Trane Technologies plc (TT) — Q2 2024 Earnings Call Transcript

Thanks, Operator. Good morning. And thank you for joining us for Trane Technologies’ second quarter 2024 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 David Regnery, Chair and CEO; and Chris Kuehn, Executive Vice President and CFO. With that, I’ll turn the call over to Dave. 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 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 to 10 times multiple of higher margin service revenue over the life of the equipment. So, we’re 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?

Thanks, Dave. Please turn to Slide #6. This slide provides a snapshot of our performance in the second quarter and highlights continued strong execution, top to bottom. Organic revenues were up 13%, adjusted EBITDA and operating margins were both up 140 basis points, and adjusted EPS was up 23%. At an enterprise level, we delivered strong organic revenue growth in both equipment and services, up low-teens and mid-teens, respectively. Our high-performance flywheel continues to pay dividends, with relentless investments and innovation driving strong topline growth, margin expansion and EPS growth. Please turn to Slide #7. At the enterprise level, we delivered robust volume growth with strong incrementals, positive price realization and productivity that more than offset inflation and continued high levels of business reinvestment. In our Americas segment, we delivered about 14 points of volume and about 2 points of price. Our Americas commercial HVAC business again outperformed the markets and delivered very strong volume growth of more than 20 points. Adjusted operating margin expansion of 130 basis points was driven by volume growth, productivity and price realization, more than offsetting inflation and high levels of business reinvestment. In our EMEA segment, we delivered about 4 points of volume and 1 point of price, with strong volume in our commercial HVAC business. Adjusted operating margin expansion of 130 basis points was driven by volume growth, productivity and price realization, more than offsetting inflation and high levels of business reinvestment. In our Asia-Pacific segment, the team delivered 310 basis points of adjusted operating margin expansion, despite a mid-single-digit volume decline. Strong productivity and positive price realization more than offset inflation and high levels of business reinvestment. Now I’d like to turn the call back over to Dave. Dave?

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 in 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?

Thanks, Dave. Please turn to Slide #9. Our initial 2024 guidance reflected targets that we believed would deliver top quartile performance on organic revenue and adjusted EPS growth for the full year. Halfway through, we’re exceeding those objectives. Given our strong performance, positive outlook and exceptional backlog, we’re raising our organic revenue guidance to approximately 10%, 1.5 percentage points above the midpoint of our prior range of 8% to 9%. We’re also raising our full year adjusted earnings per share guidance by $0.35 at the midpoint to approximately $10.80, up from a range of $10.40 to $10.50 prior. With this updated guidance, we’re poised to deliver our fourth consecutive year of 20% or greater adjusted earnings per share growth. We continue to expect about one point of growth from M&A in 2024, with a negative impact of approximately $30 million to adjusted operating income for the full year, for a negative impact of about 5 points to reported leverage versus organic leverage. We also expect about 1 point of negative FX impact in 2024, effectively offsetting the point of growth from M&A. Net, organic, and reported revenue growth guidance for 2024 are the same, at approximately 10%. There’s no change to our organic leverage target of 25% plus for the year, consistent with our stated long-term target and we continue to expect free cash flow conversion to adjusted net earnings of 100% or greater. For the third quarter, we expect revenue growth of approximately 8.5% and adjusted EPS of approximately $3.15 to $3.20. Please see Page 17 for additional information that may be helpful for modeling purposes. Please go to Slide #10. 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 11 and I’ll provide an update on our 2024 capital deployment. Year-to-date through July, we’ve deployed $1.1 billion in cash, with $379 million to dividends, approximately $100 million to M&A and $650 million to share repurchases. We have $1.8 billion remaining under the current share repurchase authorization, providing us with strong optionality as our shares remain attractive, trading below our calculated intrinsic value. We continue to have an active M&A pipeline, with potential value accretive opportunities to further improve long-term shareholder returns. For 2024, we expect to deploy approximately $2.5 billion in cash. Our strong free cash flow, liquidity and balance sheet give us excellent capital allocation optionality moving forward. Now I’d like to turn the call back over to Dave. Dave?

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?

Hi. Good morning. Maybe just wanted to start with the organic sales growth guidance. Understand 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?

Hey. Good morning, Julian. This is Chris. I’ll start. Yeah. Look, we’re happy with the guidance we just put forth and raised full year organic revenue growth target to 10%, up 1.5 points from our prior guide. Think about the second half of the year as I’ll start with commercial HVAC Americas. They’re going to have a great year on a full year basis. As I’ve talked about in prior calls, the comps versus 2023 are just tougher as you go into the second half of the year. As a reminder, a year ago, that business grew mid-teens in Q1, high-teens Q2, and the second half of 2023, it grew in the low-20s to mid-20s Q3 and Q4, respectively. So it’s going to have a great year. Think of that second half range. It’s probably in the 10% to 12% range in growth. And what’s interesting, and we did the math on this, when you think about the first half of 2024 in that business, the three-year revenue stack is a 45% to 50% growth, and it’s actually the same when you look at the second half of the year in 2024 as well. It’s a 45% to 50% revenue growth over the last three years. So, it looks really consistent when you think about it over the last several years with a lot of dynamic markets, so to speak, and dealing with supply chain. But they’re going to have a great year. Think of transport second half of the year, as Dave called out in his comments. I mean, those markets are expected to be down further than what we even thought three months ago. ACT has called those markets down in the mid-20s in the second half of the year. So we expect that business to be down, but we expect to outperform on the full year. And then residential, I’ll leave it within the Americas, mid-single-digit growth plan for the second half of the year. And could it be better? Yeah, maybe it could be better. It is a bit of a step down from the second quarter, but we’re cautiously optimistic about that space. We’re very much in the middle of the cooling season right now. We want to really see where it plays out. But maybe I’ll end there, that we’re confident in the full year guide and could things get a little bit better in the second half? Maybe. But we’ll update you as we get to the call next quarter.

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?

Yeah. Good question. I think it’s really less about mix of the businesses. When you think about performance last year and EBITDA margins across EMEA, Asia and the Americas, very different mix of businesses. EBITDA margins were fairly consistent across all three of the businesses, actually Asia leading. But if I think about the second half, this is really where Dave has continued to challenge all of our business units with advancing investments, right? We see it as, and I’ve seen it for a very long time, with accelerating investments, and as we see high returns on them, that’s where I would call it maybe second half of the year. There’s a bit of compounding effect of the investments that we began to ramp in the first quarter of this year. Those wind up being a little bit more costly in the second half, but all of them have really strong returns. So we like the full year guidance and confidence in 25% or better organic leverage. Let’s see where the year plays out. But the focus here is making sure we continuously and relentlessly invest in the business to keep driving this market outgrowth in the next several years and Dave’s keeping the pressure on.

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.

That’s great. Thank you.

Thanks, Julian.

Thank you.

Hey. Good morning, guys. Dave and Chris, is that?

Hey, Scott. How are you doing?

I’m good. Thank you. And today’s results have been good. So it’s been a good day. So I wanted to just dig in a little bit of backlog. It’s kind of your comments about 2 times normal. I’m trying to just tease out what’s changed here. Obviously, demand is solid. But are these backlogs 2 times normal largely because lead times have gone up substantially because these projects have gotten bigger and more complex and folks want to get in front of the line? I’m thinking data centers and semi-fabs and things like that. But perhaps I’m overstating that a bit?

It’s a great question, Scott. I think we need to reconsider what we consider normal. We’re significantly larger than we were four years ago. As for lead times, I would say they are back to what I would consider a normal rate, particularly for data centers. Our data center customers are giving us visibility into their needs well ahead of time compared to other sectors. We’re experiencing strong performance across nearly all sectors. In the Americas, particularly in our commercial HVAC business this quarter, we monitored 14 different sectors and found it difficult to identify any that were underperforming. We have a wide range of strength. While there’s considerable demand in high-growth sectors like data centers, we are also seeing solid demand in other areas.

Okay. That's helpful. Regarding China, bookings are up and I understand it can fluctuate a bit. Is there any indication that China has reached its lowest point? I'm curious both about the macro perspective and whether you are experiencing some growth there. Any insights you can provide would be appreciated.

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.

Okay. Congrats, Dave. Thanks. I’ll pass it on.

Thanks. Appreciate it, Scott.

Good morning, everyone. Nice quarter.

Thanks, Andy.

Thanks, Andy.

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?

Yeah. I’m not going to forecast our incoming order rates for the rest of the year. I will tell you that we’re going to have a backlog that’ll be very strong going into 2025, much like you saw us at the beginning of 2024. We already have 2.8 billion booked for 2025 and I mean, that’s a number that we haven’t talked about that size of a number in the past. So we’re very confident there. As far as the demand that we’re seeing, look, we’re seeing a lot of demand and I emphasize it’s broad-based, right? It’s not just in the high growth verticals because we’re very strong there, but it’s broad-based and it really has to do with a lot of our innovation and our ability to execute. And with our direct sales force, we go to where the opportunities are. Our teams are highly technical and we’re winning in the marketplace. It’s that simple. And I couldn’t be prouder of what that team’s been able to execute. And by the way, we’re talking a lot about the Americas, but I would tell you that our commercial HVAC business in Europe also performed extremely well. Their order rates were up 20%. So you could see that investing in the business, always having that long-term vision as to where you want to go and the payback that you get for that, this is a flywheel, as Chris would say, and we’re seeing the impacts of that and that flywheel is going to continue to spin for us.

Thank you for that. I was trying to address the forecast for bookings. Let me ask a follow-up. Chris, you mentioned the strength in the residential sector. It seems that revenues in the first half have already increased by mid-single digits. Orders clearly accelerated in Q2, rising 30%. I understand you want to remain cautious, but is mid-single-digit growth really the minimum expectation for the year, and what have you observed so far during the cooling season?

Andy, good question. Yeah. I think mid-singles is probably the floor for the business. Could it be better? Yeah, we think it could be better. But as you know, bookings in that business, it’s less important. It’s really around seeing through the entire cooling season. As you know, there’s a refrigerant transition that’s happening later into this year, into next year, and we’re ready for that. We can certainly answer any questions there as well. But we’ve got a lot of confidence in that team. It’s been a challenging market leading into this cooling season for about a year, year and a half. But yeah, we feel like could that be better? It could be better. But let’s see how the year kind of plays itself out.

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.

Appreciate it, guys.

Okay. Thank you.

Thank you, Andy.

Yes. Thank you. I was wondering if you could talk about your expectations of any pre-buy given the A2L transition and just, yeah, have you already introduced the product, et cetera?

We have introduced about half of the products that will be affected in our commercial business, specifically those that use a scroll compressor as a target for a refrigerant change. In our commercial sites, we are currently selling both the new refrigerant 454B and still 410. However, in our residential business, we haven't introduced 454B yet, but that will be rolled out in the latter half of the year. Regarding pre-buys, we are not expecting a significant pre-buy in our residential business towards the end of the year at this time. Our focus is really on assisting our independent wholesale distributors in properly transitioning their inventory. We will work with them throughout the year to ensure they are ready for the cooling season in 2025. So, to answer your question, we do not have a large pre-buy anticipated. We have designed our operations to manufacture both products, which involves a slightly higher upfront cost, but we believe this investment will pay off since in the residential area, we’ll need to provide components of 410 for some time to ensure we can service our products throughout their useful life.

Great. Thank you.

Thanks, Gotham. Appreciate it.

Thanks.

Hey. Good morning, everyone. Congrats on the quarter.

Good morning, Damian. How are you?

Doing well, thank you. I was wondering if you could maybe help us unpack the 13% organic growth a little bit. Just give us a sense for how much of this topline being driven by volumes versus some price and mixed benefits and just maybe kind of walk us through how you’re thinking about that for the full year now?

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.

A lot of volume, Damian.

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?

I'll respond to the first question. Emerging cooling still has some challenges to navigate, and we are working through those with our partner. I wouldn't categorize it as mainstream yet. Regarding our AI tools, particularly the Nuvolo acquisition, it's still in the early stages, but we are pleased with what we've observed, and this will significantly enhance our connected asset solutions. In my opening remarks, I mentioned demand side management. While many are focusing on the generation side of power, it's essential to recognize that around 30% of the energy consumed within a building is wasted. By connecting to the asset or the building, we can ensure that it performs as intended. This figure represents a substantial amount of energy savings. We are optimistic about Nuvolo and our connected solutions. Expect to hear more about demand side management in the coming years, as the focus is not solely on generation or forecasting future demand. There is considerable discussion about data centers, and we at Trane Technology can assist our customers in using what we generate today more efficiently.

Great. Thanks, guys. Best of luck.

Thank you, Damian. Thank you.

Thanks.

Hey, Joe.

Hey, guys. Good morning.

Good morning.

So I’m going to touch on data centers again just quickly. I know that it’s both broad-based growth across commercial HVAC in the Americas. I’m just curious, though, are you seeing any constraints on your bookings for data centers, I know that that’s been a hot topic of late. And then also, can you just maybe tell us a little bit about the margin profile of the business that you’re booking in that vertical?

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?

That’s where I was going to go, Dave. I think, again, these are generally highly customized applied systems when you’re talking about data centers for the most part. And so while we’re pricing for innovation, we’re also making sure we’ve got customers for life. These are customers that are putting in multiple locations, multiple data centers, and we want to make sure we have not only a solution for today’s order, but what that order can be a year, two years, five years from now. As all market projections would suggest that this is going to be a multiyear growth factor with the growth of data centers. And with that, to Dave’s ending point, the opportunity still in front of us is to think about services here, and with typical applied systems generating 8 to 10 times of the revenue and services from a dollar of equipment, that’s still an opportunity well in front of us as we deploy products into this space and you’re starting to see that a bit in the revenues, but more of that in 2025 and 2026, that’s a nice opportunity still in front of us.

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?

Yeah. I mean, the team executed very well. Look, I’ve been saying for a long time, Joe, you got to look at the share in residential over a longer period than just a quarter. So did you do better in a quarter? Tell me what you’ve done over the long-term. So I can’t comment on if there was any one of our other competitors that didn’t do well, I don’t know that. But I am very pleased with our results. But look, we’re cautiously optimistic here. Look at share over the long-term. Don’t just look at it on a quarter. There’s different sell-in models and you could get the wrong answer if you just look at a particular quarter. But I am very happy with the results that we’ve been able to demonstrate.

Okay, guys. Thank you.

Hey. Good morning.

Hey, Steve. How are you?

Good morning.

Are you guys getting bored yet of putting up these kind of results?

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

Yeah. Congrats on great execution and very strong results. Could we just get a breakdown of the difference between applied and unitary equipment in the quarter and then what you’re expecting for the second half in those two?

I'm pleased with the performance in both the applied and unitary segments. Both saw significant increases, with commercial HVAC revenues rising over 20% this quarter. Equipment sales grew by 30%, with unitary performing slightly better than applied. For the second half of the year, we're expecting commercial HVAC Americas to be up approximately 10% to 12%. Last year's performance faced tougher comparisons, with revenue growth moving from mid-teens in Q1 to mid-20s by Q4. This year’s team is poised for great success. Additionally, 90% of our backlog is in commercial HVAC, amounting to $2.8 billion for 2025 and beyond, which consists entirely of equipment, with no service included. This positions us strongly for the future and boosts our confidence for growth next year.

Will these trends diverge in the second half? It seems that the data center business, the applied segment, and the backlog-related sectors are continuing to grow significantly, but the short-cycle areas might experience a slowdown due to tougher comparisons. Should we interpret it this way? Will there be some divergence between unitary and applied?

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.

Yeah. I would agree.

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?

It's a great question, and I appreciate you recognizing our high growth rates. To remind everyone, we’ve experienced a compound annual growth rate in the high-single digits over the last six years. In the second quarter, we saw an increase in the mid-teens. Our operating system plays a crucial role in our service business's success. Maintaining a growing applied installed base is essential since our service business is fundamentally built around it. Additionally, our perspective on an asset not performing well when it's not heating or cooling efficiently or consuming excessive energy opens up significant growth opportunities.

Okay. Thanks. Yeah. Thanks a lot.

Okay, Steve. Thanks.

Thanks. Good morning, everyone.

Hi, Jeff. Good morning.

Hey, I hope everybody’s well. I want to come back to data centers too, maybe a little bit bigger picture, just competitive and customer behavior question. Obviously, you and your peers are talking about very strong growth. It seems like there’s plenty to go around. It also does look like you’re probably outgrowing them, but it’s hard to tell. The nature of my question is, are your customers in general and maybe the hyperscalers in particular standardizing on OEMs? You end up dominating hyperscaler A and carrier as hyperscaler B, or are we looking at mixed fleets based on what people can deliver at a point in time? Just give us a sense of kind of in this almost gold rush to stand this stuff up, just how the competitive landscape and customer behavior is unfolding?

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.

And Dave, is there a way to think about just your available serve market here, dollars per megawatt deployed or some other metric as you try to really game plan for the capacity you need and the revenue trajectory you might be looking at? Any way you could help us frame that?

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.

Okay. Great. I’ll leave it there. Thanks.

Thanks, Jeff.

Thanks. Good morning, everyone. Great quarter obviously.

Good morning, Nigel. How are you?

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?

Yeah. It’s a fair question. Look, the Americas transport business is going to be down in 2014. It’s a more cyclical business than our commercial HVAC business. ACT is projecting the back half of the year to be down 25%. To be fair, our internal models say it could be down even a little bit more than that, and that’s what we have baked into our full year guide. Look, I had the opportunity early in my career, Nigel, to run this business. And I would tell you that I’ve seen these downturns in the past. And I would tell you that these markets will come back. And right now, it’s projected they’ll come back in 2015. We’ll stay tuned on that. But this is a very strong business. And when these markets come back, they’re going to come back strong. And the key is to continue to invest in the business when you’re in this down cycle. And when you do that, when the markets come back, you’re able to delight your customers with a portfolio of innovation that really allows you to win through that cycle, and that’s what our plan is right now. As Chris said, we’ve been investing heavily in the business. We’re not stopping that. And TK is a big part of those investments that we’re making. And I’m excited about the innovation pipeline that’s going to come out in the Thermo King business, and when the markets come back, we’re going to be ready. As far as the other businesses, I mean, they tend to follow a trailer, I mean, and the trailer is the big one, but they tend to follow that same cycle. We start to get freight rates to improve. If we start to get capacity coming out of the channel, we’ll see the market start to rebound, and I know they will.

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, this is Chris. Yeah. I mean, I think they could be down mid-single to high-single in the second half of the year. I mean, we expect it to be down probably in a range of low doubles, double digits on the year. If trailer markets are down mid-teens, we expect to outperform. And again, that’s the innovation and the investments we’ve had in this business for many, many years. And the key here is to make sure that while it is a down year and we’re going to manage the decrementals as so far we have, and we expect to do that for the balance of the year, it’s making sure that we’ve got the investment pipeline that continues to run the business. Just in June, we finished our long range plans for each of our business units, thinking about capacity and not only in commercial HVAC, but all of our businesses. And this is one that we like these markets to Dave’s point, want to make sure we’re still investing so that when the markets do recover, we’re ready. Could the market be down more than mid-teens? I mean, that’s what we’ve called it right now. To be fair, I know ACT’s had multiple revisions here over the last several months. I think it’s four or five this year already. Our internal models would suggest maybe it’s down a little more than that. So we’re making sure we bake that into our guide at this point. Second half of the year, we expect it to be down on down comps from a year prior, but we do expect to outperform the market.

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

Okay. Thanks, Nigel.

Thanks.

Thank you. Good morning, everyone.

Hey, Deane. How are you?

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.

That’s a tough one for me to answer. I’m not sure what they’re planning on doing. I would tell you that we’re very strong in unitary as far as the replacement market goes. Yeah, in the heat of the summer, if the unit stops working, it needs to be replaced, and having the available unit on hand is very, very important. And we carry a lot of inventory stock and we also have, with our lean thinking in manufacturing, quick ship programs, which allows us to really win in this space.

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

Yeah. I can’t comment on that and I think it would really depend on the time of year, okay. You also have a planned replacement market as well. So there’s a lot of things that are part of that statement that you just made. So it really depends.

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.

Yeah. I mean, we continue to track megaprojects. And as I’ve said in the past, megaprojects tend to be in verticals that we were always strong in. So it’s hard to say what’s incremental in that space. But right now, our teams are tracking over 300 projects and some of them have been closed, but many of them are still in the pipeline. And one of the things about these megaprojects is they tend to have lots of different decision makers, especially if any of the semiconductor space that, I mean, I’ll give you an example. We had a project that the decision maker was in Asia, the engineer was in Seattle, Washington, and the mechanical was in Austin, Texas. And one of the advantages that we have with our direct sales force is we could really help the customer triage all the information that’s required. And it allows us to really be focused on the customer needs, but also all the different individuals that are part of that process. So we really like our positioning with these megaprojects. And a lot of these megaprojects are very sophisticated engineered products, which actually plays to our strength as well.

Great. Thank you.

Sure, Deane.

Yeah. Thanks. I’ll just ask one question. And David, goes back to your opening comments around demand-side management as an underappreciated lever here. You’re sitting on one of the largest flexible capacity assets on the grid and you’re expanding your ability to play in distributed resource management and virtual power plants, district heating. I was hoping you could maybe connect the dots for us a bit more and just frame up how meaningful this is becoming in terms of some of the commercial HVAC bookings and revenue trends, how much they expand your wallet share, anything you can do to help quantify for us some of these additional facets of the business?

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 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.

Okay. Thank you. We’ll look forward to hearing more.

All right. Thanks, Noah.

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.