Trane Technologies plc (TT) — Q4 2025 Earnings Call Transcript

Thanks, operator. Good morning. Thank you for joining us for Trane Technologies' fourth quarter 2025 earnings conference call. This call is being webcast on our website at traintechnologies.com where you'll find the accompanying presentation. We're also recording and archiving this call on our website. Please go to slide two. Statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities law. Please see our SEC filings for a description of some of the factors that may cause our actual results to differ materially from anticipated results. This presentation also includes non-GAAP measures, which are explained in the financial tables attached to our news release. Joining me on today's call are Dave Regnery, chair and CEO, and Chris Kuehn, executive vice president and CFO. With that, I'll turn the call over to Dave. Dave?

Thanks, Zach, and everyone for joining today's call. Please turn to slide number three. I'd like to begin with a few thoughts on our purpose-driven strategy, which continues to drive consistent outperformance over time. Demand for energy has never been greater. Digitalization, industrial growth, and new technologies are putting pressure on energy systems. Customers are looking for smarter, more efficient ways to run their operations. That's where Trane Technologies is uniquely positioned to win. Our solutions help customers save energy, lower operating costs, and create more balance and flexibility in how they use energy. It's proof that sustainability and performance go hand in hand. As we look ahead, our innovation and expertise continue to set us apart. With our exceptional backlog, robust demand, proven business operating system, and leading innovation, we're well-positioned to continue delivering differentiated value well into the future. Please turn to slide number four. 2025 was a strong year for the company. Our global teams executed at a high level, enabling us to exceed adjusted EPS guidance despite softness in residential and transport refrigeration markets. Free cash flow remained robust, funding strategic mergers and acquisitions, a growing dividend, and significant share repurchases. Bookings were also exceptional. Our commercial HVAC businesses in the Americas and EMEA added $1.3 billion in backlog versus year-end 2024, strengthening our visibility into strong growth in 2026 and beyond. Please turn to Slide number five. Relentless investment in innovation, growth, people, culture, and our business operating system has delivered clear sustained benefits, reflected in our strong and consistent track record. Since 2020, we've achieved 11% revenue compound annual growth rate, a 24% adjusted EPS compound annual growth rate, expanded adjusted EBITDA margins by 470 basis points, and delivered free cash flow conversion of 106%, while deploying over $15 billion through our balanced capital allocation strategy. Consistent reinvestment has been central to our long-term success. For more than a decade, we've steadily invested in high ROI initiatives, built a world-class direct sales and service organization, and developed cutting-edge solutions for our customers' most pressing challenges, driving sustained demand. We have a proven track record and all the essential ingredients to execute our strategy and continue delivering differentiated returns over the long term. Please turn to slide number six. We delivered strong fourth-quarter performance, highlighted by exceptional enterprise organic bookings up 22%, driving a record backlog of $7.8 billion. Organic revenue grew 4%, led by continued strength in our Americas commercial HVAC businesses and our global services business. We also delivered 10% adjusted EPS growth and robust free cash flow. Exceptional bookings were led by our commercial HVAC businesses. America's commercial HVAC was again a standout, delivering record Q4 organic bookings, up more than 35% year over year. Applied solutions bookings were up more than 120% with a record book-to-bill of 200%, marking the second consecutive quarter with applied bookings growth exceeding 100%. EMEA HVAC also delivered strong results, with its second straight quarter of mid to high teens organic bookings growth. Commercial HVAC backlog is substantially higher versus year-end 2024, with backlog up approximately 25% in The Americas and nearly 40% in EMEA. And importantly, the backlog is predominantly applied, which carries a long higher-margin services tail. As we enter 2026, we are well-positioned for growth, especially in areas where disciplined execution to our business operating system is a key driver of success. In commercial HVAC, exceptional bookings growth and record backlog give us strong visibility to future revenues and market outgrowth. Projected pipelines remain robust and continue to build. Even after two consecutive quarters of more than 100% applied growth, America's commercial HVAC, we continue to see substantial opportunities ahead. Our services business, about one-third of enterprise revenue, remains a durable and consistent growth engine, with a low teens compound annual growth rate since becoming Trane Technologies in 2020. We continue to invest heavily in services and expand our digital capabilities to deliver advanced solutions with compelling value and attractive paybacks. We are confident services will remain a strong growth driver in 2026 and beyond. Two additional factors have the potential to accelerate growth in the back half of the year. Residential markets were a tale of two halves in 2025, with a significantly weaker second half. We expect 2026 to get progressively better, with tailwinds building later in the year as comps ease. Similarly, industrial forecasts, including from ACT, point to a transport market recovery beginning late in 2026 and extending into 2027 and beyond, a view we largely share. This should support growth in the fourth quarter and beyond. Our guidance reflects this backdrop, and Chris will elaborate shortly. Please turn to Slide number seven.

Now I'd like to turn the call over to Chris. Chris?

Thanks, Dave. Please turn to slide number eight. Dave covered many of the key points from this slide earlier, so I'll keep my comments brief. Q4 organic revenue grew 4%, and 7% excluding residential, consistent with the dynamics we've already discussed. Margins were impacted by proactive measures taken to normalize residential inventory, which reduced factory production days by one-third and resulted in roughly 60% deleverage in that business. Please turn to Slide number nine. In The Americas, we delivered 5% organic revenue growth, driven by strong commercial HVAC volume and positive price, partially offset by residential declines. Margins were lower mainly due to residential deleverage. We also stepped up innovation and growth investments. In EMEA, organic revenue grew 2% led by commercial HVAC. Adjusted EBITDA margin declined 160 basis points reflecting year one acquisition and integration costs. As noted throughout the year, channel investments and mergers and acquisitions in 2025 weighed on near-term margins but position us for stronger long-term growth. In Asia Pacific, organic revenue declined 6%, adjusted EBITDA margin declined 20 basis points. The team managed costs to limit deleverage, continuing to invest in the business. Now I'd like to turn the call back over to Dave.

With residential revenues a bit better than anticipated and commercial HVAC bookings even stronger. Our Americas commercial HVAC business continues to execute at a very high level, significantly outperforming end markets. Bookings and revenues are compounding at strong rates, especially in applied solutions. As noted earlier, our exceptional bookings, record backlog, and rapidly expanding pipeline give us a high level of confidence that 2026 will be another strong year. Based on customer delivery timing and year-over-year comparisons, we expect solid growth in the first half and even stronger growth in the back half. In residential, we believe channel inventory is largely normalized as we enter Q1. Our outlook for the market for 2026 is prudent, flat to modestly lower, with Q1 expected to be the trough, down about 20% given the high teens growth we saw Q1 2025. We expect the market to return to growth in the second half. In The Americas transport markets, ACT forecasts trailers down about 7% in 2026, and our view is generally aligned. Market indicators are improving, and we expect the sector to turn positive late in 2026 and into 2027. We expect to again outperform the market. In EMEA, commercial HVAC enters 2026 following a significant investment year and strong 2025 bookings that lifted backlog nearly 40% year over year. We expect a softer start with mid-single-digit growth improving to high single-digit growth in the second half as backlog converts. EMEA transport markets are expected to be flat to modestly lower. The team grew low single digits in a down market in 2025, and we expect them to outperform again in 2026. In Asia Pacific, we expect mixed performance with the rest of Asia outperforming China. For the region as a whole, we expect relatively flat performance in 2026. Now I'd like to turn the call back over to Chris. Chris?

Thanks, Dave. Turn to slide number 11. Our 2026 guidance reflects the market dynamics we've discussed and operational excellence driven by our business operating system. It also incorporates our value creation flywheel, continued investment in innovation, market outgrowth, healthy leverage, and strong free cash flow. We are initiating 2026 guidance with 6% to 7% organic revenue growth, and adjusted EPS of $14.65 to $14.85, up 12% to 14%. We expect about 50 basis points of growth from FX and roughly 200 basis points from M&A, either closed or committed for early 2026. All in, reported revenue growth is expected to be 8.5% to 9.5%. We are targeting organic leverage of 25% or higher, consistent with our long-term framework, and free cash flow conversion of 100% or greater. For the first quarter, we expect flattish organic revenue growth, reflecting continued strength in commercial HVAC, offset by tough comps in residential, given the high teens growth we saw in Q1 2025 and market-driven declines in transport. We expect Q1 adjusted EPS of approximately $2.50. Importantly, over the past four years, Q1 has averaged slightly below 17% of full-year EPS, which aligns with our 2026 guidance. Given the dynamics we've outlined, we believe this is a strong and achievable start to the year. For additional details, please refer to slide 18. Please turn to slide number 12. We remain committed to our balanced capital allocation strategy focused on deploying excess cash to maximize shareholder returns. First, we strengthen our core business through relentless reinvestment. Second, we maintain a strong balance sheet to ensure optionality 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 our calculated intrinsic value. Please turn to slide 13. In 2025, we deployed or committed approximately $3.2 billion through our balanced capital allocation strategy, including about $840 million to dividends, $720 million to M&A, and roughly $1.5 billion to share repurchases. We advanced several strategic acquisitions during the year, and our pipeline remains active heading into 2026. The largest acquisition announced in December is Stellar Energy, a leading provider of turnkey data center cooling solutions. Stellar brings strong capability in modular design and build, positioning us to meet growing demand for prefabricated cooling systems that ease supply chain and labor constraints and enable rapid scalable deployment. Their expertise also enhances our ability to apply modular solutions across additional verticals. We expect the acquisition to close in the first quarter, and we look forward to welcoming the team to Trane Technologies. The deal economics are compelling, and we expect modest EPS accretion in 2026 even after year one acquisition and integration costs. For 2026, we expect to deploy between $2.8 billion and $3.3 billion with strong free cash flow, ample liquidity, a healthy balance sheet, and $4.7 billion remaining under our share repurchase authorization, we have excellent capital allocation optionality moving forward. Now I'd like to turn the call back over to Dave. Dave?

The Americas transport refrigeration market remains dynamic, but the long-term outlook is strong. ACT forecasts the trailer market down about 7% in 2026, bottoming in the first half and improving in the back half. ACT also expects a sharp rebound beginning in 2027, including roughly 50% growth and continued expansion through the end of the decade. We expect growth as well but anticipate a more measured gradual slope to the recovery. We're managing the down cycle effectively, outperforming end markets, and continuing to invest in innovation, so we're well-positioned as the market strengthens. Please turn to slide number 16. In closing, I'm incredibly proud of our global team. Their talent has powered our consistent outperformance and leading financial results over the past five years. And we see tremendous opportunities ahead. With our exceptional backlog, strong demand, proven business operating system, and leading innovation, we're confident in our ability to deliver differentiated long-term value and advance a more sustainable world. And now we'd be happy to take your questions. Operator?

Hi, good morning. Maybe just wanted to start with America's commercial HVAC just to understand the guidance on revenue for the year ahead. I guess if I look at the orders or bookings there last year, they were up maybe 10% in the first half, up in the 30s in the back half. So with lead times and so forth, should we expect a decent acceleration in Americas Commercial HVAC revenue growth in the back half of the year ahead?

Hey, Julian. It's Chris. I'll start, and then Dave will jump in. That's right. I mean, think about the very strong bookings growth in 2025 and commercial HVAC. And the first half was strong, up mid-teens. But we saw up about 30%, over 30% in 2025. And when you think about applied systems, it's not uncommon to think about a nine-month cycle from order date to ship date. So how we see 2026 playing out for commercial HVAC Americas is the first quarter strong growth, probably in that 7% to 8% range, second quarter grows to about 10% growth, and then it is up about low teens in the second half of the year. And we've dialed that in with the backlog and the timing of which when customers want us to deliver the products.

Yeah. Hey, Julian. How are you doing? Dave here. I think as Chris described in the Americas, a very similar story that we see in Europe. Okay? So in Europe, think of the first half of the year, orders were up high single digits. The back half of the year, they were up high teens. So the same is exactly happening as to how our backlog, which is at record levels, is layered in. The good news also is that the pipelines in both businesses are extremely strong right now. I said that at the end of the third quarter that I've never seen them this high before, and I would tell you they remain very, very robust as we enter Q1 in 2026.

That's helpful. And then just my second question on U.S. Resi HVAC. Maybe help us understand the confidence in that leaning out of inventory having largely already happened? And any update you could give on pricing in that market? We keep being fed anecdotes from people every day about discounting. We didn't seem to hear that from your OEM peer yesterday. Just wondered your perspectives on that, please.

Yeah. I'll let Chris talk to the pricing side of it, but on the inventory side, look. We were very, very intentional in the fourth quarter to get the inventory right. And you heard in our prepared remarks, we took a third of the production days out. So we knew that was gonna cost us on the bottom line as we deleverage over 60% in that particular business. We also believe that we have inventory size right as we enter '26. So 2025 is behind us. We're looking forward. And how the year plays out. And remember, for the full year, we believe that, you know, resi will be, you know, flat to down up to 5%. We'll see how the year plays out. But we believe that inventory is in the position we want it to be. And we were very, very intentional in getting there. Did you wanna talk about pricing?

Julian, we've not seen pricing fade in the business. I think about the fourth quarter and pricing, it really is more due to volume being lower than anything else. So certainly, great products, good industry, and wouldn't add anything more than that.

The only other thing I would add, Julian, is remember Q1's got some really tough comps. So even though inventory is in a right-sized position, we still are gonna have some very difficult comps with last year being up in the high teens. Thank you.

Alright. Thanks, Julian. Talk to you soon.

Hey, good morning guys.

Hey, Scott. How are you?

I'm great. It's been a good quarter so far for or today, I guess, I should say. It's been pretty good. And you guys put up these orders and applied are a nice surprise. And my question just is really about whether orders are broadening out amongst your end markets you know, like office education, etcetera, or are they narrowing and more of that incremental order strength is in fact data center.

Yeah. I mean, look, data centers are very strong. Okay? But I would also tell you that if you look across the 14 verticals that we track, at least in The Americas, we had broad-based growth. Which was very, very encouraging. I think we had 12 or 14 verticals up. So that's encouraging for us. And so yeah. But don't misinterpret my comments. Data centers were very strong, and they'll continue to be strong well into the future. But it is broad-based growth across the majority of our verticals that we track in commercial HVAC.

And comparably, broad, you would say, Dave, versus maybe a year ago?

I have to go. I mean, you know, it's hard to say. I think we saw growth in some verticals that maybe a year ago I was saying were weak like retail. We saw growth in retail. Office is coming back for us. So, look, I'm bullish, Sean. And for the order rate is one thing, but if I look at where the pipeline is, it's also very broad-based, which is very encouraging for the future.

Makes sense. Okay. I'll keep it at that. Thank you, guys. Best of luck this year.

Scott, talk to you soon. Appreciate it.

Thank you. I also wanted to ask about the applied orders. Second straight quarter up over 100%. Know, as we've seen this ramp in orders into the back half of the year, has there been an impact at all from changes in customer lead times? Are we starting to see customers order maybe with longer lead times again? You know, there's some concerns out there in certain spots around supply chain pinch points. Just wondering if that's having any impact on these, you know, just the massive orders we're seeing.

Yeah. Hey, Chris. How are you doing? This is Dave. But I would say we haven't seen that. I mean, you know, you have some verticals that will give you more of a longer view versus others. But for the most part, I haven't seen any change occurring there probably since, really, probably at least the last, I'll say, at least twelve months. There hasn't been a dramatic change there in lead times. We're very competitive on our lead times. I told you that in the third quarter. We actually introduced a couple of quick ship programs so that sometimes you could have an emergency or you could have a contractor that forgot to order a piece of equipment. We're able to provide that now with some of our quick ship programs.

Appreciate that color. Thank you. Maybe if I could follow-up on data center, but specifically on the service side. You know, as that the architecture there continues to change, you know, obviously very rapidly, you know, are the attachment rates in that business better than they were, say, five or seven years ago as there may be more so relying on you guys to do a lot of that service just given how fast things are changing relative to a decade ago? Thank you so much.

Yeah. I think for sure. Okay. Obviously, hyperscalers or colos, they want the OEM to be doing the service work. Okay? I think what's changing is the size of these data center fields or farms as they're referred to. Are quite large. So we're seeing more dedicated resources to a particular data center. But I would say for sure, if you go back up, like, say, a decade ago, I don't think our attachment rate was nearly what it is today. In fact, I'd be hard-pressed to think where we've done a major chiller farm where we haven't had the service agreements.

Thank you. Appreciate that.

Alright. Thanks, Chris.

Hey, Andy. How are you?

Good. How are you?

Great. David, Chris, you had some margin pressure in Q4 in Americas and Europe. You explained it well. A lot of it was resi deleveraging in Americas. And European investment. But maybe you could talk about how to think about segment incrementals in the context of your normal expected 25% plus as European margins start to turn now more positive in 'twenty-six, given its backlog and how should we think about your overall price cost dynamics? Dynamics given recently higher commodity costs?

Andy, on the 25% or better incrementals for 2026, you know as well that's certainly where we like to start the year, and it gives us a lot of flexibility to make investments. We view each one of our segments. So The Americas, EMEA, and Asia all to be delivering 25% or better organic incrementals. In 2026. Reported incrementals, they'll have about a 700 basis point lower impact than organic, and that's really just the result of M&A coming into the year at a starting point of lower margins, which gives us a great opportunity to grow those margins over time. So 25% plus across each of the segments for the year. I think about price cost in the guide of the six to 7% organic, think of pricing as around a point and a half for the year. We've had a very proven and strong track record of staying ahead of inflation. It's our current view around inflation and tariffs today. And at the same time, we have to remain very nimble and dynamic given input costs. So confident that that one and a half points of price would be in a position to drive the 20 to 30 basis points of margin growth as we'd go into any year thinking about price versus inflation, but we'll remain dynamic.

Helpful, Chris. And then, Dave, maybe you could talk a little more about your positioning in the data center market. I think the Stellar acquisition is going to help you a lot. But how is Trane adapting in thermal management as it adapts to maybe a little more liquid cooling? And then obviously, were some comments a few weeks ago from one of your data center partners. So you could opine on, you know, their comments you know, water chillers versus air chillers and so on.

Yeah. Well, hey. Thanks for the question, Andy. Look. At the end of the day, we've been very strong in the data center vertical for decades, and we're gonna be very strong in the future. And the short answer to your question is we see chillers in the data center vertical well into the future. But let me take a step back. Look, we're working very closely with many influencers in the data center vertical. So think of hyperscalers, think of chip manufacturers, like Nvidia and others. We're helping them design data centers of the future. Or you may have heard them referred to as reference design data centers. And think of these data centers as the data centers that will be built you know, maybe two to four years out. And when we're sitting with these customers, we're bringing our expertise around the thermal management system to the discussions. And I have not seen a reference design or data center of the future that does not include chillers, just to be very clear. Now I think that when we talk about some of these future designs, you're gonna see a lot of innovation around the thermal management system, specifically around the chiller that is really exciting. I won't talk about in too much detail here for obvious reasons, but this is I mean, this is fun. I mean, when you sit down in these rooms and our engineers are very detailed on this, but it's just you get really creative ideas. We have a lot of these new innovations in the pipeline. Some of them are actually still being in the modeling stage because they're so futuristic in thought process. But I want everyone to realize that Trane Technologies is at the forefront of this innovation. And we're helping our customers think through what's possible. And I'll conclude with we've been very strong in the data center vertical for decades. And we're gonna continue to be very, very strong well into the future.

Helpful color, Dave. Thank you.

Alright. Thank you.

Thanks. Hey, Dave. I just wanted to follow-up on that point because I don't think people are debating whether a chiller will be in a data center in the future. I think the question really is about, you know, how much you need to run it and do runtimes get affected, and do you need as many of them? And so I'd appreciate if you can just address that point, particularly also how Trane is positioned in an environment where chillers run less or are needed less. Because on one side, you're working with NVIDIA to create this reference design, and the other side, you know, one of the main value products you sell in that market could just need less of them or run less. I mean, I don't know if you disagree with that, but I'd love your perspective on it.

Well, I do. I think, first of all, I mean, think about a data center farm in the future. Think about free cooling being built into the data center. Okay? So you'll have a so make up a number here. A 100 chillers will have free cooling capability. To run free cooling, you'll obviously be running the fans. We could debate how often you're gonna run the compressor side of the thermal management system there, but will definitely be running the fans through the free cooling cycle. How you manage that is gonna be very important in the future. And I'm trying to be sensitive here to some of the innovation that you're gonna see coming in the future. But chillers are mechanical systems. They're not a lot different than maybe your car. So you don't leave your car in the garage for six months and don't run it. Because if you did, you may not be very happy when you go out to try to start it up. So these systems do need to run at some point. And so we're working through that equation. The other side of it is do you need more or less? I think at the end of the day, you have a thermal load that you have to be able to size for the size of the data center. So the answer is you're still gonna have the same number. The frequency at which the compressor side runs will vary but which could impact the services side as to how often you service these pieces of equipment. And to be fair, we're still modeling that based on different innovations that are coming in the future.

Got it. Okay. That's helpful. Thank you. And then just maybe more tactically, Chris, the organic growth target 6.5%, obviously, it's an acceleration to 25%. But not as much of an acceleration as that maybe I would have expected given resi is kinda flattish to down. You know, you've got probably applied equipment and services maintaining, if not accelerating growth just given the strength of the orders. Is that a fair assumption? I know you guys like to be conservative out of the gate. And give yourself cushion, especially given the uncertainty of last year and what happened. But I maybe you'd push back to me saying it's not actually that conservative based on some puts and takes that you think of?

Yeah. I mean, Amit, we like to set guidance where we can meet it or exceed it, and so that's where we're starting here in January with a lot of flexibility to react to conditions that may present themselves we don't know today. You know, the guidance range on the six to seven on the full year organic, it's got America's commercial HVAC up about 10%. And, again, we think that's very strong growth for that business, and maybe a derisked outlook when you think about residential. You described it as flat to down 5%. Transport markets and residential markets trough in the first half and then much easier comps in the second half of the year. But transport, we're expecting to be flat to down low single digits. With markets down in the high single digits. We'll outperform. So I think it's a reasonable start to the year. We have a lot of confidence in delivering on the results like we would anytime here in January. And when you think about transport and residential, they're making up around 25, 30% of the portfolio that we're not baking in much growth for. On a full year basis. So we expect that they'll improve in the second half on easier comps. We've got great teams and innovations. We keep leaning both of those portfolios. And we'll see how the year kinda plays out. But we have a lot of confidence in the guide that we just put today.

K. I thought I'd ask that question, but thank you, Chris, for entertaining it. Appreciate it. Take care, guys.

Yes. Good morning.

Hey, Andrew. How are you? Good morning.

I'm great. Just a question on residential in the first quarter. I think the scope of sort of under absorption in the fourth quarter was a little bit surprising to us. At the same time, you commented that residential market was better in the fourth quarter. How should we think about under absorption relative to sort of normal operating leverage? In Americas in '26.

Yeah. I'll let Chris talk about the unobserved. Let me just clarify a few things. I'm not sure the market was a lot stronger in the fourth quarter. I think we were stronger in the fourth quarter on resi. And I would also tell you, Andrew, that we were very, very intentional in these days out. So it wasn't necessarily a surprise to us to deleverage. We kinda had that baked into our models. But we wanted to get this behind us. And we believe it's behind us now. So I know, Chris, you wanna talk about Q1 leverage?

Sure. And we've got residential in our guide in the first quarter down about 20%. A reminder, the business was up in the high teens in the first quarter of last year. And that drove strong volume growth. For Q1, look. We're still very much in a shoulder season for residential. We'd expect the deleverage in the first quarter to be better than the deleverage we saw in the fourth quarter. To Dave's point, we intentionally took production days out, and that had the strongest impact on a roughly 60% deleverage in the fourth quarter. So think about the first quarter residential deleveraging within gross margins. We've got level loaded production assumptions through the first quarter. We've got inventory we believe, at the right level in the channel. And then let's see how the year kinda plays out, but I think we really tried to, as one person noted, take the medicine in the fourth quarter as best we could and then set ourselves up well for 2026.

Thanks so much. And just I know there is a lot of focus on data centers at a vertical, but at the same time, there are a lot of announcements about biopharma reshoring and, clearly, one of your key verticals. Can you tell us what it is you are seeing in terms of biopharma reshoring, how real it is, how excited should we get about it, into '26, and how much visibility do you have from your customers in '26 and '27? Thank you.

Sure. A great question, Andrew. I mean, I said earlier that, you know, we had 12 of 14 that were positive. One of the verticals that was not positive was life science. Okay? So but if I look at the pipeline of activity, yeah, we see some of those large pharma projects that are, you know, set for reshoring, I said, in the pipeline. We're optimistic. But we'll see how they play out. But we are all over tracking some of those large projects that are in these, you know, this classification of mega projects. But we're hopeful that some of those actually come to reality here in the near term.

Andrew, I'll add, on the $7.8 billion of backlog that we finished 2025 with, there's a bit over a billion dollars of backlog that's for 2027 and beyond. That's up more than 30% versus a year ago, and it reflects multiple verticals. Let me be clear. But you know, again, entering 2026 with a stronger backlog than '25 and certainly building backlog already for '27 and beyond.

Thanks so much.

Alright. Thanks, Andrew.

Good morning and thank you for taking my questions.

Hey, Tommy. How are you? Good morning.

Doing fine. Thanks. Dave, I wanna start by going back to the commentary from NVIDIA that you've elaborated on a bit today. If you think about the HVAC content in the data center, so whatever fraction of every dollar spent on a data center today that you would attribute to HVAC. And then you think about the two to four-year roadmap where you're in discussions already. When we're two to four years out, do you think that fraction is higher, lower, about the same as today?

Yeah. I'm gonna err on the side of saying it's probably about the same. Okay? You gotta look at the whole thermal management system, and that's one of the advantages that we bring to these conversations as we do look at the whole thermal management system. I think the amount of power that is being consumed by the thermal management system may be less. Okay? So think of it as a trade-off between you will still need the thermal management system. How often it runs or the power that it consumes may be less. Therefore, you'll have the opportunity to do more computing within the data center. Right? If that makes sense. So those are the conversations that are happening where you know, how do we redirect some of the power over to the computing side versus running the thermal management system?

Thank you. That's very helpful, Dave. Also wanted to ask a follow-up on resi pricing. Chris, I think earlier you said you have not seen it fade. I'm curious as you dialed in your outlook for sales this year flat to down five. Does that assume some incremental price realization? And 26? And if the answer there is yes, do you feel like you're pricing plus minus in line with other major players in the market there? Thank you.

Yeah. Tommy, I don't wanna get in front of our residential team in terms of their plans for pricing, so I won't comment specifically there. But the flat to down five residential for the full year on a dollar basis assumes some level of price, whether it be new price increases or carryovers from last year, and then we'll see how the year plays out. It's rough estimates. At this point in time, it's probably a modestly lower year to flat on pricing. We'll see how that plays out.

Thank you. I appreciate it, and I'll turn it back.

Thanks, Tommy.

Hey, thanks for taking the questions. I'd like to pick up on the broad commercial HVAC strength. In the past, I think the split of orders backlog has maybe skewed a little bit more towards retrofit. We're seeing some new construction indicators picking up. So how should we think about new build versus retrofit split as relative drivers of the '26 outlook? And to what extent, if any, the back half acceleration ties into new construction?

Yeah. I mean, I think you need to look at it by vertical, Noah. So certainly in the data center vertical, there's a lot of new construction almost all. But then when you get back into some of the other core verticals, it's very similar to what we've seen in the past. And it makes a lot of sense. Right? I mean, I always tell people look out your window and how many buildings do you see how many cranes do you see. And you'll realize that the majority of our business is focused on the, you know, how do you retrofit versus new construction. But it really you gotta really your question's a great one. Just look at it by different verticals, and you may get a different answer. Okay?

Yeah. Very fair. Thanks, Dave. I wanna ask you about Stellar Energy. I guess just how much overlap is there in the customer base today? And maybe can you talk a little bit about kind of key points of differentiation around what this adds to your capabilities?

Yeah. I mean, look. I think that sure sure. There's some overlap, but at the end of the day, think of Stellar Energy as being able to build modular chiller plants. And, you know, I mean so just the and then these modular chiller plants get assembled on a job site like Legos. And so you're reducing the amount of skilled labor required on the job site. You're moving that back to the factory. You're testing these systems in a different way at a factory there versus what you would do at a job site. So, that's a benefit as well. Look. They're predominantly right now in the data center vertical. But we see a lot of opportunities for this modular concept in core verticals as well. I think we're all aware of the skilled labor shortages and the potential that that has to slow projects up where modular designs are gonna become they're very, you know, very attractive today, but I think they're gonna become even more attractive in other verticals than just the data center vertical.

Yeah. And that cross-sell is an opportunity for you. Great. Thank you very much.

Hey, Regina, before you go to the next speaker, let me just clarify a point I made. I don't wanna confuse anybody. Resi down up to 5% in 2026. It's really driven by volume. We'll see where pricing ultimately falls out. I don't want anyone to think that pricing is coming down in that market. You know, the impact may be less than what we saw in 2025, which was significant pricing, but we'll see. But it's really, really volumes coming down that makes up that. I don't wanna intimate that we know pricing's coming down.

Hey, thanks for putting me in.

Hey, Steve. How are you? Glad you clarified that resi pricing comment because a few messages came in immediately when you said down. So, obviously, some sensitivity around that. But just the commercial HVAC side, can you help reconcile the like 100% plus applied orders and the 35% total orders, like, what was down to kind of get it to that rate or is applied just, you know, a smaller piece of that pie?

We saw growth in orders in both applied and unitary here in the fourth quarter. Unitary, you know, closer to that low single-digit kind of range, but it was positive. I guess I'd leave it there. I mean, it's pretty broad-brushed in terms of the verticals where we saw growth. They described the 12 to 14 verticals.

Well, I mean, I guess if they're just fifty-fifty simplistically, wouldn't that be a lot higher of a total order number? Or is there services maybe in there or something?

Yeah. There's services that certainly would be part of the conversation as well in terms of order growth. We'd have to get back to you guys with Yeah. We can do the math on it, Steve. But, you know, also a little bit on comps. What's the prior year comps as well? We have to look at that too.

Okay. And then just thinking about this kind of trajectory, obviously, very strong orders, strong backlog. In the first quarter, you're starting at like 7% to eight exiting the year at a higher rate. And obviously, these orders are very strong. Is there something outside of the core applied business? And I guess what I'm getting at is are there like a lot of like liquid cooling related orders that are now coming through and pushing that number higher and driving the acceleration in the second half. It's I know you guys have come out with some really big launches on that front. Is that moving the needle on some of this?

Well, I think we're mixing orders versus revenue. So the revenue is more a function that we're gonna see in the back half of the orders that we've already booked. Steve. So think of it as if our last six months in commercial HVAC in The Americas, our orders are up over 30% just start adding nine months almost on average. To each of those to understand when it's going to ship out. And Europe is very similar. As I said, that was up the high teens level. So all that backlog is gonna come up. To your question on are we seeing robust demand for other elements of the thermal management system? Absolutely, certainly in our pipeline. And as you can imagine, we're all over it, and the teams are just doing a great job there on the innovation side as well as on the front end talking to customers as to what we have in our portfolio.

Okay, and then just what are the kind of tier one Tier two kind of raws base is, so we can kinda, like, do our own math on that inflation dynamic this year? Yeah. Tier one is still around $750 million and then the Tier two is around $5.5 to $6 billion in terms of size.

Great. Thanks for the details as always.

Alright. Thanks, Steve.

Thanks, everyone, for joining today's call. As always, we'll be around to take any questions that you may have today or in the coming days. We'll be on the road at a couple of conferences here in February and then into the rest of the quarter. So we look forward to seeing many of you on the road. Thanks very much. Bye.