Trane Technologies plc (TT) Earnings Call Transcript & Summary

Good afternoon. My name is Nigel Coe, Wolfe's multi-industry analyst. It's Wednesday, May 26, 2:00 p.m. Very pleased to welcome Trane to the Wolfe Conference. With me is David Regnery, COO; and Chris Kuehn, CFO. Gentlemen, thank you very much for the time. It's a pleasure to be hosting you. Looking forward to Q&A. But Chris, I think you're going to be making some opening remarks. So Chris, over to you.

Yes. Thanks, Nigel. Really happy to be here and great to be part of the conference. Dave and I have had some good conversations this morning. I know that will continue in the afternoon, and the team is always doing a good job putting together a successful event. So thanks. While the pandemic has created challenges that really none of us would have expected in our lifetimes, our strategy as a global climate innovator remains steadfast. We're innovating rapidly to address complex and pressing sustainability challenges for our customers and for the planet. We're setting bold goals and challenging what's possible for a sustainable world. At our investor event in December, we outlined that we're on track to deliver $300 million of run rate transformation savings by 2023. And we take those savings, we reinvest them in both relentless innovation and in improving our cost structure. It's a proven formula for enabling sustainable operating leverage and margin improvement. Our investors have seen how this high-performance flywheel delivers consistent market outgrowth and powerful free cash flow, which we continue to deliver and deploy with our balanced capital allocation strategy. One example of how this all comes together is actually the launch of our Advancer refrigerated trailer unit that was launched last year in Europe by our team in Europe. The Advancer has the lowest carbon footprint of any trailer refrigeration unit on the market, along with the lowest total cost of ownership, including 30% less fuel consumption, which is really versus the next best product on the market, which is our product. The Advancer is produced in our Galway, Ireland factory, and that factory contributes zero waste to landfill. And in addition, the product also takes 60% less energy to manufacture than prior models. Recently, the Advancer production line received certification by the National Standards Authority of Ireland for being carbon neutral. It's the first production line in Ireland to achieve this status and amongst the first in Europe, so we couldn't be more proud of the team for launching a great product and doing it in the right way. This is really just one example of how we're driving towards our 2030 sustainability goals and commitments. It's simply untrue that there has to be some sort of trade-off between being sustainable and being profitable. Our purpose-driven strategy is backed by long-term sustainability megatrends, and our innovation continues to drive customer demand in our end markets. We can drive differentiated returns for our shareholders while also taking bold action toward a more sustainable world. With that, Nigel, Dave and I are happy to take your questions.

Great. Thanks, gents. And certainly, 2030 is a long way away, but -- and I think for the last 10 years in the way that the old Ingersoll Rand has transformed the Trane today, it's been quite something to watch. So the next 10 years will be interesting for sure. Before we get into Q&A, I just want to remind the audience that if you got any questions, use the text box in the cast portal or IM me, and we'll get the questions halfway through. So I'm not going to direct this to anyone in particular, but I'm just wondering if maybe we could just touch on the trading environment. I know you don't provide inter-quarter commentary, but -- or to a large degree. But in general, kind of like how are things tracking relative to the last time we heard from you back in April?

Yes. I'll start Nigel. And Dave, feel free to jump in, if that's okay. When we had our earnings call just a few weeks ago, we saw the second quarter really playing out with strong growth. And we entered the second quarter with, in many cases, record backlog in most of our businesses. So we're intending for the second quarter for our organic revenues to be up around mid-teens. With the recent acquisitions we completed in December and in January, channel acquisitions, both in the U.S. as well as in Australia and New Zealand. That's going to add about another 1.5 points of revenue growth on top of that organic mid-teens outlook. So we're probably mid to high teens in terms of revenue growth all in between those two. And we're anticipating organic leverage being around 30% for the quarter as well. So as you look around the globe, I know, Dave, we kind of look at things in the U.S., so what's working in some verticals, what some verticals are challenged and the same in Asia and Europe. Do you want to take that and give some...

Yes, sure. I mean let's start in Asia because we always tend to start in the U.S. But in Asia, China is -- we're seeing nice growth in China, and we expect that to continue. The rest of Asia is very -- it's really country-dependent. And it really has to do with COVID vaccine distribution or not. And so we see it kind of being -- it will be plus and minuses for the rest of Asia, but China will be strong. If you go to Europe, Europe is -- again, it's very country-specific. We have some countries that are doing quite well, other countries that are still kind of maybe where the U.S. was 4 or 5 months ago with vaccine distribution. We're seeing a lot of activity in Europe with some of our innovations, especially around the electrification of heating. And Chris talked earlier in our Thermo King business with our Advancer product there. So we'll -- we're doing very well in Europe right now. We expect that to continue. You come to the U.S., it's -- you got to really look at it by vertical. And if you think about it, the data center vertical is strong. It has been strong in the past, that will continue. Warehousing has been strong, that will continue. Education has been strong, obviously, with infrastructure or relief funds coming from the American Rescue Plan. That will be a tailwind there. There's other verticals that are weaker, office, obviously, retail, hospitality. One of the things we are seeing in the U.S. is we are seeing requests for indoor air quality picking up in office, which you would expect as CDC last week came up with the new removal of masks if you're fully vaccinated. So people are really now starting to think about how do I get my employees back to the office, whatever that is, I'm not sure if it's 100% or some sort of a combination of virtual or with 100%. But the indoor air qualities, and that's a good sign for the office vertical, because it starts with let's do an audit, let's get our people back to work. I'm sure employers are asking their employees how they're making our space safer. And we're playing a big role in that with the audits that we're doing. So hopefully, that gives you a little bit of color, Nigel.

It does. Absolutely. And maybe -- I don't want to dismiss China or Europe, but sticking with the U.S., and you mentioned some of the stronger verticals and education, obviously, is top of the mind for a lot of investors right now, just given the sheer number of dollars that are going in there. Any kind of more definition on sort of the benefit that you expect to see coming into your pockets -- not your pockets, but just the HVAC kind of verticals, CapEx, the relevant sort of spending categories for Trane? How much of that is going to come into your TAM? And is it too early this year? I mean it seems to me that a lot of our competitors aren't really being specific about this year, but do you think it's more of a next year tailwind? Any thoughts there?

Yes. I mean if you look at stimulus funding, and there's been 3 different tranches of stimulus funding, but the last one is the one that's significant. The timing on that, it used to have a duration of 3 years. They now extended that for 4 years, okay, because legislative bodies understand that you could really only do work in the education vertical when students are in the building, at least anything of any kind of magnitude. So they now extended that to 4 years, which is a good sign. Our approach there has been with our indoor air quality audits. So we do kind of the day 1 activity, which is let's get your school as healthy as it can be with the infrastructure that you currently have. We then provide our customers with a road map as to what the future would look like. Now we do this at a very -- at a systematic level, okay? So this isn't just like selling a point solution. We look at the entire system and we work with our customers to come up with a road map so that a, the building can be as safe as possible today. More importantly, what is that -- what are those infrastructure investments that need to be made over time, okay, to improve the indoor air quality and to reduce the energy intensity of the billable. Most of the way you improve indoor air quality is -- the best way to do it is through -- there's lots of different ways, but one of it is certainly to bring in more fresh air. As you bring in more fresh air, it uses energy. When you increase filter density, it uses energy because you have more velocity that needs to be pushed through the air ducts. We provide our customers with a road map so that you could have a safe environment and an energy-efficient environment. The day 1 activity has been happening for a while. We're now starting to see our customers act upon some of that day 2 activity with stimulus funding becoming available. It's going to be -- it's too early to say the size of that, Nigel, because we really don't -- we really haven't been able to ascertain how much of it's really going to be incremental versus what normal spend would be. So if your normal spend was going to be $1,000, are you now going to spend $2,000 or are you still only going to spend -- you're not going to spend any, you're going to use all the stimulus funds. That's to be determined. But I would tell you that we are starting to see activity on what we call day 2. So these are the audits that we've completed. Customers are coming back to us saying, hey, look, let's pull some of this infrastructure work forward. And what can be done and whether it be this year or 1 of the next 3 years, so the stimulus funds can be used.

So if you think about the totality of your HVAC end markets. And I'm talking about China, Europe, subverticals within there, the U.S. as well. Will you think U.S. education is going to be your strongest growth vertical given the sheer number of dollars coming in over the next 3 years?

Yes. Yes. I don't think -- I mean, I think that -- first of all, we play in all verticals, okay? So we're not overweighted necessarily, although we're very strong in the education vertical. It will be a strong vertical, but there'll be other verticals that we believe will have strength as well. I don't see any of us using less data, okay? Everything is connected. And then -- and more things want to be connected tomorrow. So the data center market is certainly one that is very active today and I see that being very active in the future. Office, I think, is a little bit of a wildcard, Nigel. I think we need to look at that and say, we're starting to get the inquiries again on the audits. That's a good sign. What does the office look like tomorrow? What does the work environment look like tomorrow? I think that's still to be determined. There's a lot of articles being written on it, whether it's -- what percentage is virtual, what percentage is in office? Do offices get reconfigured for more teaming space versus hard office doors? That's to be seen. And I think all of us are working through that as business leaders to find out what's optimal for our businesses as well as for employees. So I mean, education will be strong. Health care will be strong. Data centers will be strong. Warehousing will continue. There's some other ones that are out there that we'll wait to see what happens. And if you look at the Dodge reports, they would say that education is still going to be down, But I think they didn't take into account some of the stimulus funding.

Broadly, Nigel, for IAQ, we try to size it as 1% to 2% of revenues. So over the longer term, right, with 400 billion square feet of commercial space to get done, it's going to take many years to get there. This year, we're seeing it's probably closer to 2% of revenues in terms of growth from IAQ. So just a broader view there, too.

Okay. And then think about some of the more heavy impacted verticals, you mentioned office, lodging and 1 or 2 others. It seems that it's going to be a bit a wave of reopenings happening in the next 6 months. Certainly, New York feels like it's going back to work. Is there any element of catch-up as employees return to these buildings where there just has to be some deferred maintenance or some -- bring on 2 chillers or 3 chillers is going to -- kind of a Yeti involved in there in that work. Is there any deferred maintenance involved with this reopening?

Yes. I mean if I look at our service business and our service contract base, there certainly have been customers where you've had some problems having access to locations. That's -- we kind of worked through that early days, though, in the pandemic. I'm talking the first 6 months, we were able to get access and do maintenance on these -- on buildings. I think that people that made the decision to say, I'm not going to do any maintenance on equipment and I'm going to kind of shut everything off. When they go back to their office, they may be very disappointed, right? These are systems that need to be maintained. And if they don't maintain them properly, they're going to have to get them back up and running to a state that would be what they desire. So it's kind of a mixed bag. I don't -- there could be some, okay? I think it really depends. But remember, a lot of hotels and stuff, they've still been operating. Maybe at reduced capacity rates, but they've still been operating. So there could be some, but I don't see it to be -- I don't think it's going to be the spike that we'll see automatically.

Okay. And then maybe sticking with Commercial for 1 or 2 more, and then we'll switch to Residential. When we look at the next like 7 years and get away from stimulus here, sort of more structural energy efficiency legislation, regulations, codes, maybe [ actuary ] regulations and things like that. What are you expecting -- coming through the funnel, I know we've already got some regulations in Europe, some funding in Europe around heat pumps. But what are you expecting to see over the next several years going to be drive tailwinds for Trane and your competitors?

Yes. Well, I mean if we start with Europe, okay, electrification of heating will continue. And just to be clear on that, our approach there is at a system level, okay? If you think about a conventional building, it was typically a chiller plant and a boiler plant. Our strategy is to combine the two, okay? And we talked about heat pumps. That was really kind of a metaphor for variable water flow systems, okay? When you combine those two together with some of the technology that our clever engineers have developed, you could increase the efficiency rates by 400%. And it really depends on the heat sink that you're going to be using in your system. But these are ways where it's eliminating a fossil fuel boiler. It's providing extensive value for the customer. I mean just think about a system that's going to operate 400% more efficient than the 2 systems that you are replacing. So this is going to be a big tailwind for us in Europe. It's being regulated in certain countries. We're starting to see -- we see interest, obviously, in China as well as they're very concerned about the environment there in certain -- very concerned about what's happening there and there's some legislation around that they talk about as far as this has become applicable there. We're getting a lot of inquiries for the same technology in the U.S. And one of the constraints that we always had in the U.S. was leaving water temperature. It had to be at 180 to 185 F. Through our system approach on that, we've been able to solve that. So these are systems now that really can be applicable throughout the globe.

Okay. So you think that this could be a meaningful market in the U.S. as well?

Absolutely. Over time, it will be. As far as the U.S. legislation that's coming down the pike, we've had a strategy that we kind of adopted maybe a decade ago that we're not waiting for legislation, okay? We want to be in front of any kind of legislation. I think if you look back in the 2012 time period, we were one of the first in the market with next-generation refrigerants. There's no legislation back then. We developed a system that would work with HFO-type refrigerants that had close to 0 GWP. And by the way, our customers were asking for that. So we're well -- I'm not worried about any regulation coming in and we won't be ready for it. We're probably ahead of most regulations that are even being talked about right now.

Okay. And then within -- going back to Europe, the European opportunity, it sounds like you've got a great product with the combined heat and cooling. What is the competitive set in the commercial building for heat pumps right now? Who would you describe as your most competitive in that market?

Yes. I mean I think everyone might have a heat pump. It's -- are they looking at it at a system level and being able to say, I'm combining this chiller plant with this boiler plant and really creating a different system, okay? And there's a lot of logic behind how you do that from a controls standpoint. And there's some patented features that we have in our system that allow us to really expand that operating map. Where in the past, we were usually constrained by ambient temperature. So the heat pump technologies don't work in very cold climates, and we were always constrained by the water temperature at a leaving level. So think of it as if you can only get to 150 degrees F for leaving water temperature, the codes are written around 180. So we've been able to expand that operating map by creating a system approach at this. And that's what's differentiating us. A lot of companies have like heat pumps, right? Of course, they do. We've been -- when you think about it, the heat pump has been around for decades. And -- but the combining of those into a system that has efficiencies like our systems do, we're pretty unique in the marketplace right now.

Okay. Great. Moving to Residential. This is a market where you've got incredible strength. And I think it's fair to say, Residential has been stronger for a long time than perhaps we don't expect it. But right now, I mean, I think the replacement demand models that we were running just don't work. I mean, I think the market is running well ahead of what typical kind of break, replace will get you to. What do you think is driving this market right now? I mean, there obviously a number of factors, but what do you think is driving the market? And aren't we stealing from the future? And I know this question was asked on the call, but do you think we are borrowing from the future in some ways that the replace cycle is so strong today that maybe some of that future replacement cycle has been brought forward into this year?

Yes. I mean it's a great question. I mean we certainly look at replacement cycles, okay? The highest correlation that we see is consumer confidence and unemployment, right? And it's the same -- it's the same things that track the auto sales as well. We look at our Residential business as a GDP-plus business. And that's our model going forward. We're putting innovation into that -- into our Residential portfolio. We're very happy with the success that we've had in that space.

Okay. So you think that we can grow in '22 and '23 off the space? I mean...

I think it's a GDP-plus business.

Okay. Fair enough. That's loud and clear.

Yes. I want -- I mean the historical trends, and you kind of hit on it, Nigel. There's a lot of assumptions as to why, okay? People are working from home, right? If you look at what happened in 2020, right, pandemic hits, everything kind of stops. It starts getting really warm like it is here in Charlotte today. And then people realize, I'm working from home and I don't like working from home when it's hot. So the whole replacement cycle, we started this slow first half, really ramp up in the second half. And then you have some stimulus funding that makes its way. Consumer confidence starts to improve. Vaccines start to happen. Consumer confidence last month was very positive. So those are all good signs. Again, we think it's a GDP-plus business.

Sure. But you're right. I mean consumer confidence, home prices and unemployment typically do [indiscernible] market. So we're at an uber peak on replacements, and our unemployment is still unreasonably high. And consumer confidence is okay, but it's not peak. So that's what I was coming to, just in terms of [ budget's ] going to hit there, but I understand. You've given a lot of details around transport. Your thoughts on the market this year, next year, and even, I think, 2023. Maybe just getting away from the cycle aspects here and thinking about the structural changes in this business over time. What do you think has changed in this business? And I know that there's some electrification going on here as well. I'm thinking about the cold chain in places like India and emerging markets. Are you seeing changes in those markets that maybe drive the stronger cycle going forward?

We are seeing changes, but it's off of a low base, Nigel. So there's still a ways to go in Asia Pacific or certain regions of Asia Pacific, India for one. China business is growing nicely. But again, it's off of a small base. So -- but long term, if 26% of all food that is produced is wasted, that's a really -- as a society, that's a really bad metric. So we need to find a way to reduce that amount of waste. And a lot of that waste happens because the food isn't transported properly or handled properly throughout the cold chain.

Right. Right. Okay. So moving on. So Chris, you mentioned 30% incrementals for 2Q and 30% for the balance of the year and just be [indiscernible] includes organic incrementals in 2Q. But it doesn't feel like you've seen any deterioration over the balance of the year despite the fact that I know inflationary pressures are picking up through the year. So any updates on sort of how that price costs gap looks over the balance of this year?

Yes. We're expecting that, Nigel, to be flattish Q2 to Q4 on price/cost. We did get out ahead on the first round of price increases, really in that November, January time frame. We had a second round of price increases that went into effect in the April time frame, early April to mid April. So that helped drive some very strong positive price/cost in the first quarter. So that was particularly strong then. But as we just see that volatility with commodities, and it doesn't seem to ever be relenting, we're forecasting that it's going to be flattish for us for the balance of the year. We've got the playbook in terms of what we're executing. So we're moving forward with locks on copper. We'd enter any quarter with roughly 75% of the copper buy locked in on price. So as prices go up, we don't see that effect immediately. We would see that over time. On aluminum, we follow a similar strategy, probably a little bit less locked as we go into a quarter, just given availability. And then on steel, where we've seen rapid price appreciation, we're about 6 months locked, let's say, in terms of the 3 months we buy in advance on pricing and then 3 months we have in inventory. It's about a 6-month window before price really hits us there. So Q1, very strong. Flattish for the balance of the year, but something we're continuing to manage and monitor given the volatility.

And then -- sorry.

I'm sorry, one more piece I would add there. I think that this ties in innovation as well. When you've got innovative products and you're showing total cost of ownership improvements to the customer like that Advancer product we mentioned at the open, that's a great place for us to also drive price and improvement in our products as well.

Right. Absolutely. Would you say that, that neutrality is pretty much across the board? And I'm thinking here that historically, we've seen some spats of kind of price pressure in APAC, APAC Applied, Middle East Applied markets. Are you covering inflation in those markets as well? Or is this sort of good news, bad news across the portfolio?

Yes. I'm looking at it just in totality, kind of for flattish. But there have been cycles several years ago where we were negative price cost for a quarter or 2. That can absolutely happen. But price generally sticks in this industry. So that's a good thing in terms of as we rolled out the 2 price increases. I'm not taking a third price increase off the table, depending on where commodities go. But my comments are more the kind of enterprise, top level, flattish. We could have some spots in between in the business that could be negative. But generally, that's not lasting for more than a couple of quarters.

Sure. And then swinging to my question about the APAC margins, outstanding. I mean it's been the biggest upside to my model easily in the last 2 or 3 quarters. And APAC margins were actually the highest of the 3 geographic regions in 1Q '21. How sustainable are those margins? And do you think that going forward -- I realized that in the Americas, we are in a slightly different part of the recoveries, maybe. But do you think APAC, EMEA, Americas going forward will be much more similar than they've been through history?

Yes. I'll start. If you look at 2020, those margins for the 3 regions were all about within 100 basis points of each other. So you're right, Asia probably being in the lead there. But the team in Asia has just done a fantastic job over many years in their maturity around going to market strategies, cost containment and cost improvement strategies. Five years ago, we invested in a direct sales force in Asia. It was the right thing to do to get closer to the customer. It's allowing us to drive market outgrowth. And as Dave has commented before, be the basis of design for products in Asia, so that allows us to capture more. Transformation savings, though, it's not just a cost containment action. It was really let's move accountability for certain functions to where it makes the most sense. And the maturity of many functions maybe have been centrally led that really made sense for us to move closer to the regions, closer to the business units. And Asia is a great example of that. Moving functions within the IT organization, within my finance organization into the business and not centrally led has really let the team locally make the right decisions with the right view on the street. So that's allowed them to really optimize the cost structure, optimize where we want to make our bets and our investments. So I think with transformation, we view that as structural. And I think our team in Asia has just done a phenomenal job there in growing those margins very rapidly, but now the goal is how do we keep growing them going forward. I see them, like all of our regions, that 25% mid- to long-term operating leverage, organic leverage target that we put out in December. That's across all of our regions. So we'd expect Asia to continue with that as well.

Yes.

They also -- Nigel, they also have a great portfolio of innovation that they've come forward with. Again, to Chris' earlier point, when you have innovative new products, you're able to upsell those because of the benefit that they provide to the customer. And that's a team that's been very, very creative in some of their innovations there.

Yes, absolutely. I did want to come back to the 25% incremental margins. But before that, just touch on supply chain. Because you've coped with some of the supply chain pressures admirably. Some of your competitors have not, quite frankly. And it has been a share shift, especially in U.S. residential markets. Is that continuing? Are you still seeing, number one, the pressures for Trane and any alleviation there? And secondly, is it still a driver for some share shifts?

Yes. Nigel, it's -- if you think about it, during the pandemic, we put a process together to help work with our supply chain, and it's now part of our operating system. We have a very open relationship with our strategic suppliers. We share with them what our forecasts are going to be. We understand what their concerns are. We help -- we work with them to understand where their pressure points are. So it's a very collaborative working relationship that we've developed and a lot of standard work that goes into that to make sure that we don't let things slip. That process started during the early days of the pandemic, and we've continued it -- we continue it now. That's not to say that we don't have issues that pop up because we do. And it's not that it's easy work because it's not. And I actually sit on the call once a week with the team. They meet more frequently, obviously, just to get a sense of what they're feeling. I'm really proud of what that team has been able to do to solve problems. And when we have a problem, we work with our suppliers, we understand what their constraints are. How can we help them? How can they help us? And it tends to get resolved in the short term. It doesn't mean we don't have disruptions because we do periodically, but the team does a great job to minimize that. And to date, we're able to have the right components in our factories to make sure that we meet our customers' demand.

Right. Okay. Thanks, Dave. Back to the 25% incrementals. And obviously, this is thoroughly embedded in December. And I think the response was reinvestment in the business to drive growth. I mean -- and that's the right thing to do. One thing that Mike mentioned a few years ago that struck me was the goal of reducing emissions for customers, Tier 3 emissions, meet the efficiency targets, coping with next-gen refrigerants is going to mean rising investment levels, rise in R&D. Is that still the case? Do you still see R&D requirements in the industry rising? And secondly, is the industry structure today the right one, i.e., do we need more consolidation? I think Mike has been on record of saying that there needs to be more consolidation. So if you can touch on those topics, that would be great.

Yes. As far as the investment required, we invested at a high level decades ago, and we continue to invest every year, okay? So we're not episodic in that, okay? We don't take a year off. We believe in investing at a high level and continuously invest. And that's what allows you to stay ahead of a lot of regulations. And you could even demonstrate what's happening or what's possible in the industry, and I think that our creative innovations have been able to do that. As far as the market dynamics around consolidation. If you look at the top 4, which Trane Technologies is one, there's certainly a concentration that maybe has built over the last 5 years. So any consolidation with that -- those top 4 would probably be a little bit difficult, okay? If you look at 5 through 15, yes, you're right. I mean we spend a lot on innovation every year. Regulations are changing, right? HFOs are in front of us. Energy efficiencies continue to be pushed. It takes a lot of dollars and resources to make sure that you stay on top of those regulations and you're able to achieve the results that are required to be able to sell your products globally, okay? It's not -- people often think of the regulations and they look at the U.S. Well, there's regulations in Europe that we're able to achieve. There's regulations in the Middle East. There's regulations in Asia, right? It's looking at it from a global perspective. So could there be consolidations at 5 through 15? Sure, there could be. The good thing about the Trane Technologies portfolio is we don't have to do anything, right? We have a great product. We have great controls. We have great service business. We have an unbelievable channel to market. In our Commercial business, we're predominantly direct sales force, which allows us to be very nimble and flexible, okay? We have new products that come out all the time. Our sales force is very reactive to getting those to market. They understand the value propositions. It's not like we're going through distributors where you have to convince them to sell your product. This is all Trane Technologies, right? And it's a great business because of that. So we spend a lot to developing that channel. The channel just doesn't happen by accident. I mean there's -- we have graduate training programs out of college that we send people away to be trained, technically trained for 6 months. This is an all-encompassing system of things that makes Trane Technologies a great company.

Yes, no question. So when the 5 to 15 consolidation comments was centralized, the question many had was, are there 15 HVAC companies? And of course, there's a lot of small players in APAC. Do you think it's possible for a Trane or a Carrier or whoever to go on and buy Asian -- and I know that Carrier bought Chigo. But do you think there's scope for Trane to consolidate some of those players in Asia?

Yes. I don't think we have to do anything, Nigel. I think anything is possible. We want to make sure it's going to add value, right? We're going to be very disciplined as we have been very disciplined in our M&A activity. And the returns that we've been able to achieve with our M&A have been remarkable. So we're going to continue with that discipline. If it can add value, we're certainly willing to look at it. Our M&A pipeline is very active. We look -- at as a large player, obviously, we would look at a lot of different deals that come across our desk. So -- but we're going to be very disciplined with that approach. And to date, it's been very successful for us.

Absolutely.

Yes, I'll focus there, Nigel. If it reduces energy intensity or reduces greenhouse gases, it's absolutely a technology we want to look at, and that's where we'd probably be leaning in a bit more. To Dave's point, some of those returns we've seen on acquisitions in the last 4 years in the technology space that we can bring into our channel. We're seeing 80% or better cash flow returns on invested capital on those acquisitions. So that's where we just see a very strong pipeline, and we'll evaluate anything that really comes across the table but remaining disciplined.

It extends our bets. I mean that's not a bad return at all. But is there an ambition though to maybe branch further -- away from the farm, in the building? Meaning I know that there's been some competitors that have done sort of diversifying deals in terms of the building systems. Is there any ambition for Trane to do that? Or do you still see very much within this HVAC cluster?

We like energy efficiency. We like sustainability. We like creating value for our customers, and we like the HVAC space.

Absolutely. Okay. You've got the target to deploy $1.5 billion of surplus capital this year, Chris. Maybe talk about where the needle is shifting. It sounds like, Dave, you mentioned you got a very active M&A pipeline. The degree of confidence that you can kind of deploy a good quarter of that into M&A? Any views on M&A versus buybacks this year?

Yes. I've got confidence that we've got a really strong pipeline, you're right, we took up that guide from $1 billion share repurchase M&A to $1.5 billion. All in, with dividends and debt pay down, it's $2.5 billion of deployment. When you look at it at that level, we deployed about $600 million in the first quarter. So close to 25% of the full year, we deployed in Q1. But I'm optimistic we're going to get some M&A continued done this year. We closed on a number of transactions, a couple of them in December, one in January. And that pipeline just continues to be robust. So we'll look at it quarter-by-quarter as we kind of see opportunities. We're going to lean into M&A where it makes sense and what Dave and I are going to describe, Nigel. But if not, as the stock continues to trade below intrinsic value, we'll deploy that cash to share repurchases. We're committed that 100% of that excess cash is going to get to shareholders over time. So we're going to just look at that as we go quarter-by-quarter during the year.

Great. That's perfect. That's very clear. Well, gents, we're our of time. So thanks for the conversation. That was a great discussion. Dave, Chris, we really appreciate your participation and your time, and good luck. Thanks a lot.

Thanks. Thanks, thanks for having us.

Bye now.