Trane Technologies - Q2 2023

Transcript

Operator (participant)

Good morning. Welcome to the Trane Technologies Q2 2023 earnings conference call. My name is Josh, 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. If you would like to ask a question during the Q&A session, please press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you. I will now turn the call over to Zac Nagle, Vice President of Investor Relations.

Zac Nagle (VP of Investor Relations)

Thanks, operator. Good morning, and thank you for joining us for Trane Technologies' second quarter 2023 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 two. 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 earnings release. Joining me on today's call are Dave Regnery, Chair and CEO, and Chris Kuehn, Executive Vice President and CFO. With that, please go to slide three, and I'll turn the call over to Dave. Dave?

Dave Regnery (Chair and CEO)

Thanks, Zac, everyone for joining us on today's call. Let me begin with a few comments on our purpose as a company: to boldly challenge what's possible for a sustainable world. Our purpose is at the heart of our strategy, which is linked to powerful megatrends like climate change. This enables us to drive differentiated financial results and shareholder returns over the long term. The recent news on climate change has been sobering. Water temperatures off the Florida coast recently soared to over 100 degrees. We've seen deadly heat waves in parts of the United States, Europe, and Asia, in one of the Earth's hottest summers on record. In fact, scientists say these temperatures are likely the warmest the planet has seen in 120,000 years and have dangerous effects on the environment, the economy, and human life.

Urgent action is needed to limit global warming and preserve our planet for the next generation. Our customers are seeking sustainable solutions and choosing Trane Technologies as their partner in decarbonizing the built environment and the cold chain. We are leading the way with our innovation. The end result is long-term value creation across the board for our team, our customers, our shareholders, and for the planet. Moving to slide number four. Our global team continues to execute at a high level and delivered another quarter of strong performance, showcasing the benefits of our diverse, resilient portfolio. Organic revenue was up 11%, adjusted operating margins expanded 110 basis points. Adjusted EPS grew 24%. We delivered 30%+ organic leverage across the enterprise and in each segment, led by our commercial HVAC businesses in each region.

Our residential HVAC business continued to normalize and was further impacted by a difficult comp versus the second quarter of last year, when revenues were up 30%. Net on a two-year stack, residential revenues were up mid-teens in Q2. Importantly, we're delivering strong results while increasing business reinvestments. We're accelerating high ROI projects in focused areas, including digital, electrification, and factory automation. These investments are flowing through our segment results, as well as through corporate expenses for enterprise-wide initiatives to drive innovation, growth, and productivity well into the future. Bookings remained robust after reaching unprecedented levels in 2021, with nearly 30% bookings growth. In 2021, bookings exceeded revenue by approximately $2.7 billion, nearly doubling our backlog in a single year to $5.4 billion. During 2022, bookings grew more modestly, up 5%.

The sharp increase in absolute bookings in 2021 translated 5% bookings growth in 2022 into another 27% increase in backlog. Net, 2021 and 2022 are both important drivers of our strong backlog position of $7 billion at the end of the second quarter, which is roughly 2.5x historical levels. We've been encouraging investors to look at absolute booking levels and backlog in addition to growth rates to gain a more complete understanding of the strength of our business. When looking at growth rates for Trane Technologies, it's important to consider a three-year stack that includes 2021 for the reasons discussed. Commercial HVAC continues to be a standout across our segments globally.

In the second quarter, commercial HVAC bookings were up nearly 40% in each region on a three-year stack, supporting revenue growth of high teens in both the Americas and EMEA, and 45% in Asia. Additionally, our commercial HVAC book-to-bill ratios were effectively 100% or higher in each region. Our end markets continue to be healthy overall, and we believe we are well positioned for strong growth in 2023. While it's premature to dial in an outlook for 2024, continued high levels of demand and our extremely strong backlog position, particularly across our commercial HVAC businesses globally, puts us in a strong position to drive growth in 2024 as well. We expect to enter 2024 with elevated backlog of more than $6 billion. To put that in perspective, backlog has historically represented approximately 20% of the next year's revenue.

It's also worth noting that $2 billion of our $7 billion in current backlog is for equipment to be delivered in 2024. This is approximately 5x the level of backlog for the next fiscal year versus historical trends at the end of the second quarter. Our strong results through the first half, combined with healthy end markets and backlog that remains 2.5x norms, positions us well to raise our full year 2023 guidance. Chris will discuss in more detail later in our prepared remarks. Please go to slide number five. As we discussed, bookings and revenue growth were broad-based globally, with particular strength in our commercial HVAC businesses in all regions.

Enterprise and Americas bookings were down 5% and 8%, respectively, largely due to softness in our Americas residential business, which was down approximately 20% in the quarter as that business continues to normalize. Excluding the impact of residential bookings decline, enterprise bookings were up 1%, and Americas bookings were down low single digits. In our Americas segment, commercial HVAC bookings were down mid-single digits against high teens growth comp in the prior year. Absolute bookings remained robust, with growth of approximately 40% on a three-year stack. Commercial HVAC revenues were up high teens in the quarter, with strong growth in both equipment and services. Even with strong revenue growth, the book-to-bill ratio was approximately 100%. Commercial HVAC backlog remains highly elevated at 3x historical levels. Residential HVAC revenues were down as expected as the business continues to normalize.

Revenues were down low teens. However, it's important to note that the team delivered leading revenue growth of 30% in the second quarter of 2022. On a two-year stack, the business was up mid-teens. In our transport refrigeration business, we delivered strong bookings and revenue growth, up approximately 40% and 30% respectively. Revenue strength was broad-based in North America, with the big three: truck, trailer, and APUs, up approximately 50%. In our EMEA segment, our commercial HVAC business delivered another strong quarter. Bookings were up mid-single digits on top of low teens growth comp in the prior year. Revenues were up high teens, with strength in both equipment and services, up mid-twenties and high single digits, respectively. Our transport refrigeration business is executing well in a modestly down market.

Expect the EMEA weighted average transport markets to be down low single digits to mid-single digits in 2023, and for our Thermo King business to outperform and to be relatively flat for the year. With revenue growth of mid-single digits in Q1 and revenues down low single digits in Q2, we're well positioned to hit this target for the full year. In our Asia Pacific segment, the team delivered strong results, with bookings up mid-single digits versus bookings up mid-teens in the prior year. Revenues were very strong, up 41%. China results were robust, with bookings and revenues up 20% and 40%, respectively. Now, I'd like to turn the call over to Chris. Chris?

Chris Kuehn (EVP and CFO)

Thanks, Dave. Please turn to slide number six. We delivered strong revenue growth, margin expansion, and EPS growth again in the second quarter. Organic revenues were up 11%, adjusted EBITDA margins were up 100 basis points, and adjusted EPS was up 24%. At an enterprise level, we delivered strong organic revenue growth in both equipment and services, up low teens and high single digits, respectively. Our high-performance flywheel continues to pay dividends, with relentless investments in innovation driving strong top-line growth, margin expansion, EPS growth, and powerful free cash flow. Please turn to slide number seven. We've discussed the key revenue dynamics for the second quarter, so I'll focus my comments on margins. We delivered strong margin expansion in each of our business segments and have highlighted the key margin drivers on the right side of the page.

In each of our regions, as the supply chain continues to improve, we're driving strong leverage on volume growth, along with strong price realization and improving productivity. Near term, challenges continue in pockets of our business with associated costs, and we are managing these well across our segments, as reflected in our results. As an enterprise, we delivered about 6 points of volume and about 5 points of price in the quarter, which was slightly ahead of our expectations on both price and volume. Volume growth was robust in our commercial HVAC businesses, accompanied by strong organic leverage in excess of 30% in each region. Americas' performance was led by strength in commercial HVAC and aided by robust growth in our Americas transport refrigeration business, more than offsetting continued normalization of our residential business.

EMEA delivered strong incrementals and margins after accounting for approximately 9 points of M&A growth in the quarter, which negatively impacted reported leverage given year one integration costs. As we discussed previously, we've earmarked 70 basis points for incremental business reinvestment in 2023, which is about 30 basis points higher than normal, to accelerate the timing of key projects. This is included in our guidance and reflected in segment margins and partially in corporate expenses each quarter. Now I'd like to turn the call back over to Dave.

Dave Regnery (Chair and CEO)

Thanks, Chris. Please turn to slide number eight. Looking forward, we see continued strong underlying demand for sustainable solutions well into the future. We see the stacking effect of policy and regulatory changes that play to our unique strengths as a leading climate innovator, as tailwinds that are either early to mid-innings or future multi-year opportunities. The pace of these tailwinds has only accelerated in recent years, and with the realities of climate change all around us, it's likely we'll see this pace continue. The tailwinds impact all of our businesses, as 100% of our portfolio is focused on driving more sustainable solutions for our customers. In our Americas segment, our overall outlook is relatively unchanged. We see commercial strength continuing to outweigh impacts from ongoing normalization of our residential business.

We expect residential to continue to normalize through Q3, but to improve from Q2, and we expect the normalization process to be complete in 2023. Commercial faces tough comps in the second half of the year, with less contribution from price. We'd expect growth rates to remain strong, but moderate from the first half of 2023. There's no change to our transport refrigeration outlook overall. ACT has modestly lowered their forecast for 2023 from flattish to a decline of low single digits, largely related to trucking OEM build constraints. We expect our Thermo King business in the Americas to outperform, with low to mid-single-digit growth for the year. One additional call-out is related to the timing of our revenues in our Thermo King business.

In the first half of the year, Thermo King delivered 20% growth, outpacing the North America transport markets, which were flat overall. A portion of that outgrowth was driven by timing of customer deliveries committed in the first half versus the second half of the year. Additionally, Thermo King delivered extremely strong results in Q3 of 2022, up 60%. Given this difficult comp and the timing dynamics between the first half and the second half, we expect our Thermo King business to be down approximately 10% in the third quarter. In our EMEA segment, the second quarter was strong, and our outlook for the full year is also unchanged. Like the Americas, commercial HVAC faces tough comps with less contribution from price in the second half of the year, we would expect growth rates to moderate. Our Thermo King business in EMEA is unchanged.

The forecast for the overall market calls for a low single-digit to mid-single-digit decline. We expect our Thermo King business to be flattish. Turning to Asia Pacific, our outlook for the region is largely unchanged, with strength continuing in key verticals as highlighted. Our team delivered a better-than-expected second quarter against a relatively soft comp from the prior year, given COVID-19 lockdowns in China. The strong Q2 results pulled in a modest amount of revenue from the third quarter based on timing of customer deliveries. Overall, the year is shaping up as expected, with a solid growth outlook. Now, I'd like to turn the call back over to Chris. Chris?

Chris Kuehn (EVP and CFO)

Thanks, Dave. Please turn to slide number nine. As Dave highlighted at the beginning of the call, we're midway through the year with strong results, near record backlog, and good visibility into the balance of the year. All in, we're confident in raising our full-year revenue and EPS guidance for 2023. We're raising our full-year organic revenue growth guidance to approximately 8%, up from our prior guidance range of 7%-8%, reflecting strong results in the first half and improving visibility into the balance of the year across the portfolio. Including M&A, reported revenues are expected to be up approximately 10%.

We're raising and tightening our EPS guidance to a range of $8.80-$8.90, up from a range of $8.30-$8.50, or up $0.45 at the midpoint. Our new adjusted EPS guidance indicates earnings growth of 20%-21% in 2023. Importantly, we continue to expect to generate powerful free cash flow of equal to or greater than 100% of adjusted net earnings, or approximately $2 billion. We're raising our organic leverage guidance to 30%+, up from 25%+, as we expect the strength we've delivered in the first half of the year to continue in the second half. We also believe it's constructive to give you some color around our expectations for the third quarter to assist with your modeling.

We expect organic revenues of approximately 7% in the third quarter, with strong 30%+ organic leverage. We also expect approximately 3 points of M&A in the third and fourth quarters. We closed on two acquisitions in the second quarter, so our expected M&A contribution in the third and fourth quarters is a bit higher than it is for the first half and for the full year. Please see slide 18 for additional information that may assist with your models. Please go to slide number 10. We remain on track to deliver $300 million of run rate savings from business transformation by 2023. Importantly, we continue to invest these cost savings in high ROI projects to further fuel innovation, growth, and productivity.

Our continuous improvement mindset is an integral part of our business operating system. It's designed to drive gross productivity each year to offset other inflation. While it's been difficult to realize meaningful levels of productivity in recent years, given the supply chain and other macro challenges, productivity has been improving as supply chains recover. This is reflected in our strong first half results and our updated 2023 organic leverage target of 30%+. Please go to slide number 11. We remain committed to our balanced capital allocation strategy, focused on consistently deploying excess cash to opportunities with the highest return 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 that further improves long-term shareholder returns and share repurchases as stock trades below our calculated intrinsic value. Please turn to slide 12. I'll provide an update on our capital deployment for 2023. Year-to-date, we've deployed $1.2 billion in cash, with $341 million to dividends, $535 million to M&A, and $300 million to share repurchases. We have $2.9 billion remaining under the current share repurchase authorization, and our shares remain attractive, trading below our calculated intrinsic value. Our M&A pipeline remains active, and we have deployed $535 million year to date for bolt-on leading technology acquisitions and equity investments.

During Q2, we acquired a leading industrial process cooling technology company in EMEA and a precision temperature control cooling company in the life sciences vertical in the Americas. All in, we're on track to deploy approximately $2.5 billion in cash in 2023. Our strong free cash flow, liquidity, and balance sheet continue to give us excellent capital allocation optionality moving forward. I'd like to turn the call back over to Dave. Dave?

Dave Regnery (Chair and CEO)

Thanks, Chris. Please go to slide number 14. Today, I'll take just a minute to provide an update on the transport refrigeration markets. As we know, this is a topic of interest for investors. The key takeaway is that while there has been a modest movement in the ACT North America forecast from flattish to down low single digits for 2023, we're not seeing material changes that would impact our full-year outlook, given our strong backlog and bookings expectations. Overall, we expect our Thermo King business in the Americas to be up low to mid single digits in 2023, which reflects several points of market outgrowth. Our EMEA Thermo King outlook is also unchanged. The overall EMEA transport refrigeration market is expected to be down low to mid single digits. We expect to outperform end markets and to be roughly flat for 2023.

In both segments, we are on pace to achieve these targets. Please go to slide number 15. ACT continues to provide long-term forecast for refrigerated trailers, and they are projecting strong demand through 2028, after low single-digit dips in 2023 and 2024. The data supports the view we've been highlighting for some time now, that this is a strong mid 40,000 unit market ± a few percentage points. Please go to slide number 16. In summary, we are positioned to outperform over the long term. We are proud to have recently been recognized by Fast Company as one of the best workplaces for innovators, and also certified as a Great Place To Work for the third consecutive year. It's our culture and our people that fuel our innovation and fulfill on our purpose each and every day.

Our strong second quarter performance, resilient portfolio, and tremendous backlog gives us confidence in again raising our full-year revenues and EPS guidance and reaffirming our full-year free cash flow conversion guidance. We believe we have the right strategy, the best team, and a solid foundation in place to deliver strong performance in 2023 and differentiated long-term shareholder returns. Now, we'd be happy to take your questions. Operator?

Operator (participant)

As a reminder, if you would like to ask a question at this time, please press star followed by 1 on your telephone keypad. We ask that you please limit yourself to one question and one follow-up. Our first question comes from the line of Andy Kaplowitz with Citigroup. Your line is open.

Andy Kaplowitz (Managing Director and U.S. Industrial Sector Head)

Hey, good morning, everyone.

Chris Kuehn (EVP and CFO)

Hey, Andy. How you doing? Good morning.

Andy Kaplowitz (Managing Director and U.S. Industrial Sector Head)

Good, how are you? Dave or Chris, you delivered 30% leverage in Q2 and expecting 30% for the year, which obviously is above your usual 25%+ guide. Is the biggest reason that you're getting... Is it that you're getting more than 20-30 basis points of price versus cost in the quarter and for the year? You mentioned higher than usual investments this year, as well as accelerating productivity. Could 30% really be the new 25% potentially as you go into 2024 over the longer term in terms of incremental margin?

Chris Kuehn (EVP and CFO)

Andy, it's Chris. Thanks for the question. Now, look, we're proud where we've delivered 30% organic leverage through the first half of the year, and it's giving us a lot of confidence to be 30% or greater in 2023. Look, we're leveraging all parts of the P&L. Price cost is coming in better than expected. We typically target 20-30 basis points, a price-cost spread. We're going to do better than that this year. We are seeing a recovery of the supply chain. You know, it is driving improved productivity, less inefficiencies in our plants, and with that higher volume growth and the fewer inefficiencies, we're really getting some nice, strong incrementals. What we're really seeing is a dovetail here between, you know, price-cost contribution, which will normalize in the second half of the year.

We're seeing productivity improving with that improved supply chain. And ultimately, like I said, driving those higher volumes. We're continuing to invest incrementally. We're still targeting 60-70 basis points of incremental investment, you know, call it 30-40 basis points above normal. We really like that formula. Really, it's all parts of the P&L that are working and giving us confidence on the 30%+, Andy, for this year. On your question, longer term, we do like the model at 25%+, organic leverage into the future. We like that optionality that it gives us to keep reinvesting into the business. As we go into each and every year, we'll, we'll kind of call it as we see it at that time. We do, we do like that long-term target.

Andy Kaplowitz (Managing Director and U.S. Industrial Sector Head)

Well, I tried, Chris. Thanks for that.

Chris Kuehn (EVP and CFO)

Thank you.

Andy Kaplowitz (Managing Director and U.S. Industrial Sector Head)

Then, Dave, can you give us some more color into how you're thinking about commercial HVAC markets in the Americas? You know, you talked about, you know, good three-year stack. We know there are tough comps. You know, maybe you could give us your thoughts on book-to-bill going forward there. Are there any markets that you would term as slowing? Then you kept the $6 billion overall minimum backlog for the company. The two quarters behind you, would you say the chances are higher that you'd end the year closer to $7 billion than $6 billin? Any thoughts around sort of that minimum?

Dave Regnery (Chair and CEO)

Okay, that's a, that's a long question, Andy. I'll try to remember it all. As, as we said, I think it's going to be $6 billion, north of $6 billion for the year. I'll start there. Look, I'm proud of what the team's been able to deliver. If you look at the revenue growth for commercial HVAC in the second quarter, it was high teens, and despite that high revenue growth, our book-to-bill was approximately 100%. You can just see the absolute bookings numbers are just very, very strong. If you look at where the strength is coming from, it's, it's really broad-based across several verticals.

Think of data centers, think of high tech, think of healthcare, think of ESSER funding in the education vertical, all really driving a lot of growth for us in our commercial HVAC business, and that team continues to execute at a very, very high level. Now, we're seeing we're starting to see some of the mega projects now, really come in, and our team is just doing a great job of triaging how we call on those customers. This is where a direct sales force, Andy, I know you and I have talked about this before, it's, it's really a competitive advantage, and it's a global direct sales force. You know, we, we recently were working with a customer in Texas and, on a semiconductor plant.

Just to give you some of the complexity, these are complex projects, but here's a project where the owner was located in South Korea. The engineer was located in Portland, Oregon. The general contractor was also out of South Korea. The mechanical was located in Texas, and here our team triages, has direct contact with all of those influencers and really allows us to create a differentiated value proposition for the customer. Short answer is we continue to see lots of nice growth.

Andy Kaplowitz (Managing Director and U.S. Industrial Sector Head)

Very helpful, Dave. Thanks.

Dave Regnery (Chair and CEO)

Sure.

Operator (participant)

Our next question comes from the line of Julian Mitchell with Barclays. Your line is open.

Julian Mitchell (Equty Research Analyst)

Hi, good morning. It sounds like, you know, slightly better, perhaps, you know, commercial HVAC sales outlook, unchanged in, in transport largely, and then resi HVAC, maybe slightly worse. Just wanted to sort of ask you on that last piece, you know, is the right way to think about that, that you had sort of volumes down, high teens in the second quarter, that narrows in Q3, and then you're sort of flat to modestly down in the fourth quarter. Is that the way to think about that, resi market? Any thoughts on the sort of inventory levels, sitting out there for you?

Dave Regnery (Chair and CEO)

Yeah. Hey, Julian, this is Dave. I'll start. Look, I think I, I'll go back to a year ago, okay? The second quarter of 2022, our revenue growth in the resi business was 30%. I don't remember the exact market number, but I believe it was up in the teens. We, we had a lot of, lot of growth there in the second quarter. Obviously, the, the second quarter of this year, we're down in the mid-teens. If you look at it on a two-year comp, you'd say we're still up in the mid-teens. As far as inventory goes in the channel, look, we're, we're normalizing in 2023 in our res business. You know, it's, we think that normalization process is gonna continue in the back half of the year.

We're calling residential to be down high single digits on a unit basis for the year. We think the third quarter will be better than the second quarter, but there's still gonna be some normalization that has to occur in that business. If you look a little bit forward into 2024, we think the normalization process, at least from an inventory standpoint, will be behind us in 2023. A little early to call what 2024 will be. However, we do expect some tailwinds coming in from, from policy, specifically around IRA. Can't size that yet because the rules are still a little unclear on IRA, but we do believe it will be a tailwind for our businesses in both the residential and in commercial. Chris, anything you want to add?

Chris Kuehn (EVP and CFO)

Going back to Q2, Q3 last year, you know, I think we felt like we led in price over 2021 and 2022, so that is a part of the reason and the tough comp. To Dave's guidance on the full year, you know, revenues down mid-single digits, units down high singles. You know, we've built into our guide, ± revenues down mid-singles. We feel like that's part of our guidance that we've updated here on top-line revenue growth and earnings per share.

Julian Mitchell (Equty Research Analyst)

That's great. Thank you. Then just my second question on the, the backlog, backlog outlook, maybe to ask it a, a slightly different way from the prior question, but, you know, pre-COVID-19, I think the backlog to sales coverage was, you know, 20%. Last 18 months, it's run at sort of 40%+. Is the, the sort of the broad idea here that that coverage shrinks, slowly but surely, but ends up at a place well above where you were, pre-COVID-19? Is that how we should sort of think about the backlog? Your commercial HVAC orders, therefore, don't see a big drop from current levels.

Chris Kuehn (EVP and CFO)

Hey, Julian, Chris, I'll start. When I think about the backlog at the end of December to now at the end of this, the second quarter, backlog's up about $100 million. You're seeing residential, you know, execute through its normalization, Thermo King executing through its backlog, and actually, commercial HVAC is up from even six months ago. We just continue to see very strong strength there. You know, our view is we're going to be greater than $6 billion going into the end of 2023. It's going to set us up very well for healthy revenue growth in 2024, I think, I think it'll continue to be a high-grade problem we're going to have for a little bit of time to come. The backlog will normalize over time.

We're just not seeing very much of that happening this year. You know, in Dave's comments, you know, $2 billion of the current backlog here at the end of the second quarter is already built for 2024, and that's 5x the normal level we'd have here at the end of the second quarter. We're getting a lot of visibility into next year already. As you mentioned, you know, a normal percentage of the next 12-month of revenue and backlog is 20%. Dave won't let me commit to $30 billion of revenue next year if we end the year at $6 billion of backlog, but it will normalize to your point, Julian. It's just going to take some time, but we're still seeing some very strong strength in commercial HVAC right now.

Julian Mitchell (Equty Research Analyst)

That's great. Thank you.

Chris Kuehn (EVP and CFO)

Thanks, Julian.

Dave Regnery (Chair and CEO)

Thank you.

Operator (participant)

Our next question comes from the line of Josh Pokrzywinski with Morgan Stanley. Your line is open.

Josh Pokrzywinski (Equity Analyst)

Hi. Good morning, guys.

Dave Regnery (Chair and CEO)

Hey, Josh, how you doing?

Chris Kuehn (EVP and CFO)

Morning.

Josh Pokrzywinski (Equity Analyst)

I'm well, thanks. Dave, you mentioned, ESSER and IRA a couple times, you know, IRA specifically having a hard time quantifying just yet, but maybe thinking about how those two, you know, maybe intersect and then, and then diverge. You know, where are we in sort of the, the total ESSER spending, whether it's, you know, orders or shipments? Then do you feel like IRA will be similar size, larger, smaller, you know, any way you can kind of dimensionalize those two things as we're maybe maturing in one and entering the other?

Dave Regnery (Chair and CEO)

Yeah. We'll start with ESSER. I think if you look at it from a revenue standpoint, I'd say it's middle, middle innings. If you look at it from an order standpoint, it's obviously a little bit ahead of that 'cause we have orders in our backlog for this. Our team's just done a great job there working with, you know, the school systems across the country and really helping them, you know, help them, you know, increase the ability for them to have a safe environment for the children that are learning there. It really started, you know, I think you, you heard me say this before. It started when we were doing indoor air qualities. We created roadmaps, and we're really executing to that. Revenue standpoint, think of it mid-single digits. IRA, it's all in front of us, okay?

It is, it's gonna be, it's gonna be a 2024 tailwind. Very difficult to size right now because it's gonna be. Each state may have a different set of standards. We're trying to understand all those different standards now. It will be a tailwind. We're just, we're just trying to size it. With the breadth of our portfolio, regardless of how the final rules are written, we'll have a product that will be part of a solution for our customer. I know we, we tend to want to think of IRA in the residential space, and it will certainly be a tailwind there. It's also going to be a tailwind for our commercial business. So we're working both fronts of it, stay tuned, as we learn more, we'll, we'll, we'll tell others.

Josh Pokrzywinski (Equity Analyst)

Got it. That's helpful. Then, maybe just on the backlog, if I recall correctly, you guys don't count service in that reported backlog number. If that's correct, maybe give us some context for, you know, how service backlogs look if you had to parse them out that way and, you know, how much, you know, kind of extra visibility you have on that front?

Dave Regnery (Chair and CEO)

You, you're correct. It doesn't, it doesn't provide any service. We don't include that in our backlog. Difficult to say. Service, you know, First of all, our service business is a great business, okay? It was up again, high single digits in the second quarter. Chris, I think we're now, I think I could say six years now, where we have compound annual growth rate of high single digits across the globe, okay? This is a very strong business, and it's key to our strategy and really allows us to be tethered to our customers for the life of our products. It's difficult to ascertain a backlog because if you start thinking of multi-year service agreements, it would just really be difficult to say if it's a three-year service agreement. A lot of times we like to add, add, add things to service agreements. It'd, it'd be, it'd be hard to quantify that number.

Josh Pokrzywinski (Equity Analyst)

Understood. Appreciate the detail.

Dave Regnery (Chair and CEO)

Thanks, Josh.

Operator (participant)

Our next question comes from the line of Chris Snyder with UBS. Your line is open.

Chris Snyder (Equity Research Analyst)

Thank you. You know, obviously a lot of focus on orders, and with that, I wanted to kind of follow up on, on the prior commentary around the U.S. mega projects that we're seeing. Could you just maybe talk a little bit about, you know, how these projects flow, you know, into orders for Trane and then ultimately revenue for Trane, just to kind of get a sense for what that lag could be? Thank you.

Dave Regnery (Chair and CEO)

Yeah, Chris, good question. It's, you know, we, we have very, part of our operating system is a very detailed process that we follow. We start all the way in the planning phase. We then move to permitting. We then go to engineering. We then go to groundbreaking and site prep, then through construction. It's a very detailed approach you need to follow, and the earlier you're involved, the more value you're going to create for the customer. As far as the timing on these, it depends on the type of project, okay? If it's a semiconductor plant, that process could take, you know, 3.5, four years from planning all the way through completion. Think about HVAC equipment probably being installed and operating maybe 9-12 months before operation of the facility.

You can start to back that up as to when you'd start to see orders. It's a bit different on a battery plant, a little bit shorter duration, but again, it's, it's really being involved early in the planning phase and then all through the process. Again, these are very complex projects, so you often have influencers in different parts of the globe that you need to have relationships with and be able to call on.

Chris Snyder (Equity Research Analyst)

Thank you. appreciate that. If I could follow up on data center, another big, you know, focus in the market right now. I mean, it's a, it's a vertical that the company has always done well in. you know, can you maybe talk about how activity is trending here? Is the business seeing any impact from AI investment into data centers? Is that still on the horizon? Any color outlook there would be helpful. Thank you.

Dave Regnery (Chair and CEO)

Yeah. Chris, well, thanks for the question, Chris. Yes, this is a vertical that we've been strong in for a long time, okay? The, the answer on AI and the new GPU chip that's, that's now going to be used with AI, predominantly with, with AI, that's a graphic process unit. These units produce a lot more heat. Think of a conventional CPU or central processing unit versus a GPU, graphics process unit. The graphics process unit throws off about 3x the amount of heat versus what we've seen in the past. If you, if you take that and you think about a data center, the cooling loads within data centers are going to have to change, and we're working with a lot of data center customers 'cause we have a lot of really neat solutions around these high heat applications.

It's definitely going to have an impact on the data centers of tomorrow, how they're being constructed, how they're being planned. I would tell you that our teams are, are working very closely with our customers and, and, and developing really creative solutions.

Chris Snyder (Equity Research Analyst)

Thank you. Appreciate that.

Operator (participant)

Our next question comes from the line of Joe Ritchie with Goldman Sachs. Your line is open.

Joe Ritchie (Managing Director and Senior Equity Research Analyst)

Hey, good morning, guys.

Chris Kuehn (EVP and CFO)

Hey, Joe. Good morning.

Joe Ritchie (Managing Director and Senior Equity Research Analyst)

Hey, Chris. I, I know that, you don't want to give, I guess, maybe too many details on, on just price cost, but following up on Andy's question from earlier, I'm just curious, like, the benefit that you got in 2Q, are you expecting that benefit to be fairly consistent through the remainder of the year? Or is it kind of like, you know, the biggest benefit you'll see in, in 2023? and then as you kind about the transformational cost outs beyond this year, I'm just curious, like, you know, what's in store beyond 2023?

Chris Kuehn (EVP and CFO)

Yeah, Joe, you know, we did see price of around 5 points in the second quarter. We do expect that to moderate into the second half of the year. If I think about Q3 and Q4 of 2022, we delivered over 10 points of price in the second half of last year, so we do expect that to moderate. As I think about the full year, our 8% organic revenue growth guide, we still see a bias towards a little bit more volume growth and price. That price contribution will moderate, still be above, you know, the normal levels, let's say, of price, you know, pre-pandemic and pre this inflation. This is where that dovetail with productivity, I think, is another way for us to, you know, fully leverage the P&L.

As the supply chain continues to get better, we had 6 points of volume growth in the quarter, and we're expecting strong volumes in the second half. We're seeing better productivity in the plants. To your second question, you know, there's a lot of lost productivity for us to recapture over the last couple of years of these supply chain constraints. That, I think, is the next layer of opportunity for the company, is we're, A, well on track to deliver the $300 million of savings from transformation, and then, A, B, we're always looking to make improvements in our business, leverage our business operating system to drive efficiencies and offset other inflation with productivity. There's a pro-productivity recapture here that I think is a tailwind for the company gives us, you know, confidence that 25% or greater organic leverage target is something we can achieve over time.

Joe Ritchie (Managing Director and Senior Equity Research Analyst)

Yeah, that makes, that makes a lot of sense. It's great to hear, Chris. Maybe one, one quick follow-up for Dave. You know, I'm curious, this is a much broader question around the labor markets and then kind of the tightness we've seen over the last couple of years. I'm just curious, how is that kind of impacting, you know, some of, some of the projects actually getting completed and whether it's actually elongating the timelines of some of these projects? I know that you mentioned earlier that we're probably halfway through, you know, the ESSER funding coming through in the P&L. I'm just curious, like, what, what are you seeing in terms of construction projects, and, and labor tightness today?

Dave Regnery (Chair and CEO)

Yeah. I'll answer the question two ways, Joe. One is from, on the commercial side, so construction projects. We've seen some delays, but nothing that I would call. I think those have improved from what we've seen in the past. I, I wouldn't say that's something that's. We're seeing some projects push, but not a lot, so that's not a major problem. I think from a, from an internal source of our, of our direct labor, we've done a lot of work with developing programs to really, apprenticeship programs, to really grow talent and to give opportunities to, to people to learn new skills. We've done a lot with, tuition advancement programs so that we could deliver at a grassroots level, the talent, not only for today, but also for the future. We've had a lot of success with that.

It's, you know, I was out in La Crosse, Wisconsin, a couple of weeks ago, and it was just refreshing to see the, to see the apprenticeship labs we have out there and teaching, teaching individuals that, you know, were not experts in welding, become experts in welding. It's a great, it's a great job, it's a great, you know, living that these individuals can, can, can, can have with Trane Technologies, and there's great advancement. Overall, we're okay.

Joe Ritchie (Managing Director and Senior Equity Research Analyst)

Sounds good. Thank you.

Dave Regnery (Chair and CEO)

Thanks, Joe.

Operator (participant)

Our next question comes from the line of Steve Tusa with JPMorgan. Your line is open.

Steve Tusa (Managing Director and Senior Equity Analyst)

Hi, good morning.

Dave Regnery (Chair and CEO)

Hey, Steve. How you doing? Morning.

Steve Tusa (Managing Director and Senior Equity Analyst)

Not too bad. Can you just give the split between, like, commercial and applied in that equipment, number?

Dave Regnery (Chair and CEO)

Yeah.

Steve Tusa (Managing Director and Senior Equity Analyst)

Equipment sales, sales number or bookings, either one.

Dave Regnery (Chair and CEO)

Yeah. In the Americas, our revenue was very strong in equipment. It was up, over 30%. applied was a bit stronger than unitary, but both were strong.

Steve Tusa (Managing Director and Senior Equity Analyst)

Okay, great. Then, and then just on, on resi, the guidance this year, so I, I think your units are down like, like low double so far, first half, maybe something like that. It's, it's hard to tell how much price you're getting there. You're guiding for, I guess, for the year a high single-digit decline. Is that just the comps in the second half? Then maybe just some color on what you guys are seeing so far with the, the hot weather here in July.

Dave Regnery (Chair and CEO)

Yeah, Steve Tusa, it's a bit of all of that. I think sequential improvement, we're expecting from Q2 to Q3, the, the delayed start to the cooling season, that's fully in force, you know, at this point. We see that sequential improvement into the second half. The comps get a little bit easier as you go into the second half of the year. As Dave Regnery mentioned, 30% growth in Q2. A year ago, it was mid-teens growth in Q3 and then flattish in Q4. You know, we just see a little bit easier comps in the second half of the year for resi than where they were in the first half of 2022. Have a lot of confidence that we think we're, you know, calling the, the units down high single digits for the year.

Chris Kuehn (EVP and CFO)

Revenue's down, probably around mid-singles. Again, plus or minus, you know, we've got that in our guide for the full year outlook.

Steve Tusa (Managing Director and Senior Equity Analyst)

Is there any difference between the sell-in and sell-through, your independent distribution versus your captive in the quarter?

Dave Regnery (Chair and CEO)

Yeah, a bit. Like, our, our revenue was down in the mid-teens. Our sell-through was down in the mid-single digits. The inventory adjustment happened in the second quarter, Steve. We just think more of it will happen in the third quarter as well.

Steve Tusa (Managing Director and Senior Equity Analyst)

Yep, makes some sense. All right. Thanks, guys.

Chris Kuehn (EVP and CFO)

Okay.

Dave Regnery (Chair and CEO)

Yeah, Steve, one more thing on, on price. Just, I think we were trying to dial in price on the first half. We're, we're not getting the strong levels of prices you may think we're getting in the first half. It is less than 5% for the first half, and it's gonna get lower in the second half for resi.

Steve Tusa (Managing Director and Senior Equity Analyst)

Yeah.

Dave Regnery (Chair and CEO)

That's just really a strong, very strong comp against where we led with price in 2021 and 2022. You know, we're just seeing that normalize here, in the business. Hopefully that helps, clarify a couple of things.

Steve Tusa (Managing Director and Senior Equity Analyst)

Yeah, great. Thanks.

Dave Regnery (Chair and CEO)

Sure.

Operator (participant)

Our next question comes from the line of Jeff Sprague with Vertical Research. Your line is open.

Jeff Sprague (Founder and Managing Partner)

Hey, thanks. Good morning, all.

Dave Regnery (Chair and CEO)

Hey, Jeff. How are you doing?

Jeff Sprague (Founder and Managing Partner)

I'm doing really well, thanks. Hope you are too. Hey, Dave, I wonder if you could just give us your thoughts on the refrigerant transition in 2025 for resi, and whether that does, in fact, cause any sort of pre-buy or channel distortions in 2024.

Dave Regnery (Chair and CEO)

Yeah, I mean, there is a refrigerant change that will happen in 2025, moving away from 410. Look, we're ready for it. I'll start with the engineering side of it. We're ready for it. We've been We worked with next-generation refrigerants for a while, so this is right up our alley, and the team's done a great job preparing us. We're also preparing our manufacturing locations as we speak, to be ready for it. The new refrigerant is classified as slightly flammable, so you have different procedures as to how you handle the refrigerant. We'll be ready for it. We're not concerned about that. As far as a pre-buy goes, Jeff, you know, the product's gonna be more expensive, yes, because it's a, it's a, what they call a two-L refrigerant, slightly flammable.

You will have additional sensors on the equipment, so the cost will be higher. there's also gonna be a limit on the sell-through. If you, if you had if you were trying to create a pre-buy, you would have to sell through that inventory. The way it's written right now is within 12 months, or it'd be stranded inventory. I do not anticipate that we're gonna see a large pre-buy at this time. We'll see how it plays out.

Jeff Sprague (Founder and Managing Partner)

Great, understand. Then, it looks and feels like M&A is picking up a little bit, select kind of technology bolt-ons and the like. Is that the playbook going forward? Do you see the prospect for larger things? Are there larger things in the pipeline, whether or not, you know, they may be actionable or not?

Dave Regnery (Chair and CEO)

Yeah, I mean, as you could imagine, being a global HVAC player, we get to see a lot of different opportunities. We like these technology acquisitions. We've been very successful with them. We acquired MTA, great industrial process cooling technology. We'll be able to scale that. It's predominantly in Europe. We'll be able to scale it in our channels. We, we also acquired Helmer in the second quarter. Think of that in the life science space. Think about it as at the, at the storage capability, but also in the processing capability. Again, a nice acquisition that we'll be able to scale with our channels. You know, we, we like this technology.

We've been very good at taking these technology companies with great products and bolting them on to our operations, and with our strong channel, we've been able to create a lot of value for, for our shareholders.

Jeff Sprague (Founder and Managing Partner)

Great, thank you.

Dave Regnery (Chair and CEO)

Sure, Jeff.

Operator (participant)

Our next question comes from the line of Nigel Coe with Wolfe Research. Your line is open.

Nigel Coe (Managing Director and Head of U.S. Capital Goods Equity Research)

Oh, thanks. Good morning. Thanks for the question. I want to go back to margins.

Dave Regnery (Chair and CEO)

Hey, Nigel.

Nigel Coe (Managing Director and Head of U.S. Capital Goods Equity Research)

Hi, Dave. I want to go back to margins. Obviously, you know, the, the improving organic incrementals. So I'm, I'm hearing better pro-productivity at the factory. Obviously, price cost is a nice tailwind. So I'm just curious, you know, how do margins and backlog look generally compared to what we're, you know, converting now? Do, do we have better backlog margins to come through over the next year or so? Then on the investment spending, I, I think we had a slight back-end loading on the investment spending this year. Is there anything on the timing of investment spending we need to factor into our models?

Chris Kuehn (EVP and CFO)

Hey, Nigel, it's Chris. I'll start. You know, we've been happy with the margins and backlog. You know, obviously, our backlog is more focused on equipment than it is service, but we're happy with the margins, and the backlog gives us confidence on the 30%+ you know, leverage for the year. We're just starting to build some backlog for 2024, so we'll comment more on that as we get to, you know, guiding for 2024. The team's just done an outstanding job for several years now, making sure that we're embedding inflation and expectations around that and making sure that we're getting price.

It's a lot easier, as Dave reminds me all the time, it's a lot easier to get price when you got innovative products out there, and you're talking to the customer about an improved solution from what they previously have. All that is reflected in our higher organic leverage guide for the year, we'll kind of update as we go through, you know, the end of this year, getting ready for 2024. On the investments, yeah, we're still targeting, call it 70 basis points of incremental investment. Think of this as investments in our electrification portfolio across our product lines and electrifying the portfolio, investments in the digital strategy, the, the connectedness back to customers, the, the previous question on AI.

You know, we have over 36,000 connected buildings, over 1 million pieces of connected assets. This is an area that we're continuing to invest in, and we're really pleased with that progress and investment so far this year. A third area of investments for us would be around automation and investing in our own factories. This is starting to see some early results with better productivity as well. The pipeline is strong on the investments. We're continuing to make sure we can accelerate them where we can, and just gives us a lot of encouragement that's gonna drive results in the future.

Dave Regnery (Chair and CEO)

Yeah, and that's all baked into our guide, Nigel. If you look at our, the midpoint of our EPS guide for the year, we'll be above 20% EPS growth for the third year in a row. I mean, I'm super proud of what the team's been able to accomplish there, and it's the flywheel of innovation. It's the flywheel around how we operate our business operating system. You know, I always tell people it's a, it's a system of things that makes Trane Technologies a great company, and hopefully, investors see how we're executing to that system of things.

Nigel Coe (Managing Director and Head of U.S. Capital Goods Equity Research)

Oh, no, no question. The 60 basis points that I, I think you mentioned in one queue that, that was a bit lighter than the 60 basis points. Just wanted to see if, if maybe there was anything on timing as well. My, my follow-up question is, is maybe a bit off piece, but, you know, the, you know, most of your industrial peers, have gone to cash EPS, and, you know, I think you're carrying about $150 million of intangibles right now. I think it's about $0.50 per share or thereabout, so it's a chunk of change for sure. Have you considered maybe moving and moving to cash EPS, especially as you do in these bolt-ons, which, which do tend to carry a lot more, you know, fair amount of intangibles?

Have you considered that move? If not, you know, would you consider that if you were to do more deals?

Chris Kuehn (EVP and CFO)

Hey, Nigel, appreciate the suggestion. We'll look into it. We like the. simple methodology of looking at just net earnings and how much free cash flow are we driving off of that. When I think about our conversion the last three years, the average free cash flow conversion and net earnings for us is 110%. You know, we're targeting this year equal to or greater than 100% on conversion. We do look at that metric. When it comes to return on invested capital, we'll look at cash flow return on invested capital as another metric. I think it takes out the noise a bit of some of the accounting conventions that you have to manage through, and ultimately, on a ex and tangible basis, let's look at the cash returns of those investments.

We'll start that with an acquisition, really, year one, year two, year three, and evaluate its creativeness over a period of time. So we like the ability to, by, you know, by the 3rd year of an acquisition, have accretive EPS growth, drive accretive cash flow return on invested capital. I would say, while very modest this year, you know, even the acquisitions we just made this year will have a very modest impact on EPS already in year 1. I think that's a bit of the metric, but appreciate the insight. We'll, we'll certainly give that some thought.

Nigel Coe (Managing Director and Head of U.S. Capital Goods Equity Research)

Fair enough. Cash is king. Thanks, guys.

Dave Regnery (Chair and CEO)

Thanks, Nigel.

Operator (participant)

Our next question comes from the line of Deane Dray with RBC Capital Markets. Your line is open.

Deane Dray (Managing Director and Senior Equity Analyst)

Thank you. Good morning, everyone.

Dave Regnery (Chair and CEO)

Hey, Deane. Morning.

Deane Dray (Managing Director and Senior Equity Analyst)

Hey, can we put the spotlight on China for a moment here? It was really a standout. Whereas a lot of the other industrials have struggled in terms of COVID reopening and so forth, how much of that was a catch-up? Just kind of give us perspective on what the cadence of orders are and what you're expecting in the second half.

Dave Regnery (Chair and CEO)

Yeah, I mean, we, we did have an easy comp in the second quarter in Asia Pacific, specifically in China because of COVID lockdowns. Think about, I think it was like $60 million that pushed out of the, pushed out of the second quarter into the back half of the year. Even with that, we had very strong results in China. You know, if you look specifically in China, I mean, the verticals that are strong, we're strong in. Think of, you know, the high-tech verticals, semiconductors, data centers, healthcare, those are all, you know, with the direct sales force, again, we're very strong in those verticals, and the team there has just executed a very high level.

We have a very strong team in Asia Pacific, and we continue to, you know, do very, very well in that region of the world.

Deane Dray (Managing Director and Senior Equity Analyst)

That's great. If we just... Yeah, data center has come up multiple times. AI has come up multiple times. We get that. In your answer to Chris's question about, you know, the implications of AI and the whole 3x heat factor with the new chips, the legacy cooling for data centers will still be in demand, but more investment is happening on the liquid cooling side. Maybe you teased us a bit with, say, you've got some other projects that you're working on, so maybe there's some liquid cooling opportunities there. How do you see, as a legacy air cooling business, how do you see the rise of liquid cooling? Is this a threat? Is this a business that you need to get into?

Just, you know, share with us on what you think the roadmap is.

Dave Regnery (Chair and CEO)

Great, great question, Deane. You obviously did your homework in this space. You know, we made a, we made an equity investment in a company called LiquidStack at the end of the first quarter, and they specialize in immersion cooling. Think about immersion cooling as you're actually putting the rack into a, what they call a dielectric fluid, and all that means is it doesn't conduct electricity. These are very efficient systems. We have our scientists working with LiquidStack scientists, and we actually have some, some data center customers that are involved in this as well, as we really triage this opportunity. Early days, well, this has a lot of promise, and we're excited about it.

I think when you get into these high heat applications, this is where a new technology will be developed, and we're gonna, we're gonna keep working it. We're not there yet, but we think it has a lot of opportunities for the future.

Deane Dray (Managing Director and Senior Equity Analyst)

Yeah, we agree. Thank you.

Dave Regnery (Chair and CEO)

Sure. Nice question.

Operator (participant)

Our next question comes from the line of Andrew Obin with Bank of America. Your line is open.

Andrew Obin (Managing Director of Equity Research)

Hey, guys, good morning.

Dave Regnery (Chair and CEO)

Hey, Andrew. How are you doing?

Andrew Obin (Managing Director of Equity Research)

I'm, I'm doing well. Just a question, trying to size another opportunity. Obviously, you know, these big mega projects, EVs and semiconductors, what's the right way of sizing it per project as a petrcent of sales? I mean, I've heard a number, I think 100,000 ton chiller per semi plant. You guys brought up, I take it at Samsung Gong in Texas. Is that sort of the right size of thinking per facility? Just. Thank you.

Yeah, I mean, it, it's a good question, Andrew. The, the short answer is it depends, okay? You know, you have some, you have some fab plants that are extensions, you have other fab plants that are new. The EV battery plant could be really all over the, all over the map as far as the size that they'll be putting in. I hate to give out a number because averages will always... I, I know you're trying to size the total opportunity. I would just tell you it's large. It's large on both the, on the, on the chilled water side as well as on the air handling side. If you think about it as an applied system, this is a large opportunity. It will be a tailwind for our business into the future.

Just maybe shifting a little bit, to light commercial, can we just talk about what has been driving the strength, in light commercial and anything that sort of concerns you about maybe channel inventory on light commercial or just, comps getting tough? You know, frankly, you talked about not seeing any impact from IRA into 2024, if that just trumps everything, and we should just take a longer term view. But just more color on light commercial unitary. Thank you.

Dave Regnery (Chair and CEO)

I don't think there's anything I would call out. I think there was an efficiency change. You knew about that, so certainly there could have been some pent-up demand. I'm not sure. We don't, it's not a product that we have a lot of inventory on. Some of it goes through our IWDs on the very light side, but not where, that's not where the... When we talk about our residential business, we talk about normalizing. That's not where the normalization has to occur. It's been strong. It's been strong for a while, and obviously, we have a very competitive portfolio there with some really neat innovations. I think I, I told you when we were together that, you know, when we, we took the opportunity when we had the efficiency change to really refresh the portfolio.

All of our light unitary product can be offered in what we call a dual fuel option. Think of it as a heat pump that could also operate with a fossil fuel, based on what ambient temperatures are, in a particular region at a particular time. Very efficient-

Andrew Obin (Managing Director of Equity Research)

Cool

Dave Regnery (Chair and CEO)

... customers. It's, we're super excited about the opportunities there.

Andrew Obin (Managing Director of Equity Research)

Gotcha. Thank you.

Dave Regnery (Chair and CEO)

Thanks, Andrew. Thank you.

Operator (participant)

There are no further questions. I'd like to turn the call back to Zac Nagle for closing comments.

Zac Nagle (VP of Investor Relations)

Thank you. I'd like to thank everyone for joining in today's call. Thanks for your interest and time spent with Trane Technologies. We'll be at a variety of investor events in the fall. We hope to see many of you there. We'll chat soon. Thanks.

Operator (participant)

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