Rolls like to be a bad thing.
Good to go? Awesome. Well, thanks everybody for joining us. Good morning, I'm Tim Wojs. I cover building products here at Baird, and we're delighted to have Trane Technologies join us again this year at our Global Industrial Conference. Trane Technologies is a global climate innovator. They provide heating, cooling, and transport refrigeration solutions through their Trane and Thermo King brands. From the company, we have Chairman and CEO Dave Regnery, and then we have EVP and CFO Chris Kuehn. Maybe just to start, Dave, if you want to give a couple opening remarks.
Yeah, I'll be brief.
Then we'll do Q&A.
Let's get to the Q&A. First of all, thanks for coming today. Look, when I saw all the investors that were going to be here, I actually changed my plans to come here because I wanted to make sure that you were able to hear from me about Trane Technologies, not only all about the success we've had in the past, but really where we're going in the future. We're the company that's basically doubled our top line in the last six years, and we have so many opportunities in front of us. I know we're going to get a lot of questions on data centers, and that's fine. I just want everyone to know we're more than data centers, okay?
Rest assured that we're very strong in all vertical markets, and there's a reason why we win, and that's because we have a great operating system, we have a great service business, we have a great direct sales force, and it allows us to really compete in all different verticals and be very, very successful. With that—
With that, we'll—
I'll quickly turn it over to you, Tim.
We will wait five minutes on a data center question. Maybe just start within commercial HVAC. You have consistently talked about having 14 different verticals that you track, and you are seeing a lot of growth across the board. Maybe just go through the heat map and where are you seeing—
Yeah.
—better growth, where maybe things are a little bit sluggish, and then we will go from there.
Well, we talk about, we track 14 different verticals in our commercial HVAC business in North America, okay? Just so we could understand when we talk about the verticals, we have really good data in North America on the verticals, and we are able to go really, really deep on all of these different verticals. We said at the end of, during our third quarter call that we have seen growth in 11 of 14 verticals. Look, data centers is very, very strong. I think we all know that. But we are also seeing a lot of great activity in industrial, high-tech industrial, healthcare is very strong for us. Even some of the—
Office, yeah.
—education verticals are very strong as well. It's broad-based growth that we're seeing. It's not just data centers, but data centers are very, very strong.
On that point, like if you think about reshoring, you think about pharma, how is the complexity, how is the cooling complexity changing, and how does that fit into your strategy?
I think our systems continue to become more and more advanced, okay, from an energy efficiency standpoint. A lot of what we're being pushed to do in the data center vertical is being transferred into what we would call our core verticals. Think of smarter chillers, think about chillers that are going to be able to operate in free cooling environments more versus vapor compression cycles. That's all happening. On the pharma side, think about air purification, think about clean room environments. Those are all things that are very, very applicable to Trane Technologies, and the breadth of our portfolio really allows us to capture those opportunities in all these different verticals.
I guess, like when you think about decarbonization, globally, I mean, where are you in the, I guess, where is the market in terms of just decarbon?
Yeah.
Or is that kind of a continuous kind of opportunity for you when you think about—
Well, it depends where you are in the world.
Yeah.
Okay, number one. In the United States. It hasn't been fashionable to be talking about sustainability recently. I would tell you that that's not Trane Technologies, right? If you ever listen to any of our earnings calls, if you ever listen to me speak publicly, we're always talking about sustainability. We're always talking about the purpose we have as a company to be the innovator for the future of this planet. That's not changing. Most people have forgotten that 30% of all the world's energy is for heating and cooling of buildings, 30%. We know, because we've done hundreds of thousands of energy audits, that most buildings operate very inefficiently. In fact, most buildings waste about 30% of the energy that they pay for.
I mean, you think about it's just like, "Oh my gosh, you're paying for this." Forget about the transmission, that's a different problem that we're solving. After the meter, right? So where buildings are actually paying for it, they're wasting 30%. That's the opportunity that we have. Look, in the United States., we're going to lead with our paybacks. We're going to sell on our paybacks. The cost of energy continues to increase. If you're wasting 30% of what you're paying for, great opportunity for you to make your building more efficient. You're going to save a lot of money. It's going to be very accretive to you. By the way, your carbon footprint is going to be reduced. If I was in Europe—
Yeah.
—we'd be leading with sustainability. I just came back from, Monday I was in England, and we are still selling jobs there where we're replacing boilers with heat pumps. If you know anything about our industry, that's a really long payback, right? But we're doing that because of the carbon footprint. If I was in different parts of Asia, I'd be selling more on our carbon footprint. So, it varies all over the world on sustainability. Look, we believe that because there is so much waste that's happening, sustainability will become vogue again, and all over the world. It's important to make sure that we all understand how we can make our carbon footprint lower for the future of our planet. I would tell you that will change here in the United States.
When it does, I want you to be very leery about all the companies that were out there two and a half, maybe three years ago, talking about sustainability and their sustainability commitments, and then stopped talking about it. Now, when they start talking about it again, I want you all to remember, Trane Technologies never stopped talking about it. It's still very, very important to us.
Yeah.
In fact, we just had a town hall meeting on our quarterly basis with all of our employees, and we were talking about our 2030 sustainability commitments, and we were talking about the Gigaton Challenge. If you remember, we had this, in 10 years, we would cumulatively save our customers a gigaton of carbon. I would tell you that we will surpass that number, and that's just an unbelievable accomplishment, because when we set that target at the end of 2019, I was part of that process of setting that, and I knew that we didn't really have a clear roadmap to get there. We knew technology would be part of it, and it's proven out true. Today, we will surpass that number. So I'm super proud of what we've been able to accomplish as a company.
How does something like BrainBox AI kind of help you in that?
Yeah, BrainBox is a—
It's a small acquisition, but I mean, it seems like it's pretty powerful in terms of—
Yeah, I mean, think of it as agentic controls, right? Now you're getting buildings to operate not only the way they were designed, right? When I talk about 30%, they're wasting the energy based on what they were designed at. With BrainBox, you're having a building operate the way it's being operated as well, and there's a difference. So, they have so many different points of data that it augments. Like, we've had connected buildings forever, right? And we know the way the building was designed, we know how it's operating. Think of that as very structured data or machine learning data. With BrainBox, you take this unstructured data and you combine it with the structured data, and that's where the opportunity exists. And we find that we're able to get 10%, 15%, up to 20% efficiency above the way the building was designed by utilizing BrainBox.
That's one aspect of BrainBox. The other is cloud BMS. We're a leader in cloud BMS with BrainBox. And the third area is, they've helped us design a virtual engineer for our service technicians. It's called ARIA. You'll probably hear more about that. But think of it as it's a smart system for our engineers. As we're connected to an asset and a service tech goes to service that asset, they're pinging that asset beforehand. They know exactly what needs to be done before they even get to the job site. So those are all things that BrainBox brings to us. So it's a great acquisition. We're super excited to I guess it's been two years now, Chris?
Yeah, it will be two years. Think about that last ARIA for service techs. Services is a third of the enterprise revenues. It has been growing the low teens, CAGR for the last five to six years. We think about productivity and investments you put into that fleet, there is certainly more people, but this is a great product for them to go use and software tool for them to be even more intelligent when they show up on a job site.
Yeah. BrainBox AI has been a great acquisition for us.
It has. It has, definitely. Maybe we will go into data centers for a few minutes. Obviously—
Love data centers.
—obviously, it's kind of early. We saw what happened last week. Just any sort of kind of initial kind of read data points that you can kind of give us around how, if the election changes anything with data centers.
Look, I think it is early. We'll see how it plays out. Do I believe that 28 states that have Democratic governors will never put another data center in their state? No. Do I believe that data centers will become more sustainable and more efficient in the future? Absolutely. I know what we have in our reference designs. I know how we're designing data centers for tomorrow, and I would tell you that as these trade-offs become more prominent in this space, in this vertical, you're going to see a company like Trane Technologies leading. This plays to our strength. As more regulation comes in, as more pressure is put to make sure that these data centers are more sustainable and give back to the communities, that's to our advantage. You may not know this, but in Europe, who's here from Europe?
A lot of people from Europe here, right? So you guys know this, but district heating loops are very prominent. So district heating loops, think of it as hot water is sold as a utility. We're doing a project now up in the Nordic area, and I won't be too specific, but it's up in that region. Major district heating loop, data center comes in. We're basically taking the waste heat that five years ago when I brought this up, people told me we were nuts, that it's low-grade heat, you can't do anything with it. We basically took our high-performance heat pumps and we're boosting the water temperature up to 90 degrees Celsius and feeding the district heating loop. So the waste heat coming from data centers is basically giving back to the community, in this case, in the form of a reduced utility rate.
Those are the types of things that you're going to start seeing happen more and more. I think you'll see that chillers will get smarter, you're going to have more free cooling capability. Those are all things that we're looking at that I think you're going to see a lot more hybrid systems in the future, but those are all things that play to the advantage of Trane Technologies. We'll see what happens with the election. I think many people are aware that how someone talks while they're being elected or running for office versus how they talk after they've been in office for a period of time sometimes changes. Maybe they just know more and they get smarter, which is a good thing, and they're flexible. I don't see this slowing down.
When you think about, I mean, you guys have a really close relationship with some of the chip manufacturers. Obviously, what's kind of going in your kind of order book and your backlog might be different than maybe what we're talking about two chipsets from now. How do you kind of see the technology roadmap kind of evolving in data center cooling, and how do you make sure that Trane is kind of positioned to make sure that you can evolve with that?
I think chillers are going to get smarter. I think water temperatures are going to continue to rise. I think you'll see more free cooling applications. I think you'll see more hybrid systems. I was trying to explain to a group earlier today that if a data center is going to operate 95% in this band, why do you want to design it to operate in this band? I know it's the worst possible thing, but it's so much easier to say, "Let's go 95% here. We'll augment it if it happens to need this much more." Let me give you a real-life example. A chiller, it's basically going to run in a free cooling mode 90% of the time.
If it needs additional capacity, you'll put it on with the trim chiller side of it, or the vapor compression cycle, and that will augment the water to make sure we're able to remove the heat. Those are the things that are happening. Or adiabatic cooling would be another one where you'd sit there and say, "I'm going to design for 95% use. If I happen to have an extreme, I'll use adiabatic cooling to get there," versus having everything designed at that extreme level. Those are the things that are happening right now, and those are part of the reference designs of the future. The good news is, a company like Trane Technologies is sitting at the table, as are others, certainly on the electrical side, sitting at the table, helping to design what the future's going to look like.
That's why, back to your prior question about, what's the election impact going to be? Data centers are going to get more sustainable. Data centers are going to get greener. I think you'll see a lot more power behind the meter. I think if you can envision transformational change, think of how data centers possibly could help greenify and make the grid more resilient in the long term, and think of nuclear behind the meter, adding to the grid. How does that make it more sustainable? You'll hear more and more about this as we continue to evolve in this space. Data centers are not going to go away. The need to have computing power is not going to be reduced. It's only increasing. How you operate a data center may change.
The other thing I would tell you is that everyone talks about data centers like it's a new thing. Data centers have been around for decades.
If you think about, if you follow data centers today, the PUE of a data center today, whether it's 1.1 or 1.2, they're very efficient. Data centers years ago were at close to two or over two. So there's a whole opportunity there that has just not even really been tapped yet about how you take old data centers that have power, that have infrastructure, and upgrade them to today's standards. So that's another thing that you'll probably start hearing a lot more about.
Have you seen, when you're talking to your customers, I mean, it sounds like you have, but have you seen that? Because obviously there's been a speed to get these up, and it's like, "Hey, we just need to build these things and get as much of this cooling capacity as we can." But there's a lot of power that's needed to actually operate the cooling system. Are you starting to see customers start to say, "Hey, how can you help us reduce the power needed for cooling so then we can actually get more chips, make more—
That's what I was just describing.
Yeah.
All of that makes your power usage go down, right? If you are able to be more creative on how you come up with your solutions. The other thing I would tell you about data centers, I know there is a lot of talk out there about long-term capacity agreements and master purchase agreements, and all that is true. At Trane Technologies, we only put something in our backlog when we have a signed PO. When you have a signed PO, you have a clear line of sight to build. I think you are going to hear a lot, and you probably already have read a lot about particular projects getting pushed out or canceled. Those are usually in the pipeline, not when a PO has been issued.
There is a little bit, people get confused when they hear about, "This project is being pushed out," or, "This project is being canceled." It was never a project in our eyes unless we had a PO. Once you have the PO, you have clear line of sight to build.
How do you think about the replacement kind of opportunity? Because the equipment that you are putting in these facilities is not like in this hotel, right, in terms of usage. You are going to have a lot more run time. They are going to be used all the time. How do you think about the replacement opportunity, and then when does service start to kick in?
I will let Chris answer the service side of it, but I would say that we really do not know the replacement yet, okay? You can make one argument that these units are going to be used, the demand on these units is going to be more severe than it is today. That may, in fact, be the case on the fans, but not necessarily on the compressor, right? Because you are going to be running in a free cooling mode much more than you do in a traditional application. But the answer is, it depends, and there is a lot of variables that go into that. So we will see. I mean, think about in this building, if you had a chilled water system in this building, which we do, and I am pretty sure it is Trane, it is because you guys are all comfortable.
I think you will find that the useful life will be in the 20-year, 25-year time period. I am not sure that will be the case in the data center, but I am also not sure if it will change because of the product is no longer useful or the efficiency of that product has changed dramatically. Therefore, they will want to replace it just so they can reduce the amount of energy and get more compute for the energy that they save. I do not know if you want to talk about the service.
Yeah. Look, our service business is highly tied to our applied systems, and other than, say, the recent growth we have seen in data centers, that model has generally been 8x-10x of revenue over the life of that equipment versus the original equipment cost is what the service opportunity would be, and that could be over 20- 25 years, to Dave's point. I think with respect to data centers, we do not know exactly what that will look like.
There are opportunities to do upgrades more quickly. But when you think about a warranty period that could be one to two years, there is maintenance happening during that time. There is not really much service, so to speak, outside of the maintenance, because you are under warranty. Then after that, you get beyond the warranty period. It is not immediately day one. It starts to ramp up as you get more usage.
But one thing we know about data center customers is that runtime, uptime is absolutely critical, and you are cycling through chillers constantly on the job site. You are having dedicated resources there pretty much all the time, either doing maintenance service or upgrades. We will see how it kind of plays out. But the key is, you win the work on the front end with the design, you have a great customer relationship, and let us tie it into a service contract thereafter.
Okay. How are you guys kind of thinking about managing capacity in a growth environment like this, and also kind of the supply chain, kind of where you are seeing constraints? How are you trying to get ahead of some of these pinch points—
Look, I'm not—
—coming up in the market?
First of all, we've invested in our capacity. Our four-wall capacity is not a concern for us, okay? We have ample, I think we've 4x on the applied side in the last three years. We have ample opportunities there to continue to grow our business without adding additional fixed costs. That said, we have added fixed costs. We've added a couple plants, but we're in good shape there. The supply chain is a little bit different story, right? You heard me talk, if you listened to our third quarter earnings call, there's two sides of the supply chain. One is just the normal supply and demand. As we're putting a lot more demand on our supply partners, they are struggling to keep up. We're helping them through that lean journey, as they're all becoming stewards of lean.
That will continue to be probably a headwind for us, at least for the next six, nine months, as they have more capacity that's coming on board. That, to us, is very manageable, and we're used to managing that. We do it in a lot of different ways. In some cases, we actually deploy resources that we have into our supply partners to help them, and we'll continue to do that. I see that problem, like six to nine months, that's going to get better, because I know what they're planning to bring on board. The regulatory changes that happen sometimes that are very acute, those are harder to overcome. You can't just say, "This supplier can no longer supply into the United States of America," and then have all of our partners pivot real fast. That happened to us in early August with the capacitor incident.
But, look, we're agile. We'll pivot, and unfortunately, we do have a playbook in our operating system that says, "Run this product missing a component and put it back on the line when the component comes in." Not a great way to run the railroad, but we know how to do it, and we're as efficient as we possibly can. Unfortunately, we did a lot of that in the third quarter, but that's behind us now, and we're hopeful that we've been very, very specific with the administration that these type of acute changes are really, really, really hard for the manufacturing base that resides right here in the United States , and we need to be really careful about how we implement them so we don't disrupt the jobs right here in the United States . So, we'll continue to work on that.
Tim, on the capacity, we've done that entirely within a 1%-2% CapEx to revenue framework, and I don't see that changing into the near future at this point. So, think about the opportunities we've had to go upgrade or redesign our existing facilities. We've really gotten that capacity out staying within a CapEx-light model.
Right. On the service side, just, that business used to grow kind of high single digits. The last four or five years, it's grown double digits. Service has always been a pretty critical part of your business. Where are you seeing kind of the acceleration in service growth, and where are you prioritizing investment there?
Look, we love our service business. We have a whole operating system built out around our service business. I typically don't talk a lot about that, because I don't necessarily need to create a roadmap for others to copy. I would just tell you that it's a business that you need to invest in, just like your product business. And whether it's the training facilities, whether it's the tools you deploy to your service technicians, it's all of that. And we talked earlier about ARIA, the virtual engineer. That's a big investment we're making. We talked about connected solutions, big investment we're making. How do you make sure that your service techs are the smartest in front of the customer as they could possibly be, right? If you go in with that kind of a mindset, the investments are easy to decide how you do.
We just put in a new training facility in North Carolina. It's state-of-the-art. If you went there, you'd want to become a technician. It's that much fun to just walk around and see all the products and the classes that are going on. It's a great business. It's very resilient. Compounding your growth rate has been double digits for the last-
Five to six years, yeah.
I think about six or seven years now. Very predictable. It's one of those things where I know what it's going to grow every quarter, right? It's very predictable, and it's certainly something that differentiates us in our industry. By the way, these are all company employees, company-trained employees. We developed apprenticeship programs to help ease the fear of the skilled labor not being available. Today, we have over 350 people that are part of the apprenticeship program. We went to a graduation a couple weeks ago. It was just, I mean, I literally, I met this individual. I didn't know that they were in the apprenticeship program, right? I was like, "So what do you do?" He goes, "I'm a technician." He goes, "Oh, really?" He doesn't really know who I am, okay?
I mean, I'm the CEO, but he probably doesn't know that, right? So I'm just talking to him, I'm like, "So tell me about what you've done and your learnings." The individual started to cry, literally. He goes, "You've changed my life with this program, and I'm now graduating. I make lots of money. I can support my family. This whole thing has just changed who I am as an individual." I just sat back, I was like, "God, this is like so impactful, the impact that we're having on people's lives and the impact that this is an individual that is going to be so loyal to our company for a long period of time, just because of the investment we've made in it." Anyways, our service business, great business.
Good business.
If you want to become a technician, let me know. We take unskilled and we teach you how to be skilled in a four-year period. They keep telling me that I could do it, and I'm convinced I can. But right now, I'm busy doing something else.
Chris, maybe just on kind of investments and margins. I mean, you guys have doubled the business over the last five years. You kind of have an underlying incremental, and then you manage investments down to something a little bit lower than that. By doubling revenue, you obviously have a bigger bucket to make investments. So has the ability to invest changed at all, or do you guys-- It sounds like you keep seeing more and more opportunities to invest, but has there been any change in that kind of underlying operating?
Well, I think if anything, the pipeline on the investments just continues to be very robust. While we've doubled the top line, we've nearly quadrupled the bottom line over that same time period, right, when I think about our earnings per share. So we look at it as incrementals, 25% +. It allows us to invest back into the business, and that's how you drive the bookings growth. That's how you ultimately then drive the revenue growth, is to have those connections and investments in new products. Think about a business like Transport that's had typically an 18-month down cycle that's coming out of year four of a down cycle, and we saw an inflection in orders in the third quarter. You don't get that by under-investing in the business the last four years just because the business itself or the markets aren't performing.
We look at it as across the portfolio, we're investing. In fact, next week, we have twice-a-year innovation reviews, and it goes business by business around the globe in terms of a look back on projects we've already executed. There's projects that are in the pipeline, how are they doing, and then here's what the forward look is on those pipelines. We like the 25% + in the incrementals. It allows us to really invest and think about it across the portfolio. It's not just commercial HVAC and data centers. There's 13 other verticals that we need to support. I think you'll see some spillover from the innovation in data centers into those other verticals where we sell applied equipment. But great innovations would exist within the Transport portfolio and within residential too.
This innovation review, it's one of the best meetings that we have all year, for me at least, right? Because I love to understand the how we're actually solving problems. Yesterday, I flew here from Paris, and I was on the plane, and I had my book, so I was reading my book for however long that flight is, which is very long. I don't recommend it. It's like a 10-hour flight. Anyways, the flight attendant comes up to me, she goes, "You're really busy." She goes, "What are you working on?" I start trying to. I was like, "Well, look, this is about innovation review. Here's a product." I could just look up, and she looked at me, and she goes, "I have no idea what you're talking about." I said, "Yeah, well, you can come to the meeting if you'd like."
Maybe last one, I mean, we've spent a lot of time on services and commercial HVAC, but you guys do have a couple shorter cycle businesses that do seem to be kind of primed for maybe growth acceleration as you kind of think about 2027 and beyond. Maybe just kind of talk about what you're seeing on the short cycle side and if there's an opportunity to see that there.
I think we're going to carry a lot of momentum into 2027.
Yeah.
We have an incred— I'm not guiding, okay? Just keep your pencils down. We'll guide that. We'll do that during our fourth quarter call. Think about it, our backlog's at $12.5 billion. A third of our business is our services business. We've just talked about that compound annual growth rate. We have our Thermo King business, as Chris said, had an inflection in orders in the third quarter, up over 30%.
30%.
Which was great to see. Large customers were buying, which is a good sign. Now, obviously, it's more price competitive the larger the customer, but large customers were buying, and that's the first sign of recovery, which is nice, very nice to see after four years. We have a residential business that we'll see how it goes. I mean, I think that from an industry standpoint, inventory will be in a much better position entering 2027 than it was in 2026. We were fine. The rest of the industry maybe was not so. That could be a positive. We're going to have to watch interest rates there. It tends to be more interest rate sensitive than maybe some other markets because a lot of the products that we're selling are financed, and people are looking at their monthly payment.
Look, I'm bullish on the momentum that we're going to carry into the year.
Yeah, the exit rates coming into 2026 were so much lower than as we see the exit rates going into 2027. And even back to residential, where we started the year of 2026, well, could it be down a little bit? Could it be flattish? That's kind of where our thought was, and now it's going to be up high single digits for the year. And it's just a great team that just, you keep investing in businesses like that, and you take advantage of the opportunities.
Great. Sounds awesome. Please join me in thanking Trane Technologies for being here.
Yeah, thanks, everyone. Thanks for coming today.
Thank you.