IR
#Good morning, <UNK>.
What we're focused on is really exactly what you said that the EBIT growth should be the free cash flow growth.
And that's exactly what's happening in 2016 is the operating income growth is falling through.
Our percentage on working capital is remaining true.
We're not having to invest heavily in terms of capital.
But we're also doing all of the projects and all of the items that our businesses bring forward that make financial sense.
And so if we can keep that rigor going, that is exactly the model we want, which is the EBIT flowing through.
<UNK>, I'm going to punt that down the road here a little bit for us to be honest.
We want to dial in what North American trailer volumes will be.
We're going probably center around a 20% down number and make sure we don't do anything in the event that it's only down 10% or if it's down 30% we want to optimize cost structure to match it.
So I know that at down 15% we're working the plan to be relatively flat.
We'll see as we get closer and dial this in but we need a few more months on this before we can really back to you on that.
Yes, so let's talk about the fourth quarter first.
So you're right.
If you do the math and you have an 80 basis point spread for the year, it would get you to flat to maybe 20 basis point spread in the fourth quarter.
But what we see happening ---+ and, again, the third quarter came out better than we had hoped at 60 basis points, which was really about 50/50 material deflation and the other price.
As we start to look at 2017, I think what 2017 does is it reverts to what we've said all along, which is that we would have a 20 to 30 basis point spread between price and cost.
And as we start to look at commodities for 2017 ---+ so steel has moved around a little bit.
We saw an increase earlier in the summer to over $800 a ton.
We currently see spot prices back in the $700 range.
So we have about a six month time lag between when those prices move around and when we see it.
Translated, that means I'm going to see some steel inflation in the fourth quarter as well as probably the first quarter of 2017.
However, I still continue to see tailwinds coming out of copper and aluminum going into 2017 helping us to offset that balance.
So we have line of sight to what we think the commodities are going to do.
And therefore we have line of sight to what our costs are so that we can price per our operating model with top line margin expansion and get back to the 20 to 30 basis points for the year.
Yes, really it's the volume running through industrial so low on the large equipment, which is where the big heavy fixed costs really tend to sit.
So it's more volume dependant.
If you look at what's actually flowing through, there's good productivity on that lower volume.
So, <UNK>, the long story short is volume helps productivity.
Cost reductions we've taken need volume to apply them too and that's ---+ it needs to happen in the industrial business.
Look, fundamentally you'll see us turning up the gas again in 2017 and we'll make sure the pipeline ---+ we try to keep the pipeline 125% of what we think it needs to be.
We try to calendarize that by quarter.
So what we're doing now and we do every month is make sure that we've got that pipeline lined up to be 125% percent of what we want it to be for our plan, allowing for things to break or timing to be different.
Absolutely.
Because we try and separate productivity on volume from volume and standards.
Yes, I think the combination of sort of the regulatory effect and the thought about getting in front of that when customers have the opportunity plus, from our point of view, there's a passion in the Company around energy efficiency and sustainability.
I think you hear that every time you talk to us.
That combination I think is helping our people in the field make the story more compelling.
And I do think it's led to why we're seeing share gain globally across the board.
Good morning, Andy.
Yes, you're seeing some of the smaller equipment growing, which is a good sign.
You're seeing really severe contractions in large machines.
But we're ready to lap that I think next quarter.
And so that's why I think it's going to stabilize where it is.
And you're seeing still good growth in oil free machines and contact cool machines that would be supplied into pharma, food and bev, in particular markets.
Which, again, the earlier comments I made were really trying to direct more of that proactive activity into the markets that are actually growing.
We don't see a lot of relief coming in iron, steel, air separation, those sorts of markets.
I'd say it's exactly that, Andy.
It's exactly what you just said.
It's North American trailer, APU and marine being weak and not really a surprise.
We've been thinking about this really all year.
We thought it would actually be earlier in the year.
It's actually in the back half of the year but certainly that's the change really as you come through now the final quarter.
I would hope not.
We're trying to look at crop yields and other fundamental factors that determine if you're going to see produce and food and perishables move.
So structurally you're getting to a pretty low level here.
Hi, Shannon.
It's the typical way it does evolve.
It really is always kind of a K through 12 led institutional recovery in that it moves up through higher ed, through healthcare and eventually with state, city and federal projects.
And a lot of that is based on just property values and the ability to tax against those values and have bonds pass local city vote.
And so you're into that cycle here now.
It's still about 25% below where it was last time on a volume basis.
So there's quite a bit of room I think in the institutional side to continue to grow.
Maybe to step back even one step further, the first thing we want to do is make sure that we are absolutely investing in the business fully.
And I can check the box and say we're absolutely doing that.
I can check the box and say we've now put the dividend in a good place relative to the peer group and we're proud of that.
So it really does come down to what do you do the with the pieces of this thing.
And if you think about it in the long run, roughly half of the cash either acquisition or share buyback ---+ we certainly would like to grow the Company but we're not going to do that at the expense of making a poor capital allocation decision.
So what you see right now is a large number of channel and potential product extension investments that might fit the portfolio.
If we could close, it would be worth the ---+ the juice is worth the squeeze on those.
So that's really why you're seeing us hold back here.
Now, with all that being said, we've continued for at least seven years ---+ I guess now that I've been saying this ---+ always controlling dilution of the share count.
So as <UNK> alluded to the fact, that's roughly 2.5 to 4 million shares and we'll continue to make sure it's part of the program going forward.
And I think what you're seeing, Shannon, just as another point on that is we're going to be patient with this and with the cash that we have because we really want to create long-term value.
We'd really like to invest in some of these opportunities.
To your point, some of them in the smaller size with channel investments but also in new products.
And so it doesn't mean that we are going to just make an either/or decision.
We're being patient with the cash that's on the balance sheet and we're finding the best opportunities.
But we want to let some of those M&A opportunities play for a little bit and see if we can close them because we think that's important, too.
Hi, Josh.
Well mix matters, Josh.
I mean definitely if you look at the high margin material handling and tools businesses, they matter a lot.
But if you look at a normal mix that we would have seen sort of pre-downturn, about 70% of the downturn that we've seen has been volume-related.
The balance being some currency and then some mix.
So fundamentally we do need volume to return.
But with that being said, if volume doesn't turn next year and we have the same mix of business that we have today, we have a healthy expectation to expand margins in 2017 in the industrial business based on the actions we know we can take at these low levels of volumes.
And we'll be bold about that.
And you'll see us commit to that probably in February.
Yes, Josh, I don't have an exact split for you.
But I'm amazed at the size of equipment and controls orders that we're getting that are not performance contract-based like the Chunnel Tunnel and I could name a handful of marquee projects like that.
So we're winning a lot of that work and we're loading up on that work as well.
With that being said, performance contracting is an interesting place for us to play and there is a healthy amount of pull-through that comes both not just in equipment but in service.
Performance contracts always have a healthy service component that comes along with the guarantee.
It's going to be large applied and performance contracting.
And so it will be equipment and controls and service with and without an energy guarantee is the way to think about that.
You're welcome.
Good morning.
<UNK>, I'll tell you I don't have a public point of view that's prime time at this point.
So good try.
I appreciate the last question as one more shot at it.
But we're putting our plans together now and there's a process of all companies to put that together.
So I don't want to sort of play our hand here too soon on that.
But we understand what top quartile will be.
We understand what our goals are, what our operating system is set out to do.
And so there's not a lot of acrimony inside the Company to understand what good performance looks like.
So that's what you'd expect for us next year and I'll dial that in as we get closer into next year.
Thank you.
I'd like to thank everyone for joining today's call.
As always, we'll be available for questions today and over the next several days.
And we look forward to speaking with you soon.
Thank you.
