Q3 2022 Trane Technologies PLC Earnings Call
[music].
Good morning, welcome to the Trane technologies third quarter 2022 earnings Conference call. My name is Lisa and I'll be your operator for the call. The call will begin in a few moments with the speaker's remarks, and the Q&A session. At this time all participants are in a listen only mode.
Please limit yourself to one question and one follow up I will now turn the call over to Zac Nagle, Vice President of Investor Relations.
Thanks, operator.
Good morning, and thank you for joining us for Trane technologies third quarter 2022 earnings Conference call.
This call is being webcast on our website at Trane technologies Dot com, where you'll find the accompanying presentation.
We are also recording and archiving this call on our website.
Please go to slide two statements made in today's call that are not historical facts are considered forward looking statements and are made pursuant to the safe Harbor provisions of Federal Securities Law.
Please see our SEC filings for a description of some of the factors that may cause our actual results to differ materially from anticipated results.
This presentation also includes non-GAAP measures, which are explained in the financial tables attached to our news release.
Joining me on today's call are Dave Regnery Chair and CEO .
And Chris Kuehn, Executive Vice President and CFO .
With that I'll turn the call over to Dave Dave.
Thanks, Zach and everyone for joining us on today's call, let's turn to slide number three.
Before I dive into our quarterly results I'd like to spend a few minutes on our purpose driven strategy, which is the engine behind our differentiated financial performance and shareholder returns.
Our strategy is aligned to powerful megatrends like climate change and the crucial need for climate action last week, the United Nations released its emission GAAP report 2022.
Calling for urgent transformation to avoid climate disaster. The report cites critical actions needed, including efforts to scale zero emission heating and cooling technologies and to Decarbonize the food supply chain.
That's where trane technologies has a unique position to make a difference.
We have the technology today to transform tomorrow.
We are proud to be leading our industry with aggressive science based sustainability commitments actions and results.
Together with our customers, we are dramatically, reducing emissions and creating sustainable homes buildings and cities.
Our purpose driven strategy relentless innovation and strong customer focus enables us to deliver a superior growth profile through cycles.
This in turn helps us drive strong margin and powerful free cash flow to deploy through our dynamic capital allocation strategy.
The end result is strong value creation across the board.
For our team our customers our shareholders and for the planet.
Okay.
Moving to slide number for Q3 was another strong quarter for us across the board.
Our innovation leadership continues to win customers at an unprecedented pace and our bookings level remained extremely high reflecting.
Strong share gains in virtually every area of our businesses.
Organic revenues were very strong up nearly 20% and our book to Bill remained over 100% with organic bookings up 8% absolute demand continues to be strong extremely robust.
For perspective year to date organic bookings are 95% of our total revenues for 2021.
And we still have the fourth quarter to go.
Bookings continued to be particularly strong in commercial HVAC businesses globally.
Our global commercial HVAC business is up more than 40% on a two year stack.
Our Americas commercial HVAC business is even stronger up more than 50% on a two year stack.
Strong broad based bookings growth over the past seven quarters have driven our backlog to unprecedented levels with backlog of $6 4 billion at the end of the third quarter.
We expect backlog to remain at elevated levels well into 2023.
Strong execution of our business operating system has enabled us to stay ahead of persistent inflation and deliver over 10 points of incremental price.
And positive price versus inflation again in the third quarter.
Pricing execution is a core competency for us and increasingly important given higher cost to serve customers across the value chain.
On our second quarter earnings call, we discussed two temporary plant closures that delayed $120 million in revenue from the second quarter into the second half of 2022 with the majority of the revenue is expected to be recovered in the fourth quarter.
I am proud of the way our teams rose to the challenge to accelerate that recovery in the third quarter to meet or exceed our customers needs.
As a result, we successfully recovered $100 million of the $120 million in the third quarter.
Which is approximately $70 million ahead of our expectations.
And we're on pace to deliver the additional $20 million in the fourth quarter.
Our performance during the third quarter has been strong.
Booking levels have remained robust.
Backlog remains at unprecedented levels.
Inflation has been persistent but our pricing execution has more than kept pace.
Supply chain remains tight.
Our slowly improving all in we're confident in raising both our organic revenue and adjusted EPS guidance above the high end of our previous ranges.
When you consider that our guidance includes an additional seven cents of headwind from FX, we're effectively raising our operational guidance for the year by about 15 at the midpoint.
The secular mega trends underpinning our strategy are only growing stronger.
Execution of our high performance business operating system, and our unwavering focus on putting customers first remain at the core of everything we do.
Our balance sheet liquidity position and ability to deliver strong free cash flow provides a robust financial foundation and good optionality for capital deployment.
We are well positioned to not only navigate near term macro challenges, but to thrive as conditions improve.
Please turn to slide number five as I discussed on the prior slide both bookings and revenue growth were strong and broad based in the quarter <unk>.
Americas commercial HVAC was again a standout.
With organic bookings on a two year stack up more than 50%.
Continued strong bookings have driven our Americas commercial HVAC backlog to new Heights.
More than 70% year over year and more than 200% of historical norms.
Commercial HVAC revenues were also strong with low teens growth in both equipment and services.
Residential HVAC revenues robust up 16% in the quarter.
Bookings were down 8% consistent with our expectations.
As bookings continue to normalize towards a GDP plus profile that we see for our long term outlook.
Still our book to Bill was <unk>, 92% in the quarter and backlog remains at historically high levels.
We just opened the first half of 2023 order book for our transport refrigeration Americas business in September and bookings were strong out of the gate up high single digits for the quarter.
Growth is consistent with our expectations as we've been working with customers on slotting throughout the year.
Transport refrigeration revenues were very strong up nearly 60% our team has done a terrific job of ramping up operations at the plant that was impacted by extreme weather in the second quarter and accelerating the recovery of delayed Q2 revenues into the third quarter.
When we held our Q2 call we expected the team to recover about $10 million of the $60 million in revenues in Q3 with the balance in Q4.
The team delivered the entire $60 million in the quarter effectively accelerating the recovery of $50 million in revenues into the third quarter, and enabling us to meet or exceed our customers expectations.
If we exclude the shift in revenues from the fourth quarter into the third quarter third quarter revenues were still extremely strong up more than 40%.
We're on pace for significant share gains in 2022, adding to strong share gains the team delivered in 2021.
Turning to EMEA, we continued to see strong demand for our innovative products and services that help reduce energy intensity and greenhouse gas emissions for our customers. Despite the challenging macro backdrop.
EMEA commercial HVAC orders were up low teens and revenues were up in the mid twenties, reflecting strong demand across the portfolio, particularly for our thermal management systems, which are three to four times more efficient than conventional heating and cooling.
EMEA transport refrigeration orders decline consistent with our expectations, mainly due to tough comps in the quarter.
Additionally, we have been carefully managing our order book to mitigate inflationary impacts and therefore, just opened our order book in September for the first half of 2023.
Revenues were up high single digits significantly outpacing end markets.
Overall backlog for the region remains strong approximately 40% higher than historical norms and.
In Asia Pacific commercial HVAC bookings growth continued to be strong up low teens.
The team has delivered organic bookings growth between low teens, and low twenty's and each of the past six quarters.
Asia Pacific revenues were strong up 28%.
Similar to transport refrigeration Americas, our team has done a terrific job accelerating the recovery of delayed revenues due to a temporary plant closure from COVID-19 related lockdowns in China in the second quarter.
When we held our Q2 call we expected the team to recover about $20 million of the $60 million in delayed revenues in Q3 with the balance in Q4.
The team rallied and delivered $40 million in the quarter.
Actively accelerating the timing of recovery of $20 million in revenues into Q3.
If we exclude the shift in revenues from the fourth quarter into the third quarter third quarter revenues were still strong up mid teens.
Overall backlog for the region remains strong approximately 50% higher than historical norms.
Now I'd like to turn the call over to Chris Chris.
Thanks, Dave Please turn to slide number six.
This slide does a nice job encompassing our overall performance in the quarter, which was strong across the board.
Organic revenue growth was up 19% adjusted EBITDA margins were up 50 basis points and adjusted EPS was up 26%.
We delivered robust enterprise growth in both equipment and services.
More than 20% and low teens, respectively.
EBITDA and operating margin expansion was driven primarily by strong leverage on volume growth.
Pricing remains strong up more than 10% in the quarter and price versus inflation was positive on a dollar basis.
Productivity continues to be negatively impacted by supply chain challenges driving plant inefficiencies as well as higher costs to serve customers.
We also continued to make high levels of business reinvestment to support continued innovation and product leadership across our product portfolio.
Organic leverage was strong at approximately 21%.
Please turn to slide number seven.
We discussed the key revenue dynamics for each of the businesses earlier in the presentation. So I'll focus my comments on margins.
In addition to the items discussed below each of our segments also continued to make significant investments in our innovation pipeline to fortify, our leading brands and drive market outgrowth.
In our Americas segment, we delivered solid margin expansion driven primarily by strong incrementals on robust volume growth.
Price offset inflation on a dollar basis, but remained a margin headwind.
Margins were also negatively impacted by the supply chain challenges and higher costs to serve customers that I referenced earlier.
In EMEA, our strong volume growth with solid incrementals was more than offset by foreign exchange impacts and continued acute supply chain challenges, which continue to have an outsized impact on productivity in the region.
Rice versus inflation improved sequentially and was positive on a dollar basis, but remained a margin headwind.
In Asia Pacific margins expanded over 300 basis points on robust volume growth with strong incrementals more than offsetting FX headwinds.
Now I would like to turn the call back over to Dave Dave.
Thanks, Chris Please turn to slide number eight <unk>.
We've discussed throughout the call underlying demand for our innovative products and services has never been higher with unprecedented levels of bookings and backlog across our businesses.
Relentless innovation strong brands with leading market positions customer focus and operational excellence are hallmarks of our market outgrowth over a long period of time.
In the Americas, our commercial HVAC business is driving strong demand and share gains as demonstrated by our order growth of approximately 50% on a two year stack.
And we are exiting the third quarter with another quarter of record backlog up more than 70% year over year and more than 200% of historical norms.
End markets remained strong with a variety of economic indicators pointing to growth in 2022 unemployment is low and indicators like the architectural billing index remained favorable with a reading of over 50 since February of 2021.
Demand remains strong in data centers education health care and high Tech industrial verticals, where we have strong customer relationships and market positions.
Our commercial HVAC business is underpinned by long term secular tailwind of energy efficiency de carbonization and indoor environmental quality.
We also see tailwind from new and ongoing regulatory and policy related drivers such as inflation reduction Act and education stimulus.
Our commercial HVAC business has a lot of runway and we believe we have the premier franchise to capitalize on significant opportunities that lie ahead.
Demand for our residential products remained healthy with a book to Bill of <unk>, 92% combined with 16% revenue growth in the third quarter, we expect bookings and revenue to normalize over time and for regulatory and policy related tailwind such as the upcoming seer change and the inflation reduction act to help buffer potential market declines longer.
Term, we continue to see residential HVAC as a GDP plus business, which makes up about 20% of our portfolio.
Turning to Americas transport refrigeration at continues to project solid growth in 2022, followed by a relatively flat 2023, where the market is expected to remain at a high level.
We have a diversified portfolio of solutions across a number of vertical markets, which provide opportunities and continued growth prospects through further market penetration and share gains.
Longer term, we continue to see transport refrigeration as a GDP plus plus business for us.
We'll talk more about the transport refrigeration outlook and our topics of interest section.
Turning to EMEA commercial hvac's.
While we have muted expectations for overall market growth given the volatile geopolitical backdrop demand for our leading sustainability focused solutions remains strong.
We continue to see good opportunities for market outgrowth and share gains across the region and we're seeing great traction and growth across our thermal management systems portfolio.
Looking at EMEA transport refrigeration the market is expected to be down roughly mid single digits in 2022, primarily reflecting the removal of Russia from the market sizing.
Looking out to 2023, we expect the market to be down modestly, reflecting economic uncertainty in the region.
We're continuing to work closely with our customers as the market evolves.
Turning to Asia, we continue to see strength in data center electronics, pharmaceutical and health care verticals outside of.
China. The picture is mixed with varying dynamics country to country now I'd like to turn the call back over to Chris Chris.
Thanks, Dave Please turn to slide number nine.
As Dave discussed at the outset of the call. We are pleased with our execution through the first three quarters of the year and we continue to see slow, but steady improvement in our supply chain.
Additionally, bookings and backlog continue at high levels, providing us with good visibility into future revenues.
All in we're confident in once again, raising our full year revenue and EPS guidance for 2022.
We are raising our full year organic revenue growth guidance to between 13 and 14%.
Up from our prior guidance of 12%, reflecting both stronger price and volume for the year.
We are raising our adjusted EPS guidance range to $7 15 to $7 20.
From a range of $7 five to $7 15.
Which is an increase of about <unk> <unk> at the midpoint.
As Dave mentioned previously our updated guidance includes an additional <unk> <unk> headwind from FX for the year that we are absorbing in our guidance, which means our core guidance range is effectively higher by about 14 to 15 at the midpoint.
Our full year organic leverage expectations are unchanged at mid teens.
While we continue to see our supply chain slowly improving remains challenging and continues to pressure productivity in our plants and drive higher cost to serve customers as we've discussed previously.
As a result, we're expecting similar to modestly improve leverage in the fourth quarter versus the third quarter or between 20% and 25%.
We expect free cash flow to remain healthy and are targeting a 100% of adjusted net income for the year.
Dependent upon the timing of revenue and shipments as we close out the year, we could see some receivables carryover into 2023, which could modestly impact the timing of our cash conversion.
Other elements of our guidance remain largely unchanged.
One last item I wanted to highlight relates to our guidance cadence.
As Dave discussed earlier, when we raised our guidance on our second quarter call. We envisioned recouping about $30 million of the $120 million in delayed revenues related to the second quarter plant closures in the third quarter.
And recouping the other $90 million in revenues in the fourth quarter.
We're extremely pleased we were able to accelerate this recovery plan and recoup $100 million in revenues in the third quarter $70 million ahead of our guidance expectations.
The net effect is a modest shift in the timing of $70 million and revenues were approximately seven <unk> of adjusted EPS into the third quarter from the fourth quarter with no impact to the full year.
Please see page 17 of the presentation, which provides additional details related to guidance to assist with your models.
Please go to slide number 10.
We remain on track to deliver $300 million of run rate savings from business transformation by 2023.
We continue to invest these cost savings and high ROI projects to further fuel innovation and other investments across the portfolio.
Important to note that our transformation savings program as a discrete program related to recovering three times the amount of stranded costs, we expected to see as a result of the separation of our industrials business.
Our business operating system is designed to drive continued strong productivity and cost savings over the long term and we have a long track record of success over the past 10 plus years.
Our relentless focus on executing our business operating system and driving productivity and cost savings continues long after the discrete transformation program has achieved its targets.
Please go to slide number 11.
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 12, and I'll provide an update on our capital deployment in 2022.
In the third quarter, we deployed $406 million in cash.
With $156 million of dividends and $250 million of share repurchases.
Year to date through October the company has deployed approximately $1 6 billion with $900 million of share repurchases 467 million dividends and approximately $250 million to M&A, including the acquisition of Alco Air Technology, which closed on Monday October 31.
We continue to target the deployment of approximately $2 $5 billion of capital in 2022.
Our M&A pipeline remains active and we have significant firepower for share repurchases with approximately $3 5 billion remaining under our current share repurchase authorizations.
Our strong free cash flow liquidity and balance sheet continue to give us excellent capital allocation optionality and dry powder moving forward.
Now I would like to turn the call back over to Dave Dave.
Thanks, Chris Please turn to slide number 14 overall global transport refrigeration markets are expected to remain healthy in 2022.
Forecast for 2022 are largely unchanged versus the last quarter with strong growth in North America, and a mid single digit decline in EMEA, largely driven by the removal of Russia from the market sizing.
For 2023 forecast have softened a bit versus the prior quarter Act is now projecting roughly flat growth from 2022 to 2023 with the overall market remaining at a high level.
In EMEA, while IHS has yet to publish an official outlook for 2023, we expect the market to be down modestly based on a softening European economic backdrop.
After clear share gains in truck trailer and Apu and both the Americas and EMEA in 2021, we're expecting continued share gains in 2022.
For 2023, we have strong and diversified portfolios in both North America, and EMEA and see opportunities for growth and share gains across our portfolio.
Please go to slide number 15 and.
In summary, we are positioned to outperform consistently.
Energy efficiency de carbonization, and sustainability Mega trends continued to intensify and create record levels of demand for our innovative products and services.
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.
The strength of our business operating system, the power of our global team and our broad based market demand gives us confidence in raising our full year revenue and EPS guide.
We believe we have the right strategy the best team and a solid foundation in place to deliver strong performance in 2022, and differentiated long term shareholder returns and now.
We'd be happy to take your questions operator.
Thank you if you would like to ask a question on the phone lines. Today. Please press star one on your telephone keypad to remove yourself from the queue. You can press star one again once again, everyone. Please limit yourself to one question and one follow up we will take our first question from Andy Kaplowitz with Citigroup.
Good morning, guys nice quarter.
Hey, Andy how are you doing.
Dave can you give us more color into the commercial HVAC bookings environment in the Americas. It looks like you booked.
And he has actually accelerated a bit in Q3 could you talk about the biggest drivers of that bookings growth at discipline that visibility of continued strong bookings how much of the good growth as the impact from institutional customers, maybe generally each day to spend on a Q have you seen any customers begin to pull back on spend yet and are you seeing any major <unk>.
<unk> between applied and unitary.
Well, we haven't seen any pullback andi. Good question, but we're seeing broad based demand electronics Datacenters education healthcare.
High Tech industrial think of electronics EV plants on battery plants. So we're seeing some nice nice demand I mean order rates were up around 20% in the Americas.
And it's really across many verticals so a lot of strength there.
Great and then maybe a similar question on <unk> I know you don't want to give us exact forecast for 2003 of our bookings down high single digits in line with what you guys thought.
Pricing still very strong have you seen any weakness in replacement volume at this point you kind of said that you didn't expect it to follow the cliff how is that going what about inventory in the channel and are you still measuring your resi backlog in months.
Gives you a decent visibility, especially with Seo change in 'twenty three.
Yes, our rescue business had a very strong third quarter with strong mid teens organic.
Revenue growth book to Bill in the quarter was 92% channel inventory and our independent wholesale distributor channel was a bit higher than normal, but nothing alarming sell through in the independent channel was mid teens. So it was strong.
<unk>.
Order rates will be under pressure here in the short term as we think about this backlog that we're still measuring in months as it starts to normalize and Andy if you remember.
In 2021.
Order rates for our resi business on a full year basis, we're up around 30%.
Our revenue was up 14%. So we built this really large backlog that we'll need to process through and you only need to look at when you think about residential really look at three different elements. One is what's your order rate too is what's your backlog and then obviously your revenue and those three will start to neutralize themselves over time, but.
Longer term, we see our residential business as a GDP plus business.
<unk>.
They had a very strong third quarter for us Andy I'll add on the enterprise backlog, we reported a $6 $4 billion.
We still see that 90% is non residential it's focused on our commercial businesses, including thermo King.
The same here in the third quarter, we do not see rajeev fallen off a cliff theres going to be some positive tailwind to next year.
You have the sheer change that will happen, which will drive some price you also have IRR, which we're still working through there are some elements there that still need to be defined but that will be a tailwind.
That starts towards the beginning of the second quarter. So there was some positive two in residential.
Appreciate it guys.
Thanks, Andy.
We will take our next question from John Walsh with Credit Suisse.
Hey, good morning, and congrats on the nice quarter. Thanks.
Thanks, John I appreciate it.
I'm going to take a stab at it. So you have incredibly strong backlog you've opened up the order book at Thermo King services continues to grow nice just.
Anything you can give us.
In terms of maybe how you think the market develops into 'twenty three or just how much more visibility you have today than you would normally have.
Going into it.
A year.
Yes, I mean, I think with a backlog of $6 4 billion. It gives us a lot of visibility. If you think about a normal fiscal year. John we typically go in with about 20% of our revenue in the backlog. Obviously, we're going to go into 2023 with a much larger number which really is going to help us to with our forecasting capability.
With our suppliers.
The supply base is still constrained it's improving the third quarter was certainly better than the second quarter, the fourth quarter will be better than the third quarter, but it is going to be constrained for a period of time, but having that visibility really helps us helps our suppliers helps us with our forecasting capability.
Great and then maybe just on the margin.
Price cost still positive on absolute dollars I think you said, it's still a headwind to the margin just.
As you think about price flowing into next year.
Maybe also what youre seeing on inflation, just maybe give us some expectations for price cost and when it flips positive on a margin percent.
Hey, John .
Summarized it well with third quarter price cost positive on a dollar basis still a margin headwind, but less of a margin headwind in Q3 than what we saw in Q2. So it is it is getting a little bit better as we think about 2023, we'll certainly see some carryover price coming into next year.
We're seeing those commodities start to come down off of their peaks certainly not back where we were two years ago in terms of commodity costs, but a little bit of deflation. There, we see that impacting 2023 more so than 2022.
But we also are looking at items like wage inflation in energy inflation as well that will need to bundle altogether and we will provide a better look on 2023 and a few months when we report our Q4 earnings but it.
There should be some deflationary opportunities in there and we're going to as Dave mentioned, a very strong backlog entering into 2023 and ultimately the goal here is to deliver top quartile results.
Great. Thank you I'll pass it along.
Thanks, John .
We will take our next question from Scott Davis with Melius research.
Hey, good morning, guys.
Hey, Scott how are you doing.
Good good thank you.
Because if you think back to kind of prior housing recessions we saw.
A bit of a double mix shift mix shift down to lower end units and a mix shift towards more repair versus replace what.
Given the sheer changes that are coming in in 'twenty three and.
Perhaps maybe.
Change in <unk>.
Dealers have taken inventory and stuff.
What do you do you see a similar potential or muted impact it sounds from your prepared remarks, like perhaps a more muted impact, but maybe some color on why it would be helpful.
Yes, I think it will be a little bit more muted.
I think that there is obviously, the seer change, which which we are in the process obviously of.
Shipping the new products as we speak so that's going to add some price and it's also going to push up.
The higher end of the Sears.
Market I also think that <unk> will be a tailwind.
Again, we're working through some of the details on that that still needs to be defined but that'll.
That will certainly push the market more to the heat pump side of things and the higher share of on the heat pumps.
Okay.
And switching gears I see.
Our releases press releases plus kind of trade magazines.
The next generation of products in Thermo King where is that.
I mean help us understand kind of the demand from the customer for.
Next generation product in particular really where is that technology going is it going to a hybrid.
Or all battery.
When I suppose is another way to.
Good question totally the crystal balls, there, but I would tell you that it is moving to electrification youre seeing it in the smaller vehicles now on.
We have a complete portfolio of products there that are able to capture that market on the long haul carriers. So think about the reefer units that will be a slower transition.
But we're ready for it we actually have products that are out now we're testing in the field with customers that are fully electric it'll it'll take it approach very similar probably to what <unk> seen with cars, where youll start with hybrid and then it will move to.
An all electric version.
Okay Best of luck. Thank you guys I appreciate it thanks, Thanks Scott.
We will take our next question from Julian Mitchell with Barclays.
Okay.
Hi, good morning.
Just wanted to good morning, just wanted to start with.
The thermo King.
Outlook, so you've got that very helpful Slide 14.
Just when we're thinking about next year.
And it looks like as you said the sort of third party market full cost and so forth are sort of flat to down units in 2023.
So I just wondered about how would you sort of.
The scope for Thermo King.
Overall transport.
Trained to do.
Better than that.
What's the outlook for that one third of revenue, which is sort of marine bus rail and after market.
How is pricing in transport for you versus the train and surprise any thoughts on share gain potential.
Potential perhaps after some under growth in North America. This year any sort of color on that please.
Yeah, I would say that our thermo King business I'll start in the Americas, It's performed very well for a number of quarters consecutively.
Very strong quarter, obviously in third quarter as we saw the revenue that we missed in Q2. The team was able to pick that up in Q3, just a great effort by the team as.
As far as share gains, we're very happy with our share gains in our thermo King business.
Outlook for 2020, we like the innovation that we've been able to.
Drive in that business and really both regions, both EMEA and in the Americas, and it's really helping us with those share our share position. So 2023 in the Americas. You Act has got it relatively flat to 2022, but understand that sort of very very high level. I mean, there are forecasting the trailer.
Market to be.
Last number I saw was like 45000, which is a very very robust market and in.
In Europe , we haven't seen an official forecast from IHS, we're estimating that it's going to be down modestly.
But don't assume that that means that our business will be will be down. Okay. We have some great innovations there.
We continue to get continue to get traction with some of the innovations that we've had in our EMEA business.
And Dave maybe just one follow up on that the pricing and transport how do we think about that versus the train enterprise average of I think 10 points.
Julian I'll jump in we.
We don't really dial it in necessarily by each SBU, but I would say, it's certainly contributing to the enterprise performance.
The business operating system, that's been deployed for many years, one aspect of that is pricing and getting in front of inflation and the thermo King team is really a part of that strength that we've shown over the last now seven quarters in this highly inflationary environment in staying ahead on price costs. So really.
Proud of where our teams both in the Americas, and Europe and in Asia of Delta there.
And Julie if I could just follow up on just a quick story here talk a little bit about our culture here at Trane technologies.
That team in the Americas overcame a massive obstacle that happened in the early may time period, when our tornado hit our facility in Puerto Rico, and really removes the roof from one of our major assembly operations there.
And I can remember meeting with that leadership team and it was early may and the president of that business. She walked into the room and she looked at the team and she had three questions for the team.
And she said number one our all of our employees safe.
And the answer was yes, because of the storm hit on a Sunday afternoon, and the plant was unoccupied. The second was do any of our team members need help and the answer was no because there's tornadoes are they tend to be very targeted.
Targeted and it wasn't a larger impact to the community and the third question was how do we get this facility back up and running so we could take care of our customers.
And here, we are talking about this in.
Late third quarter early fourth quarter, and we were able to recover all of the missed revenue that happened in the second quarter in the third quarter that team performed exceptionally well and just it speaks volumes to the the character of not only that team, but to trane technologies.
That's good to hear Dave maybe just switching for a second operating leverage Chris you called out 20% to 25% of Q4, when we look at just sort of broadly. The next 12 months do we assume that number lifts gradually as you get this kind of steady abatement of price cost.
And our supply chain margin headwinds, there's no kind of step change, but it should clearly move higher from Q4.
Yes, I'd say Julian.
The commodity the direction, where commodities are going would suggest there should be certainly some improvement.
We've done some great work staying ahead on price.
And keeping ahead of inflation, so I think that as an opportunity going into next year is that price versus direct material cost inflation. We are looking at areas such as wage inflation and energy inflation as well that have to be factored in so we'll provide more guidance on that in a few months.
Also going to be right now we're in the middle of that planning process for next year, we're really spending a lot of time around our investments again, and where can we accelerate some of those investments to really drive returns. So all of that is going to be baked in as we think about incrementals for next year, but.
A lot of moving components as always but we'll give you guidance in a few months.
Great. Thank you.
Thanks, Julien Thank you.
We will take our next question from Joe Ritchie with Goldman Sachs.
Thanks.
Good morning, Hey, Joe how are you.
Hi, great.
It seems like you guys are doing well as well, but thanks for asking.
Yes.
Maybe just starting off with EMEA.
Can you just parse out a little bit what's happening here on the margin.
Clearly.
FX price cost, having an impact.
It's been down now for four quarters in a row I'm just wondering at what point do we start to see an improvement in the margin profile for the EMEA business.
Yeah, Joe I think of that FX decline on a year over year basis about half of that is coming from foreign currency.
The other half of that is still these acute supply chain issues that.
Frankly, we saw in that region, starting about a year ago with the significant demand and we're still incurring higher cost to serve customers, which we know is the right thing to do in this market, but bulk of those costs to the supply chain inefficiencies, which is still very real and then foreign currency are really the drivers for.
For margin, we do expect those margins to improve over time as these supply chain challenges improve Dave's talked about this gradual recovery and we've seen that occur in the third quarter with some stronger volumes than what we had forecasted and.
And we do see that gradually getting better as we move out over the next several quarters, but it's going to take some time, yes, John the other thing I would add is.
I'm very confident long term with our outlook in Europe that region continues to grow share and it is one of our leading regions with innovation. So just a really creative management team there thats been able to execute well.
Long term I feel good about Europe .
And I guess, maybe part of my question should asked it earlier is like are you starting to see any any impact from European energy costs.
Is that is that impacting the margin in August .
Any color around that would be helpful.
Yes, I'd say, maybe a little bit in the third quarter and certainly as we've talked to our employees. They are feeling the impact of that in there on utility bills in the statements that theyre getting at home.
Yes, it is starting to creep in a little bit in the third quarter, a little bit into the fourth quarter and certainly into next year.
Maybe a bigger dollar amount for us to kind of consider in thinking about from pricing perspective I.
I think what it is also doing is driving a fair amount of the order growth as well as you think about.
Products that are in the <unk>.
Thermo King space hybrid electric products that have 30% fuel savings versus the product that was on the market two years ago. The.
The electrification of heating and.
Driving our thermal management systems of the commercial HVAC side that reduce energy intensity.
Those are really contributing as well in this and it's very challenging energy crisis in Europe .
Sure.
Got it that's helpful. If I could just maybe sneak one more in just on <unk>.
Can you parse out what.
How much how much of the growth this quarter was price.
Versus versus volumes and whether theres been any discernible.
Discernible difference between what you are selling through your own network versus what youre selling through independent distribution.
I think the simple answer there is everything was up mid teens, so that makes it easy to answer.
Yes.
For the enterprise.
Over 10 points of price and.
<unk> continues to be one of our.
Leading businesses with price so it's north of 10.
We won't go any further than that for.
Competitive reasons, but it's a strong business had a good strong third quarter.
Alright, great. Thanks, guys.
Thanks, Jeff Thank you.
We'll take our next question from Gautam Khanna with Cowen.
Good morning, nice quarter guys.
I appreciate it guys.
Sure.
Yes, just to follow up on the last question on <unk>.
I was wondering are you seeing any.
Any.
Lines of double ordering pushback maybe.
As lead times come in Youre, not getting your getting cancellations or anything of that assortment.
Curious just you haven't given guidance for next year, but do you think resolute profits.
Can actually be up.
Next year.
With volumes down some on quantified level and if so kind of why.
Yeah, I'll start I'll, let Chris talked about the profit next year, but.
Not seeing any cancellations, okay, that's not happening if I look at the inventory in the channel as I said earlier, it's a bit higher than we would normally see but nothing alarming and we haven't seen any cancellations I do believe that we will see our order rates on a unit basis continue to.
Come down because we have to process through this backlog that is.
It's just we're still measuring it in months and it's going to take several quarters before we're able to process that down.
Yes, I would add on the on the margins as we've said the residential business has really had some very strong price over the last seven quarters.
Same time stayed ahead of inflation.
As you go into our planning process, we look at all of our strategic business units when we think about.
Topline growth leverage growth cash flow performance across the board.
I think the team has executed quite well.
With the investments they've made over several years in the value space. That's a market that continues to grow well for that so that SBU and depending on how markets move in the U S.
An area that 10 years ago, we didn't have very much of a presence in the value channel. That's the area. We do have a presence in today.
And on the replacement side versus.
Repair, we will see where that plays out but it's a business that has a great a great sense of.
Purpose as well as brands.
Said this before but we don't see the residential business falling off a cliff next year, and we don't see margin contraction or large revenue fall offs.
Okay.
Thank you guys.
Okay. Thank you.
We will take our next question from Steve Tusa with Jpmorgan.
Hi, good morning.
Hey, Steve how oriented morning good.
Is your mix of your resi business with furnaces is that about in line with the industry call it like 30% or something like that.
Yes, I don't I know that it's a good question, Steve I don't have that in front of me I would tell you that I know that our mix of heat pumps is stronger than the industry.
So that would and obviously you don't have a furnished with a heat pump, but I don't have the specifics on heat pumps, when we're selling split systems.
Okay, and then just on the commercial side.
I think you guys put through a pretty dramatic.
This increase in the third quarter on light commercial.
And.
We're continuing to hear about extended lead times there can.
Can you just talk about maybe.
What kind of behavior, you saw around that price increase or if I'm wrong about that and then.
Are you guys.
Seeing longer than than normal lead times on your on the light commercial side.
Steve I'll start with with pricing.
Part of our business operating system is to evaluate the input costs and then ultimately.
Making sure we're pricing based on value as well.
I would say across the majority of our businesses in 2022, we've seen actually three rounds of price increases.
Very similar to the three rounds, we saw in 2021.
So yes, I think the team is looking at a significant demand, making sure we're pricing for it.
These products are getting delivered 369 months out so we want to make sure we are protecting ourselves from an inflation perspective on the cost side.
As far as lead times go Steve we have extended lead times across our portfolio as the broader industry.
As do most industrials right now as we're still working through the supply chain.
Challenges that are improving as far as on the unitary side actually thats.
We're doing pretty well there so I don't see that that's not an area that.
We have.
I would imagine that we're very competitive in the marketplace there.
Commercial unitary order up in the quarter. That's my last question. Thanks.
<unk> I'm, sorry in unitary commercial unitary commercial unitary equipment.
I know our revenue was up in the <unk> I don't know what the order rate was I think it will get back to you on that okay. Thanks, a lot I appreciate it.
We will take our next question from Nigel Coe with Wolfe Research.
Yes. Thanks, good morning, Thanks for the question.
Hey, Nigel Bourne catching back quickly.
Dave just quickly on the you don't see this as applied mix.
Obviously lots of questions about the macro.
<unk> launched commercial feels like a global effect with tailwind in the half.
Is that would you say units, we still have a bit more of the casualty risk then applied just just just a quick question there, but really my question is really around the services low teens in the Americas and EMEA really impressive I think over time its grown 78% is the delta between trend and now mainly price or.
<unk> and other things so that's driving that that growth rate and kind of like how do you think that trends in 'twenty three.
I think if you look longer term at our service business and let's look over.
Five year period here on a global basis, our service business is up on a compound annual growth rate high single digits. So that's a business that's very resilient that's performed very well for us in.
In fact in 2020, the pandemic year, we were flat to 2019, despite having lockdowns and having difficulty accessing some buildings. So service business is a great business, we have a great operating system around our our service business and today it represents.
Close to a third of Trane technologies. So we're very happy with our service business on the unitary side, we had we had strong growth in the.
Yeah.
Throughout our commercial HVAC business. So it was broad based and unitary and applied.
No.
Really broad based in many verticals across the globe.
Okay, that's great and then Mike Mike let alone it's really a quick one on supply chain.
One of the companies this morning surprised on supply.
Supply chain availability issues in the current quarter about the last quarter.
It feels like most companies are talking about supply chain slightly improving I'm, just wondering how you're characterizing the momentum in your kind of in the hard to get components.
Yes, I would say supply chain performed as expected during the third quarter.
We anticipate a gradual improvement through the rest of the year and for several quarters.
Into 2023.
The team is do our team is doing just a great job of.
Managing that and I think this large backlog gives us more visibility as we talked about earlier, which again being able to tell the.
Our suppliers, what we need okay is very important in being accurate with that and our team's just done a fantastic job. There. So supply chain is improving slowly slower than any of us want.
And we will continue to see improvement in the fourth quarter here.
Great. Thanks, Ed.
We'll take our next question from Jeff Sprague with vertical research.
Hey, Thanks, good morning, everybody.
Got it.
Jeff how are you doing great. Thanks.
Hey, just a couple of loose ends.
First Chris just back on Europe margins in FX, I typically think of ex FX.
Being a profit headwind, but not a margin headwind is there some particular transactional issue going on in Europe beyond just kind of a translation effect of dollar strength.
And Jeff It's a good question not all of the components raw material purchases in Europe are all denominated in euros. There is certainly components that come in from the U S or from Asia. So there are some transactional.
Headwinds here when you think about the declining euro against the dollar so thats part of the driver but.
Totally understand your question, but it is that dynamic of some of the components, we buy in currencies other than the euro.
And I was wondering also if you guys could kind.
Kind of take a swag at measuring.
Kind of the productivity headwinds you've absorbed here over the last whether it's the year to date or since.
We got into this whole kind of tangled supply chain mass and.
How significant have they been to margins in aggregate and just your thought process on being able to reverse some of that as we perhaps get into the second half of 'twenty three.
Yes, I think the.
One of the.
The knock on effects of the supply chain, that's inconsistent as productivity right. So if you think about.
You're running a factory you don't have the right components Youre youre stopping lines, you're partially building product here.
It out in the yard Youre, bringing you back on the line when you get the components to retest the product because obviously, we want to test everything before it gets shipped out to our customers. So it's been disruptive.
It's improving but it's going to improve slowly.
As the supply chain improves.
As far as quantifying it is difficult to do right now I would just tell you that it's going to be slowly improving and will continue to make progress. It's certainly a focus of our teams is to how do we get back to being able to have the productivity we've seen in the past, but the supply chain the knock on effect associated with it it has had an impact.
In our operations for sure.
Im sorry, just a related follow up to that date, so it's <unk>.
<unk> chain got better.
Quickly than expected do you think you could actually accelerate backlog conversion or the customer at the job site still is not ready that there really isn't a scope to dramatically accelerate backlog conversion.
Yes, I think I think we're obviously getting with extended lead times. Okay. I think the first thing you're going to see is the supply chain improves youll youll see those lead times start to contract back to more of a normal level, but right now we're obviously, especially on applied jobs. Those are specific to a job site, so and theyre, giving us enough.
Lead way, so we're able to hit their expectations. So it's very difficult to accelerate that on the applied side unless the job site suddenly gets pulled forward, which happens, but I wouldn't say, it's we're not seeing that as the norm right now okay. Great. Thank you.
Okay. Thanks Jay.
We will take our next question from Deane Dray with RBC capital.
Thank you and good morning, everyone.
Good morning.
Im not sure how specific you can get here, but at the outset of the call you talked about market share gains in virtually all businesses. If we think about that nine percentage points and volume growth.
How much of that might be attributed to share and again its harder at a total company level versus the business unit, but any color there would be helpful.
Yes. It is I think when you start talking averages and you start getting share up to a company level, it's not it's not meaningful but I would tell you that if you look around the different regions.
We like the growth rates, we're seeing and we like the innovations we've been able to drive and we certainly like the order rates that we're seeing.
<unk>.
You can see that with our order rates versus maybe some some other companies, but we're very happy with the performance, we're very happy with our product management teams being able to reach.
Really understand customers' insights and being able to have innovations that exceed their expectations. So I expect that to continue in the future.
One of the things that we pride ourselves in is the fact that we don't let up on innovation, we don't let up on the dollars that we invest in innovation and we're going to you're going to continue to see that from trane technologies well into the future.
I appreciate that and just as a follow up on any update on indoor air quality healthy buildings initiative.
You all had kind of drawn a line in the sand and said it would be at 200 basis points lift for 10 years, or so where does that stand.
Yeah go ahead, Chris, Yes, Japan, yes.
Quantified it last year Dean as a two point lift on revenues.
And then as we move through the year last year, we just thought it was really hard to start bifurcated.
What was an indoor air quality order versus maybe the traditional equipment order our service order so.
Certainly helped contribute to the growth last year, but as we are seeing significant growth. This year to full year guide of 13% to 14% organic growth on the full year indoor air quality is one of those contributors to the customer is looking at upgrading their equipment.
Energy savings rate earlier, especially where we see energy prices right now.
He is a contributor and the remaining tailwind, yes, one of the areas.
Just talk a little bit about is in the education vertical and I know the funding there with Essar are our education vertical in North America order rates are up year to date over 40% over 40%.
So you could see the traction that we're having there.
That's real helpful. Thank you.
Sure.
Yes.
We will take our next question from Joe O'dea with Wells Fargo.
Hi, good morning, Thanks for taking the question Hey, Joe how are you good morning Manuel.
Thanks.
I wanted to ask on Cogs, and just thinking about some of the cost dynamics moving forward and if you could talk about sort of within the materials exposure how much materials of Cogs, how much that is raws.
<unk> source components.
Do you think about this cost trends or should we see sort of their supply chain and lower raws contribute to lower component costs as well or strong demand doesn't translate to lower component costs just to kind of understand some of those moving pieces.
Yes, certainly.
I guess all of the above in our mix.
We're probably we're going to look as we go into guidance for next year trying to just give an update of the componentry of.
Commodity costs versus other cost because that has kind of changed over time.
We've described.
Between copper aluminum and steel those being each about a third of total what I call tier one commodity costs, excluding say refrigerant.
And certainly as I said before it provides a bit of a tailwind going into next year.
In terms of where we see those commodity costs going right now.
Certainly with more volume there generally is a bit more leverage we can try to get but in the supply chain environment and the constraints.
We're ultimately just trying to manage that quarter to quarter and continue to see that getting better.
So I guess I'd leave it at that kind of.
And that kind of level as we kind of ultimately look to price for next year and ultimately try to get our price cost positive spread for next year.
Yes.
Got it that's helpful and then back to the.
Price cost margin dynamic just based on the visibility that you have.
When do you see that flipping such that Youre positive on the margin side.
From a price cost angle.
Yes, we expect for the fourth quarter.
To remain price cost positive on a dollar basis I think it will still be margin decremental on a year over year basis.
That price.
Component, though the growth in the fourth quarter that'll be lower than the third quarter, we're just comping against stronger price realization from a year ago.
On the second half of 2021 much stronger than the first half. So do you expect topline price to be less of a contributor in Q4, but.
We're on track to be price cost positive for the full year.
And ultimately for the full year, it'll be a bit of a margin headwind as well.
Okay.
Sure. Thanks.
Yes.
And that concludes today's question and answer session I would like to turn the call back over to Zac Nagle for closing remarks.
Great I'd like to thank everyone for joining on today's call and as always we'll be around to take any questions that you might have.
Coming days and weeks and hopefully we will see you on the road soon and we'll have a great day.
Hi.
And that concludes today's presentation. Thank you for your participation you may now disconnect.
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