Trane Technologies Q1 2024 Earnings Call Transcript

Good morning, Andy.

Good morning, Andy.

Yeah. Thanks for the question, Andy. Good question.

Look, in the quarter, we saw broad-based growth, and it wasn't concentrated necessarily in any one vertical. I mean, we certainly had strength in data centers, we certainly have strength in education, healthcare, high-tech, industrials. It was almost hard for us to find a vertical that we didn't grow in.

We did have a bit of weakness in, I guess, you would say conventional office, and some in lodging, but for the most part, it was broad-based growth, and it was really on a global level. So a lot of strength in our Commercial HVAC businesses. And the good news is our pipeline is also very strong, so this would be, before an order actually comes in to be a booking, this is what our sales teams are working on, that continues to be very strong as well.

So look, it's a lot of innovation. I'm certainly proud of what the team's been able to deliver. And -- and we're executing at a very high-level right now.

Hey, Andy. It's Chris. I'll start and then Dave may jump in.

So -- as we think about the first quarter, investments back into the business began to ramp really stronger into February and March than, say, the start of the quarter, and our run rate exiting Q1 is stronger than when we started. The pipeline for investments continues to grow and these are across multiple categories.

So to your question, we really like the long-term framework of the 25% or better incrementals. That's what we're continuing to guide for 2024. But the investment pipeline and where we can see the market outgrowth here, in the order rates and the revenue rates, I think just tells us we want to keep investing back in the business. Think of these investments, again around innovation, sales and service investments that Dave talked about in the comments, these are upfront tools as well as people investments, making sure we've got capacity investments, automation in a factory, digital, the -- the list goes on. And we want to make sure we're always funding back into the business.

On the productivity side, we're not there yet. We're -- we're getting better on the gross productivity, but there's still more opportunities for us going forward.

Thanks, Andy.

Thank you.

Good morning, Scott.

Yeah, great question, Scott. I think we've been very well positioned in data center vertical for a long time, and I think you know this, but technology tends to move pretty fast in this vertical compared to others. And we're certainly aware of these new technologies that are being developed really at the terminal side of cooling. So think of that as -- direct cooling to the chip, or think of it as emerging cooling at the rack level.

One of the things that we do really, really well at Trane Technologies is we think about systems. And if you think about a data center's cooling systems, you need to think about the entire system. So some of it certainly is what we would call the terminal side and that's what we just referred to. But these systems also require sophisticated air handling. They also require high-efficiency chillers. And we look at the entire system to really help the customer think through the entire energy needs for that, for the whole data center.

The other thing that's really emerging and you're going to hear more about this is we think of the data center, think of it as a thermal management system. So I know you know this, but when you're cooling a space, you're removing heat from it. Data centers have a lot of heat. What do you do with that heat that you're removing? Conventional thinking would be it gets -- it gets emitted back out into the atmosphere. But how can you repurpose that heat, and we've done some projects, still early stages here where we're creating district heating loops from the heat that would normally just be wasted, and -- and reusing it as an asset.

So, it's a -- it's a very dynamic space. It's -- it's obviously growing at a -- at a nice -- at a nice clip. It will grow at a nice rate for the continued future, and we're a spot in the middle of it, and it's always been a very strong vertical and it will be in the future.

Yeah, I wouldn't call out any particular company here, but I would tell you that we have technology partners that we work with, because you're spot on. It's a cooling system, right? It's no different than -- think about a system that exists within a building, right? We may not have every component, but we would have a partner that would have that component, but we would help integrate it into a -- a system that would be operating in an efficient way for the customer.

Hey, Julian. How you doing?

Hey, Julian. It's Chris. I'll start. It is tough comps for Commercial HVAC, and especially the Americas. They're going to have a great year on a full-year basis, but when you think about -- go back a year in the first quarter of 2023, the growth there in Commercial HVAC, Americas is around mid-teens, and then by the fourth quarter of last year, the growth was mid-20s. So think of that as a 10-point increase in terms of growth and revenue throughout last year. So the comps do get co -- tougher as we work through 2024.

But again, they're going to have an outstanding year this year. But you're right, it is a bit of a tough comps in Commercial HVAC. Transport Americas, we do expect the second half to be stronger than the first half. That is also due to tough comps. The business was up 20% the first half of '23, down 20% in the second half of '23, so the comps get easier as we go throughout the year.

But you're right, you've dialed it in a little bit there. Look, we feel comfortable with the guide that we put out there now, and our ability to meet or exceed that guide on the full year. Run -- let us get through another quarter of -- of results here in the second quarter. As you know, the first quarter within Trane Technologies is generally our smallest quarter of the year. Let us get through the second quarter, we'll give a better insight on the second half of the year at that time. We feel very confident with the guide that we just released today.

Yeah, Julian. So in the first quarter, at the Enterprise level, we delivered about 3 points of price. Those comps get tougher as we move throughout the year as we start getting to a little bit more of a normalization of price. Think of the full year now, we're guiding to about 2 points of price.

With certainly a question on the call that we had a few months ago on our full year guide on price, we thought we could maybe do a little bit better there and delivering on Q1 gives us the confidence to -- to raise our full-year revenue by 2 points. Think of that as a point of price and a point of volume.

In the Americas, we led with price in the Americas. That's generally been the model within the company and within that Commercial HVAC would have been -- would have been stronger.

As we think about -- price-mix and -- and maybe inflation a bit, we're very confident in terms of delivering the -- 20 basis points or 30 basis points, maybe better on [Phonetic] terms of price cost, price versus inflation on the full year. That's one of the best parts of, I think, about our business operating system has been our ability to remain nimble with pricing. You can say that we've got the right inputs.

And as we think about commodities and how they kind of play out over the next year to two years, remaining nimble in terms of pricing is something that [Technical Issues] it was in our business operating [Technical Issues]

Your comment on residential, why not, Dave, do you want to cover that?

Yeah, the -- we don't have a lot of 454B at least in the Americas built into our -- our guide, okay? We -- we're obviously ready from a product standpoint, and we'll be launching those products as we -- as we go through the year, but we're not anticipating a large volume in -- in 2024, and we'll see how the year progresses for 2025.

On -- one of the things, too, on 454B is, I -- I saw a couple of pre-comments come out about -- being a new refrigerant. I just want to make sure everyone's clear, we've been using 454B in Europe for over two years now so this is not a new refrigerant for Trane Technologies. We were very comfortable with the refrigerant, and we've had it in our portfolio for some time. [Technical Issues] A lot of it baked into Americas and [Technical Issues]

Okay. Thanks, Julian.

Thanks, Julian.

Thank you. Thanks. Good morning.

So we have -- we got -- It's a good question, Gautam. I hope all is well with you.

Look, we don't anticipate a lot of 454B product in 2024 as I just said. That will obviously ramp up in 2025. We're not projecting 2025 yet. From a pricing standpoint, we're going to -- we'll announce pricing when we release the products. But I think what you've heard from others is probably in the ballpark as to what to expect from a pricing standpoint. We're going to -- we're going to see how the year plays out. Okay? We don't see a big pre-buy happening in -- at the end of the year for 410. Maybe you'll get maybe a minor one with some high runners, so it's -- it's really going to be -- nobody wants to get stuck with inventory.

And it's just that we have to watch out to see how the balance plays out and we'll give you an update as we move through the year.

No problem, Gautam.

Thanks, Joe.

Yeah. You start -- you start talking about averages, which are always dangerous, Joe. I mean, I -- I've read reports where people have estimated the 3% to 5% range. You know, in some cases, I'd say they're in the ballpark, and then you get into some hyperscale that may have a different configuration so. But it's not that far off.

Look, we're -- we're very strong in this vertical, we have been for a while. And it's going to have a lot of growth in the future and -- which is exciting. But understand, it's one vertical of many verticals that we play in. And in the first quarter, we had broad-based strength, so wasn't just focused on data centers.

Yeah. I'll start with megaprojects. I mean I think that -- megaprojects are happening in verticals that we've always been very strong in, so it's always difficult to say what's additive versus what's ongoing strength in a particular vertical. That said, our team is tracking over 300 megaprojects, and we've had some orders that have been received, however, the majority are still in the pipeline as these are typically longer-duration projects to close.

A lot of these projects that are deemed as megaprojects are global in nature, which gives us really a competitive advantage with our direct sales force because we're able to triage decision makers and provide technical support in different parts of the world. So well, well in tune to what's happening with megaprojects.

As far as ESSER goes, look, ESSER funding, the way it's designed right now, you can take an order up until September of this year and it has to be fulfilled within the first quarter of 2026. And we've done very well with ESSER funding, but we don't believe that the whole education vertical -- stops after ESSER funding. There's also IRA funding that's available, and there's of course, the municipal bond process that's always been very robust in the past.

So look, the education vertical has always been strong for Trane Technologies, expected to be strong in the future as well.

All right. Thanks, Joe.

[Speech Overlap] Hey there, Steve. [Phonetic]

Good morning.

Thank you. Thank you.

Yeah. I mean, obviously -- in the Americas, which I think is where your question's focused, we were very strong in Equipment overall. I mean, our order rate for Equipment was up over 40%, and we saw strength really in both Applied and Unitary. And you know, in the past, I've said unit's -- Applied's been a lot stronger. This time they were pretty close, so there's a lot of strength out there. And that makes sense because if you look -- or -- we had broad-based growth across really almost all verticals. So -- and a lot of those verticals are served with different applications, so it was -- it was very strong.

Yeah, I don't -- I can't speak to a competitor because you get comps from one year to another. I would just tell you that that -- broad-based, you're going to have some verticals that are more on the Applied side, but some verticals that are more on the Unitary side. So think about education, it's probably a 50-50 split. Conventional office typically tends to be more on the Unitary side, not always, but tends to be. Retail will be on the -- on the rooftop side.

But look, we're very happy with the performance we had in Q1. And -- I -- I don't remember a quarter when I was talking about 40% order growth and it was -- as broad-based as we saw in Q1.

Yeah, Steve. Yeah, revenues were up low-single-digits. Think of them as very low numbers contributing price volume in terms of residential, it just -- we start getting a lot of small numbers there and up low-single-digits. It did better than we expected, as Dave talked to -- to earlier. You know think of price as really de minimis, maybe volume was up around 1 for -- for resi.

But -- let's see. We're just starting the cooling season here, let's get through another quarter and we'll see how the year plays out for residential.

Thanks, Steve.

Yeah, thanks.

Hey, Deane. How are you?

Good morning.

Yeah. The team there continues to execute at a very high level, very seasoned team. Been in place for -- a lot of tenure with the company. A lot of strength in pharmaceutical, healthcare, high-tech data centers, which is really where our portfolio plays well with our Applied systems. So very happy with what we saw.

Now, China is a small percentage of the Enterprise -- in the 5% range, but a lot of strength there, which is encouraging.

Yeah, it's -- it's a great question. I was telling Chris, I think, we're going to have -- in the Americas, we always said our Service business was 50% Service and 50% Equipment, but with our Equipment growth, we got to go back and look at the calculation.

Look, we had a very strong Services business in the Q1, on a global level was up in the -- in the low-teens. In the Americas, it was up over 15%. And there's a compounding effect that's going on there. And this is the sixth year where we've had service growth of low-single-digits. So it's a -- we've invested heavily in this. I think it's one of the areas that sometimes gets underappreciated in Trane Technologies, but I tell you, it's a third of our business. It's very resilient, and it is an enabler. And that team continues to execute at a very high level and expected in the future as well.

Yeah, Deane, the -- the six years -- up high-single-digits growth in Services. Last year, was up double digits, and Dave keeps pressuring us to kind of move to the double digits, but I'll tell you, it's -- you know, the resiliency as he called out, and we like the margins there. And nice start to the year in the business.

Thanks, Deane.

Thanks.

Yeah, I think there was really two things that were -- were to the upside. One was our commercial HVAC business in the Americas. It really performed -- it performed better than -- than expect -- expectations. Just a lot of demand for our innovative products and the team executed extremely well.

The other upside within 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 -- 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 were the -- where we saw the upside. You know, the rest of the world really played out the way we thought -- Europe strengthened. 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 -- it really played out as expected in the rest of the world.

Yeah, I -- I haven't -- I -- I can't -- 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 out 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 -- I -- I hear the disconnect too, when you look at ABI [Phonetic] or some of the other macro numbers, you just have to look at -- we -- 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 very strong demand, broad-based, and the pipelines are still strong.

Okay. Thanks, Nigel.

Andrew?

I can. How are you?

[Speech Overlap] Hey. Good morning.

Yeah, 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 a 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 coolings. 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 -- is taken out of the data center, how can you repurpose it? And that's some of the technology that we're -- we're in discussions, kind of at a -- a thought leadership level as to how we can take an asset and -- and heat -- or -- or heat and turn it into an asset in the future.

You're right on, Andrew. All opportunities and it's a -- it's a growing vertical.

Andrew, I'll start. It's Chris. Yeah, pipeline remains very active. You know, it's sometimes episodic when a -- when an M&A transaction closes. So -- quarter to by quarter may be hard to call, but over the course of a year, I think the pipeline remains very active. We're very happy with the acquisitions we've done over, say, the last 18 months, 24 months, right?

You'd -- you'd properly describe 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 -- in Europe and/or in -- in the Americas. So we've been very successful with that strategy.

As it looks to the pipeline today -- we -- we're going to remain disciplined. We've got our hurdle rates, and as we think about what's constructive to be EPS secretive 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 years, seven years ago with an acquisition in -- in Europe with Thermocold and -- really started out with our four [Phonetic] 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 -- over a longer period of time.

We've got the people. We've got a great -- 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 -- the successes depend on how well you integrate.

You know, 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 plants, 50 plants across the globe.

So I'll tell you, we're -- we're bullish in this area, so I'll just say the pipeline remains strong.

Thanks, Andrew.

Thanks.

Yeah, great question, Noah. 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 -- and that's the way our account managers behave with customers.

We don't -- as -- as the sophistication of these products continue to increase, obviously, our strength shines, really, on a global basis. A lot of the decision makers on, especially some of these megaprojects 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 -- 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 -- with these applied systems that we're selling. And we're investing heavily, too. It's not like -- people -- 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.

As I said in my opening remarks, we think about an applied system, you can think about an 8 times to 10 times multiplier of services over the life of that system. And -- we want to be connected to the system, okay? So this -- 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. Well, we're 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.

Okay. Thanks, Noah.

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.