The operator welcomes participants to the Trane Technologies Q4 2023 Earnings Conference Call and introduces the speakers. The call is being recorded and archived on the company's website. The speakers, Dave Regnery and Chris Kuehn, will discuss the company's purpose-driven strategy, which is aligned with mega trends like energy efficiency, decarbonization, and digital transformation. These trends are driving demand for the company's sustainable solutions, especially in light of extreme weather events caused by the warmest year on record in 2023.

Trane Technologies is committed to reducing emissions and addressing the effects of climate change through their Gigaton Challenge and purpose-driven strategy. They aim to consistently deliver top quartile financial performance and have seen success in meeting or exceeding targets in 2023. The company also prioritizes investment in innovation, people, and their business operating system, which has led to a strong track record of success.

Trane Technologies has shown strong financial performance, with a 12% revenue growth rate, margin expansion, and high cash flow conversion. Despite challenges in the transport and residential markets, the company has leveraged its diversified portfolio and efficient business operating system to deliver strong results. The Americas saw growth in residential and transport refrigeration bookings, while the global commercial HVAC markets remain robust. Trane Technologies is excelling in key verticals such as data centers and high-tech industrial, and its commercial HVAC bookings and backlog reflect this success. The company anticipates continued growth in the future, with a strong pipeline of projects that align with its strengths.

In 2024, the company had a backlog of $6.9 billion, with a focus on commercial HVAC systems. The backlog has been steadily increasing over the past three years. The company expects strong financial performance in 2023, with organic revenue growth and adjusted EPS. Demand for their products and services remains strong across all segments. Bookings were up 12% in the fourth quarter, led by commercial HVAC. The residential business is normalizing, while the transport business experienced a decline in the second half of the year. The EMEA segment had strong performance in the quarter, with robust bookings and revenue growth.

The fifth paragraph discusses the performance of the company in terms of transport bookings, revenues, and end markets. It also mentions the performance of the Asia-Pacific segment and the impact of a tough prior year comp in the commercial HVAC sector. The overall strong execution of the company is highlighted, with organic revenues, adjusted EBITDA and operating margins, and adjusted EPS all showing significant growth. The services business is also noted as a standout, with strong growth and higher margins. The company's free cash flow conversion rate is also praised. The following paragraph discusses the company's volume growth, price realization, and productivity, which helped offset inflation and led to margin expansion in the Americas segment.

The company's volume growth was higher than price growth at the segment level, with strong performance in commercial HVAC and margin expansion in the EMEA and Asia segments. The company plans to reinvest in innovation and focus on sales and services excellence, digital, and factory automation in 2023 and 2024. They expect continued strength in their commercial HVAC business, offsetting any potential softness in other areas, and anticipate improvement in the residential market in 2024.

In the 2024 fiscal year, the company expects a slight decline in the transport market, but sees opportunities to outperform and mitigate the impact. They are also optimistic about their key end markets and have a philosophy of continued investment in innovation, outgrowth, healthy leverage, and strong free cash flow. The company is targeting 6-7% organic revenue growth and $10-10.30 in adjusted earnings per share, with a 25%+ organic leverage. They also expect a modest headwind to operating income and leverage from recent M&A transactions. The company expects to have a 100% or greater free cash flow conversion in 2024 and projects 7% organic revenue growth in the first quarter.

The company expects adjusted EPS between $1.60 and $1.65 for 2024, reflecting high levels of reinvestment in the business. They have successfully delivered $300 million in transformation savings over the past four years and will continue to focus on cost reduction and productivity. Their balanced capital allocation strategy includes business reinvestment, maintaining a strong balance sheet, and deploying excess cash through strategic M&A and share repurchases. In 2023, they deployed $2.4 billion in cash and plan to continue this approach in 2024.

The company is targeting $2.5 billion in capital deployment in 2024 and plans to deploy excess cash over time. They have remaining funds for share repurchases and a strong balance sheet. In 2023, they outperformed their end markets and expect to do so in 2024 as well. The transport business is expected to have a shallow down cycle, but the company is confident in its long-term prospects and plans for growth.

Trane Technologies is well positioned to drive value and has been named to Corporate Knights 2024 Global 100 list. Their strong business operating system and high customer demand allow for consistent financial performance and reinvestment in the business. They believe they have the strategy, innovation, and team to deliver strong performance and shareholder returns. They have taken $60 million in cost savings as part of a $300 million cost takeout program and continue to focus on productivity and cost savings through their business operating system. They are now taking questions from the audience.

The company is focused on reducing costs and improving long-term leverage. They have a strong M&A pipeline and have recently acquired several companies. They are always looking for opportunities to expand their technology and channels.

Julian Mitchell from an investment firm asks about the company's organic growth framework and operating leverage for the year. The company confirms that their growth rate is on track, with commercial HVAC expected to grow by 9-10%, resi by flattish, and TK globally by single digits. They also state that their organic operating leverage of 25% is in line with their long-term target, and they plan to continue investing back into their businesses in 2024 to drive market outgrowth.

The company is investing in electrification, digital services, digital controls, and sales and service. They are looking to maintain their 25% plus growth rate and stay ahead of their competition. The CEO is pleased with the company's top-line and bottom-line growth and the quality of their earnings.

Dave Regnery, CEO of Train Technologies, talks about the company's positive and can-do culture and their excitement for the future. He mentions that their sales outlook for the first half of the year will be tougher than the second half, but they expect to outperform their competitors. He also mentions their Thermo King business and their strong dealer network, and their optimism for growth in the future. The next question from Chris Snyder is about orders.

The speaker explains that the company's strong performance in the back half of the year is due to their ability to pivot to where the opportunities are, such as in data centers, high tech, education, and healthcare. They credit their direct sales force and technical expertise for being able to exceed customer expectations. The company's performance in Asia has also been strong, with a 10% revenue growth last year. The speaker expresses pride in the company's global service business.

The company's service business has experienced significant growth over the past six years, particularly in the applied space. This trend is expected to continue as the installed base increases. The company is also well-positioned in the data center market, which is expected to see high growth rates in the future. The company has a strong presence in this market and anticipates continued success.

During a conference call, Dave Regnery, the operator, and Joe Ritchie discuss the growth of the company's service business. Regnery credits the success of the service business to a detailed operating system and playbook. He also mentions that the service business is closely tied to the company's applied systems, which have a significant impact on its growth.

Dave Regnery discusses the growth of the enterprise and the potential opportunities in the future. He also addresses investor concerns about the health of the office market in 2024 and how it may impact the company's growth. He mentions that the office vertical is expected to be weak in 2024, but the strength in other verticals will compensate for it. The company is also expecting a 3% price increase in 2024.

The company's price contribution has started to level off in 2023, with over 6 points of price in Q1 and less than 3 points in Q4. They are expecting around a 1 point price contribution at the enterprise level in 2024, possibly slightly better. Inflation is stable for Tier 1, but Tier 2 is experiencing some inflation. The company is targeting 20-30 basis points of price over cost for the year, with the ability to adjust prices if necessary. For residential, they are expecting flat revenues with a possible low-single digit increase in price.

The company plans to increase prices for their A2L product in 2025, but the exact amount is still being determined. They expect to see growth in their thermal management systems in Europe and are working to bring it to the U.S. and Asia as well.

Trane Technologies believes there is a great opportunity to electrify heating and reduce carbon footprint for buildings globally. They have introduced new products in different regions and plan to continue innovating in Europe. There are incentives for these projects, but they also have good paybacks on their own. The company is excited about thermal management systems and expects to see more growth around the world. In China, Trane Technologies has seen strong bookings and revenue, and they credit their team for this success. The company is confident in the durability of growth in Asia and is proud of their team's performance.

In terms of geographic regions, the company is expecting high-single-digit growth in the Americas and flat growth in residential HVAC. The Americas and EMEA markets for commercial HVAC are expected to be down mid-single digits and low-single digits, respectively, but the company is confident in their ability to outperform these markets. They have a history of outperforming in the transport business due to their investments.

The speaker discusses the performance of different markets, comparing it to the dating scene. They mention that EMEA is like down-low singles, while Asia is in the mid singles range. The team is seeing strength in commercial HVAC globally, but residential is expected to remain flat. They may be able to increase prices in response to inflation, but it is still early in the year. The company remains flexible and will update as needed. The speaker also mentions that one of their competitors has given up on the IRA.

In response to a question about the potential benefits of stimulus measures, Dave Regnery discusses the impact on the commercial and residential sectors. He notes that the 179D tax credit is driving some positive effects in the commercial space, but the results in the residential sector have been more muted. Regnery emphasizes the importance of simplifying policies and avoiding complexity for customers. He also comments on the ongoing process of normalizing residential inventory, stating that it has taken longer than expected and may continue into the first half of 2024.

The speaker expresses optimism about the residential business and expects it to rebound. They mention inventory aligning with demand and plan to give an update on the first quarter earnings call. The topic of data centers and liquid cooling is brought up, with the speaker acknowledging the potential for growth in this area and their investment in the technology. They mention ongoing developments in the fluid technology and believe immersion cooling could be a key technology in the future.

During a conference call, Deane Dray from RBC Capital Markets asks about the company's pricing strategy. Dave Regnery, the CEO, responds by saying that they were early in implementing price increases due to their efficient business operating system. Chris Kuehn, the CFO, adds that they are being strategic with pricing and that it is still early in the year to see how it will play out. Some of their competitors have also implemented aggressive price increases, but the company is confident in their approach.

The company is considering wage inflation and market demand when setting prices for services. They are not trying to overcharge customers and want to maintain long-term relationships. The company plans to deploy around $1.7-1.8 billion in capital in 2024, but it is uncertain how much will go towards buybacks or M&A. The company will monitor amortization and may consider switching to cash EPS in the future.

The speaker discusses the potential impact of future years on operating income and highlights the use of EBITDA margins as a metric for investors. A question is asked about the potential impact of CMS on TMS in North America, to which the speaker responds that it could be a game changer in terms of reducing carbon footprint and increasing efficiency. The tax credit is also mentioned as a potential tailwind, but not the sole driver of success.

The speaker discusses the main drivers of efficient and sustainable systems, including tax credits, and addresses the impact of the refrigerant change on inventory and seasonality in the unitary business. They also mention their Chief Digital Officer and investments in digital technology.

Dave Regnery, President and COO of Trane Technologies, discusses the company's digital transformation opportunities and the recent addition of Riaz Gulamali, who will help identify new opportunities. He also mentions the growth in the service business and expects backlog to remain elevated for several periods. The composition of the backlog is changing, with 90% focused on commercial HVAC, particularly in verticals such as data centers.

The speaker expresses happiness with their company's performance and thanks the caller for their question. The operator then ends the Q&A session and the speaker concludes the call, thanking everyone for participating and mentioning future conferences.

This summary was generated with AI and may contain some inaccuracies.