Trane Technologies plc

Thank you, Mary. Good morning, everyone.

Welcome to Ingersoll-Rand's third quarter 2012 conference call. We released the earnings this morning at 7:00 a.m., and the release is posted on our website.

We will 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 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 securities law.

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.

Mike Lamach, Chairman and CEO; Steve Shawley, Senior Vice President and CFO; and Joe Fimbianti, Director of Investor Relations.

With that, I'll -- please go to Slide 3, 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 of 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 of revenues on a reported basis.

Versus last year's third quarter, operating margins were up in each of the sectors.

Markets were somewhat softer, somewhat below our outlook, particularly in China, which continues to show slower-than-expected growth. We also saw a slowing 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 from pricing and productivity, partially offset by unfavorable mix, currency and investment spending year-over-year.

Steve will give you more structured 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 #4.

Orders for the third quarter 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 in 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 5. Here's a look at the revenue trends by segment and region.

Note that the Climate information on the 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 of 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 #6. 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 data 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 leverage 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 #7. 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 when 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 #8. 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 U.S.

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 was 15.2%. It 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 #9. 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 showed that market unit shipments in September were down nearly 10% versus last year.

For the first 9 months of 2012, the 13, 14 SEER segment of the market was higher in 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 remained 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 #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 U.S. 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 #11. We continue to maintain our focus on working capital.

We finished the third quarter with working capital of 3.9% of revenues, similar to our levels of the third quarter 2011.

Slide #12, please. We resumed our share repurchase in June.

We repurchased 7.6 million shares in the third quarter and 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. And 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 forecasts.

Although we still expect Asia to be up for the year, we have trimmed our revenue growth expectations for the region by about 5 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 in 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 to low-teens for the year including currency impact. Activity in the U.S.

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 U.S. non-residential new construction market for next year, particularly in our key institutional markets.

Although the euro had strengthened since our July forecast, foreign exchange will continue to be a headwind in 2012, adversely impacting revenue growth by about 2 points.

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

Please go to Slide 14. We're narrowing our guidance for full year EPS from continuing operations to a range of $3.17 to at $3.23 per share, which was 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 Hussman, are forecasted to be down 2% to up 1% versus the fourth quarter of last year. That includes FX, which would be a headwind of about 1 point.

That means excluding foreign exchange, revenues would be down 1% to up 2%. Fourth quarter earnings per share are forecast to be $0.64 to $0.70.

We're 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're 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're focused on continued change and improvement to ensure that we're managing our business optimally across the spectrum of economic conditions. Our focus is on positioning our companies 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 life cycle cost. 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 3 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.

Since the start of the year, we expected flat to slow growth in our markets, and we built our plans to 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, 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.

Just Mike, you mentioned your confidence that China bottomed last quarter in 3Q. What gives you that confidence?

Yes, Nigel, we actually saw a progression from Q1, 2 and 3 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 sort of 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're about equally divided between China and Asia. So in general, I think we're 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 2.

Okay. And then just finally, Thermo King, the flat bookings surprised me a little bit.

Obviously, revenues were down 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, I mentioned in my remarks that the marine business is down significantly. So if you take marine, which is -- shows up in our European pile, it's down quite a bit from prior year.

So the -- when I say quite a bit, it's a 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 the truck-trailer in Europe. But quite frankly, these bookings in truck-trailer Europe are not down as far as we kind of expect.

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

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

Well, outlook for TK for the full year is flat, slightly 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.

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. So I was wondering if you could talk about that strength, where it might be coming from geographically.

Yes, it's in the applied business, and we're seeing really strong bookings in -- throughout the year and in fourth quarter, in the Middle East, that continues to bode well. The combination of new product introductions, I think, helping to support that.

And we're 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.

Okay. And then on the Residential business, I was just wondering if you're getting a sense from the builder market, or the Big Box.

Is this a 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 Big Box, you'll see the typical fourth quarter de-stocking that goes on. So I think just in terms of their patterns for the last 7, 8 years that I've been involved, we'll see some de-stocking 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 and the seasons there.

Okay. And then just following up on Residential, when you're looking at those 14 -- 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 the 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.

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 on the Commercial side.

Are you seeing that at all, and just the 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 towards larger applied sales. And again, if you look at even the shift between Unitary and Applied, Q3 and Q4, you're seeing that -- what we're seeing -- Unitary, down to the 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. 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're 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 2-, 3-year paybacks, and that's sort of a sweet spot. So I would probably differ from the view you heard and say that we're seeing probably more of a shift there.

It's also true that we shifted resources, feet on street, really from looking at some of the -- I would say the sort of the plan and spec market over to the retrofit market toward energy conservation. So you've also got more feet on street for us, pursuing owner direct negotiations that are energy efficiency motivated.

So that can 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 planned spec institutional construction market.

And then additionally, a 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?

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 there to comment on it. So nothing to this point.

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 last couple of years there continue to bear fruit. We've got an excellent oil-free 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 this 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 and it goes into share gain. And I think all that really is coming to bear.

The other thing is the largest investment that we've made this year in that business has been really a move towards the service side of the house and 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.

It's 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 it's -- the resiliency is more a function of maybe share gains and what you're 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 other 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.

Just 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 tend to go back and take a meaningful step in the dividend and to go back and reauthorize the share repurchase going forward.

So we'll be able to size that up for you in December.

Just over on the Residential HVAC side, any updates on the rollout of the Ameristar brand?

It was a success. The season is largely over if you think about it from a cooling standpoint.

Moving into the heating season here, I think we're in great shape really with regard to the furnace platform, the 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 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, and a product range.

And then with respect to the differences we're seeing in the Applied versus Unitary, my experience has been, 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, Dean, I'd say it even splits a little finer than that. Applied, yes; I mean Unitary, I was just talking about larger unitary.

So particularly on 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 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.

Great. That color is helpful.

And then on -- I might have missed this, but I know you called out some help from the other income lines, sometimes you have hedging in there. Is there anything that you would call out?

Nothing abnormal, Dean. We -- it was a one-time issue relative to an old legal suit -- legal claim.

Mike, maybe you could start off a little bit on the productivity side and cost reduction in terms of how that's 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 -- and 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, we -- to answer that, we have to look at all the levers that we have to pull there because we manage them really independently. And if you think about the lean work going on, we're on track there with what we set out to do with a number of value streams.

More importantly, since those value streams are widening, we're looking at this more as a percentage of the cost under transformation, particularly the conversion cost of labor and overhead. So that continues as planned, and we're 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're redefining the SG&A structure -- really the G&A structure of the company. And we've been working through that as well.

So 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 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 total 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 of poor quality for us, which is an area that 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.

And, Steven, I don't know…

No, I'd just reiterate the comment about SG&A. I think the opportunity we have in '13 is to really the focus there, pull off the targets we have for reducing the G&A piece of our cost structure.

Yes. Steve, I would say the restructuring that we've done is the last piece, and we've done a lot of that.

We've got a little bit more to do there but that's played well. I'll give you an example.

For Trane commercial in North America, they were able, this past year, year-to-date in forecast, to achieve 45% operating leverage in the business. And we got a little bit of volume coming into the Unitary and Applied business there against 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 am 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're entitled to get.

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

When you say compressor, are you talking about air compressor bookings?

Yes, yes.

Yes. If you look at North America, we've got it blended 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 down for us there, Europe about as expected -- little bit less than expected.

Okay. And then just a different topic, but I know you mentioned, obviously, the Board is going through all 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's still room for additional consolidation in HVAC? And obviously, the Daikin move with Goodman will sort of continue to get people thinking about that, but just broadly speaking?

Well, on the Res side, I think there probably is. On the Commercial side, you're really dealing now with 2 or 3 major players that have got large shares in the marketplace, so it's more difficult there.

Our chiller shares are roughly 40%. So as an example, and if you got a #2, it's probably 30%; #3 is probably 20%.

So there's not a lot there to be split. And if you see consolidation there, it's going to be fairly small players.

And frankly, I would say the competitive base doesn't need distribution on the commercial side, generally speaking. And so anything you'd see there would be a small distribution network perhaps.

But on Res, yes, there was a lot of fragmentation of small suppliers out there where it had to be really a cost play. It really wouldn't be a distribution play.

It'd be a cost play.

Right. And when you say Res, you include like 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. We get something north of 30% share in light commercial because of that.

So there's some anomalies there when you think about the channels to market, which you really are able to manage those 2 channels with not a high degree of tension and overlap in the marketplace. I would say a fair amount of it, but appropriate channel attention.

So you have to be careful that, that you consider that as well.

Right, I'm just separating RRC 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.

Just need to dig in here a little bit more on residential. I understand that kind of 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 you guys are seeing obviously a tough – or I'm sorry, an easy comp last year with some of the warmer weather? And then maybe a sense around the profitability of residential into this year, so -- 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, I mean 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 holds just the way it did before.

And you're 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 sort of like a week's work 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.

Going into the fourth quarter, we would have a similar view there. In fact, you've seen almost every month and every quarter, working a pretty severe sawtooth.

A great example was third quarter. You saw a great July and 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 sort of 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 any event, there was anomaly, whether it be 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're taking it out of the most profitable business we have, which is actually Asia and China for both the Air in the Climate businesses, which are 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-plus million dollar tick-up on FX, volume coming down $92 million at the midpoint, but at very high margin sort of with those businesses coming down.

High margin is 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 '13 term to see it in shipments?

Yes.

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 top line hit?

It was just -- kind of the answer was in the previous question. There's really 2 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 cost associated with that. But coming back the other way is 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 was very, very little OI. So the leverage on the reduction in guidance looks pretty high as a result of that.

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

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

Or what else is going on there?

Well, there's 2 components there. Frankly, one is just FX.

And the second is there's been several businesses where we've just decided we've made the decision to take on incremental inventory here in the fourth quarter. The 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, 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 some excess diesel engines on hand. And you put that all together, and the $100 million was mostly design, FX being the other part of it.

And to kind of clarify a little bit on the TK comment, Andy, the Ag folks reduced their estimate of the number of trailer units in the market again here recently, and that 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 '12, but that's why we picked up a little bit of inventory there.

And on -- now that Trian is -- I don't know if you can share anything there, but have you thought about changing the pace of restructuring, how you allocate R&D, marketing expense? How much strategic discussion have you had with Trian 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 even 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's 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 of Lean across the company while maintaining a very high level of 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 market.

So and we've been able to really consume sort of the restructuring that's 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's 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 here.

My first question is just on the investment spend. I think you've said before that the investment, sort of, an 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 '12.

I just wanted to check that's 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 Resi, a lot of that work has been done. So you're kind of really [ph] 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, 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 $25 million of incremental spend a quarter. It was exactly $25 million in Q3, and we're planning on another exactly $25 million in Q4.

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

Yes, Julian, on the 2013 view, we're in the process of putting our plans together. And similar to last year, we will do some scenario planning around different possibilities for the major lines of business and regions.

And since I don't know the answer to that question at this point in time, I can't tell you -- I can tell you that we'll continue to invest in the Applied HVAC portfolio. So most of what we've been doing has spent on the Unitary HVAC portfolio for Commercial, we'll 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 into the quarter and give you a full update on that at this point in time.

I think what we're doing is working, We're seeing that we can launch at higher margins. It's contributing to 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, this really steady margin expansion over time, doing it in a sustainable way with product development and implementation of Lean across the company, right?

And there's fasters 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, and 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 on. 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 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 thought about our investments in 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're seeing for some of these opportunities.

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 in the 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's a -- and that's helping also.

The conversation in the last couple of quarters, we're seeing productivity show up in the second half associated with those spendings that went on in the first half. So we're kind of right on cue there with that program.

Spent about $20 million more in restructuring in 2012 and 2011, Jamie. So it's been a pretty steady-state restructuring program for the last 3, 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, yes, we'll come back and give you definitive guidance in a 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 kind of trended in the quarter, and if there are any surprises on that front?

It's about 40% today, Jamie. I think we'll move that over next few years to something closer to 50%.

That's our design in that business. And there, we're looking at order rates for services that really kind of get into sort of the mid-double digits even in times high -- I'm sorry, mid-single digits, even high-single-digit order rates for service.

So we like the contribution margin service. We like the growth rates.

And obviously, we're trying to move the mix up closer to 50% the industrial business.

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.