Trane Technologies plc (TT) Earnings Call Transcript & Summary

Thank you very much, everyone, for being here. Welcome to the third session this morning. It's my pleasure to have Trane Technologies; Dave Regnery, Chair and CEO; and Chris Kuehn, CFO. Dave and Chris, thanks very much for coming here and being with us today. Maybe first off, I think the biggest surprise from your results a few weeks ago was the strength in those commercial HVAC orders ending 2025, maybe help us understand kind of main drivers of that? And do you see those types of growth rates persisting into this year?

Sure. I'll start, Chris you could add in. First of all, thanks, everyone, for coming. We got a full house here today. So that's great. It's always good to be at this conference, coming down to Miami. It's a little warmer here and certainly in North Carolina right now, but Look, Trane Technologies is very strong in Q4. We talked about order rates. Order rates were up over 22%. It was broad-based, too, which is a good thing, right? It wasn't just one particular vertical that was strong. We had strength in many verticals. We talked on our earnings call, certainly, data centers was very strong. But we also saw strength in Higher Ed, health care, Industrial. So it was good broad-based growth. And if you look at the pipeline, which is what I'm always looking at, and these are -- this is the activity that our account managers are working on, it remains very, very robust. And I've been in this industry a long time. And I would tell you that I haven't seen a pipeline quite this strong in a long time. So it just bodes very well for the future, specifically in our commercial HVAC business. And I know we always want to talk about what's going on here in North America, which is important, obviously, to Trane Technologies. We also had a lot of strength in Europe, which is also great to see. So good things happening at Trane Technologies right now.

You definitely saw the order acceleration into the second half of 2025 in both the EMEA commercial business and the Americas business as well. And that plays into the 2026 guidance as we see typically applied systems can take, call it, roughly 9 months from order date to ship date. That's where we just see the growth of revenue in both of those businesses ramp throughout 2026.

That's great. And when you're thinking about Higher Ed and Industrial, you mentioned those, Dave, in the U.S. Education, I guess, there were some concerns around that stimulus money coming off kind of where are we in all that? Has that already happened and people sometimes worry about demographic pressures on Higher Ed. Any thoughts around that vertical in general? .

Yes. I mean, look, if you look at the fourth quarter, we had order growth in our commercial HVAC business in 12 of 14 verticals that we track. There were 2 verticals that actually contracted a bit. One was life science and the other was K-12. For K-12, if you remember probably a year ago, I was here saying, look, we do not see K-12 falling off a cliff, and it certainly has not. So a small contraction in a vertical that has had exceptional growth with all the stimulus money that was provided to it. This is a good outcome. And also the pipeline is still very strong in K-12. I think one thing that the stimulus pointed out was how underinvested this particular vertical was in. I mean, the state of this vertical needed a lot of investment. And I think that everyone sees that now and look, this will be a strong vertical long into the future.

And on the Industrial front, I think a lot of investors are kind of hopeful of an acceleration in domestic industrial demand happening and the PMI gave kind of license for that a couple of weeks ago. How do you see that domestic industrial environment right now? .

Yes, we see a strong pipeline again in that vertical. I think the mega projects that -- I don't like that terminology, but there are a lot of projects that are out there with some reshoring efforts that are taking place. Some of those projects tend to be a little bit longer to close, but we're still very optimistic of the higher tech Industrial vertical. .

Great. And market share wise, I think there's been many commercial HVAC companies have been showing good orders growth, which is good for the industry. Kind of how do you assess your market share progress in terms of, I guess, the bold kind of numbers around share that you see? And any thoughts around kind of technology advantage or acquisition.

I want to know which CEO gets up here and says they're losing market share. Has anyone heard of it? Look, we're very happy with our market share, but you all see the growth rates that we're able to put up versus maybe some of our direct competitors, and you could come up with your own conclusion. But I would tell you that market share doesn't -- it's not an event, okay? It has to be over time. And a company that's going to continue to invest in innovation, a company that's going to be steadfast in how they commit to innovation and how we commit to building our channel, that's a company that you're going to want to think long term is going to continue to be very, very strong. And over time, we'll gain share. And that's what Trane Technologies is all about.

And I think something you've mentioned as a contributor to share has been the sort of the direct approach, number one, in selling and then the kind of systems approach maybe with how you think about product development. So maybe flesh out those elements a little bit more.

At the end of the day, it's a simple philosophy, right? If you're talking to your customer, that's a good place to be. If you're relying on someone else to talk to your customer for you, mean when we were younger, did any of us play the telephone game. Remember that, where I tell you something, and you have 10 people and the message that comes back is totally different than what you started with. That happens too when you start not talking directly to your customers. So our philosophy has been and will continue to be that we want to direct sales force. We want a direct service organization. We like those touch points. We want to make sure that we understand what our customers' needs are today and what they will be in the future. What are the problems that our customers are seeing and how are we going to be different than maybe some of our competitors. The other thing, Julian, you hit on it is we think of everything at a system level, right? I know that I often get asked questions like, what did unitary do versus what did chillers do. And I'm sure we have that data, and Chris' team could probably talk in detail at it. But at a very high level, look, we're selling solutions to our customers. And with the broadest portfolio in the industry, we could do that. right? We don't tell a customer, oh, here's a VRF solution or here's a rooftop solution or here's an applied solution, we sit down and understand what their needs are and what's going to be the best solution for their needs. And we then -- as long as the product says Trane on it, we're happy, right? But we're going to select that. And it's the exact same way we think about data centers. I know we're going to talk about data centers here in a bit. But think of it at a system level right? You're going to get a different outcome when you think of it at a system level. So it is a competitive advantage we have. Talk to your customer, understand their needs today, tomorrow, have a broad portfolio, sell solutions, don't sell products.

On that point around data centers that you mentioned, how comfortable or confident are you in Trane's position? There are some technology changes going on in the industry. You're aware of them kind of with channel partners and customers before kind of we are. Do you feel comfortable with Trane's market share in things like CDUs and those kind of liquid cooling products versus the chillers and air handlers.

I mean, look, at the end of the day, in the data center world, think of the thermal management system. And I know there's a lot of conversation out there right now about a particular component within the thermal system, right? Look at it as a system, that's how we're looking at it. And you're going to have trade-offs that exist depending on which system is going to be implemented. And I would also tell you that we're working with many, if not all, of the influencers in this space, whether that be the hyperscalers, the large colos, or, in some cases, actually the chip manufacturers to develop what that future thermal management system looks like within a data center. . And just to put all of your minds at ease, I haven't seen a future design that does not have a chiller as part of it, okay? But there are trade-offs that exist. And if you're going to remove heat at the chip level with cold plates you're going to have less heat that's going to go into the data hall. So you probably need less air handling in that system. If you're going to use deionized water and you're going to have stainless steel piping, you're going to have a trade-off with CDUs. Probably less CDUs versus more. So those are the types of trade-offs that we're working with our customers on a continuous basis. And you've heard me say for a long time that this is a vertical that's moving very fast from a technology standpoint. You need to be a leader, not a follower in this technology and you need to be working with the influencers to make sure that they know the best solutions or potential solutions. And just to be very fair, we're learning a lot from these data center customers as well, right? You get a bunch of smart people in a room and you're going to come up with solutions that are maybe different than what you thought when you walked into the room. And -- but that's good, right? That's great. That's great for this vertical. The other thing I would tell you about data centers, too, is like when we think about our conventional think of the other verticals, think of buildings, right, we always think of like energy savings and we're like, oh, the customer is going to save energy. In the data center, the vertical, it's not about the energy that saved goes to the bottom line. It's really you save the energy so you could do more computing, right? So it's a different way to think. All they're doing is redirecting it into where they could be able to have more yield out of their data center. But there's a lot of trade-offs, and there's a lot of cool things that are happening. Some I can talk about, some I can't talk about. But think of the whole system, right? And there's a lot of talk about, well, these chips can run at higher temperatures. Great, right? Think of free cooling, think of chillers that can have -- they could be operating as a dry cooler as well as a chiller within the same system and being able to have flexibility as to knowing what to do when and that's an area where Trane Technologies does really, really well.

Got it. And if you think about the kind of competitive landscapes in your traditional businesses versus some of the emerging ones in data center thermal management, it seems from the outside, there's a lot more players in the newer areas. How confident are you that Trane can kind of have a good market share in those new areas, even amidst a lot more competitors out there? .

Again, I think it just goes back to a system approach, right? Yes, we have CDUs, okay? We just acquired LiquidStack. So our portfolio is strong as compared to 6 months ago. And if you look at their pipeline, it's even stronger than -- it will be even stronger 6 months from now. But again, I think that component manufacturers are going to be selling components and Trane Technologies looking at the entire system is going to help people think through what is the system and how do you optimize the system. It's a different approach, okay? But if you want to talk to a hyperscaler or a colo, they're going to want that broader view versus just a component within that system. And by the way, I was talking to a large colo the other day and they basically -- they went down the road of maybe optimizing on a part of the thermal management system and they're basically like -- we really like our relationships. We need to expand it with you to make sure that we're thinking more strategic about not what today is but what tomorrow is and what that whole thermal system is going to look like.

And maybe add the thermal system on the data center. It's also not just innovating on the front end with engineering and then fabricating and manufacturing. It's also commissioning and making sure you can hit the dates that the customers are looking for to have the product on site. So one of the investments we made, Dave made really 2 years ago was to build out a service technician training center, an advanced service technician training center that we just opened up in the fourth quarter last year in North Carolina and think about all the suite of products that we can have service technicians on site from unitary all the way to the most complex data center chiller. And bringing customers through that to see our capabilities with nearly 4,500 service techs. It's also getting -- making sure you can commission that product in the field. And so that's end-to-end in terms of bringing the product to life and commissioning and then also we have the service opportunity thereafter.

If you're ever in the Davidson area, you give Chris a call, he'll set up a tour for you. I get yelled at when I told people they can come down. But -- so we had a large colo that they went -- originally their first project was with another provider and they were very disappointed with the commissioning that took place. And I was talking to this, I invited them down. I know these individuals quite well. And I said, come down to Davidson I want to show you what we invested in and why. And I will -- I'm very confident that future orders will be coming to Trane Technologies from this particular customer. When they saw our capability that we have and the detail of which we train our associates on the commissioning side of things. So it's really, really exciting. The other thing too that -- let me just talk about data centers, one other thing. When you talk about innovation, right? I talk about the thermal management system, okay? But some of this is thinking differently about solving issues, right? So we bought a company about a year ago, BrainBox AI right? So we're taking -- you've probably heard me talk about, we used to have great connected solutions with structured data. We now have this unstructured data. We're augmenting it. We're thinking differently, making buildings smarter. We're using that same technology in data centers. And I'll give you an example. When you have a data center, let's just say it's a large day center, you're going to have -- let's just make up a number here, 100 chillers that may all be rejecting heat at the same time. Well, it's what they call a micro environment is created when that happens. And you could think of it as like the Delta T or the temperature rise in that particular micro environment, it could be up to 30 degrees F, okay, from the ambient air just close by. And what we've done is been able to take weather patterns to understanding how the wind is going to be blowing versus what set of chillers, you could actually use free cooling for because it's at a lower ambient versus others that you'd be doing the condensing on. So there's a lot of that type of innovation. And when you sit down with really smart people on the other side of the table and you start bringing these types of solutions and a little bit means a lot in the data center world from an energy saving standpoint. And we're able to capitalize that with some of our thought process.

And you mentioned LiquidStack just now. Maybe help us understand kind of what it brings to Trane. And I don't know if you looked out a few years, including, obviously, LiquidStack. Any sense of kind of how -- what proportion of your business in data centers could be liquid cooling related versus traditional.

I mean, first of all, LiquidStack, okay? We've had a partnership with LiquidsStack for a long time, okay? Originally, we invested in LiquidStack because of their emerging cooling, okay? That's still to come, okay? That's a little bit further out. There's some difference, I can get into the technical side of that, if you'd like. But they also have a great CDU line, and they also have a great pipeline of CDUs that are going to be introduced. So the acquisition of LiquidStack really just fortifies our position in the CDU space. That's number one. As far as what was the back half of your question? .

Just around -- It's hard to think about system.

Again, I think it depends on what is the customer looking for. In some cases, you're going to end up with liquid cooling solution, and we're talking here about cold plates and CDUs and alike versus just the chiller. In some cases, depending on what the need is and what the use of that data center is going to be, you're going to go to a more conventional data center. And in some cases, you're going to have hybrid, right? So I think it's just being flexible as far as the share I just want a high share of hyperscalers and colos because at the end of the day, I know that's where we're going to add value. And the other thing about data centers, too, is we all understand the build-out that's occurring right now. Think of the service tail that's going to be associated with that. A lot of that's in front of us. A lot of that's in front. Even though we've been strong in data centers for decades, I would tell you that if you look at the current growth rate that's occurring there, A lot of that service work is in front of us. So these 7,500 technicians think of that number growing, think of them becoming smarter because we're also doing a lot of work on the AI side there with our virtual engineer area. So the technician now is so much smarter than maybe a technician was 3 years ago on a job site because they're coming there. They know exactly what's going on with that particular unit and if there's any kind of inquiry, it's all like it's under phone now. So it's really, really innovative what we've been able to do there.

When you're looking at the future changes, let's say, one big one in data centers, I suppose, is around 800-volt direct current more power intensity inside the IT room. Do you see any big implication on the cooling or thermal management side?

Well, I mean 800-volt is lot of heat, right? So let's just -- first of all, there's a safety requirement, right? So if we're going to be running our units at 800-volt, we can, okay, there's some changes that have to take place, and it needs to be a safe -- I think we all understand AC/DC, but maybe not I can talk to you off-line. But there's some implications and there's some reasons why we went to AC versus DC. That's okay. We're okay being a disruptor there. So that very well could happen and it probably will happen. Just remember that the heat load is very important, right? So again, thinking of the thermal management system, if you're going to be using 800 DC, you're going to end up with a higher heat load and how are those -- if you had eaten up here, they'd be talking about the cooling effect within the bus bars, et cetera. So that the heat within the data hall now, depending on the -- how the infrastructure is constructed may be higher, so it may require more air handling systems versus what was in a conventional data center.

Great. And then maybe sort of moving to the other side of the spectrum on top line trends. Domestic residential demand. How do you see kind of where we are in that cycle right now on volumes? And are you confident kind of prices holding up? .

Sure, I'll start. We were very intentional in the fourth quarter of taking production days out in our residential business. We took out about 1/3 of the production days, and that's what really drove the deleverage around 60%. But what it did is it put us in a position to the start of 2026, feeling that inventories were at the right level in the channel, okay? So the first quarter of 2026 will be a very tough comp for resi. We were up high teens in Q1 of last year. So it's the toughest comp of the year. And with our guidance a few weeks ago, we guided residential to flat to down 5% on a dollar basis. The comps certainly get easier as we go throughout the year. We don't think that there'll be a tariff prebuy or refrigerant prebuy or a challenge with the transition to refrigerant like we saw in 2025. But good business, we feel like the inventory is at the right levels. and we'll kind of progress as we move throughout the year. But the key is making sure we get the inventory at the right spot.

Yes. And Chris said it, but I'll reemphasize it, look, 2025 was a very strange year in residential. 2 pre-buys, a refrigerant transition that did not go well for the industry and a very short cooling season. Well, I don't know about the weather, but the other 2, I bet won't happen again. So I know there's a lot of questions, well, structurally, has this changed and we're not believers in that, okay? We think we have this market size right for us this year, think of it being on a dollar basis, flat to maybe down 5%. And but this is a very strong business, and it will be strong in the future.

And on price, the team announced a price increase just in the last 10 days, it's up to effective April 1. And so our plans are to make sure we continue to capture price to offset inflation and still get a spread on that. .

And from what you see, the competitive landscape, people are behaving themselves on the whole on price.

Therefore, the industry has been very disciplined in that regard over many years. I mean, think about a price increase up to 5%. You generally get a couple of points of that. It's not necessarily on the top line, but it gives our teams the ability to go price effectively, but we don't see pricing going backwards.

And I think in terms of kind of self-help, looking across Trane, you've done a lot of heavy lifting on Europe recently. So where are we on that kind of reorganization, what kind of results should we expect there?

Yes, I'll start. I mean Europe in 2025, to be very clear, it was really about intentional investments in the channel. And it was investments around our direct sales force and adding more with some recent acquisitions we've done, Julian, to -- they were very strong in 2 or 3 countries, and let's make sure we've got the capacity to be strong in 20 countries. And at the same time, we also brought on some acquisitions, both in the transport space and a small acquisition in the commercial HVAC space, where we want to give a view to be more direct to the customer. And those businesses just came with lower margins in year 1. So a very intentional decision in '25. The margins came down a little bit in '25, but it's going to give us some nice growth opportunities. for '26 and beyond. And our expectation is for that region, we'll see margin expansion. We'll see incremental organic incrementals at 25% or better for each of our regions, so I'll put EMEA in that space as well. but a great team and a great business and outperforming down to flat transport markets, outperforming very low flattish growth in commercial HVAC. It's a lot of innovation that, that team drives.

And Chris, you mentioned incremental margins. Last year, there was a very good performance on that despite resi deleverage late in the year, transport under pressure, tariffs halfway through the year. This year, the guidance embeds the organic incremental, you have that 25% plus, which is lower than what you did last year. Are there any notable headwinds that would cause the incremental to move down this year? .

Well, I'll start and Dave will jump in. It's a common question, and I think it's a good one. But if we were going back a year ago, we started last year with 25% plus organic incrementals as well. And if the pipeline ever got smaller inside the company, our innovation and the investments we want to do, then maybe we change in January and start with a bigger number. But I'll be honest, Dave put in place many years ago, a minimum 2 times a year of innovation review and what's the pipeline within across all of our businesses. And the pipelines continue to grow. So we like starting at 25% with a plus sign. The last several years, we've done better than that, and we like putting out guidance we can meet or exceed. Let's see how the year kind of plays itself out. But it gives us that opportunity to make the investments and pull things ahead. And that's generally what we've been doing each and every quarter is pulling things ahead where we can.

I think I've told many people this, but I'll say it again. And the easiest decision the CEO can make is to cut investments. right? Because in the short term, you know what happens. It goes right to the bottom line and everyone's happy. You know what happens in the long term, you start to shrink. You start to market share because you're not innovative. And that's not who we are as a company. So look, our model is always going to be. We'll go out with our guide of 25%. That's our model. We always want to make sure we have optionality I'm always thinking about what's happening in the future and how we're going to be ready for that. And hopefully, that's what you want me as the CEO to be thinking about.

And strong free cash flow. Let's not forget about that. Let's make sure...

We always forget about that.

Let's make sure it's high-quality earnings of the cash flow that comes in as well at 100% or better. .

Yes. I think yes, the earnings conversion into cash is always best in class, and I think a lot of people just sort of stock at the adjusted net income line or whatever.

You can't spend adjusted net income, you can spend cash, Yes. So that's what we make sure we're focused on.

And on that point, partly because the cash flow has been good, balance sheet is in very good shape. Going back to that point on technology changes, clearly, it's helpful as an accelerant sometimes to acquire instead of organically invest or alongside it, how do you see kind of the M&A landscape? You've done LiquidStack and folded that in completely . Stellar as well. I mean, how likely is it you could you say a large acquisition in liquid cooling or anywhere .

Look, at the end of the day, we're going to look at everything, and we get to see everything as a major HVAC global player, we'll be disciplined. And we'll make sure we look at everything. We make sure we understand what the value is. We're really, really good at buying technologies, as Julian said, and scaling against a really strong channel. And don't underestimate the power of the channel, right? The direct sales force builds the channel. If you have a strong channel, you could put products through that channel and leverage it quickly. and that's what we've been able to demonstrate. Stellar is another great acquisition, modular chillers, Think about all the labor constraints that are out there. This is a solution where you're taking that labor and you're putting it in the factory and you're deploying it to a job site. It's very popular in data centers. It's also going to be very popular in other verticals because it's very, very applicable.

Fantastic. Well, that we'll move to the audience .

Before I start, just closing, I told this group earlier this morning, the same thing. But look, 5 years ago, I sat up here as a new CEO and I was probably super nervous and oh my gosh, we're all these people in the crowd. And I told everyone back then that we're a great innovator, we're a great operator, but my goal is to create a growth company. And if you look at our -- what's happened over the last 5 years, we have a compound annual growth rate that's double digits. We were $12.5 billion 5 years ago. Today, we're at $21.3 billion. We closed the year we almost doubled the business. And I could tell you with confidence, I sit up here today and tell you that I see more opportunities in the future than I saw 5 years ago. So I appreciate everyone's interest in Trane Technologies and the future is brighter than what we saw in the past.

Go ahead, julian.

Thanks very much, Dave, for that. And the -- maybe we'll switch to the first question, please. It's around sort of your own shares in Trane today.

I always love this. I wish you would do this first.

It's meant to reflect the discussion as well. Fairly polarized. Second question is around kind of general bias right now. So generally positive. Third, The next question. Through-cycle EPS growth for Trane versus the kind of multi-industry average. So okay, everyone thinks above peers, next question, please. It's around excess cash, and we just had that discussion on M&A.

And we just raised the dividend 12% a couple of weeks ago, right? .

Don't influence the audience .

Bolt-on acquisitions, the biggest portion. The next question is around valuation. Where should Trane trade out on sort of current year PE?

Hopefully, we don't have any #1s here.

That's for the continuous history. Okay. So 80% in the 20s. And then the last question is kind of any drawbacks any headwinds, any anchors on the valuation that are top of mind today? It's a very balanced capital deployment, core growth. So with that, thanks so much Dave, thanks so much, Chris.

Thank you all.