Trane Technologies plc (TT) — Q2 2023 Earnings Call Transcript

Thanks, operator. Good morning, and thank you for joining us for Trane Technologies Second Quarter 2023 Earnings Conference Call. This call is being webcast on our website where you'll find the accompanying presentation. We are also recording and archiving this call on our website. Statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities law. Please see our SEC filings for a description of some of the factors that may cause our actual results to differ materially from anticipated results. This presentation also includes non-GAAP measures, which are explained in the financial tables attached to our news release. Joining me on today's call are Dave Regnery, Chair and CEO; and Chris Kuehn, Executive Vice President and CFO. With that, please go to slide 3 and I'll turn the call over to Dave.

Thanks, Zac, and everyone, for joining us on today's call. Let me begin with a few comments on our purpose as a company: to boldly challenge what's possible for a sustainable world. Our purpose is at the heart of our strategy, which is linked to powerful megatrends like climate change. This enables us to drive differentiated financial results and shareholder returns over the long term. The recent news on climate change has been sobering. Water temperatures off the Florida coast recently soared to over 100 degrees. We've seen deadly heat waves in parts of the United States, Europe, and Asia in one of the Earth's hottest summers on record. In fact, scientists say these temperatures are likely the warmest the planet has seen in 120,000 years, and have dangerous effects on the environment, the economy, and human life. Urgent action is needed to limit global warming and preserve our planet for the next generation. Our customers are seeking sustainable solutions and choosing Trane Technologies as their partner in decarbonizing the built environment and the cold chain. We are leading the way with our innovation and the 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 benefits of our diverse, resilient portfolio. Organic revenue was up 11%. Adjusted operating margins expanded 110 basis points and adjusted EPS grew 24%. We delivered 30%-plus organic leverage across the enterprise and in each segment, led by our commercial HVAC businesses in each region. Our residential HVAC business continued to normalize and was further impacted by a difficult comp versus the second quarter of last year when revenues were up 30%. Net, on a two-year stack, residential revenues were up mid-teens in Q2. Importantly, we're delivering strong results while increasing business reinvestments. We're accelerating high ROI projects in focused areas, including digital, electrification, and factory automation. These investments are flowing through our segment results as well as through corporate expenses for enterprise-wide initiatives to drive innovation, growth, and productivity well into the future. Bookings remained robust after reaching unprecedented levels in 2021, with nearly 30% bookings growth. In 2021, bookings exceeded revenue by approximately $2.7 billion, nearly doubling our backlog in a single year to $5.4 billion. During 2022, bookings grew more modestly, up 5%. However, the sharp increase in absolute bookings in 2021 translated 5% bookings growth in 2022 into another 27% increase in backlog. Net, 2021 and 2022 are both important drivers of our strong backlog position of $7 billion at the end of the second quarter, which is roughly two and a half times historical levels. 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. Further, when looking at growth rates for Trane Technologies, it's important to consider a three-year stack that includes 2021 for the reasons discussed. Commercial HVAC continues to be a standout across our segments globally. In the second quarter, commercial HVAC bookings were up nearly 40% in each region on a three-year stack, supporting revenue growth of high-teens in both the Americas and EMEA and 45% in Asia. Additionally, our commercial HVAC book-to-bill ratios were effectively 100% or higher in each region. Our end markets continue to be healthy overall, and we believe we are well positioned for strong growth in 2023. While it's premature to dial in an outlook for 2024, continued high levels of demand and our extremely strong backlog position, particularly across our commercial HVAC businesses globally, puts us in a strong position to drive growth in 2024 as well. We expect to enter 2024 with elevated backlog of more than $6 billion. To put that in perspective, backlog has historically represented approximately 20% of the next year's revenue. It's also worth noting that $2 billion of our $7 billion in current backlog is for equipment to be delivered in 2024. This is approximately five times the level of backlog for the next fiscal year versus historical trends at the end of the second quarter. Our strong results through the first half combined with healthy end markets, and backlog that remains two and a half times norms position us well to raise our full year 2023 guidance. Chris will discuss in more detail later in prepared remarks. Please turn to slide number 5. As we discussed, bookings in revenue growth were broad-based globally, with particular strength in our commercial HVAC business in all regions. Enterprise in Americas booking were down 5% and 8% respectively, largely due to softness in our Americas residential business, which was down approximately 20% in the quarter, as that business continues to normalize. Excluding the impact of residential bookings declined. Enterprise bookings were up 1% and Americas bookings were down low single digits. In our America segment, commercial HVAC bookings were down mid single digits against high teens growth comp in the prior year. Absolute bookings remained robust with growth of approximately 40% on a three-year stack. Commercial HVAC revenues were up high teens and quarter strong growth in both equipment and services. Even with strong revenue growth, the book-to-bill ratio was approximately 100%. Commercial HVAC backlog remains highly elevated at three times historical levels. Residential HVAC revenues were down as expected as the business continues to normalize. Revenues were down low teens. However, it's important to note that the team delivered leading revenue growth of 30% in the second quarter of 2022. On a two-year stack, the business was up mid-teens. In our transport refrigeration business, we delivered strong bookings and revenue growth up approximately 40% and 30% respectively. Revenue strength was broad-based in North America with the big three truck trailer and APUs, up approximately 50%. In our newest segment, our commercial HVAC business delivered another strong quarter. Bookings were up mid single digits on top of low teens growth comp in the prior year. Revenues were up high teens with strength in both equipment and services, up mid 20s and high single digits respectively. Our transport refrigeration business is executing well in a modestly down market. We expect the EMEA weighted average transport markets to be down low single digits to mid single digits in 2023 and for our Thermo King business to perform and to be relatively flat for the year. This revenue growth of mid single digits in Q1 and revenues down low single digits in Q2 are well positioned to hit this target for the full year. In our Asia-Pacific segment, the team delivered strong results, with bookings up mid single digits versus bookings up mid teens in the prior year. Revenues were very strong up 41%. China results were robust with bookings and revenues up 20% and 40% respectively. Now, I'd like to turn the call over to Chris.

Thanks, Dave. Please turn to slide number six. We delivered strong revenue growth, margin expansion, and EPS growth again in the second quarter. Organic revenues were up 11%. Adjusted EBITDA margins were up 100 basis points and adjusted EPS was up 24%. And at an enterprise level, we delivered strong organic revenue growth in both equipment and services, up low teens and high single digits, respectively. Our high-performance flywheel continues to pay dividends with relentless investments in innovation, driving strong top line growth, margin expansion, EPS growth and powerful free cash flow. Please turn to slide number seven. We've discussed the key revenue dynamics for the second quarter, so I'll focus my comments on margins. We delivered strong margin expansion in each of our business segments and have highlighted the key margin drivers on the right side of the page. In each of our regions, as the supply chain continues to improve, we're driving strong leverage on volume growth, along with strong price realization and improving productivity. Near term, challenges continue in pockets of our business with associated costs, and we are managing these well across our segments as reflected in our results. As an enterprise, we delivered about six points of volume and about five points of price in the quarter, which was slightly ahead of our expectations on both price and volume. Volume growth was robust in our commercial HVAC businesses, accompanied by strong organic leverage in excess of 30% in each region. Americas performance was led by strength in commercial HVAC and aided by robust growth in our Americas transport refrigeration business, more than offsetting continued normalization of our residential business. EMEA delivered strong incrementals in margins after accounting for approximately nine points of M&A growth in the quarter, which negatively impacted reported leverage given year one integration costs. As we discussed previously, we've earmarked 70 basis points for incremental business reinvestment in 2023, which is about 30 basis points higher than normal to accelerate the timing of key projects. This is included in our guidance and reflected in segment margins and partially in corporate expenses each quarter. Now I'd like to turn the call back over to Dave.

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.

Thanks, Dave. Please turn to Slide number 9. As Dave highlighted at the beginning of the call, we're midway through the year with strong results, near record backlog, and good visibility into the balance of the year. All in, we're confident in raising our full year revenue and EPS guidance for 2023. We're raising our full year organic revenue growth guidance to approximately 8%, up from our prior guidance range of 7% to 8%, reflecting strong results in the first half and improving visibility into the balance of the year across the portfolio. Including M&A, reported revenues are expected to be up approximately 10%. We're raising and tightening our EPS guidance to a range of $8.80 to $8.90, up from a range of $8.30 to $8.50, or up $0.45 at the midpoint. Our new adjusted EPS guidance indicates earnings growth of 20% to 21% in 2023. Importantly, we continue to expect to generate powerful free cash flow of equal to or greater than 100% of adjusted net earnings, or approximately $2 billion. We're raising our organic leverage guidance to 30% plus, up from 25% plus, as we expect the strength we've delivered in the first half of the year to continue in the second half. We also believe it's constructive to give you some color around our expectations for the third quarter to assist with your modeling. We expect organic revenues of approximately 7% in the third quarter, with strong 30% plus organic leverage. We also expect approximately three points of M&A in the third and fourth quarters. We closed on two acquisitions in the second quarter, so our expected M&A contribution in the third and fourth quarters is a bit higher than it is for the first half and for the full year. Please see Slide 18 for additional information that may assist with your models. Please go to Slide number 10. We remain on track to deliver $300 million of run rate savings from business transformation by 2023. Importantly, we continue to invest these cost savings and high ROI projects to further fuel innovation, growth, and productivity. Our continuous improvement mindset is an integral part of our business operating system, and it's designed to drive gross productivity each year to offset other inflation. While it's been difficult to realize meaningful levels of productivity in recent years, given the supply chain and other macro challenges, productivity has been improving as supply chains recover. This is reflected in our strong first half results and our updated 2023 organic leverage target of 30% plus. Please go to Slide number 11. We remain committed to our balanced capital allocation strategy, focused on consistently deploying excess cash to opportunities with the highest return for shareholders. First, we continue to strengthen our core business through relentless business reinvestment. Second, we're committed to maintaining a strong balance sheet that provides us with continued optionality as our markets evolve. Third, we expect to consistently deploy 100% of excess cash over time. Our balanced approach includes strategic M&A that further improves long-term shareholder returns and share repurchases as stock trades below our calculated intrinsic value. Please turn to Slide number 12, and I'll provide an update on our capital deployment for 2023. Year-to-date, we've deployed $1.2 billion in cash, with $341 million to dividends, $535 million to M&A, and $300 million to share repurchases. We have $2.9 billion remaining under the current share repurchase authorization and our shares remain attractive, trading below our calculated intrinsic value. Our M&A pipeline remains active, and we have deployed $535 million year-to-date for bolt-on leading technology acquisitions and equity investments. During Q2, we acquired a leading industrial process cooling technology company in EMEA and a precision temperature-controlled cooling company in the life sciences vertical in the Americas. All in, we're on track to deploy approximately $2.5 billion in cash in 2023. Our strong free cash flow, liquidity, and balance sheet continue to give us excellent capital allocation optionality moving forward. Now, I'd like to turn the call back over to Dave.

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 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.

Thank you. I'd like to thank everyone for joining 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.

Hey, good morning, everyone.

Hey, Andy. How are you doing?

Good morning. Everyone.

Hi, Andy. How are you doing? Good morning.

Good. How are you? So Dave or Chris, you delivered 30% leverage in Q2 and expect 30% for the year, which is higher than your usual guide of 25%. Is the main reason for this that you're seeing more than 20 to 30 basis points of price versus costs in the quarter and for the year? You also mentioned higher-than-usual investments this year and accelerating productivity. Could 30% potentially become the new 25% as you move into 2024 in terms of incremental margin?

Andy, it's Chris. Thanks for the question. Look, we're proud where we delivered 30% organic leverage through the first half of the year, and it's giving us a lot of confidence to be 30% or greater in 2023. Look, we're leveraging all parts of the P&L. Price/cost is coming in better than expected. We typically target 20 basis points to 30 basis points of price/cost spread. We're going to do better than that this year. We are seeing a recovery at the supply chain. It is driving improved productivity, less inefficiencies in our plants. And with that higher volume growth with fewer inefficiencies, we're really getting some nice strong incrementals. What we're really seeing is a dovetail here between price/cost contribution, which will normalize in the second half of the year. We're seeing productivity improving with that improved supply chain and ultimately, like I said, driving those higher volumes. We're continuing to invest incrementally. We're still targeting 60 basis points to 70 basis points of incremental investment, call it 30 basis points to 40 basis points above normal, and we really like that formula. So really, it's all parts of the P&L that are working and giving us confidence on the 30%-plus, Andy, for this year. On your question longer term, we do like the model at 25%-plus organic leverage into the future. We like that optionality that it gives us to keep reinvesting into the business. But as we go into each and every year, we'll kind of call it do like that long-term target.

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?

That's a lengthy question, Andy. I'll do my best to cover everything. To start, I believe we'll exceed $6 billion for the year. I am proud of what our team has accomplished. In the second quarter, the revenue growth for commercial HVAC was in the high teens. Even with that substantial revenue growth, our book-to-bill ratio was around 100%, indicating very strong absolute bookings. The strength is widespread across various sectors, including data centers, high tech, healthcare, and ESSER funding in education, which are all contributing significantly to growth in our commercial HVAC business, and our team continues to perform exceptionally well. We're beginning to see progress on some megaprojects, and our team is effectively managing our approach to these customers. As we've discussed before, having a dedicated global direct sales force is a competitive advantage. For example, we recently collaborated with a customer in Texas on a semiconductor plant, coordinating with stakeholders located in South Korea, Oregon, and Texas, which demonstrates the complexity of these projects. Our team maintains direct communication with all involved parties, allowing us to offer a unique value proposition to our customers. In short, we are experiencing substantial growth.

Very helpful, Dave. Thanks.

Hi. Good morning. So it sounds like slightly better, perhaps, commercial HVAC sales outlook, unchanged in transport largely, and then resi HVAC may be slightly worse. So, just wanted to sort of ask you on that last piece. Is the right way to think about that, that you had sort of volumes down high-teens in the second quarter, that narrows in Q3 and then you're sort of flat to modestly down in the fourth quarter? Is that the way to think about that resi market? And any thoughts on the sort of inventory levels sitting out there for you?

Hey, Julian, this is Dave. I'll start by referencing a year ago. In the second quarter of 2022, our revenue growth in the residential business was 30%. While I don't recall the exact market number, I believe it was in the teens. We experienced significant growth that quarter. However, in the second quarter of this year, we're seeing a decline in the mid-teens. On a two-year comparison, we are still up in the mid-teens. Regarding inventory levels in the channel, we are normalizing in 2023 in our residential business, and we anticipate this process will continue in the latter half of the year. We expect residential to decline in the high single digits on an EBIT basis for the year. We believe the third quarter will perform better than the second quarter, but some normalization will still need to take place. Looking ahead to 2024, we expect the inventory normalization process to be complete in 2023. It's too soon to determine what 2024 will look like, but we do expect some positive effects from policy, particularly regarding the IRA. We can't quantify that yet since the rules are still somewhat unclear, but we believe it will positively impact both our residential and commercial sectors. Chris, do you have anything to add?

Going back to Q2, Q3 last year, I think we felt like we led in price over 2021 and 2022, so that is a part of the reason in the tough comp. And to Dave's guidance on the full year, revenue is down mid-single digits, units down high singles. We've built into our guide plus or minus revenues down mid-singles. We feel like that's part of our guidance that we've updated here on top line revenue growth and our earnings per share.

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 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?

Hey, Julian, this is Chris, I'll start. I think about the backlog at the end of December to now at the end of the second quarter, backlog is up about $100 million, but you're seeing residential execute towards normalization, Thermo King executing through its backlog, and actually commercial HVAC is up from even six months ago. So we just continue to see very strong strength there. Our view is we're going to be greater than $6 billion going into the end of 2023. It's going to set us up very well for healthy revenue growth in 2024. And I think it will continue to be a high-grade problem, we're going to have for a little bit of time to come. The backlog will normalize over time. We're just not seeing very much of that happening this year. In Dave's comments, $2 billion of the current backlog here at the end of the second quarter is already built for 2024. And that's five times the normal level we'd have here at the end of the second quarter. So, we're getting a lot of visibility into next year already. And as you mentioned, a normal percentage of the next 12 months of revenue in backlog is 20%. Dave won’t let me commit to $30 billion of revenue next year. We end the year at $6 billion of backlog. But it will normalize to your point, Julian. It's just going to take some time, but we're still seeing some very strong strength in commercial HVAC right now.

That’s great. Thank you.

Thanks, Julian.

Thank you.

Hi, good morning, guys.

Hey Josh, how are you doing?

Good morning.

Dave, you mentioned ESSER and IRA a couple of times. IRA specifically having a hard time quantifying just yet. But maybe thinking about how those two maybe intersect and then diverge. Where are we in sort of the total ESSER spending, whether it's orders or shipments? And then, do you feel like IRA will be similar sized, larger, smaller? Any way you can kind of dimensionalize those two things as we're maybe maturing in one and entering the other.

Certainly. We'll begin with ESSER. From a revenue perspective, I would consider it to be at a mid-point. In terms of orders, it's slightly further along since we have a backlog of orders. Our team has really excelled in collaborating with school systems nationwide to enhance their capacity to maintain a safe learning environment for children. This effort originated when we focused on indoor air quality. We established roadmaps, and we are currently executing those plans. In terms of revenue, expect mid-single digit growth. Regarding IRA, the benefits are ahead of us. It’s challenging to estimate right now due to the varying standards across states that we are trying to comprehend. However, it will be a positive factor for us. Regardless of how the final regulations come together, our broad portfolio will ensure we have solutions for our customers. While we often think of IRA in the residential sector, it will also positively impact our commercial business. We are addressing both areas and will keep you updated as we gain more insights.

Got it. That's helpful. And then maybe just on the backlog. If I recall correctly, you guys don't count service in that reported backlog number. If that's correct, maybe give us some context for how service backlogs look if you had to parse them out that way. And how much kind of extra visibility you have on that front?

You're right. It doesn't provide any service, and we don't count that in our backlog. It's hard to determine. Our service business is excellent and experienced high single-digit growth again in the second quarter. I believe we're looking at six years of a compound annual growth rate in the high single digits worldwide. This business is a vital part of our strategy, keeping us connected to our customers for the entire lifecycle of our products. It's challenging to evaluate a backlog because it's complicated with multiyear service agreements. If we consider a three-year service contract, for instance, it can be tough to quantify since we often like to add services to those agreements.

Understood. Appreciate the detail.

Thanks, Josh.

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.

Yes, Chris, that's a great question. One of our operating systems involves a very detailed process. We start with planning, then move to permitting, engineering, groundbreaking, site preparation, and finally construction. It's essential to follow this thorough approach, and being involved early adds more value for the customer. The timing varies by project type. For example, a semiconductor plant might take around 3.5 to 4 years from planning to completion, with HVAC equipment typically installed and operational 9 to 12 months before the facility opens. You can estimate when orders will come in based on this timeline. Battery plants usually have a shorter duration, but again, early involvement in planning is crucial throughout the process. These projects are complex, often requiring relationships with influencers in various parts of the globe.

Thank you. Appreciate that. And if I could follow-up on data centers, 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.

Yeah, Chris. Well, thanks for the question, Chris. Yeah, it is a vertical that we've been strong in for a long time, okay? And the answer on AI and the new GPU chip that's now going to be used with AR predominantly with AI, that's a graphic process unit. These units produce a lot more heat. So think of a conventional CPU or central processing unit versus a GPU, graphics process unit. The graphics process unit throws off about 3x the amount of heat versus what we've seen in the past. So if you take that and you think about a data center, the cooling loads within data centers are going to have to change. And we're working with a lot of data center customers because we have a lot of really neat solutions around these high heat applications. So it's definitely going to have an impact on the data centers of tomorrow, how they're being constructed, how they're being planned. And I would tell you that our teams are working very closely with our customers and developing really creative solutions.

Thank you. Appreciate that.

Hey. Good morning, guys.

Hey, Joe. Good morning.

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.

Yes, Joe, we did see price of around 5 points in the second quarter. We do expect that to moderate into the second half of the year. If I think about Q3 and Q4 of 2022, we delivered over 10 points of price in the second half of last year, so we do expect that to moderate. As I think about the full year, our 8% organic revenue growth guide, we still see a bias towards a little bit more volume growth and price. So that price contribution will moderate, still be above the normal levels, let's say, of price pre-pandemic and pre this inflation. But this is where that dovetail with productivity, I think, is another way for us to fully leverage the P&L. As the supply chain continues to get better, we had 6 points of volume growth in the quarter, and we're expecting strong volumes in the second half. We're seeing better productivity in the plants. And to your second question, there's a lot of lost productivity for us to recapture over the last couple of years with these supply chain constraints. That, I think, is the next layer of opportunity for the company is we're A, well on track to deliver the $300 million of savings from transformation, and then B, we're always looking to make improvements in our business, leverage our business operating system to drive efficiencies and offset other inflation and productivity. But there's a productivity recapture here that I think is a tailwind for the company and gives us confidence that a 25% or greater organic leverage target is something we can achieve over time.

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 timelines 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?

Sure, Joe. I'll address your question in two parts. First, regarding the commercial aspect and construction projects, we've experienced some delays, but they are not significant. In fact, things have improved compared to what we saw before. While a few projects have been pushed back, it is not a major issue. Secondly, on the internal labor front, we've focused on developing programs such as apprenticeship initiatives to cultivate talent and provide people with opportunities to acquire new skills. We've implemented tuition assistance programs to ensure we build talent at a grassroots level, both for current needs and future growth. We've seen considerable success with this approach. I recently visited La Crosse, Wisconsin, and it was encouraging to observe the apprenticeship labs where individuals who weren't experienced in welding have become skilled welders. It’s a fantastic opportunity for them to build a career with Trane Technologies, and there is significant potential for advancement. Overall, we're in a good position.

Sounds good. Thank you.

Thanks, Joe.

Hi. Good morning.

Hey, Steve, how you doing? Good morning.

Not too bad. Can you just give the split between light commercial and applied in that equipment number, sales number or bookings, either one?

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.

Okay. Great. And then just on resi. The guidance this year, so I think your units are down like low double so far first half maybe, something like that. It's hard to tell how much price you're getting there. You're guiding for, I guess, for the year, a high single-digit decline. Is that just the comps in the second half? And then maybe just some color on what you guys are seeing so far with the hot weather here in July.

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.

And is there any difference between the sell-in and sell-through, your independent distribution versus your captive in the quarter?

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.

Yep. Make some sense. All right. Thanks, guys.

Yeah.

Yeah. Steve, one more thing on price. Just I think you were trying to dial in price in the first half. We're not getting the strong levels of prices you may think we're getting in the first half. It is less than 5% for the first half, and it's going to get lower in the second half for resi. That's just really a strong, very strong comp against where we led with price in 2021 and 2022. We're just seeing that normalize here in the business. So hopefully, that helps clarify a couple of things.

Yeah, great. Thanks.

Sure.

Hey, good morning, everyone.

Hey, Andy. How are you doing?

Good morning. Everyone.

Hi, Andy. How are you doing? Good morning.