Okay, great. We're going to wrap up this trio of industrial fireside chats with Trane. Very pleased to welcome back to the Wolfe Conference, Chris Kuehn, CFO of Trane, and Donny Simmons, who's the President of the Americas for Trane Technologies. The Americas is what? Two-thirds of the business, Donny?
Yeah, a little bit higher than that.
Yeah. A little bit higher than that. Yeah. Math is never my strong suit, so Great to have you both here. Thanks for taking the time. Chris, I think maybe spend a minute or so just-
Sure
setting the scene, and then we'll get into Q&A.
Yeah, Nigel, thanks for having Donny and I and Pat here at the conference. Good to be back in New York. We know it's going to be a very warm day in New York, and maybe a warm couple of days this week. Look, our company had a strong start to the year. Maybe a highlight in the first quarter for us were bookings were up 24%. Think of that in Donny's space. Commercial HVAC bookings were up 40% in the first quarter. Applied bookings were up over 160%. We had a really good start to the year. Backlog reached $10.7 billion at the end of the first quarter. That's up nearly $3 billion from the start of the year. Think of that as two-thirds organic and about one-third from acquisitions.
Of the acquisitions, about $1 billion of backlog came from Stellar Energy, which we're really excited about, and we'll probably talk about here this morning on modular chiller solutions that are in the data center vertical today. Services had a very strong start to the year, up low double digits. It's had a low double-digit CAGR for the last five plus years, and a strong start in the first quarter. We ultimately raised our guidance on the top line and the bottom line for the year based on the start of the year. We do expect strong acceleration into the second half of the year, led by our commercial HVAC businesses. Think of that as the timing of backlog converting to revenue, and when customers want products on their job site, request on-job dates.
That's what we reaffirmed kind of in the end of April, was that acceleration we expect in the second half of the year in commercial. Easier comps in residential and transport as well. We're expecting strong growth as we go into the second half of the year. With that, I'll turn it back over to you, Nigel.
Thanks, Chris. Of course, being 95 degrees today in N.Y. is good for business, right? You must be quite pleased to hit the streets and feel that hot air. Finally, it's finally here.
We were certainly sweating on the way over here this morning.
That's good. You mentioned the second half acceleration, and I think that makes a lot of sense in terms of the moving pieces. A couple of points. In terms of the 5% on the mid-single digits, your call-out for 2Q, any moving pieces you can call out for that?
Sure.
Overall, we expect the continued progress in our commercial HVAC business and continued strength there. We talked about our transport markets being a bit stronger in the first quarter, but we're holding essentially what we expect here in the first half and for the full year in transport. In residential, we had a first quarter that was stronger than what we had expected. We did increase our guide for the full year in residential, and we do feel like our inventories have normalized, and we talked about that in the first quarter. We're cautiously optimistic there that with residential now expected to be flattish for the full year, we're in a good spot. Commercial HVAC continues to be strong, so we had a very strong first quarter, and we expect the first half and the second half to continue to strengthen.
Yep. The commercial is, as you mentioned, Chris, very kind of back-half load in terms of the growth profile. That's something we're seeing from a lot of your competitors as well, this back-half loading of the growth profile. Maybe just talk about what's causing that back half, first half, second half, mid-teens plus type organic growth commercial.
Sure. Look, first off, I think with commercial, we have to talk about both sides of the business. We talk about our services business being half the business, and we've had low double-digit growth for the last 5, 6 years in services. Automatically, we get that. We've also talked about the fact that we see the unitary markets as being flattish for the full year. That scale-up and growth comes from our applied business as well as our services business. That first half versus back half and getting to that mid-teens is just meeting the customer requirements and what the customer delivery requirements are throughout the year. That's really what's driving that change.
It's similar for me as well. I think about the second half order growth profile last year. It just really inflected upwards in Europe commercial HVAC and Americas commercial HVAC. That timeline just suggests delivery's more in the second half of this year.
Yeah. Do you find the, I think you talked to this on the last earnings call, the product timelines for the data center segment is extending, so backlog conversions are a little bit longer than it has been historically?
Yeah, we have. If you look over the last couple of years, that certainly changed. I don't think it's anything drastic. I think about it as the customers are giving us more visibility so that they can secure the supply chain that they need. It's now moved to 12 to 18 months instead of 9 to 12 months. It has extended out overall, but that's more of a visibility for the supply base more than anything else. For us, it's helpful. For our supply chain, it's helpful because the more visibility that we have, so when we're getting orders that are coming in past our lead times, the lead times for this equipment is 6 to 9, it could be 6 months, it could be less.
When we're getting orders 12 months to 18 months in advance, it gives us a lot of ability to plan accordingly and make sure that we're able to meet those delivery requirements.
Yeah. Obviously, a lot of inflation is emerging and has been in place, and I'm sure that continues. When you've got longer backlogs, how do you protect margins? I'm assuming you price with the contract, but what protections do you have against spikes in inflation?
Yeah. As part of our business operating system, and we've been doing this for a long time, we've had multi-year agreements with customers for a long period of time, and we're always building escalations in to make sure that we're protected throughout. For the majority of those contracts, we also have things like tariff protection if something were to change abruptly that we weren't anticipating, that we're able to make sure we're able to recover that as part of that process in the contract.
Yeah. On the cost side, we continue to hedge base metals. We'll go out 12 to 18 months for copper and aluminum, and that'll get adjusted for volumes as we see volumes grow into the future. At least for us, it just smooths that inflationary curve, and it gives us better insight on what the cost is going to be. On Donny's side, if you're delivering product a year or 18 months out with a cost escalator, we just get a more precise view of what that cost will be with that hedging strategy. On steel, it's about a 6-month hedge. You're locking in steel consumption. You have about a 6-month lock on price. After that you're a little bit more exposed. That just kind of keeps you rolling on a 6-month basis for steel.
Has the hedging strategy changed over the last several years? Because I've always felt there's 12-month hedges, but now it seems like we're extending-
A little bit further out on copper and aluminum. Think of it as, you're right, Nigel, going from 12 to maybe in that range of anywhere 15-18 months. It really comes down to the forecastability of what we think for volumes. We're generally, if you're a year to 18 months out, you're probably hedging 20%-30% of the expected buy, and the closer in, you're probably 75%-80% of the buy. We'll just keep executing through that strategy and smooth the ups and the downs.
Okay. I'm going to shock you. I do want to talk about data center.
Surprising.
Touch on data center a little bit. Before that residential is a real hot topic. Maybe just give us a little bit of color in terms of what you see in real time. 1Q is very encouraging. Still very early days in the season, but just give us a little bit of color in terms of the conversations with your contractors and distribution partners. Do you lean more optimistic or pessimistic based on what you've seen so far?
We lean more optimistic, especially with what we saw in the first quarter. We expected the first quarter to be much lower than what we came in. We were down low single digits. If you think about that in terms of a year-over-year compare from last year, that's actually a significant improvement if you look at it on a two-year basis. Last year we had a lot of challenges in the first half of the year. We had really three major factors. We had a refrigerant transition that was a challenge. We had shortage in canisters in part of that process that really impacted the market in the second quarter of last year. We had weather delays, which, a shorter season last year, which was also an impact.
We had at least maybe 1, maybe even 2 pre-buys is the way we talk about it last year. One associated with refrigerant, the other associated with the pricing associated with that change as well as the tariff impact. There were multiple dynamics that hurt last year. That makes this year, for at least, seeing what we saw in the first quarter as a positive trend, and that's why we did raise our overall guide for the residential market. Now we're saying flattish for the year. That gets a lot easier in the second half of the year for us, just from a compare standpoint, because the second half of last year was very challenging for the overall market based on the inventory build.
We do feel like the inventory is normalized in terms of our channel and what that looks like, and so overall we're optimistic in terms of the market.
It was an aggressive plan in the fourth quarter to take production days out that Donny Simmons and his team said, "Let's go ahead and kind of, quote unquote, take that medicine here as soon as we could." We took about a third of the production days out in the fourth quarter. We felt at the end of 2025, inventory in the channel is at a good level. We reaffirmed that at the end of the first quarter. To Donny Simmons's point on the flattish guide for the year, it implies volumes will still be a bit negative. There'll be some positive price, again, first quarter is maybe the least important quarter of the year in terms of residential. We know it's getting warm out there, we'll see how the year plays out.
Yeah, no question. Your guide doesn't seem down like low single-digit, mid-single-digit volumes this year, give or take.
Yeah.
Flattish or about. It feels like, again, just extrapolating from the most insignificant quarter of the year, 1Q, it does feel like we could be up modestly on volumes this year. Is that fair, Donny? Do you think we could be up on volumes?
I think we'll see. It's a little too early to tell through the first quarter. Certainly, that came in better than what we expected, and we feel like we've guided appropriately for what we can see at this point in time.
If it is, we're ready, right?
Yeah.
Donny's team has level loaded production this year, which is something different than what we would typically do. The industry typically ramps in the first quarter, second quarter, building inventory, being ready for the season. We've intentionally level loaded the factories. What that means is first half, it's a little bit of a headwind when you think about absorption in the factories. There's less absorption in the first half. That's a tailwind in the second half of the year. In addition to the easier comps based on what we saw in the industry in the second half of last year, there's also a tailwind coming through in terms of absorption from level loading factories.
Was there anything in 1Q, though, Donny, that could have accounted for just a little bit better? Were distributors getting ahead of price increases or concerns around the impact of tariffs?
No. We didn't see any pre-buy in the first quarter. We did announce a price increase in the first quarter for April, but we didn't see anything significant from that in terms of the change. Certainly don't feel like there's any dynamics there that would've caused anything to be different. I believe really what happened is that our impact that we took in the fourth quarter of last year with taking production days out, really getting aggressive on the inventory. We also changed our production strategy where we went into this year with a mindset of having a flat production for the full year. In the past, we would ramp up production, we would do a lot to just kind of build inventory in the channel and then let that bleed off at the end of the year.
This year, we approached it very differently and said, "We're going to go in and be more productive. We're going to drive a flat production strategy and manage the inventory throughout that process." I think that the benefits of that probably were, we just didn't take into account in the first quarter.
Yeah. Okay, that's great. Have you announced, as of earnings call, you hadn't announced a price increase for resi. Maybe just bring us up to speed in terms of that. I do want to talk about the fact that Trane, I think you called out, has one plant in Mexico-
Right
out of the, what, 19 or so?
Yeah.
20 in the Americas.
Yeah.
Very different footprint to some of your competitors. Just wondering, how that competitive advantage in the world of tariffs, Section 232 tariffs, how you monetize that advantage?
Certainly. To answer your first part of your question, pricing, we announced up to a 5% price increase in April, which we announced in the first quarter. We expect to get 2% realized from that throughout the year. From a manufacturing strategy, we've always had an in region, for region manufacturing strategy, certainly Mexico's part of the region. Our footprint is predominantly in the U.S., we have one factory in Mexico. We have 21 factories growing in the U.S. There certainly is a different impact when you think about 232 on our business. Residential product, the majority of our residential product is manufactured in the U.S., between Texas, Georgia, and New Jersey, we're well positioned from that standpoint.
I guess your competitors have to, well, are forced to go out with much more aggressive price increases. I think some of the competitors have gone out with high single-digit price increases. The plan to realize 5%. It feels like there's a price divergence to the market. Trane at the low end, some of the competitors at the high end. Do you think that causes some elasticity and some share shifts this year?
Well, what I'll say is, when Donny talked about the price increase in the first quarter, it was effective April 1st.
Yeah.
We know that there's new intelligence that came out in terms of tariffs and inflation, and that's also inclusive of raw materials and base metals. We'll run our business operating system and ultimately evaluate what those cost inputs are, and we'll evaluate first, how do we mitigate those costs? Again, having the majority of our factory and assembly manufacturing operations in the U.S. We'll continue to keep moving that in region, for region strategy for suppliers. Then we'll look at pricing as an option if we need to. We don't want to get in front of our businesses in terms of anything they may be doing. I'm aware that some competitors have announced maybe some price increases more recently, but at this point, we're going to run it through our business operating system, see what we can do to mitigate, and then we'll evaluate anything further.
Yeah. Okay, great. Okay, let's move on to data center. I'd be really curious, first of all, before we get into any views on pipelines, et cetera, how is Trane's strategy evolving? Because, I think at the very basic level, the view is that Trane and your competitors are ship chillers into the data center, but you've made some pretty smart acquisitions. Stellar Energy. Could be a stellar acquisition.
We're excited.
Yeah. What are the Lego pieces you're building here to put together a more integrated offering?
I'll start with, we always approach our customers from a system perspective, we're working with our customers on the system and how to make that system more efficient. The innovation pipeline that we have in the data center space is rapidly growing, and it's rapidly changing. Where typically we would have a new product that would launch, say, historically in a 2- to 3-year timeframe, we're now doing that in 12 months. We're working on concepts with our customers and then developing those. When you look at how we've grown the portfolio, when we've moved downstream into the Stellar acquisition, think about modular chiller plants, where we're part of the system, but we're also able to make our customers more efficient because of labor constraints.
We're able to produce a better product for them in terms of a modular chiller plant that has production quality in a factory, as opposed to stick-built in the field. That adds productivity to our customers. It helps them with the challenges that they have from an overall supply chain standpoint. Then you look further downstream and LiquidStack and the capability for us to enhance our capabilities from a total system standpoint when you get into liquid cooling. The expertise that we acquired when we acquired LiquidStack, we're really proud of, and a very robust innovation pipeline there that continues to help make sure that we're positioned well to have that system conversation with our customers.
we met with your team at the recent conference in D.C., one of the things that they were highlighting was the reference designs that you have.
Yeah
for the data center, the AI factories. How important is that, in terms of driving share?
Look, it's an extremely important aspect of our business, is to make sure that we're working on those reference designs. We're not the only ones creating reference designs, right? It is extremely important because it gives a roadmap point of view in terms of what the design of that factory should be. It gives a third party validation of what that should look like. It's not just Trane saying, "Here's a reference design." In that case, it's NVIDIA as well saying, "This is the appropriate design for this system.
Do you find the customers are coming to you still very much on a product basis? chiller, CRAH, CDU, separate or?
No
a system approach?
No, it's a system approach, and that's really what these reference designs are all about, is to make sure we're approaching it from a system point of view so that we can drive efficiency in the total system. We're not having individual conversations. We're talking about the complete system. It doesn't mean that we don't have customers that only buy chillers or only buy CRAHs. Certainly, we have that. Predominantly, when you're looking at our approach to the market, our approach is that system approach.
What they're also talking about is the ability not only to build out the product in the timeframe that they want, but also tell us about your commissioning capabilities. Tell us about your service capabilities after the product's installed. We made some significant investments within our service fleet, which we had for years. Our service technicians, we have about 7,000 globally and 4,500 in the Americas, where they are direct serving really the applied markets, and one of the verticals being data centers. We just opened up a new service technician training center in Davidson, North Carolina. It's a state-of-the-art service technician training center, and we've actually brought customers through it who are concerned about commissioning in the field, given the labor shortages.
They've come back and said, "We're comfortable Trane, that you've got the right technology or the right people." They think about the order even more broadly than just the equipment, the readiness for commissioning, and we've been able to show that we've got, I think, the best people on the street for that.
Yeah. Okay, thanks. That's useful. Maybe just remind us, Donny, on the deal math for Stellar Energy. What is it coming in at in terms of revenues and a margin profile, and where do you see that? I think the backlog was quite high.
Yeah. We brought in $1 billion of backlog with the business. Think about that as this year, we're going to have $500 million in revenue from that business, and eventually, we see that business getting to a mid-teens EBITDA level. We're very positive in terms of what that brings us overall.
Yeah. For this year, with the $500 million, we said it's going to be marginally, modestly accretive on the bottom line, and the reason being because of all the investments we need to put in.
Yeah
to scale it from a revenue business last year in 2025. It was about a $350 million revenue business, to even $500 million this year. That's a scale. To Donny's point, we see this in two to three years being a billion-dollar revenue business, mid-teens plus EBITDA. Scaling it to that regard not only means let's look at the current production facilities in Florida, but we're adding another production facility in Texas. It's kind of one of the reasons why we raised our CapEx guide from 1%-2% to 2%-3% of revenue for this year. Still very modest at the end of the day for investments. That's where we're going to bring that business operating system to scale. Think about procurement, think about how to run lines.
Donny's been doing this for years in terms of running businesses and understanding how to bring that business operating system in. At the same time, learn from what those teams have done well. Procurement opportunities, how do we run lines at the space that we need to, and then set up a brand new factory running the way that we need. That's going to be a really nice opportunity for us. Think of that investment this year probably carrying over a bit into first part of next year, to make sure that we've got the capacity we need to grow the business.
What's really exciting about that business for me as an operator in the business, think about a modular chiller plant. It's like 3 times the size of this room from a footprint standpoint. Okay? Think about that as 3 sections. One section is your chiller plant, one section is your electrical, and one section is your mechanical, so piping. You're making those in a production environment. In the field, those would typically be stick-built. You'd build it up from the ground up. We're making it a production environment, flowing those through a factory in 3 sections and then putting them together at the end and then just modularly connecting them when we actually install them in the field. It's a transformational change in the industry.
We're the only ones that have factories that are flowing product like this down the factory floor, and we're starting another factory right now in Texas. We'll have two very large factories producing these modular chiller plants. What's exciting about that is beyond data center. Data center is one aspect, but we have chiller plants are constructed for every vertical market you can think of, and we now have that capability to provide that same value to those customers in the other markets, the other vertical markets we talk about. Healthcare, K through 12, office. Any one of these verticals, industrial, we can apply that same capability to serve those markets as well.
Excellent. Any questions from the audience? Please put up your hand. Nope. We'll continue. I guess the only problem you have in commercial is the comps keep getting tougher. Yet you keep on comping the comp. The treadmill gets faster, you keep on running faster.
That's one way to look at it.
Yeah. Confidence in continuing to show double-digit order growth. I'm not talking about quarter by quarter, I'm talking about just generally speaking, just comping that comp.
I think for us, certainly the second half comps become more challenging for us, but we're really happy and excited about the pipeline of opportunities that we have. There's no deterioration in our pipeline. We don't guide on what we would expect from an order rate standpoint. In the second half, comps will be more challenging, but like I said, the pipeline is strong. We have a lot of positive coming.
We'll remind investors, growth rates are important. Look at absolute dollars as well, and then look at the revenue growth rates and tie them all out together. Again, we think about it, going into each and every year, top quartile, top-line growth, top quartile EPS growth, and then driving 100% of cash flow to operating earnings to net income. Keep with that philosophy, I think we'll be in good shape. That's how we see 2026 playing out.
Maybe not triple-digit growth anymore, but very healthy double digits. Okay. Would you be surprised if the question we get is, at some point, do we start to consume backlog? Doesn't seem like that's on the cards, but just typically kind of curious.
Yeah. Let's see how it plays out. We've added, again, as I said earlier, about $3 billion of backlog in the first quarter. We typically add a few hundred million dollars. Again, two-thirds of that was organic, and a third of that was from acquisition. To Donny's point, the pipelines remain robust. On the data center side, those orders can be uneven in terms of size. We said in the first quarter, we had roughly the same number of those larger orders, over $100 million, a couple of those in the first quarter, just like we did in the fourth quarter. It can be uneven with the timing of that, but what it does, it gives us a lot of visibility. From that, we can make investments and have a lot of confidence in terms of what we need to be ready for from customers.
Just a reminder, on the data center side, when you think about our direct sales force, which is a common model we have in the Americas and in Europe and in Asia for commercial HVAC, over 95% of our account managers do not call on data center customers. They call on the 13 other verticals that we serve that are largely served from Applied and also unitary product. It's a small group of folks that call on data center customers, the hyperscalers, the colos. It's 30, 40 customers plus or minus off of that. Think about our direct sales force. After three years, they're commissioned sales agents for the company, direct to the company. They're calling on all those other verticals. I'll tell you, Donny spends a lot of time with our sales force, me less so.
Although the last 2 weeks, I've been in the New York office, and I've been in the Florida office, the West Palm office, with our direct sales force, and I couldn't be more excited about the pipelines that they see around education, higher ed, hospitals, and infrastructure that just needs to be upgraded. They're focused on that each and every day. While data centers will be strong, and we've been strong in data centers for decades, we're also making sure that we're cultivating and growing in all the other verticals that are out there that can serve our products.
The driver of those pipelines in those areas, because we don't see that strength really in the ABI data necessarily. Is it decarb, electrification? What are the drivers of that strength?
I think those are certainly components to it. The driver for us is a system view and how do we help save our customers money. We often talk about the fact that 30% of energy used in a building is wasted after the meter, so the buildings are operating inefficiently. For us, focusing on that with our customers and how we can create a payback for them to reduce their overall operating costs is what drives the pipeline that we have.
Any leaky buckets in those 13 verticals right now?
Yeah, there's some leaky buckets. They're spotty. You think about life sciences. K through 12 is slower, but really think about that in the context of the past few years, where there was a lot of momentum and growth in K through 12. Lodging is a bit slow as well, but overall, there's a lot of strength. We see strength in healthcare. We see strength in retail. We see strength in office. There's a lot of strength.
Government was strong.
Government
in the first quarter.
Yeah. A question in the audience, yeah. Can we get the mic, please? Thank you.
Thank you. You talked about the advantages you get from the Stellar acquisition. Could you also just spend a minute talking about the advantages of the LiquidStack acquisition, please?
Certainly. LiquidStack gives us advantages in terms of our ability to participate in the liquid cooling aspects of the market, and the expertise that we get from that team that was part of the acquisition, and the innovation pipeline that they have, that will enable us to just continue to advance our full capabilities in the system design for our customers.
Great. Maybe my final question would be on transport, actually. Transportation.
Yeah.
We're seeing a lot of momentum in freight rates. Seems like there could be a pretty powerful cycle forming there. Any views on that?
Yeah.
Are we seeing any evidence of that cycle forming?
Yeah. Look, we've talked about the fact that the second half of the year, we expect to see growth in the transport markets. All the underlying factors are going in the right direction. spot rates are increasing. Fleet utilization is increasing. Fuel prices actually help this market overall. We certainly are excited about the fact that we've been in a four-year downturn of an 18-month downturn. We're in year four. We talked about it last year, but we're even more confident now that we see that finally coming back.
Fleets are at their oldest they've ever been in 30, 40 years. At some point, that's where the excitement is. I think we're aligned with the external data, where they think production will be, and we're aligned that there'll be growth in 2027. Maybe not to the same scale of growth that some of them are calling, but there's going to be growth in 2027, and let's see how this year plays out. We're excited to have that part of the portfolio, the residential portfolio in the second half of the year growing, and then get the continued growth in the commercial HVAC portfolio. The exit rates in 2026 should be much stronger going into '27.
Great.
I think on transport too, the last thing is that we just have to be cautious. It'll take some time for the supply chain to be able to ramp up and meet the demand in the market, and specifically trailers. The trailer manufacturers' ability to ramp up and meet that requirement will impact how steep that climb is as well.
Okay, great. Well, thanks, Donny. Thanks, Chris. Great discussion, thanks again for being here.
Yeah. Thanks, Nigel.
Thank you.
Appreciate it. Thank you.
Thank you.
Yeah.
Thanks, Nigel.