Q2 2022 Trane Technologies PLC Earnings Call
Booking levels, we've delivered over the past year and a half have been extraordinary.
And have been broad based across our portfolio.
Last quarter I discussed the natural tendency to focus on bookings growth trends.
But growth trends may be misleading when the absolute number move step functions higher than any historical reference period.
As they did in 2021 I encourage investors to consider absolute bookings and backlog. In addition to bookings growth to get a fuller picture.
Even with our robust organic revenue growth of 11% in Q2 absolute bookings exceeded revenues with a strong book to bill of 111% and our backlog grew more than $300 million sequentially from Q1 to Q2.
These results are even stronger when you consider that we are constraining bookings in our transport refrigeration business to help mitigate inflationary risks.
Absolute bookings levels and backlog provide us good visibility into future revenues, particularly in our nonresidential businesses.
Our nonresidential businesses represent roughly 80% of our total revenue and closer to 90% of our total backlog and tend to be longer cycle.
Strong execution of our business operating system has enabled us to stay ahead of persistent inflation and deliver over 10 points of price and positive price versus inflation again in the second quarter. This is a core competency for us and increasingly important given higher cost to serve customers across the value chain.
I'm, especially proud of our team's performance given to temporary plant closures, we overcame in the quarter.
We discussed the China Covid Lockdowns on our first quarter call and our expectation to make this up in the second half which is still the case.
Our teams managed to minimize the revenue impact to approximately $60 million better than the $80 million to $100 million range, we anticipated at the time to Lockdowns occurred.
We also overcame a tornado that temporarily knocked out production at one of our North America transport refrigeration facilities in the quarter.
The revenue impact to the quarter was also approximately $60 million, we expect to recoup the full impact in the second half of the year.
We exited the quarter with both plants fully back up and running.
Our performance in the first half of the year has been stronger than we originally anticipated.
Booking levels have remained robust.
Backlog is significantly higher.
Inflation has been persistent but our pricing execution has more than kept pace.
Supply change remains tight, but we have seen some improvement and believe we have line of sight to further improvement in the second half of the year.
All in we are confident in raising our adjusted EPS guidance range to 705 to 715.
When you consider that our guidance includes an additional <unk> <unk> headwind from FX.
Partially offset by a <unk> tailwind from M&A, we're effectively raising our operational guidance by <unk> 10.
The secular mega trends underpinning our strategy are only growing stronger execution of our high performance business operating system and our unwavering focus on putting customers first remain at the core of everything we do.
Our balance sheet liquidity position and ability to deliver strong free cash flow provides a robust financial foundation and good optionality for capital deployment.
We are exceptionally well positioned to not only navigate near term macro challenges, but to thrive as conditions improve please.
Please turn to slide number five as I discussed on the prior slide we delivered the strongest bookings quarter in our history in Q2.
And the bookings growth was broad based.
Demand in our Americas commercial HVAC business continues to top records and bookings were up mid teens.
Two year stack bookings were up approximately 45%.
Backlog is extremely strong up over 70% year over year.
Commercial HVAC revenues were strong up high single digits with growth across equipment and services.
And residential HVAC bookings were down mid single digits versus a high thirties prior year comp.
Absolute booking levels were resilient with 101% book to Bill <unk>.
Despite strong revenue growth.
Transport Americas bookings were healthy up low teens. Despite the fact that we are constrained bookings to mitigate inflationary risks non constrained demand would be much stronger.
Customers understand the dynamics are working closely with us on slots.
Revenues were down low single digits against a tough prior year comp up nearly 70%.
And were impacted by the extreme weather event I referenced earlier.
This effectively shifted revenue from Q2 to the second half.
Mainly to Q4.
Turning to EMEA, we continue to see strong demand for our innovative products and services that help reduce energy intensity and greenhouse gas emissions for our customers.
EMEA commercial HVAC orders continued to be strong up low teens and revenues were up high single digits as.
As expected transport bookings were down in part due to tough prior year comps and similar to our Americas transport business, we continued to constrained bookings through our order book to help mitigate inflationary risks.
Revenues were up low teens outpacing end markets.
Our Asia Pacific team delivered commercial HVAC bookings growth in the high teens and revenues were down due to Covid lockdowns in China as discussed.
Now I'd like to turn the call over to Chris Chris.
Thanks, Dave Please turn to slide number six <unk>.
Organic revenue growth of 11% in the quarter was strong despite the volume impacts from China's COVID-19 lockdowns and temporary plant shutdown related to extreme weather and transport Americas that Dave mentioned earlier.
FX was about a 2% headwind.
Pricing was strong up more than 10% comprising the majority of the revenue growth this quarter.
Price versus inflation was positive on a dollar basis and improved from the first quarter, but we're still a margin headwind in the quarter.
Productivity mix and lower corporate expenses were favorable.
And we continue to make incremental business reinvestments to support innovation in the quarter.
Organic leverage was solid at approximately 16%.
All in adjusted EBITDA, and operating margins declined, 40% and 20 basis points respectively.
Adjusted EPS grew 13% driven primarily from strong operating performance and higher adjusted operating income.
Please turn to slide number seven.
We discussed the key revenue dynamics for each of the businesses earlier in the presentation. So I'll focus my comments on margins.
Each of the businesses was heavily impacted by continued supply chain challenges and associated inefficiencies across our operation.
In the near term, we are incurring higher costs to serve customers across the value chain, including significant investments in spot buys and expedited freight.
Each segment also continued to make significant investments in our strong innovation pipeline.
Our Americas segment delivered strong price, which offset inflation on a dollar basis.
And modest volume growth was strong incrementals and solid productivity netting to a modest decline in margins.
In EMEA prices offset by inflation on a dollar basis negatively impacting margins.
Acute supply chain challenges are having an outsized impact on productivity in the region and are expected to improve as we move through the second half.
As is price versus inflation.
In Asia Pacific Lower margins were primarily the result of lower revenues, which de levered at roughly the region's gross margin rate consistent with our expectations.
Now I'd like to turn the call back over to Dave Dave.
Thanks, Chris Please turn to slide number eight as we've discussed throughout the call underlying demand for our innovative products and services has never been higher with unprecedented levels of bookings and backlog across our businesses.
Relentless innovation in franchise brands with leading market positions customer focus and operational excellence are hallmarks of our market outgrowth over a long period of time.
In North America, our commercial HVAC business is driving record demand and share gains demonstrated by our order growth of approximately 45% on a two year stack.
And we're exiting the second quarter with another quarter of record backlog up more than 70% year over year and more than double historical norms.
End markets remained strong with a variety of economic indicators point to growth in 2022.
Unemployment is low and indicators like the architectural billing index, which has been over 50 since February of 2021 remained favorable.
Demand remains strong in data centers education and healthcare.
Every day, we see customers, establishing their own sustainability targets and we're partnering with them to create de carbonization roadmaps to achieve their targets through our customized system based approach.
We are helping our K through 12 customers deploy federal stimulus funds to improve the indoor air quality of schools, we see both de carbonization and indoor air quality as multiyear tailwind for our business, given our deep customer relationships and expertise.
Demand for our residential products remained strong with a book to bill of 101%.
Despite strong revenue growth.
Turning to Americas Transport Refrigeration Act projects continued market growth through 2023, we'll talk more about transport refrigeration outlook in our topics of intersection.
Turning to EMEA.
We have muted expectations for market growth with a volatile geopolitical backdrop, continuing demand for our sustainability focus systems and services remains strong and we continue to see good opportunities for market outgrowth and share gains.
Turning to Asia, we are monitoring the Covid lockdowns in China, and the broader impact on the region.
<unk> is healthy with strong bookings growth in the second quarter.
Potential geopolitical and Covid related risks have proven hard to predict for the region.
For the year, we continue to see underlying strength in China's datacenter electronics pharmaceutical and healthcare markets.
Outside of China. The picture is mixed with cohort related lockdown still impacting market expansion in some countries.
Our direct sales model is differentiated in the region and provides good opportunities for market outgrowth in both equipment and services now.
Now I'd like to turn the call back over to Chris to outline our updated full year guidance Chris.
Thanks, Dave Please turn to slide number nine.
As Dave discussed at the outset of the call. We are pleased with our first half performance.
And our second half outlook.
<unk> backlog and pricing execution gives us confidence to raise our full year revenue and EPS guidance.
We are raising our full year organic revenue growth guidance to approximately 12% up from our prior guidance of 10%.
We are raising our adjusted EPS guidance range to $7 five to $7 15.
Which is higher by <unk> <unk> at the midpoint.
As Dave mentioned previously this is <unk> <unk> higher when you factor in the negative impact of FX, partially offset by M&A.
We continue to expect a stronger second half on revenue growth and leverage versus the first half with an improving supply chain and product redesigns coming online that will help us serve our customers better and provide added resiliency to our supply chain.
Organic leverage for the third quarter is expected to be similar to Q2 were around mid teens.
We expect free cash flow to remain strong and equal to or greater than 100% of adjusted net income.
Our outlook includes capital expenditures of approximately 2% of revenues across high ROI projects in support of our profitable growth objectives, and our sustainability commitments.
These high ROI projects include manufacturing automation and supply chain resiliency as well as investments to further decarbonize our operations.
Our free cash flow outlook also includes modest investment in working capital with a particular focus on strategic inventory to support continued growth.
Please go to slide number 10, we.
We remain on track to deliver $300 million of run rate savings from business transformation by 2023.
Importantly, we continue to invest these cost savings in high ROI projects to further fuel innovation and other investments across the portfolio.
Please go to slide number 11.
We remain committed to our balanced capital allocation strategy focused on consistently deploying excess cash to opportunities with the highest returns for shareholders.
First we continue to strengthen our core business through relentless business reinvestment.
Second we're committed to maintaining a strong balance sheet that provides us with continued optionality as our markets evolve.
Third we expect to consistently deploy 100% of excess cash over time.
Our balanced approach includes strategic M&A that further improve long term shareholder returns and share repurchases as the stock trades below our calculated intrinsic value.
Please turn to slide 12, and I'll provide an update on our capital deployment in 2022.
In the second quarter, we deployed $565 million in cash.
With $155 million of dividends $110 million for M&A, and 300 million to share repurchases.
Year to date the company has deployed approximately $1 1 billion.
Of which $650 million was for share repurchases and we have approximately $3 $7 billion remaining under current authorization.
We expect to continue to pay a competitive and growing dividend and to deploy 100% of excess cash to shareholders over time.
Turning to M&A, we completed a small channel acquisition in April and our M&A pipeline remains active.
All in we are on track to deploy approximately $2 5 billion in cash in 2022 inclusive of $1 9 billion between M&A and share repurchases.
Our strong free cash flow liquidity and balance sheet continue to give us excellent capital allocation optionality and dry powder moving forward.
Now I'd like to turn the call back over to Dave Dave.
Thanks, Chris Please go to slide number 14 overall.
Overall global transport refrigeration markets are expected to remain healthy in 2022.
In North America Act has raised their 2022 forecast modestly primarily reflecting actual builds coming in a bit stronger than expected in the first half.
On balance 2022 weighted average growth is expected to be up 10%.
Versus up 8% prior.
Growth is expected for 2023 as well.
Overall, the forecast for EMEA markets is relatively unchanged.
Total market size has dropped year over year to reflect the removal of the Russian market.
Russia comprises about 14% of EMEA market for trailers and trucks.
Effectively removing Russia from the total available market for three quarters of 2022 lowers the market size for trailers and trucks by approximately 11%.
The weighted average market size by approximately 6% for the year.
While the reduction in the total available market will impact our EMEA business growth in 2022, we continue to expect to drive growth through share gains and strong price realization across the region.
After clear share gains in truck trailer and Apu and both the Americas and EMEA in 2021, we're expecting global outgrowth and continued share gains in 2022 as well.
Please turn to slide number 15.
We've updated the North America trailer market growth outlook slide and added the 2024 forecast for reference.
You can see that that continues to call for a 10 year average for North America trailers in the mid 40000 unit range with.
With growth through 2023, and a modest step down in 2024.
IHS has not updated its outlook for EMEA beyond 2022 at this stage.
Please go to slide number 16.
Energy efficiency de carbonization, and sustainability Mega trends continue to intensify and create record levels of demand for our innovative products and services.
We are uniquely positioned to deliver leading innovation that addresses these trends and accelerates the world's progress.
Supported by our business transformation and are engaging uplifting culture.
With the strength of our business operating system, we continue to successfully navigate macro challenges with a customer first mindset.
Our first half performance record backlog and our outlook for the back half of the year give us confidence in raising our full year revenue and EPS guide.
We believe we have the right strategy the best team and a solid foundation in place to deliver strong performance in 2022 and differentiated long term shareholder returns.
And now we'd be happy to take your questions operator.
At this time I would like to remind everyone in order to ask a question press star one to allow time for everyone to ask a question. Please limit yourself to one question and one follow up.
Your first question comes from Andy Kaplowitz with Citi. Your line is open.
Good morning, everyone.
Hey, Andy how are you doing good how are you.
Great.
Point of considering backlog at that $6 5 billion up over 40% versus just orders maybe you could give us your perspective in terms of the visibility of that backlog gives you into 'twenty three amidst the macro headwinds that everyone knows about it and then just in terms of that visibility have you seen any slowing in core Americas commercial HVAC orders across any end markets.
Given those concerns.
Yeah, I'll start with the orders and orders were very robust in the second quarter really.
Finishing on the commercial HVAC business in America is really across all verticals, Andy So we didn't see any.
Any soft spots there as.
As far as the backlog I mean, our backlog right now is at record level of $6 5 billion, our book to Bill in the second quarter was 111%.
We see a backlog entering 2023.
It'll be north of $6 billion and that will give us great visibility into 2023, especially in our longer cycle businesses, which are 80% of our backlog, where 90% of our backlog 80% of our business.
Okay. That's helpful. And then just digging a little bit can you give us a little more color into the EMEA supply chain and the price cost issues, you've seen in that particular region. It's obviously much smaller region for training and then the Mac is that you've been hit hard there with supply chain issues negative price versus cost. So what's the difference there versus in the Americas can you talk about your confidence in <unk>.
Expected improvement, especially if Europe does fall into a bigger slowdown.
Sure I'll start with the <unk>.
Positive in our commercial HVAC C. We continue to have strong backlog in EMEA order rates were up low teens and we continue to see strong demand revenues was up high single digits with growth in both equipment and services Thermo King.
Business also continues to perform well with organic revenues up low teens outpacing the markets.
We did see acute supply chain challenges in Europe , and a higher cost to serve our customers with spot buys and expedited freight.
We see these as investments really good investments, especially when the demand for our thermal management system and the opportunities to minimize the need of fossil fuels for our customers' overall I am very confident long term with Europe . This region continues to grow share through leading innovation supply chain will improve.
In the back half that is going to be a gradual improvement and as it improves the efficiencies in our factories will improve and we'll get our margins back on track.
I appreciate the color.
Thanks, Andy.
Your next question comes from John Walsh with Credit Suisse. Your line is open.
Hi, good morning.
Hey, good morning, John how are you.
Maybe I'll make a suggestion first it would be great on topics of interest maybe we take a look at services, we've done a lot of deep.
Deep dive into the truck trailer market.
But maybe we can start there I mean services up double digits I remember when we used to think this was the <unk>.
Single digit plus grower kind of what's happening there and where do you think services can continue to grow.
Yes, I mean, we're very happy with our services business and I'll take your suggestion and topics of interest but.
Our service business over the last five years and I'll speak globally. It's got a compound annual growth rate of high single digits and that's over a five year period in 2020, a pandemic year.
We had our service business was flat to 2019. Despite the fact that we were constrained with getting access to facilities, So very happy with our service business.
A third of our total business globally and.
In the second quarter. It was again it was up double digit rates, so very happy with the performance there and a very resilient business.
Great and then maybe just starting on the price cost conversation.
Maybe just remind us if you think we can get some of the commodity deflation benefits here.
Here in the back half or if this is more of a 2023 story.
How you guys would think about the phasing of the lower commodity costs rolling through thank you.
Yes, John it's Chris.
It is going to be more of a 2023 story.
Our practice has been for a long time to hedge and lock in on our main commodities for steel and copper and aluminum.
One to two quarters out we're 70 plus percent locked and then three to four quarters out where 50% to 60% locked.
And certainly we're seeing the volatility in those markets even in the second quarter with it looked like a bit of a pullback on steel and then a little bit of Av.
Uptick in terms of steel prices later in the quarter, but we see that more of a 2023 tailwind. If we continue to see these commodities start to come down in terms of in terms of cost inputs, but today's point, we're being selective on the backlog and making sure we're booking orders with as much visibility as we can get.
We price appropriately.
And we're really happy with the price performance here in the second quarter and that being positive on a dollar basis in Q2 over cost.
Yes.
Great good quarter, and I will pass it on.
Thanks, John I appreciate it.
Your next question comes from Julian Mitchell with Barclays. Your line is open.
Hi, good morning.
Good morning.
Maybe just a first question around the operating leverage so I think.
As you highlighted you did sort of 16%.
In Q2, it sounds like Q3's guide at about the same.
So that implies a big step up.
35% plus in Q4.
So maybe just confirm if that's correct and I guess why in Q3, not seeing operating leverage improve if Asia is going from steep volume declines to a catch up and globally, probably over the hump in terms of price cost headwinds and those should narrow.
Sure.
Hey, Julien if I step back on the first half organic leverage was up about 12%.
About 16% in Q2, so we saw a nice improvement from the first quarter to the second quarter.
Back half of the year, we're expecting leverage to really be in the high teens low <unk> range.
Whole year guide on leverage.
As consistent with what we said in may that it would be organically up mid teens on a full year basis.
But we baked into the guide as I think about the third quarter and the fourth quarter, Dave mentioned and.
An improving but gradually improving supply chain, we baked into the guide that we're going to continue to see additional costs to serve our customers with spot buys and expedited freight.
It's going to continue to cause factory disruption certainly on a year over year basis, Q3, Q4, and while it does get a little bit better sequentially is going to be.
A little bit of a challenge to the leverage on the second half so.
It will be a gradual improvement, but that's where we thought Q3 would be around that mid teens level like we saw in Q2, and then Q4 would get a little bit stronger than that.
That's helpful. Thank you and then just sort of one follow up around that so when we're thinking about kind of third quarter earnings probably sort of 10% or so growth year on year.
Mid high teens leverage so thinking sort of $2 that kind of earnings range and then.
Any sort of thoughts on resi HVAC, let's start into that back half off to a very strong Q2.
Yes, I think for the third quarter Julien.
Think about the second half revenue growth kind of in that low teens range, we see that growth roughly the same in Q3 and in Q4 and a year over year basis, roughly the same growth now in the third quarter comes with higher dollars of revenues. It's traditionally our strongest quarter of the year in terms of top line revenues and then Q4.
Would come down off of Q3, so revenue growth roughly the same for the second half of the two quarters leverage in Q3 more around that mid teens organic range and then it will step up into the fourth quarter and Thats, how we kind of see that second half playing out.
Yes.
I'll chime in here on the second part of that question on <unk> first of all I'll start with the second quarter and we had.
Just the team did just a fantastic job in the second quarter I mean, we had 30 with.
30% growth in the top line.
Our book to Bill was 101% so our backlog was flat.
With a 30% growth in on the top line.
We have tough compares all year and Ramsey.
With.
Bookings level that we haven't seen before in 2021. So we'll have some tough compares going into the back half of the year and for sure. We could see some negative bookings like we saw here in the second quarter, but you've got to really look at the backlog the book to Bill and.
I couldnt be happier with our performance in our residential business to date.
Great. Thank you.
Sure.
Your next question comes from Scott Davis with Melius Research Your line is open.
Hey, good morning, Thanks, Scott Thanks, Scott Good morning.
Good. Thank you I wanted to switch gears and go back to M&A and it's always kind of a question of is there another <unk>.
Round of consolidation or what more can be done globally, and I know, there's lots more opportunity perhaps outside of the U S. But.
As your main.
Pipeline.
In the distribution channel is that how we should think about it or is there more you think you can do down the road.
Yes, it's a great question I mean, obviously, our M&A pipeline is full as you would expect we get to see all the opportunities being a large large global player in <unk>.
It's active.
No. We don't just look at channel, we look really at any sense in the pipeline that's available, but I would tell you that.
We don't need to do anything as I've said before we have great equipment portfolio of great service portfolio, great access to channel.
But we'll we'll look and we're going to be patient and we're going to make sure that we make the right investments.
Okay fair enough and just separately really going back to the supply chain questions.
Is it a broad list of components, so hard to get or is it more specific stuff.
Other companies were just semiconductors and stuff that you guys is it a.
The wide list of stuff, that's kind of short or is it narrowing.
Short list.
Good question, our supply chain performed as expected during the second quarter and we anticipate as I said earlier gradual improvement through the back half of the year. Our team continues to do an excellent job.
Managing through this environment working closely with our suppliers.
Yes, electronics still as a theme okay.
Chips of.
Some somewhat better we see progress working with our suppliers and thats going to continue to get better in the back half.
Other components like wire harnesses too, but again, we're working through it we have a great team they were able to solve problems.
<unk>.
It's open communication with our suppliers and good things happen.
Okay. Good good luck. Thank you guys I appreciate it.
Your next question comes from Joe Ritchie with Goldman Sachs. Your line is open.
Thanks, Good morning, everyone.
Hey, Jeff Good morning.
Can we just maybe on price cost.
I think you guys told US last quarter was like roughly 100 basis point impact to margin I'm curious if you have that same color for TQ, and then whether thats supposed to get better in the second half of the year and then I guess just.
Maybe just thinking through that revenue growth number that we gave the 30% Im just curious if you can give us.
Much of that was price as well.
And Joe it's Chris so.
As I think about the second quarter kind of price cost.
Certainly a margin headwind you are right. We described Q1 was about 100 basis points I would describe Q2 was less than 100 basis points of our margin headwind I don't want to dial it in any further than that we were happy with the performance on a net basis with turning dollar positive really moderately positive in the quarter.
And it's giving us even more confidence as we think about the balance of the year to be positive on a full year basis. So.
I think that's one of the most improved parts of our business operating system that for the last.
18 months in a very highly inflationary environment, we've been able to stay on the right side of the price cost equation and happy to see us deliver that to year end.
In the second quarter.
Second part of your question it was <unk> growth.
Reggie price, so, yes, 30% growth in the quarter overall for <unk>.
What we are going to report today price for the enterprise was up 10, 4%.
We will report in the Q that the Americas price was up about 11, 8% and I will just say that resi was was better than those averages.
Here in the quarter.
In terms of price recognize realization.
Okay, Great. That's helpful and quick follow up I know last quarter, I think you've talked about <unk> 12.
The rates really picking up I think they were up 50% in the first quarter I'm just curious like what did we see another step in the right direction on K through 12 orders and take care. Thank you.
I started the education vertical Joe has always been very strong for us and we continue to see.
Stimulus funds flow there.
Incoming order rates in the second quarter were very strong for the education vertical they were north of 40%. So we continue to show great progress there and we have a great process in place to help our customers attract funds and to make sure that they are able to make the proper upgrades to their facilities.
Great to hear thanks, guys.
Thank you.
Your next question comes from Josh <unk> with Morgan Stanley . Your line is open.
Hey, good morning, guys.
Hey, Josh.
I want to go to Europe first if we don't mind pretty solid commercial HVAC bookings growth, there and obviously a bit more of a macro uncertainty to say the least I'm just wondering how much of this you guys feel is sort of.
Driven by what's going on like the energy paybacks with prices just skyrocketing there or if this is just sort of stuff that it started through the process, maybe kind of pre Russia, Ukraine and is this just continued to go through like where are we in terms of <unk> kind of representing what's what's really going on in <unk>.
A market yes.
Yes, I would say that Europe has shown market outgrowth for a long period of time now with our innovations that we have specifically around thermal management systems, obviously, what's happening right now with.
With the war in the Ukraine, and the supply of energy into the rest of Europe from Russia, and Thats getting tighter. So it is a bit of a tailwind for sure is our thermal management systems eliminate the need for fossil fuel.
<unk>.
So our original value proposition, which is extremely strong to our customers just got stronger and we think that'll be a continued tailwind into the future.
Got it that's helpful. And then just on the price cost everyone's trying to skin this cat a little differently, but.
I think in the applied business.
Kind of a less of a list price maybe go to market, they're more like a job bidding strategy.
What's been the historical.
Your kind of ability to hold price.
Or maintain that spread as commodities come in and understanding that it's.
Lastly, if I could list phenomenon.
Yes, Josh what I would say is on those longer.
<unk> type projects versus the team.
Thinking about what does that future curve look like for commodities and costs when they're ultimately bidding the job.
Some of those longer term projects also allow for cost.
Cost escalation depending on the external.
Index for which we can adjust price if something were to change you have to rebid it out but.
As I think about the whole company in a normal year, we go into the.
The view of getting price costs, a 20 to 30 basis points positive and with the commercial business as being the largest part of the company. They are very much in that same ballpark of in a normal year getting positive price cost.
But then also having a lot of visibility as best we can and to the forward curves of inflation and cost to price accordingly.
So if I can just add.
Don't see pricing going down next year.
The price increases that we've seen over the last 18 months likely won't continue at the same rate into the future, but we don't see prices coming down.
Got it that's helpful context, I appreciate it guys.
Thanks.
Your next question comes from Steve Tusa with Jpmorgan. Your line is open.
Hey, guys good morning.
Hey, Steve how are you.
Good execution in a choppy environment for sure.
Okay.
Just digging back into the resi up 30.
What do you think your channel movement was I know you guys are kind of 50 50 independent and captive.
30% is just like a pretty big number obviously relative to other guys that are reporting so.
Just curious as to if there were any differences between the.
The channel and your more captive distribution.
Yes. Good question I mean, we're really proud of the results we got in residential and then up 30, Youre right and the good news there.
The shocking there is is that our book to Bill was 101, so our backlog stayed flat as.
As we enter Q3.
Just to put some context around it the sell through in our <unk> was up in the twenties.
But around 20, there was a little bit stronger in our own channel. So as far as inventory levels are about where we would expect them to be Steve we track that pretty carefully especially are independent.
Captive distributors, what percentages like parts and pieces or non equipment.
I mean, we're about a 50 50 shop, if that was your question I'm not sure if youre going through like.
The part side of our business, Steve or yes, yes, just your captive distributors, if they do parts and services and things like that the guys that you offer.
Hey, guys.
Absolutely I mean, we have.
They have part of that I don't have the exact percentage in front of me, but we can dig that up for you. Okay. One follow up quick follow up on commercial what was light commercial up in the quarter.
Alright.
Yes, it was our incoming order rates for light commercial was was very strong.
In the Americas. It was it was up over 30%.
Great Alright, thanks, a lot guys. Okay. Thanks, David Thank you.
Your next question comes from Nigel Coe with Wolfe Your line is open.
Yes.
Thanks, Good morning.
Hey, good morning.
Got a little ground, but just wanted to come back to residential use.
Excuse me strong results.
I'd use the word dynamic so I'm, just wondering what sort of your phone to that sort of the damage with seeing elsewhere.
<unk>.
The non HVAC, but across other end.
End markets. So just wondering what dynamic we mean that but.
Really.
This kind of period of bill from.
The inflation protection Bill has some some provisions around subsidies for high efficiency equipment, just wondering kind of how you view that and what that could do to.
The demand over the next 12 months.
Yes, I mean dynamic I mean, it is a dynamic environment, obviously, we're seeing a lot of price there, we're seeing volume there as well.
A lot of a lot of different things happening at the same time.
And obviously, we have a backdrop of very very strong compares from prior year. So that's kind of will remain around the <unk>.
Being a dynamic space as far as the the IRR that is currently working its way through.
Washington, Yes, there is at least the way it's written right now at least the pre draft that I've seen it.
There is a provision in there for electrification of heating right, which is in the heat pump space for the.
For the homeowner so that could be a tailwind for sure if that goes through and we will see we'll wait and see how that gets written in and what the final proposal goes.
Goes to Congress on the Senate.
Fair enough and then my follow on is on the buyback cadence you've done so far.
Ft of seven to deal with that bouts of buyback and M&A. So it's a bit more of a backend loaded on that one nine.
Just given the share price.
Through the second quarter.
I thought I might see a bit more buyback activity during the quarter. So just wondering if there's any restrictions on buybacks during the quarter was there some M&A activity that potential during the quarter, but just wondering on the cadence there.
Yeah, Nigel I would say, we're kind of looking at this quarter by quarter as we go through the year.
Youre right about $750 million of deployment between M&A and share repurchases. So far this year and about 1 billion. One left to go when you already account for dividends that will be paid out in the second half. So I think today's point the pipeline remains active in M&A certainly by the end of the year.
I would like to see.
One or two.
Transactions closed or committed to by the end of the year. So we're just trying to make sure we.
Leave some powder for that at the same time our balance sheet.
Strong we've got a lot of capacity here to do a lot of different things with the cash we have but I would say at this point the share price continues to look.
Very favorable and below trading well below our calculated intrinsic value. So we would continue to deploy cash to shares if M&A isn't available as we think about Q3 to Q4.
Let me if I could.
Nigel but I'm going to go back to a comment that Julian made earlier around leverage.
I think for the third quarter, we commented that it would be around mid teens similar to Q2, it could be a little better than that as we work through the quarter. So the EPS estimate during you put out of around $2 I think that could be a little higher than that maybe closer to $2 10 range and is the $2 range and.
And that would come with a little bit stronger leverage probably not above 20%, but maybe it can be higher teens in the mid teens would be the range I'd be thinking about for Q3. Thanks.
Thanks, Let me add that.
Great. Thanks.
Yes.
Your next question comes from Jeff Sprague with vertical research your line is open.
Okay.
Thank you good morning, everyone.
Hey, Jeff how are you.
Great. Thanks.
Two.
Dave can you just address.
Lead times and not not lead times in your own supply chain, but just kind of the customer order behavior.
We've seen of course really the spectrum here the customers are ordering further in advance so.
I Wonder if you could kind of just addressed that are orders being booked further in advance than typical and what is it that youre doing on kind of price and other things to make sure. Your you are protecting yourself on the kind of a longer tail on some of these orders.
I mean I think the answer is yes. They are again book sooner and Thats Theres two reasons for that one is our customers want to make sure we have enough visibility.
And the second is that our lead times out of our factories are longer.
With all of our backlog. So yes that is a fact as far as how we are protecting ourselves from the pricing some of the longer lead items, we would actually put in escalations on.
That's a portion of the business is not the entire business.
And but you don't do that for transport what is the difference.
Port orders.
That's not we don't do that in our transport business. There, we basically will go out like.
Quarter six months at a time to fill the backlog will control that.
It's not that we're not working with our customers on slots, we just won't be able to price. It until we in fact get to a point in time, so like we have not yet opened up.
2023, yet for.
For orders now we were talking with our customers. So we understand what their demands might be so we will slot. It. So we make sure we don't disappoint them. We're just unable to price. It at this time I just want to make sure we.
And that business, it's very difficult to go back and say well I have to reprice something and it's been very volatile. So we just want to be conservative in that from that standpoint to make sure. We have the right price on the product.
And maybe just finally for me just more kind of big picture cycle. Your sort of your call on Rajeev from here you are well aware the debate and the replacement cycle, but it's hotter and we're running them longer.
Seer changes that kind of a whole mix of things going on.
When you look forward into 'twenty, three and 'twenty four.
I mean do you see.
Legitimate argument for resi.
At least on a relatively high plateau or do you think there is.
Kind of give back that we need to get here cyclically, yes.
Its pretty dynamic Jeff I'll start with that as I said earlier I think the other variable that you may want to put into your model. There is the sheer change that will be coming in 2023 remember that's going to be depending on the model that would be 10% to 15% on the top line I wouldn't expect it to be expect.
Margins to be neutral on that because obviously the product cost more for the highest higher seer product. So that's another.
Tailwind on the topline that we'd be seeing.
We haven't we haven't come out with our with our guide you for 2023, we're working through our planning process now.
As I said before we have very detailed models in this space and when we come up with our guide for 2023, let me explain to you in a lot of details to whats happening, but remember.
I sound like a little bit of a broken record here, but residential is only 20% of our total business. So even if it did fall by 10% it would be a 2% drop for the enterprise.
And the opportunities that we see in our commercial businesses on both thermo King and our trane commercial business far exceed the 2%.
Great. Thanks for the insight.
Sure.
Our next question comes from Andrew <unk> with Bank of America. Your line is open.
Hey, you have Sabrina Abrams on for Andrew how are you guys.
Hello, Good morning.
So first I wanted to ask another question on Europe , and sort of how the conversation on HVAC is changing in Europe , given the recent weather and in the longer term what it means for your organization in Europe , and what you need to do to be better positioned in Europe .
Kept position for a new climate trends.
Yes, well first of all I think we're very well positioned with some of the latest innovations that we've introduced into the marketplace with our thermal management systems.
So.
And I think that as.
You could eliminate the need for fossil fuels in buildings.
That's the value proposition was already great. It just got even better.
These products are significantly more efficient than conventional ways of thinking.
Which would have been a separate chiller plant and boiler plant. We now have technology that combine these your efficiency is up between two and Forex depending on what your heat sink is so we're very happy with our position there and we're seeing a lot of traction.
Cool thank you.
Just quickly on the 2023 share change can you talk about where you are in terms of transitioning production to the new high share equipment.
Yes, we're certainly ready we're well equipped for this we've already sold all the higher seer product prior to the change so we're in good shape there.
Thank you I'll pass it on.
Our next question comes from Gautam Khanna with Cowen Your line is open.
Yes, good morning.
Hey, Jonathan.
Doing well.
I had a couple of questions one.
Nothing you said on the call.
Good point people to to worry in the commercial markets at least about a slowdown but I'm curious.
Can you comment on the front log some of the project pipeline is there any timing slips related to them any funding issues that youre seeing emerge even anecdotally more so than was the case, maybe a year ago.
Three months ago or any sign.
Let me.
I'm, assuming your question is more slanted towards the Americas, but.
It's been strong I mean, if you look at the architectural billing index, which is a good macro indicator to look at I mean, it's been over 50 now for 17 months.
We continue to see strength.
In the Americas, we are nice strength in EMEA as we've already talked in.
It was a good trend we had in Asia in the second quarter with our order rates they're up.
The 16% range so.
There are all lots of strength and.
And if you look at the longer term macro trends I would say, it's going to be with us for a while.
And then secondly, we've talked a little bit about raw material copper steel aluminum.
What about <unk>.
Components broadly in terms of cost next year do you guys are you seeing inflation in those continuing and maybe offsetting whatever benefit we get from raws or.
Do you think it is a net positive as.
As we stand today on the cost side.
Hey, Jonathan we track.
For these calls and others, we generally spend a lot of time on tier one, but we track everything on the tier two which would be the components. You described from electrical components motors to.
Metal fabrication and we're tracking that all of the input costs from the commodities to that but also <unk>.
Impacts from labor costs at others, but.
As it stands right now with things looking at bit more deflationary.
At this point versus say three months ago six months ago.
So it's really kind of looking at as more of a benefit and a tailwind in 2023.
Locking in steel, we lock that in for really six months.
So.
Our cost in June is really going to be realized in December .
Any type of pullbacks, we see in deflation here in the third quarter that really carries over into the first quarter next year for steel and then we've got the locking mechanism is in place with respect to copper and aluminum that also really push any change in price out roughly at least three to six months. So I think it represents a tailwind if we.
We continue to see.
<unk> environment I think that's also a dynamic where it's hard to tell which way the market is going but we're really just making sure. We follow a process, where we hedge each and every quarter with a similar level. So we smooth any type of increases on the way up and that means also a bit of a smoothing on the way down if you see deflation.
Thank you.
Thanks.
Our next question comes from Deane Dray with RBC. Your line is open.
Thank you and good morning, everyone.
Hey, good morning, Dave Good morning.
Eight.
Question on data centers, just what kind of growth rate are you baking in and a bit of a tactical question do you see any threat to the growth in liquid cooling and data centers is this going to take share or can they both coexist and <unk>.
What affect each other's growth path.
I'll start with a lot of their liquid cooling is certainly an emerging technology that.
That we're certainly doing a lot of work with.
We'll see how that.
That moves forward. So we are aware of the technology and.
Some of our scientists are looking at that very closely.
As far as we saw a nice growth and it is I don't have the exact number in front of me.
We can dig that up for you, but we continue to see nice growth in data centers.
I think you understand it's part of the office vertical so it gets a little bit.
Complicated, but we continue to have.
Nice growth there we have dedicated teams that work on data centers because there is.
Our specific expertise there.
Sure.
That we have that we work with our customers on.
Got it and then as a follow up on indoor air quality, and we talked about the education market, but do you still feel good about that.
Broad estimate of a 10 year path 200 basis points of annual top line and then just another tech more technical question.
It was a year ago lots of focus on air Disinfection technologies that seems to have waned a bit.
But just give us a sense of.
Whats the take rate in.
Businesses offices that are using disinfection technologies.
Yes.
First of all we see indoor air quality is a long term secular mega trends for the industry.
We continue to see growth there.
And lots of different verticals, okay. It's not just in health care we are.
We're doing indoor air quality as we're continuing to indoor air quality is in several different verticals, including education office as well as health care.
As far as the <unk>.
Cleaning of the air products like.
Like a dry hydrogen proxy.
Rai hydrogen peroxide product, we continue to sell well.
We continue to see demand for so we don't see a waning we think that indoor air quality is going to be top of mind for our customers for the foreseeable future. It's generally embedded in our applied systems as well as our controls and our services. So it's harder to track as a standalone item.
But we continue to see it as a growth a growth tailwind for the for our business and really for the whole industry.
That's real helpful. Thank you.
Sure.
We have reached the end of the question and answer session I will turn the call back over to Zac Nagle for closing remarks.
I would like to thank everyone for joining today's call and will be around for questions in the coming days and weeks as always and we look forward to seeing you on the road hopefully in person in the near future.
This concludes today's conference call you may now disconnect.
Okay.
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