Nigel Coe : And I don’t often say this, but a great quarter, fantastic results. I guess — I’m sorry, I’ve been going back and forth on the different calls here. So maybe just step back, I mean, what surprised you to the upside this quarter? I mean, obviously, organic came a lot better, really strong commercial HVAC trends. But specifically, what really surprised you during this quarter? Was it just backlog conversion? Anything — any color there would be helpful.
David Regnery : Yes. I think there was really two things that were to the upside. One was our commercial HVAC business in the Americas. It really performed better than expectations. Just a lot of demand for our innovative products and the team executed extremely well. The other upside was in our residential business. Look, we thought that was a business that was going to be down low-single-digits, maybe even mid-single-digits in the beginning of the year for Q1 with destocking that was going to occur. I think that where we kind of got help there was the EPA coming out with their clarification on the sell-through for 410 and gave confidence to our independent wholesale distributors that they should be stocking up and getting ready for the season, which is what we saw.
So those would be the two big areas that kind of where we saw the upside. The rest of the world really played out the way we thought. Europe, strength in our commercial HVAC business continues. Our Thermo King business, look, it’s going to be a modest downturn in Thermo King in the year, we’ll do better than the markets, but that’s exactly what we saw play out in the first quarter. Asia, pretty much as we thought, maybe a little bit stronger in our commercial HVAC business but it really played out as expected in the rest of the world.
Nigel Coe : And then my follow-on is just the stand on here is just the resilience of the commercial HVAC orders and backlog, especially in the backdrop of such weak — book start [ABI] et cetera. So just wondering, are there — obviously, there’s pockets of strength in data center, et cetera, but is there increasing evidence of just more proactive replacement demand, CO2 emission targets really driving demand? Any color there?
David Regnery : Yes. I can’t answer that specifically. I haven’t looked that way. But I would tell you that we continue to see a very strong pipeline. And so this would be what our sales force is actually are working on that they’re putting in our CRM systems. And that remains very robust. So there’s a lot of activity out there. And I hear the disconnect, too, when you look at [ABI] or some of the other macro numbers, you just have to look at — we don’t look at just one, okay? You have to look at several and some are aligned to one vertical versus another vertical. But look, we saw a very strong demand broad based and the pipelines are still strong.
Operator: Your next question comes from Andrew Obin with Bank of America.
Andrew Obin : Just a question. As we think about cooling for semiconductor plants and data centers, right? It seems that the scale of the project, it’s going up. And the question I have for that, A, does this provide an opportunity to provide more sophisticated solution to your customers and also to capture more value to Trane? And second, what are you doing to your aftermarket support organization to take advantage of that?
David Regnery : Yes. We talked a little bit about data centers earlier. But look, this is a vertical that tends to move faster from a technology adoption than others. And we’re working closely with partners and data center customers to understand what the trends are and I would tell you, we’re right in the middle of it. In the data center, Andrew, look at the entire system, okay? We like to look at things at a system level. And you’re hearing a lot right now on the terminal side of data center. So that would be like direct cooling to the chip or immersion cooling. We look at the entire system. So the air handling side of it as well as the sophisticated chillers, the high-efficiency chillers with next-gen refrigerants that are also required.
I think where you’re going to hear a little bit more is on the thermal management side of a data center. They produce a lot of heat that heat is taken out of the data center, how can you repurpose it. And that’s some of the technology that we’re in discussions, kind of at a thought leadership level as to how we can take an asset and — or heat and turn it into an asset in the future.
Andrew Obin : My question, I think, was more basic. I was just thinking that these systems are bigger and more complex, they more energy hungry. So more opportunity for — more need for your customers to partner up with you and more opportunity for you to sort of provide these packaged energy-saving solution. That’s where I was going.
David Regnery: You’re right on, Andrew, all opportunities and it’s a growing vertical.
Andrew Obin : And then just a follow-up on M&A. You guys have been pretty active over the past couple of years. But looking at the market, the market is on to the fact that once we get manufacturing, clean rooms, biopharma, all the areas you guys have been focusing on but these, I think are getting hot, pardon my punt. So what’s the environment looking like for these bolt-on? What’s your ability to sort of pursue targets at recent valuations? What does the pipeline look right now? What are you interested in?
Chris Kuehn : Andrew, I’ll start. It’s Chris. Yes, pipeline remains very active. It’s Sometimes episodic when an M&A transaction closes. So quarter-by-quarter, maybe hard to call but over the course of the year, I think the pipeline remains very active. We’re very happy with the acquisitions we’ve done over, say, the last 18, 24 months, right? You properly described them as a bolt-on bit of strategy. Think of that around investments in the channel and investments in technology. And in some cases, it’s both. It’s taking a great technology that has a limited channel and applying it to our deep channels in Europe and/or in the Americas. So we’ve been very successful with that strategy. As it looks at the pipeline today, we’re going to remain disciplined.
We’ve got our hurdle rates. And as we think about what’s constructive to be EPS accretive in three years, ROIC accretive in three years. But I’ll tell you that we’ve got a great balance sheet to really deploy to not only acquisitions but also deploy if the cash isn’t available for M&A over to share repurchases, as we see the stock trading below our calculated intrinsic value. So if you go back even six, seven years ago with an acquisition in Europe with Thermocold, then it really started out with our more pipe chillers and thermal management systems and how that’s grown over time now, I think to our sixth or seventh generation of thermal management systems, it tells you that we can take that early-stage technology and really grow it over a longer period of time.
We’ve got the people, we have a great sales team. We have a great service team. That’s where some of those investments are going as well this year is to make sure we have all the infrastructure and support to keep growing those businesses, And I’ll tell you, we’ve got a great team in each of our regions that can integrate acquisitions. When you think about the challenge of an acquisition, a lot of time, it’s the success is depending on how well you integrate. We don’t think of it as Trane Technologies is acquiring and let’s take our best of Trane to the business. It really is also what are we learning from the business we just acquired and bring it into our organization. And I’ll tell you some of our recent acquisitions, it’s spot on with taking the learnings of the businesses we’ve acquired, bring them into the Trane family and how do we replicate that across 40, 50 plants across the globe.
So I’ll tell you where we’re bullish in this area. So I’d just say the pipeline remains strong.
Operator: Your final question comes from Noah Kaye with Oppenheimer.
Noah Kaye : Dave, this is going to be a broad question, but it goes to what you discussed around the increase in complexity in Applied. When we think about the customer value proposition, and I understand there are many dimensions, it’s going to differ across verticals. How does the increasing complexity play into the customer value proposition? Maybe give us the two or three biggest dimensions that really speaks to and where that creates a sustainable competitive differentiation for the company.
David Regnery: I think it all starts with our direct sales force that’s highly technical, right? They understand the applications and a lot of times, helping the customer think through what the best solution is for whatever their need may be. I always tell people we don’t sell products, we sell solutions. And that’s the way our account managers behave with customers. We don’t — and as the sophistication of these products continue to increase, obviously, our strength shines, not really on a global basis. A lot of the decision-makers on — especially some of these mega projects right now are on a global basis. And because we have this direct sales force globally, we’re able to really triage the decision-makers and help them think through the technical side.
And then, of course, the downstream effect is these products are more sophisticated, they require OEM service in the future. So there’s a long tail associated with these applied systems that we’re selling. And we’re investing heavily, too. It’s not like people sometimes think about, as I say, we’re investing in capacity. They think of it as just the plant, okay, that’s part of our capacity investment but we’re also investing heavily in training of our direct sales force, adding to our direct sales force, adding to our service technicians, adding to our engineer skill set, adding to our critical to close process, adding to our back offices to make sure we have the right customer support. So it’s all inclusive but it really — the sophistication of these systems as they become more and more engineered, really just plays into the strength we have as Trane Technologies.
Noah Kaye : And the follow-up is really around the attach rate of services to those projects, right? I think you’ve answered it in part but just quantitatively, how do we think about services attach rates for applied at this point? And where those grow to as you see the increasing complexity of the projects you’re working on?
David Regnery : As I said in my opening remarks, we think about an applied system, you can think about an 8x to 10x multiplier of services over the life of that system. And we want to be connected to the system, okay? So the — it’s no longer just a break-fix. This is all connected solutions. And by the way, the customer wants us connected to the solution. They want to make sure that it’s — their asset is always performing the way it was designed. I was telling a group earlier this week that it’s no longer the system isn’t operating properly. The system is using too much energy, but we were able to detect that. And that’s where the sophistication goes both ways. It’s on the application of the system, but then how you monitor and service that system is also increasing in complexity and we’re right in the leading edge there.
Operator: There are no further questions at this time. I will now turn the call back to Zac Nagle for closing remarks.
Zac Nagle: I’d like to thank everyone for joining today’s call. We’ll be around, as always, for any questions that you may have in the coming days and weeks and we look forward to seeing many of you on the road or actually at our headquarters in some cases in the near future here. So thanks again, and have a great day.
Operator: This concludes today’s conference call. You may now disconnect.
