Good morning. Welcome to the Trane Technologies First Quarter 2023 Earnings Conference Call. My name is Brent, 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. [Operator Instructions] It is now my pleasure to turn the call over to Zac Nagle, Vice President of Investor Relations.

Thanks, operator. Good morning, and thank you for joining us for Trane Technologies' first quarter 2023 earnings conference call. This call is being webcast on our website at tranetechnologies.com, where you'll find the accompanying presentation. We're also recording and archiving this call on our website. Please go to Slide 2. Statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities law. Please see our SEC filings for a description of some of the factors that may cause our actual results to differ materially from anticipated results. This presentation also includes non-GAAP measures, which are explained in the financial tables attached to our news release. Joining me on today's call are Dave Regnery, Chair and CEO; and Chris Kuehn, Executive Vice President and CFO. With that, I'll turn the call over to Dave. Dave?

Thanks, Zach, and everyone, for joining us on today's call. I want to begin with a few thoughts on our purpose-driven strategy, which enables us to drive differentiated financial results and shareholder returns over the long term. Our strategy is aligned to powerful megatrends like climate change, which continues to have serious and far-reaching effects on the environment, the economy and human health. Urgent action is needed to limit global warming and preserve our planet for next generations. That's where Trane Technologies is uniquely positioned to lead. We just released our latest ESG report, which highlights how our innovation is helping our customers decarbonize their operations, save energy and improve performance. We have reduced our customers' carbon emissions by 93 million metric tons since 2019 towards our goal of reducing emissions by 1 gigaton or 1 billion metric tons by 2030. These bold ambitions drive our relentless focus on innovation, and our innovation creates tremendous demand for our sustainable solutions. This enables us to deliver a superior growth profile, strong margins and powerful free cash flow. The end result is long-term value creation across the board for our team, our customers, our shareholders and for the planet. Moving to Slide number 4. Our global team continues to execute at a high level and delivered another quarter of strong performance. showcasing the power of our diverse, resilient portfolio. Organic revenue was up 9%. Adjusted operating margins expanded 140 basis points, and adjusted EPS grew 26%. Absolute bookings levels continue to be extremely strong, as evidenced by our book-to-bill ratio of 117% in the first quarter. We added $400 million to our backlog, driving record backlog of $6.9 billion at year-end 2022, up to $7.3 billion at the end of the first quarter. Demand continues to be particularly strong in our long-cycle…

Thanks, Dave. Please turn to Slide number 6. This slide does a nice job highlighting our overall performance in the quarter, which was strong across the board. Organic revenues were up 9%, adjusted EBITDA margins were up 100 basis points and adjusted EPS was up 26%. At an enterprise level, we delivered strong organic revenue growth in both equipment and services, up high single digits and low teens, respectively. Our high-performance flywheel continues to pay dividends with relentless investment in innovation, driving strong top line growth, margin expansion and EPS growth. Please turn to Slide number 7. We discussed the key revenue dynamics for the first quarter so I'll focus my comments on margins. We delivered strong margin expansion in each of our business segments and have highlighted the key margin drivers on the right side of the page. In each of our regions, strong price realization, volume growth and productivity combined to more than offset continued supply chain challenges and persistent inflation in the quarter. As we've highlighted previously, the supply chain is slowly improving, and we expect this trend to continue throughout 2023. As an enterprise, we delivered about 6.5 points of price and about 2.5 points of volume in the quarter, which is largely in line with our expectations. We delivered strong volume growth in our commercial HVAC businesses in each region accompanied by strong leverage, which was partially offset by lower volumes in our residential business as those markets continue to normalize. As we discussed previously, we've earmarked approximately 30 basis points for incremental business reinvestment to accelerate the timing of key projects. This is above our average run rate of approximately 40 basis points annually for a total of approximately 70 basis points in 2023. While investment spending was less than 70 basis points in the first quarter, it was in line with our expectations based on the timing of projects. We expect to ramp up to 70 basis points in the second quarter and there is no change to our full year guidance of approximately 70 basis points. Now I'd like to turn the call back over to Dave. Dave?

Thanks, Chris. Please turn to Slide number 8. We presented this slide on our fourth quarter earnings call to help provide color on our key markets. Overall, we had a very strong first quarter as expected, and our positive outlook for our segments and our end markets is largely unchanged. We see strong core demand for our sustainability-focused solutions continuing. We see the stacking effect of support of policy and regulatory changes that play to our unique strengths as a leading climate innovator as tailwinds for either early to mid-innings or future multiyear opportunities. We see the effect of tight supply chain slowly but steadily improving, and we see strong execution of our business operating system and unprecedented backlog supporting resiliency and improving visibility into 2023 and 2024. In our Americas segment, our overall outlook is relatively balanced between commercial and residential. We see our residential business continue to normalize through Q2. Our bias on our prior revenue estimates of the business being plus or minus low single digits for the year is now towards the lower end of that range or flat to down low single digits. While this may present a modest headwind to the second quarter, we see strength in our commercial HVAC business more than offsetting this on the full year. Our transport refrigeration business performed as planned in the first quarter, and we continue to expect to outperform the market for the year. In our EMEA segment, the first quarter was strong and in line with our expectations for both businesses, and our outlook for the year is unchanged. Likewise, for our Asia-Pacific segment, Q1 performance was strong, and our outlook for the full year is unchanged. Now I'd like to turn the call back over to Chris. Chris?

Thanks, Dave. Please turn to Slide number 9. We're off to a strong start to the year and we continue to see slow but steady improvement in our supply chain. Additionally, bookings and backlog continued at high levels providing us with improving visibility into future revenues. All in, we're confident in raising the low end of our full year revenue and EPS guidance for 2023. We're raising our full year organic revenue growth guidance to between 7% and 8%, up from our prior guidance of 6% to 8%, reflecting strong results in the first quarter and improving visibility on the year. We're raising our adjusted EPS guidance range to $8.30 to $8.50, up from $8.20 to $8.50. We're also expecting to deliver free cash flow equal to or greater than net earnings. Other elements of our guidance remain largely unchanged with a few modest exceptions, mainly one additional point of M&A and associated impacts, higher interest expense related to debt refinancing in the first quarter and expected pension expense in 2023. Please see Page 18 of the presentation for additional details related to guidance to assist you with your models. As we've highlighted before, we paid close attention to our investment peer group and target top quartile revenue growth, EPS growth and free cash flow conversion as part of our annual planning process, and we monitor our progress throughout the year. We believe our full year guidance places us in the top quartile of the peer group on these metrics for 2023. In addition to our full year guidance, we believe it may be useful to provide a high-level construct regarding how to think about Q2 and the cadence of earnings. For the second quarter, we expect revenue growth in the high single-digit range. which reflects a step down in…

Thanks, Chris. Please turn to Slide number 14. The key takeaway for our Thermo King business is that the transport refrigeration market forecasts for both North America and EMEA remain unchanged, and we expect to outperform each market in 2023. Our performance through the first quarter is on track to meet these expectations. The slide shows key data points on the markets and on Thermo King specifically to provide additional transparency and reference information. Please turn to Slide number 15. Act has updated their long-term forecast for refrigerated trailers, and they are projecting strong demand through 2028. The data supports the view we've been highlighting for some time now that this is a strong mid-40,000 unit market plus or minus a few percentage points. One key takeaway is that ACT has increased their 2024 forecast to 42,000 units, up from 40,000 units, which represents a 7% decline versus an 11% decline. In 2025, Act forecasts the market to increase 7% and return to 45,000 units and to continue growing low single digits through 2028. Both our Americas and EMEA Thermo King businesses are poised to continue to outperform their end markets through leading innovation and strong execution. We believe this is a GDP plus-plus business for us over the long term. Please turn to Slide number 16. In summary, we are positioned to outperform over the long term. Energy efficiency, decarbonization and sustainability megatrends continue to intensify, driving increased demand for our innovative products and services. We are delivering leading technology and innovation to address these trends and accelerate the world's progress, underpinned by our engaging uplifting culture. Our strong first quarter performance, diverse and resilient portfolio and unprecedented backlog gives us confidence in raising our full year revenue and EPS guidance and reaffirming our full year free cash flow conversion guidance. We believe we have the right strategy, the best team and a solid foundation in place to deliver strong performance in 2023 and differentiated shareholder returns over the long term. And now we'd be happy to take your questions. Operator?

[Operator Instructions] Your first question is from the line of Scott Davis with Melius. Your line is open.

You guys always give a lot of great detail and answer a lot of questions, which is helpful. But I haven't really heard you talk about mega projects specifically. And when I think about kind of these giant semi fabs and the EV facilities and everything that is on the list that folks are talking about, is this stuff starting to move into your backlogs? Are people starting to spec out the HVAC needs in those facilities? And if so, I'm just kind of guessing these are super complicated. I have to imagine a semi fab requires some pretty incredible engineering to get the cooling right, and perhaps you guys have an advantage in that regard. So I'll just open it up to that.

And the short answer is, look, we're -- this high-tech industrial vertical, as we call it, we have a lot of strength in that vertical and we have for a number of years. Yes, we are starting to see early stages of some big orders coming in, specifically on the fab plant side of things. But again, I think the CHIPS and Science Act is really in front of us. And once that really starts to happen, you're going to see even greater closing of some of these big projects. So I think a lot of it's in front of us. We are seeing some. We're also seeing some of it on the EV battery plants. And that's certainly been a nice -- again, we classify this all of this high-tech industrial vertical, but it's certainly been a strength to us. And you're right, these are sophisticated operations that require kind of detail engineering, not everyone is as cookie-cutter as you might think, so there's always unique things. And our expertise in this vertical really allows us to have a lot of strength, and we'll continue to execute in the future.

And this is a little pie in the sky, but AI, the cooling of the chips, when you start talking about, I think it's something like 5-kilowatt going to 100-kilowatt and there's a lot of heat there. And I'm told there's a lot of white space because, frankly, the cooling of those chips is still -- whether we go all liquid or whether there's other kind of hybrid solutions. But are you guys involved at all working on technologies to be involved at all in some of that CHIP level cooling?

Yes, absolutely. You're talking about immersion cooling, and that's certainly on the cutting edge. And yes, we're very active there. In fact, we made an equity investment in a company called Liquid Stack, which is really -- that's their expertise. We're partnering with them. And yes, we're certainly on the leading edge of that technology.

Your next question comes from the line of Andy Kaplowitz with Citigroup. Your line is open.

Dave, commercial HVAC bookings growth has remained really strong, low teens growth in EMEA despite maybe a little bit slowing against tough comps as you talked about in the Americas. Have you seen any slowing in any of your main commercial HVAC verticals in the Americas? Or is it really just tough comps? And then would you say the main difference in EAME is the strength of your thermal management system out there? And if it is, where are you in that buildout? And where are you in terms of bringing it into the U.S.

Well, Andy, I think it's -- commercial HVAC has been strong globally for us. And I think the mega trends around decarbonization, they continue to intensify. We had a very strong start to the year here in the Americas. Order rates were up low single digits, but the backlog grew, and that's a great thing. If you go to EMEA, I mean, yes, I mean, the team there is just performing at a very high level. And you hit it, right? Thermal management systems is -- we have a differentiated technology and we're winning with our customers. If you think about the commercial HVAC EMEA business in 2022 was up 20%. In the first quarter, we were up 25%. Our equipment orders for commercial HVAC, I mean, we're up close to 40%. So I mean, this is great. The team is executing well. The other thing, too, I'd point out is that margins were very, very strong in Europe as well. If you remember a year ago, we were talking about more acute supply chain problems in Europe and a higher cost to serve our customers. And we are -- with spot buys and expedited freight. You see that pulling through now with productivity that the team has been able to deliver. So very strong in EMEA, very strong in the Americas and Asia-Pacific also performed quite well. Order rates were up low teens and really broad-based too, both in China and outside of China. So off to a great start here in 2023. And commercial HVAC business is certainly -- we're seeing a lot of demand for our products.

And I want to follow up on your comments on sort of the EMEA margin. Maybe for Chris, you talk about price versus cost benefit in Q1 for the year. I think you mentioned previously the 2% to 2.5% carryover price embedded in 2023. Has that gone up a bit? And as Dave mentioned, is it really you're comping against sort of and easier supply chains are better in EMEA and Asia, and that's sort of the big reasons why the margins were much stronger in those regions than versus the Americas? Or are you investing maybe more in the Americas versus those other regions?

Andy, it's a great question. If I go to EMEA margins first, I mean, if I go back a year ago, we saw very acute supply chain issues impacting that region and really unfortunately holding back revenue growth and lowering volumes. It also came with the product we get out the door, a lot of additional cost to serve our customers. And a year ago, it was very difficult to get leverage in that region. What you're seeing coming through here in the first quarter, and you guys will see this in the 10-Q that gets filed, you'll see 9 points of price in EMEA and about 6.5 points of volume. And with that volume came strong leverage, and we're starting to see some productivity come through within a slowly but improving supply chain. So I think about the margins around productivity improvements on a year-over-year basis, stronger volume with good incrementals and pricing continues to remain strong in the region as well. So really nice start to that team. I think you mentioned a question on maybe price overall for the company. Enterprise-wide on the full year, we're probably still in that 200 basis points to 300 basis points on a full year price. And I would bias our full year revenue growth more to the volume side than to the price side on the full year.

Your next question is from the line of Julian Mitchell with Barclays. Your line is open.

Maybe just wanted to start with the sort of the backlog outlook and orders. And I guess one approach is just not report the orders when they're down in quarter. But if we look at over the balance of the year, how are you thinking about the sort of the book-to-bill ratio, let's say, -- just trying to understand a little bit better, Dave, your commentary around that $6 billion backlog at year-end perhaps being a floor number. Any color as you're thinking about book-to-bill by region or the market in terms of commercial versus transport?

Yes. Look, our order rates for the first quarter were actually flattish, okay, but our backlog increased by $400 million. So we thought we had a real high backlog at the end of 2022 at $6.9 billion, it's now $7.3 billion. We will enter 2024 with a very inflated backlog. And we're kind of using $6 billion just as -- just to demonstrate the strength. If you think about any year we go into, the backlog typically represents about 20% of the forward revenue. We'll be far in excess of that going into 2024. So the book-to-bill, if you just do the simple math while we're -- looking at our midpoint on revenue, yes, it would come down a bit from what we're seeing right now. But I would tell you, the first quarter was exceptional and it was a little bit stronger than even we thought, especially on our commercial HVAC standpoint. Our commercial HVAC business on a 2-year stack in the first quarter, it's up 35% for orders. So I mean it's very, very strong right now and we're seeing a lot of demand. And you heard Scott talk about some of the tailwinds that are to come, some of the mega projects out there with the CHIPS and Science Act and IRA as it starts to kick in here in the -- hopefully, the fourth quarter. That will be an additional tailwind that we're going to see into 2024 and beyond.

Then my second question would just be on the Americas operating margin for the year. So I suppose one, I think some investors may have thought maybe you'd have higher operating leverage in the first half and the sort of mid-20s number because of price cost, tailwinds to margins and the last sort of bout of transformation, savings as well as the good volume growth. So I understand the sort of investment reference that Chris had made. Anything else going on in that Americas margin? And also, when we're thinking about second half operating leverage in the Americas, does that stay at that mid-20s rate that you've got in the first half? Anything sort of moving around there?

Julian, this is Chris. I'll jump in. Yes, the Americas saw a nice margin expansion in the first quarter, 90 basis points op margin expansion, about 50 basis points EBITDA margin expansion really led by our commercial HVAC business. We saw declines in residential in the quarter, and Thermo King was right in line with our expectations, plus or minus. So I think it's really just the combination of the mix in the quarter, where residential volumes were down but we saw very strong growth in commercial HVAC. I think on the guide, as we've guided Q2 and then raised the low end of the guide on both revenue and earnings on the full year, would suggest maybe some leverage, it's a little lower second half versus first half. But I'll tell you, we're very confident in our full year guide. I think the performance in the first quarter was very strong. And at the same time, we've got a strong backlog entering into the second quarter. And as Dave talked out, the guide for the backlog going into 2024 we expect to be very high as well. So we have a lot of confidence in the full year guide. The first quarter, it's really our smallest quarter of the year. It's about 17% of our earnings on a full year basis. And let's get into the cooling season and we'll update you in a couple of months. But we're really happy with where we started.

Your next question is from the line of Gautam Khanna with TD Cowen. Your line is open.

I just wanted to ask if you're seeing any evidence of price elasticity in the residential channel given the volumes are a little bit lower across the industry, just -- or any sort of competitive price movements downward.

Gautam, it's Chris. I'll start. Look, I think pricing continues to be strong and as we expected in the quarter for residential. We're ready for the cooling season with the inventory we have on hand, but we're not seeing anything from a price elasticity perspective that you're referring to. Things remain to be very disciplined as we see today, and we're ready for the cooling season.

And just a quick follow-up on the M&A pipeline, if you could talk about what kinds of things you're looking at. And is it more of what we've seen before with technology add-ons, anything sizable in the pipeline that might be attractive?

Yes. Gautam, I'll start on that. At the end of the day, we're going to get an opportunity to see everything as a major global HVAC player. In the second quarter -- or in the first quarter here, we announced MTA. Chris talked about that and we've actually announced yesterday. A great example of what we do really well. This is a technology in industrial process cooling, it's in EMEA, great technology at an enterprise level, the revenue is less than 1% for the enterprise. Margins are nice, they fit nicely into the business with our strong scale -- with our strong channel, we're able to scale these acquisitions quite quickly. So we'll look at everything. We'll be disciplined, and we're going to continue to execute the strategy that we've been executing too, and we've had a lot of success with it.

Your next question is from the line of Josh Pokrzywinski with Morgan Stanley. Your line is open.

So look, we talked a lot about the backlog. Clearly, the trends there are impressive in terms of what that means for the revenue story. I guess I'd like to talk a little bit about how backlog margins have trended. And I guess where I'm coming from is some of what the answers have already touched on is these opposing forces where supply chain and price cost, it seemed like they should probably be improving in the backlog. But you also have some of these larger projects, where I would imagine in commercial HVAC, maybe a lower margin upfront and you get paid more on that longer tail of things like service. How would you carve that for us as you're thinking about the margin in backlog today and maybe where that trends?

Josh, it's Chris. I'll start. We see the backlog is still over 90% nonresidential. So that would be primarily commercial HVAC plus our transport businesses globally. But price/cost, we like the margins in backlog. But remember that price scenario, that's going to be a tougher comp as we work throughout the balance of the year. Just to remind investors, we really led with price in 2022. And so we're going to have a tough comp as we work throughout the year on incremental price. Our product management teams have done an outstanding job staying ahead of inflation over the last couple of years, and we were price cost positive in the first quarter on a dollar basis and a margin basis. So I think that's an opportunity. But again, that headline price number is going to be a tougher comp as we work throughout the year. We have a lot of confidence in the 25% or better operating leverage on the full year, and that's going to come from multiple parts of the bridge, right? We're confident that 20 to 30 basis points of price over cost. The first quarter start gives us confidence on that on a full year basis. But we expect to see good incremental on volume, some productivity return as supply chain normalizes and really leverage all parts of the P&L to go drive the performance for the year.

And then I guess just sticking with the same kind of follow-up on some of the questions around some of these bigger projects. How do you think about the crowding out between more of the policy-led stuff and stimulus versus private? Obviously, a lot of focus on the higher interest rates and maybe tougher liquidity situation coming from the regional banks. And I don't know how relevant that's going to be for like HVAC retrofit. But I guess, the wrench can only turn so fast and we still have labor bottlenecks. Is there a crowding out that you guys think happens on kind of the IRA stuff maybe versus more private demand here over the next year or 2?

Yes. Well, we haven't seen that to date, Josh. It's a good question. But at the end of the day, we think they are all opportunities really in front of us. And we are -- as far as labor shortages, we have so many programs in place now to really train all of our employees at grassroots level. So that's starting to get a lot better for us, and we're not concerned about any crowding out as far as being able to meet the demand. And our account managers, our sales team, they're all over this, right? And they're well trained and they're able to go to the most attractive verticals and really drive demand. And that's what we're seeing right now. And you see it in our results. I mean, our order rates are just tremendous right now. And I look at our team and what they've been able to do in EMEA right now and all those opportunities there that are -- we talk about IRA, but there's other policy that are happening in Europe right now that are really helping drive demand, and we're able to capitalize upon it.

Your next question is from the line of Chris Snyder with UBS. Your line is open.

I wanted to ask on commercial HVAC demand. Obviously, orders can reflect a bunch of things, comps, lead times. But when you were speaking with customers, do you sense any easing of demand, whether it's the result of macro uncertainty or just higher cost of financing?

Chris, good question. Look, we haven't seen that yet. And in fact, we continue to see very strong demand. And I think the whole megatrends around decarbonization continue. And the world is getting warmer, and we need to take action and more of our customers realize that, and we have some solutions out there right now that can have a dramatic impact on how we decarbonize the built environment. So we have not seen anything slowing down right now. And that really is on a global basis for our commercial HVAC business. If you look at the Americas, we play across all verticals. I think there's like 14 different verticals that we track. Maybe there's a little bit of softness in office, but there's a lot of strength in high tech that we talked about earlier. Education continues to be strong. Europe, we've been strong really across many verticals with our solutions there. In Asia-Pacific, again, very strong start to the year. So we haven't seen any slowing yet, Chris, but it's a great start to the year for Trane Technologies, and it gives us a lot of confidence in our full year guide.

Appreciate that. And then following up on price cost. The company had been running ahead or kind of staying price cost positive. When we see the year-to-date reflation in metal, does that change how you're thinking about incremental price later in '23 as you try to kind of maintain that staying ahead on price cost into '24?

Yes. Let me jump in, Chris. So it's a dynamic market around Tier 1 metals, and we started the year 3, 6 months ago, thinking we could be in a really deflationary environment and that really hasn't proven through. As I said earlier, our product management team members have done an outstanding job thinking about cost inputs, value to the customer and staying ahead on price. We remain confident that we're going to be price/cost positive on the year. The start in the first quarter gives us a lot of confidence on the 20 basis points to 30 basis points price/cost spread that we have in the full year guide. We know that pricing gets to be a tougher comp as we work throughout the year. But we remain nimble. If there's further movement of inflationary commodities or we continue to see some inflation certainly in Tier 2 around wage and energy, which we have baked into the guide. But if things were to become more inflationary. We have the nimbleness in the company, and I think the proven track record that we've priced effectively. So we have a lot of confidence on where we're going to be on the full year and ultimately just staying very nimble to what happens in the marketplace.

Your next question is from the line of Joe Ritchie with Goldman Sachs. Your line is open.

So Dave, just maybe I'll start on resi HVAC. So interesting to see it flat, but your organic growth this quarter was down mid-single digits. I'm assuming pricing had to be up. So first, did I get my math right? It seems like volumes were probably down double digits, direct volumes were down double digits in the Americas. So my question is, is that right? And then secondly, what kind of line of sight do you have to that improving and what's embedded in the guide?

Yes, your math is about right. So you think about it on a revenue basis, we were down mid-single digits, on a unit basis we were down in the mid-teens. Pricing was positive in the business. There's a little bit less than the company average, which is the first time that's happened in a while. But again, we have some very strong comps here in the resi business. The sell-through, which is really how we're looking at this business right now was flat, right? So we don't see it falling off a cliff. If you look at inventory levels in our IWD, our independent wholesale distributors, maybe they're a bit high but that will normalize through Q2, nothing alarming. This is a business that we have a lot of innovation coming through. We have some great brands, some great products, great distributors and a great management team. So it's early in the year. It's the first quarter. So we'll wait to see how the cooling season starts. But we don't see this business falling off a cliff. And we have this guide -- in our guide, okay? So it gives us confidence in our guide with what we have projected right now.

And then going back to the margins in EMEA, I mean, just -- I know that you had an easier comp because of some of the issues that occurred last year, but still a 17% margin in the business. The start of the year is pretty darn good. I guess my question is, is that kind of like the jumping off point now for the rest of the year? Because I'm assuming revenue/volumes are going to be higher through the remaining three quarters. And so it just kind of like the floor for margins in EMEA for the year?

Yes. Joe, it's Chris. Look, our expectation for the region would be that they'll deliver 25% or better leverage on the full year -- organic leverage on the full year. Q1 is off to a nice start. But as you said and as we commented before, it's really an easier comp versus some real challenges we had in the business a year ago. Supply chain got better as we got to the end part of 2022. The fourth quarter, we saw a strong revenue growth in EMEA from our commercial HVAC business, and they were really hurt first and hard with the supply chain challenges. So we have a lot of confidence that team can deliver this year and the backlog continues to grow with their innovative products. So let's see how it kind of plays out. But we're confident we're going to deliver strong margin improvement on a full year basis for the region. And keep in mind, TK EMEA markets there are expected to be down low to mid-single digits. We expect to outperform. But all in, we expect to have a strong year in the EMEA segment this year.

Joe, you're right. again, just Joe, a great start to our -- it really is. I'm so proud of what that team has been able to deliver. So fantastic.

Your next question is from the line of Steve Tusa with JPMorgan. Your line is open.

Congrats on the execution on the quarter.

Appreciate it.

Thanks.

So 9% price in EMEA, I know we can wait for the Q, but what was it in the other two segments?

Yes, Steve, it's Chris. So it was a little over 6 points in Americas. So think of that as 6 points of price in the Americas, pretty much in line with the enterprise. EMEA, we said 8.9 points of price, and Asia was around 4 points of price in the quarter.

And then just in the back half here, there's like kind of strange comps from last year. You had the China dynamics. Europe had a pretty good second half as well on volume. How do we -- I know you don't like to kind of guide by quarter. But like you guided to high singles. You're running in the first half at high singles so far. Are there any comps in the back half that are volatile? Or is it pretty smooth? Maybe just help us out with the non-U.S. businesses and how you expect organic growth year-over-year to play out in 3 and 4Q.

Yes. I think as we get to the fourth quarter -- well, let me start with Asia, right, given the lockdowns in the second quarter of 2022. We saw muted growth in Q2 a year ago. The business was able to recover very nicely in the third and fourth quarter last year. So Asia may have a little bit of tougher comps in the second half just given the cadence of how earnings played out and the lockdowns from COVID played out in China a year ago. I mentioned just earlier in EMEA, for commercial HVAC, the business really through the third quarter of last year had some very acute supply chain challenges. We're not out of the woods yet, but that continued to get better in the fourth quarter, and we saw that getting better here in the first quarter as well. So I think we're -- fingers crossed, that continues to be a nice tailwind for the business on a year-over-year. But as you get later in the year, I think you'll see a little bit of a headwinds begin to the fourth quarter there. But TK, if I go to the Americas side of the house, the back half of the year for TK Americas, that will be a bit of a tough comp, very strong growth we saw in the third and fourth quarter in the Americas last year. So yes, there was a little bit of tough comps coming in the second half in a few of the businesses but we have such strength in the commercial HVAC businesses as well that we're really confident in the full year guide.

And then just on -- I just want to clarify some of these resi numbers. So you said revs down mid-singles. The sell-through comment being flat, is that revenue or is that units?

That will be revenue, Steve. That would be revenue.

So basically, like through your independence, your volume was down probably more like, I don't know, like 20% or something like that, just through the independents?

They certainly normalized their inventory in the first quarter. We've seen that happen. Like I said earlier, inventory may be a bit high, but it really depends on how the cooling season kicks off. It's the first quarter. right? And as you know, this is the smallest quarter. We'll wait until the cooling season starts, and hopefully, it starts real soon.

How's April so far?

I think it's -- the cooling season hasn't started. So we're still in that shoulder part of the year. But we'll see. It's forecasted to get real warm here in May. So we'll see how it goes.

Your next question comes from Jeff Sprague with Vertical Research. Your line is open.

Just one follow-up on resi and then just a different topic on the M&A from you. Just the price in resi below the 6.5% range, little surprised to hear that given the year change and the mix effect associated with that. Maybe you're not including mix when you say price, or perhaps you're still selling a lot of older units in the quarter. Could you just maybe clarify a little bit what's going on there?

Jeff, you're right. We're not including the price benefit from the SEER change in that price number. We consider that as part of volume. So this would be more pure on a year-over-year basis.

Put that as mix, Jeff.

We'll call it mix. And then just on the deals, a 2% revenue impact right on the $16 billion revenue base last year, that's $320 million of sales you're guiding for the partial year on deals, right, on $500 million expended. That sounds like a pretty good chunk of revenue for that amount of dollar spent. So maybe just a little color on the margin rates in these businesses. Do I have that math right? What percentage of the year do you expect what you just announced to actually be in the year? When does this stuff close?

Yes, Jeff, it really is the contribution of three acquisitions that's leading to that roughly 2 points of revenue growth from M&A in 2023. One relates to the ALCO acquisition we closed in October of last year. So you've got about 9 months of that revenue coming through in 2023 that we're calling out as inorganic. Fourth quarter would be a comp would just be part of our organic results. Dave just mentioned, we closed on MTA just yesterday. It is an industrial process cooling business in EMEA. So we'll start picking up the revenues from that business, also a partial year. Think about it as 8 months of revenue this year. And then the pending acquisition that we've announced in the life sciences vertical in the Americas, that's not closed yet. We expect that to close sometime in the second quarter. We made an estimate of that here in the full year. So all in, it's the combination of those 3 businesses that's getting us to roughly 2 points of revenue growth. And look, the contribution margin in year one, it's low just given the integration costs. But we have a great track record of taking bolt-on acquisitions and bringing them into our channels, selling through with our robust sales forces and ultimately really driving very strong returns in subsequent years. So in the year, it's about $0.03 positive on an EPS basis with that leverage. And ultimately, we'll see what kind of plays out for the year, but it's still positive and slightly accretive by the year.

Your next question is from the line of Nigel Coe with Wolfe Research. Your line is open.

Dave, I don't know but about your neighborhood but still pretty cold up here. So make sure [Indiscernible] you week.

It's warming up, Nigel. It's warming up.

Okay. it's coming, it's coming. So obviously, one of your competitors is making a pretty big splash in European residential markets. How do you characterize the importance of Trane being a player in European residential heating specifically? I'm not saying a multi-billion dollar deal, but do you see opportunities to be a player there in a smaller scale, perhaps?

Yes, great question. I mean, we really like our portfolio in Europe. You think about it in the commercial HVAC space where we play, we're having a lot of success. We have differentiated offerings that we're able to provide to our customers. And you see the results. I mean, our thermal management systems there, we've eliminated or significantly reduced the need for fossil fuel for heating in all geographic climates. And you could see the team's results. And like I said earlier, our revenue in 2022, up 20%, first quarter, 25%, equipment revenue, 40%. So we're going to continue to execute on our strategy in Europe. We're having a lot of success. The team is high-powered and performing extremely well. And we have so much innovation that's coming through the pipeline that I get excited just talking about it. And as I said earlier, we get the opportunity to look at a lot of M&A deals being a global HVAC player, and we'll continue to do that and we'll continue to be disciplined. And we'll make sure we make the right investments for Trane Technologies and our shareholders.

And then maybe it's Chris. We're kind of up to the end of the $3 million program transformation savings. Is this it? This is the end of the kind of the big part of your move? Or do you see the potential for like another way perhaps of initiatives?

Nigel, thanks for the question. Look, we're on a really good track to realize the incremental $60 million in savings this year, We continue to deploy that back into the business through reinvestment and innovation in the portfolio also gives us confidence on delivering 25% or better operating leverage on the full year. But look, the company has always prided itself on lean thinking. And I would tell you that as we move forward, there's always going to be opportunities for us to lean on operations and drive cost improvements. I think another area of opportunity for the company is the ability to call back on some of the productivity that's been very challenged over the last few years to deliver on supply chain challenges, higher cost to serve customers. Dave talked in past calls about spot buys and being exposed to those markets and higher costs. Those are really great opportunities for the company to get back to basics, get back to productivity offsetting off inflation. And we're seeing a little bit of that come through in the first quarter with our commercial EMEA business. And we'll see how that kind of plays out for the year. But I would tell you that -- we'll update you more as we work throughout the year, but I'm really excited on the productivity side and I'm excited we still have a lot more opportunities to take costs out in the business.

Your next question is from the line of Deane Dray with RBC Capital Markets. Your line is open.

Question about indoor air quality. Has the whole urgency around that theme faded? And understandably, you've showcased all the decarbonization benefits and climate change, and that makes perfect sense. But has the driver of indoor air quality, is that faded at all? Because originally, you were talking about a 200 basis point lift for quite a period of time.

Deane, it's a good question. I mean we've embedded indoor air quality into our applied systems. And I would tell you that -- I've been in this industry a long time, 10 years ago, we used to just have the conversation about indoor air quality in the health care vertical. We have that now in all verticals. So you might not read about it, but I would tell you it's still prevalent and we talk about it with our customers. And they talk about it with us. I mean, I think everyone's been educated on the importance of indoor air quality, the importance of fresher exchange, the importance of being able to balance that with energy consumption -- and we've done a great job of helping our customers work through that. So no, it's certainly part of our business. It's certainly part of our offering and it's top of mind of many of our customers.

Yes. And I see that with the education stimulus spending that it's usually one of the top priorities.

Absolutely, absolutely.

And then second question on the incremental 70 basis points of spending reinvestment. Can you give us some examples of where that's going and a sense of the returns?

Yes. We really like the digital space. We really like the electrification of our portfolio. We really like optimizing our operations with automation, just to name a few. But our innovation pipeline is very robust. It's very full. Three times a year, I actually get to -- we have a deep dive on our innovation pipeline. It's the best four hours I spend some times in the quarter because it's just so exciting to talk to our engineers and to see what they've invented and the impact that it could have on not only decarbonizing the built environment really helping our customers save on energy costs and improve indoor air quality. So it's very robust right now. We love to invest in our business. It's -- we have a proven track record here, and we're going to continue to do that more in the future as well.

Deane, I'd add on the investment side, we had a normal level of investments in the first quarter, wanted to highlight that into the second quarter, we do expect that level of investments to ramp up to 70 basis points. We still see that being around 70 basis points for the full year, but that will be a ramp-up into Q2 as we just continue to see very strong projects, as Dave outlined. And let me come back to just a comment on EMEA as well. I know a lot of questions around EMEA margins, maybe just to highlight, in the first quarter, we saw growth both in commercial HVAC and in the Thermo King business. Important to know that the Thermo King markets in Europe are expected to be down low to mid-single. So we're probably not expecting to see that outgrowth in Thermo King each and every quarter of the year. That's going to be an area we'll see how the year plays out. But nice to see both businesses deliver in Q1. But that will be a little lumpy and choppy as we think about Thermo King for the balance of the year.

Your next question comes from the line of Andrew Obin with Bank of America. Your line is open.

Just a follow-up on institutional spending. Can you just chat again -- clearly a key market schools you've talked about. But can you talk about what's happening with the hospital spending? Because I know there was a pullback during COVID because of the budgetary issues. Are we sort of seeing cumulative catch-up or are hospitals still in trouble? If you could just talk about that key end market.

Yes. I mean, we've been strong in the health care vertical forever. I think. As I said, we track all 14 different verticals, but health care is certainly one that we have a lot of strength in. And it really -- the reason why we have the strength there, Andy, it's a complex sale. And hospitals, they have varying degrees of requirements, especially around fresh air exchange. So you're going to have a different application in a surgical suite versus you're going to have in a hospital room. So we're still seeing strength in health care. But to be fair, we've always seen strength in health care because our solutions are really built around those kind of more complex situations that we're able to capitalize on.

Yes. Just a follow-up. Headlines on pricing I think Daikin introduce lower-priced product in the U.S. on the resi side. I think we've heard yesterday at the meeting that Aon, it's the first sort of price -- they rescinded a price increase actually on the commercial side. As supply chains are getting looser, do you feel that people can get more competitive? Or you think there's still enough demand there to support steady pricing?

Andrew, I'd say, look, demand remains strong, and we -- it's an industry that typically retains price and is disciplined on price. I won't necessarily talk about potential pricing actions they may do throughout the year. As I mentioned before, our product management teams, our business units have done an outstanding job taking all the inputs in to lead on price the last two years, and a good strong performance here in the first quarter as well. So I do think we'll remain proactive and be prudent. And I think our track record hopefully speaks for itself that we can really have a lot of confidence on the 20 basis points to 30 basis points of price over cost in the year.

Your next question is from the line of Nicole DeBlase with Deutsche Bank. Your line is open.

So just -- there's been a lot of focus on the EMEA margins on this call, but the Asia-Pac margins and the operating leverage was also really, really strong. So can we just talk about how you guys are seeing that progressing through the rest of the year?

Yes, Nicole, it's Chris. I would say, certainly the second quarter, but even in the first quarter last year we saw some parts of the China economy and these COVID lockdowns. And so as we entered into lockdown, it certainly cost a lot more money to keep customers happy and trying to get products out where you could in limited situations. And now we're comping against a little bit easier comps as we think about the first half of 2023. So first off, the demand in Asia remains very strong. We continue to expect very strong performance from the team, and they had a great first quarter. Comps probably get a little bit better in the second half given the partial reopening we saw in the second half of 2022. But look, very strong growth, not only on the revenue side, but bookings were up high teens for commercial HVAC in Asia. Services were up nearly 25% in the quarter. So I think our innovation and then the verticals that we play in, in Asia really played through very well in the year. And great job by our team there.

Yes. Thanks for noticing Nicole. I mean, Asia, sometimes we don't talk enough about it. But what a great leadership team we have there. And they really have been leaders for train technology with innovation and the team just executed extremely well in the first quarter, a great start to the year. And to be fair, all of our segments really executed very strongly in the quarter. And it just speaks to the resiliency of our portfolio and it just gives us lots of confidence in our full year guide. So I certainly appreciate the question.

And then on the TK order book, are you guys now fully booked out to 2023? And I guess what's the status of the order book? Is it actually open to accept new orders?

Yes. Nicole, so we opened up the second half of the year order book mid- to late March. So orders started to come in a little bit in the first quarter, but we would expect that to really get filled up in the second quarter. And we have a lot of confidence that from what we can see with the backlog entering Q2 and the forward look that our guide in the full year, we're going to outperform the markets both in the Americas and in EMEA for the full year.

Your next question is from the line of Noah Kaye with Oppenheimer. Your line is open.

Would love to dig into the services trend a little bit more. I mean, that 25% year-over-year in China, maybe to the extent that reopening played into that and you can comment. But just the overall trends in services and how you expect that to trend over the course of the year.

Yes. I mean, services is a great part of Trane Technologies. It represents about one-third of our total business. And if you look at it over a 5-year period, we've had a compound annual growth rate globally in our service business in high single digits. In the first quarter, we were double digits. So I mean, it's a really strong business. It really differentiates us with our customers in China, yes, really strong start to the year. Some of that was obviously, the comps year-over-year just because there's a lot of restrictions still, specifically in China at this time last year. But I would tell you, our service business is a very strong business. We invest heavily in our service business. And it's just a -- it's a great business. And it's very, very resilient as well even during 2020 COVID where we didn't have access to many buildings, our service business was flat. And these products are more and more sophisticated today, and they require OEM service and we're able to provide that for our customers. So thanks for the question. I mean, service is a big part of who we are as Trane Technologies.

Yes. And that actually ties into the next question. I think in talking about the incremental spend, you called out the digital investments and maybe pulling forward some of that. Just would love an understanding of the road map to the extent you can share with us and how that plays into the services strategy. Are we looking at some meaningful refreshes or additions to the digital suite over the course of the year?

No. Look, being connected to our assets is nothing new to Trane Technologies. We're connected to over, what number is it now, well over 30,000 buildings and millions of different assets. So we love being connected to our assets. And now think about the next is, how do you even get smarter with all the data that you have, and think about how you could actually have buildings operate more efficiently. And so when I talk about digital, those are the things that we're working on. It's no longer the service tech gets deployed when something is not operating properly. It's not operating properly because it's using too much energy. And that's the space that we're into here. And we really like the digital space and service, and it really is a tailwind to our service business.

At this time, I would like to turn the call back to Mr. Zac Nagle for closing remarks.

Thank you. I'd like to thank everyone for joining us on today's call. And as always, we'll be around to answer any questions that you have over the next -- well, today and the next coming days and weeks. And we'll also be on the road at a couple of conferences. So we'll be looking forward to seeing folks on the road or in person through a variety of events soon. Thanks, and have a great day.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.