Q1 2023 Trane Technologies plc Earnings Call
Speaker 1: SDSG report, which highlights how our innovation is helping our customers decarbonize their operations.
Speaker 1: save energy, and improve performance. We have reduced our customers' carbon emissions by 93 million metric tons since 2019.
Speaker 1: towards our goal of reducing emissions by one gigaton, or one billion metric tons by 2030.
Speaker 1: These bold ambitions drive our relentless focus on innovation, and our innovation creates tremendous demand for our sustainable solutions.
Speaker 1: This enables us to deliver a superior growth profile, strong margins, and powerful free cash flow.
Speaker 1: The end result is long-term value creation across the board for our team, our customers, for shareholders, and for the planet.
Speaker 1: Moving to slide number four.
Speaker 1: Our global team continues to execute at a high level and delivered another quarter of strong performance.
Speaker 1: showcasing the power of our diverse, resilient portfolio.
Speaker 1: Organic revenue was up 9%. Adjusted operating margins expanded 140 basis points.
Speaker 1: An adjusted EPS screw 26%.
Speaker 1: Absolute bookings levels continue to be extremely strong, as evidenced by our book-to-bill ratio of 117% in the first quarter.
Speaker 1: We added $400 million to our backlog.
Speaker 1: driving record backlog of $6.9 billion at year end 2022, up to 7.3 billion at the end of the first quarter.
Speaker 1: Demand continues to be particularly strong in our long-cycle commercial HVAC businesses.
Speaker 1: where global commercial HVAC bookings were up more than 35% on a two-year stack.
Speaker 1: America's commercial HVAC bookings were up nearly 40% on a two-year stack.
Speaker 1: We've been encouraging investors to look at absolute booking levels and backlog in addition to growth rates to gain a more complete understanding of the strength of our business.
Speaker 1: Q1 is a good example of why that is important.
Speaker 1: Our enterprise book to bill of 117% was led by commercial HVAC in all regions and demonstrates ongoing exceptional levels of demand for innovative products and services and continued backlog build
Speaker 1: These strong results position us well for continued profitable growth in 2023 and 2024 with improving visibility.
Speaker 1: Our backlog of 7.3 billion is more than two and a half times historical norms.
Speaker 1: Further, we expect backlog to remain elevated throughout 2023, and anticipate entering 2024 with backlog in excess of 6 billion.
Speaker 1: To be clear, $6 billion in backlog is a scenario we believe represents the floor.
Speaker 1: The intent is to accomplish two goals. First, give investors a high degree of confidence we will meet or exceed the floor scenario.
Speaker 1: The second is to give investors a high degree of confidence that the floor scenario would put us in a very strong position entering 2024 with backlog as a percentage of forward revenues significantly higher than historical norms.
Speaker 1: Our strong balance sheet liquidity and financial position continue to provide us with excellent capital allocation optionality.
Speaker 1: Year-to-date, we've deployed $720 million to dividends, share repurchases, and M&A, and we expect to deploy approximately $2.5 billion in 2023.
Speaker 1: On the M&A front, we acquired a leading industrial process cooling technology company in O'Neill and committed to acquire a precision temperature control cooling company in the life science vertical in the Americas.
Speaker 1: Overall, the first quarter played out essentially as expected and gives us confidence in raising our full year guidance for revenue and EPS growth.
Speaker 1: We continue to expect free cash flow to be equal to or better than 100% of adjusted net earnings.
Speaker 1: Chris will discuss our guidance in more detail later in the presentation.
Speaker 1: Please go to slide number five.
Speaker 1: Demand for our innovative products and services continue to be broad-based across our segments, highlighting the strength of our global portfolio.
Speaker 1: our book, The Bill and the Quarter, was not only strong at the enterprise level,
Speaker 1: but exceeded 115% in each segment as well.
Speaker 1: contributing to elevated backlog across the portfolio.
Speaker 1: Revenues were also robust in each segment, with particular strength across our commercial HVAC businesses.
Speaker 1: In the Americas, our book-to-bill ratio exceeded 115%, led by commercial HVAC.
Speaker 1: The commercial HVAC team delivered standout results with strong absolute bookings that exceeded mid-change revenue growth.
Speaker 1: Revenue growth was strong in both equipment and services, of high teams and low teams, respectively.
Speaker 1: Our Americas residential business performed largely in line with our expectations at this early stage in the year.
Speaker 1: Bookings and revenue continue to normalize as we approach the cooling season and distributors manage their inventory positions.
Speaker 1: Still, our book to bill was roughly flat in the quarter.
Speaker 1: Sell-through revenues across our channel and our IWDs were flat year over year.
Speaker 1: Our Americas transport refrigeration business performed consistent with our expectations for the first quarter, with mid-single digit revenue growth. We expect this business to outperform the end markets, which are expected to be flat for the year.
Speaker 1: It's also worth noting that we expect quarterly bookings for both America's and EMEA transport to be wanted throughout the year.
Speaker 1: the timing of order books, customer order patterns, and elevated backlogs.
Speaker 1: In our EMEA segment, our commercial HVAC business delivered another standout quarter.
Speaker 1: Bookings were robust and revenues were up more than 25%, with strength in both equipment and services.
Speaker 1: up nearly 40 percent and high single digits respectively.
Speaker 1: Our transport refrigeration business also had a very strong quarter with revenues up mid-single digits.
Speaker 1: We expect this business to outperform the EMEA transport refrigeration markets.
Speaker 1: which are expected to be down low single digits to mid single digits for the year.
Speaker 1: In our Asia Pacific segment, the team also delivered strong results with revenues up high single digits.
Speaker 1: supported by broad-based growth in China and across the region.
Speaker 1: Commercial HVAC was again a standout with low teens revenue growth led by services.
Speaker 1: which was up nearly 25%.
Speaker 1: Now, I'd like to turn the call over to Chris. Chris? Thanks, Dave. Please turn to slide number 6. Please turn to slide number 6.
Speaker 1: This slide does a nice job highlighting our overall performance in the quarter, which was strong across the board. Organic revenues were up 9 percent, adjusted EBITDA margins were up 100 basis points, and adjusted EPS was up 26 percent.
Speaker 1: At an enterprise level, we delivered strong organic revenue growth in both equipment and services.
Speaker 1: up high single digits and low teens respectively. Our high performance flywheel continues to pay dividends with relentless investment in innovation, driving strong top-line growth, margin expansion, and EPS growth.
Speaker 1: Please turn to slide number seven.
Speaker 1: We've discussed the key revenue dynamics for the first quarter, so I'll focus my comments on margins. We'll discuss the key revenue dynamics for the first quarter, so I'll focus my comments
Speaker 1: We delivered strong margin expansion in each of our business segments and have highlighted the key margin drivers on the right side of the page.
Speaker 1: In each of our regions, strong price realization, volume growth, and productivity combine to more than offset continued supply chain challenges and persistent inflation in the quarter.
Speaker 1: As we've highlighted previously, the supply chain is slowly improving. We expect this trend to continue throughout 2023.
Speaker 1: As an enterprise, we delivered about six and a half points of price and about two and a half points of volume in the quarter, which is largely in line with our expectations.
Speaker 1: We delivered strong volume growth in our commercial HVAC businesses in each region, accompanied by strong leverage.
Speaker 1: which is partially offset by lower volumes in our residential business as those markets continue to normalize.
Speaker 1: As we discussed previously, we've earmarked approximately 30 basis points for incremental business reinvestment to accelerate the timing of key projects.
Speaker 1: This is above our average run rate of approximately 40 basis points annually, for a total of approximately 70 basis points in 2023.
Speaker 1: While investment spending was less than 70 basis points in the first quarter, it was in line with our expectations based on the timing of projects.
Speaker 1: We expect to ramp up to 70 basis points in the second quarter, and there is no change to our full year guidance of approximately 70 basis points.
Speaker 2: Now, I'd like to turn the call back over to Dave. Dave? It's just wonderful how the whole community of people has a way to focus on our community and mar easy works, as far to Draco says.
Speaker 1: Thanks Chris, please turn to slide number eight. We presented this slide on our fourth quarter earnings call to help provide color on our key markets. Overall, we had a very strong first quarter as expected and our positive outlook for our segments and our end markets is largely unchanged.
Speaker 1: We see strong core demand for sustainability focused solutions continuing.
Speaker 1: We see the stacking effect of supportive policy and regulatory changes that play to our unique strengths as a leading climate innovator, as tailwinds for either early to mid-innings or future multi-year opportunities.
Speaker 1: We see the effect of tight supply chains slowly but steadily improving.
Speaker 1: And we see strong execution of our business operating system and unprecedented backlog supporting resiliency and improving visibility into 2023 and 2024. In our America segment, our overall outlook is relatively balanced between commercial and residential.
Speaker 1: We see our residential business continue to normalize through Q2. Our bias on our prior revenue estimates of the business being plus or minus low single digits for the year is now towards the lower end of that range or flat to down low single digits.
Speaker 1: While this may present a modest headwind to the second quarter, we see strength in our commercial HVAC business more than offsetting this on the full year.
Speaker 1: Our transport refrigeration business performed as planned in the first quarter, and we continue to expect to outperform the market for the year.
Speaker 1: In our EMEA segment, the first quarter was strong and in line with our expectations for both businesses.
Speaker 1: and our outlook for the year is unchanged.
Speaker 1: Likewise, for our Asia-Pacific segment, Q1 performance was strong and our outlook for the full year is unchanged. Now I'd like to turn the call back over to Chris. Chris?
Speaker 1: Thanks, Dave. Please turn to slide number 9. We're off to a strong start to the year, when we continue to see slow but steady improvement in our supply chain.
Speaker 1: Additionally, bookings and backlog continue at high levels, providing us with improving visibility into future revenues.
Speaker 1: All in, we're confident in raising the low end of our full year revenue and EPS guidance for 2023.
Speaker 1: We're raising our full year organic revenue growth guidance to between 7 and 8 percent, up from our prior guidance of 6 to 8 percent, reflecting strong results in the first quarter and improving visibility on the year.
Speaker 2: We're raising our adjusted EPS guidance range to $8.30 to $8.50, up from $8.20 to $8.50.
Speaker 2: We're also expecting to deliver free cash flow equal to or greater than net earnings.
Speaker 2: Other elements of our guidance remain largely unchanged, with a few modest exceptions, mainly one additional point of M&A and associated impacts, higher interest expense related to debt refinancing in the first quarter, and expected pension expense in 2023. Please see page 18 of the presentation for additional details.
Speaker 2: related to guidance to assist you with your models. As we've highlighted before, we pay close attention to our investment peer group and target top quartile revenue growth, EPS growth, and free cash flow conversion as part of our annual planning process, and we monitor our progress throughout the year.
Speaker 2: We believe our full year guidance places us in the top quartile of the peer group on these metrics for 2023.
Speaker 2: In addition to our full year guidance, we believe it may be useful to provide a high-low construct regarding how to think about Q2 and the cadence of earnings.
Speaker 2: For the second quarter, we expect revenue growth in the high single-digit range.
Speaker 2: which reflects a step down in pricing sequentially, given very high levels of pricing realized in 2022.
Speaker 2: It also reflects continued normalization and inventory optimization across our residential distribution channels, as Dave referenced earlier.
Speaker 2: Adjusted EPS is expected to be between $2.50 and $2.55, which includes approximately 30 basis points of incremental investment spend in the second quarter versus the first quarter, as I discussed earlier. This EPS range is also consistent with our three-year average for second-quarter earnings as a percentage of full-year earnings.
Speaker 2: which is approximately 30% at our full year EPS guidance midpoint of $8.40.
Speaker 2: Please go to slide number 10.
Speaker 2: We remain on track to deliver $300 million of run rate savings from business transformation by 2023, including an incremental $60 million in 2023. We continue to invest these cost savings in high ROI projects to further fuel innovation and other investments across the portfolio.
Speaker 2: Our continuous improvement mindset is an integral part of our business operating system.
Speaker 2: and it's designed to drive gross productivity each year to offset other inflation. While it's been extremely difficult to realize meaningful levels of productivity in recent years, given the supply chain and other macro challenges, productivity has been improving as supply chains slowly recover and is contributing to our 25 percent plus organic leverage target in 2023. Please go to slide number 11.
Speaker 2: We remain committed to our balanced capital allocation strategy focused on consistently deploying excess cash to opportunities with the highest returns for shareholders.
Speaker 2: First, we continue to strengthen our core business through relentless business reinvestment.
Speaker 2: 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 percent of excess cash over time. Our balanced approach includes strategic M&A that further improves long-term shareholder returns Cherie.
Speaker 2: and share repurchases as the stock trades below are calculated intrinsic value. Please turn to slide number 12 and I'll provide an update on our capital deployment for 2023. Year to date through May, we've deployed $720 million in cash, so the 170 million to dividends, 250 million to M&A, and 300 million to share repurchases.
Speaker 2: We have significant dry powder with $2.9 billion remaining under the current share repurchase authorization and our shares remain attractive, trading below our calculated intrinsic value.
Speaker 2: Our M&A pipeline remains active, and we have committed or deployed approximately $500 million due to date to bolt-on leading technology acquisitions and equity investments, two of which Dave mentioned earlier, including a leading industrial process cooling technology business that's closed on May 2nd and will complement our portfolio and our EMEA commercial HVAC business. Thanks for watching.
Speaker 2: All in, we're on track to deploy approximately $2.5 billion in cash in 2023.
Speaker 2: Our strong free cash flow, liquidity, and balance sheet continue to give us excellent capital allocation optionality moving forward.
Speaker 1: Now, I'd like to turn the call back over to Dave. Dave? Thanks, Chris. Please turn to slide number 14. The key takeaway for our thermal cane business is that the transport refrigeration market forecasts for both North America and EMEA remain unchanged.
Speaker 1: and we expect to outperform each market in 2023. Our performance through the first quarter is on track to meet these expectations.
Speaker 1: The slide shows key data points on the markets and on ThermalKing specifically to provide additional transparency and reference information.
Speaker 1: Please turn to slide number 15. ACT has updated their long-term forecast for refrigerated trailers, and they are projecting strong demand through 2028.
Speaker 1: The data supports the view we've been highlighting for some time now, that this is a strong mid-40,000-unit market.
Speaker 1: plus or minus a few percentage points. One key takeaway is that ACT is increased their 2024 forecast to 42,000 units, up from 40,000 units, which represents a 7% decline versus an 11% decline.
Speaker 1: in 2025, ACT forecast the market to increase 7% and return to 45,000 units and to continue growing low single digits through 2028.
Speaker 1: Both our Americas and EMEA ThermoKing businesses are poised to continue to outperform their end markets through leading innovation and strong execution.
Speaker 1: summary, we are positioned to outperform over the long term.
Speaker 1: Energy efficiency, decarbonization, and sustainability megatrends continue to intensify, driving increased demand for innovative products and services. We are delivering leading technology and innovation to address these trends and accelerate the world's progress, underpinned by our engaging, uplifting culture.
Speaker 1: Our strong first quarter performance, diverse and resilient portfolio, and unprecedented backlog gives us confidence in raising our full year revenue and EPS guidance, and reaffirming our full year free cash flow conversion guidance. We believe we have the right strategy.
Speaker 1: the best team and a solid foundation in place to deliver strong performance in 2023 and differentiated shareholder returns over the long term.
Speaker 3: 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, followed by the number one on your telephone keypad.
Speaker 3: If you would like to withdraw your question, again press star 1. In the interest of time, please limit yourself to one question and one follow-up question. Your first question is from the line of Scott Davis with Melius. Your line is open.
Speaker 4: Hi, good morning Dave and Chris and Zach and everybody else is in the room.
Speaker 4: Good morning, Dave and Chris and Zach and everybody else in the room. Good morning. Good morning, you guys. Good morning.
Speaker 4: I'm good, thank you. I'm getting a little beat up by earnings here, but we're near the end.
Speaker 4: You guys always give a lot of great detail and answer a lot of the questions which is helpful. I haven't really heard you talk about MEGA projects specifically. When I think about these...
Speaker 4: giant semi-fabs and the EV facilities and everything that is on the list that folks are talking about. Is this stuff starting to move into your backlogs? Are people starting to spec out the HVAC needs in those facilities? And if so, I'm just kind of guessing these are super complicated. I have to imagine a semi-fab requires some...
Speaker 4: some pretty incredible engineering to get the cooling right. Perhaps you guys have an advantage in that regard. So I'll just open it up to that.
Speaker 1: Yeah, great question Scott, and the short answer is look, we're this high-tech industrial vertical as we call it. We have a lot of strength in that vertical and we have for a number of years. Yeah, we are starting to see early stages of some big orders coming in, specifically on the fab plant side of things, but again I think the...
Speaker 1: The Chips and Science Act is really in front of us, and once that really starts to happen, you're going to see even greater closing of some of these big projects. So I think a lot of it's in front of us. We are seeing some. We're seeing some of it on the EV battery plants.
Speaker 1: And that's certainly been a nice, again, we classify this all as this high-tech industrial vertical, but it's certainly been a strength to us. And you're right, these are sophisticated operations that require kind of detail engineering. Not everyone is as cookie cutter as you might think, so there's always unique things. And our expertise in this vertical really allows us to...
Speaker 1: have a lot of strength and we'll continue to execute in the future.
Speaker 4: That's helpful Dave. And this is a little pie in the sky, but AI, the cooling of the chips, when you start talking about something like 5 kilowatt going to 100 kilowatt and there's a lot of heat there. I'm told there's a lot of white space because, quite frankly, the cooling of those chips is...
Speaker 4: is still, whether we go all liquid or whether there's other kind of hybrid solutions. Are you guys involved at all or perhaps working on technologies to be involved at all in some of that chip level cooling?
Speaker 1: Yeah absolutely you're talking about immersion cooling and that's certainly on the cutting edge and yeah we're very active there in fact.
Speaker 1: We made an equity investment in a company called Liquid Stack, which is really, that's their expertise. We're partnering with them and yeah, we're certainly on the leading edge of that technology. Okay, best of luck. Thank you. I'll pass it on. Alright, thanks Scott. Appreciate it.
Speaker 3: Your next question comes from the line of Andy Kaplowitz with Citigroup. Your line is open.
Speaker 3: Your next question comes from the line of Andy Kaplowitz with Citigroup. Your line is open. Good morning, everyone.
Speaker 5: Good morning. How are you? Good. How are you? Dave, commercial HVAC bookings growth has remained really strong and low teams growth in EAME despite maybe a little bit of slowing against tough comps as you talked about in the Americas. Have you seen any slowing in any of your main commercial HVAC verticals in the Americas or is it really just tough comps? And then would you say the main difference?
Speaker 5: EAME is the strength of your thermal management systems built out there. If it is, where are you in that build-out and where are you in terms of bringing it into the U.S.?
Speaker 1: Well, Andy, I think it's, you know, commercial HVAC has been strong globally for us. And you know, I think the mega trends around decarbonization, they continue to intensify. You know, we had a very strong start to the year here in the Americas. You know, order rates were up.
Speaker 1: low single digits, but the backlog grew and that's a great thing. If you go to EMEA, I mean, yeah, the team there is just performing at a very high level and you hit it, right? Thermal management systems is, you know, we have a differentiated technology and we're winning with our customers.
Speaker 1: If you think about it, you know, the commercial HVAC AMIA business in 2022 was up 20%. In the first quarter, we were up 25%. Our equipment orders for commercial HVAC AMIA were up close to 40%.
Speaker 1: So, I mean, this is great. The team is executing well. The other thing too I'd point out is that margins were very, very strong in Europe as well. If you remember a year ago, we were talking about more acute supply chain problems in Europe and a higher cost to serve our customers. And we were, you know, with spot-bys and expedited freight.
Speaker 1: You see that pulling through now with productivity that the team has been able to deliver. So very strong in EMEA, very strong in the Americas, and Asia Pacific also performed quite well. Order rates were up low teens and really broad base too. It was both in China and outside of China.
Speaker 1: Off to a great start here in 2023 and commercial HVAC business is certainly, we're seeing a lot of demand for our products.
Speaker 5: I wanted to follow up on your comments on the EME margin, maybe for Chris. You talk about price versus cost benefit in Q1 for the year. I think you mentioned previously the 2-2.5% carryover price embedded in 2023. Has that gone up a bit?
Speaker 5: And as Dave mentioned, is it really you're comping against sort of an easier, supply chains are better in the EME and Asia, and that's sort of the big reasons why the margins were much stronger in those regions versus the Americas, or are you investing maybe more in the Americas versus those other regions? And it's a great question. I'd go to EMEA March.
Speaker 2: And a year ago, it was very difficult to get leverage in that region. What you're seeing coming through here in the first quarter, you guys will see this in the 10Q that gets filed, you'll see nine points of price in EMEA and about six and a half points of volume. And with that volume came strong leverage, and we're starting to see some productivity come through.
Speaker 2: within a slowly but improving supply chain. So I think about the margins around productivity improvements on a year-over-year basis, you know, stronger volume with good incrementals, and pricing continues to remain strong in the region as well. So really nice start to that team.
Speaker 2: I think you mentioned a question on maybe price overall for the company. Enterprise wide on the full year, we're probably still in that 200 to 300 basis points on a full year price. I would bias our full year revenue growth more to the volume side than to the price side on the full year. Appreciate the color, guys.
Speaker 2: I think you mentioned a question on maybe price overall for the company, enterprise-wide on the full year. We're probably still in that 200 to 300 basis points on a full year price. And I would bias our full year revenue growth more to the volume side than to the price side on the full year. Appreciate the color, guys. All right. Thanks, Andy.
Speaker 3: Your next question is from the line of Julian Mitchell with Barclays. Your line is open.
Speaker 6: Hi, good morning. Maybe just wanted to start with the sort of the backlog outlook and orders. And I guess one approach is just not report the orders when they're down in quarter. But you know, if we look at over the balance of the year, how are you thinking about the sort of the book to bill?
Speaker 6: ratio, let's say just trying to understand a little bit better Dave your commentary around that 6 billion backlog at year end perhaps being a floor number. Any color as you're thinking about book to bill by region or the market in terms of commercial versus transport.
Speaker 1: Yeah, look, our order rates for the first quarter were actually flattish, okay, but our backlog increased by 400 million. So we thought we had a real high backlog at the end of 2022 at 6.9 billion, it's now 7.3 billion.
Speaker 1: We will enter 2024 with a very inflated backlog.
Speaker 1: We're kind of using $6 billion just to demonstrate the strength. If you think about any year we go into, the backlog typically represents about 20% of the forward revenue. We'll be far in excess of that going into 2024.
Speaker 1: So we booked a bill, you know, if you just do the simple math on looking at our midpoint on revenue, yeah, it would come down a bit from what we're seeing right now. But I would tell you the first quarter was exceptional. And it was a little bit stronger than even we thought, especially on our commercial HVAC standpoint. You know, our commercial HVAC business on a two-year stack in the first quarter is up 35% for orders.
Speaker 6: That's helpful, thank you. Then my second question would just be on the America's operating margin for the year. So I suppose one, you know, I think some investors may have thought maybe you'd have higher operating leverage in the first half and the sort of mid-20s.
Speaker 6: number because of price costs, tailwinds to margins and the last sort of bout of transformation savings, as well as the good volume growth. So understand the sort of investment reference that Chris had made.
Speaker 6: Anything else going on in that America's margin and also, you know, when we're thinking about second half operating leverage in the Americas, does that stay at that mid-20s?
Speaker 6: rate that you've got in the first half, you know, anything sort of moving around there.
Speaker 2: Julian, it's Chris. I'll jump in. Yeah, the Americas saw a nice margin expansion in the first quarter. You know, 90 basis points, top margin expansion, about 50 basis points, but that margin expansion really led by our commercial HVAC business. We saw declines in residential in the quarter, and Thermocaine was right in line with our expectations.
Speaker 2: raise the low end of the guide on both revenue and earnings on the full year. We'd suggest maybe some leverage that's a little lower second half versus first half, but I'll tell you we're very confident in our full year guide. I think the performance in the first quarter.
Speaker 2: was very strong and at the same time, we've got a strong backlog entering into the second quarter and as Dave talked out, the guide for the backlog going into 2024, we expect to be very high as well. So we have a lot of confidence in the full year guide. The first quarter, it's really our smallest quarter of the year.
Speaker 2: It's about 17% of our earnings on a full year basis. And let's get into the cooling season and we'll update you in a couple of months, but we're really happy with where we started. That's great. Thank you.
Speaker 2: It's about 17% of our earnings on a full year basis. And let's get into the cooling season, and we'll update you in a couple months. But we're really happy with where we started. That's great, thank you. Thanks, Julian. Thanks.
Speaker 3: Your next question is from the line of Gotham Kanna with TD Cowan. Your line is open.
Speaker 2: Hey, good morning guys. Hey Gotham, how are you?
Speaker 1: Doing well, thanks. Hey, I just wanted to ask if you're seeing any evidence of
Speaker 1: price elasticity in the residential channel given the volumes are a little bit lower across the industry.
Speaker 2: or any sort of competitive price movements downward. Thanks. Hey, Gotham, it's Chris. I'll start. Look, I think pricing continues to be strong and as we expected in the quarter for residential, we're ready for the cooling season.
Speaker 2: with the inventory we have on hand, but we're not seeing anything from a pricey elasticity perspective that you're referring to. Things remain to be fairly disciplined, as we see today, and we're ready for the cooling season. And just a quick follow-up on the M&A pipeline, if you could talk about what kinds of things you're looking at.
Speaker 1: You know, is it more of what we've seen before with technology add-ons? Anything sizable in the pipeline that might be attractive?
Speaker 1: Thanks. Yeah, I got them. I'll start on that. You know, at the end of the day, we're going to get an opportunity to see everything as a major global HVACR player. You know, in the second quarter, in the first quarter here, we announced MTA. Chris talked about that. It was actually announced yesterday. Great, a great example of what we do really well. This is a technology and industrial process cooling. It's in EMEA. It's some kind of innovation that really gives you this high stuffing level that really
Speaker 1: great technology at an enterprise level. The revenue is less than 1% for the enterprise. Margins are nice. They fit nicely into the business. With our strong scale, with our strong channel, we're able to scale these acquisitions quite quickly. So we'll look at everything. We'll be disciplined.
Speaker 1: And we are going to continue to execute the strategy that we have been executing too, and we have had a lot of success with it.
Speaker 7: Thanks guys.
Speaker 8: Thank you.
Speaker 3: Your next question is from the line of Josh Pokrozinski with Morgan Stanley . Your line is open. Hey, good morning guys.
Speaker 3: question is from the line of Josh Pakrozinski with Morgan Stanley . Your line is open. Hey, good morning guys. Hey Josh, how are you?
Speaker 9: Good, thanks. Much like Scott Davis, I think getting the crap beaten out of me by earnings. So yeah, we'll try to keep the momentum going here. So we've talked a lot about the backlog. Clearly the trends there are impressive in terms of what that means for the revenue story. I guess I'd like to talk a little bit about how backlog
Speaker 9: projects where I would imagine in commercial HVAC, you know, maybe a lower margin up front and you get paid more on that longer tail of things like service. How would you carve that for us as you're thinking about the margin and backlog today and maybe where that trends? Josh, it's Chris. I'll start. We see the backlog is still...
Speaker 2: to be a tougher comp as we work throughout the balance of the year. Just to remind investors, we really led with price in 2022. And so we're going to have a tough comp as we work throughout the year on incremental price. Our product management teams have done an outstanding job staying ahead of inflation over the last couple of years and we were price cost positive in the first quarter.
Speaker 2: We're confident at 20 or 30 basis points of price over cost. The first quarter start gives us confidence on that on the full year basis, but we expect to see good incrementals on volume, some productivity return as supply chain normalizes, and really leverage all parts of the P&L to go drive the performance for the year.
Speaker 9: Got it. And then I guess just sticking with the same kind of follow up on some of the questions around some of these bigger projects. How do you think about the crowding out between more of the policy led stuff and stimulus versus private? Obviously a lot of focus on the higher interest rates and maybe tougher liquidity situation coming from the regional banks.
Speaker 1: question, but at the end of the day, you know, we think they're all opportunities really in front of us and and we are you know as far as you know labor shortages we we've we have so many programs in place now to Really train all of our employees at grassroots levels so that's starting to get a lot better for us and we're not concerned about any crowding out as far as
Speaker 1: being able to meet the demand. And our account managers, our sales team, they're all over this, right? And they're well-trained and they're able to go to the most attractive verticals and really drive demand. And that's what we're seeing right now. And you see it in our results. I mean, our order rates are just tremendous right now.
Speaker 1: I look at our team and what they've been able to do in EMEA right now and all those opportunities there. We talk about IRA, but there's other policies that are happening in Europe right now that are really helping drive demand and we're able to capitalize upon it.
Speaker 3: Thanks, best of luck guys. Thanks, Sean. Your next question is from the line of Chris Snyder with UBS. Your line is open.
Speaker 9: Thank you. I wanted to ask on commercial HVAC demand, you know, obviously orders can reflect a bunch of things, comps, lead times. But when you were speaking with customers, do you sense any easing of demand, whether it's the result of macro uncertainty or just higher cost of financing?
Speaker 1: Yeah, Chris, good question. We haven't seen that yet. In fact, we continue to see very strong demand. And I think the whole megatrends around decarbonization continue. And the world's getting warmer and we need to take action.
Speaker 1: and more of our customers realize that. And we have some solutions out there right now that can have a dramatic impact on how we decarbonize the built environment. So we have not seen anything slowing down right now. And that really is on a global basis for our commercial HVAC business. You know, if you look at the Americas.
Speaker 1: We play across all verticals. I think there's like 14 different verticals that we track. Maybe there's a little bit of softness in office, but there's a lot of strength in high tech that we talked about earlier. Education continues to be strong. You know, Europe , we've been strong really across many verticals with our solutions there.
Speaker 1: and Asia Pacific again, very strong start to the year. So we haven't seen any slowing yet, Chris, but it's a great start to the year for trained technologies and it gives us a lot of confidence in our full year guide.
Speaker 9: Appreciate that. And then, you know, following up on price-cost, you know, the company, you know, had been, you know, running ahead or kind of, you know, saying price-cost positive. When we see the year-to-date reflation in metal, does that change how you're thinking about incremental price later in 23 as you try to kind of maintain that?
Speaker 2: and that really hasn't proven through. As I said earlier, our product management team members have done an outstanding job thinking about cost inputs, value of the customer, and staying ahead on price. We remain confident that we're gonna be price cost positive on the year. The start in the first quarter gives us a lot of confidence on the 20 to 30 basis points.
price cost spread that we have in the full year guide. We know that pricing gets to be a tougher comp as we work throughout the year, but we remain nimble if there's further movement of inflationary commodities or we continue to see some inflation certainly in tier two around wage and energy which we have baked into the guide.
Thank you, I appreciate that.
Thanks. Thanks, Chris.
Your next question is from the line of Joe Ritchie with Goldman Sachs. Your line is open.
Hey, good morning guys. Hey Joe, how are you?
Doing great, doing great. So Dave, just maybe I'll start on Resi HVAC. So, you know, interesting to see that it's flat, but your organic growth this quarter was down the single digits. I'm assuming pricing had to be up. So first, do I get my math right? It seems like volumes are probably down double digits.
direct volume for down double digits in the Americas. So my question is, is that right? And then secondly, what kind of line of sight do you have to that improving and what's embedded in the guide?
Yeah, yeah, your math is about right, you know, so you think about it on a revenue basis, we were down mid-single digits, on unit basis we were down in the mid-teens. Pricing was positive in the business. It was a little bit.
less than the company average, which is the first time that's happened in a while. But again, we have some very strong comps here in the Residue business. The sell-through, which is really how we're looking at this business right now, was flat. So we don't see it falling off a cliff. If you look at inventory levels in our IWDs, our independent wholesale distributors, maybe they're a bit high, but that will normalize through Q2, nothing alarming.
This is a business that we have a lot of innovation coming through. We have some great brands, some great products, great distributors, and a great management team. It's early in the year. It's the first quarter. We'll wait to see how the cooling season starts, but we don't see this business falling off.
and you know falling off a cliff and you know we have this guide in our guide okay so it gives us confidence in our guide with what we have projected right now okay great that's that's helpful and then and then going back to the margins of Mia I mean just I know that you had you know an easier comp because of some of the issues that occurred last year but still you know
for margins in EMEA for the year.
Our expectation for the region would be that they'll deliver 25% or better leverage on the full year, organic leverage on the full year. Q1's off to a nice start, but as you said and as we commented before, it's really an easier comp versus some real challenges we had in the business a year ago.
Supply chain got better as we got to the end part of 2022. The fourth quarter we saw a strong revenue growth in EMEA from our commercial HVAC business and they were really hurt first and hard with the supply chain challenges. So we have a lot of confidence a team can deliver this year.
and the backlog continues to grow with their innovative products. So let's see how it kind of plays out. But we're confident we're going to deliver strong margin improvement on a full year basis for the region. And keep in mind, TK EMEA markets there are expected to be down low to mid single digits. We expect to outperform. But all in, we expect to have a strong year in the EMEA segment this year.
But Joe, you're right. Joe, again, you're just a great start to Europe . It really is. I'm so proud of what that team's been able to deliver. So fantastic.
Thanks, guys. See you next week. See you. Sounds good. Your next question is from the line of Steve Tusa with JP Morgan. Your line is open.
Hi, good morning. Congrats on the execution on the quarter.
morning congrats on the execution on the quarter. Appreciate it. Thanks, good morning.
So you had 9% price in EMEA. I know we can, you know, wait for the queue, but what was it in the other two segments?
Yeah, Steve, it's Chris. It was a little over six points in America, so think of that as 6.6 points of price in the Americas, pretty much in line with the enterprise. And we said 8.9 points of price, and Asia was around four points of price in the quarter.
Okay, and then just in the back half here, there's like kind of strange comps from last year. You had the China Dynamics, Europe had a pretty good second half as well on volume. I know you don't like to kind of guide by quarter, but like.
You guided the high singles, you're running in the first half at high singles so far. Are there any comps in the back half that are volatile or is it pretty smooth? Maybe just help us out with the non-US businesses and how you expect organic growth year over year to play out in 3 and 4Q.
Yeah, I think as we get to the fourth quarter, well, let me start with Asia, right? Given the lockdowns in the second quarter of 2022, we saw muted growth in Q2 a year ago. The business was able to recover very nicely in the third and fourth quarter last year. So Asia may have a little bit of tougher comps in the second half, just given the cadence of how...
earnings played out and the lockdowns from COVID played out in China a year ago. I mentioned just earlier in EMEA for commercial HVAC, the business really through the third quarter of last year had some very acute supply chain challenges. We're not out of the woods yet, but that's continued to get better.
in the fourth quarter and we saw that getting better here in the first quarter as well. So I think we're, you know, fingers crossed that continues to be a nice tailwind for the business in the year-by-year, but as you get later in the year, I think you'll see a little bit of a headwind as we get to the fourth quarter there.
TK, if I go to the Americas side of the house, you know, the back half of the year for TK Americas, that'll be a bit of a tough comp, a very strong growth we saw in the third and fourth quarter in the Americas last year. So yeah, there's a little bit of tough comps coming in the second half and a few of the businesses, but we have such strength in the commercial HVAC businesses as well that we're really confident in the full year guide. Okay, and I just wanna clarify some of these RESI numbers. So you said, REVs down mid singles.
The sell-through comment being flat, that's revenue or is that units? That would be revenue, Steve. Yeah, revenue. Okay, that makes more sense. So basically, through your independence, your volume was down probably more like 20% or something like that. Just through the independence. A similar birdie is allowed to learn more about the living story of your father's when he views in an emotional manner. So you don't lose the substrate of!!!!
that the cooling season starts and hopefully it starts real soon. How's April so far?
I think the cooling season hasn't started so we're still in that shoulder part of the year. But we'll see. It's forecasted to get real warm here in May so we'll see how it goes. Alright, rely on those weather forecasts as always. Alright, thanks guys, really appreciate it. Take care, thanks.
Your next question comes from Jeff Sprague with Vertical Research. Your line is open. Hey, thanks. Good morning, all. Hey, Jeff. How are you? Doing great, thanks. Hey, just one follow-up on Resi, then just a different topic on the M&A from you. Just the price in Resi below the 6.5% range.
Little surprised to hear that given the fear change and the mix effect associated with that. Maybe you're not including mix when you say price or perhaps you're still selling a lot of older units in the quarter. Could you just maybe clarify a little bit what's going on there?
your basis. Put that as mixed, Jeff. All right, we'll call it mixed. Thank you. And then just on the deals, you know, a 2% revenue impact right on the 16 billion.
you know, revenue base last year. That's 320 million of sales you're guiding for the partial year on deals, right, on 500 million, you know, expended. That sounds like a pretty good chunk of revenue for that, you know, that amount of dollars spent.
So maybe just a little color on the margin rates in these businesses. Do I have that math right? What percentage of the year do you expect what you just announced to actually be in the year when does this stuff close? Yeah, Jeff, it really is the contribution of three acquisitions.
that's leading to that roughly two points of revenue growth from M&A in 2023. One relates to the ALCO acquisition we closed in October of last year, so you've got about nine months of that revenue coming through in 2023 that we're calling out as inorganic. Would we have a 2023 Monster
Fourth quarter would be a comp. We'd just be part of our organic results. Dave just mentioned we closed on MTA just yesterday. It is a industrial process cooling business in EMEA. So we'll start picking up the revenues from that business. Also a partial year. Think of that as, okay, eight months of revenue this year. And then the pending acquisition that we've been.
given the integration costs, but we have a great track record of taking both on acquisitions and bringing them into our channels, selling through with our robust sales forces, and ultimately really driving very strong returns in subsequent years. So in the year, it's about three cents positive on an EPS basis with that leverage.
Ultimately, we'll see how it plays out for the year, but it's still positive and slightly accretive on the year.
Ultimately, we'll see how it kind of plays out for the year, but it's still positive and slightly accreted by the year. Great, thanks for the detail.
Your next question is from the line of Nigel Coe with Wolf Research. Your line is open. Thanks, good morning everyone. Hey Dave, I don't know about your neighborhood, but it's still pretty cold up here, so make sure you pack them in the wool next week. It's warming up, it's warming up Nigel. It's warming up, it's warming up. Okay, it's coming, it's coming.
Obviously, one of your competitors is making a pretty big splash in the European residential market. How do you characterize the importance of Trane being a player in European residential heating specifically? I'm not saying a multi-band deal, but do you see opportunities to be a player there in a smaller scale perhaps? Yeah, great question. We really like our portfolio in Europe .
geographic climates and you could see the team's results. I said earlier, our revenue in 2022 up 20%, first quarter 25%, equipment revenue 40%. So we're going to continue to execute on our strategy in Europe . We're having a lot of success. The team is high powered and performing extremely well and we have so much innovation.
that's coming through the pipeline that I get excited just talking about it. And as I said earlier, you know, we get the opportunity to look at a lot of M&A deals being a global HVAC player and we'll continue to do that, we'll continue to be disciplined, and we'll make sure we make the right investments for trained technologies and our shareholders.
Great, thanks. And then maybe, Chris, we'll come up to the end of the $3 million program transformation savings. Is this the end of the big part of the move? Or do you see the tension in another way, perhaps, of initiatives? Yes, it is.
And Nigel, thanks for the question. Look, we're on really good track to realize the incremental 60 million in savings this year. We continue to deploy that back into the business through reinvestment and innovation in the portfolio. It also gives us confidence on delivering 25% or better operating leverage on the full year.
But look, the company is always part of itself on lean thinking, and I would tell you that as we move forward, there's always going to be opportunities for us to lean out operations and drive cost improvements. I think another area of opportunity for the company is the ability to call back on some of the productivity.
that's been very challenged over the last few years to deliver on. Supply chain challenges, higher cost to serve customers. Dave's talked in past calls about spot buys and being exposed to those markets and higher costs. Those are really great opportunities for the company to get back to basics, get back to productivity, offsetting other inflation. And we're seeing a little bit of that come through in the first quarter with our commercial EMEA business. And we'll see how that kind of plays out for the year. But I would tell you that.
We'll update you more as we work throughout the year, but I'm really excited on the productivity side and I'm excited we still have a lot more opportunities to take cost out in the business. That's great, thank you. Thanks, Michael. Thank you. Your next question is from the line of Dean Dre with RBC Capital Markets.
I'm excited to update you more as we work throughout the year. I'm really excited on the productivity side and I'm excited we still have a lot more opportunities to take cost out in the business. That's great, thank you. Your next question is from the line of Dean Dre with RBC Capital Markets. Your line is open.
Thank you. Good morning, everyone. Hi, Dane. How are you? Doing real well. Thank you. Question about indoor air quality. Has the whole urgency around that theme faded? And understandably, you've showcased all the decarbonization benefits in climate change, and that makes perfect sense. But has the driver of indoor air quality, is that faded at all? Because originally, you were talking about a 200-page...
points lift for quite a period of time? Yeah, it's a good question. I mean, we've embedded indoor air quality into our applied systems and you know I would tell you that I've been in this industry a long time. Ten years ago we used to just have the conversation about indoor air quality in the healthcare vertical. We have that now in all verticals. So you know you might not read about it but I would tell you it's still prevalent and we talk about it with our customers and they talk about it with us. I mean
I think everyone's been educated on the importance of indoor air quality, the importance of fresh air exchange, the importance of being able to balance that with energy consumption, and we've done a great job of helping our customers work through that. So no, it's certainly part of our business, it's certainly part of our offering, and it's top of mind of many of our customers. Yeah, and I see that with the education stimulus spending, that it's usually one of the top priorities. Absolutely, absolutely. Thank you.
All right, and then second question on the incremental 70 basis points of spending reinvestment, can you give us some examples of where that's going and a sense of the returns? Yeah, we really like the digital space. We really like the electrification of our portfolio. We really like optimizing our operations with automation, just to name a few. Our innovation pipeline.
It's very robust, it's very full. Three times a year I actually get to – we have a deep dive on our innovation pipeline. It's the best four hours I spend sometimes in the quarter because it's just so exciting to talk to our engineers and to see what they've invented and the impact that it can have on not only –
you know, continue to do that more in the future as well. Dean, I'd add on the, on the, um, investment, uh, we had a normal level of investments in the first quarter. Wanted to highlight that into the second quarter, we do expect that level of investments to ramp up to 70 basis points. We still see that being around 70 basis points for the full year, but
but that will be a ramp up into Q2 as we just continue to see very strong projects as Dave outlined. And let me come back to just a comment on EMEA as well. We know a lot of questions around EMEA margins. Maybe just to highlight, in the first quarter we saw growth both in commercial HVAC and in the ThermoKing business. Important to know that the ThermoKing markets in Europe are expected to be down low to mid-single, so we're probably not expecting to see that outgrowth and ThermoKing each and every quarter.
Hey, Andrew, how are you? Good morning. I'm good. I'm good. Just to follow up on institutional spending, can you just chat, you know, clearly key market, you know, schools you've talked about, but can you talk about what's happening with the hospital spending? Because I know there was a pullback during COVID because of the budgetary issues. Are we sort of seeing
And it really, the reason why we have the strength there, and it's a complex sale. And hospitals, they have varying degrees of requirements, especially around fresh air exchange. So you're gonna have a different application in a surgical suite versus you're gonna have in a.
in a hospital room. So we're still seeing strength in healthcare, but to be fair, we've always seen strength in healthcare because our solutions are really built around those kind of more complex situations that we're able to capitalize on.
Just to follow up, headlines on pricing, I think, DAI can introduce lower priced products in the US on the Resi side. I think we've heard yesterday at a meeting that Aon, it's the first sort of price, they send a price increase actually on the commercial side.
It's an industry that typically retains price and is disciplined on price. I won't necessarily talk about potential pricing actions we may do throughout the years. I mentioned before our product management teams, our business units have done an outstanding job taking all the inputs in to lead on price.
the last two years and a good strong performance here in the first quarter as well. So I do think we'll remain proactive and be prudent and I think our track record hopefully speaks for itself that we can really have a lot of confidence on the 20 or 30 basis points of price over cost in the year.
last two years and a good strong performance here in the first quarter as well. I do think we will remain proactive and be prudent and I think our track record hopefully speaks for itself that we can really have a lot of confidence on the 20 to 30 basis points of price over cost in a year. Thanks so much and as I said great execution.
Thanks, Andrew. Appreciate it. Your next question is from the line of Nicole DeBlais with Deutsche Bank. Your line is open. Yeah. Good morning, guys. Thanks for squeezing me in. No problem. Sure. How are you, Nicole? Good, thanks. So just there's been a lot of focus on the EMEA margins on this call, but the Asia PAC margins and the operating leverage was also really, really strong. So can we just talk about how you guys are seeing that progressing through the rest of the year?
Yeah, Nicole, it's Chris. I would say certainly the second quarter, but even in the first quarter last year, we saw some parts of the China economy in these COVID lockdowns. And so as we entered into lockdown, it certainly cost a lot more money to keep customers happy and try to get products out where you couldn't live in situations. And now we're comping against a little bit easier comps as we think about the first half of 2023. So first off, the demand in Asia remains very strong. We continue to expect...
Yeah, thanks for noticing, Nicole. I mean, sometimes we don't talk enough about it, but what a great leadership team we have there and they really have been leaders for trained technology with innovation and the team just executed extremely well in the first quarter, great start to the year. And to be fair, all of our segments really executed very strongly in the quarter. It just speaks to the resiliency of our portfolio.
And it just gives us lots of confidence in our full year guide. So certainly appreciate the question.
Great, thanks. And then on the TK order book, are you guys now fully booked out to 2023? And I guess what's the status of the order book is actually open to accept new orders. Thank you. Yeah, Nicole. So we opened up the second half of the year order book mid to late March. So orders started to come in a little bit in the first quarter, but we would expect that to really get filled up in the second quarter.
We have a lot of confidence from what we can see with the backlog entering Q2 and the forward look that our guide in the full year, we're going to outperform the markets both in the Americas and in the NIA for the full year. Thank you. I'll pass it on.
Your next question is from the line of Noah Kay with Oppenheimer. Your line is open. Good morning and great to be joining you for the first time. Thanks for taking the questions. No problem. Thank you. I would love to dig into the services trend a little bit more. I mean that 25% year over year in China, you know, maybe to the extent that reopening played into that and you can comment, but just the overall trends in services and how you expect that to trend over the course of the year. Yeah, I mean services is a great part of trained technologies. It represents about a third of our total business. And if you look at it over a five-year period, we've had a compound annual growth rate globally in our service business in high single digits.
And the first quarter we were double digits. So, I mean, it's a really strong business. It really differentiates us with our customers. And in China, yeah, really strong start to the year. Some of that was obviously the comps year over year just because they had a lot of restrictions still specifically in China at this time last year. But I would tell you our service business is a very strong business. We invest heavily in our service business and it's just a great business and it's very, very resilient as well.
even during 2020 COVID where we didn't have access to many buildings, our service business was flat. And these products are more and more sophisticated today and they require OEM service and we're able to provide that for our customers. So thanks for the question. I mean, service is a big part of who we are as Trane Technologies. Yeah, and that actually ties into the next question. I think in talking about the incremental spend, you called out the digital investments and maybe pulling forward some of that.
would love an understanding of, you know, the road map to the extent you can share with us and how that plays into the services strategy. You know, are we looking at some meaningful refreshes or additions to the digital suite over the course of the year? No, no, look, being connected to our assets is nothing new.
to train technologies. We're connected to over, what the number is now, well over 30,000 buildings in millions of different assets. So we love being connected to our assets. And now, think about the next is how do you even get smarter with all the data that you have? And think about how you could actually have
buildings operate more efficiently. And so when I talk about digital, those are the things that we're working on. It's no longer the service tech gets deployed when something's not operating properly. It's not operating properly because it's using too much energy. And that's the space that we're into here. And we really like the digital space and service, and it really is a tailwind to our service business.
Thank you. All right. Thanks so much. Thank you. At this time, I would like to turn the call back to Mr. Zach Nagel for closing remarks. Thank you. I would like to thank everyone for joining us on today's call. And as always, we'll be around to answer any questions that you have over the next, well, today and the next coming days and weeks.
And we'll also be on the road at a couple of conferences. So we'll be looking forward to seeing folks on the road or in person through a variety of events soon. Thanks and have a great day. Ladies and gentlemen, this concludes today's conference call. You may now disconnect.
And.