Q3 2019 Earnings Call
I'm all participants are in listen only mode. After the speaker's remarks, there will be a question and answer session.
Good question during the session you'll need to press star one on your telephone keypad, we ask that you limit yourself to one question and one follow up and rejoin the queue for any additional questions I would know what they had the conference over to suck Nagle Vice President of Investor Relations. Please begin.
Good morning, Thank you for joining us for you saw brands third quarter 2019 earnings Conference call.
This call is being webcast on our website and universal ran dot com real find the company presentation.
We're also recording in archiving this call on our website.
Please go to slide two.
Statements made today is called that are not struggle facts are considered forward looking statements and are made pursuant to the safe Harbor provisions of Federal Securities Law.
Please see our assay filings for a description of some of the factors that may cause our actual results to differ materially from anticipated results.
This presentation also includes non-GAAP measures, which are explained in the financial tables attached to our news release.
Joining me on today's call or.
Well, Mark Chairman and CEO .
And Sue Carter Senior Vice President and CFO .
With that please go to slide three and I'll turn the call over to Mike Mike.
Thanks, and thanks, everyone for joining us on the call today.
Like the start out today, it's called the brief overview of our global business strategy, that's enabling us to consistently deliver strong financial results for our shareholders.
Fundamentally our strategy as of the Nexus of environmental sustainability, an impact, which a strong secular tailwinds for our business.
The World is continuing to urbanize will become a warmer and more resource constrained as time passes.
At our core we're focused on an excel at reducing energy intensity in buildings, reducing greenhouse gas emissions, reducing waste of food and other perishable goods and we excel and our ability to generate productivity for our customers all enabled by technology.
Unless you think the world, it's getting cooler less populated and less resource constraint as time passes. These strong secular tailwinds will continue to provide opportunity for shareholders and purpose for our vision.
As we continue separation integration planning activities related to the combination of our industrial segment with Gardner Denver and transformation activities related to our move towards creating the premier pure play climate business in 2020, our aggressive pursuit of excellence in driving solutions to mitigate the impact will be secular trends.
Only intensifies.
Our climate businesses squarely focused 100% of our portfolio at the Nexus of sustainability and global environmental impact, where our products and services can reduce the impact of these mega trends and further advance the platform for the company to grow above average global economic conditions.
Moving to slide four.
We continue to deliver strong financial results by effectively managing through an evolving global landscape.
The third quarter, we delivered 6% organic revenue growth at 14% adjusted Dps growth compounding and tough comps up 10% organic revenue growth and 22% adjusted EPS growth third quarter of 2018.
We remain bullish on our strategy the opportunities that lie ahead, and our end markets broadly and particularly and our teams resilience and their ability to execute using our business operating system to deliver against the top tier organic revenue growth adjusted EPS guidance targets, we provided for fiscal 2910.
We continue to deliver strong and differentiated performance in Q3 at our climate segment globally.
Climate segment organic revenues were up 8% against a tough comp in 2018.
Our global HPC business performance was particularly strong with approximately 10% organic bookings growth at approximately 10% organic revenue growth.
Our performance was also broad based with North America commercial HPC European commercial HBC residential HPC, all significantly contributing to the growth.
Our backlog pipeline and order rates continued to be salads and support healthy growth in the fourth quarter.
This is reflected in a revised full year climate segment organic growth guidance of 7% to 7.5% revenue growth, which is a full point above the top of the prior guidance range.
Delivering strong climbed performance has enabled us to effectively offset persistent softness and global short cycle industrial spending which drove organic revenue declines in our short cycle industrial businesses, mainly in compression technologies and tools.
In 2019 long cycle larger breast orders are showing more resiliency and small to midsize short cycle compressors are building a solid backlog for these products year over year.
Over the majority of these units won't ship or deliver meaningful revenues onto 2020 in 2021.
Despite revenue declines that are high gross margin compression technologies business. The steps, we've taken to restructure and fundamentally improve our operations and service mix over the past several years enabled us to manage the de leverage of the business within our gross margin target rate demonstrating what we believe is a more resilient business better able to weather.
Economic downturns.
And transport, we delivered low single digit revenue growth from the quarter against a tough comp in 2018.
We also expect revenues to moderate some in the second half versus the first half again, comparing a tough comps in the second half 2018.
Further softening of the European economy, and combined with ongoing Brexit uncertainty has softened our European trailer outlook for the back half of the year for the region.
We expect this to be largely offset by strong North American revenues for 2019.
Our outlook for mid single digit organic revenue growth in 2019 for our overall transport business remains unchanged.
We continue to effectively manage terrorists and inflationary headwinds and deliver a positive price versus material cost spread.
Volume in the productivity were also strong they like us to drive solid margin expansion.
As always delivering strong free cash flow and directing capital deployment towards high ROI projects remains core priorities.
Lastly, we're excited about the pending reverse Morris trust transaction or Gardner, Denver, creating a premier industrial company, while simultaneously, creating a leading pure play climate technologies company focused in HPC and transport refrigeration we.
We believe both businesses have the potential to unlock value for shareholders.
Please go to slide five.
This slide provides a visual detection organic bookings and revenue growth in the third quarter.
As I discussed in the prior slide we delivered strong broad based bookings revenue growth in virtually all businesses in regions that are climate segment, and the third quarter and the business was up approximately 10% that organic bookings, excluding transport and up 8% overall inorganic revenues.
Asia continues to see the impacts of trade tensions and broader economic uncertainty remains a stable market.
Commercial HPC Asia organic bookings were up mid single digits third quarter.
Climate Asia organic revenues were down mid single digits against a tough low teens revenue cob in China, and the third quarter of 2018.
As outlined in the prior slide our compression technologies industrial products businesses continued to be impacted by slowing industrial short cycle spending.
Our small electric vehicle business has continued to deliver strong growth driven largely by our consumer vehicle strategy.
All in industrial organic bookings and revenues were essentially flat in the quarter.
Please turn to slide six.
Weve encapsulate the number of takeaways from major end markets on the slide for your reference I've covered much of this concept already so I'll just add a few brief comments before passing the call along to Sue.
First focused execution of our business strategy is enabling us to continue to deliver very strong global HPC performance, particularly in North America, Europe , and then a residential business.
Our end markets are largely healthy and we believe we're outperforming the underlying growth rates in these markets.
The transport markets have softened a bit versus our view when we exited the second quarter.
Really driven by a softening of the European market, which continues to be impacted by weakening economic fundamentals.
Certainty surrounding Brexit.
Overall, we believe focused execution of our strategy is enabling us to outperform global transport market conditions. We are on track to deliver mid single digit growth and transport for 2019.
Lastly, I have talked at length about slowing industrial short cycle spending impacting our quicker book and ship small and midsized air compressors industrial products businesses, we expect the softness to continue through the fourth quarter consistent with our updated 2019 guidance.
Back to offset the soft us with the strength of saying and global it's fairly soon.
And now I'd like to turn the call over to suit, but more details on the quarter soon.
Thank you Mike. Please go to slide number seven I'll begin with a summary of the few main points to take away from today's call as Mike discussed we delivered strong financial results in the third quarter with adjusted earnings per share of $1.99 cents, an increase of 14% versus a year ago period, driven by strong performance in our climate.
Segment, we continue to execute well in an evolving global landscape and remain on track to deliver against our full year organic revenue growth EPS growth and margin guidance.
Third quarter organic revenue growth was strong, particularly in our climate segment orders were also strong in our climate segment.
When excluding our transport business that some outsized order growth in 2018 organic bookings were up high single digits for the enterprise and approximately 10% for climate segment.
In our industrial segment organic revenues were flat versus a tough year over year comp of 9% organic revenue growth in the prior year strong revenue growth in small electric vehicles, largely offset the softness in the industrial short cycle markets. We mentioned previously.
During Q3, we expanded adjusted operating margin 70 basis points and delivered 25% operating leverage consistent with our full your expectations. We continue to leverage our business operating system across the enterprise to manage direct material tariff related and other inflationary headwinds as we look to the fourth quarter.
We will continue to leverage our business operating system to drive further margin expansion.
As Mike mentioned, we continue to expect strong free cash flow in 2019 of equal to or greater than 100% of net income.
Through Q3, we have delivered approximately $1 billion in free cash flow and are on track to hit our full your expectations Importantly, we continue to deliver on our balanced capital allocation strategy. During Q3, we deployed approximately $124 million in dividends and approximately $250 million on.
Share buybacks looking forward, we expect to consistently deployed 100% of excess cash overtime.
Please go to slide number eight taking a step back from the details from.
Q3 was a very strong quarter with top quartile performance.
We delivered organic revenue growth of 6% adjusted operating margin improvement up 70 basis points and adjusted earnings per share growth of 14%.
Organic revenue growth was driven by global H.B. I see strength in our climate segment.
Continued disciplined focus on pricing and productivity actions enabled us to effectively manage inflation and tariff related headwinds and drive margin expansion across the enterprise.
Please go to slide nine our climate segment delivered another strong quarter of operating income growth, enabling us to drive solid year over year EPS growth in the quarter.
Our industrial segment delivered five cents of EPS growth with solid small electric vehicles growth and the addition of our precision flow systems acquisition that we closed in Q2 more than offsetting revenue declines in other industrial businesses.
In addition to good segment performance third quarter corporate costs were lower than prior year due to ongoing cost management activities lower stock based and incentive compensation and the timing of the unallocated corporate spending we now expect our full year corporate costs to be less than $240 million down from our previous guidance.
Of approximately $250 million.
Please go to slide number 10 in Q3 strong execution drove 70 basis points of adjusted operating margin improvement on strong price versus material inflation and productivity versus other inflation spreads.
During the second half of 2019, we're lapping strong pricing implemented in the back half of 2018, consistent with expectations. We delivered 40 basis points of margin expansion from price versus material inflation. This represents our sixth consecutive quarter of positive price cost.
We delivered solid margin expansion from volume growth in the quarter margin expansion was tempered by mix pressure as we delivered outsize growth from commercial HPC applied systems as compared to other initially higher margin products like unitary or transport equipment.
Over a 20 to 30 year life and applied system carries high margin service and aftermarket parts, but the initial sale creates pressure on margin mix. Additionally, consistent with last quarter, we sell mix pressure from softness in short cycle industrial revenue, which also tend to have high margins.
Productivity versus other inflation across the enterprise improved margins by 80 basis points in the quarter.
In both our climate and industrial segments, we delivered strong productivity from operational excellence and restructuring savings reduce corporate costs also contributed to the margin expansion.
We continue to invest heavily in gross and operating expense reduction projects with high returns on investment incremental Q3 investments totaled approximately 30 basis points.
Please go to slide 11.
Our climate segment delivered another strong quarter with 8% organic revenue growth and adjusted operating margin expansion of 30 basis points consistent with our expectations, we delivered strong volume growth price realization and productivity.
Please go to slide 12 in our industrial segment organic revenues were flat against tough comps of 9% organic growth in the prior year strong revenue growth in small electric vehicles, largely offset softness in the industrial short cycle markets.
Over the past several years, we have built a stronger more resilient industrial business in our compression technologies business for example, pricing productivity in restructuring savings, partially offset volume declines to enable de leverage within gross margin range for the second quarter in a row.
Industrial segment, adjusted operating margins expanded 40 basis points in the quarter, our high EBITDA margin PFS acquisition continues to improve our industrial EBITDA margins, we expanded adjusted EBITDA margins 110 basis points in the quarter.
Please go to slide 13.
We remain committed to a dynamic capital allocation strategy that consistently deploys excess cash to the opportunities with the highest returns for shareholders. We maintained a healthy level of business investments in high ROI technology innovation and operational excellence projects, which are vital to our continued growth product leadership in March.
And expansion, we continued to make strategic investments in acquisitions that further improve long term shareholder returns.
We remain committed to maintaining a strong balance sheet that provides us with continued optionality as our markets evolve.
We have a longstanding commitment to a reliable strong and growing dividend that increases at or above the rate of earnings growth overtime.
With the proposed transaction with Gardner Denver growing closer I'd like to highlight that we expect to maintain our annualized dividend of $2.12 per share post closing in through 2020 . This will deliver a very attractive dividend yield for the new climate cattle for 2021 and beyond we will evaluate dividend increases.
In line with earnings growth consistent with our longstanding capital deployment priorities.
We continued to see value in share repurchases and we expect to consistently deployed 100% excess cash overtime.
Please go to slide number 15, when we are on the road, we often get questions about the status of the proposed transaction to combine our industrial segment with Gardner Denver, We continued to be excited about the prospects of creating a premier industrial company as well as a leading pure play climate technologies company focused on H. bank in transport.
Refrigeration I'll give you a brief update today.
First the transaction with Gardner Denver remains on track for deal closure in early 2020.
In reviewing our priorities between now and deal closure. Our first priority is and will continue to be running the business and taking care of our customers to maintain focus on our customers. We have dedicated teams carrying out separation in integration planning as well as climate cattle transformation activities separation activities encompass step.
Operation of technical and financial operating processes and systems manufacturing operations and supply chain services and real estate, along with all business regulatory filings. We have a detailed project plan and we are executing against that plan.
When necessary, we are creating transition services agreements just important day, one operations for certain processes and services.
At this stage, we anticipate onetime separation and transaction related costs to be at the high end of our previously communicated range of approximately 150 million to $200 million.
Given that we in Gardner Denver continue to operate as two separate companies and compete in the marketplace until the close of the transaction. The integration planning work must be managed under clear rules and antitrust protocols. We will continue to work within these rules as we progress towards a day one of the new industrial business.
Additionally, we expect to leverage this opportunity to further improve our climate business to better serve our customers and unlock value for shareholders with a singular focus on reducing the world's energy intensity and greenhouse gas emissions. We're building on an incredibly strong foundation with great businesses engaged and talented people and it.
Distinctive winning culture and core values as I said at the beginning we remain excited about the prospects of creating a premier industrial company as well as a leading pure play climate technologies company.
On another now given the outsize transport order growth in 2018, we often get questions on the road butter order outlook as we look at the fourth quarter I'll remind you that we booked a large commercial order worth approximately $200 billion in Q4 of last year as we discussed when we book. This order the revenues are expected to be.
Recognized over the course of approximately three and a half years. Excluding this large order we have tough comps in the rest of the business, where enterprise organic bookings were up approximately 11% and climate segment organic bookings were up approximately 13%.
Please go to slide number 16, as we highlighted earlier, we continued to execute well in an evolving landscape all in our full year adjusted earnings per share guidance remains unchanged at approximately $6.40. Our enterprise revenues and margin guidance also remains unchanged with our continued.
Strong climate segment revenue growth led by global H.B.C., We now anticipate full year organic revenues to grow between approximately 7% and 7.5% a full point higher than our original guidance.
Our industrial segment revenues have been impacted by soft short cycle investment spending we now anticipate industrial organic revenue to be flat to a 0.5% for the year as we expect short cycle softness to persist in the fourth quarter.
Our guidance for both our climate segment in our industrial segment margin rates remain unchanged, although we do anticipate delivering towards the high end of the climate range and towards the low end of the industrial range. We are increasing full year restructuring cost guidance to approximately 30 cents from 25 cents primarily related to additional footprint optimal.
In addition efforts.
Have a couple of elements of guidance, we also recommend tweaking, including reduced corporate spending to less than $240 million and a lower expected effective tax rate of approximately 20% to 21% and with that I'll turn the call back over to Mike.
Thanks, Sir please go to slide 17.
In summary, we're effectively managing the global landscape as it evolves to deliver our 2019 guidance for top tier revenue growth EPS growth and free cash flow in 2019.
Looking forward, we believe the company is extremely well positioned to deliver strong shareholder returns over the next several years.
Fundamentally strategy remains at the Nexus of environmental sustainability and impact.
Today, 15% of the world's carbon emissions come from heating and cooling buildings and by 2030, it's estimated at 25% will derive from these sources.
Transport refrigeration creates another 80 million metric tons of Cotwo emissions annually, which can be eliminated through electrification overtime.
Earlier this year, we announced our 2030 SG commitments, which included a commitment to reduce our customer carbon footprint by one gig a ton of Seo to through our HPC and transport refrigeration products and services.
We believe this is the largest customer climate commitment made by any b to B, a company and our math shows this reduction could equate to 2% or the world's total emissions.
Besides the scale, it's equivalent to the annual emissions of Italy, France, and the UK combined.
At the climate Summit last month, we also introduced the same challenged likeminded companies.
We are abandoning the global warming curve by changing the way the world heats and cools buildings and moves refrigerated cargo.
New technology, we've developed can reduce up to 99% submissions that come from heating and cooling and commercial building.
This doesn't include the substantial environmental benefit of increasing system energy efficiency through optimize system designs advanced controls and data analytics ongoing system monitoring and service and maintenance.
These congrats solutions can also dramatically reduce power generation Eversource energy storage requirements.
We are continually working to innovate in this way to electrify heating electrified diesel engines used to call trucks and trailers the transport perishable goods at a reduced the energy intensity in greenhouse gas emissions and residential and commercial buildings.
Our 2030 SG commitments also included addressing a host of other important measures.
We continue to transform our supply chain and operations to ever sort of impact on the environment, including achieving carbon neutral operations and giving back more water than we use in water stressed areas.
We are committed to increasing opportunity for all strengthen the economic mobility and bolstering the quality of life of our people.
Additionally, we're committed to gender parity and leadership roles workforce reflective of our community populations, maintaining livable market competitive wages and broadening committed to access the cooling comfort and healthy foods.
We've been investing heavily for years to build franchise brands and to advance our leadership market positions to enable consistent profitable growth.
We haven't experienced management team at a high performing culture that is still is operational excellence into everything we do.
We remain committed to dynamic and balance deployment of capital and we have a strong track record of deploying excess cash to deliver top tier shareholder returns over the years.
Lastly, we're extremely excited about the proposed transaction and the strategic combination of our industrial segment with Gardner Denver.
Good biding to the Premier complimentary industrial companies offers the opportunity to drive significant innovation and growth with meaningful revenue and cost synergies supported by secular growth trends and diverse end market exposure.
We're also excited about creating the premier pure play HPC and transport refrigeration company with our existing climate segment businesses.
We have a tremendous opportunity to leverage a simplified business model and design and sharpen our sustainability focus in our investments.
Our climate businesses have clearly differentiated performance and we see significant opportunity as a pure play built in this performance for our employees customers and shareholders.
With that so I'll be happy to take your questions operator.
Ladies and gentlemen to ask a question. Please press Star then the number one on your telephone keypad, well pause for just a moment to the path acuity roster.
Your first question comes from Steve Tusa with JP Morgan Your line is open.
Hey, guys good morning.
Thanks, Good morning.
I don't usually suck up on these calls, but congrats to you guys for not getting over your ski tips. After a good first half and.
Staying conservative it obviously is warranted and this this environment. So kudos to you guys for that.
On the on the businesses Ramsey.
We're saying contributed to kind of orders and revenue goes to that means it was kind of revenues up you know greater than high single digit and.
Orders up around double digit does that you know is that kind of the messaging there aren't ready.
The resi with strong Steve I agree with what you said, we typically don't think about residential bookings because residential bookings book in turn so quickly, but we did on the quarter.
With a low teens booking number so to the extent you can.
We look forward in the fourth quarter I feel it so it's going to be fairly strong again.
And then say Steve as you think about died on our residential business. In addition to having you know good revenues in the third quarter also had some tough comparisons to the third quarter of last year, where the revenues were also very high.
Yeah, Great. Clearly you guys are taking some of this year that was lost by Lennox.
What are the what are the mechanics of of kind of holding onto those customers and is that do you feel like that's now yours to lose.
Or as they kind of try and come back after that there's a risk that that fades.
Yes, so you've obviously, we just executing our own strategy here. So this is.
Moving great stuff, having great distribution.
Working through all the technical.
And digital work that we've been working on now for a couple of years. So this is this really is executing against our on strategy more than it is anything else.
Okay, and then just a quick one on the details on on the productivity and other inflation.
Even acts.
The corporate kind of benefits there looks pretty solid at like up 50 basis points to me. It was up 80 basis points reported and anything specific to call out there and is that kind of the benefits of recent restructuring and is that something that you guys can pull lever on ended in the future if things get a little bit weaker on your revenues.
Well, let you comment here in the second Steve a one thing I'd say would would be on the corporate side, we worked really hard at reducing corporate costs and thought about this over the past year now two years now and putting the same lean tools toward benchmarking and executing against the cost reductions there. So I'm happy to see that Thats actually.
Flowing through and then sued you have any other promise, yes, I think I think when you think about the productivity in general Steve on your you're absolutely right on some of the productivity in operations I'm comes from normal productivity projects that we have on any given year, but it also comes from.
Some of the restructuring that we've done over the past couple of years and on the corporate side to to Mikes point, we weren't really hard at side, you know decreasing the functional spending over time, we know we've been successful. It died in that weve level down to spending as well as have off.
Said any inflation that comes into the corporate arena and just in case anyone is thinking about you know the less than $240 million. The fourth quarter is when all you'd have different accruals and other things get get trued up. So we didn't want to get ahead of ourselves on non on what that looks.
But all in all a really good productivity quarter for the entire company.
Okay, great. Thanks, a lot.
Thanks.
Your next question comes from Jeffrey Sprague with vertical research your line is open.
Morning.
Maybe the pickup on that right a little bit.
Should we view, what we're seeing in corporate costs, you're kind of a running start on the stranded costs than could you.
Data song what your view there is and how that should play out maybe over the next couple of quarters.
Yes, Jeff we've done a lot of work on the bleed printing to this point about where we think the opportunity is for all of climate co across all the climate us or all the cost structure whether that be yet.
Corporate or whats in the segments also rethinking what should be incorporate what should be in the segments, but with that being said.
There is probably ton specific ideas, we have kind of going forward into 2020 that we're beginning to execute on as it relates to the entire cost structure and so yes. You can think about this is getting a running start on 2020.
And then just.
The order and.
Revenue performance, certainly impressive I'll echo that.
How are you feeling about backlogs now Mike could mean.
You know.
Did you have notable backlog depletion in this quarter I think.
The commercial HVAC franchise overall was at something like 21% backlog growth last quarter, if I recall correctly.
Just your your visibility in Q4 I'm sure is very buttoned up but how much further around the corner can you look.
Yes pipelines look very strong coming in backlogs were still very strong.
Yes.
Don't go back and look at the 21, you're talking about Q2 versus Q1, I'd go back and given number Q to Q3, but my guess is we did complete much of the backlog there I was a strong bookings.
Quarter again for us so that that all feels good.
Even.
The industrial compressor business and we've had backlog build on.
Engineered to order compressor as backlog build on oil free rotary backlog on services. So there is theres. Good has built up I think of the backlog backlog going forward.
We place we saw the reduction of backlog would have done in thermo King.
That's fundamentally just a weakening.
Europe from the last few we had in quarter two and then also just some summer cancellations that that occurred but backlog there is still above where it was this year at last time, and just a little bit less than it was last time, we spoke dive into last quarter.
And just finally on T.K., obviously your comments around Europe weakness.
That all eyes are probably on kind of the t. numbers into next year.
Thank you are trying to avoid 2020 outlook here today on the call but.
How do you feel about your ability to kind of counteract.
Kind of pressure in that part of the business essentially next year.
I think the context put it Jeff what to say that on a pro forma basis Klima coal would have about 5% for less than 5% of its revenues associated with North American trailer, which is really what we're talking about here.
He took the C.T. numbers at face value it would reflect something on the order of an 18% decline between the 49.9 units this year.
The next year is units in the 41 and change range. So if you. If you think about that less than 5% revenue and 18 percentage drop you end up with something less than one point of.
Revenue headwind so the company I think that.
Only teekay has significant levers to pull with a lot of the new launches and product innovation coming through in 2020.
But I feel good about the HPC businesses at large and the backlog that we're building there and what I still think is.
Early to mid.
In the in the North American institutional cycle as well, so I feel like without giving specific 2020 guidance. We size that we think we've got plenty of levers to pull to have a good year in 2020.
Great. Thank you.
Your next question comes from Scott Davis with nucleus Research Your line is open.
Hi, good morning, guys.
Good morning, Scott Corning.
It it seems like maybe I'm over reading this that PSG.
It has become a pretty big theme for you guys almost increasingly every quarter and.
I guess, what I'm wondering is how much does this.
Narrow or widen the lens I guess when it comes to M&A for.
Once the deal is done.
Meaning are you more likely to stick to HVAC or think more broadly is SG as a as a theme over all kind of.
Forward you at least the mindset to think a little bit more broadly.
Well I think you about I think you think about it as a funnel really you think about the enormity of the.
HPC and transport refrigeration markets. Some businesses first that's obviously what the go forward companies very good at and then you look at that in the context of.
Any innovation or idea that we would have that would make.
Sense from reducing energy intensity or reducing greenhouse gas emissions point of view, it's going to be additive to that so I think you look at those in combination as opposed to independently.
Okay.
I guess that kind of answers it but moved on to the next one what are you Doug.
Scott This is because we really clear because I want to be clear on us we've got plenty to do on our core space and so we're not opening the lens here to thinking about a third leg of the school from a sustainability perspective.
Building the company odds HPC and refrigeration roots and.
To the extent, we find things a lower energy intensity and lower greenhouse gas emissions within that that's sort of a double Chuck for us.
Okay. That's that's more clear thanks, Mike and just just one of the things that sometimes tough to analyze is the mix of non res as you think about your order book I mean is is there a.
Mix change as far as complexity and.
Size of projects and things like that that we should think about for 2020 or something in your backlog.
The mix really wouldn't be size of projects. The mixes that come into play here are going to be things like applied systems versus unitary systems, which apply carry a lower initial gross margin, but over the long haul were pretty agnostic to the margins because service margins really accrue to the applied business that is we're growing the.
Okay see business faster than the transport business scores and transport margins higher than the HPC business lives the of the general.
Yes issues that we see.
But as we look at the business regionally the EBITDA as in the three businesses recently are fairly close and so were somewhat agnostic to.
Were in the world the growth as but certainly the actual product for systems or services can change the mix.
For us.
Okay. Okay. Thank you.
Yes.
Your next question comes from Julian Mitchell with Barclays. Your line is open.
Hi, good morning.
The joint just one hey, just wanted to focus on the climate.
Revenue guidance and little bit. So you took up the guide I think for the year just over a point organically for climate just wanted to confirm if that's mostly renzi related.
He took up your resin market guide for the year, just when you're thinking over the next.
So what have you.
Any perspective, you could provide on the longevity of the racy replacement cycle in the us.
The standing that raises only.
15%, 20% also is the climate piece.
Yes, Julianna, we took a climate really based on just universal strength across the globe and pipeline bookings and backlog.
In general so what about on commercial and residential across the board. The point you made about residential going up I think it might have been related to last quarter. I think we had a bit of a typo in the duck, we might as a low single digit the mid single digit we didn't mean to do that it was always mid single digit Zach instead about right now it was we actually put low single dose.
In the deck.
Instead of low to mid single digit which is what we've always intended yeah. Okay. So we don't really for different about whereas all year long is playing out the way that we thought it would.
And then really to comment on a cycle. We've got over the year is pretty good sources of data and analytics that our proprietary to what we use and.
Because our businesses so dependent on replacement, it's well north of 80% replacement for us.
We're watching very carefully, but but really don't see anything here and the in the near future that would change your view toward a strong 2020 in the residential business for us.
Thank you very much and then just my second quick follow up.
Would be around just if you could give some more color on the climate business in Asia.
It seems quite choppy some of the construction trends there.
Got some tough comps.
You do have the benefits I guess of a lot of share gains from that distribution Buildout you did a couple of years ago. So maybe just give us some context as to how you see growth.
In your non res climate business in Asia, and anything on competitive discipline as well.
Yes, I think that we're still seeing Asia in general in China, specifically to your question.
As being a good market over the long run.
And could change within China around end markets themselves and so if you think about the three largest markets in Asia their retail.
Leisure on office all three of those markets are down significantly retails down some of the market down about 15% leisure down about 11% office about six and a half for side those are big markets that are down.
Interestingly industrial markets are up that's good for us.
And things like education, and transportation are up double digit even other smaller markets for those of the markets that we wanted to focus on some of them from applied perspective as being longer cycle, but.
Court so the economy core to the to the five year plan in China. So we will continue I think it's a good markets. There continue to see benefits of the direct strategy that we put in place in China.
Great. Thank you.
Okay.
Your next question comes from Nigel Coe with Wolfe Research Research Your line is open.
Thanks, Good morning.
40, Nigel So hey, I'm just want to go back to the productivity buckets and they 80 basis points, how did that line between the two segments and that you've been restructuring in both segments. So im just curious whether it was heavier in one this is the other and then it maybe just touch on the industrial business what's changed since 2006.
Theme, where we saw a lot of de leverage in that business and I know that was partly due to the fact, you just a quite cameron, but what's changed today versus three four years ago to kind of hold and margins a lot better through a choppy environment.
Predict productivity was about equal between both segments, there's nothing remarkable.
That we're seeing really there.
Inflation, what about higher on the climate side. So so then that would have been little bit stronger toward.
Industrial not productivity, if you think about totoki.
Tivity over non material productivity industrial would've been a little bit stronger and there there's been really good progress over the years.
Congratulate all our leaders in industrial space.
Todd has done a very nice job specifically in.
The compression technology business around looking at some of its footprint there and we've essentially gone from a number of larger compressor plants down to a smaller number and have executed that without missing a hedge so theres a very strong.
Market work there I would tell you within the club car business, they're doing an outstanding job and have grown this consumer vehicle into him a meaningful part of the business and every time, we sell you know a consumer vehicle versus a golf vehicle, we mix up in terms of the margin.
I'm pleased with what's happening in our tool and material handling business and even material handling in particular.
As we back to the black after pretty strong declines over the years and.
Oil and gas and then are fluid management PFS business really had a record Q3 for them and so we're proud of what's happening there.
Coming out of private equity it's always a.
The challenge to improve margins, but the team and managed to improve margins in Q3, So just across the board good performance and to US. It's a tough the resilience that we've talked about in stress testing our business to make sure that when we do see negative revenue growth that the de leverage can be maintained inside of our gross margins and we get that question a lot from us.
Busters and so it's important point out that when we see the us and we have leverage.
Inside that sort of 30% margin number.
It's indicative of the fact that we think we're executing well against the plans.
Great. Thanks, Mike lifted good detail and then just on the you know you pointed out in the slides that big sort of Mendota projects, a you booked in in full Q.
What's the outlook so number one the funnel for commercial globally, maybe just touched on that but specifically these large much a mega projects because I'm assuming that as your net wells, we'll see a lot more these large projects, maybe rip and replace type projects that maybe just touch on that please.
Yeah. It's some it's almost normal now for us to see large projects in the pipeline is difficult to predict when they close and what they look like when they are complete.
We've got a number in the backlog I would say not as large as that but maybe collectively some of the large projects with total that so yes. We are seeing seeing more of that it is more of a sort of a base business for us at this point in time and in terms, our ability to execute against that and we're set up to do that so we've invested heavily in that.
Business and.
We do have a pipeline of larger projects sitting on that in that backlog.
Great. Thank you.
Your next question comes from John Walsh with Credit Suisse. Your line is open.
Hi, good morning.
John .
I was wondering if you could talk a little bit about what you saw in service for both the climate business and the industrial business as well a little more granularity around those growth rates.
Yeah, I mean service.
For both the span a strategy for both I mean, so there's nothing new in terms of our.
Focused on the services business there at all.
Service has us for us span something thats grown kind of in the high single digit range, particularly in a climate business over the last decade or so.
That continues to clip along at about that level consistently as we're going forward and then.
As you've seen in the industrial segment from the reports we did here that we continue to see good service growth.
They are differentiated service growth there.
The mix, so maybe a little bit less than what we've seen in climate overtime.
But again, it's been a healthy mid to higher single digit growth than industrial services overtime and really what we're talking about industrial services, it's really in our compressor technology business and that's generally going to be based off our larger some terrific goal and engineered to order or larger Wilfred compressors.
As opposed to some of the book in turn smaller compressors, which don't have the same sort of service.
Opportunity.
Great. Thank you and then you know going back to kind of the M&A question I mean, I think a lot of time, we focus on the larger.
Deals, but you did get the smaller deal done here in September and I was just kind of curious what kind of made this Arctic Chiller company an interesting property for Ingersoll was it something on the technology side was it something to do with where their service and sales reps were located.
Good.
You know any color around these smaller kind of singles that are that are out there to do in the industry would be helpful.
Well I appreciate you actually raising that we've done about 18 years. So those last few years.
Lot of more sort of that size, maybe maybe a little smaller but.
The typically it's going to be a technology that we think is novel innovative it's not part of the portfolio portfolio today.
It may come with.
A channel it may not but generally speaking if we can take.
And innovative product and and then then moved through the dedicated Trane commercial channel.
It's a home run for us.
In other cases Theres also strategy to maintain.
Second channel through independent reps.
And that's an important element, where we might go to market train for some of the portfolio and in this case Arctic chiller for another part of the portfolio. So that that multi channel strategy can can work for some of this as well.
This is just a novel idea around a.
Hey modular.
Smaller chiller design for modular small applications.
And just adds to our portfolio in that regard.
Great appreciate the color. Thank you.
Your next question comes from Andrew Open with Bank of America Merrill Lynch. Your line is open.
Good morning.
Andrew.
Hey, just going back to slide 10.
If you look at volume leverage.
Anyway, you can.
Decompose that between climate and industrial and specifically what I'm trying to get a few sided applied.
Impacting volume leverage.
Climate and I'm, just trying to figure out how bad it was and when does it go away. Thank you.
So I assume Andrew I think is your as you are looking in yet volume in total I.
I think that volume and im talking about the volume leverage is going to come out of the climate segment, which is you know what we were talking about we'd that within markets a little flatter on the industrial sign.
That is going to beat a piece of that and as we were going through.
On the different areas.
And constructing this slide what we wanted to look at wise not only when it was contributing and then the comments around mix that we've given through out the commentary with that being more to the applied side. Then then to the unitary side, but it was more on the climate side than industrial.
Yes.
Andrew on that I mean, I'm looking at I'm seeing volume kind of flowing through pretty much at the 25% level.
For for climate and was there was the mix that kind of pull that back little bit from there and if I go to the de leverage.
Cannot go side of the deleverage and industrial.
Elaborate at about the gross margins a of the business.
Hurt a little bit on mix.
But again you know this is where the productivity and.
Imagine the not productivity equation and price help that out quite a bit.
That makes sense and just a follow up question.
I know institutional market is quite important you seem to be constructive.
If you look at construction put in place data institutional markets, you know education healthcare seems to be mixed at best. So what gives you confidence that this market continues to grow into the gear and and into 2020. Thank you well well. Thank you and what I always say is what when you look.
Get put in place you really only get about half the visible market and the other half visible market as the market that you go out great demand with by putting offers to customers that would reduce their energy intensity or improve operations in their buildings and so.
Notwithstanding what you side, what I would tell you that in quarter three from a from a vertical market perspective. The strength. We saw was in higher education and in health care.
We saw that and continue to see that going into the fourth quarter and in 2020, just by virtue of the pipeline that we're chasing.
Commercial and industrial.
We saw strength there in energy food beverage and interestingly even in retail.
Which gets to be national accounts, and some of the brick and mortar out there. So that was a again really strong.
For us as well, but we're seeing a very good pipeline going forward and these markets and that put in place data would tells only about half the story not always indicative of what we're seeing in the marketplace and do you guys track bond issuance in those markets do they tell you anything in terms of visibility.
Yes, they well they do they give that's a very long leading indicator toward a visibility the marketplace generally speaking.
When we know that a school district is going to vote or applying for bonds.
We know generally than what they're trying to do a construct with with those bonds and so we're doing some preliminary work with schools as they are going out for bonds to get estimates for what things might cost and sort of what it might take from an operational basis to maintain those facilities that of course is predicated on that bond to actually pass.
Thing and then once that bond passes it can go through a fairly traditional cycle of detailed.
Models and designs all the way through procurement. So yes, very early indicator on a bond, but generally speaking if we know a school district for hospitals going for a bond vote, we're going to be working with that customer to understand what the scope of the project might look like.
Your next question comes from Nicole Deblase with Deutsche Bank. Your line is open.
Yes, thanks, good morning.
Good morning.
So I just want to start on the.
The kind that margins just to take out a step further so understanding that you guys did 25% incrementals on volume growth.
The the Fourq margin assumption seems to embed a bit of a stronger performance versus threeq is that all accountable are attributable to the mix headwind going away or are you anticipating stronger incrementals on volumes as well.
The call just to be clear isn't this nicole in the line right.
Yeah, Yeah, Okay. Good wouldn't sort of first so I just have a quarter for.
Climate leveraged exactly.
Yes.
So what's your view on that well Phillies you should look at the volume leverage in Q4.
It is it is straightly.
Slightly on stronger identity is in in Q3, but again.
You know the environment is roughly going to be the same as what we were seeing in Q3. So in other words.
Growth in in all of the end markets, a probably add.
I've seen slide towards applied versus on unitary, but there really isn't a huge amount of of change that comes out of the volume leverage in in Q4 on.
Again, all of our businesses are going to continue to grow in Q4 on residential on the commercial businesses et cetera.
Total leverage so for quarter four suit suits exactly right in the volume piece to that.
What I would tell you is the mix will hurt us a little bit more there.
We think about more applied less transport.
We would expect less price then we would have in Q3 sequentially, just because we're kind of lapping price there again so.
I would think that we'll manage the full year for the enterprise that same 25% we've talked about.
But I would expect that quarter four will look a lot like quarter three for climate.
Probably not not any better.
Okay got it and that's really helpful. On thanks, Mike can Sue and then.
You brought up price cost seems to me, because you're lapping tougher pricing comps and for Q price cost impact to margins probably comes down a little bad but thoughts on that and then any early thoughts into 2020, just specifically on the price cost front.
And so if you think about on Q4 I think the back half of 2019 days is similar so I think you'll see about same thing in Q4 that you saw in.
In Q3 and is I think about 2020, so I'm going to give you any answer in its not going to be what you want which is what are our guide is but when I think about.
2020, and I think about tier one materials on.
Steel copper aluminum should all be on the surface deflationary. So any good spot we see the spot prices coming down we're seeing it in resells and and that should be you know a really nice tailwind if you will going into 2020, the how ever.
Asia Day, you know as we look at this we want to watch this play out over you know the upcoming months because we just do not know why you know the tariffs in all of those pieces are going to mean to 2020. So in other words you could have deflation on you know those base material.
Meals and you could be offset by tariffs you could have a change in the tariffs and and that's just something that we're not comfortable we is trying to give that that outlook on so I can tell you when I see on spot prices and wide on we're doing on you know early buys a material going into 2000.
But but we'll just once the environment and then as we get closer to 2020.
Give you had a guide on what we think it looks like at that point in time in the call I'd say that there's been so much as you know volatility around news and announcements coming out around tariffs that.
Unfortunately, we've gotten pretty good at being able to react to it takes us about two days to get from an announcement or a change to having that flow through and I understand from a gross perspective, what the impact does and it takes us maybe a week from that point in time to understand what we think we can do from a net perspective around mitigating some of that there.
More than we know at that point time, probably weaker. So later, what we need to do from a pricing perspective, and so volatile that I think we're comfortable with our ability to react and changed our stand and push the sort of pricing through and mitigate where we can.
That at this point in time, we're not trying to guess where things go in 2020 there.
Thanks, Guy that's really helpful.
Yes.
Your next question comes from Josh Pokrzywinski with Morgan Stanley . Your line is open.
Hi, good morning, guys.
Josh.
Just a follow up on I think a couple of questions trying to get at maybe kind of the shift in climate overtime toward more sustainability and energy efficiency.
Seems like a lot of your compassion competitors talk more about selling boxes and you guys you're talking more about selling solutions can can you give us a sense for how that mix has evolved in terms of just kind of straight away product.
Sold through traditional channels versus something that is this more kind of comprehensive.
Sustainability path.
Yes, I think two things if you have happened I mean, one is that.
Obviously, the world is looking at regulations differently around greenhouse gas emissions are standing the impact of refrigeration systems on.
Environment that's one.
Two as the assistance become greener, if you don't do anything to the fund fundamental underlying system. The refrigerants tend to be less energy efficient. So you're I know you end up using more power to generate the same level of cooling or heating in the system and so from a system level, it's really making sure that you can reduce the energy intensity while using.
Next generation refrigerants, and so there's a lot of innovation that goes into that.
It also feeds right into how we think about the need to have a direct.
Very high quality salesforce their.
Typically engineers or professional engineering, selling to professional engineers and and our customers in the commercial space and that model exists for us all over the world.
Because these are complex tradeoffs and then as you think about 30 year lives on many of these systems.
Any innovation you have any advantage you have and what the cost of maintaining those systems will be.
Can be a very meaningful.
You know sort of the kicker to total cost of ownership in so it's just the way we go to market, it's our model and when we think about creating demand. It was the earlier question about put in place and I said about half of that is put in place and half of it is going out creating demand the half that we go out and create demand with our looking for those kinds of customers that.
I understand this technically and are wanting to do something about it in may of systems.
At age or variety, where there's a particular opportunity to go have a high return on invested capital and so it's just a more sophisticated sale and way to market and that's what we.
Train people to do I mean, we train them technically and then we train them financially around how to go back the case.
Got it so it's really all the mix has shifted toward this it's it's kind of getting away from Hey, you need a box for the top of your your strip mall and we'll sell you want.
Well, it's really over time as you try to move away from.
Responding to quotes to creating specifications, creating opportunities and creating your own demand.
And that is the control element of what we do even in a downturn right as opposed to sitting back waiting for something to be built and asking somebody asking you for a price is plenty to do in the world today to go out and create an opportunity for return on investment for for somebody the other thing too as in a downturn and I said this very often we fully expect both our search.
Service business and our performance contracting business to increase because you have to maintain or extend asset life in a few.
The longer extend the asset life.
We've got away of paying for these assets through the energy savings that we're willing to guarantee.
As part of the asset swap.
Okay. Thanks for that.
Thank you.
There are no further questions queued up at this time, a turn the call back over to Zac Nagle for closing remarks.
Thank you operator, I'd like to thank everyone for joining todays call I apologize to anyone who is not able to answer a question or get a question asked in the queue whoever machine and I will be available all day today and obviously in the coming days weeks to answer any questions that you may have and we encourage you to call and we look forward to see on the road soon thank you.
This concludes today's conference call you may now disconnect.