Good morning. Welcome to the Trane Technologies' Q1 2024 Earnings Conference Call. My name is Briana, and I will be your operator for the call. The call will begin in a few moments with the speaker remarks and the Q&A session. 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' First Quarter 2024 Earnings Conference Call. This call is being webcast on our website where you'll find the accompanying presentation. We're also recording and archiving this call on our website. Please go to Slide 2. Statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities law. Please see our SEC filings for a description of some of the factors that may cause our actual results to differ materially from anticipated results. This presentation also includes non-GAAP measures, which are explained in the financial tables attached to our news release. Joining me on today's call are Dave Regnery, Chair and CEO; and Chris Kuehn, Executive Vice President and CFO. With that, I'll turn the call over to Dave.

Thanks, Zac, and thanks, everyone, for joining today's call. As we begin, I'd like to spend a few minutes on our purpose-driven strategy, which drives our engaging, uplifting culture and enables our differentiated financial results over time. Our purpose is centered on creating a more sustainable world, and our strategy is aligned to powerful mega trends like energy efficiency, decarbonization, and digital transformation. Customer demand continues to increase as the need to address climate change becomes more urgent. We need creative solutions and game-changing innovation to bend the curve on global warming, and that's where Trane Technologies leads. Our relentless innovation, proven business operating system, and high-performing culture enable us to consistently deliver a leading growth profile, strong margins, and powerful free cash flow. The end result is strong value creation across the board for our customers, our shareholders, our employees, and for the planet. Please turn to Slide 4. In the first quarter, we extended our track record of strong execution. Our global teams delivered robust performance across the board. Quarterly bookings of more than $5 billion were at an all-time high and up 17% organically. Organic revenues were up 14%. Adjusted operating margins were up 230 basis points, and adjusted EPS was up 38%. First quarter bookings strength was again led by our Commercial HVAC businesses globally, which were up over 20% with growth in more than 30% in equipment and mid-teens in services. Bookings in our Americas Commercial HVAC business were once again a standout, up 30% with more than 40% growth in equipment and more than 15% in services. Booking strength was broad-based with growth in nearly all vertical markets. We delivered exceptional bookings growth across our applied solutions, leveraging the power of our direct sales force, deep customer relationships, and leading innovation to capitalize on increasing project complexity in high-growth verticals. Our Commercial HVAC pipeline remains robust around the world, and we see tremendous growth opportunities well into the future. Our strong growth profile provides us with excellent optionality to accelerate key investments in 2024 while delivering strong leverage, EPS, and free cash flow. We put several high ROI investments in flight in the first quarter. With a focus on future growth, these investments include product innovation, increased capacity, sales and service excellence, and digital and automation. Our bookings performance further strengthens our position for 2024 and increasingly for 2025. Q1 ending backlog of $7.7 billion is up 10% from year-end 2023, and we increased our backlog for 2025 and beyond by $800 million to a total of $1.8 billion, increasing visibility to future growth. Based on our Q1 results and expectations for continued strong performance, we're raising our full-year revenue and EPS guidance. Chris will cover the details in a few minutes.

Thanks, Dave. Please turn to Slide 6. This slide provides a snapshot of our performance in the first quarter and highlights strong execution. Organic revenues were up 14%, adjusted EBITDA and operating margins were up 200 basis points and 230 basis points, respectively, and adjusted EPS was up 38%. At an enterprise level, we delivered strong organic revenue growth in equipment and services, both up low teens. Our high-performance flywheel continues to pay dividends, with relentless investments in innovation driving strong top-line growth, margin expansion, and EPS growth. Please turn to Slide 7. At the enterprise level, we delivered robust volume growth with strong incrementals, positive price realization, and productivity that more than offset inflation. In our Americas segment, we delivered about 12 points of volume and about 3 points price, with our Americas Commercial HVAC business delivering very strong volume growth of approximately 20 points. Strong adjusted operating margin expansion of 240 basis points was driven by strength in our Commercial HVAC business, which more than offset the expected impact from revenue decline in our transport business. In our EMEA segment, we delivered about 3 points of volume and about 1 point of price with stronger volume in our Commercial HVAC business. Adjusted operating margins were up 30 basis points for the segment and stronger when you consider the impact of acquisitions and FX in the quarter. Excluding FX currency losses related to the devaluation in the Egyptian pound in the quarter, EMEA EBITDA margins would have been 19.5%. The Asia segment delivered mid-teens revenue growth almost exclusively from higher volumes. Strong volume, productivity, and modest price contributed to 310 basis points of adjusted operating margin expansion. We reinvested heavily back into each business in the first quarter and expect to ramp these investments through the year to drive growth well into the future. Now I'd like to turn the call back over to Dave.

Thanks, Chris. Please turn to Slide 8. Our end market segment and business unit outlook is largely unchanged from our Q4 earnings call with a couple of notable differences. First, our Americas Commercial HVAC business had a very strong quarter, stronger than we expected despite a tough comp of mid-teens revenue growth in the first quarter of 2023. We're encouraged by the strong start for the business, especially taking into account the exceptional 30% bookings growth and 125% book-to-bill ratio on mid-20s revenue growth in the quarter. We expect the Americas Commercial HVAC business to remain strong throughout 2024 versus increasingly tough comps from 2023 as we move throughout the year. Second, our residential business performed stronger than we expected in the first quarter. We expect the business to be down modestly due to continued destocking, and we believe the EPA clarification on sell-through helped to mitigate some of the independent wholesale distributors' concerns heading into this season. While we're pleased with the results, the first quarter for residential is typically a very small percentage of the year and doesn't provide a sufficient read-through to the balance of the season. We believe it's prudent to move through Q2 and gain more visibility before extrapolating too much from Q1. All other businesses performed as expected, and the outlook for the year is unchanged. We provided additional details on the slide for your reference. Now I'd like to turn the call back over to Chris.

Thanks, Dave. Please turn to Slide 9. Our initial 2024 guidance reflected optimism about key end markets and our ability to outperform. While we're only one quarter in, our exceptional bookings, revenues, and backlog in our Commercial HVAC businesses strengthen our conviction that 2024 will be another year of robust top-line and bottom-line growth. We're raising our organic revenue guidance by 2 percentage points to 8% to 9% from 6% to 7% prior. We're also raising our full-year adjusted earnings per share guidance by $0.30 at the midpoint and raising the low end of our guidance range above the high end of our prior guidance range. Our new adjusted EPS guidance range is narrowed to $10.40 to $10.50, up from $10 to $10.30 prior. Embedded in our guidance is our philosophy around our value creation flywheel, which builds in relentless high levels of business reinvestment to drive end market outgrowth, healthy leverage, and strong free cash flow. We expect to see investments continue to ramp in the second quarter and into the back half of the year, accompanied by leading growth and strong incrementals. We continue to expect about 1 point of growth from M&A in 2024 with a negative impact of approximately $30 million to adjusted operating income for the full year, or a negative impact of about 5 points to reported leverage versus organic leverage. The impact is primarily related to the technology acquisition, Nuvolo, which carries non-cash accelerated intangibles amortization of approximately $25 million, plus year 1 acquisition and integration-related costs. We also expect a negative impact to revenues of about 1 percentage point from FX in 2024. FX is expected to offset the point of M&A revenue growth on a reported basis, meaning our organic and reported revenue growth guidance is now the same at 8% to 9% for 2024. There's no change to our organic leverage target of 25% plus for the year, consistent with our stated long-term target. Turning to cash, we had a strong start to free cash flow generation in the first quarter, and we expect 2024 to be another year of free cash flow conversion of 100% or greater. For the second quarter, we expect revenue growth of approximately 8.5% and adjusted EPS of approximately $3.05. Please see Page 17 for additional information that may be helpful for modeling purposes. Please go to Slide 10. We remain committed to our balanced capital allocation strategy, focused on consistently deploying excess cash to opportunities with the highest returns for shareholders. First, we continue to strengthen our core business through relentless business reinvestment. Second, we're committed to maintaining a strong balance sheet that provides us with continued optionality as our markets evolve. Third, we expect to consistently deploy 100% of excess cash over time. Our balanced approach includes strategic M&A to further improve long-term shareholder returns and share repurchases as the stock trades below our calculated intrinsic value. Please turn to Slide 11, and I'll provide an update on our 2024 capital deployment. Year-to-date through April, we've deployed $540 million in cash, with $190 million to dividends and $350 million to share repurchases. We have $2.1 billion remaining under the current share repurchase authorization, providing us with strong optionality as our shares remain attractive, trading below our calculated intrinsic value. Our M&A pipeline remains active. We continue to see potential opportunities for value-accretive M&A as we did in 2023, where we made key, strategic investments to accelerate our progress across energy services, digital solutions, industrial process cooling, and precision temperature control technology. For 2024, we expect to deploy approximately $2.5 billion in cash. Our strong free cash flow, liquidity, and balance sheet give us excellent capital allocation optionality moving forward. Now I'd like to turn the call back over to Dave.

Thanks, Chris. Please go to Slide 13. As discussed, our transport performance in Q1 was as expected, and there's no change to our outlook for the year. The overall markets are expected to be down modestly, and we expect to outperform in both regions. We've continued to provide this slide in the deck for your reference. Please turn to Slide 14. We operate our transport business for the long term. And while we're moving through a modest downturn in 2024, this is a great business with a bright future. ACT projects a strong trailer market rebound from 2024 into 2025, up 19% and project continued growth through their forecast horizon in 2029. We have a diversified transport business globally with opportunities to grow across the portfolio. With leading innovation, strong execution through our business operating system, and a world-class dealer network, we're well positioned to outperform in any market environment. In summary, we are well positioned to drive differentiated growth and value over time. Our leading innovation, proven business operating system, and unmatched culture enable us to consistently deliver top quartile financial performance over the long term while continuing to reinvest in our business. I believe our best days are ahead. We have the team, the strategy, and the track record to deliver leading performance in 2024 and differentiated shareholder returns over the long term. And now we'd be happy to take your questions.

Your first question comes from Andy Kaplowitz with Citigroup.

Dave, can you give us a little more color into your order momentum and backlog growth? You obviously enjoyed significant acceleration orders and you mentioned strength in applied. So can you give us any more color to how much of the continued Americas orders acceleration is coming from data centers? Do you think you can continue to grow your backlog from here? And maybe your thoughts on the duration of this order cycle if it is, in fact, data center-led?

Yes. Thanks for the question, Andy, good question. Look, in the quarter, we saw broad-based growth, and it wasn't concentrated necessarily in any one vertical. I mean, we certainly had strength in data centers. We certainly have strength in education, health care, high-tech industrials. It was almost hard for us to find a vertical that we didn't grow in. We did have a bit of weakness, and I guess you would say, conventional office and some in lodging. But for the most part, it was broad-based growth, and it was really on a global level. So a lot of strength in our Commercial HVAC businesses. And the good news is our pipeline is also very strong. So this would be before an order actually comes in to be a booking, this is what our sales teams are working on. That continues to be very strong as well. So look, it's a lot of innovation. I'm certainly proud of what the team's been able to deliver, and we're executing at a very high level right now.

David, definitely, I can appreciate that. So on that note, organic incremental margins continue to trend higher than your 25%. Given the strength in your markets and the overall ability to execute, why isn't 30% or 35%, as you've been able to record for a while now, the new 25% for Trane? And then where are you on, let's say, the slope of productivity projects that you've been undertaking? Because we know you've been really focused on productivity after not being able to do as much during the pandemic.

Andy, it's Chris. I'll start, and then Dave may jump in. So as we think about the first quarter, investments back into the business began to ramp really stronger into February and March than, say, the start of the quarter, and our run rate exiting Q1 is stronger than when we started. The pipeline for investments continues to grow. And these are across multiple categories. So to your question, we really like the long-term framework of the 25% or better incrementals. That's what we're continuing to guide for 2024. But the investment pipeline and where we can see the market outgrowth here and the order rates and the revenue rates, I think, just tell us we want to keep investing back in the business. Think of these investments, again, around innovation, sales and service investments that Dave talked about in the comments. These are upfront tools as well as people investments, making sure we've got capacity investments, automation in the factory; digital, the list goes on, and we want to make sure we're always funding back into the business. On the productivity side, we're not there yet. We're getting better on the gross productivity, but there's still more opportunities for us going forward.

Can you give an update on your data center capabilities? I know you've invested in LiquidStack. Are you developing comprehensive capabilities in the data center to manage these newer, hotter chips?

Yes. Great question, Scott. I think we've been very well positioned in the data center vertical for a long time. And I think you know this, but technology tends to move pretty fast in this vertical compared to others. And we're certainly aware of these new technologies that are being developed really at the terminal side of cooling. So think of that as direct cooling to the chip or think of it as emerging cooling at the rack level. One of the things that we do really, really well at Trane Technologies is we think about systems. And if you think about a data center's cooling systems, you need to think about the entire system. So some of it certainly is what we would call the terminal side, and that's what we just referred to. But these systems also require sophisticated air handling. They also require high efficiency chillers, and we look at the entire system to really help the customer think through the entire energy needs for the whole data center. The other thing that's really emerging, you're going to hear more about this is we think of the data center, think of it as a thermal management system. So I know you know this, but when you're cooling a space, you're removing heat from it. Data centers have a lot of heat. What do you do with that heat that you're removing? Conventional thinking would be it gets emitted back out into the atmosphere. But how can you repurpose that heat? And we've done some projects, still early stages here, where we're creating district heating loops from the heat that would normally just be wasted and reusing it as an asset. So it's a very dynamic space. It's obviously growing at a nice clip, and we're spot in the middle of it, and it's always been a very strong vertical and will be in the future.

That makes sense, Dave. And just a little bit of a pie in the sky here. But does it make more sense to think about you guys in a data center partnering with somebody like Vertiv or explicitly competing against them? It seems like you both have very different capabilities, but obviously overlap on some critical applications there. How do you guys think about that opportunity when you think about these giant, giant about like a 1-gigawatt data center, something where the engineering capabilities would presumably almost rely on maybe more than one supplier, not just one. Is that accurate, Dave? Or am I thinking about it wrong?

Yes. I wouldn't call out any particular company here, but I would tell you that we have technology partners that we work with because you're spot on. It's a cooling system, right. It's no different than think about a system that exists within a building, right, we may not have every component, but we would have a partner that would have that component, but we would help integrate it into a system that would be operating in an efficient way for the customer.

I have a question regarding the organic sales guidance for the year. It seems that for the first half, the forecast suggests an increase of about 11%. For the full year, the expectation is for growth in the high single digits, which would imply around 6% for the second half. Is that the right way to interpret the revenue guidance? It seems like there could be a significant slowdown in the Commercial HVAC sector compared to Q1 due to challenging comparisons. I would have anticipated better year-on-year sales for residential and TK in the second half compared to the first half. Given that the total enterprise growth is projected to decrease from 11% to 6%, is the main factor the impact of tough comparisons in the Commercial HVAC segment?

Julian, it's Chris. I'll start. It is tough comps for Commercial HVAC and especially the Americas. They're going to have a great year on a full-year basis. But when you think about going back a year in the first quarter of 2023, the growth there in Commercial HVAC Americas was around mid-teens. By the fourth quarter of last year, the growth was mid-20s. So think of that as a 10-point increase in terms of growth and revenue throughout last year. So the comps do get tougher as we work through 2024. But again, they're going to have an outstanding year this year. But you're right, it is a bit of the tough comps in Commercial HVAC. Transport Americas, we do expect the second half to be stronger than the first half. That is also due to tough comps. The business was up 20% in the first half of '23, down 20% in the second half of '23. So the comps get easier as we go throughout the year. But you're right, you've dialed it in a little bit there. And look, we feel comfortable with the guide that we put out there now and our ability to meet or exceed that guide on the full year. Let us get through another quarter of results here in the second quarter. As you know, the first quarter within Trane Technologies is generally our smallest quarter of the year. Let us get through the second quarter. We'll have better insight on the second half of the year at that time. We feel very confident with the guide that we just released today.

And maybe just my follow-up would be on the sort of price and price/mix outlook. So I think in the first quarter, maybe price was about a 2-point tailwind to revenue. Maybe remind us kind of what you're embedding for the year as a whole. And has there been any shift in expectations on the sort of price/mix tailwind in light commercial and resi HVAC from the refrigerant change in the various EPA movements on that?

In the first quarter, we achieved about 3 points of price at the enterprise level, but those comparisons will become more challenging as we move through the year and prices start to normalize. For the entire year, we are now guiding to about 2 points of price, which was a topic of discussion on our previous call when we provided our full year guidance. We initially thought we might perform a bit better in that area, and the results from Q1 give us the confidence to raise our full year revenue estimate by 2 points, attributed to one point of price and one point of volume. In the Americas, we've maintained our focus on price, which has been our standard approach, and the Commercial HVAC segment would have fared better. Considering price/mix and the potential impact of inflation, we are very optimistic about achieving 20 to 30 basis points, or possibly better, in terms of price versus inflation for the whole year. One of the strengths of our business model has been our ability to remain agile with pricing. We have the right inputs, and as we evaluate commodities and their trends for the next year or two, staying flexible with pricing remains a priority. Regarding your comment on residential, would you like to cover that, Dave?

Yes, we don't have a lot of 454B at least in the Americas, built into our guide, okay. We're obviously ready from a product standpoint, we'll be launching those products as we go through the year, but we're not anticipating a lot of volume in 2024, and we'll see how the year progresses for 2025. One of the things, too, on 454B is, I saw a couple of pre-comments come out about being a new refrigerant. I just want to make sure everyone's clear. We've been using 454B in Europe for over 2 years now. So this is not a new refrigerant for Trane Technologies. We're very comfortable with the refrigerant and we've had in our portfolio for some time.

Great results. I wanted to ask if you could share your thoughts on what you expect to happen with average residential pricing next year, considering the transition to 454. Do you still anticipate it increasing by around 10% to 15%? How would you describe it?

It's a good question, Gautam. We don't expect a significant amount of 454B product in 2024, as I mentioned earlier. That will certainly increase in 2025. We're not making projections for 2025 at this time. Regarding pricing, we will reveal the pricing when we launch the products. However, I believe what you've heard from others is likely a fair estimate for pricing expectations. We'll see how the year unfolds.

Yes, stellar results. Just maybe taking it back to the data center discussion for a second. Is there a way to maybe parse out or provide a range or relative sense of your dollar content on a data center and what the opportunity is?

Yes. You start talking about averages, which are always dangerous, Joe. I mean I've read reports where people have estimated the 3% to 5% range. In some cases, I'd say they're in the ballpark, and then you get into some hyperscale that may have a different configuration. But it's not that far off. Look, we're very strong in this vertical. We have been for a while, and it's going to have a lot of growth in the future, which is exciting. But understand, it's one vertical of many verticals that we play in. And in the first quarter, we had broad-based strategy. So it wasn't just focused on data centers. Our team is tracking over 300 mega projects. And we've had some orders that have been received. However, the majority are still in the pipeline as these are typically longer duration projects to close. A lot of these projects that are deemed as mega projects are global in nature, which gives us really a competitive advantage with our direct sales force because we're able to triage decision makers and provide technical support in different parts of the world. So well in tune to what's happening with mega projects. As far as ESSER goes, look, ESSER funding, the way it's designed right now, you can take an order up until September of this year, and it has to be fulfilled within the first quarter of 2026. And we've done very well with ESSER funding, but we don't believe that the whole education vertical stops after ESSER funding. There's also IRA funding that's available. And there's, of course, the municipal bond process that's always been very robust in the past. So look, the education vertical has always been strong for Trane Technologies, expected to be strong in the future as well.

Some very nice orders. Congrats. Can you just talk about what you're seeing on applied versus light commercial, just orders and revenues?

Yes. I mean, obviously, in the Americas, which I think is where your question is focused, we were very strong in equipment overall. I mean our order rate for equipment was up over 40%. And we saw strength really in both applied and unitary. And in the past, I've said applied has been a lot stronger. This time, they were pretty close. So there's a lot of strength out there. And that makes sense because if you look, we had broad-based growth across really almost all verticals. And a lot of those verticals are served with different applications. So it was very strong.

Are there specific areas in the commercial sector where you believe you are gaining market share, especially since your main competitor experienced a significant decline in orders?

Yes, I can't comment on a competitor since comparisons vary from year to year. I can say that our growth was widespread; some sectors are more focused on applied solutions while others are more on unitary solutions. For example, in education, the split is likely 50-50. Conventional office spaces generally lean towards unitary solutions, though not exclusively, while retail tends to align more with applied solutions. Overall, we are very pleased with our performance in the first quarter. I can't recall a time when I reported a 40% increase in orders that was as widespread as what we experienced this quarter.

Yes, Steve. Revenues were up by a small percentage, which can be considered very low figures, mostly from price and volume in residential. It performed better than we anticipated, as Dave mentioned earlier, with price being minimal and volume potentially increasing about 1% for residential. We're just beginning the cooling season, so let's get through another quarter and see how the year progresses for residential.

So those were pretty positive comments coming out of China. So could you kind of give us a sense of where the demand is, the outlook? Because we have heard some mixed signals about at best stabilizing, but it sounds like you're seeing some pretty strong growth.

The team is performing exceptionally well and is very experienced, having been with the company for a considerable time. They possess significant expertise in pharmaceuticals, healthcare, and high-tech data centers, which aligns well with our applied systems. We are pleased with what we've observed. While China accounts for a small portion of the enterprise at around 5%, there is considerable strength in that market, which is promising.

That's real helpful. And then can you give us a sense of where you stand on your services mix, refresh us on the target? And how do you think that plays out for this year?

That's a great question. I mentioned to Chris that in the Americas, we've traditionally viewed our service business as being split equally between service and equipment. However, given our equipment growth, we need to revisit that calculation. We experienced robust service business growth globally in Q1, with an increase in the low teens. In the Americas specifically, the growth was over 15%, and there's a compounding effect happening. This marks the sixth consecutive year of low single-digit service growth. We've made significant investments in this area, which often doesn't receive the recognition it deserves within Trane Technologies. I want to emphasize that it's one-third of our business, it's very resilient, and it serves as an enabler. Our team continues to perform at a very high level, and we expect that to continue in the future as well.

Deane, we have experienced high single-digit growth in services over the past six years, and last year, it rose by double digits. Dave is pushing us to accelerate this growth toward double digits. However, I can say that the resilience is evident, as he mentioned, and we are pleased with the margins and the solid start to the year in the business.

I don't often say this, but we had a great quarter with fantastic results. I apologize for the back and forth during the different calls. Perhaps we can take a step back. What surprised you positively this quarter? Clearly, the organic growth was much better, particularly with strong trends in Commercial HVAC. Specifically, what caught you off guard this quarter? Was it just the backlog conversion? Any insights you could share would be appreciated.

Yes. I think there were really 2 things that were to the upside. One was our commercial HVAC business in the Americas. It really performed better than expectations. Just a lot of demand for our innovative products and the team executed extremely well. The other upside was in our residential business. Look, we thought that was a business that was going to be down low single digits, maybe even mid-single digits in the beginning of the year for Q1 with destocking that was going to occur. I think that where we kind of got help there was the EPA coming out with their clarification on the sell-through for 410 and gave confidence to our independent wholesale distributors that they should be stocking up and getting ready for the season, which is what we saw. So those would be the 2 big areas that kind of where we saw the upside. The rest of the world really played out the way we thought. Europe, strength in our Commercial HVAC business continues. Our Thermo King business, look, it's going to be a modest downturn in Thermo King in the year; we'll do better than the markets, but that's exactly what we saw play out in the first quarter. Asia, pretty much as we thought, maybe a little bit stronger in our commercial HVAC business, but it really played out as expected in the rest of the world.

My follow-up question highlights the resilience of the Commercial HVAC orders and backlog, particularly given the overall weak ABI. I'm curious if there is any indication of more proactive replacement demand driven by CO2 emission targets, in addition to the observed strengths in areas like data centers. Can you provide any insights?

I can't provide a specific answer to that. I haven't examined it in detail. However, I can say that we continue to have a very strong pipeline indicated by the work our sales team is doing and what they're entering into our CRM systems, which remains very robust. There's a lot of activity happening. I also recognize the disconnect when looking at ABI and other macro indicators. It's important to consider multiple factors as they can vary by sector. That said, we've observed strong, broad-based demand, and our pipelines are still solid.

Just a question. As we think about cooling for semiconductor plants and data centers, right? It seems that the scale of the project, it's going up. And the question I have for that, does this provide an opportunity to provide more sophisticated solutions for your customers and also to capture more value for Trane? And second, what are you doing to your aftermarket support organization to take advantage of that?

Yes, we discussed data centers earlier. This sector typically adopts technology more rapidly than others. We are collaborating closely with partners and data center customers to identify trends, and I can assure you that we are deeply involved in it. In the data center, we take a holistic view of the entire system. There's a lot of focus right now on the terminal aspects of data centers, such as direct cooling to the chip or immersion cooling. We consider the entire system, including air handling and advanced chillers that utilize high-efficiency and next-generation refrigerants. There will be more conversation about thermal management in data centers, which produce significant heat. It's essential to consider how to extract and repurpose that heat. We are engaging in discussions at a thought leadership level regarding transforming what was once considered waste into an asset in the future.

Yes. My question was more basic. I was considering that these systems are larger and more complex; they require more energy. This creates more opportunities for your customers to collaborate with you and for you to offer these packaged energy-saving solutions. That's the direction I was aiming for.

You're right on, Andrew. All opportunities, and it's a growing vertical.

Andrew, I'll start. It's Chris. Yes, the pipeline remains very active. It's sometimes episodic when an M&A transaction closes. So quarter-by-quarter, maybe hard to call. But over the course of the year, I think the pipeline remains very active. We're very happy with the acquisitions we've done over, say, the last 18, 24 months, right? You properly described them as a bolt-on bit of strategy. Think of that around investments in the channel and investments in technology. And in some cases, it's both. It's taking a great technology that has a limited channel and applying it to our deep channels in Europe and/or in the Americas. We've been very successful with that strategy. As it looks at the pipeline today, we're going to remain disciplined. We've got our hurdle rates. And as we think about what's constructive to be EPS accretive in 3 years, ROIC accretive in 3 years. But I'll tell you that we've got a great balance sheet to really deploy not only acquisitions but also deploy if the cash isn't available for M&A over to share repurchases as we see the stock trading below our calculated intrinsic value. So if you go back even 6, 7 years ago with an acquisition in Europe with Thermocold, then it really started out with our more pipe chillers and thermal management systems and how that's grown over time now, I think to our sixth or seventh generation of thermal management systems, it tells you that we can take that early-stage technology and really grow it over a longer period of time. We've got the people; we have a great sales team. We have a great service team. That's where some of those investments are going as well this year to make sure we have all the infrastructure and support to keep growing those businesses. And I'll tell you, we've got a great team in each of our regions that can integrate acquisitions. When you think about the challenge of an acquisition, a lot of time, its success is depending on how well you integrate. We don't think of it as Trane Technologies is acquiring, and let's take our best of Trane to the business. It really is also what are we learning from the business we just acquired and bringing it into our organization. And I'll tell you some of our recent acquisitions, it's spot on with taking the learnings of the businesses we've acquired, bringing them into the Trane family, and how do we replicate that across 40, 50 plants across the globe. So I'll tell you where we're bullish in this area. So I'd just say the pipeline remains strong.

Dave, this is going to be a broad question, but it goes to what you discussed around the increase in complexity in applied. When we think about the customer value proposition, and I understand there are many dimensions, it's going to differ across verticals. How does the increasing complexity play into the customer value proposition? Maybe give us the 2 or 3 biggest dimensions that really speak to and where that creates a sustainable competitive differentiation for the company.

Yes, that's a great question, Noah. It all starts with our highly technical direct sales force, who understand applications and often assist customers in determining the best solutions for their needs. I always say we don't sell products; we sell solutions, and our account managers approach customers this way. As the complexity of our products increases, our strengths become evident, especially on a global scale. Many decision-makers for significant projects are now global, and because of our worldwide sales force, we can effectively guide them through the technical considerations. Additionally, these more sophisticated products necessitate OEM service in the future, resulting in a long-term relationship related to the applied systems we market. We are also investing significantly; people often think of capacity investment as just the plant, but it's much broader. We're investing in training our direct sales team, expanding our sales force, enhancing our service technicians, increasing our engineering expertise, improving our critical processes, and bolstering our back-office operations to ensure top-notch customer support. This comprehensive approach plays into our strengths at Trane Technologies as these systems become more engineered. As I mentioned earlier, we view the applied system as having an 8 to 10 times multiplier in services over its lifespan. We aim to stay connected to the system. It is no longer just about fixing issues; these are integrated solutions. Customers expect us to be connected to ensure their assets operate as intended. I shared with a group earlier this week that it's not simply about systems malfunctioning, but rather about systems consuming excessive energy, which we have been able to identify. The complexity increases both in the application of the system and in how we monitor and service it, and we are at the forefront of this advancement.

There are no further questions at this time. I will now turn the call back to Zac Nagle for closing remarks.

I'd like to thank everyone for joining today's call. We'll be around, as always, for any questions that you may have in the coming days and weeks, and we look forward to seeing many of you on the road or actually at our headquarters in some cases in the near future here. So thanks again, and have a great day.

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