Good morning. My name is Liandra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ingersoll Rand Third Quarter 2017 Earnings Conference Call. [Operator Instructions] Mr. Zac Nagle, Vice President of Investor Relations, you may begin your conference.

Thanks, operator. Good morning, and thank you for joining us for Ingersoll Rand's third quarter earnings conference call. This call is being webcast on our website at ingersollrand.com, where you'll find the accompanying presentation. We're also recording and archiving this call on our website. Please go to Slide 2. Statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities law. Please see our SEC filings for a description of some of the factors that may cause our actual results to differ materially from our anticipated results. This presentation also includes non-GAAP measures, which are explained in the financial tables attached to our news release. The participants on this morning's call are Mike Lamach, Chairman and CEO; and Sue Carter, Senior Vice President and CFO. With that, please go to Slide 3, and I'll turn the call over to Mike.

Thanks, Zac, and thank you, everyone, for joining us today. I'll start this morning by discussing how focused execution of our strategy underpins our ability to deliver sustainable, high levels of performance over time. I'll also provide comments on how we're thinking about our business and our end markets broadly as we closeout solid performance in 2017 and move into what we expect to be another strong year in 2018. Sue will discuss our third quarter performance in more detail, and address some key topics we know that are on the minds of investors. And I'll then close with a brief summary before we take your questions. As I said on prior calls, our overall strategy remains straightforward. We believe our business operating system, people and culture are source of competitive advantage. First, our business strategy is grounded in anticipating and addressing global trends that positively impact many of the world's most pressing, sustainability challenges. We focus on delivering the most reliable, energy-efficient and environmentally friendly products and services in durable growing markets. In our case, it's an orientation toward the importance of sustainability, which is enabled by digital and other exponential technologies growing at dramatic rates that are enabling new business models and sources of productivity in a world that will increasingly value the conservation of resources. We excel at delivering energy efficiency and reducing greenhouse gas emissions, reducing food waste, preserving natural resources and generating productivity for our customers. It's what we do and it's what we're known for. We maintain a healthy level of investment in our businesses to sustain leading brands, which are #1 or #2 in virtually every market in which we participate. Second, we excel at delivering strong top line, incremental margins and free cash flow through our business operating system. Our business operating…

Thank you, Mike. Please go to Slide #5. I'd like to begin with a summary of main points to take away from today's call. As Mike discussed, we drove solid operating and financial results in the third quarter with adjusted earnings per share of $1.44 despite business disruptions from natural disasters in the quarter negatively impacting results by approximately $0.04 to $0.05 per share. Our adjusted tax rate was 17.7% driven by the timing of a number of tax planning-related discrete items that hit in the third quarter that were expected in the second half of 2017. We continue to expect our full year 2017 adjusted tax rate to be approximately 21% or the lower end of our previous range. Bookings growth was strong with growth in both segments and in every strategic business unit. On the Climate side, organic bookings were up mid-single digits in both Commercial HVAC and Transport, and up low single digits in Residential with another quarter of share gains. We also drove high-teens Commercial organic bookings growth in Asia and Europe, Middle East and Africa. Climate organic revenues were also higher, up 3% in the quarter. Our Industrial segment continues on a path of steady improvement and is actually performing a bit better than our guidance with strong organic bookings growth of 5% overall. Compression Technologies had growth across small and medium compressors and particular strength in large compressors. We also drove a 90-basis-point improvement in adjusted operating margins on essentially flat revenues. Flat revenues were also better than our expectations given difficult compares versus Q3 of 2016 as we discussed on our second quarter call. In January, we laid out our capital allocation priorities for 2017, including spending approximately $430 million on dividends and an additional $1.5 billion on a combination of share buybacks,…

Thank you, Sue. So on closing on Slide 19. We expect to deliver our 2017 plan for revenue growth, adjusted EPS, free cash flow, utilizing our business operating system and building a thriving, more valuable Ingersoll Rand. To summarize, our Climate segment remains strong, led by our Commercial and Residential HVAC businesses, which are focused on growth areas with equipment, controls and service. Our Transport Refrigeration business is diverse and agile, and is executing their strategy and delivering against our high expectations in a challenging market. Our Industrial business is improving ahead of our expectations for growth and margin expansion. 75% of our negative price versus cost spread in 2017 is expected to come from very strong growth in Asia, primarily China. We expect both the inflation and pricing headwinds to moderate heading into 2018. The balance of our markets should see moderating inflation in 2018 as well as they lap 2017 inflation. Nonetheless, we're accelerating our 2018 productivity initiatives to drive more direct control over margin expansion irrespective of market conditions. We're also on track to achieve the capital allocation priorities we laid out at the beginning of 2017. We expect to deploy roughly $1.9 billion in cash in the form of dividends, buyback and acquisitions. We have a tremendous depth of talented people and our culture remains as strong as ever. And taken together, I'm confident that with this formula, we'll continue to deliver top-tier financial and operating performance. So with that, Sue and I will now be happy to take your questions.

[Operator Instructions] And your first question comes from the line of Andrew Kaplowitz with Citi.

Mike, you gave a lot of color on your price versus costs issues, and you talked about how most of the issues were emanating from China and the Middle East. I know you don't want to give detail on 2018, but as you tend to shift the overall company, it's a little more of these longer cycle Applied HVAC orders, especially in international markets, how difficult do you think it'll be to get your arms around price versus cost? And what could you do specific on these regions where competition is significant and inflation is still reasonably high?

Yes, Andy, I think maybe it's best for us to start with what is our China strategy historically and how we're evolving, and I think that will answer a lot of questions for you. First of all, China as a country and Asia as a region would have some of the highest operating margin that we have across the HVAC space, still today even this quarter. Historically, we've been a Tier 1 and Tier 2 city-focused company and largely on applied equipment and we've been very successful there. We've penetrated those markets with very high share and often Trane is the basis of design in many of these projects. What we've done over the last 2 years and you're seeing it this year in spades, is we've extended to Tier 3 and Tier 4 cities. We've also launched both localized, ducted and ductless unitary product nationally. We've penetrated, and are penetrating larger infrastructure project things, subways and airports and the electronics vertical specifically, which is Applied. And those 3 things in Tier 3, Tier 4 cities help drive Trane as a basis of design in those cities as well. It's been a formula we followed for years and it's been very successful for us. We know that, that grows a large service tail and we know that we grow margins by leveraging the SG&A and the manufacturing base around that. So to put it in context, the strategy has been very successful. We put a PGT in place about 2 years ago. We fully localized product portfolio in unitary, duct to ductless, we've been there and Applied for some time. We added 178 selling and marketing people onto the street over the last 12 months and 165 of those, we put in just since January so the project pipeline we're seeing in China is up 211%. So to speak for clarity, it's 3x larger than what it would have been last year at the same time around that pipeline. So year-to-date, we've seen bookings growth in unitary, it's actually been 40-plus percent. We've had mid-20s revenue growth in unitary. Unitary is now 25% of the mix that we have in equipment in China. We've also been able to grow the Applied business at twice the market rate year-to-date, and we're seeing excellent service growth. So again, it's become so successful that it really is, we classify it as price, but we're growing this accretively to the company and long term it's the right and most successful strategy that we know how to conduct. By the way, we would have a similar strategy, there are nuances to what we'll be doing in Europe or Latin America, but every region of the world, it's got a unique strategy, and in China, it's just been very successful for us.

Mike, that's helpful color. And then just shifting gears to North American Commercial HVAC bookings, they were up low single digits against tough comp as you talk about it. I think it's good result compared to last quarter, but can you give us a little more color regarding what you're seeing in the overall North American HVAC market? There's been slowing like unitary. You talked about Applied HVAC improving there, do you still see a good runway in Applied HVAC, so North American Commercial HVAC bookings should be up low single digits or better moving forward?

Yes, I would say first as a starting point, nothing has changed that would make us less bullish on the end markets than we were 5 years ago when we talked to everybody at Analyst Day. Our outlook continues to be very positive. We'll see contingent...

5 months ago.

5 months ago, thanks. Low single digit to mid-single digit growth in North America Commercial, and that we're going to drive share gains. Our project pipeline is actually stronger today than it was last year at the same time. We also think inflation in 2018 is fairly consistent with what we expected 5 months ago. We think it's going to be much more copper-related, which is much easier for us to set pricing and cost into the factories, about how to price and cover that as supposed to steel, which is very difficult than the longer lead items, so we think that, that will be more manageable for us. So staying with where we were 5 months ago, the CAGR of 4% to 4.5% over the 3-year period, 11% to 13% EPS growth over that period, still very much in the cards for us. We're very confident about that. We'll update that in the fourth quarter, but a lot of that's underpinned that we're seeing strength not only in North America, but across the globe and you're seeing that in even Latin America. As we pointed out, mid-teens growth rate in Latin America, finally seeing some recovery there and don't forget, that's an important market for us too. It's a $0.5 billion in revenue in the Climate space for us.

Your next question comes from the line of Nigel Coe with Morgan Stanley.

Mike, so I just wanted to go back and visit the price cost. So the 55 bps impact from Asia and Middle East you called out, so just given your comments on China, is that more accurately a mix impact as opposed to price cost impact?

Yes, Nigel. It's a very specific definition we use and we say that if it's equipment coming out of a factory using the same machining and assembly processes, that we mark that as price. But clearly, what you're seeing in Tier 3 and Tier 4 cities, is even more decontented product and you're seeing that generally, those have done some of the local players that have been in that market. So it is mix more than it is price. But again, for consistency of what we've been talking about, we classify on the bridge as price just to keep it sort of straight for everybody at this point in time. But it is something that if you move past China, you look at say Res for example. On the Residential in North American business, we grew margins considerably, we grew share considerably. We're managing that. If you go to the balance of the Commercial businesses, excluding the Middle East and Asia, we're largely covering inflation there and of course, in the Industrial side, we're covering inflation there completely. So it's really isolated to this penetration we're seeing in China. Middle East is a bit different. Here you've got just this fact that you've got the same number of competitors fighting over fewer projects there, and so you're going to have a bit more competition there as well. In 2018, I think that we're clear that we've got moderating steel environment. We've got our copper environment that we can lock a good portion of it, understand at the beginning of the year. We feel like, generally speaking, it's a more manageable year in terms of the global material inflation, pricing scenario. And specific to Asia, it's really a matter of just getting to scale on some of these Tier 3, Tier 4 cities, getting additional service density in these cities and we know how to grow margins from there. So again, it's a long-term view towards China. I think we see an improvement in 2018 in China leverage.

Right. Okay. But if you have to think about maybe just moving away from China because obviously that's -- it's kind of a good problem to have if you grow into that kind of rate. But if you think about North America, Europe, if you think about the pendulum of competition and pricing, is it becoming more competitive? Less competitive? About balanced? I mean, how do you say that pendulum is shifting?

Yes, there's nothing structurally different about the competition in these markets. We've had high-teens growth before in Europe. We've had substantial growth in Europe over the last few years. It's really about new product introduction, around next-generation refrigerants, building out a controls portfolio, a wireless portfolio, double-digit growth there, more digital involvement in connecting our businesses remotely, more service feet on the street. So it's always been a competitive environment, but you're able to differentiate that business on total cost of ownership, which is 90% of that equation is not the initial cost, it's the energy efficiency and the maintenance and the reliability of the product over the long haul and nothing's has changed about our value proposition there at all.

And Nigel, it's Sue. Let me add a little bit of color on the pricing to that, I think, is important and it really doesn't come out in all of the detail that we've got. So we talked about that price is actually positive in both of the segments, which it is. The other piece of it is that the pricing that we have achieved in the year is actually higher than last year. Again, we know the inflationary pressures that we've got, but we have really been able to build positive pricing in the areas of the world, and like I said, in total, it is positive in a dollar terms on a year-over-year basis and it's fairly significant. And it does have the headwind in there on price from Asia. So I don't want anyone to think that the pricing is actually not strong and that we haven't in pricing in 2017, we actually have and it's actually stronger than it was in 2016.

That's an important point. And just to follow on SG&A. You talked about G&A as an important area of productivity improvement. And Mike, in the PR, you talked about ramping up productivity to offset some of these price material pressures. If we delineate between the S and the G&A in that 5% inflation, are we starting to see the G&A good news coming through but it's being masked by some of these sales investments, so is that on the come?

Yes. Relative to 2018, Nigel, I will tell you that we're going to generate $300 million plus in productivity like we do every year. It's going to be direct material. It's going to be PGT led with engineering product management and operations. It'll be both direct and indirect in that regard. I think what's going to be different for us is we spent a couple of quarters in excruciating detail, understanding the G&A and sort of benchmarks and ideas around reducing G&A across the company, which will show up strict on the G&A line over time between '18 -- 2018 and 2020 over a multiyear period, certainly starting in 2018 will have an impact. We also see opportunities with a lot of what we've done around automation and lean around things like warehouse consolidations and logistics opportunities that we are able to take advantage of. And again, we'll start to see those in 2018 as well. So what I'm saying is, in addition to the normal high levels of productivity that we expect in the operating system, there are a couple of projects that literally we're having to build program offices and [ secund ] very talented people into the program office to be able to drive what's likely to be hundreds of projects that roll up into these 2 bigger ideas, but I think that we got more leverage in '18, '19 and '20, from those things and I'm pretty excited about it. We talked about it at your conference in fact, and I'm glad you asked me the question.

Your next question comes from the line of Steve Tusa with JPMorgan.

On the Commercial side, last quarter, you had mentioned the unitary markets on that slide as growing. What are you seeing in those markets and ahead of this kind of regulatory transition in 2018? Do you expect any kind of pre-buy? And then just what's your outlook for kind of the core unitary markets going forward?

Yes, [indiscernible] growth again in North America, in the quarter, nice growth in the quarter there. So I don't anticipate a pre-buy there, Steve, per se. There could be some. I mean, it'd be great, if there was, but I don't -- we don't anticipate much of one at this point in time. But we are going to be sure that we build inventory and we're talking to customers about what is stackable and if in fact, they want to take that on.

Okay, great. And then in Residential, you guys also mentioned for the first time, channel, at least relative to last quarter. What do you -- I've heard from the Chunnel that you guys are kind of building out a bit of these -- the storefronts like Lennox has. I don't know if that's kind of an ongoing strategy that you've been just doing under the radar that you haven't talked about a lot. Maybe you can just give us some clarity on what exactly you're doing in the channel outside of the digital stuff that you've already mentioned and maybe different relative to last year, the year before that?

Yes. Thanks, Steve. We've got about 260 part stores today. Generally speaking, we've got them where we want them. We were adding up 3 last year, but we've got the coverage we generally need, and we're finding opportunities to transition some of that digitally so it doesn't all have to be brick-and-mortar, but there's 260 brick-and-mortar stores that are out there. What you're finding on unitary, both res and commercial though, is there is this past year in particular, much more of a bias with customers replacing than repairing. So I do think that that's put a little bit of pressure on mix, but for the right reasons. You're really seeing people at this point in time doing wholesale replacements.

And Steve, I would also point out that in the context of our part stores, the 260 that Mike mentioned, that serves both Commercial and the Residential markets for us. And in fact, Commercial is a little heavier than Residential in terms of overall sales for those part stores.

And as you know, Steve, a lot of contractors don't identify themselves as one or the other.

Right.

So it makes sense that we just have one presence to our customers.

That makes sense. And how fast -- just one last question, how fast did those grow like over the last couple of years, what was the -- how many, I guess, did you add in 2016, just as a reference point?

Yes, a dozen maybe. And we -- Steve, we've been working at that for a long time. It's not -- it just hasn't been something that you'd pull out of our company as being the large mover and shaker around the business, but they're an important part of the business and we've got the 260, the coverage we think we need.

Your next question comes from the line of Rich Kwas with Wells Fargo Securities.

Mike, wanted just to get your thoughts on as we -- big picture as we think about mix within Climate for next year? You've had very strong growth on the order side in China. You've talked about the price, the mix headwinds there, that brings lower growth than the developed markets. How does that shape up as we think about a normal incremental margin for Climate particularly in comparison to this year? Do we get -- do you think you can get back into that 25%, 30% range on a year-over-year basis with some of the initiatives you have in place and given the mix changing?

Yes, I've no doubt, Rich, that the planning we'll do for 2018 will have us coming back to more normalized leverage in that business, and we've built a portfolio that should be agnostic to the product specifically. I mean, as you know, Applied's got a little lower margin, but great service base over a long period of time. And unitary gives you a little bit of a margin pop sooner, but there's enough happening in the world and enough growth in the world that I expect, again, good growth in 2018. The pipeline supports that. We think we've got a more manageable mix of inflation moving from steel to copper, easier to get on top of that from a pricing perspective. So -- and then your question related to what Nigel asked, if we can do a bit more around some of the rooftop consolidation, a bit more around the G&A leverage in the company, no doubt that will get back to where we've historically been.

Okay. And then just on -- as we think about institutional, given you seem some -- to have some macro-wise, some moving numbers here with regard to forward indicator given Dodge and ABI, et cetera, but generally moving in the right direction, I know you emphasized no change versus 5 months ago earlier in the call, but just within the mix of the business, how do you think about that shaping up for this year in terms of higher growth rate, potentially for '18 versus '17 and impact on margin? I think you touched on Applied being lower margin, but is that meaningful enough to impact overall incrementals and how much -- what's the offset on the top line with regards to...

Yes. So one of the issues, it's tough I know from an analyst and investor's perspective, is to take that Dodge or ABI data and all you can do is take it at face value, but I've always said that, that Dodge data would really account for about 50% of what we consider to be the market, the visible market would be what Dodge is reporting, but 50% of it, frankly, it's the good 50%, is the negotiated piece of that, the negotiated retrofit of the performance contracting side of that, and that's where we've got the added benefit of looking at a pipeline, and those pipelines are well done. It's a process that we've been running in the company for a long time. It's a high level of confidence about what gets reported in there and how we assign close rates and probability to those projects. And so when I look at what I see for 2018, I see a good runway and good projects. There's a number of very large projects that have the possibility of going in 2018 for us that we generally wouldn't put into a forecast, we generally wouldn't even put into our guidance, but similar to what happened in 2016 or at historic '17 a little bit for us, we're going to have a little bit of it in 2018 as well. These projects would range from $50 million to $200 million apiece and so they're going to move the numbers a great deal if, in fact, they hit. But excluding those, we see a strong pipeline, including those, is a very strong pipeline.

Your next question comes from the line of Julian Mitchell with Crédit Suisse.

Maybe just switching to the Industrial segment for a change. So Compression Tech, you've had pretty good equipment orders growth in the last say, 3 quarters. The sales though have been down substantially in equipment year-to-date. So I just wondered within Compression Tech, how we think about the conversion of that order number into equipment revenues and when we should start to see the equipment revenue line accelerate?

One really good data point for us that I'll tell you on this call, is that you know we're very indexed toward very large compressors. We're #1 in centrifugal compression technology in that space and of course, you know that, that carries 40% to 50% pull through on service along with that over time. And that has grown in the mid-20s, bookings growth during the year, and it grew in the mid-20s again in the third quarter. So we're feeling good about what that means for 2018 shipments and even beginning to formulate early 2019 shipments around some of the larger compressors. So that's an exciting change for us as it relates to backlog being built in large compressors and it's exciting as it relates to the kind of leverage we expect to see from that.

Understood. And then just circling back on the productivity and other inflation line in your margin bridge. Historically in years, when that have been good, it was about 100 basis point tailwinds, 2012 or 2014, 2015. When you're talking about more aggressive measures on productivity for next year, is that the type of tailwind you think that we should expect, about 100 bps from that line?

Julian, without setting guides, being careful here. That's sort of the general theme about how we think about setting plans would be to have about 100 bps of positive spread there. And then I take you back to my boxer analogy, that works great sitting in November and December and then as you get in the ring in January and you take a punch to figure out how to use all the tools at your disposal to win the fight. So that would be our sort of going in idea, and then what we want to make sure we're doing is we're putting some additional levers in place around ideas like rooftop consolidation and G&A that would be additive to that or in the event that inflation or pricing wouldn't behave the way we expect it to, we've got some additional countermeasures in place.

Your next question comes from the line of Jeff Sprague with Vertical Research.

Mike, I want to come back just a little bit again to China, and just the maturation of this Tier 3 and Tier 4 strategy, just a couple of points I'm interested in. Where are you on product development for those companies -- for those cities? I'm sorry. You mentioned decontenting product to serve those markets. Do you have a product refresh or product redesign that needs to be -- needs to happen to kind of effectively address this? And also I'm just wondering, you talked about the opportunity for service capture, what kind of service capture are you actually seeing in those markets?

Yes. And to be clear, Jeff, we've got all of the product now in the marketplace, both ducted -- ductless and applied and controls in the marketplace, so we're fully functional there. What will happen is, you'll get certain feature sets that are often specified by others into Tier 3, Tier 4 cities. You go out and you try to explain the value and the total cost of ownership around time and over time, we're pretty successful with that. But initially, you tend to find feature sets that carry lower margins than perhaps something you'd find in Beijing or Shanghai, typically. In fact, the product development going on now around the unitary space is to take the unitary product that we have and actually go the other way with that, which is higher efficiency unitary coming back into Tier 1, Tier 2 cities around that. And again, this is all in the Commercial space, not on the Residential space at all. So it's a very thoughtful strategy over time about putting manufacturing, product management, operations in place, product road teams, feet on the street, incrementally quite a few as a result of all this. And then excellent execution on the ground by the team there. To the point where you just don't forecast 40-plus-percent growth rates as you're doing your plans. You set goals and objectives around those sorts of things, but you don't sort of plan those things. What the team has generated sort of -- they've been on top of even those stretch goals, which to me is really solid execution. In the long run, it's building out a strong base. And -- it's not changed that half of the world's chillers, the last 5 years have gone in China, half the world's chillers are going to go into China in the next 5 years, and it makes sense like it does everywhere for us to have a full unitary, applied, controls, service and digital footprint and for that to be direct on the Commercial side, and that's what we're doing.

And on the service capture side of things? How's that playing out?

Yes, when I look back to 2008 and 2009, it would have been in that 10% range, compare that to North America or Western Europe, 50%. Today, it's in that 20%, 25% range and it will continue to move up in over the next say 5 to 10 years, look like Western Europe and North America, no doubt about that. The equipment gets more sophisticated. Customer's expectations around energy efficiency -- around sustainability goals in China, much more stringent than they have been in the past. All those things really lead more toward the OEM having an advantage in maintaining the equipment.

How much actual physical capacity are you needing to add to accomplish this? I mean there's certainly concerns that there's just excess manufacturing capacity in this space. Clearly, you're winning orders and growing your business and therefore, may need some, but how do you balance that risk reward?

We don't have a need to build additional factories in Asia. We've got a substantial footprint today and we continue to lean it out. So lines are running faster in less space. And the more scale we get, the faster we can run the lines and hypothetically, the less space per dollar of margin we're going to need. So I don't have in the plans us needing to build a factory in China at any point in the future.

Your next question comes from the line of Joe Ritchie with Goldman Sachs.

So maybe going back to price for a second. We heard from Watsco this morning that some of its vendors were starting to advertise pricing increases in the fourth quarter. Are you guys trying to pull forward price in 4Q or should we think about that as being more like typical, like 1Q type event?

No. I mean, Joe, I think we follow our normal cadence, some of which might be in the fourth quarter, some in the first quarter, but there's no discussion that we're having about pulling any of that forward on a different schedule than normal.

And Joe, just to confirm, price in res is exceeding material inflation and we grew margins again in the quarter. The hurricane impact to us was not in the res space. The res space, we were able to move inventory into the market. We're well positioned there. The impact for us was really losing 3 weeks of time in Puerto Rico at the manufacturing facility and there, just to skip to it, it wasn't the factory itself. We had the factory up and running with around temporary power with plenty of diesel, plenty of water, it was the fact that it was so difficult for our employees in the market that many of them lost their homes, lost everything, were just unable to come to work or didn't have the means to come to work to be able to build products. We're back up. We've been back up for a couple of weeks. We're running at rate. We haven't missed a beat in terms of customers there. We plan to head to build for hurricanes in advance and so we had stock there, just waiting for the ports to open up a little bit to ship them back out, but just to skip to that, it really wasn't in the res business for us, it was largely in the Thermo King business.

Got it. That's helpful color, Mike. Maybe my follow up here, and this is just perhaps refreshing my memory, but I thought you guys were targeting investments in the second half of the year that were roughly 2x that of the first half? So we were thinking it was going to be closer to like call it $40 million of spend in the second half. I think you did about $11 million this quarter? So should we think about the fourth quarter as being pretty highly loaded with an uptick in investments? Or are you pulling back on spend a little bit?

Well, Joe, so that's an interesting area. We are pulling back a little bit, but let me tell you how that's actually coming about because this is not, Mike and I going out and saying, we need to cut investments. So I would expect the fourth quarter to be a little higher than the third quarter, but nowhere near what the math would tell you that you would pull in, it's not 30, by any stretch. But our businesses, as we get closer to actually going through the projects that are in investments, and again, our investments are mostly new product development, channel and some IT type of investments, are actually looking at the projects and the return on those projects and they're coming to the conclusion that the returns are not at the expectations that they have and we have as a company. And so they're the ones pulling them off the table and perhaps going back to do some additional work on those business cases and maybe they'll show up again in 2018, but it's really SBU-driven, pulling down those investments in the back half of the year and we're very supportive of that for those reasons.

Your next question comes from the line of Andrew Obin with Bank of America Merrill Lynch.

Just a question on sort of management succession. You've had some recent changes at the top. I think some have been scheduled like Didier and Robert, but I think Gary Michel was probably not expected. Can you just tell us as to what this means about sort of operational direction of the company, this transition at the top? And what's happening with Gary's role?

Yes. Thank you, Andy. It's a good probably, opportunity to step back and talk about all the changes, some of which you mentioned, some that they'll be able to catch-up on. Robert and Didier have been great partners to this company for a long time, both had plans for 2018 retirements. We began to put pen to paper in January '17, and we've got Robert who will step out in January of '18 and Didier in September of '18, so we're able to benefit from their involvement for some time yet. At that point, we began to plan and in early September, or the 5th of September, we actually appointed Dave Regnery as the EVP combining those 2 roles. And really what's happened here is we've had very strong, consistent leadership at the SPU level for now a long time. We're not at the same place we were 5 years ago and so the role has changed and I've got a lot of confidence in Dave and Dave's capability of 30 years with the company, and obviously, doing a great job with the HVAC business in North America and EMEA, lived in different parts of the world and managed about every part of the company at one point or another. At the same time, we put Dave in that role, we moved Donny Simmons into Dave's role. Now Donny, you all would have met at our Investor Day, Donny was leading fluid material, handling Power Tools. He led a large part of the Commercial North American and Trane organization before that. Before that, he was in finance, both the Climate segment and going all the way back to TK, so Donny stepped into that role. A couple of weeks later, Gary had announced his intent to retire from the company…

And just a follow-up question on cost, and I apologize I'm sort of beating the dead horse here. Just so we have slightly lower spend in the quarter following lower investment spend that we're planning on. I would imagine that China and Middle East strategy, you've had that for a while, so I'm just still sort of a little bit missing why there was this earnings shortfall? Is it because sort of China and Middle East ended up being more expensive than we expected? Or is there something else on top of that below the surface that was weaker than we expect? And I apologize if I missed it.

Yes. I mean, if I put it really simply, I would say that the Tier 3, Tier 4 strategy for some of the larger infrastructure projects are carrying about 5 points lower gross margin, let's say than the Tier 1, Tier 2 city historical applied market. And the fact that we've grown that at a rate twice the rate of the other business just put margin mix pressure there. And then, again, adding 178 people into the mix, it takes a while for those people to ramp up, but again, 40-plus-percent growth rate serves the ramping up pretty quickly.

And the other element, Andrew, is that Asia, China specifically, has had material inflation that has escalated throughout the year. So when we talk about that being persistent, it is very persistent. In fact, if I looked at where biggest impact occurs, it's our Commercial HVAC in North America followed by Asia-Pacific, followed by Residential. So they've also had that headwind that was bigger than what we thought earlier in the year and that also contributes to that dynamic.

Our last question comes from the line of Jeff Hammond with KeyBanc Capital Markets.

This is James Picariello, actually. So just on M&A, you mentioned $200 million commitment year-to-date. It looks like only $60 million has actually been spent. So is it safe to assume that the telematics asset represents most of that difference? And then also, how do you bridge to this $400 million to $500 million range? What's the timing between and actual agreement and close of a deal? So just trying to get a sense there.

Yes, James, I think we closed 4 transactions or will close 4 transactions by the end of the month. So I wouldn't assume it all to be in the telematics space, so that would have been the larger of the group, but a couple of hundred million is really laid out, and we'll have that closed by the end of the month. The balance of that is our best guess of stuff in flight, of which I would say between $50 million and $200 million, there's a number of things in flight there that the timing could be off slightly, it could be a quarter off here or there. But those are lining up nicely as well too, and it ranges between channel and technology being added to the core portfolio.

Okay. And then just last one on Residential HVAC replacement opportunity. How has -- how have prior storms really pulled through that demand? And typically over what time frame? Just trying to get your early assessment of what the opportunity could be next year and maybe even beyond that?

Yes, it's a -- Commercial is a little easier to predict than res. Commercial, you could predict a great rental boom and followed by an immediate service requirement and we poured people into those locations to be able to provide service from out of state. And then depending on the criticality of what it is that you're conditioning space for those things really quickly. Res, you get everything between the tip of the tail, which is people with insurance, maybe a bit more fluent who are able to step in very quickly with or without insurance and replace, you've got the body of the bell curve, which is focused waiting for insurance that can take some time, the process and it's probably at this point, a 2018 event they should think about that. And they've got sort of other part of the bell curve, people without insurance that may not be able to step in and buy that as well. So that will take 1 to 3 years before that happens. So generally over 1 or 2 years, you see growth as a result of this so the net of it is usually growth, but it usually takes 1 to 2 years for it to show up on the res side -- on that res side, that is; on the commercial side, it's quicker.

I will now turn the call over to Mr. Zac Nagle for closing remarks.

Great. Thank you. I'd like to thank everyone for joining today's call. As usual, we'll be around to take any questions that you may have today or over the coming days. And we look forward to see many of you on the road in the coming weeks and into 2018. Thank you.

This concludes today's conference call. You may now disconnect.