Thank you everybody. Super excited to have Trane Technologies up here with us today. Dave Regnery, Chair and CEO, Chris Kuhn, CFO. Thank you guys for joining us. You know, maybe starting off, you know, at a high level, you know, if we look at commercial HVAC growth, it bifurcated from global construction over the last couple of years, and no company has bifurcated more than Trane. Can you just talk about what's driving this?
Yeah. Well, first of all, thanks, Chris, for having us here, and this conference is always one of my favorites. Maybe it has to do with the view outside my room, I don't know. Actually, not outside my room, to be clear. When I walk out here, I see it. But thanks, everyone, for joining us today, too. I really appreciate your interest in Trane Technologies, and you know, we certainly had a very strong second quarter. Our organic revenue growth was up 13%, orders were up 19%, EPS growth was 23%, and our backlog remains extremely strong at $7.5 billion. To your question, like I always tell everyone, that it's a system of things that makes Trane Technologies a great company.
And, you know, we start with our direct sales force, and being able to talk to customers, and being able to understand their needs today, and more importantly, anticipate what their needs are gonna be tomorrow. I always talk about our service business, which is a third of our company, that represents just a fantastic business that we have. It's got a compound annual growth rate of high single digits over the last six years. I talk about innovation, and if you notice, I didn't say product innovation, because innovation to us is a much broader category, right? We invest in all aspects of our business, and the relentless innovation is what maybe differentiates us from some of our competitors.
I always get asked on earnings calls, "Well, why can't you leverage at a higher level?" And I always tell people, "We're not gonna be the company that wins the leverage story, right? But we are gonna be the company that wins the growth story, because we're investing for the long term on a consistent basis." So I could talk about a lot of different things. I would tell you that the one thing that I always talk about that truly differentiates any company is its culture. And at Trane Technologies, we have an uplifting, inclusive culture, and we don't look at problems, we look at what's the opportunity to solve that problem. When you can solve that, that's when you become disruptive.
That's where you have the real opportunity, and we believe that we can disrupt ourselves, and we've proven that we've been able to do that. So look, we've had a great run over the last several years, and expect more in the future.
Yeah. Do you think customers have a better appreciation of energy efficiency than they did five years ago? And if it's true, is it just because the paybacks are better, or because there's a bigger focus on ESG targets and emissions?
I think the short answer is yes. Okay, certainly the paybacks on our solutions today are very attractive. I think the education process, Chris, as you and I have discussed before, is certainly something that's a hurdle, right? We need to educate everyone on what's possible, and I think that many customers don't understand what's possible today. Even though I like to think they do, 'cause maybe I talk to myself in the mirror too much about it, at the end of the day, we still have a lot of work there. I'll tell you a funny story, and I told a group this earlier today. So I was out buying a home with my son, right? So he brought me along for moral support. Chris told me it was banking support. But so anyways, I'm out buying...
It's a national builder. They do not use Trane, and there's no way to convince a national builder, unless you have the contract with them, that they're gonna make any substitutions in their home, right? So anyways, we'll go through this story, and I'm like, "Okay, just go down the road." And so I said to the person that's selling the home, I said, "Well, could we at least have a heat pump?" He says, "Oh, you can't use a heat pump in this house." I was like, "This is in North Carolina, right?" And I said, "Why can't you use a heat pump?" He said, "Oh, it's too big. The house is too big.
You'd never... you could never heat it." I was like, "Really?" I was like, "Do you understand, you know, a heat pump..." And I started to get, you know, my wife sitting there saying, "Dave, calm down, calm down." And I'm like, "But you know," I'm like... So I started talking about, "You know, well, you understand the efficiency levels," and that really blew her away as soon as I said, "Coefficient of performance," it was like, phew, I wasn't gonna get anywhere. So anyways, we leave, and then about 15 minutes, maybe 30 minutes later, my son calls me and says, "Hey, Dad, she wants to know if I should get the 80% furnace or the 90% furnace." And that triggered me.
I was like, "Oh, this is ridiculous." So I go in there, and I said, "Do you understand the question you just asked?" And she goes, "You know, what?" I said, "You know, an 80% furnace, one unit in equals 0.8. A 90% furnace, one unit in equals 0.9. Do you understand that a heat pump, one unit in equals 3.5? Do you understand the efficiency levels that we're talking about here with a heat pump?" And she just looked at me, and she goes, "Look, we don't sell heat pumps." But it was like, but it's one of those things where it's just, it's a microcosm of the amount of education that we need to, you know, demonstrate and to bring to the industry.
And it, you know, I use residential as an example, but in commercial, the direct sales force helps us, right? Because we're able to educate our customers. We're able to take them on that journey that they need to be on, that these solutions exist today, right? You don't have to wait for something to be invented, right? We'll continue to innovate, and we'll make ourselves even better tomorrow, but these solutions exist today. And getting that word out. You know, 30% of all the energy in a building is wasted. I'm talking after the meter, right? I have to go up to San Francisco to speak at a conference next week, right? It's Dreamforce, which is Salesforce's conference.
The only reason why I'm going there is because I wanna tell the world, or at least the world that is in that space, how to use AI to solve real-world problems in a manufacturing environment.... Right? 30% of the energy after the meter is being wasted, right? That's the opportunity. There's goodness on the supply side, and that'll happen. Data centers, yes, they're, they're growing. It's a strong vertical, right? It's gonna go from, you pick a number, 4% of the energy consumed in the United States to some number that's double that in a very short period of time. Got it! The opportunity is in between, what we call demand side management, solving the waste. That's where the opportunity is, and that's what we're doing as Trane Technologies.
I mean, that 30%, you know, in efficiency is, you know, obviously a massive, massive number. What... is that just because buildings have old systems, they have new systems that are maybe lower efficiency, they don't have the controls? Like, what's the biggest piece of that 30?
Yes, yes, and yes, but when we say 30%, we've done hundreds of thousands of energy audits, okay? So this isn't a made-up number here. Most buildings operate a minimum 30% inefficient. That's based on how they were designed, right? So it's not. When you put new equipment in, it gets better. Right, so this is based on how it's designed, right? Is the asset performing the way it was designed to perform? I tell people, our service business, we have a great service business, right? In today's world, right, an asset is not performing, not only when it's not heating or cooling properly, it's not performing when it's using too much energy, right? And that's the mindset. It's a shift, right, in our thought process. And we've been using, you know, what I'd call structured data for AI for over a decade, right?
We've been connected to buildings. We've been connected to assets. Now, when you take unstructured data and add it to your structured data, your intelligence in how you operate a building and how you operate the sequence within your systems fundamentally changes for the better. This 30%, this is the opportunity. You need data centers, okay? You need that computing power to help solve this bigger problem, which is the 30% waste.
The company's direct sales force, I know, you know, very important to you, as you talked about earlier. I think sometimes it does get underappreciated in the market. You know, I guess it's always been a positive for the company, allows you to pivot to where the growth is. Would you argue that, you know, the value add from that direct sales force has picked up, you know, in a world where energy efficiency and paybacks have kind of come to the forefront?
Absolutely. Absolutely. It is a competitive advantage that we have. If you have a direct sales force, you're out talking to the customer. If you have a direct sales force and you're an innovative company, you're out educating the customer all the time on your newest innovations, and that's one of the advantages we have. Marrying those two together is very, very powerful.
And then, you know, on that relentless reinvestment, you know, I guess, what do you see in the pipeline today? You know, obviously, you know, thermal management's been a big deal for you guys, digitized service. And then ultimately, you know, how does it come back through the P&L, whether it's pricing or gross margin, you know, as you guys are delivering these best-in-class?
I'll let you start, Chris.
Sure. I mean, think about these investments, Chris, as a really wide umbrella. We can talk about product, but I'm actually going to start with the front end of the business, with our sales force, our direct sales force, making sure we're adding resources globally. This is not just an Americas comment. It's an EMEA comment. It's an Asia comment as well. It's also providing upgraded tools to the sales force, so how they connect with customers, track down leads. We talked about it in the second quarter. Those backlogs of our verticals continue to remain very robust. We wanna make sure that our teams have got the right level of tools to go manage that. Let's move to service technicians. You know, service is a third of the company's revenues.
We're always adding technicians, but also the tools that they use, and that's where Dave was mentioning digitalized service, making sure we're connected to our equipment, so you're rolling a service technician when you know what the problem is. You detected a problem. You're not going out there trying to hunt for it. Now, you can be very specific in how you solve for it. Now, let's shift into capacity, which capacity can mean a lot of different areas, but if I focus on just physical capacity, we're focused, and have been for a long time. We're a lean company. We wanna make sure that we've got an existing line, that we're continuing to get more throughput through, so think of that as factory automation. It could be adding lines in an existing facility, and how do you reorganize the space in that facility to optimize it?
That's making sure that you've got a lean thinking. And then we're adding capacity where we think it makes the most sense. But it's really not starting with just, "Let's add four walls." It's actually starting with what you have today and getting more throughput there. And, I'll tell you, the investment base. Our focus has been, how much do you keep pulling in and advancing the investment, and then still driving 25% or better incrementals over the long term?
Yeah. A great example of that is in our Thermo King business. So our Thermo King business, if you follow Trane Technologies, you knows that this is a business that's more cyclical than our Trane business. And it's in a down year. And next year, we can talk about what's gonna happen, but it's in a down year. We're doubling down on investments in that business, right? And we're trying to disrupt ourselves in that business, and we have some really, really cool things that we're working on there that's gonna fundamentally change how that industry works. So anyways, that's the advantage of a company that's constantly looking to recreate or disrupt themselves.
Maybe turning to the market-
I'd tell you more, but I can't tell you.
Yeah, look forward to learning more. Turning to the market, maybe commercial applied, you know, kind of company's strongest market. You know, pretty incredible run. I think Americas 90% on a three-year stack, seems pretty good. Can you talk about the runway for growth?
Why can't it be a hundred?
Yeah. Yeah, yeah. Can you talk about the runway for growth, both just in the market opportunities-
Yeah
... but then also your guys' ability to continue to take share and outgrow?
Look, I think this whole, you know, how you, how you make buildings operate more efficiently is certainly part of it, okay? I think you're gonna hear a lot more. You'll hear others start talking about demand-side management and how that works... On the applied systems side, look, again, there's just opportunities in different verticals, and it's being able to understand where those opportunities are, pivot your sales force to the greatest opportunity, and right now, you're hearing a lot about data centers, and that vertical is very, very strong, and it will be very, very strong for the, you know, the foreseeable future.
We don't only sell to data centers, and I try to make that very clear to our investors that, you know, we play in 14 different verticals, at least in the Americas, and we have strength in all 14, and there's opportunities that exist in all 14. So, look, we see this as a, you know, I always tell people that we've had certainly a great run for the last 4 years, but in my eyes, the best days are yet in front of us.
I mean, yeah, 14 verticals. I think all or almost all of them were positive in Q2, if I-
We had to search for the one or two that weren't positive, and I think it was like... I think it was, was it retail and government?
Retail, may have been, and government.
Government.
Government. I mean, when you look across these end markets, like, is there anywhere where you're seeing positive or negative rate of change?
Certainly some of the high growth verticals, they're certainly positive there. So I mean, I've been saying for a while, the high tech industrial has been very strong. Data centers have been very strong. Education has been very strong. Everyone thinks of education as just K through twelve. Think of higher ed as well, also very strong. We separate those two. Those are two separate verticals for us, two different focuses. So those continue to be very, very strong for us.
Yeah, um-
And I don't see the... I mean, there's lots of opportunities there. I mean, if you've taken your child to college this year... Has anyone taken their child to college this year? Nobody? Man. Oh, a couple, okay. They probably sold you on the fact of what they're doing to upgrade their facility, right? And how they've been able to take actions to make the learning environment more conducive to the student. And I tell you that we're all part of that whole solution for them.
Yeah. I mean, obviously, the backlog is, you know, well above normalized levels. But it does include some, you know, longer duration projects with data center. But when you look at the backlog and the orders that are coming in from customers, like, in general, do customers still want equipment sooner rather than later?
Go ahead, you start.
Look, lead times are pretty much back to normal at this point, and as we phase out the backlog and timing, it's really when do customers need the equipment on site. We had $7.5 billion of backlog, as Dave said, at the end of the second quarter, 2.8 billion of that was for 2025 and beyond. And really, that's majority commercial HVAC, and of that, it's really applied systems. Think of that, Chris, as usually nine to 12 months out is a normal period of time for an applied system to be booked in advance of when it needs to be shipped. Data centers probably gives us a little bit more visibility. It could be 15, could be 18 months out.
But think of it as when the customers need it, that's when we're making sure it's getting into the backlog, and we're building a slot and executing to it. But that $2.8 billion at the end of the second quarter, that's normally what we would have at the end of a year to start the next year. So we'll build that level of backlog in the third and the fourth quarter, and our expectation is that it's gonna remain elevated for a period of time here.
Yeah.
Remember, our backlog does not include services.
That's right.
Yeah.
I did.
It's a third of our business.
You know, I know the company sort of serves 14 markets, not just data center, but that has become a very, very important one. And it does seem like, you know, when we look at the orders and the bifurcation, it does seem like you guys are winning more than your fair share in data center. You know, what is the driver of that success? Is it, you know, the technology they appreciate it? Is it the direct sales force?
Yeah, I'm working directly with the data center customers, their engineering teams. That's been happening for a long time, so that's not new to us. I was smiling because I was reading someone, and not in this industry, okay? They were saying how we stood up a data center team, and I was like: "You stood up a data center team? What were you doing before?" You know, we've had a team in place for a long time, right? But look, our teams are experts in this space, and they're able to speak the language. They challenge the data center customer. They challenge us. It's a great way to have innovative products.
And the other thing I would tell you that is a little bit different is, we look at everything at a system level. And it really goes back to our roots of being our strength in the applied world as a system. These are all bespoke systems, and data centers fall into that. So we're always looking at the entire system, not just the, think of it as the terminal or the where the cooling is happening at the chip, but think about the air handling that's happening within the data center halls. Think about the chillers that are outside that are actually removing the heat. So I mean, that's all part of the equation that we will look at.
How is the selling process to a data center? Is that like at Trane, you know, is working with the engineer of, you know, Hyperscaler X? How does that go?
Yep, most of the hyperscalers will select their products, and then they'll turn it over to someone else to do the build, and it's not something that's deviated. Like in a commercial building, you'll have an engineering team that will design a building, and sometimes you'll hear me. You'll hear others say it as well, basis of design, and sometimes that gets deviated from. In a data center, it does not get deviated from. So the hyperscaler, if it's a hyperscaler, will select how they want their data center being built, and then they'll contract with someone to actually do that building. It's not the... You're not negotiating with the mechanical that's actually building it. You're talking direct to the hyperscaler.
Can you-
In a hyperscale world.
Can you talk about the service opportunity in data center? And is it any different than, you know, the kind of the typical service model elsewhere?
I would think as you think about service just at a higher level, anytime the product is more sophisticated, the more opportunity you have. And data center products are, or systems are very, very sophisticated. So more sophisticated, higher the service.
... content.
I guess maybe on service more broadly, you know, I guess ex-2020 basically been a double-digit growth CAGR. You know, still a very fragmented market. What is the runway for growth there on service broadly?
Look, it's a great business. We have an operating system that's built around our service business. Chris won't let me say... This Chris won't let me say double-digit growth. He makes me say high single-digit growth, 'cause that's what it has on a compound annual growth rate for the last six years. That includes the pandemic, and as our installed base grows, obviously, our service business is gonna grow. As we do combined heating and cooling with thermal management systems, our service business, maybe it's not double, 'cause it's not purely linear, but it's a function of what it was before, a multiple function of what it was before. So these are all opportunities for us that are really ahead.
When you start talking about the digital world, and being connected, and really going after this 30% of energy that's being wasted, that's an additional opportunity on top of where we are today.
You know, obviously, we're seeing, like, you know, tremendous growth in the installed base of Trane assets in the world. How... You know, on an applied project, when do they really start generating service revenue for you guys? Is there a period of lag before that starts to kick in?
Yeah, think of it as, you know, a one- or two-year warranty. You'll have maintenance in those first couple of years, Chris, but it really starts to inflect up probably years three through five, through six, through seven. Those first couple of years, they're under warranty, a little bit less. But look, we think the model is, over the life of the equipment, you know, service is bringing eight to ten times the revenue from the original cost of the equipment over that period of time. So as the install base grows, we have a lot of confidence that we're gonna see the service business continue to grow, and maybe more recently, we've seen a lot of volume coming through equipment, so service is still right around about a third of the company. But look, that install base continues to grow.
It's gonna be a really nice opportunity for us going forward.
The other thing we do in our service business is that, as our product is becoming more efficient, we've actually taken some of those efficiencies, and we bring it back into the installed base. So we call it our noodles. It's probably not a great name, but you kind of get the concept, where we're able to make existing product that's already installed more efficient. So it's not just a linear line. Think of it as a you know, it could start like this, and then it could be linear as far as what you'd see for service growth, but then you have function changes as you upgrade that equipment in the field. In many cases, it doesn't make sense to take equipment that still has useful life and take it out. It makes more sense to upgrade that.
Maybe you don't get 100% of the efficiency you'd have for a new product, but you'd get a high percentage of it.
Yeah. You know, I think the biggest pushback that we quite honestly get on Trane is, you know, can things get much better than they are right now?
You asked me the same question a year ago.
Um-
Different conference, but you asked me a year ago.
And, you know, like, obviously, you know, we kind of see, you know, demand still stays very good. Obviously, you know, tough comps, particularly on orders into the back half of the year. Like, you know, what gives you confidence that things can continue to get better?
Look, we have such a creative culture at Trane, and like I told you before, it's, we don't look at things as problems. We look at what's the opportunity to solve the problem. When you could develop that culture, and you have that momentum behind you, and the amount that we're reinvesting in this business and the opportunities that we see in front of us, look, I, I say with confidence, our best days are in front of us. And if you think... I mean, it, it makes sense, right? I mean, if buildings are operating 30% inefficiently, and we live in buildings, right? We all live in buildings, but we really live in buildings as Trane, right? We, we love this space, right? And we love what we're doing there. In our Thermo King business, I told you, we're, we're reinventing how we're doing that.
Think about it as, I'll give you a hint here, as a trailer's going down the road, right, what's all the energy that's being wasted, that's not being harnessed? When you could solve that and not put drag on the tractor, but when you can solve that, that's where you're gonna fundamentally change the diesel engine that exists in transport refrigeration. That's exciting.
On commercial HVAC, look, there's estimated to be 400 billion sq ft of commercial real estate that needs to be decarbonized, and we believe we're very much in the very early innings of that process, and then the estimate on the residential side is, I think, 600 billion sq ft. You got a trillion sq ft of decarbonization opportunities, so a lot of companies have made pledges to, you know, hopefully decarbonize their facilities. We're there with them over a multi-year journey, and I think it plays back in that direct sales force. These are long sales cycles, right? We're not here just to optimize one given quarter or one given contract. We want a customer for life, so it's making sure we've got that balance and blend.
Yeah.
Look at electrification of heating. That's another one on our Trane business, right? This started in Europe.
Yeah.
You probably heard me talking in the past about thermal management systems. That entire portfolio has been replicated here in the Americas, right? So I could tell you that if you're building a new building... In fact, we were just with one of the largest builders in the world, in New York City yesterday, and we were talking about how all new construction is, these buildings are 100% electric, right? And we were talking about the solutions that we have. And it was funny, back to the education comment. He's like: "Well, have you done that before, can you show us?" I'm like: "Yeah, let's walk around the city block. I'll show you where we've been." Right? But it's, I tell you, there's tremendous opportunity in front of us. Tremendous opportunity.
You know, maybe on commercial unitary, and I think that market has hung in better than many expected, twelve months ago. I guess, why has that stayed resilient, and does commercial unitary get a lift from the strength that we're seeing on the applied side?
Yeah, I always get asked about unitary versus applied, and I probably give an answer that nobody likes because I'm pretty vague. And there's a reason why I'm pretty vague, is because, look, we have product portfolio and the breadth of our product portfolio is very vast, right? We sell solutions to customers, right? The solution could have Applied as part of it, it could have Unitary as part of it, it could have a mini split as part of it, right? We're agnostic to the product that's gonna solve the solution for the customer. So yeah, could an Applied system also have a Unitary? Look at a hospital. That's a great example. Yeah, they're Applied systems. Usually, they're centrifugal chillers. They could be air-cooled chillers. They could also have rooftops in certain parts.
They could have an annex that could have a mini split or a VRF system as part of it, right? Because of the breadth of our portfolio, we don't necessarily just focus on one aspect of the portfolio, of the product portfolio. We're more interested in the solution and making sure the customer has the right solution, the right efficiency within that solution.
Yeah, uh-
It's been, like I said, in the second quarter, Unitary was actually stronger than Applied. I think that got a lot of people's attention. I didn't mean it to, but. And there's reasons there. But look, we have strength in. If you have strength in 12 of the 14 verticals that you're tracking, and the two that were down took us a while to find that they were actually down a little bit year over year, you're gonna have strength, just because of the different products that serve those verticals.
I appreciate that. Maybe moving over to resi. You know, built some momentum in Q2, maybe better-
And if it was two years ago, I would've got residential the first question. Now I'm getting it as the last question. Wow, the times have changed, huh?
You know, Q2, but, you know, there was some support from probably visibility around the policy. You know, weather was pretty positive in Q2. Do you feel like that resi market is turning? And, you know, maybe also layered into there, you know, what's the expectations with the refrigerator?
Yeah, as I said in the second quarter, look, you know, certainly the second quarter was stronger than we thought for residential. Three reasons, right? Clarification on the, on the regulation. Certainly, inventory became normalized, and unfortunately, it, and I say this tongue in cheek, unfortunately, it was a very, very warm start to the season. In fact, it was another record this summer, I think. I don't know if that's public yet, but it will be public. Another, you know, record of summer heat, which is something we should all not be proud of that record, right? We keep setting it year after year, which is a different problem. What was the other?
Refrigerant.
Oh, the refrigerant change. Yeah, yeah. Sure. We've been doing refrigerant changes since 2013, and so this isn't new to us. And, like, as I said before, we're ready. One of the things that we did that's a little bit different there is we did mixed model lines, so it cost us more, but we're able to run 410 as well as 454 down the same line. Yeah, we have to change what we call line- side inventory, but we're able to do that. We believe that'll be a great investment for long-term. Because remember, you're gonna be able to make these components for a long time. You wanna make sure your product can be serviced in the industry for the life of that product. So we'll have the capability of doing both.
We've been saying for a long time we don't expect a big pre-buy. I think that's the case. We're probably one of the first to say that we don't expect to have a lot of 454 B product being sold in 2024 . I think that has played out. We still don't expect a lot. So...
And then,
Did I hit all your questions?
Yeah, you hit them all.
All right.
Pretty good. Maybe moving over to Thermo King. I know a business, you know, near and dear to your heart. You know, down market this year, you know, ACT forecasts a recovery. You know, you guys are obviously investing. You know, what do you see there over the next twelve months?
Yeah, I'll start. My markets, I expect to be down kind of mid-teens for 2024. Our internal models, we're suggesting maybe it could be a little bit worse than that, especially in the second half of the year, Chris. Those models would suggest down 25%. We think it could be a little bit worse than that. We factored that into our guidance when we released at the end of July. So let's see how the rest of the year plays out. ACT released its forecast just this week on 2025 refrigerated trailer volumes. They took down 2025 a bit. I think it's just under 37,000 units right now. So if you believe 2024, it could be flat to up about mid-singles. The key there is making sure where does 2024 fall out?
Today's point, we continue to invest in that business. It's going through a cycle, but when this does recover, and it looks like maybe second half of 2025 will be the timing of that, we want the new products ready and available for that recovery to happen. So that's the key-
Pretty-
For that business.
Last one, you know, international market. Like, America has been incredibly strong. You know, what do you guys see in the international market?
Yeah, Europe was, through the second quarter, certainly as we expected, which was a good thing. In Asia, I think, the rest of Asia pretty much as expected. China's a watch. And remember, before you get too excited, China represents about 4% of the enterprise revenue, but it's certainly a watch.
We're up on the 30 minutes. You know, thank you guys both for coming.
All right. Thanks, everyone, for coming.
Appreciate it.
Great seeing you.
Thank you.