David Regnery
Chairman and Chief Executive Officer at Trane Technologies
Thanks, Zac, and everyone, for joining us on today's call. Let's turn to slide number three. Before we dive in, I'd like to spend a few minutes on our purpose-driven strategy, which drives our differentiated financial results and long-term shareholder value. Our strategy is aligned to powerful megatrends like climate change, which has serious and far-reaching effects on the environment, the economy and human health.
2022 was again one of the warmest years on record, and we continue to see extreme weather events. Urgent action is needed to accelerate our transition to a low-carbon green economy. That's where Trane Technologies is uniquely positioned to lead. Our innovation is transforming the industry and accelerating decarbonization of commercial buildings, homes and transport. We're helping our customer advance their own sustainability goals while contributing our gigaton challenge, a pledge to reduce customers emissions to one billion metric tons by 2030.
Our purpose-driven strategy, relentless innovation and strong customer focus enables us to deliver a superior growth profile, strong margins and powerful free cash flow. The end result is strong value creation across the board for our team, our customers, our shareholders and for the planet.
Moving to slide number four. Our global team delivered strong performance in 2022. As we compare our results to peers and the broader industrials, we're confident our organic revenue and adjusted EPS growth will again rank in the top quartile for both the fourth quarter and for the full year. Our global teams have demonstrated resiliency and tenacity, navigating persistent inflation, supply chain and a myriad of other macro-related challenges globally. They've executed our business operating system, which is designed for operational excellence and delivered record results across virtually all key metrics.
Throughout 2022 and building on extraordinary strength in 2021, we are continuing to see our relentless year-in, year-out, rain or shine reinvestment and innovation paid dividends through unprecedented levels of customer demand.
While this demand has been broad-based, we're seeing particular strength in our nonresidential businesses led by commercial HVAC. Global commercial HVAC organic bookings were up nearly 40% in 2022 on a two-year stack.
America's Commercial HVAC bookings were up more than 40%, on a two-year stack. The tremendous growth we've delivered over the past two years has driven absolute bookings to record levels.
We continue to encourage investors to look at absolute bookings levels in addition to growth rates, a more complete understanding of the strength of our businesses and our backlog. As an example, our commercial HVAC organic revenues were up more than 20% in the fourth quarter.
While organic bookings were higher by about half that level, up 11%. Still, the book-to-bill was over 105%, further adding to a already record backlog. Likewise, while enterprise organic revenues were up 16% in the quarter, and organic bookings were flat, total book-to-bill was still 100%.
Customer demand, absolute bookings, and absolute backlog never been higher, we disclose absolute bookings and revenues each quarter by segment in our earnings release. 2022 bookings of $17.5 billion exceeded 2022 revenues by $1.5 billion for a book-to-bill of 109%.
The backlog entering 2023 is $7 billion, well over two times historical norms. Further, we expect backlog to remain elevated throughout 2023. And anticipate entering 2024 with backlog in excess of $6 billion.
At our guidance midpoint revenue growth rate of 7%, 2023 revenues would be approximately $17.2 billion. When compared to bookings of $17.5 billion in 2022, bookings would need to decline by over $1.1 billion in order for backlog to fall to the $6 billion number that I referenced heading into 2024.
That would equate to a decline of about $275 million per quarter. For backlog to return to more normal levels of approximately $3 billion bookings would need to decline by over $4 billion or more than $1 billion per quarter.
While we recognize that we have difficult comps in 2023, we have a high degree of confidence that bookings will remain robust and that we will enter 2024 with backlog of $6 billion or more.
Turning to our guidance for 2023, we expect continued strong revenue growth, EPS growth and free cash flow. We have a proven strategy to outperform end markets, and our business operating system enables us to deliver consistent, strong execution despite challenging macro environments.
We have a multiyear track record of delivering differentiated financial performance for shareholders and are well positioned to deliver strong shareholder returns over the long-term.
Please turn to slide number five. As I discussed at the outset, I am proud of our global teams. We're delivering strong performance in 2022 despite persistent macro challenges. We significantly exceeded our revenue and EPS growth targets while delivering solid leverage and free cash flow, and returning significant cash to shareholders through dividends and share repurchases. While free cash flow was strong at 91% of adjusted net earnings for the year, we fell short of our target of 100% free cash flow conversion. We drove an exceptional volume of shipments in the month of December in our commercial HVAC and Thermo King businesses to meet customer demand, which shifted the timing of approximately $150 million in receivables into the first quarter of 2023. We also invested about $40 million in safety stock inventory in the fourth quarter to ensure continuity of supply in this dynamic environment. Net of these two areas, free cash flow would have been 100%.
Please turn to slide number six. One of the most important elements of our long-term strategy is fueling our high-performance flywheel through relentless investments and innovation to solve our customers' most complex problems. Leading customer innovation drives consistent and profitable market outgrowth, which in turn drives more cash to reinvest back into the business to further accelerate growth. This flywheel, as we refer to it, is one of the key differentiators between Trane Technologies and our competition.
We are unwavering in our commitment to invest heavily in our business, year-after-year in good times and in bad. It's this ongoing focus that has enabled us to drive differentiated financial performance for shareholders over time. Over the past five years, including the pandemic in 2020, we delivered a 7% revenue compound annual growth rate, 250 basis points of margin expansion, free cash flow conversion well in excess of 100%. And since 2017, we've deployed more than $13 billion in capital with $8.3 billion returned to shareholders in the form of dividends and share repurchases.
Looking forward, you can expect us to continue to consistently reinvest in our business. And we'll talk later in the presentation about some of the ways in which we are accelerating investments in 2023, leveraging the strong outlook we see entering the year. Overall, we are exceptionally well positioned to continue our strong track record of performance and capital deployment over the long term.
Please turn to slide number seven. As I discussed earlier in the presentation, customer demand for our innovative products and services is at record levels with particular strength in our non-residential businesses, which comprise approximately 80% of our portfolio. Americas Commercial HVAC was again a standout with low teens bookings growth and mid-teens revenue growth, including another quarter of high single-digit services revenue growth.
Bookings were up nearly 40% on a two-year stack resulting in high absolute dollar bookings and a book-to-bill ratio of over 110%. Backlog continued to grow from an already high now at levels that are three times historical norms, further adding to our visibility and confidence in our guidance for 2023.
In residential, bookings continue to normalize and were down mid-20s in the quarter. The decline was expected against a very high prior year comp as two-year stack bookings were still up double digits. Residential revenues were up low single digits in the quarter and sell-through was up mid-single digits, reflecting healthy end market demand.
We continue to have historically high backlog in our residential business. And in the fourth quarter, we worked closely with our independent wholesale distributors or IWD help them manage their inventory positions and mix as they enter 2023. Our goal was to mitigate the risk of stranded inventory across the channel. I'm pleased with the approach we took and the partnership with our channel, we believe our IWDs are in a good inventory position entering 2023 as a result.
Our Americas ThermoKing business had another very strong quarter with 30% revenue growth. This follows growth of more than 60% in Q3. We've included our traditional transport refrigeration market overview slide near the back of the presentation, which shows the strong share gains for our ThermoKing businesses globally in 2021 and 2022.
Bookings were down modestly as expected, but still up more than 40% on a two-year stack. Backlog in this business remains at historically high levels, providing good visibility into future revenues. Overall, Americas backlog is unprecedented at three times historical levels.
Turning to EMEA. Results in the quarter were also very strong. In our commercial HVAC business, we've highlighted acute supply chain challenges that have been impacting revenues and more importantly, leverage throughout 2022. We were able to overcome many of these challenges in the fourth quarter and delivered revenue growth in excess of 40% with strong leverage.
Services growth was once again robust, up double digits. Bookings were also robust, up low teens with two-year stack bookings up more than 20%. We're seeing tremendous demand for our thermal management systems, which are three to four times more efficient than conventional heating and cooling.
Our transport refrigeration business in EMEA also delivered strong performance with low single-digit organic revenue growth in the quarter in a market that was down double digits. We discussed the transport refrigeration business in detail on Slide 16 of the presentation. Overall, EMEA backlog remains elevated, 40% higher than historical norms.
Turning to Asia Pacific. The commercial HVAC team delivered another very strong quarter in Q4, with revenues up more than 20% and services up mid-teens. Asia bookings were down as expected, related to tough prior year comps on large bookings in the high-tech sector outside of China. Two-year stack bookings were still up high teens. China was resilient in the quarter, with bookings up high single digits and revenue up double digits. Overall, Asia backlog remains elevated, approximately 50% above historical norms.
Now I'd like to turn the call over to Chris. Chris?
