Good morning. Welcome to the Trane Technologies Q3 2021 earnings conference call. My name is Paula (ph) and I will be your Conference Operator for the call. The call will begin in a few moments with the speaker's remarks, and the Q&A session. At this time, all participants are in a listen-only mode. . I will now turn the call over to Zac Nagle, Vice President of Investor Relations. Please go ahead, sir.

Thanks, Operator. Good morning. And thank you for joining us for Trane Technologies, Third Quarter 2021 Earnings Conference Call. This call is being webcast on our website at tranetechnologies.com where you will find the Company in presentation. We're also recording and archiving this call on our website. Please go to Slide 2. Statements made in today's call that are non-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 David Regnery, CEO and Chris Kuehn, Executive Vice President and CFO. With that, I will turn the call over to Dave. Dave.

Thanks, Zac and everyone for joining us on today's call. Let's turn to Slide number 3. As we do each quarter, I'd like to spend a few minutes upfront on our focus sustainability strategy, the engine that enables us to deliver differentiated shareholder returns over time. Long term sustainability mega trends continue to intensify and our innovation leadership is transforming the climate industry as the world de -carbonizes. Our aggressive goals and bold actions can dramatically reduce carbon emissions and accelerate the world's progress. This is more critical every day as the clock is ticking on climate change. That's why we're calling for businesses and governments to take stronger action at COP26, and why we continue to set aggressive science-based emission reduction targets to push our innovation further and faster. That innovation also extends to emerging trends as we see heightened focus on indoor air quality and strong momentum in aging infrastructure in our schools. We continue to make a difference consistently, relentlessly, and over the long term. This unyielding approach drives market outgrowth over the long term. Which in turn helps us drive strong margins and powerful free cash flow to deploy through our balanced capital allocation strategy. The end result is more value across the board for our customers, for our team, for our shareholders, and for the planet. Moving to slide number four, our global team delivered solid execution in the third quarter, and we continue to target top quartile EPS growth for 2021. Bookings were once again exceptional in Q3, building on strong growth in both Q1 and Q2, and bringing our year-to-date organic bookings growth to over 25% for the enterprise. Underlying demand for our innovative products and services have never been stronger, and our Q3 ending backlog reflects the strength. In fact, Q3 ending…

Thanks, Dave. Please turn to slide number 7. Organic revenue growth in the quarter was driven by continued strong price execution, yielding 4.3% incremental price in the quarter. Price over material inflation was positive in the quarter. And combined with mix, offset the net impact of productivity over other inflation and increased investment spending to support leading innovation. Organic volume, and therefore pull-through leverage, was largely flat for the enterprise in the quarter. At a high level, positive leverage was primarily the result of mix and a modest flow-through of M&A and FX, consistent with our guidance. Net, adjusted EBITDA, and operating margins declined by 70 and 60 basis points respectively. Adjusted EPS grew 5% driven primarily by higher adjusted operating income. Please turn to slide number eight. We discussed the key revenue and margin dynamics for the enterprise on the prior page. The dynamics impacting revenue and margins were similar across each of our business segments as we've highlighted here. But strong price realization, productivity, inflation, and higher investments in innovation as consistent drivers. In EMEA, solid price realization was accompanied by strong volume growth, delivering good leverage and margin expansion in the quarter. Both the Americas and Asia Pacific segments delivered higher revenues on modest volume declines impacting leverage. Asia Pacific also experienced price versus cost headwinds in the quarter, further impacting margins. We continue to expect Asia Pacific to deliver solid margin expansion for the full year and are pleased with our overall performance in the region. Now I'd like to turn the call back over to Dave. Dave?

Thanks, Chris. Please turn to Slide number 9. Commercial HVAC Americas has significantly outperformed the broader markets over a number of years through strong focus, agility, and execution. Combined with relentless innovation for our customers. These defining characteristics compounded by the strength of the underlying market conditions power the business forward today, yielding bookings growth of over 30% in the quarter an exceptional backlog entering Q4. Booking strength was universal across nearly every vertical market and major product category. End-markets continued to improve. Vaccination rates are improving. and end-market indicators are generally strong, with ABI over $50 since February and a healthy GDP. Data centers and warehouse demand remain strong. Education and healthcare end market demand is also growing. We're benefiting from increased demand across our K through 12 customers, with federal stimulus fund supporting both current and more importantly future growth. We see this as a multiyear tailwind for our business, given our strong position in the education market and our direct sales force with deep relationships in this vertical. Our residential end markets remain strong. As I mentioned previously, we delivered low single-digit bookings growth in the quarter, compounding on nearly 40% growth in the prior year. And we are entering the fourth quarter with unprecedented backlog. I'm proud of our residential team that has continued to meet customer demand while ramping capacity after our February weather event in our Texas facility. The team delivered historically high revenues in Q3 and is on track for capacity expansion in advance of next year's cooling season. Turning to Americas transport, we're significantly outgrowing strong end markets in 2021. ACT market forecaster projecting strong growth in 2022 and 2023 as well. I'll talk more about the transport outlook in our topics of interest section. Turning to EMEA, economic conditions are improving across the region. We expect continued improvement for the remainder of the year, with increased vaccination rates supporting the opening of an increased number and variety of venues. Transport markets have been strengthening throughout the year, and we're on track to outperform end markets in 2021, as evidenced by our year-to-date performance. Turning to Asia, we expect growth in China in 2021, supported by increased vaccination rates and strengthened data centers, electronics, pharmaceutical, and healthcare. Outside of China, the picture is mixed, with vaccination and economic recovery rates still low in some countries. Now I'd like to turn the call back over to Chris. Chris.

Thanks, Dave. Please turn to slide number 10. Given all the puts and takes we've discussed today, our guidance for 2021 is unchanged. Importantly, we continue to see our 2021 adjusted EPS growth guidance of more than 30% as top quartile among peers and the broader industrials. We've discussed the shift in revenues from Q3 to Q4 in 2022 throughout the call. Our fourth quarter revenues are supported by record backlog, and that backlog is firm. Supply chain, labor, and logistic systems will continue to be challenging, and are the limiting factor to potential upside, not demand or backlog. We also continue to expect free cash flow to remain strong at equal to or greater than a 100% of adjusted net income. Please go to slide number 11. As we outlined during our investor event in December, we are on track to deliver $300 million of run rate savings by 2023, including $90 million in 2021. Importantly, we continue to invest these cost savings to further fuel innovation and other investments across the portfolio. This consistent investment strengthens our high performance flywheel, which has a reinforcing and compounding effect over time. Please go to slide number 12. We remain committed to our balanced capital allocation strategy that is focused on consistently deploying excess cash to opportunities with the highest returns for shareholders. First, we continue to strengthen our core business through relentless business reinvestment. Second, we're committed to maintaining a strong balance sheet that provides us with continued optionality as our markets evolve. Third, we expect to consistently deploy a 100% of excess cash over time using a balanced approach that 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 13, and I'll provide an update on how we're deploying excess cash in 2021. Year-to-date, we have deployed $1.8 billion in cash with approximately $1 billion to M&A and share repurchases, including $250 million for the Farrar scientific life sciences acquisition, we closed in October. We have paid $422 million in dividends and $425 million to pay down debt. Our strong free cash flow, liquidity, and balance sheet continue to give us excellent capital allocation optionality, and dry powder moving forward. We are on track to deploy at least $2.5 billion in excess cash in 2021. Now, I would like to turn the call back over to Dave. Dave.

Thanks, Chris. Please go to slide number 15. I wanted to spend a couple of minutes providing an update on the transport refrigeration markets for 2021, as we've seen the forecast shift with fair amount since our second quarter earnings call. I think the primary takeaway this quarter is that ACT is projecting an extended and more gradual upturn in the North America transport refrigeration markets than initially projected. North America Trailers is probably the clearest example and one of the most watched by investors and analysts as a proxy for the overall transport refrigeration health. ACT started out the year projecting an almost immediate snap-back in the North America trailer production in 2021, up 39% of the lows of the pandemic in 2020. As trailer OEMS have had a challenging year producing enough trailers to meet the forecast, ACT has gradually pulled the forecast down and is now projecting a strong but more gradual improvement in 2021, up 18% and continued improvement in production rates in both 2022 and 2023, up another 18% and 14% respectively. If you look at the all-in weighted average market forecast for North America transport refrigeration, 2021 is now expected to be up about 14% versus 24% projected in July. Year-to-date, our Thermo King Americas transport refrigeration business is up more than 30%. Clearly outperforming the markets, and we expect to outperform the markets for the full year as well. Looking at IHS and other key indicators for EMEA markets, the outlook has improved about 3 points with the weighted average market growth now expected to be about 12% for 2021. Year-to-date, our Thermo King EMEA business is up more than 20% clearly outperforming the markets. And we expect outperformance for the full-year 2021 as well. Please go to slide number 16. We added…

this time I would like to remind everyone in order to ask a question, . Your first question comes from the line of Joe Ritchie of Goldman Sachs.

Thanks. Good morning, everyone.

Hey, Joe, how you doing?

Good morning.

Yeah, doing great. So maybe just the first question on the supply chain. It's helpful to have kind of that visibility on the revenues that pushed out from this quarter. I guess, just any other color that you can provide, is this predominantly occurring in your North America trailer business. And then just confidence that you're going to be able to shift these revenues and not see sustained supply-chain issues in the next few quarters.

Yeah. Sure, Joe, great question. Tight supply chain really globally, we talked about it during our second quarter earnings call. It caused us to push about $150 million of revenue out of the quarter, as we said. we think we'll get about 50 to 75 of that back in the fourth quarter. Our team is doing a great job of managing the supply chain constraints. We chose not to include a slide in our deck telling you the 50 things that we're doing to manage our suppliers or help our suppliers. But I could assure you that supply chain resiliency has been part of our business operating system for a long time. And I can assure you that Trane Technologies employees around the globe are working hand in hand with our suppliers, ensuring that we could take literally pages out of our operating system and help them implement it. We think it's going to be choppy for a while on the supply chain, at least for the foreseeable future. It's a little bit, I think I mentioned it in the second quarter call, it's a little bit like when you were a kid, you play that game Whack-A-Mole, where we fix one problem and another problem pops up. But if you're looking for overarching kind of like where are we seeing constraints? I don't think we're -- I know we're not any different than what you probably already heard from the rest of the industrials that have reported. Electronics, resin, semiconductors, wire harnesses, these are all areas that certainly at an overarching level, we're seeing supply chain constraints. That said, just a couple of points I want to make. One is, we're working very closely with our customers. It's very important that in some cases our customers are having supply…

Thanks, David. That was helpful. Maybe my one quick follow-up. One of your suppliers, just did their conference call about an hour ago, and they talked about the price cost formula being roughly a $100 million positive for them in 2022, you did a good job with pricing this quarter. I'm just curious as you think about 2022, should we be thinking about a positive price cost environment given what you're seeing in your cost price today.

Hey Joe (ph), it's Chris. I'll take the question. So we are in the middle of our 2022 planning. Going into 2022, though, we would expect some carryover price from the three price increases, most of our businesses announced this year, we will start lapping price increases though really starting in the first quarter of next year. But I will tell you as part of our business operating system, we enter every year coming up with a plan of how we're going to get about 20 to 30 basis points, positive spread price costs. More to come in a couple of months as we released guidance for next year, but we're going to go in with the mentality that we're going to cover price cost, but it's also a very inflationary environment which is why we're really trying to size that for pricing increases if we need to going forward.

Yeah, the only thing I would add to that, Joe, is that price is never easy to get despite what people may think. But when you have an innovative portfolio of products, it becomes that much easier. As you're selling additional value to your customer, being able to get pricing, it becomes a little bit easier.

Great, thank you both.

Thanks.

You next question comes from Scott Davis of .

Good morning, guys.

Hey, Scott (ph), how are you doing?

Good morning.

Good. I want to talk about IAQ if that's okay and the 2 point tailwind that you noted in the slide is pretty material. One, I want to just get some color on the sustainability of that. How many years of project backlog do you ultimately have? Where is that 2% -- it stayed 2%, does it become 3 this year and any kind of view around that. And then what does a systems focused solution really mean for practical purposes for us at least? Does that mean a service contract with monitoring? Maybe just a little color around that too. Thanks.

Sure. Good question. As far as the demand goes, we had said early on that we thought would be 1% to 2% tailwind. We're seeing 2% this year. Pipeline is strong. What started out to be strong in really just healthcare and education, we're now seeing in office and other verticals. So that's the good news. On the other thing, I would tell you that if you remember, we had an approach where we were doing indoor air quality audits where we would do a day one activity, where we do the audits, make the environment as safe as possible today with existing assets. And then we give a road map as to how you would do day two activity. Those day two activities are really starting to come through for us, especially in the education with some stimulus funds flowing there. So that's a good news story. As far as we see indoor air quality as a mega trend that's not going to go away. It's top of mind. I mean, Trane Technologies has always had a robust focus on indoor air quality. It was always big in the healthcare vertical. It's now top of mind in all verticals. But we don't see this stopping. We see people constantly asking about indoor air quality. I would tell you that we're building it into our systems, which is kind of your second question there is. This is now integrated into a system, and we're seeing nice traction in all verticals.

What I'll add, Scott, is because it is embedded in systems now, it is becoming harder and harder to kind of spike out the impact in indoor air quality separate from a systems order. I've offered Dave, we can hire a few more accounts to try to track those revenues in that level of detail. But I think the fact is, it's really becoming just a long-term tailwind for the Company.

Yeah, this is Dave. We're really seeing a lot of traction, especially with our dry hydrogen and peroxide solutions. And this is predominantly in the education vertical as we're building this into the systems. And the dry hydrogen peroxide solution, the unique innovation there is that these molecules last longer. So if you think about a school room where you have students that are moving around the different class rooms on different desks, these molecules actually settle on the desk, so they clean the air as well as the surface. And we're getting a lot of traction around that.

That's very interesting. I'll pass it on to my peers, but thank you and good luck.

Thanks.

Thanks.

Your next question comes from Jeff Sprague of Vertical Research.

Hey. Thank you. Good morning, everyone.

Good morning, Jeff.

Good morning.

Hey. Good morning. I just wanted to follow-up on backlog as it relates to price and, Dave, you mentioned opening a kind of measuring how you open up the order book to not get caught here. To what extent do you have the ability or are you in fact going back and repricing some of the backlog or given the environment that we're in, perhaps you're changing commercial terms just to protect yourself better. If you take an order today and you deliver it 12 months from now, who knows what we're dealing with on the inflation front. So just any color there on how you're managing that, protecting yourself and maybe -- and some flexibility to commercial terms.

Hey, Jeff. This is Chris, I'll start and then Dave can jump in. If I go business by business, when we started the residential, really, we have the ability to look at our backlog and reprice our backlog as we see higher inflation impacting orders that will shift now, a couple of months out where the backlog and residential used to be a couple of weeks, now we see it continue to be a couple of months out. We actually have repriced the backlog already in 2021, but we've got that ability to reprice going forward should we see a significantly more inflation. On the Commercial HVAC side, when I think about long lead time equipment. Those contracts generally have price escalation clauses in them that allows us to reset pricing based on an index. So we have some protection there as well. And then on Thermo King, today's remarks earlier, we've been really selective with opening up the order books for 2022. We wanted to get as much insight as we can get on inflationary environment through the third quarter of 2021. We've only had the first quarter of 2022 order book booking. We've now recently opened up the '22 order book for the balance of the year, and we did that intentionally to make sure we had the right to reflect that in the backlog. So I think we got really in terms of price and inflation.

What I would add to that is also we got pricing built in and we got mechanisms in place and also our backlog is very firm. We're not seeing cancellations on our backlog and don't anticipate cancellations for backlog in the future.

And then separately just on resi, I don't think you've mentioned resi in terms of something you're positive on in terms of your 2022 outlook. Obviously, we've got this question that everyone is asking and ensure how the hands are on -- how these comps play out and that sort of thing. Dave, what is your high-level view on how the resi market behaves next year? And certainly you might have a different view on how you behave inside that, but any perspective would be appreciated. And I'll leave it there. Thank you.

Okay. Thanks, Jeff. Yeah. We look at our resin business at a very high level as a GDP plus business. So if you could tell us what GDP is, you could tell us what consumer confidence is. We could dial in what our residential business and how it's going to perform. That said obviously we have detailed models that we go through and it's really just to validate our high level approach. So GDP is projected to be positive next year, and we do not see the resi business falling off a cliff in 2022. We see the GDP plus business.

Great. Thank you.

Your next question comes from Julian from Barclays.

Hi, good morning. Just starting with price cost just to understand the sort of jumping off point into next year. I saw you said that you have $150 million of price in Q3, similar sort of cost step up. Maybe just help us understand on those two numbers what should we expect for Q4, and then what's the kind of total year 2021 for price and cost, please.

Hey Julian, it's Chris. Thanks for the question. Yeah, we were really pleased with the price realization in the third quarter, 4.3% of price realization and really equals the revenue growth we had in the third quarter as well as we were very flat on volumes. And for the quarter Q3, we saw slightly positive price cost. When I think back a few years ago when we had our last inflationary environment, we were really trying to catch up on the price cost equation. I think it was about six quarters where the Company was negative. Now, we're able to keep up with that at least through Q3 of this year. And really, that goes back to the business operating system we continue to enhance in the Company. So very positive price cost in Q3. For Q4, I'm expecting price realization to get a little bit stronger, but I also can see inflation getting stronger in the fourth quarter as well. So we're right now kind of expecting price cost to be flattish in the fourth quarter. And then we'll see how this kind of plays out for 2022, where we're always targeting 20 or 30 basis points of price over cost for a given year, but I'm expecting that to be flattish in the fourth quarter.

That was helpful. Thank you.

The only thing the only thing I would add to that is that the operating system, don't underestimate the amount of work we've put into building our operating system to stay ahead of these inflationary curves. I mean, as Chris said, I think it was the last time we had this type of inflation, it took us several quarters to overcome them. And now we're in the quarter being able to offset it. So we're very proud that we've been able to do that.

That's helpful. Thank you. And then maybe just following up in terms of overall firm-wide operating leverage, so it looks like, I think, in the fourth quarter, you are looking for maybe 20% also operating leverage year-on-year. I just wanted to check that's roughly the right ballpark. And do you think that's a good sort of entry point starting out next year given you've still got price costs margin headwinds, at least in the first quarter or 2.

Yeah, Julian. I think you're in the ballpark for Q4. We left the full-year guide intentionally intact, given that we can see the push-out of some revenues into the fourth quarter. The figure was $75 million. Really, from my perspective, our perspective, the backlog and the demand is very firm. It really comes down to supply chain. And that's why we got the squiggle 605 on the full year from an adjusted EPS perspective. So could it be a little better? Could it be a little worse? I think we're right around that $6.05 based on how we see the supply chains today. But it's really going to depending on that. But you're in the ballpark for fourth quarter. We'll see a lever kind of plays out for next year. I think we're certainly expecting an inflationary environment next year with pricing actions. We'll need to continue to moderate that. But we'll have more insight on that as we get into January.

Great. Thank you.

Thank you.

Your next question comes from John Walsh with Credit Suisse.

Hi, Good morning.

Good morning, John.

Maybe piggybacking off of I think it was Jeff's question earlier. I think in your answer it was mostly around the equipment. I wanted to hear a little bit about your ability to pass-through inflation on your service contracts because obviously labor availability and I think the wage inflation is something we're all expecting in the next year. So give those same ability to pass through those inflationary pressures there?

Good question. Yes, we do have a long-term contract and prices for escalations potential. So that estimate is taking into consideration, we have our .

Got you. And then maybe coming at the backlog and orders question a little differently here. 20% order growth, it's not like you're comping a down 20, you're comping up plus 7. So how do we think about just the orders rate And if you think you can actually build backlog next year, potentially, obviously, I understand you're not in the business of guiding orders, but it's definitely a question we're getting from investors here. Sort appreciate any color. Thank you.

Yeah. If you look at it, it's really phenomenal what's happening right now. We had 30% order growth in the first quarter. We had 30% order growth in the second quarter. And here we are in the third quarter talking about 20%. And in some of our businesses, I call our Commercial HVAC, and equipment's up 50% there. So I don't anticipate that bookings will continue at the 30% growth rate, but I would tell you that we're seeing a lot of demand right now for our innovations in the marketplace. And whether it be in the Thermo King business or in the Commercial HVAC business, that's really driving a lot of this demand for us. And we also have these tailwinds behind us around sustainability and the de - carbonization of the built environment, that it's only gaining momentum. So we like what we see here going into 2022. We're going to have record backlogs and we'll see what 2022 is from an incoming order rate. But right now, we really like the position we have going in.

Great. Thank you. I'll pass it along.

Thanks.

Thanks.

Your next question comes from Andy Kaplowitz with Citigroup.

Hey, good morning, guys.

Hey, Andy. How are you doing?

Good. How are you? EMEA continues to be a significant out-performer versus the other regions. Maybe you can give us little more color into what's going on there. How big it your heat pump business already become? Are products such as heat pumps and the advanced or just nicely accretive to margin that they're helping? And how sustainable is that 30% incremental you put up this quarter?

Yeah. Innovation, you kind of hit on it, Andy. That's what's really driving us in EMEA and it's just such a great place to be. The advancer product in our Thermo King business, it's exceeding our expectations. If you look at what we've been able to do with the electrification of heating in the HVAC business, again, it's in tremendous demand, tremendous demand. I don't want to get into specifics as to how big we are or how large the market is there. But I would tell you that it is propelling our growth and we're excited about what the pipeline looks like in the future. And rest assured, the innovations are continuing there as we continue to look to expand the, what we call the operating maps of how our HVAC product works. We're going for higher temperatures on the heating side and lower temperatures on the cooling side, which are only going to expand our market further.

Great --

I'll add, Andy. Sorry, on the incremental is your question there. Look, we've set up each of the segments to really have over the long term 25% plus incremental. So, we think Europe is well situated for that over the long run to deliver.

Very helpful guys. And then, maybe you can give us a little more color into what you're seeing in Asia. You mentioned record backlog in the region, I did notice that your transfer revenue turned down a bit and the pandemic does remain a challenge in the area. So are you seeing overall China hold up well, and how are you thinking about that region in '22?

Yes. I mean, Asia Pacific is about 10% of Trane Technologies, it's an important region for us. Let's talk about it in 2 different pieces, talk about China first, obviously, GDP, it's pretty well documented, has slowed a bit in the third quarter, or at least versus expectations, I think it was 4.9 and expectations were over 6. So it is slowing a bit in China. I would tell you though where it continues to grow. Think about electronics, pharmaceuticals, datacenters, healthcare, are also verticals that we're very strong in. So, we're seeing nice growth in China and we expect that to continue in the future. You get outside of China, it really becomes country-specific. And unfortunately, we're still having some countries that are going into different phases of lockdowns based on where the pandemic is. But it's going to be a little bit mixed outside of China, at least into the fourth quarter.

I appreciate it, guys.

Thanks

Thank you.

Your next question comes from Steve Tusa of JPMorgan.

Hi, guys. Good morning.

Hey, Steve. How are you?

Good morning.

So where are you going to end on price and cost for the year now, with this neutral back half, neutral - ish back-half, like what was the first-half pricing cost?

First-half would have been positive, but are much smaller numbers, Steve. Just given how price has grown considerably from Q1 now to Q3, expecting Q4 to be flattish price cost. The full year, I think we're probably around the flattish range. Maybe it could be slightly positive. Our goal here is to keep driving the innovation and then driving the pricing to reflect what we think the inflation is going to be. So really happy where we are year-to-date on the price realization. Like I said before, it's going to grow a bit in the fourth quarter. At the same time, we're seeing inflation grow into the fourth quarter, and we're really just trying to stay ahead of it. So I'm thinking flattish to slightly positive on the full-year.

Okay.

And Steve, we've already had three price increases in many of our businesses. And if we still see the inflation be persistent, another price increase will be part of our business operating system where we would execute on that.

Right. I guess I'm just looking for the 150 and the 150, what was that in the first half.

I don't know if we've actually probably given that number. It would have probably been less than the 150 would be my guess, but I'd have to go look at that.

Okay. Thanks. And then on commercial equipment, you said orders up 50%. Can you just split those out between applied and then how did the light commercial kind of unitary business fair within that?

To be fair, Steve, it was more than 50%, and both our unitary and applied, we're both over 50%. So the being part of that number was very strong, as you would imagine. So we have seen unbelievable amounts of growth in our Commercial HVAC equipment business. And it's actually, and I've said it earlier, but it's actually, to be fair to our suppliers, we're putting that demand right on them. So it's causing them to have to spike forward as well.

Yeah, that's very positive. And then one more for you, what would sell through? For you, what do you think movement was for your resi business, but stuff that you know to the customer given out before.

Yeah. On the IWG side, which again, is about 50% of our business sell-through was mid single-digits, sell-in was flat. So obviously their inventory adjusted as you would expect, in a shoulder season. The next to follow-on question is, Steve, would be, what's inventory level look like in the IWG space? It's about what you would expect, maybe a bit lower than we would like this time a year, but it's nothing to call out.

Great. Great color. Thanks a lot.

Okay.

Thanks, Dave.

Steve, to your earlier question, just to follow up on that for the first half kind of price for the enterprise is around 2.2%. So less than a $150 million we realized in Q3, we got a little less than that for the first half of the year. So that price is really ramped up from the first half to Q3 and we're expecting that to be stronger even in Q4.

Yeah. And cost? End cost, the 150 cost?

I would say in the first half was positive, again, with less than 150, but positive in the first half, slightly positive in Q3. And we're expecting 5s for Q4.

Okay, thanks.

You're welcome.

Your next question comes from Nigel Coe of Wolfe Research. Nigel, your line is open.

Sorry. Comes on me and I had a pretty funny joke which I won't repeat.

We want to hear the joke.

I was going to say, let's go back to that first half price cost question, but let's not. But I do want to go back to the backlog because obviously super hot, plus 70 in Americas. I'm just wondering, is the -- how does the aging of that backlog look? I mean, do you expect the majority of that to convert in 2022 outside of supply chain pressures. And I guess my real question is, I know you're not going to answer this specifically, but we really haven't grown higher than 8%, 9% in climates over time organically. And I'm just curious, could 2022 be above that bar. Just curious if that backlog converts?

Yeah. As we said earlier, we're still working through the 2022, but just talking about the backlog. I mean, you really need to -- as far as when it burns, you really need to go through it by business. So if you think about our Commercial HVAC business with applied orders, that backlog, when an order comes in, there could be a 6 to 9-month burn rate on those type orders before the actual ship. In the Teekay, it's a little bit different this year than I've seen in other years. We had a lot of customers place orders in the first quarter and kind of lay them in through the rest of the year. And the other complication with Teekay we're seeing right now is obviously we're working with our customers on their slots for trailers and tractors. So normally the burn rate in Teekay would be 2 months to 3 months. That's been extended a little bit just because of the constraints associated with the actual building of a trailer. On the resi space, our backlog turns. It's turning on a regular basis. And overall, I mean, we have a very large backlog. We have order demand that is some of the best I've ever seen in my career. But understand, our backlog is not stale. It continues to churn and we're shipping out, we're just getting order rates that we haven't seen in a very long time in this business that are continuing to build this backlog.

Okay. I'll leave that backlog question there. On price cost, you did call out APAC as challenging near-term and I think we're all tuned into the fact that APAC of a time as being a bit more challenging on price. So just curious, we've seen some deflation in APAC and any concerns as we go into 2022 around that region?

Yeah, Nigel, I would say, yes, price costs right now, it's a little bit challenging in the near-term. We're really are on track to having very strong full-year margin expansion in the region. If I go back, even just two years, a two-year stack, we're up over 400 basis points in margin expansion in the region. If we go back to when we invested in our direct sales force of over 500 basis points. So the region has had some great growth, being very selective around orders as well. I will tell you that we'll continue to evaluate the pricing environment and make price increases where necessary. And I'd be looking for that region like for the rest of the Company to be getting price cost positive going into 2022, but near-term, little bit of challenges. It's also a little bit of loss small numbers for revenue, our margin contraction in the quarter for Asia in Q3.

Okay, thanks. That's great color. Thanks.

Thank you.

Your next question comes from Josh Pokrzywinski of Morgan Stanley.

Hey, Josh. How are you doing?

Well, thanks. Just on this commercial equipment growth, I mean, look, for what is historically kind of a replacement business and with a pretty massive installed base like 50% sort of an eye-popping number. Obviously supply chain and bottlenecks are kind of everywhere like -- is there sufficient labor, whether it's in your own house or out there in the independent world virtually install this stuff in a reasonable timeframe or is that going to be a gating factor on converting that backlog as well?

In as far as labor constraints in our own four-walls, it's really -- we have seen some early in Q3. This subsided a bit as we moved through the quarter. We're planning for it. It's just a matter of how your training mechanism and hiring of new people. So that's happening. On a job site basis. We have seen jobs push out to your point because of job site labor constraints. It's not anything that I would spike out and say it's super alarming, but it's certainly there, and it's not just in North America. It's really on a global basis.

Got it. And then, R&D, the missed revenue that you're starting to make up in the fourth quarter. I mean, we've had similar metrics out of some other folks, but with the expectation that just we don't miss any more revenue in 4Q and starting to make it up would imply that not only your maybe some of those supply chain issue stabilizing, but starting to improve., I don't want to put too many words in your mouth, but like would you characterize the last 30 days or so as seeing some actual improvement rather than just stability?

Yes. I mean, we had some acute supplier problems in our Thermo King business and we've been able to overcome those. So we are -- we have line of sight to what we're guiding to you right now. That said, supply chain is very volatile right now. It is the whack-a-mole game. So we fixed one problem and then other one comes out. But it should really about staying on top of where you are, working with your customers, working with your suppliers. And it's a lot about communication and I would tell you that our operating system allows us to be working hand-in-hand with our suppliers to make sure they can meet the expectations that we're seeing, which again, is extremely robust right now.

Hi, thanks. Good luck working those moles.

Your next question comes from Andrew Obin of Bank of America.

. Good morning.

Hi, Andrew. How are you?

Good morning

I'm good. I'm good. Just a bit of a longer-term question. You've highlighted strength on institutional and I think after the first wave of stimulus came in, I think education was very much highlighted as an area, air-quality improvement, etc. which were going to benefit the industry. My understanding is that there is a timeline on spending that money. I think you have to do it over 3 years. Can you just tell us what you have seen so far? And how do you expect the spending to play out over this period of time in the institution of vertical learning specifically education. Thank you.

Yes. We're seeing -- we're seeing funds flow, which is a good thing, 2024 is the date, whereas we spend. That may -- that's the date right now that may get pushed out, obviously, you going to think about any work you're going to do on a school, you're going to do when students aren't there, so you tend to become a quote season to do score. What funds are flowing, the elementary, secondary school relief, emergency relief for ESSER as they have it. It's flowing from the states down to the local levels. And we're seeing really, really good traction where we did a phase one indoor air quality audit. We gave our customer our roadmap for the future, they're now executing to many of those roadmaps with upgrades in their facility.

Got you. And just a longer-term question on residential as well. You sort of highlighted that it's a GDP plus business. But how should we think about 21 fitting into the overall sort of length of the cycle. Do you think there was any pull forward or do you think just thinking over the next several years, as I said, it just continues to be positive in '22, positive in '23, and just keeps going until consumer gets tired. Just maybe the broader shape, longer-term shape of the resi cycles as you think about it, particularly after a strong '21. Thanks a lot.

Well, hopefully the consumer doesn't get tired, but I'm not sure the historical models on the cycles have played out certainly in the past. Again, we look at it as the GDP plus business. We have models that will go through replacement cycles and use of unit etc.. and they have a lot of data on and the rest. But at the end of the day, if you think about as a GDP plus business, you think about consumer confidence, that's what drives that market. And we're very happy with the performance that we've had this year. And GDP will be positive in 2022.

Great answer. I appreciate it. Thanks a lot.

Your next question comes from Deane Dray of RBC Capital Markets.

Thank you. Good morning, everyone.

Hey Deane. How are you doing?

Doing very well, thank you. Just a question about your CapEx plans and we're hearing from some companies who just are not able to get projects done, also a consequence of supply chain labor constraints and so forth. But you as a customer, is -- are you seeing any of that, and how is that factored into CapEx planning for '21 and '22?

Yeah, we have several upgrades that we're doing, actually continuous as we continue to upgrade our lines. We've seen some push out, but nothing that we can't manage.

Okay.

I'd add that, we're still tracking again that 1% to 2%, probably closer to 2% this year spend on capital as a percent of revenue. But with enough advance notice and ordering within lead times, we've been able to try to mitigate some of that supply chain pressure.

Got it. And then just a quick follow-up question on the whole whack-a-mole phenomenon is, are you doing much in the way of partial assemblies at your manufacturing plants? You're waiting for a component. And so this would imply, you've got -- you're actually spending on work in progress inventory and then when that product does come in, you ship them out. If it follows through to subsequent quarter, that's actually a higher margin shipments since you've already expensed some of that. How does that factor into your planning right now, are you doing partial assemblies and so forth?

The answer to partial assemblies is yes, we could have you come work for us in Operations because that's obviously what's remaining for some components. In some cases, you could do a partial assemblies. In some cases you cannot. But as far as the revenue recognition of the cost, Chris, I don't know if you want to have it, but the answer is no.

Yeah. I think if we've got a partial assembly, we can't recognize the revenue. We're capturing all the costs associated with it. It stays in inventory until we ultimately recognize the revenue. The following quarter, we're adding the components we need to on the partial assembly to make it full. And then that's when the full cost gets expensed.

Okay. That's really helpful. Thank you.

You're welcome.

Your final question comes from Stephen Volkmann of Jefferies.

Hi. Thanks guys for squeezing me in. Most of my questions have been answered, but maybe a big picture question for you, Dave. I'm wondering, sort of the old model that we had in this industry of trying to keep inventories as lean as possible and so forth. It worked well for a slower gross environment, but it feels like we're still transitioning into something better than that. So I wonder, do you need some more capacity? Does it make sense to layer in some more inventory on structural basis to deal with a stronger growth environment?

Yes. It is an excellent question and obviously we pride ourselves in being a lean Company. And maybe that's why we were out talking about supply chain choppiness in the second quarter ahead of many others, because we saw it in our planning horizons. That said, we have capacity for sure, but the inventory investment is something that we're working with internally and an inventory don't think of it necessarily as finished goods. Maybe you would in the resi business, but in our Commercial business, it's really at the raw level where you're able to convert it more easily into WIP and then finished goods.

Super. Great. And then just anything else that you've thought about over the last few months, as you've taken on this role that might differentiate you a little bit from your predecessor?

Yes. It's been -- I don't know. It's been a 150 days. It feels like forever, but this is just such a great Company, Trane Technologies. And we have -- and we are a part of such a great industry. So I couldn't be prouder to be the CEO of Trane Technologies. We're talking -- I'm talking next week at COP26, talking about a way for the next rate invention to starting to de -carbonizing the world decent benches already exist today. So I'm excited to do that. And then the only thing I would add is we just completed our employee engagement survey. And here we are. I don't know how many years in this. But top decile performance for engagement is our culture that differentiates us and not sure that's going to differentiate between me and my, but it is really our culture and how much pride we'd taken to building a strong culture. So Trane Technologies is in a great place today and it's -- we're headed in an even better place in the future, but thanks for the -- thanks for the question.

Great. I appreciate. All the best.

Thank you.

This ends the question-and-answer session for today's call. I will now turn the call back over to Zac Nagle for any additional or closing remarks.

Thanks, Paula. I'd like to thank everyone for joining today's call. As always, we'll be available in the coming days and weeks to answer any questions that you may have. And hopefully we will see you in person on the road in the not-too-distant future. Have a great day. Thanks.

Ladies and gentlemen, thank you for your participation in today's call. This does conclude today's event. You may now disconnect.