Q3 2023 Trane Technologies PLC Earnings Call

Good morning, and welcome to the Trane Technologies Q3, 'twenty twenty-three earnings Conference call. My name is Cheryl 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.

I'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again Press Star one please limit yourself to one question and one follow up I will now turn the call over to Zac Nagle, Vice President of Investor Relations.

Thanks, operator.

Good morning, and thank you for joining us for Trane technologies third 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.

Were you 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 <unk> Executive Vice President and CFO.

With that I will turn the call over to Dave Dave.

Thanks, everyone for joining us on today's call I'd like to begin with a few comments on our purpose.

Boldly challenge, what's possible for a sustainable world.

Our purpose is at the heart of our strategy, which is aligned to powerful megatrends like energy efficiency <unk>.

Organization.

And digital transformation.

Coming off the hottest summer on record, we see policies aimed at decarbonising, the built environment continuing to expand.

We see growing sustainability commitments for our customers our suppliers and for our investors.

We see corporations, not only setting goals, but taking action.

We are their partner of choice.

And we have the technology to help bend the curve on climate change and that's exactly what we're doing we are scaling today's technology and relentlessly innovating for tomorrow to meet our customers' needs to dramatically reduce emissions.

This enables us to consistently outgrow our end markets and deliver differentiated financial results.

The end results is long term value creation for our customers.

Our shareholders, our employees and for the planet.

Moving to slide number four.

Cheryl: Good morning and welcome to the Train Technologies Q3 2023 earnings conference call. My name is Cheryl and I will be your operator for the call. The call will begin in a few minutes with the speaker remarks and the Q&A session.

Our global team performed extremely well in the third quarter setting us up for a strong 2023 and positioning us well for 2024.

We delivered strong organic growth of 9%.

Leveraged throughout the P&L, resulting in adjusted EPS growth of 23%.

Operator: At this time all participants are in a listen only mode. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again, press star one. Please limit yourself to one question and one follow up.

<unk> powerful free cash flow.

We continue to see very strong customer demand for our products and services with the enterprise bookings at an all time high of nearly $5 billion in the quarter.

Zach Nagle: I will now turn the call over to Zach Nagle, Vice President of Investor Relations. Thanks operator. Good morning and thank you for joining us for Train Technologies 3rd quarter 2023 earnings conference call. This calls being webcast on our website at TrainTechnologies.com, where you'll find the accompanying presentation. We are also recording and archiving this call on our website.

Bookings were exceptionally strong in our commercial HVAC businesses globally.

With organic bookings growth of low to mid teens in all segments.

Our Americas commercial HVAC business was once again, a standout with organic bookings up mid teens in the quarter and up approximately 65% on a three year stack.

Enterprise backlog ended the quarter at $6 9 billion.

Zach Nagle: Please go to slide to statements made 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 SDC fileings 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-gab measures which are explained in the financial tables attached to our news release.

With the composition shifting increasingly towards commercial HVAC I see.

Year to date backlog in commercial HVAC is up approximately $800 million.

Over the past three years, our commercial HVAC backlog has nearly tripled up approximately 170%.

As residential and thermo King have normalized the backlog burn in these businesses has been completely offset by growth in commercial HVAC IC backlog.

Dave Regnery: Joining me on today's call are Dave Regnery, Chair and CEO in Chris Cune, Executive Vice President in CFO. With that, I'll turn the call over to Dave. Dave? Thanks Zach and everyone for joining us on today's call. I'd like to begin with a few comments on our purpose to boldly challenge what's possible for a sustainable world. Our purpose is at the heart of our strategy, which is aligned to powerful mega trends like energy efficiency, decarbonization and digital transformation.

<unk>, a large percentage of long cycle applied systems.

We continue to drive strong demand and a healthy pipeline of projects and key growth verticals across our commercial HVAC businesses.

We're leveraging the power of our direct sales force, which brings specific expertise on how to customize solutions and leverage policy programs and incentives to optimize customers' paybacks total cost of ownership and performance.

Dave Regnery: Coming off the hottest summer on record, we see policies aimed at decarbonizing the built environment continuing to expand. We see growing sustainability commitments for our customers, our suppliers and for our investors. We see corporations not only setting goals, but taking action. We are their partner of choice. And we have the technology to help bend the curve on climate change, and that's exactly what we're doing. We are scaling today's technology and relentlessly innovating for tomorrow to meet our customers needs to dramatically reduce emissions. This enables us to consistently outgrow our end markets and deliver differentiated financial results. And the result is long term value creation for our customers, our shareholders, our employees, and for the planet.

Our leading innovation and unique direct go to market strategy enables us to quickly pivot and win in the highest growth verticals as markets evolve.

We have a resilient and diverse portfolio and our business operating system is designed to deliver consistent top quartile performance.

As our residential business has normalized and transport markets have softened. Our overall business has delivered strong results and is on track to deliver high single digit organic revenue growth and 20% plus adjusted EPS growth for the year.

Our third consecutive year of 20% or higher adjusted EPS growth.

We're on pace to deliver free cash flow equal to or greater than 100% of net earnings and continue to execute our balanced capital allocation strategy.

With high levels of business reinvestment, a strong and growing dividend strategic bolt on M&A and share repurchases.

Dave Regnery: Moving to slide number four, our global team performed extremely well in the third quarter, setting us up for a strong 2023 and positioning us well for 2024. We delivered strong organic growth of 9% and leveraged throughout the P&L, resulting in adjusted EPS growth of 23% and powerful free cash. Fuller. We continue to see very strong customer demand for our products and services, with the enterprise bookings at an all-time high of nearly $5 billion in the quarter.

Our strong execution robust bookings and revenue growth and exceptional backlog gives us confidence in raising our 2023 guidance and confidence in our ability to deliver strong performance in 2024 as well.

Yeah.

Please go to slide number five.

Demand for our innovative products and services continues to be broad based across our segments highlighting the strength of our global portfolio organic bookings were up 8% led by our commercial HVAC businesses.

Dave Regnery: Bookings were exceptionally strong in our commercial HVAC businesses globally, with organic bookings growth of low-to-mid teens in all segments. Our America's commercial HVAC business was once again a stand-up, with organic bookings of mid teens in the quarter, and up approximately 65% on a three-year stack. Enterprise backlog ended the quarter at 6.9 billion, with the composition shifting increasingly towards commercial HVAC. Year-to-date backlog in commercial HVAC is up approximately $800 million. Over the past three years, our commercial HVAC backlog has nearly tripled up approximately 170%.

In the Americas commercial HVAC was very strong across the board, we discuss booking strength on the prior slide but revenues were exceptional as well up into low 20% range.

With equipment up approximately 30% and services up low teens.

Our residential business continues to normalize as expected with revenues up low single digits.

Consistent with our prior comments the nature of our transport refrigeration business is lumpy and our performance in Q3 was in line with our expectations on both bookings and revenues.

Revenues were a bit lower than our guidance of down 10% driven by the timing of customer deliveries between Q2 and Q3.

But remained strong against a tough 60% prior year growth comp.

Dave Regnery: As residential and thermal king have normalized, the backlog burn in these businesses has been completely offset by growth in commercial HVAC backlog, including a large percentage of long-cycle applied systems. We continue to drive strong demand and a healthy pipeline of projects in key growth verticals across our commercial HVAC businesses, where leveraging the power of our direct sales force, which brings specific expertise on how to customize solutions and leverage policy programs and incentives to optimize customers' paybacks, total cost of ownership and performance.

On a two year stack revenues were up more than 40% in the quarter.

America's backlog is approximately three times historical norms with the largest component being commercial HVAC applied systems for 2024 and beyond.

<unk> systems are the most complex and innovative systems and the largest driver of our service business in commercial HVAC I see.

Our EMEA business was right on track with our expectations.

Kings were strong in both businesses, both up low teens commercial HVAC revenues were robust with mid single digit growth on tough prior year comps.

Dave Regnery: Our leading innovation and unique direct go-to-market strategy enables us to quickly pivot and win in the highest growth verticals as markets evolve. We have a resilient and diverse portfolio and our business operating system is designed to deliver consistent top court health performance. As our residential business has normalized and transport markets have softened, our overall business has delivered strong results and is on track to deliver high single digit organic revenue growth and 20% plus adjusted EPS growth for the year.

Teekay EMEA revenues were up versus a down market.

Backlog remains strong approximately 60% higher than historical norms and predominantly commercial HVAC I see okay.

Our Asia Pacific business performed well with strong bookings growth in China, and the rest of Asia.

Asia revenues were slightly lower against a tough prior year comp of nearly 30% growth.

Our outlook for the region continues to be positive.

Verticals, we play in remains strong with good opportunities for future growth.

Asia segment backlog continues to be robust as we approach 2024, approximately 70% above historical norms and predominantly commercial HVAC I see now I'd like to turn the call over to Chris Chris.

Dave Regnery: Our third consecutive year of 20% or higher adjusted EPS growth. We're on pace to deliver free cash flow equal to our greater than 100% of net earnings and continue to execute our balanced capital allocation strategy with high levels of business reinvestment, a strong and growing dividend, strategic bulk on M&A and share repurchases. Our strong execution, robust bookings and revenue growth and exceptional backlog gives us confidence in raising our 2023 guidance and confidence in our ability to deliver strong performance in 2024 as well.

Thanks, Dave Please turn to slide number six.

The scoreboard for the quarter highlight strong execution top to bottom.

Organic revenues were up 9% adjusted operating and EBITDA margins were up 130 basis points, and 100 basis points, respectively, and adjusted EPS was up 23%.

And the enterprise level, we delivered strong organic revenue growth in both equipment and services up high single digits and low teens, respectively.

We continue to highlight our exceptional services growth because our services business continues to differentiate us in our industry. It.

Dave Regnery: Please go to slide number five. The band for innovative products and services continues to be broad based across our segments highlighting the strength of our global portfolio. Organic bookings were up 8% led by our commercial HBAC business, and Mrs. In the Americas, commercial HVAC was very strong across the board. We discussed booking strength on the prior slide, but revenues were exceptional as well, up into low 20s percent range, with equipment up approximately 30% and services up low teens.

It makes trane technologies more resilient with higher recurring revenues at higher margins overtime and represents about one third of our enterprise revenues.

Over the past six years, including 2020, our services business delivered a revenue growth CAGR of up high single digits and were driving even stronger growth in 2023.

Our high performance flywheel continues to deliver results with relentless investment in innovation driving strong top line growth margin expansion and EPS growth.

Dave Regnery: Our residential business continues to normalize as expected with revenues up low single digit. Consistent with our prior comments, the nature of our transport refrigeration business is lumpy and our performance in Q3 was in line with our expectations on both bookings and revenues. Revenues were a bit lower than our guidance of down 10%. Driven by the timing of customer deliveries between Q2 and Q3, but remained strong against a tough 60% prior year growth outcome.

Please turn to slide number seven.

As an enterprise, we delivered about five points of volume and about four points of price in the quarter.

Strong volume growth positive price realization and productivity combined to more than offset inflation in the quarter.

The supply chain continues to stabilize enabling improving productivity as we move throughout the year.

In the Americas segment, we delivered about seven points of volume and four points of price that accompanied strong leverage and margin expansion led by our commercial HVAC business more than offsetting volume declines in transport.

Dave Regnery: On a two year stack, revenues were up more than 40% in the quarter. America's backlog is approximately three times historical norms, with the largest component being commercial HVAC applied systems for 2024 and beyond. Applied systems are the most complex and innovative systems, and the largest driver of our service business in commercial HVAC. Our amea business was right on track with our expectations. Bookings were strong in both businesses, both up low teens.

The EMEA segment delivered very strong organic incrementals and margin expansion with organic revenues up low single digits in the quarter.

The segment also delivered approximately 12 points of M&A growth in the quarter, which impacted reported leverage given year one integration costs.

The Asia segment delivered strong margin expansion and organic leverage in the quarter and slightly down revenues.

For the enterprise, we earmarked an additional 30 plus basis points for incremental business reinvestment in 2023 to accelerate the timing of key projects across the enterprise.

Dave Regnery: Commercial HVAC revenues were robust with mid single digit growth on tough prior year comps. TK amea revenues were up versus a down market. Backlog remains strong, approximately 60% higher than historical norms, and predominantly commercial HVAC. Our Asia Pacific business performed well with strong bookings growth in China and the rest of Asia. Asia revenues were slightly lower against a tough prior year comp of nearly 30% growth. Our outlook for the region continues to be positive. The verticals we play and remain strong with good opportunities for future growth. Asia's segment backlog continues to be robust as we approach 2024, approximately 70% above historical norms, and predominantly commercial HVAC.

This is nearly double as our average run rate of approximately 40 basis points annually for a total of 70 plus basis points in 2023.

We're extremely pleased we've been able to make these incremental investments in 2023, while driving strong leverage.

We see a tight linkage between investments in innovation and market outgrowth, and we're taking opportunities to go further and faster in 2023.

Now I'd like to turn the call back over to Dave Dave.

Thanks, Chris Please turn to slide number eight.

Overall, our positive outlook for our segments and our end markets is largely unchanged from the prior quarter and as we move into the fourth quarter with continued high levels of absolute demand exceptional backlog and strong execution, we're gaining additional visibility into healthy growth in 2024.

Chris Cune: Now, I'd like to turn the call over to Chris. Chris? Thanks, Dave. Please turn to slide number six. The scoreboard for the quarter highlights strong execution top to bottom. Organic revenues were up 9%, adjusted operating in EBITDA margins were up 130 basis points, and 100 basis points respectively, and adjusted EPS was up 23%. At an enterprise level, we delivered strong organic revenue growth in both equipment and services up high single digits and low teens respectively.

Across the enterprise there are some key themes.

Strong demand for our sustainability focus solutions remains high while we expect the law of large numbers to kick in at some point and for order growth to decline absolute bookings are expected to remain robust given our new baseline is at a very high level.

Chris Cune: We continue to highlight our exceptional services growth because our services business continues to differentiate us in our industry. It makes train technologies more resilient with higher recurring revenues at higher margins over time and represents about one third of our enterprise revenues. Over the past six years, including 2020, our services business delivered a revenue growth cager of up high single digits, and we're driving even stronger growth in 2020.

Across our businesses, we see the stacking effect of supportive policy and regulatory changes that play to our unique strengths as a leading climate innovator.

In addition to all the tailwind at a national level in both the U S and Europe, we see activity at the state and municipal levels and our direct sales force is able to help customers leverage these programs.

In Americas commercial HVAC, our business is extremely strong as we've outlined we are winning with customers and developing innovative solutions and data centers education and high Tech just to name a few strong verticals.

Chris Cune: III. Our high-performance flywheel continues to deliver results, with relentless investment in innovation, driving strong top-line growth, margin expansion and EPS growth.

And we're driving tremendous growth in our applied business, which makes up the majority of our backlog.

Chris Cune: Please turn to slide number seven. At the dinner prize, we delivered about five points of volume and about four points of price in the quarter. Strong volume growth, positive price realization and productivity combined to more than offset inflation in the quarter. The supply chain continues to stabilize, enabling improving productivity as we move throughout the year. In the America segment, we delivered about seven points of volume and four points of price. With a company strong leverage and margin expansion led by our commercial HVAC business, more than offsetting volume declines in transport.

Applied business is the most differentiated and complex and that's where our competitive advantage is shine it's.

It's long cycle with higher margin service opportunities, representing a multiple of initial purchase price over the life of the system.

Additionally, this business helps to forge long term relationships with customers as they move from project to project over a multiyear period.

We have the most comprehensive portfolio of products in the industry, which enables us to compete and win across all verticals.

Chris Cune: The AMEA segment delivered very strong organic incrementals and margin expansion, with organic revenue used up low single digits in the quarter. The segment also delivered approximately 12 points of M&A growth in the quarter, which impacted reported leverage given year one integration costs. The Asia segment delivered strong margin expansion and organic leverage in the quarter on slightly down revenues. For the enterprise, we earmarked an additional 30 plus basis points for incremental business reinvestment in 2023 to accelerate the timing of key projects across the enterprise.

Diving, leading long term sustainable growth.

There's no change to our residential business outlook, we expect residential to continue to normalize through the fourth quarter and for the normalization process to be largely complete in 2023.

Also as expected strength in commercial HVAC is more than offsetting the decline in residential in 2023.

Our transport refrigeration business was largely in line with our expectations in the third quarter and up more than 40% on a two year stack.

Chris Cune: Businessly doubles our average run rate of approximately 40 basis points annually, for a total of 70 plus basis points in 2023. We're extremely pleased we've been able to make these incremental investments in 2023 while driving strong leverage. We see a tight linkage between investments in innovation and market outgrowth, and we're taking opportunities to go further and faster in 2023.

We expect to outperform the market for the year.

Act is projecting a dip in 2024 and a bounce back in 2025 and continued growth. Afterwards, however acts forecast has been volatile in recent months and we are in the process of validating assumptions versus our internal forecast and other sources, we will update the market when we hold our <unk>.

Year end earnings call.

Dave Regnery: Now I'd like to turn the call back over to Dave. Dave. Thanks, Chris. Please turn to slide number eight. Overall, our positive outlook for our segments and our end markets is largely unchanged from the prior quarter. And as we move into the fourth quarter, with continuing high levels of absolute demand, exceptional backlog and strong execution, we're gaining additional visibility into healthy growth in 2024. Across the enterprise, there are some key themes.

In our EMEA segment. The third quarter was also in line with our expectations for both businesses as.

As we highlighted on our second quarter call EMEA HVA C has very tough comps in both the third and fourth quarters up high <unk> and low 40%, respectively and revenue growth is expected to be more moderate in the second half.

The two year stack for Q3 is up more than 30%.

Our transport refrigeration outlook is unchanged.

Dave Regnery: Strong demand for our sustainability focus solutions remains high. While we expect the law of large numbers to kick in at some point, and for ordered growth to decline, absolute bookings are expected to remain robust, given our new baseline is at a very high level. Across our businesses, we see the stacking effect of support of policy and regulatory changes that play to our unique strengths as a leading climate innovator. In addition to all the tailwinds at a national level in both the US and Europe, we see activity at the state and municipal levels, and our direct sales force is able to help customers leverage these programs.

Likewise, our Asia Pacific segment, our outlook for the full year is unchanged revenue in the second half is expected to be flattish purely related to tough prior year comps.

Bookings continued to be strong now I'd like to turn the call back over to Chris Chris. Thanks, Dave Please turn to slide number nine.

Strong execution record bookings and near record backlog puts us in an excellent position as we move into the fourth quarter.

Dave Regnery: In America's commercial HVAC, our business is extremely strong as we've outlined. We're winning with customers and developing innovative solutions in data centers, education, and high tech, just to name a few strong verticals. And we're driving tremendous growth in our applied business, which makes up the majority of our backs. Club. Applied business is the most differentiated and complex, and it's where our competitive advantages shine. It's long cycle with higher margin service opportunities, representing a multiple of initial purchase price over the life of the system.

We're raising our full year revenue and EPS guidance for 2023.

Organic revenue growth is expected to be between eight 9% up from our prior guidance of up approximately 8%, reflecting strong Q3 performance and are largely unchanged outlook for a robust Q4.

We are raising our adjusted EPS guidance to approximately $9 up from a range of $8 $88 90.

Mainly reflecting a flow through of our third quarter outperformance versus our guidance and continued strong leverage of 30% plus for the fourth quarter.

We're pleased with our free cash flow performance of approximately $1 $3 billion year to date.

And on the full year, we continue to expect to deliver powerful free cash flow of equal to or greater than adjusted net earnings were approximately $2 billion.

Dave Regnery: Additionally, this business helps to forge long term relationships with customers as they move from project to project over a multi year period. We have the most comprehensive portfolio products in the industry. It enables us to compete and win across all verticals, driving leading long term sustainable growth. There's no change to our residential business outlet. We expect residential to continue to normalize through the fourth quarter and for the normalization process to be largely complete in 2023.

As we've highlighted before we pay close attention to our investment peer group and consistently target top quartile financial performance, including adjusted EPS growth and adjusted free cash flow conversion.

We believe our guidance places us in a strong position to deliver against that target in 2023.

As we said in our last earnings call. We expected increased M&A contribution in the second half versus the first half due to the timing of acquisitions we.

We had approximately three points of M&A in the third quarter and expect to have approximately two points of M&A in the fourth quarter as one acquisition passes the one year Mark and is included in our base.

Dave Regnery: Also, as expected, strength and commercial HVAC is more than offsetting the decline in residential in 2023. Our transport refrigeration business was largely in line with our expectations in the third quarter and up more than 40% on a two year stack. We expect to outperform the market for the year. Act is projecting a dip in 2024 and a bounce back in 2025 and continued growth afterwards. However, acts forecast has been volatile in recent months. We are in the process of validating assumptions versus our internal forecast and other sources.

There is no change to our full year guidance of approximately two points from M&A.

Please see slide 19 of the presentation for additional details related to guidance to assist with your models.

Please go to slide number 10, we.

We remain on track to deliver $300 million of run rate savings from business transformation by 2023, including $60 million, which will be realized in 2023.

We continue to invest in these cost savings in high ROI projects to further fuel innovation and other investments across the portfolio.

Chris Cune: We'll update the market when we hold our year end earnings call. In our AMIA segment, the third quarter was also in line with our expectations for both businesses. As we highlighted our second quarter call, AMIA HVAC has very tough comps in both the third and fourth quarters, up high 20s and low 40s respectively. And revenue growth is expected to be more moderate in the second half. The two year stack for Q3 is up more than 30%. Our transport refrigeration outlook is unchanged. Likewise, our Asia Pacific segment, our outlook for the full year is unchanged. Revenue in the second half is expected to be flatish, purely related to tough prior year comps.

Our continuous improvement mindset is an integral part of our business operating system and its designed to drive gross productivity each year to offset other inflation.

Well, it's been extremely difficult to realize meaningful levels of productivity in recent years, given the supply chain and other macro challenges productivity is improving our supply chain challenges abate and is contributing to our 30% plus organic leverage target in 2023.

Please go to slide number 11.

Remain committed to a balanced capital allocation strategy focused on consistently deploying excess cash to opportunities with the highest returns for shareholders.

First we continue to strengthen our core business through relentless business reinvestment.

Second we're committed to maintaining a strong balance sheet that provides us with continued optionality as our markets evolve.

Chris Cune: While bookings continue to be strong, now I'd like to turn the call back over to Chris. Chris, thanks Dave.

Chris Cune: Please turn to slide number nine. Strong execution record bookings and near record backlog puts us in an excellent position as we move into the fourth quarter. We're raising our full year revenue in EPS guidance for 2023. Organic revenue growth is expected to be between 89% up from our prior guidance of up approximately 8%. Reflecting strong Q3 performance and a largely unchanged outlook for robust Q4. For raising our adjusted EPS guidance to approximately $9.

In 2023, we received upgrades to our credit ratings, which are now <unk>, one triple B plus reflective of our strong balance sheet and cash flow generation.

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 12, and I'll provide an update on our capital deployment for 2023.

Chris Cune: Up from a range of $8.80, $8.90, mainly reflecting a flow through of our third quarter out performance versus our guidance and continued strong leverage of 30% plus for the fourth quarter. We're pleased with our pre cash flow performance of approximately $1.3 billion year to date. And on the full year, we continue to expect to deliver powerful pre cash flow of equal to or greater than adjusted net earnings or approximately $2 billion, as we've highlighted before, we pay close attention to our investment peer group and consistently target top court off financial performance, including adjusted EPS growth and adjusted free cash flow conversion. We believe our guidance places us in a strong position to deliver against that target in 2023.

Year to date as of the end of October we've deployed $1 6 billion in cash with $513 million of dividends $535 million of M&A and $550 million of share repurchases we.

We have significant dry powder with over $2 $6 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 or committed approximately $900 million year to date as of the end of October to bolt on leading technology acquisitions and equity investments.

Our latest acquisition <unk> was announced in early October.

<unk> will augment our energy services enterprise management, and digital capabilities and commercial HVAC.

Chris Cune: As we said in our last earnings call, we expect an increased M&A contribution in the second half versus the first half through the timing of acquisitions. We get approximately three points of M&A in the third quarter and expect to have approximately two points of M&A in the fourth quarter, as one acquisition passes the one year mark is included in our base. There is no change to our full year guidance of approximately two points from M&A.

We expect them to bogo transaction to close in the fourth quarter.

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 turn to slide number 14.

Transport refrigeration market forecast for both North America, and EMEA remained unchanged and we expect to outperform each market in 2023.

Chris Cune: Please see slide 19 of the presentation for additional details related to guidance to assist with your models.

Chris Cune: Please go to slide number 10. We remain on track to deliver $3 million of run rate savings from business transformation by 2023, including $60 million which will be realized in 2023. We continue to invest in these cost savings and high ROI projects to further fuel innovation and other investments across the portfolio. Our continuous improvement mindset is an integral part of our business operating system and it's designed to drive gross productivity each year to offset other inflation.

Our performance through the third quarter is on track to meet these expectations.

The slide shows key data points on the markets and on Thermo King specifically to provide additional transparency and reference information.

Please go to slide number 15.

As discussed <unk> projections for 2024 have been volatile and we are focused on conducting a thorough analysis of the markets.

Chris Cune: While it's been extremely difficult to realize meaningful levels of productivity in recent years, given the supply chain and other macro challenges, productivity is improving a supply chain challenge as a bait and is contributing to our 30% plus organic leverage target in 2023.

In the interim we've included <unk>. Most recent forecast for 2023 through 2028 for your reference.

Please go to slide number 16, we expect to provide 2020 for guidance on our fourth quarter earnings call. However, given increasing visibility. We believe it may be constructive to discuss key dynamics at play that give us confidence, we'll see healthy growth in 2024.

Chris Cune: Please go to slide number 11. We remain committed to our balanced capital allocation strategy focused on consistently deploying excess cash to opportunities with the highest returns for shareholders. First, we continue to strengthen our core business through relentless business reinvestment. Second, we're committed in maintaining a strong balance sheet that provides us with continued optionality as our markets evolve. In 2023, we received upgrades to our credit ratings which are now BWA1, triple B plus, reflective of our strong balance sheet and cash flow generation. 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 are calculated intrinsic value.

Our commercial HVAC businesses, which make up roughly 65% of our total revenues are executing well and healthy markets and the agility of our sales teams to quickly pivot focus to growing vertical markets is driving record bookings and backlog.

Our applied backlog is a standout and provides a long higher margin service tail that makes our business stronger and more resilient.

Secular mega trends continue to support growth and policy and regulatory stacking is amplifying these tailwind.

With the majority of these programs still ahead of us.

We expect to enter 2024 with our residential business largely through the normalization process and on path to our long term target of GDP plus growth.

Chris Cune: Please turn to slide number 12 and I'll provide an update on our capital deployment for 2023. You to date, as of the end of October, we've deployed $1.6 billion in cash with 513 million to dividends, 535 million to M&A, and 550 million to share repurchases. We have significant drive powder with over $2.6 billion remaining under the current share repurchase authorization and our shares remain attractive. Training below are calculated intrinsic value. Our M&A pipeline remains active and we have deployed or committed approximately $900 million a year to date as of the end of October to bolt on leading technology acquisitions and equity investments.

We continue to lead with innovation, which yields healthy pricing opportunities and our business operating system is primed to stay ahead of inflationary pressures.

The supply chain is vastly improved and pockets of remaining challenges continue to abate.

Our culture is lean based and we're excited about the productivity, we can unlock as we move into 2024.

We've also been heavily investing in productivity enhancing projects such as factory automation, which we expect to unlock further value.

Chris Cune: Our latest acquisition, Navolo, was announced in early October. Oliver. Nivolo will augment our energy services, enterprise management and digital capabilities and commercial HVAC. We expect a Nivolo transaction to close on the fourth quarter.

Act is forecasting a dip in North America trailer production in 2020 for a snapback in 2025 and growth thereafter.

While we are in the process of further assessing their forecast our North America transport refrigeration business is approximately 10% of our total revenues.

Chris Cune: All then, 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.

We expect to execute well.

Manage the business tightly output.

Outperform the end markets and if necessary manage deleverage within gross margin rates.

Dave Regnery: Now I'd like to turn the call back over to Dave. Dave, thanks Chris, please turn to slide number 14. Transport refrigeration market forecast for both North America and Amia remain unchanged. And we expect to outperform each market in 2023. Our performance through the third quarter is on track to meet these expectations. The slide shows key data points on the markets and on thermal king specifically to provide additional transparency and reference information.

Lastly, while we don't talk about our service business a lot we're quietly putting up double digit growth in 2023 on top of a six year compound annual growth rate of high single digit growth.

Our service business is strong resilient and poised for growth and we continue to build out our energy services and digital capabilities and offerings, which represents a big current and even larger future opportunity.

Dave Regnery: Let's go to slide number 15. As discussed, acts projections for 2024 have been volatile and we are focused on conducting a thorough analysis of the markets. In the interim, we've included acts most recent forecast for 2023 through 2028 for your reference. Please go to slide number 16. We expect to provide 2024 guidance on our fourth quarter earnings call. However, given increasing visibility, we believe it may be constructive to discuss key dynamics at play that give us confidence will see healthy growth in 2024.

Please go to slide number 17.

In summary, we are well positioned to drive significant value over time, we are proud to have been named one of Fortune's best workplaces for women and one of the world's best companies by time magazine.

Our culture and people fuel, our innovation and helped us to fulfill our purpose every day.

This steadfast focus on purpose, our leading innovation our proven business operating system enables us to execute our strategy and stay nimble across our resilient portfolio.

This in turn enables us to consistently deliver a leading revenue and earnings growth profile and powerful free cash flow.

Dave Regnery: Our commercial HVAC businesses which make up roughly 65% of our total revenues are executing well in healthy markets and the agility of our sales teams to quickly pivot focus to growing vertical markets is driving record bookings and backlog. Our applied backlog is a standout and provides a long higher margin service tail that makes our business stronger and more resilient. Secular mega trends continue to support growth and policy and regulatory stacking is amplifying these tailwinds with the majority of these programs still ahead of us.

With our strong performance elevated backlog and continued high levels of customer demand. We are confident in once again, raising our full year revenue and EPS guidance and reaffirming our free cash flow conversion target.

We have the team the strategy and it has a track record 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.

Dave Regnery: We expect to enter 2024 with our residential business largely through the normalization process and on path to our long-term target of GDP plus growth. We continue to lead with innovation which yields healthy pricing opportunities and our business operating system is primed to stay ahead of inflationary pressures. The supply chain is vastly improved and pockets of remaining challenges continue to evade. Our culture is lean based and we're excited about the productivity we can unlock as we move into 2024.

Thank you to ask a question. Please press star one please limit yourself to one question and one follow up.

First question is from Scott Davis Melius Research. Please go ahead your line is open.

Hey, good morning, Dave and Chris <unk>.

Scott.

I'm kind of getting sick of congratulating you on good quarters, but this is not one of the better ones.

Please keep it up.

Yeah.

Lehigh proud Dave all good.

Got it guys when you when you think about.

The backlog that you have in the demand environment in commercial is this the type of environment, where you can really.

Dave Regnery: We've also been heavily investing in productivity enhancing projects such as factory automation which we expect to unlock further value. Act is forecasting a dip in North America trailer production in 2024. We'll snap back in 2025 and growth thereafter. While we're in the process of further assessing their forecast, our North America Transport Refrigeration Business is approximately 10% of our total revenue. News. We expect to execute well, manage the business tightly, outperform the end markets, and if necessary, manage delivery to the gross margin rates.

Be selective on projects and kind of Cherry pick the stuff that as really the margin price margin structure that you won or are you still or is that not kind of how it works and you are just out there bidding on.

A wider array of stuff, but just bidding at a higher price. So just trying to get a sense of that interplay between project selectivity and and really just.

The supply demand imbalance that's out there right now.

Yeah, Scott. It's a good question, we have a strong core business right now and we spend a lot on innovation.

Dave Regnery: Lastly, while we don't talk about our service business a lot, we're quietly putting up double digit growth in 2023, on top of a six year compound annual growth rate of high single digit growth. Our service business is strong, resilient, and poised for growth. And we continue to build out our energy services and digital capabilities and offerings, which represents a big current and even larger future opportunity. Let's go slide number 17. In summary, we are well positioned to drive significant value over time.

We price our innovation to ensure that we get proper returns.

I would say, it's leading more with innovation and we're constantly looking for how we can improve our portfolio. How we can improve the efficiency of our products. How our products can use next generation low GWB refrigerants thats all inclusive in our business operating system when it comes to innovation and that's what's really leading our.

Our markets right now and I would also tell you that.

Having this and I know I've told you this before but this direct sales force and being able to educate them on new innovations real time, and having them take those messages to the influencers on jobs is very very important when you go to close, especially some of these large applied jobs.

Dave Regnery: We are proud to have been named one of Fortune's best workplaces for women and one of the world's best companies by Time Magazine. Our culture and people fuel our innovation and help us to fulfill our purpose every day. This steadfast focus on purpose, our leading innovation, our proven business operating system, enables us to execute our strategy and stay nimble across our resilient portfolio. This in turn enables us to consistently deliver a leading revenue and earnings growth profile and powerful free cash flow.

Yes.

Helpful color I have to ask this question.

You have a competitor who had a ransomware issue in the quarter did that help you guys as it related to.

Bidding on things and such or is that a non event.

It was not it was a non event. So I hope everything is okay, there, but it was a non event.

Okay I'll pass it on thank you again.

Okay. Thanks, Scott.

Dave Regnery: With our strong performance, elevated backlog and continued high levels of customer demand, we are confident and once again raising our full year revenue and EPS guidance and reaffirming our free cash flow conversion target. We have the team, the strategy and the track record to deliver strong performance in 2023 and differentiate it's shareholder returns over the long term.

Your next question is from Julian Mitchell of Barclays Capital. Please go ahead. Your line is open.

Hi, good morning.

I think.

Dave you emphasized a couple of times the strength in applied.

Bookings and the difference versus like commercial because of the service element. So maybe just to follow up on that point would be around sort of what's the rough split today of say the revenues in your commercial HVAC business between applied and light commercial and just wanted to.

Operator: And now we'd be happy to take your questions.

Operator: Operator? Thank you. To ask a question, please press star one. Please limit yourself to one question and one follow-up.

When you're looking at the revenue outlook next 12 months.

Do you anticipate much of a difference in revenue trends of applied versus light commercial.

Scott Davis: Your first question is from Scott Davis of Mulea's research. Please go ahead. Your line is open. Hey, good morning, Dave and Chris and Zach. I'm kind of getting sick at congratulating you on good quarters, but this is one of the better ones. Please keep it up. You're making Lehigh proud, Dave. All good.

Maybe because of stimulus impact so the scale of the respective backlogs.

Any sort of perspective around that please.

Yeah, Julian we don't we don't look at just like we look at unitary in total so it would be light and large and historically, it's been about 50 50 in our equipment business.

Dave Regnery: When you think about the backlog that you have in the demand environment and commercial, is this the type of environment where you can really be selective on projects and kind of cherry pick the stuff that has really the margin, price margin structure that you want or are you still or is that not kind of how it works and you're just out there bidding on a wide array of stuff but just bidding at a higher price. They're just trying to get a sense of that interplay between project selectivity and really just supply demand imbalance.

But obviously in the third quarter, we had very very strong demand in our applied business. So think of data centers High Tech education were very strong we had solid performance in other verticals to like health care life Science government industrial.

And then there was some weaker verticals as well think of traditional office.

Warehousing and retail and those those weaker verticals, where you tend to see more unitary and applied systems.

Dave Regnery: It's out there right now. Yeah, Scott, it's a good question. We have strong core business right now and we spend a lot on innovation and we price our innovation to ensure that we get proper return. Williams. So, I would say it's leading more with innovation and we're constantly looking for how we can improve our portfolio, how we can improve the efficiency of our products, how our products can use next generation, low GWP, refrigerant.

That's very helpful.

Thank you and then just my follow up.

Hey, Dan it's more of a.

Sort of silly short term, one, but only one quarter left in the year.

Your sales guide I think Youll Q4 sort of construct on guidance is the same as it was back in July and you just kind of flowed through the Q3 beat to your full year guide, but if I wanted to look at the Q4.

Dave Regnery: That's all inclusive in our business operating system when it comes to innovation. And that's what's really leading our markets right now. And I would also tell you that, you know, having this, and I know I've told you this before, but this direct sales force and being able to educate them on new innovations, real time, and having them take those messages to the influencers on jobs is very, very important when you go to close, especially some of these large applied jobs. Yeah, that's helpful color.

That's worth.

The revenue guide implies Neely, I think sort of eight 9% sequential sales decline from Q3, which seems a bit heavier than normal.

Just kind of noise around backing out from the year or is there anything specific maybe in trans split or something like that that's weighing on Q4.

Hey, Julien, it's Chris I'll start off.

The Q4 implied guide is kind of around mid single digits organic revenue growth.

<unk>.

It is a little bit of a step down versus Q3, but if we put a few reasons behind it one is when I think about the toughest comp of the year. Our commercial HVAC businesses. This is really the toughest comp across the board going into the fourth quarter on a year over year basis.

Dave Regnery: I have to ask this question. And, you know, you have a competitor who had a ransomware issue in the quarter. Did that help you guys as it related to bidding on things and such, or was that a non-abent? It was not, it was a non-abent. So, hope everything's okay there, but it was a non-abent.

Second would be the contribution from price, we would expect to be a bit lower in the fourth quarter than the third quarter.

Scott Davis: Okay, I'll pass it on. Thank you again. Okay, thanks, Scott.

Commented price delivered around four points of growth in Q3, probably dial that into about two ish points of growth in Q4. So there was about two points right there sequentially and then.

Julian Mitchell: Your next question is from Julian Mitchell of Barclays Capital. Please go ahead. Your line is open. Hi, good morning. You know, I think Dave emphasized a couple of times the strength in applied bookings and the difference versus, you know, like commercial because of the service element. So, maybe just to follow up on that point would be around sort of what's the rough split today of say the revenues in your commercial age fact business between applied and like commercial.

Just to round out another response here really be around residential as it continues to normalize we.

We did a little better in the third quarter on revenues, our constructive view around residential for the full year Hasnt changed with revenues down about mid single digits. So we're very focused on making sure inventory in the channel is positioned well for the start of 2024. So we would expect that normalization to continue really.

Julian Mitchell: And just wondered, you know, when you're looking at the revenue outlook next 12 months, do you anticipate much of a difference in revenue trends of applied versus like commercial? Maybe because of stimulus impact for the scale of the respective backlogs, any sort of perspective around that, please. Yeah, Julian, we don't, we don't look at just like we look at units are in total, so it would be light and large and historically it's, it's been about 50 50 in our equipment business.

Into the fourth quarter, so hoping that gives you a little bit of a.

Some view here on how we think about Q3 to Q4, but let's not forget it maybe the first point the commercial HVAC on tough comps.

We had 40% growth in EMEA last year at 30% growth in Asia last year.

US comp of the quarter.

That makes sense. Thank you.

Welcome Thanks Julien.

Your next question is from Andy Kaplowitz of Citigroup. Please go ahead. Your line is open.

Good morning, everyone impressive quarter.

Julian Mitchell: But obviously in the third quarter, we have very, very strong demand in our applied business. So think of data centers, high tech, education, we're very strong. We had solid performance and other verticals to like health care, life science, government, industrial. And then there were some weaker verticals as well. Think of, you know, traditional office warehousing and retail and those, those weaker verticals where you tend to see more unitary than applied systems. That's very helpful.

Hey, Thanks, Andy Thank you.

Dave with the understanding that orders can be lumpy and it appears that you actually had a positive inflection in orders in Americas commercial HVAC in the quarter. Despite concerns of higher U S rates. So did you see larger mega projects start to hit a little more frequently in the quarter. I know you mentioned strength in data centers did you see like some of your bigger vertical is actually key.

Up a bit as the quarter went on and you would.

Would you say that that gives you more of a probability of ending backlog at the end of the year closer to $7 billion and $6 billion I know youre guiding.

Yeah I mean.

Still tracking a lot of quote Mega projects and we're defining a mega project again, a project where the total revenue.

Chris Cune: Thank you. And then just my follow up, you know, it's more of a sort of silly short term one, but you know, only one quarter left in the year. Your sales guide, you know, I think your Q4 sort of construct on guidance is the same as it was back in July. And you just kind of flowed through the Q3 beat to your full year guide, but if I wanted to look at the Q4 for what that's worth.

Total size of it is over $1 billion, we're still tracking a lot of those in our pipeline. So yes, we had a little bit of activity in the third quarter, but we just had some really nice growth and as I said earlier data centers education continues to be very strong and then we had like what I would call solid solid performance over.

Chris Cune: You know, the revenue guide implies that nearly a, I think sort of eight, nine percent sequential sales decline from Q3, which seems a bit heavier than normal. Is that just kind of noise around backing out from the year, or is there anything, you know, specific maybe in transport or something like that that's weighing on Q4? Mitchell. Usually it's Chris, I'll start off, you know, the Q4 implied guide is kind of around mid single digits organic revenue growth, and it is a little bit of a step down versus Q3, but if we put a few reasons behind it, one is, when I think about the toughest comp of the year, our commercial HVAC businesses, this is really the toughest comp across the board going into the fourth quarter in a year-to-year basis.

A lot of different verticals healthcare life Science government industrial those are all very solid performance in the quarter. So.

I think a lot of the Mega projects are yet to come which is which is still good news and I think I've told you on.

So our second quarter call our ability to track these projects and to triage them on a global basis, because some of these big Mega projects. You have decision makers that are in different parts of the world and you know you have.

You could have the owner in Korea, you can have the engineer in Seattle, Washington, and the project is in Texas, and we're able to triage that and work with the customer and show the value that we can provide so we're super excited about a lot of the mega projects.

Chris Cune: Second would be the contribution from price who would expect to be a bit lower in the fourth quarter than the third quarter. We commented price delivered around 4 points of growth in Q3. You probably dial that into about 2-ish points of growth in Q4, so there's about two points right there sequentially. And then maybe just around out another response here, really being around residential as it continues to normalize. We did a little better in the third quarter on revenues, our constructive view around residential for the full year hasn't changed, with revenues down around mid single digits.

That are still in the pipeline.

Thanks for that and then Chris could you give more color into the organic leverage you've been delivering organic leverage in the mid 30% range is obviously a good result for train we know youre guiding 13% from Q4, and 25% plus long term, but maybe you could talk about whether you have an extended period of productivity projects along with <unk> prices.

Of course that can help your margin performance well into 'twenty four Kevin I think it was more difficult to engage these projects during the pandemic.

Yeah, Andy It's a great question and I would say we go into every year looking at.

Chris Cune: So, you know, we're very focused on making sure inventory in the channel is positioned well for the start of 2024. So we would expect that normalization to continue really into the fourth quarter. So over that gives you a little bit of some view here on how we think about Q3 to Q4. But let's not forget maybe the first point, the commercial HVAC on tough comps. You know, we had 40% growth in a mea last year, 30% growth in Asia last year, real up-as-cop of the quarter. That makes sense. Thank you.

Incrementals in the 25% or better category right and we'll dial that in as we get a little closer to 2024, but we continue to see this dovetail of the contributions from growth price normalizing with the gross productivity getting better as we've worked through the quarter. This year the quarters this year.

The supply chain has continued to improve with that the volume growth has continued to grow each and every quarter. We delivered around five points of volume growth here in the third quarter and with that the inefficiencies as you said it was hard to get that productivity. The last couple of years.

Chris Cune: Welcome.

Chris Cune: Thanks, Joanne.

Andy Kaplowitz: Your next question is from Andy Kapilit of City Group. Please go ahead. Your line is open. Good morning, everyone. Impressive quarter. Thanks, Andy. Thank you. Dave, with the understanding that orders can be lumpy, it appears that you actually had a positive inflection in orders in America's commercial HVAC in the quarter despite concerns of higher US rates. So, did you see larger mega projects start to hit a little more frequently in the quarter?

The inefficiencies have gotten less so there is a lot of room to go here, we're starting to see some of the benefits of that in 2023, but this will be a continued opportunity for us as we go into 2024 really and beyond we're really getting back to the DNA of the company right the ability for us to.

To drive a lean culture and look at cost takeout.

Andy Kaplowitz: I know you mentioned, you know, strengthen data centers. Did you see like some of your bigger verticals actually keep up a bit? You know, as the quarter went on, and would you say that that gives you more of a probability of ending backlog at the end of this year, closer to $7 billion and $6 billion, as I know you're guiding. Yeah, I mean, we're still tracking a lot of, quote, mega projects.

And ultimately lead through with automation in our factories. These are all investments, we're making this year.

Able to pivot the workforce to focus on that versus the supply chain challenges over the last few years.

Yes, Andy I had I had the opportunity to visit several of our locations during the quarter.

Andy Kaplowitz: And we're defining a mega project. Again, a project where the total revenue bill, you know, total size of it is over a billion dollars. We're still tracking a lot of those in our pipeline. So yeah, we had a little bit of activity in the third quarter, but we just had some really nice growth. And as I said earlier, data centers, education, continues to be very strong. And then we had like what I would call solid, solid performance over a lot of different verticals.

Since a great feeling to field the flow that's happening in the operations today versus where we were a year ago, where we were looking at the yard full of product that had to go back on the line to be reworked. So that's all helping with the productivity. So we're really starting to hit our stride here in our operations, which is a great job by the team because they've had some.

Some tough times, they are working through the supply chain, but I'm glad to say that.

They are operating extremely well right now.

I appreciate all the color guys.

Andy Kaplowitz: Healthcare, life science, government, industrial, those are all very solid performance in the quarter. So I think a lot of the mega projects are yet to come, which is, which is still good news. And I think I've told you on our second quarter call, you know, our ability to track these projects and to triage them on a global basis, because some of these big mega projects, you have decision makers that are in different parts of the world.

Thanks, Andy.

Your next question is from Gautam column of TB Cowen. Please go ahead. Your line is open.

Hey, good morning, great quarter.

Thanks, Scott I appreciate it.

Just wanted to get your sense on you mentioned the transport refrigeration you opened the order books in October any early read on how demand looks.

And how far out youre booking.

Andy Kaplowitz: And you know, you have, you know, you could have the owner in Korea, you could have the engineer in Seattle, Washington, and the project is in Texas. And we're able to triage that and work with the customer and show the value that we can provide. So we're super excited about a lot of the mega projects that are still in the pipe. One. Thanks for that. And then Chris, could you give more color into the organic leverage you've been delivering the organic leverage in the mid 30% range is obviously a good result for Trane.

Into 2024 right now.

Yeah, I mean like I said, we did up in the order book in October.

As expected golf I mean, the thermo King business has performed very well for us over a number of years.

And with our current guide we're forecasting that we're going to outperform the markets again in 2023. So it's a great business. We have a lot of innovation that we're pumping through that business right. Now is we electrify our portfolio of products.

Andy Kaplowitz: We know you're gone at 30% for Q4 and 25% plus long term, but maybe you could talk about whether you have an extended period of productivity projects along with good price versus cost that could help your margin performance well in the 24. Given I think it was more difficult to engage these projects during the pandemic. Andy, it's a great question. And I would say we go into every year looking at incremental is in the 25% or better category, right?

Great team and.

I'm pretty excited about where we are with thermo King I know that.

Act is forecasting a bit of a dip in 2024.

Validating that theres, some some things that don't align up with our internal forecast, but we'll validate that in the short term and update everyone. As we report out our fourth quarter earnings.

Okay can you comment on how far out you guys are actually booking into 24 at this point.

Andy Kaplowitz: And we'll dial that in as we get a little closer to 2024, but you know, we continue to see this dovetail of the contributions from growth price normalizing with the gross productivity getting better as we work through the quarter this year, the quarters this year. The supply chain has continued to improve with that the volume growth has continued to grow each and every quarter we delivered around five points of volume growth here in the third quarter.

It's all it's always within within a 12 month period. So these orders don't get book way out but in fact in the prior years, we were only opening up the book for six month increments. So just because we want to make sure. We are placing right. When we were in a higher inflation market yes.

Yes, I think for Americas.

Through middle of 'twenty, four got them and I think for Europe. It may be open for a bit longer than that but.

To Dave's point the.

Andy Kaplowitz: And with that, the inefficiencies, as you said, it was hard to get that productivity last couple of years. The inefficiencies have gotten less. So there's a lot of room to go here. We're starting to see some of the benefits of that in 2023. But this will be a continued opportunity for us as we go into 2024 really and beyond. We're really getting back to the DNA of the company, right? The ability for us to drive the lean culture and look at cost takeout and ultimately lean through with automation and our factories, these are all investments we're making this year.

The order book would really only be for 2024 at this point.

Thanks, So just one quick follow up on <unk> any evidence of.

People deferring replacement and instead repairing units are you seeing any uptick in those products.

I was with the resi team recently, we're not saying that no. So I think the short answer is no we haven't seen that yet.

Thank you guys appreciate it.

Awesome. Thank you.

Your next question is from Chris Snyder of UBS. Please go ahead. Your line is open.

Andy Kaplowitz: And we're able to pivot the workforce to focus on that versus the supply chain challenges of the last few years. Yeah, Andy, I had the opportunity to visit several of our locations during the quarter and it was just such a great feeling to feel the flow that's happening in the operations today versus where we were a year ago, where we were looking at, you know, the yard full of product that had to go back on the line to be reworked.

Thank you I wanted to ask on commercial HVAC.

Orders this quarter.

Clearly bifurcated from.

From the broader industry.

And now the company has always prided itself on driving innovation. So I guess my question is the world moving to emissions targets and just higher electricity prices globally are you seeing customers more so appreciate the innovation and.

Andy Kaplowitz: So that's all helping with the productivity. So we're really starting to hit our stride here in our operations, which is a great job by the team because they've had some some tough times there working through the supply chain, but I'm glad to say that they're they're operating extremely well right now. Appreciate all the color guys. Thanks, Andy.

Efficiency that you are providing to them and do you think that could result in a higher rate of share gains moving forward. Thank you.

Alright, Chris Hope all is well with your great questions.

We always lead with innovation I think our customers always appreciate.

Dave Regnery: Your next question is from Gotham column of TD Cohen. Please go ahead. Your line is open.

Higher efficient products greener products using low GWB refrigerants, so we pride ourselves on that.

Gautam Khanna: Hey, good morning and great quarter. Thanks, Gotham, appreciate it. Just wanted to get your sense on you mentioned the transport refrigeration you open the order books in October, any early read on how demand looks and how far out you're you're booking into 2024 right now. Yeah, I mean, I guess that we did open the order book in October as expected, Gotham, I mean, you know, the thermal king business has performed very well for us over a number of years.

Look we.

We do a lot of innovation around verticals.

And I don't talk a lot about that for obvious reasons, but if you think of data centers, we have a very strong quarter in data centers a lot of that has to do with the innovation that we're providing working with the customer. So these are unique solutions for them and then they scale it through all the data centers that they're building so well.

Continue to do that in the future, we will continue to to to sell our energy efficiency to our customers and we will continue to make sure that we have.

Gautam Khanna: And, you know, with our current guide, we're forecasting that we're going to perform the markets again in 2023. So it's a great business where we have a lot of innovation that we're pumping through that business right now as we electrify our portfolio products. Great team and it's I'm pretty excited about where we are with thermal king.

Connected solutions, so that our service business can continue to expand in the future.

Thank you I appreciate that and then maybe following up I think you mentioned in the prepared remarks that or does it need to go down at some point.

Dave Regnery: I know that you know, act is forecasting a bit of a dip in 2024 validating that there's some some things that don't align up with our internal forecast, but we'll validate that in the short term and update everyone as we report out our fourth quarter.

The law of large numbers.

So I guess my question is would need a step change negative on the macro.

See that because it feels like the lead time compressing headwinds are kind of largely in the rearview at this point commercials healthy resume seems to be turning and you mentioned before the Mega projects really haven't ordered yet it's mostly still in the pipeline so what.

Do you need to see on a macro standpoint.

Material order declines off these levels. Thank you.

Yes, Chris it's Chris I'll start.

Operator: Thank you for joining us today.

This is why we want to make sure. It's important that investors look at growth rates as well as backlog position and just absolute bookings levels right.

I think the trends around de Carbonization and as you mentioned just before our customers putting out emissions targets. We see these as long term tailwind.

Chris Cune: Thank you for joining us today, David Regnery, for joining us today, David Regnery, for joining us today. [inaudible] Chris Alstart, this is why we want to make sure it's important that investors look at growth rates, as well as backlog position and just absolute bookings levels. I think the trends around decarbonization, and as you mentioned just before, customers putting out emissions targets, we see these as long-term tailwinds. Growth around data centers appears to be a multi-year tailwind, as we think about the need for for data and for saving data and to process data, so we see this as some longer-term tailwinds.

Of growth around data centers appears to be a multiyear tailwind as we think about the need for.

For data and for saving data and to process data. So we.

We see this as some longer term tailwind the when we think about the beginning of the year we guided.

Ending backlog down to around $6 billion and that would have implied bookings down around 5% 6%.

But even on a down 5% to 6% that would have been still very elevated levels in terms of absolute bookings and we continue to see that strength here through the third through the third quarter. So I would say that the trends we don't necessarily see is abating could we find some quarters, where the backlog will start to normalize or <unk>.

<unk> growth will will be negative I guess, we could but I would just encourage people to look at absolute bookings levels. Because when you look at two year stacks three year stack surrounds putting around bookings growth there is significant.

You think about commercial HVAC and.

In the Americas, three year booking stack of over 65%, 65% so.

The fact is that we went down five points in a given period you still have to subtract that from 65% points of growth. So maybe a bit of a long answer to your question but.

We're we're confident we've got a long term tailwind here.

I appreciate that thank you.

Thanks, Chris.

Your next question is from Joe Ritchie of Goldman Sachs. Please go ahead. Your line is open.

Hey, guys good morning nice quarter.

Thanks, Joe I appreciate it.

So yesterday evening resize, the Mega project funnel up 25%.

Now tracking almost close to like $900 billion in Asia.

They suggested that about 20% of the projects have kind of broken ground and a lower percentage they've actually bid I'm curious like I know that you guys have your own funnel and you guys are also tracking projects over $1 billion, but.

Does that all kind of Jive with what Youre seeing in your pipeline.

Broadly or any other color around that would be helpful.

Yes, I Havent read <unk> report, so I can't comment specifically I would just tell you that we have.

We have a lot of projects in the pipeline right now that we're tracking I think it's always you always have to be a little bit careful when you track one company versus another company as well.

When orders are.

Procured by different companies could vary so.

Maybe a bit before us but.

I guess the good news is we still see a lot out there it sounds like Eaton does as well.

And we're very very confident with the many of the solutions that we have that we're talking with customers about and we feel that many of these projects were in a unique position.

Yeah, maybe maybe following up on that Dave Davina had any any concerns I know youre not seeing it really in the order book today, but are there any concerns out there on project financing or things pushing to the right just given the rate environment that we're in.

Hey, Joe It's Chris No we're not.

Think while certainly interest rates have gone in a negative direction on paybacks I would tell you that the change in paybacks is minor when we think about the energy efficient systems that we're able to CRO customers.

Chris Cune: When we think about the beginning of the year, we guided ending backlog down to around $6 billion, and that would have implied bookings down around 5-6%, but even on a down 5-6%, that would have been still very elevated levels in terms of absolute bookings, and we continue to see that strength here through the third quarter. I would say that the trends we don't necessarily see as a baiting, could we find some quarters where the backlog will start to normalize, or bookings growth will be negative?

Our payback may have gone from two two and a half years to three ish years now with interest rates. So the fact is there is still very strong paybacks when.

You are implementing some of these solutions. So we're not seeing that right now.

Okay.

Got it that makes sense and I guess, maybe one last one quickly for you Chris.

I know that we're not ready to blast any 2020 numbers at this point, but as you kind of think through both pricing and mix for next year, just any any thoughts initial thoughts on how that kind of play out across the Americas business.

Chris Cune: I guess we could, but I would just encourage people to look at absolute bookings levels, because when you look at two year stacks, three year stacks around bookings growth, they're significant. You think about commercial HVAC, in the Americas, a three-year booking stack of over 65%, 55%. So the fact is that we went down five points in a given period, you still have to subtract that from 65% points of growth. So maybe a bit of a long answer to your question, but we're confident we've got a long-term tailwind here.

Yes, we'll dial it in a little bit further Joe is we get a couple of months from now but we.

Chris Cune: I appreciate that.

We do target from a price inflation measure.

Chris Cune: Thank you.

Let's say a spread of 20 to 30 basis points in a normal year, what we'll dial that in as we get closer to next year.

Chris Cune: Thanks, Chris.

Today's earlier point, we're making sure we're pricing for innovation and also long term customer relationships. So.

I'm confident that we'll have a good set of numbers there we're going to target.

Joe Richie: Your next question is from Joe Richie of Goldman Sachs. Please go ahead, your line is open. Hey guys, good morning, Miss Quarter. Thanks, Joe. Appreciate it. So yesterday, you know, eaten, resized the mega-project funnel up 25%, you know, now tracking almost close to like $900 billion, and they suggested that about 20% of the projects have kind of broken ground and a lower percentage they've actually did. I'm curious, like I know that you guys have your own funnel and you guys are also tracking projects over a billion dollars, but does that all kind of jive with what you're seeing in your pipeline, broadly, or any other color around that would be helpful?

Positive on a dollar basis and margin basis on price versus inflation.

And we've been able to demonstrate that for the last three years. So I have a lot of confidence our teams will be able to do that going forward.

Great. Thank you.

Thanks, Joe Thank you.

Your next question is from Steve Tusa of Jpmorgan. Please go ahead. Your line is open.

Hey, guys good morning.

Good morning, Steve how are you.

I'll Echo those orders.

Pretty strong for sure.

There's been a lot of strength in <unk>.

Commercial.

How strong was your light commercial business.

Right.

Our revenue was up.

Dave Regnery: Yeah, I haven't read Ian's report, so I can't comment specifically. I would just tell you that, you know, we have, we have a lot of projects in the pipeline right now that we're tracking. I think it's always, you always have to be a little bit careful when you track one company versus another company is when orders are, you know, procured by different companies could vary. So, and maybe a bit before us, but, you know, I guess the good news is, is we still see a lot out there.

It was up in the Americas was up over 20% equipment was up over 30% applied was stronger than unitary.

Applied was stronger than unitary costs.

Yes, yes, yes, both were strong but applied was stronger than unitary.

You can look at the verticals that really had the strengthening and Steve who are data centers high Tech education, those tend to be more applied systems, and even though even the verticals that were solid like healthcare life science again, those tend to be more.

Dave Regnery: It sounds like Ian does as well, and we're very, very confident with many of the solutions that we have that we're talking with customers about, and we feel that on many of these projects, we're in a unique position.

Integral projects, where you need to really have designed system, which is our applied systems. So.

Okay.

We're pretty happy with the performance that we saw in the third quarter and again not to reiterate but these implied.

Chris Cune: Yeah, maybe, maybe following up on that day, if you haven't had any, any concerns, I know you're not seeing really a new order book today, but are there any concerns out there on project financing or things pushing to the right, just giving the raise environment that we're in? Joe, Chris, no, we're not. I think while it's only interest rates have gone in a negative direction on paybacks, I would tell you that the change in paybacks is minor when we think about the energy efficient systems that were able to quote customers, you know, a payback may have gone from two, two and a half years to three issues now with interest rates. So the fact is, there's still very strong paybacks when, you're implementing some of these solutions. So we're not seeing that right now. Got it. That makes sense.

Know this but this is where you get the long service tail.

And so this is going to fuel our service business in the future.

Yes.

Can you just give us some maybe a little I know you've kind of you haven't done this before but like you've mentioned. These these four verticals in every slide presentation for like the last several years. Obviously you guys are doing a great job there.

Can you just give us given it's so important now I mean commercial HVAC, 65% of your of your revenue base.

Can you just give us some sort of color on how much those four verticals represent now I mean is that like 50% of your portfolio like just roughly how much those growth verticals represent.

They are strong Steve is what I would answer.

We track about 14 verticals in the Americas.

Chris Cune: And I guess maybe one last one quickly for you, Chris, I know that we're kind of not ready to bless any 2024 numbers at this point, but as you kind of think through both pricing and mix for next year, just any thoughts on how that should kind of play out across the America business. Yeah, we'll dial in a little bit further Joe as we get a couple of months from now, but, you know, we do target from a price inflation measure, you know, let's say a spread of 20 to 30 basis points in a normal year, we'll dial that in as we get closer to next year.

<unk>.

Certainly office and warehousing would be areas retail there'd be a little bit weaker today I know the office vertical has a number of things kind of buried in it today, where we've been lobbying to try to break that out just given demand on warehousing data centers, but.

I wont dial it in specifically, but we like our positioning here and what I think is again most important with a direct sales force is there ability that if a vertical is slower like office the ability to pivot into another vertical.

Is really.

That's exactly where I was going to go Chris I mean these verticals. We track 14, you could even get 18. If you if you do a little subdividing there, but there is often times when one vertical is stronger than another vertical.

Chris Cune: Today's earlier point, we're making sure we're pricing for innovation and also long term customer relationships. So I'm confident that we'll have a good set of numbers there. We're going to target positive on a dollar basis and a margin basis on price versus inflation. And we've been able to demonstrate that for the last three years. So I have a lot of confidence. Our teams will be able to do that going forward. Great. Thank you. Thanks, drop. Thank you.

The extended period of time I'll use warehousing as an example.

Two years ago, three years ago warehousing was extremely strong we pivot our sales force to focus on warehousing, we developed programs for them and they go capture share in those particular verticals right now the strength in data centers I don't see that going away in the near term high Tech we have all the mega projects that are really in front of us and education.

Steve Tusa: Your next question is from Steve Tusa of JP Morgan. Please go ahead. Your line is open. Hey guys, good morning. Hey, morning to the morning. Yeah, I'll let go. Those are orders, you know, pretty strong for sure. What were there? There's been a lot of strength in like commercial. How strong was your like commercial business? You know, our gen light. Our revenue was up. It was up in the Americas was up over 20% equipment was up over 30% applied was stronger than unitary.

Education has been strong obviously essar funding is helping that I think as our funding is probably in the.

Fifth or sixth inning, but we have been extremely strong and education for an extended period of time.

One last one for you and your peers have talked about this refrigerant change in <unk>, driving some pretty nice price mix, 10% to 15% or something like that over the next couple of years, perhaps a bit more backend loaded into 25 given the change comes then can you just give us your latest and.

Steve Tusa: Applied was stronger than unitary. Yes, yes, yes, both were strong, but applied was stronger than unitary. I mean, you could look at the verticals that really had the strength in its speed of data centers, high tech education, those tend to be more applied systems. And even the one even the verticals that were solid like healthcare life science. Again, those tend to be the more intricate projects where you need to really a design system, which is our applied system.

And greatest lens on price and mix from that transition and what potentially you could see in 'twenty four 'twenty five on that front for resi.

Yeah. The short answer is we're dialing in but I mean, if you think about the whole refrigerant change right. We've been leading with refrigerant change really the industry I think we've been added since about 2013 with next generation refrigerants.

So we're more than ready for this transition away from $4 10.

Two in our case $4 54 big.

Dave Regnery: So we're we're pretty happy with the performance that we saw in the third quarter. And again, not to iterate, but these applied. I know you know this, but this is where you get the long service tail. And so this is going to continue to fuel our service business in the future. Yeah. Can you just give us maybe a little, I know you've kind of you haven't done this before, but like you've mentioned these these four verticals in every slide presentations like the last several years.

Our designs are complete our manufacturing is ready to go we're going to start up production here in early Q2. So all systems goes there there are some definition, Steve that we're still working with the EPA to make sure our interpretation is correct.

And then really our focus is going to shift to the to the channel to make sure we have a clean phase in phase out of inventory.

We will be manufacturing, both <unk> product and $4 54 product in 2024.

Dave Regnery: Obviously, you've got to do a great job there. Can you just give us given it's so important now? I mean, commercial HVAC 65% of your of your revenue base. Can you just give us some sort of color on how much those four verticals represent now? I mean, is that like 50% of your portfolio like just roughly how much those growthy verticals represent? They're strong, Steve, it's what I would answer. We track about 14 verticals in the Americas and certainly office and warehousing would be areas retail that'd be a little bit weaker today.

And probably even into 2025 at least our interpretations right now what we're seeing with the EPA as far as price, we're still dialing that in the 454 product is going to be more expensive. Obviously, it's a slightly flammable refrigerants. So you got to put different sensing equipment around the around the June so we'll get more data on that in the coming.

<unk> weeks here and we will update everyone on our fourth quarter call.

Right. Thanks, a lot.

Okay. Thanks, Steve.

Your next question is from Jeff Sprague of vertical Research partners. Please go ahead. Your line is open.

Dave Regnery: I know the office vertical has a number of things kind of buried in it today. We've been lobbying to try to break that out just given demand on warehouse and data centers, but we won't dial it in specifically, but we like our positioning here. And what I think is, again, most important with the direct sales force is their ability that if a vertical is slower, like office, the ability to pivot into another vertical is really, that's exactly where I was going to go Chris.

Hey, Thank you good morning, everyone.

Jeff how are you.

Im doing great not as good as you guys are doing well. Thank you.

I Wonder if we could just dig a little bit more into just customer behavior and backlogs.

As big as the backlogs are versus history, right, if I think about.

90% of 6 billion, maybe it's $6 billion plus right but.

Dave Regnery: I mean, these verticals, we track 14, you could even get 18 if you sub, do a little sub dividing there, but there's often times when one vertical is stronger than another vertical for, you know, extended period of time. I'll use warehousing as an example. You know, two years ago, three years ago warehousing was extremely strong. We pivot our sales force to focus on warehousing. We develop programs for them and they go capture share in those particular verticals.

That'd be caught my math roughly half of your <unk>.

2024 commercial revenues are in backlog.

I mean, that's a good healthy number but given the size and scope of some of these projects maybe it goes back a little bit to one of the earlier questions I'm not sure why backlog would really go down much from here.

Dave Regnery: Right now, the strength and data centers, I don't see that going away in the near term. High tech, we have all the mega projects that are really in front of us. And education, you know, education's been strong. Obviously, S or funding is helping that. I think S or funding is probably in the, you know, fifth or sixth inning, but you know, we've been extremely strong in education for an extended period of time.

But do you actually see.

Customers.

It just kind of changing their order patterns or there's kind of something else that.

Whats suggests that backlogs really do need to kind of go back down towards where they were historically.

Jeff I'll start I mean, I think the lead times are still a bit extended in applied systems.

Dave Regnery: All right. One last one for you. Your peers have talked about this refrigerator and change and Rezzy driving some pretty nice price mix 10 to 15% or something like that over the next couple of years. Perhaps a bit more back and loaded into 25 given the change comes then. Can you just give us your latest and greatest lens on price and mix from that transition and what potentially you could see in 24 and 25 on that front for Rezzy?

Getting better certainly from where we were beginning of the year same in unitary getting better. So I think as the lead times come in a bit you may see where the backlog contracts, but over time it is elevated today.

90% of the backlog would relate to our global commercial HVAC business.

And when you think about our commercial businesses, including Thermo King it's over 95% so.

Dave Regnery: Yeah. The short answers we're dialing in. But I mean, if you think about the whole refrigerant change, right? You know, we've been leading with refrigerant change, really the industry. I think we've been at it since about 2013 with next generation refrigerants. So we're more than ready for this transition away from 410 to in our case, 454 B. You know, our designs are complete. Our manufacturing is ready to go. We're going to start up production here in early Q2.

It gives us a lot of visibility into what we think 2024 would be with some healthy growth.

But let's see how the policy stacking effects that continue to positively affect us.

And the order rates Mega projects as Dave said are ahead of US here in terms of bookings and apply these are long cycle projects, let's see how this plays out we we think it can be elevated for longer but it will start to normalize at some point, yes, I think the only thing I would add to that Jeff.

Dave Regnery: So all systems goes there. There are some definitions that we're still working with the EPA to make sure our interpretation is correct. And then really our focus is going to shift to the channel to make sure we have a clean phase and phase out of inventory. We will be manufacturing both 410 product and 454 product in 2024. And probably even into 2025, at least our interpretation right now, what we're seeing with the EPA.

I'll go back to data centers again, and kind of our strategy was to work with the data Center engineers and develop solutions.

Our optimal for them once we do that they do tend to lock in for an extended period of time with you.

So they'll provide orders beyond.

Beyond your lead times, just to ensure that they have slots available and we don't disappoint, what I'm missing a shipment.

And can you gauge in any way what percent of this forward project pipeline.

Dave Regnery: As far as price we're still dialing that in, the 454 product is going to be more expensive. Obviously it's a slightly flammable refrigerant. So you're going to have to put different sensing equipment around the June. So we'll get more data on that in the coming weeks here.

Is tied the various stimulus programs.

B J.

IRA chips, other things and what's coming down through through the state obligations.

Steve Tusa: And we'll update everyone on our fourth quarter call. Great. Thanks a lot. Okay.

Steve Tusa: Thanks, Steve.

Jeff I would say from an IRR perspective, Thats really all in front of US I don't think thats necessarily in the backlog today, but from an S or funding for several years now we've had projects and making sure that over the summer months when when schools are open we're ready to.

Jeff Sprague: Your next question is from Jeff Sprague of Vertical Research Partners. Please go ahead. Your line is open. Hey, thank you. Good morning, everyone. I'm Jeff. I'm doing great. Not as good as you guys but doing well. Thank you.

Service and upgrade equipment. So I think thats certainly been the backlog for a while data centers continues to elevate.

Dave Regnery: I wonder if we could just dig a little bit more into just customer behavior and backlogs. You know, as big as the backlogs are versus history, right? If I think about, you know, 90% of 6 billion, maybe it's 6 billion plus, right? But that would be called, you know, my math, roughly half of your 2024 commercial revenues are in backlog. I mean, that's a good, healthy number. But given the size and scope of some of these projects, maybe it goes back a little bit to one of the earlier questions.

And we see that as a long term tail, but chips and science that we don't have that dialed in but that would be one where I guess you could specifically say. This is this is driving this demand.

And the data center Theres no Theres no.

It's more about just the pure demand for data centers right now.

Right.

Great. Thanks for the color guys I appreciate it.

Thanks.

Your next question is from Nigel Coe of Wolfe Research. Please go ahead. Your line is open.

Dave Regnery: I'm not sure why backlog would really go down much from here. But do you actually see, you know, customers, you know, it's just kind of changing their order patterns or there's kind of something else that, you know, let's suggest that backlogs really do need to kind of go back down towards where they were historically.

Thanks, Good morning, everyone.

Thanks for the question.

So going back to the commercial HVAC growth in <unk>, which was obviously a spectacular but.

In the Americas.

Pick up Cuba, Cuba was quite something so you called out obviously the strength in the verticals.

Was there any kind of supply chain, so listening or kind of flush there that maybe drove that understand the demand is very strong and then within that education. I think there is some concerns out there with the stimulus funding kind of reaching a peak, perhaps that maybe indication falls off in 2000, and so any visibility on.

Chris Cune: Jeff, I'll start. I mean, I think the lead times are still a bit extended in applied systems. Getting better, certainly from where we were beginning of the year, same in unitary, getting better. So I think it's the lead times come in a bit. You may see where the backlog contracts, but over time it is elevated today. You're right, 90% of the backlog would relate to our global commercial HVAC business. And when you think about our commercial businesses, including fair cocaine, it's over 95%.

On occasion would be helpful.

Yeah, I'll start with the law.

Or the education, we haven't seen a cool off yeah, we still have a lot in our pipeline as well there's still a lot of money to be spent out there and as I said I think if we had we were playing baseball I'd say, we're in the sixth inning.

Chris Cune: So it gives us a lot of visibility into what we think 2024 would be with some healthy growth. But let's see how the policy stacking effects that continue to positively affect us and order rates. Mega projects as Dave said are ahead of us here in terms of bookings and, you know, apply these are long cycle kind of projects. Let's see how this plays out. We think it can be elevated for longer, but it will start to normalize at some point.

There is still some funding to come there we've been strong there for foreign extended period of time.

Other question was.

Yes.

Obviously.

By chain constraints have been a factor.

<unk> business, yes.

The supply chain.

It's I wouldn't say, it's normal, but it's pretty close to normal we always have some.

Some noise that you're going to see in the supply chain, but our teams have done just a great job. There. So I wouldn't say it was I would not say our third quarter performance was because supply chain suddenly got better because it's been.

Dave Regnery: Yeah, I think the only thing I would add to that, Jeff, is you know, I'll go back to data centers again and kind of our strategy was to work with the data center engineers and develop solutions that are optimal for them. Once we do that, they do tend to lock in for an extended period of time with you. So they'll provide orders beyond your lead times just to ensure that they have slots available. And we don't disappoint by missing a shipment.

What's up.

Okay, and then I think on the common.

Doing very well on the front end of our business, we're executing very well on the operation side of our business.

And you really see it in our results okay.

Okay. Thanks.

There's another crack at the pricing.

Question <unk>.

Chris You mentioned 23 basis points spread this inflation is what your targets. It does feel like some of your competitors, taking a much more aggressive policy towards pricing. So I'm just curious on two aspects number one the potential to really be a bit more aggressive on price.

Chris Cune: And can you gauge in any way, you know, what percent of this forward project pipeline is tied to various stimulus programs, you know, be they, you know, IRA ships, other things and what's coming down through through the state provocations. And Jeff, I would say from an IRA perspective, that's really all in front of us. I don't think that's necessarily in the backlog today, but from an SR funding for several years now, we've had projects and making sure that over the summer months when when schools are open, we're ready to service and upgrade equipment.

I think go into 'twenty, four and then and then secondly.

This.

Commercial HVAC backlog starts to convert is that sort of embedded pricing in that backlog is going to emerge over the next 12 months.

Yes, I'll start with your second question Nigel as we think about the backlog they've runs out a year year and a half we're making sure that we've got the right <unk>.

Cost escalators built in.

And it could be a reference to an external index or it could be where we are.

Chris Cune: So I think that's only been the backlogs for a while data centers continues to elevate. And we see it as a long term tail, but chips and science, we don't have that dialed in, but that would be one where I guess you could specifically say this is this is driving this demand, but in the data center, there's no, there's no, you know, that that's more about just a pure demand for data centers right now.

Put cost inflator is into the project ultimately make sure we're pricing effectively so I think we've got that embedded in the backlog right now and our best view and the teams have done an outstanding job with this over the last three plus years in the inflationary environment to stay ahead on inflation.

Yeah look I think pricing will remain a way for us to continue to drive with our innovative products, making sure we're pricing effectively it's going to be healthy.

Jeff Sprague: Thanks for the call, guys. Appreciate it. Thanks.

Nigel Coe: Your next question is from Nigel Coe of Wolf Research. Please go ahead. Your line is open. Thanks. Good morning, everyone. Thanks for the question. So, go back to the commercial HFAC growth in 3Q, which was obviously spectacular, but especially in the Americas, you know, the pick-up QVQ was quite something. So, you called out obviously the strength in the verticals. Was there any kind of supply chain sort of loosening or kind of flush there that maybe drove that and the demand's very strong? And then within that, you know, education, I think there's some concerns out there, you know, with the stimulus funding, kind of reaching a peak perhaps that, you know, maybe education falls off in 24.

I just wanted to get three more months ahead of US here before we dial it in for 2024, but.

I am confident that as we think about the.

The cost environment and the innovation of our products were going to make sure we're pricing effectively and again.

Making sure we've got long term customer relationships here as Dave described with the applied business, we want to make sure that the services business continues to grow with that which you can and it will.

And that of course brings with itself healthy margins. So we're well positioned for next year and just give us a little more time to dial that in.

Oh, great. Thanks, guys.

Thanks, Michael.

Your next question is from Deane Dray of RBC capital markets. Please go ahead. Your line is open.

Dave Regnery: So any visibility on education would be helpful. Yeah, I'll start with the latter of the education. We haven't seen the cool off yet. We still have a lot in our pipeline as well. There's still a lot of money to be spent out there. As I said, I think if we had a, we were playing baseball, I'd say we're in the sixth inning. There's still some funding to come there. We've been strong there for our foreign extended period of time.

Thank you and good morning, everyone.

Hey, Dan how are you doing real well thank you.

Maybe circle back on China, you had good bookings.

Impressed that even though you had lighter margins lighter revenues and margins were much stronger so.

How did China play out for you.

Dave Regnery: The other question was, yeah, just the, you know, of the pipeline constraints have been a factor. Supply chain. It's, you know, I wouldn't say it's normal, but it's pretty close to normal. We always have some noise that you're going to see in the supply chain, but our teams have done just a great job there. So I wouldn't say it was, I would not say our third quarter performance was because supply chain suddenly got better because it's been. [inaudible] you, you, you, you you, you, you, you, you you, you, you, you, you, you, you, Thank you. Oh, great. Thanks, good. Thanks, Michael.

We're very very happy with our performance in Asia Pacific overall, so thanks for the question.

Think about I'll start with the orders right I mean orders were up in the low teens up 12%, okay for the for the region and China had high single digits and the rest of Asia had.

Mid teens, so very strong performance on order rate on revenue.

We were flattish down a bit but remember last year, we had 30% growth.

In Asia Pacific. So, it's really just a comp issue the team there is performing very well.

I was very very happy with the incoming order rates in that region and and the pipeline is strong as well.

Great and just as a follow up to that September.

Customer experience event in New York can you give us a sense of the on the applied business, both the backlog and the funnel how much is our customers opting for this thermal management feature.

Still since you like using the baseball analogy is it are we in the early innings of adoption where does that stand.

Thermal storage, yes, I mean, we have.

Adoption, that's continuous there we've been selling for.

Thermal storage systems for quite some time I do think that one of the.

The elements of Iras that could accelerate that is that would be included there and we are still dialing in what that exact rebate would be.

And how it will be applied but that could be significant and really drive that and just so everyone's aware thermal management, our thermal storage systems are great great ways for energy efficiency, but they are also great ways to help balance the grid.

<unk>.

If you have a need in a peak period to shut off power or limit power. This is a great way to do it because you burn ice versus running your your compressors on your on your Chillers. So we're excited about the technology, we've had it for a while and IRR it could be a catalyst to even grow faster.

Thank you.

Alright, Thanks, Dan.

Your next question is from Andrew <unk> of Bank of America. Please go ahead. Your line is open.

Hey, guys good morning.

Hi, Andrew how are you.

I'm good.

So question on <unk>.

<unk> margins I guess, what type of my model I think gross margins are hitting all time highs.

And I know you guys don't work at other companies, but we do.

I'm just wondering.

How much price cost.

Dean Dray: Your next question is from Dean Dray of RBC Capital Markets. Please go ahead.

The spread between price cost is a benefit and I guess the bigger question is.

Dean Dray: Your line is open. Thank you.

Dave Regnery: Good morning, everyone. Hey, Dean. How are you? Doing real well. Thank you. Maybe you circled back on China. You had good bookings. It was impressed that even though you had lighter margins, lighter revenues and margins were much stronger. How did China play out for you? I'm very happy with our performance in Asia-Pacific overall. So thanks for the question. You know, you think about, I'll start with the orders, right? I mean, orders were up in the low teams up 12% for the region.

We rebased gross margins because clearly you guys have done a lot of.

Core from cost cutting right. It seems that you have an aggressive stance on maintaining the spread.

But also how much of it is timing right is just the peak between the balance between price and cost. So if you could just talk about.

Dave Regnery: China had high single digits and the rest of Asia had midteens. So very strong performance on an order rate. On revenue, you know, we were flattish down a bit. But remember, last year we had 30% growth in Asia-Pacific. So it's really just a competition. The team there is performing very well. I was very, very happy with the incoming order rates in that region and the pipeline is strong as well.

Are we in the new normal was gross margins or should we expect gross margins normalize somewhat going forward. Thank you.

Andrew I'll start and then think about the third quarter, we really were able to execute across all parts of the P&L to drive leverage and gross margin expansion. So the.

Price execution versus inflation as I said earlier was positive on a margin and dollar basis, there are areas, though of inflation, especially in tier two around wage and energy inflation.

Are impacting the business. So it was a positive.

The incrementals on volume at five points of volume in the quarter. So we like those incrementals.

Dave Regnery: Great. And just as a follow-up to that September customer experience event in New York, can you give us a sense of the, on the applied business, both the backlog and the funnel? How much is our customer's opting for this thermal management feature? We still, since you're like using the baseball analogy, is it, are we in the early innings of adoption? Where does that stand? Yeah, thermal storage. Yeah, I mean, we have, you know, adoption that's continuous there.

We've continued to invest in the business as well right, we're still targeting for the full year and 70 basis points of.

Incremental investment above a 40 basis point normal so all parts of the P&L are really working but I would tell you the productivity opportunity for us as price comes back to a bit more of a normal normalized level that is really the opportunity for us going forward to really continue to drive, 25% or better incrementals, and we really like our mix and sort of.

<unk>.

So services, what's driving higher gross margins as well.

Dave Regnery: We've been, we've been selling, you know, thermal storage systems for quite some time. I do think that one of the elements of IRA that could accelerate that is that would be included there. And we're still dialing in what that exact rebate would be and how it will be applied. But that could be significant and really drive that. And just so everyone's aware, you know, thermal management or thermal storage systems are great, great ways for energy efficiency, but they're also great ways to help balance the grid.

Its a contributor right distributor it was a system of things that other than but we really like the mix, we have with our service business.

Great.

Just a follow up question on <unk>.

Right I think J C. I also bought a workplace management software company.

<unk> has a presence can you just talk about what excites you.

This vertical and maybe also remind us how big is software.

Dave Regnery: And, you know, if you, if you have a need in a, in a peak period to, to shut off power or limit power, this is a great way to do it because you burn ice versus running your, your compressors on your, on your chillers. So we're excited about the technology we've had it for a while. And IRA could be a catalyst to even have it grow faster. Thank you. All right, thanks, Dean.

Business for you at this point thank you.

<unk> is a cloud based connected workplace and enterprise asset management company.

And it's leveraging the service now platform.

Look we look at this as a way to augment our current digital capabilities just to remind everyone. We have over 36000 connected buildings, where we're all over it.

Andrew Kaplowitz: Your next question is from Andrew Open of Bank of America. Please go ahead. Your line is open. Hey, yeah, good morning. Hi, Andrew. How are you? I'm good. So a question on gross margins, I guess. Look at my model. I think gross margins are hitting all time highs. And I know you guys don't look at other companies, but we do. And I'm just wondering how much price cost the spread between price cost is a benefit.

<unk> connected assets. So we think this is this is a great company great leadership, Great technology, and we're excited to get this closed and have it be part of the Trane technologies portfolio and it's going to really help us grow our digital business setup.

Andrew Kaplowitz: And I guess the bigger question is, have we rebased gross margins because clearly you guys have done a lot of, um, who are concuss cutting, right? It seems that you have an aggressive stance on maintaining the spread, but also how much of it is timing, right? It's just the peak between the balance between price and cost. So if you could just talk about, you know, are we ending you normal with gross margins or should we expect to gross margins normalize somewhat going forward?

At a nice clip.

And how big is that there is still business now.

Well I won't be specific on that I would say that this acquisition is less than 1% of the enterprise revenue.

Okay. Thanks, a lot.

Okay. Thanks, Andrew.

We have completed the allotted time for questions I will now turn the call all participants nagel for closing remarks.

Thanks, operator, I'd like to thank everyone for joining on today's call as always we'll be available in the coming days and weeks to answer any questions that you may have so please don't hesitate to reach out stay safe and we look forward to seeing everyone. Soon.

This concludes today's conference call. Thank you for your participation you may now disconnect.

Andrew Kaplowitz: Thank you. Andrew, I'll start thinking about the third quarter. We really were able to execute across all parts of the PNL to drive leverage and gross margin expansion. So the price execution versus inflation, as I said earlier, was positive on a margin in dollar basis. There are areas though of inflation, especially in tier two around wage and energy inflation that, you know, are impacting the business. So it was a positive, the incremental is on volume at five points of volume in the quarter.

Yeah.

Yeah.

Today's conference call. Thank you for your participation.

Andrew Kaplowitz: So we like those incrementals. And we've continued to invest in the business as well, right? We're still targeting for the full year on 70 basis points of incremental investment above a 40 basis point normal. So all parts of the PNL are really working, but I would tell you the productivity opportunity for us as price comes back to a bit more of a normal normalize level, that is really the opportunity for us going forward to really continue to drive 25% or better incrementals.

Andrew Kaplowitz: And we really like our mix and service. So services what's driving a high gross margins as well. It's a contributor, right? Yes, it was a system of things that doesn't, but we really like the next we have with our service business. Right.

Chris Cune: And just to follow up question on novello, right? I think JCI also bought a workplace management software company. Ford if has a presence. Can you just talk about what excites you about this vertical and maybe also remind us how big a software as a business for you at this point. Thank you. Yeah, novello is a cloud-based connected workplace and enterprise asset management company. And it's leveraging the service now platform. Look, we look at this as a way to augment our current digital capabilities.

Chris Cune: Just to remind everyone, we have over 36,000 connected buildings. We have well over a million connected assets. So we think this is a great company, great leadership, great technology. And we're excited to get this close and have a part of the train technology portfolio. And it's going to really help us grow our digital business at a nice clip. And how big is the digital business now? I won't be specific on that. I would say that this acquisition is less than 1% of the enterprise revenue. Okay. Thanks, Todd. Okay. Thanks, Andrew.

Zach Nagle: We have completed the allotted time for questions. I will now turn the call over to Zach Navel for closing remarks. Thanks, operator. I'd like to thank everyone for joining on today's call. As always, we'll be available in the coming days and weeks to answer the questions that you may have. So please don't hesitate to reach out. Stay safe. We look forward to seeing everyone soon. Thank you.

Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.