Trane Technologies plc (TT) Earnings Call Transcript & Summary

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.