Trane Technologies Stock

The 14th Annual Laguna Conference. To start off, for any important disclosures, please see the Morgan Stanley research disclosures website at morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your Morgan Stanley representatives. We're happy to have Trane Technologies here with CEO, Dave Regnery; and CFO, Chris Kuehn.

So to start off, I mean, service is about 1/3 of the business. It's been performing very well. I think this is going to be, what, the fifth straight year of double-digit growth. How long can you sustain this? And looking at the kind of lag it has versus equipment and how equipment has ramped over the past few years, what kind of opportunity do you see for some acceleration?

Well, first of all, thanks, everyone, for coming today. Thanks for your interest in Trane Technologies. It's a great time to buy, so double down. I don't know what the news was today, but it's a great time to buy. Look, I always tell everyone that Trane Technologies is a great company for several different reasons, right? It's not one, it's many. And one of those reasons is the fact that our service business is so strong. And Toby, as you said, it's 1/3 of the company. It's had a double-digit growth rate since 2020, okay? And that includes COVID year. So just think about the durability and the resiliency of this business.

I would also tell you that it doesn't happen by accident, right? We invest heavily in our service business, whether it's how we train our technicians. We have about 7,500 technicians all Trane technology employees, all trained by Trane Technologies. It's how we recruit our technicians. It's the apprenticeship programs that we have that we are constantly looking to attract and build new talent in that space. It's pretty obvious. Our service business is built around our applied business. And our backlog, which is at record levels of $12.1 billion, is over 90% applied. As your installed base grows, the tether to your service business is going to continue to expand. So we don't forecast what the growth rate is going to be in the future. But look, we've demonstrated for a long period of time that this is a very, very sustainable and competitive advantage that we have as Trane Technologies. So expect more in the future.

And I guess without forecasting, kind of following along there and data center has clearly been a strong driver. You've highlighted that 8 to 10x revenue tail you can get on service. How is that augmented as systems have become more complex and especially with data centers?

Yes. I mean we've said that applied systems and our conventional verticals or our core verticals typically carry about 8 to 10x the original price over the life of that asset. That number is probably a bit different in data centers for a variety of reasons. Look, we don't -- how the chiller is actually being used is different in a data center than what you would see in a core vertical, the renewal process or how you retrofit that will probably be different. So we don't believe it's going to be 8 to 10. We think it's going to be a little bit lower. But at the end of the day, if you look at all of the chillers that we're installing in data centers, which is a lot, this is going to be a great upside for the future.

And kind of staying on that AI theme, how have some of your investments in digital, such as like BrainBox augmented your service offering?

Yes. We love being connected to assets. So in the past, we've been connected to assets and buildings for a long time now for decades. But today, we have over 70,000 buildings connected. We probably have 2 million to 3 million assets connected. And what BrainBox has done is in the past, we would always think of things like -- think of it as machine learning, so we were connected, but it was always about how do you make sure the asset or the building is performing the way it was designed. With BrainBox, we now can take unstructured data and add that to the equation. So now all of a sudden, you have buildings that are performing not only the way they were designed, but also how they're being used, and that's a difference. And we're able to get 15%, 20% savings by putting algorithms or agentic algorithms in place, in buildings.

So if you think about it, and most people don't know this, but buildings waste about 30% of the energy that they pay for, 30%, and that's a very conservative number. And what we can do is we have the technology today with BrainBox and our portfolio of products to not only eliminate that 30%, but actually drive it negative, so think about the savings that we're able to drive for our customers and the buildings. And if you think the cost of energy is going to be less in the future, I don't think that's the case. I think it's going to continue to improve. And I think our paybacks to customers is going to continue to increase. We have this -- our strategy is, think of it as we think buildings are going to get smarter, more resilient in the future. And what that means smarter, they're going to start using more sophisticated controls, using structured and unstructured data to ensure that they operate at the most efficient level. Resilient, they're going to start using different sources of power at different times.

So for example, you may use electricity, you may use fossil fuel or you may use storage. And our controls will know what to do at what time to optimize the return for our customer. We had our Chief Digital Officer, we're running a pilot in Minneapolis. And in February, he came in and he was like, "Dave, let me show you the pilot." He's all excited. I said, "This is great." And I'm looking at the screen, and I'm like, "What the heck are we running the heat pump for?" Which is electric, and it's minus 5 degrees F, in Minnesota. Now it was 5 in the morning, Minnesota time, when I was looking at this, and he quickly pointed to the bottom of the screen, and he said, "Well, the cost of a kilowatt is $0.02. That's why we're doing that." So think of it as almost free. Think about that at scale, and that's what we're talking about what we're doing right now. It's really, really exciting. I know everyone wants to talk about data centers. We're very strong in data centers. We're going to continue to be very strong in data centers in the future. Smart, resilient buildings is as big or a bigger opportunity in the future.

And to that point on bringing the resiliency and savings of the building, could you speak on the longer-term tailwinds that surround the equipment business in commercial HVAC?

Look, I think the pipeline of activity that we're seeing right now in our business is probably the most I've seen in my career in this industry. And I've been in it a long time. So we're going to continue to accelerate our growth rates, and I can tell you our pipelines are very, very strong. In the second quarter, we had order growth in the Commercial HVAC Americas business of 50%. And we track 14 different verticals in a lot of detail. And I would tell you the majority of those verticals had growth of over 20%. So look, we see a lot of demand not only today, but well into the future and the breadth of our portfolio, our service business, the way we go to market with the direct sales force, those are all things that make Trane Technologies as a great company.

And kind of digging in there, could you speak on like which of the verticals outside of data centers have really been the most attractive?

Go ahead, Chris, I'll let you speak.

Thanks. I mean, look, in the second quarter, we said 11% to 14%, we saw growth. Actually, year-to-date 11% or 14% growth in the second quarter, all of them we saw growth. So look, we're seeing a lot of continued support and higher education. Office is turning positive, and we're seeing growth there. But let me step back and think about the direct sales force, you go to any one of our commercial sales offices, we have over 100 of them in the U.S., and you sit down with those teams and you look at the pipelines that they're working on, it's not data center pipelines, it's office, it's higher ed, it's K-12, it's federal government. It's -- gosh, there's so many different verticals. But I think about what they're working on in their pipeline, sure, data centers as a line item. But for them, over 95% of our sales force is focused on verticals other than data centers.

And speaking to that direct sales force, how is that -- how does that create a competitive advantage for Trane? And how do you communicate the value proposition to your customers?

Yes. What people don't realize is a direct sales force, we have the optionality on calling on all the influencers in a job, right? So I think if you're going to go sell to a hospital, who's involved in that decision making, right? That could be a mechanical contract or it could be a general contractor, it could be an architect, it could be the engineer or it could be the end user. The reality of it is, it's all five. And with the direct sales force, we have the appetite, okay, to call on all of them to make sure that we could show our value proposition.

If you're going through someone who's representing you or what they call a rep agency, they may not have that appetite, right? They may want to just call the mechanical contractor, which is fine. But we're calling on all to be able to explain the value proposition. And when you talk to the engineers, do you know how much product engineers buy? Not quite zero, but close to zero, right? What you're doing is you're calling on them to explain the value proposition of your products. And when you do that, you become the basis of design. And if you're a mechanical contractor, you may or may not want to start changing the basis of design because once you start changing that, you start taking on liability that you may or may not know of. And what we do is we call on all those influencers, and that's the competitive advantage that we have as Trane Technologies. We love this, we love talking to customers, we love getting their feedback, and we love being able to help our customers save a whole bunch of money.

And Toby, the direct sales force, they're local, so they know the local laws, right? So in a city level or state level, they understand if there's incentives that come from the states or from the cities. They understand incentives that can cover utilities, and they're bundling these incentives and making sure with that local knowledge, bringing it to the customer, and then it's an even stronger payback from the customer when you have that understanding locally. We've talked in the past about New York City where it's not just -- right now, it's maybe some carrots to move to decarbonization, but it becomes sticks in 2030 and 2035, and so on. So how do you get your customers on that decarbonization journey so they don't pay penalties in the future? Having that local knowledge of those laws, that helps out a lot.

And kind of with that value proposition, I believe a lot of that is captured in the margin premium you get on the service business. And as this business kind of mixes towards services, that continues to grow, how does that augment your incremental margin outlook? I know you've previously spoken to like 25% plus. Is there any room to push that higher?

Well, that's why we have the plus on the back end of that, right? And so we had some conversations this morning and we typically do about price versus inflation and then incrementals on volumes. And that altogether, you get you to the 25% plus. Making sure you have a customer for life, as Dave said earlier, we want a broad relationship. Many of our customers have multiple assets that you want to be on a journey with them for multiple years for CapEx upgrades, okay? But at the same time, it's a plus because we have a very robust pipeline of investments. And the way to get the top line revenue growth, and it's been a double-digit CAGR for the last 5 years, as Dave called out, is to keep investing in the product, having new products out there, more energy-efficient products. So that's the governor, but at the same time, we look at it is we're always going to bias to accelerating investments where we can.

We're always looking at long-term growth, Okay? I know it's -- as a CEO, you could get boxed into trying to manage the short term. I would tell you, as soon as that happens, you're probably going to fail. So as you always look out, right, we're interested in top quartile growth on the top line. We're interested in top quartile growth on the bottom line. And we're looking for free cash flow which we've been able to have, what, over 100% over the last 6 years on average, right, conversion because that tells you the quality of your earnings. I think you all know that. But look, this is a long-term view that we're always going to take, and you saw in the second quarter, Toby, we were a bit below the 25%. No excuse, right? No excuse from Trane Technologies. Yes, we're investing heavily. We bought a new business, Stellar. We're making sure we're implementing our operating system. We have some investments that we pulled in to make sure we get the fundamentals correct so that we could start taking these solutions to other verticals other than just data centers. And again, that's a long-term view that we have as to how we're going to continue to be top quartile growth.

You mentioned Stellar there. Why is that such a good strategic fit with that long...

I think if you could take skilled labor and variability out of the job site, that's a good thing, right? If you could take -- if you think about a job site, there's so much variability that happens there, right, whether it be weather or whether it be being able to have the proper skills on the job site at a particular time. If you take all that and you move it to your factory, a lot of that work, and then you basically just deploy it and it's like literally assembling LEGOs on a job site, that's a much better solution. And by the way, the quality level becomes so much greater.

So look, we think this is a trend not only in the data center space, it's exaggerated in the data center space because of the speed at which we're trying to build data centers, but it's going to be very, very applicable in all verticals. And I think the key, though, is we need to make sure that we get our fundamentals correct before we start deploying it to the other verticals. And by the way, Stellar, think of it as a $1 billion business, think of it -- in a couple of years, think of it as mid-teens EBITDA, and we are well on our way to make sure that, that will become reality.

And kind of to that line of thinking of investing to support these changes in the market, are there any other adjacencies that could be interesting as you see these changes, especially with like data center infrastructure moving forward?

Look, I mean we always get asked the question about what's the M&A you're looking at. And I always say that's a great question that I can't answer. Look, we love being a pure play. It took us a long time to become a pure play. We're going to continue to be a pure play, so if you're wondering about that, don't wonder about that. But we're always looking at technologies, and we're always looking at how we could scale those technologies within our strong channels. We have the advantage of having the strongest channels in the industry, right? And when you do that, you could take technologies and deploy it relatively quickly through your channels. And whether that be Stellar on a modular design or whether that be thermal management systems in Europe that we're scaling or whether it be an air handling system in Europe that we scale through the rest of our distribution.

And then kind of thinking to the fact that you're a pure play. And when you think about the pitch that you give to customers, how is the partnership with Eaton kind of helped bring to...

Eaton, first of all, a great company, great leadership team. We work with them relatively a lot in reference designs for data centers, so they're on the same team we are with one of the larger chip manufacturers to develop what the data center is going to look like of the future. And think of it as speed, think of it as efficiency, think of it as cost, and all three, and that's what we work on together. It's just amazing to me when you take a whole bunch of really smart people and put them in the room together, the solutions that can be developed. And I'm super excited about the reference designs that we've developed with this particular chip manufacturer. But I would also tell you that we're doing that same work with the majority of the hyperscalers. And just to be fair, we work with Eaton, but we also work with others in that space as well like ABB.

And kind of to that point, why does Trane's portfolio resonate so well with the hyperscalers and chip vendors? What gives you that right to win?

I think it's not a lot different than what we'd say in other verticals, right? It's about our domain expertise, right? We have some of the most technical experts in the industry, and they want to be able to work with us. We have this system mindset, right? Think about how we go to market in our core verticals, right? We have a breadth of a portfolio that's broader than anyone else in the industry. We don't get -- we're not selling a product. We're selling a solution. We're selling a system. What are you selling in a data center, right? You're selling a thermal management system, right? It's not about the chiller. It's not about the CDU. It's not about the cold plate. It's about how that system works together, including the electrical infrastructure with Eaton, so you can come up with a solution that's more efficient. And that's what we do really, really well.

And kind of to that point, how do those relationships help drive your innovation engine?

Yes. I mean I think the innovation is why we're at the table, right? Because we're able to think differently. We're okay disrupting ourselves. I know that sounds odd, but it's true, right? I always tell our team, what are we doing to disrupt ourselves. If you're the incumbent and you disrupt yourself, go look in history, those are the companies that survive well into the future. And we're not afraid to do that, right? We pride ourselves on disrupting ourselves, thinking differently. Look at the thermal management system that we developed in Europe, right? You had a cooling system on this vertical, you had a heating system, a boiler over here. They didn't even talk together, right? We combined them into one system, thought differently about how to solve the problem. And all of a sudden now, we have the most efficient systems in the world, at least today.

And by the way, we keep pushing the envelope on that. So look, we're okay disrupting ourselves. We're okay pushing the innovation. I would tell you that what we are seeing is, especially in the data center vertical, as we're developing next-generation product, that product is making it into other verticals. So we talk about chillers being smarter in data centers. That's happened, right? So the majority of what we're doing in data centers right now are air-cooled systems or basically closed loop systems. The water is not using evaporative cooling. It's using free cooling or -- and what we've done is we've designed the chiller, so the chiller is smart enough to know what's the receiving water temperature, what's the leaving water temperature have to be regardless of what it is, and it will optimize that, whether it will take into account the math associated with the area, the temperature that it's operating in and being able to optimize at what point do you use compressor versus when you just use free cooling. That same technology is being deployed right now, not only in data centers, in schools, in hospitals, wherever it's applicable. It's all about efficiency. It's all about how you generate a system that's different and more competitive for our customers.

And kind of on that point of chillers, there was some news earlier this year in conversation on what the content for chillers can be in data centers going forward. Any kind of commentary on your orders have still been strong, so how does that kind of factor in your outlook there?

What I told you a couple of years ago, we're doing all the reference designs, right? We're working on the reference side, I have yet to see in a reference design that doesn't have a chiller in it. But look, I think that we don't -- we optimize to what the customer needs. If the water temperature needs to be at 45 C at the plate, we'll have it at 45 C. It's going to leave the plate at a level that's higher than 45 C, right, at about 7, and you'll be pretty close, that's what has to be removed, right? Because it's got to go back at 45 C. And we're really good at optimizing that. So look, chiller aren't going to go away. I think what you're going to find is chillers are going to get smarter, right? They're going to know when to operate in a free cooling mode versus when to operate in a vapor compression mode.

I think you'll see a lot more creativity on heat recovery within data centers. We're working on a really cool project right now up in the Nordic area, where in the Nordic area, they already have a lot of district heating loops in place. So what we're doing is we're taking the data center and we know when to augment the heating, the district heating loops. So you're recapturing the heat rather than wasting the heat or putting the heat back out into the environment so that it becomes an efficiency gain for the district heating loop. And it's going to be really breakthrough thinking as to how data centers of the future start to become an asset to the community versus all the rhetoric you may be reading about in the news right now. But more to come on that. But it's really exciting.

And as you kind of think about the chiller evolution, though, there's been kind of debate on the future of water versus air cooled and kind of to that community impact, what kind of impacts are there from these water-cooled chillers?

I mean at the end of the day, we're using predominantly air cooled right now. And by the way, just be cognizant of the fact that you could sit there and say the data center isn't using water because it's a closed loop system, and when you're using air-cooled chillers, that's a true statement or where you're using dry coolers with the centrifugal that's a true statement. Remember to ask the next question, right, which is where is the power coming from because that's a very important question to ask because if the power is coming from coal, there's a lot of water being used. If the power is coming from nuclear, there's a lot of water being used. If the power is coming from natural gas, it's about 10% that of coal. So there is a knock-on effect that you all need to be cognizant of that we certainly are aware of as well.

So even though we may be out there saying, look, our data centers that we're doing, we're not using water. We may be using water if you look one step removed, which is very, very important. In fact, I have to go to a meeting actually on Thursday, where we'll be talking about that at a very high level with many of these influencers about let's not be naive to just think of the data center as a -- it's a whole ecosystem there and the data center is part of it, but the power is coming from somewhere that you need to make sure that that's in a sustainable way as well.

And then I know it's still like a smaller piece of the portfolio, but how have the investments in CDUs kind of augmented those data centers?

We're very happy with our CDU business. Very happy. We acquired Stellar, how long ago Chris?

LiquidStack we acquired in the first quarter. I think of a great example of a partnership that evolved to a minority investment that evolved to a full acquisition earlier this year and emerging cooling technology that's not ready for prime time, but a great CDU portfolio that to Dave's point, it just gets integrated into a system.

And then kind of turning to orders and backlog. I think we're looking at lead times kind of across the industry, their discussion that they started to extend. So as you think of your order acceleration, how have lead times kind of trended across the portfolio? How does that compare to a year ago?

Yes. Our published lead times, I don't know the answer to a year ago, but I would guess they're the same or pretty close. Our backlog is growing, but our backlog is growing because customers are telling us when they want something, not necessarily when they could have something right? They're trying to give visibility, so we make sure we can go back to our supply chain and make sure that everyone is ready so we don't have any misscheduled dates. As far as our published time, if you're in a -- if you're a hospital, the published time depending on the product you need is probably not that much different than what we've seen in the past. And then you get into some of the -- like residential, obviously, is next day, light unitary could be next day. A lot of those products are stocked, so it really depends on the portfolio. On the applied side those, think of it as pretty close to what it was a year ago.

I guess that kind of segues us, shifting gears into resi. What's your current sense of channel inventory? And then what kind of gives you that color into the channel?

Yes, look, we were the company in the fourth quarter of last year. We said, look, we're going to get our inventory right going into 2026. And we made a decision to take a lot of work days out, which was not an easy decision because it impacted a lot of lives. But we thought that was the right decision, so we could get this behind us. We adjusted our inventory. I told you in the first quarter, I think we had it set right. I'd tell you right now, we have our inventory set right. So inventory in our channel, we're in good shape.

And any commentary on how end demand has been trending so far in the quarter and what the outlook is?

I won't give you inter-quarter guidance on that. But it's been pretty hot out this summer. North Carolina, I was out walking yesterday, it was 100 degrees. I was like, this is crazy. So we'll see.

Year-to-date sell-in sell-through, about the same. As Dave said, we entered into the year with a really good inventory level in the channel. We said the same at the end of the first quarter, end of the second quarter as well. And our guide for the year is on mid-single-digit growth for the residential business. We'll see how it kind of plays out. But happy with what we did last year to set this year up for better success.

Remember, residential is about 15% of the enterprise.

And then I guess, how do you think about the pricing environment in resi? One of your peers has commented that it's very different from like 2022 when you'd be pushing through some multiple mid- to high single-digit increases during the year. How does that -- how do you think about pricing now?

Yes, the business has put forth two price increases this year. One was effective April 1, that was up to 5%. One was effective July 1, also up to 5%. And really, it starts with just leveraging our inputs and our business operating system on what are we seeing for cost, what are we seeing for demand, what are we working with the supply chain to mitigate, and to the extent that you've solved for as much as you can, then pricing is a lever that we'll kind of have to implement to ultimately have that cost versus inflation balance out.

What we said for the enterprise is that for the first half of the year, price versus inflation was a headwind, expecting it to be a headwind in the second half of the year. It was captured in our guide that we provided in July. And to Dave's point, we're focused on top line, bottom line and cash flow for the enterprise, and we'll see where we go into next year, taking inflationary environment and how do we make sure we're ready for mitigants and ultimately with pricing where it needs to be. But I look at residential, it's really a ZIP code by ZIP code space where you're making decisions on price. But on the aggregate, where the price increases were generating the yield that we expected through the end of July.

And then turning to the transport side. How do you assess the pace of recovery in that market that's been fairly soft over the past couple of years? And what gives Thermo King the opportunity to outperform the market?

You mean over the last 4 years? Look, Thermo King is a great business. It's probably the business that got the most overbuilt during the COVID time, where there was a lot of product that was put in, and it's taken a long time to get it out. But I would tell you that the first half was slow for us, but we project the second half to be much stronger and we project momentum going into 2027. Look at spot rates, look at rejection rates, look at the age of the fleet. These are units that if they get too old, they start to cost a lot to run. And I've had the opportunity to run that business at one time in my career, and I would tell you that some of the smartest business people I've ever met, run trucking companies. So they will make the right decision. So pretty bullish on 2027. I don't think the recovery will be as fast as what ACT is projecting for a lot of reasons, mostly because I don't believe the trailer OEMs will be able to react that fast. But I do think that will be a growth driver for us in 2027 and beyond. We think we're going to go into the year with a lot of momentum.

Then kind of shifting to the international side. How is the EMEA pipeline has been progressing -- in EMEA?

EMEA. Well, I think let's separate Middle East from Europe. In Europe, very strong second quarter. Orders were up 20%, right? And I think I told everyone in the second quarter earnings call, the pipeline of activity, so before something becomes an order is very, very strong in Europe, probably the strongest I've seen in a long, long time. So that's exciting. Middle East is a little bit different story that obviously, we're down over 30% there, and that will continue until hopefully, things get resolved quickly. But overall, in Europe, we're seeing a lot of strength, which is good.

What have been, I guess, the strongest underlying drivers of that strength?

I mean obviously, data centers are certainly strong there, but I would also tell you that it's a lot of innovation. Europe is one where we've always led with innovation. You could argue that the markets in Europe have been flat for a long time and go look at our growth rate in Europe. And you see that we're winning with our innovation. We're winning with our direct sales force. We're winning with our service business. We're winning with our can-do culture and expect that to continue in the future.

And then on APAC, what's the strategy there? And outside of China, what have been the growth drivers?

Yes. I mean, Asia Pacific, I mean, think of it, it's about 6% of the enterprise, first of all. I think about half of that is China, half of that is outside of China. Outside of China, we've had some nice strength. And we have a lot of good activity going on really across the regions, right, whether it be India, whether it be Malaysia, whether it be Thailand, Singapore, all areas of where we've seen nice growth. It's in the high-tech industrial space, it's in data center space. It's in hospitals. It's in a lot of what we would call our core verticals. China, a little bit more dynamic, but we have a very strong team there, and that team will continue to execute, but we'll continue to move forward.

And then could you speak on like broader capital allocation? We spoke about M&A earlier. Any other priorities that will be kind of key to the strategy?

Well, I think we've got -- we feel we've got the broadest portfolio in the industry. So there isn't anything we absolutely need. We've got almost a fortress balance sheet, right? I say almost, but we have a fortress balance sheet in terms of we can have great optionality to look at make versus buy decisions and not feel constrained. Maybe quietly, but for the last 5, 6 years, we've done about 30 acquisitions and it's across channel. It's across early-stage technology. Some of it is like that partnership with LiquidStack from a partnership to an investment or ultimately an acquisition. But we really like taking those early-stage technologies and matching them up with the deep channel we have, especially in our commercial HVAC portfolio.

But I would say is, look, our focus is invest in the business first. And a couple of times in the year, it happens more frequently, but we have some very robust meetings twice a year on the innovation reviews, it's our pipeline within each of our business units. We've limited it to 10 to maybe sometimes 11 projects that the teams are working on. And generally, we're really talking about how do we keep adding and moving faster in that innovation pipeline and that drives bookings, drive the top line revenue growth. So for us, it's really maintaining unconstrained investments where we can go drive that. At the same time, we've grown the dividend each and every year, and the Board approved a 12% raise this year. So we'll fund the dividend with earnings over time. Since we launched Trane Technologies, I think we're just about, I think, growth of the dividend from there. So let's see next year. We'll see we break 100%...

I would say we go to 13%, we can say...

I know. I could have said 100% at that point. After that, it is toggling between M&A and share repurchases. And we continue to calculate the intrinsic value of the company stock as we think about our long-range plan and our inside knowledge on where we're growing, where we're investing. And as you've seen us do in the past, we've deployed cash to M&A. And when that's not actionable or in the quarter, we'll look at doing share repurchases as well. But it's unconstrained in terms of the cash that we generate, and we really like that 5-year average. I think the last I saw was 105%, 106% conversion of free cash flow to earnings.

Someone told me a long time ago that when you hear a lot of arguments from both sides of the equation, right, things get a little bit they get a little volatile, and they told me they just stay with the fundamentals. If you stick to your fundamentals, you're going to be in good shape. And I would tell you that Trane Technologies, we're going to continue to execute, we're going to continue to have top quartile growth on the top line. We're going to continue to have top quartile growth on the bottom line, and we're going to continue to convert our cash flow. And those are the fundamentals that will be in the long term. I've been the CEO now for on my sixth year. I feel like I was just here the first time I became a CEO like in a snap, but it's been 6 years now. And back then, I think I told everyone, look, we're a great innovative company. We're a great operator, but I want to create a growth company. And people looked at me like I was a little bit crazy. And here we are, we've had double-digit growth, double-digit growth during that time, compound annual growth rate of double digits over that time period.

And I look at you all today and I say, I see more opportunities today than I saw 6 years ago. And whether it be the data center vertical, whether it be the smart resilient buildings or I see a service business that's just executing flawlessly, we have more opportunities today than we did 6 years ago. So look, it's a great time to invest in train technologies. For some reason, we're on sale today. But look, I would tell you that I have so much confidence in the future of our company. And yes, I am biased because I'm the CEO, but I would also tell you that I've been in this industry a long space -- a long time, and we have just unbelievable opportunities in front of us.

And as you look at those growth opportunities, especially with data center moving so fast, how does that affect how you think about capacity and what you may need to do...

Look, we've been -- we got in front of capacity, maybe we did it silently. We didn't advertise it. We've expanded our applied system capacity by 4x over the last 2.5, 3 years. We continue to make investments where required. We know what our pipeline is. We know what our commitments are. And we have a business operating system that helps us make sure that we stay in front of that, and we plan on doing that. I would tell you that we're relatively CapEx light okay? I know that we'll talk about 2%, but compared to other industries, that's CapEx light. And these facilities that -- we are bringing facilities on board, most of them are leased. So there is a bit of variability there if something starts to slow down, which we don't see happening.

And think about capacity, too, in 1/3 of the company's revenues being services, it's capacity with service technicians and always adding to our service technician fleet, and we think about it as retention, and why do you retain a service tech when they're in high demand? Well, one of the ways you do it is you train them. And so late last year, we opened up a service technician training center in Davidson, North Carolina. We have multiple of these around the around the globe, but this is, I think, the premier one. It's nearly 50,000 square feet. And think about over -- I think it's 3,000 now technicians to date have been through training at the technician center.

And starting from, let's call it, the more basic applications in the unitary space and rooftops, water cooled, air cooled all the way through the largest applications you'd see that would go in our data center vertical, having that service tech leave their office where we come down to Davidson and be trained and not just on equipment, but on controls as well, what's the latest architecture we have with controls, what are we doing with BrainBox, and now those service techs go back to their offices, and they're even more ready to go support the customer where many times they are the main contact to our end customer, and they're helping guide the customer on a path. So bigger capacity is around service techs, about training and retaining. Many times you get more service techs because of great referrals. They like to be trained, as I said. And then we're putting in programs and have had programs around apprenticeship where we're adding, I think it's at 300, 400, Dave or so.

A little bit less than 400.

Where you're getting apprentices where it's a multiyear journey for them and a lot of it's on the job, and then they come back and they get trained for a couple of weeks and they go back into the into the workforce and work with a master apprentice or master technician to grow through their apprenticeship program. So think of it as a great investment, and next time you're down and Davidson would love to show you what that service training center is, it's pretty cool. And this is this is all operating equipment there in the room.

And as we think about the capacity added both on manufacturing and on the labor side, how do you stay thoughtful about the cost profile of the business and making sure you stay on the healthy margin trajectory?

Well, I think, number one, we think about incrementals, right, let's have volume come through the facility and we like the incrementals on volume. So we're always thinking about lean, right? So work with what you have, how do you get faster or more volume on an existing line, how do you redesign the space to get even more lines with an existing location. And then after that, then you're thinking about additional space beyond it. But think about having value to the customer, it leads with innovation. That's when you can get pricing. And if you're out there 4 years later with the same product you had 4 years ago, that's a tough conversation for a salesperson, I'm sure. So our goal is, let's keep investing in the product drive the factories to where we need to be for great output, great quality as well. We get quality where you want it to be, that's a lower cost to serve. We have multiple ways to get there on the margins.

That's great. I think that's about all the time we have, but thank you again.

Thanks, everyone, for coming, and thanks for your interest in Trane Technologies, and hopefully, you're happy shareholders. Thanks, everyone.

Welcome to the Trane Technologies Q2 2026 Earnings Call. My name is Lisa, 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. [Operator Instructions].

I will now turn the call over to Zac Nagle, Vice President of Investor Relations. Please go ahead, sir.

Good morning, and thank you for joining us for Train Technologies Second Quarter 2026 Earnings Conference Call. You can access our webcast and slide presentation at tranetechnologies.com, A replay will be archived there as well. Today's discussion includes forward-looking statements. Key risk factors are listed in our SEC filings.

We also use non-GAAP measures. Explanations and reconciliations are in our press release and presentation appendix.

Joining me are David Regnery, Chair and CEO; Chris Kuehn, Executive Vice President and CFO, and joining us for Q&A is Donald Simmons, Executive Vice President and Chief Operating Officer.

With that, I'll turn the call over to Dave. Dave?

Thanks, Zach, and good morning, everyone. Please turn to Slide #3. I will start with a few thoughts on how our focused strategy continues to propel our performance. Elevated energy prices are driving companies to assess their operations, and customers are choosing train technologies to enhance performance, save energy and reduce operating costs.

Our Smart systems integrated controls and Agentic AI allow buildings to predict, act and optimize in real time for industry-leading efficiency and resiliency. Our strategy is built on a strong foundation, our robust business operating system, a powerful cash flow engine and an uplifting engaging culture. This formula positions us to deliver differentiated long-term value to our people, our customers, our shareholders and our communities.

Please turn to Slide #4. Q2 was another strong quarter. Enterprise organic bookings were up 37%, driving record backlog of $12.1 billion, up 70% year-over-year. Organic revenue grew 9%, led by America's Commercial HVAC and services and residential and adjusted EPS increased 11%. Our commercial HVAC businesses delivered outstanding performance, particularly in the Americas, where bookings reached an all-time high up 50% year-over-year. Applied bookings were up 130%, marking our fourth consecutive quarter of growth above 100%.

On a 2-year stack, applied bookings are up more than 4x. We are fueling robust growth for 2026 and beyond. Our exceptional bookings, record backlog and healthy pipeline provides strong visibility to accelerating revenue in the second half. Our historic backlog also lays a strong foundation for continued market outperformance in the future. with approximately $6 billion slated for 2027 and beyond.

Services, which represents about 1/3 of enterprise revenue continued to be a consistent, durable growth driver with low teens compound annual growth rate since 2020. Residential was strong in the quarter, and we expect second half tailwinds driven by market fundamentals and easier comparisons. Americas transport market fundamentals continue to improve, supporting the outlook for late 2026 and 2027 recovery.

Operational excellence remains central to how we run the business and underpins our success. We expect continued strong execution as we move through the year. All in, we are raising our full year revenue and EPS guidance, which Chris will cover shortly.

Please turn to Slide #5. Second quarter results were strong, led by standout performance in Americas. Commercial HVAC delivered exceptional bookings up 50% and organic revenue up low teens. Our residential business exceeded our expectations for the quarter, with bookings up high 20s and organic revenue up low teens.

In EMEA, performance was consistent with our outlook. It's worth highlighting the underlying strength in commercial HVAC, where excluding the impact of the Middle East conflict, bookings were up mid-20s and revenues were up mid-single digits. Our teams in Asia Pacific also delivered strong results with bookings up 31% and organic revenue up 10%.

Now I'd like to turn the call over to Chris. Chris?

Thanks, Dave. Please turn to Slide #6. Dave covered the key drivers, so I will be brief. Enterprise organic revenue grew 9%, supported by robust equipment and services growth. Adjusted EPS increased 11% and underscoring the effectiveness of our business operating system and driving operational excellence throughout the P&L.

Please turn to Slide #7. Our performance this quarter reflects strong execution and strategic reinvestment across the portfolio. Margins in the Americas and Asia remain healthy and reflect increased investments in capacity, innovation and channel expansion to support robust demand.

In EMEA, margins were impacted by the conflict in the Middle East. As the regional outlook became clearer during the quarter, we acted to align our cost structure for improved profitability in the second half.

With that, I'll turn the call back over to Dave. Dave?

Thanks, Chris. Please turn to Slide #8. Our 2026 outlook has strengthened, reflecting accelerating growth in the second half, driven by continued strong execution. In commercial HVAC, momentum is robust, driven by exceptional bookings, a robust pipeline and historic backlog.

We are certainly seeing strength in data centers, but also broad-based growth across the majority of our key verticals -- as a result, we are raising our full year outlook. In residential, we are also raising our full year outlook to reflect our strong year-to-date performance while maintaining a prudent outlook for modest growth in the second half.

The slide outlines second half headwinds in EMEA stemming from the Middle East conflict. Importantly, our raised guidance fully absorbs these challenges, reflecting the strength of our portfolio. Our outlook for the rest of the business is largely unchanged. And we've provided additional details on the slide for your reference.

With that, I will turn the call back over to Chris. Chris?

Thanks, Dave. Please turn to Slide #9. For the full year, we are again raising our guidance. This reflects the market dynamics and investment priorities we've discussed and consistent strong execution of our value creation flywheel.

We are increasing our full year organic revenue growth outlook to approximately 9% and our adjusted EPS guidance to a range of $15.20 to $15.30. For the third quarter, we expect organic revenue growth of approximately 10% and with adjusted EPS of approximately $4.70.

Please turn to Slide #10. This slide provides a clear view of the acceleration we expect in the second half of the year. The step-up in performance is supported by robust backlog and gives us strong momentum heading into 2027. For additional details, please refer to Slide 17 of the appendix.

Please turn to Slide #11. We remain committed to a balanced capital allocation strategy focused on deploying excess cash to maximize shareholder returns. First, we strengthened our core business through relentless reinvestment. Second, we maintain a strong balance sheet to ensure optionality as markets evolve. Third, we expect to deploy 100% of excess cash over time. Our approach includes strategic M&A to enhance long-term returns and share repurchases when the stock trades below our calculated intrinsic value.

Please turn to Slide #12. We remain on track with our balanced capital allocation strategy with a target deployment of $2.8 billion to $3.3 billion for the year. A key component of this strategy is our commitment to shareholder returns. Earlier in the year, we increased our dividend by 12% to $4.20 per share annualized.

In addition to dividends, we have repurchased approximately $840 million of shares year-to-date with $3.8 billion remaining on our current share repurchase authorization.

We continue to pursue disciplined M&A and are strategically investing in capacity to support future growth. with expected CapEx of 2% to 3% of revenue in 2026. Our strong balance sheet and free cash flow continue to provide us with significant optionality.

With that, I'll turn the call back over to Dave. Dave.

Please turn to Slide #14. Following a prolonged downturn, we see the Americas transport market improving in late 2026 leading into a multiyear up cycle. Our internal outlook is directionally aligned with ACT, but assumes a more gradual slope of recovery. This reflects a more realistic pace for trailer OEMs to ramp capacity, a dynamic that has historically extended the duration of the up cycle.

Having managed the down cycle effectively, while outperforming the markets. We look forward to this business transitioning from a headwind to a healthy growth contributor for our portfolio.

Please turn to Slide #15. In closing, our strategy is aligned to powerful megatrends that are intensifying the need for our sustainable solutions and services. Customers choose Trane Technology for a leading innovation, strong execution and the expertise of our team around the world.

With our clear strategy, exceptional bookings strength and record backlog, we are confident in raising our full year guide and are well positioned to continue delivering differentiated shareholder value in 2026 and beyond.

And now we'd be happy to take your questions. Operator?

[Operator Instructions]. And your first question comes from Scott Davis, Melius Research.

I'm great. It's been a very busy quarter, which is, I guess, always is, but it feels extra busy. Anyways, a lot of things here, and I do appreciate your shortened prepared remarks. I appreciate that.

I thought I might get that comment from you, Scott, but...

Free up some time for Q&A. But I have to ask, I mean, with the bookings you have in did inventories get too low, did we overcorrect and now we need to correct up the other direction? Is that kind of what's going on here?

I don't think I -- we do -- we track the the IW independent wholesale distributors inventory pretty closely. I think we were in a good spot. Look, that was -- if you remember correctly from the fourth quarter, that's kind of where we -- unfortunately, we had to take 30% of our our production days out of the cycle to get the inventory where it needed to be. We came into the year with the right level. And the good news is it's still at the right level, which is reassuring for us in the back half of the year.

I would add, Scott. I mean, year-to-date sell-in is really approximately equal to sell-through. And to Dave's point, inventory is at a good spot at the end of the quarter.

Okay. Fair enough. And then the price versus cost and kind of you guys are delivering a fair amount of stuff and taking big orders in and the scaling issues, et cetera. But did the cost issues kind of mitigate over time and thinking in terms of scaling in particular on new capacity, but -- would we -- I guess a better way to ask the question is should we expect a little bit of improvement in incremental margins kind of going forward?

Yes. That's how we got the guide slated for this year, margins are stronger in the second half and comps do matter. In the second quarter last year, we had organic leverage up around 40%. So you're right, it does get better in the second half. I mean, price versus all inflation. It was a headwind in the second quarter as we thought.

We're having our guide, it will be a bit of a headwind in the second half of the year as well. It does sequentially get better from Q2 to Q3 than to Q4. But we're just leveraging all parts of our business operating system right now to take in all these cost inputs make sure we can offset where we can with supply chain, where can we drive productivity and then ultimately lead with pricing or follow up with pricing as needed.

I would also tell you, Scott, that we invested pretty heavy in the second quarter. a couple of capacity expansions that we did. We're deploying our operating system in stellar. So we pulled some investments forward there. But these are all good long-term investments for our future.

Next up is Andy Kaplowitz from Citigroup.

So David, Chris, maybe you could give a little more color into your commercial HVAC pipeline and the strong orders you've been booking -- does the pipeline continue to refill even as your book in the backlog have been accelerating here?

And obviously, you just talked about Stella, you've been beefing up your sort of portfolio with these recent acquisitions. So how are they doing in terms of helping your share -- and maybe you can talk about the strength of other verticals besides data centers, which we know are strong.

A big question there. But yes, look, as far as orders go in commercial HVAC in the America is obviously very strong 50% growth the pipeline. And I told -- I think I told you on an earnings call, probably 2 or 3 quarters ago, I said I have a -- we have a pipeline that I've never seen as strong as it is. And I sit here today and I look at our pipeline, and it's still really, really strong, which is just great for the future.

The only thing I would add there is the pipeline in Europe has really started to increase. And again, in Europe, we had -- think of it as commercial HVAC, excluding the Middle East, we had orders up over 20%, but we also have a very, very strong pipeline there.

On your question on verticals, look, obviously, with 50% growth in the Americas, I think everyone is aware, we track 14 different verticals. They were all very strong. They were all up in fact, they were all of them up over 20%. But it's probably more constructive to look year-to-date -- and year-to-date, we had growth in 11 of 14 verticals from an order standpoint.

And most of those 11 were double-digit growth. So Andy, as we've spoken before, we're very strong in the data center vertical. We've been very strong for a long time and will be very strong in the future.

But the growth that we're seeing right now is very broad-based, which plays to our strength with the strength of our leading portfolio. This is core to Trane Technologies and it was a great second quarter, but really excited about the future because we have so many opportunities in front of us.

And I'll add something. This is Simmons, the Chief Operating Officer. I've been with the company for 25 years. Glad to meet everybody that I haven't met before. One thing I'll add to Dave's comments there is that in the second quarter, we had 4 orders that were over $100 million in the business and 1 of which was in Stellar, which was an excellent start to that acquisition.

Very helpful. And then, Chris, I'll just ask you a small question here, like on the Middle East impact. You already talked about it. But -- maybe you could elaborate on the cost actions you took there and the ability to sort of inflect even if the Middle East is still a bit weak in terms of EMEA margins in the second half.

Yes. Thanks, Andy. I mean just to step back, the Middle East is less than 3% of our total enterprise revenue. But when you look at the EMEA segment, it represents almost about 15% of that segment. So that's why we wanted to make sure we called out that excluding the Middle East, the segment had strong bookings in the quarter, up mid-teens and then revenues were positive, up low single digits. But -- just given the ongoing conflict and the performance in the second quarter, we did take some cost actions at the end of June. This would include looking at rightsizing for positions and also for infrastructure -- that's behind us at this point, confident that the deleverage was above gross margins in the second quarter after those cost actions, we do expect deleverage to be within gross margins into the second half of the year.

We do expect the revenues we're anticipating to be down about 30% and -- it was down about 30% in the second quarter. We've got that in our guide for the second half as well, but it'd be down about 30%. And again, we're just -- we're thankful for the team that's there in terms of they're executing under difficult conditions and we've got this baking to our guide at this point.

Next up is Chris Snyder from Morgan Stanley.

I wanted to ask about backlog -- so you guys -- you exited the quarter with over $12 billion of backlog. You started the year at less than $8 billion. So added $4 billion, up 50% in 6 months. I guess the question is, has there been any change in the conversion of backlog versus a year or 2 ago, just backlog is built. I imagine every -- you guys are mixing to data center, which may be a slower conversion. Just kind of any thoughts on if that's changing versus a year or 2 ago.

Good question, Chris [indiscernible] as well. Look, our backlog is up significantly as we're now through the second quarter, 90% of the backlog is in commercial HVAC. -- and -- which is probably similar to what we said in the past. On the conversion, if you look at our revenue growth in the second quarter for Applied, it was up over 40%. And -- so you can see the backlog is starting to flow through. And if you look at the back half of the year, based on our current guide, we're projecting that 40% to carry forward to the back half of the year.

So -- very strong backlog gives us a lot of visibility, not only into 2026, but into 2027. We have approximately $6 billion of the backlog is for 2027 and beyond. So it's going to be not only a very strong second half for us, but we're going to carry a lot of momentum into 2027.

Yes, Chris, I would add. I mean backlog remains now almost 95% for commercial HVAC, and it's up year-over-year. The backlog in our commercial HVAC business is up year-over-year about 90%. And -- so very strong Wow, yes, it's kind of getting normalized to hearing these into data center and that data center market moves.

So David, I'd really be just interested in your view on this. You guys are always typically ahead of the curve on where things are going, obviously, have an incredibly broad portfolio to kind of cover any kind of maybe changes that are out there. So just would be interested in your perspective on a lot of that news.

Yes. Thanks for the question, Chris. Look as you said this -- the innovation in this particular vertical moves very fast. And obviously, we're working direct with hyperscalers, colos or other influencers -- and we're constantly looking at reference designs or data centers of the future. I guess if I had to sum up what I think the innovation of tomorrow will be there. Think of chillers as getting smarter.

And in our world, when you think about the thermal management system, whether that desired leaving water temperature needs to be 31 C or whether it needs to be 45 seat it doesn't matter to us. With our portfolio, we're going to optimize to ensure that, that data center is getting the right mix of water temperatures so that it can operate in the most efficient way possible.

And when I say chillers are getting smarter, think of it as building in control systems so that if you want to run in a free cooling mode, meaning that you could use the ambient air to do the cooling that's great. If you need to do some vapor compression be running your compressor to tweak that water temperature, we're able to do that. So it's really -- it's fun, okay? I mean, I sit through the -- with our engineers, and they bring up these concepts. It's just -- it's moving fast, but I would tell you, we're on top of it.

We see where this is going at least right now, and my bet is that will change in the future. But right now, we have some great solutions that -- some of which we're selling, some of which are in the pipeline. -- but we're working with all the influencers to make sure that they know what's possible. And they challenge us and we challenge them, which is a great way to come up with creative solutions.

Yes, Dave, just that I'll add a little bit there. So I think about one of the ways that we win in this market is the design days that we do. And in the second quarter, we had.

Please remain online while we connect our speaker line.

And once again, everyone, we do expect our speakers back on shortly. Please continue to stand by.

All right. Chris, sorry about that. We're going to do this the old-fashioned way on cell phones. So we sound a little bit scratchy, that might be it. So Donnie, go ahead, you adding a little color.

Yes. Sorry about that, Chris. What I was saying is that when we think about this market and the focus that we have overall -- we look at the thermal management system for the customer, we have design days. So in the second quarter, we had multiple design days with our customers with these critical customers. And we're looking at the full portfolio of the thermal management system.

So we don't just talk about chillers. We're talking about the chilled water requirements that they have that would be from chillers as well as air handlers as well as CDUs and how does all of that work together to meet the requirements of the customer. And that's where we really focus on the innovation and and what the requirements are and how we're looking at the next wave of new products that we're developing for our customers to meet those requirements.

It's a great vertical. We're strong guys -- we're going to be strong enough well into the future.

Our next question will come from Amit Mehrotra from UBS Financial.

I guess I just wanted to come back to backlog. Backlog, if I look at backlog today, it's more or less 50% of this year's revenue and that backlog is sort of mostly attributable to 15% to 20% of your revenues, which is applied equipment. So just given there's no material elongation of the backlog, I guess it kind of begs the question, at what point do you start turning away orders because of any capacity constraints. If you can just talk about that, I appreciate it.

Yes. I think Look -- I'll start. Look, we have about $6 billion of the backlog, that's for 2027, as I said earlier. So that's going to give us a lot of momentum going into next year. We're not turning away orders, okay? We kind of I think I mentioned probably 2 quarters ago, we've expanded our applied capacity 4x over the last 3 years. That expansion continues to happen.

So we have several -- first of all, we deploy our lean principles. So we're always looking to do more with what we have. But with that said, we also have brick-and-mortar investments that we're making -- we talked about Scalar already. We also have in Grand Rapids, we're making some investments. So look, that's going to continue.

We're in front of that. So I feel like we're in a good spot there from a -- do we have enough capacity for the orders that are out there. And bring on if you have any orders and then just bring them out.

Let's have all I guess it's my cheeky way of asking. It wasn't that long ago, we were asking you $5 billion was peak. And here we are. approaching $8 billion. And is my cheeky way of asking, are we at peak orders or not. I was -- I can remember when it was $2 billion, okay?

And I was getting asked about how are you going to maintain that? So we've come a long way. But look, the good news is that the pipeline of orders is so strong -- and that's what gets me excited. And it's not just in the Americas, okay? We're seeing a lot of pipeline as well, as I said earlier, in Europe, which we haven't seen in a while. I mean, Europe has performed very well for us. But we haven't seen -- we almost came to an inflection point with the pipeline there, which is we're really looking forward to some strong orders in EMEA.

Yes. Amit, I'd add some of these investments are captured in CapEx. Some of these investments are just flowing through the P&L as you think about ramping up production and bringing our business operating system to line. So that's 1 of the impacts on leverage here in the second quarter, it may impact leverage in the very near term. But -- for us, these are great medium to long-term investments to make for the company to make sure that you've got the revenue capability. And to Dave's first point, a, we're not going to get behind and b, we're not turning away any orders.

Okay. Chris, maybe if I could just ask a follow-up. We're now closer to 2027 than we are to the start of 2026. So I'd just be curious, I mean, you we're ending this year kind of second half growth of 11.5% first half growth this year, 6.5%. Is that exit rate sort of the right starting point to build off of in '27? I know you're probably not going to answer that question, but I want to ask it anyways. And just related to that just related to that, are we not only you guys have the capacity, but we've had a couple of examples where the supply chain have not met the expectation? And just talk about how comfortable you are on that almost doubling of organic growth 1/2 to 2 half where your supply chain can come along with you?

Yes. I'll start with the first part of your question, and then we can kind of address the supply chain. But look, there's a lot of things to be excited about. -- as we go into the back half of this year, and we always thought our exit rates at the end of '26 would be stronger than the exit rates we had at the end of '25. We've got significant growth in our applied business.

Bookings remain strong, and we have, as Dave said, over $6 billion of backlog for next year already here at the end of June. So it's given us a lot of confidence for this year's guide more visibility in the next year than we normally had. We are seeing tailwinds in both our residential and our Thermo King businesses. That's something to be excited about as well.

Dave mentioned Europe commercial HVAC has been seeing strong orders. And then our services business, again, about 1/3 of the enterprise revenues growing double digits. So we know not everything is going to go perfect, but we like this setup as we're going in the second half of the year. And let's get a few more quarters in before we dial in 2027, but we're going to like the exit rates.

Yes. And on the supply chain capacity, look, we always are working with our supply chain partners on deliveries is what we do every day, welcome to manufacturing. But look, as volumes continue to expand, we are asking more from our supply partners. And so are we seeing constraints? Yes, but we always do. Are we seeing a bit more than normal? Maybe a bit more normal, but nothing that our team can't manage. And we do a great job of managing are managing with our supply partners.

And I used the word partners because they really are partners. And many times, including myself, will meet with the leaders of these companies to make sure that we're a lockstep on what we see coming and how we're going to leverage them and how they could help us. So maybe just Donnie if you could just give some examples of how we work with our supply partners.

Absolutely. So actually, just this morning, I was on the call with the CEO of one of our great partners talking about what our plans are and what they're doing to ramp up capacity. What I would say is that we lean heavily into our business operating system. And much of that has been developed over the last couple of decades, but a lot of that was even developed even further in 2021, 2022 during the supply chain crisis post COVID. I lived through that. That was a lot different than now.

We're not in the same scenario as we were then. We're looking at a 3-year plan and think about that in terms of multiple levels. So we look at here's what our 3-year plan is. We communicate that with our suppliers. We look at what's the max capacity of our current factory footprint.

We communicate that with our suppliers. And we also look at what's the unconstrained demand and what are our plans and we share that with our suppliers. In many cases, we'll see some of our lean resources to work with our suppliers on how to improve their own processes.

We also work with them in their supply chain and making sure that they're able to secure components to make sure that they're able to meet the demand that we have as well. So it's a very robust process within our business operating system.

Thanks, Donnie. I mean, as Donnie said, we have a very robust process around this. So our team is managing the situation great.

We'll take the next question from Andrew Obin, Bank of America.

Just a broader question, I guess, maybe for Dave and done. How do you think about running companies structurally in sort of this high-growth inflationary environment because it doesn't seem inflation is going to go away -- any changes to operating model? Do you -- how do you negotiate with customers? How do you lock in capacity with hyperscalers? Was this in this inflation environment? Any color will be very helpful.

Yes, Andrew, I mean, it's a great question. I mean, look, our operating system, we have an operating system, obviously, around how we deal with inflation, okay, which is kind of what you're referring to. And we have an operating system around how we conduct pricing okay, in our markets. So you really have to -- I don't want to go into too much detail, but there's a lot of detail between all of those, okay?

On the inflation side, if we see inflation, which obviously we all are seeing right now, we're working with our suppliers. We're working on the resiliency of our suppliers. We're working on our own internal productivity -- and if we're not able to offset that, then we'll do pricing. On the pricing side, we're very strategic on the pricing. We have a whole operating system built out around that to understand that, a, we have to be very competitive, but we also want to always be fair to our customer because, again, we want customers for life.

So -- it's a multipronged attack that we leverage, but it really comes down to our operating system, right? It's not like we recreate it every time. It's a very powerful tool that we have.

Yes, I'll add to that, Dave. So I think about with our customers, many times, we'll have long-term capacity agreements in place with those customers. So we understand what the volume is going to be. That's a bit different than it was in the past. And we also give those -- that same visibility and those commitments to our suppliers. So that helps us manage -- the other one is, and Dave touched on it productivity, I think it's a really important point because it's not all about pricing. It's also about how we drive productivity.

When we launch a new product, the day after we launch that product, we're looking for how do we remove cost out of that product. That could be through in-sourcing components. It could be through redesign, it could be multiple different levels. So we always have a pipeline of productivity to help offset that inflation as well. So that's just part of our business operating system.

And maybe a follow-up question. I think in February, you launched a battery energy storage systems rental offering. And it seems that internally, you guys are focused on improving off-grid reliability, and this seems to -- there is a part for you to play sort of improving resiliency and shaving peak capacity. Could you just expand on it? What kind of conversations do you have with customers on this concept? And how fast do you think adoption could be over the next 12 to 24 months?

Yes. Sure, Andrew. Look, this is where we're talking about smart, resilient buildings, right? And this plays into our acquisition that we did just about 1.5 years ago now with brain box. But think of a building, getting smarter, and that's with our Agentic controls and resiliency. And in the future, we believe that buildings will have alternatives to what type of energy they're going to use at any 1 time, whether that be electricity or whether that be a fossil fuel, and/or storage. And that's where the battery comes in.

So we're still early days, but obviously, as we as we have these conversations with our customers, very excited, a, about Brainbox because that's a great starting point, but more about the amount that they're able to reduce that day waste. And remember, most buildings today conservatively, conservatively waste about 30% of the energy they pay for. And in tomorrow's world, they're going to get smarter, and we're going to help them build the resiliency into how they operate. It's a massive opportunity for us.

Your next question is from Noah Kaye, Oppenheimer.

To ask about the increased business reinvestment and the CapEx raise. You said some of it is for stellar and tied to the modular demand growth there. But -- just what are the benefits that are coming from that reinvestment? And then is the higher CapEx primarily supporting what's in backlog? Or is this for longer-dated growth expectations?

Yes. No, I'll start. I mean we've guided CapEx to 2% to 3% of revenue for the year. I'd put it still very much in a CapEx-light model. To the earlier points, we've been investing in capacity for every year, but certainly for the last 3 to 4 years, we've added 4 x amount of capacity in our applied business. So when I think about that, this is -- part of it is focused on new acquisitions and how do we make sure that we can scale them for even stronger growth taking these strong acquisitions, tying them into a direct sales force and to the opportunities that we see globally. That's a nice investment to make. So it is a constant focus about. not again that I don't think we've ever found ourselves behind it.

And no, it also gives us a lot of confidence as we make these capacity expansions to Amit's question, about turning away orders -- absolutely not. And that's because we're very confident in our 4-wall capacity.

Yes. I mean outside of capacity, there's innovation investments that we're making all the time. We've explained some of them may be in the data center vertical. Given the speed of that innovation cycle and the quickness of that innovation cycle, but that really can still over and it has into other verticals as well.

And then after that, it's operational excellence. It's bringing as Donnie mentioned, cost out for products in leaning out production and maybe some insights not just in our facilities, but in our supplier partner facilities, too.

Very helpful. And then maybe just to put a finer point on margin trajectory. I think, although correct me if I'm wrong, that 3Q is implied to be back to year-over-year margin expansion. Maybe you can talk directionally about where we should see margin expansion across the segments because obviously, with EMEA, there's a tough comp there with Middle East continuing. So just trying to understand how we should think about it across the segments.

Yes. Noah, I'd say you're right on the guidance that we put out that we have a lot of confidence in we would expect margin expansion in the third quarter. It's probably in that 50-ish basis point kind of range.

And then it accelerates into the fourth quarter, which should be -- we'd be targeting over 1 point of margin expansion. And driving the margin expansion on the full year. A lot of that will be led with the Americas just given the relative size of the business. I would expect EMEA will be under pressure for margins as we go into the second half, just given we've taken again, Middle East is around 15% relative to that region to that segment.

We've taken out about 30% of the revenue now in our guide. So I expect that to be a bit of a headwind for that segment in the second half. And then for Asia, let's see. I mean it's a little bit of a loss, small numbers on margins for Asia when you look at percentages, but very encouraged with the order rates that we've seen in the rest of Asia and where we're seeing the growth there.

So we do have, I think, about leverage overall, with the M&A that we've done this year, we've again reaffirmed on that guidance that there's about a 700 basis point delta between reported leverage, which will be lower than organic, and a lot of that is from the M&A and the investments we're making in year 1.

Yes. And I would just add that, look, as the CEO, I'm focused on the long term -- so any -- I'm not necessarily concerned about leverage in any quarter or really in any half of the year, okay? It's more about the long-term vision that we have as a company, we just see tremendous opportunities on the growth side of things.

We just want to make sure we're ready. So we're always going to be making those long-term investments. And by the way, it's proven out to be very, very beneficial for us if you -- and I know you've tracked us for a while, so I'm sure you're a believer in that.

For sure. And thanks for the holding in the models as well.

Next question is from Jeff Hammond from KeyBanc Capital Markets. doing great.

So just back on kind of the chiller and data center question. Just can you talk about what -- how your customers are maybe ordering differently between liquid and air cooled chillers and kind of -- some of the new products that you've been introducing I think, Dave, you talked about Grand Rapids expansion and new -- some new air cooled products as well. So just want to understand the shift there, if any?

Well, I mean, I think, as Donnie kind of alluded to, many of our hyperscalers now have -- whether it be a master purchase agreement or a long-term capacity commitment with us. So we're gaining a lot of visibility to what they need, okay? As far as the technology goes, we certainly see a mix towards the air cooled side, okay? These are air cold for sure, but think of it as less evaporative cooling, okay? Most systems that we're designing now not all, but I would say that it's sort of weighted towards closed-loop systems.

And unfortunately, if you read the press, you'll see that there's a lot of conversations about how data centers waste water. And the reality of it is, is that statement, to be honest, that's not necessarily true in the majority of the cases. So that's certainly a trend that we're seeing. There's other trends that are out there, too, that I'm sure you've heard about like whether we're going to be going to direct current versus alternating current -- and rest assured, we're well aware of that, and we'll -- we help we're helping many of our hyperscalers and our big colos design those systems. Anything you want to add, Donnie?

Yes, I think you hit on it very well. I do think that the overall market has trended more towards air cool historically, like if you go back 5 years ago, you would see water cooled when a customer was expecting to have a 40-year data center and air cooled when they were having a 20-year data center. And so -- that shift has changed given the capacity requirements and the increase.

Overall, many times, customers will choose water cold when it's -- when they want the absolute best possible efficiency. But even then with air cooled technology today, we can get similar with about better efficiencies. So -- it really just depends on what the design is for the customer, and that's what we focus on meeting their requirements, making sure that we deliver what they need.

That's those are the conversations we would have during these design days that we have with many of the hypers.

Okay. Great. And then just Stellar came in lighter, I guess, North America acquisition revenue came in light. I just want to better understand the cadence of this $500 million of stellar revenue into 26 as you ramp up.

Yes. I don't think a lot has changed with stellar. Look, we -- just to refresh everyone's memory, we had -- think of the backlog we brought in when we had the acquisition of about $1 billion. We said about half of that would ship this year about $500 million. We're on track to that. Probably the only thing that's changed with Stellar is as we're implementing our operating system, we pulled some investments forward.

And I think I told you all at the end of last quarter that we thought Stellar would be modestly accretive for the year. I think you should look at and what we have modeled into our guide is stellar being flat for the year from an EPS standpoint. But again, it's pulling in these investments. We need to be able to make sure that we have the operating system deployed there for future growth.

And the good news, as Donnie said, 1 of our large orders this quarter was for Stella. So we're making a lot of progress there, and I'm excited about the future of Stellar it's -- and you've heard me say this before, it's modular chiller plants. It's today, it's basically 100% focused on data centers. but we know that, that is a product that is very applicable to other verticals as well.

And I would just add, as we said last quarter, -- we expect the stellar business to be $500 million in revenue this year, and nothing has changed there. So we -- no change in revenue.

The next question comes from Varun Govindaraj from Bernstein.

So quick question. On -- for the back half of the year, clearly, you're expecting a ramp -- how confident are you in customer ability to take delivery, specifically for data center products? I'm asking because is that narrative out there the projects are getting delayed, power is taking longer to connect. -- and it's obviously harder to test and commission a cider when you don't have power. So any commentary you have there would be helpful.

Run. Look, we have a lot of confidence in the backlog. And as we think about our guide, we always assume some level of leakage breakage in the guide, right? We know not everything goes perfectly. We do a great job with our suppliers, but we're also making sure that we've got a little bit of breakage in there. So could there be some things in shift? It is just part of site construction and otherwise, but I'd say that we're confident in our guide.

Yes. I mean you're always going to see some job sites move, okay? And we certainly see some of that in the data center, both positive and negative, right? We also have other customers that are saying, "Hey, can you ship early. So nothing that's alarming right now, but it's a good question.

No, appreciate it. And separately on the Thermo King side, expecting a recovery in the back half of the year, the ACT numbers look positive. What other signals are you seeing that sort of give you confidence independently of the forecasts that are coming in?

Yes. Look, we think that Thermo King is going to be transitioning into more of a growth engine for us to come in the back half of the year. Look, rejection rates have remained high for several months. That's a key indicator. Spot to contract spread is trending positively for several months, and utilization rates have trended positive for the last 10 months. So these are all good signs for our Thermo King business.

And I just look forward to Thermo King becoming more of a growth company as we are as train technologies. And I'm very confident that we're going to start to see that in the back half of the year, and that should carry momentum through 2027. And this is a business to that even though we've had a trough for an extended period of time here, we have not stopped investing in this business. So we have a lot of great products, and we're willing -- we're excited to delight our customers.

The next question is from Alexander Virgo, Evercore ISI.

I wondered if you could talk just a little bit about the impact from business reinvestments in the Americas. I wonder if you can maybe give us a sense of the weighting of those 3 points. And whether or not it's something we need to think about as we think about the first half of next year as well.

Yes, Alexander, this is Chris. I'll start. I mean waiting, it's probably in the order that we provided as we think about capacity, innovation and operational excellence. But I wouldn't say materially different. These are things that we are investing in, though all the time. And in fact, back in May, at least twice a year, we have innovation reviews and we go business by business.

We've had to cap them at 10 ideas and under launches just because we'll go over time. And each and every year, we think about the investment cycle that we have and I would just tell you the pipeline remains very robust and our bias is always to accelerate on the investments.

Within the confines of let's drive leverage over the long term, 25% plus. But look, we've got accelerated orders, accelerated backlog, and we're just going to keep investing to make sure that we're staying ahead as we have so far.

Yes. I think it's a good question. But look, don't get held off by any 1 quarter. We've been saying for a while, our our target is 25% plus. We may have a quarter like the second quarter, we were below that, but that's okay, right? This is all about long-term growth that we're creating.

No, I appreciate that. That's kind of why I was thinking about the next 12 months, I guess, and thinking I appreciate your -- you do this all the time. And therefore, if you're calling it out now is obviously a little bit more, which I get because of the pipeline and the backlog. But that's kind of why I was thinking about it on a 12-month view rather than the quarter per se.

Yes. No, that's good question.

We'll take the next question from Joe Ritchie, Goldman Sachs.

Yes, doing great things. So really good results. I wanted to just focus on resi for a second, the low teens growth this quarter. Is there any way to bifurcate how the replacement market did versus resi new construction? And the reason I'm asking is you had a peer report yesterday, who was calling for pretty tough pricing in that market and walking away from some business. So I was wondering if you can maybe shed some light on the ready new construction market.

Yes. Look, our position there really hasn't changed. I think you know, we're heavily focused on the replacement, not undue construction. That said, we do have, I don't know, maybe it's we'll say, in the teens as a percentage of the business is residential new construction. But we're -- think about -- when we talk about residential new construction, we're usually talking about the think of the smaller builders that are building custom homes. And -- but we're doing -- we're -- look, it was the resi team, they had a very strong second quarter, okay? -- some of that had to do with all the debacles that happened last year.

But I'd tell you, I give that team a lot of credit. They've executed very well. And I'm just proud of what they've been able to do. I think there's -- we've -- year-to-date, our resi business from a from a dollar basis is up mid-single digits, and we're projecting that to carry forward for the rest of the year. And if you remember, when we came into the year, we thought that residential could be even down a bit this year. And then at the end of the first quarter, we revised it to flat.

Now we're very confident with our guide that this will be a mid-single-digit growth number for us. in 2026, and we'll see how that carries forward for positive momentum into 2027.

Yes. Great. No, it's great to see a rebound there. And then just a quick question, a follow-up on just data centers. Can you just level set for us at this point how the CDU business is doing? I think you guys started shipping earlier this year. What does the pipeline look like? Maybe just in terms of like how much of your backlog it is today. I'm just curious like how that business is trending.

Yes, I probably won't go into that level of detail, but I would tell you that look -- it's -- we're in the CDU business. Business is performing. The liquid stack acquisition is exceeding our expectations and the pipeline is strong.

Your next question is from Jeff Sprague, Vertical Research Partners.

Dave, we don't need any AC up here. It's cold and wet. So because.

I was up in New York. I was up in New York a few weeks ago and it was boiling. So. I think it was most cool problem.

A few weeks ago, it was unbearable. Yes. But now we need a rain here today all week. But I'm doing well. Just a couple of quick follow-ups. I know we covered a lot of ground. I just wanted to come back to Europe and even maybe Asia. -- in Europe, ex Middle East, there's a pickup that you're starting to see, is that primarily data center that market kind of content coming around, trying to catch up? Or is there a level of breadth and the activity you see there. And similar on Asia, we've heard from a number of companies, even beyond HVAC, this earnings season that non-China Asia is looking better. Maybe you could just provide a little bit more color what you're seeing there.

Yes. As far as Europe goes, it's both, okay. We're certainly seeing data centers there. We certainly are seeing core vertical growth there as well. One thing I would say on the pipeline in Europe, as we're looking -- as we talk about data centers, they're getting bigger. -- okay, which is -- that's a good sign, right? They see the opportunity there. So we'll see how that plays out, whether they actually get permitting. But at least in the pipeline, we're seeing bigger data centers than maybe we've seen in the past.

On Asia, look, China still remains dynamic, but the rest of Asia is where we're seeing growth. In fact, -- that's where we're also doubling down on some of our investments, especially on the channel side, and that would be adding account managers because we see a lot of opportunities in India, for example, in Malaysia, Thailand. So we think there's a lot of opportunities there that we want to make sure we're ready for and we're gearing up for it.

And maybe just one quick follow-up on resi. Any significant difference in just the kind of level of activity, your volumes in your one-step versus 2-step channel?

I don't -- one, I don't believe we saw a different belt were strong. I think Chris mentioned earlier, the sell-in, sell-through year-to-date is basically the same number. So nothing abnormal there, John.

Our final question today comes from Deane Dray from RBC Capital Markets.

What's this rumor right here?

Yes. Listen, all good things, let's come to an end at some point, but I'm ready.

Well, congratulations, and you will certainly be missed, always is an insightful analyst. So I wish you all the best.

I appreciate that. And I also want to extend my welcome and congrats to Donnie and the start of his new chapter.

Thank you very much, Deanne. I appreciate that.

Great. Well, listen, I know we covered a lot of ground here. I'd love to get any kind of update on your ambitions in liquid cooling and whether you need to do any capacity expansion. You've got liquid stock, you got a really good presence in this market. I mean this is probably the fastest growth opportunity in data center today, and just would love to hear updated ambitions, if we could.

Yes. I mean we don't have cold place. I think you know that we have partners, obviously, that we work with so that we can model it so we can understand the impact that it has on the thermal management loop, as Lisa, we refer to that. As far as immersion cooling, and I know you and I've had this conversation in the past, -- that's still out there a bit. There's some challenges there, but we have a lot of patents in that space.

And it's very efficient. It's just got some infrastructure that we have to figure out how to make that in an economical way. But look, we love data centers. We love innovating with our customers there. We're going to continue to do that in the future.

Great. And thanks for your kind words, and I'll be watching from the sidelines..

All right. Good luck to you.. Take care.

And everyone, at this time, there are no further questions. I'd like to hand the call back to Mr. Zac Nagle for additional or closing remarks.

I'd like to thank everyone for joining today's call. as always, will be available for your follow-up questions at any time over the next several weeks. We'll also be on the road attending conferences and other marketing activity. So we look forward to seeing you soon. Thank you.

Once again, everyone, that does conclude today's conference. We would like to thank you for your participation. You may now disconnect.

Okay. Great. So we're going to wrap up this trio of industrial fireside chats with Trane. And very pleased to welcome back to the Wolfe Conference. Chris Kuehn, CFO of Trane; and Donny Simmons, who's the President of the Americas for Trane Technologies. And the Americas is what, 2/3 of the business, Donny. So it's..

Yes. A little higher than that..

A little bit higher than that. Yes, Math is not my strong suit. So -- but great to have you both here. Thanks for taking the time. Chris, I think maybe spend a minute or so just set the scene, and then we'll get into Q&A.

Yes. Nigel, thanks for having Donny and I and Pat here at the conference. Good to be back in New York. We know it's going to be a very warm day in New York and maybe a warm couple of days this week. So look, the company had a strong start to the year. Maybe a highlight in the first quarter for us where bookings were up 24%. Think of that in Donny's space. Commercial HVAC bookings were up 40% in the first quarter. Applied bookings were up over 160%. So we had a really good start to the year. Backlog reached $10.7 billion at the end of the first quarter. That's up nearly $3 billion from the start of the year. And think of that as 2/3 organic and about 1/3 from acquisitions.

And of the acquisitions, about $1 billion of backlog came from Stellar Energy, which we're really excited about, and we'll probably talk about here this morning on Modular Chiller Solutions that are in the data center vertical today. Services had a very strong start to the year, up low double digits. It's had a low double-digit CAGR for the last 5-plus years a strong start in the first quarter, and we ultimately raised our guidance on the top line and the bottom line for the year based on the start of the year. We do expect strong acceleration into the second half of the year led by our commercial HVAC businesses.

Think of that as the timing of backlog converting to revenue and when customers want products on their job site or request on job dates. And that's what we reaffirmed kind of in the end of April was that acceleration we expect in the second half of the year in commercial and easier comps in residential and transport as well. So we're expecting strong growth as we go into the second half of the year. And with that, I'll turn it back over to you, Nigel.

Thanks, Chris. Of course, being 95 degrees [ today ] in New York is good for business, right? So you must be quite pleased to hit streets and feel that hot air and finally.

We were certainly sweating on the way over here this morning.

Yes, sounds good. So you mentioned the second half acceleration, and I think that makes a lot of sense in terms of the moving pieces. A couple of points. I mean, in terms of the 5% on the mid-single digits you're calling out for 2Q, any moving pieces you can call out for that?

Sure. Overall, I mean, we expect the continued progress in our commercial HVAC business and continued strength there. I mean we think about -- we talked about our transport markets being a bit stronger in the first quarter, but we're holding essentially what we expect here in the first half and for the full year in transport. And then residential, residential, we had a first quarter that was stronger than what we had expected.

We did increase our guide for the full year in residential, and we do feel like our inventories have normalized, and we talked about that in the first quarter. So we're cautiously optimistic there that with residential now expected to be flattish for the full year, we're in a good spot. And commercial HVAC continues to be strong. So we had a very strong first quarter, and we expect the first half and the second half to continue to strengthen.

Yes. And the commercial is, as you mentioned, Chris, very kind of back half loaded in terms of the growth profile. That's something we've seen from a lot of your competitors as well that this back half loading of the growth profile. Maybe just talk about what's causing that back half -- first half, second half, mid-teens plus type organic growth in commercial?

Sure. Look, I mean, first off, I think with commercial, we have to talk about both sides of the business. We talk about our services business being half the business. And we've had low double-digit growth for the last 5, 6 years in services. So automatically, we get that. We've also talked about the fact that we see the unitary markets as being flattish for the full year. So that continued -- that scale up in growth comes from our applied business as well as our services business. And so that first half versus back half and getting to that mid-teens is just meeting the customer requirements and what the customer delivery requirements are throughout the year. That's really what's driving that change.

It's similar for EMEA as well. If you think about the second half order growth profile last year, it just really inflected upwards in Europe, commercial HVAC in Americas, commercial HVAC and that time line just suggests deliveries more in the second half of this year.

Yes. And do you find -- I think you talked about this on the last earnings call, the product time lines for the data center segment is extending. So backlog conversions are a little bit longer than it has been historically.

Yes, we have. I mean, if you look over the last couple of years, that certainly changed. I don't think it's anything drastic in terms of -- I think about it as the customers are giving us more visibility into what they're -- so that they can secure the supply chain that they need. So it's now moved to 12 to 18 months instead of 9 to 12 months. And so it has extended out overall, but that's more of a visibility for the supply base and more than anything else. And so for us, it's helpful.

And for our supply chain, it's helpful because the more visibility that we have. So when we're getting orders that are coming in past our lead times, the lead times for this equipment is 6 to 9 -- it could be 6 months, it could be less. And so when we're getting orders 12 months to 18 months in advance, it gives us a lot of ability to plan accordingly and make sure that we're able to meet those delivery requirements.

Yes. Obviously, a lot of inflation is emerging and has been in place, and I'm sure that continues. When you got longer your backlogs, how do you protect margins? I'm assuming you price for the contract. But what protections do you have against spikes in inflation?

Yes. We -- I mean, it's part of our business operating system, and we've been doing this for a long time. We've had multiyear agreements with customers for a long period of time, and we're always building escalations in to make sure that we're protected throughout. And then for the majority of those contracts, we also have things like tariff protection if something were to change abruptly that we weren't anticipating that we're able to make sure we're able to recover that as part of that process and the contract.

Yes. On the cost side, we continue to hedge base metals, and we'll go out 12 to 18 months for copper and aluminum, and that will get adjusted for volumes as we see volumes grow into the future. But at least for us, it just smooths that inflationary curve and it gives us better insight on what the cost is going to be. So then on Donny side, if you're delivering product a year or 18 months out with a cost escalator, we just get a more precise view of what that cost will be with that hedging strategy. And on steel, it's about a 6-month hedge, right? You're locking in steel consumption, you have about a 6-month lock on price. And then after that, you're a little bit more exposed. But then that just kind of keeps rolling on a 6-month basis for steel.

Has the hedging strategy changed over the last several years? Because I always felt it was like 12-month hedges, but now it seems like we extend.

A little bit further out on copper and aluminum. And so think of it as you're right, Nigel, going from 12 to maybe in that range of anywhere 15 to 18 months. And it really comes down to the forecastability of what we think for volumes. But we're generally, if you're a year to 18 months out, you're probably hedging 20%, 30% of the expected buy and the closer end, you're probably 75%, 80% of the buy. But we'll just keep executing through that strategy and smooth the ups and the downs.

Okay. I'm going to shock you. I do want to talk about data center. touch on data center a little bit. Before that, residential is a real hot topic -- maybe just give us a little bit of color in terms of what you're seeing real time because 1Q is very encouraging. Still very early days in the season, but just give us a little bit color in terms of the conversations with your contractors and distribution partners. And do you lean more optimistic or pessimistic based on what you've seen so far?

Look we lean more optimistic, especially with what we saw in the first quarter, we expected the first quarter to be much lower than what we came in. We were down low single digits. But if you think about that in terms of a year-over-year compare from last year, that's actually a significant improvement if you look at it on a 2-year basis. And so last year, we had a lot of challenges in the first half of the year. We had really 3 major factors. We had a refrigerant transition that was a challenge. We had shortage in canisters and part of that process that really impacted the market in the second quarter of last year.

We had really weather delays, which kind of a shorter season last year, which was also an impact. And that -- and we had at least maybe 1, maybe even 2 prebuys is the way we talk about it last year, one associated with refrigerant, the other associated with the pricing associated with that change as well as the tariff impact. So there are multiple dynamics that hurt last year that makes this year at least seeing what we saw in the first quarter is a positive trend, and that's why we did raise our overall guide for the residential market. Now we're saying flattish for the year. That gets a lot easier in the second half of the year for us, just from a compare standpoint because the second half of last year was very challenging for the overall market based on the inventory build. We do feel like the inventory has normalized in terms of our channel and what that looks like. And -- and so overall, we're optimistic in terms of the market.

It was an aggressive plan in the fourth quarter to take production days out that Donny and his team said, let's go ahead and kind of "take that medicine here as soon as we could. So we took about 1/3 of the production days out in the fourth quarter. We felt at the end of 2025, inventory in the channel is at a good level. We reaffirmed that at the end of the first quarter. And to Donny's point on the flattish guide for the year, it implies volumes will still be a bit negative. There'll be some positive price. But again, first quarter is maybe the least important quarter of the year in terms of residential. We know it's getting warm out there, and we'll see how the year plays out.

Yes. No question. But your guide does seem down like low single digit to mid-single-digit volumes this year, give or take, flattish. It feels like Again, just [indiscernible] from the most insignificant quarter of the year, 1Q, it does feel like we could be up modestly on volumes this year. Is that fair, Donny? Do you think we could be up on volumes?

I think we'll see. It's a little too early to tell through the first quarter. Certainly, that came in better than what we expected, and we feel like we've guided appropriately for what we can see at this point in time.

If it is, we're ready, right? Donny's team has level loaded production this year, which is something different than what we would typically do. The industry typically ramps in the first quarter, second quarter building inventory being ready for the season. We've intentionally level loaded the factories. So what that means is first half, it's a little bit of a headwind. When you think about absorption in the factories, there's less absorption in the first half. That's a tailwind in the second half of the year. So in addition to the easier comps based on what we saw in the industry in the second half of last year, there's also a tailwind coming through in terms of absorption from level loading factories.

Was there anything in 1Q though, Donny, that could have accounted for just a little bit better with distributors getting ahead of price increases or concerns around the impact of tariffs?

No. I mean we didn't see any prebuy in the first quarter. We did announce a price increase in the first quarter for April, but we didn't see anything significant from that in terms of the change. So certainly don't feel like there's any dynamics there that would have caused anything to be different. I believe really what happened is that our impact that we took in the fourth quarter of last year, we've taking production days out, really getting aggressive on the inventory. We also changed our production strategy where we went into this year with a mindset of having a flat production for the full year. where in the past, we would ramp up production. We would do a lot to kind of build inventory in the channel and then let that bleed off at the end of the year. This year, we approached it very differently. So we're going to go in and be more productive. We're going to drive a flat production strategy and manage the inventory throughout that process. And I think that the benefits of that probably were -- we just didn't take into account in the first quarter.

Yes. Okay. That's great. Have you announced -- as of earnings call, you hadn't announced a price increase for resi. Maybe just [ speak ] in terms of that. And then -- but I do want to talk about the fact that Trane, I think you called out, has one plant in Mexico out of the, what, [ 19 ] or so Americas -- very different footprint to some of your competitors. So just wondering how about competitive advantage in the world of tariffs, Section 232 tariffs, how you monetize that advantage?

Yes, certainly. So to answer your first part of your question, pricing, we announced up to a 5% price increase in April, which we announced in the first quarter. And we expect to get 2% realized from that throughout the year. From a manufacturing strategy, we've always had an in-region for-region manufacturing strategy. And so certainly, Mexico is part of the region, but our footprint is predominantly in the United States. And so we have one factory in Mexico. We have 21 factories and then growing in the United States. And so there certainly is a different impact when you think about 232 on our business. Residential product, the majority of our residential product is manufactured in the U.S. between Texas, Georgia and New Jersey. And so we're well positioned from that standpoint.

But I guess your competitors have to are forced to go out with much more aggressive price increases. I think some of the competitors have gone out with high single-digit price increases, plan to realize 5%. So it feels like there's a price divergence in the market, [ Trane ] at the low end, some of the competitors at the high end. Do you think that causes some elasticity and some share shifts this year?

Well, what I'll say is when Donny talked about the price increase in the first quarter, it was effective April 1. And we know that there's new intelligence that came out in terms of tariffs and inflation, and that's also inclusive of raw materials and base metals. So we'll run our business operating system and ultimately evaluate what those cost inputs are, and we'll evaluate first, how do we mitigate those costs. Again, having the majority of our factory and assembly manufacturing operations in the U.S. We'll continue to keep moving that in-region, for-region strategy for suppliers. But then we'll look at pricing as an option if we need to. So we don't want to get in front of our businesses in terms of anything they may be doing. I'm aware that some competitors have announced maybe some price increases more recently. But at this point, we're going to run it through our business operating system, see what we can do to mitigate and then we'll evaluate anything further.

Okay. Let's move on to data center. I'd be really curious, first of all, before we get into the kind of any views on pipelines, et cetera. How is Trane strategy evolving? Because I think at the very basic level, the view is that Trane and your competitors to ship chillers into the data center. But you've made some pretty smart acquisitions, Stellar could be a Stellar acquisition. How does that -- what are the kind of the LEGO pieces you're building here to put together a more integrated offering?

So I'll start with -- we always approach our customers from a system perspective. And so we're working with our customers on the system and how to make that system more efficient. And so the innovation pipeline that we have in the data center space is rapidly growing, and it's rapidly changing. So where typically, we would have a new product that would launch, say, historically in a 2- to 3-year time frame, we're now doing that in 12 months. So we're working on concepts with our customers and then developing those. And then when you look at how we've grown the portfolio when we've moved kind of downstream into the Stellar acquisition, think about Modular Chiller plants. where we're -- it's part of the system, but we're also able to make our customers more efficient because of labor constraints.

We're able to produce a better product for them in terms of a modular chiller plant that has production quality in a factory as opposed to stick built in the field. So that adds productivity to our customers. It helps them with the challenges that they have from an overall supply chain standpoint. And then you look further downstream in LiquidStack and the capability for us to enhance our capabilities from a total system standpoint when you get into liquid cooling and the expertise that we acquired when we acquired LiquidStack, we're really proud of and a very robust innovation pipeline there that continues to help make sure that we're positioned well to have that system conversation with our customers.

We met with your team at the recent conference in D.C. and one of the things that they were highlighting was the reference designs that you have the factories. How important is that in terms of driving share?

Look, it's an extremely important aspect of our business is to make sure that we're working on those reference designs. And we're not the only ones creating reference designs, right? But it is extremely important because it gives a road map point of view in terms of what that -- the design of that factory should be, and it gives a third-party validation of what that should look like. And so it's not just Trane saying, here's a reference design. It's -- in that case, it's NVIDIA as well, saying this is the appropriate design for this system.

Do you find the customers that come to you still very much on a product basis? So Chiller, [ CRAH ], [ CDU ] separate or a system approach.

No, it's a system approach, and that's really what these reference designs are all about is to make sure we're approaching it from a system point of view so that we can drive efficiency in the total system. And we're not having individual conversations. We're talking about the complete system. It doesn't mean that we don't have customers that only buy chillers or only buy [ CRAHs ]. Certainly, we have that. But predominantly, when you're looking at our approach to the market, our approach is that system approach.

What they're also talking about is the ability not only to build out the product in the time frame that they want, but also tell us about your commissioning capabilities. Tell us about your service capabilities after the product is installed. And so we've made some significant investments within our service fleet, which we had for years and our service technicians, we have about 7,000 globally and 4,500 in the Americas, where they are direct serving really the applied markets and one of the verticals being data centers.

We just opened up a new service technician training center in Davidson, North Carolina. It's a state-of-the-art service technician training center, and we've actually brought customers through it who were concerned about commissioning in the field given the labor shortages. And they've come back and said, we're comfortable training that you've got the right technology or the right people. They think about the order even more broadly than just the equipment, the readiness for commissioning, and we've been able to show that we've got, I think, the best people on the street for that.

Maybe just remind us, Donny, on the deal [ map ] for Stellar. I mean what is it coming in at in terms of revenues, I don't know, margin profile? And where do you see that I think the backlog was quite high.

Yes. We brought in $1 billion of backlog with the business. Think about that as this year, we're going to have $500 million in revenue from that business. And eventually, we'd see that business getting to a mid-teens EBITDA level. So we're very positive in terms of what that brings us overall.

Yes. For this year, with the $500 million, we said it's going to be marginally modestly accretive on the bottom line. And the reason being because of all the investments we need to put in to scale it from a revenue business last year in 2025, it was about a $350 million revenue business to even $500 million this year. That's a scale -- and to Donny's point, we see this in 2 to 3 years being a $1 billion revenue business, mid-teens plus EBITDA. So scaling it to that regard not only means let's look at the current production facilities in Florida, but we're adding another production facility in Texas. It's kind of one of the reasons why we raised our CapEx guide from 1% to 2% to 2% to 3% of revenue for this year, still very modest at the end of the day for investments. But that's where we're going to bring that business operating system to scale.

And think about procurement, think about how to run lines. Donny has been doing this for years in terms of running businesses and understanding how to bring that business operating system in at the same time, learn from what those teams have done well procurement opportunities, how do we run lines of the space that we need to and then set up a brand-new factory running the way that we need. That's going to be a really nice opportunity for us. But think of that investment this year, probably carrying over a bit into first part of next year to make sure that we've got the capacity we need to grow the business.

What's really exciting about that business for me as an operator in the business, like think about a modular Chiller plant, it's like 3x the size of this room from a footprint standpoint, okay? One section is think about that as 3 sections. One section is your chiller plant. One section is your electrical and one section is your mechanical, so piping. So you're making those in a production environment. In the field, those would typically be stick built. You build it up from the ground up. We're making in a production environment, flowing those through a factory in 3 sections and then putting them together at the end and then fielding and then just modularly connecting them in when we actually install them in the field. So it's a transformational change in the industry.

We're the only ones that have factories that are flowing product like this down the factory floor, and we're starting another factory right now in Texas. So we'll have 2 very large factories producing these modular chiller plants. And what's exciting about that is beyond data center, data center is one aspect, but we have chiller plants are constructed for every vertical market you can think of. And we now have that capability to provide that same value to those customers in the other markets, the other vertical markets we talk about, health care, [ K-12 ], office. I mean, any one of these verticals, industrial, we can apply that same capability to serve those markets as well.

Any questions from the audience? So please put your hand continue. So I guess the only problem you have in commercial is the comps keep getting tougher, yet you keep on comping the comp. So the treadmill gets faster, you keep on running faster.

That's one way to look at it.

Confidence in continuing to show double-digit order growth. I'm not quarter-by-quarter. I'm talking about just generally speaking, just comping that comp.

Look, I think for us, certainly, the second half comps become more challenging for us, but we're really happy and excited about the pipeline of opportunities that we have. So there's no deterioration in our pipeline. And so we don't guide on our -- what we would expect from an order rate standpoint and the second half comps will be more challenging. But like I said, the pipeline is strong. So we have a lot of positive coming.

Yes. And we'll remind investors, the growth rates are important, look at absolute dollars as well and then look at the revenue growth rates and tie them all out together. And again, we think about it going into each and every year, top quartile top line growth, top quartile EPS growth and then driving 100% of cash flow to operating earnings to net income. And keep with that philosophy, I think we'll be in good shape. That's how we see 2026 playing out.

So maybe not triple-digit growth anymore, but very healthy double digits. Okay. But would you be surprised if -- I mean, the question we get is, at some point, do we start to consume backlog? It doesn't seem like that's on the cards, but just...

Yes. Let's see how it plays out. I mean we've added, again, as I said earlier, about $3 billion of backlog in the first quarter. We typically add a few hundred million dollars. And again, 2/3 of that was organic and 1/3 of that was from acquisition. But to Donnie's point, the pipelines remain robust. On the data center side, those orders can be uneven in terms of size. We said in the first quarter, we had roughly the same number of those larger orders over $100 million, a couple of those in the first quarter, just like we did in the fourth quarter. So it can be uneven and with the timing of that. But what it does, it gives us a lot of visibility.

And from that, we can make investments and have a lot of confidence in terms of what we need to be ready for from customers. But just a reminder on the data center side, when you think about our direct sales force, which is a common model we have in the Americas and in Europe and in Asia for commercial HVAC, over 95% of our account managers do not call on data center customers. They call on the 13 other verticals that we serve that are largely served from applied, also unitary product. But it's a small group of folks that call on data center customers, the hyperscalers, the [ colos ], it's, I don't know, 30, 40 customers, plus or minus off of that. And so think about our direct sales force after 3 years, they're commissioned sales agents for the company, direct to the company. They're calling on all those other verticals.

And I'll tell you, Donny spends a lot of time with our sales force, me less so, although the last 2 weeks, I've been in the New York office and I've been in the Florida office, the West Palm office with our direct sales force. And I couldn't be excited -- more excited about the pipelines that they see around education, higher ed, hospitals and infrastructure that just needs to be upgraded. They're focused on that each and every day. So while data centers will be strong, and we will -- we've been strong in data centers for decades, we're also making sure that we're cultivating and growing in all the other verticals that are out there that can serve our products.

And the driver of those pipelines in those areas because we don't see that strength really in the [ PIP ] data necessarily. Is it decomp, electrification? What are the drivers of that strength?

I mean I think those are certainly components to it. I mean the driver for us is a system view and how do we help save our customers' money. And we often talk about the fact that 30% of energy used in a building is wasted after the meter. So the buildings are operating inefficiently. So for us, focusing on that with our customers and how we can create a payback for them to reduce their overall operating cost is what drives the pipeline that we have.

Any leaky buckets in those 13 verticals...

Yes, there's some leaky buckets. I mean there's spotty. I mean you think about life sciences, [ K-12 ] is slower, but really think about that in the context of the past few years where there was a lot of momentum and growth in [ K-12 ]. So we do see lodging is a bit slow as well. But overall, there's a lot of strength. We see strength in health care. We see strength in retail. We see strength in office. There's a lot of strength.

Government was strong. Government first quarter.

A question -- can we get the mic?

You talked about the advantages you get from the Stellar acquisition. Could you also just spend a minute talking about the advantages of the LiquidStack acquisition, please?

Certainly. So LiquidStack gives us advantages in terms of our ability to participate in the liquid cooling aspects of the market and the expertise that we get from that team that was part of the acquisition and the innovation pipeline that they have that will enable us to just continue to advance our full capabilities in the system design for our customers.

Then maybe my final question would be on transport actually transportation. We're seeing a lot of momentum in freight rates seems like there could be a pretty powerful cycle for in there. Any views on that? And are we seeing any evidence of that cycle forming?

Yes. So look, we've talked about the fact that the second half of the year, we expect to see growth in the transport markets. All the underlying factors are going in the right direction. Spot rates are increasing fleet utilization is increasing. Fuel prices actually helped this market overall. So we certainly are excited about the fact that we've been in a 4-year downturn of an 18-month downturn like we're in year 4 when we talked about it last year, but we're even more confident now that we see that finally coming back.

Fleets are at their oldest they've ever been in 30, 40 years. So at some point, that's where the excitement is. So I think we're aligned with the external data where they think production will be. and we're aligned that there'll be growth in 2027, maybe not to the same scale of growth that some of them are calling, but there's going to be growth in 2027. And let's see how this year plays out. But we're excited to have that part of the portfolio, the residential portfolio in the second half of the year growing and then the continued growth in the commercial HVAC portfolio, the exit rates in 2026 should be much stronger going into '27.

Right. And I think on transport, too, the last thing is that we just have to be cautious like it will take some time for the supply chain to be able to ramp up and meet the demand in the market and specifically trailers. So the trailer manufacturers' ability to ramp up and meet that requirement will impact how fast that -- how steep that climb is as well.

Okay. Great. Well, thanks, Donny. Thanks, Chris. Great discussion. And thanks again for being here.

Thank you, Appreciate it. Thank you.

Thank you.

Hi, I'm Andrew Obin, BofA's multi-industrial analyst. And with us, we have management of Trane Technologies. We have David Regnery, Chairman and CEO; and Chris Kuehn, Executive Vice President and CFO. I guess we'll just jump into the fireside, right?

Great. Thanks, everyone, for coming today. Appreciate it.

Always a pleasure to have you here. So maybe we can start with tariffs and inflation, now more visible than 90 days ago. Where do you see pressure points on price cost as we head into the second half?

Chris, I'll let you start?

Yes, sure. As we said on our call a couple of weeks ago, it is a bit more inflationary from a tariff perspective and from a raw material input perspective than when we started the year in January. We think we have that captured in our guide. We raised our full year guide to 7% revenue growth and EPS growth of 13% to 15%.

But look, we're going to leverage our business operating system. Unfortunately, we've had to get really good at this over the last 5, 6 years from inflation and our tariffs and looking to mitigation first and then ultimately, if we need to, to deploy pricing. But I think, Andrew, from a relative perspective, as a company that has been in region for region for well over a decade, we have 21 factories that serve our North America business and 20 of those factories are in the U.S. So over 95% of what we sell in the U.S. is either manufactured and/or assembled in the United States.

So we like having that framework. But I said it's a little bit more inflationary based on some movements in tariff. It's a dynamic area, but we think we have that captured in the guide for the year. Maybe some near-term pressure on price versus inflation. But over the medium to long term, we'll make sure that we're driving to the spread.

And I think the industry announced a number of price increases in early May. Would those be normal? Or would those be sort of to reflect inflationary pressures?

I can't speak for the entire industry. I'll just say for us, what we did is we announced a price increase in February. It was effective April 1. We have that baked into the guide that when we had our call just a couple of weeks ago. And again, it's a very dynamic environment in terms of cost, and we'll keep taking those inputs. We'll understand what we can do to mitigate with suppliers. And then one of the areas we'll have to -- may have to use is pricing to have an offset. But we're going to take all those inputs, and I don't want to get in front of our teams in terms of what they're thinking.

Yes. I mean just to reiterate a little bit of what Chris said here. Look, we've been -- our business operating system, we've proven how we could stay ahead of inflation. And we've had a lot of practice over the last, I'll say, 5 years, but we're very comfortable we'll stay ahead of it this time as well.

So maybe we can talk about commercial HVAC. So applied HVAC bookings were up over 106% in the quarter. How much of that strength is data center driven versus traditional verticals like health care, education and government?

Yes. Look, our applied bookings have been up over 100% for 3 quarters in a row. So they're up 160% last quarter, but they've been up over 100% for the last 3 quarters. And data centers are very strong, okay? But I would also tell you that we're strong in many other verticals as well. Healthcare, you mentioned for one. Certainly, higher ed is another one that we've been very strong in. High-tech industrial, we've been strong in. Government, we've been very strong in, whether it be municipal or state or federal.

Look, we're the company out there that doesn't talk about the size of our business in data centers. And just to be fair, I'll explain to you the why, right? We've made the investment in a direct sales force, and we've had that investment for decades now. And it's a very expensive model to go to market in. However, when you have a direct channel, you have a very strong channel. And we're not going to disclose the size of any vertical, whether it be data centers or healthcare or you pick another vertical just because we don't need to be able to tell others that have not made that investment where we see opportunities. And it's that reason why.

But I would tell you that we're very strong in data centers. We've been very strong in data centers for decades and we will be very strong well into the future. But you should also know that this 100% plus growth that we've seen in Applied over the last 3 quarters is more than just data centers. And if you think about it, 95% plus of all of our account managers or our sales force does not call on data centers. So there's a reason why we have strength that's broad-based.

Right. I mean it seems it's compensated for -- regionally for the entire portfolio.

Absolutely. Well -- and most of our account managers or sales force are on 100% commission. So they're going to go out and become experts in particular verticals and particular geographic areas so they could help serve our customers.

So maybe just talk about pricing in applied HVAC. I assume is it price cost positive?

We haven't done that or provided an info on an individual P&L or product line. I would say, for the enterprise in the first quarter, we had a little over 1.5 points of price. We've guided the year. It's probably approaching 2 points of price. But when I think about Applied Systems, we're not only thinking about the equipment for day 1, we're thinking about the service tail that comes with that over a many-year journey.

And if we stick with data centers, for example, that service growth is really in front of us. So what you're seeing with converting to revenues is really equipment. And you can see, I think, strong performance in our Americas business and our European business in terms of margins. So we like the margins on the equipment. We like making sure that we have that customer for life because it isn't just one application. It's a journey in terms of how they're thinking about their footprint and whatever vertical they're in, build out capital expenditure plans for a customer for the next 5 years and get through all of their assets and build with them a journey. That's how we think about customers for life. So...

And just as Applied is growing faster now than unitary, how strong -- how should we think about incremental margins, particularly once Stellar and LiquidStack are fully integrated and operating at scale?

Yes. Look, we like the 25% plus framework that we start generally every year with. And we do that because the pipeline of investments that we have is very, very strong. And we like ensuring investors that we have the minimums we're going to deliver. And if we can do better than that, we will. Last couple of years, we've done a little better than that on the incrementals. But that's where our guide was for this year and where we're holding to 25% plus. Let's see what happens by the time we get to July. We're halfway through the year. And obviously, at that point, well within what we think for the balance of the year will be.

But you mentioned Stellar, you mentioned LiquidStack. I think we should talk a little bit about Stellar. It's a great acquisition. It has some very modest EPS accretion this year. We said about $0.03 of accretion in year 1. But we see that business in the next 2 to 3 years growing from $350 million of revenue that they generated last year, okay, prior to our ownership to $1 billion of revenue, we think, in the next 2 to 3 years with mid-teens EBITDA with a plus sign after that.

The other thing about Stellar is it's serving data centers today 100%, and it's modular chiller plants. So think of it as a chiller pumping station as well as the electrical infrastructure that would get assembled on a job site. So it's basically taking a lot of the skilled labor that's required on a job site and moving it to your factory where it's very controlled and it really speeds up the installation process as well as eliminating what they would call stick build on the job site.

Well, if you think about the scarcity of skilled labor, it's not unique to data centers. So we're seeing this in many verticals. So we believe that in the future, Stellar will be serving more than just the data center vertical. This is very applicable in all of our vertical markets that we serve today. So we're really excited about Stellar. It's only been about 60 days now, maybe 65 or so, but off to a great start. We're excited about what the future is.

Think about it. This is a business that's got a $1 billion backlog. Half of it will ship this year. And in 2 to 3 years, this will be a $1 billion business at mid-teens EBITDA.

And think about the investments. So a business that needs to ramp and scale, we know how to do that very well. And so think about our business operating system being deployed to the business, learning from them what's worked for them, but also at the same time, let's think about procurement. Let's think about factory flow. There's a factory in set of factories we acquired in Florida. We're actually expanding given the backlog that we see in the pipelines, we're expanding through a new facility in Texas.

So as I mentioned in my numbers earlier of how many factories we have in the U.S., we should be adding 2 to that by the end of this year in terms of our investment. And -- but it will take some time. We're going to have investments this year. They'll probably carry over into 2027. But let's make sure we've got a nice scalable business here, and I think we know exactly how to do that.

Alright. Can we just sort of talk about lead times? And I think they are extending at the customer decision level. Does that give you better visibility or raise risk around lumpiness and execution?

Yes. I think I tried to answer this on our earnings call. I think I got a lot of comments that maybe I didn't do a great answer. But look, lead times, we have published lead times or what we would publish to a contractor. And think of it as some of our products, the lead time can be weeks. Some of our products could be up to 6 months. Think of a centrifugal chiller. That's the lead time.

Now over time, lead time has actually contracted, right? So we've actually improved a lot of that. In fact, for the first time in a long time, we have quick ship programs that we're able to meet our customers' needs should they have an emergency. So that's lead time.

The second question is what are customers asking for, right? So a customer would say, I can give it to you in 6 months, but the customer will say, "I don't want it in 6 months. I want it in 12 months. I want it in 18 months." So they're giving us a lot more visibility to what they need, specifically in the data center vertical. So they're out there saying that here's my plan for the next 12 months or in some cases, even 18 months as to making sure that we have plenty line of sight to what their needs will be.

As far as risk factor, I don't really see a risk factor. We only put something in our backlog when we have a signed PO. So it's a signed PO. Our backlog of $10.7 billion at the end of the first quarter is all equipment. We do not put service in our backlog. So it's just equipment and there's all signed POs. And once there's a signed PO, you could assume, especially in the data center vertical that there's a green light to start construction and power will be supplied to that data center.

And from that perspective, I mean, we've been hearing, I think, in the channel, some concerns about just delays of the field with the EPCs. Are you seeing that?

Well, I mean, I think that in the data center space, they're pretty aggressive build cycles. So we haven't necessarily seen any, what I would call, delays that I would say are chronic, but there can be delay on any job cycle. We haven't seen that become a trend yet. But I would tell you that there's very aggressive build cycles in data centers. So we'll see how that progresses. But I don't see that becoming a cancellation. I see that being a pushout, right? Once you have the approval and you have the power source, that data center is going to be built. And we won't get a PO until that clearance has happened. So I don't -- I see it maybe there could be delays, but I don't see any cancellations.

Right. But these delays is it enough to create volatility quarter-to-quarter versus your plan?

It could, but I wouldn't see these things being -- these could be, I don't know, 4-week, 6-week, 8-week delays. But eventually, that will start to lap itself. So your backlog will just move out. I don't see that as a major risk right now.

Got you. I appreciate it. How sort of to -- as you go into data centers, right, you've extended your data center toolkit with Stellar and LiquidStack. So how do you think about sort of growing your presence inside data-centric in terms of product, systems, life cycle services? And another thing I sort of want to add, there was an interview with Jensen and he sort of said that he wants to have partners in the room and sort of to be able to design next generation of product and effectively sort of saying that specific product capabilities become less relevant. What becomes more relevant is to have the total system capability, design, install, commission, service. How do you maintain the seat at the table with NVIDIA? And what capabilities do you need to sort of to grow your presence there?

Yes. I would say, well, we were in the room, okay, number one. So that's a good thing. I'm glad you brought that up. We are part of the reference design. In fact, it's actually published on NVIDIA's website. We've had 2 different reference design. We did one about, I guess, 8 months ago. We did another one that was just released and published probably about 2 months ago. And he's right.

You got to think of it at a system level. It's not a component, it's at a system, right? And this is the same philosophy we've had in buildings forever, right? This is how we go to market. With the breadth of our portfolio, we're able to think of things at a system level, right? It's not a particular component within the system. It can be the greatest efficiency you want. But if the whole system isn't delivering that efficiency, you're at a loss. And that's where Jensen is getting it with, I'm assuming, by making that statement.

So we're really good at the thermal management system within the data center because we have many of the components and/or we have a partner that will have another -- some of those components, especially at the cold plate, but we know how to interface with it. And if you think of it at a system level, you're going to open your mind as to what the possibilities are and how efficient to make that particular data center thermal management system.

But this isn't new to us. This is how we win in our core verticals, right? It's funny because when I was younger in my career, it was always used to have regulations about components within a product, like the compressor has to be at a certain efficiency level. And I was always thinking myself, what the heck does that matter about how efficient the compressor is if the entire product isn't efficient.

And it's now -- so that everyone's gotten smarter on how they regulate products now. And it's so why are they longer at a component level. It's now at the product level, but you need to take the product and think of it at a system level. And that's what we do in not only data centers but all the verticals today. And there's a massive service opportunity, by the way. You were talking about how to think about it at a system level, a massive service opportunity that's in front of us in data centers.

Some of your competitors have published data that sort of indicates that perhaps service opportunity related to data center is greater than regular. Would you care to comment?

I would say it's probably the same. These are applied systems that are very complex. I think that data center customers are very risk-averse, so they want to make sure the OEM is doing the service work. So maybe that's what they're referring to, but we're connected to all of our applied systems coming out. So it's not -- for us, it's probably the same...

[indiscernible]

I think one of the other points you touched on, Andrew, just to go back to is this commissioning capability. This is a competitive advantage that we have. It's not being able just to be able to supply the components to the system in a data center, it's being able to make sure they're going to operate and you commission them to make sure they're operating the right way. And with over 7,000, 6,500 global technicians, we have a workforce that's geared to do this. And we had a major colo come to our operations in Davidson, and I was telling them about how we commission and how we train technicians to commission data centers.

And I guess they came to Verify, trust with Verify. And they came in and we took them through our training center, which is now state of the art. And they were just like, "Oh my gosh, you do all this." And there was actually a class going on with technicians about how to commission in a data center. And it's just the depth that we have, the knowledge that we have, the ability to invest in the technicians so they become the best possible. This particular colo gave us 100% of their order, which is somewhat unheard of in the data center space. But it was all based on our ability to make sure that we commission the products.

Sure. Maybe talk a little bit about M&A. I think M&A related to data center cooling has been picking up. How do you think about your strategic positioning? And what would it take for you to consider a larger deal in this space?

Well, I mean, as a major HVACR player, we're going to get a chance to see, obviously, everything on a global basis. I say everything, but the majority. So we're going to take a look at it. Obviously, we'll evaluate it. Look, we did acquire Stellar. We did acquire LiquidStack. Those are in that space. We always want to make sure that we're -- we want to add value to our shareholders, right? At the end of the day, that's one of my and Chris' jobs is to make sure that any acquisition is going to be accretive to our business in the long term.

So you always have to be careful about what you're paying for these businesses to make sure that you're getting the proper returns. And I would tell you that we've been very disciplined. I think you've all seen that over the last several years that we're a very disciplined orchestrated company here that's very -- has added a lot of value with the M&A that we've been able to do.

And just another sort of topic, fairly controversial topic. We're getting a lot of incoming questions about the evolve...

You like to give me the controversial?

Because you guys do well. Evolving architecture of the data centers, sort of more dry cooling, maybe less chiller content, absorption cool -- absorbing cooler chillers. So, a, how do you see the technology evolving? And second question, which I think is sort of more important, what do you think it does to thermal content per megawatt and service opportunity, right? Because it goes back to the sort of extreme how we design thing, like the point solutions will evolve, but I think a more relevant number, I think, is content per megawatt, your ability to capture it and how much service does it generate. There's 2 ways of looking at it.

Yes. I mean, at the end of the day, we're part of reference designs, which is some of the terminology that you use, part of data centers of the future. Some hyperscalers will use that terminology. And we are designing data centers. Think of it as what's the data center going to look like in 18 months or 24 months. And there are different technologies that are being deployed in those developments.

I guess the general rule, I would say is think of chillers being smarter and more integrated. And as the temperature -- as the chips can have a higher water temperature to be cooled at, the chillers will be smarter as to how they remove the heat that's there. Think about it as if the water is hitting the cold plate at a certain level, right, whatever that level is, it's leaving at a temperature that's much higher, right? Think of it as 20 to 25 degrees F higher. That's the heat that needs to be removed.

So regardless of what you started, if it's 45C, it's still going to have to be removed. And how you remove that is why I say chillers will be smarter. So think of it as a chiller farm being able to understand what mode that chiller farm should operate in. So should I be in a free cooling mode? Okay, depending on the ambient air, maybe. Should I be in a vapor compression mode? Maybe. Maybe not all the chillers are operating in a particular mode, maybe only some of them are, and you're worried more about the leaving water temperature out of that chiller farm or segments of that chiller farm. Those are all things that are evolving that we're working on. I haven't seen any reference designs or data center of the future that does not have a chiller in it, okay? How those chillers are operating? Yes, I've seen lots of different variations on that.

But how to think about dollar, right? Because if you think, such a small portion of the total -- of total cost for data center, and it's so critical. Like the feedback we get is that this is going to get more and more complex?

It's certainly getting more complex because what you're doing now is you're building like dry coolers into your chiller, right? Maybe we won't even call them chillers in the future, right, because these things are different. The use of water in a data center is -- you don't want to necessarily use evaporative cooling, right, because you use a lot of water. So many colos and hyperscalers are saying, we're not going to -- we're going to have all closed-loop systems. Well, there's a different complication associated with that.

We have some that are looking for how can we go from chiller to chip, right? Interesting concept. We have a hyperscaler that's working on that. And how do you do that? What do you do with deionized water? You do it with stainless steel components because it's about purity of water and how do you maintain water flows. So all that is part of this chillers getting smarter in the future kind of mindset that you need to have.

And maybe last data center question. How much exposure do you have to neoclouds? And is that portion of the market evolving differently than sort of more hyperscaler focused?

I think neoclouds are getting -- they're getting bigger, so we could see if they are. I think we deal with all chiller customers. So you'd have to be specific with the name, and then I probably wouldn't tell you anyone [ what you do ] with everyone. So everyone is our friend if they're a customer.

Got you. Maybe on residential, since first quarter earnings, what has the residential market looked like? How has the start to the selling season been?

Let me start?

Sure.

Yes. I mean our first quarter, we had guided residential down around 20%, and the business did better than that. It was down about mid-single digits. I think the most important part was entering the year, we wanted the inventory in the channel to be at the right levels, okay? And we took some drastic actions in the fourth quarter internally from a production perspective. We took about 1/3 of the production days out of our residential business in the fourth quarter.

We also decided starting this year, we would level load the factories. And the path usually has been you ramp up production through the first quarter into the second quarter to build inventory to be ready for season. This year, we said, okay, we're going to take the inventories to the right level in the channel. We're going to level load production this year and ultimately had a good start to the first quarter. It is just the first quarter, right? It's maybe the least significant quarter of the 4 for residential. But what we're doing this year, again, that level loading, it will put a little pressure on the first half of the year when you think on a year-over-year basis incrementals. That will be a nice tailwind for the second half, though.

And also we have easier comps going into the second half of the year, just given the challenges we saw with 2 prebuys last year, refrigerant change and ultimately, maybe not whether that was as cooperative. So we raised our guidance to stay flattish for the year for residential. It means volumes will be down, right? There'll be some positive price in there, but very happy where the channel started the year and happy where the channel ended at the end of the first quarter.

Yes. Look, we're probably the ones that are more bullish on residential than maybe others. Like 2025 was a really, really strange year for residential, right? You had a prebuy with refrigerant. You could argue you had another prebuy with tariffs. And then all of a sudden, you had a refrigerant problem where you couldn't install new units, so you couldn't burn through the inventory and you had a really short selling season, meaning it was a lot cooler last year than it had been in a long time. So we could argue about what of that's going to repeat in 2026, but the first 3 are not. So we'll see how the year progresses. But as Chris said, it's the first quarter, but we're off to a good start in that business.

But with level loading, does that mean that -- insofar as sell-in?

No, no, think of it more as what your manufacturing output. So instead of ramping up your factory output in the first 4 months of the year and then letting it drift as you see demand in the back half, we're basically just going to manufacture at the same level.

Right. But from that perspective, it means that there's not going to be a lot of variability to second quarter unless demand is really well outside your range?

You have inventory that buffers that your own inventory. So if you had additional needs, you'd be able to satisfy that with the inventory level.

With the inventory level.

Yes, and then you would just ramp up your rates. What it does is it means less unit volume through your factories in the first half of the year, which means less absorption. And then you'll have more absorption in the back half of the year. And if you remember, in the fourth quarter, we made the decision that, okay, we're going to get this excess inventory in the field adjusted. So we took 1/3 of our production days out of our factory. And that was not an easy decision for a lot of reasons. Forget about the financial side of it, just think about the impact to our employees. So we wanted to get that over with. And we're happy to say right now, inventory is in a good position right now within our residential business.

But in terms of demand, so the point is that if demand is stronger, you'll work down the inventory.

We have the availability for that. But we did guide the second quarter to about flattish residential and growth in the second half of the year really off of easy comps. And then let's see how the year kind of plays out, but the team is really executing well there where they started the year and ultimately managing the inventory and then taking the decisions around, as we said, the factory production, the level load.

How should we think about replacement versus discretionary upgrades in residential as sort of affordability pressures persist? And do you see a mix shift towards things like hot box or...

Okay, are you talking about like higher SEER to lower SEER, or are you talking repair versus replace or...

Well, it's just people -- that's right. Is it like people are just -- because the things are so expensive.

Repair versus replace, I don't think you could tell in the first quarter, right? It's a shoulder season. So we'll see how that plays out as we go through the year. We have not seen a mix change. So we're still -- we lead in high SEER products. But we haven't seen -- we really haven't seen a mix change, although it's just the first quarter. So we'll see how the year progresses. But right now, we haven't seen that.

Excellent. Maybe just focus on transport. I think transport remains one of the slower recovering pieces of the portfolio.

We're in year 5 of a 2-year downturn, yes.

Anything about...

I think we are seeing green shoots there, okay? I mean, look, I know this business very well, and the fleets are very old. And the good trucking companies and the -- most of these trucking companies are very well run. They know there's a cost to having an old fleet. And that will -- so as an underlying macro, I would say that's one thing that's out there.

The other is if you look at what spot rates are doing, they actually are increasing. If you look at rejection rates, meaning that I have a contract, but you go show up and it's like, I can't deliver because they want you to go on the spot side, that's increasing and utilization of fleet is increasing. So those are all positive signs for that business.

Now I've been wrong because last year, I was probably up here, maybe not at this particular conference, but I was conferencing, the back half of the year is going to be a lot stronger, and we're going to have a recovery and that didn't happen. But I guess I'll say I'm more optimistic this year than I was last year about Thermo King recovering and -- which is a good sign for Trane Technologies. As you think about it, we had a residential business that was -- had a terrible 2025 for the reasons I explained. You have Thermo King that's been down for at least 4-plus years now. And both of those, we're seeing that the back half of the year, those are going to be positive, and we think we're going to have positive momentum going into 2027.

On the Thermo King business specifically, if you look at ACT, their projections for 2027, we don't -- we're not as bullish as they are, okay? We believe that 2027 will be a strong year, but we don't believe we'll see the inflection point up that they're predicting. I think there -- the demand might be there, but I don't know if the trailer OEMs will be able to meet that. And because we're a reefer that goes on a trailer, if you don't have a trailer, you're not going to sell the reefer. But we'll see how that plays out, but we're optimistic about the future in Thermo King.

What does the normalized margin profile look for Transport once volumes recover relative to historical peaks?

I would say that we like the margins in that business today, and we'll like the margins, I think, even better when you get more volumes coming through the factories with more units. At the same time, we made some really good investments in this business for the last 3 to 4 years when markets have been down. We're not going to be out there trying to sell the same products we had 4 years ago and say, here they are. They're maybe a bit more expensive due to inflation. They're more energy efficient, more options around electrification, to hybrid, to more efficient even gas-powered units.

So I think we've been -- that team has done a phenomenal job outperforming end markets. And the same would be within our EMEA transport team as well, right? There's a market that hasn't necessarily grown either for many, many years, and they've outperformed those markets, and it really comes back to the innovation flywheel of where they've invested. And I think as we see these markets start to recover, we'll like the incrementals, and I think it gives us a lot of confidence we should be 25% plus. And that's sort of like the plus sign after that. It's a commitment that we'll be at 25% and can it get better? We'll see if we can.

And for EMEA Thermo King, what's driving the outperformance over the past several years? What are you doing to win market share versus your competitors?

I'll start. I mean, look, I think it does come back to the innovation. Again, this is a team that, as Dave said earlier, right, Europe is still very focused on sustainability. It's focused on decarbonization. And especially when you get to city centers, there's also noise abatement concerns. You want quiet systems, you want running on electricity. And that team has led with that innovation all the way from trailers down to truck units to smaller units.

But they have a fleet. They have a choice. If you want something that's hybrid, you've got that and you can go full gas as well. What the team has also done is they've done a number of acquisitions actually over the last 12 to 15 months. And where we've typically been 2-step distribution, we've actually bought back some of that distribution to go direct in certain markets. And this is a bilateral with the owner. They wanted to sell. We said, okay, we're going to come in and we'll buy back the business.

And in some cases, it's a really well-run business, so let's go grow what we have. And in some, there's opportunities there for share. And so let's invest in the business, let's go direct here in those markets, and let's ultimately grow back the share where we need to and/or keep expanding where we're at. So it's -- we just actually closed on the fourth acquisition just last week in Germany, one of the larger providers of transport equipment in Germany. We bought back that distribution.

So they've now got a combination or a mixed model and more opportunities now to now get touching to the service side. So think about the dealer is the one that would do the service for the units. Now by going direct, we have access to that service and how do we make sure we're servicing customers effectively.

And just talking about service, services is 1/3 of the revenue growing low teens. So the question is, do data centers accelerate service growth through the end of the decade?

I think that any time you expand your installed base, it's going to accelerate service. So -- and obviously, we're doing a lot of data center work. So I think it's going to be good for our service business. Our service business is 1/3 of the company, and it has demonstrated results of a compound annual growth rate of low teens for the last 7 years. So this is a very, very resilient business, a very proven business. It's got an operating system built around it that is very, very robust.

And look, we love investing in our service business. I love what we're doing on the digital side of our service business. I love what we're doing on the virtual engineer within our service business with ARIA, making our technicians smarter in front of customers. This is all part of our philosophy, and it's a business that's 1/3 of the company that has demonstrated compound annual growth rate of 11% over the last 7 years.

And as maybe last question, as service mix rises, what's the ceiling for enterprise margins without sacrificing growth and investment?

We love the 25% plus, right? Look, could you leverage more in a particular quarter? For sure. I would tell you that we like optionality. We love to invest in ourselves because we like to think about the long term. And I've probably told this group before, the easiest decision a CEO can make is to cut investments because in the short term, you look like a hero. In the long term, you don't have a business or you're not going to be able to hit the growth rates.

Look at our growth rates, look at the model that we have. We love investing in ourselves for the long term. And that's a model that we've been able to prove, and it's a model that you're going to see from us well into the future. So our model is 25% plus. And we assume that within that, we're always going to have lots of ample capital to invest in ourselves. And that's what we've been able to do, and that's why we've become the growth company that we are.

Well, on that note, we'll end.

All right. Thanks, everyone, for your attention today, and talk to you all soon.

All right. Good morning, everyone, and welcome back to day 2 of Oppenheimer's 21st Annual Industrial Growth Conference. I'm Noah Kaye, Managing Director in Oppenheimer's Industrial Innovation Research Practice. We're very happy to welcome back to the conference, the management of Trane Technologies, CFO, Chris Kuehn; and Group President of Americas, Donny Simmons. Gentlemen, welcome. Thanks so much for being here.

Thank you.

Thanks for having us.

So we've got a lot to discuss today. I think I'd like to maybe ask you, Chris, just to give some opening thoughts and Donny as well as some state of the business, and then we can jump into some subjects that are near and dear to our heart.

Yes. Noah, we're happy to join again the conference this year. So, so far, conversations have been very engaging and no surprise. Look, we started out the year strong, had a strong first quarter, sets us up for a very strong 2026. We do expect significant revenue acceleration into the second half of the year, especially in Donny's businesses that he leads across the Americas and commercial HVAC and stronger growth in the second half with residential and transport. I expect we'll get into that.

We delivered very strong bookings growth, up 24% in the quarter, and we reached an all-time high in our backlog, $10.7 billion at the end of the first quarter, up 30% from year-end. Service had a great start to the year as well, up double digits. It's a franchise that since 2020 is up low teens CAGR, continues to execute well about 1/3 of our enterprise revenues. And all of that gave us a lot of confidence to raise the full year guide for 2026 on our call last week. So off to a strong start, and we'll keep navigating what we can control.

Great. Maybe just to start with the data center market and discussing as well the backlog trends that we saw, which were very impressive. There's been a lot of consolidation and acquisition activity in the last 6 months, really around the thermal chain. And there's been a move towards more modularity and more integrated solutions. You grew your commercial HVAC backlog by $2.7 billion last quarter, almost, I think, $1.7 billion of that was organic. So how much of that growth is new customers and new project wins versus picking up a growing share of wallet.

That's a great question, Noah. Thank you. So when you look at the dynamics in the business, if you look at last year -- or sorry, last quarter, we saw both a mix of wallet share as well as growth in new projects from customers. So we've got relationships with all of the hyperscalers. And so as they expand and look at different capital investments that they're making, we're able to plan that out and make sure that we're developing solutions looking at a system level, whether it be a modular offering, actually, the Stellar acquisition that we had talked about during earnings is a great example of the modular offering that we have. So we're producing modular chiller plants for customers with that offering.

So if that hyperscaler has a desire to have a water cooled chiller plant and needs a modular offering, that's something that we're able to provide. But in aggregate, overall, really great growth that we're seeing in that market, and we're participating in that and really happy with the position that we have.

I guess to double-click on it, the push towards modular, I mean, we've written pretty extensively about this, the labor constraints, I think last week, Dave mentioned the applicability of Stellar's modular solutions to verticals beyond the data center. So maybe just level set for us what the non-data center content is in Stellar's backlog today? And which verticals do you see as the next incremental adopter.

Okay, absolutely. And Dave was actually -- I mean he's absolutely right. I mean the modular chiller plant concept is applicable well beyond data centers. Every vertical market that uses a chiller plant can have a modular concept. And so today, in the backlog for Stellar, it's virtually 100% data center. But we're able to expand the capacity there and then offer that same concept to other vertical markets. So think like health care, as an example, a hospital system that needs a chiller plant. And the benefits associated with a modular chiller plant are multiple.

One is the labor availability that you mentioned. So you pull the labor out of the field and move it into the factory. You're also able to produce it in a manufacturing -- with a manufacturing mindset of a concept of flowing a line through the factory rather than stick building in the field. And so with that, you get consistency, you can ensure that from one site to another, the product is exactly the same. You get -- you improve the quality as a result of that in the product that's delivered to the customer. And ultimately, you're able to do that in a faster fashion than they would be able to do it on their own. So you can -- if you were to stick build a chiller plant, maybe it takes 3 months to do that in the field, you're able to get that down to 8 weeks, maybe even 6 weeks in a production environment. So it's a big benefit.

And the efficiencies you can underwrite from using a solution like that, there's the labor efficiency, time to first token. I guess, how do you kind of quantify the full benefit to the customer today? And honestly, you're just getting going integrating this. What do you think that figure can get to over a couple of years?

Well, the way we've sized this business over the next few years, talk about it like 2 to 3 years is we see this being a $1 billion business with mid-teen EBITDA margins. That's where we see this business serving the data center market as it is today. And there's opportunities that we'll continue to expand. We're making significant investments in that business right now. So it's only been 60 days. We're putting a new factory in place today as we're expanding the existing -- putting efficiencies in our business operating system in the existing location. So there's a lot of work associated with that. But once we're able to completely deploy our operating system, we're going to be -- we're going to see some significant overall benefits for our customers as it relates to the...

Yes. The business brought about $1 billion of backlog to the enterprise, Noah, here at the end of the first quarter. We think about half of that will revenue this year and already have $0.5 billion of revenue for 2027. But it's going to take a lot of investment to go from a $350 million revenue business, which Stellar was last year to that $1 billion revenue plus business 2 to 3 years out. But we're really good at that, take our business operating system and how we lean out factories, how we expand factories.

It's actually one of the reasons why we're raising our CapEx guide to 2% to 3% for the year versus -- which I think is still very CapEx light, but from our normal 1% to 2% is adding capacity to support the growth that we see in the Stellar business modular builds. And look, it's a great business. We're learning a ton from their relationships and also bringing our relationships to bear. But think of those investments this year carrying over into next year to really drive a business that in 2 to 3 years, we think is mid-teens EBITDA or better, and then let's continue to see the growth after that.

Okay. I may follow up on that later, but that's a good place to leave it for now. I guess more broadly on the data center market, we've talked about the visibility improving here. You mentioned on the call, typical 12 to 18 months now for data centers and in some cases, orders going out as far as 24 months. I think the new reference designs that you've released with NVIDIA as well as I would guess the increase in CapEx plan for this year implies confidence really beyond the time frame of orders. So what gives you the confidence to invest that extra CapEx this year? What kind of demand visibility are you now getting from customers on a longer-term basis?

Look, what I would say is that depending on the hyperscaler, we have long-term capacity agreements in place. And so we have visibility to what they're planning on doing over the next 2, 3 years, and that gives us the confidence to invest in the capacity and additional capacity that we're adding to make sure that we can serve their demands going forward beyond the purchase orders that we have.

But to be clear, in our backlog, it's firm purchase orders. and those purchase orders come typically 12 to 18 months in advance of when the delivery takes place. So we have -- just with the purchase orders alone, we have plenty of visibility to be able to stand up additional capacity to meet our customers' requirements.

I'm not going to ask you about the sensitive nature of long-term agreements with hyperscalers on a public call or even in private, frankly, because you would say the same. But what I am interested in is how you think about negotiating such agreements in the context of your own planning visibility, pricing and margin protection. Can you speak to that a little bit?

Yes, it's no different than any purchase order that we would negotiate with a customer. We have pricing protection in there. We have tariff language protection. But keep in mind, we've got an in-region, for-region manufacturing strategy. So tariff impacts really come from components. And even then, we have a very resilient supply chain strategy to make sure that we've got multiple options. We do build in inflation assumptions. We build in productivity assumptions. And this has been part of our standard as part of our business operating system for a long period of time. So we're pretty good when it comes to understanding exactly what we need to accomplish in order to be able to make those commitments to our customers.

And maybe one more follow-up. The concept of long-term capacity agreements obviously makes intuitive sense in this market, just given the time horizon and planning considerations for the customers, time to get power availability, land availability, all of that. How unique and how recent is this for the data center market compared to some of the other markets and verticals that you serve?

Well, compared to the other -- I mean, the other markets and verticals, this concept doesn't really exist. I mean -- but what does exist is when we have large commitments and purchase orders, we'll have typically a down payment that can take place is associated with that, which is a nonrefundable. That gives us the security associated with the order that we're receiving. It also makes sure we're able to plan materials, make sure our supply chain is ready in the same. But if you look at other vertical markets like High-Tech, I mean, we approach those in the same way. When it's very large orders that would require us to make sure that we've got the supply chain to support that, we will require a prepayment associated with that capacity that we're going to put in place to be able to support it.

One follow-up question really around the technology evolution here. So we talked about module, that's certainly important. There were a number of improvements you made to your reference design for the AI Gigafactory, more efficient compression technology, right, I mean just to name one. Can you talk a little bit as a company that is really engineering first and always looking where the pocket is going, kind of what are you trying to manage for as you kind of look at the technology road map within data center specifically going out a couple of years?

Yes. So we have to look like this discussion with NVIDIA, we're having to look at what is the future chip design and what's the cooling load that's going to be required for that. And we look at the full system. I mean that's one of the benefits that we have in the marketplace is to work with our customers on what their system concepts are going to look like in total. So what's the full design of their data center and then how can we offer ways to improve the efficiency associated with that.

And that's really where the customization comes into play for each one of these customers is where we can actually test out different concepts that we have. And it's an ongoing evolution that every 6 months, there's a different evolution of products that we're delivering to customers. And it's changed. In the past, in this marketplace, it used to be that you would develop a product over a 2-year period, you would launch that product, you would sell it. Today, we're developing a concept with a customer. We're taking an order for that concept, and we're developing that product and delivering it. And so that in itself significantly changes the way the industry works. And we're uniquely positioned to be able to handle that with our customers because of our experience and our expertise with system design. We can do that with confidence.

Yes. Can you talk a little bit about the investments you've made, not just in sort of 4 walls manufacturing, but really around testing, design and innovation to be able to support that.

It's a good question because we -- capacity is not just about 4-wall capacity. We're constantly adding engineers as think about our technical capacity to develop products. We're constantly investing in our service capability. As an example, we built out a new service. It's a world-class technician training center here in Davidson. It doubled our capacity for training technicians. We've had customers, data center customers that we've brought through to show them our capability from a service and commissioning of their product and the training that we do here on site in Davidson as well as in La Crosse, Wisconsin, and we've received orders as a result of the confidence that we're able to give them.

So it's a very unique position that we put ourselves in. So we're looking at capacity in 4 walls. We're looking at the capacity that we have in our new product development in terms of engineering capacity, and then we're positioning ourselves in the right way to make sure that we can serve the customers.

Just on that theme, I think you're up to, what, 7,500 technicians globally. So I mean, how much runway for growth can the current service force support. What kind of headcount growth are you may be targeting by the end of this year to support what should be, I would expect continued double-digit growth in services just as you harvest the tail of opportunity with all these equipment sales?

Well, I think you have to look at -- I don't have an exact number to give you in terms of that we would publicly share in terms of the number of technicians we're going to add. But if you look at that double-digit growth that we've had over the last 5 years, and we certainly expect that to continue. It's not just about the number of technicians, it's also how much more productive you make your technicians. So digital gives us a capability there as well, where we're able to analyze and monitor through our Trane Intelligence Services, how the equipment is operating and dispatch technicians only when needed as opposed to having them dispatched to diagnose a problem. We're able to many times diagnose that problem remotely, and then they can bring the right parts or whatever with them to make sure they can service the customer. So that's another aspect.

And then as well as our training capabilities, and I mentioned the doubling our capacity. What that really means is that every technician we have, just in the Americas, we've got 4,500 technicians of the 7,500 you mentioned are in the Americas. They're coming through the technician training center twice a year and getting trained on the most up-to-date technology that we've deployed so that they make sure that they're experts in the field and they're able to commission that.

And what that means, commissioning means you're able to start that equipment up and you're able to prove that it operates the way that it was designed. So we do -- we test all the equipment as it comes off the line to make sure it meets the requirements. But then when you get in the actual environment of the use case, you're able to actually prove on the ground that the equipment is performing as designed. And so you effectively commission and start that equipment up. So to do that, you have to put it under load, you have to do various things. And that's a very technical activity that only we are prepared to do for our equipment, for our customers.

That's great color. And you were talking just now about some of the digital and productivity tools to make the workforce more effective. Is it a simple -- an overly simple question to ask about labor productivity in terms of revenue per man hour. Does that kind of apply? Is that how you look at it at all? And is there anything you can kind of share with us on how labor productivity has trended for you within the Service business over the last few years?

We do look at a number of metrics across the Service business, probably 15 to 20 to be fair. I do think the investments around digital, Noah, I think that's really important to stay connected to a building. And then the ability for like a recent acquisition of ours early last year with BrainBox AI, where you've got agentic decision-making on how to control the building, anticipating the needs of the building based on its history. That allows for when there is an issue in a building or otherwise a fix, you're getting better intel before the service technician even makes their way towards the building, right?

They've got the parts that they need. They've got intelligence already of what needs to be fixed. And at the same time, then the utilization of those service techs becomes much stronger. And I would add to Donny's comment, not all service techs are the same, right? There may be folks that have a higher number, I don't know. But we're not necessarily connecting everything on site, but we are doing exactly what Donny said, we're commissioning and we do that with all of our applied systems to make sure we're there for start-up. But we'll measure productivity, but I think that digital investment we continue to make, that is another force multiplier for our Service business to ensure that we can stay well ahead of the capacity needs we need. As we think about the -- even the data center revenue that we've been starting to enjoy last year and this year, and it takes a few years before that Service revenue really starts to kick in and then grow, we're very much making sure we've got the capacity for all of that.

It's a good point. The spirit of my question -- and by the way, I think you guys know this, but I used to work in the industry. And so you didn't want to kill time on the job, right? You go in with the best plan you have, best information, get it done, put in the part and get out, right? And that's how you make margins. So my question to you is, is this perhaps an underappreciated lever for margin expansion within services, the types of investments that you're making? And how should we think about services margin specifically trending over the medium term?

Yes. Services margins are accretive at a segment level for each segment. Think of it as globally, it's 1/3 of the revenue. It's approximately half of the commercial HVAC Americas revenue. It's approximately half of the commercial HVAC Europe revenue is Services. And as we continue to grow the installed base, as you well know, especially with the more complexity we're seeing in these systems, especially in data centers, the need for service and connective tissue back to the OEM is just so important.

I think in terms of productivity, in terms of pricing, look, we want a customer for life. And so we'll make sure that we're getting a nice margin on that business, but many of our customers have multiple locations, multiple upgrades. We're tying into their capital needs over the next 5 to 10 years. We want to make sure we're part of that journey with them for a long time. But growing that part of the portfolio low double digits, low teens over the last 5 years and the margins that it brings gives us a lot of confidence that we should be able to get incrementals 25% or better. We've done a little better than that the last couple of years, but it gives us a lot of confidence. That's one of the engines that will drive that way, including digital.

Very good. Maybe just pulling back to commercial HVAC demand broadly. I think last week, Dave mentioned commercial HVAC revenue growth in 9 out of 14 verticals. Just we put data center aside for a second. Just talk about where you're seeing relative strength and relative softness in demand in the order book right now and how we should be thinking about growth trends and drivers outside of data centers?

Sure. So we're seeing growth, as Dave mentioned, in 9 of the 14 verticals. Think about strength and we're seeing strength in office. We're seeing strength in retail. We're seeing strength in High-Tech. And so it's really broad-based in terms of the markets that we're seeing strength in. Overall, health care is another one we're seeing strength in. So on a relative basis, those 9 verticals, we're seeing good strength in those verticals on a go-forward basis.

And I guess on EMEA, there's really 2 broad demand tailwinds we think about and that inflection that the industry is going to see in data center demand. And the second is the 30% wasted energy that the company often highlights has gotten a lot more expensive in the last couple of months. And I know your guide contemplates, was it high single-digit growth in the segment for the back half of the year. Do you think that the higher energy costs or stronger data center demand growth can maybe drive upside to that outlook?

No, we've got -- for the commercial HVAC business in EMEA, we've got, you're right, high single-digit revenue growth in the forecast for the second half. For the segment, probably mid-single-digit revenue growth, given that we're calling the transport business kind of flattish at this point. But it's very similar when you think about Donny's business, Commercial HVAC Americas with the order inflection in the second half of 2025.

The EMEA business had the exact same realization of stronger orders in the second half of '25 and the first half. And first half was growth. Second half was mid- to high teens growth in 2025. So you're starting to see in the second half of '26 where that revenue turns over. The 30% wasted behind the meter, I think that's a global number. And to your point, in Europe, unfortunately, it's getting hotter sooner in Europe in a lot of countries. And at the same time, the cost we know for fuel and energy has only gone up, as you noted, the last couple of months.

Look, we're excited for what that region can deliver. I mean, at best, the region has been, from a market perspective, flat, and we've been able to outperform that for many years. It leads with innovation. And I'll tell you, we keep investing in that region relentlessly. So while there's some headwinds with the Middle East, and it's going to have a little bit of some pressure on growth for the overall segment, it's not going to stop us in terms of the investments we're making in the region.

And I'll call out one of them since we were talking about Stellar in the Americas around modular chiller plants, we made an investment in the first quarter with a company called Kieback&Peter. It's a minority interest investment. One of the last large controls companies in all of EMEA with strength in really 2 or 3 markets in Europe and great controls technology. And with our direct sales force in commercial HVAC EMEA, we're strong in 20-plus markets.

So we're making those investments on bringing that technology and that sales leadership into our 17 other, call it, markets in Europe to go expand. And despite what we're seeing in the Middle East, which we'll see how that kind of plays out for the year, we're going to keep making those investments in the region. We bought back some distribution on the transport side as well to be more direct in that region to capture some share opportunities. But look, this year, it's probably in that low to mid-single-digit growth for EMEA. We'll see where margins go, but we're going to keep investing there.

Very helpful. Maybe turning to resi and transport. I guess with transport specifically, it was looking better than feared prior to the war or the conflict in Iran. And so I'd like to ask to what extent has the spike in fuel costs impacted the outlook for fleet refreshment. Maybe you can talk a little bit about payback period for a new retrailer and see the market inflecting in the back half here moving into '27?

Well, I think we feel pretty strongly that the market itself, and we're in year 4 of an 18-month downturn. That's how we talk about it. And we expect the first half to be down, and we expect the second half to be up overall for our transport market. We think it's a little bit less than what ACT is projecting. They're projecting mid-single digits, and we think it's going to be more flattish for the year. And really, the difference there is that whether or not the OEMs can actually produce trailers. So the market activity might actually strengthen in terms of customers that want to buy refrigeration units for their fleet.

But if they can't get the trailers, it's not going to come to fruition. We might get the orders, but they'll be waiting on trailers. So we still feel pretty confident that what we've predicted here for the full year is going to be in line. Whether or not -- certainly, fuel cost has an impact. It's probably a bigger impact on our auxiliary power unit line in terms of when customers actually decide, "hey, I'm going to switch over to an auxiliary power unit instead of running my tractor to cool the cab." And so we certainly will see. What I'll tell you is that that's already been predicted in terms of the increase in market that will come within our -- and it's in our guidance associated with auxiliary power unit because there's a prebuy that's taken place associated with the new tractor efficiency requirement that's coming at the beginning of next year. And so we already had that kind of built in. So I don't know that we'll see anything differentiated from that perspective.

Helpful. And then on the resi side, I think you had a little bit of outperformance for sure in the first quarter. When we think about the updated price expectations for the enterprise, the industry obviously is still contending with tariffs. We still see Trane as the best positioned player in the industry with regard to tariffs. You raised that outlook, was it 0.5 point for enterprise-wide price. I guess the question that we were wrestling with is, even if all of that is on your resi and unitary portfolio, it's still substantially less of a price increase than some of your peers are talking about. So can you maybe talk a little bit about your approach here to pricing and how you're positioned competitively?

Yes, I'll start, Noah. We did raise our full year revenue target about 0.5 point. It's covering some of the headwinds that we're anticipating between the first quarter and the second quarter in the Middle East of around $75 million. But think of that revenue raise, it's contributing both to price and to volume. So price, we started out about 1.5 points in our January earnings call. Think of it as probably closer to 2% now on the call last week, and -- but there is some volume that's coming through there in terms of the guide as well. .

We did implement a price increase in the residential business in the first quarter. We announced that in February, and it took place -- or it was effective April 1. Since then, we've certainly learned more about the raw material inflation and Section 232 tariffs and such. And those are more inflationary than where we were in January. I do think given we've had over a decade in in-region, for-region manufacturing strategy, we've got 21 factories in the Americas and 20 of those are in the U.S. And as Donny was just talking about the business Stellar Energy we acquired with operations in Florida, and we're expanding, think of it probably 2x the size of the business for capacity.

We're expanding in a new facility in Texas. So by the end of the year, we're going to have 23 locations in the Americas with 22 of them in the U.S. So over 95% of the products we sell in the U.S. are either manufactured and/or assembled in the U.S. So on a relative basis, we may be better fared, but it's a little bit more inflationary. And I don't want to get in front of our businesses in terms of any of the pricing they may do for the year. But our goal is to leverage the business operating system with this inflation, find the offsets, find the way to mitigate. And when you put a lot more demand on your suppliers, you can generally try to mitigate some of that cost. We look for alternate sources of supply.

And then with higher costs, we'll look at pricing as another lever there. But we've unfortunately had to have a really good track record here over the last 5-plus years between inflation and supply chain and tariffs. And we've, over time, stayed ahead of that. So maybe some near-term pressure, but we're confident in the guide that we've got for the year. We'll manage it.

That's a good segue just to ask about the organic leverage comments you made earlier. You reiterated 25% plus organic leverage for '26. Just give us some more colors on the driver of how leverage improves through the back half?

Yes. Think of it as high 20s in the second half of the year, and a lot of it is due to volume. And a lot of it is coming through Donny's business, but also in our EMEA HVAC business, commercial HVAC business, too, with just higher volumes. So the factories absorb costs much better in the second half, so you get the leverage on the volume growth. We had some tough comps last year with some underabsorption in factories, whether it be in residential, we're taking a lot of days out in the fourth quarter, lower volumes coming through our transport facilities.

And then, of course, you've got the higher volumes coming in with low teens growth in the second half for our commercial HVAC business. So that's one piece of it. We're going to keep accelerating investments into the second half of the year. I think about back to the factory piece of transport and resi, they were deleverage situations last year. We're not going to deleverage in those business. We're going to positively leverage. So a lot of confidence that we're going to drive high 20s-ish organic leverage in the second half. And at the same time, we're going to keep accelerating those investments to go drive the growth for many years.

And then first, can I confirm that the M&A and FX are still 700 bps headwind to reported leverage this year? Is that right roughly?

That's right. That's right. And think of it as Stellar Energy being probably the biggest piece of that, around $500 million of revenue. We identified about $0.03 of positive earnings contribution this year, $11 million of OI. And a lot of that is the investments we're making this year that will carry over into 2027. But from a lean factory perspective to starting up a new factory with the under-absorption you're expecting to get that and inefficiencies, we're confident that this will be a great -- it's a great business now. It will be even stronger business as we think 2 to 3 years out.

Could you see in time -- you talked about this being a mid-teens EBITDA business. Maybe just grouping in Stellar and LiquidStack, how you think about the opportunity for these types of businesses to eventually become comparable to corporate average margins or even margin accretive?

I'll start. We did say mid-teens plus EBITDA for Stellar. And look, we like to underpromise and overcommit. So the goal is going to be let's get this business in really good shape to manage the capacity. We've got a great team that we've now brought into the Trane Technologies family. And Donny is going to keep pushing on pulling those investments in as fast as we can to have a resilient business for the long time. And lean is just part of our DNA. Donny, do you want to spend a moment on LiquidStack?

Yes. I mean I think the same holds true for LiquidStack. I think the reality with LiquidStack is it becomes now us playing in a whole different space with our customers in that liquid cooling element of a data center, and us actually being able to develop new products for the customers based on the total system design and then scaling that production capability. In fact, the factory that we're building in Fort Worth for Stellar, we're also going to be producing CDUs in that factory that would be LiquidStack CDUs that we'll be producing there.

Good stuff. Looking forward to seeing it all play out. And I think that's about all the time we have today. Gentlemen, I really appreciate the dialogue. I hope everyone has a great rest of their day and week here at the Oppenheimer Conference and see you all soon.

Thank you.

Thank you.

Good morning. Welcome to the Trane Technologies Q1 2026 Earnings Conference Call. My name is Lisa, 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. [Operator Instructions] I will now turn the call over to Zac Nagle, Vice President of Investor Relations. Please go ahead, sir.

Thanks, operator. Good morning, and thank you for joining us for Trane Technologies First Quarter 2026 Earnings Conference Call. This call is being webcast on our website at tranetechnologies.com where you'll find the accompanying presentation. We are also recording and archiving this call on our website.

Please note that statements made today are forward-looking and may differ materially from actual results as detailed in our SEC filings. This presentation also includes non-GAAP measures explained in our news release and presentation appendix. Joining me today 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, Zac and everyone, for joining today's call. Please turn to Slide #3. I'll start with a few thoughts on how our purpose-driven strategy continues to fuel strong performance over time. The dynamic global environment and rising demand for power is pushing customers to think differently about energy. With our leading innovation, Trane Technologies is uniquely positioned to win. Our high-efficiency systems and smart controls help customers save energy, lower operating cost and increased resiliency proving that sustainability and performance go hand-in-hand.

Our strategy is built on a strong foundation, our robust business operating system, a powerful cash flow engine and an uplifting engaging culture. This formula positions us to deliver differentiated long-term value to our people, our customers, our shareholders and our communities.

Please turn to Slide #4. Q1 was another strong quarter, marked by exceptional enterprise organic bookings, up 24% and a record backlog of $10.7 billion, up over 30% versus year-end 2025. We delivered organic revenue growth of 3%, led by our Americas Commercial HVAC business and double-digit global services growth. This strong performance translated to adjusted EPS growth of 7%. Our Commercial HVAC businesses delivered outstanding performance, particularly in the Americas, where our commercial HVAC bookings reached an all-time high, up approximately 40% year-over-year, with Applied Solutions bookings up over 160%. Our third consecutive quarter of applied bookings growth of greater than 100%. The strength of our Commercial HVAC business is further underscored by our combined Americas and EMEA backlog, which is up approximately $2.7 billion over year-end 2025. This includes approximately $1 billion from our acquisition of Stellar Energy, a leader in modular data center cooling solutions.

We are exceptionally well positioned for continued growth in 2026 and beyond. Our exceptional bookings and record backlog provides strong visibility to continued market outgrowth and revenue growth acceleration in the second half of the year. Our robust and rapidly growing Commercial HVAC pipeline across key verticals, including long-term capacity and master purchase agreements in data centers bolsters our confidence in the long-term outlook.

Our services business, which represents 1/3 of our enterprise revenue, continues to be a consistent and durable growth driver, boasting a low teens compound annual growth rate since 2020. Additionally, we anticipate residential market tailwinds in the second half of 2026 driven by improving market fundamentals and easier prior year comparisons. The Americas transport market also continued improvement in fundamentals, strengthening the outlook for a late 2026 and 2027 recovery. Operational excellence is core to everything we do, and we expect to mitigate tariff and inflationary pressures through our business operating system. Altogether, we are raising our full year revenue and EPS guidance, which Chris will cover shortly.

Please turn to Slide #5. As discussed in our Americas segment, Commercial HVAC continued its standout performance with bookings up approximately 40% and revenues up high single digits. In high-growth verticals like data centers, customers expect innovative, highly engineered solutions tailored to their unique needs. This plays directly to our strengths, including leading innovation, system expertise, proven operational excellence and the capacity to grow with our customers as their needs rapidly expand. These factors and the expertise of our direct sales force enabled us to capture a significant share of these opportunities.

Turning to residential. Bookings were up low single digits, while revenues declined mid-single digits, exceeding our expectations entering the quarter. In Americas transport refrigeration, bookings were up double digits and revenues were up low single digits, significantly outperforming end markets, which saw truck, trailer and APU segments down double digits in Q1. EMEA results were solid and consistent with our expectations, excluding headwinds from geopolitical events in the region. In Asia Pacific, Commercial HVAC bookings were up high 20s and revenues grew low single digits in the quarter, led by the rest of Asia, where bookings were up approximately 50% and revenues were up low single digits. Now I'd like to turn the call over to Chris. Chris?

Thanks, Dave. Please turn to Slide #6. Dave covered many key points from this slide earlier, so I'll keep my comments brief. Organic revenue growth for the enterprise was solid, up 3%, led by services growth, up double digits. Enterprise organic leverage was in the high teens and adjusted EPS growth was 7%, demonstrating the effectiveness of our business operating system and driving operational excellence throughout the P&L.

Please turn to Slide #7. Margins across the segments were largely in line with our expectations, with the Americas and Asia operating margins up 10 basis points and 90 basis points, respectively. EMEA margins were impacted by expected first year acquisition and integration-related costs and lower revenues than forecast in the Middle East. We also maintained high levels of business reinvestment across the portfolio in the quarter, driving our flywheel of innovation and growth. Now I'd like to turn the call back over to Dave. Dave?

Thanks, Chris. Please turn to Slide #8. Our outlook for 2026 remained strong, supported by our record bookings and backlog. Our Americas Commercial HVAC business is executing at a very high level, significantly outperforming end markets. We expect continued strength in data centers and other core markets like higher education, government and health care, just to name a few. Our Q1 book-to-bill was approximately 150% and and our backlog is up nearly 70% year-over-year, strengthening our visibility into 2026 and beyond.

Based on our exceptional backlog and the timing of customer deliveries, we expect approximately 10% revenue growth in Q2 against a tough prior year comp of mid-teens growth. We expect revenues to accelerate to low teens growth as we move through the second half of the year. In residential, we had a strong start to the year. We expect Q2 to be flattish, pivoting to growth in the second half aided by easier prior year comps. At this early stage in the year, our outlook remains prudent with flat revenues expected for 2026.

Turning to transport. Market fundamentals continue to improve and are increasingly supportive of a recovery in late 2026 and healthy growth in 2027. Our market forecast remains largely unchanged, with a mid-single-digit decline expected for full year 2026. We expect Q2 to be down roughly mid-teens based on the timing of large customer deliveries within the year. As we've discussed previously, given our strong mix of large customers, orders and revenues can be uneven from quarter-to-quarter. We significantly outperformed the transport markets in the first quarter and expect to outperform for the year.

Turning to EMEA. Our results to date and expectations for the year are largely unchanged, excluding impacts related to the Middle East. First and foremost, we have prioritized the safety of our employees in the region. We do expect continued headwinds in the second quarter of approximately $50 million in revenues, representing an estimated $0.05 EPS impact in Q2. We continue to monitor the situation closely.

In Asia Pacific, China remains challenging with dynamic macro conditions. We expect the rest of Asia to be stronger than China in 2026. Overall, our outlook for the region remains flattish for 2026. Now I'd like to turn the call back over to Chris. Chris, over to you.

Thanks, Dave. Please turn to Slide #9. Our 2026 guidance reflects the market dynamics we've discussed, and operational excellence driven by our business operating system. It also incorporates our value creation flywheel, continued investment in innovation, market outgrowth, healthy leverage and strong free cash flow. We're increasing our organic revenue growth guidance to approximately 7%, the high end of our prior range of approximately 6% to 7%. Our reported revenue guidance moves to approximately 9.5% with unchanged estimates for approximately 2 points of M&A and 50 basis points of favorable FX. We're also increasing our adjusted EPS guidance range to $14.75 to $14.95, were approximately 13% to 15% of adjusted EPS growth, up from $14.65 to $14.85 prior. For Q2 2026, we expect approximately 5% organic revenue growth and adjusted EPS in the range of $4.20 to $4.25. For additional details, please refer to Slide 16.

Please turn to Slide #10. We remain committed to our balanced capital allocation strategy, focused on deploying excess cash to maximize shareholder returns. First, we strengthened our core business through relentless reinvestment. Second, we maintain a strong balance sheet to ensure optionality as markets evolve. Third, we expect to deploy 100% of excess cash over time. Our approach includes strategic M&A to enhance long-term returns and share repurchases when the stock trades below our calculated intrinsic value.

Please turn to Slide #11. We are on track to deploy between $2.8 billion to $3.3 billion in 2026 through our balanced capital allocation strategy. This includes approximately $900 million for dividends reflecting a 12% increase to $4.20 per share annualized in 2026. We deployed or committed approximately $340 million year-to-date for M&A and strategic investments. Our share repurchases year-to-date through April stand at approximately $300 million, and we still have approximately $4.4 billion remaining under our current share repurchase authorization, providing significant optionality. Our M&A pipeline remains active, and we will continue to be disciplined in our approach. Overall, our strong free cash flow, liquidity, balance sheet and substantial share repurchase authorization offer excellent capital allocation optionality as we move forward. Now I'd like to turn the call back over to Dave. Dave?

Thanks, Chris. Please turn to Slide #13. The Americas transport refrigeration market remains dynamic, but the long-term outlook is strong. ACT projects the market to bottom in the first half of 2026 and recover late in the second half. ACT also expects a sharp rebound beginning in 2027 and continued expansion through the end of the decade. We expect growth as well, but anticipate a more gradual slope to the recovery. We're managing the down cycle effectively, outperforming end markets and continuing to invest in innovation, so we're well positioned as the market strengthens. .

Please turn to Slide #14. In closing, our strategy is aligned to powerful secular tailwinds that position us to outperform megatrends around sustainability, digitalization, and rising energy demand are intensifying the need for our systems and services. Through breakthrough innovation and the strength of our people, we're delivering superior performance for our customers and advancing a more sustainable future. With our proven business operating system, record backlog and strong demand, we are well positioned to deliver differentiated shareholder value in 2026 and beyond. And now we'd be happy to take your questions. Operator?

[Operator Instructions] The first question today comes from Chris Snyder from Morgan Stanley.

I wanted to ask about the Americas applied orders. Just kind of keep getting better despite the bar already being very high. I think this quarter, you're up 160%. I guess my question is, are customers ordering with longer lead times than they were 6 or 12 months ago. Like when you guys look at this backlog, is the delivery schedule meaningfully different versus a year ago? Just trying to figure a part of the strength is there's some extension in that lead times.

A little bit confusion. Let me try to clear it up. Look, we have published lead times for all of our products. And the published lead time on the unitary could be relatively quickly, in many cases, we have stock products. so it could be next day, all the way up through our applied solutions where you could have lead times, say, 30 weeks. So from a lead time perspective, we're very, very competitive. In fact, we also offer a majority of our applied products, quick shift programs, which if a customer had an emergency, we'd be able to respond to at a premium, but we'd be able to respond. So that's kind of the lead time side of it. Now if you're asking when customers are asking for the products, a little bit of a different question. And that could be really -- I think in the past, we probably talked about on average, and averages are always a little bit different. So we would talk about a 6 to 9 months. In some verticals, we are seeing that being extended. Could it be 12 months, 18 months, in some cases for sure, depending on the customer, how much visibility they want us to have to make sure that we make sure our supply chain is ready as well. So it's it's -- I guess the answer is, if you're asking from a customer standpoint, for sure, it's a little bit longer. Customers want that security that they're going to make sure that we have their order, and we're able to execute to it. From lead times that we actually published that we actually can meet demand for customers, that is as it's always been.

And I appreciate you highlighting that distinction between like the customers' lead times in your own because it does seem quite important. Maybe if I could just follow up on some of the cost/tariff changes that are in the market. I guess any impact on your back half price expectations in response to that? And then just kind of maybe more broadly, we hear a lot about difficulty or challenges of producing in the U.S. and others say it's just straight up uneconomical. You guys have proved the opposite. Can you just maybe talk about the advantages of producing in the United States? And how have you been able to compete effectively while facing the higher labor costs that come from domestic production?

Yes, Chris, thanks for the questions. I'll kick off, and I think Dave will jump in. But look, tariffs and inflation, look, it's certainly a dynamic environment with many changes since our last earnings call in January. On a net basis, we are expecting more inflation, including from raw materials and tariffs in the year than was estimated, say, 90 days ago. We do expect inflation will put some near-term pressure on price costs. However, we expect to manage this for the full year and it's baked into our guide. I'm not going to size the dollar impact for competitive reasons. However, let me just share some context that I think would be helpful. We've had an in-region, for-region manufacturing strategy for well over a decade in Trane Technologies. At the end of 2025, we had 21 factories in the Americas. Of that, 20 of those factories are in the U.S. and 1 factory is in Mexico. Since then, we've acquired Stellar Energy, which added production in Florida, which we're expanding, and we're expanding capacity with a new site to open later this year in Texas. So one more thing to add. Over 95% of our products sold in the U.S. are manufactured and/or assembled in the U.S. So look, we've had a very strong track record to manage through inflation and tariffs, maybe some short-term pressure, but we've got that managing our guide, and we'll continue to leverage our business operating system to mitigate the impact of inflation, including tariffs over time. We'll look at mitigating the cost with suppliers. We'll look at alternative sources of supply. And then we'll look at pricing as necessary to offset that cost. So at this point, I don't want to get ahead of our businesses on price for the year. Our guide was around 1.5 points back in January. It's probably a little bit higher than that, probably closer to 2 points at the enterprise level now, but we'll continue to leverage the business operating system and mitigate the cost where we can and price where we need to.

Yes. And Chris, just a follow-up there on how do we stay competitive. Look, I'll brag about our operating system, right? We are a great operator at Trane Technologies. And we like our plants right here in the United States. We like creating jobs right here in the United States, and we do it, and we do it in a very competitive way. And every time I go to one of our plants, I just see all the improvements they're making from the last time I had an opportunity to visit and I just get so excited about what the future is going to look like for our company. So look, we have -- as Chris said, we have over 21 plants now in the United States, for real shortly like that, and we are very, very competitive, as you could see with our results.

Julian Mitchell from Barclays has the next question.

Just wanted to start off with a question on operating leverage. I think organically, it was high teens in the first quarter and you've got that mid-20s sort of baseline for the year. Maybe kind of walk us through how we should think about the operating leverage playing out through the balance of the year organically. And I suppose the inorganic headwind to that shrinks progressively? Is that the fair way to look at it?

Yes, I mean in the first quarter, I think leverage is consistent with our expectations. We did a little bit better in the residential business. We had a bit of a headwind in the impact in the Middle East due to the conflict. And you're right, it was around high teens organic leverage in the first quarter. We do see that improving as we move the year. So you can think around the second quarter is in that mid-20s kind of range. And then in the second half, we're in the mid- to high 20s. In terms of organic leverage, we continue to see an acceleration in the top line and then conversion to the bottom line in the second half of the year, consistent with our guide in January. We have even more conviction about the second half of the year and the guide for the year. And a little bit easier comps in residential, growing top line and transport. And we expect to have a very strict business in the second half of the year with the Americas Commercial HVAC executing on the backlog and when customers want products.

Yes. The only thing I would add, Julian, is in our resi business, and we talked about this on our fourth quarter earnings call, we're level loading. So where in the past, we would ramp up our factory and over really produce in the first 5 months of the year and then bleed that down as we work through the peak season. We've changed our playbook there. So we're level loading. So yes, we are taking a bit of an absorption impact here in the first, I'll say, half of the year, but that will obviously come back in the back half of the year.

That's helpful. And then maybe just a follow-up question on the resi HVAC side of things. Any big differences you're seeing on the one-step versus two-step sort of movement there? And what's your confidence in terms of that inventory level in the channel? And any early reads on summer selling season as it's starting out soon.

Good question. I mean, look, we're very happy with our first quarter in resi. It came in a bit better than what we anticipated down mid-single digits. As far as inventory goes in, look, as we said on our fourth quarter call, we thought it was set properly in the independent wholesale distributor channel and here we are at the end of the first quarter, and we say it's set properly. So no change to that. We have the desired inventory levels, and we're optimistic. I mean we -- at the end of the fourth quarter, we felt we could be down 5% on our resi business. We've now modified that. We think it's going to be a flattish year. But we'll see how it plays out. We're only in Q1. But early signs are we're executing well. And we're more bullish than we have been for a while in our resi business. And the team there is doing a great job executing. So we'll see how the rest of the year plays out.

The next question comes from Scott Davis, Melius Research.

So look, I want to back up a little bit. I think last quarter, you talked about the applied orders widening out and beyond just data center. Can you give a little bit of color on that? What particular markets -- I'm assuming that continued just given the orders up 160% has to be pretty broad-based. But can you talk a little bit about some of the non-data center verticals that were strong for you?

Yes. I mean I think I talked a little bit in the prepared remarks. But yes, it was broad-based, which is always encouraging for us. Look, everyone should understand, data centers was very strong, okay? Very strong. However, we had -- from a revenue standpoint, we had growth in the majority of the verticals that we track in, at least in the Americas. I think we had -- it was 9 of the 14 verticals had positive growth, so you could see that this is a broad based. We have -- I want to make sure everyone is aware, we have not lost focus on the core or what we call the core, even though data centers are very strong. I'll remind everyone that 95% plus of our account managers or sales force do not call on data centers. And they have deep domain expertise in these verticals. And that really allows us to win. So broad-based growth, mega projects continue to grow. Data centers continue to grow. And obviously, our order rates continue to grow, and it's going to be a great year for Trane Technologies.

Scott, I'll add on the backlog. The growth in the first quarter was -- I'll use a little bit around numbers here is around $3 billion. And of that $3 billion, around $1.2 billion was from acquisitions, and of that was around $1 billion for Stellar Energy. So that means we had about $1.7 billion, $1.8 billion of backlog growth from the core, from organic growth in the business. So a very strong quarter in terms of backlog growth. We typically have seen plus or minus a couple of hundred million dollars to the backlog in any quarter over the last few years. So very strong momentum in orders and backlog and the pipeline continues to remain very strong.

And are you guys operating full out in your factories and your applied facilities right now? Are you fully capacitized at this point? Or do you still have a little bit of flex?

Yes. I mean there's flex in some of the factories. Obviously, we're operating at a very high level right now. But capacity is one of those things where everyone will -- how you're defining it, right? Right now, the majority of our factories were only running two shifts. So -- in fact, some were only running one shift. So we certainly have that to fall back on. With that said, I would also tell you that we have expanded our capacity certainly over the last 3 years, and we have plans to continue that expansion. In fact, we're making those investments as we speak. Stellar, Chris talked about earlier. We also have expansions going into our -- some of our applied factories as well.

Yes. And Scott, we did raise our CapEx target for the year. We're generally 1% to 2% of revenue. We raised it to 2% to 3% of revenue, a, to capture the expanded production in Florida and in Texas for stellar and also to make sure we are staying ahead of where we see the growth, especially in our applied commercial HVAC business. So still targeting greater than or equal to 100% of free cash flow even with that higher CapEx spend for the year.

[Operator Instructions] We'll take the next question from Andy Kaplowitz from Citi.

So -- like obviously, data centers continue to be strong. But I'm curious like if you look globally, you look at a market like Asia Pac, I mean, it's still a tough market, as you said, but you did have, I think, 50% growth ex China in bookings there. So you see maybe a little bit more broad-based growth. I don't know if it's led by data centers in places like that or maybe in Europe as well?

Yes. I mean, data centers are strong globally, okay? Once you get outside of the U.S., they tend to get smaller in size, but they're strong everywhere. Look, we had some -- we have -- our Asia team, we're still calling Asia flat for the year. But outside of China, we had some nice growth, nice orders. Team's got a very robust pipeline that they're tracking there. So we're going to continue to execute. I'm still optimistic that we could hopefully do a little bit better than flattish in our Asia Pacific region for the year. And then the team is certainly executing to that goal as well. In Europe, look, I mean, Europe is actually -- was relatively strong for us in Q1. I mean orders were up as we expected as was revenue. So we're not concerned at all about Europe, and that team continues to be very innovative and satisfying their customers in creative ways. So we're happy with Europe. Obviously, the Middle East, we could all understand what's happening there, and we talked about that in our prepared remarks. But the good news is all of our employees are safe in the Middle East and let's hope that conflict gets over in the near term here.

Agreed. And I'm curious about your continued outperformance in Americas transport pretty strong in Q1 versus the market. I know you expect a recovery late this year, maybe a more gradual recovery than ACT. But maybe you can talk about why you continue to outperform sort of the new products in the market and of the outlook as you move forward there?

Yes. I'll sound like a little bit of a broken record here because we love to talk about the innovation that we're putting out into the marketplace. And the transport markets have been down for years now. I think we all know that. And we've been saying for a long time that we're going to continue to invest even in down markets because that's what makes great companies in the long term. And you see some of those innovations and the efficiency of our products, the quality of our products. It's -- you could go out and do a sample of the trucking industry and you'd see the the gold star is Thermo King, it's a gold star for a reason. And that team will continue to execute. We're seeing some nice signs that hopefully, this market turns around. We're pretty confident it's going to turn here in the back half of the year. It's late, but 2027 looks like it's going to be a very strong market. And if you listen to ACT they would tell you it's going to be a strong market and continue to build through the rest of the decade. So we're well positioned there. And I'll congratulate my team there for execution quite well here in the first quarter.

Next up is Amit Mehrotra from UBS.

Dave, I just would like to see if you can talk about what you think your TAM is within data centers and how Stellar may change that. When I think about Trane and data centers, I think large applied chillers, but obviously, there modular systems now with Stellar and obviously, the orders and the conversion is very good. So can you just talk about what that does for your competitive offering within data centers and really kind of what it does for your TAM?

Yes. Sure. Well, let me start with Stellar, okay, because I think that's a great business, and we're so excited to have to be part of the Trane Technologies family. Today, Stellar specializes in building modular chiller plants for data centers, okay? But if we start kind of with the end in mind as to where we see stellar. Think of this as a business that in 2 to 3 years is a $1 billion business. Think of it with mid-teens plus EBITDA serving many verticals, not just data centers. The skilled labor scarcity is not unique to the data center vertical. It applies to all of our verticals, and we know that this is a great solution to help alleviate some of those shortages. So we're very excited to have Stellar as part of the acquisition. If you look at it today, it's $1 billion in backlog. I think about half of that shipping here in 2026. Modest accretion in 2026 as we'll be investing pretty heavily there. Chris talked a little bit about some of the expansions, but we're really deploying our operating system. So we'll continue to deploy that and make a good company, an even better company. And so I think it's going to -- we'll continue to see benefits with our Stellar acquisition well into the future, and we're excited to have it be part of the family.

The other addition that we made was in LiquidStack, which really expanded our offering in CDUs. So another nice addition that's off to a great start, and we'll continue to leverage that. They also have some technology, kind of futuristic technology as well that we think could be part of the solutions and data centers in the future. As far as our position in data centers, we like our position, right? We're thought of it as the thermal management experts, okay? We're working with hyperscalers. We're working with other influencers, chip manufacturers and designing what some refer to as reference designs, others refer to as data centers of the future. But look, we get called on for a reason because of our expertise. And as far as the TAM goes, it keeps expanding, okay? And the data center vertical keeps moving with innovation, and we keep pushing some of that innovation and developing that innovation. But it's a very, very strong vertical today, and it will be a very strong vertical well into the future.

Great. And maybe just a follow-up to that. I don't know if this question is for Chris, maybe if you can talk about data center service revenue and when you expect that to kick in? Obviously, services 1/3 of the business mix right now. And maybe you can just help us think about how much of that is already data centers and really like the mix within mix is data center service revenue ramps up as the mix within that mix of service positive.

Sure. I mean, again, with the end of mind, I mean, the service opportunity with the recent last few years' growth in data centers is still well in front of us. We've been in the data center vertical for decades. And so there's been a service component, but it's been 1 of 14 verticals prior to the last few years with the significant investments there, Amit. So that's very much in front of us. We think about complex applied systems. They require the OEM to be connected. They require the OEM to provide service and maintenance and I know the last thing a data center wants is to ever have a fall to go down. So making sure that those systems and cooling systems are operating efficiently and rotation through the products is obviously very, very important. And maybe one more thing I'll maybe add on Stellar. Maybe just from a modeling perspective, as Dave said, we expect about $500 million of revenue this year from Stellar. We had about the base of that business that we acquired is around $350 million of revenue. That was part of our January guide of around 2 points of revenue contribution from M&A. We also had anticipated about maybe 25% of growth off of that just based on where data center growth was going in our January guide. Now in April, we've got the entire $500 million in our guide. And think of that as probably around $50 million incremental revenue we got captured in April. But it's an exciting business. The pipelines remain very strong in that business as well. And to Dave's point, we've got a lot of investments to make to take this from a $350 million business to a $1 billion-plus revenue business in 2 to 3 years.

Yes. Just one other comment on services. I think I've told most of you about our investment that we made here in North Carolina and our training facility. It's really the largest of its kind. I had the opportunity of the data to speak to a class. And this particular class was there, there were technicians getting certified in data center commissioning, okay? That's how detailed we are in our training. And I'll tell you, I was so impressed with the talent of our technicians and the excitement that they had on their face. I went home and I told my wife, I said, well, I come back -- when I come back next time I'm going to be a service technician. It's just somewhat -- it's going to be so fun and there's going to be so much growth in that space. But look, we're going to -- as Chris said, a lot of this data center service works in front of us, and we're making sure we're ready for it. And it's going to be a really fun journey here.

I think you will make a great technician, by the way.

I was okay with me being a technician, but I had to do it now.

Andrew Obin from Bank of America has the next question.

Dave, I think you're probably doing better than a technician. That would be my guess. But maybe a question, there's a lot of conversation about behind-the-meter power and sort of resulting changes in HVAC infrastructure in data centers. Can you maybe talk about absorption chiller technology at Trane? What do you guys have? Do you need to add capacity? And does technology need to evolve to support behind-the-meter needs?

Look, I think behind the meter needs are not only in data centers, I'll start with that, but I'll come back to that. But as far as in data center sure, we're starting to see that. As far as absorption chillers, yes, that's a technology that has been around for a while, okay? It's certainly getting some conversation now in data centers. But I would tell you there's a lot of other types of technologies that we're looking at as well that probably have less water usage, and you could get some of the same benefits -- a little bit careful here. Think of it as abiotic cooling type solutions that we're working on in clever ways. So that's another one. There's certainly a lot of conversation around direct current in data centers. So that's another technology that we're doing a lot of work on. All that's going to be in front of us. And if you look at -- and there's a couple of some of the larger chip manufacturers that will actually publish some of these reference designs. It's very interesting to go out and look at some of what our team is working on there, and it's pretty explicit as to what some of those technologies could be in the future. But the behind-the-meter, yes, that's happening. And I would also tell you that we have a philosophy that, that will happen in all buildings, right? And long term, we believe that all buildings will be smarter. All buildings will be more resilient. And we believe that we're going to be part of the solution there with our agentic AI software tools to make buildings a lot smarter. And that's really going to be part of our future growth projections that we have going forward because we know that most buildings waste about 30% of the energy that they pay for. And when you can solve that problem, is solving a great problem for the planet from a carbon footprint standpoint. They're also creating great paybacks for the customer. And you probably heard me say before, it is green for green, right? It's great because it's saving our customers a lot of money, and it's also really good for the environment. So data centers is 1 part of it, but don't leave out the core because that same concept is going to take hold there.

Excellent. And maybe once again, stay on the data center topic. Your client Stellar Energy. Can you just talk about -- and also, obviously, you have How has dialogue changed with customers since these acquisitions? And specifically, your ability to increase your service presence inside data center with these acquisitions. How should we think about that?

Yes. I mean I don't think our dialogue has really changed with the end customers. We kind of always led with our deep domain expertise. We like direct relationships with the customer, okay? So that's not new to us. We have the broadest portfolio in the industry. So we're able to make sure that we're thinking at a system level, not a product level. So that hasn't changed. Look, the service organization, and I've said this before, when customers, whether they be a hyperscaler or a colo, when they come and see the capacity that we have within our service organization, you can see their eyes light up because they see the expertise that we have. They see how we train our associates and they just -- it alleviates a big -- if they had a fear that if something went wrong, we'd be there, that fear gets alleviated very quickly.

Next, we'll take a question from Noah Kaye, Oppenheimer.

Maybe just to go back to transport and the outlook. You just give us a little bit more insight on what drives your back half conservatism versus ACT. Anything that you may be seeing from the pipeline to drive that? Or we're just kind of leaving this as upside for the year.

Yes. I mean, look, we have several models, okay, ACT as one of them that we use to do our forecasts. And so don't just base everything on ACT. Look, we think it's going to have an uptick in the back half of the year. It's probably the oldest fleet of vehicles that we've seen in a long, long time, maybe 30, 40 years. I mean this -- these units eventually have to get replaced. They cost too much to operate if you don't. You have the spot rate that's now exceeding the contract rate, which is always a good sign. We're bullish that this market is going to start to come back. And when it comes back, it's going to come back relatively strongly. We don't quite have the same inflection point in 2027 is ACT those. We think they're being a little aggressive there because I'm not sure that the trailer OEMs could respond to that type of an increase. But we're bullish about -- I think it's going to trough here in the second quarter, and I think it's upside in the back half of the year and really for several years to come. So this is a great business, and it's had some tough years. But look, having personal experience of running this business at oen time in my career, we will continue to be very, very successful in our transport refrigeration business.

Yes. Maybe just want to ask about some of the improvements that the company made to the reference design for large-scale data center deployments. It's a little bit of a piece with your comments earlier on innovation, but there's more of a benefit from heat recovery integration, larger air cooled chillers. How far in front of kind of the market is this in terms of the innovation trend? Are you already starting to see this kind of reflected in your orders rates or your pipeline?

Yes. I think you got to take a reference design and think it's probably out there. We could argue whether it's 12 months or 24 months, but it's probably somewhere in between there. I think -- like I said, I think you could think of buildings being smarter, I think you're going to see chillers being smarter. And we're doing a lot of work around that. And think of it as taking different elements that may not be part of that system today and embedding them in the system. So having a chiller that knows when to run in a free cooling mode only, or having a chiller that knows when to run in a vapor compression cycle and for how long, understanding weather patterns and the impact that they have on these micro grids that are being created here with these chiller farms and knowing when to cycle which units, that's all part of the efficiencies. And then you start thinking about the water flow. By the way, they're all closed loop systems, but the water flow within the system and the velocity and the needs and the pressure. So there's a lot of complications here, and I'll get over my skis relatively quickly, but I know that we have some smart technical engineers that work with the hyperscalers and the -- of the world that love to have these conversations. And little changes make a big difference, and it can have a big impact on the bottom line of a data center.

Nigel Coe from Wolfe Research is up next.

I want to go back to this AI reference design that you've been highlighting, Dave. But before that, I just want to make sure we cover just a couple of guidance points. The resi outlook for flat for the year, you got flat for 2Q. Seems like 1 comp, the back half looks super easy or rather super conservative. I just want to make sure I understand that. And I think that ACT did raise the reefer builds for the full year, you're not raising your market outlook. So just wondering what that disconnect about.

Yes. Well, I mean I'll start with the TK side of it. Look, we didn't -- we thought that TK we think that ACT maybe was a little bit -- maybe wasn't very accurate at the end of the fourth quarter. So them raising their number didn't really change our outlook very much at all, okay? Like I said, we use ACT. We use other sources, including our own internal models. So we're happy that it's not a negative number for ACT. I think it jumped up, I think it's 6% now, what they're projecting. We'll see out of the year unfolds here, but we're off to a good start in the first quarter. Some of that had to do with timing of some large customers, as I talked about in our prepared remarks. But at the end of the day, we're starting to see some some growth signs in Thermo King, which I haven't been able to say in a long time. So I'm proud of what that team has been able to do.

Nigel, I'll add on residential. We took the full year guide up to about flattish versus flat to down 5% in January. Off to a strong start, but it's also just the first quarter of the year, right? We're just about to enter into the cooling season calling the second quarter around flattish, and maybe around mid-single-digit growth in the second half. But I mean, our teams are ready. We've talked about inventory in the channel is in a very good spot just like it was 90 days ago. And we'll see how the year plays out, but we'll let like to put it out in this outlook and a lot of confidence in the full year guide.

Let me know if you need a unit, okay, Nigel, you could help us out.

Yes. Well, I just replaced my unit, but you never know, maybe another year or 2. And then just on going back to data center -- so go back to data center. You mentioned DC power and you seem to indicate you wanted to those opportunities. So I'm wondering, do you want to be a DC power sort of equipment provider? Or are you talking about sort of realigning your equipment to be DC power native. Just want to clarify that. And then on the AI reference design, to what extent is that helping drive higher content for Trane. I'm talking about chillers and the whole integrated unit as opposed to just selling pieces of the puzzle.

Yes. I think on the DC question, absolutely. It's -- we're not going to get into DC power, but we're going to make sure our system can work on DC power. So think of it like that. As far as the reference design, look, every reference design I've seen as chillers in it. I would also tell you that in data centers, as in other verticals, we love to think of it at a system level, and we have the opportunity to think at a system level based on the breadth of our portfolio. So we're not wed to any particular component within that system. We just wanted all to say, Trane Technologies at the end of the day. And when we sit down with the influencers in the data center vertical and work on reference designs, we're plugging and playing lots of different products and derivatives of those products that could be in a pipeline of our own NPD pipeline for the future. We're very happy with our position in data centers. We believe that the data center vertical will be strong for the foreseeable future, and we know that we're going to be a big part of that.

This does conclude the question-and-answer session. I'd like to turn the call back to Zac Nagel for any additional or closing remarks.

I'd just like to thank everyone for joining today's call and wanted to let folks know we'll be around for questions, as always. So please feel free to give us a call. Also we're looking forward to seeing many of you on the road here in the second quarter, and we'll speak to you at the end of the second quarter on our earnings call. Thanks again. Bye.

Once again, everyone, that does conclude today's conference. We would like to thank you all for your participation. You may now disconnect.

Get started again. We are super excited to have Trane Technologies with us. Again, a mainstay of our conference, and we appreciate it. We've got Dave Regnery, who is the Chairman and CEO of Trane; and Chris Kuehn, who is the EVP and CFO.

So Dave, as I walk over, I think I ask you this question every year, but maybe I'll get a different answer, maybe get the same.

If I don't give the same answer, AI will pick up, I changed words and start to interpret something.

That's for sure. But innovation, as you know, has been a focus of consistent outperformance for you guys. So your competitors are always coming for you. So how do you stay ahead? And what are the latest investments you're making? How is AI impacting your approach to innovation?

There's a lot there.

Well, I've tried to adjust, adopt, evolve.

I like it. Well, first of all, thanks, everyone, for coming today. We're excited to be here. Andy and the team always do such a great job at this conference. So it's -- it's also nice to be in Miami where it's a little bit warmer than North Carolina right now.

Look, as far as innovation goes, it's about consistency. And people always ask me, they say, well, why are you the innovation leader in the industry? And it's like it hasn't happened because of an event, okay? It's been decades that we've consistently invested at a very high level in our company. And it's part of the philosophy as to why we put a model out that says we're going to leverage at 25% because we want to make sure that we always have the opportunity to invest in ourselves. It's the safest investment you will make.

And as a CEO, I told the group yesterday the same thing that the easiest decision that a CEO can make is cut your investments because you know what happens in the short term? It falls to the bottom line. You know what happens to the long term? We could define what long term is. But it's usually not a really good outcome, okay? Because you start to have -- you don't have innovation. You start to have a sales force that doesn't have anything new to sell. You start to be knocking on the door selling the same thing you've sold year after year, and it's a vicious cycle of bad things that happen.

So look, we're going to continue to invest heavily in our business. It's core to who we are as Trane Technologies. And I'd also tell you that it's not just the amount that you invest, it's the process you have around how you invest. And we have a gate process that's very detailed that all investments go through. And it really ensures that you're not having do over loops.

So you ask the questions upfront. And we've been able to really hone this for over a long period of time to really get it really exact so that we know that if we're launching a new product, we're going to hit the mark. We know that if we have an investment that we're making in the channel, we know what we're going to be up against, and we're able to really perfect that and really be able to execute at a high level.

As far as what we're investing in, I'd say everything, but that's not the right answer that you're looking for. But look, we're doing a lot with AI right now, okay? And at lunch, I'll be on a panel, we'll talk more about this. But we're doing a lot on the Level 5. So think of it at the application side, and it's really about how do you make buildings smarter. And if you just get your head around how do buildings become smarter and more resilient, and I'll talk more about this at lunch, but you could then understand the investments that we're making in AI. We're also doing some work with our virtual engineer, okay? It's called ARIA. And remember, our service business is about 1/3 of our portfolio. And this virtual engineer makes our technicians smarter every day in front of their customers. And it's not just about knowing when you're connected to the assets, what's there, what potentially could be wrong, you could ask a query.

So I was with a group of technicians a couple, I guess, last week. And I was telling them like my mindset here is that I want you to be smarter in front of the customer, and then you could just see their eyes open up like, oh, yes, I got it. And I mean, it's like I have a pressure drop. This is the unit, scan the barcode, goes back, reads the bill of material, knows what potential solutions can help solve the problem if the technician doesn't already know. It's very, very powerful. And it's going to make us even a better service company, although we're -- we're the leader in the industry today. It will make us even better in the future. So that's just a few things.

I mean we continue to invest in our channel. We continue to invest in our service organization, just put in a very large training facility in our North Carolina campus, all built around our technicians, by technicians to help train them. They were telling me when I was visiting this last week, they've already had over 3,000 students. This thing opened not too long ago, I think, but I don't know when it opened maybe October.

December, November.

So there's a lot of traction there. We're investing a lot, too, in apprenticeship programs. And the whole thing is about how do you create career ladders in our organization from hourly all the way through. And we have a lot of investments in advancement -- tuition advancement programs where in the past, it used to be -- if you had an associate that want to continue their education, even at a trade level, it was, well, you have to put the money upfront. If you get a passing grade, we'll refund you the money. Well, we switched that around. We said, we'll advance you the funds because we really want you to become better as an individual and better for our company.

So just a wide variety and obviously, new product development, and we're never going to stop investing in NPD. So we consider ourselves lucky because we generate a lot of cash. We have a great organization. And despite the questions that I get on every earnings call, our model is still going to be 25% leverage because I want to make sure that we have lots of dollars available to invest in ourselves. And you want me to because it's the safest investment we'll make, and it really creates the long-term growth that we've been able to see for the last 5 years.

So I thought we were going to set a new target of 35% today. I can't believe it. I'll move on from that. So I have about 12 questions in my next one, so I'm going to try to just separate it into 1 or 2. Maybe just quick updates on anything you're seeing in Q1, just to get it out of the way. It's obviously shoulder season in residential. We assume no change to the down 20%, although furnaces are probably running pretty hard in North Carolina and places like that. So anything you're seeing on the resi side or just kind of...

Yes, why don't I jump in? We won't provide an update today, but maybe I'll just remind everyone what we did say about the first quarter. We expected about flattish growth in Q1. Think about strong growth in commercial HVAC in the Americas in the 7% to 8% range. It's a little lower than what the growth has been in that business, the prior quarters. But think about aligning the backlog with what the customer required delivery dates are, and that's how we came up with the 7% to 8% growth. So there are more orders that are turning into revenue as you move throughout the year.

Think about the second half of 2025 and the inflection of the order growth in our commercial HVAC Americas business, over 30% growth in the second half of '25, much of that being Applied Systems. Generally, 9 months is a good range or average to use from the date of the order to the date of shipment. So that's why that revenue starts to inflect more, Andy, in the second quarter and the third and fourth quarter of the year.

But back to the first quarter, why flattish growth? The largest piece would be residential. We guided residential down about 20% in the first quarter. It's really due to the tough comps in first quarter of 2025. That business was up high teens last year. And looking back now, could it be from a few different reasons, probably a prebuy ahead of the refrigerant transition and maybe a prebuy ahead of tariffs coming into effect. That's really the drivers of the outperformance a year ago. So think about those being the 2 biggest drivers. We'd expect about mid-single-digit growth in EMEA and our Asia business to be around flattish for the first quarter.

That's helpful, Chris. And Dave, we'll definitely get to data centers, as I know you're aware. But...

You have a bet with someone...

How many times we're going to say it. I haven't get to it yet.

We're very strong in the data center vertical. But go ahead.

You haven't won yet. So you talked about 12 or 14 verticals growing with retail turning around and office coming back. So maybe just from your perspective, ex data center, would you say that commercial HVAC is better this year than last year? Like how do you...

Better 2026 versus 2025?

Yes.

Well, look, we're growing in 12 of 14 verticals. I'm not sure the market is growing in 12 or 14 verticals, right? And it's really because we stay focused on all verticals. And I know the hype is around data center, so I'll bring it up. Doesn't count...

Wait, I think you look...

But look, I was telling the group earlier today that 95% plus of our account managers or sales associates, which are all direct, never call on data centers. never, right? They're calling on what we would call our core verticals. And it's -- they have so much expertise in those verticals that we capitalize on the opportunities that exist. And the deep domain knowledge that they have in these verticals at a local level is extremely impressive. If you've ever been to one of our sales offices, they'll do deep dives into verticals. And it's -- I mean, I don't know all this, obviously, right, because they do because they live it every day. And it really allows us to capture the opportunity.

So look, we were very strong in the fourth quarter in data centers. We were very strong in Higher Ed. We were very strong in retail. I'm not sure retail has come back. We were very strong. We were very strong in office, right? And you can look at vacancy rates, okay? We were strong in office all year long. So we'll see what 2026 brings, but I'm optimistic about the capabilities that we have within our channel and the strength we have in that channel to go find opportunities. And maybe there are some companies, I don't know if this is true that are just running after data center business, that's fine because we'll give them a fair run, but we're also going to stay focused on our core verticals.

You're kind of leading me in your answer, but is there anything that changes in retail for that to turn? Or it's just what your penetration is? And then you've taken us to like, was it 55 Water Street. So we know why office can be strong for you, because you're kind of digging in, you've got the sort of best salespeople, but the duration of that?

I mean the retail is a broad-based vertical, okay? So it's not just any particular big -- it's not like a mega project that is going to change retail, right? It's really -- it's across the country, and it's a lot of groundwork, right? And it just goes to the strength of our channel.

What some people don't realize is that I tell people we have a direct channel and they're like, okay, so they're calling -- they have account manager or sales associates that call directly on customers. Yes. But they call on all 5 influencers within a sales process. So they'll call on the end user, they'll call on a general contractor, they'll call on a mechanical, they'll call on an engineer, they'll call on an architect. Do you know how much architects and engineers buy? Pretty close to 0, okay, other than maybe the building they reside in. Why do you call on them? Because you want to become the basis of design. You want them to understand the capabilities that we have in our portfolio. And when they do, that becomes the specification. And when you have it specified, that tends to start everything else moving.

If you do not have a direct sales force, you may or may not call on all those influencers. But I would tell you that when you do, your probability of winning is very, very high. And so one of the -- I was group earlier was the most undervalued piece of Trane Technology, the power of our channel, the power of our channel, whether it be -- on the commercial side or whether it be in our service business, it's the power of our channel.

So I am going to bring up data centers now. 120% commercial HVAC Americas order growth. So we saw it across our sector to some extent, at least the companies that are well exposed. So based on the conversation with the customers, I guess we wonder about the sustainability of the recent surge. How do you think about that? How should we condition ourselves? We think 120%...

I'm not sure 120% is going to repeat itself all the time. But I will tell you that the pipeline is very strong. And I said that at the end of the third quarter, and I've been in this industry a long time. I've never seen a pipeline like we have right now. I said at the end of the third quarter, I said at the end of the fourth quarter. There is a lot of activity that's happening. And I know everyone will point to data centers, and that's certainly very, very strong. But we see activity in many verticals, high-tech industrial, some of the reshoring activity that's going on. We see some nice mega projects that are working in pharma, which is nice to see because life science has been down for a while.

So look, it's broad-based that we see, and we have a lot of activity that's out there. So it's very bullish for us, at least on our commercial HVAC. And Europe, we haven't talked about Europe, but Europe, look at the inflection we've had in the last 2 quarters of the year. Our order growth was, what, high teens?

Yes, high teens.

High teens. Our backlog going into the year in Europe for commercial HVAC is up 40%, 4-0. So -- and I would tell you that one would argue the markets in Europe are not that robust and they may be right, but we're doing very, very well there. A lot of that has to do with innovation. A lot of that has to do with our -- the strength of our channel.

Is it also sort of the data center wave moving over there?

We certainly have -- I'll let Chris comment as well, but we certainly have data center business on a global basis, right? So don't just think it's North America. I would tell you the size of the data centers in Europe are much, much smaller than what we're seeing here in the States, like maybe like 1/10 the size. Now there is some pipeline activity that is working that you have larger 350 meg data centers that are being planned, 300 meg data center. But we'll see how that pans out, right? We'll see if they could actually -- if the permitting and the power supply actually comes to reality. But I don't know, Chris, if you want to add anything?

I think you got it.

Okay.

No. So I asked you this question at the beginning about how do you stay ahead of competition, but particularly in data centers, right? It's one of the fastest pace in terms of innovation, obviously, liquid cooling, higher power density. So maybe talk about what you're doing now to stay on offense. And I think it's not lost on me that the power of your channel and your sales force helps you, too, and service as well. So...

Yes. I think in data centers, it's a little bit different because it's such a small population of customers, right? I mean you guys -- I'm not allowed to, but you can probably all guess the hyperscalers and you could probably even guess at least 50% of the colos that matter. But I would tell you -- so others are able to have a direct sales force there as well, right? And I would tell you that maybe a little bit of a differentiation that we bring is within our core verticals, we always think of everything at a system level, right? So it's not just about a product, we're selling a solution.

And if you ever listened to one of our earnings calls, I will guarantee one of the questions will come in and we'll say, "How did you do in unitary?" And I'm always like, "Chris answer that." Because I'm not sure exactly how because we look at it as a solution, right? We don't look at it like this building here. If I told you how this building was configured, you'd sit there and say, "Okay, does it matter? We're just really concerned about the outcome." Right? Did I sleep well? Is it comfortable? Is the space the way expected is the air fresh and clean and breath. That's what you care about. You don't care about the fact that it's a chilled water system that's using air handling system. It's located on the third floor and you're trimming the perimeters with VRF systems. But you wouldn't care that way.

Well, in a data center world, right, we bring that thermal management system to the table. So yes, we're all working with the hyperscalers. Many of us are working with other influencers like chip manufacturers or some of the larger colos. But what we'll do is we look at the trade-offs that exist within the thermal management system. And there are trade-offs that exist, right? So for example, if you're using liquid cooling with cold plates, you're going to remove the heat at the source, at the chip, right? So therefore, less heat gets wear in the data hall. So what do you need less of air handling.

We have other customers that are looking at, hey, look, we don't want to necessarily have CDUs or cooling distribution units, right? We want to develop a system that goes from chiller to plate, right? Okay. Let's talk about water purity. Let's talk about deionized water. Let's talk about stainless steel piping. That's a solution. So there's lots of -- if you go across, don't get fixated on one particular part of the thermal management system. Look at the entire thermal management system because that's where you're going to find opportunities.

You'll hear a lot about, well, 800 DC. Sure. Yes, we've heard it, too, right? We're part of that conversation. A lot of heat, right? You hear about chiller farms, right? Because remember, these data centers, a hospital could have 3 chillers, right? A data center could have 200 chillers, right, side by side. You take 200 chillers and you start rejecting heat all at the same time, you know what you create call the micro environment, right? That micro environment could be 20, 25 degrees F hotter than the ambient temperature right next door.

How could you -- how do you utilize free cooling in that environment? Are there some chillers that maybe free cooling is more applicable to that at certain times of the day based on maybe like how the wind blows. So those are the kind of things that we would bring to the equation. And little things mean a lot in the data center world. So don't -- like people sometimes in a building, if I talk to you about saving energy because you're wasting 30% of it, people will say, "Well, that goes to my income statement." In a data center world, it's really positioning it to how I could do more computing, right, because that's where the value is being generated.

Helpful. So I'm going to open it up to the audience in a second. But this next question is definitely for Chris because it's about unitary.

Okay.

I think we did well.

There you go. But you did outperform the market in '25 in unitary, but you're forecasting relatively flattish growth, I think, in '26. So I assume unitary is just kind of going to be smaller versus your applied business given -- I know Dave is going to remind me there's a gray line, all that kind of stuff. But like how do we think about unitary why you're outperforming on let's call it, in the smaller boxes?

Yes. I mean last year, think of unitary growth in that low single-digit range, flattish to low single digit. We're thinking about that the same way for 2026 in this guide we put out a few weeks ago. Lead times are back to normal, right? We're ready with quick ship programs. And so we're in really good shape for what that season is going to look like and emergency repair is a big part of unitary.

What I would add is in our commercial HVAC business, the way we've described it is 50% equipment, 50% service. And then traditionally, of the 50% of equipment, it's been about half applied, half unitary. More recently, it's indexing a little bit more to applied. It's maybe more in that 60-40 range, plus or minus. No surprise just given the strength of some of the verticals that are out there. But to Dave's point, we understand the tonnage ranges that would fall in traditional unitary. We do think about it as a system approach. And we're not there to sell oversell on unitary product versus applied. It's what's the right solution for the end customer at the end of the day.

Yes. Helpful. Any questions from the audience? Anyone? We had a question in the last session. I was like, wow. All right. So let me keep coming.

So on price versus cost, you said, I think, Chris, correct me if I'm wrong, 1.5% of price this year, kind of more normalized 20 to 30 basis points of price versus cost. Obviously, there's questions, right? There's questions about resi pricing for you guys. But I think the complexity of the business is getting more. So pricing kind of gets lumped in there and commercial is strong. So what's the conviction level to deliver 20 to 30 basis points of price versus cost? Any more color around pricing in both your...

Let me step back. I mean the last 5 years have been fairly dynamic as we work through COVID to supply chain challenges to now ultimately refrigerant transition in the resi space in 2025. And I think the strength of the company's business operating system to manage through identifying cost inputs, which we know well, how do we ultimately hedge for those inputs where we can and then making sure we can price effectively so that we get that spread. I think the company has had a very strong track record in that regard, and we'll remain dynamic that way, Andy.

Yes, a few weeks ago on our earnings call, we guided to about 1.5 points of price for 2026. At the time, the residential business had not announced their price increase. They since have. It's an up to 5% price increase effective April 1. I think though we'll probably net in the couple of points range there, right? It wouldn't necessarily be on the top up to. It would be probably a couple of points. But pricing is led by innovation, right? And to Dave's opening point here, when you keep investing in your products and you've got new products to sell to customers that are more efficient than even the previous generation from 1 or 2 years ago, not 20 years ago, but from 1 or 2 years ago, that's an easier conversation to have with the customer and then leading with payback.

So a lot of confidence on the 1.5 points for the year, but we'll remain dynamic. As I said on the call, I hope that 2026 is a more stable year in terms of those cost inputs, but we will remain flexible to make sure we drive for that 20 or 30 basis points of outperformance on price cost.

Got it. Helpful. And I have a question here on geography. We already talked about North America and EMEA. So maybe just APAC, flattish in Asia overall, but maybe discuss visibility. How should we think about what's going on in rest of Asia versus China?

Yes. You want me to start?

Sure. Go ahead.

Think of the Asia segment, it's about 6% of the enterprise revenue, half of that revenue, 3 points would be -- 3% would be in China, 3% would be rest of Asia. We're seeing China remain choppy in terms of the markets that we serve, and these are non-res markets. We are -- just to be very clear that we serve in China. Choppy markets, right? We're expecting China to be down again in 2026. We're expecting growth in rest of Asia and overall net on a flattish basis.

But I would just remind listeners here that about 1.5 years ago, our team in Asia made the decision, and Dave and I said, yes, we agree. They wanted to make sure that they had a more focused customer base that they were going to sell to in China, right? Mechanical contractors or end users, there are 2 different classes of customers. Mechanicals would be more thinly capitalized and not uncommon to see the project that you've just sold to them, they're trying to pay with the next project. That's not the best outcome in terms of getting cash in. Now end users, okay, where we can ultimately go direct to them and understand what their usage is going to be, that's the place we want to go focus. That helped contribute to some of the declines in China, but I think it's bolstered the business there to make sure that you got high confidence in the collection cycle all the way to the end.

Yes. Look, we have a great team in Asia. We really do. And you can look at their margins, they're controlling what they can control. And look, we made a decision we're going to be pretty selective on some of our customer base in China. And we believe that's the right prudent long-term decision. And the rest of Asia is performing quite well.

So we'll see how 2026 pans out. But right now, we have it called flattish. That's what we have in our guide.

That's helpful, Dave. And it was nice to hear that you guys thought that resi channel inventory largely normalized heading into 1Q. So maybe discuss confidence around that. And I know you talked -- you gave a guide of flat to down 5%. So any risks, upside, downside? Like how do you think about it? You guys got good...

Look, we do a lot of work with our independent wholesale distributors. And just remind everyone, think of our resi business with 15% of the enterprise, think about half of that is through independent wholesale distributors. The other half, we act as the wholesale distributor. So we're talking about the 7% or so part of the business. It got overstocked. It just did, right? We -- first quarter last year, we didn't really see the fact that there was a prebuy happening because of tariffs, but it happened. Then we had this refrigerant change that didn't go very well for the industry. I'm sure everyone is aware of that, so I won't rehash it. And then we had a very short selling season, right?

So all the potential avenues to burn off the inventory in 2025 really didn't happen. And we knew that we had to make a decision in the fourth quarter -- we had to take down production. It's not an easy decision. There's a workforce on the other end of this. And we took 1/3 of the days out in the fourth quarter. We wanted to get it behind us. Based on our intelligence, working with our independent wholesale distributors and understanding their inventory requirements and their levels, we believe we're in good shape going into 2026.

So I think it's look, we had to get this behind us, and we believe it's behind us. We're looking forward. 2025 was an abnormal year for res. And I know I hear all the -- not all, I certainly have heard some of the dialogue around, [ boy ], it's structurally broken the business and though it's been a pull forward for the last 3 or 4 years. And let's see how the year plays out. We don't share those views. We think that long term, this is a GDP plus business. We've been saying that, Andy, for a long time. And over the long term, we've been correct. So let's see how 2026 plays out. Right now, we're calling it flat to down 5%, but we'll have a better indication as we start getting into season.

Got it. And just to get into the transport business for a second, like remind us how big it is? I think last time I remember it was like 15%, but maybe it's something.

Globally, it's probably a little less than 15%, but round down a little bit, you'd be right.

Yes. And so I keep asking every year how you're outperforming. One of these years you're going to give me like even more, but like maybe talk about sort of '25, '26, how you're performing. And obviously, ACT gives us forecast. They tend to change them. So how are you feeling about the transport business?

Look, I'm -- I was -- look, last year, I said the same thing, okay, someone remind me of that. I'm optimistic on the back half of the year. I know the first half is going to be tough. I could see what's coming at us. But I'm optimistic about the back half of the year. Look, this is a great business. Now maybe I'm a little bit biased because I ran it for several years earlier in my career. But this is a business when it comes back, it's going to come back very strong. And there's some fundamentals that will tell you it will come back, right? These units are getting older. They're probably the oldest I've seen in a long time. They cost more money to run when they're older. I don't believe that the amount of perishables have gone down that are being transported. I do believe there was an overbuy with COVID that is just a long time to work through, right? These are usually 18-month down cycles. This has now been 4 years.

So it will come back. We're starting to see some signs of that. I talked to some of the trucking companies because I know them well because I ran this business at one time. And they're starting to get more optimistic, but we'll see how the year progresses. It will be a back half, though. It's not going to be the first half. I think the first quarter, the market is forecasted to be down by 20%. So I think we'll do better than that, which we've been able to outperform in the past. So I'm pretty confident in that statement. But it's a good business.

This is another business, too, by the way. We're using a lot of AI. And these are assets no different than a Trane commercial unit. It's just these assets tend to move around, right, which is a problem, but an opportunity, right? Because if you know where the assets are and you know what potentially could go wrong, you now start to direct the driver to where the solution exists based on inventory levels and for particular parts. So it's really cool what we're doing there. And I think it will be a -- it's going to come back. We'll be -- we've invested heavily in the innovation. And when it comes back, we'll be more than ready.

One of the things we've also done here is in Europe, we developed an axle power generation and remove the engine from the TRU which is -- it sounds novel, but it's really cool because what it's using is kinetic energy, if you remember your engineering school. But -- and it's basically harnessing the -- think of the volume and the mass going down the road and how it harnesses that and doesn't put drag on the tractor. So most things that are trying to generate power off of braking, whatever they put drag on the tractor, we've been able to put that to a very de minimis level. So it's really exciting.

It's -- the payback isn't there yet, but we're working really hard on the payback. And when we get that payback within a certain tolerance range, we believe this will be disruptive to this industry. And again, as an incumbent, we're okay disrupting ourselves, right? That's why at Trane Technologies, we challenge what's possible and we work towards, yes, right? When you do that, you become a disruptor to yourselves, which is okay. And if you go back in history and look at companies that have disrupted ourselves, those are companies that tend to exist for a long time.

So Dave, I know you're not going to change the 25% plus because you just told me again today. But maybe you can just answer this question. Haven't all your businesses substantially improved their margin capabilities since you first set that 25% plus?

We're very happy with our margins. We're very happy with the progress that we've been able to make as a company. Look, I've been in this business since -- I'll date myself here, but a long time, like back in -- when I was running Thermo King was back in 2010, then I came in and I ran the Trane business. I would tell you that, that wasn't a business that we were very proud of our margins on, especially on the equipment side. And the prior CEO and myself, we kind of made a pack that says, "If we're going to get better, we're going to do it through innovation." And we invested heavily. And when you have innovation, you could price for it. When you price for it, you start to have margin accretion and the flywheel just continues.

So I'm very proud of what we've been able to do really on a global basis, right? Asia used to have our lowest margins. Now they're our highest margins, right? That's the power of innovation. That's the power of a direct sales force.

I don't know if you want to add anything?

Well, I would -- one thing I'd add, business operating system that just runs across the entire company. So whether it's finance or IT or procurement or operations and how we walk into a factory, there's a lot of consistency in how those functions or factories are run. And when we think about new acquisitions, which may be below the radar, but over the last 5-ish years, we've completed 25 acquisitions. We think of it the same way. There's power to what we're acquiring, and we want to learn from those companies that we're acquiring. And let's make sure we're just improving the business operating system where we can help them. Maybe it is on procurement or lean thinking. The key is we're going to make sure we bring those acquisitions, bring their knowledge in and also what can we share and let's go ahead and go drive the margins.

That's helpful. And maybe just answer this question where my understanding is as you get a lot of these larger projects, if you do it in a data center, you have 100 chillers, like that can get pretty productive in the factory for you. So that in itself can lead to higher incremental margin.

It certainly lends itself to productivity, right? Most Applied Systems, everyone is a bit different. either from a centrifugal chiller to an air cooled, there's a lot of different options that people -- you wouldn't notice that it's difficult to -- it's not difficult. You just have to have the right processes in your manufacturing lines to be successful, and we do. But with the data center customer, they have a design for a particular data center. Now it may change a little bit to another data center. But yes, you're getting large quantities that you could just run these things right down the same line. And we've created lines that you're going to run 103-megawatt air-cooled maglev compressors down the line, and you could start to really dial in the repeatable nature of that and be able to create some economies of scale there.

And you mentioned the strong Asia margins. Is there anything structural that happened there? I know you kind of redistributed the business a little bit. Maybe is there anything structural that happened there? And conversely, is there anything structural in EMEA that keeps your margin down there a little bit?

Let me talk about Asia. I'll let Chris talk about EMEA because EMEA is just really about investments. But in Asia, what structurally changed happened about 9 years ago when we implemented -- or 10 years ago now, Chris, when we implemented our direct sales force. That's what structurally changed, right? We structurally changed not to just have someone representing our company, but we hired the sales force to represent our company. And when you do that, as I said earlier, you start to talk to all the discipline that are involved in closing a transaction.

And the basis of design, it's called a little bit something different in China, same principle applies. But when you do that, that's when you're able to really create value and explain the value that you're bringing the customer. It's not just about I'm going to get an engineer to believe me. It's value that's created to the end customer. Being able to explain that is something that oftentimes is missed.

You want to talk about Europe?

Yes. Europe in 2025 margins did retreat a little bit. That was entirely intentional. It was investments we made with also a great team in Europe, thinking about their front-end sales investments that they wanted to make in terms of coverage, especially on the commercial HVAC side. And then on the transport side and one business in the commercial HVAC side, we did some very targeted investments to take in some channel. And so think about 3 now almost 4 countries with transport businesses are independent that we've now acquired that distribution back. We're going direct. Opportunities for us where market share wasn't where we wanted it to be, so we can go take up the market share and ultimately the margins, but an investment year in 2025.

And a lot of confidence as we go into 2026, the 25% plus incrementals that we start the year with, we look at each of our regions, okay, Americas, EMEA and Asia, all of them are driving to that performance of 25% plus. But the enterprise in 2025 can grow earnings per share at 16% and grow margins, and we can still make those investments in EMEA, and now they'll contribute even more to 2026 and beyond.

Got it. So I got 3 minutes, so I want to hit 2 important questions because you mentioned the 25 acquisitions. I still think it's an underappreciated aspect of you guys. So maybe you can talk about BrainBox a little, but also this pending acquisition of Stellar and what it sort of does?

Sure. Well, BrainBox, I think Dave talked a little bit about it before, but think about digital offerings to make buildings smarter, okay? We've got some great examples. I know Dave can speak to probably better than I in terms of that are doing -- that's true. I don't want to go too far there. But early-stage technology company that you get to match up with the strongest channel in the Americas, and it's actually got a global opportunity as well when you think about making buildings smarter. So I'll leave that there.

Stellar, we announced that we're going to close on that acquisition. Stay tuned. We said in the first quarter, so stay tuned closely, but a great company in terms of modular chiller design. So think about a pumping station, an electrical system and a chiller, all getting put together in a factory OEM and shipped to the job site. You're reducing complexity of the job site. You're improving quality by controlling that assembly in the factory. And so that will be -- right now, it's a data center-focused play, but there's no reason why that can't be extended over to other applied verticals to make it simpler on the job site when you've got a scarcity of a resource for commissioning. And that's one of the things we do really, really well with commissioning with our direct service technicians, but making sure you've got that complexity reduction in the job site, that's a nice acquisition.

So I would never reject the question, but it's got to be quick.

As we're trying to understand whether AI data centers represent structural complexity versus a portion of scale. Are you guys seeing pooling intensity per megawatt increase versus traditional cloud?

Cooling intensity.

In some cases, it really just depends on how the data center is being constructed. Think of the whole thermal management system, you'll have different trade-offs that exist depending on what the use is going to be for that data center. It's a learning data center, sure, you're going to have higher heat loads in that, on average, okay?

But it really don't think of it over the entire spectrum of the thermal management system and how you would apply different products to solve a different customers' needs. Don't assume that everyone is using the same chip, too, okay? That's another -- there's other -- I know we talk a lot about one particular supplier's chips, but there's a lot of other chips that are out there, too, that they're called ASICs, right? And these could be maybe designed by specific hyperscalers themselves.

You mentioned on average -- can you give a -- can you quantify that by any chance?

As far as what do you want me?

I think you we're saying the increase of megawatt for pricing.

Look, I think that a traditional data center, you'd be talking about $10 million per megawatt. I think the AI learning data center, it would be up to 15 to 20, that kind of a delta. You think of 10 to 15 to maybe 15 to 20.

Dave, if we could do this in 30 seconds. What are the top 2 or 3 innovations and structural change?

I believe AI is going to transform industries, okay? So if you're a CEO, embrace it, right? And I'll talk more about that at lunch. So we're investing heavily in that AI for growth as well as AI for productivity. We're doing a lot with our virtual engineer. So that's certainly going to be an opportunity for us in the future.

The other would be, look, this whole demand side management and the fact that buildings waste 30% of the energy that they pay for. If you think the cost of electricity is going to go up, right, think about our paybacks increasing. And I think that's a pretty safe bet. If people are wasting 30% of the energy that they're paying for, that's an opportunity. And this whole concept around I need more power on the grid, we need to balance the grid, right? And if you're wasting 30% of it, that's a big part of the balancing that needs to take place. And if you think about what you can do with the power of AI, this isn't futuristic. This is today, right? And it's just -- this is such an opportunity for our company. I'm very, very excited.

I was -- I told some people last week, I was like 5 years ago, when I became the CEO of this company, I told everyone we're going to continue to be a great operator. We're going to be an innovator. But I also told them that I wanted to create a growth company. And I know that some of you are sitting in the room today, and you looked at me like this guy is a little bit off. And where were we 5 years ago? We were a $12.5 billion business. Where are we today? We closed the year at $21.3 billion. We have a compound annual growth rate of over 12%. But I would tell you that I see more opportunities in the next 5 years than I saw 5 years ago.

So look, we appreciate everyone's interest in Trane Technologies. It's a great company, and it's a great time to invest.

On that note, thank you, Dave and Chris. Thank you.

Thanks, Andy.

Thank you very much, everyone, for being here. Welcome to the third session this morning. It's my pleasure to have Trane Technologies; Dave Regnery, Chair and CEO; and Chris Kuehn, CFO. Dave and Chris, thanks very much for coming here and being with us today. Maybe first off, I think the biggest surprise from your results a few weeks ago was the strength in those commercial HVAC orders ending 2025, maybe help us understand kind of main drivers of that? And do you see those types of growth rates persisting into this year?

Sure. I'll start, Chris you could add in. First of all, thanks, everyone, for coming. We got a full house here today. So that's great. It's always good to be at this conference, coming down to Miami. It's a little warmer here and certainly in North Carolina right now, but Look, Trane Technologies is very strong in Q4. We talked about order rates. Order rates were up over 22%. It was broad-based, too, which is a good thing, right? It wasn't just one particular vertical that was strong. We had strength in many verticals. We talked on our earnings call, certainly, data centers was very strong. But we also saw strength in Higher Ed, health care, Industrial. So it was good broad-based growth.

And if you look at the pipeline, which is what I'm always looking at, and these are -- this is the activity that our account managers are working on, it remains very, very robust. And I've been in this industry a long time. And I would tell you that I haven't seen a pipeline quite this strong in a long time. So it just bodes very well for the future, specifically in our commercial HVAC business. And I know we always want to talk about what's going on here in North America, which is important, obviously, to Trane Technologies. We also had a lot of strength in Europe, which is also great to see. So good things happening at Trane Technologies right now.

You definitely saw the order acceleration into the second half of 2025 in both the EMEA commercial business and the Americas business as well. And that plays into the 2026 guidance as we see typically applied systems can take, call it, roughly 9 months from order date to ship date. That's where we just see the growth of revenue in both of those businesses ramp throughout 2026.

That's great. And when you're thinking about Higher Ed and Industrial, you mentioned those, Dave, in the U.S. Education, I guess, there were some concerns around that stimulus money coming off kind of where are we in all that? Has that already happened and people sometimes worry about demographic pressures on Higher Ed. Any thoughts around that vertical in general? .

Yes. I mean, look, if you look at the fourth quarter, we had order growth in our commercial HVAC business in 12 of 14 verticals that we track. There were 2 verticals that actually contracted a bit. One was life science and the other was K-12. For K-12, if you remember probably a year ago, I was here saying, look, we do not see K-12 falling off a cliff, and it certainly has not. So a small contraction in a vertical that has had exceptional growth with all the stimulus money that was provided to it. This is a good outcome. And also the pipeline is still very strong in K-12. I think one thing that the stimulus pointed out was how underinvested this particular vertical was in. I mean, the state of this vertical needed a lot of investment. And I think that everyone sees that now and look, this will be a strong vertical long into the future.

And on the Industrial front, I think a lot of investors are kind of hopeful of an acceleration in domestic industrial demand happening and the PMI gave kind of license for that a couple of weeks ago. How do you see that domestic industrial environment right now? .

Yes, we see a strong pipeline again in that vertical. I think the mega projects that -- I don't like that terminology, but there are a lot of projects that are out there with some reshoring efforts that are taking place. Some of those projects tend to be a little bit longer to close, but we're still very optimistic of the higher tech Industrial vertical. .

Great. And market share wise, I think there's been many commercial HVAC companies have been showing good orders growth, which is good for the industry. Kind of how do you assess your market share progress in terms of, I guess, the bold kind of numbers around share that you see? And any thoughts around kind of technology advantage or acquisition.

I want to know which CEO gets up here and says they're losing market share. Has anyone heard of it? Look, we're very happy with our market share, but you all see the growth rates that we're able to put up versus maybe some of our direct competitors, and you could come up with your own conclusion. But I would tell you that market share doesn't -- it's not an event, okay? It has to be over time. And a company that's going to continue to invest in innovation, a company that's going to be steadfast in how they commit to innovation and how we commit to building our channel, that's a company that you're going to want to think long term is going to continue to be very, very strong. And over time, we'll gain share. And that's what Trane Technologies is all about.

And I think something you've mentioned as a contributor to share has been the sort of the direct approach, number one, in selling and then the kind of systems approach maybe with how you think about product development. So maybe flesh out those elements a little bit more.

At the end of the day, it's a simple philosophy, right? If you're talking to your customer, that's a good place to be. If you're relying on someone else to talk to your customer for you, mean when we were younger, did any of us play the telephone game. Remember that, where I tell you something, and you have 10 people and the message that comes back is totally different than what you started with. That happens too when you start not talking directly to your customers. So our philosophy has been and will continue to be that we want to direct sales force. We want a direct service organization. We like those touch points. We want to make sure that we understand what our customers' needs are today and what they will be in the future. What are the problems that our customers are seeing and how are we going to be different than maybe some of our competitors.

The other thing, Julian, you hit on it is we think of everything at a system level, right? I know that I often get asked questions like, what did unitary do versus what did chillers do. And I'm sure we have that data, and Chris' team could probably talk in detail at it. But at a very high level, look, we're selling solutions to our customers. And with the broadest portfolio in the industry, we could do that. right? We don't tell a customer, oh, here's a VRF solution or here's a rooftop solution or here's an applied solution, we sit down and understand what their needs are and what's going to be the best solution for their needs. And we then -- as long as the product says Trane on it, we're happy, right? But we're going to select that. And it's the exact same way we think about data centers. I know we're going to talk about data centers here in a bit. But think of it at a system level right? You're going to get a different outcome when you think of it at a system level. So it is a competitive advantage we have. Talk to your customer, understand their needs today, tomorrow, have a broad portfolio, sell solutions, don't sell products.

On that point around data centers that you mentioned, how comfortable or confident are you in Trane's position? There are some technology changes going on in the industry. You're aware of them kind of with channel partners and customers before kind of we are. Do you feel comfortable with Trane's market share in things like CDUs and those kind of liquid cooling products versus the chillers and air handlers.

I mean, look, at the end of the day, in the data center world, think of the thermal management system. And I know there's a lot of conversation out there right now about a particular component within the thermal system, right? Look at it as a system, that's how we're looking at it. And you're going to have trade-offs that exist depending on which system is going to be implemented. And I would also tell you that we're working with many, if not all, of the influencers in this space, whether that be the hyperscalers, the large colos, or, in some cases, actually the chip manufacturers to develop what that future thermal management system looks like within a data center. .

And just to put all of your minds at ease, I haven't seen a future design that does not have a chiller as part of it, okay? But there are trade-offs that exist. And if you're going to remove heat at the chip level with cold plates you're going to have less heat that's going to go into the data hall. So you probably need less air handling in that system. If you're going to use deionized water and you're going to have stainless steel piping, you're going to have a trade-off with CDUs. Probably less CDUs versus more. So those are the types of trade-offs that we're working with our customers on a continuous basis. And you've heard me say for a long time that this is a vertical that's moving very fast from a technology standpoint. You need to be a leader, not a follower in this technology and you need to be working with the influencers to make sure that they know the best solutions or potential solutions.

And just to be very fair, we're learning a lot from these data center customers as well, right? You get a bunch of smart people in a room and you're going to come up with solutions that are maybe different than what you thought when you walked into the room. And -- but that's good, right? That's great. That's great for this vertical.

The other thing I would tell you about data centers, too, is like when we think about our conventional think of the other verticals, think of buildings, right, we always think of like energy savings and we're like, oh, the customer is going to save energy. In the data center, the vertical, it's not about the energy that saved goes to the bottom line. It's really you save the energy so you could do more computing, right? So it's a different way to think. All they're doing is redirecting it into where they could be able to have more yield out of their data center. But there's a lot of trade-offs, and there's a lot of cool things that are happening. Some I can talk about, some I can't talk about. But think of the whole system, right? And there's a lot of talk about, well, these chips can run at higher temperatures. Great, right? Think of free cooling, think of chillers that can have -- they could be operating as a dry cooler as well as a chiller within the same system and being able to have flexibility as to knowing what to do when and that's an area where Trane Technologies does really, really well.

Got it. And if you think about the kind of competitive landscapes in your traditional businesses versus some of the emerging ones in data center thermal management, it seems from the outside, there's a lot more players in the newer areas. How confident are you that Trane can kind of have a good market share in those new areas, even amidst a lot more competitors out there? .

Again, I think it just goes back to a system approach, right? Yes, we have CDUs, okay? We just acquired LiquidStack. So our portfolio is strong as compared to 6 months ago. And if you look at their pipeline, it's even stronger than -- it will be even stronger 6 months from now. But again, I think that component manufacturers are going to be selling components and Trane Technologies looking at the entire system is going to help people think through what is the system and how do you optimize the system. It's a different approach, okay? But if you want to talk to a hyperscaler or a colo, they're going to want that broader view versus just a component within that system. And by the way, I was talking to a large colo the other day and they basically -- they went down the road of maybe optimizing on a part of the thermal management system and they're basically like -- we really like our relationships. We need to expand it with you to make sure that we're thinking more strategic about not what today is but what tomorrow is and what that whole thermal system is going to look like.

And maybe add the thermal system on the data center. It's also not just innovating on the front end with engineering and then fabricating and manufacturing. It's also commissioning and making sure you can hit the dates that the customers are looking for to have the product on site. So one of the investments we made, Dave made really 2 years ago was to build out a service technician training center, an advanced service technician training center that we just opened up in the fourth quarter last year in North Carolina and think about all the suite of products that we can have service technicians on site from unitary all the way to the most complex data center chiller. And bringing customers through that to see our capabilities with nearly 4,500 service techs. It's also getting -- making sure you can commission that product in the field. And so that's end-to-end in terms of bringing the product to life and commissioning and then also we have the service opportunity thereafter.

If you're ever in the Davidson area, you give Chris a call, he'll set up a tour for you. I get yelled at when I told people they can come down. But -- so we had a large colo that they went -- originally their first project was with another provider and they were very disappointed with the commissioning that took place. And I was talking to this, I invited them down. I know these individuals quite well. And I said, come down to Davidson I want to show you what we invested in and why. And I will -- I'm very confident that future orders will be coming to Trane Technologies from this particular customer. When they saw our capability that we have and the detail of which we train our associates on the commissioning side of things. So it's really, really exciting.

The other thing too that -- let me just talk about data centers, one other thing. When you talk about innovation, right? I talk about the thermal management system, okay? But some of this is thinking differently about solving issues, right? So we bought a company about a year ago, BrainBox AI right? So we're taking -- you've probably heard me talk about, we used to have great connected solutions with structured data. We now have this unstructured data. We're augmenting it. We're thinking differently, making buildings smarter. We're using that same technology in data centers.

And I'll give you an example. When you have a data center, let's just say it's a large day center, you're going to have -- let's just make up a number here, 100 chillers that may all be rejecting heat at the same time. Well, it's what they call a micro environment is created when that happens. And you could think of it as like the Delta T or the temperature rise in that particular micro environment, it could be up to 30 degrees F, okay, from the ambient air just close by. And what we've done is been able to take weather patterns to understanding how the wind is going to be blowing versus what set of chillers, you could actually use free cooling for because it's at a lower ambient versus others that you'd be doing the condensing on. So there's a lot of that type of innovation.

And when you sit down with really smart people on the other side of the table and you start bringing these types of solutions and a little bit means a lot in the data center world from an energy saving standpoint. And we're able to capitalize that with some of our thought process.

And you mentioned LiquidStack just now. Maybe help us understand kind of what it brings to Trane. And I don't know if you looked out a few years, including, obviously, LiquidStack. Any sense of kind of how -- what proportion of your business in data centers could be liquid cooling related versus traditional.

I mean, first of all, LiquidStack, okay? We've had a partnership with LiquidsStack for a long time, okay? Originally, we invested in LiquidStack because of their emerging cooling, okay? That's still to come, okay? That's a little bit further out. There's some difference, I can get into the technical side of that, if you'd like. But they also have a great CDU line, and they also have a great pipeline of CDUs that are going to be introduced. So the acquisition of LiquidStack really just fortifies our position in the CDU space. That's number one. As far as what was the back half of your question? .

Just around -- It's hard to think about system.

Again, I think it depends on what is the customer looking for. In some cases, you're going to end up with liquid cooling solution, and we're talking here about cold plates and CDUs and alike versus just the chiller. In some cases, depending on what the need is and what the use of that data center is going to be, you're going to go to a more conventional data center. And in some cases, you're going to have hybrid, right? So I think it's just being flexible as far as the share I just want a high share of hyperscalers and colos because at the end of the day, I know that's where we're going to add value.

And the other thing about data centers, too, is we all understand the build-out that's occurring right now. Think of the service tail that's going to be associated with that. A lot of that's in front of us. A lot of that's in front. Even though we've been strong in data centers for decades, I would tell you that if you look at the current growth rate that's occurring there, A lot of that service work is in front of us. So these 7,500 technicians think of that number growing, think of them becoming smarter because we're also doing a lot of work on the AI side there with our virtual engineer area. So the technician now is so much smarter than maybe a technician was 3 years ago on a job site because they're coming there. They know exactly what's going on with that particular unit and if there's any kind of inquiry, it's all like it's under phone now. So it's really, really innovative what we've been able to do there.

When you're looking at the future changes, let's say, one big one in data centers, I suppose, is around 800-volt direct current more power intensity inside the IT room. Do you see any big implication on the cooling or thermal management side?

Well, I mean 800-volt is lot of heat, right? So let's just -- first of all, there's a safety requirement, right? So if we're going to be running our units at 800-volt, we can, okay, there's some changes that have to take place, and it needs to be a safe -- I think we all understand AC/DC, but maybe not I can talk to you off-line. But there's some implications and there's some reasons why we went to AC versus DC. That's okay. We're okay being a disruptor there. So that very well could happen and it probably will happen. Just remember that the heat load is very important, right? So again, thinking of the thermal management system, if you're going to be using 800 DC, you're going to end up with a higher heat load and how are those -- if you had eaten up here, they'd be talking about the cooling effect within the bus bars, et cetera. So that the heat within the data hall now, depending on the -- how the infrastructure is constructed may be higher, so it may require more air handling systems versus what was in a conventional data center.

Great. And then maybe sort of moving to the other side of the spectrum on top line trends. Domestic residential demand. How do you see kind of where we are in that cycle right now on volumes? And are you confident kind of prices holding up? .

Sure, I'll start. We were very intentional in the fourth quarter of taking production days out in our residential business. We took out about 1/3 of the production days, and that's what really drove the deleverage around 60%. But what it did is it put us in a position to the start of 2026, feeling that inventories were at the right level in the channel, okay? So the first quarter of 2026 will be a very tough comp for resi. We were up high teens in Q1 of last year. So it's the toughest comp of the year. And with our guidance a few weeks ago, we guided residential to flat to down 5% on a dollar basis. The comps certainly get easier as we go throughout the year. We don't think that there'll be a tariff prebuy or refrigerant prebuy or a challenge with the transition to refrigerant like we saw in 2025. But good business, we feel like the inventory is at the right levels. and we'll kind of progress as we move throughout the year. But the key is making sure we get the inventory at the right spot.

Yes. And Chris said it, but I'll reemphasize it, look, 2025 was a very strange year in residential. 2 pre-buys, a refrigerant transition that did not go well for the industry and a very short cooling season. Well, I don't know about the weather, but the other 2, I bet won't happen again. So I know there's a lot of questions, well, structurally, has this changed and we're not believers in that, okay? We think we have this market size right for us this year, think of it being on a dollar basis, flat to maybe down 5%. And but this is a very strong business, and it will be strong in the future.

And on price, the team announced a price increase just in the last 10 days, it's up to effective April 1. And so our plans are to make sure we continue to capture price to offset inflation and still get a spread on that. .

And from what you see, the competitive landscape, people are behaving themselves on the whole on price.

Therefore, the industry has been very disciplined in that regard over many years. I mean, think about a price increase up to 5%. You generally get a couple of points of that. It's not necessarily on the top line, but it gives our teams the ability to go price effectively, but we don't see pricing going backwards.

And I think in terms of kind of self-help, looking across Trane, you've done a lot of heavy lifting on Europe recently. So where are we on that kind of reorganization, what kind of results should we expect there?

Yes, I'll start. I mean Europe in 2025, to be very clear, it was really about intentional investments in the channel. And it was investments around our direct sales force and adding more with some recent acquisitions we've done, Julian, to -- they were very strong in 2 or 3 countries, and let's make sure we've got the capacity to be strong in 20 countries. And at the same time, we also brought on some acquisitions, both in the transport space and a small acquisition in the commercial HVAC space, where we want to give a view to be more direct to the customer. And those businesses just came with lower margins in year 1.

So a very intentional decision in '25. The margins came down a little bit in '25, but it's going to give us some nice growth opportunities. for '26 and beyond. And our expectation is for that region, we'll see margin expansion. We'll see incremental organic incrementals at 25% or better for each of our regions, so I'll put EMEA in that space as well. but a great team and a great business and outperforming down to flat transport markets, outperforming very low flattish growth in commercial HVAC. It's a lot of innovation that, that team drives.

And Chris, you mentioned incremental margins. Last year, there was a very good performance on that despite resi deleverage late in the year, transport under pressure, tariffs halfway through the year. This year, the guidance embeds the organic incremental, you have that 25% plus, which is lower than what you did last year. Are there any notable headwinds that would cause the incremental to move down this year? .

Well, I'll start and Dave will jump in. It's a common question, and I think it's a good one. But if we were going back a year ago, we started last year with 25% plus organic incrementals as well. And if the pipeline ever got smaller inside the company, our innovation and the investments we want to do, then maybe we change in January and start with a bigger number. But I'll be honest, Dave put in place many years ago, a minimum 2 times a year of innovation review and what's the pipeline within across all of our businesses. And the pipelines continue to grow. So we like starting at 25% with a plus sign. The last several years, we've done better than that, and we like putting out guidance we can meet or exceed. Let's see how the year kind of plays itself out. But it gives us that opportunity to make the investments and pull things ahead. And that's generally what we've been doing each and every quarter is pulling things ahead where we can.

I think I've told many people this, but I'll say it again. And the easiest decision the CEO can make is to cut investments. right? Because in the short term, you know what happens. It goes right to the bottom line and everyone's happy. You know what happens in the long term, you start to shrink. You start to market share because you're not innovative. And that's not who we are as a company. So look, our model is always going to be. We'll go out with our guide of 25%. That's our model. We always want to make sure we have optionality I'm always thinking about what's happening in the future and how we're going to be ready for that. And hopefully, that's what you want me as the CEO to be thinking about.

And strong free cash flow. Let's not forget about that. Let's make sure...

We always forget about that.

Let's make sure it's high-quality earnings of the cash flow that comes in as well at 100% or better. .

Yes. I think yes, the earnings conversion into cash is always best in class, and I think a lot of people just sort of stock at the adjusted net income line or whatever.

You can't spend adjusted net income, you can spend cash, Yes. So that's what we make sure we're focused on.

And on that point, partly because the cash flow has been good, balance sheet is in very good shape. Going back to that point on technology changes, clearly, it's helpful as an accelerant sometimes to acquire instead of organically invest or alongside it, how do you see kind of the M&A landscape? You've done LiquidStack and folded that in completely . Stellar as well. I mean, how likely is it you could you say a large acquisition in liquid cooling or anywhere .

Look, at the end of the day, we're going to look at everything, and we get to see everything as a major HVAC global player, we'll be disciplined. And we'll make sure we look at everything. We make sure we understand what the value is. We're really, really good at buying technologies, as Julian said, and scaling against a really strong channel. And don't underestimate the power of the channel, right? The direct sales force builds the channel. If you have a strong channel, you could put products through that channel and leverage it quickly. and that's what we've been able to demonstrate.

Stellar is another great acquisition, modular chillers, Think about all the labor constraints that are out there. This is a solution where you're taking that labor and you're putting it in the factory and you're deploying it to a job site. It's very popular in data centers. It's also going to be very popular in other verticals because it's very, very applicable.

Fantastic. Well, that we'll move to the audience .

Before I start, just closing, I told this group earlier this morning, the same thing. But look, 5 years ago, I sat up here as a new CEO and I was probably super nervous and oh my gosh, we're all these people in the crowd. And I told everyone back then that we're a great innovator, we're a great operator, but my goal is to create a growth company. And if you look at our -- what's happened over the last 5 years, we have a compound annual growth rate that's double digits. We were $12.5 billion 5 years ago. Today, we're at $21.3 billion. We closed the year we almost doubled the business. And I could tell you with confidence, I sit up here today and tell you that I see more opportunities in the future than I saw 5 years ago. So I appreciate everyone's interest in Trane Technologies and the future is brighter than what we saw in the past.

Go ahead, julian.

Thanks very much, Dave, for that. And the -- maybe we'll switch to the first question, please. It's around sort of your own shares in Trane today.

I always love this. I wish you would do this first.

It's meant to reflect the discussion as well. Fairly polarized. Second question is around kind of general bias right now. So generally positive. Third, The next question. Through-cycle EPS growth for Trane versus the kind of multi-industry average. So okay, everyone thinks above peers, next question, please. It's around excess cash, and we just had that discussion on M&A.

And we just raised the dividend 12% a couple of weeks ago, right? .

Don't influence the audience .

Bolt-on acquisitions, the biggest portion. The next question is around valuation. Where should Trane trade out on sort of current year PE?

Hopefully, we don't have any #1s here.

That's for the continuous history. Okay. So 80% in the 20s. And then the last question is kind of any drawbacks any headwinds, any anchors on the valuation that are top of mind today? It's a very balanced capital deployment, core growth. So with that, thanks so much Dave, thanks so much, Chris.

Thank you all.

Good morning, and welcome to the Trane Technologies Fourth Quarter 2025 Earnings Conference Call. My name is Regina, 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. [Operator Instructions]

I will now turn the call over to Zac Nagle, Vice President of Investor Relations. Please go ahead.

Thanks, operator. Good morning, and thank you for joining us for Trane Technologies' Fourth Quarter 2025 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, Zac, and everyone, for joining today's call. Please turn to Slide #3. I'd like to begin with a few thoughts on our purpose-driven strategy, which continues to drive consistent outperformance over time. Demand for energy has never been greater. Digitalization, industrial growth and new technologies are putting pressure on [indiscernible] Energy Systems. Customers are looking for smarter, more efficient ways to run their operations. That's where Trane Technologies is uniquely positioned to win. Our solutions help customers save energy, lower operating costs, and create more balance and flexibility in how they use energy. It's proof that sustainability and performance go hand-in-hand. As we look ahead, our innovation and expertise continue to set us apart. With our exceptional backlog, robust demand, proven business operating system and leading innovation, we're well positioned to continue delivering differentiated value well into the future.

Please turn to Slide #4. 2025 was a strong year for the company. Our global teams executed at a high level, enabling us to exceed adjusted EPS guidance despite softness in residential and transport refrigeration markets. Free cash flow remained robust funding strategic M&A, a growing dividend and significant share repurchases. Bookings were also exceptional. Our Commercial HVAC businesses in Americas and EMEA added $1.3 billion in backlog versus year-end 2024, strengthening our visibility into strong growth in 2026 and beyond.

Please turn to Slide #5. Relentless investment in innovation, growth, people, culture and our business operating system has delivered clear sustained benefits reflected in our strong and consistent track record. Since 2020, we've achieved an 11% revenue compound annual growth rate, a 24% adjusted EPS compound annual growth rate; expanded adjusted EBITDA margins by 470 basis points and delivered free cash flow conversion of 106%, while deploying over $15 billion through our balanced capital allocation strategy.

Consistent reinvestment has been central to our long-term success. For more than a decade, we've steadily invested in high ROI initiatives, built a world-class direct sales and service organization, and developed cutting-edge solutions for our customers' most pressing challenges, driving sustained demand. We have a proven track record and all the essential ingredients to execute our strategy and continued delivering differentiated returns over the long term.

Please turn to Slide #6. We delivered strong fourth quarter performance, highlighted by exceptional enterprise organic bookings up 22%, driving record backlog of $7.8 billion. Organic revenue grew 4%, led by continued strength in our Americas Commercial HVAC businesses and our global services business. We also delivered 10% adjusted EPS growth and robust free cash flow. Exceptional bookings were led by our Commercial HVAC businesses. Americas Commercial HVAC was again a standout delivering record Q4 organic bookings, up more than 35% year-over-year. Applied Solutions bookings were up more than 120% with a record book-to-bill of 200%, marking the second consecutive quarter with applied bookings growth exceeding 100%.

EMEA HVAC also delivered strong results with its second straight quarter of mid- to high-teens organic bookings growth. Commercial HVAC backlog is substantially higher versus year-end 2024, with backlog up approximately 25% in the Americas and nearly 40% in EMEA. And importantly, the backlog is predominantly applied, which carries a long higher-margin services tail.

As we enter 2026, we are well positioned for growth, especially in areas where disciplined execution to our business operating system is a key driver of success. In Commercial HVAC, exceptional bookings growth and record backlog give us strong visibility to future revenues and market outgrowth. Projected pipelines remain robust and continue to build. Even after 2 consecutive quarters of more than 100% applied growth in Americas Commercial HVAC, we continue to see substantial opportunities ahead.

Our Services business, about 1/3 of enterprise revenue remains a durable and consistent growth engine with a low teens compound annual growth rate since becoming Trane Technologies in 2020. We continue to invest heavily in services and expand our digital capabilities to deliver advanced solutions with compelling value and attractive paybacks. We are confident Services will remain a strong growth driver in 2026 and beyond.

Two additional factors have the potential to accelerate growth in the back half of the year. Residential markets were a tale of 2 halves in 2025 with a significantly weaker second half. We expect 2026 to get progressively better with tailwinds building later in the year as comps ease. Similarly, industrial forecast including from ACT point to a transport market recovery beginning late in 2026 and extending into 2027 and beyond, a view we largely share. This should support growth in the fourth quarter and beyond. Our guidance reflects this backdrop, and Chris will elaborate shortly.

Please turn to Slide #7. Americas Commercial HVAC continued its standout performance with bookings up more than 35% and revenue up low double digits. Growth was broad-based across nearly all verticals and in both equipment and services. In residential, bookings were up mid-single digits, while revenues declined mid-teens, reflecting the normalization of channel inventory in the quarter. In Americas transport refrigeration, bookings were down mid-single digits and revenues were down low single digits, outperforming transport markets that declined more than 20%.

In EMEA, Commercial HVAC bookings were again robust, up mid-teens and revenues were up mid-single digits. EMEA transport bookings were down low single digits and revenues declined at a similar rate, outperforming end markets that were down mid-single digits. In Asia Pacific, China remained challenging with double-digit declines in bookings and revenue. The rest of Asia performed as expected, with bookings up low double digits and revenues down low single digits.

Now I'd like to turn the call over to Chris. Chris?

Thanks, Dave. Please turn to Slide #8. Dave covered many of the key points from this slide earlier, so I'll keep my comments brief. Q4 organic revenue grew 4% and 7%, excluding residential, consistent with the dynamics we've already discussed. Margins were impacted by proactive measures taken to normalized residential inventory which reduced factory production days by 1/3 and resulted in roughly 60% deleverage in that business.

Please turn to Slide #9. In the Americas, we delivered 5% organic revenue growth driven by strong Commercial HVAC volume and positive price, partially offset by residential declines. Margins were lower mainly due to residential deleverage. We also stepped up innovation and growth investments.

In EMEA, organic revenue grew 2%, led by Commercial HVAC. Adjusted EBITDA margin declined 160 basis points, reflecting year 1 acquisition and integration costs. As noted throughout the year, channel investments in M&A in 2025 weighed on near-term margins, but position us for stronger long-term growth.

In Asia Pacific, organic revenue declined 6%, and adjusted EBITDA margin declined 20 basis points. The team managed costs to limit deleverage while continuing to invest in the business.

Now I'd like to turn the call back over to Dave. Dave?

Thanks, Chris. Please turn to Slide #10. Overall, Q4 played out largely as expected, with residential revenues a bit better than anticipated, and Commercial HVAC bookings even stronger. Our Americas Commercial HVAC business continued to execute at a very high level, significantly outperforming end markets. Bookings and revenues are compounding at strong rates, especially in Applied Solutions. As noted earlier, our exceptional bookings, record backlog and rapidly expanding pipeline give us a high level of confidence that 2026 will be another strong year.

Based on customer delivery timing and year-over-year comparisons, we expect solid growth in the first half and even stronger growth in the back half. In residential, we believe channel inventory is largely normalized as we enter Q1. Our outlook for the market for 2026 is prudent, flat to modestly lower with Q1 expected to be the trough, down about 20% given the high teens growth we saw in Q1 2025. We expect the market to return to growth in the second half.

In the Americas transport markets, ACT forecast trailers down about 7% in 2026, and our view is generally aligned. Market indicators are improving, and we expect the sector to turn positive late in 2026 and into 2027. We expect to again outperform the market.

In EMEA, Commercial HVAC enters 2026 following a significant investment year and strong 2025 bookings that lifted backlog nearly 40% year-over-year. We expect a softer start with mid-single-digit growth improving to high single-digit growth in the second half as backlog converts. EMEA transport markets are expected to be flat to modestly lower. The team grew low single digits in a down market in 2025, and we expect them to outperform again in 2026.

In Asia Pacific, we expect mixed performance with the rest of Asia outperforming China. For the region as a whole, we expect relatively flat performance in 2026.

Now I'd like to turn the call back over to Dave. Chris?

Thanks, Dave. Please turn to Slide #11. Our 2026 guidance reflects the market dynamics we've discussed and operational excellence driven by our business operating system. It also incorporates our value creation flywheel, continued investment in innovation, market outgrowth, healthy leverage and strong free cash flow. We are initiating 2026 guidance with 6% to 7% organic revenue growth and adjusted EPS of $14.65 to $14.85, up 12% to 14%. We expect about 50 basis points of growth from FX and roughly 200 basis points from M&A, either closed or committed for early 2026.

All in, reported revenue growth is expected to be 8.5% to 9.5%. We are targeting organic leverage of 25% or higher, consistent with our long-term framework and free cash flow conversion of 100% or greater. For the first quarter, we expect flattish organic revenue growth, reflecting continued strength in Commercial HVAC, offset by tough comps in residential, given the high teens growth we saw in Q1 2025 and market-driven declines in Transport. We expect Q1 adjusted EPS of approximately $2.50.

Importantly, over the past 4 years, Q1 has averaged slightly below 17% of full year EPS, which aligns with our 2026 guidance. Given the dynamics we've outlined, we believe this is a strong and achievable start to the year. For additional details, please refer to Slide 18.

Please turn to Slide #12. We remain committed to our balanced capital allocation strategy, focused on deploying excess cash to maximize shareholder returns. First, we strengthened our core business through relentless reinvestment. Second, we maintain a strong balance sheet to ensure optionality as markets evolve. Third, we expect to deploy 100% of excess cash over time. Our approach includes strategic M&A to enhance long-term returns and share repurchases when the stock trades below our calculated intrinsic value.

Please turn to Slide 13. In 2025, we deployed or committed approximately $3.2 billion through our balanced capital allocation strategy, including about $840 million to dividends, $720 million to M&A and roughly $1.5 billion to share repurchases. We advanced several strategic acquisitions during the year, and our pipeline remains active heading into 2026. The largest acquisition announced in December is Stellar Energy, a leading provider of turnkey data center cooling solutions. Stellar brings strong capability and modular design and build, positioning us to meet growing demand for prefabricated cooling systems that ease supply chain and labor constraints and enable rapid scalable deployment. Their expertise also enhances our ability to apply modular solutions across additional verticals. We expect the acquisition to close in the first quarter, and we look forward to welcoming the team to Trane Technologies. The deal economics are compelling, and we expect modest EPS accretion in 2026, even after year 1 acquisition and integration costs.

For 2026, we expect to deploy between $2.8 billion and $3.3 billion, with strong free cash flow, ample liquidity, a healthy balance sheet, and $4.7 billion remaining under our share repurchase authorization, we have excellent capital allocation optionality moving forward.

Now I'd like to turn the call back over to Dave. Dave?

Thanks, Chris. Please turn to Slide #15. The Americas Transport Refrigeration market remains dynamic, but the long-term outlook is strong. ACT forecasts the trailer market down about 7% in 2026, bottoming in the first half and improving in the back half. ACT also expects a sharp rebound beginning in 2027, including roughly 50% growth and continued expansion through the end of the decade. We expect growth as well, but anticipate a more measured gradual slope to the recovery. We're managing the down cycle effectively, outperforming end markets and continuing to invest in innovation, so we're well positioned as the market strengthens.

Please turn to Slide #16. In closing, I'm incredibly proud of our global team. Third talent has powered our consistent outperformance and leading financial results over the past 5 years. And we see tremendous opportunities ahead. With our exceptional backlog, strong demand, proven business operating system and leading innovation, we're confident in our ability to deliver differentiated long-term value and advance a more sustainable world.

And now we'd be happy to take your questions. Operator?

[Operator Instructions] Our first question will come from the line of Julian Mitchell with Barclays.

Maybe just wanted to start with Americas Commercial HVAC, just to understand the guidance on revenue for the year ahead. Because I guess if I look at the orders or bookings there last year, they were up maybe 10% in the first half, up in the 30s in the back half. So with lead times and so forth, should we expect a decent acceleration in Americas Commercial HVAC revenue growth in the back half of the year ahead?

Julian, it's Chris. I'll start and then Dave will jump in. That's right. I mean think about the very strong bookings growth in the second half of 2025 in Commercial HVAC. The first half was strong, up mid-teens, but we saw up about 30% -- over 30% in the second half of 2025. And when you think about Applied Systems, not uncommon to think about a 9-month cycle from order date to ship dates. So how we see 2026 playing out for Commercial HVAC Americas is the first quarter strong growth, probably about 7% to 8% range, second quarter grows to about 10% growth, and then it is up about low teens in the second half of the year. And we've dialed that in with the backlog and the timing of which when customers want us to deliver the products.

Julian, it's Dave. I think, as Chris described in the Americas, it's a very similar story that we see in Europe, okay? So in Europe, think of the first half of the year, orders were up high single digits. To the back half of the year, they were up high teens. So the same is exactly happening as to how our backlog, which is at record levels, is layered in. The good news also is that the pipelines in both businesses are extremely strong right now. I said that at the end of the third quarter that I've never seen this high before. And I would tell you they remain very, very robust as we enter Q1 in 2026.

That's helpful. And then just my second question on U.S. resi HVAC. Maybe help us understand the confidence in that leaning out of inventory having largely already happened. And any update you could give on pricing in that market. We keep being fed anecdotes from people every day about discounting. We didn't seem to hear that from an OEM peer yesterday, just wondered your perspectives on that, please.

Yes. I'll let Chris talk to the pricing side of it. But on the inventory side, look, we were very, very intentional in the fourth quarter to get the inventory right. And you heard in our prepared remarks, we took 1/3 of the production days out. So we knew that was going to cost us on the bottom line as we deleveraged over 60% in that particular business. But we also believe that we have inventory size right as we enter 2026. So 2025 is behind us, we're looking forward and see how the year plays out. And remember, for the full year, we believe that resi will be flat to down up to 5%. We'll see how the year plays out. But we believe that inventory is in the position we want it to be, and we were very, very intentional in getting there. Chris, do you want to talk about pricing?

Julian, we've not seen pricing fade in the business. If I think about the fourth quarter and pricing is really more due to volume being lower than anything else. So certainly, great products, good industry and wouldn't add anything more than that.

Yes. The only other thing I would add, Julian, is remember, Q1 has got some really tough. So even though inventory is in a right-sized position. We still are going to have some very difficult comps with last year being up in the high teens.

Our next question will come from the line of Scott Davis with Melius Research.

It's been a good quarter so far for -- or today, I guess, I should say, has been pretty good. And you guys -- I mean these orders in applied are a nice surprise. And my question just is really about whether orders are broadening out amongst your end markets, like office, education, et cetera? Or are they narrowing and more of that more of that incremental order strength is, in fact, data center?

Yes. I mean, look, data centers are very strong, okay? But I would also tell you that if you look across the 14 verticals that we track, at least in the Americas, we had broad-based growth, which was very, very encouraging. I think we had 12 or 14 verticals up. So that's encouraging for us. And -- so yes, but don't misinterpret my comments. Data centers were very strong, and they'll continue to be strong well into the future. But it is broad-based growth across the majority of our verticals that we track in commercial HVAC.

And comparably broad, you would say, Dave, versus maybe a year ago?

I have to -- I mean, I -- it's hard to say. I think we saw growth in some verticals that maybe a year ago, I was saying were weak like retail. We saw growth in retail. Office is coming back for us. So look, I'm bullish, Sean. And the order rate is one thing. But if I look at where the pipeline is, it's also very broad-based, which is very encouraging for the future.

Makes sense. Okay. I'll keep it at that.

Our next question comes from the line of Chris Snyder with Morgan Stanley.

I also wanted to ask about the applied orders, second straight quarter up over 100%. As we've seen this ramp in orders into the back half of the year, has there been an impact at all from changes in customer lead times? Are we starting to see customers order maybe with longer lead times again? There's some concerns out there in certain spots around supply chain pinpoint. Just wondering if that's having any impact on these -- just the massive orders we're seeing?

Chris, this is Dave. But I would say we haven't seen that. I mean you have some verticals that will give you more of a longer view versus others. But for the most part, I haven't seen any change occurring there probably since really probably at least the last, I'll say, at least 12 months, there hasn't been a dramatic change there on lead times. We're very competitive on our lead times. I told you that in the third quarter. We actually introduced a couple of quick ship programs so that sometimes you could have an emergency or you could have a contract or I forgot to order a piece of equipment, we're able to provide that now with some of our quick ship programs.

I appreciate that color. Maybe if I could follow up on data center, but specifically on the service side. As that the architecture there continues to change, obviously very rapidly. Are the attachment rates in that business better than they were, say, 5 or 7 years ago as they maybe more so relying on you guys to do a lot of that service? Just given how fast things are changing relative to a decade ago?

Yes. I think for sure, okay. Obviously, hyperscalers or colos, they want the OEM to be doing the service work, okay? I think what's changing is the size of these data center fields or farms as they referred to, are quite large. So we're seeing more dedicated resources to a particular data center. But I would say for sure, if you go back, like, say, a decade ago, I don't think our attachment rate was nearly what it is today. In fact, I'd be hard-pressed to think where we've done a major chiller farm where we haven't had the service agreements.

Our next question will come from the line of Andy Kaplowitz with Citigroup.

Dave and Chris, you had some margin pressure in Q4 in Americas and Europe. You explained it well. A lot of it was resi deleveraging in Americas and European investment. But maybe you could talk about how to think about segment incrementals in the context of your normal expected 25%-plus. Does European margins start to turn down more positive in '26 given its backlog? And how should we think about your overall price/cost dynamics given recently higher commodity costs?

Andy, on the 25% or better incrementals for 2026, you know us well, that's certainly where we like to start the year, and it gives us a lot of flexibility to make investments. We view each one of our segments, so the Americas, EMEA and Asia, all to be delivering 25% or better organic incrementals in 2026. Reported incrementals, they'll have about a 700 basis points lower impact than organic, and that's really just the result of M&A coming into the year at a starting point of lower margins, which gives us a great opportunity to grow those margins over time. So 25% plus across each of the segments for the year.

I think about price cost in the guide of the 6% to 7% organic, think of pricing is around 1.5 points for the year. We've had a very proven and strong track record of staying ahead of inflation. It's our current view around inflation and tariffs today. And at the same time, we have to remain very nimble and dynamic given input costs. So confident that, that 1.5 points of price would be in a position to drive the 20 to 30 basis points of margin growth as we go into any year, thinking about price versus inflation, but will remain dynamic.

Helpful, Chris. And then Dave, maybe you could talk a little more about your positioning in the data center market. I think the Stellar acquisition is going to help you a lot. But how is Trane adapting in thermal management as it adapts to maybe a little more liquid cooling? And then obviously, there were some comments a few weeks ago from 1 of your data center partners. So you could opine on their comments, water chillers versus air chillers and so on.

Yes. Well, thanks for the question, Andy. Look, at the end of the day, we've been very strong in the data center vertical for decades, and we're going to be very strong in the future. And the short answer to your question is, we see chillers in the data center vertical well into the future. But let me take a step back. Look, we're working very closely with many influencers in the data center vertical. So think of hyperscalers, think of chip manufacturers like NVIDIA and others, okay? And we're helping them design data centers of the future or you may have heard them refer to as reference designed data centers. And think of these data centers as the data centers that will be built maybe 2 to 4 years out. And when we're sitting with these customers, we're bringing our expertise around the thermal management system to the discussions. And I have not seen a reference design or data center of the future that does not include chillers, just to be very clear.

Now I think that when we talk about some of these future designs, you're going to see a lot of innovation around the thermal management system, specifically around the chiller that is really exciting. I won't talk about in too much detail here for obvious reasons. But this is -- I mean, this is fun. I mean when you sit out in these rooms and our engineers are very detailed on this, but it's just you get really creative ideas. We have a lot of these new innovations in the pipeline. Some of them are actually still being in the modeling stage because they're so futuristic in thought process. But I want everyone to realize that Trane Technologies is at the forefront of this innovation, and we're helping our customers think through what's possible. And I'll conclude with we've been very strong in the data center vertical for decades, and we're going to continue to be very, very strong well into the future.

Our next question comes from the line of Amit Mehrotra with UBS.

Dave, I just wanted to follow up on that point because I don't think people are debating whether a chiller will be in a data center in the future. I think the question really is about how much you need to run it and do run times get affected and do you need as many of them? And so I appreciate if you can just address that point, particularly also how Trane is positioned in an environment where chillers run less or needed less. Because on one side, you're working with NVIDIA to create this reference design. And the other side, one of the main value products you saw in that market, you could just need less of them or run less. I mean I don't know if you disagree with that, but I'd love your perspective on it.

Well, I do. I mean I think first of all, I mean think about a data center farm in the future, think about free cooling being built in to the data center, okay? So you'll have make up another 100 chillers, they'll have free cooling capability. To run free cooling, you'll obviously be running the fans. We could debate how often you're going to run the compressor side of the thermal management system there. But you will definitely be running the fans through the free cooling cycle.

How you manage that is going to be very important in the future. And I'm trying to be sensitive here to some of the innovation that you're going to see coming in the future. But chillers are mechanical systems. They are not a lot different than maybe your car. So you don't leave your car in the garage for 6 months and don't run it because if you did, you may not be very happy when you go out to try to start it up. So these systems do need to run at some point and so we're working through that equation.

The other side of it is, do you need more or less. I think at the end of the day, you have a thermal load that you have to be able to size for the size of the data center. So the answer is you're still going to have the same number the frequency of which the compressor side runs will be -- it will vary but -- which could impact the services side as to how often you service these pieces of equipment. And to be fair, we're still modeling that based on different innovations that are coming in the future.

Got it. Okay. That's helpful. And then just maybe more tactically, Chris. The organic growth target is 6.5%. Obviously, it's an acceleration in '25, but not as much of an acceleration. Is that maybe I would have expected given resi is kind of flattish to down. You've got probably applied equipment and services, maintaining not accelerating growth, just given the strength of the orders. Is that a fair assumption? I know you guys like to be conservative out of the gate and give yourself cushion, especially given the uncertainty of last year and what happened, but maybe you'd push back to me thing, it's not actually that conservative based on some puts and takes that you think of?

Yes. I mean, Amit, we like to set guidance where we can meet it or exceed it. And so that's where we're starting here in January with a lot of flexibility to react to conditions that may present themselves. We don't know today. The guidance range on the 6% to 7% on the full year organic, it's got Americas Commercially HVAC up about 10%. And again, we think that's a very strong growth for that business. And maybe a derisked outlook when you think about residential, we described it as flat to down 5%. Transport markets and residential markets trough in the first half and then much easier comps in the second half of the year. But Transport, we're expecting to be flat to down low single digits with markets down in the high single digits will outperform. So I think it's a reasonable start to the year. We have a lot of confidence in delivering on the results like we would any time here in January. And when you think about transport and residential, they're making up around 25%, 30% of the portfolio that we're not baking in much growth for on a full year basis. So we expect that they will improve in the second half on easier comps. We've got great teams and innovations. We keep leaning into both of those portfolios, and we'll see how the year kind of plays out, but we have a lot of confidence in the guide that we just put out today.

Our next question comes from the line of Andrew Obin with Bank of America.

Just a question on residential in the first quarter. I think the scope of sort of under absorption in the fourth quarter was a little bit surprising to us. At the same time, you commented that residential market was better in the fourth quarter. How should we think about under absorption relative to sort of normal operating leverage in Americas in Q1 of '26?

I'll let Chris talk about the unobserved, but let me just clarify a few things. I'm not sure the market was a lot stronger in the fourth quarter. I think we were stronger in the fourth quarter on resi. And I would also tell you, Andrew, that we were very, very intentional in taking these days out. So it's not -- it wasn't necessarily a surprise to us to deleverage. We kind of had that baked into our models. But we wanted to get this behind us, and we believe it's behind us now. So I don't know, Chris, do you want to talk about Q1 leverage.

Sure. We've got residential in our guide in the first quarter, down about 20%. Reminder, the business was up in the high teens in the first quarter of last year, and that drove strong volume growth. For Q1, look, we're still very much in a shoulder season for residential. We'd expect the deleverage in the first quarter to be better than the deleverage we saw in the fourth quarter. To Dave's point, we intentionally took production days out and that had the strongest impact on roughly 60% deleverage in the fourth quarter. So think about the first quarter, residential deleveraging within gross margins. We've got level-loaded production assumptions through the first quarter. We've got inventory we believe, at the right level in the channel. And then let's see how the year kind of plays out. But I think we really tried to, as one person noted, take the medicine in the fourth quarter as best we could and then set ourselves up well for 2026.

And just -- I know there's a lot of focus on data centers at a vertical, but at the same time, there are a lot of announcement about biopharma reshoring. And clearly, one of your key verticals, can you tell us what it is you are seeing in terms of biopharma reshoring? How real it is? How excited should we get about it into '26? And how much visibility do you have from your customers into '26 and '27?

It's a great question, Andrew. I mean -- I said earlier that we had 12 or 14 verticals that were positive. One of the verticals that was not positive was life science, okay? So -- but if I look at the pipeline of activity, yes, we see some of those large pharma projects that are set for reshoring, I said, in the pipeline. We're optimistic, but we'll see how they play out. But we are all over tracking some of those large projects that are in this classification of mega projects. But we're hopeful that some of those actually come to reality here in the near term.

Andrew, I'll add on the $7.8 billion of backlog that we finished 2025 with, there's a bit over $1 billion of backlog that's for 2027 and beyond. That's up more than 30% versus a year ago, and it reflects multiple verticals, let me be clear. But again, entering 2026 with a stronger backlog than '25 and certainly building backlog already for '27 and beyond.

Our next question comes from the line of Tommy Moll with Stephens.

Dave, I want to start by going back to the commentary from NVIDIA that you've elaborated on a bit today. If you think about the HVAC content and the data center. So whatever fraction of every dollar spent on a data center today that you would attribute to HVAC? And then you think about the 2- to 4-year road map where you're in discussions already. When we're 2 to 4 years out, do you think that fraction is higher, lower, about the same as today?

Yes. I'm going to on the side of saying it's probably about the same, okay? You got to look at the whole thermal management system, and that's one of the advantages that we bring to these conversations as we do look at the whole thermal management system. I think the amount of power that is being consumed by the thermal management system may be less, okay? So think of it as a trade-off between you will still need the thermal management system, how often it runs or the power that it consumes may be less. Therefore, you'll have the opportunity to do more computing within the data center, right, if that makes sense. So those are the conversations that are happening where -- how do we redirect some of the power over to the computing side versus running the thermal management system.

That's very helpful, Dave. I also wanted to ask a follow-up on resi pricing. Chris, I think earlier you said you have not seen it fade. I'm curious as you dialed in your outlook for sales this year flat to down 5%. Does that assume some incremental price realization in '26? And if the answer there is yes, do you feel like you're pricing plus/minus in line with other major players in the market there?

Tommy, I don't want to get in front of our residential team in terms of their plans for pricing. So I won't comment specifically there. But the flat to down 5% residential for the full year on a dollar basis. It assumes some level of price, whether it be new price increases or any carryovers from last year. And then we'll see how the year plays out. It's rough estimates at this point in time. It's probably a modestly lower year to flat on pricing. We'll see how that plays out.

Our next question will come from the line of Noah Kaye with Oppenheimer.

I'd like to pick up on the broad Commercial HVAC strength. In the past, I think the split of orders backlog is maybe skewed a little bit more towards retrofit. We're seeing some new construction indicators picking up. So how should we think about new build versus retrofit split as relative drivers of the '26 outlook? And to what extent, if any, the back half acceleration ties into new construction?

Yes. I mean I think you need to look at it by vertical, Noah. So certainly, in the data center vertical, there's a lot of new construction almost all. But then when you get back into some of the other core verticals, it's very similar to what we've seen in the past. And it makes a lot of sense, right? I mean, I always tell people look out your window and how many buildings do you see versus how many cranes do you see. And you'll realize that the majority of our business is focused on the honey retrofit versus new construction. But really -- you got to really -- your question is a great one. Just look at it by different verticals and you may get a different answer, okay?

Yes. Very fair. I want to ask you about Stellar Energy. I guess just how much overlap is there in the customer base today? And maybe can you talk a little bit about kind of key points of differentiation around what this adds to your capabilities?

Yes. I mean, look, I think -- sure, there's some overlap. But at the end of the day, think of Stellar Energy as being able to build modular chiller plants. And I mean -- so just -- and then these modular chiller plants get assembled on a job site like LEGOs. And so you're reducing the amount of skilled labor required on the job site, you're moving that back to the factory. You're testing these systems in a different way in a factory versus what you would do at a job site. So again, that's a benefit as well. Look, they're predominantly right now in the data center vertical, but we see a lot of opportunities for this modular concept in core verticals as well. I think we're all aware of the skilled labor shortages and potential -- and the potential that, that has to slow projects up, where modular designs are going to become -- they're very attractive today, but I think they're going to become even more attractive in other verticals than just the data center vertical.

Yes. And that cross-sell is an opportunity for you.

Regina, before you go to the next speaker, let me just clarify a plan. I don't want to confuse anybody. Resi down up to 5% in 2026. It's really driven by volumes. We'll see where pricing ultimately falls out. I don't want anyone to think that pricing is coming down in that market. The impact may be less than what we saw in 2025 with significant pricing, but we'll see. But it's really, really volumes coming down that makes up that. I don't want to intimate that we know pricing is coming down. Thank you.

And our next question will come from the line of Jeff Hammond with KeyBanc Capital Markets.

Maybe just -- we talked a lot about Applied, just touched on commercial unitary orders, trends and how you see that shaping up in '26?

Yes. I mean it's a great question. Look, if I go back and look at 2025, Applied was extremely strong. But unitary was positive, slightly. I guess, if I look forward to 2026, look, we have a kind of model right now as flattish for 2025. We'll see how that is out as the year progresses. But -- and again, it really depends on different growth rates that we're going to see in different verticals because some are more apt to have unitary product for Applied systems. But right now, to answer your question, we're looking at it to be flattish in 2026.

Okay. Great. And then just looking at your CapEx, I think you're guiding 1% to 2% of sales. You've kind of been in that 1.5% to 2% range. But just -- talk to me about what you've been doing behind the scenes to really ramp your capacity in the Applied business, just given the strength? And what you need to do going forward, given all that pipeline in terms of capacity expansion for Applied? And maybe just touch on your ability to kind of continue to ramp on the labor side for the service business as well.

Let me start, and I'll let Chris talk more about the actual dollars being spent. But look, when we think of capacity. We really break it down into 3 different areas, okay? One is our 4-wall capacity. And that's in our factories itself. And that's what we control. And I would tell you that we've been ramping there for a long time, and I think I told you in the third quarter call that our chiller capacity over the last 2 or 3 years is up over 4x, okay? So we've done a nice job there. And some of that's new builds. Some of that is just leaning out. Some of that is putting in lines and reducing inventory to create space. So there's a lot of goodness that's there, and I'm very comfortable with our capacity in that space.

The other area we look at capacity is on our supply chain. And it's their ability could hinder us if we're not careful. So we spend a lot of time working with our supply chain partners on their capacity. And making sure that they understand what our demands are going to be in the future, understand they know kind of like the robustness that we see in our pipelines so that they can anticipate as well. So that's another bucket that we look at. And we're in good shape there. I think there's always opportunities to improve, and our team is doing a great job of making sure that we have enough capacity there as our future needs will dictate.

The third area that we look at is within our Service business. And there, really, it's about being able to not only do the service on this equipment, but commission the equipment. So Applied systems, we commission, right? So we go out to the -- our own employees are out there before the mechanical contractor starts these systems up. We're out there making sure that everything is perfect before we start them up. And then we make sure that the system is operating the way it was designed before it gets turned over to the customer. And to be fair, we have over 7,500 technicians now on a global basis. So I feel very comfortable in our ability there to make sure that all these applied orders that we've been receiving. We're not only to be able to manufacture, but we're also going to be able to make sure that we can commission on the job sites. So Chris, I don't know if you want to talk about the actual capital dollars.

Yes. I mean we remain CapEx-light in terms of intensity. You're right, Jeff. 1.5% to 2% has been the CapEx spend to revenues over the last few years, and it's been able to support all the capacity expansions we needed to do. I would add though, M&A has been a great option for us as well as we brought in businesses on air handling or industrial process cooling capacity for data centers, the M&A brings capacity as well into our 4 walls and then it gives us a lot of optionality as to how we want that production facility to operate what products will it run and what can we expand into that as well. So it's organic and also some inorganic opportunities, we've been able to expand capacity.

Our next question will come from the line of Joe Ritchie with Goldman Sachs.

So look, for all -- for good reason, there's always a focus on the U.S. data center market. You take a look at your Commercial HVAC bookings though in EMEA, up mid-teens and some expectations that you could actually see some really robust growth in the data center market in EMEA. And I'm just wondering whether you're starting to see any of that already? And then how are you positioned geographically if things were to really accelerate?

Yes. I mean, absolutely, we see data centers really on a global basis, Joe. So it's not just in the Americas. I will tell you that the size of the data centers is dramatically different in Europe than it is here in the States. And you could almost -- I mean, the data centers that are being built in Europe are probably about 1/10 the size of what's being built, the majority of what's being built now or what's being certainly planned to be built here in the states. So I am hearing from some that they're going to be making much larger data centers in Europe, but we'll see how that plays out. But if it does, we're very well positioned. I mean we have incredible portfolio of products, really on a global basis. And there are nuances that you will see in the product portfolio for preferences and data centers as you start to move around the world. And my comments on Europe, you could replicate them into Asia as well because it's, again, a very similar -- Asia is actually more similar to what we're seeing in Europe right now.

Got it. That's helpful. And then I guess maybe then just double clicking on those orders. You mentioned your priority verticals in the Americas, most of them are seeing broad-based growth. Where are you seeing kind of like the real growth in the EMEA side of the business?

Yes. I mean it's less -- we have less data there on the different verticals, but I would say it's, again, broad-based. We certainly see it in data centers. We certainly saw it in Commercial as well, Commercial Office that is, which is -- it's a focus area. We also see nice growth in Europe, as you would expect, in our Services business. It's very -- it's as broad-based as you would have in the Americas. We just have less granularity on the verticals and kind of like have a reporting mechanism on those verticals. But -- if you ever come visit us in Europe, I think you'll see us being able to play across all the verticals. And again, the direct sales force really allows us to pivot to where the opportunities are, and that's really on a global basis as well.

Our next question will come from the line of Jeff Sprague with Vertical Research Partners.

Good looking numbers here, guys. Congrats. I wonder if we could talk a little bit more about price cost. Chris, you gave some color there. But I was just kind of curious if you could kind of level set us on kind of what you absorbed on tariffs in 2025, what the wraparound might be? And then also just this pretty dramatic metal spike we are seeing. Gold is getting all the attention, but copper and other things have moved a lot. Just how dynamic might your pricing have to be here as we progress through 2026?

Well, I'm hoping it's less dynamic than what it had to be in 2025, Jeff. But -- that's the power of the business operating system and the models we have to take into account all of the costs that we can see. But your specific question, just given time on tariffs, we described it about a bit higher than $140 million of tariff cost in 2025 on our last call. We're in that range for what that cost was in 2025 for the full year. And think about that wrapping into 2026. We really have 3 quarters of that tariff cost in '25. Now you've got 4 quarters of that. So we expect it to be inflationary from a tariff perspective, maybe in that $50-ish million range in the ballpark. All in, maybe it's $200-ish million of costs that we'll make sure we price accordingly for. But the first step we do is we make sure we mitigate the tariff costs. So the numbers I'm quoting you are after mitigations. So we're continuing to work with suppliers on the short term to the long term to ultimately mitigate the costs and/or move source of supply to really not make this an area where we have to price. And if we do, we're not trying to make it a profit center.

On commodities, we've had a program for well over a decade in terms of how we hedge. Think of copper and aluminum in 2026. Now about half of our needs are hedged at this point. And so we'll continue to layer on hedges as we move throughout the year as we normally would. But we'll remain dynamic in terms of pricing as we see those commodities move. On steel, we have about a 6-month lock in terms of pricing. So any pricing moves there impact us beyond 6 months. But I think a proven track record to stay ahead of inflation and make sure that we've got a positive on the dollars and the margins for price cost.

Our next question will come from the line of Nigel Coe with Wolfe Research.

So you said some very interesting comments. Well, first of all, I want to say well done on taking the inventory down. That's not easy, but set you up well for 2026, so well done there. Going back to the comments you made on the Services intensity for chillers and data centers. I just want to make sure I understand that correctly because obviously, these aren't running 24/7, depending on the amid temperature. But just could you just remind us how the service tail on Applied Systems typically looks versus upfront cost? And is that materially different for data centers, that would be an interesting comment.

Yes. Actually, it's a great question. And I think I can tell you right now, we think of it at the [ 8 to 10 ], you've heard us say that number before in an Applied System, at least on a thermal management Applied System. In data centers, look, to be honest with you, it's probably going to be a bit lower, and some of that we're still modeling. And there's a couple of reasons for that, right? One is we could all sit there and speculate what the what the life expectancy is of a thermal management system in a data center. I know what it will run from a mechanical standpoint, and that doesn't change. But because of the efficiencies that you're going to see in the -- if you just follow the track of innovations and how we've been able to improve efficiency over the last 5 years, if you roll that forward to the next 5 years, you may start to see some of these chillers have different lives other than the data center because you switch them out to be able to get power to divert back into the computing side of the equation versus into the thermal management side. So those are some of the variables that are kind of unknown right now. But the question that came in that I would try to answer was, "Hey, if a chiller runs less, do you have the same service on it?" And the reality of it is in a data center, think of it as a chiller -- the fan side or the air side of the chiller is going to run as it does today. The compressing side of the chiller may run less, but it still has to run. And if you don't run it, you're going to end up with problems. So those are kind of the balances that we're working through. So it's pretty dynamic. And -- we don't have it 100% dialed in, but I would tell you, we have a lot of people that are modeling that so we can understand it. But don't -- there's a couple of things that are going to be the same, right? Response time, being on the job site, making sure that you have uptime. All that is going to be the same. Connected solutions is all going to be the same. So we'll still have a big robust Service business as well.

Yes. And then just one more crack at the resi pricing, just given the inflation wave that's coming through in that business. And maybe, Chris, it doesn't sound like you want to put a pin on sort of the pricing. I just wondered, is that because the demand environment is to fluids, the raw material inflation impact is to fluids. I mean any sense on why you kind of -- I don't know if the mystery of pricing here, but just wondering what's kind of like driving our thinking around pricing?

Well, I'll start with our team hasn't announced a price increase yet for -- I'd say that we've got expectations for the year, but we'll continue to remain dynamic. I don't want to signal anything in advance, but we have a lot of confidence in the team that they're going to manage well throughout the year, okay?

Our final question will come from the line of Steve Tusa with JPMorgan.

Glad you clarify that resi pricing comment because few messages came in immediately when you said down. So obviously, some sensitivity around that. But just the Commercial HVAC side, can you help reconcile the -- like 100% plus applied orders and the 35% total orders like what was down to kind of get it to that rate? Or is it Applied just a smaller piece of that pie?

We saw growth in orders in both Applied and unitary here in the fourth quarter. Unitary closer to that low single-digit kind of range, but it was positive. I guess I'd leave it there. I mean, it's pretty broad brushed in terms of the verticals where we saw growth. Dave described the 12 to 14 -- 12 of the 14 verticals.

Well, I mean, I guess, if there is 50-50 simplistically, wouldn't that be a lot higher of a total order number? Or is the -- am I -- is there services maybe in there or something?

Yes. Those services that certainly would be part of that conversation as well in terms of order growth. We'd have to get back to you with the answer. Yes. We can do the math on -- but you're also sit on comps with the prior year comps as well. We have to look at that, too.

Okay. And then just thinking about this kind of trajectory, obviously, very strong orders, strong backlog. In the first quarter, you're starting at like 7% to 8% exiting the year at a higher rate. And obviously, these orders are very strong. Is there something outside of the core Applied business? And I guess what I'm getting at is, are there like a lot of like liquid cooling related orders that are now coming through and pushing that number higher and driving the acceleration in the second half? I know you guys have come out with some big launches on that front. Is that moving the needle on some of this?

Well, I think we're mixing orders versus revenue. So the revenue is more a function that we're going to see in the back half of the orders that we've already booked, Steve. So think of it as -- if our last 6 months in Commercial HVAC in the Americas, our orders are up over 30%, and you just start adding 9 months almost on average to each of those to understand when it's going to ship out. And Europe is very similar, as I said, that was up the high teens level. So all that backlog is going to come up.

To your question on are we seeing robust demand for other elements of the thermal management system, absolutely certainly in our pipeline. And as you can imagine, we're all over it, and the teams are just doing a great job there on the innovation side as well as on the front end talking to customers as to what we have in our portfolio.

Okay. And then one last one, Chris, can you just remind us what the standing kind of Tier 1, Tier 2 kind of raws bases, so we can just kind of like door on math on that inflation dynamic this year?

Yes, Tier 1 is still around $750 million and then the Tier 2 is around $5.5 billion to $6 billion in terms of size.

And that will conclude our question-and-answer session. I'll turn the conference back over to Zac Nagle for any closing remarks.

Thanks, everyone, for joining today's call. As always, we'll be around to take any questions that you may have today or in the coming days. We'll be on the road at a couple of conferences here in February and then into the rest of the quarter. So we look forward to seeing many of you on the road. Thanks very much. Bye.

This concludes our call for today. Thank you all for joining. You may now disconnect.

Good morning, everybody. I'm Tim Wojs. I cover building products here at Baird, and we're delighted to have Trane Technologies join us at our Global Industrial Conference this year. Trane Technologies is one of the leading HVAC manufacturers globally. They have strong market positions in Commercial HVAC Equipment and Service, Residential HVAC and then Refrigerated Transportation.

From the company, we have EVP and CFO, Chris Kuehn. We have Donny Simmons, who is the Group President of the Americas business; and then Pat, who's the Director of IR, is up here in the front.

So I'm going to kind of flip it over to Chris and just kind of maybe give everybody a quick state of the union on Trane, and then we'll get into more specific questions.

So with that, I'll turn the floor to you.

Tim, thanks. Donny and I are very happy to be here, Pat as well and being on a hopefully less snowy day here in Chicago than what the city experienced a couple of days ago.

Look, we're happy to report it's going to be another very strong year for Trane Technologies in 2025. We're guiding to 6% organic revenue growth, 7% reported growth and EPS growth in the range of 15% to 16% with very strong free cash flow conversion again. So we're very happy to be in another very strong year, and we're already putting the plans together for 2026.

If Dave Regnery were here, our CEO, he would say that, "Gosh, we have more opportunities in front of us today than we did even 5 years ago when Trane Technologies was launched." So with that, we're happy to be here and talk more about what we're seeing in the landscapes in the business and what we're seeing out into the future.

Great. You could raise your hand if you have questions or you can e-mail [email protected] and to hit this iPad up here.

But I guess as you think about '26, I mean, it's not like you've given guidance or anything, but just kind of thinking about the puts and takes as you look into next year. You've had some really strong bookings in Commercial HVAC. As those convert, it seems like you have visibility to pretty strong growth there, maybe double digits next year. Residential, Thermo King, both kind of cyclically kind of pressured this year, but at some point, those will recover.

So I guess how are you thinking about growth next year and the puts and takes to that? And then anything on the margin side that you'd call out relative to that kind of 25% plus organic framework that you've always kind of talked about and delivered on?

Sure. Well, why don't I -- Donny, why don't you start and give the landscape of how you're seeing things at the end of the third quarter for the Americas businesses and then how we're thinking about the framework for next year?

Yes. I think just like we talked about in our third quarter earnings, we have a very robust backlog going into the year, primarily -- think about that backlog is 90% Commercial HVAC. So we certainly expect strength in commercial HVAC next year.

On the Residential side, a very challenging market this year. We talked about the third and fourth quarter being down 20%. What I will say as we go into next year, we haven't given guidance around next year is that you could expect the first half of the year to be challenging from a year-over-year perspective, in particular, the first quarter. I mean we had high teens revenue growth in Residential in the first quarter last year. So we can expect that to be a factor. And as we get into the -- through the fourth quarter and into the first quarter, we'll talk about guidance and how we expect that to play out next year.

On the Thermo King side, very much a different scenario in aggregate. I mean, the Thermo King markets have been challenged. We're in what we call a year 4 of an 18-month downturn, very challenging. Certainly, we expect that to change. And historically, if you look, we're at -- the market size today is at a 15-year low. I mean it's a significant downturn. As we go into next year, again, the first half will be more challenged as compared to the second half. And right now, all predictions are as of the second half, we should start to see growth in that marketplace, and we'll factor that in as well as we give guidance into next year.

Yes. I mean the ending backlog at the end of the third quarter was $7.2 billion, and the vast majority of that is Commercial HVAC. We said over 90%. And of that, the vast majority is Applied Systems, and it covers the 14 verticals we track in the Americas as well as globally.

Think about that backlog from the start of the year, okay, it's up about 7%, but it's up about $450 million from the start of 2025. But it's really up $800 million from Commercial HVAC, and it's down a couple of hundred million dollars when you look at the Transport business and the residential business. So the complexity or the mix of the backlog is just continuing to inflect up for Commercial HVAC and Applied Systems.

So it gives us a lot of visibility into next year in terms of what customers want in their deliveries for applied solutions. We need to see how Unitary plays out. We need a few more months to see how that market plays out for next year. So that's another piece of our Commercial HVAC business. And then we have an outstanding Service business that represents about 1/3 of the company revenues that -- those Service contracts are not in the backlog, but we've grown that business low teens CAGR the last 4 years and on low double-digit growth so far this year, and it's going to underpin the growth into next year and for many years to go into the future.

Okay. I guess when you think about Commercial HVAC, just a lot of the data you see that's published, I mean, data centers is kind of the thing that's growing and everything else is kind of muddling along or kind of plus or minus. I mean you talk -- and you and Dave talk about tracking kind of 14 different verticals internally. How is each one of those performing? Because I think there's a perception out there that it's just all data center growth. I think you guys pushed back against that, but I'm just kind of curious how you would kind of characterize it?

We intentionally do.

Yes. I mean we do push back on that because we serve all 14 verticals, and we're very well diversified. We're not heavily weighted to any one. And so we do see growth beyond data centers, and we see growth in some pockets in office. If you think about Class A office space, we're seeing growth there. And think about that in terms of upgrading Class B to Class A to make that more attractive to pull in tenants. So we see growth there.

We see growth in higher education. We see growth in health care. We see growth to some extent in government as well. Where the markets are challenged and where we've seen challenging markets this year, retail has been a challenging market this year. Life sciences has been a challenging market this year. And that's -- but honestly, like if you look forward and look through our pipeline going forward, we see nice prospective growth in all the 14 verticals for the most part.

Okay. I guess when -- if you step back, just I mean your Commercial HVAC business has basically doubled since COVID. There's obviously some price in there, but I think you've picked up a significant amount of market share over the last 5 years. So could you just talk about why Trane is kind of winning in the market and why what you've built around products and distribution and service is kind of hard to replicate?

Sure. look, it's a system of things, and we talk about -- it's hard to replicate, and we're very proud of what we have. And it starts with our people. It starts with the innovation that we have for our customers, and that's a key driver for us is the innovation. We want to make sure that we're continuously innovating the next generation of technology for our customers. It also has a lot to do with our channel strategy.