Q4 2022 Trane Technologies PLC Earnings Call
I'll now turn the call over to Zac Nagle, Vice President of Investor Relations.
Thanks, operator, good morning, and thank you for joining us for treating technologies fourth quarter 2022 earnings conference call.
This call is being webcast on our website at Trane technologies Dot com, where you'll find the accompanying presentation.
We are 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 us on today's call, let's turn to slide number three before we dive in I'd like to spend a few minutes on our purpose driven strategy, which drives our differentiated financial results and long term shareholder value.
Our strategy is aligned to powerful megatrends like climate change, which has serious and far reaching effects on the environment.
Economy and human health.
2022 was again one of the warmest years on record and we continue to see extreme weather events.
Urgent action is needed to accelerate our transition to a low carbon green economy.
That's where trane technologies is uniquely positioned to lead.
Our innovation is transforming the industry and accelerating de carbonization of commercial buildings homes and transport.
We're helping our customers advance their own sustainability goals, while contributing to our Gigaton challenge a pledge to reduce customers' emissions by 1 billion metric tons by 2030.
Our purpose driven strategy relentless innovation and strong customer focus enables us to deliver a superior growth profile strong margins and powerful free cash flow.
The end result is strong value creation across the board.
For our team our customers our shareholders and for the planet.
Moving to slide number four.
Our global team delivered strong performance in 2022.
As we compare our results to peers and the broader industrials, we're confident our organic revenue and adjusted EPS growth will again ranked in the top quartile for both the fourth quarter and for the full year.
Our global teams have demonstrated resiliency and tenacity navigating persistent inflation supply chain and a myriad of other macro related challenges globally.
They have executed our business operating system, which is designed for operational excellence and delivered record results across virtually all key metrics.
Throughout 2022 and building an extraordinary strength in 2021, we are continuing to see our relentless year in year out rain or shine reinvestment and innovation pay dividends.
Through unprecedented levels of customer demand.
While this demand has been broad based we're seeing particular strength in our nonresidential businesses led by commercial HVAC.
Global commercial HVAC organic bookings were up nearly 40% in 2022 on a two year stack.
Americas commercial HVAC bookings were up more than 40% on a two year stack.
The tremendous growth we've delivered over the past two years has driven absolute bookings to record levels.
We continue to encourage investors to look at absolute bookings levels. In addition to growth rates to gain a more complete understanding of the strength of our businesses and our backlog.
As an example, our commercial HVAC organic revenues were up more than 20% in the fourth quarter, while organic bookings were higher by about half that level up 11%.
The book to Bill was over 105% further adding to already record backlog.
Likewise, while enterprise organic revenues were up 16% in the quarter and organic bookings were flat total book to Bill was still 100%.
Customer demand absolute bookings in absolute backlog have never been higher.
We disclose absolute bookings and revenues each quarter by segment in our earnings release.
2022 bookings of $17 5 billion exceeded 2022 revenues by $1 5 billion for a book to Bill of 109% <unk>.
Log entering 2023 is $7 billion well over two times historical norms.
Further we expect backlog to remain elevated throughout 2023, and anticipate entering 2024 with backlog in excess of 6 billion.
At our guidance midpoint revenue growth rate of 7%.
2023 revenues would be approximately $17 2 billion.
When compared to bookings of $17 5 billion in 2022 bookings.
Bookings would need to decline by over $1 1 billion in order for backlog to fall to the 6 billion number that I referenced heading into 2024.
That would equate to a decline of about $275 million per quarter.
For backlog to return to more normal levels of approximately 3 billion bookings would need to decline by over $4 billion or more than 1 billion per quarter.
While we recognize that we have difficult comps in 2023, we have a high degree of confidence that bookings will remain robust and that we will enter 2024 with backlog of $6 billion or more.
Turning to our guidance for 2023, we expect continued strong revenue growth EPS growth and free cash flow, we have a proven strategy to outperform end markets and our business operating system enables us to deliver consistent strong execution, despite challenging macro environments.
We have a multiyear track record of delivering differentiated financial performance for shareholders and are well positioned to deliver strong shareholder returns over the long term.
Please turn to slide number five.
As I discussed at the outset I am proud of our global teams for delivering strong performance in 2022, despite persistent macro challenges we.
We significantly exceeded our revenue and EPS growth targets, while delivering solid leverage and free cash flow.
And returning significant cash to shareholders through dividends and share repurchases.
While free cash flow was strong at 91% of adjusted net earnings for the year, we fell short of our target of 100% free cash flow conversion.
We drove an exceptional volume of shipments in the month of December and our commercial HVAC and thermo king businesses to meet customer demand, which shifted the timing of approximately $150 million in receivables into the first quarter of 2023.
We also invested about $40 million in safety stock inventory in the fourth quarter to ensure continuity of supply in this dynamic environment.
Net of these two areas free cash flow would have been 100%. Please.
Please turn to slide number six.
One of the most important elements of our long term strategy is fueling our high performance flywheel through relentless investments in innovation to solve our customers' most complex problems.
Leading customer innovation drives consistent and profitable market outgrowth, which in turn drives more cash to reinvest back into the business to further accelerate growth.
This flywheel as we referred to it as one of the key Differentiators between Trane technologies and our competition.
We are unwavering in our commitment to invest heavily in our business year after year in good times and in bad.
It's this ongoing focus that has enabled us to drive differentiated financial performance for shareholders over time.
Over the past five years, including the pandemic in 2020, we delivered a 7% revenue compound annual growth rate.
250 basis points of margin expansion.
Free cash flow conversion well in excess of 100% and since 2017, we've deployed more than $13 billion in capital with $8 3 billion returned to shareholders in the form of dividends and share repurchases.
Looking forward <unk>.
Can expect us to continue to consistently reinvest in our business and we will talk later in the presentation about some of the ways in which we are accelerating investments in 2023, leveraging the strong outlook, we see entering the year.
Overall, we are exceptionally well positioned to continue our strong track record of performance and capital deployment over the long term.
Please turn to slide number seven as I discussed earlier in the presentation customer demand for our innovative products and services is at record levels.
With particular strength in our nonresidential businesses, which comprise approximately 80% of our portfolio.
Americas commercial HVAC was again, a standout with low teens bookings growth and mid teens revenue growth, including another quarter of high single digit services revenue growth.
Bookings were up nearly 40% on a two year stack, resulting in high absolute dollar bookings and a book to bill ratio of over 110%.
Backlog continued to grow from an already high base and is now at levels that are three times historical norms further adding to our visibility and confidence in our guidance for 2023.
And residential bookings continue to normalize and we're down mid <unk> in the quarter.
The decline was expected against a very high prior year comp as two year stack bookings were still up double digits.
Residential revenues were up low single digits in the quarter and sell through was up mid single digits, reflecting healthy end market demand.
We continue to have historically high backlog in our residential business and in the fourth quarter. We worked closely with our independent wholesale distributors or <unk> to help them manage their inventory positions and mix as they entered 2023.
Our goal was to mitigate the risk of stranded inventory across the channel.
I am pleased with the approach we took in the partnership with our channel. We believe our <unk> are in a good inventory position entering 2023 as a result.
Our Americas Thermo King business had another very strong quarter with 30% revenue growth. This fall's growth of more than 60% in Q3.
We've included our traditional transport refrigeration market overview slide near the back of the presentation, which shows the strong share gains for our thermal king businesses globally in 2021 and 2022.
Bookings were down modestly as expected, but still up more than 40% on a two year stack.
Backlog in this business remains at historically high levels, providing good visibility into future revenues.
Overall Americas backlog is unprecedented at three times historical levels.
Turning to EMEA results in the quarter were also very strong.
In our commercial HVAC business, we've highlighted acute supply chain challenges that have been impacting revenues and more importantly leverage throughout 2022.
We were able to overcome many of these challenges in the fourth quarter and delivered revenue growth in excess of 40% with strong leverage.
Services growth was once again robust up double digits.
Bookings were also robust up low teens with two year stack bookings up more than 20%, we're seeing tremendous demand for our thermal management systems, which are three to four times more efficient than conventional heating and cooling.
Our transport refrigeration business in EMEA also delivered strong performance with low single digits organic revenue growth in the quarter and a market that was down double digits.
We discussed the transport refrigeration business in detail on slide 16 of the presentation.
Overall, EMEA backlog remains elevated 40% higher than historical norms.
Turning to Asia Pacific the commercial HVAC team delivered another very strong quarter in Q4 with revenues up more than 20%.
Services up mid teens Asia bookings were down as expected related to tough prior year comps on large bookings in the high tech sector outside of China.
Two year stack bookings were still up high teens.
China was resilient in the quarter with bookings up high single digits and revenue up double digits overall Asia backlog remains elevated approximately 50% above historical norms now I'd like to turn the call over to Chris Chris. Thanks, Dave Please turn to slide number eight.
This slide does a nice job encompassing our overall performance in the quarter, which was strong across the board.
Organic revenues were up 16% adjusted EBITDA margins were up 100 basis points and adjusted EPS was up 34% versus prior year.
We delivered strong organic enterprise growth in both equipment and services up high teens and low teens, respectively.
Services growth was consistently strong throughout 2022, and our services mix is approximately 32% of enterprise revenues.
Strong services mix bolsters, the company's resiliency in virtually all market conditions.
Please turn to slide number nine.
We've discussed the key revenue dynamics for the quarter. So I'll focus my comments on margins.
We delivered strong margin expansion in each of our business segments.
The key margin drivers are the same for each of our businesses. So we've consolidated the highlights on the right side of the page.
Robust volume growth positive price realization and modestly positive productivity more than offset persistent material and other inflation in the quarter.
We also leveraged strong margin expansion across the businesses to accelerate investments in innovation across a number of key initiatives.
As mentioned previously we are pleased with the significant progress we've made over the past two quarters mitigating acute supply chain challenges in our EMEA businesses, which led to strong volume growth coupled with significant margin expansion in the quarter.
Now I'd like to turn the call back over to Dave Dave. Thanks, Chris Please turn to slide number 10 as.
As we discussed throughout the call underlying demand for our innovative products and services has never been higher with historically high levels of bookings and backlog across our businesses.
Relentless innovation, leading brands with strong market positions customer focus and operational excellence are hallmarks of our market outgrowth over time.
In the Americas, our commercial HVAC business is driving strong demand and share gains as demonstrated by our full year 2022 order growth that is more than 40% on a two year stack.
And we've exited the fourth quarter with elevated backlog that is three times historical norms, providing us significant visibility into future revenues.
The nonresidential markets remained strong and we are bullish on the outlook for commercial HVAC.
Demand continues to be robust and data centers education health care and the high Tech industrial verticals, where we have strong customer relationships and market positions.
Our commercial HVAC business is underpinned by long term secular tailwind of energy efficiency de carbonization and indoor environmental quality, which are only growing stronger.
We also see tailwind from new and ongoing regulatory and policy related drivers such as the inflation reduction Act education stimulus and the chips in science.
Our commercial HVAC business is well positioned as the premier franchise to capitalize on the significant market opportunities that lie ahead.
The residential market outlook remains dynamic near term, we see the market continuing to normalize across bookings and revenue and the process is well underway as we saw in the third and fourth quarters.
For 2023, we believe this normalization process results in market units likely down in the mid single digit range.
With tail winds from elevated backlog pricing supported.
Supportive regulatory and policy initiatives and share gains we believe our revenues will be relatively flat.
Our guidance encompasses scenarios for residential in the plus or minus low single digits range.
We don't see a cliff scenario and residential is about 20% of our business. So a 10% decline would present, a 2% headwind to the enterprise.
Longer term, we continue to see residential as a GDP plus business for us.
Turning to Americas transport refrigeration, our diversified portfolio of products and aftermarket significantly outperformed the end markets in 2021 and 2022.
Act is calling for low single digit growth in trailer in 2023 and for weighted average transport refrigeration growth to be flattish.
Consistent with our strong track record, we expect to outperform the end markets in 2023.
Longer term, we continue to see transport refrigeration as a GDP plus plus business, we will talk more about the transport refrigeration outlook in our topics of interest section.
Turning to EMEA commercial HVAC I see the market growth picture remains muted with macroeconomic and geopolitical challenges way, given our innovative and leading sustainability solutions, we've been able to significantly outgrow the EMEA HVAC markets over a long period of time.
We see continued opportunities for market outgrowth going forward aided by our thermal management systems, which are three to four times more efficient than traditional heating and cooling solutions and are gaining momentum in the market.
Turning to EMEA transport refrigeration the removal of the Russian market was a key driver of the market decline in 2022, Thermo King EMEA outgrew the end markets up high single digits for the year.
As we turned to 2023, we expect the market to be down low single digits to mid single digits, mainly related to economic uncertainty in the region.
Our innovative products and solutions continue to provide us with strong platform to outgrow our end markets, which we expect to do again in 2023.
Turning to Asia, the environment remains dynamic and Colby continues to add complexity and unpredictability to the market forecasts. We see continued strength in data center electronics pharmaceutical and healthcare verticals and if these markets continued to perform well we could continue to see relatively stable growth in <unk>.
2023.
Asia continues to be one of the more dynamic markets. So we're cautiously optimistic on this segment, which represents about 10% of our portfolio.
Now I'd like to turn the call back over to Chris Chris. Thanks, Dave Please turn to slide number 11 de.
<unk> provided a good framework for how we're looking at our key end markets for 2023, and our guidance reflects these views.
Embedded in our guidance is our philosophy around our value creation, flywheel, which builds and high levels of business reinvestment in innovation outgrowth across our end markets and strong leverage.
We're guiding 2023% to 6% to 8% organic revenue growth and $8 20 to $8 50, and adjusted earnings per share or approximately 11% to 15% EPS growth.
Through the back half of last year, we talked about ending 2022 with $6 billion or more in backlog and we're sitting at a record level of 7 billion as of the beginning of 2023.
This gives us good visibility into 2023 revenues.
We have approximately 1% of growth from M&A in 2023 from bolt on acquisitions completed in 2022, and we expect FX to be neutral on a full year basis.
We're targeting organic leverage of 25% plus for the year.
There are a few key factors that play into our organic leverage target. So I'll spend a couple of minutes covering these factors to help frame that guidance.
First we're expecting modest incremental price and solid volumes to offset material and other inflation and drive strong incremental margins.
Second, while we're expecting slow and steady improvement in the supply chain as we've seen throughout 2022, we're not expecting it to be fully normalize until well into 2023 at the earliest.
This will continue to put pressure on the realization of strong productivity, which is where our business operating system really thrives.
Third the environment around prices for tier one metals remains dynamic and.
In the third quarter and early part of the fourth quarter of last year, we saw a deflationary trend for base metal prices.
Pricing has increased over the last two months on copper aluminum and steel negating much of the potential deflationary benefit in 2023.
To update you on a question from our earnings call last quarter, our tier one spend on these metals is approximately $750 million split roughly a third each for copper aluminum and steel.
We are seeing modest deflation in freight and logistics costs, but we're also seeing inflation from tier two suppliers as they incur higher than normal wage increases in energy costs.
Net we're not baking in significant inflation or deflation into our guidance at this early stage in the year.
Fourth we're using a favorable environment, we see in 2023 is an opportunity to double down on key investments across the business and advanced manufacturing and automation digital in electrification platforms. Among other key programs.
We're targeting 20% to 30 basis points of incremental spend across these areas, which will be embedded in the segment P&L.
This is above and beyond our average incremental spend of approximately 40 basis points per year.
So we're targeting 60 to 70 basis points of incremental spend in total.
We've highlighted that business reinvestment is how we win over the long term and we're confident we can make these investments in 2023, while hitting our guidance range.
We have additional investments earmarked in our corporate and Capex guidance as well.
Lastly, while our M&A transactions I referenced earlier will have a strong payout over the next several years.
We'll add about 1% to our revenue at approximately 3% leverage in the first year.
Inclusive of integration costs.
The net effect cuts about two percentage points off of our enterprise reported leverage versus our organic leverage that excludes M&A.
It's not a huge amount, but it is something we wanted to highlight is a factor to consider in our guidance as organic leverage will be stronger than reported leverage simply on the math related to M&A.
I will highlight organic leverage each quarter to provide transparency.
Turning to cash we expect 2023 to be a strong cash collection year.
We have about $150 million in receivables that shifted from December into early Q1 and.
And barring persistent supply chain issues, all year, which we do not anticipate we expect to bring working capital levels down specifically around inventory.
Net free cash flow conversion should be 100% or better.
Please go to slide number 12.
We remain on track to deliver $300 million of run rate savings from business transformation, including an incremental $60 million in 2023.
We continue to invest these cost savings into high ROI projects to further fuel innovation and other investments across the portfolio and I discussed a number of targeted investments for 2023.
To be clear our continuous improvement mindset is an integral part of our business operating system and continues well beyond the transformation program that we started in 2020, when we launched Trane technologies.
Our business operating system is designed to drive gross productivity each year to offset other inflation.
While it's been impossible to realize that level of gross productivity over the past three years.
Given the tumultuous macroeconomic backdrop productivity.
Productivity has been improving as supply chain slowly recover and is contributing to our 25% plus organic leverage target in 2023.
Please go to slide number 13.
We remain committed to our balanced capital allocation strategy focused on consistently deploying excess cash to opportunities with the highest returns for shareholders.
First we continue to strengthen our core business through relentless business reinvestment.
Second we're committed to maintaining a strong balance sheet and provides us with continued optionality as our markets evolve.
Third we expect to consistently deploy 100% of excess cash over time.
Our balanced approach includes strategic M&A that further improves long term shareholder returns and share repurchases as the stock trades below our calculated intrinsic value.
Please turn to slide number 14, and I'll provide an update on our capital deployment in 2022 and our outlook for 2023.
In 2022, we executed strong and balanced capital allocation of $2 1 billion, including approximately $1 2 billion of share repurchases $620 million of dividends and approximately $250 million to M&A.
We're targeting $2 $5 billion in capital deployment in 2023, and expect to deploy 100% of excess cash over time.
Our M&A pipeline remains active and we continue to exercise discipline in our approach.
Our shares remain attractive trading below our calculated intrinsic value and we have approximately $3 $2 billion remaining under our current share repurchase authorizations.
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 turn to slide number 16, our thermo King businesses have significantly outperformed their end markets in both 2021 and 2022 as illustrated on the table on the right hand side of the page and.
In 2022, the North America transport refrigeration markets were up 12%, while thermo King Americas was up more than 20%.
The EMEA transport refrigeration markets were down 9% in 2022, while thermo King EMEA was up high single digits. We're very pleased with the share gains we've achieved over the past two years.
In 2023, we expect the markets to be flat to modestly down and for thermal king to once again outperform consistent with our strong track record. We also added additional information to the slide this quarter to help investors and analysts gain a better understanding of the size of the businesses. We've included a footnote that global thermal king is approximately 15%.
Of our enterprise revenue.
And the split between the thermal King segments is roughly 60% Americas, 35%, EMEA and 5% Asia.
Please turn to slide number 17.
Act has updated their long term forecast for refrigerated trailers through 2027.
The data supports the view we have been highlighting for some time now that this is a mid 40000 unit market plus or minus about 10%. The chart plots the actual and forecast, but the key takeaways is that the market is expected to be flat at 45000 units in 2023.
Dipped to 40000 units in 2024 rebound back to 45000 units in 2025 and to continue growing low single digits from that point forward to 2027.
Additionally, our transport refrigeration business is a diversified portfolio with a healthy aftermarket business, we have strong positions in large and small trucks Apu's bus air and rail and a proven track record to outperform the transport refrigeration markets.
We believe this is a GDP plus plus business for us over the long term.
Please go to slide number 18 in summary, we are positioned to outperform consistently energy efficiency de carbonization and sustainability Mega trends continue to intensify driving increased demand for our innovative products and services.
We are delivering leading technologies and innovation to address these trends and accelerate the world's progress underpinned by our engaging uplifting culture.
The strength of our business operating system the power of our global team unprecedented backlog and continued high levels of customer demand give us confidence in our full year revenue and EPS guidance.
We believe we have the right strategy the best team and a solid foundation in place to deliver strong performance in 2023 and differentiated shareholder returns over the long term.
And now.
We'd be happy to take your questions operator.
Thank you.
As a reminder, everyone that is star one to ask a question again, please limit yourself to one question and one follow up our first question comes from Julian Mitchell with Barclays.
Good morning.
Maybe just a first question around any thoughts on sort of the cadence of the.
Organic sales trends the 7% through the year.
Any sort of particular awaiting.
Early versus late in the year and also that 25% plus.
Core leverage.
For the year.
Is that is there anything you can kind of price cost stole the investment spend waiting that skews that first half versus second half at all.
Hey, Good morning, Julien This is Chris I'll start and then Dave may jump in but as we think about the cadence throughout 2023, let me start with the first quarter.
Q1 is typically around 11% to 12% of our full year earnings.
Right now, we would project Q1 to be a bit stronger than that than our historical average, it's probably in the 15% to 16% range of full year earnings and we see that around really between $1 30, and $1 35 in adjusted EPS.
Thank you.
Revenue growth in terms of the first quarter, it's roughly in line with how we see kind of a full year at this point and we see leverage being really.
25% plus really throughout the year, it's up roughly balanced.
The investment spend it really is going to be ratable throughout the year.
We started.
<unk> been many years of course with <unk>.
Investments in leading in innovation, but I see that spend really being roughly equal throughout the year, David anything you want to add.
Thanks, Hi, Julien how are you doing on first of all Chris talked a little bit about.
Our leverage of 25 plus.
Could there be a quarter, where that has higher sure absolutely based on where we see opportunities but.
I would tell you.
From my Vantage point, we love to reinvest in our business, we love to find opportunities.
To drive differentiated revenue growth on the top line the flywheel that I referred to in my opening comments, it's something that has a proven track record for us.
As an innovation leader in the industry, we plan on that continuing well into the future.
Yes.
That's very helpful.
Thank you.
If we're looking at.
The.
Sort of markets residential and then transport on a global basis.
Are we assuming that the resi weakness is more sort of first half.
Transport weakness more pronounced in the second half is that the right way to think about those two pieces.
Well, let's start with residential I think we are pretty clear on this.
Comments, there, we think residential for the full year will be down to mid single digit range.
We think that based on some of the tailwind that we have in our own business being strong backlog strong price we'll.
We will see some tailwind probably later in the year with some regulatory changes specifically around <unk>, we see that as well.
We'll be plus or minus 1% and residential on thermo King if you look at the Americas and you look at specific data right now they have that as a stronger first half versus second half, but that assumes julian that the trailer Oems will actually be able to hit the.
<unk> rates.
<unk> seen them demonstrate that.
So my belief is that some of that volume will actually push towards the second half.
From the first half, but we'll see how the year plays out as far as in Europe Thermo King we think the market will be down a lot of that as the economic conditions there.
In both cases, whether the Americas or in Europe , we plan on outperforming the markets as we've demonstrated our capability over the last two years.
That's very helpful. Thank you.
Thanks, Joe Thanks.
We will take our next question from Gautam Khanna with Cowen.
Good morning, Thanks, guys.
How are you.
Thank you Hey, I just wanted to I wanted to ask you about.
Any are you seeing any evidence of weakness in the forward.
Our project pipeline on the commercial HVAC.
And in that domain.
Or I'm, sorry, I'm, just curious I guess.
Yes, I'm, sorry, Ralph mentioned in the forward.
Yeah, No we're actually.
If you look at our commercial HVAC businesses on a global basis right lots of strength in the Americas.
Really across many verticals, okay, which is always a good sign.
We don't see that slowing down in fact, we see some tailwind towards the back half of the year with regulatory changes as far as IRI as well as.
With the chips Act, Okay Thats all in front of us so it doesn't really nice tailwind.
Book to Bill of 110%, we have a lot of backlog at our commercial HVAC Americas business in Europe .
Just to be really blunt about it we're winning in Europe with our innovations.
And just a really strong fourth quarter, we had been.
Faced with some supply chain issues there throughout 2022, a lot of those challenges improved dramatically in the fourth quarter.
You see that with our revenue growth I mean, the revenue growth in the fourth quarter was up.
It was over 40% and our in our bookings continued to be strong as they were up in the high teens. So a lot of strength there and then in Asia I mean Asia was a surprise in our revenue growth was 20% about five points of that was kind of a hangover from the COVID-19 problems, we had in the second quarter, but still a.
15% very strong and order rates remained strong.
In China, specifically, our order rates were up close to double digits revenue was up double digits. So we're cautiously optimistic on Asia as it reopens.
China vendors.
Yeah.
Thanks for the thorough answer and then just lastly could you could you quantify how much price you have embedded in the sales guidance this year.
Hey, guys. This is Chris Yeah, I think we have modest price carryover going into 2023.
Certainly we're going to be comping against tough comps in 2022 with record levels of pricing you think about the full year 2002, we had close to 10 points of price, it's actually nine five points of price on a full year right.
Right now we're not planning on multiple price increases in 2023, but we do remain nimble to react to how we see input costs playing out during the year.
The strength in our business operating system, we remained price cost positive.
These last few years of highly inflationary environment. So we're going to remain nimble.
Could it be in the two to two 5% range, yes, that's probably the range of 10 for carryover.
Thanks, a lot guys.
Okay. Thank you.
Our next question comes from Josh <unk> with Morgan Stanley .
Hi, good morning.
Good morning.
Okay.
Hey, guys. Just wondering if you can give us any detail on how youre thinking about some of the stimulus items.
Yes.
Mentioned that probably more of a second half phenomenon. So maybe more of a 24 story, but what do you think that could be worth in terms of growth.
It's 23 really just the bookings year.
And when you think about Dave that sensitivity you gave on the backlog conversion versus maybe the cushion you have on the orders front.
With the potential kind of further source of Cushing that you think about in that.
Okay.
Next question, Josh I think that first I'll start with what we're seeing right now in stimulus, we're seeing a lot of demand obviously with in the education vertical.
If you look at our education vertical in the Americas, the equipment business in 2022, its up close to 40%, Okay and thats going to continue for some time now I believe.
The change and that was on orders booked in September 2024, you actually happens in 2026 to having installed so we see that continuing to happen and you see that in a very very strong absolute booking dollars network, we're able to generate.
Ray.
Obviously, that's still being worked through the funds are going to flow from the.
The fed to the states and the states will operate in a framework and and we will work with with the different states to make sure that we're very clear on how that's going to happen, we see that as.
Certainly in the back half of the year.
Both in the commercial space as well as in the residential space the key to being successful really with IRI is how do you take something that's pretty complex right now and make it really simple for the customer and that's exactly what we did with the education funding that was available and we will do the same we are really good at that with the IRS as far as.
Chip's Exco.
Yes, that's going to be back half I mean, thats all in front of us and it's certainly going to be an opportunity. We have a lot of strength in that vertical we have great customer relationships, but.
Some of that bookings could happen in 2023, but that's really all in front of us I think.
Applications are just being opened up here in the first quarter. So that they can even start applying for these funds. So that's that's really all in front of us given the duration time it takes to actually get a bad plan from planning up to operations.
Perfect. That's helpful I'll leave it there.
Alright, thanks, guys. Thank you.
We will take our next question from Chris Snyder with UBS.
Thank you.
I wanted to start by following up on the prior commentary around some of the IRA benefits potentially coming through in the back half of the year.
Do you feel about capacity.
Bailable supply to meet.
The expected pickup in heat pump demand into the back half.
Yes, it's a great question I think I'll start with the supply chain.
I think the supply chain continues to improve gradually.
The fourth quarter was better than the third quarter I'm sure in the first quarter, what we've done in the fourth quarter.
We see that as a several quarters before the supply chain gets back to what I would call normal.
As far as capacity is concerned we don't have capacity concerns.
Yes.
As a company that Embeds lean thinking in our operating system, we're constantly looking to offer.
For ways to expand our capacity within our own four walls. So so we're very comfortable we'll be able to meet the demand.
That will happen and hopefully it starts to happen in the fourth quarter.
Yes.
Thank you I appreciate that thanks for the follow up I wanted to ask on transport bookings, specifically in the Americas, which seem to drive.
A good chunk of the sequential slowdown.
As we look forward.
Should we expect the bookings there to pick up as the back half 2023 order book has opened up thank you.
Hey, Chris This is Chris I'll start with that answer.
<unk> been selective with opening up the backlog in our Thermo King business is now for the last couple of years.
What it means is we havent opened up the second half of 2023 orders at this time.
Talking with customers, we are getting strong insights from them on what units. They need we're just not pricing that at this point.
At the end of the fourth quarter and.
Therefore, it's not making its way into bookings <unk> into backlog so.
Our for the Americas business, we're seeing that transport markets being slightly favorable.
The trailer market being one to two points up on a year over year basis of a very solid Dave commented about the cadence throughout the year that may shift a little bit more into the second half depending on how the Oems.
Through there.
Get through their fleet you can get there I'll put up but I would tell you that really strong business. We have a lot of innovation that business with a diversified business as well and so while we've been able to outgrow the markets. The last several years, we have those plans to do it again in 2023, yeah, Chris the only thing I would add is if you look at <unk> Americas business on <unk>.
Your stack order rates are up over 40% of a very large backlog going into 2023. So it's a business that has performed extremely well in 2022, and we will continue to outperform the markets in 2023.
Thank you.
Okay.
We will take our next question from Joe Ritchie with Goldman Sachs.
Thanks, Good morning, guys.
Hey, Joe how are you doing.
Yes.
Thanks, Dave.
We like the way you teed up the backlog discussed earlier today.
Lot of focus on order rates accelerating and it seems like that.
The trends in your business, particularly on the commercial HVAC side remain really strong.
It's probably too early but as you kind of think about.
What's occurring today from a stimulus perspective non res construction.
Supply chain scale, but a bit of an issue I mean sitting here hitting your backlog exited the year.
Like well above normal levels.
Think about that.
That growth rate, even just beyond 2023.
Yes.
You're spot on Joe I think that a normal backlog for our business at the end of any year is probably in the $3 billion range and we will end 2023, and enter 2024 with a backlog that could be.
$6 billion or greater.
We do we believe our backlog will be elevated for a long period of time, which gives us a lot of visibility, which gives us a lot of visibility not only to future revenues, but also allows us to help our suppliers into make sure. They have plenty of visibility as to what our requirements are going to be.
That's great to hear and I guess, mainly by one my one follow up Israeli defense commercial HVAC in EMEA.
That was really strong this quarter much stronger than we anticipated can you maybe just provide a little bit more color on what youre seeing there specifically is that is that heat pump demand like what drove that.
Growth rate this quarter.
Yes, Joe it's a great question and I'll tell you I am so proud of our team and commercial HVAC EMEA.
Yes, we had 40% plus revenue growth in the quarter.
We had some supply chain issues earlier in the year that we highlighted okay. A lot of those many of those got rectified in the fourth quarter. So that helped us get the volume out, but I look at the order rates as well on the order rates are up mid teens, two year stack up 20.
We are seeing tremendous demand for our thermal management systems. So.
Our growth rates in Europe are really a function of our innovation that we've been able to deliver to the marketplace.
And we are winning share in Europe , and we are winning with our customers. So it's a.
It's a really great story with our business in EMEA I've been.
With that business for a long time and I was in the days when it was.
Not such a great business, but it is very very strong today, we have such a great leadership team there thats constantly pushing the envelope on innovation, so expect more in the future.
Great. Thank you.
We will take our next question from Steve Tusa with Jpmorgan.
Hey, good morning.
Hey, Steve how are you good morning.
Okay.
Can you just provide a little bit of color on the difference in the Americas between unitary and applied just on the revenue side, and then maybe orders as well.
Sure.
For my glasses on here, so I can see.
We were strong really on an equivalent basis. The Americas was strong really in both I mean, our unitary revenue was up it was north of 30%, Steve and are the applied business in the Americas was mid teens, so both very very strong.
Hi, James.
Go ahead, Yeah, and then sorry go ahead in bookings sorry about that.
Bookings were high single digits and unitary and.
Around 30 for the.
Applied very strong very strong results.
And then how do you how do you kind of see just the high level profile of each of these businesses. You said the revenue is going to be pretty consistent.
Throughout the quarter from a cadence perspective.
How do you see the businesses.
Each of those businesses performing at the high level commercial HVAC Teekay and Ravi realm.
Relative to it.
The annual guidance.
Yes, Steve as we think about commercial businesses I'll speak for Americas, and EMEA really just.
Our plans right now up high single digits in terms of revenue on a full year.
The significant backlog that gives us really strong visibility to the revenue profile and then Dave talked about the stacking effect from a bookings perspective.
Could we see 10% growth in some of these businesses in pockets, possibly it really depends on the maturity of the supply chain, which we've seen gradually get better over the last several quarters and we've got embedded in the guide a gradual improvement in 2023, but if it got stronger could that output be stronger on the top line, yes, it could be.
But let's see how the year kind of plays out I think for Asia, we're calling it dynamic.
Calling right now for stable growth as we work throughout the year, but it's a dynamic market and were watching it closely but very strong backlog entering into the year.
Alright, and then just one in for first and then for the first quarter I don't know if thats, what youre talking about just the first quarter high level on the three businesses.
Yes, I would say first quarter overall, let me start with enterprise like I mentioned earlier I see the revenue growth in Q1.
In line with how we see the full year.
That.
6% to 8% kind of range.
Commercial HVAC I would expect to be stronger as we work throughout the year just given the profile.
We've got some backlog, but certainly carrying into the first quarter, we'll open up the bookings here for the second half shortly.
I would expect that to be at the enterprise level in that 6% to 8% range and we'll see how it plays out.
Okay, great. Thanks.
Thanks, Steve Thanks.
We'll take our next question from Andy Kaplowitz with Citi.
Hey, good morning, guys.
Hey, Andy how are you and how are you so Dave or Chris I know you mentioned not too much carryover pricing in 'twenty three and then you might not get as much deflationary benefit as you first thought given the rising recent rise in commodity prices, but I think just in the <unk>.
Last couple of weeks, we've continued to raise prices commercially to that call. It mid to high single digits and up to 10% on resi HVAC. So the recent price increases really because commodities such as copper had been rising again lately or should we read into the fact that demand is still quite good for train and so the ability to raise price is still there in 'twenty three.
Sure.
Andy I say, it's really a mix of all of the above we are trying to get.
Mark just one price increase as we start the year that's been our cadence prior to the last two years of this highly inflationary environment. So we're trying to set the stage for where we see pricing for the year inclusive of how we see these commodity costs playing out over the last couple of months and the goal is we don't have three rounds of price.
Increases as we worked through 2023, so right now it's really baking in all of that information today with that price increase entering 2023, and just add to that obviously, we are seeing Chris.
Chris talked about materials.
Labor is certainly inflationary as energy costs. So if you look at all the cost inputs, which our product growth teams look at in a lot of detail on.
It allows them to have visibility as to what to see in the future.
That's helpful guys, and then talk about thermo king's increasing ability to outperform its end markets. It seems like.
As you talked about you're suggesting them looking to grow again in 'twenty three despite the primary markets being flat to down but does it secular tailwind is that we all know about such as the electrification that's going on in thermo King raises the probability that it just becomes a lot less cyclical and so as you go into a year late 'twenty four.
He is talking about.
Its forecast is down a little bit that you can still.
Be that cyclical or even go up in 'twenty one yes.
I mean, the cyclicality, we could arm wrestle over okay. If you look at the trailer market in the Americas. It's been in that 40000 unit range for for a long time, plus or minus 10%, so very strong market.
As far as the electrification.
We'll wait and see on that I would tell you that.
We are that's one of the investments that we're really doubling down on is how do we expedite what we're doing there on electrification we are seeing demand from our customers, especially in the shorter distances. So think of the truck aspect. There. So our team is doing a great.
Job meeting their expectations, but more to come and we're I'm very excited about the innovation pipeline, specifically in our thermo King business.
I appreciate it guys.
Thanks, Andy Thank you.
We will take our next question from Nigel Coe with Wolfe Research.
Yes.
Thanks, Good morning, everyone.
Hey, Nigel good morning.
Good morning.
I think I can.
Tim on little bit late but I think you mentioned backlog moving down from 7% to $6 billion is still a very healthy levels I'm guessing most of that would be in commercial HVAC, but I'm just I'm wondering how much teekay will come.
Come into that backlog conversion as well.
Real question I have is what is the key gating factor to an even stronger backlog conversion.
Your supply chain.
Construction labor skilled labor in the field.
Versus maybe customers don't want the equipment today, ma'am I'm guessing they do but what is the gating factor to getting even more backlog competitors.
I think you've got the answer Nigel there's a couple of things first of all the backlog of $6 billion I was kind of using that as an example, I think we're going to end.
And 2023 with a backlog of $6 billion or more.
So there is.
For us to burn a $1 billion in backlog will be a lot.
As far as why can't you burn it faster.
A couple of reasons you hit on one of the supply chain, it's improving and will continue to improve in the future. Our teams are doing just a fantastic job working with our suppliers, giving them visibility and everything we can to make sure that we improve their performance and that's happening.
Is that.
Lead times, especially in our commercial HVAC businesses and the applied side of it for sure have extended and that's not unique to trane technologies thats really across the industry.
We're very competitive with our lead times.
So that means that.
Customers don't want an order early right youre not going to ship, an order, especially on the applied side to a customer before their job site is ready and so that's that's elongated.
The backlog as well.
Okay. Okay.
Kind of hoping you might delineate between okay labor a real problem, if I can't get them better, but that's okay, and then on the 25% or better incremental margins.
For this year.
Pretty impressive when you think about commercial HVAC outgrowing residential and Teekay and we've all been trained to believe that resi teekay better margin commercial focus of that business is low margin is that the wrong thesis surrounding absorbing mix headwinds within that 25% plus.
Nigel it's Chris So we're aware that thesis and I think with our focus on our business operating system, we're ensuring all of our businesses are growing margins.
I would say in the commercial HVAC business has really been impacted the last couple of years with the supply chain challenges lots of inefficiencies the inability to drive productivity.
Lots of increased costs to serve customers expediting freight.
<unk> components on the spot markets, we've we've incurred a lot of cost in the business just to get the revenue out and that's presenting a nice opportunity as the supply chain normalizes as we can drive productivity in the plants and ultimately.
Get our team members focused on both productivity and solving the supply chain issues, which they've done an outstanding job solving.
Solving the supply chain issues throughout the last the last two years, but.
I see all of our segments next year, having very strong leverage.
That's some really nice opportunities there for us to go driving when we eliminate some of those inefficiencies.
We are also baking in incremental investments. So I think we can do both next year, we can drive 25% or better organic leverage with also incrementally 120 to 30 basis points of investments.
Allows us to do both and really drive for market outgrowth.
So just to follow up on the labor concern that's not a concern for trane technologies, we've done a great job of being able to attract the right labor we're doing a great job our human resource Department is doing just a fantastic job of training, creating career ladders for hourly associates. So.
We really want to be that destination location not only for our salaried employees, but also our hourly employees and we're doing a great job there maybe I'll add one more thing because just our Asia business writers.
Majority call it 90 plus percent commercial hvac's.
And it's driving high teens EBITDA margin. So I think it shows that we can we can really drive their for our businesses globally.
Oh good point, thanks, Thanks, guys.
Thanks, guys.
We'll take our next question from Deane Dray with RBC capital markets.
Good morning, everyone.
Hey, good morning, doing very well thank you.
Lot of discussion on backlog here just struck me is what happens on past due.
Do you have to set realistic expectations with the customers on when they'll actually get deliveries.
Yes that is exactly why there is elongated lead times right now you do not want to disappoint, a customer with delivery, yes think about it I mean, some of our products will use air handling as an example, if you're constructing a building. Okay. You could end up holding up for the entire job if you're late.
And Trust me you don't want to be on the other end of the phone call.
That has the whole building being slowed up because of your products. So we're making sure that we're providing realistic lead times to our customers.
We don't have sure I'll pass throughs, we do we track that very intensely.
Our plant managers drive that on a daily basis, but for the most part you really have to give.
Realistic dates as to when a customer can expect the product and you need to hit it and that's one of the key operational metrics for that.
But we look at it at a high level and I could tell you what happens at a very detailed level within our business.
That's real helpful. And then as a follow up I was really interested in your comment just saying you're trying to avoid situations with stranded inventory how does that happen.
And any comment on the whole new seer rollout.
Yes.
It was a source of the continent was associated with the sheer rollout right and I think that theres, a little bit more complexity in this time, where depending on where you are located in the country. It's an install date for some manufacturing date. So we've really worked with our independent wholesale distributors in the south okay, because thats really where the.
For non heat pump product.
That was an install date by so we don't want them to get stranded. So we help we help manage that situation.
We're pretty good at this I mean, we implement so many new products that phase in phase out as we referred to it as the second nature to us. So we just really helped our rwd's worked through that process.
Thank you.
No problem.
We will take our next question is from Brett Linzey with Mizuho.
Hi, good morning, all.
Good morning, Hey, just wanted to come back to the transport business you guys have been outperforming there for quite some time.
It looks like 23 have done a lot of innovative solutions new products coming to the market I was hoping you could just put a finer point on the outgrowth expectation there and then specifically on some of these new product launches are you simply cannibalizing older equipment technology or you're actually increasing the total addressable market with some of these electrification offerings.
A bit of both on that I think that you're obviously going to cannibalize any combustion engine thats out there with your electric solution.
Theres also opportunities you think about I guess, the best example that would probably be I would think of home delivery right.
I mean, it's.
As a relatively new market, okay, it's expanding quite quickly.
I think with some of our new electrified product at higher capacity.
Are you going to be able to create different market opportunities and I won't be more specific than that but we're pretty excited about what we see there and.
And your other question was.
In Canada, it's just.
Just on the total outgrowth expectation for the year.
I won't get too specific on that but I think you could see that we've obviously taken share for last couple of years, and we anticipate taking more share.
In the future right I mean, our team just does a great job there with <unk>.
We are working with our dealers, creating value propositions for our customers that are very compelling.
I'll use Europe as an example, I mean, if you have a product that's.
Able to get 30% better efficiency than the best in the market.
Youre going to Youre going to have a very compelling opportunity to talk to every customer about the value proposition that we bring and that's what we do and we see these these innovations in thermo King These innovations and residential these resin these innovations and commercial really hitting the mark with our customers and it really allows us to create.
That differentiated revenue growth that we're seeing on the top line, it's that flywheel that I referred to.
And we're going to continue to make sure that we we say plenty of dollars to reinvest in our business to keep that that flywheel very vibrant.
Yes, it makes sense, thanks, and just one follow up regarding the incremental investment could.
Could you just spend a little more time on those priorities I think you said factory automation.
Anything on paybacks or what do you think the structural benefits might be there.
Yes, I'll start.
Brian So generally what I'd look at is to focus on our factory of the future and automation.
We're spending time and cost around digital and also around electrification that Dave spoke to specifically and not only that thermo king portfolio, but also in our commercial HVAC portfolio portfolio. As you think about electrification of heating so they're great investments to make some of them are driving revenues and backlogs immediately.
<unk> on the on the automation side of the factory side.
This is the opportunity for us as we see the productivity coming back into the business.
It allows the features for us to go drive more of that productivity and when you can drive some more automation and get more volume through the factories and thats been a an investment we've been working on for several years and if you're also going to be a little bit of an increased investment in 2023, but very strong paybacks and look I think it helps contribute over the long term to that.
The target, we have in incrementals of 25% or better.
Got it I appreciate the insight best of luck.
Thank you David.
And we'll take our next question from Andrew <unk> with Bank of America.
Hey, guys. Thanks, a lot for fitting me in.
No problem. Good morning, Hey, good morning, just a question very interesting discussion.
And how about the fact that the industry is changing so do you think that these extended lead times and much more visibility in the cycle is becoming more of a permanent feature.
Of the industry because it seems you and the others are trading the customers to live with the lead times that maybe you could give them some flexibility in terms of deliveries, but it seems that you have.
Perhaps thats the future of the industry. That's here to stay I was wondering if we could push that discussion further thank you.
Its a provocative question Andrew I don't see it that way I think that is supply chain improves youll see lead times.
The contract does it go back to what it was post pandemic, maybe not maybe it's a little bit longer I think that everyone sees the value in the visibility and we've done a lot of work with our customers setting up some of those.
More visibility.
In that space, so that will stay so could they extend a bit sure I don't expect I expect them to improve from where they are today.
If I went back a year I would tell you they have dramatically improved from a year ago, so well.
We'll see how it plays out but it's a very provocative question.
Thank you and just a follow up can you just the safety stock investment what specific area is that related to various.
The very specific it was.
Very nervous about what's coming out of Asia.
And so we want to put additional safety stock for anything that's coming out of Asia.
And we think it's very prudent.
It's both a $40 to $40 million range.
The reopening there of China, specifically, although we are cautiously optimistic.
We just want to make sure that.
We were reading the tea leaves correctly and that we did not get caught short of supply.
Terrific. Thanks, so much.
Brian .
And that concludes our question and answer session I would like to turn the call back over to Zac Nagle for any additional or closing remarks.
Thank you operator, I'd like to thank everyone for joining on today's call and as always Pat and I will be available along with Susan to take any questions that you may have in the coming days and weeks and we look forward to speaking with you then and also will going to be on the road quite a bit here.
At conferences in February and into March and we look forward to seeing you on the road soon thanks and be safe.
Okay.
And that concludes today's presentation. Thank you for your participation and you may now disconnect.
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