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spk01: 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. 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 Nagel, Vice President, Investor Relations.
spk09: Thanks, Operator. Good morning, and thank you for joining us for Terrain Technologies' fourth quarter 2023 earnings conference call. This call is being webcast on our website at traintechnologies.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 in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities law. Please see our SEC filings for a description of some of the factors that may cause our actual results to differ materially from anticipated results. This presentation also includes non-GAAP measures, which are explained in the financial tables attached to our news release. Joining me on today's call are Dave Regneri, Chair and CEO, and Chris Kuhn, Executive Vice President and CFO. With that, I'll turn the call over to Dave.
spk14: Thanks, 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 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. 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 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 system enable us to consistently deliver a superior growth profile, strong margins, and powerful free cash flow. 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. 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. And while the results are not yet in, we believe we'll hit top quartile on organic revenue growth up 9% and adjusted EPS growth up 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 technologies. 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 expansion, and free 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 six. Q4 was another strong quarter. Despite challenges in our transport and residential businesses, We leveraged the strength of our diversified and resilient global portfolio in our best-in-class business operating system to deliver strong financial performance as an enterprise. 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. 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're 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. This is one of the things that Trane Technologies does best in our commercial HVAC bookings, backlog, and revenue reflect our success. To put this in context, our America's commercial HVAC bookings are up more than 50% on a three-year stack. Our 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 stack. 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. 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. For 2023, backlog in 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% and adjusted EPS of $10 to $10.30. Chris will discuss some of the key dynamics later in the presentation. Please go to slide number seven. 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. In the Americas segment, commercial HVAC bookings were up mid-teens, and revenues were even stronger up mid-20s. Revenues were up more than 30% in equipment with particular strength in applied. 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. 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 were healthy, up 8%. 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%. 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 in markets, which were down 5%. Our immediate 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. Transport bookings were flat as expected, and revenues were up mid-single digits for Q4. In 2023, revenues were up low single digits, outperforming end markets, which were down mid-single digits. 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 20s. China bookings were down low single digits, but up high single digits on a two-year stack. Revenues were down mid-single digits against an up low team's prior year comp. Now, I'd like to turn the call over to Chris. Chris?
spk15: 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 3 cent headwind related to foreign exchange losses from the devaluation of the Argentine peso. At an enterprise level, we delivered strong organic revenue growth in both equipment and services, up low single digits and low teens respectively. 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 time. Over the past six years, our services business delivered a compound annual growth rate of high single digits. 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 103% free cash flow conversion. Please turn to slide number nine. At the enterprise level, we delivered robust volume growth with strong incrementals, positive price realization, and productivity that more than offset inflation. The America segment, we delivered about four points of volume and three points of price, and 200 basis points of margin expansion. While volume growth was modestly higher than price growth at the segment level, it's important to understand the dynamics below the segment level. 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 expansion, with organic revenues up high single digits in the quarter, made up of approximately five points of volume and three points of price. The segment also delivered approximately six points of M&A growth in the quarter. Organic incrementals were greater than 30%. 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 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?
spk14: Thanks, Chris. Please turn to slide number 10. Looking at our segments and markets, we're excited about the year ahead. 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. 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 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. 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. 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 over to Chris.
spk15: Chris? 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% to 7% organic revenue growth, and $10 to $10.30 in adjusted earnings per share, or approximately 11% to 14% EPS growth. We've included approximately one point of growth from M&A in 2024, reflecting the carryover impact from bolt-on acquisitions completed in 2023. We're targeting organic leverage of 25% plus for the year, which is 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, Nivolo, which carries non-cash accelerated intangibles amortization of approximately $25 million, plus year one acquisition and integration related costs. 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 markets. 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. 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. 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. This has been a strong lever for incremental margins historically and will continue to be in the future. Please go to slide number 13. We remain committed to our balanced capital allocation strategy, focused on consistently deploying excess cash to opportunities with the highest returns for shareholders. First, we continue to strengthen our core business through relentless business reinvestment. Second, we're committed to maintaining a strong balance sheet that provides us with continued optionality as our markets evolve. Third, we expect to consistently deploy 100% of excess cash over time. Our balanced approach includes strategic M&A that further 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 in cash, including approximately $750 million to 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 time. 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. Our strong free cash flow, liquidity, and 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.
spk14: Thanks, Chris. Please go to slide number 16. In 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. 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 single digits. In the table on the page, we've also included forecasts for the big three, trailer, truck, and APU for your reference. We expect to outperform the markets in both segments in 2024 and to de-lever within gross margin rates. This slide also includes some additional data points related to our transport businesses that you may find helpful. Please turn to slide number 17. 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 a bright future. 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 through our business operating system, and a world-class dealer network, we're well-positioned to outperform in any market environment. Please go to slide number 18. In summary, we are well-positioned to drive significant value over time. We are proud to have been recently named to Corporate Knight's 2024 Global 100 list. Our uplifting culture and our talented team around the world help us fulfill our purpose every day. This focus on purpose, 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 believe we have the strategy, the innovation, and the team to deliver strong performance in 2024 and differentiate its shareholder returns over the long term. And now, we'd be happy to take your questions.
spk12: Operator?
spk01: 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 Milius Research. Please go ahead. Your line is open.
spk02: Hey, good morning, guys. Dave and Chris and Zach.
spk00: Good morning.
spk02: I feel like a broken record, but good quarter a year, et cetera. You took, looks like, $60 million or something of cost out structurally. Is that, just to clarify, is that to kind of reset the cost base into this downturn in transport and perhaps resi, or is that more structurally spread out?
spk15: Hey, Scott, it's Chris. 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. However, I would tell you that the business operating system that we've had and we've built over a decade It's 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.
spk02: Okay. That's helpful. And, guys, you've got a high-class problem in that you're generating a lot of cash. You've delevered. Give us a sense, the M&A kind of possibles. Is there a pipeline? I know you have a competitor that seems like they're going to be selling some assets, but is there an active pipeline that's interesting and material enough to help put capital to work? I mean, share buybacks obviously can always be an option, but walk us through kind of what how you think about m a at least and and whether there is kind of a higher or lower or or uh or some sort of a tam associated with potentials out there that you guys think about hey scott how you doing this is dave look our m a pipeline is strong and i think we've been able to demonstrate um you know i think we we actually closed five deals in 2023 um we like technologies
spk14: We like products that we could put through our channels, and I think you see the success that we've had with those, whether it be MTA last year, Alco. We recently acquired Nivolo, which we're very excited about from, think of it as augmenting our connected solutions. Very excited the more I learn about Nivolo. So, look, we have a very active pipeline. 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 a technology or a channel and expand what we do great today. So we'll continue to be active in that area and expect more to come.
spk02: Fair enough. Best of luck this year, guys.
spk14: All right. Hey, thanks, Scott.
spk12: Thank you.
spk01: Our next question comes from Julian Mitchell from Barclays. Please go ahead. Your line is open.
spk07: Hi, good morning. Maybe just the first question around the organic growth framework for the year. So you have the 6% to 7% guide. When we're thinking sort of by 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 9%, 10% in commercial HVAC know maybe flattish in in resi and then down single digits in tk globally is that roughly the right framework you're pretty close there so you're spot on there julian okay that's helpful thank you and then just um my i guess quick follow-up would be on the operating leverage point um you know, 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. 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 mix or accelerating reinvestment spend? Anything like that you'd call out when thinking about the organic leverage 2024 versus last year?
spk15: Yeah, thanks, Julian. It's Chris. Look, the 25% organic leverage or better, 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 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 factor automation is a big investment for us. We continue into 2024. Digital, think about digital services, digital controls. Dave just talked about the Nibolo acquisition. We're very excited about as we continued 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 now six years driving high single-digit CAGR and services growth. We really like making investments in that space as well. 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 those are some of the reasons, but the guide is 25% plus. 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.
spk14: It's a great question. We really like the model we have today with 25% plus. It gives us a lot of optionality. And as a CEO, you look at our results, right? And you look at the top line and you say, okay, 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 reports. I look at the bottom line. And I look at EPS growth of 23%. I'm pretty 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, Julian. And I'll use free cash flow as a proxy to determine that. And over a three-year period, 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 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.
spk07: Thanks. That makes a lot of sense. I just had one tiny follow-up on the sales outlook, Dave. 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 steady down through the year?
spk14: No, I think the first half will be tougher than the second half. A lot of that has to do with the comps. 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's a little bit down, you know, low single digits. We'll do better than that as well. Look, our Thermal King business, it's a great business. In fact, actually, after 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. If you look at what ACK's projecting right now, it's, you know, it's down in 2024, a quick step 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.
spk07: Great. Thank you.
spk14: All right. Thanks, Jillian.
spk01: Our next question comes from Chris Snyder from UBS. Please go ahead. Your line is open.
spk05: Thank you. I wanted to ask about orders. In the back half of the year, orders have been incredibly strong, and they've really bifurcated when compared to any sort of industry benchmark we look at or peers. 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 investment that we're seeing in data center and AI specifically. Thank you.
spk14: Yeah, Chris, great question. And, you know, our team is just executed at a very high level. I'll start with that. And you think about it, with the direct sales force, we're able to really pivot to where the opportunity is. And we track it. 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. Education's another. Healthcare's 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 customers expectations so um very happy with what we've seen from an order growth standpoint in the americas very help very happy as well as in in europe that team has continued to perform very well and uh 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 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%. So the team performs very, very well there. And I'd be, you know, also 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. 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 could 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.
spk05: 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, but is there any way that you could frame trained positioning in that market, the opportunity that you see going forward, just because it is very new, but it also does seem very significant. Thank you.
spk14: Yeah, I mean, it's not new to us. 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 have a lot of variations in in those reports just because the by nature the data center market is um 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 and a half billion to up to 10 billion So, I mean, it'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 anticipate it being strong well into the future. Appreciate that. Thank you. All right. Thanks, Chris. Have a great day.
spk01: Our next question comes from Gautam Khanna from TD Cowan. Please go ahead. Your line is open.
spk00: Hey, Gautam. Gautam.
spk12: I think we might want to come back to Gotham.
spk01: Certainly. I'll move on to Joe Ritchie from Goldman Sachs. Your line is open.
spk04: 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 continues to accelerate. In 2023, the double-digit growth number is pretty impressive. Maybe you maybe just like point out like what's what's allowing you to continue to accelerate that business here. You know, is there is it something around your digital offering connected You know how much you're connecting how much feet, you're putting on the street like what what is it that's kind of driving this acceleration and growth and that service business. And then, and how do you see that playing out in the coming years.
spk14: Yeah, Joe, thanks for the question. I think I'd say yes, yes and yes. OK, it's a system of things that makes our service business great. It starts with a great operating system around around our service business. You know, 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 a great business. OK, I won't 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 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 of an applied system. 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 our service business. And you could 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's a lot of opportunities in the future as well.
spk04: No, that's, that's great to hear. And I guess, you know, look, there's a lot of, there's a lot of good news in this brand. I know that there's, you know, some investor concern around, you know, the health, 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 expected to in 24?
spk14: yeah i mean i'll speak of the americas and i think i said earlier we track about 14 different verticals um you know office is one of the weaker ones in 2023 and and right now we're forecasting that that weakness to continue in 2024. um we do believe that at one point office 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 uh at least through 2024 we'll see uh we'll report back at the as the year progresses as to how that that vertical is behaving. There's a lot in the news about it, 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 that's 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 more than compensate what we're seeing in the in the office vertical.
spk12: Understood. Thank you. Sure.
spk01: Our next question comes from Steve Tusa from JP Morgan. Please go ahead. Your line is open.
spk03: Hey, good morning and congrats on a very strong 23. Thanks, Steve.
spk14: Appreciate it.
spk03: 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?
spk15: Yeah, Steve, it's Chris. 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. 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 2024. But we're dialing in at the enterprise level, probably around a point. Could be a little bit better than that.
spk03: Okay. And your inflation is kind of stable, I would assume?
spk15: Yeah, tier one is fairly stable. I appreciate the notes you put out every weekend with updates on commodities. It's a close read. At tier two, that happens to be inflationary, right, as we're looking at wage inflation and refrigerants or a couple of examples in that space. And, um, you know, we continue to work with our vendors on the demand we're putting through with, uh, with our order growth. So tier two is a bit inflationary. Freight could be a little bit inflationary going into 24, uh, with a very, uh, positive, at least for us and in 2023 on the cost side. Um, but overall I would say, you know, we're on track to get 20, 30 basis points price over costs in the year, like we would normally target. Um, but we remain flexible, right? We're, uh, We see things turn and we need to make another price adjustment. We've got the business operating system to do that.
spk03: 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 commercial. 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 is the question.
spk15: All in for resi, 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 resi. I'd expect price to be at that one or less kind of level for residential. It really is independent of what we think for the volume in the year, but not a lot of price necessarily coming through at this point.
spk03: And then for 25, are you guys going to push through the A2L price like everybody else? the 10%, 10 to 15%?
spk15: Yeah, we don't have a lot baked into 2024 on the conversion to 454B. If we think that does have an impact, it's certainly second half of the year, maybe fourth quarter impact. We haven't dialed in the pricing exactly on that. 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. We'll see how the demand plays with the 410a product versus the 454b transition and we'll update as we kind of go through the year but to be specific steve this is dave yeah for sure we'll see that in 2025. yeah our next question comes from andy kaplowitz from citigroup please go ahead your line is open hey good morning everyone hey andy how are you good morning good how are you
spk08: 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 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 it means coming from thermal management systems and where you are in terms of bringing it out here in the U.S.?
spk14: Yeah, I mean, it's a great question. We continue to do very well in Europe, obviously, as you see in our results. Obviously, some of that has to do with thermal management system, which is really electrification and heating. 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 U.S. 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. 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're on our, last time I was there, it was like our fourth or fifth generation of what's happening there. So 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, I know 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.
spk08: Very helpful. And then, David, I wanted to double click on your comments around Asia and China in particular. You know, as you said, China 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.
spk14: Yeah, I'm so proud of what our team's been able to do in Asia. In fact, Thursday morning, I have my 6.30 a.m. call with the Asia team, and they're super excited about what they see moving forward. I think that sometimes you get, if you look at the headlines coming out of China specific, you're going to see GDP down and 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 it is the pharmaceutical, it is the 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 there.
spk08: Awesome. Keep up the good work.
spk14: All right. Thanks, Andy. Talk to you soon.
spk08: Thanks.
spk01: Our next question comes from Jeff Sprague from Vertical Research. Please go ahead. Your line is open.
spk13: Hey, thanks. Good morning, everyone. Good morning, Seth. Hey, morning. Sorry, I was on 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 the three regions fit within the six to seven guide?
spk15: Yeah. Hey, Jeff, it's Chris. What we really talked about was, you know, in the Americas and in EMEA for commercial HVAC, you know, we can really see from our guide probably up by single digits for the year. In the Americas with resi, we're guiding that around flat, you know, plus or minus LSD, but we're calling it 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 in the Americas. And then if I go to transport and EMEA, markets also down low single digits, and we'll outperform those markets. And one of the slides we really like putting into the materials is really just the history of market performance versus our performance within the transport businesses. 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 singles, 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. 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.
spk14: And just think about a lot of strength around commercial HVAC globally.
spk13: 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 commercial price would be a little bit better than maybe kind of the one plus implied. Can you just maybe kind of talk to that a little bit, like the price and 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?
spk15: Yeah, Jeff, it's Chris. I mean, look, it's early in the year, you know, Rezzy 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. We remain flexible as we move through the year and we'll look at the dynamics of costs. But right now we've got a 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. 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.
spk13: Hey, maybe one just quick follow-up. Dave, 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, 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, you know, work its way through the system, and, you know, are you actually seeing any tangible benefits?
spk14: Yeah, I mean, we're still holding out hope, okay? Look, we are seeing some of it in the commercial space with the 179D tax credit, so that is driving some tailwinds, okay? On the resi side, yes, that's been a little bit muted. We're We're still hopeful that that could work through. We're still marketing to the customers about heat pumps and the importance of heat pumps and how we can help them. The key is going to be on IRA, and I've said this in the past, Jeff, you got to make it simple, right? So make it simple. It's complex. Don't let that complexity make its way to the customer because they won't understand it. So we've been really good with 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 for commercial. We just hope that the pipe starts opening in residential sooner versus later.
spk13: Great. Thank you for that call. I appreciate it. Thanks, Jeff. Thanks.
spk01: Our next question comes from Dean Dre from RBC Capital Markets. Please go ahead. Your line is open.
spk12: Thank you. Good morning, everyone. Hey, Dean. How are you? Good morning. I'm doing real well. Thank you. So what has surprised you about the resi inventory normalization process and how long do you think it might extend into 24?
spk14: What's maybe surprised me a little bit is the amount of time it's taken to burn off. I think you heard me in our third quarter call was 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. But look, we're optimistic on residential. It's a great business. It will snap back. 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 It's the first quarter, I remind you of 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.
spk12: That's all good to hear. 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 a plus 30% growth for the next several years in that technology. And 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?
spk14: yeah i mean dean i appreciate your insights and and immersion cooling i think you did a great piece on that so appreciate that educating really the the industry on the possibilities that that we have with immersion cooling look we're still very bullish our view hasn't changed we're working through the technology okay really on the on the fluid itself so that 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 it's a 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 you're in the 20s, it's a large growth number. And the 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 on that.
spk12: Great. Thank you. All right. Thanks, Dean.
spk01: Our next question comes from Nigel Coe from Wolf Research. Please go ahead. Your line is open.
spk06: Oh, thanks. Good morning, guys. Thanks for the question. So today, you've been fielding a few questions on price. So let's have a couple more pricing 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? It just feels like it's unsustainable, this gap here. So any thoughts? And then just kind of sub-questions to that would be the service fleet, you know, you've got obviously a lot of labor inflation to deal with there. I mean, would you expect service pricing to be better than that 1%?
spk14: 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 on 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.
spk15: I think that's where it starts, Dave, right? 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 services, what we would look at is we'd look at 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. 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 backwards. 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.
spk06: Okay. And it sounds, obviously, you're guiding for about $1.7, $1.8 billion of capital deployment in 2024, consistent with what you 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 AMORTS 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?
spk15: We'll give it some thought as we move throughout. You're right on amortization. It's actually really the main driver with the Nivolo acquisition that we wanted to call out with higher amortization, non-cash, you know, 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 and an income. 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 as we move out into the future years, at some point, we're going to start comping against the train acquisition amortization. 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 a tailwind, let's 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 and just gives another metric to look at.
spk06: Right. Okay. Thanks for the details, Chris. Appreciate it.
spk14: You're welcome. Thanks, Nigel.
spk01: Our next question comes from Andrew Obin from Bank of America. Please go ahead. Your line is open.
spk10: Hi, guys. Good morning. Hey, Andrew. How are you doing? Hey, how are you? Just a question on TMS. You know, I think you highlighted it to us back last year. And, you know, my understanding that it sort of qualifies, you know, ICC, I think, was clarified back in November. And I think there are potential more tax incentives. Does this change the game on TMS in North America? or it's 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? That's the question, I guess.
spk14: 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 wrap all together, I'd say, sure, absolutely. It's a game changer. You know, it's making its way around the world. And as we launch it in different regions and continue to see more of that in the future.
spk10: Yeah, I guess I was referring to the tax credit as a game changer. No, I know you're excited about the technology.
spk14: You know, I think any policy or tax credit become tailwinds. I don't think they drop. They're the only drivers. I think the main driver of these systems is they're very, very efficient. They're very sustainable. And they have great paybacks with or without any kind of policy or tax credit. Got you. Tax credit will be a benefit to it, but it's not the only thing that's driving it.
spk10: No, that makes sense. And then as we think about inventory in the channel and the refrigerant change, both on residential and light commercial How do you see, you know, I think you addressed inventory on 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. And then the second question, does it introduce different seasonality first half versus second half for the unitary business? Thank you.
spk14: Yeah, I really don't. I think last year 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. We support that. It gives the channel time to do proper sell-through. We see that all as possible. I don't see any different dynamic 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 res.
spk10: And how big is it, under 25 tons for you?
spk14: It's a large portion of our unitary business, but we also have this great applied business, Andrew, that's even bigger.
spk10: I appreciate it. Thank you.
spk14: All right.
spk10: Yeah.
spk01: Our last question today will come from Noah Kay from Oppenheimer. Please go ahead. Your line is open.
spk11: Appreciate it. Thanks. So you talked earlier about some of the digital investments you're making this year, and you appointed the 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 going uh opportunity internally uh 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 uh 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 connected solutions are not new to us
spk14: I think that bringing Riaz on board, which is he's just a fantastic talent and early days is just doing a great job. It's just it's just creating a huge focus. And we believe that, you know, digital digitalization is a big part of our future. And Riaz is going to help us see the opportunities that exist. You take with Riaz, you take the Volo that we've added on. You think about what we're doing with Digital Twins. There's a lot of opportunities. And 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.
spk11: Appreciate that, Dave. Maybe the last question, you know, I think around this time last year, you shared with us, you know, your view of where backlog would end. You said greater than 6 billion exiting 23, you know, 6.9 billion. So you clearly surpassed that. Can you share with us today where you see it ending 2024?
spk14: Yeah, I would just say that 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. I think one thing I would say is 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 has that long service tail associated with it. So, a lot of demand in those, in the verticals, data centers, et cetera, that really require applied systems. So, we're very happy with our performance there.
spk11: Appreciate that, Collin. Thank you.
spk01: Sure. This concludes today's Q&A session. I would like to turn the call back over to Zach Nagel for closing remarks.
spk09: 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 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. Have a great day, and we'll talk to you soon.
spk01: This concludes today's conference call. Thank you for your participation. You may now disconnect.
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