Q2 2023 Trane Technologies PLC Earnings Call
Good morning, welcome to the Trane Technologies Q2, 2023 earnings conference call.
My name is Josh and I will be your operator for the call.
The call will begin in a few moments with the speaker remarks, and the Q&A session.
At this time all participants are in a listen only mode.
If you would like to ask a question during the Q&A session. Please press star followed by the number one on your telephone keypad.
If you would like to withdraw your question again press Star one.
I will now turn the call over to Zac Nagle, Vice President of Investor Relations.
Thanks, operator.
And thank you for joining us for Trane technologies second quarter 2023 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 are made pursuant to the safe Harbor provisions of Federal Securities Law.
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 <unk> Executive Vice President and CFO .
With that please go to slide three and I'll turn the call over to Dave.
Thanks, Jack and everyone for joining us on today's call. Let me begin with a few comments on our purpose as a company.
Boldly challenge, what's possible for a sustainable world.
Our purpose is at the heart of our strategy, which is linked to powerful megatrends like climate change.
This enables us to drive differentiated financial results and shareholder returns over the long term.
The recent news on climate change has been sobering.
Water temperatures off the Florida Coast recently soared to over 100 degrees.
We've seen deadly heat waves in parts of the United States, Europe , and Asia, and one of the Earth's hottest summers on record in.
In fact scientists say these temperatures are likely the warmest the planet has seen in 120000 years.
And have dangerous effects on the environment, the economy and human life.
Urgent action was needed it to limit global warming and preserve our planet for the next generation.
Our customers are seeking sustainable solutions, and choosing trane technologies as their partner and Decarbonising, the built environment and the cold chain.
We are leading the way with our innovation and result is long term value creation across the board for our team our customers our shareholders and <unk>.
For the planet.
Moving to slide number four.
Our global team continues to execute at a high level and delivered another quarter of strong performance.
Showcasing the benefits of our diverse resilient portfolio.
Organic revenue was up 11% adjusted operating margins expanded 110 basis points.
And adjusted EPS grew 24%.
We delivered 30% plus organic leverage across the enterprise and in each segment led by our commercial HVAC businesses in each region. Our residential HVAC business continued to normalize and was further impacted by a difficult comp versus the second quarter of last year.
When revenues were up 30%.
Net on a two year stack residential revenues were up mid teens in Q2.
Importantly, we are delivering strong results, while increasing business reinvestments.
We're accelerating high ROI projects and focused areas, including digital electrification and factory automation.
These investments are flowing through our segment results as well as through corporate expenses for enterprise wide initiatives.
To drive innovation growth and productivity well into the future.
Bookings remained robust after reaching unprecedented levels in 2021 with nearly 30% bookings growth in 2021 bookings exceeded revenue by approximately $2 7 billion nearly doubling our backlog in a single year to $5 4 billion.
During 2022 bookings grew more modestly up 5%. However, the sharp increase in absolute bookings in 2021 translated 5% bookings growth in 2022 into another 27% increase in backlog.
Yeah two.
2021, and 2022 are both important drivers of our strong backlog position of $7 billion at the end of the second quarter.
Which is roughly two five times historical levels.
We've been encouraging investors to look at absolute booking levels and backlog. In addition to growth rates to gain a more complete understanding of the strength of our business.
Further when looking at growth rates for Trane technologies, it's important to consider a three year stack that includes 2021 for the reasons discussed.
Commercial HVAC continues to be a standout across our segments globally in the second quarter commercial HVAC bookings were up nearly 40% in each region on a three year stack supporting.
Supporting revenue growth of high teens in both the Americas, and EMEA and 45% and Asia.
Additionally, our commercial HVAC book to Bill ratios were effectively 100% or higher in each region.
Our end markets continued to be healthy overall, and we believe we are well positioned for strong growth in 2023.
While it is premature to dial in and outlook for 2020 for continued high levels of demand and are extremely strong backlog position.
Particularly across our commercial HVAC businesses globally.
Puts us in a strong position to drive growth in 2024 as well.
We expect to enter 2024 with elevated backlog of more than $6 billion.
To put that in perspective backlog has historically represented approximately 20% of the next year's revenue.
It's also worth noting that $2 billion of our $7 billion and current backlog is for equipment to be delivered in 2024.
This is approximately five times the level of backlog for the next fiscal year versus historical trends at the end of the second quarter.
Our strong results through the first half combined with healthy end markets and backlog that remains two five times norms positions us well to raise our full year 2023 guidance.
Chris will discuss in more detail later in our prepared remarks.
Please go to slide number five.
As we've discussed bookings and revenue growth were broad base globally with particular strength in our commercial HVAC businesses in all regions.
Enterprise and Americas bookings were down, 5% and 8% respectively, largely due to softness in our Americas residential business, which was down approximately 20% in the quarter.
That business continues to normalize.
Excluding the impact of residential bookings decline enterprise bookings were up 1% and Americas bookings were down low single digits.
In our Americas segment commercial HVAC bookings were down mid single digits against high teens growth comp in the prior year.
Absolute bookings remained robust with growth of approximately 40% on a three year stack.
Commercial HVAC revenues were up high teens in the quarter with strong growth in both equipment and services.
Even with strong revenue growth the book to Bill ratio was approximately 100%.
Commercial HVAC backlog remains highly elevated at three times historical levels.
Residential HVAC revenues were down as expected as the business continues to normalize.
Revenues were down low teens. However, it's important to note that the team delivered leading revenue growth of 30% in the second quarter of 2022.
On a two year stack the business was up mid teens.
Our transport refrigeration business, we delivered strong bookings and revenue growth up approximately 40% and 30% respectively.
Revenue strength was broad based in North America with the Big three truck trailer and Apu used up approximately 50%.
In our EMEA segment, our commercial HVAC business delivered another strong quarter bookings.
Bookings were up mid single digits on top of low teens growth comp in the prior year.
Revenues were up high teens with strength in both equipment and services up mid twenties and high single digits respectively.
Our transport refrigeration business is executing well and are modestly down market.
We expect the EMEA weighted average transport markets to be down low single digits to mid single digits in 2023, and four our thermo king business to outperform and to be relatively flat for the year.
With revenue growth of mid single digits in Q1 and revenues down low single digits. In Q2, we are well positioned to hit this target for the full year.
In our Asia Pacific segment, the team delivered strong results with bookings up mid single digits versus bookings up mid teens in the prior year.
Revenues were very strong up 41%.
China results were robust with bookings and revenues up 20% and 40% respectively.
Now I'd like to turn the call over to Chris Chris.
Thanks, Dave Please turn to slide number six.
We delivered strong revenue growth margin expansion and EPS growth again in the second quarter.
Organic revenues were up 11% adjusted EBITDA margins were up 100 basis points and adjusted EPS was up 24%.
And an enterprise level, we delivered strong organic revenue growth in both equipment and services up low teens and high single digits respectively.
Our high performance flywheel continues to pay dividends with relentless investments in innovation driving strong top line growth margin expansion EPS growth and powerful free cash flow.
Please turn to slide number seven.
We've discussed the key revenue dynamics for the second quarter. So I'll focus my comments on margins.
We delivered strong margin expansion in each of our business segments and have highlighted the key margin drivers on the right side of the page.
And each of our regions as the supply chain continues to improve we're driving strong leverage on volume growth, along with strong price realization and improving productivity.
Near term challenges continue in pockets of our business with associated costs, and we are managing these well across our segments as reflected in our results.
As an enterprise, we delivered about six points of volume and about five points of price in the quarter, which was slightly ahead of our expectations on both price and volume.
<unk> growth was robust in our commercial HVAC businesses, accompanied by strong organic leverage in excess of 30% in each region.
America's performance was led by strength in commercial HVAC.
And aided by robust growth in our Americas transport refrigeration business more than offsetting continued normalization of our residential business.
EMEA delivered strong incrementals and margins after accounting for approximately nine points of M&A growth in the quarter, which negatively impacted reported leverage given year one integration costs.
As we've discussed previously we've earmarked 70 basis points for incremental business reinvestment in 2023, which is about 30 basis points higher than normal to accelerate the timing of key projects.
This is included in our guidance and reflected in segment margins and partially in corporate expenses each quarter.
Now I'd like to turn the call back over to Dave.
Thanks, Chris Please turn to slide number eight looking forward, we see continued strong underlying demand for sustainable solutions well into the future.
We see the stacking effect of policy and regulatory changes that play to our unique strengths as a leading climate innovator as tailwind that are either early to mid innings or future multi year opportunities.
The pace of East <unk> has only accelerated in recent years and with the realities of climate change all around us it's likely we will see this pace continue.
The tailwind impact all of our businesses as 100% of our portfolio is focused on driving more sustainable solutions for our customers.
In our Americas segment, our overall outlook is relatively unchanged, we see commercial strength continuing to outweigh impacts from ongoing normalization of our residential business. We expect residential to continue to normalize through Q3, but to improve from Q2, and we expect the normalization process to be complete in 2000.
23.
Commercial faces tough comps in the second half of the year with less <unk>.
Contribution from price. So we would expect growth rates to remain strong, but moderate from the first half of 2023.
There's no change to our transport refrigeration outlook Overall act has modestly lowered their forecast for 2023 from flattish to the decline of low single digits largely related to trucking Oems build constraints.
We expect our thermo King business in the Americas to outperform with low to mid single digit growth for the year.
One additional callout is related to the timing of our revenues and our thermo King business in the first half of the year thermal King delivered 20% growth outpacing the North America transport markets, which were flat overall.
A portion of that outgrowth was driven by timing of customer deliveries committed in the first half versus the second half of the year.
Additionally, thermo King delivered extremely strong results in Q3 of 2022 up 60%.
Given this difficult comp and the timing dynamics between the first half in the second half, we expect our thermo king business to be down approximately 10% in the third quarter.
In our EMEA segment in the second quarter was strong and our outlook for the full year is also unchanged.
Like the Americas commercial Hvac's faces tough comps with less contribution from price in the second half of the year.
So we would expect growth rates to moderate.
Our thermo King business in EMEA is unchanged the forecast for the overall market calls for low single digit to mid single digit decline and we expect our thermo king business to be flattish.
Turning to Asia Pacific our outlook for the region is largely unchanged with strength continuing in key verticals as highlighted.
Our team delivered a better than expected second quarter against a relatively soft comp from the prior year, given COVID-19, Lockdowns in China.
The strong Q2 results pulled in a modest amount of revenue from the third quarter based on timing of customer deliveries.
For all the year is shaping up as expected with a solid growth outlook now I'd like to turn the call back over to Chris Chris.
Thanks, Dave Please turn to slide number nine.
As Dave highlighted at the beginning of the call. We're midway through the year with strong results near record backlog and good visibility into the balance of the year.
All in we're confident in raising our full year revenue and EPS guidance for 2023.
We're raising our full year organic revenue growth guidance to approximately 8%.
Up from our prior guidance range of 7% to 8%, reflecting strong results in the first half and improving visibility into the balance of the year across the portfolio.
<unk> M&A reported revenues are expected to be up approximately 10%.
We are raising and tightening our EPS guidance to a range of $8 80 to $8 90.
Up from a range of $8 $38 50.
Are up 45 at the midpoint.
Our new adjusted EPS guidance indicates earnings growth of 20% to 21% in 2023.
Importantly, we continue to expect to generate powerful free cash flow of equal to or greater than 100% of adjusted net earnings were approximately $2 billion.
We're raising our organic leverage guidance to 30% plus up from 25% plus as we expect the strength we've delivered in the first half of the year to continue in the second half.
We also believe it is constructed to give you some color around our expectations for the third quarter to assist with your modeling.
We expect organic revenues of approximately 7% in the third quarter with strong 30% plus organic leverage.
We also expect approximately three points of M&A in the third and fourth quarters.
We closed on two acquisitions in the second quarter. So our expected M&A contribution in the third and fourth quarters is a bit higher than it is for the first half and for the full year.
Please see slide 18 for additional information that may assist with your models.
Please go to slide number 10.
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 and high ROI projects to further fuel innovation growth and productivity.
Our continuous improvement mindset is an integral part of our business operating system and is designed to drive gross productivity each year to offset other inflation.
While it's been difficult to realize meaningful levels of productivity in recent years, given the supply chain and other macro challenges productivity has been improving as supply chains recover.
This is reflected in our strong first half results and our updated 2023 organic leverage target of 30% plus.
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 return 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 stock trades below our calculated intrinsic value.
Please turn to slide number 12, and I'll provide an update on our capital deployment for 2023.
Year to date, we've deployed $1 2 billion in cash with $341 million of dividends 535 million to M&A and $300 million of share repurchases.
We have $2 $9 billion remaining under the current share repurchase authorization and our shares remain attractive trading below our calculated intrinsic value.
Our M&A pipeline remains active and we have deployed $535 million year to date for bolt on leading technology acquisitions and equity investments.
During Q2, we acquired a leading industrial process cooling technology company in EMEA.
And the precision temperature controlled cooling company in the life Sciences vertical in the Americas.
All in we're on track to deploy approximately $2 5 billion in cash in 2023.
Our strong free cash flow liquidity and balance sheet continue to give us excellent capital allocation Optionality moving forward.
Now I'd like to turn the call back over to Dave Dave.
Thanks, Chris. Please go to slide number 14 today I'll take just a minute to provide an update on the transport refrigeration markets. As we know this is a topic of interest for investors.
The key takeaway is that while there has been a modest movement in the act North America forecast from flattish to down low single digits for 2023, we're not seeing material changes that would impact our full year outlook, given our strong backlog and bookings expectations.
Overall, we expect our thermo king business in the Americas to be up low to mid single digits in 2023, which reflects several points of market outgrowth.
Our EMEA Thermo King outlook is also unchanged. The overall EMEA transport refrigeration market is expected to be down low to mid single digits, we expect to.
To outperform and markets and to be roughly flat for 2023 and.
In both segments, we are on pace to achieve these targets.
Let's go to slide number 15.
<unk> continues to provide long term forecast for refrigerated trailers and they are projecting strong demand through 2028 after a low single digit dips in 2023 and 2024.
The data supports the view we have been highlighting for some time know that this is a strong mid 40000 unit market plus or minus a few percentage points.
Okay.
Please go to slide number 16.
In summary, we are positioned to outperform over the long term.
We are proud to have recently been recognized by fast company as one of the best workplaces for innovators and also certified as a great place to work for the third consecutive year.
It's our culture and our people that fuels, our innovation and fulfill on our purpose each and every day.
Our strong second quarter performance resilient portfolio and tremendous backlog gives us confidence and again, raising our full year revenues and EPS guidance and reaffirming our full year free cash flow conversion 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 long term shareholder returns.
And now we'd be happy to take your questions operator.
As a reminder, if you would like to ask a question at this time. Please press star followed by the number one on your telephone keypad.
We ask that you please limit yourself to one question and one follow up.
Our first question comes from the line of Andy Kaplowitz with Citigroup. Your line is open.
Hey, good morning, everyone.
Andy how are you doing good morning.
How are you.
Dave a question he delivered 30% leveraging <unk> and expecting 30% for the year, which obviously is a probably an easier with 25% plus guide is the biggest reason that youre getting is it getting more than 20 to 30 basis points of price versus cost in the quarter and for the year and you mentioned higher than usual this year as well as tolerating pudding.
<unk>, so 30% really be the new 25% potentially as you go into 24 over the longer terms in terms of an incremental margin.
Andy It's Chris Thanks for the question.
Look we're proud of where we've delivered 30% organic leverage through the first half of the year and it's giving us a lot of confidence to be 30% or greater in.
In 2023 look really leveraging all parts of the P&L price cost is coming in better than expected, we typically target, 20% to 30 basis points of price cost spread we're going to do better than that this year.
We are seeing a recovery of the supply chain is driving improved productivity less inefficiencies in our plants.
And with that higher volume growth from the fewer inefficiencies, we're really getting some nice strong incrementals.
We're really seeing is a dovetail here between price cost contribution, which will normalize in the second half of the year, we're seeing productivity improving with that improve supply chain and <unk>.
And like I said driving those higher volumes.
We're continuing to invest incrementally, we're still targeting 60 to saving 70 basis points.
Incremental investment call it 30 to 40 basis points above normal.
And we really like that Formula So really it's all parts of the P&L that are working and giving us confidence on the 30% plus Andy for this year.
On your question longer term, we do like the model at 25% plus.
Organic leverage into the future, we like that Optionality that it gives us to keep reinvesting into the business, but as we go into each and every year, we'll kind of call. It as we see it at that time, but we do like that long term target.
Hi, Chris Thanks for that and then Dave can you give us some more color into how youre thinking about commercial HVAC market in the Americas.
Talk about the three year stack. We know there are tough comps, maybe you could give us your thoughts on book to Bill going forward. There are there any markets that you would term is slowing and then you kept the $6 billion overall minimum backlog for the company and two quarters behind you. When you say the counter higher and they need to end the year closer to $7 six any thoughts.
And so that minimum.
Okay. That's a long question I'll try to remember at all but.
As we said I think it's going to be $6 billion north of $6 billion for the year I'll start there, but I'm proud of what the team's been able to deliver if you look at the revenue growth for commercial HVAC.
In the second quarter, it was high teens and despite that high revenue growth. Our book to Bill was approximately 100%. So you can just see the absolute bookings numbers are just very very strong. If you look at where the strength is coming from it's really broad based across several verticals. So think of data centers think of high too.
Think of health care think of Essar funding in the education vertical all really driving a lot of growth for us in our in our commercial HVAC business and that team continues to execute at a very very high level.
We're seeing we're starting to see some of the Mega projects now.
Really come in and.
And our team is just doing a great job of Triaging, how we call on those customers. This is we're a direct sales force Andy I know you and I have talked about this before it's really a competitive advantage and it's a global direct sales force. We recently, we're working with a customer in Texas and.
On a semi conductor plant.
Just to give you some of the complex. These are complex projects, but here's a project where the owner was located in South Korea. The engineer was located in Portland, Oregon. The General contractor was also out of South Korea. The mechanical was located in Texas and here our team triage as has direct.
Contact with all of those Influencers and really allows us to create a differentiated value proposition for the customers.
Short answer is we continue to see lots of nice growth.
Very helpful. Dave Thanks.
Sure.
Our next question comes from the line of Julian Mitchell with Barclays. Your line is open.
Hi, good morning.
So it sounds like.
This is slightly better perhaps.
Commercial HVAC sales outlook.
In transport largely and then raise the HVAC maybe slightly worse.
So just wanted to ask you on that last piece.
Is the right way to think about that that you had sort of volumes down high teens in the second quarter.
That narrows in Q3, and then you sort of flat to modestly down in the fourth quarter. I mean is that the way to think about that.
Resi market and any thoughts on the sort of inventory levels sitting out there for you.
Hey, Joe This is Dave I'll start look I think I'll go back to a year ago, Okay, and the second quarter of 2022, our revenue growth in the resi business was 30% I don't remember the exact market number but I believe it was up in the teens. So we had a lot a lot of growth there.
During the second quarter, obviously, the second quarter of this year were down.
Oh in the mid teens, if you look at it on a two year comp you would say were still up in the mid teens, so as far as inventory goes in the channel look.
Normalizing in 2023, and our <unk> business.
And.
We think that normalization process is going to continue in the back half of the year, we're calling residential to be down high single digits on a net basis for the year.
We think the third quarter, we better than the second quarter, but theres still going to be some normalization that has to occur in that business.
If you look a little bit forward into 2024, we think the normalization process at least from an inventory standpoint will be behind us in 2023.
It's early to call what 2024 will be however, we do expect some tailwind coming in from from policy, specifically around IRR don't cant size that yet because the rules are still a little unclear on IRR, but we do believe it will be a tailwind for our businesses in both the residential and in commercial Chris anything you want to.
Ed.
Going back to Q2 Q3 last year.
I think we felt like we lead in price over 2021 and 2022. So that is a part of the reason and the tough comp and to Dave's guidance on the full year revenue is down mid single digits units down high singles.
We built into our guide plus or minus revenues down mid singles, we feel like Thats part of our guidance that we've updated here on topline revenue growth and our earnings per share.
That's great. Thank you and then just.
My second question on the the backflow backlog outlook maybe talk.
Slightly different way from the prior question, but.
Pre COVID-19 I think the backlog to sales coverage was 20% plus 18 months, it's Ron that sort of 40% plus.
So is the sort of the broad idea here that that coverage shrinks.
Slowly, but surely but ends up at a place well above where you are.
Pre COVID-19 is that how we should sort of think about the backlog and so youll commercial HVAC orders, therefore don't see a big drop.
From current levels.
Yeah, Julien I'll start and I think about the backlog at the end of December to now at the end of the second quarter backlog is up about $100 million, but youre seeing residential.
Execute through its normalization thermo king executing through its backlog and actually commercial hvac's up from from even six months ago. So we just continue to see very strong strength there.
Our view is we're going to be greater than $6 billion going into the end of 2023, it's going to set us up very well for a healthy revenue growth in 2024.
I think it will continue to be a high grade problem, we're going to have for a little bit of time to come.
Backlog will normalize over time, we're just not seeing very much of that happening this year.
<unk> comments 2 billion of the current backlog here at the end of the second quarter is already built for 2024, and that's five times the normal level, we'd have here at the end of the second quarter. So we're getting a lot of visibility into next year already and as you mentioned a normal percentage of the next 12 month revenue in <unk>.
Log is 20%.
Dave will commit to $30 billion of revenue next year, if we end the year at $6 billion.
Backlog, but it will normalize to your point Julian it's just going to take some time, but we're still seeing some very strong strength in commercial HVAC right now.
Yeah.
That's great. Thank you.
Thanks Julien.
Our next question comes from the line of Josh <unk> Winski with Morgan Stanley . Your line is open.
Hi, good morning, guys.
Hey, Josh how are you doing.
Well, Thanks, Dave you mentioned <unk> and I are a couple of times IRS, specifically, having a hard time quantifying just yet, but maybe thinking about how those two maybe intersect and then and then diverse where are we in sort of the total <unk> spending whether it's orders or shipments and then.
Do you feel like IRA will be similar size larger smaller any way you can kind of dimensionalize. Those two things were maybe maturing in one and entering the other.
I will start with Essar I think if you look at it from a revenue standpoint, I would say, it's middle middle innings.
If you look at it from an order standpoint, it's obviously a little bit ahead of that because we have orders in our backlog for this and our team has just done a great job, they're working with.
The school systems across the country and really helping them.
Help them increase the ability for them to have a safe environment for the children that are learning there and it really started I think you heard me say this before it started when we were doing indoor air quality is we created Roadmaps and we're really executing to that so revenue standpoint think of mid single digits IRR. It's all in front of US Okay. It is.
It's going to be.
It's going to be a 2024 tailwind very difficult to size right now because it's going to be each state may have a different.
Set of standards and we're trying to understand all of those different standards now it will be a tailwind.
We're just trying to size it with the breadth of our portfolio regardless of how the final rules are written we will have a product that will be part of a solution for a customer and I know we tend to want to think of IRI in the residential space and it will certainly be a tailwind there it's also going to be.
Be a tailwind for our commercial business.
And so we're working both fronts of it and stay tuned and as we learn more we'll tell others.
Got it that's helpful and then.
Just on the backlog if I recall correctly, you guys don't count service in that reported backlog number.
If that's correct maybe give us some context for how service backlogs look if you had to parse them out that way.
How much extra visibility you have on that front.
You are correct. It doesn't it doesn't provide any service. We don't include that in our backlog.
Difficult to say services.
Services first of all our service business is a great business. Okay. It was up again high single digits in the second quarter, Chris I think we're now I think I can say six years now where we have compound annual growth rate of high single digits across the globe. Okay. So there is a very strong business and that's key to our strategy and really allows us to be tethered to our <unk>.
Customers for the life of our products.
We don't it's difficult to ascertain a backlog because if you start thinking of multiyear service agreements.
It would just really be difficult to say if its a three year service agreement a lot of times, we like to add add add things to service agreements. So it would be it would be hard to quantify that number.
Understood I appreciate the detailed forecast.
Thanks, Josh.
Our next question comes from the line of Chris Snyder with UBS. Your line is open.
Thank you.
Obviously, a lot of focus on orders and with that I want to follow up on the prior commentary around the U S. Mega projects that we're seeing could you just talk a little bit about how these projects flow into.
Into orders for training and then ultimately revenue per train just to kind of get a sense for what that lag.
Sure.
Yes, Chris good question.
We have very.
Part of our operating system is a very detailed process that we followed so we start all the way in the planning phase.
He then moved to permitting we then go to engineering. We then go to groundbreaking and site prep and then through construction. So it's a very detailed approach you need to follow and the earlier you're involved.
The more value you are going to create for the customer as far as the timing on these it depends on the type of project. Okay. If it's a semiconductor plant.
That process could take 354 years from planning all the way through completion.
About HV AC equipment, probably being installed and operating maybe nine to 12 months before operation of the facility. So you can start to back that up as to when you'd start to see orders that could be it's a bit different on a battery plant a little bit shorter duration, but again its really being involved.
It's early in the planning phase and then all through the process and again. These are very complex projects. So you often have influencers in different parts of the globe that you need to have relationships with and be able to call on.
Thank you I appreciate that Ben if I could follow up on data center and other big.
Focus in the market right now.
Vertical at the company has always done well in can you maybe talk about how activity is trending here is the business seeing any impacts from from AI investment into data centers is that still on the horizon any color outlook. There would be helpful. Thank you yeah sure well. Thanks for the question Chris Yes. It is a.
Recall that we've been strong in for a long time, okay and the answer on AI and.
The new GPU chip, that's that's now going to be used with our predominantly with with AI and Thats a graphic process unit.
These units produce a lot more heat so think of a conventional CPU or central processing unit versus a GPU graphics processing unit the graphics processing that throws off about three times the amount of heat.
Versus what we've seen in the past. So if you take that and you think about a data center cooling loads within data centers are going to have to change and we're working with a lot of data center customers. Because we have a lot of really neat solutions around these high heat applications. So it's definitely going to have an impact.
On the data centers are tomorrow, how they're being constructed how they are being planned and I would tell you that our teams are working very closely with our customers.
And in developing really creative solutions.
Thank you I appreciate that.
Our next question comes from the line of Joe Ritchie with Goldman Sachs. Your line is open.
Hey, good morning, guys.
Good morning.
Hey, Chris I know that.
You don't want to give I guess, maybe too many details on this price cost. The following up on Andy's question from earlier I'm just curious like the benefit that you got in <unk> are you expecting that benefit to be fairly consistent through the remainder of the year or is it kind of like the.
The biggest benefit Youll see in 2023, and then and then as you kind of think about the transformational cost out beyond this year I'm just curious like.
What's in store beyond 2023.
Yes, Joe.
Did see price of around five points in the second quarter we.
We do expect that to moderate into the second half of the year if.
I think about Q3 and Q4 of 2022, we delivered over 10 points of price in the second half of last year. So we do expect that to moderate if you think about the full year, our 8% organic revenue growth guide, we still see a bias towards.
A little bit more volume growth and price so that price contribution will moderate still be above.
The normal levels, I'd say, a price pre pandemic and previous inflation, but this is where that dovetail with productivity I think is another way for us to fully leverage the P&L as the supply chain continues to get better we had six points of volume growth in the quarter and we're expecting strong volumes in the second half.
We're seeing better productivity in the plants and to your second question.
A lot of loss productivity for us to recapture over the last couple of years of these supply chain constraints that I think is the next layer of opportunity for the company as we are.
Well on track to deliver the $300 million of savings from transformation and then a and B. We're always looking to make improvements in our business leverage our business operating system to drive efficiencies and offset other inflation with productivity, but there is a productivity recapture here that I think is a tailwind for the company and gives.
Us.
Confidence that 25% or greater organic leverage targeted some of we can achieve over time.
Yes that makes that makes a lot of fans have been great to aircrafts, maybe one quick follow up for Dave.
Im curious this much broader question around the labor market and kind of the tightness we've seen over the last couple of years I'm. Just curious how is that kind of impacting.
Some of the projects actually getting completed and whether it's actually elongate ing. The timeline for some of these projects I know that you mentioned earlier that we're probably halfway through.
The <unk> funding coming through in the P&L, but just curious what are you seeing in terms of the construction projects.
And labor tightness.
Yes, I'll answer that question two ways, Joe one is from from the on the commercial side. So construction projects, we've seen some delays, but nothing that I would call I think those were those have improved from what we've seen in the past, but I Wouldnt say thats something thats were seeing some projects pushed but not a lot. So thats not a major problem.
I think from a from an internal source of our of our direct labor. We've done a lot of work with developing programs to really apprenticeship programs to really grow talent and to give opportunities to people to learn new skills, we've done a lot with.
Tuition advancement programs, so that we could deliver at a grassroots level the talent not only for today, but also for the future and we've had a lot of success with that at some.
Lacrosse, Wisconsin, a couple of weeks ago, and it was just refreshing to see the.
To see the apprenticeship labs, we have out there and teaching teaching individuals that were not experts in welding become experts in welding.
It's a great it's a great job, it's a great.
Living that these individuals can can can can have with trane technology in this great advancement.
Overall, we are okay.
Sounds good thank you.
Thanks, Joe.
Our next question comes from the line of Steve Tusa with Jpmorgan. Your line is open.
Hi, good morning.
Hey, Steve how are you doing more of them.
Not too bad can you just give.
The split between light commercial and applied in that equipment number.
Yes sales sales number or bookings either one yes.
In the Americas, our revenue was very strong in equipment it was up over 30%.
Applied was a bit stronger than unitary, but both were strong.
Okay, Great and then just on on <unk>.
The guidance this year. So I think your units are down like.
Like low double so far first half maybe something like that it's hard to tell how much price you are getting there.
Youre guiding for I guess for the year a high single digit.
Klein is that just a comps in the second half and then maybe just some color on what you guys are seeing so far with the.
The hot weather here in July .
Yes, Steve.
Bit of all of that I think sequential improvement, we're expecting from Q2 to Q3, the the delayed start to the cooling season thats fully enforce.
At this point, so we see that sequential improvement into the second half.
The comps get a little bit easier as you go into the second half of the year as Dave mentioned, 30% growth in Q2, a year ago. It was mid teens growth in Q3, and then flattish in Q4 so.
We just see a little bit easier comps in the second half of the year for resi than where they were in the first half of 2022, but.
We have a lot of confidence that we think we are calling the units down high single digits for the year revenues down probably around mid singles and again plus or minus.
We've got that in our guide for the full year outlook.
And is there any difference between the sell in and sell through your independent distribution versus your captive in the quarter.
Yes, a bit.
Our revenue was down in the mid teens, our sell through was down in the.
Mid single digits. So the inventory adjustment happened in the second quarter, Steve. We just think more of it will happen in the third quarter as well.
Yes makes some sense alright, thanks, guys.
Steve one more thing on price just I think we were trying to dial in price in the first half where we're not getting the.
A strong levels of prices you may think we are getting in the first half it is less than 5% for the first half and it's going to get lower in the second half of <unk>.
Just really a strong very strong comp against where we lead with price in 'twenty, one and 'twenty two we're just seeing that normalize here.
The business, so hopefully that helps clarify a couple of things.
Great. Thanks.
Sure thing.
Our next question comes from the line of Jeff Sprague with vertical research. Your line is open.
Hey, Thanks, good morning, all.
Hey, Jeff how you doing.
I am doing really well. Thanks hope you are too.
Hey, Dave I Wonder if you could just give us your thoughts on the refrigerant transition and 25 for <unk> and whether that does in fact cause any sort of pre buy or channel distortions in 2024.
Yes.
There is a refrigerant change that will happen in 2025 move.
Moving away from <unk>.
Look we're ready for it I'll start with the engineering side of it we're ready for it we've been reworked with next generation refrigerants for a while so this is right up our alloy and the team's done a great job preparing us.
We're also preparing our manufacturing locations as we speak to be ready for it.
The new refrigerant is classified as slightly flammable. So you have different procedures as to how you handle the refrigerant, but we'll be ready for it we're not concerned about that as far as a pre buy goes yes I did.
It's going to be more expensive, yes, because it's a what they call a two hour refrigerant slightly flammable you will have additional sensors on the equipment. So the cost will be higher.
But theres also going to be a limit on the sell through so if you. If you had a if you were trying to create a pre buy you would have to sell through that inventory. The way. It's written right now is within 12 months or it would be stranded inventory.
I do not anticipate that we're going to see a large pre buy.
At this time, we will see how it plays out.
Great I understand and then.
It looks and feels like M&A is picking up a little bit.
Select kind of technology bolt ons and alike.
Is that the playbook going forward do you see the prospect for larger things are there larger things in the pipeline.
They are not they may be actionable or not.
Yes.
As you can imagine being a global HVAC our player we get to see a lot of different opportunities. We like these technology acquisitions, we've been very successful with them, we acquired MTA, great industrial process cooling technology, we'll be able to scale that is predominantly in Europe , we'll be able to scale and in our channels. We also acquired <unk>.
In the second quarter I think of that in the life Science space think about it is at the at the storage capability, but also in the processing capability. So again, a nice acquisition that we'll be able to scale with our channels.
We like this technology, we have been very good at taking these technology companies with great products and bolting them onto our operations and with our strong channel we've been able to create a lot of value for our shareholders.
Great. Thank you.
Sure Joe.
Our next question comes from the line of Nigel Coe with Wolfe Research. Your line is open.
Oh. Thanks. Good morning. Thanks for the question. So I wanted to go back to margins.
Hi, David.
Going back to margins.
The improving.
Kind of Incrementals.
I'm hearing better productivity of the factory, obviously price cost was a nice tailwind, but I'm just curious how do margins and backlog look generally compared to what we are.
Now do we have better backlog market to come through over the next year or so and then on the investment spending.
I think we had a slight backend loading on the investment spending this year is there anything on the timing of investments that we need to factor into our model.
Hey, Nigel it's Chris I'll start.
We've been happy with the margins in backlog.
Obviously, our backlog is more focused on equipment that is service, but we're happy with the margins in the backlog gives us confidence on the 30% plus leverage for the year.
We're just starting to build some backlog for 2024, so we will comment more on that as we get to guiding for 2024, but the team's just done an outstanding job for several years, now and making sure that we're embedding inflation and expectations around that and making sure that we're getting price.
And it's a lot easier as Dave reminds me all the time.
Not easy to get pricing you got innovative products out there and you were talking to the customer about.
An improved solution from what they previously have all of that is reflected in our higher organic leverage guide for the year and what kind of update as we go through.
The end of this year getting ready for 2024 on.
The investments, yes, we are still targeting call it 70 basis points of incremental investment.
<unk> of this is in investments in our electrification portfolio across our product lines and electric electrifying the portfolio.
And the digital strategy the connectedness back to customers that the previous question on AI, we have over 36000 connected buildings over 1 million pieces of connected assets.
This is an area that we're continuing to invest in and we're really pleased with that progress and investments so far this year.
A third area of investments for us would be around automation and investing in our own factories. This is <unk>.
Starting to see some early results with better productivity as well. So the pipeline is strong and the investments we're continuing to make sure we can accelerate and where we can and just gives us a lot of encouragement that is going to drive results in the future and Thats all baked into our guide Nigel and if you look at the midpoint of our EPS guide for the year.
We will be above 20% EPS growth.
For the third year in a row.
So I mean I'm Super proud of what the team has been able to accomplish there and its the flywheel of innovation it's the.
Flywheel around how we operate our business operating system.
Tell people, it's a system of things that makes trane technologies is a great company and hopefully investors see how we're executing to that system of things.
No question, so the 50 basis points.
Think you mentioned in <unk>.
License 80 basis points I, just wanted to see if maybe there was anything on timing as well.
My follow up question is maybe a bit off piece, but.
The most of your industrial peers have gone to a cash EPS.
I think youre carrying about $150 million of intangibles right now.
Think about 50 cents per share so it's a chunk of change for sure.
Have you considered maybe moving and moving to cash EPS, especially as you're doing these bolt ons, which tend to carry a lot more family of intangibles, but have you considered that moves in.
And if not.
Would you consider that if you were to do more deals.
Hey, Nigel appreciate the suggestion, we'll look into it.
We like the <unk>.
Simple methodology of looking at just net earnings and how much free cash flow are we driving off of that.
When I think about our conversion the last three years, the average free cash flow conversion and in earnings for Us is 110%.
And we're targeting this year equal to or greater than 100% on conversion. So we do look at that metric when it comes to return on invested capital look at cash flow return on invested capital is another metric.
It takes out the noise a bit of some of the accounting conventions that we have.
I have to manage through and ultimately on a tangible basis, let's look at the cash returns of those investments and we will start that with an acquisition really year, one year two year, three and evaluate its accretive newness over a period of time.
So we like the ability to buy in a by the third year of an acquisition have accretive EPS growth drive accretive cash flow return on invested capital and I would say, while very modest this year, even the acquisitions. We just made this year, Rob a very modest impact on EPS already in year one so.
I think that's a bit of a metric, but I appreciate the insight will certainly give that some thought.
Fair enough cash is king.
Thanks Nigel.
Our next question comes from the line of Deane Dray with RBC capital markets. Your line is open.
Thank you and good morning, everyone.
Hey, Dan good morning.
Hey, can we put the spotlight on China for a moment here it was really a standout.
And whereas a lot of the other industrials have struggled.
In terms of Covid reopening and so forth how much of that was a catch up.
Just kind of give us a perspective on what the cadence of orders are and what youre expecting in the second half.
Yes.
We did have an easy comp in the second quarter.
In Asia Pacific, specifically in China, because of Covid Lockdowns think about.
I think it was like $60 million that pushed out of the pushed out of the second quarter into the back half of the year, but even with that we had very strong results in China.
If you look specifically in China, I mean, the verticals that are strong we're strong in so think of.
The high Tech vertical semiconductors data centers health care those are all with a direct sales force again were very strong in those verticals and the team. There has just executed a very high level, we were very strong team in Asia Pacific.
And we continue to.
Do very very well in that region of the world.
That's great and then just data centers come up multiple times AI has come up multiple times, we get that.
And in your answer to Chris' question about the implications of AI and the whole three X factor with the new chips.
The legacy.
Calling for data centers will still be in demand, but more investment is happening on the liquid cooling side.
Have you and maybe you teased us a bit let's say you've got some other projects that youre working on so maybe there is some liquid cooling opportunities there, but how do you see.
As the legacy air cooling.
Business.
How do you see the rise of liquid cooling is just a threat is this.
A business that you need to get into just share. Some of what you think the roadmap is great. Great question. Dan you, obviously do your homework in this space. We made we made an equity investment in a company called liquid stack at the end of the first quarter.
And they specialize in emerging cooling.
And think about emerging cooling as you're actually putting the rack into what they call a dielectric fluid and all that means is it doesn't conduct electricity.
These are very efficient systems. So we have our scientists working with liquid stacked scientist and we actually have some some data center customers that are involved in this as well as we really triage. This opportunity early days with this has a lot of promise.
And we're excited about it I think when you get into these high heat applications.
This is where our new technology will be developed and we're going to we're going to keep working it we're not there yet, but we think it has a lot of opportunities for the future.
Yes, we agree thank you.
Nice question.
Our next question comes from the line of Andrew <unk> with Bank of America. Your line is open.
Hey, guys good morning.
Hey, Andrew how are you doing.
Well.
Just a question trying to size and other opportunity obviously.
<unk> Mega projects Evs and semiconductors.
We're sizing it for a project as a percent of sales.
I've heard a number I think 100000 ton chiller per assignment plant.
This brought up.
The Samsung filing in Texas.
Is that sort of the right size of thinking per facility just.
Thank you.
I mean, it's a good question Andrew.
Short answer is it depends.
Hey.
You have some some fab plants that are extensions you have other fab plants that are new the EV battery plant can be really all over the all over the map as far as the size that they will be putting in so I hate to give out a number because averages will always.
I know you're trying to size the total opportunity I would just tell you it's large.
And its large on both the on the on the chilled water side as well as on the year handling side. So if you think about it as an applied system. This is a large opportunity it will be a tailwind for our business into the future.
And just maybe shifting a little bit to light commercial can we just talk about what has been driving the strength.
In light commercial and anything that sort of concerns you about maybe channel inventory life commercial adjust.
Comps getting tough or.
Frankly, you talked about not seeing any impact from <unk> to 'twenty four event, just trumps everything and we should just take a longer term view, but just more color on light commercial unitary.
I don't think Theres anything I would call out I think there was an efficiency change you knew about that so certainly there could be some pent up demand I'm not sure. It's not a product that we have a lot of inventory on some of it goes through our <unk> on the very light side, but not.
Not where.
That's not where the.
When we talk about our residential business, we talked about normalizing, that's not where the normalization has to occur. So it's been strong it's been strong for a while and obviously we have a very competitive portfolio there with some really neat innovations.
Think I told you when we were together.
We took the opportunity when we had the efficiency change to really refresh the portfolio now all of our light unitary product can be offered in what we call a dual fuel option. So think of it as a heat pump that can also operate with fossil fuel.
Based on what ambient temperatures are in a particular region at a particular time, so variable Asia customers. So.
We're super excited about the opportunities there.
Gotcha. Thank you thanks.
Thanks, Andrew.
There are no further questions I'd like to turn the call back to Zac Nagle for closing comments.
Okay.
Thank you and I'd like to thank everyone for joining today's call.
Thanks for your interest and time spent with Trane technologies will be at a variety of investor events in the fall and we hope to see many of you there.
Chat soon.
Yeah.
This concludes today's conference call you may now disconnect.
Yes.
[music].