Good morning. Welcome to the Trane Technologies Q2 2022 Earnings Conference Call. My name is Chantel, and I will be your operator for the call. The call will begin shortly with the speaker remarks and the Q&A session. I will now turn the call over to Zac Nagle, Vice President of Investor Relations.

Thanks, operator. Good morning, and thank you for joining us for Trane Technologies' Second Quarter 2022 Earnings Conference Call. This call is being webcast on our website at tranetechnologies.com, where you'll find the accompanying presentation. We are also recording and archiving this call on our website. Please go to Slide 2. Statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities law. Please see our SEC filings for a description of some of the factors that may cause our actual results to differ materially from anticipated results. This presentation also includes non-GAAP measures, which are explained in the financial tables attached to our news release. Joining me on today's call are Dave Regnery, Chair and CEO; and Chris Kuehn, Executive Vice President and CFO. With that, I'll turn the call over to Dave. Dave?

Thanks, Zac, and everyone, for joining us on today's call. Let's turn to Slide #3. Before we dive into the quarterly results, I want to frame up the bigger picture, the strategy that enables Trane Technologies to deliver differentiated financial performance and shareholder returns. First and foremost, we are driven by purpose. We love what we do because we are forging new ground for a better, healthier world. Our people take pride in knowing their work makes a real difference for our customers, for our communities, and for the world. Our purpose-driven strategy is aligned to mega-trends that are only getting stronger. We see the impact of climate change every day, including more frequent and intense weather events, like the heat waves we're experiencing in many parts of the world. These climate events have serious and far-reaching impacts on the economy, the environment, and human health. We must act now to mitigate those impacts and ensure the health of our planet for the next generation. Trane Technologies is proud to be leading our industry with bold sustainability commitments and actions to back it up. Our innovation is accelerating the decarbonization of commercial buildings, homes, and transport. Our customers recognize our innovation and our expertise, and we are their partner of choice in achieving sustainability goals while improving performance and efficiency. Demand has never been higher. Our purpose-driven strategy, relentless innovation, and strong customer focus enable us to deliver a superior growth profile through cycles. This, in turn, helps us drive strong margin and powerful free cash flow to deploy through our balanced capital allocation strategy. The end result is strong value creation across the board for our team, our customers, our shareholders, and for the planet. Moving to Slide #4. Q2 was another strong quarter for us. Our global teams faced adversity and leveraged our high-performance business operating system to deliver record results. Our innovation leadership is at the apex of secular mega-trends on energy efficiency and decarbonization, which is enabling us to win customers at an unprecedented pace. Our booking levels remained extremely high, reflecting strong share gains in virtually every area of our business. In the second quarter, organic bookings were up 7%, reaching the highest level in the company's history at $4.6 billion. As a result, backlog also eclipsed prior records, rising to $6.5 billion, up 43% year-over-year and more than twice historical norms. On a 2-year stack, enterprise bookings were up 37% in Q2. This adds to a 2-year stack of up 37% in Q1. Our global commercial HVAC business is up 40% on a 2-year stack. The absolute booking levels we've delivered over the past 1.5 years have been extraordinary and have been broad-based across our portfolio. Last quarter, I discussed the natural tendency to focus on bookings growth trends, but growth trends may be misleading when the absolute number moves step functions higher than any historical reference period, as they did in 2021. I encourage investors to consider absolute bookings and backlog in addition to bookings growth to get a fuller picture. Even with our robust organic revenue growth of 11% in Q2, absolute bookings exceeded revenues with a strong book-to-bill of 111%, and our backlog grew more than $300 million sequentially from Q1 to Q2. These results are even stronger when you consider that we are constraining bookings in our transport refrigeration business to help mitigate inflationary risks. Absolute booking levels and backlog provide us good visibility into future revenues, particularly in our nonresidential businesses. Our nonresidential businesses represent roughly 80% of our total revenue and closer to 90% of our total backlog and tends to be longer cycle. Strong execution of our business operating system has enabled us to stay ahead of persistent inflation and deliver over 10 points of price versus inflation again in the second quarter. This is a core competency for us and increasingly important given higher cost to serve customers across the value chain. I'm especially proud of our team's performance, given 2 temporary plant closures we overcame in the quarter. We discussed the China COVID lockdowns on our first-quarter call and our expectation to make this up in the second half, which is still the case. Our teams managed to minimize the revenue impact to approximately $60 million, better than the $80 million to $100 million range we anticipated at the time the lockdowns occurred. We also overcame a tornado that temporarily knocked out production at one of our North America transport refrigeration facilities in the quarter. The revenue impact to the quarter was also approximately $60 million. We expect to recoup the full impact in the second half of the year. We exited the quarter with both plants fully back up and running. Our performance through the first half of the year has been stronger than we originally anticipated. Booking levels have remained robust. Backlog is significantly higher. Inflation has been persistent, but our pricing execution has more than kept pace. Supply chains remained tight, but we have seen some improvement and believe we have line of sight to further improvement in the second half of the year. All in, we're confident in raising our adjusted EPS guidance range to $7.05 to $7.15. When you consider that our guidance includes an additional $0.06 headwind from FX, partially offset by a $0.01 tailwind from M&A, we're effectively raising our operational guidance by $0.10. The secular mega-trends underpinning our strategy are only growing stronger. Execution of our high-performance business operating system and our unwavering focus on putting customers first remain at the core of everything we do. Our balance sheet, liquidity position, and ability to deliver strong free cash flow provides a robust financial foundation and good optionality for capital deployment. We are exceptionally well-positioned to not only navigate near-term macro challenges but to thrive as conditions improve.

Thanks, Dave. Please turn to Slide #6. Organic revenue growth of 11% in the quarter was strong despite the volume impacts from China's COVID lockdowns and a temporary plant shutdown related to extreme weather in Transport Americas that Dave mentioned earlier. FX was about a 2% headwind. Pricing was strong, up more than 10%, comprising the majority of the revenue growth this quarter. Price versus inflation was positive on a dollar basis and improved from the first quarter, but was still a margin headwind in the quarter. Productivity, mix, and lower corporate expenses were favorable, and we continue to make incremental business reinvestments to support innovation in the quarter. Organic leverage was solid at approximately 16%. All in, adjusted EBITDA and operating margins declined 40 and 20 basis points, respectively. Adjusted EPS grew 13%, driven primarily from strong operating performance and higher adjusted operating income.

Thanks, Chris. Please turn to Slide #8. As we've discussed throughout the call, underlying demand for our innovative products and services has never been higher, with unprecedented levels of bookings and backlog across our businesses. Relentless innovation and franchise brands with leading market positions, customer focus, and operational excellence are hallmarks of our market outgrowth over a long period of time. In North America, our commercial HVAC business is driving record demand and share gains demonstrated by our order growth of approximately 45% on a 2-year stack. And we're exiting the second quarter with another quarter of record backlog, up more than 70% year-over-year and more than double historical norms. End markets remain strong, with a variety of economic indicators pointing to growth in 2022. Unemployment is low, and indicators like the Architectural Billing Index, which has been over 50 since February of 2021, remain favorable. Demand remains strong in data centers, education, and healthcare. Every day, we see customers establishing their own sustainability targets. And we're partnering with them to create decarbonization road maps to achieve their targets through our customized system-based approach. We're helping our K-12 customers deploy federal stimulus funds to improve the indoor air quality of schools. We see both decarbonization and indoor air quality as multiyear tailwinds for our business given our deep customer relationships and expertise. Demand for our residential products remained strong, with a book-to-bill of 101% despite strong revenue growth. Turning to Americas Transport refrigeration. ACT projects continued market growth through 2023. We'll talk more about transport refrigeration outlook in our topics of interest section. Turning to EMEA, while we have muted expectations for market growth with a volatile geopolitical backdrop continuing, demand for our sustainability-focused systems and services remain strong. And we continue to see good opportunities for market outgrowth and share gains. Turning to Asia, we are monitoring the COVID lockdowns in China and their broader impact on the region. The business is healthy, with strong bookings growth in the second quarter. Potential geopolitical and COVID-related risks have proven hard to predict for the region. For the year, we continue to see underlying strength in China's data center, electronics, pharmaceutical, and healthcare markets. Outside of China, the picture is mixed, with COVID-related lockdowns still impacting market expansion in some countries.

Thanks, Dave. Please turn to Slide #9. As Dave discussed at the outset of the call, we are pleased with our first half performance. In our second half outlook, strong backlog and pricing execution give us confidence to raise our full year revenue and EPS guidance. We are raising our full year organic revenue growth guidance to approximately 12%, up from our prior guidance of 10%. We're raising our adjusted EPS guidance range to $7.05 to $7.15, which is higher by $0.05 at the midpoint. As Dave mentioned previously, this is $0.10 higher when you factor in the negative impact of FX, partially offset by M&A. We continue to expect a stronger second half on revenue growth and leverage versus the first half, with an improving supply chain and product redesigns coming online that will help us serve our customers better and provide added resiliency to our supply chain. Organic leverage for the third quarter is expected to be similar to Q2 or around mid-teens. We expect free cash flow to remain strong and equal to or greater than 100% of adjusted net income. Our outlook includes capital expenditures of approximately 2% of revenues across high-ROI projects in support of our profitable growth objectives and our sustainability commitments.

Thank you, Chris. Please go to Slide #14. Overall, global transport refrigeration markets are expected to remain healthy in 2022. In North America, ACT has raised their 2022 forecast modestly, primarily reflecting actual builds coming in a bit stronger than expected in the first half. On balance, 2022 weighted average growth is expected to be up 10% versus up 8% prior. Growth is expected for 2023 as well. Overall, the forecast for EMEA markets is relatively unchanged. The total market size has dropped year-over-year to reflect the removal of the Russian market. Russia comprises about 14% of EMEA market for trailers and trucks. Effectively removing Russia from the total available market for 3 quarters of 2022 lowers the market size for trailers and trucks by approximately 11% and the weighted average market size by approximately 6% for the year.

I would like to thank everyone for joining today's call, and we'll be around for questions in the coming days and weeks as always. And we look forward to seeing you on the road, hopefully in person, in the near future. Thanks.

This concludes today's conference call. You may now disconnect.