kind of mid-single digits, of course based on the share gains that we talked about.

Now going into the fourth quarter, we would have a similar view there. In fact, you've seen almost every month of every quarter working a pretty severe sawtooth. A great example was third quarter. You saw a great July, a ho-hum August, and a pretty poor September for the industry, and that's been the pattern we've seen all year long.

I would think the pattern would persist going into the heating season. The difference we've -- the thinking we've put into the heating season here is we've taken on more inventory, more component inventory than we normally would and what would be considered sort of beyond our forecast that we're giving you. So in the event there was an anomaly, whether it would weather-related or other, we'll have the capability of building to that demand forecast, for sure, but we're really not just banking on it, based on what we've seen year to date.

Got you. And I guess just the way the math works out, that implies, at least for the margin in the fourth quarter, kind of something maybe just shy of mid-single digits as well. Is that a fair way to think about it?

Yes.

Okay. And then, just to understand the fourth-quarter guidance, you guys guided down about $50 million versus the last few and taken out about $40 million of EBIT. And it sounds like price cost is relatively neutral. Is there anything going on at the corporate line or any other kind of one-timers or mix issues that we should be thinking about that maybe help to explain that sequential drop?

Yes, actually, Josh, it's really taken out $92 million at the midpoint of volume. And we are taking it out of the most profitable business we have, which is actually Asia and China for both the air and the climate business. It's our most profitable businesses.

We're also taking it out of the TK business in Europe, again which is a very profitable business for us. So it's really masked that we've got the FX going one way, kind of a $50 million-plus pickup on FX, volume coming down $92 million at the midpoint, but at very high margin sort of with those businesses coming down.

High margins, and also the capacity costs associated with it.

Got you. And it sounds like those are the precise areas where, at least on a near-term order basis, you guys are feeling a little bit better. But maybe more of a 2013 term to see it in shipments.

Yes.

Okay. Appreciate the time, guys. Thank you.

Andrew Obin, Bank of America.

Just a short question on guidance, just to make sure that I read it correctly. It seems like you have reduced outlook for the year by $50 million in terms of revenue. And if we apply sort of a reasonable decremental margin to that, we would have gotten EPS hit maybe like $0.05 and instead it looks like closer to $0.10. A, am I calculating it correctly, and B, what's driving the substantial earnings hit relative to the guidance -- topline hit? Thank you.

It was -- kind of the answer was in those previous questions. There are really two parts to the revenue change in Q4. One is a little over $90 million associated with volume that we're taking out in China, Europe at pretty high margins, and also the capacity costs associated with that.

But coming back the other way, there's a favorable change associated with foreign exchange because the euro primarily has kind of recovered here recently. So that's adding $50 million of revenue back with very, very little OI. So the leverage on the reduction in guidance looks pretty high as a result of that.

Yes, Andrew, if you just think about it on an EPS basis, add $0.04 back for FX and drop something like $0.13 on the volume mix that we're talking about, and you get the $0.09 differential.

That makes sense. And on free cash flow, is it all related to -- your sort of $100 million hit there, is that just sort of net income reduction or what else is going on there?

Well, there are two components there, frankly. One is just FX and the second is there's been several businesses where we've just decided and we've made the decision to take on incremental inventory here in the fourth quarter.

An example I used was the res business around the furnace season, again just to make sure that we've got what we need. Even around coil production coming into the early part of next year, we'll do some coil production even in the fourth quarter related to next year's season, okay, just to smooth and linearize capacity that we have available to us, which we think is a better way to do that into next year.

And also in the TK business, you've got the changeover happening, and so it's a good time for us, at least, to have just an excess diesel engines on hand. And you put that all together, the $100 million was mostly designed, FX being the other part of it.

And to kind of clarify a little bit (multiple speakers) on the TK comment, Andy, the [ack] folks have reduced their estimate of the number of trailer units in the market, again, here recently, and it was mainly because they took out the assumption that there was going to be a pre-buy of refrigerated units because of this changeover to the Tier 4 classification.

So it's shifting a little bit of the demand into 2013 that we would've expected to see in the fourth quarter of 2012, but that's why we picked up a little bit of inventory there.

And now that Trion is -- I don't know if you can share anything there, but have you thought about changing the pace of restructuring, how do you allocate R&D, marketing expense? How much strategic discussion have you had with Trion and the Board, given their involvement, about how you're going to run the business just very broadly over the next 12 to 24 months, if you can share anything?

Yes, Andy, we've had, I would say, a very aggressive capability building program in place for 2.5 years in terms of what we've done with bringing the talent into the Company and developing talent from within the Company to really do what we're doing.

So transformations to become a top-performing, diversified industrial don't happen overnight, clearly. And we've been at it for 2.5 years. Most that get into the business would argue that there is a lot of change going on, and frankly, how do you guys manage all the change going on inside the business between systems implementation, organizational changes, implementation to lean across the Company, while maintaining a very high level investment in innovation around the product portfolio.

So I feel good about the pace of change. I feel good about the fact that year over year over year, we've had margin expansion with relatively, in this case, flat markets. And we've been able to really consume -- so the restructuring is embedded in what we're giving you. So this is not some sort of a serial restructuring story here. This is embedded in what we're doing and embedded in the margin. So we feel good about that.

Now with regard to Nelson being on the Board, Nelson's on the Board now and Nelson is part of the discussions around the Company, and so there is no update as to where we are, other than to say that the release we had in August was heading toward sort of a December information with regard to what decisions we would make around the Company. And those are progressing on plan and on track. No new news there.

Thank you very much.

Julian Mitchell, Credit Suisse.

Hi. Thanks. My first question is just on the investment spend. I think you'd said before that the investment and other line in terms of the year-on-year margin effect for the full year this year would be about 100 bps, I guess, headwind for 2012. I just wanted to check that is still the case.

And also, when you're looking a bit further out, does that headwind start to shrink as you move into next year? Because it sounds like the new product introductions, particularly in Climate, Industrial Tech, and Residential, a lot of that work has been done. So you are kind of investing, but the big kind of catch-up ramp up is largely finishing.

Yes, I'll take the first part, Julian. The expenditures on the initiatives that we've been talking about -- and those are new product developments, those are common systems, those are things like centralizing our procurement organization -- are continuing, and we hit that right on the head here in Q3. We said about spent $25 million of incremental spend a quarter. It was exactly $25 million in Q3 and I am counting on another exactly $25 million in Q4.

So the $100 million of headwinds associated with investment initiatives is still there. So maybe, Mike, you can take the second half.

Yes, Julian, on the 2013 view, we are in the process of putting our plans together. Similar to last year, we will do some scenario planning around different possibilities for the major lines of business and regions, and so I don't know the answer to that question at this point in time.

I can tell you that we'll continue to invest in the applied HVAC portfolio, so most of what we've been doing has been in the unitary HVAC portfolio for commercial will go to the applied side. And then, on the industrial side, we'll continue to invest there, but probably be able to hold that relatively flat going into next year.

But we'll have to come back and talk to you about that here in another quarter and give you a full update on that at this point in time.

I mean, I think what we're doing is working within that we can launch at higher margins. It's contributing through the margin growth inside the Company. We've gained share wherever we've done that, so the formula seems to work for us. And maybe a little bit to Andrew's question as well as what you're asking, just really steady margin expansion over time, doing it in a sustainable way with product development and implementation to lean across the Company.

If there are faster ways to do that, I wouldn't want to do that through cutting investments or to do something silly with regard to not really putting that permanent operational capability into the Company. That would just be a long-term mistake for us.

Sure. And then, on the Security business, it never seems to get many questions. But the -- you're obviously in this kind of transition of trying to move away from excessive reliance on mechanical, more towards electronics access. And so, I just wondered if you think that requires acquisitions to do that or you feel that internal R&D is sufficient. Because I guess the rhetoric around M&A has been watered down a lot over the course of this year.

Well, I mean, I think you have got to hold the acquisition story up to the mirror of share repurchase, and I think the acid test is share repurchase, and right now we just haven't found a better investment than our own Company.

You still see fairly pricey, very pricey electronics security sort of targets out there, and that's not in the cards for us.

Now, organically, again this gets back into the investment question, a large part -- I would say all of the investment going on in security has been around electronic security platforms, and they've got a very good capability sitting in that organization around the ability to develop product in that area. So I don't feel like we're compelled to do that. And we certainly wouldn't be compelled to do that, favoring that over purchasing our own shares here at the multiples we are seeing for some of these opportunities.

Great. Thank you.

Jamie Sullivan, RBC Capital Markets.

Thanks. Good morning. Just wondering on the restructuring spending side, if you have a figure for the quarter and what you expect going into the fourth?

We talked about restructuring last call. We have restructuring front-end loaded, so we would have spent somewhere in the neighborhood of $40 million in the first half of the year, and that ramps down to about $10 million in the second half of the year. So there is a -- and that's helping also -- remember the conversation in the last couple of quarters. We are seeing the productivity show up in the second half associated with those spendings that went on in the first half. So we are kind of right on cue there with that program.

We spent about $20 million more in restructuring in 2012 than 2011, Jamie, so it's been a pretty steady-state restructuring program for the last three, 3.5 years.

Okay. And probably kind of a similar focus on that as you go into next year, is that the way we should think about it?

For now, you know, for now, yes. We'll come back and give you definitive guidance in the quarter. But for now, I think it's a good assumption.

Great. And then, just one last one. On the industrial side, you talked about focus on the aftermarket side of the business. What's the mix of equipment versus service today? And also, maybe if you could touch on how the order patterns trended in the quarter and if there are any surprises on that front?

About 40% today, Jamie. I think we will move that over the next few years to something closer to 50%. That's our design in that business.

And there, we are looking at order rates for services that really kind of get into the mid-double digits, even at times higher -- I'm sorry, mid-single digits, even high single digits order rates for service. So we like the contribution margin of service. We like the growth rates, and obviously we are trying to move the mix up closer to 50% in the industrial businesses.

Thank you.

I would like to turn the conference back to Ms. Janet Pfeffer for closing remarks.

Thank you, Mary, and thank you, everyone. Joe and I will be around today if you have any follow-up questions. Have a good day.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect at this time.