Good morning. Welcome to the Trane Technologies Q3 2024 Earnings Conference Call. My name is Julianne, 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. At this time, all participants are in a listen-only mode. After the speakers' remarks, we will have a question-and-answer session. Thank you. 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' third quarter 2024 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 today's call. Please turn to Slide #3. I'd like to begin with a few minutes on our purpose-driven strategy, which enables our differentiated financial results over time. Climate change is occurring much faster than anticipated, affecting people and communities around the world, as we saw here in North Carolina just a few weeks ago. Urgent and transformative action is needed to reduce emissions and limit global warming. That's where Trane Technologies comes in. Through our innovation, we are helping our customers reduce energy and emissions. When you consider that in a typical building, approximately 30% of the energy after the meter is wasted, it's a massive opportunity. For our customers, it's grain for grain, good for the planet and good for the bottom line. With our relentless innovation, consistent execution, and uplifting culture, we are positioned to deliver a leading growth profile and differentiated financial results over the long term and build a more sustainable future. Please turn to Slide #4. We delivered strong performance in the third quarter, extending our track record of leading revenue and EPS growth among industrials. Our global team delivered 11% organic revenue growth, adjusted EBITDA margin expansion of 120 basis points, and adjusted EPS growth of 21%. Enterprise organic bookings were very strong at $5.2 billion, the second-highest quarter in the company's history, up 5% in the quarter and up 13% on a two-year stack. To put this into perspective, bookings were only about $120 million or 2% below our highest bookings quarter in Q2 of this year. Organic bookings in Americas commercial HVAC this quarter were also the second-highest in the company's history, up low-single-digits and mid-teens on a two-year stack. Q3 bookings were only $100 million below the highest bookings quarter in Q1 of 2024. Net absolute bookings remained very strong. Given the tremendous growth we've seen over the past four years and the variation in order timing, comps will likely continue to be somewhat lumpy. While absolute bookings are expected to remain very strong, backlog also remains very strong at $7.2 billion, up from $6.9 billion at year-end 2023, and we expect to exit 2024 with highly elevated backlog. We encourage investors to look at absolute bookings, revenues, and backlog, along with growth rates in order to gain a clear picture of our strength. Robust performance continues to be led by our Americas commercial HVAC business, where revenue growth has been exceptionally strong and consistent. Revenues for each of the first three quarters of 2024 are up over 50% on a three-year stack, inclusive of both equipment and services. We expect fourth-quarter revenue to be up 50% on a three-year stack as well. We are building a strong track record of market outperformance, particularly as increasing project complexity plays to our unique strengths in innovation and direct sales and service. Case in point, organic bookings and revenue for our Applied Solutions in the Americas are both up well over 100% over the past four years. Our installed base is expanding rapidly, adding an estimated eight to ten times higher-margin services revenue over the life of the equipment. Our strong performance throughout 2024 has enabled us to accelerate incremental investments while delivering full-year leverage above our long-term framework of 25% or more. We've stepped up the pace of investments in the second half of 2024, further strengthening our position for 2025 and beyond. Given our strong performance and positive outlook, we are raising our full-year organic revenue and adjusted EPS guidance. Chris will cover our guidance update in more detail later in the presentation. Please go to Slide #5. In our Americas segment, commercial HVAC has delivered exceptional bookings and revenues throughout the year, as I've highlighted on the prior slide, with broad-based strength across vertical markets. Revenue was very strong, up nearly 20% in the quarter, with equipment and services up nearly 25% and mid-teens, respectively. In residential, the team delivered very strong results with bookings up high-20%s and revenues up low-teens. Turning to transport, the business performed as expected. Bookings were strong, up high-20%s. Revenues were down high-single-digits, consistent with our guide. In EMEA, commercial HVAC strength continues to be driven by demand for our innovation, with bookings up mid-single-digits in the quarter and up high-teens on a two-year stack. Revenue was also strong, up low-teens. Our transport business performed in line with our expectations, with bookings up mid-teens and revenues flat. Turning to Asia, results were mixed between China and the rest of Asia. Starting with the rest of Asia, bookings and revenues were solid, up low-single-digits and mid-single-digits, respectively. China had a challenging quarter, which I will discuss in more detail on Slide 8. Now, I would like to turn the call over to Chris. Chris?

Thanks, Dave. Please turn to Slide #6. This slide provides a snapshot of our performance in the third quarter and highlights continued strong execution top to bottom. Organic revenues were up 11%, adjusted EBITDA margin was up 120 basis points, and adjusted EPS was up 21%. At an enterprise level, we delivered strong organic revenue growth in both equipment and services, up double-digits and low-teens, respectively. 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 increments, positive price realization, and productivity that more than offset inflation, and continued high levels of business reinvestment. In our Americas segment, we delivered about 12 points of volume and 3 points of price. Strong volume growth in our commercial HVAC and residential businesses was partially offset by muted performance in our transport business. Adjusted operating margin expansion of 130 basis points was driven by volume growth, productivity, and price realization, more than offsetting inflation and high levels of business reinvestment. In our EMEA segment, we delivered about 7 points of volume and 1 point of price with strong volume in our commercial HVAC business. Adjusted operating margin expansion of 140 basis points was driven by volume growth, productivity, and price realization, more than offsetting inflation and high levels of business reinvestment. In our Asia Pacific segment, volumes declined by approximately 22 points. The team was able to deleverage within gross margin rates. Now, I'd like to turn the call back over to Dave. Dave?

Thanks, Chris. Please turn to Slide #8. Our outlook is largely unchanged as we move closer to the end of the year with America's commercial HVAC and residential a bit stronger and Asia Pacific more muted. We've talked about the strength of our Americas commercial HVAC business at length, so I won't go into a lot more detail. We expect the strength to continue in the fourth quarter with three-year stacked revenue growth of approximately 50%, consistent with our performance each quarter this year. Our residential business delivered stronger-than-expected growth in the third quarter, driven by the factors highlighted on the slide. We continue to expect a modest pre-buy of 410A in 2024, primarily impacting Q1 of 2025. We've raised our full-year 2024 revenue growth outlook to high-single-digit growth, up from mid-single-digit growth prior. In our Americas transport business, ACT continues to forecast the 2024 transport markets to be down mid-teens, and we expect to outperform. Looking to 2025, ACT has moderated their trailer growth expectations to low-single-digit growth. This includes a weak first half and a stronger second half, and we largely agree with that view. We've been investing heavily in our transport business. As the markets recover, we expect to emerge well-positioned to outperform. Overall, the changes to our outlook in the Americas segment are favorable, and we reflected this in our raised guidance for the year. Turning to EMEA, the business performed as expected, and there's no change to our outlook. Asia represents about 8% of our overall revenue mix with about 50% in China and 50% in the rest of Asia. The rest of Asia performed in line with our expectations in the third quarter, and we expect continued modest growth in Q4 as well. Our China commercial HVAC business came in below our expectations in the third quarter, primarily related to two factors: First, the non-residential markets in China deteriorated meaningfully since the June timeframe, and bookings and revenues were negatively impacted as a result. Second, we made the prudent decision to tighten our credit policies in China, primarily related to downpayments and progress payments. Despite the significant revenue decline in China, the team maintained deleverage within gross margin rates. While China will remain a dynamic environment, we expect some improvements in the fourth quarter as our customers and sales teams navigate the market and policy changes. We have an outstanding team in China that has delivered leading results for many years, and I remain confident in our team's ability to outperform over the long term. Now, I'd like to turn the call back over to Chris. Chris?

Thanks, Dave. Please turn to Slide #9. We continue to target top-quartile performance on organic revenue and adjusted EPS growth for the full year and believe we're on track to achieve those objectives. Given our continued strong performance, positive outlook, and exceptional backlog, we're raising our organic revenue guidance to approximately 11% from our prior guide of 10%. We're also raising our full-year adjusted earnings per share guidance by $0.30 to approximately $11.10, up from $10.80 prior. We're well positioned to deliver our fourth consecutive year of adjusted earnings per share growth of 20% or greater. Between our strong year-to-date revenue performance and the addition of two small acquisitions that we made in the third quarter, we expect M&A to contribute approximately 50 basis points to 100 basis points to revenue in 2024, which we expect to result in about 3 points of negative impact on reported versus organic leverage for the year. We also expect a more moderate negative impact from FX for the year at less than 1 point, effectively offsetting the positive revenue impact of M&A. Net organic and reported revenue guidance is the same at approximately 11%. We expect full-year organic leverage of approximately 30%, up from our prior guidance of 25% or more. We continue to expect free cash flow conversion to adjusted net earnings of 100% or greater. Absolute free cash flow is expected to be higher, reflecting our higher adjusted earnings guidance. For the fourth quarter, we expect organic revenue growth of approximately 7% and adjusted EPS of approximately $2.50. Embedded in this guidance is a step-up in investments and higher incentive-based compensation, reflecting strong performance in 2024. Please see Page 18 for additional details related to our guidance 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. And third, we expect to consistently deploy 100% of excess cash over time. Our balanced approach includes strategic M&A that further improves long-term shareholder returns and share repurchases as the stock trades below our calculated intrinsic value. Please turn to Slide #11. Year-to-date through October, we've deployed or committed approximately $2 billion in cash, with about $800 million to dividends, $230 million to M&A, and about $1 billion to share repurchases. We have $1.5 billion remaining under the current share repurchase authorization, providing us with strong optionality as our shares remain attractive, trading below our calculated intrinsic value. We continue to have an active M&A pipeline, with potential value-accretive opportunities to further improve long-term shareholder returns. Our outlook for 2024 cash deployment remains unchanged at approximately $2.5 billion. Our strong free cash flow, liquidity, balance sheet, and significant share repurchase authorization gives us excellent capital allocation optionality moving forward. Now, I'd like to turn the call back over to Dave. Dave?

Thanks, Chris. Please go to Slide #13. We discussed the transport markets in our outlook discussion on Slide #8, so I won't cover them again here. However, we've continued to provide this slide with additional details for your convenience. Please turn to Slide #14. We operate our transport business for the long term. And while we will continue to manage through a down cycle in 2024, this is a great business with a bright future. ACT projects a modest trailer market rebound in 2025, mid-teens growth in 2026 and 2027, and continued strong markets in 2028 and 2029. We're directionally aligned with these projections. We have a diversified transport business globally and 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. Turning to Slide #15. We expect to provide 2025 guidance on our fourth quarter earnings call. However, given our strong bookings, backlog, and growing pipeline of opportunities, visibility into 2025 has steadily increased. We thought it would be constructive to provide our early views on 2025 as another year of healthy growth. Our commercial HVAC businesses are executing well. Our world-class direct sales and service teams are a clear competitive advantage, enabling us to quickly pivot across vertical markets to capture growth opportunities. We have the broadest and most innovative portfolio in the industry, and we're relentlessly reinvesting in our business for growth. As we look at market opportunities, we're in the early innings of a strong multiyear CapEx cycle. We're also in the early innings on the journey to decarbonize hundreds of billions of square feet across the built environment. Increasing complexity of these project opportunities plays to our unique strengths, and we're seeing this in our bookings, backlog, and pipeline of projects. Net, we see another strong year ahead for commercial HVAC in the Americas and in EMEA. In Asia and more specifically, China, which is more than 90% commercial HVAC, the macro is more dynamic. However, with China at roughly 4% of our portfolio, we expect strength in the Americas and EMEA to more than offset a challenging backdrop for the region. Turning to residential. We've moved through a period of normalization in 2023 and 2024, and we believe we're returning to a GDP-plus framework. While we expect a moderate amount of prebuy in 2024, we expect this to largely impact revenues in the first quarter of 2025. Pricing differentials from the A2L transition should also act as a tailwind as we move through 2025. Turning to our Americas transport business, which is about 7% of our revenues, ACT is projecting modest growth largely in the second half of 2025. Net, 2025 will be a modest tailwind for the enterprise. We continue to lead with innovation, which yields healthy pricing opportunities, and our business operating system is prime to stay ahead of inflationary pressures. Underpinning our enterprise growth is our resilient services business. Services comprised about a third of our enterprise revenues and has averaged high single-digit growth over the past seven years. We see opportunities for continued growth in services across our portfolio. In particular, we expect strong performance in our commercial HVAC businesses with our large and growing installed base. With increased focus on decarbonization, we're seeing increased demand for digital performance optimization and demand side management, where our energy services business shines. All in, we're excited about the opportunities for strong growth again in 2025. Please go to Slide #16. In summary, we are well positioned to deliver leading performance and differentiated shareholder returns in 2024 and beyond. We recently received the results of our annual employee engagement survey, and engagement was at a record level, and in the top quartile compared to external companies. I experienced that engagement firsthand when I see our team members engage with customers around the world. That engaging culture, combined with our leading innovation and proven business operating system continues to set us apart. I'm proud of our team's consistent track record and believe our brightest days are ahead. And now, we'd be happy to take your questions. Operator?

Our first question will come from Scott Davis from Melius Research. Please go ahead. Your line is open.

Hey, good morning, Dave, Chris, and Zac.

How you doing, Scott?

I'm great. The numbers are good. I'm just trying to figure out a little bit of context around data center specifically, just since it's so topical right now. Just anything you can give us, whether it's growth, orders, materiality to your algorithm? I'm just trying to get my arms around how important that is for you guys for the next year.

Sure. Good question, Scott. Look, Scott, we've been strong in data centers for decades now, okay? So, this has always been a very strong vertical for us. I think we were kind of early adopters in the data center. We had a dedicated team that just focused on data centers, which has really allowed us to continue to remain very strong in that vertical. If you look at data centers, the growth projection that's projected, I mean, if you take the middle there, and there's a lot of numbers out there, you're going to see the data center vertical is going to be growing at the mid-teens for the foreseeable future. You should expect that Trane Technologies will continue to be very, very strong in this vertical as we have been for a long time. So, it's important that when you think of data centers, they're probably the most complex systems that we build, okay? We like working directly with the data center customers. We like thinking about it at a system level, okay? You'll hear a lot about different components within the system. We look at the entire system and really help the customers think through the optionality that exists for their particular needs based on what they're going to be using in that data center for. And it does depend on what they're going to be using it for. Chris, I don't know if you want to add anything.

Yeah. What I would add, Scott, is year-to-date in our Americas commercial HVAC business, data centers have provided a lot of growth to bookings, but when you remove data centers from those bookings, the rest of the verticals, in aggregate, are also up very strong. So, we like the broad-based focus of our direct sales force. Data centers are one strong vertical, but as we highlighted in our release, there are a number of verticals that have been strong for us this year, almost nearly all of them year-to-date showing strength.

Okay. That's helpful. And I wish you'd size it for us, but I understand if you don't want to do that, it's totally fine. Just moving to China, guys. Is that market mature enough at this point where we can start to see it, perhaps moving to more retrofit and services and being a little bit more stable longer term? I understand the down 45%, projects can disappear pretty quickly over there. But it's been a couple of decades now that you guys have been pretty strong and have a pretty big installed base there. So, is that something that you see that kind of becoming a more mature market going forward?

We have a service business in China that is not as developed as in the Americas, but it is growing. Specifically regarding China, we all understand the current market conditions there, and we have been affected by them. We decided to tighten our credit policies, particularly concerning downpayments and progress payments. For instance, if a customer places an order without a downpayment, we will not accept it. Similarly, if a product is ready to ship and the customer hasn’t made the necessary downpayment or progress payments, we will hold off on shipping. We believe this is a wise long-term decision. We have a strong team in China that has performed well for an extended period, and I am fully confident that we will continue to excel in that market. Our teams will navigate these changes in the fourth quarter, and this approach is the right one for the region at this time.

Okay. Makes sense. I'll pass it on. Best of luck, guys.

Thank you.

Thanks, Scott. See you in December.

Our next question comes from Chris Snyder from Morgan Stanley. Please go ahead. Your line is open.

Thank you. I wanted to ask on services, which continues to be really strong, up low-teens again here in Q3. Can you just maybe talk a little bit about the mechanics of the service business? What is the lag between when you sell the equipment to when it starts generating service revenue? Anything you could talk about on service margins? And then, it seems like a lot of the reinvestment the company is making is in that service side. So, just what are you spending on to better position the company to capture more of that revenue?

Sure. I'll start and I'll let Chris answer some of the margin questions. But look, we love our service business. It's a third of the company, and it's very, very resilient, okay? Over the last seven years, its compound annual growth rate is high-single-digits. So, it's a very, very competitive weapon that we have within Trane Technologies. We continue to invest heavily in it. Look, as far as the timing as to when a product gets installed, specifically on the applied side to when service starts, it varies, okay, depending on what the warranty is on a particular product. A lot of customers will have extended warranties. That's why I say it varies. Obviously, that would vary around the world. But think of it year two, year three, it starts to ramp up. And by the way, even if it's under extended warranty, we're going to be doing PM work on these products in many cases. The applied systems are so much more sophisticated today than they were just four or five years ago. The customers are really demanding that OEMs do the service on these systems to make sure that they're always performing the way they're designed. And Chris, you and I spoke a lot about connected solutions in the past. I would tell you that that's going to be so fundamental to how we continue to drive our service business in the future. I think you could certainly understand that our installed base is increasing. That will continue to drive growth. But the connected solutions and making sure that the asset is always performing the way it was designed while consuming energy at that level is so important. Today and a little bit certainly into the future, an HVAC asset isn't performing not only if it's not cooling properly, but if it's using too much energy. If you think about that, that's where the opportunity is. We've done hundreds of energy audits in buildings, and we know that I'll be conservative here and say that 30% of the energy after the meter is being wasted. However, if you are connected to an asset, you could always ensure that it's performing the way it was designed, and that's going to continue to be a significant tailwind for our service business well into the future. So, Chris, I don't know if you want to talk about margins?

Yeah. I'd add with the applied growth over the past four years, over 100%, that obviously bodes well as we think about that installed base maturing. As Dave said, two to three years out, it starts to build a little bit of a ramp on the services revenues. The services business typically has higher margins in the average. So, we like that business for that reason as well. It's a perfect example of where we've accelerated investments over the last few years, but even more so into the second half of this year. Dave talked about digital connected solutions. That's absolutely one way we're making investments, but think about it as capacity as well. I'm not going to focus on factories or plant capacity. I'm going to focus on people. When you think about sales and service, adding employees from covering verticals to adding service technicians to support our customers with that higher installed base. That's one area where we're really continuing to inflect up in investments. The tools to support the sales and service team, so sales support tools, whether it be customer relationship tools, order intake tools, billing, collections, you name it, it's all part of what Dave and I coming out of the second quarter, said we're going to accelerate the speed of some of these investments just to give us even further confidence on growth over the next couple of years. But it's such a strong business, and we're going to keep investing in it.

Yeah. One other point, Chris, that I always tell people that some of our service technicians are our best sales associates. Our service techs are with our customers every day, and they're building that trusted advisor relationship with our customers. They often see opportunities that the customer can make improvements in their own facilities. The service business is a strong part of Trane Technologies today and think of it being even stronger tomorrow.

I really appreciate all of that. I would like to follow up specifically on data center service. Considering the two- to three-year lag, it suggests that much of the growth we've observed in orders and even revenue in the data center sector over the past 12 to 18 months hasn't yet translated into service. Could you provide insights specifically on data center service? It would be helpful to understand how the data center service model is different. Thank you.

As I mentioned earlier, a more advanced product tends to lead to a greater willingness from OEMs to provide service. Data centers are among the most complex systems we handle, and we excel in that area. While the growth in data centers has been impressive over the past few years, it’s important to note that data centers have existed for a long time, and we have maintained a strong position in this segment from the start. Despite the significant growth we’ve experienced, we also have a substantial installed base in data centers that we are currently servicing.

Thank you.

Sure, Chris.

Our next question comes from Julian Mitchell from Barclays. Please go ahead. Your line is open.

Hi, good morning. I wanted to start with Slide 15. You provided some valuable insights on next year. Could you share any thoughts on organic operating leverage? This year is projected at 30%. I'm trying to understand what to expect for next year. Are there any specific factors you want to highlight, like product mix? It seems there might be a favorable mix within residential due to the A2L transition. Additionally, there could be significant operating leverage if transport markets improve in the second half. Considering all this, should we anticipate strong operating leverage in 2025? Is there any reason to expect otherwise?

Hey, Julian, it's Chris. I'll start. We'll provide a bit more detail around 2025 in our earnings call for the fourth quarter, but we really do like that long-term algorithm of 25% or better operating leverage and making sure we have the ability to fund investments in the business. We would be targeting 2025 for top quartile financial performance. We're going to look at that in the top line. We look at that on the bottom line and cash conversion as well. One thing so far this year, we've had excellent free cash flow conversion. The average over the last four years is, I think, 108%. We're going to be targeting top line, bottom line, and really strong cash conversion going into 2025. So, we would expect commercial HVAC to remain strong. The backlog visibility gives us a lot of confidence around that. We just talked about services and the high-single-digit growth we've seen over the last seven years gives us a lot of confidence that should continue. I think about Americas transport, it's probably not a headwind; it could be a modest tailwind going into next year, just given the expectation of around refrigerated trailers in the Americas being up low-single-digits, more second half of the year than first half. So, we think we've got some nice tailwinds going into next year, but on the leverage, we like the 25% or greater algorithm and keep those investments coming.

Thanks very much, Chris. And then maybe my second question just around the US resi HVAC market, which I don't think has been touched on in the questions so far. Maybe just help us understand, I think, Dave, you mentioned a slight increase to your revenue assumption for that business this year. Was that tied to sort of share gain or some behavior by distributors in general? Any color on that? And it sounds like you're pretty confident of decent revenue growth in 2025 again despite the prebuy. I just wondered if you could flesh that out, please, at all.

Certainly. First of all, Julian, great job on CNBC the other day; you did incredibly well. Regarding the residential market, we started the year expecting low-single-digit growth. By the end of the first quarter, we felt encouraged by the EPA's clarification on the refrigerant transition and believed that inventory levels had stabilized, which positively impacted us. Additionally, we experienced an exceptionally warm cooling season this summer, which contributed to our growth. As for market share, while we've seen gains, I acknowledge that others are reporting similar results, so I’m uncertain about the final numbers. However, we feel confident and are pleased with our share and the strides our team has made. Our team is performing exceptionally well in the residential sector, and the investments we've made in manufacturing are yielding positive results. I am extremely proud of their execution. We are optimistic about the current state of the residential business. Looking ahead to 2025, I've consistently stated that I view our residential business as a GDP-plus opportunity, which is the perspective we’ll pursue as we approach that year. Regarding the prebuy, I don't anticipate a significant impact, a sentiment I've held since January. There will be some prebuy activity, and we will provide more details as we progress through the fourth quarter. Overall, the residential sector is thriving, and we expect this momentum to continue.

Great. Thank you.

Our next question comes from Andy Kaplowitz from Citi. Please go ahead. Your line is open.

Hey, good morning, everyone.

Good morning, Andy.

Hey, Andy, how you doing?

Good. How are you? Dave, look, I know you already talked about data centers a little bit, but interestingly, in your presentation, you mentioned other verticals. You've mentioned before education, healthcare, but you also mentioned office. Maybe you can elaborate on what you're seeing there. And then, given we're at the tail end as you're spending for K-12, what could that mean for education-related HVAC spend in 2025?

Andy, look, first of all, thanks for noticing office on the page. We haven't talked about office in a long time. Although it may sound counterintuitive because you still have vacancy rates that are quite high, we had a very strong quarter in office. Actually, year-to-date office is up from an order rate perspective. If you think about it, you go kind of a click lower; you could sit there and say, 'Well, we're doing a really good job in Class A buildings.' We're also really helping our customers navigate through how they get tenants back into their space. I know you had the opportunity to visit us in New York, and you got to see it firsthand, right? Having this direct sales force with deep domain expertise as to what's happening in a particular city is critical, right? We know what the carrots are, what the sticks are and, more importantly, how to navigate that so that we could help the customer make the right decisions that can get tenants back into their space. I can't speak enough about our direct sales force. I can't speak enough about how they pivot to where the opportunities are and how. It's not just about data centers that's growing. For us, it's really almost all of our verticals. I was doing the study or I had the team do a study, and I was looking from year-to-date from order rates; I was speaking about commercial HVAC, we track 14 different verticals, 13 of them were positive by a lot, and office was one of those. It just shows you the broad-based strength that we have and the ability of our teams to really navigate to where the opportunities are. I could not be happier with seeing office on the page, and the team continues to execute at a high level there.

Great. Let me ask you about China. You have experienced somewhat high decremental margins there, which is partially due to the decisions you've made. You've been in China for a long time and shifted to direct sales, which worked well. Do you perceive this as a more structural issue, or is it mainly cyclical? If it is one or the other, can you reduce costs in that business, and how should we approach that to counteract higher decrementals?

Yeah. I mean, first of all, the team performed quite well. Even though the revenues were down, they were, within gross margins, on a deleverage standpoint. That was good to see. We're going to just work through this in China. We have a great team there, and we have a great business, and we've been overperforming in China for a long time. We've made a decision to change our credit policy, specifically around downpayments and progress payments. Long term, this will be the right decision. I think people will see that in the future. But right now, our teams are working through this change. I have all the confidence in the world that they'll get back to outperforming here in the future. But right now, we're going to work through it, and we have a great team there that's executed for a long time at a high level, and I expect more of that in the future.

Appreciate the color, guys.

Okay. Thanks, and we'll see you in a couple of weeks.

Our next question comes from Joe Ritchie from Goldman Sachs. Please go ahead. Your line is open.

Hey, guys. Good morning.

Hey, Joe, how are you?

Doing great, Dave. Thanks. Yes, look, we talked about office. We talked about data centers. Clearly, the commercial HVAC business is humming along. Can you maybe just kind of talk a little bit about some of the megaproject activity, how that's coming through, whether it's semiconductor plants? I know there's been some delays on EV plants. Just any commentary around that would be helpful.

Yes. Megaproject is my favorite term, I don't really like it. But look, megaprojects are happening in verticals that we've always been very strong in, and it's dynamic, as you could imagine, right? Yeah, you've talked about a few projects that maybe are getting a little bit delayed; we have others that are pulled up. Some, especially on the EV battery side, a couple of them have been canceled. But we also have new ones that are coming in. It's dynamic, but we continue to win in the megaproject space, right? Again, verticals we've always been strong in. A lot of these decisions are made on a global basis. Decision-makers live in different parts of the world. Again, having a direct sales force that could help triage those decision-makers is extremely important. We've been very successful, and I anticipate, and I know we'll be very successful in the future as well.

Got it. That's helpful. And look, I know you're not talking about a prebuy on the residential side of the business and yet the industry is seeing pretty significant growth in the back half of this year in resi, and a few of your competitors are talking about how much of the kind of 454B is going to go through their system next year. With one saying 65% of their business, the other one is saying 90% of their business. I'm just kind of curious as you think about your resi business since the next year, like how much of it do you think is going to be the 410A product that you'll manufacture this year versus the R-454B product that will be hitting the market next year? Any thoughts?

Yeah. I mean, if you think about inventory in the channel, three months of inventory is probably a good average to use, so by definition, you're going to be at 75%. Now, it won't probably be linear; it won't all be in the back half. You'll have some of the 410 that will sell throughout the year. But look, we'll probably be in that 75%, 80% range in resi. In commercial, remember that no one wants to take well commercial, but commercial also went through a refrigerant change on the unitary side. That one will obviously be a lot higher, think of that one in the 90%-plus range.

Helpful. Thank you very much.

Okay. Thanks, Joe.

Our next question comes from Nigel Coe from Wolfe Research. Please go ahead. Your line is open.

Thanks. Good morning, everyone. I appreciate the question. I know that the Asia-Pacific and China markets are quite small for you, so I may revisit this topic later. The surprising factor is that it has taken such a long time, especially considering the challenging market conditions in China for a while now. You've mentioned outperforming, which makes sense, but it seems that trend has shifted this quarter. If you were to assess how much of this situation stems from more stringent credit procedures versus a true decline in market conditions, how would you evaluate that? I suspect this correction may continue into 2025 without any significant rebound. I would welcome any thoughts on this matter.

I believe that the fourth quarter will be better than the third quarter. As you pointed out, China only accounts for 4% of our revenue, so it’s a minor part of our income, yet it remains significant. Determining how much of the decline is due to market factors versus our policy changes can be challenging. It could be around 50-50, though it might lean slightly more towards policy changes, at least in the short term, as we need to navigate through those adjustments. We must provide our customers with clear expectations. Our teams are well-equipped to handle this. A direct sales force can engage in meaningful discussions and understand the reasoning behind the changes, and we will work through it together. As I mentioned, we expect the fourth quarter to be somewhat stronger than the third quarter, which is reflected in our guidance.

Okay. That's great. And then, a follow-up for Chris. Not asking about the '25 guidance, but maybe just some of the moving pieces. On corporate, running at $330 million now; it was as low as $350 million back in 2022, 2021. So, any sense on what would be a good run rate for corporate? And then, it looks like amortization comes down in '25. So, I think some of the Trane acquisition amortization is starting to roll off. Is that correct? And then finally, just on interest. We got a refi coming up in November, I think, very small, but should we expect interest expense to go up a little bit next year?

Hey, Nigel. Yeah, corporate, I think $300 million is probably a good longer-term run rate number. I mean, there are times like this year where we have a little bit higher corporate expense, and think of that as where we're driving some of the enterprise investments for the company. Those are decisions we'll make as we work throughout a year, always making sure that that pipeline of investments is getting funded. But I think going into 2025, a squiggle of $300 million is probably a good place to start. We'll update you as we get together in a few months from now. On amortization, yes, there's going to be a little bit of a roll-off on the Tarne amortization. We'd have to look at that across the new M&A that we've done over the last few years and dial that all in. So yeah, we'll give you some more input on that over the next few months, see if there's any more M&A that comes through the balance of this year. And then, on the interest side, yeah, I would say we had $237 million of guided interest expense for this year. We took out some debt proactively earlier this year just to derisk a refinance that actually is going to come due here in a couple of days. We've held on to that cash actually this year from the bond offering we did in June. It's a net positive on net interest here. So, we'll pay down that cash and pay down that bond going into next year. But maybe that number for 2024 is not far off from what we have for 2025. But we'll see. We'll dial it in. The good thing is we've generated a lot of cash this year, maybe earlier than normal. It's generated a little bit more interest income as well as we've earned it this year. We have a pristine balance sheet, very strong leverage on the balance sheet, a lot of firepower to go deploy cash. I would say maybe for next year, interest is probably in that ballpark as 2024.

That's great. Thanks, Chris.

Thanks, Nigel.

Our next question comes from Deane Dray from RBC Capital Markets. Please go ahead. Your line is open.

Hi. Good morning. This is Sahil Manocha on for Deane Dray. My question is on weakness in China, understanding it's a smaller part of the business, but have you taken any write-downs of receivables or increased reserves? And how might the Chinese government stimulus actions play out? Are there any verticals in China doing particularly worse?

Why don't I start? This is Chris. The first answer is no. We've not seen any material write-downs or bad debt reserves. I think the key there is coming out of the second quarter, working with our business team in China to make sure that they were deploying these tightened credit policies really at the end of the second quarter. We've got orders that are waiting to be delivered. When the cash comes in, we'll deliver them. At this point, no, we're not seeing that. We generally play in the non-resi markets in China and largely commercial HVAC with a smaller transport business. Those are the markets that have been, as you may have seen here in the last several months, the non-resi markets are just seeing a bit of a downturn. We've been outperforming for some time. At some point, it does catch up with you a little bit. We should ensure that we're focused on the long term here. We don't want to create a short-term problem that's a booking or revenue that three, six, or nine months down the road, you wind up with a problem you have to deal with. We're making sure we've got quality orders, quality customers, quality receivables and then ultimately driving the cash.

That's really helpful. And then, one more on data centers. Could you provide an update on your liquid cooling investment in LiquidStack?

Yeah. We continue to work with LiquidStack. We've been partners with them for an extended period of time now. I think the activity is starting to pick up there, but there are some hurdles that we're still working through with them, and we'll keep you posted, but not really any kind of an update right now as far as orders are concerned.

All right. Thank you very much.

Our next question comes from Andrew Obin from Bank of America. Please go ahead. Your line is open.

Hey, guys. Good morning.

Hey, Andrew. How are you?

I am going to sort of belabor this China point a little bit more. My understanding was that for you, China was mostly industrial exposure. I think the prior explanation for the fact that your performance in China was better was because you did not have exposure to these non-residential office buildings. I just want to understand if that's the right way of thinking about it. And yeah, right, because, as I said, the commercial weakness was there. Your response was we're not really on this commercial development. We're playing mostly on the industrial side. Did I just understand it wrong?

No, think about our business in China, where 90% is commercial HVAC, mostly applied systems. You're correct about that. The downturn is affecting the markets, which is a trend we're seeing in China. However, as I mentioned earlier, if a customer isn't ready to make the downpayment or progress payment, even if the product is ready for shipment, we will hold it. We won't ship until we receive that progress payment. This led to a significant decline in our performance this quarter. In the long run, this is a wise decision that we believe will be appreciated in the future. For now, we're focused on working through these challenges, and we have a strong team that has consistently performed well, and I expect that will continue.

No, I understand, but the answer is that all along your China business was mostly commercial real estate, not industrial facilities, not factories, not data centers, it's 90% commercial real estate. Just want to get that point. Is that correct?

No, that's false. No, we're actually the reverse. We don't really play in the commercial real estate place. These are applied systems. So, think of them as semiconductor or industrial applications.

No, that's exactly what I was asking. Thank you. Yes, that was my understanding. Okay. Fine. So, it's really industrial weakness. It's weakness outside the real estate market that's getting you down?

You got it.

Thank you. Regarding A2L pricing, there have been numerous data points. There seemed to be a perception that Daikin, given its use of a different refrigerant, might not raise prices as significantly. It appears your competitors are estimating increases in the high single digits, around 10%. Could you clarify where you stand on A2L pricing for 2025?

Andrew, I mean, think of the introduced pricing for the new refrigerant products really being up in the high-single-digit range. There is more cost associated with the products for many reasons, the refrigerant, the sensors, etc. Our target is to be margin neutral here as we think about pricing and cost for end customers. Think of it for us up in that high-single-digit range. As we guide next year, we'll dial in a little bit better based on visibility the percentages that Dave outlined previously of how much will be 454B versus 410A. Not all of the residential products we sell are subject to the new refrigerant like furnaces; we'll walk you through what we think that price contribution is for next year, but it will be a tailwind for next year.

Terrific. And I really appreciate this clarification in China. Thanks a lot.

Sure. No problems, Andrew. Thanks.

Our next question comes from Tommy Moll from Stephens. Please go ahead. Your line is open.

Good morning, and thank you for taking my questions.

How are you doing, Tommy?

Good morning.

Doing fine. Thank you. We've talked a lot about China. So, I wanted to circle back on one of the positive topics from today, which is the backlog you've called out for 2025, which was up sequentially by a pretty large amount. I'm just curious, as you look at the composition there, is there anything we can learn in terms of what verticals are particularly strong? Why customers may be ordering a little bit earlier in the cycle than in the past? Just anything we can glean. Obviously, you've talked about next year is a strong one for commercial HVAC, but maybe if we go one layer deeper there, what can we learn?

I believe, as I mentioned earlier, our order rates for commercial HVAC in the Americas have increased by nearly 20% this year, and this growth is widespread across nearly all verticals. Additionally, our pipeline, which represents opportunities before they convert into orders, is exceptionally robust. Our advanced CRM systems help us track ongoing projects effectively. This strong pipeline gives me significant confidence not only for the fourth quarter but also for our expectations heading into 2025. I'm quite optimistic about 2025, and we will provide more details as we approach our fourth quarter earnings. Moreover, our backlog has increased by $300 million year-to-date, which is over 2.5 times the historical average. We will enter next year with a very solid backlog, and market activity across all verticals remains very strong at this time.

Which leads to my follow-up, Dave. Office got a little airtime earlier. So, if we discuss these commercial trends, ex data centers, which we've covered, and think about office and some of the other verticals that we don't talk about as much, am I hearing you correctly that it feels like the rest of that commercial business has actually gotten stronger in terms of the orders as 2024 has progressed?

Certainly, office has. I think all of our verticals have positive growth except for one. They had positive growth on a year-over-year basis, which is encouraging. But again, it kind of comes back to who we are as Trane Technologies. We are very broad-based. Our portfolio of products and services is extensive. We have expertise in all verticals. It's not like we've become over-indexed on any one. I know data centers are certainly very strong, and they will continue to be very strong in the future. We have a great team working on data centers, as well as great teams focused on other verticals with that expertise. If they see opportunities, they will pivot to them and ensure they can win with the customer. We are seeing very strong backlogs and strong activity before orders, and we are optimistic.

Thank you, Dave. I'll turn it back.

Thanks, Tommy.

Our last question today will come from Noah Kaye from Oppenheimer. Please go ahead. Your line is open.

Thanks, and I will give it to one question. Dave, in the past, we've talked a little bit about a cascading impact of policies going from, say, ESSER to CHIPS and IRA. I know there are a lot of fundamental drivers here around decarbonization and improved efficiency paybacks. But just at this point, as we look at '25 and your comments around the pipeline of activity, to what extent are those policy impacts actually impacting the pipeline or the bookings you're seeing? Just help us level set what kind of impact they're actually having on the business?

I'm sure they have a benefit. However, our solutions provide excellent returns regardless of those benefits. While those advantages make it more appealing, we have strong returns for our existing projects, whether we benefit from external support or not, such as ESSER funding. Some of those orders have indeed come from ESSER funding, which is an important part of our backlog. We'll be processing these orders over the next year for schools. Much of this is due to the timing, as work is typically done when students are not in school, usually during the summer. We'll have to see how the next administration in Washington will influence things, but we remain hopeful that we will continue to see attractive returns no matter the policies, whether they are supportive or not, and we expect to succeed well into the future.

All right. Thanks, Dave. Appreciate it.

Thanks, Noah.

I'd like to thank everyone for joining today's call. As always, we'll be available for questions at any time. We'll also be on the road quite a bit in the fourth quarter, and we look forward to seeing many of you on the road. So, have a great day. Thanks.

This concludes today's conference call. Thank you for your participation. You may now disconnect.