Trane Technologies plc (NYSE:TT) Q1 2024 Earnings Call Transcript April 30, 2024

Trane Technologies plc beats earnings expectations. Reported EPS is $2.17, expectations were $1.64. Trane Technologies plc isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. Welcome to the Trane Technologies Q1 2024 Earnings Conference Call. My name is, 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. At this time, all participants are in a listen-only mode. [Operator Instructions] I will now turn the call over to Zac Nagle, Vice President of Investor Relations.

Zac Nagle: 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. Please go to Slide 2. Statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities law. Please see our SEC filings for a description of some of the factors that may cause our actual results to differ materially from anticipated results. This presentation also includes non-GAAP measures, which are explained in the financial tables attached to our news release. Joining me on today's call are Dave Regnery, Chair and CEO; and Chris Kuehn, Executive Vice President and CFO. With that, I'll turn the call over to Dave.

David Regnery : Thanks, Zach 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 megatrends like energy efficiency, decarbonization and digital transformation. Customer demand continues to increase as the need to address climate change becomes more urgent. We need creative solutions and game changing innovation to bend the curve on global warming, and that's where Trane Technologies leads. Our relentless innovation, proven business operating system and high performing culture enables us to consistently deliver a leading growth profile, strong margins and powerful free cash flow.

The end result is strong value creation across the board for our customers, our shareholders, our employees and for the planet. Please turn to Slide number 4. In the first quarter, we extended our track record of strong execution. Our global teams delivered robust performance across the board. Quarterly bookings of more than $5 billion were at an all-time high and up 17% organically. Organic revenues were up 14%. Adjusted operating margins were up 230 basis points and adjusted EPS was up 38%. First quarter booking strength was again led by our commercial HVAC businesses globally, which were up over 20% with growth of more than 30% in equipment and mid-teens in services. Bookings in our Americas commercial HVAC business were once again a standout, up 30% with more than 40% growth in equipment and more than 15% in services.

Booking strength was broad based with growth in nearly all vertical markets. We delivered exceptional bookings growth across our applied solutions, leveraging the power of our direct sales force, deep customer relationships and leading innovation to capitalize on increasing project complexity in high growth verticals. Our commercial HVAC pipeline remains robust around the world and we see tremendous growth opportunities well into the future. Our strong growth profile provides us with excellent optionality to accelerate key investments in 2024, while delivering strong leverage, EPS and free cash flow. And we put a number of high ROI investments in flight in the first quarter. With a focus on future growth, these investments include product innovation, increased capacity, sales and service excellence, digital and automation.

Our bookings performance further strengthens our position for 2024 and increasingly for 2025. Q1 ending backlog of $7.7 billion is up 10% from year-end 2023 and we increased our backlog for 2025 and beyond by $800 million to a total of $1.8 billion increasing visibility to future growth. Based on our Q1 results and expectations for continued strong performance, we're raising our full year revenue and EPS guidance. Chris will cover the details in a few minutes. Please go to Slide number 5. Demand for our innovative solutions continues to be exceptional with a book-to-bill of 120% on strong organic revenue growth of 14%. In the Americas segment, our commercial HVAC business delivered strong performance across the board. Bookings were up 30% in the quarter and up over 60% on a three year stack led by our applied solutions portfolio, which we estimate carries an 8 to 10 multiplier of higher margin services revenue over the life of the equipment.

Backlog for applied solutions continues to grow, which bodes well for future growth. Commercial HVAC revenues were up mid-20s with more than 35% growth in equipment and mid-teens growth in services. The compounding of services revenue year-after-year provides strong growth in good times and is resilient in more challenging macro conditions. We're investing heavily in sales and services excellence programs to strengthen our business for the long-term. Turning to residential, bookings were down low-single-digits and revenues were up low-single-digits. The business performed stronger than our initial expectations for Q1 and we're cautiously optimistic moving forward. Our transport businesses performed as expected with bookings down low-single-digits and revenues down mid-teens.

While we see the down cycle in transport as modest overall, the business is facing tough comps from 2023. A plus 20% growth comp in the first half and a down 20% growth comp in the second half, which impacts the optics in the near-term. Net, in 2024, we expect to see a soft first half and a strong second half. Turning to EMEA, the region performed in line with our expectations. Commercial HVAC bookings and revenues were strong, up low-teens and up high-single-digits respectively, while transport bookings and revenues were down low-single-digits. The book-to-bill was very strong at approximately 120%. Turning to Asia. The team delivered strong performance consistent with our expectations for the quarter. China remains very strong with bookings up more than 20% and revenues up high-teens.

Asia's book-to-bill was also very strong at approximately 120%. Now, I'd like to turn the call over to Chris. Chris?

Chris Kuehn: Thanks, Dave. Please turn to Slide number 6. This slide provides a snapshot of our performance in the first quarter and highlights 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. Our high performance flywheel continues to pay dividends with relentless investments in innovation driving strong top-line growth, margin expansion and EPS growth. Please turn to Slide number 7. At the enterprise level, we delivered robust volume growth with strong incrementals, positive price realization and productivity that more than offset inflation.

In our Americas segment, we delivered about 12 points of volume and about 3 points price with our Americas commercial HVAC business delivering very strong volume growth of approximately 20 points. Strong adjusted operating margin expansion of 240 basis points was driven by strength in our commercial HVAC business, which more than offset the expected impact from revenue decline in our transport business. In our EMEA segment, we delivered about 3 points of volume and about 1 point of price with stronger volume in our commercial HVAC business. Adjusted operating margins were up 30 basis points for the segment and stronger when you consider the impact of acquisitions and FX in the quarter. Excluding FX currency losses related to the devaluation in the Egyptian pound in the quarter, EMEA EBITDA margins would have been 19.5%.

The Asia segment delivered mid-teens revenue growth, almost exclusively from higher volumes. Strong volume, productivity and modest price contributed to 310 basis points of adjusted operating margin expansion. We reinvested heavily back into each business in the first quarter and expect to ramp these investments through the year to drive growth well into the future. Now, I'd like to turn the call back over to Dave. Dave?

David Regnery: Thanks, Chris. Please turn to Slide number 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 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. We expect the Americas commercial HVAC business to remain strong throughout 2024 versus increasingly tough comps from 2023, as we move throughout the year. Second, our residential business performed stronger than we expected in the first quarter.

We expected the business to be down modestly on continued destocking and we believe the EPA clarification on sell through helped to mitigate some of the independent wholesale distributors concern heading into the season. While we're pleased with the results, the first quarter for residential is typically a very small percentage of the year and doesn't provide a sufficient read through to the balance of the season. We believe it's prudent to move through Q2 and gain more visibility before extrapolating too much from Q1. All other businesses performed as expected and the outlook for the year are unchanged. We provided additional details on the slide for your reference. Now I'd like to turn the call back over to Chris. Chris?

Chris Kuehn : Thanks, Dave. Please turn to Slide number 9. Our initial 2024 guidance reflected optimism about key end markets and our ability to outperform. While we're only one 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. We're raising our organic revenue guidance by 2 percentage points to 8% to 9% from 6% to 7% prior. We're also raising our full year adjusted earnings per share guidance by $0.30 at the midpoint and raising the low end of our guidance range above the high end of our prior guidance range. Our new adjusted EPS guidance range is narrowed to $10.40 to $10.50, up from $10 to $10.30 prior.

Embedded in our guidance is our philosophy around our value creation flywheel, which builds in relentless high levels of business reinvestment to drive end market outgrowth, healthy leverage and strong free cash flow. We expect to see investments continue to ramp in the second quarter and into the back half of the year, accompanied by leading growth and strong incrementals. We continue to expect about 1 point of growth from M&A in 2024 with a negative impact of approximately $30 million to adjusted operating income for the full year or a negative impact of about 5 points to reported leverage versus organic leverage. The impact is primarily related to the technology acquisition, Nuvolo which carries non-cash accelerated intangibles amortization of approximately $25 million, plus year one acquisition and integration-related costs.

We also expect a negative impact to revenues of about 1 percentage point from FX in 2024. FX is expected to offset the point of M&A revenue growth on a reported basis meaning our organic and reported revenue growth guidance is now the same at 8% to 9% for 2024. There's no change to our organic leverage target of 25% plus for the year, consistent with our stated long-term target. Turning to cash. We had a strong start to free cash flow generation in the first quarter, and we expect 2024 to be another year of free cash flow conversion of 100% or greater. For the second quarter, we expect revenue growth of approximately 8.5% and adjusted EPS of approximately $3.05. Please see Page 17 for additional information that may be helpful for modeling purposes.

Please go to Slide number 10. We remain committed to our balanced capital allocation strategy, focused on consistently deploying excess cash to opportunities with the highest returns for shareholders. First, we continue to strengthen our core business through relentless business reinvestment. Second, we're committed to maintaining a strong balance sheet that provides us with continued optionality as our markets evolve. Third, we expect to consistently deploy 100% of excess cash over time. Our balanced approach includes strategic M&A to further improve long-term shareholder returns and share repurchases as the stock trades below our calculated intrinsic value. Please turn to Slide number 11, and I'll provide an update on our 2024 capital deployment.

Year-to-date through April, we've deployed $540 million in cash with $190 million to dividends and $350 million to share repurchases. We have $2.1 billion remaining under the current share repurchase authorization, providing us with strong optionality as our shares remain attractive, trading below our calculated intrinsic value. Our M&A pipeline remains active. We continue to see potential opportunities for value-accretive M&A as we did in 2023, where we made key strategic investments to accelerate our progress across energy services and digital solutions, industrial process cooling and precision temperature control technology. For 2024, we expect to deploy approximately $2.5 billion in cash. Our strong free cash flow, liquidity and balance sheet give us excellent capital allocation optionality moving forward.

Now I'd like to turn the call back over to Dave. Dave?

David Regnery : Thanks, Chris. Please go to Slide number 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 number 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. We have a diversified transport business globally, with opportunities to grow across the portfolio, with leading innovation, strong execution through our business operating system and a world-class dealer network, we're well positioned to outperform in any market environment.

Please go to Slide number 15. In summary, we are well positioned to drive differentiated growth and value over time. Our leading innovation, proven business operating system and unmatched culture enables us to consistently deliver top quartile financial performance over the long-term, while continuing to reinvest in our business. And I believe our best days are ahead. We have the team, the strategy and the track record to deliver a leading performance in 2024 and differentiated shareholder returns over the long-term. And now we'd be happy to take your questions. Operator?

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