Trane Technologies plc (TT) — Q2 2025 Earnings Call Transcript

Thanks, operator. Good morning, and thank you for joining us for Trane Technologies Second Quarter 2025 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 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, Zac, and everyone, for joining today's call. Please turn to Slide #3. I'd like to begin with a few minutes on our purpose-driven strategy, which enables our leading financial results. The global demand for energy is increasing at an unprecedented rate, while many areas lack access to reliable power sources. But this is not just a supply equation. At Trane Technologies, we see tremendous opportunities on the demand side. In an average building, we estimate a staggering 30% of energy after the meter is wasted. Our solutions are addressing this head on, helping our customers save energy and reduce emissions with a strong return on investment. We are setting the pace for the industry and paving the way to a more sustainable world. With our leading innovation, robust customer demand, and talented team, we're well positioned to deliver differentiated shareholder value over the long term. Please turn to Slide #4. Q2 was another strong quarter, marked by record bookings and revenues, a 90 basis point expansion in adjusted operating margins, and 18% growth in adjusted EPS. Our Enterprise and Americas Commercial HVAC organic bookings reached new all-time highs with increases of 4% and over 20%, respectively. In our Americas Commercial HVAC business, we continue to lead the industry by solving our customers' most complex challenges with applied solutions in large, high-growth verticals. Notably, orders for Applied Solutions surged by over 60% in the quarter and are up over 120% on a 2-year stack. Our commercial HVAC businesses have demonstrated remarkable durability and resilience, achieving compounded growth over multiple years. Our project pipelines are expanding, underscoring continued opportunities ahead. Our direct sales strategy enables us to capture a significant share of these opportunities and consistently outgrow our end markets. Our backlog remains strong at $7.1 billion, up 6% compared to year-end 2024. While there was a sequential decline from the first quarter of approximately $125 million, this was due to expected backlog reductions in our shorter-cycle businesses, mainly residential. Our commercial HVAC book-to-bill ratio exceeds 100% in all regions, further elevating our global commercial HVAC backlog. Our services business remains robust, representing a third of our enterprise revenues. We delivered low teens growth in the quarter and have maintained a low teens compound annual growth rate since the inception of Trane Technologies in 2020. We are effectively managing and mitigating all enacted tariffs and inflationary impacts through our world-class business operating system. This system includes advanced mechanisms for pricing, supply chain management, and scenario planning, which we leverage to offset tariffs, drive market outgrowth, and minimize the impact on our customers. As we review the key drivers for the quarter, our results were in line with expectations with two notable exceptions. First, Americas Commercial HVAC. This business continues to perform exceptionally well, exceeding our expectations and aligning with our track record of consistent market outperformance. Second, residential HVAC revenues fell short of our expectations due to a near-term industry shortage of R-454B refrigerant cylinders. However, the strength in our Americas commercial HVAC business more than compensated for this, positively impacting our adjusted EPS for the quarter. Overall, we are confident in raising our full year revenue and EPS guidance, which Chris will cover in more detail shortly. Please turn to Slide #5. In our Americas segment, as we discussed, commercial HVAC continues to deliver standout performance. In the first quarter of 2025, this business achieved all-time high quarterly bookings. In the second quarter, we surpassed this record by nearly $300 million with growth of over 20%. Revenue growth continues to be exceptional, increasing by mid-teens on top of a mid-20s growth comp in the prior year. Our market outgrowth has been consistent, compounding year after year. For perspective, in the second quarter, 3-year stack commercial HVAC revenues are up approximately 60%, with equipment up approximately 80%, led by Applied. Our growth in Applied Solutions is broad-based, aided by market outgrowth in sectors with large CapEx investments such as data centers and high-tech industrial. These sectors require the most complex applied solutions, and our ability to win more than our fair share of business here adds to our leading growth profile. CapEx spend in these sectors is expected to remain high over the next several years, providing further growth opportunities. In addition, Applied Solutions carry strong service revenue tails, generating 8 to 10 times the equipment sale, meaning the majority of the revenue from our applied growth is still ahead of us. Turning to residential. Revenues were down mid-single digits due to the near-term cylinder-related headwinds I discussed earlier. However, combining our strong first-quarter revenues, up high teens, with our second quarter, our year-to-date residential revenues are up 3%. Additionally, we saw very strong growth in the second quarter of 2024, up low teens, which was a multiple of the industry growth rate. Given the varying business models of mix of 2-step versus 3-step distribution across the industry, it's important to look at residential over the long term to get a clear picture of growth trends. In Americas transport refrigeration, bookings were up low single digits, while revenues were down low single digits, significantly outperforming end markets, which were down over 30%. In EMEA, commercial HVAC bookings were down low single digits against a tough 20% prior year growth comp. However, 2-year stack bookings were strong, up high teens. Revenues were up low single digits, impacted by timing of customer shipments from Q2 into the second half. EMEA Transport organic bookings were down low single digits, while revenues were up low single digits, significantly outperforming end markets, which were down low single digits. In Asia Pacific, the quarter met our expectations. As we approach the anniversary of our tightened credit policies in China, we expect results to improve. The region is on track to meet full year 2025 expectations for flat revenues with stronger performance in the rest of Asia. Now I'd like to turn the call over to Chris. Chris?

Thanks, Dave. Please turn to Slide #6. This slide underscores our robust second quarter performance. Organic revenues increased by 7%, adjusted EBITDA margins expanded by 70 basis points, and adjusted EPS rose by 18%. Our services business delivered impressive organic revenue growth, up in the low teens, while our equipment business achieved mid-single-digit growth despite softer residential results. Please turn to Slide #7. Our Americas segment delivered 9% revenue growth, driven by our commercial HVAC business. Adjusted EBITDA margins increased by 120 basis points to 24%, marking a record quarterly EBITDA for the segment. Margin expansion was fueled by volume growth, productivity, and price realization despite softer residential revenue. In EMEA, revenue growth was up 3%, and adjusted EBITDA margin declined by 200 basis points, consistent with our expectations. We are doubling down on channel investments and M&A integrations in 2025 to support our growth and position for future opportunities. These strategic investments are impacting margins this year as expected. In Asia Pacific, revenue declined by high single digits, and adjusted EBITDA margin contracted by 220 basis points, primarily due to lower volumes in China, consistent with our expectations. Now I'd like to turn the call back over to Dave. Dave?

Thanks, Chris. Please turn to Slide #8. 2025 is shaping up largely as expected, with modest adjustments in our Americas commercial HVAC and residential outlooks. In residential, we faced temporary headwinds mainly affecting Q2 and Q3 of 2025 due to the cylinder shortage. We expect this issue to improve in Q3 and be resolved by year-end. At this point in the selling season, we also believe it's prudent to factor inventory normalization into the second half outlook. The estimated revenue impact of these combined headwinds is roughly $150 million for the second half. We now expect residential revenues to be flat for the full year versus our prior expectations of mid- to high single-digit growth. We expect to return to a healthy GDP plus framework over the long term. On the positive side, our Americas commercial HVAC business continues to exceed expectations, particularly in complex bespoke applied solutions. Leveraging our best-in-class operating system and direct sales force, we have consistently outperformed our end markets over multiple years. For 2025, we are raising our Americas commercial HVAC outlook from high single digits to low double digits. Overall, while we're addressing temporary challenges in residential, the strength of our commercial HVAC business more than offsets these impacts and provides clear long-term benefits for our stakeholders. And now I'd like to turn the call back over to Chris. Chris?

Thanks, Dave. Please turn to Slide #9. We are raising our revenue guidance to approximately 8% organic growth, up from 7% to 8% previously, and our adjusted EPS to approximately $13.05, up 16% year-over-year and up from $12.70 to $12.90 previously. With the U.S. dollar softening through the end of Q2, we now expect FX to be neutral for the year. M&A contribution remains unchanged at 100 basis points for the year. We expect to manage and mitigate all enacted tariff impacts through proactive measures, including pricing. Based on tariffs in place as of July 28, we estimate the cost impact in 2025 to be approximately $140 million, roughly half of our estimate provided at the end of the first quarter, and our full year organic revenue growth guidance includes an estimated pricing impact from tariffs. The tariff environment remains dynamic, and we will provide updates as appropriate throughout the year. We continue to target organic leverage of 25% or higher for the year, consistent with our long-term goals, and we anticipate another year of 100% or greater free cash flow conversion. For the third quarter, we expect approximately 6% organic revenue growth and around $3.80 in adjusted EPS, consistent with the outlook dynamics Dave highlighted earlier. For additional details related to our guidance, please refer to Slide 16. And please turn to Slide #10. We remain committed to our balanced capital allocation strategy focused on deploying excess cash to maximize shareholder returns. First, we strengthened our core business through relentless reinvestment. Second, we maintain a strong balance sheet to ensure flexibility as markets evolve. Third, we expect to deploy 100% of excess cash over time. Our approach includes strategic M&A to enhance long-term returns and share repurchases when the stock trades below intrinsic value. Please turn to Slide #11. Year-to-date through July, we've deployed approximately $1.5 billion through our balanced capital allocation strategy, including $420 million to dividends, approximately $15 million to M&A, $900 million to share repurchases, and $150 million for debt retirement. These figures exclude $260 million from M&A and $100 million from share repurchases made earlier in the year, which were included in our full year 2024 capital deployment targets as discussed during our fourth quarter earnings call. We have approximately $5.3 billion remaining under repurchase authorizations, providing us with significant share repurchase optionality moving forward. Our M&A pipeline remains active, and we will continue to be disciplined in our approach. Overall, our strong free cash flow, liquidity, balance sheet, and substantial share repurchase authorization offer excellent capital allocation optionality as we move forward. Now I'd like to turn the call back over to Dave. Dave?

Thanks, Chris. Please turn to Slide #13. The Americas transport refrigeration markets have been volatile as have ACT's forecast, but the long-term outlook remains strong. For 2026 and 2027, ACT projects a strong rebound with greater than 20% growth each year. We're managing well through the down cycle. We continue to invest in innovation, and we look forward to adding another significant growth driver to our enterprise portfolio in 2026 and beyond. Please go to Slide #14. In summary, we have the optimal strategy, team, and capabilities to deliver leading financial performance in 2025 and beyond. Our uplifting inclusive culture helps us attract the best talent in the market. Powering our innovation, our solutions offer strong returns to customers and also contribute to a sustainable world. This drives our consistent track record of leading financial performance and positions us to deliver differentiated shareholder value over the long term. And now we'd be happy to take your questions. Operator?

I wanted to ask on commercial HVAC, specifically in the Americas. Obviously, this business has been strong for a number of years. But the Q2 order acceleration was really a standout, kind of 20% plus versus low to mid-single digit in the prior quarters. So can you maybe just kind of talk about what end markets are driving that acceleration? Are you seeing a broadening of the strength? And do you think commercial HVAC could be getting better?

Yes, Chris, thanks for your question. This is Dave. I'll begin and then let Chris contribute. We had outstanding results in Q2 2025 for our commercial HVAC business in the Americas, with bookings reaching an all-time high of over 20%. Revenue was also very strong, exceeding previous bookings by over 40%. Our Applied Solutions led the charge, increasing by more than 60% in the quarter, and our two-year growth in Applied Solutions is over 120%. We are executing exceptionally well in this area. In response to your question, the growth is broad-based. We've seen significant strength in the healthcare sector, government, data centers, and higher education. Across the 14 verticals we monitor, the majority performed positively, reflecting Trane Technologies' capabilities through our expert direct sales force. The team continues to perform well, and regarding our activity pipeline, it remains very robust. Lastly, our services business is again seeing low teen growth, which is consistent with our historical compound annual growth rate since Trane Technologies was established. I'm very proud of what our team has achieved. Chris, do you have anything to add?

I'll add on the bookings and the revenue growth, if you remove data centers from the vertical, very strong growth excluding data centers in both revenues and bookings. So we like that growth in data centers. We were strong in data centers in the quarter, but you remove that very strong growth as well.

Yes. The only other thing I would add, Chris, because I know it's a typical question, is, well, what happened with applied and unitary? And obviously, we had a lot of strength in Applied. But I would tell you both were positive. So Applied was stronger than unitary. But as you would expect, because of the broad-based growth that we're seeing, we're serving, again, all the verticals and some of those verticals are more dominated with unitary product versus applied.

I really appreciate that. Super supportive to hear about the broadening. But I did kind of want to follow up on what does that mean for the service flywheel. In the past, Dave, you've talked about maybe a 2-year rough lag between when the equipment starts driving service revenue. And if you look at commercial HVAC equipment, top line accelerated in '23 and '24 kind of versus where it was at previously. So what does that mean kind of for the outlook for service into the back half of the year? And then any color on what's implied for the back half service growth guide?

You're absolutely right. Our service business is primarily focused on our applied portfolio. While we do provide support for unitary equipment, our main emphasis is on the applied segment. We project that the revenue from services will be 8 to 10 times the equipment price over the asset's lifespan. This creates a compounding impact, which is reflected in our significant growth over recent years, and we are now starting to see that effect in our service business. Currently, we're experiencing growth in the low teens, and I believe that's quite healthy, so I'm not going to commit to more than that. We're investing heavily in our service division, which constitutes a third of our company. It's very resilient and has considerable potential for future growth. Chris, do you want to add anything?

Yes. And as we described services on a regional basis, the margins with services are accretive to the segment margins of each of our regions. And to your point, Chris, yes, it takes maybe a couple of years post warranty to start seeing the inflection point of revenues, but we're connected to those customers from day one. We're making sure maintenance is getting performed, executing to service plans, and that 5-year CAGR now of low double-digit services growth gives us a lot of confidence that revenue is really in front of us when we think about these applied bookings today.

Yes, one additional point is that if you consider our commercial HVAC business today, it is roughly half equipment and half services. Another factor that is significantly enhancing our services is the adoption of connected solutions. Recently, I discussed the number of connected buildings we have, including those integrated with BrainBox. We now have over 60,000 connected buildings and millions of connected assets. This growth allows us to access a wealth of structured data we have developed at Trane Technologies, while also incorporating some unstructured data. Regarding energy efficiency in buildings, we are not just focused on making them operate as they were originally designed, but also on how we can improve their performance based on actual usage. This is a very exciting time for us at Trane Technologies, especially within our services business.

Maybe just first off, I wanted to try and understand the second half Americas organic sales growth outlook a little bit better. So I suppose is the sort of Americas framework, it's kind of high single-digit organic growth both Q3 and Q4 and then you have residential and transport down mid-single in both quarters year-on-year. Is that the right way to think about that guidance?

Yes, we've projected a 6% organic revenue growth for the third quarter, with an implied guidance of approximately 9% for the fourth quarter. The commercial HVAC Americas segment is expected to remain stable in both Q3 and Q4, with growth in the low double digits for each quarter. The third quarter presents a tougher comparison to last year's results, with high teens growth in commercial HVAC, while the fourth quarter should see an easier comparison with mid-teens growth from a year ago. This segment has strong visibility in our backlog, allowing us to predict consistent performance across both quarters. The transport segment may see a decline in the third quarter, as those markets are still facing pressure, with a potential flat performance in the fourth quarter. In the residential segment, we've removed about $150 million from expected revenue in the second half of the year, more so in the third quarter than in the fourth. Therefore, we anticipate residential revenue to decline by high single digits in Q3, with improvements anticipated in Q4.

That's great. And then my second question, I suppose, just following up on that residential side of things. Sort of help us understand on the cylinder point, the sort of progress on getting that resolved. And beyond that supply chain issue, I suppose on the demand side, are you seeing any change in customer behavior around sort of mixing down or repair versus replace? Anything on the competitive side shifting?

Yes, Julian, this is Dave. We started the year strong in the residential sector, seeing growth in the high teens during the first quarter. However, the second quarter saw a decline of 6%, leaving us up 3% year-to-date. Our inventory channels are heavily concentrated with 454B product, and we experienced a bottleneck at the end of April which affected us. We acted promptly and began overcharging units from the factory in May while collaborating closely with our refrigerant suppliers to understand their commitments to us and the industry. The positive aspect is that this impact was isolated, and as of July 30th, I would estimate that about 90% to 95% of this issue is behind us. We are optimistic about returning to our long-term growth framework, which aligns with GDP growth. In the second half of the year, we anticipate inventory issues coming out of the channel. Despite high inventory levels at the end of the first quarter, we still carried that inventory into the second quarter. This will start to decrease, and as Chris mentioned, we expect a greater impact in Q3 compared to Q4. Regarding your question about repair versus replace, this quarter was challenging for analysis due to the refrigerant bottleneck, and we will monitor it throughout the year. We haven't observed significant changes yet, but this quarter wasn't ideal for assessing shifts towards repair or replacement, and we're keeping a close eye on it. Lastly, as I noted at the end of Q1 when we had high teens growth, it's essential to consider the long-term trends in the residential market. Different models exist for satisfying this channel, and competitor dynamics can fluctuate. It’s more important to focus on long-term growth trends, and we are eager to return to our GDP plus business framework.

It's getting a broken record, but congrats again on the numbers and such. A couple of little ones. I mean, your incrementals sequentially went up from kind of 25% to 32%. Was that mostly just a mix? Or was there timing on investment spend or any other kind of things that impacted that?

Scott, it's Chris. I'll start. I mean, in the quarter, nice growth in our services business, right? We like the margins in services, really good productivity in the factories. It's a hallmark to make sure that we're offsetting other inflation with productivity, and that was strong in the quarter. And then even the volume growth, we got strong leverage on that. So all in, really just managing the full P&L here in the second quarter, but gives us a lot of confidence that the full year will be 25% or better incrementals.

Yes. But don't think that we haven't stopped investing, Scott, because we continue to invest at a very high level back into the business. This is all about future growth.

Yes, I understand. You seem more optimistic about the outlook in China this quarter compared to April. Has the entire market changed? I know your U.S. competitors have adjusted their pricing and credit terms. But have your foreign competitors made similar adjustments? Has there been a reset in that market with more favorable terms for your company?

I think it's a mixed situation. The positive aspect is that in Asia, we have met our expectations. We anticipate that the full year will be flat, which is a smaller segment of our business. However, the good news is that we are nearing the anniversary of our tightened credit policy, which should make comparisons easier. Our team has been closely analyzing the sequential data, and we are seeing improvements. It's important to factor out seasonality, but the sequences show progress since we implemented the new credit policies. We are very confident in stating that Asia will remain flat for the year, and the milestone of our China credit policies reaching one year is encouraging. So, we are moving forward. Scott, I really enjoy your videos, so keep it up!

I guess, Chris, we're moving to the higher end of the CapEx range. Do we think the higher CapEx translates to kind of a burning of the backlog? Or do you still expect backlog to stay elevated? And just kind of related to that, I think 50% of the product revenue is sitting in backlog today. So just curious in terms of how much visibility does that give you actually into 2026 from where we stand today?

Yes. Our backlog remains elevated through the end of the second quarter, and we expect it to stay elevated for the rest of this year and into next year. We're already building backlog for 2026 and beyond, with about $2.5 billion in backlog for that timeframe. This provides us with good visibility for next year. However, lead times have shortened significantly over the past 18 to 24 months, leading to orders being placed roughly 6 to 9 months before deliveries, particularly in the applied space. This ties back to what Dave mentioned about pipelines; we need to maintain good insight on them, which are continuing to grow. Therefore, I believe backlog will stay elevated, and currently, over 90% of our backlog is in commercial HVAC globally, with the majority being Applied.

The good news of it is we were kind of early in the CapEx investing in capacity. And now with really the surge in our Applied business, we're able to meet our customers' expectations from a delivery standpoint. So no issues there.

Got it. That's helpful. And then, Dave, I have a follow-up regarding the growth in data centers and how that is evolving. We're seeing the proliferation of next-generation chips more than before. I noticed that you mentioned expanding your liquid cooling product last month. Could you discuss how you're positioned in that sector, particularly in the fastest-growing areas of the data center, considering your extensive experience and strong position in this vertical?

Yes, I believe that the data center sector is one that evolves rapidly in terms of technology. We are actively engaged with our data center customers, who often visit our labs for collaboration. Recently, we introduced a CDU as part of our overall solution, and our portfolio of water-cooled and air-cooled systems plays a crucial role. The efficiency of our air handling systems, especially with varying aspect ratios, is also significant. We take a systems approach to identify opportunities, and our customers are looking for strong partnerships and unique solutions. For instance, we completed a project in Australia where we measured system efficiencies using the coefficient of performance (COP). For a major data center, we achieved a COP exceeding ten, which was previously unimaginable. This showcases the innovative capabilities of our experienced engineering teams in collaboration with data center clients. We are enthusiastic about data centers, but our growth extends beyond just that segment.

Dave or Chris, someone asked about margin, but I want to ask it maybe a slightly different way. Like organic leverage was impressive despite Asia Pacific and European margins down. And I think Q2's America margin was the highest we've seen from Trane. So I'm just trying to figure out how enduring the Americas performance is. I know you said you want to continue to invest, but there's a lot going on, mix up, better productivity, you're burning more complex large applied jobs. I'm trying to figure out if they're accretive or not. So maybe just all this interplay, the durability of this Americas performance moving forward.

Andy, I'll start. Look, I think the old tape of the mix of businesses having different margins, hopefully, that puts us finally to rest as you think about the commercial HVAC performance in the quarter and what we were able to perform there. But I really think it's across the P&L in terms of where we saw the benefits and the leverage, the strong productivity, good incrementals on volumes, price over inflation on a dollar basis and a percentage basis, but also making sure we're making the investments in the business. So I think the second quarter is really kind of following the same playbook. Margins came in a little bit ahead, but healthy leverage there. And again, the services business continues to drive margin accretion as part of one-third of the portfolio of the enterprise. So we've not changed the formula. The investment flywheel continues, and we just say that we're really confident that we'll have growth on the full year.

That's helpful, Chris. And then, Dave, I think you guys mentioned that your light unitary business is still doing reasonably well, which is a bit of a contrast versus some of your peers. So I know it's difficult to draw a line between larger unitary and applied. But maybe talk about sort of that particular end market and why Trane is outperforming.

First of all, I believe the unitary market will be noticeably weaker than the applied market, at least in the Americas. However, we are performing well. As I mentioned, the applied sector was much stronger than unitary, but both saw positive results, which is encouraging. Andy, this highlights our focus on the diverse range of verticals we serve. Some verticals tend to concentrate more on unitary solutions. With our direct sales team and expertise within our regional offices, we're able to seize growth opportunities. It really comes down to effective execution. We are now focusing on the book and burn aspect of the unitary market, especially in the replacement sector with high heat. We'll see how the year wraps up, but we are pleased with our performance, particularly across our commercial HVAC operations in the Americas.

Chris, could you clarify the increase in guidance? I see it's $0.25 at the midpoint, and while foreign exchange is contributing around $0.05, your organic growth only increased by 50 basis points. Does this indicate better margins or improved performance in the first half? Please help me understand the $0.25 figure.

Yes. We last guided for the year was $12.70 to $12.90, and we said we were really at the higher end of that range three months ago, Joe. So raising it to $13.05 on the full year, think about that as taking the Q2 beat and then some and passing it through. FX was probably around in that range of what you were talking about. But it really is the operational performance in the business that I think we like putting out guidance that we can meet or achieve or exceed. And the fact is the operational performance really led by commercial HVAC and the execution in the team is really driving the performance and how we think about the outlook for the balance of the year. On revenues, think about it as to get to the 8% on the full year versus where we were three months ago, think of it as a stronger commercial HVAC Americas business. We're taking that guidance up to low double digits in terms of revenue growth. Residential, we think prudently, we've reduced the revenues around $300 million on the full year. That's about a rough 1.5 points at the enterprise. So that's a subtraction. And then we're layering in plus and minus tariff pricing, where we're really trying to thread the needle between the price/cost equation there on pricing to really offset the cost, starting with mitigating the cost, but then ultimately trying to price for any residual. So that's really the puts and takes on the top line and then a lot of confidence on the operational performance here driving comfort in raising the bottom line.

Got it. That makes a lot of sense, Chris. As a follow-up, Dave, regarding your earlier comments about returning to a GDP plus business in the residential sector, it's still early, but as you're considering the future beyond this year amid the current disruptions related to the refrigerant change, do you think 2026 could be a year where we might see a return to GDP plus growth in residential HVAC volume? Also, how are you approaching pricing? There’s a significant amount of pricing adjustments, and how do you see the inelastic nature of your dealer network or customers absorbing the increased costs in the residential market?

Yes. First of all, I believe we experienced an isolated incident in Q2, and we didn't anticipate it. I don't think the industry expected it either. There are no structural issues within residential, and it's important for people to recognize that. We have maintained that this is a GDP-plus business. Despite the noise surrounding 2025 and some changes occurring, we see this as just a minor setback in Q2. We believe we will return to operating as a GDP-plus business. I will provide a clearer perspective when we report our fourth quarter and discuss the guidance for 2026. Overall, this is a strong business, and we shouldn't let the noise mislead us. We perform well here, and I am confident we will get back on track. There are no structural problems in the industry.

Can you just maybe hash out for resi what your price and mix expectations are for the back half? And then just help us parse out. I think you guys said $75 million to $100 million in prebuy last year. Maybe square that with the $150 million number.

Let me start with your first question, residential. So we're expecting in the second half, if I remove the 454B impact from volumes, which is really how we started the year and thinking about it. But if we really want to isolate volume impact from price, then we're expecting volumes to be down in the second half, more so in the third quarter based on how that $150 million of revenue reduction in the second half, that's more, Steve, in the third quarter than it is in the fourth quarter. But we expect both quarters to see some volume reduction in the second half. Dave talked about having to get some of that inventory out of the channel as well. So we think that, that's prudent. Pricing is in that double-digit range, low double-digit range. So net-net, it's a reduction in the second half, and that gets you to roughly flattish on residential for the full year.

Yes, because your mix is included in that volume, right? That's the way you guys report it. The mix is kind of included in your volume discussion.

Well, that's how we started it. But if I remove that mix from volume and I say, okay, let's just isolate volume.

Got it. Got it.

Volumes are down, right? I just think that was prudent to maybe talk about it that way this time around.

Got it. And the $75 million to $100 million from the prebuy, I don't quite recall, but that mostly came in the fourth quarter, correct? Last year you guys had estimated that?

Think of it as $100 million, right? And if you remember, in Q1, we had a very strong Q1, but we said the $100 million is still there. I think we probably replaced the 410 with the 454 product, which is obviously that's where we had the bottleneck that occurred. But we believe that our inventory in that independent wholesale distributor channel is still at an elevated level. Think of it in that $100 million to $125 million range. And there's still a little bit of noise with the 454B canister replacement. So that's how you get to the $150 million, Steve, roughly.

Got it. And then just one last quick one on services. Really good, obviously, growth rate in the low double digits. It's decelerating a bit from the mid-teens you guys did last year. I think the HVAC cycle really picked up a couple of years ago. Is there anything moving around that is influencing that? You said two years from the pickup, you'd start to see an acceleration. Is there anything going on outside of this chiller tail, if you will, in services? And I guess the implication is, is that low double-digit number that you're seeing today, does that accelerate because of all the applied stuff that you're putting in there now?

We are always looking to speed things up. Firstly, we are very satisfied with our service business, which constitutes a third of the company and has consistently delivered outstanding performance over time. The key development in this area revolves around our connected solutions. Earlier, we discussed how staying connected to the asset—think of it as continuous commissioning—has begun to gain traction. We hope this will create a positive momentum in the future, and we have a significant team dedicated to this effort. This is part of the major investments we're making to address the estimated 30% of energy wasted after the meter, which we believe is a conservative figure. We already have solutions capable of tackling this issue. As energy prices rise, addressing this waste will become increasingly important, and it also offers substantial returns for our solutions. You can expect to hear more about this moving forward. While Trane Technologies has been vocal about it, we will continue to emphasize the demand side, which often doesn't receive enough focus. If we are wasting valuable energy, that is something we can rectify relatively quickly, and it ultimately benefits our customers.

Maybe just a few nits to wrap up here on my side. Just Chris, back to your comment about resi price/mix low double-digit. I would have thought mix itself was maybe 10-ish. Can you just give us a little bit more color on kind of the mix effect you're getting and then what kind of price you're actually getting on top of that?

Yes. I just put a price/mix together, Jeff, and that's up the low double digits here in the second half. That would be inclusive of what we're seeing on 454B and otherwise. So mix is obviously a part of that, but I just put it together.

Okay. Regarding tariffs, you mentioned that your margins were positive for the quarter due to tariffs. I'm not sure if that was solely due to tariffs or if it included overall inflation. Do your expectations for the rest of the year indicate that you will continue to see margin growth from inflation?

My comment focused on price and overall inflation. It's important to view inflation as more than just tariffs; we need to consider our commodities across different tiers and ensure that our pricing stays ahead of inflation as part of our business operating strategy. Regarding tariffs, the impact in the second quarter was minor and nearly negligible. If the current situation remains stable, which is subject to change with ongoing negotiations, we expect the tariffs to increase as the year progresses. Our aim is to reduce any actual impact, and if there is a net effect, we will adjust our pricing accordingly. It’s essential to understand that we do not plan to benefit from tariffs as a margin booster; instead, we want to maintain a neutral margin in dollar terms. This may take some time to achieve, but that is our objective, and we are working towards it.

I'm really curious about how often the revenue multiplier, which is 8 to 10 times over the economic life of the business, has been discussed during the call. How does that vary by region or, more likely, by application? I would assume data centers will have the highest multiplier due to their complexity and redundancy, but it might also depend on how interconnected the systems are, like in continuous commissioning. So how does the 8 to 10 range change, and could it increase as the customer's connectivity improves?

I don't see it increasing. The potential for growth lies in energy savings, which could represent a different revenue stream for the future in the digital area. When we mention the 8 to 10 range, it does not change much by region but rather by product. The more advanced chillers typically fall within this range. We exclude unitary products from this discussion since they are not the focus of our service business. So, instead of considering regional differences, it's better to view this as a variation by product. We have a strong presence in the chiller portfolio, which plays a significant role in our service business, contributing to the anticipated 8 to 10x multiplier.

That's really helpful. I have a follow-up question about the data center. You mentioned a distinction between data center and non-data center in your commercial breakdown, and I noticed your competitor did the same yesterday. How did the data center perform this quarter? What kind of growth rate are you anticipating for that sector this year?

Deane, it's a great question. We're not going to size it there. We haven't sized our data center business for various competitive reasons. But I think when I think about the applied bookings, and that's where data center bookings would go into, I think we're getting more than our fair share. And I think it really comes down to innovation. It comes down to those relationships that Dave talked about and having the direct sales force that stays connected with these customers over a long period of time to innovate for the solutions today and then what they want to bring in two to three years' time. So the 120% 2-year stack of applied bookings is really indicative of our strength across all the verticals. And just important to highlight, it's not just data centers. And we don't want it to solely be that. These are verticals that have ebbs and flows, and we like having the broad-based growth. So we're there when these verticals, if they're slower now and they return, we like having that sales force direct and exposed to that. So that's why we just keep investing fully in our services business to make sure we're ready after the applied business comes in, we've got the ability to execute on services.

I promise you no more resi questions. I think we've beaten that dead horse to...

Nigel, I was going to ask you what you have in your home, but you probably won't tell me.

I'm not going to share that information as it's confidential, but I can discuss it privately. Now, regarding your previous question about the broad-based strength, particularly in education and health care, we've seen significant concerns about the ESSER funding, municipal bond issuance, and the funding pressures facing hospitals. I'm curious to know what you think is propelling the ongoing strength in order patterns specifically within those two markets.

Yes. In education, we’ve been stating for some time that while ESSER funding is behind us in terms of a revenue stream, it’s still relevant in terms of orders. Don’t assume the market will drastically decline because, if anything, it has increased demand due to the underinvestment in infrastructure at many schools here in the United States. We still observe activity in this area, but there is significant growth in the higher-end segment. Universities are leveraging their physical spaces to attract students, discussing aspects like dormitory conditions and indoor air quality during tours. We are witnessing strong demand in this area, which aligns well with our strengths. These projects often involve complex systems, and in some cases, we are retrofitting very old buildings, making some solutions more complicated than anticipated. However, we are performing extremely well in this sector.

I'm currently going through that process with my second son, so I'll definitely pay attention to indoor air quality. I was hoping you would discuss heat.

On a separate question or a separate call, you could tell me what schools you're going to, and I'll let you know, okay?

Okay. Well, let's have that call. But I was kind of hoping you can talk about maybe sort of electrification of heat, but maybe I touch on that in a separate question. But in China, I know it's not a huge business for you, but we're seeing just broad-based another step down, it seems in China, which might not be a big surprise based on the stats we're seeing from the market there. But just maybe talk about what you've seen in China and more importantly, around pricing, around credit quality and things like that. Just wondering what if there could be some risks going forward in China.

Yes, Nigel, I'll start. It's Chris. Look, the Asia region makes up around 7% of our enterprise revenues and half of that would be China, half of that would be the rest of Asia. Think of that as 10-plus countries that we operate in. We're seeing the slower markets in China. And to Dave's point, it was a year ago that we implemented the tighter credit policies there. And now starting in the third quarter of 2025, we've got comps that are comparable to that credit policy implementation from a year ago. So we think from a comp perspective, things certainly get easier, but we're watchful. It's a choppy environment for sure. And it's why we're viewing still the Asia segment to be flattish on the full year with declines in China with positive performance in the rest of Asia. So let's see how it plays out, but we're investing still in that region. It's a region-for-region methodology and a lot of great confidence in the team there.

And Nigel, regarding your question about the electrification of heating, we now have a core portfolio of products on a global scale, and we are making significant progress in that area. It is part of our growth profile.

Just a little bit on transport. It seems like we are at the bottom. I know that you are referencing the ACT forecast, but the truck cycle and the refresh cycle has been very strange over the past couple of years. What do you guys see in the channel? And when do you think it bottoms? And I do appreciate the ACT disclosure, very useful.

Yes, transport has indeed been quite volatile recently. We might be in the third or even fourth year of what was initially thought to be a two-year down cycle. According to ACT, we expect the market to rebound in 2026, and we are looking forward to that. It's important to invest in the business during downturns, which we've successfully done, leading to innovative solutions in the market. This is a key reason for our outperformance compared to other market players. We're preparing for the recovery in 2026. In my experience as a former President of Thermo King, I believe this is a great business with a promising future.

I appreciate it. And then just on data centers, as you have noted, you've introduced the CDU. But any interest in getting more scale in this area through M&A? I think there might be some sort of private equity assets available down the line.

Andrew, it's Chris. I mean, as a large player, we get a chance to see just about everything that comes across from an M&A perspective. So we'll remain disciplined. We'll look at returns. We'll look at where we can integrate and where we can drive value. And certainly, we like the space that we're in. We like having the partnerships that we have and then the relationships with customers over time. But as you know, we've got the financial firepower to do almost anything, but we're going to remain disciplined here around M&A.

Is there a limit on the size of an asset? Your acquisitions have been prudent and primarily bolt-ons, but would you consider pursuing something larger in a key area?

Yes. I would just say, look, bolt-ons for us is $1 billion or less, and that number keeps growing as we keep growing. But look, we like the bolt-ons. We like the channel investments. We like the early-stage technologies and match it up with deep channel. And so maybe a little bit below the radar, but we've had, I think it's 25 to 30 acquisitions over the last 5 years and deployed over $1 billion of capital to them, I think closer to $1.5 billion. So look, we like that flywheel. We look at everything. And if we think that there's an option that makes sense, we'll certainly give it a look. But we'll remain disciplined, I think, is the key message.

Chris, just to go back to Jeff's question. Can you give us the updated price assumption for the enterprise for the year? And then maybe more broadly, we can talk through where pricing power is in Applied given the booking strength and the fact that you're always pricing for value creation?

Yes. I think for price on the full year, think of that it's probably a bit above 3 points. We delivered 3 points in the first quarter. We were tracking a bit above 3 points in the second quarter. And for the full year, as we're baking tariffs in there, we're probably a bit above 3 points on the full year. And then think of volume as really closer to 5 points on the full year.

Perfect. Maybe just add one more. On EMEA, you mentioned those channel investments and the margins improving in the back half. Maybe just if you can help us think about how that translates to growth accelerating, stronger incrementals setting up into '26. I'm sure these investments are really fortifying your channel position there.

Yes. Think of them as investments in the channel for both transport and our commercial HVAC business, thinking about where we have partners and where we want to grow share. And so those are just businesses, actually part of the bolt-on acquisitions we've done over the last 6 or 9 months. And they just come with low operating margins that impact the margins in the region. I mean, we're talking a bit around the law of small numbers here as well, but very much part of our plans for the year. And you're right, what it does is that it gives us even more optionality to have formidable businesses going forward and continuing to drive revenue growth well above what the markets are showing in both of those platforms. So this is very modest in terms of relative scale to EMEA, but we think the right long-term decision here. And I think it will continue to give us confidence we're going to outperform those markets in EMEA.

I'd like to thank everyone for joining on today's call. We much appreciate all the good questions. We'll be on the road in the coming months, and we look forward to seeing many of you there. And obviously, we'll be around over the coming days and weeks to take any investor questions or analyst calls and questions. So we look forward to speaking with you soon. Thanks, and have a great day.