Trane Technologies plc ($TT)

Okay. Great. So we're going to wrap up this trio of industrial fireside chats with Trane. And very pleased to welcome back to the Wolf conference, Chris Kuehn, CFO of Trane and Donny Simmons, who is the President of the Americas for Tranel Technologies. And Americas is what, 2/3 of the business, Donny's that not be hit.

Yes.

Math is that my strong seed. But great to have you both here. Thanks for taking the time. Chris, I think maybe spend a minute or so just in the theme and then we'll get into Q&A.

And Nigel, thanks for having Donny and I and Pat here at the conference good to be back in New York. We know it's going to be a very warm day in New York and maybe a warm couple of days this week. So Look, the company had a strong start to the year, maybe a highlight in the first quarter for us, where bookings were up 24%. I think of that in [indiscernible] space. Commercial HVAC bookings were up 4% in the first quarter. Applied bookings were up over 160%. So we had a really good start to the year. Backlog reached $10.7 billion at the end of the first quarter, that's up nearly $3 billion from the start of the year. And think of that as 2/3 organic and about 1/3 from acquisitions and of the acquisitions, about $1 billion of backlog came from Stellar Energy, which we're really excited about, and we'll probably talk about here this morning on modular chiller solutions that are in the data center vertical today. Services had a very strong start to the year, up low double digits. It's had a low double-digit CAGR for the last 5 years and we ultimately raised our guidance on the bottom line for the year based on the the start of the year. We do expect strong acceleration into the second half of the year led by our commercial HVAC businesses that is the timing of backlog converting to revenue and when customers want products on their job site or quest on job dates. And that's what we reaffirmed kind of in the end of April was that acceleration we expect in the second half of the year in commercial and easier comps in residential and transport as well. So we're expecting strong growth as we go into the second half of the year. And with that, I'll turn it back over to you, Nigel.

Thanks, Chris. Of course, being nice saying the New York business, right? So you quite pleased to its streets and it hot.

We're certainly sweating on the way over here this morning.

Yes, sounds good. So you mentioned the second half acceleration, and I think that makes a lot of sense in terms of the moving pieces. A couple of points. I mean, in terms of the 5% on the mid-single you're calling out for 2Q, any moving pieces you can call out for that?

Sure. Overall, I mean, we expect the continued progress in our cage business and continued strength there. I mean we think about we talked about our transport markets being a bit stronger in the first quarter, but we're holding essentially what we expect here in the first half and for the full year in transport. And then residential, residential where we had a first quarter that was stronger than what we had expected. We did increase our guide for the full year in residential and we do feel like our inventories have normalized, and we talked about that in the first quarter. So we're cautiously optimistic there that with residential now expected to be flattish for the full year, we're in a good spot. And commercial HVAC continues to be strong. So we had a very strong first quarter, and we expect the first half and the second half to continue to strengthen

And the commercial is, as you mentioned, Chris, kind of back offload in terms of the growth profile. That's something we're seeing from a lot of your competitors as well, but this back half loading of the growth profile. Maybe just talk about what's causing that back half first half, second half, mid-teens plus type organic growth of commercial?

Sure. Look, I mean, first off, I think with commercial, we have to talk about both sides of the business. We talk about our services business. being half of the business. And we've had low double-digit growth for the last 5, 6 years in services. So automatically, we get that. We've also talked about the fact that we see the unitary markets as being flattish for the full year. So that continued that scale up and growth comes from our applied business as well as our services business. And so that first half versus back half and getting to that mid-teens is just meeting the customer requirements and what the customer delivery requirements are throughout the year. That's really what's driving that change.

It's similar for EMEA as well. If I think about the second half order growth profile last year, we just really inflected upwards in Europe, commercial HVAC in Americas, commercial HVAC and that time line just suggests deliveries more in the second half of this year.

Yes. And do you find the I think you talked about this on the last earnings call, the product time lines for the data center segment is extending. So we know backlog conversions are a little bit longer than it has been historically. .

Yes, we have. I mean if you look over the last couple of years, that certainly changed. I don't think it's anything drastic in terms of I think about it as the customers are giving us more visibility into what they're is so that they can secure the supply chain that they need. So it's now moved to 12 to 18 months instead of 9 to 12 months. And so it has extended out overall, but that's more of a visibility for the supply base than more than anything else. And so for us, it's helpful. And for our supply chain, it's helpful because the more visibility that we have so when we're getting orders that are coming in past our lead times, the lead times for this equipment is 6 to 96 months, it could be less. And so when we're getting orders 12 months to 18 months in advance, it gives us a lot of ability to plan accordingly and make sure that we're able to meet those delivery requirements.

Yes. CLO inflation emerging and has been in place, and I'm sure that continues. When you got longer backlogs, how do you protect margins? I'm assuming you price for the contract. what protections do you have against spikes and inflation?

Yes. We I mean, as part of our business operating system, and we've been doing this for a long time. We've had multiyear agreements with customers for a long period of time. And we're always building escalations in to make sure that we're protected throughout. And then for the majority of those contracts, we also have things like tariff protection, if something were to change abruptly that we weren't anticipating that we're able to make sure we're able to recover that as part of that process in the contract.

On the cost side, we continue to hedge base metals, and we'll go out 12 to 18 months for copper and aluminum, and that will get adjusted for volumes as we see volumes grow into the future. But at least for us, it just smooths that that inflationary curve and it gives us better insight on what the cost is going to be. So then on Dani side, if you're delivering product a year or 18 months out with a cost escalator, we just get a more precise view of what that cost will be with that hedging strategy. And on steel, it's about a 6-month hedge, right? You're locking in steel consumption. You have about a 6-month lock on price. And then after that, you're a little bit more exposed, but then that just kind of keeps rolling on a 6-month basis for steel.

As the hedging strategy changed over the last several years? Because it always felt it's like 12 month now seems like.

A little bit further out on copper and aluminum. And so think of it as you're right now so going from 12 to maybe in that range of anywhere 15 to 18 months. And it really comes down to the forecastability of what we think for volumes. But where generally, if you're a year to 18 months out, you're probably hedging 20%, 30% of the expected buy and the closer in, you're probably 75%, 80% of the buy. But we'll just keep executing through that strategy and smooth the ups and the downs.

Okay. Okay. I'm going to shock you. I do want to talk about data center touch on data center a little bit before that, residential is a real hot topic. Maybe just give us a little bit of color in terms of what you're seeing real-time because 1Q is very encouraging. Still very early days in the season, but just give us a little bit color in terms of the conversations with your contractors and distribution partners. And you lean more optimistic or pessimistic based on what you've seen so there?

Like we lean more optimistic, especially with what we saw in the first quarter. We expected the first quarter to be much lower than what we came in. We were down low single digits. But if you think about that in terms of a year-over-year compare from last year, that's actually a significant improvement if you look at it on a 2-year basis. And so last year, we had a lot of challenges in the first half of the year as we had really 3 major factors. We have refrigerant transition that was a challenge. We had shortage and canisters and part of that process that really impacted the market in the second quarter of last year. We had really weather delays, which kind of a shorter season last year, which was also an impact. And that and we had at least maybe 1, maybe even 2 prebuys is the way we talk about it last year, 1 associated with refrigerant, the other associated with the pricing associated with that change as well as the tariff impact. So there are multiple dynamics that her last year. That makes this year, at least seeing what we saw in the first quarter as a positive trend, and that's why we did raise our overall guide for the residential market. Now we're saying flattish for the year. That gets a lot easier in the second half of the year for us, just from a compare standpoint because the second half of last year was very challenging for the overall market based on the inventory build. We do feel like the inventory has normalized in terms of our channel and what that looks like. And and so overall, we're optimistic in terms of the market.

It was an aggressive plan in the fourth quarter to take production days out that Don and his team said, "Let's go and kind of take that medicine here as soon as we could. So we took about 1/3 of the production days out in the fourth quarter, we felt at the end of 2025, inventory in the channel is at a good level. We reaffirmed that at the end of the first quarter. And to Donny's point, on the flattish guide for the year, it implies volumes will still be a bit negative. There will be some positive price. But again, first quarter is maybe the least important quarter of the year in terms of residential. We know it's getting warm out there, and we'll see how the year plays out.

Yes. No question. But your guide doesn't seem down like low single digit to mid-single-digit volumes you will take flattish about. It feels like again, just shopping from the most significant quarter of the year, 1Q, does feel like we could be up modestly on volumes this year. Is that fair, Donny, do you think we could be up on volumes?

I think we'll see. It's a little too early to tell through the first quarter. Certainly, that came in better than what we expected, and we feel like we've guided appropriately for what we can see at this point in time.

If it is, we're ready, right? Donny's team has level-loaded production this year, which is something different than what we would typically do, the industry typically ramps in the first rooted quarter building inventory being ready for the season. We intentionally level loaded the factory. So what that means is first half, it's a little bit of a when you think about absorption in the factories, there's less absorption in the first half. That's a tailwind in the second half of the year. So in addition to the easier comps, based on what we saw in the industry in the second half of last year, there's also a tailwind coming through in terms of absorption level loading factories.

Is there anything in 1Q though, Donnie, that could have accounted for just a little bit better distributors getting ahead of price increases or concerns around the impact of tariffs.

No I mean, we didn't see any prebuy in the first quarter. We did announce a price increase in the first quarter for April, but we didn't see anything significant from that in terms of the change. So certainly don't feel like there's any dynamics there that would have caused anything to be different. I believe really what happened is that our impact that we took in the fourth quarter of last year, we've taken production days out, really getting aggressive on the inventory we also changed our production strategy where we went into this year with a mindset of having a flat production for the full year, where in the past, we would ramp up production, we would do a lot to kind of build inventory in the channel and then let that bleed off at the end of the year. This year, we approached it very differently. And so we're going to go in and be more productive. We're going to drive a flat production strategy and manage the inventory throughout that process. And I think that the benefits of that probably were we just didn't take into account in the first quarter.

Yes. Okay. That's great. Have you announced as of the earnings call, you hadn't announced a price increase for resi, maybe just some speed in terms of that. And then but I do want to talk about the fact that Trane, I think you called out has 1 plant in Masco of the '19 or so America very different footprint to some of your competitors. So just wondering how that competitive advantage in the world of tariffs, second to CRs, how you monetize that advantage?

Yes, certainly. So to answer your first part of your question, pricing, we announced up to a 5% price increase in April, which we announced in the first quarter. And we expect to get 2% realized from that throughout the year. From a manufacturing strategy, we've always had an in-region-for-region manufacturing strategy. And so certainly, Mexico is part of the region. But our footprint is predominantly in the United States. And so we have 1 factory in Mexico. We have 21 factories and then growing in the United States. And so there certainly is a different impact when you think about 232 on our business. Residential product, the majority of our residential product is manufactured in the U.S. between Texas, Georgia and New Jersey. And so we're well positioned from that standpoint.

But I guess your competitors have to are forced to go out with much more aggressive price increases. I think some of the competitors have gone out with high single-digit price increases, the plan to realize 5%. So it feels like there's a price divergence in the market. Trane at the low end, some of the competitors at the high end. Do you think that causes some assist and some shifts this year?

Well, what I'll say is when Donny talked about the price increase in the first quarter, it was effective April 1. And we know that there's new intelligence that came out in terms of tariffs and inflation, and that's also inclusive of raw materials and base metals. So we'll run our business operating system and ultimately evaluate what those cost inputs are, and we'll evaluate first, how do we mitigate those costs. Again, having the majority of our factory and assembly manufacturing operations in the U.S. . We'll continue to keep moving that in region for region strategy for suppliers. But then we'll look at pricing as an option if we need to. So we don't want to get in front of our businesses in terms of anything they may be doing. I'm aware that some competitors have announced maybe some some price increase recently. But at this point, we're going to run it through our business operating system, see what we can do to mitigate and then we'll evaluate anything further.

Let's move on to data center. And I'd be really curious, first of all, before we get into the kind of any views on pipelines, et cetera. How is Trane strategy evolving? Because I think at the very basic level, the view is a Trane and you can be as to ship chillers into the data center. But you've made some pretty smart acquisitions stellar could be a state acquisition excited how does that what are the kind of like pieces you're building here to put together a more integrated offering?

So I'll start with we always approach our customers from a system perspective. And so we're working with our customers on the system and how to make that system more efficient. And so the innovation pipeline that we have in the data center space is rapidly growing, and it's rapidly changing. So where typically, we would have a new product that would launch, say, historically in a 2- to 3-year time frame, we're now doing that in 12 months. So we're working on concepts with our customers and then developing those. And then when you look at how we've grown the portfolio, when we moved kind of downstream into the stellar acquisition, think about modular tiller plants, where we're as part of the system, but we're also able to make our customers more efficient because of labor constraints. We're able to produce a better product for them in terms of a modular chiller plant that has production quality in a factory as opposed to stick built in the field. So that adds productivity to our customers. It helps them with the challenges that they have from an overall supply chain standpoint. And then you look further downstream and liquid stack and the capability for us to enhance our capabilities from a total system standpoint when you get into liquid cooling and the expertise that we acquired when we acquired Liquid Stack, we're really proud of and a very robust innovation pipeline there. that continues to help make sure that we're positioned well to have that system conversation with our customers.

So we met with your team at the recent conference in D.C. And 1 of the things that they were highlighting was the reference designs that you have of the AM factories. Important is that in terms of driving share.

Look, it's an extremely important aspect of our business is to make sure that we're working on those reference designs. And we're not the only ones creating reference designs, right? But it is extremely important because it gives a road map point of view in terms of what that the design of that factory should be and it gives a third-party validation of what that should look like. And so it's not just Trane saying, here's a reference design. It's in that case, it's NVIDIA as well, saying this was the appropriate design for this system.

Do you find the customers that come in to you still very much on a product basis? So site crow, CDU separate or the system

No it's a system approach, and that's really what these reference designs are all about is to make sure we're approaching it from a system point of view so that we can drive efficiency in the total system. And we're not having individual conversations. We're talking about the complete system. It doesn't mean that we don't have customers that only buy chillers or only buy crawl. Certainly, we have that. But predominantly, when you're looking at our approach to the market, our approach is that system approach.

What they're also talking about is the ability not only to build out the product and the time frame that they want, but also tell us about your commissioning capabilities. Tell us about your service capabilities after the products installed. And so we made some significant investments within our service fleet, which we had for years and our service technicians. We have about 7,000 globally and 4,500 in the Americas where they are direct serving really the applied markets and 1 of the verticals being data centers. We just opened up a new service technician training center in Davidson, North Carolina. It's a state-of-the-art service technician training center, and we've actually put customers through it. We were concerned about commissioning in the field given the labor shortages, and they've come back and said, we're comfortable trying that you've got the right technology or the right people. They think about the order even more broadly than just the equipment, the readiness for commissioning and we've been able to show that we've got, I think, the best people on the street for that.

Maybe just remind us, Donny, on the deal math for Stella. I mean, what is the Chemin in terms of revenues in a margin profile? And where do you see that I think the backlog was quite high.

Yes. We brought in $1 billion of backlog with the business. Think about that as this year, we're going to have $500 million in revenue. from that business. And eventually, we see that business getting to a mid-teens EBITDA level. So we're very positive in terms of what that brings us. Overall.

Yes. For this year, with the $500 million, we said it's going to be marginally modestly accretive on the bottom line. And the reason being because of all the investments we need to put in to scale it from a revenue business last year in 2025. It was about a $350 million revenue business. to even $500 million this year. That's a scale. And to Danny's point, we see this in 2 to 3 years being a $1 billion revenue business, mid-teens plus EBITDA. So scaling it to that regard not only means let's look at the current production facilities in Florida, but we're adding another production facility in Texas. It's kind of 1 of the reasons why we raised our CapEx guide from 1% to 2% to 2% to 3% of revenue for this year, still very modest at the end of the day for investments, but that's where we're going to bring that business operating system to scale. . And think about procurement, think about how to run lines. Donny has been doing this for years in terms of running businesses and understanding how to bring that business operating system at the same time, learn from what those teams have done well. procurement opportunities, how do we run lines of the space that we need to and then set up a brand-new factory running the way that we need. That's it's going to be a really nice opportunity for us. But think of that investment this year, probably carrying over a bit into first part of next year to make sure that we've got the capacity we need to grow the business.

What's really exciting about that business for me as an operator in the business. Like think about modular chiller plan, it's like 3x the size of this room from a footprint standpoint, okay? One section is think about that as 3 sections. One section is your chiller plant. One section is your electrical and 1 section is your mechanical, so piping. So you're making those in a production environment. In the field, those would typically be stick built. You build it up from the ground up. We're making a production environment, flowing those through a factory in 3 sections and then putting them together at the end and then filing and then just modularly connecting them in the when we actually install them in the field. So it's a transformational change in the industry. We're the only ones that have factories that are flowing product like this down the factory floor, and we're starting another factory right now in Texas. So we'll have 2 very large factories producing these modular plans. And what's exciting about that is beyond data center. Data center is 1 aspect, but we have chiller plants are constructed for every vertical markets you can think of and we now have that capability to provide that same value to those customers in the other markets. The other vertical markets we talk about health care, K-12, office any 1 of these verticals, industrial, we can apply that same capability to serve those markets as well.

Any questions from the audience? So please take your hand. We'll continue. So I guess the only problem you have in commercial is the comps keep getting tougher, yet you keep on comp on the comp. So the treadmill gets faster, you keep on run them faster.

That's 1 way to look at it.

Confidence in continuing to show double-digit order growth. I'm not that quarter by quarter. I'm talking about just generally speaking, just come to that come.

Look, I think for us, certainly, the second half comps become more challenging for us, but we're really happy and excited about the pipeline of opportunities that we have. So there's no deterioration in our pipeline. And so we don't guide on our what we would expect from an order rate standpoint. And the second half comps will be more challenging. But like I said, the pipeline is strong. So we have a lot of positive coming.

And we'll remind investors growth rates are important, look at absolute dollars as well and then look at the revenue growth rates and tie them all out together. And Again, we think about it going into each and every year, top quartile, top line growth, top quartile EPS growth and then driving 100% of cash flow to operating earnings to net income. and keep with that philosophy, we'll be in good shape. That's how we see 2026 playing out. .

So maybe not triple-digit growth anymore, but very healthy double digits Okay. But would you be surprised if I mean, the question we get is, at some point, do we start to consume backlog. It doesn't seem like that's on the cards, but.

Yes, let's play it out. I mean we've added, again, as I said earlier, about $3 billion of backlog in the first quarter, we typically add a few hundred million dollars. And again, 2/3 of that was organic and 1/3 of that was from acquisition. But to this point, the pipelines remain robust. On the data center side, those orders can be uneven in terms of size. We said in the first quarter, we had roughly the same number of those larger orders over $100 million. a couple of those in the first quarter, just like we did in the fourth quarter. So it can be uneven and with the timing of that, but what it does, it gives us a lot of visibility. And from that, we can make investments and have a lot of confidence in terms of what we need to be ready for from customers. But just a reminder on the data center side. When you think about our direct sales force, which is a common model we have in the Americas and in Europe and in Asia for commercial HVAC. Over 95% of our account managers do not call on data center customers. They call on the 13 other verticals that we serve that are largely served from applied also unitary product. But it's a small group of folks that call on data center customers, the hyperscalers, the colos, it's I don't know, 30, 40 customers plus or buying us off of that. And so think about our direct sales force after 3 years, they are commissioned sales agents for the company, direct to the company. They're calling on all those other verticals. And I'll tell you, Donnie spends a lot of time with our sales force, me less so, although the last 2 weeks, I've been in the New York office, and I've been in the Florida office, the West Palm office with our direct sales force, and I couldn't be excited we're excited about the pipelines that they see around education, higher ed hospitals and infrastructure that just needs to be upgraded. They're focused on that each and every day. So while data centers will be strong, and we will we've been strong in data centers for decades. We're also making sure that we're cultivating and growing in all the other verticals that are out there that can serve our products.

And the driver of those pipelines in those areas because we don't see that strength really in the PIP data necessarily. Is it election. What are the drivers of that strength?

I mean I think those are certainly components to it. I mean the driver for us is a system view and how do we help save our customers' money. And we all we often talk about the fact that of energy used in a building is wasted after the meter. So the buildings are operating inefficiently. So for us, focusing on that with our customers and how we can create a payback for them to reduce their overall operating cost is what drives the pipeline that we have.

Any leaky buckets in those 13 verticals.

Yes, there are some leaky buckets. I mean they're spotty. I mean you think about life sciences, K-12 is slower, but really think about that in the context of the past few years where there was a lot of momentum and growth and in K-12. So we do see lodging is a bit slow as well. But overall, there's a lot of strength. We see strength in health care -- we see strength in retail. We see strength in office. There's a lot of strength.

Yes. A question on the lines. Can we get the mic, please?

Thank you you talked about the advantages you get from the Stellar acquisition. Could you also just spend a minute talking about the advantages of the liquid stack acquisition, please?

Certainly. So Liquid stack gives us advantages in terms of our ability to participate in the liquid cooling aspects of the market and the expertise that we get from that team that was part of the acquisition and the innovation pipeline that they have that will enable us to just continue to advance our full capabilities in the system design for our customers.

Great. And then maybe my final question would be on transport actual transaction. We're seeing a lot of momentum in freight rates seems like there could be a pretty powerful cycle for man there. Any views on that? Are we seeing any evidence about side performing?

Yes. So look, we've talked about the fact that the second half of the year, we expect to see growth in the transport markets. All the underlying factors are going in the right direction. Spot rates are increasing utilization Fleet utilization is increasing. Fuel prices actually helped this market overall. So we certainly we've been in a 4-year downturn of an 18-month downturn like we're in year talked about it last year, but we're even more confident now that we see that finally coming back.

Fleets are at their oldest they've ever been in 30, 40 years. So at some point, that's where the excitement is. So I think we're aligned with the external data where they think production will be, and we're aligned that there'll be growth in 2027, maybe not to the same scale of growth that some of them are calling, but there's going to be growth in 2027. And let's see how this year plays out, but we're excited to have that part of the portfolio, the residential portfolio in the same half of the year growing and then the continued growth of commercial HVAC portfolio, the exit rates in 2026 should be much stronger going into '27.

Great. And I think on transport, too, the last thing is that we just have to be cautious like it will take some time for the supply chain to be able to ramp up and meet the demand in the market. and specifically trailers like the trailer manufacturers ability to ramp up and meet that requirement will impact how fast that how steep that climb is as well. .

Okay. Well, thanks, Donny. Thanks, Chris. Great discussion. And thanks again for being here.

Appreciate it. Thank you.

Thank you.