Good morning. Welcome to the Trane Technologies Q2 2024 Earnings Conference Call. My name is Adam, and I’ll be your operator for the call. The call will begin in a few moments with the speaker remarks and Q&A session. At this time, all participants are in a listen-only mode. [Operator Instructions] I would now like 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’ second quarter 2024 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 David 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 today’s call. As we begin, I’d like to spend a few minutes on our purpose-driven strategy, which enables our differentiated financial results over time. Our purpose is centered on creating a more sustainable world and our strategy is aligned to powerful megatrends like energy efficiency, decarbonization and digital transformation. We’re all seeing the dire effects of climate change, and governments, NGOs and companies around the world are increasingly taking action. We’re hearing a lot about the need to invest in renewables and green the grid. What we’re not talking enough about is demand-side management. That’s where Trane Technologies comes in. Most buildings operate up to 30% inefficiently. Through our leading-edge technical solutions and sophisticated controls in AI, we can help our customers significantly reduce energy demand and emissions. Our relentless innovation, proven business operating system and uplifting culture enable us to consistently deliver a leading 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 #4. In the second quarter, we extended our track record of strong execution. Our global team delivered robust performance across the Board, not only bolstering our outlook for 2024, but strengthening our visibility to another year of leading performance in 2025. Bookings continue to be exceptional, with healthy momentum into the back half of 2024, as our pipeline of projects continues to grow. Q2 bookings of $5.3 billion rose to an all-time high, up 5% from our prior high in the first quarter and up 19% versus the prior year. Organic revenues were up 13%, with strong execution through the P&L, delivering 23% adjusted EPS growth. Notably, we continued to reinvest heavily in our business…

Thanks, Dave. Please turn to Slide #6. This slide provides a snapshot of our performance in the second quarter and highlights continued strong execution, top to bottom. Organic revenues were up 13%, adjusted EBITDA and operating margins were both up 140 basis points, and adjusted EPS was up 23%. At an enterprise level, we delivered strong organic revenue growth in both equipment and services, up low-teens and mid-teens, respectively. Our high-performance flywheel continues to pay dividends, with relentless investments and innovation driving strong topline growth, margin expansion and EPS growth. Please turn to Slide #7. At the enterprise level, we delivered robust volume growth with strong incrementals, positive price realization and productivity that more than offset inflation and continued high levels of business reinvestment. In our Americas segment, we delivered about 14 points of volume and about 2 points of price. Our Americas commercial HVAC business again outperformed the markets and delivered very strong volume growth of more than 20 points. Adjusted operating margin expansion of 130 basis points was driven by volume growth, productivity and price realization, more than offsetting inflation and high levels of business reinvestment. In our EMEA segment, we delivered about 4 points of volume and 1 point of price, with strong volume in our commercial HVAC business. Adjusted operating margin expansion of 130 basis points was driven by volume growth, productivity and price realization, more than offsetting inflation and high levels of business reinvestment. In our Asia-Pacific segment, the team delivered 310 basis points of adjusted operating margin expansion, despite a mid-single-digit volume decline. Strong productivity and positive price realization more than offset inflation and high levels of business reinvestment. Now I’d like to turn the call back over to Dave. Dave?

Thanks, Chris. Please turn to Slide #8. Our end market segment and business unit outlook is largely unchanged, with some notable exceptions in the Americas segment. First, our Americas commercial HVAC business delivered another very strong quarter of market outgrowth. While we’ve highlighted particular strength and key verticals, growth was again broad-based. Revenue growth on a three-year stack was extremely strong, up approximately 45% to 50% in both Q1 and Q2. With our continued positive outlook and exceptional backlog position, we expect three-year stack revenue growth to remain at this high range in the second half of the year. Second, our Americas residential business delivered stronger-than-expected growth in the second quarter, in part driven by three factors. The EPA clarification on the refrigerant transition, the normalization of channel inventories and a strong start to the cooling season. We now expect full-year revenue growth to be up mid-single digits. Third, in our Americas transport business, ACT has lowered their outlook for the 2024 transport markets to down mid-teens. Their expectation is for a much softer second half, which they project to be down more than 25%. We expect to outperform the transport markets in 2024. Looking to 2025, ACT projects approximately 15% growth as freight rates improve. Overall, the changes to our outlook in the Americas segment represent a significant net positive to our enterprise outlook for 2024 and gives us confidence in raising our full year guidance. All other businesses performed largely as expected in the first half and the outlooks for the year are unchanged. We provided additional details on the slide for your reference. Now, I’d like to turn the call back over to Chris. Chris?

Thanks, Dave. Please turn to Slide #9. Our initial 2024 guidance reflected targets that we believed would deliver top quartile performance on organic revenue and adjusted EPS growth for the full year. Halfway through, we’re exceeding those objectives. Given our strong performance, positive outlook and exceptional backlog, we’re raising our organic revenue guidance to approximately 10%, 1.5 percentage points above the midpoint of our prior range of 8% to 9%. We’re also raising our full year adjusted earnings per share guidance by $0.35 at the midpoint to approximately $10.80, up from a range of $10.40 to $10.50 prior. With this updated guidance, we’re poised to deliver our fourth consecutive year of 20% or greater adjusted earnings per share growth. We continue to expect about one point of growth from M&A in 2024, with a negative impact of approximately $30 million to adjusted operating income for the full year, for a negative impact of about 5 points to reported leverage versus organic leverage. We also expect about 1 point of negative FX impact in 2024, effectively offsetting the point of growth from M&A. Net, organic, and reported revenue growth guidance for 2024 are the same, at approximately 10%. There’s no change to our organic leverage target of 25% plus for the year, consistent with our stated long-term target and we continue to expect free cash flow conversion to adjusted net earnings of 100% or greater. For the third quarter, we expect revenue growth of approximately 8.5% and adjusted EPS of approximately $3.15 to $3.20. Please see Page 17 for additional information that may be helpful for modeling purposes. Please go to Slide #10. 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 11 and I’ll provide an update on our 2024 capital deployment. Year-to-date through July, we’ve deployed $1.1 billion in cash, with $379 million to dividends, approximately $100 million to M&A and $650 million to share repurchases. We have $1.8 billion remaining under the current share repurchase authorization, providing us with strong optionality as our shares remain attractive, trading below our calculated intrinsic value. We continue to have an active M&A pipeline, with potential value accretive opportunities to further improve long-term shareholder returns. For 2024, we expect to deploy approximately $2.5 billion in cash. Our strong free cash flow, liquidity and balance sheet give us excellent capital allocation optionality moving forward. Now I’d like to turn the call back over to Dave. Dave?

Thanks, Chris. Please go to Slide #13. We discussed the transport markets in our outlook discussion on Slide #8, so I won’t cover them again here. However, we’ve continued to provide this slide for your reference. Please turn to Slide #14. We operate our transport business for the long-term and while we’re moving through a down cycle in 2024, this is a great business with a bright future. ACT projects a trailer market rebound in 2025, up mid-teens and forecasts continued growth through their 2029 forecast horizon. 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 #15. In summary, we are well-positioned to drive differentiated growth over time. Our leading innovation, proven business operating system and unmatched culture enable us to consistently deliver top quartile financial performance over the long-term, while continuing to reinvest in our business and we believe our best days are ahead. We have the team, the strategy and the track record to deliver leading performance and differentiated shareholder returns in 2024 and beyond. And now, we’d be happy to take your questions. Operator?

[Operator Instructions] And our first question comes from the line of Julian Mitchell with Barclays. Your line is open.

Hi. Good morning. Maybe just wanted to start with the organic sales growth guidance. Understand sort of some of the year-on-year dynamics. It can depend, if we’re looking at one-year, two-year, three-year stacks and so forth. So maybe it’s easier to look sequentially. And I think the guidance implies sort of flat sales in Q3 sequentially, normally, they’re up the last few years, sort of mid-single digits, and then the fourth quarter, I think, is implied down double digits sequentially, and recently, it’s been down high singles. So, just wondered sort of from a sequential standpoint, anything in particular you’re seeing or it’s more of just a sort of conservative kind of construct based off the multi-year stacks?

Hey. Good morning, Julian. This is Chris. I’ll start. Yeah. Look, we’re happy with the guidance we just put forth and raised full year organic revenue growth target to 10%, up 1.5 points from our prior guide. Think about the second half of the year as I’ll start with commercial HVAC Americas. They’re going to have a great year on a full year basis. As I’ve talked about in prior calls, the comps versus 2023 are just tougher as you go into the second half of the year. As a reminder, a year ago, that business grew mid-teens in Q1, high-teens Q2, and the second half of 2023, it grew in the low-20s to mid-20s Q3 and Q4, respectively. So it’s going to have a great year. Think of that second half range. It’s probably in the 10% to 12% range in growth. And what’s interesting, and we did the math on this, when you think about the first half of 2024 in that business, the three-year revenue stack is a 45% to 50% growth, and it’s actually the same when you look at the second half of the year in 2024 as well. It’s a 45% to 50% revenue growth over the last three years. So, it looks really consistent when you think about it over the last several years with a lot of dynamic markets, so to speak, and dealing with supply chain. But they’re going to have a great year. Think of transport second half of the year, as Dave called out in his comments. I mean, those markets are expected to be down further than what we even thought three months ago. ACT has called those markets down in the mid-20s in the second half of the year. So we expect that business to be down, but we expect to outperform on the full year. And then residential, I’ll leave it within the Americas, mid-single-digit growth plan for the second half of the year. And could it be better? Yeah, maybe it could be better. It is a bit of a step down from the second quarter, but we’re cautiously optimistic about that space. We’re very much in the middle of the cooling season right now. We want to really see where it plays out. But maybe I’ll end there, that we’re confident in the full year guide and could things get a little bit better in the second half? Maybe. But we’ll update you as we get to the call next quarter.

Thanks very much, Chris. And just my second question on the operating margin outlook. So you’ve got the higher investments that are sort of pushing the full year up leverage into that mid-20s plus framework after a 30s number in the first half. Anything else we should be aware of for the second half in terms of that margin element? Maybe flesh out anything around mix, perhaps? I suppose if resi and transport are a bit softer, there’s a mix negative. Anything else to highlight in terms of, say, price, cost, tailwinds, and also within commercial HVAC mix, anything moving around on applied versus the light side in the back half?

Yeah. Good question. I think it’s really less about mix of the businesses. When you think about performance last year and EBITDA margins across EMEA, Asia and the Americas, very different mix of businesses. EBITDA margins were fairly consistent across all three of the businesses, actually Asia leading. But if I think about the second half, this is really where Dave has continued to challenge all of our business units with advancing investments, right? We see it as, and I’ve seen it for a very long time, with accelerating investments, and as we see high returns on them, that’s where I would call it maybe second half of the year. There’s a bit of compounding effect of the investments that we began to ramp in the first quarter of this year. Those wind up being a little bit more costly in the second half, but all of them have really strong returns. So we like the full year guidance and confidence in 25% or better organic leverage. Let’s see where the year plays out. But the focus here is making sure we continuously and relentlessly invest in the business to keep driving this market outgrowth in the next several years and Dave’s keeping the pressure on.

I’m sitting here smiling at Chris as he’s saying that, Julian. So thanks for the questions, but we love investing in our business and we’ve been able to demonstrate the results of the investments we’ve been able to make and expect more of that in the future.

That’s great. Thank you.

Thanks, Julian.

Thank you.

Our next question comes from the line of Scott Davis with Melius Research. Your line is open.

Hey. Good morning, guys. Dave and Chris, is that?

Hey, Scott. How are you doing?

I’m good. Thank you. And today’s results have been good. So it’s been a good day. So I wanted to just dig in a little bit of backlog. It’s kind of your comments about 2 times normal. I’m trying to just tease out what’s changed here. Obviously, demand is solid. But are these backlogs 2 times normal largely because lead times have gone up substantially because these projects have gotten bigger and more complex and folks want to get in front of the line? I’m thinking data centers and semi-fabs and things like that. But perhaps I’m overstating that a bit?

Yeah. It’s a great question, Scott. I would say that we should maybe challenge ourselves as to what’s normal, okay. We’re a lot bigger business than we were four years ago, obviously. Lead times, that’s not -- I would say that’s -- I would say lead times are back to what I would call a normal rate. For data centers, for sure. We have data center customers that are providing us visibility to their needs well in advance than, say, maybe some of the other verticals. So that’s a part of it. But look, we’re seeing tremendous strength, really, in almost all verticals. As we looked in the Americas in our commercial HVAC business in the quarter, I think we spoke before, we tracked 14 different verticals. It was hard for us to find a vertical that was down. So we just have broad-based strength. We certainly are seeing a lot of demand in the high growth verticals like data centers, but we’re also seeing nice demand in other verticals as well.

Okay. Helpful. And then China, the bookings are up and I know it can be a little bit lumpy, for sure. But is there an indication that China is bottomed? I think kind of -- I guess my question is kind of A, on the macro side, but B, you guys are probably getting some outgrowth, I would imagine there. So if you have some color around that, B.

Yeah. I’d say it’s a good question, Scott. I mean, Asia is less than 10% of the revenue for the enterprise. Okay. Think of it 50% China, 50% the rest of Asia. In the quarter, the region performed as we expected. Revenues were flat. I would tell you that we did see some choppiness in China towards the back half of the quarter. So we have our eyes wide open on that. But I would also tell you that we have that baked into our guide for the year. So I wouldn’t say that China has bottomed. We performed well there. Our team is executing at a very high level. We were a very seasoned team there. A lot of innovations in their pipeline there that they’re rolling out into the marketplace. But just to be clear, getting orders in China are pretty dynamic right now.

Okay. Congrats, Dave. Thanks. I’ll pass it on.

Thanks. Appreciate it, Scott.

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

Good morning, everyone. Nice quarter.

Thanks, Andy.

Thanks, Andy.

Appreciate it.

Dave, just a little bit more about bookings and backlog momentum going forward. We know you’ve more difficult order comparisons coming up, but could you maintain book-to-bill ladder over 1 times? And then the renewed momentum in Americas commercial HVAC, I know you just said it was relatively broad-based, including data centers, but how long do you think this elevated bookings environment could last and at what point do strong orders give you confidence that 2025 should be another strong earnings growth year or even a double-digit growth year?

Yeah. I’m not going to forecast our incoming order rates for the rest of the year. I will tell you that we’re going to have a backlog that’ll be very strong going into 2025, much like you saw us at the beginning of 2024. We already have 2.8 billion booked for 2025 and I mean, that’s a number that we haven’t talked about that size of a number in the past. So we’re very confident there. As far as the demand that we’re seeing, look, we’re seeing a lot of demand and I emphasize it’s broad-based, right? It’s not just in the high growth verticals because we’re very strong there, but it’s broad-based and it really has to do with a lot of our innovation and our ability to execute. And with our direct sales force, we go to where the opportunities are. Our teams are highly technical and we’re winning in the marketplace. It’s that simple. And I couldn’t be prouder of what that team’s been able to execute. And by the way, we’re talking a lot about the Americas, but I would tell you that our commercial HVAC business in Europe also performed extremely well. Their order rates were up 20%. So you could see that investing in the business, always having that long-term vision as to where you want to go and the payback that you get for that, this is a flywheel, as Chris would say, and we’re seeing the impacts of that and that flywheel is going to continue to spin for us.

Thanks for that. Yeah. I tried there to get to the forecast bookings. Oh, well. So let me then ask you a follow-up. Chris, you kind of alluded to resi and the strength that you’re seeing. It looks like revenues in the first half were already up mid-single digits plus. Orders accelerate obviously in Q2 up 30%. I know you said you want to be conservative, but really is mid-single-digit growth the minimum for the year and what did you -- what have you seen so far during the cooling season?

Andy, good question. Yeah. I think mid-singles is probably the floor for the business. Could it be better? Yeah, we think it could be better. But as you know, bookings in that business, it’s less important. It’s really around seeing through the entire cooling season. As you know, there’s a refrigerant transition that’s happening later into this year, into next year, and we’re ready for that. We can certainly answer any questions there as well. But we’ve got a lot of confidence in that team. It’s been a challenging market leading into this cooling season for about a year, year and a half. But yeah, we feel like could that be better? It could be better. But let’s see how the year kind of plays itself out.

Yeah. Andy, as I said in our prepared remarks, look, three reasons why we did so much better in resi in the second quarter. One is the clarification on the refrigerant transition. The second is certainly the inventory is at what we would call a normal level in the channel list through our independent wholesale distributors. And the third is not that I like to talk about the weather, but it’s been a very, very warm start to the cooling season, which should have us all concerned for a different reason that we could talk about if you’d like. But it’s been a very, very strong start. So as Chris said, we’re cautiously optimistic in this business, the team performed very well in the second quarter and it’s a great start for that team.

Appreciate it, guys.

Okay. Thank you.

Thank you, Andy.

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

Yes. Thank you. I was wondering if you could talk about your expectations of any pre-buy given the A2L transition and just, yeah, have you already introduced the product, et cetera?

Yeah. Gautam, good question. We’ve introduced -- in our commercial business we’ve introduced about half of the products that would be affected. And think about any product that uses a scroll compressor as a target for a refrigerant change, okay. So just in a broad brush. So in our commercial sites, about half of it we’ve introduced. We’re actually selling both. So we’re selling 454B, the new refrigerant, as well as still 410. In our resi business, not yet. We haven’t introduced it. That’ll be rolling out in the back half of the year. As far as pre-buys go, look, we’re not anticipating in our residential business a large pre-buy towards the end of the year. We’ll see how that rolls out. But right now, we’re not forecasting that. There’s just too much timing that you have to work on to make sure that you could sell through all your products in the year and our focus really is on helping our independent wholesale distributors transition their inventory properly. So we’ll be working with them as the year progresses here to make sure that they’re ready for the cooling season in 2025 and then that’s really where our focus is right now. So answer to your question, not a large pre-buy. At least we don’t have one baked in. But I would tell you that the way we designed our operations, we’re able to manufacture both products. So we have mixed model lines, which it was a little bit more upfront cost, but we believe that investment will pay, because as you know, in the resi area, you’ll be providing components of 410 for some time into the future to make sure that we could service our product over the useful life of that product.

Great. Thank you.

Thanks, Gotham. Appreciate it.

Thanks.

Our next question comes from the line of Damian Karas with UBS. Your line is open.

Hey. Good morning, everyone. Congrats on the quarter.

Good morning, Damian. How are you?

Doing well, thank you. I was wondering if you could maybe help us unpack the 13% organic growth a little bit. Just give us a sense for how much of this topline being driven by volumes versus some price and mixed benefits and just maybe kind of walk us through how you’re thinking about that for the full year now?

Hey, Damian. It’s Chris. I’ll start. Yeah. For the quarter, think of it as a little bit over 2 points of price. You’ll see this in the 10-Q that gets filed later today, about 11 points of volume. So as we anticipated coming into the year, we knew that price was going to be a contributor, but less of a contributor than what we saw in 2022 and 2023. That’s been dovetailing. And the offset to that, and a nice offset to that, has been improved productivity. And so as kind of came out at the end of last year, middle last year with supply chain challenges largely resolved, we’re continuing to see improvements on the productivity side. So if I step back, we’re getting the right combination of price, dollars and margin above inflation. It is inflationary out there, to be fair. If I think about tier one costs with copper up, aluminum up to somewhat flat, steel down, refrigerants up, and ultimately, wage inflation really being up, all of that is still going to be a bit inflationary on us for this year. But I like where we are, price versus inflation, the productivity is getting stronger and making sure that we’re funding the business with investments. It was another quarter of a high investment and continued high investment quarter with projects we think that are very, very strong. That volume growth, the 13 points, sorry, 11 points of volume on the 13 points of revenue growth, think of that as 20 points of volume in commercial HVAC Americas. On price that where we were in the second quarter, we’re confident that gives us a lot of view into the full year. Price should be around 2 points as well. And that’ll look a little bit lower in the second half of the year versus the first half, ultimately landing around 2 points on the full year. So hopefully that gives you a little bit of color.

A lot of volume, Damian.

Yeah. Not a bad thing. That was helpful. Thanks. And then I wanted to see if you might be able to share some color on how things are progressing with some of your kind of early stage, emerging growth opportunities, if you will, investment immersion cooling, your AI partnership. Would you envision these being potential capital deployment opportunities down the road?

I’ll answer the first question. Emerging cooling, as I’ve said in the past, that’s sort of -- that’s got some hurdles it still needs to work through and we’re working through some of that with our partner there. So that’s not what I would call mainstream. As far as the AI tools, like the Nuvolo acquisition we did, it’s early days, but we really like what we see there and this is going to really help us excel our connected asset solutions. And in my opening remarks, I talked about demand side management and we’re not talking a lot about that. But a lot of people are talking right now about the generation side of power. A lot of people are talking about all the demand that’s coming. What people don’t realize is that, in a building, 30% of the energy that’s consumed is wasted, right? So if you’re connected to the asset, if you’re connected to the building, you’re able to ensure that that asset or that building is going to perform the way it was designed. And this 30% number, right, I’d love to show you some of our stats, but this is a massive amount of energy that can be saved. So we’re really happy. We’re really bullish on Nuvolo. We’re really bullish on what we’re doing with our connected solutions. And I think you’re going hear a lot more about demand side management in the coming years, because it’s not just about generation, it’s not just about forecasting all the demand that’s going to be coming and you see a lot about data centers right now. It’s like, how do we use what we’re generating today in a more efficient way and that’s what we know at Trane Technology we could help our customers with.

Great. Thanks, guys. Best of luck.

Thank you, Damian. Thank you.

Thanks.

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

Hey, Joe.

Hey, guys. Good morning.

Good morning.

So I’m going to touch on data centers again just quickly. I know that it’s both broad-based growth across commercial HVAC in the Americas. I’m just curious, though, are you seeing any constraints on your bookings for data centers, I know that that’s been a hot topic of late. And then also, can you just maybe tell us a little bit about the margin profile of the business that you’re booking in that vertical?

I’ll start. I’ll let Chris talk about margins. But constraints from a capacity standpoint, no. I mean, we’ve made capacity expansions over the last several years. So we feel as though we’re in good shape there. It’s more about working with the customers. It’s more about working with the system level within the data center. We’re not just a component supplier within a data center. We look at the entire cooling system, whether you’re cooling at the building level, the server or the servers themselves. This is something that we’re really good at and we’re very strong in this vertical. And we’ve been very strong in this vertical for a long time. I’ll steal a bit of Chris’s thunder here, but the margins in this space are very attractive and we really like our service tail that this provides. Chris, you want to add anything?

That’s where I was going to go, Dave. I think, again, these are generally highly customized applied systems when you’re talking about data centers for the most part. And so while we’re pricing for innovation, we’re also making sure we’ve got customers for life. These are customers that are putting in multiple locations, multiple data centers, and we want to make sure we have not only a solution for today’s order, but what that order can be a year, two years, five years from now. As all market projections would suggest that this is going to be a multiyear growth factor with the growth of data centers. And with that, to Dave’s ending point, the opportunity still in front of us is to think about services here, and with typical applied systems generating 8 times to 10 times of the revenue and services from a dollar of equipment, that’s still an opportunity well in front of us as we deploy products into this space and you’re starting to see that a bit in the revenues, but more of that in 2025 and 2026, that’s a nice opportunity still in front of us.

Got it. That’s helpful, guys. And then just my quick follow-up, resi HVAC growth this quarter was much better than what some of your other public peers have reported so far. So it looks like you took some share. I was just wondering, was there any disruption that you noticed with any of your public or non-public comps in the quarter? And I know, Dave, you referenced some of the reasons why you grew this quarter, but the growth was surprisingly good?

Yeah. I mean, the team executed very well. Look, I’ve been saying for a long time, Joe, you got to look at the share in residential over a longer period than just a quarter. So did you do better in a quarter? Tell me what you’ve done over the long-term. So I can’t comment on if there was any one of our other competitors that didn’t do well, I don’t know that. But I am very pleased with our results. But look, we’re cautiously optimistic here. Look at share over the long-term. Don’t just look at it on a quarter. There’s different sell-in models and you could get the wrong answer if you just look at a particular quarter. But I am very happy with the results that we’ve been able to demonstrate.

Okay, guys. Thank you.

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

Hey. Good morning.

Hey, Steve. How are you?

Good morning.

Are you guys getting bored yet of putting up these kind of results?

Steve, I never get bored of putting up great results. It’s the flywheel that this talks about, right?

Yeah. Congrats on great execution and very strong results. Could we just get a breakdown of the difference between applied and unitary equipment in the quarter and then what you’re expecting for the second half in those two?

Yeah. Steve, I’ll start. I’m happy with performance in both of those businesses with applied and unitary. I’d say both up strong. We talked about commercial HVAC revenues up over 20% in the quarter and both contributing to that. Equipment was up 30%, maybe unitary a bit stronger than applied, but not by much. Second half of the year, think of our -- I’ll start with commercial HVAC Americas, think of that all in about up 10% to 12% in the second half. I described earlier great performance last year in terms of tougher comps with the growth in revenue from call it mid-teens in the first quarter of last year to mid-20s by the fourth quarter of last year. That team’s going to have a great year this year. We’re even more excited about 90% of the backlog is commercial HVAC, the $2.8 billion that Dave spoke about that we already have for 2025 and beyond. That’s all equipment, we don’t have service in that backlog and that’s all commercial HVAC. So, it’s going to be a really strong follow-on to this year and it’s giving us a lot of confidence for growth going into next year. Hopefully, that kind of answers the question.

And any -- will these diverge in the second half? I mean, it seems like, obviously, with the data center stuff, the applied business and the backlog-related businesses continue to grow really strongly, but the more short-cycle stuff maybe slows a bit given the tougher comps. Is that how we should think about it? Will they diverge a bit, unitary and applied?

I don’t know if they’ll diverge a bit. I mean, with unitary maybe being up a second quarter, I think they’re going to be somewhat close to each other here in the second half. Services is going to be strong for the second half as well. We’re tracking, as we saw in the second quarter, in Americas business was up high-teens, enterprise was up mid-teens. That’s going to be a nice contributor to the second half as well, but I wouldn’t say that there’s going to be a big divergence in the second half.

Yeah. I would agree.

And then…

… because I think that…

Go ahead. Sorry.

Yeah. Steve, I think that, again, when you talk about broad-based growth, right, different verticals are satisfied with different types of products. And if -- in this broad base that we continue to demonstrate results in, you could see that we’re growing both applied and unitary. Not that we look at the business that way because we’re really selling systems. But so our unitary, as Chris said, we were actually stronger in unitary in the second quarter than we were applied, despite the fact that we have very large backlogs in applied.

One last question for you on the services growth. I mean, I usually think of services as being pretty solid growth, but more stable. These types of growth rates in services are obviously very strong. Credit to you guys. What is the key driver here? It seems like it’s more than just a run rate of recurring break, repair, stuff like that. Is there anything that’s standing out, because it just seems these types of growth rates, they’re not lumpy, but they’re just seemingly way higher than what you would consider to be a nice, steady services business?

Yeah. It’s a great question, Steve, and appreciate you noticing our high growth rates there. Just to remind everyone, we’ve had a compound annual growth rate over the last six years of high-single digits. In the second quarter, we were up mid-teens, right? And I -- I’ll just go back to our operating system, right? It’s a system of things that makes our service business great. For sure, it helps when you keep growing your applied installed base because our service business is really built around our applied installed base. But I would also tell you that the mindset that we have of an asset is not performing when it’s not heating or cooling properly and/or it’s using too much energy is a different way to think about it and there’s a lot of growth potential when you start thinking that way. So think about…

Okay. Thanks. Yeah. Thanks a lot.

Okay, Steve. Thanks.

Our next question comes in the line of Jeff Sprague with Vertical Research Partners. Your line is open.

Thanks. Good morning, everyone.

Hi, Jeff. Good morning.

Hey. I hope everybody’s well. I want to come back to data centers too, maybe a little bit bigger picture, just competitive and customer behavior question. Obviously, you and your peers are talking about very strong growth. It seems like there’s plenty to go around. It also does look like you’re probably outgrowing them, but it’s hard to tell. The nature of my question is, are your customers in general and maybe the hyperscalers in particular standardizing on OEMs? You end up dominating hyperscaler A and carrier as hyperscaler B, or are we looking at mixed fleets based on what people can deliver at a point in time? Just give us a sense kind of in this almost gold rush to stand this stuff up, just how the competitive landscape and customer behavior is unfolding?

Yeah. I’d say hyperscales, first of all, they like technology and they like always pushing the envelope and trying to increase the efficiency of the system. So, they’re always working with us and they may be working with our competitors as well as to make sure that we can have a more efficient system tomorrow. And we have a lot of cool things that we’re working on there with them. Some of it includes some things that are maybe a little bit outside of that, which is the heat recovery side of things, which I’ve talked about in the past. Look, at the end of the day, these hyperscale customers, they like resiliency as well. So, they’ll typically pick a prime and then they’ll pick a secondary and that’s just prudent behavior on their behalf and we’ve seen that before, but I would tell you they really, really, really like innovative technologies.

And Dave, is there a way to think about just your available serve market here, dollars per megawatt deployed or some other metric as you try to really game plan for the capacity you need and the revenue trajectory you might be looking at? Any way you could help us frame that?

We have some internal models that I won’t share with you the results, but look, it’s allowed us to be able to help forecast based on talking to our customers, understanding what their demands are, okay. And then kind of pushing that back into what would it mean for us. I would tell you that think of units getting bigger, think of units getting more complex, and think of added features on units like heat recovery. That’s certainly a trend that we’re seeing and that’s certainly something that we’re working with our customers’ kind of pushing into the marketplace.

Okay. Great. I’ll leave it there. Thanks.

Thanks, Jeff.

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

Thanks. Good morning, everyone. Great quarter…

Good morning, Nigel. How are you?

… obviously. Yeah. Good. Thanks. Look, everything’s really good. I’m going to focus on a couple areas that aren’t so great right now. So, Dave, in a world of down 15% trailer declines this year in NAFTA, how does TK Americas perform? And maybe just on top of that, to add in how the other verticals are performing, your bus rail, et cetera, and spare parts?

Yeah. It’s a fair question. Look, the Americas transport business is going to be down in 2014. It’s a more cyclical business than our commercial HVAC business. ACT is projecting the back half of the year to be down 25%. To be fair, our internal models say it could be down even a little bit more than that and that’s what we have baked into our full year guide. Look, I had the opportunity early in my career, Nigel, to run this business. And I would tell you that I’ve seen these downturns in the past. And I would tell you that these markets will come back. And right now it’s projected they’ll come back in 2015. We’ll stay tuned on that. But this is a very strong business. And when these markets come back, they’re going to come back strong. And the key is to continue to invest in the business when you’re in this down cycle. And when you do that, when the markets come back, you’re able to delight your customers with a portfolio of innovation that really allows you to win through that cycle and that’s what our plan is right now. As Chris said, we’ve been investing heavily in the business. We’re not stopping that. And TK is a big part of those investments that we’re making. And I’m excited about the innovation pipeline that’s going to come out in the Thermo King business and when the markets come back, we’re going to be ready. As far as the other businesses, I mean, they tend to follow a trailer, I mean, and the trailer is the big one, but they tend to follow that same cycle. We start to get freight rates to improve. If we start to get capacity coming out of the channel, we’ll see the market start to rebound and I know they will.

Okay. They certainly will. Absolutely. So, would down mid- to high-teens be reasonable for TK Americas in the back half of the year?

Nigel, this is Chris. Yeah. I mean, I think they could be down mid-single to high-single in the second half of the year. I mean, we expect it to be down probably in a range of low doubles, double digits on the year. If trailer markets are down mid-teens, we expect to outperform. And again, that’s the innovation and the investments we’ve had in this business for many, many years. And the key here is to make sure that while it is a down year and we’re going to manage the decrementals as so far we have, and we expect to do that for the balance of the year, it’s making sure that we’ve got the investment pipeline that continues to run the business. Just in June, we finished our long range plans for each of our business units, thinking about capacity and not only in commercial HVAC, but all of our businesses. And this is one that we like these markets to Dave’s point, want to make sure we’re still investing so that when the markets do recover, we’re ready. Could the market be down more than mid-teens? I mean, that’s what we’ve called it right now. To be fair, I know ACT’s had multiple revisions here over the last several months. I think it’s four or five this year already. Our internal models would suggest maybe it’s down a little more than that. So we’re making sure we bake that into our guide at this point. Second half of the year, we expect it to be down on down comps from a year prior, but we do expect to outperform the market.

Okay. Guys, I had a follow-up question, but that was a great answer. So I’ll leave it there. Thanks a lots, guys.

Okay. Thanks, Nigel.

Thanks.

Our next question comes from the line of Deane Dray with RBC. Your line is open.

Thank you. Good morning, everyone.

Hey, Deane. How are you?

I’m doing real well. Thank you. I just want to circle back on unitary. One of your competitors this quarter talked about making a push into the emergency replacement of unitary into that market where they said they really don’t have any share. How might the competitive dynamics change here and the economic returns? Just any comments from you would be helpful. Thanks.

That’s a tough one for me to answer. I’m not sure what they’re planning on doing. I would tell you that we’re very strong in unitary as far as the replacement market goes. Yeah, in the heat of the summer, if the unit stops working, it needs to be replaced and having the available unit on hand is very, very important. And we carry a lot of inventory stock and we also have, with our lean thinking in manufacturing, quick ship programs, which allows us to really win in this space.

Is it fair to say that the emergency replacement market is basically half of the business today or is that overstated?

Yeah. I can’t comment on that and I think it would be -- it would really -- it would depend on the time of year, okay. You also have a planned replacement market as well. So there’s a lot of things that are part of that statement that you just made. So it really depends.

All right. I understand. That’s helpful. And then second question, any updates on all of the megaprojects? Are you seeing any bidding coming through? Any updates would be helpful. Thanks.

Yeah. I mean, we continue to track megaprojects. And as I’ve said in the past, megaprojects tend to be in verticals that we were always strong in. So it’s hard to say what’s incremental in that space. But right now, our teams are tracking over 300 projects and some of them have been closed, but many of them are still in the pipeline. And one of the things about these megaprojects is they tend to have lots of different decision makers, especially if any of the semiconductor space that, I mean, I’ll give you an example. We had a project that the decision maker was in Asia, the engineer was in Seattle, Washington, and the mechanical was in Austin, Texas. And one of the advantages that we have with our direct sales force is we could really help the customer triage all the information that’s required. And it allows us to really be focused on the customer needs, but also all the different individuals that are part of that process. So we really like our positioning with these megaprojects. And a lot of these megaprojects are very sophisticated, engineered products, which actually plays to our strength as well.

Great. Thank you.

Sure, Deane.

Our final question comes from the line of Noah Kaye with Oppenheimer. Your line is open.

Yeah. Thanks. I’ll just ask one question. And David, goes back to your opening comments around demand-side management as an underappreciated lever here. You’re sitting on one of the largest flexible capacity assets on the grid and you’re expanding your ability to play in distributed resource management and virtual power plants, district heating. I was hoping you could maybe connect the dots for us a bit more and just frame up how meaningful this is becoming in terms of some of the commercial HVAC bookings and revenue trends, how much they expand your wallet share, anything you can do to help quantify for us some of these additional facets of the business?

Well, I appreciate the question, Noah. I think we’re still in the early innings on this. I know we’re in the early innings. It’s more about an education process. We were working with a customer, a large customer in New York City and we created a digital twin for their particular building. And we were connected and we were watching the energy consumption. And we saved that particular customer, it may not sound like a lot, but it was like $120,000, right, in energy that they would have wasted if we weren’t connected to their solution. So, and you think about the universe, okay? If you think about the commercial space at 400 billion square feet, I mean, it’s crazy the opportunity that exists. So, look, this is a massive opportunity. Demand-side management, you’re going to hear a lot more about it. And the neat thing about it is you don’t have to wait for new technology to be developed, right? This is technology that’s readily…

Right.

… available and being connected from a structured data standpoint, which we’ve been for a while, but now we’re adding in unstructured data with our AI tools. We’re able to really dial in algorithms to really help our customers save energy, which is saving carbon, which is good for the planet as well.

Okay. Thank you. We’ll look forward to hearing more.

All right. Thanks, Noah.

I will now turn the call back over to Zac Nagle for closing remarks.

We’d like to thank everyone for joining on today’s call. As always, we’ll be around for any questions that you may have. So, feel free to bring us up. And then in the coming months, we’ll be on the conference circuit, obviously, and we’ll hope to see some of you on the conference as well. So, thanks for joining, and have a great day.

Ladies and gentlemen, that concludes today’s call. Thank you all for joining. You may now disconnect.