Q4 2021 Trane Technologies PLC Earnings Call
On today's call, let's turn to slide number three.
Today I'd like to open with a few comments on our purpose driven sustainability strategy, which is the engine that enables us to deliver differentiated shareholder returns overtime.
Secular sustainability Mega trends continue to intensify.
Climate change is causing more extreme weather events, which threatened vulnerable people and economies around the world.
Scientists say it is still possible to meet the targets set under the Paris agreement.
But it is getting more difficult as time passes we need to act today.
And Thats, what Trane technologies is doing well.
We have set aggressive science base emission reduction targets that continue to push our innovation further and faster.
That innovation is transforming the way the world heats and cools buildings.
Improve indoor air quality and safely transports food and medicine.
As we scale today's technology and innovate for tomorrow, we can dramatically reduce emissions and accelerate the world's progress.
We are committed to making a difference relentlessly and over the long term. This unyielding approach enables us to consistently outgrow our end markets, which in turn helps us drive strong margin and powerful free cash flow to deploy through our balanced capital allocation strategy.
The end result is strong value creation across the board.
For our customers for our team for our shareholders and for the planet.
Moving to slide number four.
Our global team delivered a strong close to 2021, despite persistent macro challenges related to cost inflation tight supply chains, and logistic markets and labor availability that continue to restrict capacity and negatively impact productivity.
In the fourth quarter, we delivered 27% bookings growth.
11% organic revenue growth and 32% adjusted EPS growth.
This includes approximately $80 million of $150 million of revenue that was pushed out of the third quarter, which was at the high end of our guidance range of $50 million to $75 million.
On balance 2021 was another very strong year for us with record performance across key financial metrics.
Bookings revenue backlog EBITDA margins and adjusted EPS all hit record levels.
Price realization also reached record levels, demonstrating the power of our business operating system, and enabling us to more than neutralize the impact of widespread and persistent inflation for the year.
With record demand for our innovative products and services and backlog nearly double the level. It was at this time last year, we are extremely well positioned for 2022 and beyond.
We anticipate macro challenges to continue to constrained capacity and to negatively impact productivity and those impacts are reflected in our revenue and EPS guidance.
They are also reflected in how we're thinking about the cadence of the year with the second half expected to be much stronger than the first half.
With continued strong demand and supply constrained by the macro environment, we expect backlog to remain at elevated levels throughout 2022 and into 2023.
Please turn to slide number five.
Looking at our initial guidance for 2021, we effectively met or exceeded all of our targets and delivered another year of strong financial performance.
We delivered 11% organic revenue growth of 140 basis points of adjusted operating margin expansion and 37% adjusted EPS growth.
We also delivered strong free cash flow and returned $1 7 billion in capital to shareholders through dividends and share repurchases.
Please turn to slide number six.
Our relentless investments and innovation and our unwavering focus on serving our customers enables us to deliver consistently strong performance and differentiated returns for our shareholders over the long term.
Demand for sustainable solutions continues to accelerate and our innovation leadership is positioning us to outperform end markets.
This will only intensify as the world Decarbonize.
We're confident our leadership in sustainable innovation will continue to deliver differentiated financial performance and shareholder returns into the future.
Please turn to slide number seven.
In addition to our financial metrics, our ESG performance is core to our purpose and our strategy.
Beginning in 2021, we revised our annual incentive compensation plan for approximately 2300 leaders.
Linked directly to ESG metrics.
Including reducing carbon emissions and increasing the diversity of our workforce.
These metrics are on our glide path to achieving our 2030 sustainability commitments.
And I am happy to report that we exceeded each milestone in 2021.
Job well done by the team.
Please turn to slide number eight.
Customer demand for our climate focus innovation continues to grow.
We delivered another quarter of robust organic bookings growth with growth across all segments.
Customer demand was high throughout 2021 with organic bookings up 27% for both the quarter and the year driving record backlog in each segment entering 2022.
Organic revenues were also strong up 11% for the quarter and the year.
Overall bookings growth far exceeded revenue growth, which was in part constrained by global supply chain and other macro challenges referenced earlier.
Our Americas commercial HVAC business delivered robust bookings growth in the quarter with orders up mid twenties.
Strength was broad based with applied unitary and service each up more than 20%.
Demand for comprehensive end to end indoor air quality solutions remains strong and contributed to high single digit organic revenue growth in commercial HVAC Americas.
The residential HVAC markets also remained strong and our residential HVAC team delivered bookings growth over 30%.
Revenues were up mid to high teens in the quarter.
Adding to growth of more than 20% in the fourth quarter of 2020.
Sell through across our channels was also strong up high teens.
With full year organic bookings up over 70% in full year organic revenues up over 30%, our Americas transport refrigeration business significantly outperformed the North America transport markets.
During the fourth quarter, we extended our 2022 order book through the third quarter of 2022, which.
<unk> contributed to bookings growth of more than 40%.
We continue to thoughtfully manage our 2022 order book in order to mitigate inflationary risks.
Fourth quarter organic revenue growth was consistent with full year growth of 30%.
Turning to EMEA, we continue to see strong demand for our innovative products and services that help reduce energy intensity and greenhouse gas emissions for our customers.
Our EMEA team's delivered 13% organic bookings growth in the quarter with strong growth in both commercial HVAC and transport refrigeration.
With full year organic bookings up over 40% in full year organic revenues up over 20%, our EMEA transport refrigeration business significantly outperformed the market in 2021.
During the quarter EMEA transport refrigeration bookings and revenues were both up high teens.
Our Asia Pacific team delivered strong bookings growth of 18% and revenue growth up 4% supported by broad based growth in China and across the region.
Now I'd like to turn the call over to Chris Chris.
Thanks, Dave Please turn to slide number nine.
Organic revenue growth in the quarter was driven by both strong volume and continued strong price execution of over 5% incremental price.
Turning to margins.
Over material inflation was modestly positive in the quarter capping full year positive price cost.
Productivity was significantly impacted by continued supply chain logistics and labor availability challenges, which are exacerbated in recent weeks with the rapid spread of the omicron variant.
In addition, we continue to make strong incremental business reinvestments.
Net adjusted EBITDA, and operating margins improved, 30% and 10 basis points respectively.
Adjusted EPS grew 32% driven primarily from a higher adjusted operating income.
Please turn to slide number 10.
We discussed the key revenue and margin dynamics for the enterprise on the prior page.
The dynamics impacting revenue and margins were similar across each of our business segments as we've highlighted here.
With strong price realization incremental business reinvestments in innovation and macro challenges impacting productivity and cost inflation is consistent drivers.
Both the Americas, and EMEA segments delivered higher revenues with modest margin declines.
Margins were impacted by the macro challenges we've outlined.
For the full year, both Americas, and EMEA segments delivered strong margin expansion with EBITDA margins, expanding 100 basis points and 240 basis points respectively.
Our Asia Pacific segment delivered good leverage and margin expansion in the quarter with EBITDA margins, expanding 170 basis points for the full year.
Now I'd like to turn the call back over to Dave Dave.
Thanks, Chris Please turn to slide number 11.
Commercial HVAC Americas has significantly outperformed the broader markets over a number of years through relentless innovation for our customers.
Our unwavering focus on solving our customers' most complex problems compounded by the strength in underlying market conditions.
Howard the business forward in 2021 and yielded record backlog entering 2022.
End markets continue to improve with a multitude of economic indicators pointing to growth in 2022.
GDP forecast remains strong unemployment is low and indicators like architectural billing index, which has been over 50 since February remain largely favorable.
Demand remains strong in data center warehouse education and healthcare.
We're benefiting from increased demand across our K through 12 customers with federal stimulus funds supporting both current and future growth. We see this as a multiyear tailwind for our business given our strong position in the education market and our direct sales force with deep relationships in this vertical.
Demand for our residential products was unprecedented in 2021 contributing to record revenue.
Looking at 2022, we see tailwind from record backlog entering the year and expect strong price realization and we.
We see headwinds from lapping tough growth compares from 2021.
I'm proud of our residential team that has continued to meet customer demand while ramping capacity. After our February weather event in our Texas facility.
The team remains on track for capacity expansion in advance of the 2022 cooling season.
Turning to Americas transport, we significantly outgrew strong end markets in 2021, as we outlined earlier.
<unk> continues to project continued market growth through their forecast horizon 2023.
I'll talk more about the transport outlook and our topics of interest section.
Turning to EMEA, while we have muted expectations for market growth demand for our sustainability focus systems and services remains strong and we continue to see good opportunities for market outgrowth.
Our transport refrigeration business significantly outgrew end markets delivering over 20% full year revenue growth as compared to 13% market growth in the region.
Turning to Asia, we expect growth in China in 2022 supported by strength in data Center electronics pharmaceutical and health care.
Outside of China. The picture is mixed with Covid related partial lockdown still impacting market expansion in some countries.
Our direct sales force model is differentiated in the region and provides good opportunities for market outgrowth in equipment and services.
Now I'd like to turn the call back over to Chris to outline our guidance for 2020 to Chris.
Thanks, Dave Please turn to slide number 12 base.
Based on the market backdrop, Dave just outlined and our strong backlog entering the year, we expect to deliver strong financial performance in 2022.
With high single digit organic revenue growth and adjusted EPS between $6 95.
And $7 15.
Our operating leverage outlook of approximately 20% contemplates a stronger second half with improving macro dynamics, particularly around inflation and an improving supply chain.
We expect price cost to be slightly positive for the year, but negative through the first half as we lap strong price and more modest inflation from the first half of 2021.
The macro environment remains dynamic and we expect tight supply chain logistics and labor availability to restrain revenue growth and margins, especially in the first half of the year.
We expect free cash flow to remain strong at equal to or greater than 100% of adjusted net income.
Our outlook includes capital expenditures of approximately 2% of revenues, which is at the high end of our typical 1% to 2% range.
Relentless incremental business reinvestment is never episodic for us and it's how we innovate ahead of the competition year after year.
Entering 2022, we are planning incremental investments in high ROI projects in support of our profitable growth objectives, and our 2030 sustainability commitments.
These high ROI projects include manufacturing automation supply chain resiliency as well as investments to further decarbonize our operations.
Our free cash flow outlook also includes modest investment in working capital with particular focus on strategic inventory to support continued growth.
Given inherent challenges and accurately forecasting FX rates and the fact that we're transparent about our organic bookings and revenue each quarter, our guidance excludes potential FX impacts.
Our FX exposure is largely translational in nature and each point of revenue would translate at approximately <unk> rates.
Net as a reference each point of negative FX would translate into about <unk> of EPS headwind.
Please turn to slide number 13.
While we traditionally provide annual guidance given the dynamic macroeconomic environment. We believe it may be constructive to provide an outlook for the first quarter based on what we expect to see today.
Based on backlog orders and the dynamic macro backdrop, we've outlined.
Currently expect organic revenues to grow in the low to mid single digit range with flattish unit volumes and strong price realization.
First quarter margins are expected to be challenged due to negative incremental price cost dynamics, considering very strong price versus cost in the first quarter of 2021.
Youll recall, we were able to get well ahead of inflation in the first quarter with strong price realization.
This was part of the reason we were able to deliver very high operating leverage of nearly 50% in Q1 of 2021.
Inflation was relatively modest in the first quarter of 2021, and really began to ramp aggressively in the third and fourth quarters.
We exited Q4 with peak price and peak cost for 2021 with price at unprecedented levels of more than 5%.
Net while we expect the carryover of strong pricing from the fourth quarter of 2021 into the first quarter of 2022. We're also lapping strong price from Q1 of 2021, which dampened the incremental carryover price.
Likewise, we expect to carryover peak inflation from the fourth quarter of 2021 into the first quarter of 2022.
But it's a lot more modest inflation from the first quarter of 2021.
The equation is a bit more complex than this but to keep it simple. This essentially means that we will see almost the full impact of the carryover inflation.
The end result is we expect to be upside down on price costs in the first quarter by $30 million to $40 million.
This pricing dynamic improves as we move through 2022 and additional pricing actions taken in 2022 come online and are realized.
As we've outlined macro challenges related to supply chain tight logistics and labor constraints exacerbated by the omicron Varian are expected to negatively impact productivity.
While it is difficult to predict the negative impact on productivity in a very dynamic environment, we expect a considerable impact in the first quarter.
All in our outlook is for adjusted operating income to be down approximately $35 million year over year in Q1, as we work to balance all the pieces.
As we discussed on the prior slide our full year outlook contemplates a stronger second half with easing inflation and an improving macro environment.
We will update this outlook as the year goes along.
There are a couple of items for Q1, but I also wanted to highlight to help with your models.
Interest expense is expected to be approximately $56 million, reflecting 2021 debt retirements.
The other item I'd highlight is the estimated Q1 adjusted effective tax rate of approximately 17%, which we've assumed is flat with 2021.
The Q1 tax rate is traditionally low impacted by higher stock based compensation in the quarter.
The full year 2021 guidance remains 19% to 20%.
Please go to slide number 14.
We remain on track to deliver $300 million of run rate savings from business transformation by 2023.
Importantly, we continue to invest these cost savings and high ROI projects to further fuel innovation and other investments across the portfolio as discussed earlier.
Please go to slide number 15.
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 that further improves long term shareholder returns.
And share repurchases as the stock trades below our calculated intrinsic value.
Please turn to slide 16, and I'll provide an update on our capital deployment in 2021, and our outlook for 2022.
During 2021, we deployed $2 4 billion in cash with approximately $1 4 billion to M&A and share repurchases.
We paid $561 million in dividends and $425 million to pay down debt.
Looking to 2022, we expect to deploy approximately $2 $5 billion in cash inclusive of $350 million in share repurchases, we executed in January of 2022.
Our outlook also includes our announcement that we intend to raise the quarterly dividend to $2 68 per share annualized.
When combined with the dividend increase of 11% in 2021, the annual dividend is expected to be up 26% since launching as a pure play climate control business in March 2020.
Our strong free cash flow liquidity and balance sheet continue to give us excellent capital allocation optionality and dry powder moving forward.
Now I'd like to turn the call back over to Dave Dave.
Thanks, Chris Please go to slide number 18.
I'd like to spend a couple minutes, providing an update on the transport refrigeration markets.
Both Americas, and EMEA had robust market growth in 2021, and our thermo King businesses thrived.
We pushed through macro challenges and significantly outgrew the market in both regions.
On the left side of the slide you can see that the North America trailer truck and Apu markets combined grew 19%.
While thermal King Americas grew more than 30%.
In EMEA market growth per trailer and truck combined was 17% while thermal king EMEA also grew more than 30%.
On the right side of the slide in the highlighted box you can see that the total weighted average market growth for the Americas and EMEA transport refrigeration markets in 2021 was 15% and 13% respectively.
Thermo King growth for the Americas, and EMEA was more than 30% and more than 20% respectively.
We're extremely pleased with the tremendous market outgrowth each of these businesses delivered in 2021.
Market projections for 2023 call for continued growth in both regions with particular strength continuing in North America.
There is one other important dynamic I'd like to highlight while we're discussing transport refrigeration and moving into 2022.
Our teams delivered tremendous booking growth in both regions in 2021, as we discussed on slide eight.
Our bookings growth was more than twice our revenue growth, even as our revenue growth far exceeded the growth of our end markets.
Resulting in a record backlogs.
Net we expect this dynamic to result in bookings declines during the year as we work through backlog extending well into 2022 and go up against tough compares every quarter.
We will highlight these dynamics with our earnings calls for transparency as we move through 2022.
Please go to slide number 19, we added a second transport refrigeration slide to the deck last quarter to add more color around the North America trailer market from both backward and forward looking perspectives.
We're not going to spend a lot of time on it today.
But we think it's a helpful reference slide for additional transparency.
And continues to call for a nine year average for North America trailers in the mid 40000 unit range through 2023.
With the pandemic in 2020 being the only significant outlier.
Please go to slide number 20.
Energy efficiency de carbonization, and sustainability Mega trends are only growing stronger.
We are uniquely positioned to deliver leading innovation that addresses these trends and accelerates the world's progress.
Supported by our business transformation and are engaging uplifting culture.
Despite a number of persistent macro challenges 2021 was a record year for us with top quartile EPS growth accompanied by strong free cash flow and balanced capital deployment.
We're seeing unprecedented levels of demand for our products and services and our backlog has never been stronger.
We're executing our business operating system, well and expect to continue to successfully navigate macro challenges with a customer first mindset.
We believe we have the fundamental ingredients to deliver strong performance across the board in 2022 and beyond and to continue to drive differentiated shareholder returns over the long term.
And now we'd be happy to take your questions operator.
Thank you and as a reminder, and as a reminder.
Please press Star then one on your telephone keypad.
And please limit yourselves to one question with one follow up question.
First question is from Andy Kaplowitz with Citigroup. Your line is open.
Morning, guys.
Hey, Andy how are you doing good morning, how are you.
Dave or Chris can you give us more color into how youre thinking about trains abilities offset other inflation outside of material cost with productivity because that seemed to be a big swing factor in terms of margin headwind in Q4, and it obviously is pressuring in Q1 and 'twenty two so how much was the impact in Q4, what's the impact in Q1, our senior.
The additional headwinds on labor from <unk> over the last few weeks into Q1, and how you're thinking about that for 'twenty two.
Yeah I'll start.
Andy So I think.
Going into the fourth quarter, we continue to see challenges on the supply chain front in terms of.
Driving spot buys inefficiencies in our plant in factory operations.
With our Q4 guide of leverage around mid teens, we really kind of landed right around that guide I think leverage in the quarter was around 14%. So we landed right, where we thought we would land.
In the fourth quarter, we saw a little bit more price on the realization side, we saw a little bit more inflation as well in the fourth quarter those both continue to ramp.
But we did see negative productivity over other inflation in the fourth quarter and we are anticipating that for the first half of 2022 as well.
The supply chain constraints are real we're managing through them day by day week by week and right now what we see right now is the second half of the year it looks to be stronger in terms of.
Supply chain resiliency, and ultimately getting some supply chain back on track, but it's a balance we're working each and every day, yes, Andy the only thing I would add is that in our plants right now with the supply chain constraints and I could talk more about that after its very very disruptive. Okay. So if you were a plant manager I've ever had the opportunity to be a plan.
Manager anyone on the line you know what I was talking about we're constantly having to reschedule rebalance lines, we're pulling lines side inventory and replacing it with other line side inventory rescheduling employees. So this is this is this is a plant managers kind of nightmare.
Good thing is we have great plant managers and we're working through it but it is it is disruptive it's been for disruptive for some time now and as Chris said, we anticipate this disruption to continue certainly through the first quarter and the first half.
That's helpful guys and then Dave I think you mentioned before that you expect your resi HVAC business to be a GDP plus business going forward.
And in 'twenty, two I think with resin bookings fill up 30% in Q4 capacity up strong pricing I know you talked about tough comps how are you thinking about the business in 'twenty two that would have the 10th.
Potential to grow in line with the company and how are you viewing inventory in the channel at this point.
Yeah, Great question, we do see our resi business over time being a GDP plus business and I would just remind everyone. The resi business is about 20% of our total business.
And we did that we had a very strong fourth quarter in revenue in the fourth quarter for our resi business was up 17%, 17% and our bookings were up over 30%. So the resi business is performing well.
We're really proud of what the team has been able to do ramping up the facility in Tyler, Texas After freak weather events, and just the customer mindset, there and the ability for them to ramp up and serve the customers. Some of the best I've seen in our company as far as the resi markets go.
Youre going to see we'll see growth in new construction, which is a smaller portion of our business.
And we don't expect the replacement market, which is the larger part of our business to fall off a cliff.
So our resi business will be up against tough comps as you said all year.
With that said, we have a strong backlog.
Leading brands and we will see strong price all year.
Thanks for that guys.
Thanks, Andy Vesey.
The next question is from Julian Mitchell with Barclays. Your line is open.
Hi, good morning.
Hey, Julien.
Good thank you very good.
Maybe just wanted to circle back on the sort of Etfs.
Seasonality through the year.
You gave very credit Q1 guidance, but I would say is the key one works out to being around the low teens share of the full year earnings so not too different versus history, but you kept emphasizing a sort of challenging first half.
So when we think about the first half should we assume it's around the sort of mid fourteens share with full year earnings is that roughly the right bolt.
Ballpark, what sort of price cost getting a little bit less bad in Q2.
Digitally it's Chris I'll start.
First quarter, where we're dialing in the guide around 95 to $1.
That would put us at around 14% to the full year, So Q1 would be around 14% versus the full year at the midpoint.
Actually a little better than what our average has been over the last four to five years that average is around 12%. So we're seeing it to be a little bit stronger on the full year, but.
I think it's hard to tell what we think the second quarter will fully be at this point, we continue to work the supply chain challenges.
As we see it this is not a demand the concern the demand is absolutely. There. This is really a supply chain and how do we navigate through it. So we'll provide some more guidance when we get through our first quarter call and when we think for Q2, but we definitely.
<unk> see from the supply chain aspects for the second half of the year is easing in terms of supply logistics and some of the labor constraints as well.
That's helpful. Thank you and then just my second one around <unk>.
Commercial hvac's.
Revenue trends in 2022.
Should we think about the Americas, having kind of the strongest growth of the three regions in commercial rates rank this year.
And maybe any color on how you see that new construction.
Marketing non res in the U S. This year.
Yes.
How are you doing this Dave look our commercial business performed very well in the Americas all year in 2021 with broad based strength in Q4 across unitary applied and service will all of them were up over 20%. So the team is seeing tremendous demand.
As far as the end markets go we have low unemployment you have strong underlying GDP growth.
Abi has been positive for the last 11 months, which are.
Above 50, which means positive and again thats a six to nine months lag on that metric. So that's a good foreshadowing as to what to expect in the future.
We are particularly strong strength in the data centers vertical warehousing health care education.
Starting to see nice growth in the office vertical.
Indoor air quality and de Carbonization of the built environment will continue to be tailwind for us. So we'll have a strong year in our commercial HVAC business and.
We have some nice tail winds behind us and that business will continue to execute our constraint there.
We will not be the markets it will be back to the supply chain and specifically.
Specifically in the first half as we're starting to get some visibility into the second half some of those supply constraints, specifically around electronic components will start to ease.
Great. Thank you.
Thanks.
Our next question is from Josh <unk> with Morgan Stanley . Your line is open.
Hey, good morning, guys.
Hey, Josh how you're doing with them.
Well thanks.
Just wondering what got worse on the inflation front sequentially <unk> to <unk> I know like some of the metals are sort of rolling off Theres, probably an inventory dynamic that gets in the way and realizing that near term, but putting aside kind of the year.
Year over year tyranny of the math.
It sounds like things actually got maybe a little bit worse like anything you'd call out specifically that we should be kind of watching more closely.
Josh It's Chris in the fourth quarter, I would say price was a little better than where we started the quarter and also inflation wound up being a little higher as well.
Part of this is the inefficiencies, we're seeing around spot buys and expedited freight to ultimately serve customers.
But as I think carrying over Q4 into Q1, we're seeing roughly the same levels of inflation in the fourth quarter carrying over into the first quarter.
May recall, we look at commodities and have a hedging practice and strategy in place for copper and aluminum.
Each will rolled out really over 12 months, but it really smooth the impact of inflation.
Going into any one quarter, we'd have about 70% 75% of that price already hedged. So I would say the impacts of the fourth quarter really start to be very similar to the impacts in the first quarter there.
Steel roughly the same way we have about a six month lag on our steel purchasing for when we lock in prices to when we would see any price changes.
Any dynamics now in January we're seeing in steel would really be realized in the second half of the year. So that's how it kind of playing out from Q4 to Q1.
Got it that's helpful. And then just on the commercial side, we had some of these kind of broader market initiatives and your own whether it's indoor air quality or some of the more sustainability focused products.
It really been out there in the marketplace for a while now and customers taking hold what.
What are you guys watching today.
Track that in earnest and maybe disaggregate normal replacement pipe demand in commercial from some of the spicy yourself that you guys have put out over the past couple of years.
Yes. Good question, Josh I mean first of all I'll start with <unk> indoor Air quality, we continue to see a tailwind from that we had a very good year in two.
2021, we expect to have another good year in 2022 still getting a lot of demand out there for indoor air quality audits as well as what we call day, two activity, which is helping our customers build out the infrastructure for long term improvements within energy.
<unk>.
In line of sight, there as far as de Carbonization.
The built environment as we call it.
We're in the very very early innings.
And the intensity there is growing every day.
We've talked a lot about what we're doing in Europe , there with the electrification of heating and that is again just to remind everyone. It's really not just a heat pump. It's a system, that's combining a chiller anil boiler plant together into one system.
That is we're not only seeing great traction in the in Europe . There. We're also seeing that in the Americas. So those are in the early innings.
And.
We track activity for both indoor air quality as well as on de Carbonization pretty closely is getting harder to blend. The two together. So those are going to continue.
And then you have the core business that kind of is going to follow what we would say the more traditional REIT. We obviously look at what's happening with new construction and dodges.
Is still.
Actively forecasting pretty robust demand in 2022, so that's a good sign in and as I said earlier architectural billing index is probably one of the has probably some of the highest correlation of what the future is going to be for our commercial HVAC business and that's been over 50 now for 11 months. So.
That bodes well for the future as well.
Great. Thanks, guys.
Sure.
The next question is from Jeff Sprague with vertical research your line is open.
Hey, Thanks, good morning, everyone.
Jeff did you survive the storm up in Connecticut, I did all good up here.
Before we lose the work.
Unfortunately, we had to use some four wheelers here in Charlotte two so yes.
I'm sure, it's a little scary on the roads down there we know how to drive up here, though.
Hey, Dave.
I think kind of implicit in.
Acknowledging the orders will roll down now on the comps and alike. Right would also then obviously it suggests that people have ordered further out to get their place in line and that sort of thing and really the nature of my question is.
To what extent were people able to place orders in advance of your price increases or have you been able to fully protect yourself on kind of the cost coming through the inventory channel in the backlog.
Yes, it's a good.
Good question for sure and the.
First of all let me start with the with the order rates. Okay. So for many of our products.
We do have extended lead times right now so we do have order customers that are ordering early.
By definition I would also tell you that we're working very closely with our customers.
And they want to give us as much visibility as possible.
So theres certainly they understand what's happening with supply chain, so they're asking us to make sure that we get spot secured for them in the future.
So we are getting orders and earlier you see that on a robust bookings numbers I wouldn't get overly concerned with it it's not like we're pulling in orders from.
A year and a half out okay. We're talking a few months here as far as pricing is concerned in the backlog.
At the end of the day it really has to go through it by business.
In our resi business for example, we replaced the backlog. So we have a price increase will replace the backlog in our commercial business. Some of our orders actually have price elasticity built into those based on certain industries. So.
Depending on when it's going to ship, we will actually be it'll be at a higher price vis vis its shipped today and that's normal and we've been doing that for a long time so.
The days of there's going to be a price increase let me let me.
Double order or order as much as I can to get in front of it I think we've.
It certainly happens a little bit a lot of that behavior has been changed.
And could provide a little bit more color on how you think Rosie plays out right. You said, you don't envision it falling off a cliff.
But.
How do you see it playing in is there maybe.
It may be some gamesmanship around.
Efficiency change you just said people don't pre buy anymore. So perhaps you don't youre not expecting that but just kind of the overall trajectory of <unk> as you see it over the course of the year here.
Yeah, I do as far as the pre buy for the regulation change and efficiency change in 2022, there could be some of that activity, we don't see it to be anything alarming.
Obviously, we will update everyone as we see that starting to unfold as the year goes forward.
As far as the end markets go in Ramsey.
No.
2021 is a very robust year fourth quarter was very strong for us. So I'm very encouraged with order rates over up over 30% in the fourth quarter.
Residential new construction as I said earlier, it will be positive right.
A lot of <unk>.
Metrics out around that so that will probably be in the low single digits positive, although that's a small percentage of our business about 20%.
The replacement market about 80% of our business, we don't see it falling off a cliff okay.
Could unit volume be down a point or two sure but I also would tell you that we're going to see strong price all year and rosy.
Okay, great. Thank you.
Sure.
The next question is from Scott Davis with Melius Research Your line is open.
Good morning, guys.
Hey, Scott how are you.
Great.
Thank you.
Curious just following up on Jeff's question.
The.
And new construction. It was always the builders are buying the cheapest unit out there is there a change in some buying patterns are guys buying higher efficiency and trying to sell that.
Environmental.
Benefits and stuff like that are they able to capture any value on the homebuilding side of <unk>.
Upgrade or is it still kind of similar as the past.
Yes, it's a great question again, it's a it's a smaller part of our business only about 20% and we certainly talk to many of the homebuilders many of the large homebuilders and.
What you just described they're very interested in.
We'll see if they act on that but they are very interested conceptually on being able to.
Have a greener home for lack of better terms and being able to sell that to the.
To their customer.
Right.
We are so small it'd be hard to where we're selling we sell some high seer into the market. So it will be interesting to some of the larger players actually act on.
Sure.
What that what they talk a lot about.
Okay and then.
Dave.
Back to kind of a common question, we're getting right now from folks is just about the integrity of backlogs.
Historically, the larger the down payment.
And.
The higher the integrity to backlog, but.
Has the dynamic changed with the customer base at all can you capture more upfront to get people.
It kind of secure them spots in line that.
Perhaps capture a little bit of a premium on the supply and demand imbalance that's occurring right now.
Yes.
We think the integrity of our backlog is quite strong okay. Let me tell you why.
And our resi business with our independent wholesale distributors technically they can't cancel orders so we don't see.
That backlog going away, we do see a small amount of maybe double ordering from dealers.
But it's insignificant.
With respect to a $5 $4 billion backlog in.
In commercial HAC, we're dealing with complex systems, and highly engineered products and working closely with engineers and architects and customers.
You may see a job site delay, but youre not going to see duplicate orders and in thermo King.
We're working closely with our customers and we're matching their demand with.
With other Oems, whether it be on the trailer side of the tractor side and we're all of US are working together to make sure that we can combine the solution for.
For the customer and everything gets through at the same time, so we don't see those orders being canceled as well. So overall, we think the backlog is as strong as far as your question about demanding more money upfront.
We're not doing that in <unk>.
Certainly in the Americas or in EMEA that has always been our practice in parts of Asia, which we do but.
But we're not we're not going out and demand and cash from our customers because of the incredible amount of demand that we're seeing we don't we don't that's not that's not what trane technologies about we want to solve our customers' most complex problems and work with them and that's.
That's what we'll continue to do in the future.
It sounds good good luck. Thank you okay. Thanks I appreciate it.
The next question is from Joe Ritchie with Goldman Sachs. Your line is open.
Thanks, Good morning, everyone.
Hey, Joe how are you.
All good thanks, Dave.
So just maybe.
Maybe ill start off on the on this type of question.
The $30 million to $40 million headwind in <unk>.
Whatever detail you can give us on how that's supposed to look for the for the rest of the quarters throughout the year and then specifically on pricing I'm. Just curious like what are you baking in for resin pricing in 2022.
Yeah, Hey, Joe So I'll start with the second question first so on pricing just to remind.
We had about three price increases across the majority of our portfolio in 2021.
Really an unprecedented level of price and on a full year basis.
Three five points of price at the enterprise level across the company, so really very very strong.
We are in the announced and in place.
Called the first price increase of 2022 that really started here in January and that applied to the majority of our products.
So it's based on the inflation.
We see today and as nimble as we were last year and I think we saw the.
The industry follow.
We're going to remain nimble as we go through the year as we kind of evaluate inflation.
On the price cost dynamic exactly we're carrying over.
Significant price from the fourth quarter into Q1, we're carrying over a significant level of inflation.
Nearly offset the price in the fourth quarter, we were slightly price cost positive in Q4, and we see that right now being a negative in the first quarter and likely negative on the first half.
Again in the first quarter last year, we saw very strong price. We got ahead of the market and competition in terms of the timing of our price announcements.
We had some very modest inflation in the first quarter last year, so that helped drive that near 50% leverage in the first quarter a year ago.
So we're going to unfortunately lap against very modest inflation in Q1.
We see inflation for the year, it's really a mirror image of 2021 2022 is the first half of 2022 is going to look a lot like the second half of 2021 in terms of the inflation and then we start comping in the second half of the year, so much more modest inflation in our comparable and freight inflation.
In the third quarter. So I think right now our best view is we're probably price cost negative in the first half and then it returns to really very good strength in the second half of the year and strong leverage.
And Chris maybe just following up on that point in the second half, we'll be talking about inflation, but how are you guys thinking about cost curve coming down in the second half and are you baking in deflation into your numbers in <unk>.
As part of the guidance.
Yes, I would say, we're not baking a whole lot of deflation into the guide Joe to be fair I mean, I look at copper and aluminum futures and Theyre pretty narrow from now until the balance of the year. So I don't see a lot of deflation there whats starting to show a bit of a deflationary impact of steel.
Let's see where it goes but at this point, if we start seeing deflation there that would really impact us starting six months out from today, just based on our buying habits and our locking in a steel price for six months. So that turns out we started seeing a deflationary environment, which we're not counting on but if we start to see that.
And then we will see how that plays out in the second half of the year, but that could be a tailwind then.
Okay, great. Thanks, guys.
Thanks, Joe Thanks.
The next question is from Joel <unk> with BMO. Your line is open.
Hey, guys How's it going.
Hey, Joe how are you congratulations.
<unk> is in your future congratulations Gregg.
All your great comfort for Trane technologies Slash Ingersoll Rand through the year as we certainly appreciate it and we'll Miss you.
But let me say, if I'm going to be any good at it or not.
[laughter].
Just some fishing rods, okay, yes.
Yes.
And just two longer term questions I Wonder if you can talk a little bit about.
Any factors you know kind of I don't know being the new guy and all that kind of stuff and looking over the next five years or so like what are the factors you see that could really cap the upside on your on your operating and your EBITDA margins like what do you have to work on today to make sure that there is no bottlenecks five years out.
John It's a great question and it really has to do with ensuring that you are continuously investing in innovation for the long term.
You heard Chris talk a little about it even though we know the first half of this year is going to be tough, but we're going to struggle through supply chain constraints, we got a mirror image hitting us with inflation.
I'll have strong price, but we'll have some carryover strong price as well. So we know the first half will be tough what we're not going to do in the first half is we're not going to cut our investments because we know that's about our long term and really where we see this as the whole de carbonization of what's happening in our products about may.
This world a better place for next generation. That's our purpose, that's what we're committed to and Youre going to continue to see that from Trane technologies I had a I had a call the other day with some.
ESG investors and they asked me what I was most proud of for ESG for Trane technologies I've thought about it for a minute call me a little bit off guard and I was like I'm proud of the fact that Trane technologies was green before it was cool to be green and we've been working at this for a long time since 2013, we had our.
First set of science based targets, we now have our second basis Science second set of science based targets.
And we are committed to making a difference and we're going to do that through our innovation were challenging what's possible and it's going to be tremendous upside for trane technologies over the long term.
And then last can you just give us a little sense of maybe it's a little.
And a little far out there also but what are the impacts on the transport business from trucks turning to EV.
Yes electrification is a big part of our strategy there Joel So you again once again on top of your game. There. So yes. We were we have in fact, we have a couple of our unit, that's going up and down the highways if you're in California, you may see it that has a trailer unit that is that is 100% electric.
So we have a lot of really need innovation, we're working on there.
Our customers are loving it.
The data that we've been able to extract from the unit is going up and down the highway.
Is tremendous for our for our engineers to continue to develop and.
Anyway.
I'll, let you think about EV vehicles think about thermo King as you know.
Again once again staying ahead of the market there with electrification of our products. We have some really neat products that we came out with about 18.
<unk> 18 months ago now in the home delivery.
And we're getting a lot of traction a lot of traction around the globe with those products.
Alright, Thank you very much.
Good luck to you, Okay, Alright regulations.
The next question is from Steve Tusa with Jpmorgan Chase Your line is open.
Hey, Good morning, guys. This is Pat on for Steve.
My first one is on the commercial HVAC business.
Can you break down your organic growth expectations for this year between what you expect for services versus equipment, and then within that equipment piece.
Terry versus global apart.
Paul.
Hey, Pat it's Chris I'll start.
We expect strong growth equipment and services on a full year basis.
As we've talked in the past applied orders and installed base drives a nice service tailwind and just given our orders and backlog that we have in 2021 carrying over into 'twenty. Two we expect our services business to grow as well so I'd leave it at that for now we'll kind of update as we go quarter by quarter, which we typically do to highlight the growth in each of the.
Categories, but we've got some good growth plan for both this year and the other thing I would add Pat. This is Dave is our service business performed very well all year in 2021.
And in the fourth quarter order rates for service were up over 20% and I don't expect it to grow at 20%, but what were seeing very very nice growth for our service business really not just in commercial HVAC I see but in our commercial HVAC <unk> on a global basis Nice service growth and a lot of that is on intelligence services as well.
And this would be with our connected solutions and.
So that's.
That side of the business is growing very nicely for us.
Okay I had to try it and then on the first quarter and first half versus second half dynamics that I may have missed this but did you say if any particular end market tries to slow start in volume growth in <unk>, specifically do you think theres going to be much difference between first half versus second half growth dynamics.
Yes.
Yes.
Just to be clear the first half that was constraining growth in the first half isn't.
End markets, the supply chain and specifically its components within the supply chain, which is really around electronics. So it's not end markets as you see through the fourth quarter, our end markets continue to accelerate so.
<unk>, which is a good sign I wouldn't think of it as Chris.
Outlined we've got some tough comps in the first quarter or the first half that inflation rolling over.
Price rolling over but we also have some tough comparisons against price.
We will have a choppy supply chain.
At least through the first half of the year, we see some light at the through the clouds there as we head into the second half of the year.
Got you and so that supply chain impacts renzi in commercial and transport kind of equally is what youre kind of thing.
I think that unfortunately affects most industrial companies.
Yes makes sense. Thanks, thanks for the time appreciate it sure no problem. Thanks Pat.
The next question is from Andrew <unk> with Bank of America. Your line is open.
Hey, guys. Good morning. This is.
Emily Xian for Andrew Holden.
And really how are you hey, good morning, Hey, I'm good.
So I had a question on <unk>.
Obviously, you guided to.
Thank you being one to two points.
Additionally.
You guys kaelin per year.
And does that take and where do you expect that to land in 2022 and have you seen any momentum in demand for <unk> products.
Given the on the <unk>.
Yes.
We said early last year that we thought revenue would be in the 1% to 2% tailwind from IQ It's actually.
It'll be a little bit north of two actually so the year ended up very well for our indoor air quality solutions.
<unk>.
Remember indoor air quality is not new to Trane technologies, we've been in it for quite some time.
But we have we have launched several new initiatives, there, especially on the audit side.
We call day, one day two.
We're going to continue to see tailwind from indoor air quality I wouldn't expect 2% to compound every year, but.
But we do expect to see nice tailwind from indoor air quality and we're seeing.
<unk> continues to grow.
Tell you that it's.
It's probably harder to count because these indoor air quality solutions are becoming embedded into our equipment. So think of it as like a unit controller in AR.
In a.
Unitary piece of equipment. The indoor air quality is just becoming part of the systems, but with that said we continue to push the envelope. There. We've got some great innovation in the pipeline really cool things, we're doing with our transit bus business in Thermo King.
And we're still making a lot of traction with dry hydrogen peroxide as well as some of our core Photocatalytic solutions.
Awesome.
Then what kind of visibility do you have on the already passed that.
Stimulus.
K 12 education for example are there any projects, we can trace back the spend.
As funding has extensive SKU.
<unk>.
How much stimulus has been spent on HVA systems with both the path.
Yes, I don't know if I got that specific but I would tell you that we are we.
We have a.
Dedicated Tiger team that works on this so we know where the funding is flowing and there is a lot of restrictions as you dig into the detail. You May know this you may not but some of the stimulus funds have to be going to the education side versus just the infrastructure side, but we're working with our customers, we're helping them navigate that.
Those dynamics that exist there and absolutely we are seeing the funding going all the way through to the to the local school districts and there were there with our customers on day, one helping them on what they could do day to actually helping them deploy capital and what they should be doing over the long term.
Great. Thank you.
Sure.
The next question is from John Walsh with Credit Suisse. Your line is open.
Hi, good morning, everyone.
Hey, John how are you good morning doing well thank you.
Maybe just the first one is a clarification when you were talking about the tough order comps obviously, there across the board, but you did highlight that.
Some of those product lines might see declines I think.
Wanted to understand if that was an enterprise comment or specific to those particular product lines you called out.
Yes.
It certainly got to be the case within our thermo King business. Okay. If you think about it I mean.
Our bookings rate last year was twice our order rate right. So bookings up over 70% that's not going to continue.
That will be a very strong backlog there John so that will burn during the year. So don't be surprised if you see a quarter or two of negative bookings within thermal king.
But you really need to combine it.
Incoming order rates with backlog and really be looking at what the output is through revenue.
Our view now John as we kind of look through the year is.
Ending 2022, and starting 2023 with a very strong backlog well above what our historical level will be so today's 0.1 or two quarters of.
Some comping against some very strong order growth, but we see by the end of the year, that's still being a very healthy backlog going into 'twenty three.
And we will have tough comps in resi two okay.
Just so youre aware.
On the backlog I, just want to make sure everyone's clear our backlog will be five 4 billion was at the end of the year. If you look at that as a percentage of our midpoint revenue guide, it's like 35% and in a normal year your backlog would be like 20%. So I mean, we have a very very.
Very strong backlog for the year.
Great No I appreciate that and maybe just a quick one on uses of cash obviously you called out.
<unk> spend for repo in January .
How does the deal pipeline look.
As youre thinking about the balance of the year and toggling between share repo and M&A. Thank you.
Our M&A pipeline is robust and we look at a lot of opportunities as you would imagine being a major HVAC player in the industry. So we always have.
Our full pipeline that we evaluate.
John I would add on the $1 9 billion to M&A and share repurchase we did repurchase $350 million here in January so lets say approximately $1 5 billion left to deploy in the year and from a modeling perspective, just given we can't identify at how much has to be spent.
On M&A versus share repurchase we for our guidance, we just assumed the whole $1 $5 million remaining would be the share repurchase kind of ratably over the remaining quarters of the year. So we will update.
Everyone as we go quarter to quarter, but certainly our preference would be to.
Spend some value of that $1 5 billion on M&A.
Great. Thanks for taking my questions I appreciate it no problem. Thanks John .
The next question is from Gautam Khanna with Cowen Your line is open.
Hi, good morning, guys.
Good morning.
Doing well doing well I just wanted to follow up I think it may have been Josh that was your question on that but.
Can you talk a little bit about how in the commercial space.
If at all the business model is evolving.
Customers.
Concerned about ESG targets of their own presumably utilizing HVAC as a tool to hit those targets.
As opposed to just payback on energy savings or whatever as a stimulant to demand are you seeing like performance contracts were.
If you can guarantee a certain greenhouse reductions we get paid for it just sort of the terms of sort of the contract change.
In any meaningful way.
And does that maybe allow for some pricing power in commercial that didn't exist before.
That's a great question Kyle I would tell you that it's a great question and I would tell you that it's very very early innings there.
But obviously.
There is a lot of questions, we're getting calls from customers.
<unk> asking how we can help them.
Decarbonize their built environment and one of the things we did.
Maybe a little bit different than some of us as we actually went out and practice on ourselves first.
So part of our commitment is to reduce our own greenhouse gas. So we're implementing best practices in many of our facilities as well so that we could take customers there and show them, what we've done but.
But youre certainly onto.
The carbonization as a service type environment.
That is getting some traction I would tell you it's very early innings, but it is getting traction.
And just as a follow up do you think it actually concur is going to have greater pricing power in the commercial market.
I mean overtime than has been the case historically, where we think is going to help.
That would be more competitive than in resin for example.
Thank you.
Comparison of our customers.
It's a fair question I think we'll be able to to write that chapter of probably in the coming years here, but I would tell you that whenever we've had products and services that.
Have high efficiency.
Complex.
Problems to solve for our customers, we tend to do very well.
I appreciate it guys. Thank you okay. Thanks.
The next question is from Deane Dray with RBC capital markets. Your line is open.
Good morning, everyone.
How are ya rollout thanks.
I might have missed this but did you size any revenue push out from for Q.
Into the first quarter that would be comparable to the 130 that got pushed out from <unk>.
Yes, I mean, we did not okay. So you didn't miss anything but.
But obviously, we did have revenue we did have some revenue that pushed out from Q4 into future periods, it's probably.
In the same realm that we saw going from Q3 to Q4 in that $150 million range.
One thing that's different there in the fourth quarter, we had visibility working with our suppliers that we would recoup about half of that in the fourth quarter will be in the fourth quarter, which we did.
We do not have the same visibility as we enter Q1, so obviously, we're not including that in our guidance.
Not including the guide for the first quarter is that that's correct. That's correct. It obviously, obviously the backlog law will churn in.
It will be within the year for sure.
But not in the first quarter is that mostly electronic components still.
Yep Yep electronic components is still.
The biggest concern we have there have been some areas of supply chain that have improved as I said earlier, but electronic components.
Has got still we still have some significant choppiness there.
Right just last question for me on the increase in Capex for the year you referenced some higher returns can you size for us what kind of returns you're getting on these projects and maybe an example of your own de carbonization investment Youre doing.
Yeah, Deane I think we see multiple categories kind of driving a little bit higher capex again still within our range of 1% to 2%, but right now expecting it to be closer to 2% in 2022.
The categories would be around capacity expansion driving further automation in the plants.
Supply chain resiliency projects here as we kind of manage through this transitional year in 'twenty two.
Improving front end systems, maybe one thing to highlight on the sustainability side as we take older pieces of machinery offline. There's examples where you've got three pieces of machinery in a factory that you are able to deploy one piece of machinery today, just given improvements to technology and inefficiency.
And for US that we should have a lower impact on the environment and a lower impact on energy usage. So those are the types of things we continue to lean in.
I was out of one of our factories in the Midwest and they were shown examples where they literally had.
For old pieces of equipment and they took them out of service. These are all pieces of equipment that the old.
Prior mindset would have been the assets fully depreciated I only run at 40% of the time.
I don't need the space, we take those out we put it into a new piece of equipment dramatically reduce the energy load in the facility.
In any case as you were able to increase throughput with the newer machine with new technology and it's just great great a great program that that Theyre working through us as are many of our factories around the world. So it's sort of what we were talking about all the time is don't wait for new you'll need to wait for new technology deployment.
It's available today, and Youre going to get significant benefit and this is the same.
What we say is what we do.
All sounds good thank you.
Alright, thank you thanks.
That concludes our question and answer session I'll turn the call over to Zac Nagle for any closing remarks.
Great. Thanks, Chris I'd like to thank everyone for joining us on today's call as always we'll be around for any questions that you may have in coming days and weeks and we look forward to hopefully seeing many of you on the road in 2022, Thank you and have a great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.
Okay.
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