Operator:

Good morning. Welcome to the Trane Technologies Q2 2024 Earnings Conference Call. My name is Adam, and I’ll be your operator for the call. The call will begin in a few moments with the speaker remarks and Q&A session. At this time, all participants are in a listen-only mode. [Operator Instructions] I would now like to turn the call over to Zac Nagle, Vice President of Investor Relations.

David Regnery:

Thanks, Zach, and everyone for joining today’s call. As we begin, I’d like to spend a few minutes on our purpose-driven strategy, which enables our differentiated financial results over time. Our purpose is centered on creating a more sustainable world and our strategy is aligned to powerful megatrends like energy efficiency, decarbonization and digital transformation. We’re all seeing the dire effects of climate change, and governments, NGOs and companies around the world are increasingly taking action. We’re hearing a lot about the need to invest in renewables and green the grid. What we’re not talking enough about is demand-side management. That’s where Trane Technologies comes in. Most buildings operate up to 30% inefficiently. Through our leading-edge technical solutions and sophisticated controls in AI, we can help our customers significantly reduce energy demand and emissions. Our relentless innovation, proven business operating system and uplifting culture enable us to consistently deliver a leading growth profile, strong margins and powerful free cash flow. The end result is strong value creation across the Board for our customers, our shareholders, our employees and for the planet. Please turn to Slide #4. In the second quarter, we extended our track record of strong execution. Our global team delivered robust performance across the Board, not only bolstering our outlook for 2024, but strengthening our visibility to another year of leading performance in 2025. Bookings continue to be exceptional, with healthy momentum into the back half of 2024, as our pipeline of projects continues to grow. Q2 bookings of $5.3 billion rose to an all-time high, up 5% from our prior high in the first quarter and up 19% versus the prior year. Organic revenues were up 13%, with strong execution through the P&L, delivering 23% adjusted EPS growth. Notably, we continued to reinvest heavily in our business and accelerated key strategic investments, further strengthening our competitive positioning for continued market outgrowth. Booking strength continued to be led by our commercial HVAC businesses, where we’re seeing broad-based growth. In top growth verticals, such as data centers, market projections call for an exceptionally strong multiyear CapEx cycle and high levels of project complexity play to our unique strengths. The power of our elite direct sales force, deep customer relationships and leading innovation will enable us to capitalize on the tremendous opportunities ahead. As the leading applied solution provider, we are driving significant market outgrowth in the most attractive high-growth verticals in commercial HVAC. As an example, Q2 revenues of our Americas applied solution are up approximately 90% on the three-year stack. We estimate that our applied systems carry an 8 times to 10 times multiple of higher margin service revenue over the life of the equipment. So, we’re also excited about the service opportunities that lie ahead. Our robust bookings momentum and exceptional backlog of $7.5 billion provides strong visibility into the remainder of 2024 and increasing visibility into 2025. Our backlog includes $2.8 billion for 2025 and beyond, which is the level of backlog we would historically see entering a new year and we’re only halfway through 2024. All in, we’re confident in raising our full year revenue and EPS guidance, which would deliver our fourth consecutive year of 20% or greater adjusted EPS growth. Chris will cover guidance in more detail in a few minutes. Please go to Slide #5. In our Americas segment, our commercial HVAC business delivered industry-leading performance. Bookings were up more than 20% in the quarter. Revenue was up mid-20s and broad base across vertical markets, with equipment up more than 30% and services up high-teens. In residential, the team delivered very strong results, with bookings up more than 30% and revenues up low-teens. Turning to transport, the business performed as expected. Revenues were down high-teens against a tough comp of more than 30% growth in the prior year. The two-year stack growth was more than 10% and well ahead of the market, which was down mid-teens. Bookings were solid, up low-single digits. In EMEA, commercial HVAC strength continues, with bookings up 20%. Revenues were also strong, up high-single digits in the quarter and up over 25% on a two-year stack. Our transport business performed in line with our expectations, with bookings and revenue both down modestly. Turning to Asia, results were in line with our expectations for the second quarter. Asia-Pacific bookings were flat, while China bookings were up mid-single digits. Revenues were down low single digits on a tough prior year comp of 40% growth. We’re pleased with our performance through the first half and expect Asia-Pacific to have another solid year overall. Now, I’d like to turn the call over to Chris. Chris?

David Regnery:

Thanks, Chris. Please turn to Slide #8. Our end market segment and business unit outlook is largely unchanged, with some notable exceptions in the Americas segment. First, our Americas commercial HVAC business delivered another very strong quarter of market outgrowth. While we’ve highlighted particular strength and key verticals, growth was again broad-based. Revenue growth on a three-year stack was extremely strong, up approximately 45% to 50% in both Q1 and Q2. With our continued positive outlook and exceptional backlog position, we expect three-year stack revenue growth to remain at this high range in the second half of the year. Second, our Americas residential business delivered stronger-than-expected growth in the second quarter, in part driven by three factors. The EPA clarification on the refrigerant transition, the normalization of channel inventories and a strong start to the cooling season. We now expect full-year revenue growth to be up mid-single digits. Third, in our Americas transport business, ACT has lowered their outlook for the 2024 transport markets to down mid-teens. Their expectation is for a much softer second half, which they project to be down more than 25%. We expect to outperform the transport markets in 2024. Looking to 2025, ACT projects approximately 15% growth as freight rates improve. Overall, the changes to our outlook in the Americas segment represent a significant net positive to our enterprise outlook for 2024 and gives us confidence in raising our full year guidance. All other businesses performed largely as expected in the first half and the outlooks for the year are unchanged. We provided additional details on the slide for your reference. Now, I’d like to turn the call back over to Chris. Chris?

David Regnery:

Thanks, Chris. Please go to Slide #13. We discussed the transport markets in our outlook discussion on Slide #8, so I won’t cover them again here. However, we’ve continued to provide this slide for your reference. Please turn to Slide #14. We operate our transport business for the long-term and while we’re moving through a down cycle in 2024, this is a great business with a bright future. ACT projects a trailer market rebound in 2025, up mid-teens and forecasts continued growth through their 2029 forecast horizon. We have a diversified transport business globally, with opportunities to grow across the portfolio. With leading innovation, strong execution through our business operating system, and a world-class dealer network, we’re well-positioned to outperform in any market environment. Please go to Slide #15. In summary, we are well-positioned to drive differentiated growth over time. Our leading innovation, proven business operating system and unmatched culture enable us to consistently deliver top quartile financial performance over the long-term, while continuing to reinvest in our business and we believe our best days are ahead. We have the team, the strategy and the track record to deliver leading performance and differentiated shareholder returns in 2024 and beyond. And now, we’d be happy to take your questions. Operator?

Julian Mitchell:

Hi. Good morning. Maybe just wanted to start with the organic sales growth guidance. Understand sort of some of the year-on-year dynamics. It can depend, if we’re looking at one-year, two-year, three-year stacks and so forth. So maybe it’s easier to look sequentially. And I think the guidance implies sort of flat sales in Q3 sequentially, normally, they’re up the last few years, sort of mid-single digits, and then the fourth quarter, I think, is implied down double digits sequentially, and recently, it’s been down high singles. So, just wondered sort of from a sequential standpoint, anything in particular you’re seeing or it’s more of just a sort of conservative kind of construct based off the multi-year stacks?

Julian Mitchell:

Thanks very much, Chris. And just my second question on the operating margin outlook. So you’ve got the higher investments that are sort of pushing the full year up leverage into that mid-20s plus framework after a 30s number in the first half. Anything else we should be aware of for the second half in terms of that margin element? Maybe flesh out anything around mix, perhaps? I suppose if resi and transport are a bit softer, there’s a mix negative. Anything else to highlight in terms of, say, price, cost, tailwinds, and also within commercial HVAC mix, anything moving around on applied versus the light side in the back half?

David Regnery:

I’m sitting here smiling at Chris as he’s saying that, Julian. So thanks for the questions, but we love investing in our business and we’ve been able to demonstrate the results of the investments we’ve been able to make and expect more of that in the future.

David Regnery:

Thanks, Julian.

Operator:

Our next question comes from the line of Scott Davis with Melius Research. Your line is open.

David Regnery:

Hey, Scott. How are you doing?

David Regnery:

Yeah. It’s a great question, Scott. I would say that we should maybe challenge ourselves as to what’s normal, okay. We’re a lot bigger business than we were four years ago, obviously. Lead times, that’s not -- I would say that’s -- I would say lead times are back to what I would call a normal rate. For data centers, for sure. We have data center customers that are providing us visibility to their needs well in advance than, say, maybe some of the other verticals. So that’s a part of it. But look, we’re seeing tremendous strength, really, in almost all verticals. As we looked in the Americas in our commercial HVAC business in the quarter, I think we spoke before, we tracked 14 different verticals. It was hard for us to find a vertical that was down. So we just have broad-based strength. We certainly are seeing a lot of demand in the high growth verticals like data centers, but we’re also seeing nice demand in other verticals as well.

David Regnery:

Yeah. I’d say it’s a good question, Scott. I mean, Asia is less than 10% of the revenue for the enterprise. Okay. Think of it 50% China, 50% the rest of Asia. In the quarter, the region performed as we expected. Revenues were flat. I would tell you that we did see some choppiness in China towards the back half of the quarter. So we have our eyes wide open on that. But I would also tell you that we have that baked into our guide for the year. So I wouldn’t say that China has bottomed. We performed well there. Our team is executing at a very high level. We were a very seasoned team there. A lot of innovations in their pipeline there that they’re rolling out into the marketplace. But just to be clear, getting orders in China are pretty dynamic right now.

David Regnery:

Thanks. Appreciate it, Scott.

Andy Kaplowitz:

Good morning, everyone. Nice quarter.

Chris Kuehn:

Thanks, Andy.

Andy Kaplowitz:

Dave, just a little bit more about bookings and backlog momentum going forward. We know you’ve more difficult order comparisons coming up, but could you maintain book-to-bill ladder over 1 times? And then the renewed momentum in Americas commercial HVAC, I know you just said it was relatively broad-based, including data centers, but how long do you think this elevated bookings environment could last and at what point do strong orders give you confidence that 2025 should be another strong earnings growth year or even a double-digit growth year?

Andy Kaplowitz:

Thanks for that. Yeah. I tried there to get to the forecast bookings. Oh, well. So let me then ask you a follow-up. Chris, you kind of alluded to resi and the strength that you’re seeing. It looks like revenues in the first half were already up mid-single digits plus. Orders accelerate obviously in Q2 up 30%. I know you said you want to be conservative, but really is mid-single-digit growth the minimum for the year and what did you -- what have you seen so far during the cooling season?

David Regnery:

Yeah. Andy, as I said in our prepared remarks, look, three reasons why we did so much better in resi in the second quarter. One is the clarification on the refrigerant transition. The second is certainly the inventory is at what we would call a normal level in the channel list through our independent wholesale distributors. And the third is not that I like to talk about the weather, but it’s been a very, very warm start to the cooling season, which should have us all concerned for a different reason that we could talk about if you’d like. But it’s been a very, very strong start. So as Chris said, we’re cautiously optimistic in this business, the team performed very well in the second quarter and it’s a great start for that team.

David Regnery:

Okay. Thank you.

Operator:

Our next question comes from the line of Gautam Khanna with TD Cowen. Your line is open.

David Regnery:

Yeah. Gautam, good question. We’ve introduced -- in our commercial business we’ve introduced about half of the products that would be affected. And think about any product that uses a scroll compressor as a target for a refrigerant change, okay. So just in a broad brush. So in our commercial sites, about half of it we’ve introduced. We’re actually selling both. So we’re selling 454B, the new refrigerant, as well as still 410. In our resi business, not yet. We haven’t introduced it. That’ll be rolling out in the back half of the year. As far as pre-buys go, look, we’re not anticipating in our residential business a large pre-buy towards the end of the year. We’ll see how that rolls out. But right now, we’re not forecasting that. There’s just too much timing that you have to work on to make sure that you could sell through all your products in the year and our focus really is on helping our independent wholesale distributors transition their inventory properly. So we’ll be working with them as the year progresses here to make sure that they’re ready for the cooling season in 2025 and then that’s really where our focus is right now. So answer to your question, not a large pre-buy. At least we don’t have one baked in. But I would tell you that the way we designed our operations, we’re able to manufacture both products. So we have mixed model lines, which it was a little bit more upfront cost, but we believe that investment will pay, because as you know, in the resi area, you’ll be providing components of 410 for some time into the future to make sure that we could service our product over the useful life of that product.

David Regnery:

Thanks, Gotham. Appreciate it.

Operator:

Our next question comes from the line of Damian Karas with UBS. Your line is open.

David Regnery:

Good morning, Damian. How are you?

Chris Kuehn:

Hey, Damian. It’s Chris. I’ll start. Yeah. For the quarter, think of it as a little bit over 2 points of price. You’ll see this in the 10-Q that gets filed later today, about 11 points of volume. So as we anticipated coming into the year, we knew that price was going to be a contributor, but less of a contributor than what we saw in 2022 and 2023. That’s been dovetailing. And the offset to that, and a nice offset to that, has been improved productivity. And so as kind of came out at the end of last year, middle last year with supply chain challenges largely resolved, we’re continuing to see improvements on the productivity side. So if I step back, we’re getting the right combination of price, dollars and margin above inflation. It is inflationary out there, to be fair. If I think about tier one costs with copper up, aluminum up to somewhat flat, steel down, refrigerants up, and ultimately, wage inflation really being up, all of that is still going to be a bit inflationary on us for this year. But I like where we are, price versus inflation, the productivity is getting stronger and making sure that we’re funding the business with investments. It was another quarter of a high investment and continued high investment quarter with projects we think that are very, very strong. That volume growth, the 13 points, sorry, 11 points of volume on the 13 points of revenue growth, think of that as 20 points of volume in commercial HVAC Americas. On price that where we were in the second quarter, we’re confident that gives us a lot of view into the full year. Price should be around 2 points as well. And that’ll look a little bit lower in the second half of the year versus the first half, ultimately landing around 2 points on the full year. So hopefully that gives you a little bit of color.

Damian Karas:

Yeah. Not a bad thing. That was helpful. Thanks. And then I wanted to see if you might be able to share some color on how things are progressing with some of your kind of early stage, emerging growth opportunities, if you will, investment immersion cooling, your AI partnership. Would you envision these being potential capital deployment opportunities down the road?

Damian Karas:

Great. Thanks, guys. Best of luck.

Chris Kuehn:

Thanks.

David Regnery:

Hey, Joe.

David Regnery:

Good morning.

David Regnery:

I’ll start. I’ll let Chris talk about margins. But constraints from a capacity standpoint, no. I mean, we’ve made capacity expansions over the last several years. So we feel as though we’re in good shape there. It’s more about working with the customers. It’s more about working with the system level within the data center. We’re not just a component supplier within a data center. We look at the entire cooling system, whether you’re cooling at the building level, the server or the servers themselves. This is something that we’re really good at and we’re very strong in this vertical. And we’ve been very strong in this vertical for a long time. I’ll steal a bit of Chris’s thunder here, but the margins in this space are very attractive and we really like our service tail that this provides. Chris, you want to add anything?

Joe Ritchie:

Got it. That’s helpful, guys. And then just my quick follow-up, resi HVAC growth this quarter was much better than what some of your other public peers have reported so far. So it looks like you took some share. I was just wondering, was there any disruption that you noticed with any of your public or non-public comps in the quarter? And I know, Dave, you referenced some of the reasons why you grew this quarter, but the growth was surprisingly good?

Joe Ritchie:

Okay, guys. Thank you.

Steve Tusa:

Hey. Good morning.

Chris Kuehn:

Good morning.

David Regnery:

Steve, I never get bored of putting up great results. It’s the flywheel that this talks about, right?

Chris Kuehn:

Yeah. Steve, I’ll start. I’m happy with performance in both of those businesses with applied and unitary. I’d say both up strong. We talked about commercial HVAC revenues up over 20% in the quarter and both contributing to that. Equipment was up 30%, maybe unitary a bit stronger than applied, but not by much. Second half of the year, think of our -- I’ll start with commercial HVAC Americas, think of that all in about up 10% to 12% in the second half. I described earlier great performance last year in terms of tougher comps with the growth in revenue from call it mid-teens in the first quarter of last year to mid-20s by the fourth quarter of last year. That team’s going to have a great year this year. We’re even more excited about 90% of the backlog is commercial HVAC, the $2.8 billion that Dave spoke about that we already have for 2025 and beyond. That’s all equipment, we don’t have service in that backlog and that’s all commercial HVAC. So, it’s going to be a really strong follow-on to this year and it’s giving us a lot of confidence for growth going into next year. Hopefully, that kind of answers the question.

Chris Kuehn:

I don’t know if they’ll diverge a bit. I mean, with unitary maybe being up a second quarter, I think they’re going to be somewhat close to each other here in the second half. Services is going to be strong for the second half as well. We’re tracking, as we saw in the second quarter, in Americas business was up high-teens, enterprise was up mid-teens. That’s going to be a nice contributor to the second half as well, but I wouldn’t say that there’s going to be a big divergence in the second half.

Steve Tusa:

And then…

Steve Tusa:

Go ahead. Sorry.

Steve Tusa:

One last question for you on the services growth. I mean, I usually think of services as being pretty solid growth, but more stable. These types of growth rates in services are obviously very strong. Credit to you guys. What is the key driver here? It seems like it’s more than just a run rate of recurring break, repair, stuff like that. Is there anything that’s standing out, because it just seems these types of growth rates, they’re not lumpy, but they’re just seemingly way higher than what you would consider to be a nice, steady services business?

Steve Tusa:

Okay. Thanks. Yeah. Thanks a lot.

Operator:

Our next question comes in the line of Jeff Sprague with Vertical Research Partners. Your line is open.

David Regnery:

Hi, Jeff. Good morning.

David Regnery:

Yeah. I’d say hyperscales, first of all, they like technology and they like always pushing the envelope and trying to increase the efficiency of the system. So, they’re always working with us and they may be working with our competitors as well as to make sure that we can have a more efficient system tomorrow. And we have a lot of cool things that we’re working on there with them. Some of it includes some things that are maybe a little bit outside of that, which is the heat recovery side of things, which I’ve talked about in the past. Look, at the end of the day, these hyperscale customers, they like resiliency as well. So, they’ll typically pick a prime and then they’ll pick a secondary and that’s just prudent behavior on their behalf and we’ve seen that before, but I would tell you they really, really, really like innovative technologies.

David Regnery:

We have some internal models that I won’t share with you the results, but look, it’s allowed us to be able to help forecast based on talking to our customers, understanding what their demands are, okay. And then kind of pushing that back into what would it mean for us. I would tell you that think of units getting bigger, think of units getting more complex, and think of added features on units like heat recovery. That’s certainly a trend that we’re seeing and that’s certainly something that we’re working with our customers’ kind of pushing into the marketplace.

David Regnery:

Thanks, Jeff.

Nigel Coe:

Thanks. Good morning, everyone. Great quarter…

Nigel Coe:

… obviously. Yeah. Good. Thanks. Look, everything’s really good. I’m going to focus on a couple areas that aren’t so great right now. So, Dave, in a world of down 15% trailer declines this year in NAFTA, how does TK Americas perform? And maybe just on top of that, to add in how the other verticals are performing, your bus rail, et cetera, and spare parts?

Nigel Coe:

Okay. They certainly will. Absolutely. So, would down mid- to high-teens be reasonable for TK Americas in the back half of the year?

Nigel Coe:

Okay. Guys, I had a follow-up question, but that was a great answer. So I’ll leave it there. Thanks a lots, guys.

Chris Kuehn:

Thanks.

Deane Dray:

Thank you. Good morning, everyone.

Deane Dray:

I’m doing real well. Thank you. I just want to circle back on unitary. One of your competitors this quarter talked about making a push into the emergency replacement of unitary into that market where they said they really don’t have any share. How might the competitive dynamics change here and the economic returns? Just any comments from you would be helpful. Thanks.

Deane Dray:

Is it fair to say that the emergency replacement market is basically half of the business today or is that overstated?

Deane Dray:

All right. I understand. That’s helpful. And then second question, any updates on all of the megaprojects? Are you seeing any bidding coming through? Any updates would be helpful. Thanks.

Deane Dray:

Great. Thank you.

Operator:

Our final question comes from the line of Noah Kaye with Oppenheimer. Your line is open.

David Regnery:

Well, I appreciate the question, Noah. I think we’re still in the early innings on this. I know we’re in the early innings. It’s more about an education process. We were working with a customer, a large customer in New York City and we created a digital twin for their particular building. And we were connected and we were watching the energy consumption. And we saved that particular customer, it may not sound like a lot, but it was like $120,000, right, in energy that they would have wasted if we weren’t connected to their solution. So, and you think about the universe, okay? If you think about the commercial space at 400 billion square feet, I mean, it’s crazy the opportunity that exists. So, look, this is a massive opportunity. Demand-side management, you’re going to hear a lot more about it. And the neat thing about it is you don’t have to wait for new technology to be developed, right? This is technology that’s readily…

David Regnery:

… available and being connected from a structured data standpoint, which we’ve been for a while, but now we’re adding in unstructured data with our AI tools. We’re able to really dial in algorithms to really help our customers save energy, which is saving carbon, which is good for the planet as well.

David Regnery:

All right. Thanks, Noah.

Zac Nagle:

We’d like to thank everyone for joining on today’s call. As always, we’ll be around for any questions that you may have. So, feel free to bring us up. And then in the coming months, we’ll be on the conference circuit, obviously, and we’ll hope to see some of you on the conference as well. So, thanks for joining, and have a great day.

Operator:

Good morning. Welcome to the Trane Technologies' Q1 2024 Earnings Conference Call. My name is Briana, and I will be your operator for the call. The call will begin in a few moments with the speaker remarks and the Q&A session. [Operator Instructions] I will now turn the call over to Zac Nagle, Vice President of Investor Relations.

David Regnery:

Thanks, Zac, and thanks, everyone, for joining today's call. As we begin, I'd like to spend a few minutes on our purpose-driven strategy, which drives our engaging, uplifting culture and enables our differentiated financial results over time. Our purpose is centered on creating a more sustainable world, and our strategy is aligned to powerful mega trends like energy efficiency, decarbonization and digital transformation.

David Regnery:

Thanks, Chris. Please go to Slide #13. As discussed, our transport performance in Q1 was as expected, and there's no change to our outlook for the year. The overall markets are expected to be down modestly, and we expect to outperform in both regions. We've continued to provide this slide in the deck for your reference. Please turn to Slide #14. We operate our transport business for the long term. And while we're moving through a modest downturn in 2024, this is a great business with a bright future. ACT projects a strong trailer market rebound from 2024 into 2025, up 19% and project continued growth through their forecast horizon in 2029.

Operator:

[Operator Instructions] Your first question comes from Andy Kaplowitz with Citigroup.

David Regnery:

Yes. Thanks for the question, Andy, good question. Look, in the quarter, we saw a broad-based growth -- and it wasn't concentrated necessarily in any 1 vertical. I mean, we certainly had strength in data centers. We certainly have strengthen in education, health care, high-tech industrials. It was almost hard for us to find a vertical that we didn't grow in. We did have a bit of weakness, and I guess you would say, conventional office and some in lodging. But for the most part, it was broad-based growth, and it was really on a global level.

Andrew Kaplowitz:

David, definitely, I can appreciate that. So on that note, organic incremental margins continue to trend higher than your 25%. Given the strength in your markets and the overall ability to execute, why isn't 30% or 35% as you've been able to record for a while now, the new 25% for Trane? And then where are you on, let's say, the slope of productivity projects that you've been undertaking? Because we know you've been really focused on productivity after not being able to do as much during the pandemic.

Operator:

Your next question comes from Scott Davis with Melius Research.

David Regnery:

Yes. Great question, Scott. I think we've been very well positioned in data center vertical for a long time. And I think you know this, but technology tends to move pretty fast in this vertical compared to others. And we're certainly aware of these new technologies that are being developed really at the terminal side of cooling. So think of that as direct cooling to the chip or think of it as emerging cooling at the rack level.

Scott Davis:

That makes sense, Dave. And just a little bit of a pie in the sky here. But does it make more sense to think about you guys in a data center partnering with somebody like Vertiv or explicitly competing against them because it seems like you both have very different capabilities, but obviously overlap on some critical apps there.

David Regnery:

Yes. I wouldn't call out any particular company here, but I would tell you that we have technology partners that we work with because you're spot on. It's a cooling system, right. It's no different than think about a system that exists within a building, right, we may not have every component, but we would have a partner that would have that component, but we would help integrate it into a system that would be operating in an efficient way for the customer.

Operator:

Your next question comes from Julian Mitchell with Barclays.

Christopher Kuehn:

Julian, it's Chris. I'll start. It is tough comps for Commercial HVAC and especially the Americas. They're going to have a great year on a full year basis. But when you think about go back a year in the first quarter of 2023, the growth there in Commercial HVAC Americas is around mid-teens. And then by the fourth quarter of last year, the growth was mid-20s.

Julian Mitchell:

And maybe just my follow-up would be on the sort of price and price/mix outlook. So I think in the first quarter, maybe price was about a 2-point tailwind to revenue. Maybe remind us kind of what you're embedding for the year as a whole. And has there been any shift in the expectations on the sort of price/mix tailwind in light commercial and resi HVAC from the refrigerant change in the sort of various EPA movements on that?

David Regnery:

Yes, we don't have a lot of 454B at least in the Americas, built into our guide, okay. We're obviously ready from a product standpoint, we'll be launching those products as we go through the year, but we're not anticipating a lot of volume in 2024, and we'll see how the year progresses for 2025.

Operator:

Your next question comes from Gautam Khanna with TD Cowen.

David Regnery:

It's a good question, Gautam. Look, we don't anticipate a lot of 454B product in 2024, as I just said. That will obviously ramp up in 2025. We're not projecting 2025 yet. From a pricing standpoint, we're going to -- we'll announce pricing when we release the products. But I think what you've heard from others is probably in the ballpark as to what to expect from a pricing standpoint. We're going to see how the year plays out, okay?

Operator:

Your next question comes from Joe Ritchie with Goldman Sachs.

David Regnery:

Yes. You start talking about averages, which are always dangerous, Joe. I mean I've read reports where people have estimated the 3% to 5% range. In some cases, I'd say they're in the ballpark, and then you get into some hyperscale that may have a different configuration. But it's not that far off. Look, we're very strong in this vertical. We have been for a while, and it's going to have a lot of growth in the future, which is exciting. But understand, it's one vertical of many verticals that we play in. And in the first quarter, we had broad-based strategy. So it wasn't just focused on data centers.

David Regnery:

Yes. I'll start with mega projects. I mean I think that mega projects are happening in verticals that we've always been very strong in. So it's always difficult to say what's additive versus what's ongoing strength in a particular vertical. That said, our team is tracking over 300 mega projects. And we've had some orders that have been received. However, the majority are still in the pipeline as these are typically longer duration projects to close.

C. Stephen Tusa:

Some very nice orders. Congrats. Can you just talk about what you're seeing on applied versus light commercial, just orders and revenues?

C. Stephen Tusa:

And I guess what are -- are there particular verticals in like commercial that you think your gaining share in because your main peer had orders down pretty dramatically there.

Christopher Kuehn:

Yes, Steve. Revenues were up low single digits, think of them as very low numbers, contributing price volume in terms of residential. It's just -- we start getting a [ lot of ] small numbers there in up low single digits. It did better than we expected, as Dave talked to earlier, think of price is really de minimis, maybe volume was up around 1% for resi. But let's see, we're just starting the cooling season here. Let's get through another quarter, and we'll see how the year plays out for residential.

Deane Dray:

So those were pretty positive comments coming out of China. So could you kind of give us a sense of where the demand is, the outlook? Because we have heard some mixed signals about at best stabilizing, but it sounds like you're seeing some pretty strong growth.

Deane Dray:

That's real helpful. And then can you give us a sense of where you stand on your services mix, refresh us on the target? And how do you think that plays out for this year?

Operator:

Your next question comes from Nigel Coe with Wolfe Research.

David Regnery:

Yes. I think there was really 2 things that were to the upside. One was our commercial HVAC business in the Americas. It really performed better than expectations. Just a lot of demand for our innovative products and the team executed extremely well. The other upside was in our residential business. Look, we thought that was a business that was going to be down low single digits, maybe even mid-single digits in the beginning of the year for Q1 with destocking that was going to occur.

David Regnery:

Yes. I can't answer that specifically. I haven't looked that way. But I would tell you that we continue to see a very strong pipeline. And so this would be what our sales force is actually are working on that they're putting in our CRM systems. And that remains very robust. So there's a lot of activity out there. And I hear the disconnect, too, when you look at ABI or some of the other macro numbers, you just have to look at -- we don't look at just one, okay. You have to look at several and some are aligned to one vertical versus another vertical. But look, we saw a very strong demand broad-based and the pipelines are still strong.

Andrew Obin:

Can you hear me?

Andrew Obin:

Just a question. As we think about cooling for semiconductor plants and data centers, right? It seems that the scale of the project, it's going up. And the question I have for that, a, does this provide an opportunity to provide more sophisticated solution to your customers and also to capture more value to Trane? And second, what are you doing to your aftermarket support organization to take advantage of that?

David Regnery:

You're right on, Andrew, all opportunities, and it's a growing vertical.

Christopher Kuehn:

Andrew, I'll start. It's Chris. Yes, pipeline remains very active. It's Sometimes episodic when an M&A transaction closes. So quarter-by-quarter, maybe hard to call. But over the course of the year, I think the pipeline remains very active. We're very happy with the acquisitions we've done over, say, the last 18, 24 months, right? You properly described them as a bolt-on bit of strategy. Think of that around investments in the channel and investments in technology.

Noah Kaye:

Dave, this is going to be a broad question, but it goes to what you discussed around the increase in complexity in applied. When we think about the customer value proposition, and I understand there are many dimensions, it's going to differ across verticals. How does the increasing complexity play into the customer value proposition? Maybe give us the 2 or 3 biggest dimensions that, that really speaks to and where that creates a sustainable competitive differentiation for the company.

David Regnery:

As I said in my opening remarks, we think about an applied system, you can think about an 8 to 10x multiplier of services over the life of that system. And we want to be connected to the system, okay?

Operator:

There are no further questions at this time. I will now turn the call back to Zac Nagle for closing remarks.

Operator:

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

Operator:

Good morning. Welcome to the Trane Technologies Q4 2023 Earnings Conference Call. My name is Julianne, and I will be your operator for the call. The call will begin in a few moments with the speaker remarks and the Q&A session. At this time, all participants are in a listen-only mode. [Operator Instructions] Thank you. I will now turn the call over to Zac Nagle, Vice President, Investor Relations.

Dave Regnery:

Thanks, Zach and everyone, for joining today's call. As we begin, I'd like to spend a few minutes on our purpose-driven strategy, which drives our differentiated financial results over time. Our strategy is aligned to powerful mega trends like energy efficiency, decarbonization, and digital transformation. These trends continue to intensify and increase the demand for our sustainable solutions. The year 2023 was recently confirmed as the warmest on record and caused many extreme weather events around the world. Urgent action is needed to reduce emissions and mitigate the effects of climate change on people's lives. That's where Trane Technologies is uniquely positioned to lead. We are the partner of choice to help our customers advance their own sustainability goals while driving broad impact through our Gigaton Challenge, a pledge to reduce customers' emissions by 1 billion metric tons by 2030. Our purpose-driven strategy, relentless innovation and proven business operating system, enable us to consistently deliver a superior growth profile, strong margins and powerful free cash flow. The end result is strong value creation across the board for our customers, our shareholders, our employees, and for the planet. Please turn to Slide number 4. We expect to deliver top quartile financial performance over the long-term, consistently and reliably on behalf of our shareholders. This is core to our culture and central to how we set our targets and execute our strategy across our global portfolio. I'm proud of how our global teams rose to the challenge in 2023 and met or exceeded our targets top to bottom. We track top quartile performance against our core peer group closely. And while the results are not yet in, we believe we'll hit top quartile on organic revenue growth up 9%, and adjusted EPS growth up 23%. We also delivered free cash flow of $2.2 billion or 103% free cash flow conversion, enabling us to make key strategic M&A investments while raising our dividend and returning significant cash to shareholders through share repurchases. Please turn to Slide number 5. Relentless investment in innovation and growth, people and culture and our business operating system are hallmarks of Trane Technologies. And over time, we see clear benefits accruing as evidenced by our strong track record. Since 2020, we have delivered a revenue compound annual growth rate of 12%, 260 basis points of EBITDA margin expansion and free cash flow conversion of approximately 100%, enabling us to execute a balanced capital deployment strategy. We believe we're well positioned to continue to drive strong performance for shareholders over the long-term. Please turn to Slide number 6. Q4 was another strong quarter. Despite challenges in our transport and residential businesses, we leveraged the strength of our diversified and resilient global portfolio in our best-in-class business operating system to deliver strong financial performance as an enterprise. In the Americas, we expected the residential markets to continue to normalize and for the transport refrigeration markets to move into a moderate down cycle in Q4. While the markets were down more than anticipated, each business delivered strong bookings growth in the quarter, strengthening our position entering 2024. Global commercial HVAC markets continue to be robust, and we're leveraging the power of our direct sales force to identify and pivot to the highest growth opportunities. We're thriving in key verticals such as data centers and high-tech industrial, working alongside these highly sophisticated customers to solve their most pressing challenges with ultra-efficient bespoke solutions. This is one of the things that Trane Technologies does best, and our commercial HVAC bookings, backlog and revenue reflect our success. To put this into context, our Americas commercial HVAC bookings are up more than 50% on a three-year stack. Our applied bookings, where we estimate an 8 to 10x multiplier of higher-margin services for every dollar of equipment sold, are up over 100% on a three-year stack. As we look at our commercial HVAC end markets over the next several years, we see a strong pipeline of projects increasingly playing to our unique strengths. We entered 2024 with a backlog of $6.9 billion, with the composition shifting increasingly towards commercial HVAC, including a large percentage of long-cycle applied systems. For 2023, backlog in commercial HVAC is up approximately $700 million. Over the past three years, our commercial HVAC backlog has nearly tripled. Turning to guidance. We expect another year of strong financial performance, with organic revenue growth of 6% to 7%, and adjusted EPS of $10 to $10.30. Chris will discuss some of the key dynamics later in the presentation. Please go to Slide number 7. Demand for our innovative products and services continues to be broad-based across our segments. During the fourth quarter, organic bookings were up 12%, led by our commercial HVAC businesses. In the Americas segment, commercial HVAC bookings were up mid-teens and revenues were even stronger, up mid-20s. Revenues were up more than 30% in equipment, with particular strength in applied. Services growth was also outstanding, up mid-teens as our service business continues to compound at a rapid rate. Our residential business continues to normalize, as expected, but the market declined at a faster rate than anticipated entering the quarter. We expect the normalization process to continue in the near term but to return to a GDP plus growth over the medium to long-term. Bookings were healthy, up 8%. Our transport businesses was the tale of two halves. The first half of the year, revenues were up about 20% and the back half of the year down 20%. Q4 marked the beginning of a modest market down cycle, which is expected to snap back in 2025. Our fourth quarter was down approximately 20% against a tough prior year growth comp of up 30%. For full year 2023, we modestly outperformed end markets, which were down 5%. Our EMEA segment delivered strong performance in the quarter. Commercial HVAC bookings were robust, up mid-teens. Revenues were up high single digits in Q4 and up more than 50% on a two-year stack. Transport bookings were flat as expected, and revenues were up mid-single digits for Q4. In 2023, revenues were up low single-digits, outperforming end markets, which were down mid-single digits. Our Asia-Pacific segment performed in line with our expectations. Revenues were flat in commercial HVAC due to a tough prior year comp, which was up low 20s. China bookings were down low single digits but up high single-digits on a two-year stack. Revenues were down mid-single digits against and up low teens prior year comp. Now I'd like to turn the call over to Chris. Chris?

Dave Regnery:

Thanks, Chris. Please turn to Slide number 10. Looking at our segments and markets, we're excited about excited the year ahead. We expect continued strength in our commercial HVAC businesses globally, which comprise about 65% of our revenues, supported by robust end markets, unprecedented backlog, our innovative portfolio and our world-class sales and services teams. We expect the strength of this business to more than offset softness we may see in other parts of the portfolio. We expect the residential markets, which comprise about 20% of our revenues to continue to normalize in the near term but to show significant improvement in 2024 versus 2023. We expect modest declines in our transport markets globally in 2024, which comprise about 15% of our revenues, with a snapback to growth in 2025. Further, we see opportunities to outperform and further mitigate the market impact and to deleverage within gross margin rates. Now I’d like to turn the call back over to Chris. Chris?

Dave Regnery:

Thanks, Chris. Please go to Slide number 16. In 2023, we delivered solid execution across our transport businesses globally and outperformed our end markets. Over the past three years, we’ve outgrown our end markets by roughly 30 percentage points. Globally in 2024, we’re expecting a relatively shallow down cycle and an Americas transport weighted average forecast of down 10% and an EMEA forecast of down low single digits. In the table on the page we’ve also included forecasts for the big three trailer, truck and APU for your reference. We expect to outperform the markets in both segments in 2024 and to delever within gross margin rates. This slide also includes some additional data points related to our transport businesses that you may find helpful. Please turn to Slide number 17. We operate our transport businesses for the long-term and while we’re moving through a modest downturn in 2024, this is a great business with a bright future. ACT projects a strong trailer market rebound from 2024 to 2025, up 19% and projects continued growth through their forecast horizon in 2028. We have a diversified transport business globally with opportunities to grow across the portfolio. With leading innovation, strong execution through our business operating system and a world class dealer network, we’re well positioned to outperform in any market environment. Please go to Slide number 18. In summary, we are well positioned to drive significant value over time. We are proud to have been recently named to Corporate Knights 2024 Global 100 list. Our uplifting culture and our talented team around the world help us fulfill our purpose every day. This focus on purpose, along with the strength of our business operating system and continued high levels of customer demand, enable us to consistently deliver strong financial performance while continuing to reinvest in our business. We believe we have the strategy, the innovation and the team to deliver strong performance in 2024 and differentiated shareholder returns over the long-term. And now, we’d be happy to take your questions. Operator?

Scott Davis:

Hey, good morning, guys, Dave and Chris and Zac.

Scott Davis:

Feel like a broken record, but good quarter year, et cetera. You took looks like $60 million or something of cost out structurally. Just to clarify, is that to kind of reset the cost base into this downturn in transport and perhaps resi? Or is that more kind of structurally spread out?

Scott Davis:

Okay. That’s helpful. And guys, you’ve got a high class problem and that you’re generating a lot of cash. You’ve delevered. Give us a sense, the M&A kind of possibles. Is there a pipeline? I know you have a competitor that seems like they’re going to be selling some assets. But is there an active pipeline that’s interesting and material enough to kind of help put capital to work? I mean, share buybacks obviously can always be an option. But walk us through kind of how you think about M&A at least? And whether there is kind of a higher or lower or some sort of a TAM associated with potentials out there that you guys think about.

Scott Davis:

Fair enough. Best of luck this year, guys.

Chris Kuehn:

Thank you.

Julian Mitchell:

Hi. Good morning. Maybe just the first question around the organic growth framework for the year. So you have the 6% to 7% guide. When we’re thinking sort of by maybe end market vertical, let’s say, rather than your geographic segments, is it fair to assume that that growth rate you’re embedding sort of 9%, 10% in commercial HVAC, maybe flattish in resi and then down single digits in TK globally, is that roughly the right framework?

Julian Mitchell:

Okay. That’s helpful. Thank you. And then just my, I guess, quick follow up would be on the operating leverage point. The organic operating leverage of sort of 25% plus, you’ve got that that’s your normal run rate, but a step down from what was realized in 2023. The step down is that just – it’s early in the year, so no reason to diverge from the long-term framework. Or is there anything specific going on in terms of, say, a much smaller price cost tailwind, maybe something in mix or accelerating reinvestment spend, anything like that you’d call out when thinking about the organic leverage 2024 versus last year?

Chris Kuehn:

Yes. Thanks, Julian. It’s Chris. Look, the 25% organic leverage, or better, you’re right, it’s part of our long-term target within the company and our guide for 2024, it gives us a lot of optionality to invest back in our businesses at a steady rate and really drive market outgrowth. And I’ll tell you, we continue to see lots of opportunities to invest back into our businesses. We do expect 2024 to be a year of increased investments, just like 2023 was. And some of the examples we put out there. I mean, there’s the continued innovation investment. Think about the electrification of our portfolios and heating, cooling and transport products, self help around factory automation, and we’re always looking out three years to four years in terms of demand and making sure we’ve got the infrastructure to keep up with that demand. So factory automation is a big investment for us. We continue into 2024. Digital, think about digital services, digital controls. Dave just talked about the Nuvolo acquisition we’re very excited about as we continued investment there. Expanding digital twin opportunities. I can keep running down the list, but I’ll end with sales and service investments. We really see that over now six years, driving high single-digit CAGR and services growth. We really like making investments in that space as well. It’s about a third of our overall enterprise revenues. So the fact that we want to get started earlier in the year with those investments means that the payback will come sooner from that earlier start. So those are some of the reasons. But the guide is 25% plus. We want to make sure we’re always relentlessly investing, and frankly, we don’t want anyone to catch up to where our investments are today.

Julian Mitchell:

That makes a lot of sense. I just had one tiny follow up on the sales outlook, Dave. Transport down single digits. Any big divergence? First half versus second half in terms of the year-on-year there? Or right now, it looks pretty sort of steady down through the year.

Julian Mitchell:

Great. Thank you.

Operator:

Our next question comes from Chris Snyder from UBS. Please go ahead. Your line is open.

Dave Regnery:

Yes, Chris, great question. And our team has just executed at a very high level. I’ll start with that. And you think about it, with the direct sales force, we’re able to really pivot to where the opportunity is. And we track, I’ll use the Americas here, but we track 14 different verticals and there are some verticals that are very strong right now. Data centers you just spoke about also in the high tech, think of the semiconductor space. Education is another, healthcare is another, very strong verticals. We’re able to capture those opportunities with our direct sales force, very technical sales force, and be able to really meet or exceed, in many cases exceed our customers’ expectations. So very happy with what we’ve seen from an order growth standpoint in the Americas, very help and very happy as well as in Europe, that team has continued to perform very well. And in Asia, I know there’s a lot of, we’ve heard a lot on the different calls that have already occurred where people were talking about being down in Asia. Well, our business in Asia, with the leadership team we have there, we’re doing very well in Asia. And our revenue growth in Asia last year was 10%. By the way, that’s on a two-year stack that’s 20%. So the team performs very well there. And I’d be – also, the service business that we have, I could not be prouder of what our service business really on a global basis has been able to do. In 2023, our service business was up in the teens on a compound annual growth rate over the last six years; our service business has been up in the high, high single digits. As our installed base continues to increase in the applied space, you could see that tailwind really happening within service. So very happy with our results and very happy with the order book that we have going into 2024. It gives us a lot of visibility into 2024.

Dave Regnery:

Yes, I mean, it’s not new to us. We’ve been in data centers for a long time. We’re very strong in that vertical. There’s a lot of public information out there that’s trying to size the data center market, and it’s somewhat difficult. You have a lot of variations in those reports just because by nature, the data center market is very confidential to data center providers. Okay? They don’t want a lot of that information out. But if you look at the reports and just kind of triangulate it, you get a global market anywhere between, I mean it’s a big range, but $6.5 billion [ph] to up to $10 billion. So, I mean, it’s a big range out there. And if you look at growth rates, if you take the most conservative growth rate, you’re going to see high teens, maybe mid teens growth on a compound annual growth rate for the next five years. So this is a very strong vertical today. We do very well in it with our very technical sales team calling on data center customers and working with them. It’s very strong today and anticipate it being strong well into the future.

Dave Regnery:

All right, thanks, Chris. Have a great day.

Dave Regnery:

Hey, Gautam. Gautam. Operator, I think we might want to come back to Gautam.

Joe Ritchie:

Hey, guys. Good morning and nice end to the year. Dave, look, the service business we’ve talked about now for several years, it’s been great for you guys, and yet continues to accelerate in 2023. The double-digit growth number is pretty impressive. Could you maybe just point out what’s allowing you to continue to accelerate that business here? Is it something around your digital offering connected? How much you’re connecting? How much feet you’re putting on the street? What is it that’s kind of driving this acceleration and growth in that service business? And how do you see that playing out in the coming years?

Joe Ritchie:

That’s great to hear. And I guess, look, there’s a lot of good news in this print. I know that there’s some investor concern around the healthiness of the office market in 2024 and ultimately whether that’s going to be a drag on growth for a lot of companies. Can you maybe just address that market specifically and how that’s impacting your business or expected to in 2024?

Joe Ritchie:

Understood. Thank you.

Operator:

Our next question comes from Steve Tusa from JPMorgan. Please go ahead. Your line is open.

Dave Regnery:

Thanks, Steve. Appreciate it.

Chris Kuehn:

Yes, Steve, it’s Chris. Think about 2024 at the enterprise level around a point of price. It could be a little better than that. But as we’ve seen throughout 2023, the price contribution has started to level off as we move through the quarters. We had over 6 points of price in Q1, and we ended the fourth quarter with less than 3 points of price. So there'll be some carryover into 2024, but we're dialing in at the enterprise level probably around a point, it could be a little bit better than that.

Chris Kuehn:

Yes. Tier 1 is fairly stable. I appreciate the notes you put out every weekend with updates on commodities, it's a close read. At Tier 2 that happens to be inflationary, right. As we're looking at wage inflation, refrigerants are a couple of examples in that space and we continue to work with our vendors on the demand we're putting through with our order growth. So Tier 2 is a bit inflationary. Freight could be a little bit inflationary going into 2024 with a very positive, at least for us in 2023, on the cost side. But overall, I would say we're on track to get 20 to 30 basis points, price over cost in the year like we would normally target. But we remain flexible right where we see things turn and we need to make another price adjustment. We've got the business operating system to do that.

Chris Kuehn:

All in for resi, its – we're dialing in a flat year. Our guide would take into account a plus or minus low-single digits on full year revenues for resi. I'd expect price to be at that one or less kind of level for residential. Really is going to depend on what we think for the volume in the year, but not a lot of price necessarily coming through at this point.

Chris Kuehn:

Yes. We don't have a lot baked into 2024 on the conversion to 454B. If we think that does have an impact, it's certainly second half of the year, maybe fourth quarter impact. We haven't dialed in the pricing exactly on that. We'll do that as we get ready to launch our products. But it's in the ballpark of what others have said around pricing. But we'll see how the year evolves, we'll see how the demand plays with the 410A product versus the 454B transition, and we'll update as we kind of go through the year.

Steve Tusa:

Yes.

Andy Kaplowitz:

Hey, good morning, everyone.

Chris Kuehn:

Good morning.

Dave Regnery:

Yes. I mean, it's a great question. We continue to do very well in Europe, obviously, as you see in our results. Obviously some of that has to do with thermal management system, which is really electrification of heating. Some of it has to do with some key verticals that are very strong, like data centers and electronics. Look, we're migrating that technology to different parts of the world. It's not just in the U.S. we're also bringing it to Asia. We think there's a tremendous opportunity to electrify heating and to significantly reduce the carbon footprint for buildings and help them de-carbonize around the globe. We have already introduced several products in different regions. That trend will continue in 2024. And by the way, I don't want you to think that we've stopped innovating in Europe because that continues, it well. I think we're on our, last time I was there was like our fourth or fifth generation of what's happening there. So this is an evolving market. We believe its tremendous opportunity, excuse me, for the future, but we have solutions that have set great paybacks for our customers that, and a lot of people, I was getting asked the other day about some of the incentives around this. I'm like, yes, the incentives are great tailwinds, but these projects stand on their own. I mean there's great paybacks, if you're able to increase the efficiency by three, four times these are fantastic opportunities for Trane Technologies and they're fantastic opportunities for our customers to really help them de-carbonize and actually save money as well in the process. So we're really excited about thermal management systems and expect to see more around the world.

Dave Regnery:

Yes. I'm so proud of what our team has been able to do in Asia. In fact, Thursday morning I have my 06:30 a.m. call with the Asia team and they're super excited about what they see moving forward. I think that sometimes if you look at the headlines coming out of China specific, where you're going to see GDP down and you see what's happening in the residential space there. I would tell you that the verticals that we're really strong in continue to be strong. And it is the pharmaceutical, it is semiconductor, it is data centers. We have great offerings there and we continue to win. So we're excited about the opportunities that exist in front of us there.

Dave Regnery:

All right. Thanks Andy. Talk to you soon.

Operator:

Our next question comes from Jeff Sprague from Vertical Research. Please go ahead. Your line is open.

Dave Regnery:

Hey. Good morning, Jeff.

Chris Kuehn:

Yes. Hey, Jeff, it's Chris. What we really talked about was in the Americas and in EMEA for commercial HVAC. We can really see from our guide probably up high-single-digits for the year in the Americas with resi. We're guiding that around flat plus or minus LSD, but we're calling it flat. TK Americas markets are down around 10 points on a blended average basis. We'll outperform that. Think of that around mid-single digits down in the Americas. And then if I go to transport and EMEA markets also down low-single digits and we'll outperform those markets. And one of the slides we really like putting into the materials is really just the history of market performance versus our performance within the transport businesses and it gives us a lot of confidence with the investments we made over the years and we continue to make that we've got the ability to outperform markets again in 2024. But think of EMEA as if the market is down-low singles, then we're flat to maybe a little bit better than that. And then Asia, to Dave's point, with a great team there, we're seeing somewhere in the mid singles kind of range. So hopefully that gives you a little bit of context. Julian got pretty close to it when he asked the question before, but I'll just kind of summarize it here.

Jeff Sprague:

Yes. It sounds, Dave, that commercial HVAC price, I guess is up a little bit more. Enterprise is up 1, resi is up 1 on price. Maybe TK's got less with the volume pressures. I actually would have thought commercial price would be a little bit better than maybe kind of the 1-plus implied. Can you just maybe kind of talk to that a little bit like the price in the backlog versus new things that you're trying to do on price just to kind of react to that Tier 2 inflation you were talking about?

Jeff Sprague:

Hey, maybe one just quick follow-up, Dave, a lot of your earlier comments on the call kind of about making your own luck, right, with the salesforce and everything. You may have heard one of your competitors sort of gave up on the IRA yesterday. Like, be nice if something happens, but we don't see it. Like, what's your view on really how some of the stimulus might work its way through the system and are you actually seeing any tangible benefits?

Jeff Sprague:

Great. Thank you for that color. I appreciate it.

Chris Kuehn:

Thanks.

Deane Dray:

Thank you. Good morning, everyone.

Chris Kuehn:

Good morning.

Dave Regnery:

What may be surprised me a little bit is the amount of time it's taken to burn off. I think you heard me in our third quarter call was we thought we'd be complete in Q4 and that's – that's not the case. So this will burn off eventually. Right now it's going to go in through at least the first quarter, really the first half. But look, we're optimistic on residential, it's a great business. It will snap back. It is, I've always said for a long time now think of resi as a GDP-plus business that hasn't changed. And the inventory in the independent wholesale distributor channel will start to align to demand. It's the first quarter, I remind you that. So we'll see what happens here as we get into peak season. So we'll give you an update as we get to our first quarter earnings call.

Dave Regnery:

Yes, I mean, Deane, I appreciate your insights in emerging cooling. I think you did a great piece on that so appreciate that educating really the industry on the possibilities that we have with immersion cooling. Look, we’re still very bullish. Our view hasn’t changed. We’re working through the technology, okay really on the fluid itself. So that’s continuing to evolve. But we also believe it’s a big opportunity. And if you think about it right, I mean, think about data centers. It’s a massive market today. Think about the growth rates that’s going to happen over the next five years. And whether you choose the high teen’s compound annual growth rate or you’re in the 20s, it’s a large growth number. And the technology is going to continue to evolve. And I think that immersion cooling could be one of those technologies of the future. And we’re certainly right in the middle of it, as you said, and we’re going to continue to be bullish on that.

Dave Regnery:

All right, thanks, Deane.

Nigel Coe:

Thanks. Good morning, guys. Thanks for the question. So today you’ve been fielding a few questions on price. So let’s have a couple more pricing questions. What’s really kind of struck me is that some of your competitors, some of your larger competitors are actually going out with very aggressive price increases and really guiding for pretty significant realized price increases. And your message is very, very different. So in your experience, have you seen situations where the market has this divergence on price and does it tend to lead to share shifts? It just feels like it’s unsustainable, this gap here. So any thoughts? And then just kind of a sub question to that would be the service fleets. You’ve got obviously, a lot of labor inflation to deal with there. I mean, would you expect service pricing to be better than that 1%?

Chris Kuehn:

Hi, I think that’s where it starts, Dave. Right. 2021, 2022, even 2023, we really saw where we led on price there. So, we’re being strategic, Nigel, as we think about that again, the 1% guide for the year right now, it’s early in the year. We’ll see how we do as we move throughout the year. But services, what we would look at is, we look at wage inflation, look at the demand out there in the marketplace and make sure we’re pricing appropriately. We’re also not there, and we’ve said this for many years, we’re really not out there to try to gouge our customers. What we were trying to do is offset inflation a few years ago with price. We want customers for life. And so we’re going to think about that as we move through the process here. But we don’t see pricing moving backwards here in the businesses. But again, the 1% guide, it’s just early in the year, we’ll update you as we move throughout it.

Chris Kuehn:

We’ll give it some thought as we move throughout. You’re right on amortization. It’s actually really the main driver with the Nuvolo acquisition that we wanted to call out with higher amortization, non-cash accounting rule based shorter lived assets in terms of how you amortize those with a high technology business, that’s a youngish company. But yes, we’ll watch it as we go forward. I really like our cash EPS in 2023. I calculated that after knowing your question was going to come up with 103% on cash and net income. I like our cash EPS. We have lots of opportunities still within our working capital, especially in inventory to make sure we have that level set, and that’ll be a nice opportunity for us on cash going forward. But as we move out into the future years, right at some point we’re going to start comping against the Trane acquisition amortization. Right. So as we move out into the future years, we may see some of that starting to roll off as well. Not so much here in 2024, but as we look out in the future, we could start seeing that being a tailwind, let’s say, on operating income. But that’s why we like also showing the EBITDA margins for investors. Right. It takes out that noise on the amortization and just gives another metric to look at.

Chris Kuehn:

You’re welcome.

Operator:

Our next question comes from Andrew Obin from Bank of America. Please go ahead. Your line is open.

Dave Regnery:

Hey Andrew, how are you?

Dave Regnery:

I certainly think it is a game changer, when you start thinking about thermal management systems and electrification of heating and being able to significantly reduce the carbon footprint of a building and have a very, very efficient system versus a conventional system. So, I think if you wrap all together I’d say sure, absolutely. It’s a game changer. It’s making its way around the world and as we launch it in different regions and continue to see more of that in the future.

Dave Regnery:

So I think any policy or tax credit become tailwinds. I don’t think they’re the only driver. I think the main driver of these systems is very, very efficient, they’re very sustainable and they have great paybacks with or without any kind of policy or tax credit. Tax credit will be a benefit to it, but it’s not the only thing that’s driving.

Dave Regnery:

Yes, I really don’t. I think last year the EPA came out and kind of clarified so you can manufacture to the end of this year and then you have a complete through 2025 to do the sell through. We see that as all that was a good ruling by the EPA. We support that it gives the channel time to do proper sell through. So, we see that all as possible. I don’t see any different dynamic there on the light unitary and I’m defining light unitary as less than 25 tons. So it’ll really be the same dynamic that we’re seeing in res.

Dave Regnery:

It’s a large portion of our unitary business, but we also have this great applied business, Andrew, that’s even bigger.

Dave Regnery:

All right. Thanks.

Noah Kaye:

Appreciate it. Thanks. Since you talked earlier about some of the digital investments you’re making this year, and you appointed a Chief Digital Officer in December, which seemed like a pretty significant milestone. Just to help us understand, is there more of a digital transformation opportunity internally over the next few years, or is this more about adding offerings to your quiver? Maybe you can get a little bit deeper into some of the focus areas for those digital investments, cyber, digital twin, et cetera.

Noah Kaye:

Appreciate that Dave, maybe the last question. I think around this time last year, you shared with us your view of where backlog would end. You said greater than $6 billion exiting 2023. $6.9 billion. So, you clearly surpassed that. Can you share with us today where you see it ending 2024?

Noah Kaye:

Appreciate that, caller. Thank you.

Operator:

This concludes today’s Q&A session. I would like to turn the call back over to Zac Nagle for closing remarks.

Operator:

This concludes today’s conference call. Thank you for your participation. You may now disconnect.

Operator:

Good morning, and welcome to the Trane Technologies Q3 2023 Earnings Conference Call. My name is Cheryl, and I will be your operator for the call. The call will begin in a few moments with the speaker remarks and the Q&A session. [Operator Instructions]. I will now turn the call over to Zac Nagle, Vice President of Investor Relations.

David Regnery:

Thanks, Zac and everyone, for joining us on today's call. I'd like to begin with a few comments on our purpose

David Regnery:

Thanks, Chris. Please turn to Slide #8. Overall, our positive outlook for our segments and our end markets is largely unchanged from the prior quarter. And as we move into the fourth quarter with continued high levels of absolute demand, exceptional backlog and strong execution, we're gaining additional visibility into healthy growth in 2024. Across the enterprise, there are some key themes. Strong demand for our sustainability-focused solutions remains high. While we expect the law of large numbers to kick in at some point and for order growth to decline, absolute bookings are expected to remain robust, given our new baseline is at a very high level. Across our businesses, we see the stacking effect of supportive policy and regulatory changes that play to our unique strength as a leading climate innovator. In addition to all the tailwinds at a national level in both the U.S. and Europe, we see activity at the state and municipal levels, and our direct sales force is able to help customers leverage these programs. In Americas commercial HVAC, our business is extremely strong as we've outlined. We're winning with customers and developing innovative solutions in data centers, education and high tech, just to name a few strong verticals. And we're driving tremendous growth in our applied business, which makes up the majority of our backlog. Applied business is the most differentiated and complex and it's where our competitive advantages shine. It's long cycle with higher-margin service opportunities, representing a multiple of initial purchase price over the life of the system. Additionally, this business helps to forge long-term relationships with customers as they move from project to project over a multiyear period. We have the most comprehensive portfolio of products in the industry, which enables us to compete and win across all verticals, driving leading long-term sustainable growth. There's no change to our residential business outlook. We expect residential to continue to normalize through the fourth quarter and for the normalization process to be largely complete in 2023. Also, as expected, strength in commercial HVAC is more than offsetting the decline in residential in 2023. Our transport refrigeration business was largely in line with our expectations in the third quarter and up more than 40% on a 2-year stack. We expect to outperform the market for the year. ACT is projecting a dip in 2024 and a bounceback in 2025 and continued growth afterwards. However, ACT's forecast has been volatile in recent months, and we are in the process of validating assumptions versus our internal forecast and other sources. We'll update the market when we hold our year-end earnings call. In our EMEA segment, the third quarter was also in line with our expectations for both businesses. As we highlighted in our second quarter call, EMEA HVAC has very tough comps in both the third and fourth quarters, up high 20s and low 40s, respectively, and revenue growth is expected to be more moderate in the second half. The 2-year stack for Q3 is up more than 30%. Our transport refrigeration outlook is unchanged. Likewise, our Asia Pacific segment, our outlook for the full year is unchanged. Revenue in the second half is expected to be flattish, purely related to tough prior year comps while bookings continue to be strong. Now I'd like to turn the call back over to Chris. Chris?

David Regnery:

Thanks, Chris. Please turn to Slide #14. Transport refrigeration market forecasts for both North America and EMEA remain unchanged, and we expect to outperform each market in 2023. Our performance through the third quarter is on track to meet these expectations. The slide shows key data points on the markets and on Thermo King specifically to provide additional transparency and reference information. Please go to Slide #15. As discussed, ACT's projections for 2024 have been volatile, and we are focused on conducting a thorough analysis of the markets. In the interim, we've included ACT's most recent forecast for 2023 through 2028 for your reference. Please go to Slide #16. We expect to provide 2024 guidance on our fourth quarter earnings call. However, given increasing visibility, we believe it may be constructive to discuss key dynamics at play that give us confidence we'll see healthy growth in 2024. Our commercial HVAC businesses, which make up roughly 65% of our total revenues, are executing well in healthy markets, and the agility of our sales teams to quickly pivot focus to growing vertical markets is driving record bookings and backlog. Our applied backlog is a standout and provides a long higher-margin service tail that makes our business stronger and more resilient. Secular mega trends continue to support growth, and policy and regulatory stacking is amplifying these tailwinds with the majority of these programs still ahead of us. We expect to enter 2024 with our residential business largely through the normalization process and on path to our long-term target of GDP-plus growth. We continue to lead with innovation, which yields healthy pricing opportunities, and our business operating system is primed to stay ahead of inflationary pressures. The supply chain has vastly improved and pockets of remaining challenges continue to abate. Our culture is lean-based and we're excited about the productivity we can unlock as we move into 2024. We've also been heavily investing in productivity-enhancing projects such as factory automation, which we expect to unlock further value. ACT is forecasting a dip in North American trailer production in 2024, a snapback in 2025 and growth thereafter. While we're in the process of further assessing their forecast, our North America transport refrigeration business is approximately 10% of our total revenues. We expect to execute well, manage the business tightly, outperform the end markets and, if necessary, manage deleverage within gross margin rates. Lastly, while we don't talk about our service business a lot, we're quietly putting up double-digit growth in 2023 on top of a 6-year compound annual growth rate of high single-digit growth. Our service business is strong, resilient and poised for growth, and we continue to build out our energy services and digital capabilities and offerings, which represents a big current and even larger future opportunity. Please go to Slide #17. In summary, we are well positioned to drive significant value over time. We are proud to have been named one of Fortune's Best Workplaces for Women and one of the World's Best Companies by Time Magazine. Our culture and people fuel our innovation and help us to fulfill our purpose every day. This steadfast focus on purpose, our leading innovation, our proven business operating system enables us to execute our strategy and stay nimble across our resilient portfolio. This, in turn, enables us to consistently deliver a leading revenue and earnings growth profile and powerful free cash flow. With our strong performance, elevated backlog and continued high levels of customer demand, we are confident in once again raising our full year revenue and EPS guidance and reaffirming our free cash flow conversion target. We have the team, the strategy and the track record to deliver strong performance in 2023 and differentiated shareholder returns over the long term. And now we'd be happy to take your questions. Operator?

Scott Davis:

I'm kind of getting sick of congratulating you on good quarters, but this is one of the better ones.

Scott Davis:

You're making Lehigh proud, Dave. All good. Guys, when you think about the backlog that you have and the demand environment in commercial, is this the type of environment where you can really be selective on projects and kind of cherry pick the stuff that as really the margin, price margin structure that you want? Or are you still -- or is that not kind of how it works and you're just out there bidding on a wider array of stuff but just bidding at a higher price? I was just trying to get a sense of that interplay between project selectivity and really just the supply-demand imbalance that's out there right now.

Scott Davis:

Yes, that's helpful color. I have to ask this question. You have a competitor who had a ransomware issue in the quarter. Did that help you guys as it related to bidding on things and such or was that a nonevent?

Operator:

Your next question is from Julian Mitchell of Barclays Capital.

David Regnery:

Yes. Julian, we don't look at just light. We look at units are in total so it would be light and large. And historically, it's been about 50-50 in our equipment business. But obviously, in the third quarter, we had very, very strong demand in our applied business. So think of data centers, high tech, education, we're very strong. We had solid performance in other verticals, too, like health care, life science, government, industrial. And then there were some weaker verticals as well. Think of traditional office, warehousing and retail and those weaker verticals where you tend to see more unitary than applied systems.

Christopher Kuehn:

Julian, it's Chris. I'll start off. The Q4 implied guide is kind of around mid-single digits organic revenue growth, and it is a little bit of a stepdown versus Q3. But if we put a few reasons behind it, one is when I think about the toughest comp of the year, our commercial HVAC businesses, this is really the toughest comp across the board going into the fourth quarter on a year-over-year basis. Second would be the contribution from price. We would expect to be a bit lower in the fourth quarter than the third quarter. We commented price delivered around 4 points of growth in Q3. You probably dialed that into about 2-ish points of growth in Q4, so there's about 2 points right there sequentially. And then maybe just to round out another response here, really be around residential as it continues to normalize. We did a little better in the third quarter on revenues. Our constructive view around residential for the full year hasn't changed with revenues down around mid-single digits. So we're very focused on making sure inventory in the channel is positioned well for the start of 2024. So we would expect that normalization to continue really into the fourth quarter. So hope that gives you a little bit of some view here on how we think about Q3 to Q4. But let's not forget maybe the first point, the commercial HVAC on tough comps, we had 40% growth in EMEA last year, 30% growth in Asia last year, really toughest comp of the quarter.

Andrew Kaplowitz:

Impressive quarter. Dave, with the understanding that orders can be lumpy, it appears that you actually had a positive inflection in orders in Americas commercial HVAC in the quarter despite concerns of higher U.S. rates. So did you see larger mega projects start to hit a little more frequently in the quarter? I know you mentioned strength in data centers. Did you see like some of your bigger verticals actually heat up a bit as the quarter went on? And would you say that, that gives you more of a probability of ending backlog at the end of this year closer to $7 billion and $6 billion as I know you're guiding?

Andrew Kaplowitz:

And then Chris, could you give more color into the organic leverage you've been delivering. Organic leverage in the mid-30% range is obviously a good result for Trane. We know you're guiding to 30% for Q4 and 25%-plus long term. But maybe you could talk about whether you have an extended period of productivity projects along with good price versus costs that could help your margin performance well into '24, given I think it was more difficult to engage these projects during the pandemic?

David Regnery:

Yes, Andy, I had the opportunity to visit several of our locations during the quarter. It was just such a great feeling to feel the flow that's happening in the operations today versus where we were a year ago, where we were looking at the yard full of product that had to go back on the line to be reworked. So that's all helping with the productivity. So we're really starting to hit our stride here in our operations, which is a great job by the team because they've had some tough times they're working through the supply chain. But I'm glad to say that they're operating extremely well right now.

Gautam Khanna:

Great quarter. Just wanted to get your sense on, you mentioned the transport refrigeration, you opened the order books in October. Any early read on how demand looks and how far out you're booking into 2024 right now?

Gautam Khanna:

Okay. Can you comment on how far out you guys are actually booking into '24 at this point or...

Christopher Kuehn:

Yes. I think for Americas, it [indiscernible] through middle of '24, Gautam. And I think for Europe, it may be open for a bit longer than that. But to Dave's point, the order book would really only be for 2024 at this point.

David Regnery:

Yes. I was with the resi team recently. We're not seeing that, no. So I think the short answer is no, we haven't seen that yet.

Christopher Snyder:

I wanted to ask on commercial HVAC. Orders this quarter clearly bifurcated from the broader industry. And the company has always prided itself on driving innovation. So I guess my question is the world moving to emissions targets and just higher electricity prices globally, are you seeing customers more so appreciate the innovation and efficiency that you are providing to them? And do you think that could result in a higher rate of share gains moving forward?

Christopher Snyder:

I appreciate that. And then maybe following up, Dave, you mentioned in the prepared remarks that orders need to go down at some point due to the law of large numbers. So the other question is wouldn't you need like a step change negative in the macro to see that? Because it feels like the lead time compression headwinds are kind of largely in the rearview at this point. Commercial is healthy. Resi seems to be turning. And you mentioned before, the mega projects really haven't ordered yet. It's mostly still in the pipeline. So I mean, what do you need to see on a macro standpoint to have material order declines off these levels?

David Regnery:

65%.

Operator:

Your next question is from Joe Ritchie of Goldman Sachs.

David Regnery:

Yes. I haven't read Eaton's reports so I can't comment specifically. I would just tell you that we have a lot of projects in the pipeline right now that we're tracking. I think it's always -- you always have to be a little bit careful when you track 1 company versus another company is when orders are procured by different companies could vary. So Eaton maybe a bit before us. But I guess the good news is we still see a lot out there. It sounds like Eaton does as well, and we're very, very confident with many of the solutions that we have that we're talking with customers about and we feel that many of these projects, we're in a unique position.

Christopher Kuehn:

Joe, it's Chris. No, we're not. I think while certainly interest rates have gone in the negative direction on paybacks, I would tell you that the change in paybacks is minor when we think about the energy-efficient systems that we're able to quote customers. A payback may have gone from 2, 2.5 years to 3-ish years now with interest rates. So the fact is there's still very strong paybacks when you're implementing some of these solutions. So we're not seeing that right now.

Christopher Kuehn:

Yes. We'll dial it in a little bit further, Joe, as we get a couple of months from now. But we do target, from a price inflation measure, let's say, a spread of 20 to 30 basis points in a normal year. We'll dial that in as we get closer to next year. To Dave's earlier point, we're making sure we're pricing for innovation and also long-term customer relationships. So I'm confident that we'll have a good set of numbers there. We're going to target positive on a dollar basis and a margin basis on price versus inflation. And we've been able to demonstrate that for the last 3 years, so I have a lot of confidence our teams will be able to do that going forward.

Charles Tusa:

I'll echo, those orders, pretty strong for sure. What were -- there's been a lot of strength in light commercial. How strong was your light commercial business, large and light?

Charles Tusa:

Applied was stronger than unitary?

Charles Tusa:

Yes. Can you just give us maybe a little -- I know you kind of -- you haven't done this before, but like you've mentioned these 4 verticals in every slide presentation for like the last several years. Obviously, you guys are doing a great job there. Can you just give us -- given it's so important now, I mean, commercial HVAC 65% of your revenue base. Can you just give us some sort of color on how much those 4 verticals represent now? I mean, is that like 50% of your portfolio? Like just roughly how much those growth verticals represent?

David Regnery:

That's exactly where I was going to go, Chris. I mean, these verticals, we track 14. You could even get 18 if you do a little subdividing there. But there's oftentimes when 1 vertical is stronger than another vertical for an extended period of time, I'll use warehousing as an example. Two years ago, 3 years ago, warehousing was extremely strong. We pivot our sales force to focus on warehousing. We develop programs for them, and they go capture share in those particular verticals. Right now, the strength in data centers, I don't see that going away in the near term. High tech, we have all the mega projects that are really in front of us. And education, education has been strong. Obviously, ESSER funding is helping that. I think ESSER funding is probably in the fifth or sixth inning, but we've been extremely strong in education for an extended period of time.

David Regnery:

Yes. The short answer is we're dialing it in. But I mean, if you think about the whole refrigerant change, right, we've been leading with refrigerant change really the industry, I think we've been at it since about 2013 with next-generation refrigerants. So we're more than ready for this transition away from 410 to, in our case, 454B. Our designs are complete, our manufacturing is ready to go. We're going to start up production here in early Q2. So all systems goes there. There are some definitions, Steve, that we're still working with the EPA to make sure our interpretation is correct. And then really our focus is going to shift to the channel. I'm sure we have a clean phase in, phase out of inventory. We will be manufacturing both 410 product and 454 product in 2024 and probably even into 2025, at least our interpretation right now, what we're seeing with the EPA. As far as price, we're still dialing that in. The 454 product is going to be more expensive. Obviously, it's a slightly flammable refrigerant so you're going to have to put different sensing equipment around the union. So we'll get more data on that in the coming weeks here, and we'll update everyone on our fourth quarter call.

Jeffrey Sprague:

Not as good as you guys but doing well. I wonder if we could just dig a little bit more into just customer behavior and backlogs. As big as the backlogs are versus history, right, if I think about 90% of $6 billion, maybe it's $6 billion-plus, right, but that would be, call it, my math, roughly half of your 2024 commercial revenues are in backlog. I mean, that's a good healthy number. But given the size and scope of some of these projects, maybe goes back a little bit to one of the earlier questions. I'm not sure why backlog would really go down much from here. Do you actually see customers just kind of changing their order patterns or there's kind of something else that would suggest that backlogs really do need to kind of go back down towards where they were historically?

David Regnery:

Yes. I think the only thing I would add to that, Jeff, is I'll go back to data centers again, and kind of our strategy was to work with the data center engineers and develop solutions that are optimal for them. Once we do that, they do tend to lock in for an extended period of time with you. So they'll provide orders beyond your lead times just to ensure that they have slots available and we don't disappoint missing a shipment.

Christopher Kuehn:

Jeff, I would say from an IRA perspective, that's really all in front of us. I don't think that's necessarily in the backlog today. But from an ESSER funding for several years now, we've had projects and making sure that over the summer months when schools are open, we're ready to service and upgrade equipment. So I think that's certainly been the backlog for a while. Data centers continues to elevate and we see it as a long-term tail. But CHIPS and Science Act, we don't have that dialed in but that would be one where I guess you could specifically say this is driving this demand. But in the data center, there's no -- that's more about just pure demand for data centers right now.

Nigel Coe:

So going back to the commercial HVAC growth in Q3, which was obviously spectacular, but especially in the Americas, the pickup Q-over-Q was quite something. So you called out obviously the strength in the verticals. Was there any kind of supply chain sort of loosening or kind of flush there that maybe drove that? Understand demand is very strong. And then within that, education, I think there's some concerns out there with the stimulus funding kind of reaching a peak, perhaps that maybe education falls off in '24. So any visibility on education would be helpful.

Nigel Coe:

Yes. Just obviously, supply chain constraints have been a factor in the applied business, yes.

Nigel Coe:

Okay. And then on the comment...

Nigel Coe:

Okay. Just quick -- another crack at the pricing question. Chris, you mentioned basis points spread versus inflation is what you target. It does feel like some of your competitors are taking a much more aggressive policy towards pricing. So I'm just curious on 2 aspects. Number one, the potential to really be a bit more aggressive on price as you go into '24. And then secondly, as this commercial HVAC backlog starts to convert, is there sort of embedded pricing in that backlog that's going to emerge over the next 12 months?

Operator:

Your next question is from Deane Dray of RBC Capital Markets.

David Regnery:

I'm very happy with our performance in Asia Pacific overall, so thanks for the question. You think about -- I'll start with orders, right? I mean, orders were up in the low teens, up 12%, okay, for the region. And China had high single digits and the rest of Asia had mid-teens, so very strong performance on order rate. On revenue, we were flattish, down a bit. But remember, last year, we had 30% growth in Asia Pacific so it's really just a comp issue. The team there is performing very well. I was very, very happy with the incoming order rates in that region. And the pipeline is strong as well.

David Regnery:

Yes, thermal storage. Yes, I mean, we have adoption that's continuous there. We've been selling thermal storage systems for quite some time. I do think that one of the elements of IRA that could accelerate that is that would be included there. And we're still dialing in what that exact rebate would be and how it will be applied. But that could be significant and really drive that. And just so everyone's aware, thermal management -- our thermal storage systems are great ways for energy efficiency but they're also great ways to help balance the grid. And if you have a need and a peak period to shut off power or limit power, this is a great way to do it because you burn ice versus running your compressors on your chillers. So we're excited about the technology. We've had it for a while, and IRA could be a catalyst to even have it grow faster.

Andrew Obin:

A question on gross margins, I guess. Look at my model, I think gross margins are hitting all-time highs. And I know you guys don't look at other companies but we do. And I'm just wondering how much price cost, the spread between price cost is a benefit. And I guess the bigger question is, have we rebased gross margins? Because clearly, you guys have done a lot of work on cost cutting, right? It seems that you have an aggressive stance on maintaining the spread. But also how much of it is timing, right? It's just the peak between the balance between price and cost. So if you could just talk about, are we in the new normal with gross margins or should we expect the gross margins normalize somewhat going forward?

David Regnery:

And we really like our mix and service.

Christopher Kuehn:

It's a contributor, right?

Andrew Obin:

Great. And just a follow-up question on Nuvolo, right? I think JCI also bought a workplace management software company. Fortive has a presence. Can you just talk about what excites you about this vertical and maybe also remind us how big is software as a business for you at this point?

Andrew Obin:

And how big is the digital business now?

Operator:

We have completed the allotted time for questions. I will now turn the call over to Zac Nagle for closing remarks.

Operator:

This concludes today's conference call. Thank you for your participation. You may now disconnect.

Operator:

Good morning. Welcome to the Trane Technologies Q2 2023 Earnings Conference Call. My name is Josh, and I will be your operator for the call. The call will begin in a few moments with the speaker remarks and the Q&A session. At this time, all participants are in a listen-only mode. [Operator Instructions] Thank you. I will now turn the call over to Zac Nagle, Vice President of Investor Relations.

Dave Regnery:

Thanks, Zach, and everyone, for joining us on today's call. Let me begin with a few comments on our purpose as a company

Dave Regnery:

Thanks, Chris. Please turn to slide number 8. Looking forward, we see continued strong underlying demand for sustainable solutions well into the future. We see the stacking effect of policy and regulatory changes that play to our unique strengths as a leading climate innovator as tailwinds that are either early to mid-innings or future multiyear opportunities. The pace of these tailwinds has only accelerated in recent years, and with the realities of climate change all around us, it's likely we'll see this pace continue. The tailwinds impact all of our businesses as 100% of our portfolio is focused on driving more sustainable solutions for our customers. In our Americas segment, our overall outlook is relatively unchanged. We see commercial strength continuing to outweigh impacts from ongoing normalization of our residential business. We expect residential to continue to normalize through Q3, but to improve from Q2, and we expect the normalization process to be complete in 2023. Commercial faces tough comps in the second half of the year with less contribution from price. So we'd expect growth rates to remain strong but moderate from the first half of 2023. There's no change to our transport refrigeration outlook overall. ACT has modestly lowered their forecast for 2023 from flattish to a decline of low single digits, largely related to trucking OEM build constraints. We expect our Thermo King business in the Americas to outperform with low to mid single-digit growth for the year. One additional callout is related to the timing of our revenues in our Thermo King business. In the first half of the year, Thermo King delivered 20% growth, outpacing the North America transport markets, which were flat overall. A portion of that outgrowth was driven by timing of customer deliveries committed in the first half versus the second half of the year. Additionally, Thermo King delivered extremely strong results in Q3 of 2022, up 60%. Given this difficult comp and the timing dynamics between the first half and the second half, we expect our Thermo King business to be down approximately 10% in the third quarter. In our EMEA segment, the second quarter was strong and our outlook for the full year is also unchanged. Like the Americas, commercial HVAC faces tough comps with less contribution from price in the second half of the year, so we would expect growth rates to moderate. Our Thermo King business in EMEA is unchanged. The forecast for the overall market calls for low single-digit to mid single-digit decline, and we expect our Thermo King business to be flattish. Turning to Asia Pacific. Our outlook for the region is largely unchanged, with strength continuing in key verticals as highlighted. Our team delivered a better than expected second quarter against a relatively soft comp from the prior year given COVID-19 lockdowns in China. The strong Q2 results pulled in a modest amount of revenue from the third quarter based on timing of customer deliveries. Overall, the year is shaping up as expected with a solid growth outlook. Now, I'd like to turn the call back over to Chris. Chris?

Dave Regnery:

Thanks, Chris. Please go to Slide number 14. Today, I'll take just a minute to provide an update on the transport refrigeration markets as we know this is a topic of interest for investors. The key takeaway is that while there has been a modest movement in the ACT North America forecast from flattish to down low single-digits for 2023, we're not seeing material changes that would impact our full year outlook, given our strong backlog and bookings expectations. Overall, we expect our Thermo King business in the Americas to be up low to mid single-digits in 2023, which reflects several points of market outgrowth. Our EMEA Thermo King outlook is also unchanged. The overall EMEA transport refrigeration market is expected to be down low to mid single-digits. We expect to outperform end markets and to be roughly flat for 2023. In both segments, we are on pace to achieve these targets. Please go to Slide number 15. ACT continues to provide long-term forecast for refrigerated trailers, and they are projecting strong demand through 2028 after low single-digit dips in 2023 and 2024. The data supports the view we've been highlighting for some time now that this is a strong mid-40,000 unit market, plus or minus a few percentage points. Please go to Slide number 16. In summary, we are positioned to outperform over the long term. We are proud to have recently been recognized by Fast Company as one of the best workplaces for innovators and also certified as a Great Place To Work for the third consecutive year. It's our culture and our people that fuel our innovation and fulfill on our purpose each and every day. Our strong second quarter performance, resilient portfolio and tremendous backlog gives us confidence in again raising our full year revenues and EPS guidance and reaffirming our full year free cash flow conversion guidance. We believe we have the right strategy, the best team and a solid foundation in place to deliver strong performance in 2023 and differentiated long-term shareholder returns. And now we'd be happy to take your questions. Operator?

Q – Andy Kaplowitz:

Hey, good morning, everyone.

A – Chris Kuehn:

Good morning. Everyone.

Andy Kaplowitz:

Good. How are you? So Dave or Chris, you delivered 30% leverage in Q2, expecting 30% for the year, which obviously is above your usual 25% plus guide. The biggest reason that you're getting -- is it that you're getting more than 20 basis points to 30 basis points of price versus costs in the quarter and for the year? And you mentioned higher-than-usual investments this year as well as accelerating productivity. So could 30% really be the new 25% potentially as you go into 2024 over the longer terms in terms of incremental margin?

Andy Kaplowitz:

Well, I tried, Chris. Thanks for that. And then, Dave, can you give us more color into how you're thinking about commercial HVAC markets in the Americas? You talked about good three-year stack. We know there are tough comps. Maybe you could give us your thoughts on book-to-bill going forward there. Are there any markets that you would term as slowing? And then you kept the $6 billion overall minimum backlog for the company. With two quarters behind you, would you say the chances are higher that you'd end the year closer to $7 billion than $6 billion? Any thoughts around that minimum?

Andy Kaplowitz:

Very helpful, Dave. Thanks.

Operator:

Our next question comes from the line of Julian Mitchell with Barclays. Your line is open.

Dave Regnery:

Hey, Julian, this is Dave. I'll start. Look, I think I'll go back to a year ago, okay? And the second quarter of 2022, our revenue growth in the resi business was 30%. I don't remember the exact market number but I believe it was up in the teens. So we had a lot of growth there in the second quarter. Obviously, the second quarter of this year, we're down in the mid-teens. If you look at it on a two-year comp, you'd say we're still up in the mid-teens. So as far as inventory goes in the channel, look, we're normalizing in 2023 in our res business. And it's -- we think that normalization process is going to continue in the back half of the year. We're calling residential to be down high single digits on an EBIT basis for the year. We think the third quarter will be better than the second quarter, but there's still going to be some normalization that has to occur in that business. If you look a little bit forward into 2024, we think the normalization process, at least from an inventory standpoint, will be behind us in 2023. A little early to call what 2024 will be. However, we do expect some tailwinds coming in from policy, specifically around IRA. Don't -- can't size that yet because the rules are still a little unclear on IRA, but we do believe it will be a tailwind for our businesses in both the residential and in commercial. Chris, anything you want to add?

Julian Mitchell:

That's great. Thank you. And then just my second question on the backlog outlook, maybe to ask it a slightly different way from the prior question. But pre-COVID, I think the backlog to sales coverage was 20%. Last 18 months, it's run at sort of 40%-plus. So with the sort of the broad idea here that, that coverage shrinks slowly but surely but ends up at a place well above where you were pre-COVID. Is that how we should sort of think about the backlog? And so your commercial HVAC orders, therefore, don't see a big drop from current levels?

Julian Mitchell:

That’s great. Thank you.

Dave Regnery:

Thank you.

Josh Pokrzywinski:

Hi, good morning, guys.

Dave Regnery:

Good morning.

Dave Regnery:

Yes. We'll start with ESSER. I think if you look at it from a revenue standpoint, I'd say it's middle innings. If you look at it from an order standpoint, it's obviously a little bit ahead of that because we have orders in our backlog for this. Our team has just done a great job there working with school systems across the country and really helping them help them increase the ability for them to have a safe environment for the children that are learning there. And it really started -- I think you heard me say this before, I started when we were doing indoor air qualities. We created road maps, and we're really executing to that. So revenue standpoint, think of it mid-single digits. IRA, it's all in front of us, okay? It's going to be a 2024 tailwind, very difficult to size right now because, it's going to be each state may have a different set of standards, and we're trying to understand all those different standards now. It will be a tailwind. We're just trying to size it. With the breadth of our portfolio, regardless of how the final rules are written, we'll have a product that will be part of a solution for a customer and I know we tend to want to think of IRA in the residential space, and it will certainly be a tailwind there. It's also going to be a tailwind for our commercial business. And so we're working both fronts of it and stay tuned. And as we learn more, we'll tell others.

A – Dave Regnery:

You're correct. It doesn't provide any service. We don't include that in our backlog. Difficult to say. Services -- first of all, our service business is a great business, okay? It was up again high single-digits in the second quarter. Chris, I think we're now -- I think I could say six years now where we have compound annual growth rate of high single-digits across the globe, okay? So this is a very strong business that's key to our strategy and really allows us to be tethered to our customers for the life our products. We don't -- it's difficult to ascertain a backlog because if you start thinking of multiyear service agreements, it'd just really be difficult to say if it's a three-year service agreement. A lot of times, we like to add things to service agreements so it'd be hard to quantify that number.

A – Dave Regnery:

Thanks, Josh.

Q – Chris Snyder:

Thank you. Obviously, a lot of focus on orders. And what I wanted to follow-up on the prior commentary around the US megaprojects that we're seeing. Can you just maybe talk a little bit about how these projects flow into orders for Trane and then ultimately, revenue for Trane just to kind of get a sense for what that lag could be? Thank you.

Q – Chris Snyder:

Thank you. Appreciate that. And if I could follow-up on data center, another big focus in the market right now. I mean, it's a vertical that the company has always done well in. Can you maybe talk about how activity is trending here? Is the business seeing any impact from AI investment into data centers? Is that still on the horizon? Any color or outlook there would be helpful. Thank you.

Q – Chris Snyder:

Thank you. Appreciate that.

Joe Ritchie:

Hey. Good morning, guys.

Joe Ritchie:

Hey, Chris. I know that you don't want to give, I guess, maybe too many details on just price/cost but following up on Andy's question from earlier. I'm just curious like the benefit that you got in 2Q, are you expecting that benefit to be fairly consistent through the remainder of the year, or is it kind of like the biggest benefit you'll see in 2023? And then as you kind of think about the transformational cost out beyond this year, I'm just curious like what's in store beyond 2023.

Joe Ritchie:

Yes. That makes a lot of sense. It's great to hear, Chris. Maybe 1 quick follow-up for Dave. I'm curious, this is a much broader question around the labor markets and then kind of the tightness we've seen over the last couple of years. I'm just curious, how is that kind of impacting some of the projects actually getting completed and whether it's actually elongating the time lines of some of these projects. I know that you mentioned earlier that we're probably halfway through the ESSER funding coming through in the P&L. But I'm just curious, like what are you seeing in terms of construction projects and labor tightness today?

Joe Ritchie:

Sounds good. Thank you.

Operator:

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

Dave Regnery:

Hey, Steve, how you doing? Good morning.

Dave Regnery:

Yeah. In the Americas, our revenue was very strong in equipment. It was up over 30%. Applied was a bit stronger than unitary, but both were strong.

Dave Regnery:

Yeah, Steve, it's a bit of all of that. I think sequential improvement we're expecting from Q2 to Q3, the delayed start to the cooling season that's fully in force at this point so we see that sequential improvement into the second half. The comps get a little bit easier as you go into the second half of the year. As Dave mentioned 30% growth in Q2 a year ago, it was mid-teens growth in Q3 and then flattish in Q4. So we just see a little bit easier comps in the second half of the year for resi than where they were in the first half of 2022, but have a lot of confidence that we think we were calling the units down high single digits for the year. Revenue is down probably around mid-singles. And again, plus or minus, we've got that in our guide for the full year outlook.

Dave Regnery:

Yes, a bit, like our revenue was down in the mid-teens. Our sell-through was down in the mid-single digits. So the inventory adjustment happened in the second quarter, Steve. We just think more of it will happen in the third quarter as well.

Dave Regnery:

Yeah.

Q – Steve Tusa:

Yeah, great. Thanks.

Operator:

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

A – Dave Regnery:

Hey, Jeff. How are you doing?

A – Dave Regnery:

Yeah. I mean, there is a refrigerant change that will happen in 2025 moving away from 410. Look, we're ready for it, I'll start with the engineering side of it. We're ready for it. We've been -- we've worked with next-generation refrigerants for a while so this is right up our alley and the team has done a great job preparing us. We're also preparing our manufacturing locations as we speak to be ready for it. The new refrigerant is classified as slightly flammable, so you have different procedures as to how you handle the refrigerant. But we'll be ready for it. We're not concerned about that. As far as the pre-buy goes, Jeff, the product is going to be more expensive, yes, because it's a -- what they call A2L refrigerant, slightly flammable. You will have additional sensors on the equipment so the cost will be higher. But there's also going to be a limit on the sell-through. So if you had a -- if you were trying to create a pre-buy, you'd have to sell through that inventory. The way it's written right now is within 12 months or it would be stranded inventory. So I do not anticipate that we're going to see a large pre-buy at this time. We'll see how it plays out.

A – Dave Regnery:

Yeah. I mean, as you could imagine, being a global HVAC player, we get to see a lot of different opportunities. We like these technology acquisitions. We've been very successful with them. We acquired MTA, great industrial process cooling technology. We'll be able to scale that predominantly in Europe. We'll be able to scale it in our channels. We also acquired Helmer in the second quarter. Think of that in the life science space. Think about it as at the storage capability but also in the processing capability. So again, a nice acquisition that we'll be able to scale with our channels. We like this technology. We've been very good at taking these technology companies with great products and bolting them on to our operations. And with our strong channel, we've been able to create a lot of value for our shareholders.

A – Dave Regnery:

Sure, Jeff.

Q – Nigel Coe:

Hi. Thanks, good morning. Thanks for the question. So want to go back to margins.

Q – Nigel Coe:

Hi, David. I want to go back to margins, obviously the improving organic incrementals. So I'm hearing better productivity at the factory. Obviously, price/cost is a nice tailwind. So I'm just curious, how do margins and backlog look generally compared to what we're converting now? Do we have better backlog margins to come through over the next year or so? And then on the investment spending, I think we had a slight back-end loading on the investor spending this year. Is there anything on the timing of investments that we need to factor into our models?

Dave Regnery:

Yes. And that's all baked into our guide, Nigel. And if you look at the midpoint of our EPS guide for the year, will be above 20% EPS growth for the third year in a row. So I mean, I'm super proud of what the team has been able to accomplish there. And it's the flywheel of innovation. It's the flywheel around how we operate our business operating system. I always tell people it's a system of things that makes Trane Technologies as a great company, and hopefully, investors see how we're executing to that system of things.

Chris Kuehn:

Nigel, appreciate the suggestion. We'll look into it. We like the simple methodology of looking at just net earnings and how much free cash flow are we driving off of that. When I think about our conversion in the last three years, the average free cash flow conversion and earnings for us is 110%. And we're targeting this year equal to or greater than 100% on conversion. So we do look at that metric. When it comes to return on invested capital, we look at cash flow return on invested capital as another metric. I think it takes out the noise a bit of some of the accounting conventions that we have to manage through and ultimately, on an ex-intangible basis, let's look at the cash returns of those investments. And we'll start that with an acquisition really year 1, year 2, year 3 and evaluate its accretiveness over a period of time. So we like the ability to by the third year of an acquisition, have accretive EPS growth, drive accretive cash flow return on invested capital. And I would say while very modest this year, even the acquisitions we just made this year will have a very modest impact on EPS already in year 1. So I think that's a bit of the metric, but I appreciate the insight. We'll certainly give that some thought.

Chris Kuehn:

Thanks, Nigel.

Deane Dray:

Thank you. Good morning, everyone. Hey, can we put the spotlight on China? For a moment here, it was really a standout. And whereas a lot of the other industrials have struggled in terms of COVID reopening and so forth, how much of that was a catch up? Just kind of give us a perspective on what the cadence of orders are and what you're expecting in the second half?

Deane Dray:

That's great. If we just -- data centers come up multiple times. AI has come up multiple times. We get that. And in your answer to Chris' question about the implications of AI and the whole 3x heat factor with the new chips. The legacy cooling for data centers will still be in demand. But more investment is happening on the liquid cooling side. Have you -- and maybe you teased us a bit with say you've got some other projects that you're working on. So maybe there's some liquid cooling opportunities there. But how do you see, as a legacy air cooling business, how do you see the rise of liquid cooling? Is this a threat? Is this a business that you need to get into? Just share us sort of what you think the road map is.

Deane Dray:

Yeah, we agree. Thank you.

Operator:

Our next question comes from the line of Andrew Obin with Bank of America. Your line is open.

Dave Regnery:

Hey, Andrew, how are you doing?

Dave Regnery:

I mean, it's a good question, Andrew. The short answer is it depends, okay? You have some fab plants that are extensions. You have other fab plants that are new. The EV battery plant could be really all over the map as far as the size that they'll be putting in. So I hate to give out a number because averages will always -- I know you're trying to size the total opportunity. I would just tell you it's large. And it's large on both the chilled water side as well as on the air handling side. So if you think about it as an applied system, this is a large opportunity. It will be a tailwind for our business into the future.

Dave Regnery:

I don't think there's anything I would call out. I think there was an efficiency change. You knew about that. So certainly, there could have been some pent-up demand. It's not a product that we have a lot of inventory on. Some of it goes through our IWDs on the very light side, but not where -- that's not where the -- when we talk about our residential business, we talk about normalizing, that's not where the normalization has to occur. So it's been strong. We've been strong for a while. And obviously, we have a very competitive portfolio there with some really neat innovations. I think I told you when we were together that we took the opportunity, when we had the efficiency change, to really refresh the portfolio. Now, all of our light unitary product can be offered in what we call a dual fuel option. So think of it as a heat pump that could also operate with fossil fuel based on what ambient temperatures are in a particular region at a particular time. So, variable customers. So it's -- we're super excited about the opportunities there.

Dave Regnery:

Thanks, Andrew.

Zac Nagle:

Thank you. I'd like to thank everyone for joining in today's call. Thanks for your interest and time spent with Trane Technologies. We'll be at a variety of investor events in the fall, and we hope to see many of you there. We'll chat soon. Thanks.

Operator:

Good morning. Welcome to the Trane Technologies First Quarter 2023 Earnings Conference Call. My name is Brent, and I will be your operator for the call. The call will begin in a few moments with the speaker remarks and the Q&A session. At this time, all participants are in a listen-only mode. [Operator Instructions] It is now my pleasure to turn the call over to Zac Nagle, Vice President of Investor Relations.

Dave Regnery:

Thanks, Zach, and everyone, for joining us on today's call. I want to begin with a few thoughts on our purpose-driven strategy, which enables us to drive differentiated financial results and shareholder returns over the long term. Our strategy is aligned to powerful megatrends like climate change, which continues to have serious and far-reaching effects on the environment, the economy and human health. Urgent action is needed to limit global warming and preserve our planet for next generations. That's where Trane Technologies is uniquely positioned to lead. We just released our latest ESG report, which highlights how our innovation is helping our customers decarbonize their operations, save energy and improve performance. We have reduced our customers' carbon emissions by 93 million metric tons since 2019 towards our goal of reducing emissions by 1 gigaton or 1 billion metric tons by 2030. These bold ambitions drive our relentless focus on innovation, and our innovation creates tremendous demand for our sustainable solutions. This enables us to deliver a superior growth profile, strong margins and powerful free cash flow. The end result is long-term value creation across the board for our team, our customers, our shareholders and for the planet. Moving to Slide number 4. Our global team continues to execute at a high level and delivered another quarter of strong performance. showcasing the power of our diverse, resilient portfolio. Organic revenue was up 9%. Adjusted operating margins expanded 140 basis points, and adjusted EPS grew 26%. Absolute bookings levels continue to be extremely strong, as evidenced by our book-to-bill ratio of 117% in the first quarter. We added $400 million to our backlog, driving record backlog of $6.9 billion at year-end 2022, up to $7.3 billion at the end of the first quarter. Demand continues to be particularly strong in our long-cycle commercial HVAC businesses, where global commercial HVAC bookings were up more than 35% on a 2-year stack. And Americas commercial HVAC bookings were up nearly 40% on a 2-year stack. We've been encouraging investors to look at absolute booking levels and backlog in addition to growth rates to gain a more complete understanding of the strength of our business. Q1 is a good example of why that is important. Our enterprise book-to-bill of 117% was led by commercial HVAC in all regions and demonstrates ongoing exceptional levels of demand for innovative products and services and continued backlog build. These strong results position us well for continued profitable growth in 2023 and 2024 with improving visibility. Our backlog of $7.3 billion is more than 2.5 times historical norms. Further, we expect backlog to remain elevated throughout 2023 and anticipate entering 2024 with backlog in excess of $6 billion. To be clear, $6 billion in backlog is a scenario we believe represents the floor. The intent is to accomplish two goals

Dave Regnery:

Thanks, Chris. Please turn to Slide number 8. We presented this slide on our fourth quarter earnings call to help provide color on our key markets. Overall, we had a very strong first quarter as expected, and our positive outlook for our segments and our end markets is largely unchanged. We see strong core demand for our sustainability-focused solutions continuing. We see the stacking effect of support of policy and regulatory changes that play to our unique strengths as a leading climate innovator as tailwinds for either early to mid-innings or future multiyear opportunities. We see the effect of tight supply chain slowly but steadily improving, and we see strong execution of our business operating system and unprecedented backlog supporting resiliency and improving visibility into 2023 and 2024. In our Americas segment, our overall outlook is relatively balanced between commercial and residential. We see our residential business continue to normalize through Q2. Our bias on our prior revenue estimates of the business being plus or minus low single digits for the year is now towards the lower end of that range or flat to down low single digits. While this may present a modest headwind to the second quarter, we see strength in our commercial HVAC business more than offsetting this on the full year. Our transport refrigeration business performed as planned in the first quarter, and we continue to expect to outperform the market for the year. In our EMEA segment, the first quarter was strong and in line with our expectations for both businesses, and our outlook for the year is unchanged. Likewise, for our Asia-Pacific segment, Q1 performance was strong, and our outlook for the full year is unchanged. Now I'd like to turn the call back over to Chris. Chris?

Dave Regnery:

Thanks, Chris. Please turn to Slide number 14. The key takeaway for our Thermo King business is that the transport refrigeration market forecasts for both North America and EMEA remain unchanged, and we expect to outperform each market in 2023. Our performance through the first quarter is on track to meet these expectations. The slide shows key data points on the markets and on Thermo King specifically to provide additional transparency and reference information. Please turn to Slide number 15. Act has updated their long-term forecast for refrigerated trailers, and they are projecting strong demand through 2028. The data supports the view we've been highlighting for some time now that this is a strong mid-40,000 unit market plus or minus a few percentage points. One key takeaway is that ACT has increased their 2024 forecast to 42,000 units, up from 40,000 units, which represents a 7% decline versus an 11% decline. In 2025, Act forecasts the market to increase 7% and return to 45,000 units and to continue growing low single digits through 2028. Both our Americas and EMEA Thermo King businesses are poised to continue to outperform their end markets through leading innovation and strong execution. We believe this is a GDP plus-plus business for us over the long term. Please turn to Slide number 16. In summary, we are positioned to outperform over the long term. Energy efficiency, decarbonization and sustainability megatrends continue to intensify, driving increased demand for our innovative products and services. We are delivering leading technology and innovation to address these trends and accelerate the world's progress, underpinned by our engaging uplifting culture. Our strong first quarter performance, diverse and resilient portfolio and unprecedented backlog gives us confidence in raising our full year revenue and EPS guidance and reaffirming our full year free cash flow conversion guidance. We believe we have the right strategy, the best team and a solid foundation in place to deliver strong performance in 2023 and differentiated shareholder returns over the long term. And now we'd be happy to take your questions. Operator?

Scott Davis:

You guys always give a lot of great detail and answer a lot of questions, which is helpful. But I haven't really heard you talk about mega projects specifically. And when I think about kind of these giant semi fabs and the EV facilities and everything that is on the list that folks are talking about, is this stuff starting to move into your backlogs? Are people starting to spec out the HVAC needs in those facilities? And if so, I'm just kind of guessing these are super complicated. I have to imagine a semi fab requires some pretty incredible engineering to get the cooling right, and perhaps you guys have an advantage in that regard. So I'll just open it up to that.

Scott Davis:

And this is a little pie in the sky, but AI, the cooling of the chips, when you start talking about, I think it's something like 5-kilowatt going to 100-kilowatt and there's a lot of heat there. And I'm told there's a lot of white space because, frankly, the cooling of those chips is still -- whether we go all liquid or whether there's other kind of hybrid solutions. But are you guys involved at all working on technologies to be involved at all in some of that CHIP level cooling?

Operator:

Your next question comes from the line of Andy Kaplowitz with Citigroup. Your line is open.

Dave Regnery:

Well, Andy, I think it's -- commercial HVAC has been strong globally for us. And I think the mega trends around decarbonization, they continue to intensify. We had a very strong start to the year here in the Americas. Order rates were up low single digits, but the backlog grew, and that's a great thing. If you go to EMEA, I mean, yes, I mean, the team there is just performing at a very high level. And you hit it, right? Thermal management systems is -- we have a differentiated technology and we're winning with our customers. If you think about the commercial HVAC EMEA business in 2022 was up 20%. In the first quarter, we were up 25%. Our equipment orders for commercial HVAC, I mean, we're up close to 40%. So I mean, this is great. The team is executing well. The other thing, too, I'd point out is that margins were very, very strong in Europe as well. If you remember a year ago, we were talking about more acute supply chain problems in Europe and a higher cost to serve our customers. And we are -- with spot buys and expedited freight. You see that pulling through now with productivity that the team has been able to deliver. So very strong in EMEA, very strong in the Americas and Asia-Pacific also performed quite well. Order rates were up low teens and really broad-based too, both in China and outside of China. So off to a great start here in 2023. And commercial HVAC business is certainly -- we're seeing a lot of demand for our products.

Chris Kuehn:

Andy, it's a great question. If I go to EMEA margins first, I mean, if I go back a year ago, we saw very acute supply chain issues impacting that region and really unfortunately holding back revenue growth and lowering volumes. It also came with the product we get out the door, a lot of additional cost to serve our customers. And a year ago, it was very difficult to get leverage in that region. What you're seeing coming through here in the first quarter, and you guys will see this in the 10-Q that gets filed, you'll see 9 points of price in EMEA and about 6.5 points of volume. And with that volume came strong leverage, and we're starting to see some productivity come through within a slowly but improving supply chain. So I think about the margins around productivity improvements on a year-over-year basis, stronger volume with good incrementals and pricing continues to remain strong in the region as well. So really nice start to that team. I think you mentioned a question on maybe price overall for the company. Enterprise-wide on the full year, we're probably still in that 200 basis points to 300 basis points on a full year price. And I would bias our full year revenue growth more to the volume side than to the price side on the full year.

Julian Mitchell:

Maybe just wanted to start with the sort of the backlog outlook and orders. And I guess one approach is just not report the orders when they're down in quarter. But if we look at over the balance of the year, how are you thinking about the sort of the book-to-bill ratio, let's say, -- just trying to understand a little bit better, Dave, your commentary around that $6 billion backlog at year-end perhaps being a floor number. Any color as you're thinking about book-to-bill by region or the market in terms of commercial versus transport?

Julian Mitchell:

Then my second question would just be on the Americas operating margin for the year. So I suppose one, I think some investors may have thought maybe you'd have higher operating leverage in the first half and the sort of mid-20s number because of price cost, tailwinds to margins and the last sort of bout of transformation, savings as well as the good volume growth. So I understand the sort of investment reference that Chris had made. Anything else going on in that Americas margin? And also, when we're thinking about second half operating leverage in the Americas, does that stay at that mid-20s rate that you've got in the first half? Anything sort of moving around there?

Operator:

Your next question is from the line of Gautam Khanna with TD Cowen. Your line is open.

Chris Kuehn:

Gautam, it's Chris. I'll start. Look, I think pricing continues to be strong and as we expected in the quarter for residential. We're ready for the cooling season with the inventory we have on hand, but we're not seeing anything from a price elasticity perspective that you're referring to. Things remain to be very disciplined as we see today, and we're ready for the cooling season.

Dave Regnery:

Yes. Gautam, I'll start on that. At the end of the day, we're going to get an opportunity to see everything as a major global HVAC player. In the second quarter -- or in the first quarter here, we announced MTA. Chris talked about that and we've actually announced yesterday. A great example of what we do really well. This is a technology in industrial process cooling, it's in EMEA, great technology at an enterprise level, the revenue is less than 1% for the enterprise. Margins are nice, they fit nicely into the business with our strong scale -- with our strong channel, we're able to scale these acquisitions quite quickly. So we'll look at everything. We'll be disciplined, and we're going to continue to execute the strategy that we've been executing too, and we've had a lot of success with it.

Josh Pokrzywinski:

So look, we talked a lot about the backlog. Clearly, the trends there are impressive in terms of what that means for the revenue story. I guess I'd like to talk a little bit about how backlog margins have trended. And I guess where I'm coming from is some of what the answers have already touched on is these opposing forces where supply chain and price cost, it seemed like they should probably be improving in the backlog. But you also have some of these larger projects, where I would imagine in commercial HVAC, maybe a lower margin upfront and you get paid more on that longer tail of things like service. How would you carve that for us as you're thinking about the margin in backlog today and maybe where that trends?

Josh Pokrzywinski:

And then I guess just sticking with the same kind of follow-up on some of the questions around some of these bigger projects. How do you think about the crowding out between more of the policy-led stuff and stimulus versus private? Obviously, a lot of focus on the higher interest rates and maybe tougher liquidity situation coming from the regional banks. And I don't know how relevant that's going to be for like HVAC retrofit. But I guess, the wrench can only turn so fast and we still have labor bottlenecks. Is there a crowding out that you guys think happens on kind of the IRA stuff maybe versus more private demand here over the next year or 2?

Operator:

Your next question is from the line of Chris Snyder with UBS. Your line is open.

Dave Regnery:

Chris, good question. Look, we haven't seen that yet. And in fact, we continue to see very strong demand. And I think the whole megatrends around decarbonization continue. And the world is getting warmer, and we need to take action and more of our customers realize that, and we have some solutions out there right now that can have a dramatic impact on how we decarbonize the built environment. So we have not seen anything slowing down right now. And that really is on a global basis for our commercial HVAC business. If you look at the Americas, we play across all verticals. I think there's like 14 different verticals that we track. Maybe there's a little bit of softness in office, but there's a lot of strength in high tech that we talked about earlier. Education continues to be strong. Europe, we've been strong really across many verticals with our solutions there. In Asia-Pacific, again, very strong start to the year. So we haven't seen any slowing yet, Chris, but it's a great start to the year for Trane Technologies, and it gives us a lot of confidence in our full year guide.

Chris Kuehn:

Yes. Let me jump in, Chris. So it's a dynamic market around Tier 1 metals, and we started the year 3, 6 months ago, thinking we could be in a really deflationary environment and that really hasn't proven through. As I said earlier, our product management team members have done an outstanding job thinking about cost inputs, value to the customer and staying ahead on price. We remain confident that we're going to be price/cost positive on the year. The start in the first quarter gives us a lot of confidence on the 20 basis points to 30 basis points price/cost spread that we have in the full year guide. We know that pricing gets to be a tougher comp as we work throughout the year. But we remain nimble. If there's further movement of inflationary commodities or we continue to see some inflation certainly in Tier 2 around wage and energy, which we have baked into the guide. But if things were to become more inflationary. We have the nimbleness in the company, and I think the proven track record that we've priced effectively. So we have a lot of confidence on where we're going to be on the full year and ultimately just staying very nimble to what happens in the marketplace.

Joe Ritchie:

So Dave, just maybe I'll start on resi HVAC. So interesting to see it flat, but your organic growth this quarter was down mid-single digits. I'm assuming pricing had to be up. So first, did I get my math right? It seems like volumes were probably down double digits, direct volumes were down double digits in the Americas. So my question is, is that right? And then secondly, what kind of line of sight do you have to that improving and what's embedded in the guide?

Joe Ritchie:

And then going back to the margins in EMEA, I mean, just -- I know that you had an easier comp because of some of the issues that occurred last year, but still a 17% margin in the business. The start of the year is pretty darn good. I guess my question is, is that kind of like the jumping off point now for the rest of the year? Because I'm assuming revenue/volumes are going to be higher through the remaining three quarters. And so it just kind of like the floor for margins in EMEA for the year?

Dave Regnery:

Joe, you're right. again, just Joe, a great start to our -- it really is. I'm so proud of what that team has been able to deliver. So fantastic.

Steve Tusa:

Congrats on the execution on the quarter.

Chris Kuehn:

Thanks.

Chris Kuehn:

Yes, Steve, it's Chris. So it was a little over 6 points in Americas. So think of that as 6 points of price in the Americas, pretty much in line with the enterprise. EMEA, we said 8.9 points of price, and Asia was around 4 points of price in the quarter.

Chris Kuehn:

Yes. I think as we get to the fourth quarter -- well, let me start with Asia, right, given the lockdowns in the second quarter of 2022. We saw muted growth in Q2 a year ago. The business was able to recover very nicely in the third and fourth quarter last year. So Asia may have a little bit of tougher comps in the second half just given the cadence of how earnings played out and the lockdowns from COVID played out in China a year ago. I mentioned just earlier in EMEA, for commercial HVAC, the business really through the third quarter of last year had some very acute supply chain challenges. We're not out of the woods yet, but that continued to get better in the fourth quarter, and we saw that getting better here in the first quarter as well. So I think we're -- fingers crossed, that continues to be a nice tailwind for the business on a year-over-year. But as you get later in the year, I think you'll see a little bit of a headwinds begin to the fourth quarter there. But TK, if I go to the Americas side of the house, the back half of the year for TK Americas, that will be a bit of a tough comp, very strong growth we saw in the third and fourth quarter in the Americas last year. So yes, there was a little bit of tough comps coming in the second half in a few of the businesses but we have such strength in the commercial HVAC businesses as well that we're really confident in the full year guide.

Dave Regnery:

That will be revenue, Steve. That would be revenue.

Dave Regnery:

They certainly normalized their inventory in the first quarter. We've seen that happen. Like I said earlier, inventory may be a bit high, but it really depends on how the cooling season kicks off. It's the first quarter. right? And as you know, this is the smallest quarter. We'll wait until the cooling season starts, and hopefully, it starts real soon.

Dave Regnery:

I think it's -- the cooling season hasn't started. So we're still in that shoulder part of the year. But we'll see. It's forecasted to get real warm here in May. So we'll see how it goes.

Jeff Sprague:

Just one follow-up on resi and then just a different topic on the M&A from you. Just the price in resi below the 6.5% range, little surprised to hear that given the year change and the mix effect associated with that. Maybe you're not including mix when you say price, or perhaps you're still selling a lot of older units in the quarter. Could you just maybe clarify a little bit what's going on there?

Dave Regnery:

Put that as mix, Jeff.

Chris Kuehn:

Yes, Jeff, it really is the contribution of three acquisitions that's leading to that roughly 2 points of revenue growth from M&A in 2023. One relates to the ALCO acquisition we closed in October of last year. So you've got about 9 months of that revenue coming through in 2023 that we're calling out as inorganic. Fourth quarter would be a comp would just be part of our organic results. Dave just mentioned, we closed on MTA just yesterday. It is an industrial process cooling business in EMEA. So we'll start picking up the revenues from that business, also a partial year. Think about it as 8 months of revenue this year. And then the pending acquisition that we've announced in the life sciences vertical in the Americas, that's not closed yet. We expect that to close sometime in the second quarter. We made an estimate of that here in the full year. So all in, it's the combination of those 3 businesses that's getting us to roughly 2 points of revenue growth. And look, the contribution margin in year one, it's low just given the integration costs. But we have a great track record of taking bolt-on acquisitions and bringing them into our channels, selling through with our robust sales forces and ultimately really driving very strong returns in subsequent years. So in the year, it's about $0.03 positive on an EPS basis with that leverage. And ultimately, we'll see what kind of plays out for the year, but it's still positive and slightly accretive by the year.

Jeff Sprague:

Dave, I don't know but about your neighborhood but still pretty cold up here. So make sure [Indiscernible] you week.

Jeff Sprague:

Okay. it's coming, it's coming. So obviously, one of your competitors is making a pretty big splash in European residential markets. How do you characterize the importance of Trane being a player in European residential heating specifically? I'm not saying a multi-billion dollar deal, but do you see opportunities to be a player there in a smaller scale, perhaps?

Jeff Sprague:

And then maybe it's Chris. We're kind of up to the end of the $3 million program transformation savings. Is this it? This is the end of the kind of the big part of your move? Or do you see the potential for like another way perhaps of initiatives?

Operator:

Your next question is from the line of Deane Dray with RBC Capital Markets. Your line is open.

Dave Regnery:

Deane, it's a good question. I mean we've embedded indoor air quality into our applied systems. And I would tell you that -- I've been in this industry a long time, 10 years ago, we used to just have the conversation about indoor air quality in the health care vertical. We have that now in all verticals. So you might not read about it, but I would tell you it's still prevalent and we talk about it with our customers. And they talk about it with us. I mean, I think everyone's been educated on the importance of indoor air quality, the importance of fresher exchange, the importance of being able to balance that with energy consumption -- and we've done a great job of helping our customers work through that. So no, it's certainly part of our business. It's certainly part of our offering and it's top of mind of many of our customers.

Dave Regnery:

Absolutely, absolutely.

Dave Regnery:

Yes. We really like the digital space. We really like the electrification of our portfolio. We really like optimizing our operations with automation, just to name a few. But our innovation pipeline is very robust. It's very full. Three times a year, I actually get to -- we have a deep dive on our innovation pipeline. It's the best four hours I spend some times in the quarter because it's just so exciting to talk to our engineers and to see what they've invented and the impact that it could have on not only decarbonizing the built environment really helping our customers save on energy costs and improve indoor air quality. So it's very robust right now. We love to invest in our business. It's -- we have a proven track record here, and we're going to continue to do that more in the future as well.

Operator:

Your next question comes from the line of Andrew Obin with Bank of America. Your line is open.

Dave Regnery:

Yes. I mean, we've been strong in the health care vertical forever. I think. As I said, we track all 14 different verticals, but health care is certainly one that we have a lot of strength in. And it really -- the reason why we have the strength there, Andy, it's a complex sale. And hospitals, they have varying degrees of requirements, especially around fresh air exchange. So you're going to have a different application in a surgical suite versus you're going to have in a hospital room. So we're still seeing strength in health care. But to be fair, we've always seen strength in health care because our solutions are really built around those kind of more complex situations that we're able to capitalize on.

Chris Kuehn:

Andrew, I'd say, look, demand remains strong, and we -- it's an industry that typically retains price and is disciplined on price. I won't necessarily talk about potential pricing actions they may do throughout the year. As I mentioned before, our product management teams, our business units have done an outstanding job taking all the inputs in to lead on price the last two years, and a good strong performance here in the first quarter as well. So I do think we'll remain proactive and be prudent. And I think our track record hopefully speaks for itself that we can really have a lot of confidence on the 20 basis points to 30 basis points of price over cost in the year.

Nicole DeBlase:

So just -- there's been a lot of focus on the EMEA margins on this call, but the Asia-Pac margins and the operating leverage was also really, really strong. So can we just talk about how you guys are seeing that progressing through the rest of the year?

Dave Regnery:

Yes. Thanks for noticing Nicole. I mean, Asia, sometimes we don't talk enough about it. But what a great leadership team we have there. And they really have been leaders for train technology with innovation and the team just executed extremely well in the first quarter, a great start to the year. And to be fair, all of our segments really executed very strongly in the quarter. And it just speaks to the resiliency of our portfolio and it just gives us lots of confidence in our full year guide. So I certainly appreciate the question.

Chris Kuehn:

Yes. Nicole, so we opened up the second half of the year order book mid- to late March. So orders started to come in a little bit in the first quarter, but we would expect that to really get filled up in the second quarter. And we have a lot of confidence that from what we can see with the backlog entering Q2 and the forward look that our guide in the full year, we're going to outperform the markets both in the Americas and in EMEA for the full year.

Noah Kaye:

Would love to dig into the services trend a little bit more. I mean, that 25% year-over-year in China, maybe to the extent that reopening played into that and you can comment. But just the overall trends in services and how you expect that to trend over the course of the year.

Noah Kaye:

Yes. And that actually ties into the next question. I think in talking about the incremental spend, you called out the digital investments and maybe pulling forward some of that. Just would love an understanding of the road map to the extent you can share with us and how that plays into the services strategy. Are we looking at some meaningful refreshes or additions to the digital suite over the course of the year?

Operator:

At this time, I would like to turn the call back to Mr. Zac Nagle for closing remarks.

Operator:

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

Operator:

Good morning. Welcome to the Trane Technologies Q4 2022 Earnings Conference Call. My name is Lisa, and I will be your operator for the call. The call will begin in a few moments with the speaker remarks and the Q&A session. [Operator Instructions] I will now turn the call over to Zac Nagle, Vice President of Investor Relations.