Trane Technologies plc — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Good morning. Welcome to the Trane Technologies' Q1 2024 Earnings Conference Call. My name is Briana, and I will be your operator for the call. The call will begin in a few moments with the speaker remarks and the Q&A session. [Operator Instructions] I will now turn the call over to Zac Nagle, Vice President of Investor Relations.
Thanks, operator. Good morning, and thank you for joining us for Trane Technologies' First Quarter 2024 Earnings Conference Call. This call is being webcast on our website at tranetechnologies.com where you'll find the accompanying presentation. We're also recording and archiving this call on our website.
Thanks, Zac, and thanks, everyone, for joining today's call. As we begin, I'd like to spend a few minutes on our purpose-driven strategy, which drives our engaging, uplifting culture and enables our differentiated financial results over time. Our purpose is centered on creating a more sustainable world, and our strategy is aligned to powerful mega trends like energy efficiency, decarbonization and digital transformation.
Thanks, Dave. Please turn to Slide #6. This slide provides a snapshot of our performance in the first quarter and highlight strong execution top to bottom. Organic revenues were up 14%, adjusted EBITDA and operating margins were up 200 basis points and 230 basis points, respectively, and adjusted EPS was up 38%. At an enterprise level, we delivered strong organic revenue growth in equipment and services, both up low teens.
Thanks, Chris. Please turn to Slide #8. Our end market segment and business unit outlook is largely unchanged from our Q4 earnings call with a couple of notable differences. First, our Americas Commercial HVAC business had a very strong quarter, stronger than we expected despite a tough comp of mid-teens revenue growth in the first quarter of 2023. We're encouraged by the strong start for the business, especially when you take into account the exceptional 30% bookings growth and 125% book-to-bill ratio on mid-20s revenue growth in the quarter.
Thanks, Dave. Please turn to Slide #9. Our initial 2024 guidance reflected optimism about key end markets and our ability to outperform. While we're only 1 quarter in, our exceptional bookings, revenues and backlog in our Commercial HVAC businesses strengthen our conviction that 2024 will be another year of robust top line and bottom line growth.
Thanks, Chris. Please go to Slide #13. As discussed, our transport performance in Q1 was as expected, and there's no change to our outlook for the year. The overall markets are expected to be down modestly, and we expect to outperform in both regions. We've continued to provide this slide in the deck for your reference. Please turn to Slide #14. We operate our transport business for the long term. And while we're moving through a modest downturn in 2024, this is a great business with a bright future. ACT projects a strong trailer market rebound from 2024 into 2025, up 19% and project continued growth through their forecast horizon in 2029.
[Operator Instructions] Your first question comes from Andy Kaplowitz with Citigroup.
Dave, can you give us a little more color into your order momentum and backlog growth? You obviously enjoyed significant acceleration orders and you mentioned strength in applied. So can you give us any more color to how much of the continued Americas orders acceleration is coming from data centers. Do you think you can continue to grow your backlog from here? And maybe your thoughts on the duration of this order cycle if it is, in fact, data center-led?
Yes. Thanks for the question, Andy, good question. Look, in the quarter, we saw a broad-based growth -- and it wasn't concentrated necessarily in any 1 vertical. I mean, we certainly had strength in data centers. We certainly have strengthen in education, health care, 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, and 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.
David, definitely, I can appreciate that. So on that note, organic incremental margins continue to trend higher than your 25%. Given the strength in your markets and the overall ability to execute, why isn't 30% or 35% as you've been able to record for a while now, the new 25% for Trane? And then where are you on, let's say, the slope of productivity projects that you've been undertaking? Because we know you've been really focused on productivity after not being able to do as much during the pandemic.
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.
Your next question comes from Scott Davis with Melius Research.
Guys just following up on Andy's question a little bit. But can you mark to market where you're at on data center capability? I know you made that investment in liquid stack. I think it's called -- do you have kind of -- are you developing kind of soup to nuts capabilities in the data center to be able to handle some of these newer, hotter chips?
Yes. 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.
That makes sense, Dave. And just a little bit of a pie in the sky here. But does it make more sense to think about you guys in a data center partnering with somebody like Vertiv or explicitly competing against them because it seems like you both have very different capabilities, but obviously overlap on some critical apps there.
Yes. 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 system that would be operating in an efficient way for the customer.
Best of luck guys, congrats on this start for the year.
Your next question comes from Julian Mitchell with Barclays.
Maybe just a first question on the organic sales guide for the year. So it looks like the first half, you're up maybe about 11% based on the guidance, the full year you've got up sort of high singles, so second half is there at maybe 6% or so. Is the way to think about that and understand we haven't yet seen cooling season and so forth. But is the way to think about that revenue guide framework, it's a big slowdown in commercial HVAC versus Q1 because of the extremely tough comps -- because I would have thought resi and TK would look better year-on-year sales in the back half versus the first half. So with the total enterprise sort of going from 11% to 6%, is it just really that Commercial HVAC piece just battling the tough comps?
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.
And maybe just my follow-up would be on the sort of price and price/mix outlook. So I think in the first quarter, maybe price was about a 2-point tailwind to revenue. Maybe remind us kind of what you're embedding for the year as a whole. And has there been any shift in the expectations on the sort of price/mix tailwind in light commercial and resi HVAC from the refrigerant change in the sort of various EPA movements on that?
Julian. So in the first quarter, at an 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, was certainly a question on the call that we had a few months ago in our full year guide on price.
Yes, we don't have a lot of 454B at least in the Americas, built into our guide, okay. We're obviously ready from a product standpoint, we'll be launching those products as we go through the year, but we're not anticipating a lot of volume in 2024, and we'll see how the year progresses for 2025.
Your next question comes from Gautam Khanna with TD Cowen.
Great results. I wanted to ask if you could opine again on what you think happens with resi -- average resi pricing next year given the 454 transition. You still think it's up kind of 10% to 15%? Or just how would you characterize...
It's a good question, Gautam. 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 see how the year plays out, okay?
Your next question comes from Joe Ritchie with Goldman Sachs.
Yes, stellar results. Just -- maybe just taking it back to the data center discussion for a second. Is there a way to maybe parse out or range or on a relative basis, kind of give us like any sense for your dollar content on a data center and what the opportunity is?
Yes. You start talking about averages, which are always dangerous, Joe. I mean I've read reports where people have estimated the 3% to 5% range. In some cases, I'd say they're in the ballpark, and then you get into some hyperscale that may have a different configuration. But it's not that far off. Look, 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, 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 strategy. So it wasn't just focused on data centers.
Got it. That's helpful, Dave. And maybe the follow-on question for the other things that are strong, right, you had an electrical peer throughout a $1.2 trillion mega project number today. It seems like there's just a lot of investment on the comp. At the same time, like you do have some other funding like ESSER funding as an example that might be coming down. So just maybe high level, just talk to us about what you see in terms of like your quoting activity? Or what do you see coming through the pipe over the next couple of years?
Yes. I'll start with mega projects. I mean I think that mega projects 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 mega projects. 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.
Your next question comes from Steve Tusa with JPMorgan.
Some very nice orders. Congrats. Can you just talk about what you're seeing on applied versus light commercial, just orders and revenues?
Yes. I mean, obviously, in the Americas, which I think is where your question is 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 in the past, I've said applied has 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, we had broad-based growth across really almost all verticals. And a lot of those verticals are served with different applications. So it was very strong.
And I guess what are -- are there particular verticals in like commercial that you think your gaining share in because your main peer had orders down pretty dramatically there.
Yes. I don't -- I can't speak to a competitor because you get comps from 1 year to another. I would just tell you that it broad-based, you're going to have some verticals that are more on the applied side but some verticals are more on the unitary side.
Right. And then just 1 last one, on resi. Can you just break down the -- in that business for the quarter, just the price/mix and volume for the quarter?
Yes, Steve. Revenues were up low single digits, think of them as very low numbers, contributing price volume in terms of residential. It's just -- we start getting a [ lot of ] small numbers there in up low single digits. It did better than we expected, as Dave talked to earlier, think of price is really de minimis, maybe volume was up around 1% 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.
Your next question comes from Deane Dray with RBC Capital Markets.
So those were pretty positive comments coming out of China. So could you kind of give us a sense of where the demand is, the outlook? Because we have heard some mixed signals about at best stabilizing, but it sounds like you're seeing some pretty strong growth.
Yes. The team there continues to execute at a very high level, very seasoned team, been in place for -- they have a lot of tenure with the company, a lot of strength in pharmaceutical, health care, high-tech, data centers, which is really where our portfolio plays well with our applied systems. 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.
That's real helpful. And then can you give us a sense of where you stand on your services mix, refresh us on the target? And how do you think that plays out for this year?
It's a great question. I was telling, Chris, I think we're going to -- 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 at a global level, it was up 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.
Deane, the 6 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 -- the resiliency as he called out and we like the margins there and a nice start to the year in the business.
Your next question comes from Nigel Coe with Wolfe Research.
And I don't often say this, but a great quarter, fantastic results. I guess -- I'm sorry, I've been going back and forth on the different calls here. So maybe just step back, I mean, what surprised you to the upside this quarter? I mean, obviously, organic came a lot better, really strong Commercial HVAC trends. But specifically, what really surprised you during this quarter? Was it just backlog conversion? Anything -- any color there would be helpful.
Yes. I think there was really 2 things that were to the upside. One was our commercial HVAC business in the Americas. It really performed better than expectations. Just a lot of demand for our innovative products and the team executed extremely well. The other upside was in 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.
And then my follow-on is just the stand out here is just the resilience of the Commercial HVAC orders and backlog, especially in the backdrop of such weak [indiscernible] ABI et cetera. So just wondering, are there -- obviously, there's pockets of strength in data center, et cetera, but is there increasing evidence of just more proactive replacement demand, CO2 emission targets really driving demand? Any color?
Yes. 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 are 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 hear the disconnect, too, when you look at ABI or some of the other macro numbers, you just have to look at -- 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 a very strong demand broad-based and the pipelines are still strong.
Your next question comes from Andrew Obin with Bank of America.
Can you hear me?
I can.
Just a question. As we think about cooling for semiconductor plants and data centers, right? It seems that the scale of the project, it's going up. And the question I have for that, a, does this provide an opportunity to provide more sophisticated solution to your customers and also to capture more value to Trane? And second, what are you doing to your aftermarket support organization to take advantage of that?
Yes. 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.
Yes. My question, I think, was more basic. I was just thinking that these systems are bigger and more complex, they're more energy hungry. So more opportunity for -- more need for your customers to partner up with you and more opportunity for you to sort of provide these packaged energy-saving solution. That's where I was going.
You're right on, Andrew, all opportunities, and it's a growing vertical.
Got you. And then just a follow-up on M&A. You guys have been pretty active over the past couple of years. But looking at the market, the market is on to the fact that once we get manufacturing, clean rooms, biopharma, all the areas you guys have been focusing on, but these I think, are getting hot, pardon my pun. So what's the environment looking like for these bolt-on? What's your ability to sort of pursue targets at recent valuations? What does the pipeline look right now? What are you interested in?
Andrew, I'll start. It's Chris. Yes, pipeline remains very active. It's Sometimes episodic when an M&A transaction closes. So quarter-by-quarter, maybe hard to call. But over the course of the year, I think the pipeline remains very active. We're very happy with the acquisitions we've done over, say, the last 18, 24 months, right? You properly described them as a bolt-on bit of strategy. Think of that around investments in the channel and investments in technology.
Your final question comes from Noah Kaye with Oppenheimer.
Dave, this is going to be a broad question, but it goes to what you discussed around the increase in complexity in applied. When we think about the customer value proposition, and I understand there are many dimensions, it's going to differ across verticals. How does the increasing complexity play into the customer value proposition? Maybe give us the 2 or 3 biggest dimensions that, that really speaks to and where that creates a sustainable competitive differentiation for the company.
Yes, 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.
And the follow-up is really around the attach rate of services to those projects, right. I think you've answered it in part, but just quantitatively how do we think about services attach rates for applied at this point? And where those grow to as you see the increasing complexity of the projects you're working on?
As I said in my opening remarks, we think about an applied system, you can think about an 8 to 10x multiplier of services over the life of that system. And we want to be connected to the system, okay?
There are no further questions at this time. I will now turn the call back to Zac Nagle for closing remarks.
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.
This concludes today's conference call. You may now disconnect.