Q4 2023 Trane Technologies PLC Earnings Call
Good morning, welcome to the Trane technologies Q4, 2023 earnings conference call.
Julianne: My name is Julianne and I will be your operator for the call.
Julianne: 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.
Julianne: To ask a question. Please press star followed by the number one on your telephone keypad.
Julianne: In the interest of time, we ask that you. Please limit yourselves to one question and one follow up question.
Julianne: I will now turn the call over to Zac Nagle, Vice President Investor Relations.
Zachary A. Nagle: Thanks, operator, good morning, and thank you for joining us for Trane technologies fourth quarter 2023 earnings Conference call.
Zachary A. Nagle: This call is being webcast on our website at Trane technologies Dot com, where you'll find the accompanying presentation.
Zachary A. Nagle: We are also recording and archiving this call on our website.
Zachary A. Nagle: Please go to slide two.
Zachary A. Nagle: 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.
Zachary A. Nagle: 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.
Zachary A. Nagle: This presentation also includes non-GAAP measures, which are explained in the financial tables attached to our news release.
Zachary A. Nagle: Joining me on today's call are Dave Regnery Chair and CEO.
Zachary A. Nagle: Chris <unk> executive Vice President and CFO.
Dave Regnery: With that I'll turn the call over to Dave Dave.
Dave Regnery: Zach and everyone for joining today's call as we begin I'd like to spend a few minutes on our purpose driven strategy, which drives our differentiated financial results overtime.
Our strategy is aligned to powerful megatrends like energy efficiency de carbonization and digital transformation.
Dave Regnery: These trends continued to intensify and increase the demand for our sustainable solutions.
Dave Regnery: The year 2023 was recently confirmed as the warmest on record and caused many extreme weather events around the world.
Dave Regnery: Urgent action is needed to reduce emissions and mitigate the effects of climate change on People's lives.
Dave Regnery: That's where trane technologies is uniquely positioned to lead we are the partner of choice to help our customers advance their own sustainability goals, while driving broad impact Gerard Gigaton challenge, a pledge to reduce customers' emissions by 1 billion metric tons by 2000 and serve our purpose driven strategy relentless innovation.
Dave Regnery: <unk> proven business operating system enabled us to consistently deliver a superior growth profile strong margins and powerful free cash flow.
Dave Regnery: And the result is strong value creation across the board for our customers our shareholders our employees and for the planet.
Dave Regnery: Please turn to slide number four we expect to deliver top quartile financial performance over the long term consistently and reliably on behalf of our shareholders. This is core to our culture and central to how we set our targets and execute our strategy across our global portfolio.
Dave Regnery: I am proud of how our global teams rose to the challenge in 2023 and met or exceeded our targets top to bottom.
Operator: Good morning. Welcome to the Train Technologies Q4 2023 Earnings Conference. My name is Julianne, 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.
We track top quartile performance against our core peer group closely and while the results are not yet in we believe we will hit top quartile on organic revenue growth up 9% and adjusted EPS growth up 23%.
Operator: To ask a question, please press star followed by the number one on your telephone keypad. In the interest of time, we ask that you please limit yourselves to one question and one follow-up question. Thank you. I will now turn the call over to Zach Nagle, Vice President, Investor Relations. Thanks, Operator. Good morning, and thank you for joining us for Training Technologies' fourth quarter 2023 earnings conference. This call is being webcast on our website at trainedtechnologies.com, where you'll find the accompanying presentation. We're also recording and archiving this call on our website; please go to slide two. Statements made during 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.
Dave Regnery: We also delivered free cash flow of $2 2 billion or 103% free cash flow conversion.
Dave Regnery: Enabling us to make key strategic M&A investments, while raising our dividend and returning significant cash to shareholders through share repurchases.
Dave Regnery: Please turn to slide number five.
Dave Regnery: Relentless investment in innovation and growth people and culture and our business operating system are hallmarks of Trane technologies.
Dave Regnery: And over time, we see clear benefits accruing as evidenced by our strong track record.
Dave Regnery: Since 2020, we have delivered a revenue compound annual growth rate of 12%.
Dave Regnery: 260 basis points of EBITDA margin expansion and free cash flow conversion of approximately 100%.
Zachary A. Nagle: 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 McNary, Chairman and CEO, and Chris Kuhn, Executive Vice President and CFO. With that, I'll turn the call over to Dave.
Dave Regnery: Enabling us to execute a balanced capital deployment strategy.
Dave Regnery: We believe we are well positioned to continue to drive strong performance for shareholders over the long term.
Dave Regnery: Please turn to slide number six.
Dave Regnery: Q4 was another strong quarter, despite challenges in our transport and residential businesses, we leveraged the strength of our diversified and resilient global portfolio and our best in class business operating system to deliver strong financial performance as an enterprise.
Dave McNary: Dave, thanks, Zach, and everyone for joining today's call. As we begin, I'd like to spend a few minutes on our purpose-driven culture, which drives our differentiated financial results over time. Our strategy is aligned to powerful megatrends like energy efficiency, decarbonization, and digital transformation. These trends continue to intensify and increase the demand for our sustainable solutions. The year 2023 was recently confirmed as the warmest on record and caused many extreme weather events around the world. Urgent action is needed to reduce emissions and mitigate the effects of climate change on people's lives.
Dave Regnery: In the Americas, we expect that the residential markets to continue to normalize and for the transport refrigeration markets to move into a moderate down cycle in Q4.
Dave Regnery: While the markets were down more than anticipated each business delivered strong bookings growth in the quarter strengthening our position entering 2024.
Global commercial HVAC markets continue to be robust and we're leveraging the power of our direct sales force to identify and pivot to the highest growth opportunities.
Dave Regnery: Thriving in key verticals, such as data centers and high Tech industrial working alongside these highly sophisticated customers to solve their most pressing challenges with ultra efficient bespoke solutions.
Dave McNary: That's where Trane Technologies is uniquely positioned to lead. We are the partner of choice to help our customers advance their own sustainability goals, all driving broad impact through our Gigaton Challenge, a pledge to reduce customers' emissions by 1 billion metric tons by 2030. Our purpose-driven strategy, relentless innovation, and proven business operating enable us to consistently deliver a superior growth profile, strong margins, and powerful free cash. The end result is strong value creation across the board for our customers, our shareholders, our employees, and for the planet. Please turn to slide number four.
Dave Regnery: One of the things that Trane technologies does best and our commercial HVAC bookings backlog and revenue reflect our success to put this in context, our Americas commercial HVAC bookings were up more than 50% on a three year stack.
Dave Regnery: Our applied bookings, where we estimate an eight to 10 times multiplier of higher margin services for every dollar of equipment sold.
Dave Regnery: We're up over 100% on a three year stack.
Dave McNary: We expect to deliver top quartile financial performance over the long term, consistently and reliably, on behalf of our shareholders. This is core to our culture and central to how we set our targets and execute our strategy across our global portfolio. I'm proud of how our global teams rose to the challenge in 2023 and met or exceeded our targets, top to bottom. We track top quartile performance against our core peer group closely.
Dave Regnery: As we look at our commercial HVAC end markets over the next several years, we see a strong pipeline of projects increasingly playing to our unique strengths.
Dave Regnery: We entered 2024 with a backlog of $6 9 billion with the composition shifting increasingly towards commercial HVAC, including a large percentage of long cycle applied systems.
Dave Regnery: For 2023 backlog in commercial HVAC is up approximately $700 million.
Dave McNary: And while the results are not yet in, we believe we'll hit top quartile on organic revenue growth of nine and adjusted EPS growth of 23%. We also delivered free cash flow of $2.2 billion, or 103% free cash flow conversion, enabling us to make key strategic M&A investments while raising our dividend and returning significant cash to shareholders through share repurchases. Please turn to slide number five. Relentless investment in innovation and growth, people and culture, and our business operating system are hallmarks of trained technology.
Dave Regnery: Over the past three years, our commercial HVAC backlog has nearly tripled.
Dave Regnery: Turning to guidance, we expect another year of strong financial performance with organic revenue growth of 6% to 7% and adjusted EPS of $10 to $10 30.
Dave Regnery: Chris will discuss some of the key dynamics later in the presentation.
Chris: Please go to slide number seven.
Chris: Demand for our innovative products and services continues to be broad based across our segments. During the fourth quarter organic bookings were up 12% led by our commercial HVAC businesses.
Dave McNary: And over time, we see clear benefits accruing, as evidenced by our strong track record. Since 2020, we have delivered a revenue compound annual growth rate of 12%. 260 basis points of EBITDA margin, and pre-cash flow conversion of approximately 100%, enabling us to execute a balanced capital deployment strategy. We believe we're well positioned to continue to drive strong performance for shareholders over the long term. Please turn to slide number 6.
Chris: In the Americas segment commercial HVAC bookings were up mid teens and revenues were even stronger up mid twenties revenues were up more than 30% and equipment with particular strength in applied.
Chris: Services growth was also outstanding up mid teens as our service business continues to compound at a rapid rate.
Chris: Our residential business continues to normalize as expected, but the market declined at a faster rate than anticipated entering the quarter. We expect the normalization process to continue in the near term, but to return to a GDP plus growth over the medium to long term bookings.
Dave McNary: SKU 4 was another strong quarter, despite challenges in our transport and residential business. We leverage the strength of our diversified and resilient global portfolio in our best in class business to deliver strong financial performance as an operator. In the Americas, we expected the residential markets to continue to normalize and for the transport refrigeration markets to move into a moderate down cycle in Q4.
Chris: Bookings were healthy up 8%.
Chris: Our transport businesses was the tale of two halves. The first half of the year revenues were up about 20% and the back half of the year down 20%.
Chris: Q4 marked the beginning of a modest market down cycle, which is expected to snap back in 2025.
Chris: Our fourth quarter was down approximately 20% against a tough prior year gross comp of up 30%.
Dave McNary: While the markets were down more than anticipated, each business delivered strong bookings growth in the quarter, strengthening our position entering 2024. Global commercial HVAC markets continue to be robust. And we're leveraging the power of our direct sales force to identify and pivot to the highest growth opportunities. We are thriving in key verticals such as data centers and high-tech manufacturing, working alongside these highly sophisticated customers to solve their most pressing challenges with ultra-efficient bespoke solutions. This is one of the things that trained technology does best in our commercial HVAC bookings, backlog, and revenue reflect, and Preeti Singh Khan.
Chris: For full year 2023, we modestly outperform end markets, which were down 5%.
Chris: Our EMEA segment delivered strong performance in the quarter commercial HVAC bookings were robust up mid teens revenues were up high single digits in Q4 and up more than 50% on a two year stack.
Chris: Transport bookings were flat as expected and revenues were up mid single digits for Q4, and 2023 revenues were up low single digits outperforming end markets, which were down mid single digits.
Chris: Our Asia Pacific segment performed in line with our expectations revenues were flat in commercial HVAC due to a tough prior year comp, which was up low twenties.
Dave McNary: Our America's commercial HVAC bookings are up more than 50% on a three-year stack, and applied bookings, where we estimate an 8 to 10 times multiplier of higher-margin services for every dollar of equipment sold, are up over 100% on a three-year span. As we look at our commercial HVACN markets over the next several years, we see a strong pipeline of projects increasingly playing to our unique strength. We enter 2024 with a backlog of $6.9 billion, with the composition shifting increasingly towards commercial HVAC, including a large percentage of the long cycle applied for 2023. Backlog for commercial HVAC is up approximately $700 million. Over the past three years, our commercial HVAC backlog has nearly tripled. Turning to guidance, we expect another year of strong financial performance, with organic revenue growth of 6 to 7 percent and adjusted EPS of $10 to $10.30. Chris will discuss some of the key dynamics later; please go to slide number seven.
Chris: China bookings were down low single digits, but up high single digits on a two year stack.
Chris: Revenues were down mid single digits against and up low teens prior year comp now I'd like to turn the call over to Chris Chris.
Chris: Thanks, Dave Please turn to slide number eight.
Chris: Scoreboard for the quarter highlight strong execution top to bottom.
Chris: <unk> revenues were up 6% adjusted EBITDA and operating margins were up 150 basis points, and 190 basis points, respectively, and adjusted EPS was up 19%.
Chris: Q4, adjusted EPS includes a <unk> <unk> headwind related to foreign exchange losses from the devaluation of the Argentine peso.
Chris: At an enterprise level, we delivered strong organic revenue growth in both equipment and services up low single digits and low teens, respectively.
Chris: Services growth continues to be a standout representing about one third of our enterprise revenues and making trane technologies more resilient with higher recurring revenues at higher margins over time.
Chris: Over the past six years, our services business delivered a compound annual growth rate of high single digits.
Chris: 23 services growth was even higher up double digits.
Dave McNary: Demand for our innovative products and services continues to be broad-based across our sector. During the fourth quarter, organic bookings were up 12%, led by our commercial HVAC business. In the America segment, commercial HVAC bookings were up mid-teens, and revenues were even stronger up mid-twenties. In particular, revenues were up more than 30% in equipment with particular strength and application. Services growth was also outstanding, up mid-teens as our service business continues to compound at a rapid rate. Our residential business continues to normalize as expected, but the market declined at a faster rate than anticipated entering the quarter.
Chris: Last but not least I want to thank our global teams for once again delivering strong free cash flow throughout the year, resulting in a 103% free cash flow conversion. Please turn to slide number nine.
Chris: At the enterprise level, we delivered robust volume growth with strong incrementals positive price realization and productivity that more than offset inflation.
Chris: The Americas segment, we delivered about four points of volume and three points of price and 200 basis points of margin expansion.
Chris: While volume growth was modestly higher than price growth at the segment level, it's important to understand the dynamics below the segment level.
Chris: Robust volume growth of approximately 20 points in commercial HVAC, accompanied by strong leverage more than offset volume declines in residential and transport. The EMEA segment delivered strong incrementals in margin expansion with organic revenues up high single digits in the quarter made up of approximately five points of volume and three points of price.
Dave McNary: We expect the normalization process to continue in the near term but to return to GDP plus growth over the medium to long term. Bookies were healthy, up 8%. Our transport businesses were on the tail of two halves. In the first half of the year, revenues were up about 20 percent, and the back half of the year was down.
Chris: The segment also delivered approximately six points of M&A growth in the quarter.
Chris: Organic incrementals were greater than 30%.
Dave McNary: Q4 marked the beginning of a modest market down cycle, which is expected to snap back in 2025. Our fourth quarter was down approximately 20% against a tough prior year growth comp of up 30%. For full year 2023, we modestly outperformed and the markets that were down. Our Aaliyah segment delivered strong performance in the Commercial HVAC bookings were robust, up mid-teens. Revenues were up high single digits in Q4 and up more than 50% on a two-year staff. Transport bookings were flat, as expected, and revenues were up mid-single digits for Q4.
Chris: The Asia segment delivered strong margin expansion and organic leverage on flattish revenues with positive price and productivity in the quarter, adding to margin expansion as.
Chris: As we've highlighted throughout the year, we reinvested heavily in our business and accelerated the timing of key projects across the enterprise in 2023.
Chris: We see a tight linkage between investments in innovation and market outgrowth.
Chris: And we will continue to leverage opportunities to go further and faster a.
Chris: A few high priority areas in 2023, and 2024, our sales and services excellence digital and factory automation.
Chris: Now I'd like to turn the call back over to Dave Dave.
Dave Regnery: Thanks, Chris Please turn to slide number 10, and looking at our segments and markets. We're excited about the year ahead.
Dave McNary: In 2023, revenues were up low-single digits, outperforming end markets, which were down. Our Asia-Pacific segment performed in line with our expectations. However, revenues were flat in commercial HVAC due to a tough prior year comp, which was up low-20.
Dave Regnery: We expect continued strength in our commercial HVAC businesses globally, which comprise about 65% of our revenues supported by robust end markets unprecedented backlog, our innovative portfolio and our world class sales and services teams.
Chris Kuhn: China bookings were down most single digits, but up high single digits on a two-year stack. However, revenues were down mid-single digits against an up-low teens priority. Now, I'd like to turn the call over to Chris. Thanks Dave, please turn to slide number eight. The scoreboard for the quarter highlights strong execution top to bottom. Organic revenues were up 6%, adjusted EBITDA and operating margins were up 150 basis points and 190 basis points, respectively, and adjusted EPS was up 19%. Q4 adjusted EPS includes a $0.03 headwind related to foreign exchange losses from the devaluation of the Argentine peso.
Dave Regnery: We expect the strength of this business to more than offset softness we may see in other parts of the portfolio.
Dave Regnery: We expect our residential markets, which comprise about 20% of our revenues to continue to normalize in the near term, but to show significant improvement in 2024 versus 2023.
Dave Regnery: Yeah.
Dave Regnery: We expect modest declines in our transport markets globally in 2024, which comprise about 15% of our revenues with a snap back to growth in 2025 further we see opportunities to outperform and further mitigate the market impact and to deleverage within gross margin rates now I'd like to turn the call back.
Chris Kuhn: At an enterprise level, we delivered strong organic revenue growth in both equipment and services, of Low Single Digits and Low Teens Respect. Services growth continues to be a standout, representing about one third of our enterprise revenues and making trained technologies more resilient with higher recurring revenues at higher margins. Over the past six years, our services business delivered a compound annual growth rate of high single-digits. In 2023, services growth was even higher, up double digits. Last but not least, I want to thank our global teams for once again delivering strong free cash flow throughout the year, resulting in a 103% free cash flow conversion. Please turn to slide nine.
Chris: Over to Chris Chris.
Chris: Thanks, Dave Please turn to slide number 11.
Chris: Our guidance for 2024 reflects our optimism in key end markets and our ability to outperform.
Chris: Embedded in our guidance is our philosophy around our value creation flywheel.
Chris: Which builds in continued investment in innovation outgrowth across our end markets healthy leverage and strong free cash flow.
Chris: We're guiding 2024% to 6% to 7% organic revenue growth and $10 to $10 30.
Chris: And adjusted earnings per share or approximately 11% to 14% EPS growth.
Chris: We've included approximately one point of growth from M&A in 2024.
Chris Kuhn: At the enterprise level, we delivered robust volume growth with strong incremental, positive price realization and productivity that more than offset inflation. In the America Segment, we delivered at about four points of volume and three points of price. 200 basis points of margin expansion.
Chris: Collecting the carryover impact from bolt on acquisitions completed in 2023.
Chris: We're targeting organic leverage of 25% plus for the year, which is consistent with our stated long term target.
Chris: While we expect our recent M&A transactions to have a strong payout over the next several years.
Chris Kuhn: While volume growth was modestly higher than price growth at the segment level, it's important to understand the dynamics below the segment. Robust volume growth of approximately 20 points in commercial HVAC, accompanied by strong leverage, more than offset volume declines in residential and transport. The EMEA segment delivered strong incrementals and margin, with organic revenues up high single digits in the quarter, made up of approximately five points of volume and three points of price.
Chris: <unk>, a modest headwind to operating income and to leverage in 2024 from M&A.
Chris: Overall, we expect a negative impact of $30 million to operating income for the full year, primarily related to our technology acquisition, Nevado, which carries noncash accelerated to intangibles amortization of approximately $25 million plus a year, one acquisition and integration related costs.
Chris Kuhn: The segment also delivered approximately 6 points of M&A growth in, and organic incrementalists were greater than 30%. The Asia segment delivered strong margin expansion and organic leverage on flattish revenue, positive price, and productivity in the quarter, adding to margin expansion. As we've highlighted throughout the year, we reinvested heavily in our business and accelerated the timing of key projects across the enterprise. In 2023, we see a tight linkage between investments and innovation and market outgrowth, and we will continue to leverage opportunities to go further and faster. A few high-priority areas in 2023 and 2024 are sales and services excellence, digital, and factory automation. Now, I'd like to turn the call back over to Dave. Dave?
Chris: We expect this acquisition to be EPS accretive by year, three consistent with our M&A framework.
Chris: Turning to cash we expect 2024 to be another year of free cash flow conversion of 100% or greater.
Chris: Also wanted to provide some color on how we see the first quarter.
Chris: We expect organic revenue growth of approximately 7% led by continued strong commercial HVAC growth, partially offset by softer residential and transport markets.
Chris: <unk> adjusted EPS between $1, 60, and $1 65, reflecting high levels of incremental business reinvestment we've discussed for 2024.
Chris: And consistent with our historical Q1 adjusted earnings as a percentage of our full year earnings between 15 and 16%.
Dave McNary: Thanks, Chris. Please turn to slide number 10. Looking at our segments and markets, we're excited about the following: We expect continued strength in our commercial HVAC businesses globally, which comprise about 65% of our revenue, supported by RobustNetMarket's unprecedented backlog, our innovative portfolio, and our world-class sales and services team. We expect the strength of this business to more than offset softness we may see in other parts of the portfolio. We expect the residential market, which comprises about 20% of our revenues, to continue to normalize in the near term but to show significant improvement in 2024 versus 2023. We expect modest declines in our transport markets globally in 2024, which comprise about 15% of our revenues, with a snapback to growth in 2025. In addition, we see opportunities to outperform and further mitigate the market impact and to deleverage within gross markets. Now, I'd like to turn the call back over to Chris. Chris?
Chris: Please go to slide number 12 during.
Chris: During 2023, we delivered an incremental $60 million of transformation savings.
Chris: Over the last four years, we have successfully delivered $300 million of run rate savings from our business transformation program.
Chris: Additional savings have allowed us to reinvest in our high performance flywheel, which ultimately drives consistent top quartile EPS growth.
Chris: While this discrete program is complete as a lean based company with a world class business operating system self help cost reduction programs through productivity are part of our DNA.
Chris: This has been a strong lever for incremental margins historically and will continue to be in the future.
Please go to slide number 13.
Chris: We remain committed to our balanced capital allocation strategy.
Chris: <unk> on consistently deploying excess cash to opportunities with the highest returns for shareholders.
Chris: First we continue to strengthen our core business through relentless business reinvestment.
Chris: Second we're committed to maintaining a strong balance sheet that provides us with continued optionality as our markets evolve.
Chris Kuhn: Thanks, Dave. Please turn to slide number 11. Our guidance for 2024 reflects our optimism in key end markets and our ability to outperform. Embedded in our guidance is our philosophy around our value creation flywheel, which builds in continued investment in innovation, outgrowth across our end markets, healthy leverage, and strong free cash flow for guiding 2024 to 6-7% Organic Revenue Growth. $10 to $10.30 in adjusted earnings per share for approximately 11% to 14% EPS growth.
Chris: Third we expect to consistently deploy 100% of excess cash over time.
Chris: 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.
Chris: Please turn to slide number 14, and I will provide an update on our capital deployment for 2023 and our outlook for 2024.
Chris: During 2023 and including activity in January 2024, we deployed $2 $4 billion in cash.
Chris: Including approximately $750 million to share repurchases.
Chris: $684 million to dividends and approximately $900 million on strategic M&A.
Chris Kuhn: We've included approximately one point of growth from M&A in 2024, reflecting the carryover impact from bolt-on acquisitions completed in 2023, targeting organic leverage of 25% plus for the year, consistent with our stated long-term target. While we expect our recent M&A transactions to have a strong payout over the next several years, we're expecting a modest headwind to operating income and to leverage in 2024 from M&A. Overall, we expect a negative impact of $30 million to operating income for the full year, primarily related to our technology acquisition, Novolo, which carries non-cash accelerated intangibles amortization of approximately $25 million, plus year one acquisition and integration-related costs.
Chris: We're targeting $2 $5 billion in capital deployment in 2024, and expect to deploy 100% of excess cash over time.
Chris: We have significant dry powder with approximately $2 5 billion remaining under the current share repurchase authorization and our shares remain attractive trading below our calculated intrinsic value.
Chris: Our strong free cash flow liquidity and balance sheet continue to give us excellent capital allocation optionality.
Chris: Our M&A pipeline remains active and in 2023, we made key strategic investments to accelerate our progress across the energy services and digital solutions industrial process cooling and precision temperature control technology.
Chris Kuhn: We expect this acquisition to be EPS accretive by year three, consistent with our M&A framework. Turning to cash, we expect 2024 to be another year of free cash flow conversion of 100% or greater. We also wanted to provide some color on how we see the first quarter. We expect organic revenue growth of approximately 7%, led by continued strong commercial HVAC growth, partially offset by softer residential and transport mark.
Chris: I'd like to turn the call back over to Dave Dave.
Dave Regnery: Thanks, Chris. Please go to slide number 16, and 2023, we delivered solid execution across our transport businesses globally and outperformed our end markets over the past three years, we've outgrown our end markets by roughly 30 percentage points.
Dave Regnery: Globally in 2024, we're expecting a relatively shallow down cycle and in Americas transport weighted average forecast of down 10% and in EMEA, a forecast of down low single digits.
Chris Kuhn: We expect adjusted EPS between $1.60 and $1.65, reflecting high levels of incremental business reinvestment we've discussed for 2024. And consistent with our historical Q1 adjusted earnings as a percentage of our full-year earnings between 15 and 16%, please go to slide number 12. During 2023, we delivered an incremental $60 million of transformation savings.
In the table on the page. We have also included forecast for the big three trailer truck and Apu for your reference.
Dave Regnery: We expect to outperform the markets in both segments in 2024 entity lever within gross margin rates.
Dave Regnery: This slide also includes some additional data points related to our transport businesses that you may find helpful. Please turn to slide number 17.
Chris Kuhn: Over the last four years, we have successfully delivered $300 million of run rate savings from our business transformation program. The additional savings have allowed us to reinvest in our high-performance flywheel, which ultimately drives consistent, top-quartile EPS growth. All this discreet program is complete as a lean-based company with a world class business operating system. Self-help, cost reduction programs through productivity are part of our DNA. This has been a strong lever for incremental margins historically and will continue to be in the future; please go to slide 13. We remain committed to our balanced capital allocation strategy, focused on consistently deploying excess cash to opportunities with the highest returns for shareholders. First, we continue to strengthen our core business through relentless business reinvestment.
We operate our transport businesses for the long term and while we're moving through a modest downturn in 2024. This is a great business with a bright future.
Dave Regnery: <unk> projects, a strong trailer market rebound from 2024 to 2025 up 19%.
Dave Regnery: And projects continued growth through their forecast horizon in 2028.
Dave Regnery: We have a diversified transport business globally with opportunities to grow across the portfolio with leading innovation strong execution through our business operating system and a world class dealer network, we are well positioned to outperform in any market environment.
Dave Regnery: Please go to slide number 18.
Dave Regnery: In summary, we are well positioned to drive significant value over time, we are proud to have been recently named to corporate Knights 2024, Global 100 list.
Chris Kuhn: Second, we're committed to maintaining a strong balance sheet that provides us with continued optionality as our markets evolve. Third, we expect to consistently deploy 100% of excess cash over. Our balanced approach includes strategic M&A that further improves long-term shareholder returns and share repurchases as the stock trades below our calculated intrinsic value. Please turn to slide number 14 and I'll provide an update on our capital deployment for 2023 and our outlook for 2024. During 2023, and including activity in January 2024, we deployed $2.4 billion, including approximately $750 million for share repurchases. $684 million to dividends and approximately $900 million on strategic M&A. We're targeting $2.5 billion in capital deployment in 2024 and expect to deploy 100% of excess cash over. We have significant dry powder, with approximately $2.5 billion remaining under the current share repurchase authorization, and our shares remain attractive, trading below our calculated intrinsic value. Strong Free Cash Flow, Liquidity, and the Balance Sheet continue to give us excellent capital allocation optionality. Our M&A pipeline remains active, and in 2023, we made key strategic investments to accelerate our progress across energy services and digital solutions, industrial process cooling, and precision temperature control technology. Now, I'd like to turn the call back over to Dave. Dave?
Dave Regnery: Our uplifting culture, and our talented team around the world help us fulfill our purpose every day.
Dave Regnery: This focus on perks, along with the strength of our business operating system and continued high levels of customer demand enabled us to consistently deliver strong financial performance, while continuing to reinvest in our business we.
Dave Regnery: We believe we have the strategy the.
Dave Regnery: The innovation and the team to deliver strong performance in 2024 and differentiated shareholder returns over the long term.
Speaker Change: And now we'd be happy to take your questions operator.
Yeah.
Speaker Change: As a reminder to ask a question. Please press star followed by the number one on your telephone keypad.
Speaker Change: Please kindly limit yourself to one question and my follow up thank you.
Speaker Change: Our first question comes from Scott Davis from Melius Research. Please go ahead. Your line is open.
Scott Reed Davis: Hey, Good morning, guys, David Chris It's Scott.
Scott Reed Davis: Good morning.
Scott Reed Davis: Got it.
Scott Reed Davis: Feel like a broken record, but good good quarter, a year et cetera.
Speaker Change: Yes, you took.
Speaker Change: $60 million or something that cost out structurally is that just to clarify is that to kind of reset the cost base into this downturn turned in transport and scrap.
Speaker Change: Perhaps resi or is that more kind of.
Speaker Change: Structurally spread out.
Chris: Hey, Scott it's Chris.
Chris: $60 million is let's say the final year of that 300 million dollar cost takeout program that we launched at the start of Trane technologies.
Dave McNary: Thanks, Chris. Please go to slide number 6. In 2023, we delivered solid execution across our transport businesses globally and outperformed our end market; over the past three years, we've outgrown our end markets by roughly 30%. Globally, in 2024, we're expecting a relatively shallow down cycle and an America's transport weighted average forecast of down 10% and an EMEA forecast of down low. In the table on this page, we've also included forecasts for the big three, trailer, truck, and APU, for your reference.
Chris: $300 million run rate savings now achieve by the end of 2023. So we didn't really just wanted to put a little bit of a bow around that program. However, I would tell you that the business operating system that we've had and we've built over over a decade, it's really driven to drive strong productivity and cost savings over the long.
Chris: Term so while that discrete program is behind US I would say, we're very focused on the cost structure of the company and making sure we're getting the right leverage over the long term and so we will always look at opportunities to lean out the structure in the organization.
Dave McNary: We expect to outperform the markets in both segments in 2024 and to de-lever within gross margin. This slide also includes some additional data points related to our transport businesses that you may find interesting. Please turn to slide number 17.
Speaker Change: Okay. That's helpful and guys <unk> got a high class problem and that Youre generating a lot of cash you've de levered.
Dave McNary: We operate our transporter businesses for the long term, and while we're moving through a modest downturn in 2024, this is a great business with bright prospects. ACT projects a strong trailer market rebound from 2024 to 2025, up 19%, and projects continued growth through their forecast horizon in 2028. We have a diversified transport business globally with opportunities to grow across the portfolio. With leading innovation, strong execution of our business operating system, and a world-class dealer network, we are well positioned to outperform in any market. Who's got a slide number?
Speaker Change: Give us a sense.
Speaker Change: M&A kind of Possibles.
Speaker Change: <unk>.
Speaker Change: Is is there a pipeline I know you have a competitor that seems like theyre going to be selling some assets, but there is there an active pipeline that's interesting and material enough to.
Speaker Change: That help.
Speaker Change: Put capital to work I mean share buybacks, obviously can always be an option but.
Speaker Change: Walk us through kind of what.
Speaker Change: How do you think about M&A at least in and whether there is kind of a higher or lower or or some sort of a tam associated with potentials out there that you guys think about.
Speaker Change: Hey, Scott how are you doing this is that look our M&A pipeline is strong and I think we've been able to demonstrate.
Operator: In summary, we are well-positioned to drive significant value. We are proud to have recently been named to Corporate Knights' 2024 Global 100. Our uplifting culture and our talented team around the world help us fulfill our purpose every day. Let's focus on, along with the strength of our business outside. We believe we have the strategy, the innovation, and the team to deliver strong performance in 2024 and differentiated shareholder returns over the long term. And now, we'd be happy to take your questions. Operator?
Speaker Change: I think we actually closed five deals in 2023.
Scott Reed Davis: We like technologies.
Scott Reed Davis: We like products that we could put through our channels and I think you've seen the success that we've had with those whether it be MTA last year Alco.
Scott Reed Davis: We recently acquired the Volvo, which we're very excited about from a thing.
Scott Reed Davis: If it is augmenting our connected solutions.
Scott Reed Davis: I'm very excited at the more I learn about <unk>. So look we have very active pipeline, we love. The we love the portfolio. We have today. So I think you've heard me say in the past, we don't need to do anything, but obviously, we're always looking for opportunities where we can take.
Scott Reed Davis: Take our technology, our channel and expand what we do great. Today. So we will continue to be active in that area and expect more to come.
Operator: As a reminder, to ask a question, please press star followed by the number one on your telephone keypad. Please kindly limit yourself to one question and one follow-up. Thank you. Our first question comes from Scott Davis from Melius Research. Please go ahead, your line is open. Hey, good morning, and Joe Ritchie.
Speaker Change: Fair enough best of luck this year guys.
Speaker Change: Thank you.
Our next question comes from Julian Mitchell from Barclays. Please go ahead. Your line is open.
Scott Reed Davis: Thank you. I feel like a broken record, but a good quarter of a year, et cetera. Guys, you took, looks like, $60 million or something of cost out, structurally. Is that... clarify, is that to kind of reset the cost base in this downturn? Hey, Scott, it's Chris.
Julian Mitchell: Hi, good morning.
Julian Mitchell: Maybe.
Julian Mitchell: Just a first question around the organic growth framework for the year. So you have the the 6% to 7% guide.
Julian Mitchell: When we thinking sort of by maybe end market vertical, let's say rosin Youll geographic segments.
Chris Kuhn: The $60 million is, let's say, the final year of that $300 million cost takeout program that we launched at the start of Trane Technologies. $300 million run rate savings now achieved by the end of 2023. So we really just wanted to put a little bit of a bow around that program.
Julian Mitchell: Is it fair to assume that that growth rate, you're embedding sort of.
Julian Mitchell: 910% in commercial HVAC, maybe flattish and in RAC, and then down single digits in Teekay globally is that roughly the right framework.
Speaker Change: I think youre pretty close there so.
Chile: You're spot on there Chile.
Chile: Okay. That's helpful. Thank you and then just my quick follow up would be on the operating leverage point.
Chris Kuhn: However, I would tell you that the business operating system that we've had and that we've built over a decade is really driven to drive strong productivity and cost savings over the long term. So while that discrete program is behind us, I would say we're very focused on the cost structure of the company and making sure we're getting the right leverage over the long term. And so we'll always look at opportunities to lean out the structure in the organization; that's helpful. And guys, you've got a high-class problem and you're generating a lot of cash. That's a sense, you know, that the M&A kind of... Is there a pipeline? I know you have a competitor. Is there a pipeline?
Chile: Yes, the organic operating leverage of sort of 25% plus.
Speaker Change: Got that.
Speaker Change: So a normal run rate, but a step down from what was realized in 2023.
Speaker Change: The step down is that just it's early in the year. So no reason to divert from the long term framework or is there anything specific going on in terms of say a much smaller price cost tailwind maybe.
Speaker Change: Maybe something in mix or accelerating reinvestment spend.
Speaker Change: Like that you'd call out one thing about the organic leverage 2020 full versus last year.
Yeah. Thanks, Julien, it's Chris look the 25% organic leverage or better.
Chris: Youre right its part of our long term target within the company and our guide for 2024.
Dave McNary: Thank you very much for your help. Capital to Work. I mean, share buybacks obviously can always be an option. You know, walk us through kind of what you think about M&A, whether there is kind of a higher or lower or, sort of, a TAM. Hey, Scott, how are you doing? This is Dave.
Chris: That gives us a lot of optionality to invest back in our businesses at a steady rate and really drive market outgrowth.
Speaker Change: And I'll tell you we continue to see lots of opportunities to invest back into our businesses. We do expect 2024 to be a year of increased spend just like 2023 was and.
Speaker Change: Some of the examples we've put out there I mean, there is the continued innovation investment.
Speaker Change: About the electrification of our portfolios and heating cooling and transport products.
Dave McNary: Look, our M&A pipeline is strong, and I think we've been able to demonstrate, you know, we actually closed five deals in 2023. We like technologies. We like products that we can put through our channels. And I think you see the success that we've had with those, whether it be MTA last year or ALCO. We recently acquired Novolo, which we're very excited about because we think of it as augmenting our connected solutions. I'm very excited the more I learn about Novolo.
Speaker Change: Self help around factory automation.
And we're always looking out three to four years in terms of demand and making sure. We've got the infrastructure to keep up with that demand. So factory automation is a big investment for US we continue into 2024.
Speaker Change: Digital think about digital services digital controls, Dave just talked about the <unk> acquisition. We're very excited about as we continued investment there expanding digital twin opportunities.
Speaker Change: I can keep running down the list, but I'll I'll end with sales and service investments we.
Dave McNary: So look, we have a very active pipeline. We love the portfolio we have today. So, as I've said in the past, we don't need to do anything.
Speaker Change: Really see that over now six years driving high single digit CAGR and services growth.
Dave McNary: But obviously, we're always looking for opportunities where we can take a technology or a channel and expand what we do really well today. So we'll continue to be active in that area and expect more to come. Fair enough.
Speaker Change: We really like making investments in that space as well. It's you know it's about a third of our overall enterprise revenues. So the fact that we want to get started earlier in the year with those investments means that the payback will come sooner from that earlier start. So so those are some of the reasons, but the guide is 25% plus.
Dave McNary: Best of luck this year, guys. Alright, hey, thanks, Scott. Thank you. Our next question comes from Julian Mitchell from Barclays. Please go ahead.
Speaker Change: We want to make sure we're always relentlessly investing and frankly, we don't want anybody to catch up to where our investments are to that and it's a great question. We really like the model we have today with 25% plus it gives us a lot of optionality.
Julian Mitchell: Your line is open. Hi, good morning. Maybe just the first question around the organic growth framework for the year. So you have the six to 7% guide. When we're thinking sort of by, you know, maybe end market vertical, let's say, rather than your geographic segments, is it fair to assume that that growth rate you're embedding sort of, you know, 9-10% in commercial HVAC, maybe flattish in RESI and then down single digits in TK globally? Is that roughly the right frame?
Speaker Change: As the CEO you look at our results right and you look at the topline you say, okay, we're going on now.
Speaker Change: 9% growth for the year I'm not sure if that's going to be top quartile, we believe it will be let's see when everyone else.
Speaker Change: I look at the bottom line and I look at EPS growth of 23%.
Speaker Change: Confident that'll be top quartile and by the way that's the third consecutive year that we've had 20% or greater EPS growth and then I look at the quality of our earnings Julien and I'll use our free cash flow as a proxy to determine that and over a three year period.
Dave McNary: You're pretty close to there, so. You're spot on there, Julian. That's helpful. Thank you. And then just my, I guess, quick follow-up would be on the operating leverage point. Yeah, the organic operating leverage of sort of 25% plus, you've got that. That's your normal run rate, but a step down from what was realized in 2023.
Speaker Change: Free cash flow of 100%. So we're very happy with the model and you take that and you wrap it around our culture, which is uplifting and a can do culture that we have a trane technologies. We're very excited about the future and we're very happy with our performance in the past but.
Speaker Change: I always tell people our brightest days are still in front of us So expect more investment and expect more growth and I expect us to continue to innovate for the industry.
Chris Kuhn: The step down is that just it's early in the year, so no reason to diverge from the long-term framework, or is there anything specific going on in terms of, say, a much smaller price cost tailwind? Maybe something in the mix or accelerating reinvestment spend, you know, anything like that you'd call out when thinking about the organic leverage in 2024 versus last year. Yeah, thanks, Julian. It's Chris.
Speaker Change: That makes a lot of sense I just had one tiny follow up on the sales outlook Dave.
Speaker Change: Transport down single digits, any big divergence first half versus second half in terms of the year on year. They will right now it looks pretty steady down through the year.
Dave Regnery: No I think I think the first half will be tougher than the second half. Okay. A lot of that has to do with the comps.
Chris Kuhn: Look, the 25% organic leverage or better, you know, you're right; it's part of our long-term target within the company and our guide for 2024. It gives us a lot of optionality to invest back in our businesses at a steady rate and really drive market outgrowth. And I'll tell you, we continue to see lots of opportunities to invest back into our businesses. We do expect 2024 to be a year of increased investments, just like 2023 was. And some of the examples we put out there, I mean, there's the continued innovation investment. Think about the electrification of our portfolios and heating, cooling, and transport products, self-help around factory automation, and we're always looking out three to four years in terms of demand and making sure we've got the infrastructure to keep up with that demand. So factory automation is a big investment for us, and we will continue to invest into 2024. Digital, think about digital services and digital controls.
Dave Regnery: As I said in our prepared remarks think of the Americas and a weighted average will be down in the 10% will do better than that we will outperform.
Dave Regnery: A little bit it's down low single digits, we'll do better than that as well.
Dave Regnery: Look our thermo King business, it's a great back actually after right. After this meeting I'm going to be joining the thermo King dealer network in the Americas and.
Dave Regnery: It's a great business, we have such a great dealer network. There we've been through these slight downturns before this will snap back if you look at what <unk> projecting right now.
Dave Regnery: Down in 2024.
Dave Regnery: <unk> 25.
Dave Regnery: And then they have growth through 2028.
Dave Regnery: We're very optimistic with a lot of the innovation that we've already launched and what's coming.
Dave Regnery: This is a this is a great business not only today, but well into the future.
Speaker Change: Great. Thank you.
Speaker Change: Alright, Thanks Julien.
Dave McNary: Dave just talked about the Novolo acquisition we're very excited about, and as we continued our investment there, expanding digital twin opportunities. I can keep running down the list, but I'll end with sales and service investments. We really see that over the next six years driving high single-digit CAGR and services growth. We really like making investments in that space as well. It's, you know, about a third of our overall enterprise revenues. So the fact that we want to get started earlier in the year with those investments means that the payback will come sooner from that earlier start. So those are some of the reasons. But the guide is 25% plus or minus.
Speaker Change: Our next question comes from Chris Snyder from UBS. Please go ahead. Your line is open.
Chris Snyder: Thank you I wanted to ask about orders in the back half of the year or something incredibly strong and it really bifurcated.
Chris Snyder: When compared to any sort of industry benchmarks, we look at our peers is there anything specific that's driving that pickup in orders that we've seen over the last six months.
Chris Snyder: And anything you'd comment on data centers. It feels like a lot of the ramp and he has kind of lined up with a lot of the investment that we're seeing in data center and AI specifically thank you.
Dave McNary: We want to make sure we're always relentlessly investing, and frankly, we don't want anyone to catch up to where our investments are today. Yeah, it's a great question. We really like the model we have today with 25% plus. It gives us a lot of optionality.
Speaker Change: Yeah, Chris Great question.
Speaker Change: Our team has just executed at a very high level and I'll start with that and you think about it with a direct sales force.
Speaker Change: We're able to really pivot to where the opportunity is and we track. It all so I'll use the Americas here, but we track 14 different verticals and there are some verticals that are very strong right. Now data centers. You just spoke about also in the high Tech think of the semiconductor space.
Dave McNary: And, you know, as a CEO, you look at our results, right? And you look at the top line, and you say, OK, we're going to have 9% growth for the year. I'm not sure that's going to be top quartile. We believe it will be. We'll see when everyone else does.
Dave McNary: I look at the bottom line, and I look at EPS growth of 23%. I'm pretty confident that'll be in the top quartile. And, by the way, that's the third consecutive year that we've had 20% or greater EPS growth. And then I look at the quality of our earnings, Julian, and I'll use free cashflow as a proxy to determine that. And over a three-year period.
Speaker Change: Education is another health care is another very strong verticals, we're able to capture those opportunities with our direct sales force very technical sales force and be able to really meet or exceed in many cases exceed our customer's expectations. So.
Speaker Change: Im very happy with what we've seen from an order growth standpoint in the Americas very help very happy as well as in Europe that team has continued to perform very well and and in Asia I know Theres a lot of you know we've heard a lot on the different calls that have already occurred where people were talking about being down in Asia, our business in Asia with the leadership team we.
Dave McNary: So we're very happy with the model, and you wrap it around our culture, which is an uplifting and a can-do culture that we have at Trane Technologies. We're very excited about the future, and we're very happy with our performance in the past. But, you know, I always tell people our brightest days are still in front of us. So expect more investment, expect more growth, and expect us to continue to innovate for the industry. That makes a lot of sense.
Speaker Change: Have there we're doing very well in Asia, and our revenue growth in Asia last year was 10% by the way that's on a two year stack, that's 20%. So the team performs very very well there and I'd be.
Dave McNary: I just had one tiny follow-up on the sales outlook, Dave. You know, transport down single digits, any big divergence first half versus second half in terms of the year-on-year there, or right now, it looks pretty sort of steady down through the, No, I think I think the first half will be tougher than the second half. OK, a lot of that has to do with the comp.
Also the service business that we have I could not be prouder of what our service business really on a global basis been able to do in 2023, our service business was up in the in the teens.
Speaker Change: On a compound annual growth rate over the last six years, our service businesses, but up in the high high single digits. So it's.
Speaker Change: As our installed base continues to increase in the applied space you could see that.
Dave McNary: You know, as I said in our prepared remarks, think of the Americas. The weighted average will be down in the 10%. We'll do better than that. We'll outperform. NIA is a little bit down, you know, low single digits.
Speaker Change: The tailwind really happening within service, so very happy with our results and very happy with the order book that we have going into 2024. It gives us a lot of visibility into 2024.
Dave McNary: We'll do better than that as well. Look, our Thermal King business is a great business. In fact, actually, right up to this meeting, I'm going to be joining the Thermal King dealer network in the Americas. And you know, it's a great business. We have such a great dealer network there. We've been through these slight downturns before. This will snap back.
Speaker Change: I appreciate that and then maybe just following up on data center and I know, we're in the very very early innings on AI.
Speaker Change: Is there any way that you could frame <unk> positioning in that market.
Speaker Change: For two new <unk> that you see.
Dave McNary: If you look at what Axe is projecting right now, it's, you know, it's down in 2024, back into 2025. And then they have growth through 2028, and we're very optimistic with a lot of the innovation that we've already launched and what's coming, that this is a great business not only today but well into the future. Great, thank you. All right. Thanks, Jillian.
Speaker Change: Going forward just because it is very new but it also does seem very significant. Thank you yeah. I mean, it's not new to us I mean, we've been in data centers for a long time, where we're very strong in that vertical.
Theres a lot of public information out there that's trying to size the data center market and it's somewhat difficult you got a lot of variations in those reports just because by nature of the data center market is.
Chris Snyder: Our next question comes from Chris Snyder from UBS. Please go ahead, your line is open. Thank you. I wanted to ask about orders. In the back half of the year, orders have been incredibly strong, and it really buys when compared to any sort of industry. Benchmark, we look at, or peers.
Speaker Change: It's very confidential to data center providers, Okay. They don't want a lot of that information out, but if you look at the reports and just kind of triangulate. It you get a global market anywhere between I mean, it's a big range, but six 5 billion to up to $10 billion. So I mean, it's a big range out there and if you look at growth rates.
Dave McNary: Is there anything specific that's driving that pickup in orders that we've seen over the last six months? And anything you would comment on data center, because it feels like a lot of the ramp we've seen has kind of lined up with a lot of the... Yeah, Chris, great question. And, you know, our team is just executed at a very high level.
Speaker Change: You can take the most conservative growth rate youre going to see.
Speaker Change: High teens, maybe mid teens growth on a compound annual growth rate for the next five years. So this is a very strong vertical today, we do very very well in it with our.
Speaker Change: Very technical sales team, calling on data center customers and working with them.
Dave McNary: I'll start with that. And you think about it, with a direct sales force, we're able to really pivot to where the opportunity is. And we track, I'll use the Americas here, but we track 14 different verticals, and there are some verticals that are very strong right now. Data centers, you just spoke about. Also, in high tech, think of the semiconductor space. Education is another.
Speaker Change: It's very strong today and anticipate it being strong well into the future.
Speaker Change: I appreciate that thank you.
Speaker Change: Alright, Thanks, Chris to have a great day.
Speaker Change: Yeah.
Speaker Change: Our next question comes from Gautam Khanna from TD Cowen. Please go ahead. Your line is open.
Gautam J. Khanna: Hey, guys.
Dave McNary: Healthcare is another. Very strong verticals. We're able to capture those opportunities with our direct sales force, a very technical sales force, and be able to really meet or exceed, in many cases, our customers' expectations. So I'm very happy with what we've seen from an order growth standpoint in the Americas. Very happy as well as in Europe.
Gautam J. Khanna: Got them.
Speaker Change: Operator, I think we might want to come back to go.
Certainly I'll move on to Joe Ritchie from Goldman Sachs. Your line is open.
Joe Ritchie: Hey, guys good morning, and nice end of the year.
Joe Ritchie: Hey, Dave.
Joe Ritchie: The service business, we've talked about now for several years it's been.
Dave McNary: That team has continued to perform very well. And in Asia, I know there's a lot of, you know, we've heard a lot on the different calls that have already occurred where people were talking about being down in Asia or our business in Asia with the leadership team we have there. We're doing very well in Asia, and our revenue growth in Asia last year was 10%. By the way, that's on a two-year stack. That's 20% of the population.
Joe Ritchie: Been great for you guys and yet continues to accelerate in 2023 at a double digit growth number is pretty impressive.
Joe Ritchie: Maybe could you maybe just like point out like what's allowing you to continue to accelerate that business. Here is there is it something around your digital offering connected howmet.
Joe Ritchie: How much you're connecting how much speed you are putting on the street like what is it that's kind of driving this acceleration in growth in that service business and how do you see that playing out in the coming years.
Dave McNary: So the team performs very, very well there. And I'd also like to mention the service business that we have. I could not be prouder of what our service business, really, on a global basis, has been able to do. In 2023, our service business was up in the teens. You know, on a compound annual growth rate over the last six years, our service business has been up in the high, high single digits. And as our installed base continues to increase in the applied space, you can see that tailwind really happening within service. So, very happy with our results and very happy with the order book that we have going into 2024. It gives us a lot of visibility into 2024, and I appreciate that. And then maybe just following up on data center, and I know we're in the very, very early stages, but is there any way that you could, you know, frame trains' positioning in that market, the opportunity that you see going forward, just because it is very new? Yeah, I mean, it's not new to us.
Joe Ritchie: Yeah, Hey, Joe Thanks for the question I think I'd say, yes, yes, and yes, okay. It's a system of things that makes our service business great starts with a great operating system around around our service business.
Speaker Change: We track probably 30 different Kpis and if you went to one of our offices you'd see very detailed tracking on our service, which really leads to our success. So it's a it's.
Speaker Change: It's a great business okay.
Disclose too much about our playbook, but we have a very detailed playbook and and you see it in our results and I would tell you that our system. Our service business is really built around our applied systems.
Speaker Change: And as our applied systems continue to populate.
Speaker Change: At a at an increasing rate you could see the tail that we're getting in our service business think about applied system and I've said this in our opening remarks think about it is for every dollar of equipment think about eight to 10 times over the life of our service business and you can now start to see that flywheel, that's being created in our service business. So great business today as Chris said.
Dave McNary: I mean, we've been in data centers for a long time. We're very strong in that vertical. You know, there's a lot of public information out there that's trying to size the data center market. And it's somewhat difficult, you get a lot of variations in those reports, just because, by nature, the data center market is very confidential to data center providers. Okay, they don't want a lot of that information out.
Speaker Change: It's about a third of the enterprise.
Speaker Change: Growing nicely and we're investing heavily in it because we know theres a lot of opportunities in the future as well.
That's great to hear and I guess, there's a lot of there's a lot of good news in this brand I know that there is.
Dave McNary: But if you look at the reports and just kind of triangulate it, you get a global market anywhere between, I mean, it's a big range, but six and a half billion to up to 10 billion. So, I mean, there's a big range out there. And if you look at growth rates, you know, if you take the most conservative growth rate, you're going to see, you know, high teens, maybe mid teens growth on a compound annual growth rate for the next five years. So this is a very strong vertical today. We do very, very well in it with our, you know, very technical sales team calling on data center customers and working with them. It's very strong today and anticipated being strong well into the future. I appreciate that. Thank you. All right. Thanks, Chris. Have a great day! Our next question comes from Gautam Khanna from TD Cowen. Please go ahead, your line is open, and Gautam. Gautam.
Speaker Change: Some investor concern around.
Speaker Change: The health the healthiness of the office market in 2024, and ultimately like whether that is going to be a drag on growth for a lot of companies can you maybe just address that market, specifically and how that's impacting your business are expected due in 'twenty four.
Speaker Change: Yeah, I mean, I'll speak of the Americas, and I think I said earlier, we track about 14 different verticals.
Office is one of the weaker ones in 2023 and right now we're forecasting that that weakness to continue in 2024.
Speaker Change: We do believe that at one point office will come back in with our direct sales force, we will pivot to that opportunity and capture that opportunity, but right now it's going to be soft.
Speaker Change: Leased through 2024, we will see more.
Speaker Change: Report back at the as the year progresses as to how that that vertical is having.
Speaker Change: There's a lot in the news about it so.
Speaker Change: It's got some recovery to do but it will be soft in 2024.
Speaker Change: But that's all baked into our guide Joe So that's.
Speaker Change: We've taken that into account and I would tell you that the strength that we're seeing in some other verticals are going to be more and more than compensate what we're seeing in the office vertical.
Gautam J. Khanna: I think we might want to come back to Gautam. Certainly. I'll move on to Joe Ritchie from Goldman Sachs. Your line is open.
Operator: Hey guys, good morning and a nice end to the year. Dave, look, the service business we've talked about now for several years, it's been great for you guys, and yet, it continues to accelerate. In 2023, the double-digit growth number is pretty impressive. Just maybe, can you maybe just, like, point out, like, what's allowing you to continue to accelerate that business here? You know, is it something around your digital offering, connected, you know, how much you're connecting, how much speed you're putting on the street?
Speaker Change: Understood. Thank you.
Speaker Change: Sure.
Speaker Change: Our next question comes from Steve Tusa from Jpmorgan. Please go ahead. Your line is open.
Steve Tusa: Hey, good morning, and congrats on a very strong 23.
Steve Tusa: Steve I appreciate it.
Steve Tusa: What are you guys embedding for for price this year in general for the Americas. I mean, you said it was 3% in the quarter I think but what are you embedding for your 24 guide.
Chris Snyder: Steve It's Chris.
About 2024 at the enterprise level around a point of price it could be a little better than that.
Joe Ritchie: Like, what is it that's kind of driving this acceleration and growth in that service business, and how do you see that playing out in the coming years? Yeah, Joe, thanks for the question. I think I'd say yes, yes.
Chris Snyder: But as we've seen throughout 2023, the price contribution has started to level off as we move through the quarters, we had over six points of price in Q1, and we ended the fourth quarter with less than three points of price. So there'll be some carryover into into 2024, but we're dialing in and at the enterprise level.
Dave McNary: And yes, okay. It's a system of things that makes our service business great. It starts with a great operating system around our service business. You know, we track probably 30 different KPIs.
Dave McNary: And if you went to one of our offices, you'd see very detailed tracking of our service, which really leads to our success. So it's a great business. Okay. I won't disclose too much about our playbook.
Chris Snyder: Probably around a point could be a little bit better than that.
Speaker Change: Okay, and your inflation is kind of stable I would assume.
Speaker Change: Tier one is fairly stable I. Appreciate the notes you put out every every weekend with the updates on commodities.
Dave McNary: But we have a very detailed playbook, and you see it in our results. And I would tell you that our system, our service business, is really built around our applied systems. And as our applied systems continue to populate at an increasing rate, you can see the tail that we're getting in our service business. Think about the applied system.
Speaker Change: Most read.
Speaker Change: At tier two that happens to be inflationary rate as we're looking at wage inflation refrigerants are a couple of examples in that space and we continue to work with our vendors on the demand, we're putting through with with our order growth. So tier twos have been inflationary freight could be a little bit inflationary going into 'twenty four.
Dave McNary: I said this in our opening remarks, think about it as for every dollar of equipment, think about eight to 10 times over the life of the service. And you can now start to see that flywheel that's being created in our service business. So great business today. As Chris said, it's about a third of the enterprise growing nicely, and we're investing heavily in it because we know there are a lot of opportunities in the future as well. That's great to hear!
Speaker Change: With a very positive at least for us in 2023 on the cost side.
Speaker Change: But overall I would say we're on track to get to 2030 basis points price over cost in the year like we would normally target.
Speaker Change: But we remain flexible right.
Speaker Change: We see things turn and we need to make another price adjustment. We've got the business operating system to do that so I would just sorry, just on a follow up on the price I would assume that the majority of that price is still coming in commercial so when you talk about that flat revenue number for <unk> is that.
Dave McNary: And I guess, you know, look, there's a lot of good news in this print. I know that there's some investor concern around, you know, the health and the healthiness of the office market in 2024. And, you know, ultimately, like whether that's going to be a drag on growth for a lot of companies, can you maybe just address that market specifically and how that's impacting your business or is expected to in 24? Yeah, I mean, I'll speak of the Americas.
Speaker Change: Is that basically like.
Speaker Change: What's the volume kind of price split that youre assuming in resi.
Speaker Change: I guess is the question.
Speaker Change: All in for <unk> were.
Speaker Change: We're dialing in a flat year, our guide would take into account, a plus or minus low single digits on full year revenues for Rajiv.
Would expect price to be at that one or less kind of level for residential.
Dave McNary: And I think I said earlier, we track about 14 different verticals. You know, office is one of the weaker ones in 2023. And right now, we're forecasting that that weakness will continue in 2024. We do believe that, at some point, office space will come back, and with our direct sales force, we'll pivot to that opportunity and capture that opportunity. But right now, it's going to be soft, at least through 2024. We'll see, and we'll report back as the year progresses as to how that vertical is behaving. There's a lot in the news about it.
Speaker Change: You know really going to depend on what we think for the volume in the year, but.
Speaker Change: Not a lot of price necessarily coming through at this point.
Speaker Change: And then for 'twenty five or are you guys going to <unk>.
Speaker Change: Through the hol prices like everybody else, the 10% 10% to 15%.
Yes, we don't have a lot baked into 2024 on the conversion to 454 B. If we think that does have an impact, but certainly second half of the year, maybe fourth quarter impact.
Dave McNary: So it's got some recovery to do, but it'll be soft in 2024. But that's all baked into our guide, Joe, so we've taken that into account, and I would tell you that the strength that we're seeing in some other verticals is going to more than compensate for what we're seeing in the office verticals. Understand. Thank you.
Speaker Change: We havent dialed in the pricing exactly on that we will do that as you get ready to launch the products, but it's in the ballpark of what others have said around pricing, but we'll see how the year evolves, we'll see how the demand plays with the <unk> product versus the 454 be transition and we will update as we kind of go through the year, but to be specific Steve. This is Dave yes for sure we will see.
That in 2025.
Steve Tusa: Sure. Our next question comes from Steve Tusa from J.P. Morgan. Please go ahead, your line is open. Hey, good morning, and congratulations on a very strong 23.
Dave Regnery: Our next.
Dave Regnery: Comes from Andy Kaplowitz from Citigroup. Please go ahead your line is open.
Andrew Alec Kaplowitz: Hey, good morning, everyone.
Steve Tusa: Thanks Steve, appreciate it. What are you guys embedding for price this year in general for the Americas? I mean, you said it was 3% in the quarter, I think, but what are you embedding for your 24-guide? Yeah, Steve, it's Chris.
Andrew Alec Kaplowitz: Hey, Andy how are you good morning good.
Andrew Alec Kaplowitz: Good how are you Dave.
Andrew Alec Kaplowitz: Can you give us some more color on the traction of your thermal management systems in EMEA and the progress youre, making in bringing thermal management systems to the U S is it possible to quantify the business at this point or at least give us color on how to think about how much of your growth needs coming from vendor management systems, and where you are in terms of bringing it out here in the U S.
Chris Kuhn: Think about 2024 at the enterprise level around a point of price. It could be a little better than that. But as we've seen throughout 2023, the price contribution has started to level off as we move through the quarters. You know, we had over six points of price in Q1. And we ended the fourth quarter, you know, with less than three points of price.
Speaker Change: Yeah, I mean, it's a great question, we continue to do very well in Europe, obviously as you see in our results.
Speaker Change: I see some of that has to do with thermal management system, which is really the electrification of heating some of it has to do with some some key verticals that are very strong like data centers and in electronics.
Chris Kuhn: So there'll be some carryover into 2024. But we're dialing in at the enterprise level, probably around a point. It could be a little bit better than that.
Look we're migrating that technology to different parts of the world is not just in the U S. We're also bringing it to Asia, we think theres a tremendous opportunity.
Chris Kuhn: Okay, and your inflation is kind of stable, I would assume? Yeah, tier one is fairly stable. I appreciate the notes you put out every weekend with updates on commodities. It's a close read.
Speaker Change: To electrify heating and to significantly reduce the carbon footprint.
Speaker Change: Four buildings and help them decarbonize around the globe.
Speaker Change:
Chris Kuhn: At tier two, that happens to be inflationary, right? As we're looking at wage inflation, refrigerants are a couple of examples in that space. And, you know, we continue to work with our vendors on the demand we're putting through with our order growth. So tier two is a bit inflationary.
We have already introduced several products in different regions that trend will continue in 2024 and by the way I don't want you to think that we have stopped innovating in Europe, because that continues as well and I think we're on our last time I was there was like our fourth or fifth generation of what's happening there. So.
Chris Kuhn: Freight could be a little bit inflationary going into 24 with a very positive, at least for us, in 2023 on the cost side. But overall, I would say, you know, we're on track to get 20-30 basis points price over cost in the year like we would normally target. But we remain flexible, right?
Speaker Change: This is an evolving market, we believe it's a tremendous opportunity excuse me for the future, but we have solutions that have such great paybacks for our customers.
Speaker Change: I know a lot of people are getting asked the other day about some of the incentives around the stomach, yes. The incentives are great tailwind, but these projects stand on their own I mean, theres great payback. So if you were able to increase the efficiency by three or four times. These are fantastic opportunities for trane.
Chris Kuhn: Where we see things turn, and we need to make another price adjustment. We've got the business operating system to do that. So I would, sorry, just on a follow-up on the price, I would assume that the majority of that price is still coming in commercials. So when you talk about that flat revenue number for resi, is that, you know, is that basically like, you know, what's the volume kind of price split that you're assuming in resi? I guess that's the question. All in for Res-E. We're dialing in for a flat year. Our guide would take into account a plus or minus low single digits on full year revenues for Res-E.
Speaker Change: And there are fantastic opportunities for our customers to really help them decarbonize it actually save money as well in the process. So we're real excited about thermal management systems and expect to see more around the world.
Speaker Change: Very helpful and then Dave I wanted to double click on your comments around Asia and China in particular.
Chris Kuhn: I'd expect price to be at that one or less kind of level for residential. It really is going to depend on what we think for the volume in the year, but not a lot of price necessarily coming through at this point. And then for $25, are you guys going to push through the A2L price like everybody else? the 10%, 10% to 15%?
Speaker Change: You said, China bookings barely down I think revenue up but as you mentioned one of your peers had a relatively sharp deterioration in bookings in China. You mentioned the strength of your team there maybe talk about the durability of growth that you see there and what youre doing to sustain that growth.
Speaker Change: Yes.
Speaker Change: I am so proud of what our teams, but able to do in Asia Pac Thursday morning, I have my 630, a M call with the Asia team and.
Chris Kuhn: Yeah, we don't have a lot baked into 2024 on the, you know, the conversion to 454B. If we think that does have an impact, it's certainly the second half of the year, maybe the fourth quarter. You know, we haven't dialed in the pricing exactly on that yet. We'll do that as we get ready to launch the products, but it's in the ballpark of what others have said around pricing. But we'll see how the year evolves.
Speaker Change: We're super excited about what they see moving forward I think that sometimes you get.
Speaker Change: If you look at the headlines coming out of China specific right youre going to see GDP down and you'll see what's happening in the residential space. There I would tell you that the verticals that were really strong and continue to be strong and it is the pharmaceutical it is semi conductor. It is data centers we have.
Dave McNary: We'll see how the demand plays out with the 410A product versus the 454B transition. And we'll update you as we kind of go through the year. But to be specific, Steve, this is Dave.
Speaker Change: Rate offerings, there and and we continue to win so we're excited about the opportunities that exist in front of us there.
Dave McNary: Yeah, for sure. We'll see that in 2025. Our next question comes from Andy Kaplowitz from Citigroup. Please go ahead, your line is open. Good morning, everyone. Hey Andy, how are you? Good morning. Good, how are you?
Speaker Change: Awesome keep up the good work.
Speaker Change: Alright, Thanks, Andy can talk to you soon.
Speaker Change: Our next question comes from Jeff Sprague from vertical research. Please go ahead. Your line is open.
Andrew Alec Kaplowitz: Dave, can you give us some more color on the traction of your thermal management systems in EMEA and the progress you're making in bringing thermal management systems to the US? Is it possible to quantify the business at this point or at least give us color on how to think about how much of your growth is coming from thermal management systems and where you are in terms of bringing them out here? Yeah, I mean, it's a great question. We continue to do very well in Europe, obviously, as you can see from our results. Obviously, some of that has to do with the thermal management system, which is really electrification and heating.
Jeffrey Todd Sprague: Hey, Thanks, good morning, everyone.
Speaker Change: Morning.
Speaker Change: Hey, good morning, sorry, John a few minutes late.
Jeffrey Todd Sprague: I got kind of the end market kind of organic outlook within the six to seven how about geographically that you address that how the three regions within the 67 guide.
Yeah, Hey, Jeff It's Chris.
Chris Snyder: We really talked about was in the Americas and in EMEA for commercial HVAC, we can really see from our guide probably up high single digits for the year.
Dave McNary: Some of it has to do with some key verticals that are very strong, like data centers and electronics. Look, we're migrating that technology to different parts of the world. It's not just in the US; we're also bringing it to Asia. We think there's a tremendous opportunity to electrify heating and to significantly reduce the carbon footprint for buildings and help them decarbonize around the globe.
Chris Snyder: In the Americas or the resi, we're guiding that around flat plus or minus LSD, but we're calling it flat.
Chris Snyder: Teekay Americas markets are down around 10 points on a blended average basis will outperform that think of that around mid single digits down.
Chris Snyder: In the Americas.
Chris Snyder: And then if I go to transport and EMEA markets also down.
Dave McNary: We have already introduced several products in different regions; that trend will continue in 2024. And by the way, I don't want you to think that we've stopped innovating in Europe, because that continues as well. I think we are on our last time I was there, it was like our fourth or fifth generation of what's happening there.
Chris Snyder: Low single digits, and we will outperform those markets.
Chris Snyder: One of the slides really like putting into the materials is really just the history of market performance versus our performance within the transport businesses and because there's a lot of confidence with the investments we made over the years and we continue to make that we've got the ability to outperform markets again in 2024, but think of EMEA is that the market is down low singles, then we're flat to maybe a little bit better than that.
Dave McNary: So this is a this is an evolving market, we believe it's a tremendous opportunity, excuse me, for the future. But we have solutions that have such great paybacks for our customers, that you know and a lot of people are I was getting asked the other day about some of the incentives around this I'm like yeah the incentives are great tailwinds but these projects stand on their own I mean there's great paybacks if you're able to increase the efficiency by three four times these are fantastic opportunities for trained technologies and they're fantastic opportunities for our customers to really help them decarbonize and actually save money as well in the process so we're really excited about thermal management systems and expect to see more around the world, Very helpful.
And then Asia to Dave's point with a great team there, we're seeing somewhere in the mid singles kind of range. So hopefully that gives you a little bit of context, Julien got pretty close to it when he asked the question before but ill just kind of summarize it here and just think about a lot of strength in commercial HVAC globally.
Chris Snyder: Yes.
Chris Snyder: It sounds stake that commercial HVAC price I guess, it is up a little bit more enterprises up one <unk> is up one on price maybe teekay has got less with the volume pressures.
Chris Snyder: I actually would've thought commercial price would be a little bit better than maybe it kind of a one plus implied can you just maybe kind of talk to that a little bit like the price in the backlog versus.
Dave McNary: And then, David, I wanted to double-click on your comments around Asia and China in particular, you know, as you said, Chinese bookings, you know, barely down, I think revenue up, but as you mentioned, one of your peers had relatively sharp deterioration in bookings in China, you mentioned the strength of your team there, maybe talk about the durability of growth that you see there and what you're doing to sustain that growth. Yeah, I'm so proud of what our team has been able to do in Asia.
Chris Snyder: The new things that Youre trying to do on price just to kind of.
Chris Snyder: React to that tier two on inflation you were talking about.
Chris Snyder: Yes, Jeff It's Chris I mean look it's early in the year resi on the comment.
Chris Snyder: We're calling it flat on a full year basis, we'll see if we get any price growth there may be a little bit.
Dave McNary: In fact, Thursday morning, I had my 6.30 a.m. call with the Asia team, and they're super excited about what they see, you know, moving forward. You know, I think that sometimes you get, if you look at the headlines coming out of China specifically, right, you're going to see GDP down, and you see what's happening in the residential space there. I would tell you that the verticals that we're really strong in continue to be strong. And, you know, it is pharmaceutical, it is semiconductor, it is data centers. We have great offerings there, and we continue to win. So we're excited about the opportunities that exist in front of us. Awesome. Keep up the good work. All right. Thanks, Andy. Talk to you soon.
Chris Snyder: And even on our 1% guide for the full year it could it be better than that yes.
Speaker Change: We remain flexible as we move through the year and we will look at the dynamics of cost, but right now we've got a.
Speaker Change: Positive spread in the guide like we would target any year, but we'll be nimble the opportunities. So think of it as just the start of the year, we like putting out guidance that we can meet or exceed on a full year basis, and we'll update you as we go through.
Speaker Change: Great and maybe one just quick follow up Dave a lot of your earlier comments on the call kind of about making your own luck right the salesforce and everything.
Dave Regnery: You may have heard one of your competitors sort of gave up on the IRS yesterday like it'd be nice if something happens, but we don't see it.
Speaker Change: What's your view on.
Dave McNary: Our next question comes from Jeff Sprague from Vertical Research. Please go ahead, your line is open. Hey, thanks. Good morning, everyone. Hey, morning.
How some of the stimulus might work its way through the system.
Dave Regnery: Are you actually seeing any any tangible benefits.
Speaker Change: Yeah, I mean, we're still we're still holding out hope okay.
Jeffrey Todd Sprague: Sorry, John, a few minutes late. I got kind of the end market kind of organic outlook within the six to seven. How about geographically? Did you address that? How do the three regions fit within the six to seven guide? Yeah, hey Jeff, it's Chris.
Speaker Change: Look we are seeing some of it in the commercial space with the 170 <unk> tax credit so that is driving.
Speaker Change: Some tailwind okay on the resi side, yes, that's.
Speaker Change: Then a little bit muted.
Speaker Change: Still hopeful that that could work through we're still marketing.
Chris Kuhn: What we really talked about was, you know, in the Americas and in EMEA for commercial HVAC, we can really see from our guide probably up by single digits for the year. In the Americas for RESI, we're guiding that around flat, you know, plus or minus LSD, but we'll call it a flat. TK Americas, you know, markets are down around 10 points on a blended average basis. We'll outperform that; think of that around mid-single digits down, Indy Americas. And then if I go to transport and EMEA, markets are also down, you know, low single digits, and we'll outperform those markets. And one of the slides I really like putting into the materials is really just the history of market performance versus our performance within the transport businesses.
Speaker Change: To to the customers about heat pumps, and the importance of heat pumps and.
Speaker Change: And how we can help them. The key is going to be an IRI and I've said this in the past Jeff.
Speaker Change: You've got to make it simple right so make it simple it's complex.
Speaker Change: Don't let that complexity make its way to the customer because they want to understand it. So we've been really good with taking the complexity out of some of these more.
Speaker Change: Intricate policies and that's going to be the key to success. So the short answer is we still believe it's a tailwind it's going to be a tailwind for both residential and for commercial.
Speaker Change: We just hope that the.
Speaker Change: The pipe starts opening in residential sooner versus later.
Speaker Change: Great. Thank you for that color I appreciate it.
Chris Kuhn: And it gives us a lot of confidence with the investments we've made over the years and we continue to make that we've got the ability to outperform markets again in 2024. But think of EMEA as if the market's down low single digits; then we're flat to maybe a little bit better than that. And then Asia, to Dave's point, with a great team there, we're seeing somewhere in the mid-singles kind of range.
Speaker Change: Thanks, Jeff Thanks.
Speaker Change: Our next question comes from Deane Dray from RBC capital markets. Please go ahead. Your line is open.
Deane Dray: Thank you and good morning, everyone.
Hey, Dan how are you good morning, I doing real well thank you.
Deane Dray: So what's that has surprised you about the <unk> inventory normalization process and how long do you think it might extend into 'twenty four.
Chris Kuhn: So hopefully, that gives you a little bit of context. Julian got pretty close to it when he asked the question before, but I'll just kind of summarize it here. And Jeff, just think about a lot of strength throughout commercial HVAC global. Yeah. It sounds, Dave, that commercial HVAC price, I guess, is up a little bit more. Enterprise is up one, Resi is up one on price, maybe TK's got less with the volume pressures. I actually would have thought the commercial price would be a little bit better than maybe kind of the one plus implied. Can you maybe kind of talk about that a little bit, like the price in the backlog versus, you know, new things that you're trying to do on price just to kind of, you know, react to that tier two inflation you were talking about? Yeah, Jeff, it's Chris.
Deane Dray: Yes.
Deane Dray: Maybe surprised me a little bit as the as the amount of time, it's taken to burn off.
Speaker Change: I think you heard me at the in our third quarter call was we thought we'd be complete in Q4 and that's that's not the case. So this will burn off.
Speaker Change: Eventually.
Speaker Change: Right now it's going to go in through at least the first quarter really the first half but.
Speaker Change: Look we're.
Speaker Change: We're optimistic on residential is a great business. It will snap back as I've always said for a long time now think of resi as a GDP plus business that hasnt changed and the inventory and the independent wholesale distributor channel will we will start to align to demand.
Speaker Change:
Speaker Change: It's the first quarter I'll remind you that so we'll see what happens here as we get into peak season. So we'll give you an update as we get to our first quarter earnings call.
Speaker Change: That's all good to hear and then just data center has come up multiple times already and we're the fastest growth is happening is Zen liquid cooling and I know you all made what looks to be a great investment and liquid stack.
Jeffrey Todd Sprague: I mean, look, it's early in the year, you know, Rezi on the comment. We're calling it flat on a full year basis. We'll see if we get any price growth there, maybe a little bit. And even on our 1% guide for the full year, could it be better than that? Yes.
Speaker Change: The business is still really fragmented.
Speaker Change: And if you see opportunities where you can invest further there because that's where.
Speaker Change: Youre seeing plus 30% growth for the next several years.
Chris Kuhn: We remain flexible as we move through the year, and we'll look at the dynamics of cost. But right now, we've got positive spread in the guide like we would target any year, but we'll be nimble to opportunities. So think of it as just the start of the year.
Speaker Change: That technology and you would.
Speaker Change: You have a right to be in that business and a right to win but you'll have to invest so just what are the expectations.
Chris Kuhn: We like putting out guidance that we can meet or exceed on a full year basis, and we'll update you as we go. Hey, maybe one just a quick follow-up, Dave, on a lot of your earlier comments on the call, kind of about making your own luck, right with the Salesforce and everything. You may have heard one of your competitors sort of gave up on the IRA yesterday, like, would be nice if something happens, but we don't see it. Like, what's your view on, you know, really how some of the stimulus might work its way through the system?
Speaker Change: Yes.
Speaker Change: I appreciate your insights and emerging cooling I think he did a great piece on that so I appreciate that educating really the the industry on the possibilities that we have with immersion coil, we're still very bullish our view hasnt changed.
We're working through the technology, Okay really on the on the fluid itself. So that's continuing to evolve, but we also believe it's a big opportunity and if you think about it right I mean think about data centers.
Speaker Change: Massive market today think about the growth rates, that's going to happen over the next five years and whether you choose the high teens compound annual growth rate or youre in the 'twenty, it's a large growth number and.
Dave McNary: And, you know, are you actually seeing any tangible benefits? Yeah, I mean, we're still holding out hope. Okay. But we are seeing some of it in the commercial space with the 179 D tax credit. So that is driving some tailwinds.
Speaker Change: The technology is going to continue to evolve.
Speaker Change: And I think that immersion cooling could be one of those technologies of the future and we're certainly right in the middle of it as you said and we're going to continue to be bullish on that.
Dave McNary: Okay. On the resi side, yes, that's been a little bit muted.
Speaker Change: Great. Thank you alright.
Speaker Change: Alright, Thanks, Tim.
Dave McNary: We're still hopeful that that could work through; we're still marketing to customers about heat pumps and the importance of heat pumps and how we can help them. The key is going to be IRA, and I've said this in the past, Jeff, you've got to make it simple, right? So make it simple, it's complex.
Speaker Change: Our next question comes from Nigel Coe from Wolfe Research. Please go ahead. Your line is open.
Nigel Coe: Oh, Thanks, Good morning, guys. Thanks for the question.
Nigel Coe: So today, if you've been fielding a few questions on price. So, let's let's have a couple of more pricing questions.
Nigel Coe: Yes.
Nigel Coe: What's really kind of struck me is that some of your competitors. Some of your larger competitors actually going out with very aggressive price increases and really guiding for pretty significant realized price increases and youll messages very very different. So in your experience have you seen situations, where the market has this divergence on price and does it tend to Lee.
Dave McNary: Don't let that complexity make its way to the customer because they won't understand it. So we've been really good at taking the complexity out of some of these more..., you know, intricate policies. And that's going to be the key to success. So the short answer is we still believe it's a tailwind. It's going to be a tailwind for both residential and commercial. We just hope that the pipe starts opening in residential sooner versus later. Great. Thank you for that call. I appreciate it. Thanks, Jeff. Our next question comes from Deane Dray of RBC Capital Markets. Please go ahead.
Nigel Coe: <unk> two share shifts it just feels like it's unsustainable. This gap here. So any thoughts and then just to kind of a sub question to that would be the service fleets. You've got obviously a lot of labor inflation to deal with that I mean would you expect sales prices to be better than that one defense.
Speaker Change: Yes, let me just start and then I'll, let Chris talk about price. So I think it's always important to look at the history on pricing. So if you remember we were really early with pricing right and that's really because of our business operating system, we were able to see around that corner. So you really have to go back in history and kind of look at what we did early.
Deane Dray: Your line is open. Thank you. Good morning, everyone. Hey Deane, how are you?
Dave McNary: Good morning. I'm doing real well, thank you. So what's kind of surprised you about the RESI inventory normalization process, and how long do you think it might extend into 24? What might have surprised me a little bit is the amount of time it's taken to burn off.
Speaker Change: On versus maybe some of our competitors are catching up a little bit so Chris I'll, let you answer the rest of the question I think that's where it starts day rate around 'twenty, one 'twenty two even 'twenty three we really saw where we lead on price there. So.
Dave McNary: I think you heard me on our third-quarter call that we thought we'd be complete in Q4, and that's not the case. So this will burn off eventually. Right now, it's going to go in through at least the first quarter, really the first half.
Chris Snyder: We're being strategic Nigel as we think about that again, the 1% guide for the year right now it's early in the year, we will see how we do as you move throughout the year, but.
Dave McNary: But look, we're optimistic about residential. It's a great business. It will snap back.
Chris Snyder: Services, we well we would look at as we look at wage inflation and look at the demand out there in the marketplace and make sure. We're pricing appropriately. We're also not there and we've said this for many years, we're really not out there to try to gouge, our customers, where we're trying to do is offset inflation a few years ago with price.
Dave McNary: It is, I've always said for a long time now, think of Resi as a GDP plus business. That hasn't changed. And the inventory and the independent wholesale distributor channel will start to align to demand. You know, it's the first quarter. I remind you of that.
Dave McNary: So we'll see what happens here as we get into peak season, so we'll give you an update as we get to our first quarter. That's all good to hear.
Chris Snyder: Want customers for life, and so we're going to think about that as we move through the process here, but we don't see pricing moving backwards.
Deane Dray: And then just Data Center has come up multiple times already, and where the fastest growth is happening is in liquid cooling. And I know you all made what looks to be a great investment in liquid stack. The business is still really fragmented, and you see opportunities where you can invest further there because that's where you're seeing plus 30% growth for the next several years in that technology. You have a right to be in that business and a right to win, but you'll have to invest. So just what are the expectations?
Chris Snyder: Here in the businesses, but again the 1% guide it's just early in the year, we'll update you as we move throughout it.
Speaker Change: Okay, and then it sounds.
Speaker Change: Obviously your guidance about 171 $8 billion of.
Speaker Change: A couple of deployment in 2024, consistent with what you did in 'twenty three.
Speaker Change: Obviously tough to know how much of that is going to be buybacks. This is M&A, but I can do more M&A. The AMOLED is going to be increasingly a bit and see your GAAP EPS.
Dave McNary: Yeah, I mean, Deane, I appreciate your insights into emerging cooling. I think you did a great piece on that. So appreciate that, educating the industry on the possibilities that we have with emerging cooling. Look, we're still very bullish. Our view hasn't changed.
Speaker Change: I know I asked this question last year.
Speaker Change: Moved to cash EPS, but is that something thats under consideration.
Speaker Change: Yeah.
Speaker Change: We will give it some thought as we move throughout Youre right on amortization, it's actually you really the main driver with the <unk> acquisition that we wanted to call out with higher amortization noncash.
Dave McNary: We're working through the technology, okay, really on the fluid itself. So that's continuing to evolve. But we also believe it's a big opportunity. And if you think about it, right, I mean, think about data centers.
Speaker Change: Accounting rule based shorter lived assets in terms of how you amortize those with our high technology business Thats, our youngest company.
Dave McNary: It's a massive market today. Think about the growth rates that are going to happen over the next five years. And whether you choose the high teens compound annual growth rate, or you're in the 20s, it's a large growth number.
Speaker Change: But yes, we'll watch it as we go forward I really like our cash EPS in 2023, I calculated that after knowing your question was going to come up.
Speaker Change: With 103% region.
Speaker Change: Cash net income I like our cash EPS, we have lots of opportunities still within our working capital, especially in inventory to.
Dave McNary: And, you know, technology is going to continue to evolve. And I think that immersion cooling could be one of those technologies of the future. And we're certainly right in the middle of it, as you said, and we're going to continue to be bullish. Great, thank you.
Speaker Change: Make sure we have that is level set.
Speaker Change: That'll be a nice opportunity for us on cash going forward.
Speaker Change: But you know as we move out into the future years right at some point, we're going to start comping against the Trane acquisition amortization right. So as we move out into the future years, where you see some of that starting to roll off as well not so much here in 2024, but as we look out in the future we could start seeing that being.
Nigel Coe: All right, thanks, Deane. Our next question comes from Nigel Coe from Wolf Research. Please go ahead, your line is open.
Dave McNary: Good morning, guys. Thanks for the question. So Dave, you've been fielding a few questions on price, so let's have a couple more price questions. What's really kind of struck me is that some of your competitors, some of your larger competitors are actually going out with very aggressive price increases and really guiding for pretty significant realized price increases, and your message is very, very different. So in your experience, have you seen situations where the market has this divergence on price, and does it tend to lead to share shifts?
Speaker Change: A tailwind lets say on operating income, but but that's why we like also showing the EBITDA margins for investors right. It takes out that noise on the amortization.
Speaker Change: And it just gives another metric to look at.
Speaker Change: Right. Okay. Thanks for the details guys I appreciate it.
Speaker Change: Thanks Nigel.
Speaker Change: Our next question comes from Andrew <unk> from Bank of America. Please go ahead. Your line is open.
Good morning.
Speaker Change: Hey, Andrew how are you thinking hey, how are you just a question on Tms.
Nigel Coe: It just feels like it's unsustainable, this gap here. So any thoughts? And then just kind of a sub-question to that would be... service fleet, you know, you've obviously got a lot of labor inflation to deal with there. I mean, would you expect service pricing to be better than that 1%?
Andrew: I think you highlighted to us.
Speaker Change: Back last year.
Andrew: Yes, my understanding that it sort of qualifies.
Andrew: ICC I think.
Andrew: Was clarified back in November.
Andrew: And I think that our potential more tax incentive does this change.
Andrew: The game.
Andrew: On the Tms in North America, or it's just.
Chris Kuhn: Yeah, let me just start and then I'll let Chris talk about price. Nigel, I think it's always important to look at the history of pricing. So if you remember, we were really early with pricing, right? And that's really, you know, because of our business operating system. We were able to see around that corner. So you really have to go back in history and kind of look at what we did early on versus maybe some of our competitors are catching up a little bit. So Chris, I'll let you answer the rest of the question. I think that's where it starts today, right?
Andrew: Just more arrows in your quiver and just to work with your customers and to provide a good solution for them is that a game changer Thats a question I guess.
Andrew: I certainly think it is a game changer, when you start thinking about thermal management systems and the electrification of heating.
Andrew: And being able to significantly reduce the carbon footprint overbuilding and have a very very efficient system versus the conventional system. So I think if you wrap all that together that's a sure absolutely it's a game changer.
Andrew: It's making its way around the world and.
Chris Kuhn: 21, 22, even 23, we really saw where we led on price there. So we're being strategic, Nigel, as we think about that. Again, the 1% guide for the year right now; it's early in the year; we'll see how we do as we move throughout the year. But, you know, services, what we would look at is wage inflation, look at the demand out there in the marketplace, and make sure we're pricing appropriately. We're also not there, and we've said this for many years; we're really not out there to try to gouge our customers.
Andrew: As we launch it in different regions and continue to see more of that in the future.
Speaker Change: Yes, I guess I was referring to is the tax credit a game changer no. I know you were excited about the technology.
Speaker Change: You know I think any policy or tax credit become tailwind.
Speaker Change: Don't think they draw they own.
Only driver I think the main driver of these systems is the.
Speaker Change: Very very efficient they are very sustainable and they have great paybacks with or without any kind of policy or tax credit.
Chris Kuhn: What we're trying to do is offset inflation a few years ago with price. We want customers for life, and so we're going to think about that as we move through the process here, but we don't see pricing moving backward in these businesses. But again, the 1% guide, it's just early in the year; we'll update you as we move through it. Okay.
Speaker Change: Got it tax rate will be a benefit to it but it's not the only thing thats driving that.
Speaker Change: That makes sense and then as we think about.
Speaker Change: Inventory in the channel and the refrigerant change both on residential and light commercial.
Speaker Change: Do you see I think you addressed inventory on residential but how do you see it playing out on light commercial line I know, it's sort of hard to pin down what qualifies as life commercial.
Nigel Coe: And it sounds like you're guiding for about $1.7, $1.8 billion of capital deployment in 2024, with what he did in 23. Obviously, tough to know how much of that's going to be buybacks versus M&A, but as you do more M&A, the amort is going to be increasingly a burden to your gap EPS. I know I asked this question last year about a move to cash EPS, but is that something that's under consideration? You know, we'll give it some thought as we move forward. You're right on amortization.
Speaker Change: And then the second question does that introduce <expletive>.
Speaker Change: Different seasonality first half versus second half for the unitary business. Thank you.
Speaker Change: I really don't I think last year, the EPA came out and kind of clarified. So you can manufacture through the end of this year and then you have a complete two through 2025 to do the sell through we see that as all that was a good ruling by the EPA. We support that it gives the channel time to to do proper cell.
Chris Kuhn: It's actually you're really the main driver of the Novolo acquisition that we wanted to call out with higher amortization, non-cash, accounting rule-based, shorter-lived assets in terms of how you amortize those with a high-technology business that's, you know, a youngish company. But yeah, we'll watch it as we go forward. I really like our cash EPS in 2023. I calculated that after knowing your question was going to come up with 103% on cash-to-net income.
Speaker Change: Through.
Speaker Change: So.
Speaker Change: We see that always pause I don't see any different dynamic there on the on the on the light unitary defined light unitary is less than 25 tons. So.
Speaker Change: It will really be the same dynamic that we're seeing in roads.
Speaker Change: Big is under 25 towns for Ya.
Speaker Change: It's a large portion of our unitary business, but we also have this great applied business, Andrew that's even bigger.
Speaker Change: I appreciate it thank you.
Speaker Change: Yeah.
Chris Kuhn: I like our cash EPS. We have lots of opportunities still within our working capital, especially in inventory, to make sure we have that level set. And that'll be a nice opportunity for us on cash going forward. But, you know, as we move out into the future years, right? At some point, we're going to start comping against the train acquisition amortization, right?
Speaker Change: Our last question today will come from Noah Kaye from Oppenheimer. Please go ahead. Your line is open.
Noah Kaye: I appreciate it thanks.
Noah Kaye: Earlier about some of the digital investments Youre, making this year and you appointed Chief Digital officer in December which seemed like a pretty significant milestone.
Noah Kaye: To help us understand is there more of a digital transformation.
Noah Kaye: Opportunity internally over the next few years or is this more about adding offerings to your quicker maybe you can get a little bit deeper into some of the focus areas for those digital investments cyber digital twin et cetera.
Chris Kuhn: So as we move out into the future years, we may see some of that starting to roll off as well. Not so much here in 2024, but as we look out in the future, we could start seeing that being, you know, a tailwind, let's say, on operating income. But that's why we like also showing the EBITDA margins for investors, right?
Noah Kaye: I would tell you we've been in the digital space for a long time, Okay. So digital twins are not new to us connected solutions are not new to us.
Noah Kaye: I think that bringing <unk> on board, which is he is just a fantastic talent in early days is just doing a great job.
Chris Kuhn: It takes out that noise on the amortization and just gives another metric to look at. Right, okay, thanks for the details, Chris. You're welcome. Thanks, guys. Our next question comes from Andrew Obin from Bank of America. Please go ahead, your line is open. Good morning. Hey, Andrew. How are you?
Noah Kaye: It's just creating a huge focus and we believe that digi.
Noah Kaye: Digital digitalization is a big part of our future and Ria. This is going to help us see the opportunities that exist you take with re I should take the Volvo that we've added on how you think about what we're doing with digital twins Theres a lot of opportunities there and you think about the serve.
Andrew Burris Obin: Just a question on TMS. You know, I think you highlighted it to us back last year, and, you know, my understanding is that it sort of qualifies for the ITC. ITC, I think, was clarified back in November, and I think there are potential additional tax incentives. Does this change the game on TMS in North America, or is it just, you know, just more arrows in your quiver and just to work with your customers and provide a good solution for them? Is that a game changer? That's a question, I guess. I certainly think it is a game-changer when you start thinking about thermal management systems and electrification of heating and being able to significantly reduce the carbon footprint of a building and have a very, very efficient system versus a conventional system. So I think if you take all this together, I'd say yes, absolutely, it's a game-changer.
Noah Kaye: The level that we're seeing in our service business today the growth rates, we're seeing just think of that even getting stronger with a digital application in the future.
Speaker Change: I appreciate that Dave maybe the last question I think around this time last year, you shared with US your view of where our backlog would end you said greater than 6 billion exiting 'twenty three.
Dave Regnery: $6 9 billion. So clearly surpassed that can you share with us today, where you see it ending 24.
Dave Regnery: Yeah, I would just say that I expect our backlog to remain elevated for several periods look.
Dave Regnery: We're at $6 $9 billion right now at the same level, we were at when we we entered 2023. So it's very strong I think one thing I would say is the composition of the backlog is changing quite a bit and as we went through 2023.
Dave McNary: You know, it's making its way around the world as we launch it in different regions and continue to see more of that in the future. Yeah, I guess I was referring to the tax credit as a game changer. No, I know you're excited about the technology. But, you know, I think any policy or tax credit becomes tailwinds. I don't think they drop; they're the only driver.
Dave Regnery: Like 90% plus commercial HVAC I see and think.
Dave Regnery: Or that is applied systems, which has the long service tail associated with it so a lot of demand in those and the verticals data centers et cetera that really acquire require applied systems. So.
Dave McNary: I think the main driver of these systems is that they are very, very efficient, they're very sustainable, and they have great paybacks, with or without any kind of policy or tax credit. There will be a benefit to it, but it's not the only thing that's driving it. That makes sense. And then as we think about inventory in the channel and the refrigerant change both in residential and light commercial, how do you see, you know? I think you addressed inventory in residential, but how do you see it playing out on light commercial? And I know it's sort of hard to pin down what qualifies as light commercial.
Dave Regnery: We're very happy with our performance.
Appreciate that color. Thank you.
Dave Regnery: Sure.
Dave Regnery: Yeah.
Dave Regnery: This concludes today's Q&A session I would like to turn the call back over to Zac Nagle for closing remarks.
Dave Regnery: Yeah.
Zachary A. Nagle: Thanks, Operator, I would like to thank everyone for joining today's call as always we'll be around to answer any questions you have in the coming days and weeks.
Zachary A. Nagle: Also be attending a number of the upcoming conferences as we enter the Big conference season, and we hope to have the opportunity to connect with many of you there soon.
Andrew Burris Obin: And then the second question, does it introduce differences inality first half versus second half for the unitary business? Thank you. Yeah, I really don't.
Zachary A. Nagle: Have a great day, and we'll talk to you soon.
Speaker Change: This concludes today's conference call. Thank you for your participation you may now disconnect.
Dave McNary: I think last year, you know, the EPA came out and kind of clarified, so you can manufacture to the end of this year, and then you have a complete through 2025 to do the sell through. We see that as all, that was a good ruling by the EPA, and we support that it gives the channel time to do proper sell through. So we see that all as possible. I don't see any different dynamics there on the light unitary, and I'm defining light unitary as less than 25 tons. So, it'll really be the same dynamic that we're seeing in red. And how big is under 25 tons for you?
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: This concludes.
Dave McNary: It's a large portion of our unitary business, but we also have this great applied business, Andrew, that's even bigger. I appreciate it. Thank you. All right, cool. Our last question today will come from Noah Kay from Oppenheimer. Please go ahead, your line is open.
Noah Duke Kaye: I appreciate it. Thanks. So you talked earlier about some of the digital investments you're making this year, and you appointed a chief digital officer in December, which seemed like a pretty significant milestone. So just to help us understand, is there more of a digital transformation opportunity internally over the next few years, or is this more about adding offerings to your quiver? Maybe you can get a little bit deeper into some of the focus areas for those digital investments, cyber, digital twin, etc. Yeah, I would tell you we've been in the digital space for a long time. Okay, so digital twins are not new to us.
Dave McNary: Connected solutions are not new to us. I think that bringing Riaz on board, who's just a fantastic talent and in his early days, is just doing a great job. It's just, it's just creating a huge focus.
Dave McNary: And we believe that, you know, digitalization is a big part of our future, and Riaz is going to help us see the opportunities that exist. With Riaz, you take the Volo that we've added on, you think about what we're doing with digital twins, there are a lot of opportunities. Now, you think about the level that we're seeing in our service business today, the growth rates we're seeing, just think of that even, you know, getting stronger with a digital application in the future. Appreciate that, Dave. Maybe the last question, you know, around this time last year, you shared with us your view of where the backlog would end. You said greater than 6 billion leaving 23rd, you know, 6.9 billion. So you clearly surpassed that. Can you share with us today where you see it ending? Yeah, I would just say that I expect our backlog to remain elevated for several periods. Look, you know, we're at $6.9 billion right now; it's the same level we were at when we entered 2023. So it's very strong.
Dave McNary: I think one thing I would say is that the composition of the backlog is changing quite a bit. And as we went through 2023, it's now like 90% plus commercial HVAC. And think of that as applied systems, which have that long service tail associated with them. So, there is a lot of demand for those, in the verticals, data centers, etc. that really require applied systems.
Dave McNary: So, we're very happy with our performance. Thank you. Sure.
Zachary A. Nagle: This concludes today's Q&A session. I would like to turn the call back over to Zach Nagle for closing remarks. Thanks, Operator. I'd like to thank everyone for joining today's call. As always, we'll be around to answer any questions you have in the coming days and weeks. We'll also be attending a number of upcoming conferences as we enter the big conference season, and we hope to have the opportunity to connect with many of you there soon. Have a great day, and we'll talk to you soon. This concludes today's conference call. Thank you for your participation. You may now disconnect. This concludes.