Trane Technologies : First Quarter 2025 View Transcript

Published: 2025-05-08 11:23:10 ET TT

Published on 05/08/2025 at 11:23

Trane Technologies Q1 2025 Earnings Conference Call April 30, 2025 / 10:00 AM EST

Operator: Good morning. Welcome to the Trane Technologies Q1 2025 Earnings Conference Call. My name is Julianne and I will be your operator for the call. The call will begin in a few moments with speaker remarkets and the Q&A session. (Operator Instructions)

I will now turn the call over to Zac Nagle, Vice President of Investor Relations.

Please go to Slide 2.

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 actual results to differ materially from anticipated results. This presentation also includes non-GAAP measures which are explained in the financial tables attached to our news release.

Joining me on today's call are David Regnery, Chair and CEO, and Christopher Kuehn, Executive Vice President and CFO.

With that, I'll turn the call over to Dave. Dave?

Our solutions offer very attractive paybacks, helping customers reduce energy use, emissions and operating costs. These long-term partnerships not only fuel our growth but also make a positive impact on the world. Our leading innovation, proven business operating system and uplifting culture enable us to navigate dynamic environments, outperform the markets, and deliver robust free cash flow. This strong consistent performance positions us to deliver differentiated shareholder value well into the future.

Please turn to Slide 4. We delivered strong financial results in the first quarter, continuing our track record of industry-leading revenue and EPS growth. Our global team achieved 11% organic revenue growth. 130 basis points of adjusted EBITDA margin expansion and 26% adjusted EPS

growth. Bookings were robust, up 4%, with a book-to-bill ratio of 113% for the enterprise and book-to-bill of 100% or more across all segments and businesses.

We added about $500 million to our backlog from year-end 2024 including approximately $400 million in our Americas Commercial HVAC business. Our Commercial HVAC and Services businesses have shown outstanding durability and resiliency compounding growth over multiple years. And our project pipelines continue to grow, highlighting sustained opportunities ahead.

Our direct sales strategy enables us to capture more than our fair share of these opportunities and consistently outgrow our end markets. Our Service business represents a third of our enterprise revenues with a high single-digit compound annual growth rate since 2019 and a low teens CAGR since the inception of Trane technologies.

We pride ourselves on strong execution and delivering for our customers and stakeholders. Despite a dynamic macroeconomic environment, we are confident in our ability to outperform. Our experienced global teams have effectively managed past challenges, consistently improving our business operating system to be more agile and resilient. This system includes advanced mechanisms for pricing, supply chain management and productivity to manage various inflationary scenarios.

We are well prepared to manage the modest cost inflation we expect while minimizing the impact on our customers and driving market growth. Looking forward, we're confident in our ability to deliver results towards the higher end of our full year revenue and EPS guidance ranges, which Chris will cover in more detail shortly.

Please turn to Slide 5. In our Americas segment, Commercial HVAC bookings set a new quarterly record, surpassing last year's high. Revenue growth was robust with mid-teens growth in equipment and low teens in services. Residential growth was also strong, with bookings up mid-teens and revenues up high teens. Transport refrigeration bookings were down low single digits and revenues were up mid-single digits, significantly outperforming end markets, which were down around 25%.

In our EMEA segment, Commercial HVAC bookings were very strong, up mid-teens. Revenue was up mid-single digits, in line with our expectations for the quarter. Transport bookings were up high single digits. Revenues were up mid-single digits, outperforming end markets, which were down mid-single digits.

In Asia Pacific, our team showed resilience with balanced results between China and the rest of Asia. In the rest of Asia, bookings and revenues were strong, up double digits and low 20s, respectively. In China, the market remains challenging, with bookings and revenues down low 30s and high 20s, respectively, against tough prior year comps of approximately plus 20% for both.

Now I'd like to turn the call over to Chris. Chris?

Please turn to Slide 7. At the enterprise level, we delivered strong volume growth, positive price realization and productivity gains that offset inflation and high levels of business reinvestment. Our Americas segment delivered revenue growth across all businesses. Adjusted EBITDA margin expanding by 170 basis points, driven by volume growth, productivity and price realization.

In EMEA, revenues increased in each business, though adjusted EBITDA margin declined by 190 basis points due to high business reinvestment during the shoulder season. Results met our expectations and we're confident in strong margin performance for 2025. In Asia Pacific, despite a modest revenue decline, the team delivered 90 basis points of adjusted EBITDA margin expansion through strong productivity and cost management.

Now I'd like to turn the call back over to Dave. Dave?

In the Americas, we had an excellent start to the year across our businesses, providing strong momentum. Our outlook for Commercial HVAC remains unchanged, supported by strong bookings, revenues and backlog build in the first quarter. Our world-class direct sales force and leading innovation are powerful competitive advantages, particularly in large complex projects requiring bespoke applied solutions.

We have a proven track record of rapidly compounding growth here with 2-year stacked revenue growth of approximately 90%, 3-year stack revenue growth of approximately 130% and 4-year stack revenue growth of approximately 200% in the applied equipment space. For 2025, we're targeting total Americas Commercial HVAC 3-year stack revenue growth of approximately 50%, inclusive of both equipment and services. To meet this target, we expect to deliver revenue growth of high single digits to 10% in 2025, and we're on pace to meet or exceed this target.

In Residential, our outlook is also unchanged. We expect residential markets to return to a GDP plus framework in 2025. Our strong first quarter results suggest we did not see a dip in volume due to the 2024 prebuy as anticipated, while channel inventories are modestly elevated by an estimated $75 million to $100 million, we expect them to normalize in 2025, aligning with our GDP+ outlook.

For Transport, we anticipate a strong market rebound in 2026 and beyond. For 2025, ACT has revised their trailer outlook from down low single digits to down about 15%, while our internal model suggest a mid-20s trailer market decline. For prudency, we've incorporated the mid-20s

decline into our guidance. Translating the trailer market forecast to the overall Transport market forecast, we anticipate the weighted average market to be down about 20% for the year, and we expect to outperform.

In EMEA, we see continued strength in Commercial HVAC in 2025 driven by strong execution in core markets and tailwinds from thermal management systems, services and key growth verticals. Expectations for EMEA transport markets are now expected to be down low single digits in 2025, and we expect to outperform. In Asia, our outlook for the year remains unchanged. We anticipate a flat market overall, balanced between challenging conditions in China and growth opportunities in the rest of Asia.

Now I'd like to turn the call back over to Chris. Chris?

$12.70 to $12.90 adjusted earnings per share and expect to perform towards the high end of these ranges. Given the U.S. dollar softening through the end of the first quarter, we anticipate negative 50 basis points of FX impact to revenues, an improvement from negative 100 basis points previously.

Recent bolt-on acquisitions have added approximately 50 basis points to our revenue growth from M&A bringing the total to about 100 basis points for the year, up from 50 basis points prior. The net EPS impact of FX and M&A remains unchanged at minus $0.20 for the year. We expect to manage and mitigate all tariff impacts that are now in place through proactive measures including pricing. We estimate the cost impact in 2025 to be approximately $250 million to $275 million.

We will take surgical pricing actions to offset tariff impact dollar for dollar, aiming to fully mitigate these costs while minimizing the impact on our customers. Net tariff costs are included in our EPS guidance for the year and are expected to have zero impact. Given the dynamic tariff environment, it's premature to build specific pricing into our revenue guidance at this stage. We will provide updates as more information becomes available.

We continue to target organic leverage of 25% or higher, consistent with our long-term goals and anticipate another year of 100% or greater free cash flow conversion in 2025. For the second quarter, we expect approximately 8% organic revenue growth and approximately $3.75 in adjusted EPS. We do not anticipate a material impact from tariffs that are now in place in the second quarter. For additional details related to our guidance, please refer to Slide 16.

Please turn to Slide 10. We remain committed to our balanced capital allocation strategy focused on deploying excess cash to maximize shareholder returns. First, we strengthened our core business through relentless reinvestment. Second, we maintain a strong balance sheet to ensure flexibility as markets evolve. Third, we expect to deploy 100% of excess cash over time. Our

approach includes strategic M&A to enhance long-term returns and share repurchases when the stock trades below intrinsic value.

Please turn to Slide 11. In the first quarter, we deployed approximately $775 million through our balanced capital allocation strategy with $210 million to dividends, $15 million to M&A and

$550 million to share repurchases. These figures exclude $260 million from M&A and $100 million from share repurchases made early in the quarter, which were included in our fiscal year 2024 capital deployment targets as discussed during our fourth quarter earnings call.

In February, our Board of Directors approved a dividend raise of 12% and that became effective with the first quarter payment. Since the launch of Trane Technologies, the dividend has grown by nearly 80%. We opportunistically accelerated share repurchases in the first quarter to capitalize on periods of acute share price dislocation. We have $5.6 billion remaining under repurchase authorizations, providing us with significant flexibility moving forward. Our M&A pipeline remains active, and we will continue to be disciplined in our approach.

Overall, our strong free cash flow, liquidity, balance sheet and substantial share repurchase authorization offer excellent capital allocation optionality as we move forward.

Now I'd like to turn the call back over to Dave. Dave?

Please go to Slide 14. In summary, we are poised to achieve leading performance and deliver outstanding shareholder returns in 2025 and beyond. Our vibrant culture cutting-edge innovation, robust business operating system and proven track record, differentiate Trane Technologies in the market. I'm proud of our team's consistent growth highlighted by our strong results in the first quarter and over time. I firmly believe our best days are yet to come.

And now we'd be happy to take your questions. Operator?

Disclaimer

Trane Technologies plc published this content on May 08, 2025, and is solely responsible for the information contained herein. Distributed via Public Technologies (PUBT), unedited and unaltered, on May 08, 2025 at 15:22 UTC.