Trane Technologies plc (TT) — Q4 2023 Earnings Call Transcript

Thanks, operator. Good morning and thank you for joining us for Trane Technologies' fourth quarter 2023 earnings conference call. This call is being webcast on our website at tranetechnologies.com where you'll find the accompanying presentation. We're also recording and archiving this call on our website. Please go to Slide 2. Statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities law. Please see our SEC filings for a description of some of the factors that may cause our actual results to differ materially from 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, I'll turn the call over to Dave.

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 from 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 and 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 GDP plus growth over the medium to long-term. Bookings were healthy, up 8%. Our transport business was the tale of two halves. In 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 the 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 an up low teens prior year comp. Now I'd like to turn the call over to Chris. Chris?

Thanks, Dave. Please turn to Slide number 8. The scoreboard for the quarter highlights strong execution top to bottom. Organic revenues were up 6%, adjusted EBITDA and operating margins were up 150 basis points and 190 basis points, respectively, and adjusted EPS was up 19%. Q4 adjusted EPS includes a $0.03 headwind related to foreign exchange losses from the devaluation of the Argentine peso. At an enterprise level, we delivered strong organic revenue growth in both equipment and services, up low single digits and low teens, respectively. Services growth continues to be a standout, representing about one-third of our enterprise revenues and making Trane Technologies more resilient, with higher recurring revenues and higher margins over time. Over the past six years, our services business delivered a compound annual growth rate of high single digits. 2023 services growth was even higher, up double digits. Last but not least, I want to thank our global teams for once again delivering strong free cash flow throughout the year, resulting in a 103% free cash flow conversion. Please turn to Slide number 9. At the enterprise level, we delivered robust volume growth with strong incrementals, positive price realization, and productivity that more than offset inflation. In the Americas segment, we delivered about 4 points of volume and 3 points of price and 200 basis points of margin expansion. While volume growth was modestly higher than price growth at the segment level, it's important to understand the dynamics below the segment level. Robust volume growth of approximately 20 points in commercial HVAC accompanied by strong leverage more than offset volume declines in residential and transport. The EMEA segment delivered strong incrementals and margin expansion, with organic revenues up high single digits in the quarter made up of approximately 5 points of volume and 3 points of price. The segment also delivered approximately 6 points of M&A growth in the quarter. Organic incrementals were greater than 30%. The Asia segment delivered strong margin expansion and organic leverage on flattish revenues, with positive price and productivity in the quarter adding to margin expansion. As we've highlighted throughout the year, we reinvested heavily in our business and accelerated the timing of key projects across the enterprise in 2023. We see a tight linkage between investments in innovation and market outgrowth, and we will continue to leverage opportunities to go further and faster. A few high-priority areas in 2023 and 2024 are sales and services excellence, digital, and factory automation. Now I'd like to turn the call back over to Dave. Dave?

Thanks, Chris. Please turn to Slide number 10. Looking at our segments and markets, we're excited about 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 any 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.

Thanks, Dave. Please turn to Slide number 11. Our guidance for 2024 reflects our optimism in key end markets and our ability to outperform. Embedded in our guidance is our philosophy around our value creation flywheel, which builds in continued investment in innovation, outgrowth across our end markets, healthy leverage, and strong free cash flow. We’re guiding 2024 to 6% to 7% organic revenue growth and $10 to $10.30 in adjusted earnings per share or approximately 11% to 14% EPS growth. We’ve included approximately 1 point of growth from M&A in 2024, reflecting the carryover impact from bolt-on acquisitions completed in 2023. We’re targeting organic leverage of 25% plus for the year, which is consistent with our stated long-term target. While we expect our recent M&A transactions to have a strong payout over the next several years, we’re expecting a modest headwind to operating income and to leverage in 2024 from M&A. Overall, we expect a negative impact of $30 million to operating income for the full year, primarily related to our technology acquisition Nuvolo, which carries non-cash accelerated intangibles amortization of approximately $25 million plus year one acquisition and integration related costs. We expect this acquisition to be EPS accretive by year three, consistent with our M&A. Turning to cash. We expect 2024 to be another year of free cash flow conversion of 100% or greater. We also wanted to provide some color on how we see the first quarter. We expect organic revenue growth of approximately 7%, led by continued strong commercial HVAC growth partially offset by softer residential and transport markets. We expect adjusted EPS between $1.60 and $1.65, reflecting high levels of incremental business reinvestment we’ve discussed for 2024 and consistent with our historical Q1 adjusted earnings as a percentage of our full year earnings between 15% and 16%. Please go to Slide number 12. During 2023, we delivered an incremental $60 million of transformation savings. Over the last four years, we have successfully delivered $300 million of run rate savings from our business transformation program. The additional savings have allowed us to reinvest in our high-performance flywheel, which ultimately drives consistent top quartile EPS growth. While this discrete program is complete as a lean based company with a world-class business operating system, self-help, cost reduction programs, through productivity are part of our DNA. This has been a strong lever for incremental margins historically and will continue to be in the future. Please turn to Slide number 13. We remain committed to our balanced capital allocation strategy, focused on consistently deploying excess cash to opportunities with the highest returns 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 the stock trades below our calculated intrinsic value. Please turn to Slide number 14 and I’ll provide an update on our capital deployment for 2023 and our outlook for 2024. During 2023 and including activity in January 2024, we deployed $2.4 billion in cash, including approximately $750 million to share repurchases, $684 million to dividends, and approximately $900 million on strategic M&A. We’re targeting $2.5 billion in capital deployment in 2024 and expect to deploy 100% of excess cash over time. We have significant dry powder with approximately $2.5 billion remaining under the current share repurchase authorization, and our shares remain attractive, trading below our calculated intrinsic value. Our strong free cash flow, liquidity, and balance sheet continue to give us excellent capital allocation optionality. Our M&A pipeline remains active, and in 2023 we made key strategic investments to accelerate our progress across energy services and digital solutions, industrial process cooling, and precision temperature control technology.

Now I’d like to turn the call back over to Dave. Dave? 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 deleverage 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 turn 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?

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

Good morning.

Feel like a broken record, but good quarter year, etc. 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?

Hey, Scott, it’s Chris. The $60 million is, let’s say, the final year of that $300 million cost takeout program that we launched at the start of Trane Technologies. $300 million run rate savings now achieved by the end of 2023. So we did really just want to put a little bit of a bow around that program. However, I would tell you that the business operating system that we’ve had and we’ve built over a decade, it’s really driven to drive strong productivity and cost savings over the long term. So while that discrete program is behind us, I would say we’re very focused on the cost structure of the company and making sure we’re getting the right leverage over the long term. And so we’ll always look at opportunities to lean out the structure in the organization.

Okay. That’s helpful. And guys, you’ve got a high-class problem in that you’re generating a lot of cash. You’ve deleveraged. 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.

Hey, Scott, how are you doing? This is Dave. Look, our M&A pipeline is strong, and I think we’ve been able to demonstrate, I think we actually closed five deals in 2023. We like technologies; we like products that we could put through our channels. And I think you see the success that we’ve had with those, whether it be MTA last year, AL-KO. We recently acquired Nuvolo, which we’re very excited about from think of it as augmenting our connected solutions. Very excited the more I learn about Nuvolo. So, look, we have a very active pipeline. We love the portfolio we have today. So I think you’ve heard me say in the past, we don’t need to do anything, but obviously, we’re always looking for opportunities where we can take a technology or a channel and expand what we do great today. So we’ll continue to be active in that area and expect more to come.

Fair enough. Best of luck this year, guys.

All right. Hey, thanks, Scott.

Thank you.

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?

I think you’re pretty close there, so you’re spot on there, Julian.

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?

Yes. Thanks, Julian. It’s Chris. Look, the 25% organic leverage 2024 versus last year? 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.

Yes, it’s a great question. We really like the model we have today with 25% plus. It gives us a lot of optionality, and as a CEO, you look at our results, right? And you look at the top-line, you say, okay, we’re going to have 9% growth for the year. I’m not sure that’s going to be top quartile. We believe it will be. We’ll see when everyone else reports. I look at the bottom line and I look at EPS growth of 23%. Pretty confident that’ll be top quartile. And by the way, that’s the third consecutive year that we’ve had 20% or greater EPS growth. And then I look at the quality of our earnings, Julian, and I’ll use free cash flow as a proxy to determine that. And over a three-year period, free cash flow of 100%. So, we’re very happy with the model. And you take that and you wrap it around our culture, which is uplifting and a can-do culture that we have at Trane Technologies. We’re very excited about the future, and we’re very happy with our performance in the past. But I always tell people our brightest days are still in front of us. So expect more investment, expect more growth, and expect us to continue to innovate for the industry.

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.

No, I think the first half will be tougher than the second half. A lot of that has to do with the comps. As I said in our prepared remarks. Think of the Americas weighted average will be down in the 10%. We’ll do better than that. We’ll outperform. EMEA is a little bit down low single digits. We’ll do better than that as well. Look, our Thermo King business, it’s a great fact – actually after right up to this meeting, I’m going to be joining the Thermo King dealer network in the Americas. And it’s a great business. We have such a great dealer network there. We’ve been through these slight downturns before. This will snap back. If you look at what ACT is projecting right now, it’s down in 2024, a quick snap back into 2025, and then they have growth through 2028. And we’re very optimistic with a lot of the innovation that we’ve already launched and what’s coming, that this is a great business not only today, but well into the future.

Great. Thank you.

Thanks, Julian.

Thank you. I wanted to ask about orders. The back half of the year, orders have been incredibly strong and have really bifurcated when compared to any sort of industry benchmark we look at or peers. Is there anything specific that’s driving that pickup in orders that we’ve seen over the last six months and anything you would comment on data center, because it feels like a lot of the ramp we’ve seen has kind of lined up with a lot of the investment that we’re seeing in data center and AI specifically? Thank you.

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.

I appreciate that. And then maybe just following up on data center, and I know we’re in the very, very early innings on AI, but is there any way that you could frame Trane’s positioning in that market, the opportunity that you see going forward, just because it is very new, but it also does seem very significant. Thank you.

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 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.

Appreciate that. Thank you.

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

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

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 driving this acceleration and growth in that service business? And how do you see that playing out in the coming years?

Yes, Joe, thanks for the question. I think I’d say yes, yes, and yes. Okay. It’s a system of things that makes our service business great. It starts with a great operating system around our service business. We track probably 30 different KPIs. And if you went to one of our offices, you’d see very detailed tracking on our service, which really leads to our success. So it’s a great business. Okay? I won’t disclose too much about our playbook, but we have a very detailed playbook, and you see it in our results. And I would tell you that our service business is really built around our applied systems. And as our applied systems continue to populate at an increasing rate, you could see the tail that we’re getting in our service business. Think about applied systems. I said this in our opening remarks. Think about it as for every dollar of equipment; think about eight times to 10 times over the life of our service business. And you could now start to see that flywheel that’s being created in our service business. So a great business today. As Chris said, it’s about a third of the enterprise growing nicely, and we’re investing heavily in it, because we know there’s a lot of opportunities in the future as well.

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?

Yes, I mean, I’ll speak of the Americas, and I think I said earlier, we track about 14 different verticals. Office is one of the weaker ones in 2023, and right now we’re forecasting that weakness to continue in 2024. We do believe that at one point office will come back and with our direct sales force, we’ll pivot to that opportunity and capture that opportunity. But right now, it’s going to be soft at least through 2024. We’ll see – we’ll report back as the year progresses as to how that vertical is behaving. There’s a lot in the news about it, so it’s got some recovery to do, but it’ll be soft in 2024. But that’s all baked into our guide, Joe, so that’s we’ve taken that into account. And I would tell you that the strength that we’re seeing in some other verticals are going to be more than compensate for what we’re seeing in the office vertical.

Understood. Thank you.

Sure.

Hey, good morning and congrats on a very strong 2023.

Thanks, Steve. Appreciate it.

What are you guys embedding for price this year in general for the Americas? I mean, you said it was 3% in the quarter, I think. But what are you embedding for your 2024 guide?

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.

Okay. And your inflation is kind of stable, I would assume?

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.

So I would have, sorry, just on a follow-up on the price, I would assume that the majority of that price is still coming in commercial. So when you talk about that flat revenue number for resi, is that basically like, what's the volume kind of price split that you're assuming in resi? I guess is the question.

All in for resi, 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.

And then for 2025, are you guys going to push through the A2L price like everybody else, the 10% – 10% to 15%?

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.

But to be specific, Steve, this is Dave. Yes, for sure we'll see that in 2025.

Hey, good morning, everyone.

Hey, Andy, how are you?

Good morning.

Good. How are you? Dave, can you give us some more color on the traction of your thermal management systems in EMEA and the progress you're making in bringing thermal management systems to the U.S.? Is it possible to quantify the business at this point or at least give us color on how to think about how much of your growth is coming from thermal management systems and where you are in terms of bringing it out here in the U.S.?

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 systems, which is really the 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 decarbonize 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 as 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 it's a 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 or four times; these are fantastic opportunities for Trane Technologies and they're fantastic opportunities for our customers to really help them decarbonize 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.

Very hopeful. And then, Dave, I wanted to double click on your comments around Asia and China in particular. As you said, China bookings barely down, I think revenue up. But as you mentioned, one of your peers had a relatively sharp deterioration in bookings in China. You mentioned the strength of your team there. Maybe talk about the durability of growth that you see there and what you're doing to sustain that growth?

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.

Awesome. Keep up the good work.

All right. Thanks, Andy. Talk to you soon.

Thanks.

Hey, thanks. Good morning, everyone.

Hey. Good morning, Jeff. Hey, good morning.

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.

I appreciate it. Thank you.

All right. Thanks.

Thanks, operator. I’d like to thank everyone for joining today’s call. As always, we’ll be around to answer any questions you have in the coming days and weeks. We’ll also be attending a number of the upcoming conferences as we enter the big conference season, and we hope to have the opportunity to connect with many of you there soon. Have a great day, and we’ll talk to you soon.