Q1 2022 Trane Technologies PLC Earnings Call
Sustainable World and.
And aligned to the Mega trends that are only getting stronger.
We are seeing the impact of climate change on the World every day, including more.
More extreme weather events and far reaching effects on air quality water quality food production and human health.
Science is clear there is no time to wait the world must take action now to limit global warming and mitigate the effects of climate change.
That's where our purpose meets our strategy Trane technologies is already taking actions to dramatically reduce emissions through innovative solutions that drive electrification energy efficiency and emissions reductions for commercial buildings homes and transport.
We have set aggressive science based emission reduction targets that continue to push our innovation further and faster.
Customers continue to choose us as their partner and achieving their sustainability goals, while improving performance and efficiency.
Our relentless approach to innovate strong customer focus and purpose driven culture enabled us to consistently outgrow our end markets.
This 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.
While we will cover the details of the quarter and our outlook throughout our discussion today. The primary message I'd like investors to take away from today's call is that the company has never been in a stronger position to deliver highly differentiated financial performance and shareholder returns over the long term.
Our end markets are strong and our innovation leadership is at the apex of powerful secular megatrends of energy efficiency and de carbonization.
Which is enabling us to win customers at an unprecedented pace.
Our business operating system remains at the core of everything we do and is delivering strong price realization to offset the impact of inflation, which is running at multiples of even the highest historical levels.
And our balance sheet liquidity position and ability to deliver strong free cash flow provides a solid financial foundation.
We have exceptional firepower and optionality to not only navigate near term macro challenges, but to flourish as they abates.
Our strong performance in the first quarter is ahead of our initial guidance expectations on both incremental price to offset higher inflation and on volume growth.
While it is still early in the year and the macro environments remain very dynamic our performance in Q1 serves to increase our confidence that we're on pace to meet or exceed our full year guidance.
Our booking levels remain extremely high reflecting strong share gains in virtually every area of our business.
With supply chain challenges impacting throughput and the near term.
The absolute booking levels, we've delivered over the past year have been extraordinary.
There was a tendency to focus on bookings growth trends, but growth trends may be misleading when absolute numbers move step functions higher than any historical reference period.
We encourage investors and analysts to consider both absolute bookings and bookings growth to get a fuller picture.
Our first quarter provides a prime example.
Organic sales were up 12%, while organic bookings were up about half that amount up 6%.
A fairly normal reaction to bookings growth being half the level of revenue growth might be to assume that the book to bill ratio would be negative and that backlog would be lower as a result.
However, given our tremendous bookings growth in Q1 of 2021 of over 30%.
Absolute bookings in the first quarter of 2022, we are still extremely high at $4 3 billion, even with strong revenue growth of 12% absolute revenues in the first quarter of 2022 or three 4 billion.
It may be counterintuitive, but bookings exceeded revenues by more than $800 million.
Our book to Bill was extremely strong at 129%.
And our backlog grew more than 50% year over year.
Backlog also grew 800 million or 15% sequentially from Q4 to Q1.
Given the extremely high levels of bookings throughout 2021. We believe this is an important area to watch to gain strength as we move forward.
With $16 8 billion in bookings and $14 1 billion in revenues in fiscal 2021.
The dynamic I referenced as an example from Q1 will be present throughout the year.
As I look at our business the strong secular trends are leading innovation.
Unprecedented customer demand and record backlogs and the financial health of our company I am very bullish about the future.
We have all the fundamental ingredients to deliver differentiated financial performance and strong shareholder returns over the long term.
Please turn to slide number five.
On Earth day, we released our 2021, environmental social and governance report.
The report highlights our notable progress towards our science base greenhouse gas emissions reduction targets.
<unk> and inclusion commitments and other sustainability goals.
I am proud of the progress we made last year, we exceeded or met nearly all of our annual targets on a glide path towards our 2030 sustainability commitments.
We reduced carbon emissions energy use waste and water.
In addition, we increased representation of women in leadership and workforce diversity reflective of our communities.
I encourage you to read the full report it is available on our website.
Building on the momentum captured in our 2021 report I am happy to announce that we recently learned that our 2015 net zero targets were validated by the science based target initiative.
At this time, we are the first company in our industry and one of only 11 companies globally to have 2015 net zero targets validated.
This is another example of how we are leading and challenging what is possible for sustainable world and we encourage like minded companies to join us.
Looking forward I am confident we will continue to innovate take bold actions and transform the world for a better tomorrow today.
Please turn to slide number six.
Customer demand for our climate focused innovation continues to grow we.
We delivered another quarter of robust organic bookings up 6% in the first quarter organic revenues were also strong up 12%.
Supply constraints are impacting each of our segments with particular type supply as we move up the food chain on product complexity.
Generally speaking the more intelligent and complex the product the more chipsets they require in the more constrained the supply in the near term.
Given the extremely high levels of demand and backlog more than double historical norms.
Constrained revenues would be significantly higher in every segment.
As mentioned previously our bookings in the quarter totaled $4 3 billion are exceeding our revenue of $3 4 billion, which were in part constrained by global supply chain and other macro challenges.
With these robust bookings our backlog grew to a record $6 2 billion.
Our Americas commercial HVAC business continues to deliver extremely strong bookings.
Over the past four quarters bookings growth has averaged nearly 30% in Q1 bookings were up approximately 35%.
Strength was broad based with applied and unitary each up more than 50%.
Service bookings were also strong up mid teens demand for our comprehensive solutions remained strong and contributed to our low teens organic revenue growth in commercial HVAC Americas.
The residential HVAC markets also remained strong our residential HVAC team delivered mid single digits bookings growth and low teens revenue growth in the quarter.
As expected transport Americas bookings were down in the quarter on tough prior year compare and because we intentionally constrained demand in order to manage inflationary risks.
Unconstrained demand would be much stronger, but customers understand the dynamics and are working closely with us on slots.
Bookings remained at healthy levels with bookings in excess of revenues in the quarter and adding to backlog sequentially from Q4.
Revenues were strong up mid teens.
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.
EMEA commercial HVAC bookings were up low teens and revenues were up low single digits.
As expected transport bookings were down on tough prior year compares.
Similar to our America transport business, we are intentionally constraining demand in order to manage inflationary risks.
Absolute bookings remained at healthy levels with bookings in excess of revenues and backlog up sequentially from Q4 revenues.
Revenues were strong up high single digits.
Our Asia Pacific team delivered strong bookings and revenue growth of 14% supported by broad based growth in China and across the region now.
Now I'd like to turn the call over to Chris Chris.
Thanks, Dave Please turn to slide number seven.
Organic revenue growth in the quarter was driven by both strong volume growth and continued strong price execution.
Turning to margins, we drove strong core incremental margins of approximately 30% on solid volume growth of 5%.
Volume growth was stronger than expected due to our outstanding performance by our teams and partnership with our suppliers and what remains a choppy supply chain environment.
Strong price execution through our business operating system also enabled us to neutralize the impact of higher inflation on a dollar basis, but it was about 100 basis point headwind to margins in the quarter.
Productivity was significantly impacted by continued supply chain challenges.
<unk> choosing to incur expedited freight costs and spot buys.
System with our customer focused business model.
In addition, we continue to make strong incremental business reinvestments supporting our sustainability focus strategy.
All in adjusted EBITDA, and operating margins declined 70 basis points.
Adjusted EPS grew 11% driven primarily from higher adjusted operating income.
Please turn to slide number eight.
We discuss 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 with volume growth strong price realization incremental business reinvestments in innovation and macro challenges impacting productivity and cost inflation as consistent drivers.
Our Americas segment delivered strong price execution slightly.
Slightly ahead of material inflation, and offsetting an expected negative impact from negative price cost in both our EMEA and Asia Pacific segments.
Consistent with our prior guide, we expect price cost to improve throughout 2022 in each region and.
And we expect to be price cost positive on a dollar basis for the full year for the total company.
Now I'd like to turn the call back over to Dave.
Dave.
Thanks, Chris Please turn to slide number nine.
As we've discussed throughout the call underlying demand for our innovative products and services have never been higher with unprecedented levels of bookings and backlog across our businesses commercial HVAC Americas has significantly outperformed the broader markets over a number of years through relentless innovation for our customers.
We're driving unprecedented demand with orders up nearly 30% over the past four consecutive quarters, which is indicative of our clear market leadership and we're exiting the first quarter with another quarter of record backlog up more than 70% year over year and more than double historical norms.
End markets remained strong with a variety of economic indicators point to growth in 2022.
Unemployment is low and indicators like the architectural billing index, which has been over 50 since February of 2021 remained favorable.
Demand remains strong in data center warehouse education and healthcare.
Everyday we see customers establishing their own sustainability targets.
We're creating de carbonization, roadmaps and helping them to achieve their targets with our customized system based approach.
We're helping our K through 12 customers deploy federal stimulus funds to improve the indoor air quality of schools.
We see both de carbonization and indoor air quality as multiyear tailwind for our business, given our deep customer relationships and expertise.
Demand for our residential products remained strong we entered the second quarter with tailwind from record backlog and expected strong price realization, we see headwinds from lapping tough growth compares to 2021.
Turning to Americas Transport Act projects continued market growth through their forecast horizon of 2023.
I'll talk more about transport outlook in our topics of interest section.
Turning to EMEA.
We have muted expectations for market growth with a volatile geopolitical backdrop, continuing demand for our sustainability focus systems and services remains strong.
And we continue to see good opportunities for market outgrowth.
Turning to Asia, we are monitoring the Covid lockdowns in China, and the broader impact on the region.
Outside of Shanghai, we have a plant impacted by the lockdowns that provide equipment or components to support our customers in China and the rest of Asia.
Our guidance assumes China reopens mid may and any revenue impact due to the China Lockdowns during Q2 will be recouped in the second half of the year.
For the year, we continue to see underlying strength in China's datacenter electronics pharmaceutical and healthcare markets outside of China. The picture is mixed with Covid related lockdowns still impacting market expansion and some countries are direct sales model is differentiated in the region and provides good opportunities for market outgrew.
In both equipment and services now I'd like to turn the call back over to Chris to outline our guidance for Q2 and full year 2022.
Chris Thanks.
Thanks, Dave Please turn to slide number 10.
Based on the market outlook, Dave just outlined and our strong bookings and backlog we are on track to deliver strong financial performance in 2022.
We are updating our full year organic revenue growth guidance to approximately 10%.
Primarily to reflect additional strong price realization to offset persistent material inflation.
Our adjusted EPS outlook remains unchanged between $6 95 and.
$7 15.
We continue to expect a stronger second half with an improving supply chain and product redesigns coming online that will help us serve our customers better and provide added resiliency to our supply chain.
Our updated operating leverage outlook of approximately mid teens contemplates both additional price realization and additional material inflation.
We continue to expect price cost to be slightly positive for the year on a dollar basis.
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 and high ROI projects in support of our profitable growth objectives, and our sustainability commitment.
High ROI projects include manufacturing automation and supply chain resiliency as well as investments to further decarbonize our operation.
Our free cash flow outlook also includes modest investment in working capital.
Particular focus on strategic inventory to support continued growth.
Please turn to slide number 11.
While we traditionally provide annual guidance.
Given the dynamic macroeconomic environment, we believe it may be constructive to provide an outlook for the second quarter based on what we see today.
For the second quarter, we expect core organic revenue growth of approximately 10% to 12%.
As mentioned previously our second quarter Asia Pacific revenues are expected to be negatively impacted by the lockdowns in China by approximately 80 million to $100 million.
<unk> of approximately 2% to 3% for the total company.
Our guidance assumes China reopens mid may and any revenue headwinds due to the China Lockdown during Q2 will be recouped in the second half.
Net we expect our organic second quarter revenues to be up high single digits and expect continued strong price realization.
At this stage, we expect to offset inflation with price on a dollar basis, which carries a heavy margin headwind for the quarter.
We see macro supply chain challenges continuing to hamper productivity.
We also expect continued expedited freight costs and spot buys as we focus on meeting our customers' needs for sustainable solution.
As we discussed on the prior slide our full year outlook contemplates a stronger second half with an improving macro environment.
We will continue to update our full year outlook as the year goes along.
Please go to slide number 12.
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 in high ROI projects further fuel innovation and other investments across the portfolio.
We've highlighted some of our innovation for de Carbonization on slide 21 of this presentation for your reference.
Please go to slide number 13.
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.
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 improve long term shareholder returns and share repurchases as the stock trades below our calculated intrinsic value.
Please turn to slide number 14, and I'll provide an update on our capital deployment in 2022.
In the first quarter, we deployed $506 million in cash with $350 million of share repurchases and $156 million of dividends.
Our board also authorized an additional $3 billion for share repurchases, bringing our total remaining share repurchase authorization to $4 billion as of the end of the first quarter.
Turning to M&A, we completed a small channel acquisition in April and our M&A pipeline remains active.
All in we're on track to deploy approximately $2 5 billion in cash in 2022 inclusive of $1 $9 billion between M&A and share repurchases.
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.
Dave.
Chris Please go to slide number 16 global.
<unk> markets are expected to remain healthy through 2023.
Act has recently moderated their expectations for transport growth in North America for 2022, largely driven by expected OEM trailer supply chain constraints.
European forecast have moderated somewhat also reflecting current OEM supply constraints and uncertainty related to the conflict in the Ukraine weighted average transport market growth in America is 8% down about four points.
EMEA market transport growth is forecasted to be flat down about three points from our previous outlook.
After clear share gains in truck trailer and Apu globally in 2021.
We're expecting global outgrowth in 2022 as well.
Please go to slide number 17.
We've updated the transport growth outlook slide for North America in the slide deck for reference and additional transparency at.
<unk> 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 18.
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 Q1 was a record quarter for US which provides a solid foundation as we move into the rest of the year.
While it is still early in the year, our first quarter performance and our outlook for the second quarter have us well positioned to meet or exceed our full year guidance.
We're seeing unprecedented levels of demand for our innovative 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.
At this time I would like to remind everyone in order to ask a question press star one to allow time for everyone to ask a question. Please limit yourself to one question and one follow up.
First question comes from Scott Davis with Melius Research Your line is open.
Hi, good good morning, everybody.
Hey, Scott how are you doing good morning.
Good thank you.
On a big picture question here.
The energy independence theme in Europe is set.
Center stage I think taking are getting a lot of attention here, how does that change the <unk>.
<unk> landscape and are you seeing more incoming related too.
Brian too.
Drive a little bit more energy efficiency, there or is that a real driver yet of demand.
Absolutely I mean, we're seeing unprecedented demand right now as you saw our results in the first quarter and a lot of it has to do with our new innovations around products that are helping our customers Decarbonize, which is just a massive opportunities in the future.
Yes, I think actually I think when I kind of meant Dave is it incrementally make it demand has been strong in Europe , but incrementally increasing just in the last few months since the Ukraine invasion.
We're still seeing strong growth in Europe . I think you also have some regulation, that's starting to come through there where fall.
Fossil fuels are just not going to be permitted in certain countries, we see that.
Continuing to grow with I think Germany was the latest country to adopt the type of legislation. So a lot of the products that we have and I think we're now on our I was just over in Europe , a couple of weeks ago.
We're on our fifth generation thermal management system, which is really the combination of a boiler in a chiller into a system.
Which allows the customer to accelerate their de carbonization efforts by eliminating fossil fuel. So we're excited about the opportunity keeps growing we keep innovating for it and I would tell you. It's not just unique to Europe , we're seeing it really on a global basis.
Okay, and given your stock price.
And just market dynamics overall, what should we should we expect a.
A big tick up in buybacks in <unk>.
Hey, Scott.
Chris What I would say is we see a lot of value in our shares today and frankly, we saw a lot of value in our shares three months ago.
We take a long term view in terms of stock valuation and looking at our intrinsic value.
As we noted on the prepared remarks, we have a lot of firepower with respect to repurchases.
$3 billion, new authorization provided by our board here in the first quarter puts.
Total capacity around $4 billion here at the end of the end of the first quarter. So we really like the position. We're in the balance sheet has got a lot of capacity to do both M&A and repurchases. So we're not limited.
The guide on the year is $2 5 billion roughly of deployment with about $1 9 billion of share repurchase and M&A and we will continue to execute that quarter by quarter as we go through the year, but.
Our priorities remain consistent in how we allocate our funds and our cash.
We see a lot of value in the shares we have a lot of firepower and look I think we're really on track for the full year here to deploy that cash.
Okay sounds good. Thank you good luck guys. Thanks.
Thanks, Scott I appreciate it.
Our next question comes from Joe Ritchie with Goldman Sachs. Your line is open.
Thank you and good morning, guys.
Hey, Joe how are you good morning, Joe.
Doing well guys. Thanks, Thanks for the question the first one.
I've been asking them.
Basically every company, but the.
The China, lockdown exposure that $80 million to $100 million.
How has that progressed in QQ.
And clearly like Youre, assuming a reopening in mid may that that's not too far away.
Give us give us kind of like Youre confident that.
You feel like that that's pretty well ring fenced at this point.
Yes, I mean, let me just take a higher level first I mean, we've had a manufacturing strategy for years of in region for region. So.
The factor that is in Lockdown is in is in the Shanghai region, but understand that about 90% of our supply chain tends to follow our manufacturing strategy. So think of it as a manufacturing plant you know about 90% of that located in that same region.
We anticipate the factory will be back online in the quarter. The pause as we said earlier will result in approximately $80 million to $100 million in revenue moving out of the quarter, we plan on making it up in the back half of the year.
We're starting to see some positive signs, where we see some moment movement happening in the area again, so we'll stay tuned but right now our guide has us reopening in the second half of.
The month that we're in.
Okay.
David and I guess, maybe.
Maybe my follow on there.
The recruitment of the backlog in the back half of the year and then also.
The pricing that is in your backlog today that you're building how do you get comfort that number one you will be able to recoup and there isn't potential.
<unk> revenue there lost backlog there and then secondly on the pricing dynamics with given the inflationary backdrop that we're in right now that you guys are pricing accordingly, and the margins will come through accordingly.
Yeah, I'll start with being able to recoup.
Out of capacity in our facilities. There. So we're pretty confident we'll be able to once we get turned back on we'll be able to turn back on we also have.
A smaller workforce in our in our facility today.
With obviously proper permission for them to be there to making sure that all of our equipment is in fact being run some of these perceived precision machines you need to make sure. They stay fine tuned. So we're proactively doing that so when the word is go we're ready to go. So we will be able to we're pretty confident we can recoup this in the back half of the year.
Christopher I'll talk about pricing, yes, sure and I'll talk about the firmness of the backlog too Joe we don't see any any risk right now on the backlog everything appears to be firm from a pricing perspective, we're on our second round of price increases here in 2022.
We wound up with three rounds, roughly your price increases in 2021.
Certainly from say 90 days ago material inflation in the quarter in Q1, and certainly on a full year basis, there's going to be higher than.
And then what we thought 90 days ago, but we are seeing stronger price realization.
The second round of price increases is giving us confidence that we've got the opportunity to be flattish in the second quarter and be price cost positive on the full year.
On the backlog in terms of pricing as we think about our longer.
Longer lines, let's say applied systems orders those orders given that there six 912 months out will generally have a price escalation clause inserted in there. So there's some protection in that regard.
Our residential business not only through price increases we've done same of the commercial.
<unk> side, but with the price increases we've done we've also repriced the backlog so it's given us an opportunity to reset that pricing when we see a material change in inflation and then last one at least in the transport full portfolio, we've had price increases as well there, but we're also really intent.
<unk> managing the demand and the bookings, making sure we're only opening up the bookings for a quarter. When we've got good line of sight with the cost is going to be in that quarter. So we're intentionally kind of limiting demand at this point.
And I would say for example, we don't have order books, mostly opened in the fourth this year would be an area, where we're kind of pausing until we get closer to understand the cost environment, but we're not seeing demand destruction at this point at all with the price increases we've had to put in place in.
In fact, we really look at them as inflation based price increases were really not out here to price guys. We're just trying to offset the inflation that we've got.
Hopefully that helps.
Yes very helpful. Thanks, guys.
Thanks, Joe.
Our next question comes from John Walsh with Credit Suisse. Your line is open.
Hi, good morning, and thanks for taking the questions here.
Good morning, John Hall as well.
Yes. Thank you.
So I guess, if we could focus on the strength in the Americas.
One of your competitors had some issues around.
Like commercial another ones seem like they had some supply chain issues with controls I guess can you kind of talk about if youre seeing any market share shifts or maybe what do you think you outgrew the market or what the market did.
Blended for the Americas.
I mean I would tell you if you think about the Americas, our commercial HVAC business continues to see very healthy end markets.
Very low unemployment positive architectural billing index for 14 months in a row now which is just a great indicator for six months to nine months.
Applied and unitary bookings were both up over 50% in the quarter.
50%, so we're seeing tremendous demand right now.
And we believe that that's going to continue we're seeing broad based growth too. So electronics Datacenters education healthcare office, I mean, as I looked across the verticals last week I was I.
I couldn't find the vertical that was down so we're continuing to see very strong demand there de carbonization of the built environment.
It continues to be a tailwind for us indoor air quality continues to be a tailwind. So a lot of strength in the commercial HVAC business in the America. If you go over to raise its only about 20% of our business, but we saw a strong quarter team did well there 6% order growth.
And that comes against a very tough compare where last year, we were up.
<unk> number was north of 40%, so very strong growth there and.
As far as share goes.
It's hard for me to say in a constrained environment.
You could look at.
Order share in shipping share and get two totally different answers.
Our product is obviously in our backlog is more weighted towards our applied complex products and as we said in our opening remarks think about that is where the constraint tends to be more the more intelligent. Your product is the more chipsets that are required the more constrained in the short term, but the long term, we're very very bullish.
Our market share gains and we're very bullish about what we're seeing in the market and hitting the spots with our innovations.
Great. Thanks for that answer and then maybe if we think about the guidance construct I think couple of times you said.
Meet or exceed.
Obviously still a lot of year left you put the FX headwind.
Now in the numbers, so what's kind of maybe coming at a little bit better to offset that as you think about the portfolio. Thank you.
Yes, Thanks John .
Right for the full year adjusted EPS, we held at 695 to $715000 per diem.
We did incorporate about five points of headwind from FX in that guide as well. So we're feeling confident we can offset that.
Yeah look were in the first quarter of the year is traditionally the lightest quarter of the year and we think about each Bac companies. So we're happy with the results where we are in the first quarter, we turned out stronger than we thought when we guided 90 days ago or so.
So, it's giving us increased confidence on a full year basis, we took the full year revenue up to 10% or approximately 10%.
We're seeing an increased price realization so.
Where we sit we were in the first quarter, we've got three more to go and we're assuming an update you.
<unk> in the group when we get to that.
Q2 earnings release, because we'll be halfway through the year at that point well have a much better sense on.
On where things are shaking out on a full year basis.
With the performance in the first quarter and the guide in Q2, we've really de risked a bit of the back half of the year. We got out ahead of price here in the first quarter.
Good sign we thought we'd be okay, there, but a little bit stronger than where we landed a little bit stronger than we thought so it's just giving us more confidence also on a full year basis, and we should be price cost positive on a dollar basis.
Great. Thank you and good quarter I'll pass it along thanks.
I appreciate that thank you.
Our next question comes from Andy Kaplowitz with Citigroup. Your line is open.
Hey, good morning, guys.
Hey, Andy how are you Andy good morning, I'm. Good how are you.
So maybe you could just give us a little more color into how you are looking at resi HVAC in 'twenty two.
You said strong quarter, you send the taps raising new construction would be up low single digits and I think using your words, Dave you said replacement won't fall off a cliff, but bookings were up mid single digits and revenue side of the year up low teens. As you said so can you give us a little more color on your outlook now and how youre thinking about inventories in the channel.
Yes.
It's a good question.
300, but order rates remained strong in the first quarter up 6% and that was a bit of a surprise to us, but considering we were up 40%. The prior year. So the demand continues to be strong.
No.
Our independent sell through was strong the inventory in the channel is about where we expect it to be.
<unk> in the first quarter, we had growth in the new construction channel, though it's a smaller portion of our business.
We'll watch interest rates, there and see what happens.
But.
To use your words, we don't see it falling off a cliff.
Replacement cycle again, resi is about 20% of our business. So.
Even if the replacement cycle did dropped 10%, which we don't see it happening.
It would be about a 2% drop for the enterprise.
The amount of opportunities that we're seeing.
And the decarbonization opportunities in both our commercial HVAC business and our thermo King business on a global basis.
We will far exceed that.
Thanks for that David and then I think you said last quarter that you would be upside down on price versus cost by 30 to 40 million in Q1, but it turns out you were relatively flattish I think you mentioned accelerated price realization was this really just going in and repricing your backlog.
It wasn't the Knicks help you at all and then does it really gives you more confidence in sort of staying ahead in terms of that sort of modest green for the year in price versus cost.
Yeah, Andy It does give us confidence on the full year basis, you're right, we guided negative price cost in the first quarter and we wound up realizing flattish.
Some additional volume coming through allows for maybe a little bit more price to come through but I would tell you that the pricing execution by our teams has been very strong.
I know these are not easy conversations to have with customers, we hear that all the time from our businesses and our leaders.
The fact is though we're trying to just offset this persistent inflation. So in the quarter. It was a little bit more inflation, a little bit more price, we got it to flattish and given.
Our comp on the first half of the year very strong price a year ago with moderate inflation.
Where our thoughts were we could have some headwinds in the first half of the year, giving us confidence we're going to be flattish in the first half of the year on a dollar basis for price cost.
Yes really.
Our business operating system is really being leveraged across the enterprise right now we see what's coming around the corner and the teams are being very proactive and you also asked a question about mix, yes mixed helped us a bit in the quarter.
We are we are seeing mix up and that really.
It's a good news story, because thats, where a lot of our innovations.
I appreciate it guys.
Thanks, Andy Thank you and good day.
Our next question comes from Julian Mitchell with Barclays. Your line is open.
Hi, good morning.
Maybe just.
Just wanted to start off perhaps with the volume outlook I think you talked initially.
A few months ago about volumes being kind of flattish in the first quarter or even down and you ended up I think plus five or so.
And so just wanted to understand kind of.
What drove that volume.
Up side and then as you look at the balance of the year.
What are we expecting in terms of kind of volume versus.
Price do you see that 5% of volume slowing down for example, because of <unk> or things like transport with the ICT adjustment.
Yes, let me start and then ill ask.
I'll ask Chris to comment a little bit on the pricing side as far as the volume is concerned what we saw in the first quarter.
It's not it's not.
It's a demand.
Our demand is constrained by supply okay, so with our backlog.
If we had unconstrained supply right now we'd be shipping much more and we'd be invoicing much more so in the first quarter we opportunistically.
What some for lack of better explanation chipsets on the open market and spot market spot buys, which we think is a good investment for retaining our customers. So we wanted to take care of them, we saw an opportunity and we executed on it and we saw saw more volume come through in the first quarter as a result of that now can that.
<unk> through the rest of the year.
Supply chain as we said in the fourth quarter is going to be choppy through the first half of the year, we have more confidence in the back half of the year working with our suppliers closely understanding their constraints understanding their commitments to US also some some help self help redesigns that we have coming online in the third.
Quarter, so that gives us confidence in the back half of the year unless you want to talk a little bit about pricing.
Yes, I would add.
Julian.
Today's point on being aggressive and opportunistic that will probably continue here into the second quarter, we'll see what's available and see if we can do better there.
On pricing look the realization came in stronger on the first quarter.
A second round of price increases that we've already announced for this year and we are remaining nimble depending on what happens with the material inflation and freight inflation for the year to corresponding to correspond appropriately I think on the as Dave mentioned on the second half with the self help initiatives. The redesigns that we have that gives us confidence for the second half is going to have.
Stronger volume growth and with that comes stronger Incrementals and ultimately.
Hopefully less and less inefficiencies in the plants and otherwise that have really been pervasive for us in the second half of last year and really so far this year.
Thanks, a lot and just on that second point.
Yes, just looking at kind of what's implied for the back half.
You said it looks like you are looking at sort of.
So maybe 40% plus kind of half on half operating leverage.
Year on year something like.
In the <unk> for the back half on leverage just wanted to check those numbers will roughly okay and then.
Chris that's a mix of what price cost is the assumption that the margin headwind on price cost by Q4 is about zero. So thats part of it and then you also have some of those volume inefficiencies cleaning up.
Yes, I would say on the second half.
We expect incrementals to be stronger than the first half, we will see where it kind of plays out on the second half of the year, Julian but given the volume coming through I'd say, 30% plus Incrementals, we will see where productivity other inflation falls out.
I do think on a full year basis, we're going to see the price cost equation, even if we're positive on a dollar basis.
It's still going to present some challenges on the margin in terms of.
Being able to get that positive I, just think that math may be challenging throughout the year, but we do expect leverage to be stronger in the second half we see on a full year basis that organic leverage being around the mid teens range based on what we see today and then we'll update you and the team here in the next <unk>.
<unk> earnings release based on another quarter performance, and we'll see what that kind of falls out for the year, but.
Again in the first quarter, we've been really pleased with what our teams have been able to do around procurement and engineering to find solutions and I know that they are still trying to do that today.
Thanks very much.
Thank you Julien.
Our next question comes from Josh Hoffman Ski with Morgan Stanley . Your line is open.
Hey, John Hey, good morning, guys.
Good morning.
Just kind of continuation on Julians question, there on what sort of the margin kind of cadence maybe is from here.
I know you guys had talked about kind of longer term, 25% incrementals, but you.
As we kind of work through maybe the worst of this kind of inflation wave where price and cost in both high and drive down margins in some of the supply chain interruption do we get to have this period of kind of above trend incrementals for a while or are you still kind of sticking with 25.
5% is the longer term number.
Well, we like we like 25% is a long term number.
Last year, we were able to drive 30% Incrementals and part of that was getting out in front of price earlier, we had good volume last year. So those really contributed to above our long term target. This year. It really is a price cost dynamic.
Just having that headwind on the margins on the first quarter and likely on the full year.
I do think depending on where direct material inflation falls out Josh. This is an industry that typically holds onto price fairly well, if we start to see deflation, which we don't see right now on a full year basis in 2022, but if you see if you do see deflation supply chains.
<unk> to recover and we get our strong incrementals on volume, we can offset price cost.
See where that plays out that that maybe a good formula for us, but long term, we like the 25%.
One thing I would add.
The quarter and also for Q2 and the Guy we continue to invest.
Incremental investments into our innovation and new product development, that's not something where it all relenting on and again, we'd like to say five points of.
Of Incrementals that say, let's take five points of that incremental let's invest it back in the business to get us to that 25% long term target.
Got it that's helpful and then on the the applied orders, Dave I think you mentioned that those were up.
More than 50% any way to sort of break down that on the replacement side I would imagine that's even stronger still and how much of that is sort of higher bill of material or the kind of scope versus higher volume.
Yes, I don't have the direct split yet.
Repair and retrofit versus new but I would tell you that it was strong across all verticals okay.
Data centers electronics.
And it really just speaks volumes to the innovations that we've been able to put into the market.
And we have customers that we're winning today because of the solutions that we're able to provide and it's not just about the chiller. It's about the control system that goes with it it's about the building controls it's about being connected to the product, it's about being able to run AI.
The algorithms against data that's in our.
Data warehouse to improve the efficiency of our buildings and data centers and hospitals is all of that system of things Thats, just really where we are in high gear here you can see it by the order rates that we're taking in so the team is really excited I've never I was out in.
One of our sales offices, a couple of weeks ago, and I would tell you that the teams there have never been more pumped up about number one the innovation that we're providing them to go to talk to customers about into wind customers, but just the whole the strength that we're seeing within the marketplace. So it's an exciting time right now.
We're hopeful that the and we believe it will the back half of the year from a supply constraint, we will get better and we will take.
Some of this massive backlog that we have right now $6 2 billion of backlog I never thought I would say that $6 2 billion of backlog with 90% of it is on our commercial HVAC business.
We'll start shipping it and we'll start taking care of customers.
Okay. Thanks, guys best of luck.
Thanks, Josh.
Your next question comes from Steve Tusa with Jpmorgan. Your line is open.
Hey, guys good morning.
Hey, Steve Good morning, good morning.
First of all thank you so much for the opening the books a bit and with more precision on the price cost impact Thats Super helpful for the models for sure. So.
That precision is much appreciate it.
Yes, no problem.
Second of all.
I thought Steve I thought you were going to thank me for delivering such a strong first quarter.
Yes.
Wow.
Why would I. Thank you for that.
Okay.
Yeah.
Yes.
Yeah. So.
On the commercial HVAC orders I thought you said applied and unitary were both up did you say north of 50% or north of 15% I didn't quite catch that.
55 zero.
So then if they were if if commercial HVAC orders were up 35 does that mean that I guess you are talking about services in there as well.
Yes Hello.
Yes.
Exactly so services think of it services is 50, 56% of our business our services our services were up double digits, so low teens.
Okay, and then what are you guys assuming for orders.
How does that order trend as we move throughout the year not necessarily asking for precision, but like does the 6% accelerate does it go to flat are you expecting any kind of negative order comps here in the next couple of quarters.
Yes.
Ken.
The comps get tough right remember last year, our order rates were up over 30% and virtually almost every quarter, so they get difficult but.
I think you could be looking at.
If you look at on a global basis think about commercial HVAC is probably a bit positive think about thermo King again was different dynamics going on in that space, where we're actually constraining some of the incoming order rates purposely just to manage inflationary risks that could be that could be down a bit so.
Flattish, maybe plus or minus 1% or 2% on a global basis, Chris Yes, Steve I think if you kind of think there a scenario if bookings are flattish in 2022 versus say 2021, thats the $16 $8 billion of Dave referenced before.
We've got about 10% revenue growth approximately on a full year basis.
Kind of do that math it would tell you that the backlog should grow by over $1 billion here just by the end of 2022. So we entered 2022 with record backlog.
And we thought well maybe that could moderate or even come down I think the way we could see it today as of that backlog could be even higher by $1 billion or more as we go into 2023. So it's looking like it should be a very strong year through the balance of this year and then ultimately as we start 2023.
Great I want to say, thank you, but I will say a good execution congrats.
Alright. Thanks.
Yes.
Our next question comes from Nigel Coe with Wolfe Research Your line is open.
Thanks, Good morning, everyone.
Hey, Nigel how are you. Good morning, yeah. Thanks goods, obviously, you've kept a lot of ground I do want to have a crack at the <unk>.
She had extraordinary growth in the commercial.
HVAC backlog.
In times gone by we've seen some large multi year orders coming through and I'm. Just wondering if we are seeing some of these matt massive retrofit large orders coming through the backlog here or are these just a broad base of smaller orders.
Yes, there's nothing nothing like a big ESCO job that book. So these are this is just broad based growth across many different verticals.
And you think about what's happening with de Carbonization and think about what's happening in the education vertical and think about what's happening with indoor air quality in many verticals.
It's nice tailwind as we've been saying that for a while and youre seeing it in our order books.
And is the conversion mitigated by obviously supply chain and capacity.
Customers, putting in orders for multi years he'll get in line.
Longer than they normally would.
Longer than they normally will just because of our extended lead times, but nothing that I would say is extraordinary and it really is a supply constraint. If we had unlimited supply we'd be shipping a lot of product right now.
And then my.
My final question is really around the supply chain. It seems that you've got a pretty good handle.
On the on the chip supply, but I think one thing we've seen is that a lot of quarterly volatility.
Rockwell yesterday got tripped up.
<unk> had a good first quarter.
Second quarter GCI as you ramp up into the stronger <unk> and <unk> periods.
How much paranoia and visibility you have on that on that supply.
I'm just wondering you obviously were now into April may.
What gives you the confidence.
Because it gets tripped up by I don't know something happening next couple months.
Well im not very paranoid as a person so.
We'll use that term but.
It really has to do with working with our suppliers.
It's just amazing open communication understanding what their constraints are understanding what our needs are.
We have some of our what we're calling self help redesigns.
We're simplifying some of our designs to help our suppliers have more throughput to us.
Whether it be with wire harnesses is a great example, and those are the kinds of things that we've been executing on a lot of those are going to come on in the back half of the year. So.
We've seen surprises before but where.
Pretty confident that the back half is going to be better than what we've seen here at least in the first half which remains choppy and our team is just doing an excellent job managing this day to day.
And they have a problem they triage it they overcome it.
Have incur.
Incredible processes that we've set up now and we're getting really really sophisticated at executing when a problem does arise.
Okay. Thanks, Dave.
Fair enough.
Our next question comes from Andrew <unk> with Bank of America. Your line is open.
Hey, guys. How are you thanks for fitting me in.
Hey, Andrew how are you good morning.
Just a question on.
I'm sort of thinking about interest rates and business model.
Just sort of talking to folks in the channel. It seems that low interest rates impacted people's ability to carry more inventory right because for financing is relatively inexpensive.
Despite.
Significant.
Pricing on the resi side right a lot of folks are offering financing.
Once again rates are low so instead of buying out right. If you sort of finance you feel better about your purchase on the resi side with interest rates going up how do you guys think about changes to the business model and.
And how much impact is low interest rates have had on the channel over the past several years.
An open ended question, but I'm just wondering if you guys have given any thought to that thanks.
Yes, Andrew I would say.
Short answer is in the last three six months, we're not really seeing much of a change in terms of demand based on changes in interest rates.
There are financing options that are out there selling to the consumer and it may be coming at a little bit of a higher cost too to a distributor today, but it's not changing the idea around the record demand and ultimately serving customers. So I would say, we don't see that changing the business model.
Looking backwards or even looking out over the next year, we don't see that really changing.
And Andrew I would just add that even with interest rates and I guess, we'll find out at two o'clock at least east coast time today, what the fed decides to do but there is still pretty low rates comparable to historical norms.
Alright.
Makes sense and then just a follow up question and.
Look clearly execution stands out this quarter, maybe we know why they don't know chips left in Milwaukee, but.
No.
Just in terms of.
Sorry, I lost my train of thought.
Just in terms of thinking about seer transition.
How much more visibility we have into the year and then how much sort of pull forward or do you think we're going to get from 23 on that thanks a lot.
No problem, yeah as far as the CEO transition, we don't see a big pre buy I think it really has to do with the way this year changes being executed with the south at least at the AC.
Level, it's an installed base. So it is not a manufacturing data north as a manufacturing day, so think of it more as a phase in phase out of inventory.
That we'll see in the South we're actually really good at this with all of our innovation, we're constantly doing phase and phase outs within our own plants. So we're taking those chapters out of our business operating system and helping our distributors manage their inventory in a proactive way, we don't see we don't see a big.
Pre buy and.
We're certainly more than ready for this transition to a higher seer products.
Perfect. Thanks, a lot.
From.
Our next question comes from Deane Dray with RBC. Your line is open.
Hey, Thank you good morning, everyone.
Hey, Thanks, Good morning, just a quick clarification, if we could.
And we've seen your competitors do this but not opening the <unk> order book until you get a better read on the material cost was that a teekay specific.
Now specifically to Thermo King right and then what happens to the customers in that situation did they just yet.
Yes.
You risk, losing an order there or do they wait.
What are the competitive dynamics.
I think I think it's more about explaining to the customer that we're trying to ensure that one we can price it properly, but theyre, probably also getting constrained on another from another OEM as well whether it be a trailer on retractor. So we're trying to help them marry that demand up.
So slotting in this industry is not new and it's not only thermo King it's also trailer as well as tractors.
Seeing some of that happened so we're working with our customers they know.
We have some pretty loyal customers and our thermo King business as you can imagine with the innovations that we have in our products. So we haven't seen customers move away from that they understand the reason why and they're working with us as that dynamic continues to persist.
That's helpful and just lastly.
Are you still executing the laggard purchasing of steel copper aluminum.
In the quarter, where you would have 100% purchased ahead of time in the current quarter, 80% next quarter is that still the dynamic.
And are you able to fill those calls.
Yes, Dean for copper and aluminum.
Our lettering out purchases and locking in quantities, but think of it as one quarter out we're probably around 75%, 80% locked copper and aluminum two quarters out you are probably in that 60 ish 50 ish percent range and then three quarters four quarters that drops to about 25% to 30%. So we've continued.
To execute that through that here in this environment. The last several years, we think that's a good a good process for us not to speculate on steel with our forward buy in our mill by mill by programs were generally locking in prices for about six months. So looking out any changes in price today would really have an impact.
US really in the fourth quarter.
That's real helpful. Thank you.
You're welcome.
We have ran out of time for the Q&A session on today's call I will turn the call back over to Zac Nagle for closing remarks.
Great I'd like to thank everyone for joining on today's call as always we'll be around to answer questions in the coming days and weeks and we look forward to helping you to seeing you soon on the road and be safe.
Thank you.
This concludes today's conference call you may now disconnect.
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