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Ingersoll-Rand plc (NYSE:IR)

Bank of America Merrill Lynch Global Industrials & EU Autos Conference 2013

March 19, 2013 6:30 am ET

Executives

Steven R. Shawley - Chief Financial Officer and Senior Vice President

Analysts

Andrew Obin - BofA Merrill Lynch, Research Division

Andrew Obin - BofA Merrill Lynch, Research Division

[indiscernible] Steve Shawley, the company's Senior VP and CFO. Thank you very much for being here.

Steven R. Shawley

All right. Thank you, Andrew. Okay, well, good morning. I'm very happy to be here to talk to you about our company today and our plans going forward. Since there are some of you here probably do not know our company very well, I want to spend a few minutes to go over some slides to introduce you to Ingersoll Rand, and then we'll entertain some Q&A in the second half of the hour here.

So if we go to Slide 2, I give a test on this after every presentation, so take careful notes, our Safe Harbor statement. I also will say that it's our policy that we do not answer any questions specific to the current quarter, so please refrain from going there when [ph] we get to the Q&A. Generally, we will talk about markets and those type of things. But specific questions about quarter activity, we don't address.

If you go to Slide 3, Andrew mentions what our portfolio looks like and the fact that over the past decade, we really transfer -- transformed the company into a diversified industrial concern. And if you look at the portfolio, we have a number of outstanding brands with a very, very high loyalty amongst our customer base.

We've utilized these fundamental strengths as a base to implement a strategy to drive sustainable shareholder value since 2009. 2009 is critical because in 2008, after the acquisition of Trane, I think that most people would say we really truly became a diversified industrial. This approach has paid off to date. We also have -- it also positions us to capitalize very, very effectively on the future when our end markets recover. And if you look at our end markets, we're about 60% exposed to nonresidential construction, which many of you know in the U.S. and Europe, has yet to show any type of, seeing signs of growth and return to even close to peak activity of '07 and '08.

Additionally, our innovation pipeline is driving market share improvements in all of our businesses. And even as we have improved our operating performance, we have maintained our shareholder-focused capital allocation strategy. Our businesses all produce strong cash flow, which we are using to fund growth and make significant cash returns to our investors. So we feel good about what we've created over the past few years and even more excited about opportunities in the future.

A critical differentiator for our business at a time when our end markets are fairly flat, whether they'd be in established markets or in developing ones, has been how we invest in innovation to strengthen and deepen our product portfolio. We have almost doubled the proportion of our revenues from new products, which we measure as the percentage of total revenue delivered by new products introduced in the past 3 years. And more importantly, we are doing what is necessary to sustain the technology and product differentiation that our brands have historically stood for.

The new offerings have been in every sector of the business from air compressors to unitary HVAC to electronic locks to new service offerings. Through new processes, talented and -- talent and investments, we have increased our capacity and results in the areas, like intellectual property development and protection, speed to market, margin improvement and market share growth.

In 2012, intellectual property disclosures were up 270% and patent filings were up 75% over prior year. We are by no means done. We will continue to invest in innovation and are focusing on multiple key growth platforms identified during our planning process.

Another area of our intense focus for us has been improving our level of operational execution, which we call, Operational Excellence. We categorize it in 4 main elements: footprint restructuring, pricing, strategic sourcing and implementing Lean through our value streams and in our functional processes.

First, we have made major progress in consolidating and restructuring our manufacturing footprint and synergizing our manufacturing overhead. Since 2009, we reduced the plant count from 94 to 67 and reduced square footage by 30%. Today, about 1/4 of our square footage is shared across our businesses, and we've more than doubled utilization in plant -- in that period of time even in the absence of full market recovery.

Recently, we closed an operation in China, moved it to an existing plant in Mexico. We were able to reduce headcount from 1,000 in China to 300 in Mexico. We started developing our pricing capabilities in early 2010 and have reaped benefit from better price realization and price management for the past 3 years. Our total price realization has exceeded material inflation for 7 consecutive quarters.

We looked back several years in history and could not find the time when we had done this. So it is a testament that our results -- so it's a testament to the results that we can produce when we focus on building capability. This isn't just managing price list alone. That is actually a fairly small component of what we describe as price management. It is centered on the capabilities, like pricing elasticity analysis, value pricing of offerings and discount management. We also continue to drive our material productivity. We centralized sourcing during 2012, organizing around common commodities, to increase our strategic sourcing capability through targeted training, standard work and the addition of external talent when needed.

We also strengthened capability in emerging markets to better support supplier qualification, supplier development and strategic sourcing in those regions. We had 24 value streams under transformation, which happens to also represent 24% of our cost base. The value streams continue to deliver superior results and shows separation and performance versus the remainder of the company.

In 2012, the value streams reduced past due days by 66%, reduced cycle time by over 40%, increased cost leverage, which is a plant's version of operating leverage based on cost throughput, by over 6 points and had 5-point increase in employee engagement scores. We will continue to roll out more value streams with a plan to add 8 additional streams in 2013, which will bring the cost base coverage to 40%. We have a target to reduce our functional cost by 2 points of revenue over the next 3 years. Implementation of common systems is a key enabler to that reduction. We will have our first go-lives in the first half of 2013, and the implementations will continue in 6 phases through 2016.

As you can see at the bottom of the chart, these initiatives, along with innovation, have increased our margins almost 400 basis points over the last 3 years on very little revenue growth, while still making significant incremental investments in the business. Operating leverage has been 38%, 31% and 73%, respectively, for the past 3 years.

Operational Excellence also has helped reduce our working capital requirements and improve our cash flow. We finished the year with working capital at 2.3% of the revenues, which is below our target working capital to sales range in the 3% to 4% area. Our capital allocation strategy has been consistent and shareholder focused. Our strong cash flow has funded our growth investment and created significant amounts of cash to be returned to our investors.

In December, we announced the 31% increase in the quarterly dividend. The increase is consistent with our objectives to reach a peer level payout ratio in 2014 timeframe. The 2013 dividend will exceed the 2008 peak dividend by 17%. In 2011 and 2012, we repurchased approximately 5 million shares -- actually, 55 million shares worth $2 billion. In December, we announced a new $2 billion buyback program that we expect to complete by the end of the first quarter of 2014.

Last December, the Board of Directors unanimously approved a plan for the tax free spin-off of our commercial and residential security businesses into a new publicly traded security company. The new security company will have annualized revenues of approximately $2 billion and will be a leading global provider of mechanical and electronic security products and services. The new company will have market-leading brands and products and strong market shares to set a solid foundation for future growth. The new security company is also expected to have market leading operating margins, robust free cash flows and the financial flexibility to take advantage of future growth opportunities.

This slide details some of the major milestones of the spinoff process. The separation cost for the transaction are expected to be in the range of $150 million to $250 million, and we expect to complete the separation process by the end of the year. Additional information on the split will be available when we file the Form 10s, which are expected to be completed in June.

Before my closing remarks, I'd like to cover our full year 2013 forecast from our February 1 Investor Call. 2013 guidance is on an as-is basis, in other words, assuming the company would be together for the entire year. It assumes the current -- in other words, the current 4 operating segments would stay the same as they are, including security.

Starting in North America, we expect moderate growth rates in HVAC and fairly flat markets for the refrigerated transport business. Industrial markets are growing in North America, but at a much slower pace than we have seen over the last couple of years. We are continuing to monitor growth in residential markets with choppy month-to-month trends. We are seeing positive comparisons in both new construction and replacement systems. For North America and commercial security, we see a continuation of challenging conditions in U.S. nonresidential new construction for the next year, particularly in key institutional and end markets.

We expect to see low single-digit growth in Asia. Asia HVAC equipment markets are expected to be flat in 2013, with China up low-single digits. Our Industrial businesses are also expecting low single-digit growth in Asia in 2013. Our Asian security business, which is more influenced by the timing of large infrastructure projects, should be up mid- to high-single digits for the year.

Revenues in Europe are expected to show some recovery in the majority of our markets from very low levels in 2012. The exception is Thermo King where we expect truck trailer and marine to decline low-single digits in 2013. Overall, we expect revenues from Europe, Middle East and Africa taken together to be up slightly.

In summary, we see slow growth for the most -- for most of our end markets. Translating that to our outlook by sector, we expect Climate Solutions revenues to be up 1% to 3%. Industrial Technologies revenues are forecasted to show more moderate growth than the last couple of years with revenue growth of 1% to 3%. Residential is expected to be up 4% to 6%, and security technology is up 2% to 4%.

Our guidance for 2013 full year EPS from continuing operations is $3.45 to $3.65 a share. That excludes onetime deal cost related to the security spinoff in restructuring of $0.40 to $0.60. You can get additional details related to the 2013 full year and first quarter results in the slide deck for this presentation.

Please go to Slide #11. We began the process to transform Ingersoll-Rand in 2009 with high aspirations to improve our operational performance, enhance shareholder value. We have made significant progress over the past 3 years. Our focus is on positioning our company, to continue to grow earnings and cash flow from very little help from the market. We have a multiyear record of delivering high operating leverage and margin improvement. We have implemented a consistent shareholder-focused capital allocation program. We have proactively worked to reduce cost and improve productivity, while still making prudent investments for the future. Our investments are yielding a strong pipeline of new product and service offerings. We're accelerating restructuring activity to prepare the cost structure for 2 strong standalone companies. In 2013, we will -- 2013 will represent another step forward in the progression of the company's innovation and operating capabilities as we improve margins, execute the security spin and continue to advance our core growth initiatives. We feel confident, and we feel up to this challenge that we face in 2013.

With that, I'm going to open it up for Andrew's questions and yours, if you have any.

Question-and-Answer Session

Andrew Obin - BofA Merrill Lynch, Research Division

Sure. It's very interesting, just one of the comments, we are in Europe. And one of the comments we started getting from corporates over the past couple of quarters, it has to do with sort of capacity in Europe, because I think companies, particularly American companies, had been cutting capacity in Europe for many years. And it's interesting that several companies have stated that they've sort of done cutting capacity, and they seem to be at the bottom. And you sort of commented that you are expecting your European performance to start improving this year. Where do you think you are in terms of capacity in Europe longer term? How much work you still can do in terms of just physical assets on the ground?

Steven R. Shawley

When we started this capacity journey back in 2009, at the Trane acquisition, we realized that in the midst of a recession, in the midst of post-acquisition, too many plants doing similar-type things, we were probably only operating across the globe at about 30% of capacity utilization. That's a very, very low number, but it's also very, shall we say, conservatively calculated in terms of the available capacity. The restructuring program I talked about in the presentation, really served to -- plus some recovery in some of our markets in the past 3 years. That served to double our capacity utilization from that point. So we would say that globally, we're probably at about 60% capacity utilization. The interesting thing about it is what's going on with our Lean Six Sigma programs is we're continuing to open up capacity as we have -- so we've taken capacity offline, but we continue to shrink the footprint size that we need to manufacture because of our Lean Six Sigma program. I'd say in Europe, similar things are happening. A little more difficult to restructure complete factories in Europe because the costs are very, very high. The one thing we are doing, we're investing quite a bit in some of our machining centers. We have a machining center in Germany that machines the components to go into our oil-free air compressors. We're expanding that because we had a very large capital investment there, which was brought online in 2012. So we're looking at -- our strategy pretty much is to commonize, take advantage of common manufacturing processes across the whole company, wherever we can do that, whether it's in Europe or the U.S. or Asia. And then invest in that particular manufacturing facility as we need to, to meet worldwide demand. We were shipping rotors out of the plant in Germany around the world for incorporation in our oil-free machines. That's what we're doing. I would say that if I looked at the capacity utilization numbers, they're probably a little bit worse in Europe than they are in the rest of the world, as we sit here today. But those are some things we're doing to try to address it.

Andrew Obin - BofA Merrill Lynch, Research Division

But you think in terms of the existing footprint, do you think it doesn't need to be shrunk anymore? Or do you think there's still room to shrink the actual physical assets in Europe for you?

Steven R. Shawley

Well, since we shrunk it by 30%, shrinking it more, I mean it's a matter of necessity, Andrew. It'll be [ph] -- if we can -- I think the way we're thinking about it is between the restructuring we've done already and the Lean Six Sigma work that we're doing, because we have plenty of room for upside if we see any type of return on market activity, particularly in the Trane commercial space, which requires quite a bit of manufacturing square footage. So we feel very comfortable that we can handle a large, large growth spurt with the current footprint that we have.

Andrew Obin - BofA Merrill Lynch, Research Division

Let me ask you a question in terms of update on security spinoff. When do you think you will be able to provide us more clarity on the timing of the spinoff, the management team, just company structure, just more details?

Steven R. Shawley

Really, there's a lot of heavy lifting going on right now, as you might suspect. We have filed for a private letter ruling with the IRS. I think the turning point is really going to be when we file the Form 10s. At that point in time, we'll be able to talk much more specifically about what the 2 companies look like, post-spin. What the history looks like, what to expect. We have that now scheduled for early June, so we hope that before the end of the second quarter, we can be much more conversant about how the companies look by the numbers.

Andrew Obin - BofA Merrill Lynch, Research Division

There's a question in the back.

Unknown Analyst

Can you talk about the more muted outlook for the industrial sector you talked about in your presentation? What's behind that? Which subsectors are you seeing or expecting the softness in over the course of 2013?

Steven R. Shawley

I'm sorry the question was about a footprint question?

Unknown Analyst

Yes. So you talked about a more muted outlook for the Industrial sector than you achieved in the past. What's behind that in terms of subsectors?

Steven R. Shawley

I'm still -- I can't quite understand your question.

Unknown Analyst

So in your guidance, you talked about a more muted outlook for the industrial sector. What is behind that and which subsectors, which regions?

Steven R. Shawley

We -- well, the industrial sector has been growing quite rapidly, post recession. If you look at the industrial sector, it's probably somewhere around 85% of its peak prerecession. So it's not like it's -- so there's been a recovery in the industrial markets. What's in our guidance is just a slowing of that recovery and mainly because, if you look at where our growth came from, it came back in the U.S. and it was also in Europe. But what hurt us a little bit in 2012 was the fact that the Chinese market slowed down in our industrial world. What we have planned for 2013 is really probably continued negative comparisons in the first half for the Chinese segment of the market and in industrial and some positive growth in the second half for the China end markets, which would lead to a net, probably mid single-digit type of a growth in China for the industrial business. So that's sort of the profile for the industrial segment forecast. I would say that we still would see -- it's a smaller number, but in all of our segments, we're seeing -- we're continuing to see some pretty good growth in Latin America. Industrial has a pretty big business in Latin America, so it's -- Latin America is probably a couple of percentage points higher on growth for 2013 and most of the rest of the world, based on what we have in here, but it's also a pretty small number. So it doesn't move the total that much.

Andrew Obin - BofA Merrill Lynch, Research Division

I guess without commenting specifically on the quarter, one of the themes -- I think one of the reasons investors are very much, very excited about Ingersoll-Rand story right now, is your exposure to North American construction market, I would say both in HVAC and the security side. Could you just broadly speak about the trends that you are seeing in the market, and how you see them developing going to the second half of the year?

Steven R. Shawley

Well, the exposure we have to construction in North America, really the biggest exposure is to nonresidential construction. I mentioned in my presentation, roughly 60% of our portfolio of the existing company is really driven by nonresidential construction. And if you look at security alone, security is the, probably most driven by new construction, new nonresidential construction. The Trane commercial business is really made up of -- new construction is a big factor. But 80% of Trane's market is replacement. So what you have there is the continuing issues of building occupancy, or buildings filling up, commercial buildings filling up, are people upgrading the building in order to attract new clients, new -- lessors. There's that activity going on and continuing to go on. Also within that business, 40% of Trane commercial is a service contracting and parts business, and that tends to be kind of running above, maybe a rate of twice the level of equipment growth. So there's a nice sort of a bit more of a cushion in the Trane commercial business than there is in the security business. The security business, if you looked at that segment, and you can see it in our reporting segments of our official financial statements, it's been down and running at slightly down, couple of 3% down for the last couple of years. So that's the piece that is really bumping along the bottom of the nonresidential construction dearth in North America. What we expect, I talked about fairly modest growth assumptions for 2013. I think that what we're seeing is the architectural building index in the U.S., which tends to be about a 12-month lead indicator for certainly our security business, is starting to break above 50, but it also did that back in the latter part of 2010. And we were, quite frankly, fooled by the fact that, that was going on because it didn't maintain its momentum. And 2011 did not turn out anywhere close to what we expected it to be with regard to return on those markets. So we've been burnt once with regard to that. But if we see some continued activity there in the inquiry index that sort of the backdrop for the architectural building index is also strong. Who knows? We don't see that happening in 2013, so if there's any recovery in the U.S. markets for non-res, we would expect to see it in 2014. I think the other thing that really, you have to remember about the non-res market, there's really 2 big components: There's the commercial piece, then there's the institutional piece. Institutional piece is far more interesting to us because it uses much more air conditioning and security than what the commercial piece does. The commercial piece includes factories. Includes parking garages and other structures that not necessarily in need of HVAC or significant security. We do significant business in the institutional side, particularly security in the area of education, the -- which is college -- colleges, secondary education, primary education. And you get a mixed bag even there because colleges are, in most cases, are funded by gifts from alumni as opposed to public schools, which are funded by local municipalities and local bond offerings, which are tough to get. So there's a diversion of the 2 numbers. Commercial construction is expecting to show -- put in place, increase in 2013, while the institutional piece is continuing to be down. So we're kind of facing that dynamic, too. If I switch to residential, that's probably a bit more of a near-term upside potential because the new construction residential structures is growing this year. That's still only going to be in the U.S., they're still only predicting about 890,000 housing starts. That includes multifamily. We need to be at a 1.2 million or 1.3 million to get back to peak types of markets, but the residential market is also very much driven by replacement. If you look at that market, it's probably more, probably 85% replacement compared to new. Replacement is a function of how wealthy a homeowner feels. And if we're getting increased values for resale of homes and they're able to mortgage and recapitalize major equipment in-house, okay, that's really what drives that market. Home equity loans, okay, which have pretty much dried up in the U.S. okay, is what helped people fund new HVAC or new capital improvements in their homes. So that has yet to break, but it's moving in the right direction. Resell statistics are improving, but the average price of a resold home within the U.S. is still 30% below where it was in 2007. That's a big number, so a lot of dynamics going on. But I think that the way I would like to think about it is we should see better markets before we see worse because we've been looking at worse for quite a long time in the construction industry. Europe, I would say Europe on the commercial construction side is probably still, at least, 2 years away from what we can tell. And that's really going to be an influence of a blended market, which will include the Middle East and we put the Middle East in our European numbers. And we still expect to see some decent growth in our HVAC markets in the Middle East, which helps the European numbers a little bit.

Unknown Analyst

Your comment earlier in flat end market environment. You mentioned about market share gains and opportunities. But on the Operational Excellence, you have several initiatives there that had been underway for some time. What kind of margin opportunity is there in a flat end market environment with that operational piece? I think you mentioned your systems started -- you're going live on some of the systems this year, so...

Steven R. Shawley

Well, you saw the numbers on the Slide #5 that I presented, they're down at the bottom right-hand corner. So if you look at 2012, and the question -- we get that question a lot about, what can you do on flat revenues in terms of margin expansion? 2012 was almost a case study in that because the reported numbers, excluding the Hussmann transactions that occurred in 2011, we were about 0.5% up. And that was the reported number. The organic number was up 2% because euro was a big factor in our FX. But -- so 2012 was a very good case study for, is it working? And the reported margins improved by 30 basis points. But inside that 30 basis points, we spent another roughly 70 basis points of margin on investments in new products, distribution expansion and new systems, the reinvestment in the aspects that I talked about in the presentation. So we feel very good about a situation where in flat revenue environments, we could improve margins by 30 to 50 basis points given the momentum we have going. I think that what we're most excited about is we're seeing improvement in 2012, gave us a lot of confidence, okay, that our process and strategy is working, that with any help at all from the top line, we should see excellent leverage going into the future. So we did not plan 2013 on the basis of getting lucky in the markets. We planned 2013 on the basis of continuing to do the hard work to improve our margins and to try to grow our business organically, to focus on pricing, market share improvement where we can, in order to continue to expand margins in that flat environment. I think if we were to choose anything else, okay, our concern would be that it would take people's attention off of what the real work should be and get everybody hopeful that the markets are going to return. So that's kind of how we're approaching 2013. And it's a kind of the wait-and-see attitude, if some of these things do break. What's going on with the architectural building index in the U.S., it continues to go in the right direction, and we see an upward trend. Who knows, maybe '14 is finally the year we'll start to see some of that turnaround. But right now, 2013, similar types of a mindset as 2012, drive margins, try to drive more organic growth where we can and continuing to grow margins in the face of expected tough market.

Andrew Obin - BofA Merrill Lynch, Research Division

That would be '14 as well. I mean if the Operational Excellence has some improvement, the opportunity in '14, '15 as well, or it's really reaching the tail end?

Steven R. Shawley

No question. If you get on that Page 5 that I showed, the footprint work is pretty much done. We had that conversation here. The pricing work is ongoing. Last 7 quarters is just the beginning. I can remember many, many quarters before that where price did not exceed inflation, so we expect that to continue to be, at least, offsetting direct material inflation going forward. The procurement centralization is -- we just piloted the centralization concepts last year. So we have a tremendous amount of our [indiscernible] yet to fall underneath the centralization focus for material. And the Operational Excellence thing, we made the decision to not try to achieve Operational Excellence by making speeches, sending out letters and employing consultants. We decided to employ Lean Six Sigma by going through this value-stream process, which is very, very painstaking, identifying the value streams that we're going to focus on, getting the cultural change in place for that value stream before we move on. The reason why we had just expanded it by 8 more value streams is because we made the decision that we're not going to leave the original value streams until they're right, until the people inside that value stream have adopted the techniques and the discipline of Lean Six Sigma and are driving it themselves. So now, we feel like we can move on to another 8. There's 100 value streams, over 100 value streams in Ingersoll-Rand. So we're up to 24, 1/4 of our conversion cost is being covered by that work now. So a tremendous amount of opportunity there, and we're still burning margin. If you look at our SG&A ratios, they went up in 2012, mainly because we're investing in these common systems. We expect that to turn around by 2015. The benefits from the common systems to be put in place is going to start reducing the SG&A number. So we're looking for, as I said, a 1 to 1.5 points of improvement in our SG&A ratios as a result of running the company in a much more integrated basis, using common systems. So we -- it's a formula that is working. And so far, if you take a look at what we seen in 2012, it's a blend of lowered cost and higher costs associated with the investments that we're making in new product and system. Once that normalizes and I'd say by 2015, then we'll start to see lower SG&A. And the benefit from the longer, long runway associated with the Lean Six Sigma and the material focus. So we feel good about them.

Andrew Obin - BofA Merrill Lynch, Research Division

Can you remind us the value-stream process, because I think it's a key part of your strategy. So can you just remind -- you talked about the expansion value stream, so which segments have you taken the value streams to? And another thing with the divestiture or with the spin-off of the business, how is that impacting the value stream strategy? How does it make Todd's job different in any way?

Steven R. Shawley

Value streams are spread throughout the company. And really when we set them up, there was a few targeted areas. Obviously, where we have combined manufacturing processes that service all of our businesses, or some of our businesses are prime areas for putting in the value streams. But they're generally, evenly distributed across all sectors, all segments at this point. And they will continue to be that way because kind of the easiest way to expand the value streams is to -- once you have it right in one part of a plant and you have the people trained and you have people coming to work every day talking about what they're doing versus what somebody else in the plant's doing, there's a lot of interests from the other people in the plant to get involved in the value streams. So the natural expansion is to go one more aisle over in the existing plants that we have. So we expect it to grow fairly symmetrically throughout the businesses. And the way this thing would work is that you put the leadership for the value streams into the value stream, so the leader of a value stream may or may not be the plant manager. But it may be somebody, who's got a lot of experience in Lean Six Sigma, has done this before. In fact, probably the biggest bottleneck for us to expand Lean Six Sigma is the leadership and the knowledge of the people that are in charge of the transition process. So again, breeding that skill set and having a DNA available to expand [indiscernible], makes a lot of sense to expand in existing location. So we expect it to expand symmetrically. We expect both businesses, the main co and the spin co [ph] to be continuing to drive value stream, Lean Sigma, Lean Six Sigma implementations. And for the 2 companies just to bifurcate and continue to focus that way.

Andrew Obin - BofA Merrill Lynch, Research Division

So there's been no change in implementation of -- regarding spin-off? There's just -- it's sort of operational things as usual?

Steven R. Shawley

That thing that's consistent across all of this is what's going to put value into security is to maintain or continuing to improve their margins. It's a great business today and can be better. And for sure, the remaining company expanding margins will be a prime #1 priority for that business for some time to come. So we don't see the spin changing any priorities that we're working on. It's just now we have 2 companies.

Andrew Obin - BofA Merrill Lynch, Research Division

We have time for one more question. Let me just ask a question about price cost relationship this year because this is an okay year so far in terms of commodity prices. So how does that change your approach to pricing? Do you still expect -- are you still pushing as much? And I know you talked a little bit about it, but what's your approach to a customer in a slower pricing inflation environment?

Steven R. Shawley

What we found when we start digging into our pricing issue is not so much the fact that we're not increasing prices, [indiscernible]. So just increasing our price list number, okay, is not enough. Making it stick and managing discounts in the chain, being consistent with the information, the metrics that we're using to evaluate sales performance, sales individuals performance and holding them responsible for margin expansion, okay, is -- I mean it sounds real boring and dull. But the devil is in the details. Luckily, we had pricing policies being administered almost as diverse as the number of sales managers we had in the company. So putting in discipline, common standard work around setting prices, holding people accountable to make them stick. And you can imagine the business like the Trane residential business, okay? It's a 3 -- it's a 2-tier distribution system, so you've got discounting going on to the distributor, you have discounting going on to the dealer. And the ability to manage that complexity was pretty limited. So just getting the metrics around what's going on in the marketplace and taking a look at, well, this sales office doesn't seem to be doing quite as well, why not, being able to have that kind of a conversation at a higher level with the metrics of the company, using the metrics coming back. Are the things that we've done. We're still increasing price through price list increases. But we're also now be able to do it more effectively by the right products to be reducing -- to be increasing price. And quite frankly, taking advantage of the fact that we do have an excellent brand recognition with our customer. Frustration for many years, for people like me was, why can't we good price realization to stick whenever our customers really appreciate our product and our brand. That's what's going on. It's not so much about raising price every quarter. It's about managing much more effectively at the grassroots level of customer sales-force relationship.

Andrew Obin - BofA Merrill Lynch, Research Division

I think we're out of time. Thank you so much.

Steven R. Shawley

Thank you.

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