Q3 2024 Trane Technologies PLC Earnings Call
Thanks, operator, good morning, and thank you for joining us for <unk> technologies third quarter 2024 earnings Conference call.
This call is being webcast on our website at <unk> technologies Dot com, where you'll find the accompanying presentation.
Also recording and archiving this call on our website. Please go to slide two stated.
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.
Speaker Change: Joining me on today's call are Dave Regnery Chair, and CEO, and Chris <unk> Executive Vice President and CFO.
Speaker Change: With that I'll turn the call over to Dave Dave.
Dave: Thanks, Jack and everyone for joining today's call. Please turn to slide number three.
Dave: To begin with a few minutes on our purpose driven strategy, which enables our differentiated financial results over time.
Dave: Climate change is occurring much faster than anticipated affecting people and communities around the world as we saw here in North Carolina, just a few weeks ago urgent and transformative action is needed to reduce emissions and limit global warming.
It's where trane technologies comes in through our innovation, we are helping our customers reduce energy and emissions when.
Dave: When you consider that in a typical building approximately 30% of the energy after the meter is wasted.
Dave: It's a massive opportunity.
Dave: And for our customers, it's green for Green good for the planet and good for the bottom line.
Dave: With our relentless innovation consistent execution and uplifting culture, we are positioned to deliver a leading growth profile and differentiated financial results over the long term.
Dave: And build a more sustainable future.
Dave: Please turn to slide number four we.
Dave: We delivered strong performance in the third quarter.
Dave: Extending our track record of leading revenue and EPS growth among industrials.
Dave: Our global team delivered 11% organic revenue growth adjusted EBITDA margin expansion of 120 basis points.
Dave: And adjusted EPS growth of 21%.
Dave: Enterprise organic bookings were very strong at $5 2 billion.
Dave: The second highest quarter in the company's history.
Dave: Up 5% in the quarter and up 13% on a two year stack to put this into perspective bookings were only about $120 million or 2% below our highest bookings quarter in Q2 of this year.
Dave: Organic bookings in Americas commercial HVAC I see this quarter were also the second highest in company's history up low single digits and up mid teens on a two year stack Q3 bookings were only $100 million below the highest bookings quarter in Q1 of 2024.
Dave: Net absolute bookings remained very strong given the tremendous growth we've seen over the past four years and the variation in order timing comps will likely continue to be somewhat lumpy.
Dave: While absolute bookings are expected to remain very strong backlog also remains very strong at $7 2 billion up from $6 9 billion at year end 2023, and we expect to exit 2024 with highly elevated backlog.
Dave: We encourage investors to look at absolute bookings revenues and backlog along with growth rates in order to gain a clear picture of our strengths.
Dave: Robust performance continues to be led by our Americas commercial HVAC business, where revenue growth has been exceptionally strong and consistent Rev.
Revenues for each of the first three quarters of 2024 up 50% plus on a three year stack inclusive of both equipment and services and we expect the fourth quarter revenue to be up 50% on a three year stack as well.
Dave: We are building a strong track record of market outperformance, particularly as increasing project complexity place to our unique strengths in innovation and direct sales and service.
Dave: Point organic bookings and revenue for our applied solutions in the Americas are both up well over 100% over the past four years.
Dave: Our installed base is expanding rapidly, adding an estimated eight to 10 multiple of higher margin services revenue over the life of the equipment.
Dave: Our strong performance throughout 2024 has enabled us to accelerate incremental investments, while delivering full year leverage above our long term framework of 25% plus.
Dave: We've stepped up the pace of investments in the second half of 2020 for further strengthening our position for 2025 and beyond give.
Dave: Given our strong performance and positive outlook, we are raising our full year organic revenue and adjusted EPS guidance.
Speaker Change: Chris will cover our guidance update in more detail later in the presentation.
Speaker Change: Please go to slide number five.
In our Americas segment commercial HVAC has delivered exceptional bookings and revenues throughout the year as I've highlighted on the prior slide.
With broad based strength across the vertical markets.
Speaker Change: Revenue was very strong up nearly 20% in the quarter with equipment and services up nearly 25% and mid teens respectively.
In residential the team delivered very strong results with bookings up high twenties and revenues up low teens.
Speaker Change: Turning to transport the business performed as expected bookings were strong up high twenties revenues were down high single digits consistent with our guide.
Speaker Change: In EMEA commercial Hvac's strength continues to be driven by demand for our innovation with.
Speaker Change: With bookings up mid single digits in the quarter and up high teens on a two year stack.
Speaker Change: Revenue was also strong up low teens.
Speaker Change: Our transport business performed in line with our expectations with bookings up mid teens and revenues flat.
Speaker Change: Turning to Asia results were mixed between China, and the rest of Asia, starting with the rest of Asia bookings and revenues were solid up low single digits and up mid single digits, respectively, China.
Had a challenging quarter, which I'll discuss in more detail on slide eight now I'd like to turn the call over to Chris Chris.
Chris: Thanks, Dave Please turn to slide number six.
Chris: This slide provides a snapshot of our performance in the third quarter and highlights continued strong execution top to bottom.
Organic revenues were up 11%.
Chris: Adjusted EBITDA margin was up 120 basis points and adjusted EPS was up 21%.
Chris: At an enterprise level, we delivered strong organic revenue growth in both equipment and services up double digits and low teens, respectively.
Chris: Our high performance flywheel continues to pay dividends with relentless investments in innovation driving strong top line growth margin expansion and EPS growth.
Please turn to slide number seven.
Chris: At the enterprise level, we delivered robust volume growth with strong incrementals positive price realization and productivity that more than offset inflation and continued high levels of business reinvestment.
Chris: In our Americas segment, we delivered about 12 points of volume and three points of price.
Chris: Strong volume growth in our commercial HVAC.
Chris: And residential businesses was partially offset by muted performance in our transport business.
Chris: Adjusted operating margin expansion of 130 basis points was driven by volume growth productivity and price realization more than offsetting inflation and high levels of business reinvestment.
Chris: In our EMEA segment, we delivered about seven points of volume and one point of price with strong volume in our commercial HVAC business.
Chris: Adjusted operating margin expansion of 140 basis points was driven by volume growth productivity and price realization more than offsetting inflation and high levels of business reinvestment.
Chris: In our Asia Pacific segment volumes declined by approximately 22 points. The team was able to deleverage within gross margin rates.
Speaker Change: Now I would like to turn the call back over to Dave Dave.
Dave: Thanks, Chris Please turn to slide number eight our.
Dave: Our outlook is largely unchanged as we move closer to the end of the year with Americas commercial HVAC and residential a bit stronger in Asia Pacific more muted.
Dave: We've talked about the strength of our Americas commercial HVAC business at length. So I won't go into a lot more detail. We expect the strength to continue in the fourth quarter with three year stacked revenue growth of approximately 50%.
Dave: <unk> with our performance each quarter of this year.
Dave: Our residential business delivered stronger than expected growth in the third quarter driven by the factors highlighted on the slide we continue.
Dave: To expect a modest pre buy of $4 10, a in 2024, primarily impacting Q1 of 2025.
Dave: We've raised our full year 2020 for revenue growth outlook to up high single digits up from mid single digits. Prior.
Dave: And our Americas Transport business Act continues to forecast the 2020 for transport markets to be down mid teens, and we expect to outperform.
Dave: Looking to 2025 act has moderated their trailer growth expectations to up low single digits.
Dave: This includes a weak first half and a stronger second half and we largely agree with that view.
Dave: We've been investing heavily in our transport business and as the markets recover we expect to emerge well positioned to outperform.
Dave: Overall, the changes to our outlook in the Americas segment are favorable and we've reflected this in our raised guidance for the year.
Dave: Turning to EMEA the business performed as expected and there is no change to our outlook.
Dave: Asia represents about 8% of our overall revenue mix with about 50% in China and 50% in the rest of Asia.
Dave: The rest of Asia performed in line with our expectations in the third quarter and we expect continued modest growth in Q4 as well.
Dave: Our China commercial HVAC business came in below our expectations in the third quarter, primarily related to two factors first the nonresidential markets in China deteriorated meaningfully since the June timeframe and bookings and revenues were negatively impacted as a results second we made the prudent.
Dave: <unk> tightened our credit policies in China, primarily related to down payments and progress payments.
Dave: Despite the significant revenue decline in China, the team maintained deleverage within gross margin rates.
Dave: While China will remain a dynamic environment, we expect some improvements in the fourth quarter as our customers and sales teams navigate the market and policy changes we have an outstanding team in China that has delivered leading results for many years and I remain confident in our team's ability to outperform over the long term.
Dave: <unk>.
Speaker Change: Now I'd like to turn the call back over to Chris Chris.
Chris Chris: Dave Please turn to slide number nine.
Chris Chris: We continue to target top quartile performance on organic revenue and adjusted EPS growth for the full year and believe we are on track to achieve those objectives.
Chris Chris: Given our continued strong performance positive outlook and exceptional backlog, we're raising our organic revenue guidance to approximately 11%.
Chris Chris: <unk> from our prior guide of 10%.
Chris Chris: We're also raising our full year adjusted earnings per share guidance by <unk> 30.
Chris Chris: To approximately $11 10.
Chris Chris: Up from $10 80 prior.
Chris Chris: We are well positioned to deliver our fourth consecutive year of adjusted earnings per share growth of 20% or greater.
Chris Chris: Between our strong year to date revenue performance and the addition of two small acquisitions that we made in the third quarter.
Chris Chris: M&A to contribute approximately 50 to 100 basis points to revenue in 2024.
We expect to result in about three points of negative impact on reported versus organic leverage for the year.
Chris Chris: We also expect a more moderate negative impact from FX for the year at less than a point effectively offsetting the positive revenue impact of M&A.
Chris Chris: Net organic and reported revenue guidance is the same at approximately 11%.
Chris Chris: We expect full year organic leverage of approximately 30% up from our prior guidance of 25% plus.
Chris Chris: We continue to expect free cash flow conversion to adjusted net earnings of 100% or greater.
Chris Chris: Absolute free cash flow is expected to be higher reflecting our higher adjusted earnings guidance.
Chris Chris: For the fourth quarter, we expect organic revenue growth of approximately 7% and adjusted EPS of approximately $2 50.
Embedded in this guidance is a step up in investments and higher incentive based compensation, reflecting strong performance in 2024.
Chris Chris: Please see page 18 for additional details related to our guidance that may be helpful for modeling purposes.
Speaker Change: Please go to slide number 10.
Speaker Change: We remain committed to a balanced capital allocation strategy focused on consistently deploying excess cash to opportunities with the highest returns for shareholders.
Speaker Change: First we continue to strengthen our core business through relentless business reinvestment.
Speaker Change: Second we're committed to maintaining a strong balance sheet that provides us with continued optionality as our markets evolve.
Speaker Change: And third we expect to consistently deploy 100% of excess cash over time.
Speaker Change: Our balanced approach includes strategic M&A that further improve long term shareholder returns and share repurchases as the stock trades below our calculated intrinsic value.
Speaker Change: Please turn to slide number 11.
Speaker Change: Year to date through October we've deployed or committed approximately $2 billion in cash with about $800 million to dividends $230 million to M&A and about $1 billion to share repurchases.
Speaker Change: We have $1 5 billion remaining under the current share repurchase authorization.
Speaker Change: Abiding us with strong optionality as our shares remain attractive trading below our calculated intrinsic value.
Speaker Change: We continue to have an active M&A pipeline with potential value accretive opportunities to further improve long term shareholder returns.
Speaker Change: Our outlook for 2020 for cash deployment remains unchanged at approximately $2 5 billion.
Speaker Change: Our strong free cash flow liquidity balance sheet and significant share repurchase authorization gives us excellent capital allocation Optionality moving forward.
Speaker Change: Now I'd like to turn the call back over to Dave Dave.
Dave: Thanks, Chris. Please go to slide number 13, we discuss the transport markets and our outlook discussion on slide number eight so I won't cover them again here. However, we have continued to provide this slide with additional details for your convenience.
Dave: Please turn to slide number 14.
Dave: We operate our transport business for the long term and while we will continue to manage through a down cycle. In 2024. This is a great business with a bright future.
Act projects, a modest trailer market rebound in 2025 mid teens growth in 2026, and 2027 and continued strong markets in 2028 and 2029.
Dave: Or directionally aligned with these projections.
Dave: We have a diversified transport business globally and opportunities to grow across the portfolio with leading innovation strong execution through our business operating system and a world class dealer network, we are well positioned to outperform in any market environment.
Dave: Turning to slide number 15.
Dave: We expect to provide 2025 guidance on our fourth quarter earnings call. However, given our strong bookings backlog and growing pipeline of opportunities visibility into 2025 has steadily increased.
Dave: We thought it would be constructive to provide our early views on 2025.
Dave: As another year of healthy growth.
Dave: Our commercial HVAC businesses are executing well our world class direct sales and service teams are a clear competitive advantage.
Dave: <unk> us to quickly pivot across vertical markets to capture growth opportunities.
Dave: Have the broadest and most innovative portfolio in the industry and we're relentlessly reinvesting in our business for growth.
Dave: As we look at market opportunities. We're in the early innings of a strong multiyear capex cycle.
Dave: We're also in early innings on the journey to Decarbonize hundreds of billions of square feet across the built environment.
Dave: Increase in complexity of these project opportunities plays to our unique strengths and we're seeing this in our bookings backlog and pipeline of projects.
Dave: Net we see another strong year ahead for commercial HVAC and the Americas and in EMEA.
Dave: In Asia, and more specifically, China, which is more than 90% commercial HVAC.
Dave: The macro is more dynamic.
Dave: However, with China at roughly 4% of our portfolio, we expect strength in the Americas, and EMEA to more than offset a challenging backdrop for the region.
Dave: Turning to residential we've moved through a period of normalization in 2023, and 2024 and we believe we are returning to a GDP plus framework.
Dave: While we expect a moderate amount of pre buy in 2024, we expect this to largely impact revenues in the first quarter of 2025.
Pricing differentials from the a two well transition should also act as a tailwind as we move through 2025.
Dave: Turning to our Americas transport business, which is about 7% of our revenues Act is projecting modest growth largely in the second half of 2025.
Dave: Net 2025 will be a modest tailwind for the enterprise.
Dave: We continue to lead with innovation, which yields healthy pricing opportunities in our business operating system is prime to stay ahead of inflationary pressures.
Dave: Underpinning our enterprise growth is our resilient services business services comprise about one third of our enterprise revenues and has averaged high single digit growth over the past seven years.
Dave: We see opportunities for continued growth in services across our portfolio in particular, we expect strong performance in our commercial HVAC businesses with our large and growing installed base.
Dave: With increased focus on de Carbonization, we're seeing increased demand for digital performance optimization and demand side management, where our energy services business shines.
Dave: All in we're excited about the opportunities for strong growth again in 2025.
Dave: Please go to slide number 16.
Dave: In summary, we are well positioned to deliver leading performance and differentiated shareholder returns in 2024 and beyond.
Dave: We recently received the results of our annual employee engagement survey and engagement was at a record level and in the top quartile compared to external companies.
I experienced that engagement firsthand when I see our team members engage with customers around the world.
Dave: That engaging culture, combined with our leading innovation and proven business operating system.
Dave: <unk> to set us apart.
Dave: I am proud of our team's consistent track record and believe our brightest days are ahead.
Dave: And now we'd be happy to take your questions operator.
Speaker Change: As a reminder to ask a question. Please press star followed by the number one on your telephone keypad and the interest of time, we ask that you. Please limit yourself to one question and one follow up question. Thank you.
Speaker Change: Our first question will come from Scott Davis from Melius Research. Please go ahead. Your line is open.
Scott Davis: Hey, good morning, Dave and Chris and size.
Speaker Change: Hi, Scott.
Speaker Change: Great.
Speaker Change:
Scott Davis: The numbers are good I'm, just trying to figure out a little bit of.
Speaker Change: Perhaps you can help with some context.
Speaker Change: Around data center, specifically just since it's so topical right now just.
Speaker Change: Anything you can give us whether it's.
Growth orders materiality to your to your algorithm I'm just.
Speaker Change: I'm trying to get my arms around how important that is for you guys for the next year.
Speaker Change: Sure. Good question, Scott Scott, we've been strong in data centers for decades now. Okay. So this has always been a very strong vertical for us and I think we were kind of early adopters in the data center. We had dedicated team that just focused on data centers, which has really allowed us to continue to remain.
Speaker Change: Strong in that vertical.
Speaker Change: If you look at data centers, the growth project and Thats projected I mean, if you take the.
Speaker Change: The middle there and Theres a lot of numbers out there youre going to see the data center vertical is going to be growing at.
Speaker Change: Mid teens for the foreseeable future and you should expect that Trane technologies will continue to be very very strong in this vertical as we have been.
For a long time, so it's important that when you think of data centers. They are probably the most complex systems that we build okay. We like working direct with the data center customers.
Speaker Change: We like thinking about it at a system level, Okay, Youll hear a lot about different components within the system. We look at the entire system and really helps the customer think through optionality that exist.
Speaker Change: For for their particular needs based on what Theyre going to be using that data center for and it does depend on what theyre going to be using it for.
Speaker Change: Chris I don't know if you want to add.
Chris Chris: Yeah, what I would add Scott as you know year to date in our Americas commercial HVAC business data centers have provided a lot of growth to bookings, but when you remove data centers from those bookings the rest of the verticals in aggregate are also up very strong. So we like the broad based focus of our direct sales force.
Speaker Change: Data centers is one strong vertical but.
Speaker Change: We highlighted in our release there is a number of verticals that have been strong for us. This year almost nearly all of them you know year to date showing strength.
Speaker Change: Okay.
Scott Davis: That's helpful.
I wish could size it for us, but I understand if you don't want to that's totally fine.
Speaker Change: Just moving to China is that market mature enough at this point, where we can start to see it.
Perhaps.
Speaker Change: Moving to more retrofit and services and being a little bit more stable longer term.
Speaker Change: And the down 45%.
Speaker Change: Projects can can disappear pretty quickly over there but.
Speaker Change: It's been a couple of decades now that you guys have been pretty strong and have a pretty big install base. There so is that something that.
Speaker Change: You see that kind of becoming a more mature market going forward.
Speaker Change: Yeah, I mean, we have a service business in China as you're aware, it's not at the same level that you would see here in the Americas, but its growing look specifically in China I know I've read a lot of the pre reports here. Let me just be very specific look our business in China I think we all understand what's happening in the markets in China, and we were obviously.
Speaker Change: Impacted by that the second is is that we thought it was very prudent for us to tighten our credit policies and specifically around down payments and progress payments. So for example, if a customer wants to give us an order and they don't give us a down payment with that we will not accept the order.
Speaker Change: If if we have a product that's there.
Speaker Change: That is complete and ready to ship to the customer and the customer doesn't provide the proper downpayment, our progress payments, we will not ship that product to the customer.
Speaker Change: Long term we know this is the right decision to make we have a great team in China, It's performed exceptionally well for a long period of time and I have a 100% confidence that we will continue to outperform the market. There. Our teams are just going to be working through this in the in the fourth quarter and this these changes and.
Speaker Change: Look it's the right decision to make for for that particular region at this particular time.
Speaker Change: Okay makes sense I'll pass it on best of luck guys.
Scott Davis: Thank you Thanks, Scott say in December.
Speaker Change: Our next question comes from Chris Snyder from Morgan Stanley. Please go ahead. Your line is open.
Chris Snyder: Thank you I wanted to ask on services, which continues to be really strong up low teens again here in Q3 can you just maybe talk a little bit about the mechanics of the service business what is the lag between when.
Chris Snyder: When you sell the equipment to when it starts generating service revenue anything you could talk about on service margins and then it seems like a lot of the reinvestment. The company is making is in that service side. So just what are you spending on to better position the company to capture more of that revenue.
Speaker Change: Sure I'll start I'll, let Chris answer some of the margin questions, but look we love our service business. It's a third of the company.
Speaker Change: And it's very very resilience, okay over the last seven years.
Speaker Change: Compound annual growth rate is high single digits. So it's a very very.
Speaker Change: Competitive weapon that we have within within Trane technologies, and we continue to as you've noted invest heavily in it look as far as the timing as to when product gets installed specifically on the applied side to one service starts it varies okay, depending on what the warranty is on a particular product a lot of customers.
Speaker Change: We'll have extended warranties, that's why I say it varies and obviously that would vary.
Speaker Change: Around the world, but think of it.
Speaker Change: Year, two year three it starts to ramp up.
Speaker Change: And by the way, even if it's under extended warranty we're going to be doing PM work on these products in many cases.
Applied systems are so much more sophisticated today than they were.
Speaker Change: <unk> four or five years ago and.
Speaker Change: Customers are really demanding that the Oems do the service on these systems to make sure that Theyre always performing the way. They are designed and Chris you and I spoke a lot about connected solutions in the past and I would tell you that that's going to be so fundamental to how we continue to drive our service business in the future I think you could certainly understand.
Speaker Change: That our installed base is increasing that's the that will continue to drive growth, but the connected solutions and making sure that the asset is always performing the way. It was designed and consuming energy at that level is so important.
Speaker Change: Today, and a little bit certainly into the future and HVAC asset isn't performing not only if it's not cooling properly not only if it is not heating properly not only if it's not ventilating properly, but if it's using too much energy and if you think about that.
Speaker Change: That's where the opportunities.
Speaker Change: And we have we've done hundreds of energy audits and buildings and we know that.
I'll be conservative here, and say that 30% of the energy after the meter is being wasted. However, if you are connected to an asset you could always ensure that it's performing the way. It was designed and thats going to continue to be a significant tailwind for our service business well into the future. So Chris I don't know if you want to talk about margins.
Speaker Change: Yes, I'd add with the applied growth over the past four years Chris.
Chris: Over 100% that obviously bodes well as we think about that install base maturing and as Dave said two to three years out starts to build a little bit of a ramp on the services revenues.
Speaker Change: The services business I'll call it higher margins than the average so we like that business for that reason as well and it's a perfect example of where we've accelerated investments over the last few years, but even more so into the second half of this year Dave.
Speaker Change: Dave talked about digital connected solutions, that's absolutely one way, we're making investments, but think about it as capacity as well and I am not going to focus on factory or plant capacity I'm going to focus on people and when you think about sales and service.
Speaker Change: Adding employees from covering verticals to adding service technicians to support our customers with that higher installed base. That's one area, where we're really continuing to inflect up in investments.
Speaker Change: And then the tools to support the sales and service team so sales support tools, whether it be customer relationship tools order intake tools billing collections you name. It. It's all part of what David coming out of the second quarter said, we're going to accelerate the speed of some of these investments this give us even further confidence on growth over there.
Speaker Change: Next couple of years, but it's such a strong business and.
Speaker Change: We're going to keep investing in it yeah, one other point, Chris that I always tell people that some of our service technicians are our best sales associates as you think about our service techs are with our customers every day and they are building that trusted advisor relationship with our customers they often see opportunities that the.
Speaker Change: Customer can make improvements in their own facility. So they do a fantastic job for us, but the service business is a strong part of Trane technologies today and think of it being even stronger tomorrow.
Chris Snyder: Really really appreciate all of that maybe just following up on data Center service, specifically, we kind of think about that two to three year lag. It would imply that you know a lot of the growth we've seen in certainly in orders and even I guess the revenue on the datacenter side over the last 12 to 18 months Hasnt really found its way into service.
Speaker Change: Yet.
Speaker Change: Can you just maybe talk about service.
Speaker Change: The process is different and datacenter elsewhere and I just asked because obviously these are customers that are very sophisticated uptime is everything.
Energy efficiency is even more important there than it is elsewhere. So any just color on how the data Center service model differs would be helpful. Thank you.
Speaker Change: As I said earlier I think of it think of it as the more sophisticated the product the greater the appetite is for the OEM to do the service and data centers tend to be some of the most sophisticated systems that we deploy.
Speaker Change: So we're very strong in the data centers there in service and by the way I know that the growth over the last several years has been fantastic in Datacenters, but remember data centers have been around for a long time and we've been very strong in this vertical.
Speaker Change: Since the beginning so we have even though we've seen tremendous growth. We also have a big installed base and data centers that we're servicing today.
Speaker Change: Thank you.
Speaker Change: Sure Chris.
Speaker Change: Our next question comes from Julian Mitchell from Barclays. Please go ahead. Your line is open.
Speaker Change: Hi, good morning.
Speaker Change: Maybe.
Julian Mitchell: Just wanted to start with.
Julian Mitchell: Slide 15, you talk give some useful pointers on next year.
Speaker Change: So when we're thinking about kind of.
Speaker Change: Any color you could give us as to how to think about organic operating leverage this year is guided at 30% now.
Speaker Change: Trying to think about that for next year.
Speaker Change: You're calling out in terms of mix.
Speaker Change: Mix it looks like you've got a mixed tailwind perhaps within Ramsey.
Speaker Change: Ill transition there may be some high operating leverage is transport markets turn around more in the second half.
Speaker Change: Just wondering sort of rolling all that together should we expect kind of the strong operating leverage 25 any reason not to.
Speaker Change: Hey, Julien, it's Chris I'll start yes, we.
Chris: We will provide a bit more detail around 2025 in our earnings call for the fourth quarter, but we really do like that long term algorithm of 25% or better operating leverage and making sure. We have the ability to fund investments in the business.
Chris: We would be targeting 2025 for top quartile financial performance, we're going to look at that in the top line. When you look at that in the bottom line and cash conversion as well.
Chris: One thing so far this year, we've had excellent free cash flow conversion. The average over the last four years is I think 108% and so we're going to be targeting topline bottomline and really strong cash conversion going into 2025. So we would expect commercial HVAC to be remains strong the backlog visibility gives us a lot.
Chris: Confidence around that.
Chris: Or just talk.
Chris: Services in the high single digit growth, we've seen over the last seven years gives us a lot of confidence that should continue.
Chris: Think about America's transport, it's probably not a headwind it could be a modest tailwind going into next year, just given the expectation of refrigerated trailers in the Americas being up low single digits more second half of the year than first half. So we think we've got some nice tailwind going into next year, but on a leverage we like the 25%.
Chris: <unk> greater al.
Chris: Algorithm and keep those investments coming.
Chris: Yeah.
Speaker Change: Thanks, very much Chris and then maybe my second question just around the U S resi HVAC market, which I don't think it's been touched on in the questions. So far.
Julian Mitchell: Maybe just help us understand I think Dave you mentioned, a slight increase chiller revenue assumption for that business. This year was that tied to sort of share gain.
Julian Mitchell: Awesome behavior by distributors in general.
Julian Mitchell: Any color.
Julian Mitchell: On that and it sounds like you're pretty confident of decent revenue growth in 2025 again, despite the pre buy just wondered if you could flesh that out please at all.
Speaker Change: Yeah sure Julien Julien first of all nice job on CNBC. The other day I saw you did a fantastic job so.
Julian Mitchell: Nice to see.
Speaker Change: Look on <unk>, let's just go back we started the year and we were thinking that resi was going to be plus or minus low single digits and then at the end of the first quarter. We kind of said look the EPA clarification around the refrigerant transition that was that was a nice help.
Speaker Change: We thought that inventory has normalized in the channel so that was a help and.
Speaker Change: Then we had a very warm cooling season right. So I think it was a very hot summer and that certainly drove.
Speaker Change: Growth as well as far as share goes.
Speaker Change: Sure.
Speaker Change: We're saying we had we had nice gains, but I've heard everyone say that have nice gains so I'm not sure.
Speaker Change: That will sort out, but we're very comfortable and we're happy with the share that we have in that space and the progress that that team has been able to make.
Look our team is really executing at a high level in residential right now.
Speaker Change: We've made some investments there and our manufacturing that are really paying dividends.
Speaker Change: And I could not be more proud of what that team has been able to execute too. So we're very happy with what we're seeing in residential as far as 2025 goes look I've been saying for a long time that I believe our <unk> business as a GDP plus business and I think that.
Speaker Change: That's the that's the framework that we're working through that we'll get back to in 2025.
Speaker Change: The pre buy look I don't think theres going to be a significant pre buy been saying that since January.
Speaker Change: There will be something we'll clarify that as we get through the fourth quarter, but.
Speaker Change: Look we <unk> business is operating on all cylinders right now and we expect it to continue into the future.
Speaker Change: Great. Thank you.
Yeah.
Speaker Change: Okay.
Speaker Change: Our next question comes from Andy Kaplowitz from Citi. Please go ahead. Your line is open.
Andy Kaplowitz: Hey, good morning, everyone.
Speaker Change: Hey, Andy how are you doing good how are you.
Andy Kaplowitz: David I know you already talked about data centers, a little bit, but interestingly in your presentation you mentioned other vertical.
Andy Kaplowitz: You mentioned before education health care, but you also mentioned office, maybe you can elaborate on what Youre seeing there and then given we're at the tail end of spending for K through 12, what could that mean for education related HVAC spend in 2025.
Andy Kaplowitz: Yes.
Speaker Change: But look first of all thanks for noticing office on the page, we haven't talked about office in a long time.
Speaker Change: They say they.
Speaker Change: May sound counterintuitive, because you still have vacancy rates that are quite high but we had a very strong quarter and office actually year to date office is up from an order rate standpoint, and if you think about you go you go kind of a click lower you could sit there and say well we're doing a really good job in class a buildings.
Speaker Change: And we're also really helping our customers navigate through how they get tenants back into their space.
Speaker Change: And I know you had the opportunity to visit US in New York and you got to see it firsthand right. Having this direct sales force with deep domain expertise as to what's happening in a particular city is critical right. We know what the carrots are what the sticks are and more importantly, how to navigate that so that we can help to come.
Speaker Change: Customer make the right decisions so they could get tenants back into their space. So.
Speaker Change: It's just the.
Speaker Change: I can't speak enough about our direct sales force I can't speak enough about how they pivot to where the opportunities are and how it's not just about data centers that's growing for us it's really almost all of our verticals I was doing the study I had the team do a study and I was looking from year to date from order rates and I'll speak about commercial HVAC.
Speaker Change: We track 14 different verticals.
Speaker Change: 13 of them were positive by a lot and office was one of those so it just shows you the broad based strength that we have and the ability of our teams to really navigate to where the opportunities are so I could not be happier with seeing office on the page and the team continues to execute at a high level there.
Speaker Change: Great.
Speaker Change: Just ask you about China in the context of obviously had somewhat high decremental margins. There. Some of that is the choices you have made.
Speaker Change: Do you again, you've been in China for a long time, you move to direct sales and everything was good once you did that.
Speaker Change: Do you see this as more structural issue or is it really just cyclical and if it is.
Speaker Change: Either way can you take more cost out of that business or how should we think about that to offset higher decrementals.
Speaker Change: Yeah, I mean, well first of all the team performed quite well, even though the revenues were down.
Speaker Change: Within gross margins on the deleverage standpoint, so that was good to see but we're going to just work through this in China. We have a great team there and we have a great business and we've been over performing in China for a long time.
Speaker Change: We made a decision to change our credit policy, specifically around down payments and progress payments and we long term this will be the right decision and.
I think I think people will see that in the future, but right now our teams are working through this change <unk> all.
Speaker Change: All the confidence in the world that they'll get back to outperforming.
Speaker Change: Here in the future, but right now we're going to work through it and.
Speaker Change: But a great team there that's executed for a long time at a high level and I expect more of that in the future.
Speaker Change: Appreciate the color guys.
Speaker Change: Okay, Thanks, and Youll see in a couple of weeks.
Our next question comes from Joe Ritchie from Goldman Sachs. Please go ahead. Your line is open.
Joe Ritchie: Hey, guys good morning.
Speaker Change: Hey, Joe how are you.
Joe Ritchie: Doing great day. Thanks.
Speaker Change: Yes, Hey look talking about office, we talked about data centers.
Joe Ritchie: Clearly the commercial HVAC business is humming along.
Speaker Change: Just kind of talk a little bit about some of the Mega project activity, how that's coming through whether it's semiconductor plants. You know there's been some delays on EV plants. Since then any commentary around that would be helpful.
Speaker Change: Yeah Mega projects My favorite term I don't really like but look bigger projects are happening in verticals that we've always been very strong in.
Speaker Change: And it's dynamic as you can imagine right, yes, you've talked about a few projects that maybe are getting a little bit delayed we have others that are pulled up we have some especially on the EV battery side, a couple of them actually been canceled, but we also have new ones that are coming in so it's dynamic, but we continue to win in the Mega project space right again verticals, we've always been strong.
Speaker Change: But a lot of these decisions are made on a global basis. So you have decision makers that live in different parts of the world again, a direct sales force that could help triage those decision makers is extremely important.
Speaker Change: And we've been very successful and anticipate and I know, we'll be very successful in the future as well.
Speaker Change: Got it.
And look.
Speaker Change: I know youre not talking about a pre buy on the residential side of the business and get the industry seeing.
Speaker Change: Pretty significant growth in the back half of this year in <unk> and a few of your competitors are talking about.
Speaker Change: How much of the kind of our <unk> is going to go through their system next year with one saying 65% of their business. The other one saying 90% of their business.
I'm just kind of curious as you kind of think about your resi business into next year like how much of it do you think is going to be the <unk> product.
Speaker Change: Manufacture this year versus the <unk> product.
Speaker Change: That will be hitting the market next year any thoughts.
Speaker Change: Yeah, I mean, if you think about inventory in the channel.
Speaker Change: About three months of inventory is probably a good average to use so by definition youre going to be at 75% will probably be linear will be all in the back half youll have some of the form 10 that will sell throughout the year, but we'll probably be in that 75% to 80% range and rosy.
Speaker Change: In commercial and by the way no one wants to talk about the commercial but commercial also went through a refrigerant change on the on the unitary side and that one will be obviously a lot higher I think of that one in the in the 90 plus percent range.
Speaker Change: Helpful. Thank you very much.
Speaker Change: Okay. Thanks, Joe.
Speaker Change: Yeah.
Speaker Change: Our next question comes from Nigel Coe from Wolfe Research. Please go ahead. Your line is open.
Nigel Coe: Thanks, Good morning, everyone. Thanks for the question.
Nigel Coe: I know I know I know APAC and China very small few so.
Nigel Coe: What is to come back to this but I guess it surprises that it took so long because we've seen terrible markets in China now for some time. So you mentioned you've been outperforming that makes sense, but.
Nigel Coe: The string broke this quarter so.
Nigel Coe: It seems you if you have to gauge how much of this is elective.
Nigel Coe: We're seeing more stringent credit features this is a genuine deterioration in the markets how would you sort of gauge that.
Nigel Coe: I'm guessing that's this correction has cycled through into 2025, there's no there's no kind of spring back in just any thoughts there.
Speaker Change: Yeah, I mean, I think the fourth quarter will be stronger than the third quarter I mean, just.
Speaker Change: So you kind of hit it look China is 4% of our revenue first of all so it's a small portion of our revenue, but it's important.
Speaker Change: And how.
Speaker Change: How much of the of the downturn is market related versus our policy change, it's always hard to say that.
Speaker Change: Is it 50 50, maybe it's a little bit more weighted to policy change at least in the short term probably.
Speaker Change: Just because we have to work through that we have to educate our customers as to what are your expectations are so our teams are really good again, a direct sales force can have that direct conversation that can understand the why and we'll work through it.
Speaker Change: You know what.
Speaker Change: We'll see how the fourth quarter as I said there'll be a little bit stronger than we think in the third quarter and that's what we have baked into our guide.
Speaker Change: Okay. Okay, that's great and then a follow up for Chris.
Speaker Change: Im not asking for 25 guidance, but maybe just some of the moving pieces.
Speaker Change: On corporates are running at 330 now.
Speaker Change: It was as low as $2 50 back in 'twenty, two 2021 so any sense on what would be a good run rate for corporate.
And then it looks like ammo comes down.
In 25, so I think some of the Trane acquisition.
Speaker Change: Amongst them to roll off.
Is that correct.
Speaker Change: And finally, just on interest we ought to be.
Speaker Change: Refi coming up in November I think I'm very small, but should we expect interest expense to go up a little bit next year.
Speaker Change: Hey, Nigel corporate I think three.
300 million is probably a good longer term run rate number.
Speaker Change: There are times like this year, where we have a little bit higher corporate expense.
Speaker Change: Think of that as where were driving some of the enterprise investments for the company. So those are decisions. We will make as we worked throughout a year always making sure that that pipeline of investments is getting funded so but I think look going into 2025, a squiggle 300 million is probably a good place to start we'll update you as we get together in a few months from now.
Speaker Change: And amortization, yes, there's going to be a little bit of a roll off on the train amortization, we'd have to look at that across the new M&A that we've done over the last few years and dial that all in.
Speaker Change: So yes, we will give you some more input on that over the next few months if theres any more M&A that comes through through the balance of this year.
And then on the interest side, yes.
Speaker Change: I would say, we had $237 million of guided interest expense for this year.
Speaker Change: We took out some debt proactively earlier this year just to Derisk, our refinance it actually is going to come to you here in a couple of days.
Speaker Change: We've held onto that cash actually this year from the bond offering we did in June.
Speaker Change: Net positive on our net interest here, so we'll pay down that cash and pay down that bond.
Speaker Change: Going into next year, but it.
Speaker Change: Maybe that number for 2024 is not far off for what we have for 2025, but we'll see we'll dial it in but the good thing is is that we've generated a lot of cash this year, maybe earlier than normal.
Speaker Change: Generation, a little bit more interest income as well as we've earned it this year, but.
Speaker Change: We have a pristine balance sheet.
Speaker Change: Very strong leverage on the balance sheet, a lot of firepower to go deploy cash and I would say maybe for next year interest is probably in that ballpark as 2024.
Speaker Change: That's great. Thanks, Chris.
Thanks, guys Youre welcome.
Speaker Change: Our next question comes from Deane Dray from RBC capital markets. Please go ahead. Your line is open.
Speaker Change: Hi, Good morning, this is <unk> on for gains right.
My question is on <unk>.
Speaker Change: On the weakness in China understanding, it's a smaller part of the business but.
Speaker Change: Have you taken any write downs of receivables or increase reserves.
And how might that Chinese government stimulus actions play out and are there any verticals in China doing particularly worse.
Speaker Change: Yeah, why don't I start it's Chris.
Chris: The first answer is no we've not seen any material write downs or bad debt reserves.
Chris: I think the key there is coming out of the second quarter working with our business team in China to make sure that they were deploying these tightened credit policies really at the end of the second quarter and so we've got orders that are waiting to be delivered and when the cash comes in we'll deliver them. So at this point no. We're not we're not seeing that.
We generally play in the non resi markets in in China, and largely commercial HVAC with a smaller transport business and those are the markets that have been as you may have seen here. The last several months the non resin markets I've, just seen a bit of a bit of a downturn. So we've been outperforming for some time at some point it does catch up with.
Chris: Yeah, a little bit but the days prior comments, we're also making sure. We're focused on the long term here, we don't want to create a short term problem thats, a booking or a revenue that you know 369 months down the road you wind up with a problem we have to deal with we're making sure we've got quality orders quality customers quality receivables and then ultimately driving the cash.
Speaker Change: That's really helpful. And then one more on data centers could you provide an update on your liquid liquid cooling investment and liquid stock.
Speaker Change: Okay.
Speaker Change: Yeah, we continue to work with liquid stack, we've been partners with them for extended period of time now.
Speaker Change: We're.
Speaker Change: Think the activity is starting to pick up there but.
Speaker Change: Theres some theres some hurdles that were still working through with them and we'll keep you posted but not really have any kind of an update right now as far as orders are concerned.
Speaker Change: Alright, Thank you very much.
Sure.
Speaker Change: Our next question comes from Andrew <unk> from Bank of America. Please go ahead. Your line is open hey, guys. Good morning.
Speaker Change: Hey, Andrew how are you.
Andrew: I'm going to sort of.
Speaker Change: The labor there is China point, a little bit more.
Andrew: My understanding was that for you China was mostly industrial exposure and I think the prior explanation for the fact that your performance in China was better was because you did not have exposure to these nonresidential office buildings.
Andrew: I just wanted to understand if thats, the right way of thinking about it and.
Yeah, right because as I said the commercial weakness was there you are.
Speaker Change: Our response was we're not really on this commercial developments, we're probably mostly on the industrial side, but did I just understand that wrong.
Oh, it's about think about.
Speaker Change: Our business in China think about 90% commercial hvac's, okay, mostly HV, mostly applied systems, so you're spot on there.
Speaker Change: The downturn.
Speaker Change: The markets are down Okay, that's pretty universal as to what's happening in China, but as I said earlier, Andrew if if a customer wasn't going to provide the down payment.
Speaker Change: Or the progress payment, even though the product was ready to be shipped we held it okay. We're not going to ship it until we get that progress payment and you saw the acute.
Speaker Change: Falloff in the quarter because of that but again long term. This is a prudent decision that we're making and the individual before for Dean was asking about it where we've written off anything in bad debt.
Speaker Change: And the answer is no and we don't intend to in the future.
No I understand but the answer is that all along your China business was mostly commercial real estate not industrial fulfill it is not factories not data centers, it's 90% commercial real estate just wanted to get at that point is that correct.
Oh, that's false.
Speaker Change: Actually the reverse we don't really play in the commercial real estate place. Okay. These are applied system. So think of them that semi conductor think of them industrial.
Speaker Change: No that's exactly what I was asking thank you, yes that was my understanding okay.
Speaker Change: Okay. Okay fine. So so it's really industrial weakness its weakness outside the real estate market, that's getting you down.
Speaker Change: You got it.
Speaker Change: Okay. Thank you no that's exactly what it is and maybe just the hol pricing.
<unk> been a lot of data points I think there was a view that they can because they use a different refrigerant, maybe it is not going to increase their prices as much.
Speaker Change: I think your peers are sort of saying high single digits around 10%, maybe what are you guys and I apologize if I missed it but what do you guys fall end on this.
<unk> pricing in 'twenty five.
Speaker Change: Yeah, Andrew I mean think of the introduced pricing for the new refrigerant products really being up in the high single digit range.
Speaker Change: Maybe there is more cost associated with the products for many reasons.
Speaker Change: The refrigerant the sensors et cetera.
Speaker Change: Our target is to be margin neutral here as we think about <unk>.
Speaker Change: Pricing and costs for end customers, but think of it for us up in that high single digit range. As we guide next year will dial in a little bit better based on visibility.
Speaker Change: Senators is that Dave outlined previously and how much will be 454, b versus $4 10, a and then I know as you know not all of the residential product. We sell is subject to the new refrigerant like furnaces. So we will kind of walk you through we think that price contribution is for next year, but it will be a tailwind for next year.
Speaker Change: Terrific and I really appreciate this clarification on China. Thanks, a lot.
Speaker Change: Sure no problem Andrew Thanks.
Speaker Change: Our next question comes from Tommy Moll from Stephens. Please go ahead. Your line is open.
Tommy Moll: Good morning, and thank you for taking my questions.
Speaker Change: Hello, how are you doing Tommy good morning.
Tommy Moll: Doing fine. Thank you we've talked a lot about China. So I wanted to circle back on one of the positive topics from today, which is the backlog you've called out for 2025, which was up sequentially by a pretty large amount.
Tommy Moll: And I'm just curious as you look at the composition. There is there anything we can learn in terms of what verticals are particularly strong.
By customers, maybe ordering a little bit earlier in the cycle than in the past just anything we can glean obviously you've talked about next year is a strong one for commercial HVAC.
Tommy Moll: But maybe if we go one layer deeper there what can we learn.
Speaker Change: Yeah, I think as I said earlier.
Speaker Change: Think about our order rates and I'll talk about commercial HVAC and the Americas are up close to 20% for the year and it's broad based it's in it's in basically all verticals. So.
Speaker Change: And the other thing telling me that I haven't talked about is that our pipeline. So this is before something actually becomes an order is extremely strong right. We have very sophisticated CRM systems. So we know what's being worked on and it is extremely strong which gives me confidence not only for the fourth quarter.
Speaker Change: But into 2025 as to what we should be expecting in that business. So.
I'm very bullish on.
Speaker Change: 2025, we will dial that in as we as we get into our fourth quarter earnings but.
Speaker Change: Look our backlog is up $300 million year to date, it's at.
Speaker Change: Hard to say, what's normal now, but if we looked at historical norms thats over two five times what's normal.
Speaker Change: We will go into next year with a very strong backlog and the the.
Speaker Change: Tivoli the market activity across all verticals is very very strong right now.
Which leads to my follow up David Office got a little airtime earlier.
Speaker Change: So if we if we just discussed these commercial trends ex data centers, which which we've covered.
Speaker Change: And think about office and some of the other verticals that we don't talk about as much am I hearing you correctly that it feels like the rest of that commercial business has actually gotten stronger.
Speaker Change: In terms of the orders as 2024 has progressed.
Speaker Change: Certainly office has.
Speaker Change: I think all of our vertical saw positive growth except for one.
Speaker Change: <unk> had positive growth on a year over year basis, which is encouraging but but again.
Speaker Change: And it comes back to who we are as Trane technologies right were very broad based right our portfolio of products and services is broad based we have expertise.
Speaker Change: In all verticals and it's not like we've become over indexed on any one.
Speaker Change: And I know the data centers is certainly very strong and it will be very strong in the future. We have a great team there that works on the data center. We also have great teams that work on other verticals and have that expertise and by the way if they see opportunities they are going to pivot to that opportunity and really go after it and make sure that they can win with the customer.
Speaker Change: So very strong seeing right now backlog is very strong activity. This is before an order is extremely strong.
Speaker Change: And we are bullish.
Speaker Change: Thank you, Dave I'll turn it back.
Tommy Moll: Thanks Tommy.
Our last question today will come from Noah Kaye from Oppenheimer. Please go ahead. Your line is open.
Noah Kaye: Thanks, and I will keep it to one question.
Noah Kaye: David in the past you've talked a little bit about the cascading impact of policies going from say answer to chips and IRA and I know there are a lot of fundamental drivers here around de carbonization and improved efficiency paybacks, but just at this point as we look at 25 and your comments around the pipeline.
Noah Kaye: Activity to what extent are those policy impacts actually impacting the pipeline or the bookings you're seeing just just help us level set what kind of impact they are actually having on the business I'm.
Speaker Change: I'm sure they have a tailwind okay again.
Speaker Change: Our solution, while growth pullbacks with or without those call. Obviously, the sales will make it more more attractive, but we have great paybacks for exists whether we have a.
Speaker Change: Tailwind or not like us are funding.
Speaker Change: Certainly some of them have been part of the <unk> funding is a great example, there.
Speaker Change: There is certainly is part of our backlog will be fulfilling orders all the way through probably about the next year.
Speaker Change: That's in our backlog for schools and a lot of that has to do I know it sounds like a long time, but remember in schools you tend to want to do the work when students are in the school. So it will like the.
Speaker Change: The school season in the summer but.
Speaker Change: Look we'll see what happens with.
Speaker Change: The next part is in Washington, but we're optimistic that we will continue to have attractive paybacks, regardless of what the policies are.
Speaker Change: Whether they are <unk> or not but we'll be we'll be successful well into the future.
Alright, Thanks I appreciate it.
Paul: Thanks, Paul.
We are out of time for questions I would like to turn the call back over to Zac Nagle for closing remarks.
Zac Nagle: I'd like to thank everyone for joining today's call as always we'll be available for questions. At this time, we will also be on the road quite a bit in the fourth quarter and we look forward to seeing many of you on the road so have a great day.
Paul: <unk>.
Speaker Change: This concludes today's conference call. Thank you for your participation you may now disconnect.
Speaker Change:
Speaker Change: Yeah.
Speaker Change:
Speaker Change: Yeah.