Thanks very much, everyone, for being here. It's my pleasure to have up next Trane Technologies, Dave Regnery, Chairman and CEO, Chris Kuehn, CFO. Thanks very much, both of you, for being here. Maybe start off, I guess it's a question that is exercising the minds of a lot of investors right now around sort of backlog. It's a very high number, has been a very high number for a couple of years. How are you thinking about sort of the backlog progression from here? How confident are you that Trane can still generate revenue growth at 2x+ GDP?
Sure. If you don't mind, let me just start at a different level, and then I'll answer your backlog question, but look, 2024 was a standout year for Trane Technologies. We had top-line growth of 12%. We had EPS growth of 24%. We had free cash flow conversion of 109%. We had order growth of 11%. We had a book-to-bill of 102, so we had a very strong year in 2024. And I know there's a lot of buzz right now around data centers, and yes, data centers is an important vertical for us, and we've been strong in data centers for a long time, and we'll be strong in data centers well into the future, but I want everyone to know that Trane Technologies is much more than just data centers.
In fact, in our commercial HVAC business, we had growth in 13 of the 14 verticals that we track, 13 of the 14 verticals. So we had not only nice growth, we had broad base growth. We also had our service business that was up in the low teens again in 2024. So we have a great business. We have a great portfolio of products, and we had a standout year for 2024. Now, on to Julian's questions about backlog. Look, our backlog is very strong. It's $6.75 billion. It's basically flat year over year. And that's despite having headwinds of around $500 million during the year. We had some adjustments where we took orders out of our backlog in China. We had FX that worked against us all year. And then we had a normalization that occurred in our shorter cycle businesses like Thermo King.
We had adjustments of $500 million, and our backlog is still flat year over year. If you go a little bit deeper in there, you'd say, wait a second, you had 12% growth. Your backlog's still at a very high level. If you're a historian in our company, you'd say, hey, look, in the first, when you [audio distortion] that year. If you do the math on that, that would say we'd be well over $30 billion this year. I'm not committing to the $30 billion number, but we are very comfortable with our guide of 78%. Our backlog is in a very strong position, and our commercial HVAC backlog in particular is very, very strong. In the fourth quarter, we had order growth in the Americas of high single digits, two-year stack well north of 20, three-year stack north of 30.
This is very strong growth and very consistent growth. We're able to deliver nice top-line growth and maintain a very, very solid backlog. I can tell the same story about EMEA, very strong as well, and it continues to have a lot of strength. Our backlog, I'll just remind everyone, and I'll let you get on to your next question, is we don't include services in our backlog. Services is a third of our company. It's not in the backlog number. We've been able to demonstrate consistent growth in services over a long period of time of the high, high single-digit range. We're comfortable with our backlog. We're also comfortable that what we see in our pipelines, so these would be the activity that we have with customers before we even get an order, is extremely strong, extremely strong right now.
That would be really on a global basis, but specifically in the Americas where we have very sophisticated CRM systems.
Thanks very much, Dave. And when you think about sort of incoming orders, there's been some noise. But when you think about sort of incoming orders on the equipment with that noise in data center with interest rates that are still high, how confident are you about kind of orders growth and order rates looking like?
Yeah. I mean, I'm not going to forecast a backlog number or order growth number, but I will tell you that I expect our backlog to be at a very high level for the foreseeable future. It's the same comment. I think you asked me the same question last year, and I gave you the same answer, and here we are a year later, and our backlog's the same number. We are very confident in our guide for the year. Our backlog gives us a lot of visibility into 2025, and our pipeline activity gives me even more confidence in our guide.
Yeah. Julian, I'd add interest rates haven't necessarily been a big impact on how we think about orders coming in. The paybacks on our systems are very strong in the commercial HVAC space, not uncommon to see four years or three years or less paybacks. In the Thermo King space, we're talking two- to three-year paybacks here on fuel savings or energy savings. So interest rates really haven't played into that slowdown, let's say, in terms of orders. The paybacks are just so strong.
Perfect. And you mentioned on the commercial HVAC side, verticals, 14 of them, you had orders up in almost all of them except one last year. When you're looking at kind of this year ahead, are there any of those 14 that you think things may move around much? I think education, people ask about, life sciences is the one that wasn't up last year.
I think, well, I mean, let's start. Data centers is going to be strong. Think about that as you could read the same reports I'm reading. That prediction is 15%-20% growth really for the next four or five years too in that space, so that'll be strong. Education, we believe it will be okay. I know ESSER funding is over. We have a lot of orders in our backlog that we need to fulfill, but I would also tell you that one of the things that ESSER has done is it's pointed out how underbuilt the infrastructure is for K-12 schools, and there's a lot of different funding mechanisms for K-12 that are being utilized, like municipal bonds, for example, or our ESCO business for another example, so we believe that will continue to have strength. It's a very large vertical for us, and we're very strong there.
K-12 will be very strong. And the fundamentals are, if you think about our solutions, we have, I would argue, the broadest portfolio in the industry, the most innovative portfolio in the industry. And if you think about the macro trends around decarbonization, they're not going away. And if you think about our solutions, what Chris articulated early is our solutions have great paybacks, and they have a great impact to decarbonize the built environment. And whether you believe in global warming or not, and I hope everyone does because there's a lot of science there, the payback is also very important. And it's what we call Green for Green .
And when you take that and you say to someone, "I could reduce your carbon footprint by X," and by the way, the payback on this investment is, make up a number here, less than two and a half years, it's a very compelling story for our customers across all verticals. And again, our portfolio designed around all verticals, a direct sales force that has deep domain expertise and knowledge in the particular verticals and technical aptitude within the verticals. It's a great combination, and it really allows us to win across all verticals. And by the way, then you have a service business that's a third of the company that's wrapped around all of that. So it's a great place to be.
I always tell our account managers or our sales individuals, I say, "Even I could sell." So they don't like when I tell them that, but it's really true. I mean, this is a great proposition. If you have something that's good for the environment and has a great payback on your income statement, why would you not do the project?
That's good context. And within sort of data center specifically, people can go down all sorts of rabbit holes. But I guess one question that often comes up is around liquid cooling technology. What are Trane's aspirations in there? How does it see liquid cooling complement or substitute for the traditional space cooling business that you're very strong at?
Yeah. I mean, let's take a step back and talk about data centers. I'm going to be very simplistic here, and I'm going to use all the wrong terms. So if you're a hyperscaler, you're in data centers, you'll say, "What is he talking about?" Think about a data center, three or four elements of cooling, really three. You got to remove the heat. So that is the condensing side of the equation. We'll call that a chiller. That's required. Then you have to remove the heat from the data hall. That's what we call the air handling side. We're very strong there. We're very strong in the chillers. Then you have what we would call the terminal side.
And that's where you're really doing direct cooling to chip or other mechanisms like immersion cooling as well as another one that's not quite ready for prime time, but it could be. There we have great partners. All these systems, you have to remove the heat from the data center. So they all require right now the condensing side or the chiller to basically remove the heat. So look, we're very strong in data centers. We'll be very strong in the future. And there's a lot going on. And I know there's a lot like, "Well, is this a learning data center, which requires more power, or is it an inference data center, which requires less power?" The way to think, a simple way to think of it is, what's the size of the data center? Is it a one-gig data center?
We're going to provide you one gig of cooling capacity. Because at the end of the day, what do data centers produce? Bits, bytes, and heat. So bits, bytes, and heat. We have to remove the heat. Now, another question we should be asking ourselves is, what are we going to do with the heat that's being removed from the data centers? And I think that's a massive opportunity for the future. And that's where you have to be thinking creatively as to how you can repurpose that. Is it just you put it out into the atmosphere and waste it, or is there another solution? And there's a lot of work that's going on there, and it's not ready yet for this audience, or we're not ready to start talking about that publicly.
But there's a lot of work going on there as to, is there a different solution to make data centers even more efficient by the waste heat that's being produced.
When you think about the services business, how should we think about the penetration or the attachment of your services business, maybe depending on those verticals or different?
Again, a simple rule of thumb, the more sophisticated the product is, the greater aptitude for an OEM to do the service work. Our service business is designed around our applied systems. Data centers use very complex applied systems. So there's a nice service tail there well into the future.
Services is still about 1/3 of the company revenues, Julian. It should be larger with the exception of how strong our equipment growth has been. Since services is linked to applied systems, rough math here, look at our Americas commercial business, our EMEA commercial business. In the last three years, the applied equipment revenues have doubled in each of those businesses. That's the strength of the equipment markets. It brings a service tail. That service tail doesn't really start in those first two or three years post-installation. There's warranty periods, and we get through that warranty period. Then the newer product probably needs a little bit less service, but you start growing that over time. The service dollars really bring that 8x-10x the value of services versus the original equipment. That really starts kicking in a few years after installation.
When you're looking at the, say, the light commercial, and people have different definitions of that market. For what you're doing in light commercial, there's no data center there. Maybe it's a little bit more interest rate sensitive. How do you assess the health of that market?
Look, we have a broad portfolio of products, and what we sell to customers is solutions. We don't care if it's light unitary or it's applied. I'll start with that, so we're not forecasting a light unitary market. There are verticals that tend to use one versus another. At the end of the day, look, we're going to have growth in both in 2025. Applied will be stronger than unitary, and that's just based on our backlog right now. We see what's in the backlog, so we'll continue to utilize the entire portfolio, and we'll help the customer make the right decision as to what's the right product to satisfy their needs.
Great. And when you look at the applied side, it seems like lead times have been long for a while. That's maybe helped with pricing and so forth because of tight supply. You and your peers have been adding some capacity, but demand growth is still strong. So sort of from the outside, how should we think about how are lead times trending? How much of your orders being booked today for delivery in 2026, for example, in applied?
First of all, lead times have basically retracted quite significantly from maybe where they were at a peak in 2023. We had lead times that were very extended at that time period. Now they're more at a normal level. On the capacity side, look, we've certainly added capacity and four-wall capacity within our portfolio. We've also added some of the unitary portfolio as well. So look, we're able to meet the demand. The question is, you have a lot of data centers that are talking about they're planning out for 2026 and 2027. You should understand that the long pole in the tent is not HVAC. They're planning out for different reasons, and HVAC is not one of them. If a data center customer came to us today and said, "Hey, I still need applied systems in 2025," we'd be able to fulfill that order.
So, I don't want anyone to think that we're the reason why data centers are planning out. Data center customers and other customers too, if you think about mega projects, they are providing longer lead times than they would have maybe, say, five or six years ago. And they really just want to make sure that they can have reserved slots to make sure that we're able to meet their expectations.
Got it. And the bottleneck, to your point, it's more around the power side.
Yeah. I mean, if you ask a data center customer, "What's your biggest concerns?" They might tell you land and power. It's really probably power and land. But if they have the power, they're going to find the land, and we're going to be there to help provide the cooling for their applications.
Got it. And competition-wise, some parts of the market, just because of the expected growth, like say liquid cooling, it feels like there's a lot of people who have been sort of pulled into it, adding capacity, making CDUs and so forth. How do you assess kind of competition, the discipline of it, the level of it across the whole commercial HVAC business?
There's certainly a lot of companies that want to talk about how they're now data centers too. A long time ago during the dot-com era, and everyone would say, "We're a dot-com as well." I feel a little bit of that right now, which is, "We do data centers too." That's great, so look, there's certainly a lot of companies that are out there making cooling distribution units, CDUs, cold plates. This is all on the terminal side. Remember, they all require this condenser over here to remove the heat. That's the chiller, which we're very strong in. There's a lot of demand out there right now, and I think that demand will continue in the future, so there's a lot of companies that are trying to adapt to make sure that they get their part of that.
I would tell you that we've been very strong in data centers for a very long time, and we'll be very strong in data centers well into the future, but we're more than just data centers, so we play in all verticals, and that broad-based growth that I talk about is very, very important. I was at the AHRI show down in Orlando this year, and I don't normally go to it, but I had a meet with someone, so I decided to walk in for three or four hours and walk around, and I went up to, so you have a badge on, right, and it says, "Dave Regnery, CEO, Chair," and I was like, "Oh, gosh, here I am trying to hide my badge," but anyway, I wasn't trying to be the one competitor's booth, a smaller competitor.
But I was like, "So tell me about your company." And of course, this individual is going to tell me everything I want to know about the company. So I was almost backing off. But at one point, they said, "Look, we're only going to focus on data centers." And I'm thinking to myself, "Wow, that may work today. What's going to happen in four or five years?" I mean, you want to be broad-based. I mean, that's a strategy that I would look at and say, "That could be flawed. There could be disruptions." Data centers technology moves really, really fast. You got to be really, really quick. You want to be able to invest like Trane Technologies to keep up with some of that technology.
And here's a smaller company that says, "We're only going to focus on data centers." And I'm like, "Okay, good to know, but thank you." So anyway, we're broad-based. We're more than just data centers. If you take away nothing else, we're more than just data centers. We're strong in data centers, but we're more than just data centers.
One thing on that point around sort of breadth and the lead time discussion, how do you think about price right now? I think you guided for a point of price or so for this year. And that's an enterprise-wide number. So I'm just kind of how you think about price across the business?
Sure. Yeah, I'll start. We guided to about 1.5 point of price for 2025. We closed out 2024 around 2.5 points of price. And you think about our 12% revenue growth, it means we had 9.5 points of volume growth. So for our guide of starting out the year for 2025, it's meaning we're in that six-ish range for volume and about a point a little over that for price. Think of that as announced price increases at the tail end of 2024, very early part of 2025, really ex-tariff. It's looking at the state of our tier one, tier two components, net-net, modestly inflationary, and targeting another year, 20 or 30 basis points above the cost level to ultimately get a positive price-cost spread. Maybe the next ancillary question will be around tariffs, ex-tariff. That's our price.
But we're running the scenario playbooks today. We know from this administration's 1.0 level and then going through supply chain challenges, having to stay ahead of costs and pricing effectively. We built a strong operating system around that. We've got our playbooks in place. What I would say is we're even more in region for region. It's been our strategy for decades. We're even more in region for region today than we were even seven, eight years ago. Think of the Americas as we have one component factory in Mexico, and we have over 20 factories in the U.S. We have factories in Europe. We have factories in Asia. We have factories in China and outside of China. So the ability to, or the thoughts around moving big product around the world, that really is less and less and has been less and less over the last 10 years.
But certainly, we'd be looking at the supply chain, the tier two, tier three that could be impacted from a tariff. And we'll respond accordingly. We're ready to go to put a price increase as need be to defend the margin. And we'll see what the news is and what ultimately transpires. It's important for us to hear what's coming out, but then not be overreactive. Let's see what the actual truth is.
Great. And you mentioned, Chris, the sort of guidance for this year and so on. I think the first quarter guidance surprised people when you issued it. It was stronger, I think, than many expected. Partly, people worried about the pre-buy hangover in residential. Maybe sort of help us understand the sort of thinking behind that first quarter guide and how comfortable do you feel about the resi market in general?
Sure. I mean, we guided the first quarter 6%-7% revenue growth. Again, full year 7%-8%, so maybe a little bit lower than the full year. Reminder, the first quarter for an HVAC company isn't exactly the biggest quarter of the year. But you're right. We're starting out the year, and our guidance was for our commercial HVAC businesses in the Americas and in EMEA to be up high single digits in the first quarter. Transport markets in the Americas, it really appears to be the bottoming out of that cycle. Markets down over 25% in the first quarter. We should outperform that, but we expect that business to be down. Second half, we'll see the growth, but first half will be down and then residential, we'll see where that falls out. Could it be flat to slightly down the first quarter? It could be.
We had a modest pre-buy. We thought all of 2024 that the pre-buy would be modest, and that's really where it landed. $75 million-$100 million is our best estimate. Probably split 50% in the third quarter of last year, 50% in the fourth quarter of last year. But let's see how that pre-buy ultimately gets overcome probably in the first half of the year. We'll see how much is Q1 versus Q2. But all in, confidence in the 6%-7% guide as we released that a couple of weeks ago. And a lot of that's the backlog that we have. The backlog entering the year. When do our commercial HVAC customers want the equipment and delivering it to them on time and making sure that their projects keep moving forward?
Why don't you just give them the math on the resi, how we got there with the GDP plus?
Yeah. So from a full year, we guided resi mid-single-digit growth. Think of it as three components. First would be the return to a GDP plus business for the full year. A little bit of tailwind from IRA in there should be responsive to a GDP plus business, which is what that business has been over the long term. 49 of 50 states have approved the IRA funding. I think 12 states or more now have the funding at the state level. Actually, just a couple of weeks ago, the new governor of North Carolina visited our campus in Davidson, and North Carolina rolled out their IRA benefits at that time just a couple of weeks ago. So that's one piece, as we think about that refrigerant transition for us to 454B. We've said that's around a high price increase. We won't report that in price, Julian.
We'll put that in volume, but think of that high single digit price increase on 65% of the portfolio multiplied by 75% of the year gets you around a mid-single digit contribution to revenue, and then the third piece would be deduct from that the impact of the pre-buy, probably around three points, so you add those up, you get to about a mid-single digit growth factor for resi is what our guide is for the year.
Perfect. Thank you, and then on transport, yeah, it's been a tough market for a long time. You mentioned that it's down a lot even now.
We're in year four of a two-year cycle.
What's needed to get that cycle turning up?
It got overbuilt during the COVID period. And I'm being flippant here a little bit with "we're in year four of a two-year cycle." But yeah, transport's been down for a while. And right now, what we're seeing is the first half of 2025 is going to be tough. We see the second half being stronger. We agree with t hat, that 2 026 and 2027 will have nice growth in the teens. So look, I had the opportunity to run this business once early in my career, right around the 2010 time period. So if you remember what happened in 2010, I'll remind you, it was the financial crisis. And oh my gosh, the world was ending, right? And nothing was going to happen. All this came back.
And when it started to come back, it came back very, very fast to the point where I could remember putting on second shifts and third shifts within the same quarter to meet the demand. So look, this market's going to come back. I'm very confident in that. And when it comes back, it will come back fast. And the important thing is that make sure you continue to invest in your business even though the markets may be down. And we have done just that as Trane Technologies and will be more than ready to serve our customers with really innovative products when this market comes back. But just be a little bit patient. I've been patient for a while on this one, but it will come back. Think of it in the back half of this year, we'll start to see some upticks.
Great. And then on margins, you have the 25% + organic operating leverage framework. Your own margins in the P&L have been moving up in recent years, which is obviously a good thing. But when you take that plus this service tail that you're building from all the equipment growth recently, I don't know, it feels like there should be upwards pressure on that operating leverage medium term. Kind of any thoughts on that?
Yeah, no, it's a great question. And look, the last couple of years, our incrementals were in that 30% range. But when I think about how we start a year and how we plan for a year, we're looking at top quartile revenue growth, top quartile cash flow. Cash doesn't get a lot of attention, but if you want to talk about high-quality earnings, let's talk about cash flow. And we've been able to demonstrate that over time. We like that 25% + model. And if I look over the last four years, and Dave said it kind of at the open, the 12% revenue CAGR, the four years consecutively over 20% EPS, and then 108% average free cash flow, we think that that model of making sure we're investing back in the business first, that has absolutely driven our outperformance over the last four years.
That model, we would expect to continue to be that flywheel to go drive outperformance into the future. The pipeline for investments remains very strong. A couple of times a year, in fact, in late December, we had our innovation reviews within the company. The pipeline of innovations that we have is very strong. It's our job to make sure we keep pulling that early as much as we can to get those products out into the marketplace that much faster. We like starting with 25% or better, and then we'll see how the year plays out. A lot of confidence in putting that guide out for the year.
Look, a simple rule as a CEO, and I try to tell individuals that are joining our company, especially some right out of college, what makes a successful customer is never stop innovating in your business. Never stop innovating. Customer innovation and culture. Make sure your culture is very robust. And when you do that, when you start operating, pay attention to the top line, pay attention to the bottom line, and pay attention to the quality of the bottom line. Revenue growth, EPS growth, free cash flow conversion. And if you look at what we've been able to demonstrate over the last five years as Trane Technologies, I think you could argue that we're top decile of all industrials in those metrics.
And we're very proud of that, but we also see the brightest days are yet ahead of us because of all the mega trends that we see and the opportunities that we have in front of us.
Perfect. Well, with that, we have to switch to audience response survey questions. So if we could bring up the first one, do you currently own shares in Trane?
I always like this survey here. Live feedback. A lot of opportunities.
Yeah, a lot of opportunities.
A lot of opportunities out there.
Next question is around sort of general bias right now towards Trane. So very positive. Third question is around through cycle earnings growth of Trane versus the, call it multi-industry group average. So almost a lot of conviction.
Thank you for recognizing .
A lot of conviction. Fourth question is around what should Trane do with excess cash? So organic reinvestment. Penultimate question is around the multiple, I think. What PE should Trane trade at?
There's no option seven, Julian, or eight?
So generally a premium to the S&P.
That's 10. Wow. Thank you.
Yeah, I don't know what that maybe they thought it was EV/S ales or something. And then the last question is around, yeah, why it didn't look like there was much ownership in the room. What's the biggest single reason for that on fundamentals? So core growth, which has been okay, I think.
It's been okay. Well, hey, thank you all very much for your interest in Trane Technologies and certainly enjoyed talking to everyone today. Have a great day.
Thank you.