Trane Technologies plc (TT) Earnings Call Transcript & Summary

We're very excited to have Trane Technologies with us, a stalwart of this conference. We've got Dave Regnery, Chairman and CEO; and Chris Kuehn, our EVP -- or Trane's EVP and CFO. I'm going to turn it over to Dave for some prepared remarks, and then we'll get into Q&A.

All right. Well, hey, thanks, and thanks, everyone, for coming. I see a full house, so that's always a good sign. Look, real quick, Trane Technologies had a standout year in 2024. Our top line revenue growth was 12%. Our EPS growth was over 20%, 24% to be exact. Our cash flow conversion -- free cash flow conversion was 109%. So we had a standout year. Our service business grew in the double-digit rates. And what I am -- we also introduced 190 new products into the market, 190 new products. Now some of that was based on regulation, but just think about that because that's all future growth, right? New products take a while to ramp up. So we're very excited about that. But if I look back on 2024 and I say, okay, what am I most proud of for Trane Technologies, it's really the health of our culture. And we do an annual employee engagement survey every year, and 2024, we had the highest score ever as Trane Technologies. So our culture is this diverse, inclusive uplifting culture that really looks to solve problems, and you see it in our results. We don't look at a problem and dwell on it. We look at a problem to solve it because that's really where the growth opportunity is going to come from. And that's the culture that we've been able to create at Trane Technologies. So thanks for coming today. Andy, you always do a great job at this conference. It's always great to be back in Miami. Next year, I'll make a suggestion to change these chairs. But that's okay. We'd be happy to answer whatever questions you have.

Dave, we just keep you on your toes with these chairs.

I can't keep my toes on the ground with the chair. I sink in them about 8 inches.

We'll do high tops next year. So just to your point on culture. I think culture breeds innovation. So one of the questions I get most on you guys is how do you stay ahead in innovation? How do you stay in the forefront? And so what are you doing in terms of reinvestment in the business? Because you do talk about reinvesting in the business a lot.

Yes. I mean let me talk about innovation first, and we'll talk about what we're investing in. But look, part of being an innovative company is never being afraid to invest in your business. And we're not episodic at all in our investments. And I always tell some of our younger employees, they always say, well, what's the hardest decisions you make as a CEO? And I always tell them, look, the easiest decision for a CEO to make is to cut spending on NPD, new product development because in the short term, you never see the impact. But long term, you'll see the impact. So we're a company that's never going to be there. We invest continuously in our business really about innovations tomorrow. But I would tell you that investment alone doesn't do it, right? You have to make sure that you have the right processes to ensure that the investments get the right returns. And that's part of our business operating system. So we have a very detailed gate process that we put all new products through, which ensures that we don't have any redos, right? And it looks laborious upfront, but you have to make sure you do that work to make sure that the outcome is what you desire. The third area I would say is you need to be close to the customer, right? You can't just create innovation in a box. So you need to understand your customer. You need to understand what their demands are today and foresee what their demands are, what their innovations are required for tomorrow. And we have a direct sales force, which I know you probably all heard me talk a lot about. But I would tell you, it is a competitive advantage that we have as Trane Technologies. And we have great product management that really looks around the corner to understand what's going to be happening tomorrow. And then the last area that I would say if you want to be an innovative company is you really have to get this mindset of how do we solve problems, right? Let's -- I always tell the teams, let's work towards yes. And if you've ever been in a leadership position, a lot of people will tell you no, right? I want our teams to work towards yes. I want to solve problems because when you solve the problem, that's the growth opportunity of tomorrow. And our teams are really, really good at it, and we have a lot of momentum. 190 new products last year, 190. Now some of them were regulatory based, okay, with the refrigerant change. But just think about that and think about all the innovations that we have that are coming. I always ask the team, I say, can you show me the announcements that are going out this week because I'm going to an investor meeting, and I may get asked questions on it. I'm getting -- it becomes a very thick document, right, as to all the innovations that we have in our company that are being released. But it's also very exciting. It's very exciting to work for a growth company. And if you look at Trane Technologies over the last 4 years, our compound annual growth rate has been 12% on a reported basis. It's not that different on an organic basis. But think about it, it creates a lot of opportunities. And a lot of that is fed by direct sales. A lot of that is fed by our innovation.

Dave, do you want to summarize that...

Well, some of it is public now. We came out with a really cool technology. Just -- it was just introduced yesterday where it's a manifold design where you basically take a -- you could take an old building that has infrastructure and put it. So it's taking a 4-pipe system and making it a 2-pipe system. So it's really cool.

Got it. And just one more follow-up there. Like in terms of the investments -- any place where you're focusing more these days?

I mean, look, we're investing heavily in new product development. We always have. We're investing in digital. You saw us with an acquisition, BrainBox AI. There's a reason why. It has to do with demand side management, the fact that we know that about 30% of all the energy after the meter is being wasted, and that's going to be a massive opportunity in the future. We're investing in our service business, right? Our service business compound annual growth rate over the last 6 years, high, high, high single digits, right? There's a reason why because we're constantly investing in it. We're investing in our factories. We're investing in automation. We're investing in our sales force. We're investing in our product management, our engineering teams. 5 years ago, we became Trane Technologies. 5 years ago, it's hard to believe that it's -- that 5 years goes by in a snap. 5 years ago, we were $12.5 billion in revenue. Last year, we were $20 billion in revenue. So when you have that type of change as a growth company, you have to invest in all areas of your business. And we've had a great flywheel effect, as Chris would say, of the investment. I don't know if you want to go into any deeper.

I'll add some numbers. I mean the new product development, the 190 new products launched last year, we disclosed annually our R&D expenses. It's more of a GAAP number, but the number is up 20% year-over-year. It's over $300 million of R&D expenses. And I think about the performance of what we delivered in 2024 and you can keep reinvesting in the business. Andy, that's the flywheel. You can drive the investments and it drives the outsized performance and growth.

Helpful. So I know how much you love orders questions, so we'll get out of the way now. So look, this will come.

Either that or I could talk about data centers, whatever you want.

We'll do that next. So your backlog has remained unusually high, as you know, right? Like -- but it came down a little bit sequentially in Q4. So I think if I try to sense concern, right, it's like you have really tough comps over the next couple of quarters, especially first half of the year. So maybe a little more color to the visibility you have at this point in the order cycle. Do you still see orders growing in '25? Like how do you think about that?

Yes. Look, I won't forecast our backlog. I did that 1 year, and I ask -- answer questions about it for the remainder of the year. I will tell you that our backlog will remain elevated really for the foreseeable future. And we're very happy with our backlog. We ended the year at $6.75 billion, basically flat to prior year. And by the way, we absorbed about $0.5 billion of headwinds during the year. So FX worked against us. We made some adjustments in our business in China to take things out of the backlog that we didn't have a down payment on. But think about $0.5 billion would have been on top of what we have today. And our commercial HVAC businesses continue to have nice growth. I mean, in the fourth quarter, our commercial HVAC business in the Americas was up high single digits, 2-year stack 20 plus, 3-year stacks over 30. And it's a very similar scenario that would play out in Europe. So very happy with where we are with our backlog. It gives us a lot of visibility into the future. And I'll remind everyone, our backlog does not include services, which is 1/3 of our company that has grown at high single digits for the last 6 years.

So one follow-up to that, Dave. You mentioned on the call your strong commercial HVAC pipeline. So how does your order pipeline this year compared to this?

It's very strong, right? We have very sophisticated CRM systems. So we know what our teams are working on, and we have a lot of visibility into that. And I would just tell you that our pipeline remains very, very strong. And I know, look, I'm being somewhat flippant here with data centers. But look, we've been strong in data centers for decades, and we'll be strong in data centers for decades to come. But our pipeline is broad-based as is our results, okay? So we don't just play in the data center vertical. We play in all verticals, and we have deep domain expertise with a direct sales force with deep technical aptitude within those verticals, and it allows us to win. I mean, let me give you an example. Last year, in office, in commercial HVAC in the Americas, we were up year-over-year. Did anyone look at what the vacancy rates are? They're relatively very high, right? And people would -- it's counterintuitive for people to say, how did you grow in office? We grew in office because we have a sales team that focuses on that vertical, and they understand the breadth of our portfolio, and they're out there selling solutions to customers. What's the problem? vacancy? What's the solution? Make your building more attractive. How do you do that? Well, we develop programs around that, and we are very, very successful. Maybe others just ran to data centers because it's very strong. We continue to focus on a broad-based portfolio of verticals.

So let's just talk data centers. No, just kidding. So...

We love data centers. I love data centers customers, the most creative engineers we work with.

So Dave, just stepping back, right, I do want to talk about the commercial HVAC verticals a little bit more, right? So first of all, in data centers, how are you keeping yourselves ahead of the competition? Like sort of what are you doing to position yourself there? You mentioned office. So you already answered my question there. I think you said life sciences was the only vertical that was a little weaker for you right now. So what's going on there? Does that turn? Maybe let's start there.

What was the first one? Do you want me to talk about data centers?

Yes, I think so.

So data centers, look, how do you stay close to the technology that's coming, stay close to your customer, right? I mean there's not that many hyperscalers. You all know their names, stay close to them, work with them. I mean they're in our plants on a regular basis. They're in our design centers. They're in our labs, okay? We're learning, they're learning. We're creating solutions. We have a project I was telling a group earlier that we're working on in Australia with -- I can't mention the name of the customer, but we've come up with solutions that are just dramatically different than what's been in the market before. And if you know anything about like how you measure coefficient of performance or how efficient units are, we're talking about a step function change with this particular data center customer in a particular region, so it may not be deployable everywhere. But those are the kind of things that we do on a regular basis. And you have to stay current, right? I was asked a question earlier that said, well, your portfolio is the most innovative in the industry. And I say thank you. I agree with you. But if you stop investing in it, if you stop that innovation pipeline, you'll be caught relatively quickly. And I could just tell you that I don't plan on being caught. So we're going to continue with the investments. Other verticals that are going to be strong, education. I know ESSER funding is over, got it. Those orders are still in our backlog. They'll continue to burn through for the next year. I think one of the things that ESSER funding has demonstrated was how underinvested that particular vertical is and how much more has to be invested in it. So there's lots of different ways to get funding into K-12 school systems and bonds, for example, or ESCO business that we operate. So that will continue to be strong. Higher ed will be very strong. So if anyone's taken anyone to college, I have it. My kids are all older. Tell me what they try to sell you on, right? They try to sell you on the comfort in which your student -- your children will be learning in and how important it is. And we're a big part of that vertical, and we're a big part of helping them create that atmosphere, and sustainability is very important to some of the higher ed institutions, and we play into that as well. Other verticals of life science, yes, life science was weaker this year. We'll see how it comes back. I think the whole overbuilt maybe situation there with COVID, with the vaccine generation, but it will come back. Like we don't give up on verticals, right? Verticals sometimes run into cycles. What you need to do is make sure you're investing if there's a down cycle because you want to make sure that when that comes back up, you have the innovative portfolio to be able to serve it.

Just one more question on data centers then. Like -- so I'm just trying to figure out like context for you guys a little. I know you don't want to talk about exact size, right? But are the average size data center projects getting larger for you? Like what's the example of a relatively large project? What would you be doing for a hyperscaler? Maybe you can talk a little bit about that.

Look, I'll use all the wrong terms, but hopefully, everyone can understand this, right? So think about a data center, right? You really have 4 elements, right? Think about the condensing side, that would be the chiller side. We're very, very strong. Think about the air handling side. So you're going to be removing heat from the data hall itself. We're strong there. Think about the terminal side, and this is where you start hearing terms like CDUs and direct-to-chip or immersion cooling. We have partners that we work with on that side. And then you wrap that all around with controls, and they tend to be PLC controls, which we don't play in the PLC control side, but we obviously interface. When we talk to a data center customer, we're talking about that entire system, right, whether it's a partner of ours or whether we're the manufacturer because they're looking for the efficiency of the entire system. So that's kind of how we go to market. That's kind of how we talk with them. We don't talk to them just about an element of the system. We'll talk about the entire system. As far as the -- are they getting larger? Yes, you're talking about data centers now that are gig, okay, what's the biggest problem the data center builder has, it's power, okay? They'll tell you it's land and power, it's really power and then land. So they're getting larger. And think about the larger the data center is, think about there's more heat that has to be removed. And it's a lot more complicated than that. But if you just remember that, it's kind of a good grounding. The larger is the more cooling capacity that will be required.

That's helpful, Dave. And then just shifting gears. China has obviously been a much more difficult geographic market for most companies. If I look at Q4, we're still down Q4 '24. However, you've been really strong in the region. You went to direct to the customer there. So maybe if I step back, do you see structural headwinds in the region? Or is it just a cyclical downturn, you're going to get better? Like how do you think about it?

I think there's a lot of dynamics that are going on in China that we all are aware of or we all read about, okay? So I'm not going to predict the long term of China. I would just tell you that I think that if I look at Asia Pacific, let me just start at a higher level. So Asia Pacific for us, about 7% to 8% of the enterprise revenue. I think of it 50% is China, 50% is the rest of Asia. The rest of Asia will be strong, okay? So -- but think of the rest of Asia being strong, think of Asia in total being flattish for 2025. So whatever up there, think of China being a bit down. Look, we've also implemented a different credit policy in China specifically at the end of the second quarter. It's basically saying, you need to put a down payment, if you don't put a down payment, we're not going to accept the order. And by the way, you need to give us another payment when we ship the product. We think it's the right long-term decision. A lot of the paper is held in China by mechanical contractors that can be thinly capitalized, so you don't want to end up selling something and then writing it off later. That's not a good business proposition. So we're being a bit conservative there, but I also think that it's the right prudent decision for the long term. We'll see how it plays out. We have an unbelievable team there that continues to push innovation. We just had an innovation review with that team, and I'm super excited about what they're working on and the growth elements they see. One of the things you're going to start seeing a lot in China is the -- it used to be just greenfields. So you're now going to start to really get into the retrofit market as that infrastructure ages, and we're doing a lot of work there. So we certainly -- I don't want anyone to think that we've given up on China because we haven't. Great team there. We continue to invest there. And we'll see how it plays out in the long term.

Dave, do you push more investments to the rest of Asia? Like Southeast Asia could be definitely hot there. But how do you think about sort of...

We run in a regional level. So there's a regional President for Asia Pacific that has responsibility for the rest of Asia as well as for China. And by the way, we include India in Asia. So some people don't, but we do. They'll prioritize where they see the right investments. One of the things that we've done that's a little bit unique in our structure is, I wanted to make sure that when we created Trane Technologies, we stayed close to the customer. You heard me talk about that with innovation. You need to make sure that you have regional presidents that have the autonomy to act as to what's important for their particular region. If you think every decision is going to come back to Davidson, North Carolina, there's only one thing I can guarantee, it will probably be the wrong decision. So I have very strong -- we have very strong leaders on a regional basis that really have the autonomy to make sure that -- I mean, obviously, Chris and I approve a lot of the investments, but they're the ones who do the prioritization.

Helpful. And then just moving over to Europe. You guys have really outperformed in EMEA, I think, over the last few years versus most of the competition. So I mean, if I step back, I think a lot of it is your thermal management systems, maybe not all of it. So maybe could you verify that and explain who you're taking share from, what the landscape looks like? And I think one of the big points that you guys have talked about is you can take thermal management systems to the U.S. So where are you, I think you've told me you got to educate. So where are you on the education front?

Knowledge, knowledge, right?

Knowledge is power.

I'm very proud of the team in Europe, okay? I've been involved in Europe from the beginning back in 2012, I think it ended up reporting into me. And I can tell you back then, it wasn't a business that we were very proud of. And today, what was the EBITDA in Europe? 20%?

20% in 2024.

So I mean it's dramatically turned around. It has to do with innovation. And yes, thermal management is part of it. And thermal management is an innovation where we basically -- these are -- the efficiency of a thermal management system is 3 to 4x conventional way of heating and cooling. So that's part of it. But I would also tell you it's a great service business. Our service business there was up low teens, I think, last year. So it's continuing to do very, very well. And we've also been acquisitive there, too, right? We're really good at buying companies that are relatively small that have great technology and scaling them through our channel. So a company called MTA, which is in process cooling, we've been able to scale that nicely. AL-KO, which is on the air handling side, we've been able to scale that nicely. So it's not just about thermal management system. That's certainly part of it. But it's really just an innovative team that has got a lot of momentum and is doing a great job winning. So we're very proud. I won't comment on where we're taking share from because to be honest with you, I really don't know. I just know how we're performing.

And when you talk to the European team, Dave, like Europe is tough right now, but they still see growth.

Yes. I mean if you want to focus on how tough it is, you may end up talking yourself into, boy, this is tough, right? If you want to talk about where the growth opportunities are, you're probably going to think you're going to find growth opportunities, right? So look, we don't We're a company now that we're working towards yes, and we're looking for opportunities, and we're not going to dwell on what we can't control. We're going to focus on what we can control and how we could serve our customers in a differentiated way than some of our competitors. We do that with a direct sales force. And we have a portfolio of products that is the -- I argue would be the most innovative in the industry.

And then the move into the U.S.

Europe, just sticking with that. Thermo King is another great example of flywheel of innovation, outperforming markets for the last 4 to 5 years, outgrowing those markets and just keep investing in that business. It's had its ups and downs. We may talk about the Americas in a moment, but just another great business for the investment.

Yes. On the Americas side, yes, we have the system that's in the United States, also in Asia. Yes, it's a knowledge base. The innovation I was talking about earlier, that manifold, it's actually really cool. We're going to bring that to Europe as well because it's a retrofit opportunity. And it basically takes simultaneous heating and cooling to a conventional way of thinking, but it uses a mixing box like you would see in a VRF system in that system. So it's -- there's a lot of opportunities there. And look, if you could -- if you have a system that's 3 to 4x more efficient than what you're replacing, you have something that is -- it's magic, right? I tell people it's green for green. It's great for a carbon reduction, but it also has a great payback for the customer. So whether you believe in global warming or you don't, which I hope you all do, it's science, right? It has a great impact on your income statement. So it becomes a win-win. And by the way, even if a company maybe doesn't really get the whole global warming, they're going to promote it because I guarantee if you're recruiting from colleges, they care a lot about that. And they care about making sure they come work for a company that has a greater purpose than just their financials. So we have great solutions, and it's a winning combination, green for green, right? And if you think about it, and you think that we know that buildings like this, right, we're wasting 30%, roughly 30%. And I think I'm being conservative in the estimates that you're paying for it. That's where the opportunity is to solve that. We call it demand side management. We want to talk a lot about data centers, how they're using a lot of power. We want to talk about the cost of electricity going up. Not a lot of people are talking about, let's control what we can control and not waste it because that's a massive opportunity in the future.

So I want to ask you about resi HVAC, and then I'll take questions from the audience. So you mentioned you thought $75 million to $100 million of pre-buy impact in Q1 '25. But I think for the full year, you mentioned you think resi could sort of resume that mid-single-digit growth in '25. Maybe just elaborate on the visibility you have as we sit here today. You've talked about mix tailwinds that should help, obviously, this 454B pricing. But how much visibility do you have to volume growth? And I think you said IRA benefits could actually be a tailwind in '25. Could you elaborate on that?

You want to go through the math?

Yes, happy to. So let me just start with prebuy, the $75 million to $100 million estimate. That's what it is, Andy. It's an estimate, right? There wasn't a set of purchase orders that we got that people identified what was a prebuy versus a regular order. So we're making that estimate, probably impacted half in Q3 of '24. The other half of that would have been impacting in Q4. So that's our best estimate when we gave out our guidance a couple of weeks ago, we're guiding full year 2025 to up mid-single-digit revenue growth. Think of it as 3 components. One is returning to a GDP plus environment for that space. So if GDP is a little north of 2%, maybe that's 3% to 4% growth right there. You've got -- the second piece would be the 454B for us, the refrigerant transition. That's a high single-digit price increase on 65% of the portfolio on roughly 75% of the year. So that's adding around 4 points to revenue growth as well, maybe 5. And then you've got -- the third piece would be the deduction for the prebuy. That's about a 3-point deduction. So it gets you in that 4 to 5-ish range where we think full year revenue growth could be for residential. But ready with the conversion. We've been ready through the end of 2024 on the 454B product. Dave has talked in the past about having mixed model lines being able to be flexible throughout 2024 for 410A to 454B. We've made that transition successfully, and we'll keep selling through the remaining 410A here probably in the first half of the year.

And IRA, yes, sure, it will be a tailwind. We haven't been able to quantify that. I think all but one state will be participating. And I believe that last I saw it was like 12 has actually got the dollars are starting to flow. So it's a lot slower ramp than it should have been -- or I shouldn't say that, but it's a lot slower than we anticipated. But it's out there now, right? And these dollars are appropriated, so that they're very hard to pull back. So the states are going. In fact, we actually had the Governor of North Carolina at our facility in Davidson, North Carolina, kicking off the program within our state.

Interesting. Questions from the audience. Any questions? Right up here.

Dave, when you guys sit around and plan for the data center business, what's sort of the 5-year like R&D expectation and the growth expectations that you guys have in terms of -- clearly, you're euphoric now, but obviously, at some point, this thing levels out and becomes more of a steadier cash flow versus a pure growth opportunity. How far out do you think that is?

Yes. I mean if you -- what I'm seeing, okay, is if you're talking to some of these hyperscalers, think of a compound annual growth rate conservatively in the 15% range for the next 5 years. We'll see what happens after that. You brought up -- you hit on a very important subject is long term, right? This isn't going to go away, right? There's going to be an infrastructure there. There's also going to be a service business there. And these systems are fairly sophisticated. And the more sophisticated an applied system becomes, the more you want the OEM to do the service work. So there's a long tail on these projects. So I think it's going to be strong for a while. Yes, the technology is going to change, right? We shouldn't all get concerned about technology changing. It's going to continue to advance. So it's good, right? But if you ask yourself, do I think there's going to be more need or less need for intelligence in the future? Do you think there's going to be more need for data in the future? I think the obvious answer is, yes. And so that's going to be a strong vertical into the future with a nice service tail.

Another question?

Actually, a similar topic just on data centers. How do you see like the demand for your products will change based on the transition from the training models to inference models over time?

Yes, it's a good question. I think that the larger data centers right now are more on the training side just because they require more power. I mean to have all this data that they're trying to put into models, right, where inferences tends to be smaller because you have size because they actually have the model and it's just trying to answer a question. Look, I think that's a good thing, right? I don't -- I'm not afraid of that at all. I mean, at the end of the day, being a data center customer, what's their biggest problem? They'll tell you land and power. It's power and land, right? If they have a gig, they're going to use a gig. How they use it, it's going to -- it could change, but they're going to use the power that's allocated today. And think about if you have power, what do data centers produce? Bits, bytes and heat, we're really good at removing the heat. Now I think there's a lot of opportunities on the heat that's being removed, right? What do you do with that heat? You put it back on to the atmosphere? Or is there another purpose for that? And we're spending a lot of time and effort thinking about what that purpose can be.

Any other questions? There was one over there.

Could you talk about the rationale for your management compensation plan, why it makes sense and whether that will be changing at all in the future?

Management -- from our account managers or salespeople or...

No the incentives that drive your decision-making and you've got free cash flow and TSR and all the other elements that are part of it.

Sure. I mean we've launched the 2025 plan for the annual plan. It's a mix of -- think of it revenue growth, EBITDA growth and cash flow. So that's unchanged, right? On the long-term incentives, it remains a TSR, half of that over a 3-year relative performance period to the S&P 500 Industrials. And then the other half of that is cash flow return on invested capital against the S&P Industrial peer group. So that's been in place for several years right now. We see that certainly in place for 2025. And I wouldn't say any immediate plans to make a change there. We love the combination of driving top line revenue growth, strong EBITDA delivery, and then one thing we haven't talked a lot about is cash. Last 4 years, 108% conversion on cash flow, high-quality earnings. We like making sure we're balanced across those 3 metrics from an annual incentive.

And targets at?

Sorry.

Top quartile targets?

Oh, yes. Sorry, from a financial perspective, when we launch our guidance each year, we're starting out with being in the top quartile revenue growth, EPS growth, and we typically will target 100% free cash flow conversion and see where the year goes. But that combination of starting out the year with those targets, and that plays into the target for the annual incentive plan, right? That target starts at the midpoint of that range. We're starting out the year making sure we're going to be top quartile and then deliver on that or better.

Good question.

Chris, I want to ask you, you mentioned Thermo King. So just like in terms of thinking about over the next few years, right, like I think you're guiding flat this year, give or take, accelerating in '26 to '28. It feels like it has been a little difficult to forecast lately. Like so how do you get visibility around '25? And then you've been consistently, as you said, been able to outperform. How do you consistently kind of move that flywheel as we like to call it?

Yes. We're either in year 3 or year 4 of a 2-year downturn when we talk about Thermo King in the Americas, right? But one thing that hasn't stopped in that downturn is the investment back in the business, okay, from the innovation standpoint. So when that business does grow again, we're ready for that. 2025, it's probably less of a headwind than it was in 2024 on flat markets, but it's going to be a first half, second half of the year dynamic. The first quarter is looking like the bottoming in those transport markets in the Americas, down 25%, 30% in the first quarter. So it looks like second half of the year, we should see growth. ACT is projecting, as you said, it's kind of a flattish market for '25, they're projecting mid-teens growth in '26 and in 2027. So we're making sure we're going to be ready for that growth. It looks like it's more second half of this year, Andy, when we'll see it. But a great team, great dealer base that we have in the Americas and in Europe as well, of course, but we're ready for that growth when it comes.

So it wouldn't be 2025 without asking about tariffs. So let me ask it to you in this sense, right? Like the algorithm for you guys is maintain 20 to 30 basis points of price versus cost over time. So can you still do it in this market? I know you talked about pricing of 1% to 1.5%. You got steel and aluminum, you got all these every day there's something like but is that how you're running the business to go after 20 to 30 basis points in the green on price versus cost?

Well, I'll start. Yes, we guided a couple of weeks ago, 1 to 1.5 points, call it, of price. We would target that 20 to 30 basis points price over cost. There is inflation. If I take ex tariffs, there is inflation in some of the base commodities. There's inflation in Tier 2 and wage inflation is just a good example there. But we feel like we've got that dialed in ex tariffs. On tariffs, you're right, it is probably new information coming out each and every day, and we're just remaining flexible in running our scenarios around that. Our goal would be to make sure we're margin neutral. If there is a tariff that's going to increase cost, we'll make sure that -- we'll make sure we can defend those margins and hold on to that margin and make that neutral over time. And that will result in price having to probably change there. What's good around the company, though, it's been an in-region, for-region strategy for decades. You think about the Americas, we have one great facility in Mexico. We have over 20 facilities in the U.S. So maybe that relative exposure, you have to look at other companies, maybe that relative exposure for us is a little bit less on the manufacturing side. But Tier 2 and Tier 3, right, there's common suppliers that exist in the countries that are being discussed here with tariffs today. But we have a great business operating system around this. When you think about supply chain challenges and inflation back in '21 and '22, we stayed ahead of price on that. We're going to use that same business operating system to react to whatever tariffs will be. Could there be a quarter or 2 where there's a little bit of a catch-up, maybe, but we've got the right business operating system in place to go execute when we need to.

So time flies when you're having fun, so I'm going to weave a couple of questions into one. So like just on the margin side, right, like you averaged 30% plus in incrementals over the last couple of years, you did 30%. I know you're not going to change your 25% plus today. But like maybe you can talk about sort of what you've been doing better because it seems like something has happened to be better. But also like you have this strange setup where APAC margins are higher than your other 2 segments, which tells me that you should be able to "do better than the other 2 segments." Maybe I don't know if that tells you guys that, but like...

Well, I may leverage that for our operating reviews.

Andy is going to switch roles here.

Well, as you said, Asia is our leader in terms of EBITDA margins. It's also a very different mix of businesses when you look at the Americas versus EMEA versus Asia. So we have a lot of confidence. We go into every year looking at each of our regions to deliver 25% or better leverage, right? Dave mentioned before, they have the autonomy to make investment decisions as well, but we're driving each of those regions to be 25% or better. And we think that's the right long-term target because we just look back over the last 4 years, 12% CAGR on the revenue growth, 4 consecutive years of EPS growth over 20%. Cash flow, 108% average, 109% last year, like the performance in the business just keeps giving us reinforcement that keep driving that 25% or better start point and then keep pulling in the investments as much as you can. The pipeline on the investments across our businesses remains very robust. So how do we keep pulling that and advancing it, which then drives the market outgrowth. So that flywheel, we just think has really performed very well the last 4 to 5 years. Let's keep that flywheel in place.

And you guys already mentioned the strong cash flow. So we're kind of getting used to that continuing, tell me if we shouldn't. But like assuming that does, like you talked about BrainBox, like are there any white spaces to think about? Like is there any -- I don't imagine you doing a large deal tomorrow, but at the same time, it's just like very consistent strategy for you guys, right, like smaller technology-based acquisitions, share repurchases and so on.

Yes. Well, our priorities is fund the business first, pay a competitive dividend that grows over time. We raised the dividend a couple of weeks ago, another 12%. It's up over 70% since we launched Trane Technologies over the last 5 years. And then after that, we're going to invest in either value-accretive M&A or we're going to deploy the cash to share repurchase. When the stock trades below the intrinsic value, we're not going to leave excess cash on the balance sheet for a long time. But we've been very successful. Dave mentioned before, in Europe, the acquisitions we've done there the last couple of years. We've done a number of channel acquisitions in the Americas as well. But think about where we were in 2020, we were $12.5 billion of revenue. Last year, 2024, we were right around $20 billion of revenue. So maybe the scale of an acquisition has changed when we've grown the company up where we're at. But Dave, you can jump in and...

Well, at the end of the day, we're going to get a chance to see everything, as a major HVACR player globally, we'll get a chance to see things. But we'll be prudent, but we're always looking. But at the end of the day, we don't have to do anything, as you said, right? We have a great portfolio of products, the broadest in the industry. We have a great channel with a direct sales force. We have a service business that is phenomenal. So we like where we are, but we'll get a chance to look at everything.

And we're still looking at the same metrics we have for years, what's ROIC accretive over 3 years, EPS accretive in 3 years. Those are still the metrics we look at for any acquisition. How do we integrate? How can we grab synergies. But the direct sales force we have, especially in commercial HVAC gives you a lot of confidence that we can take those early-stage technologies or existing businesses and push it through the channels we have.

I will tell you, we like being a pure play. It took us a long time to become a pure play. We like being a pure play.

Yes, we didn't think you're going to change that.

Just to clarify.

I've asked you this question every year, I ask every company, what are the top 2 or 3 innovations and structural changes affecting your company over the next 5 years? And are there any emerging industry trends that are perhaps being overlooked in the current fiscal year?

Look, demand-side management is going to get a lot of attention, right? The price of electricity continues to increase. It's becoming a scarce commodity, okay? So you're going to hear about this wasted energy in buildings. So maybe demand side management, people don't understand the terminology, but people are wasting a lot of energy that they're paying for today. That's a big opportunity. I think you're going to continue to hear about this world getting warmer and the fact that we need to decarbonize the built environment. And certainly, you're hearing now, at least in the short term, this whole reshoring or localization of manufacturing is going to continue to get tailwinds. We're tracking over 400 mega projects. I don't like the term, but that's what we have, 400 mega projects. By the way, about 75% of those are not data centers, so are not data centers. So this is going to be a massive opportunity in the future.

And I got 26 seconds, so I'll use it. Service, super strong, high single-digit growth plus, but it's been teens. You've been asked this before. You have a bigger applied base. Why can't it be more than high single digits plus?

Well, we started out, let's say, 2025 guidance for our commercial Americas business, our commercial EMEA business. We said high single-digit growth. Could it be 10%? It could be, and services is part of that. So it gives us a lot of confidence that, that business will grow not only the equipment, but also the service tail. Data centers, we talked about earlier, again, it takes a few years before the service revenues even start. That's all in front of us on data center service as well. Let's see where the year plays out, Andy. But we're getting really close to that, let's say, 10% 7-year CAGR, but we're at a very high, high single- digit CAGR.

I think's a place to stop Chris. Thank you, Chris and David.

All right. Thanks, everyone. Appreciate your time.