Trane Technologies PLC Q3 2024 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Scott Davis - Melius Research - Analyst : Hey. Good morning, Dave and Chris and Zac.

Question: Scott Davis - Melius Research - Analyst : I'm great. The numbers are good. I'm just trying to figure out a little bit of, perhaps, you can help with some context around data center specifically just since it's so topical right now. Anything you can give us, whether it's growth, orders, materiality to your algorithm. I'm just trying to get my arms around how important that is for you guys for the next year.

Question: Scott Davis - Melius Research - Analyst : Okay. That's helpful. And I wish you'd size it for us, but I understand if you don't want to do that, it's totally fine. Just moving to China, guys. Is that market mature enough at this point where we can start to see it, perhaps, moving to more retrofit and services and being a little bit more stable longer term? I understand the down 45% projects can disappear pretty quickly over there. It's been a couple of decades now that you guys have been pretty strong and have a pretty big installed base there. So is that something that you see that kind of becoming a more mature market going forward?

Question: Scott Davis - Melius Research - Analyst : Okay. Makes sense. I'll pass it on. Best of luck, guys.

Question: Chris Snyder - Morgan Stanley - Analyst : Thank you. I wanted to ask on services, which continues to be really strong, up low teens again here in Q3. Can you just maybe talk a little bit about the mechanics of the service business? What is the lag between when you sell the equipment to when it starts generating service revenue. Anything you could talk about on service margins. And then it seems like a lot of the reinvestment the company is making is in that service side. So just what are you spending on to better position the company to capture more of that revenue? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 30, 2024 / 2:00PM, TT.N - Q3 2024 Trane Technologies PLC Earnings Call

Question: Chris Snyder - Morgan Stanley - Analyst : Really, really appreciate all of that. Maybe just following up on data center service specifically. If we kind of think about that two- to three-year lag, it would imply that a lot of the growth we've seen in certainly in orders and even, I guess, revenue on the data center side over the last 12, 18 months hasn't really found its way into service yet. Can you just maybe talk about service (inaudible) process different in data center elsewhere. And I just asked because, obviously, these are customers that are very sophisticated, uptime is everything. Energy efficiencies even more important there than it is elsewhere. So any just color on how the data center service model differs would be helpful.

Question: Chris Snyder - Morgan Stanley - Analyst : Thank you.

Question: Julian Mitchell - Barclays - Analyst : Hi. Good morning. Maybe I just wanted to start with slide 15. You talk -- give us some very useful pointers on next year. Just when we're thinking about kind of -- any color you could give us as to how to think about organic operating leverage. This year is guided at 30% now. Trying to think about sort of that for next year, anything you're calling out in terms of, say, mix. It looks like you get a mixed tailwind, perhaps, within resi from the A2L transition. There may be some high operating leverage as transport markets turn around more in the second half. I guess I want sort of rolling all that together, should we expect kind of strong operating leverage in '25? Any reason not to?

Question: Julian Mitchell - Barclays - Analyst : Thanks very much, Chris. And then maybe my second question just around the U.S. resi HVAC market, which I don't think has been touched on in the questions so far. Maybe just help us understand, I think, Dave, you mentioned the slight increase to your revenue assumption for that business this year. Was that tied to sort of share gain or some behavior by distributors in general. Any color on that. And it sounds like you're pretty confident of decent revenue growth in 2025, again despite the prebuy. I just wondered if you could flesh that out, please, at all.

Question: Julian Mitchell - Barclays - Analyst : Great. Thank you.

Question: Andy Kaplowitz - Citi - Analyst : Hey. Good morning, everyone. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 30, 2024 / 2:00PM, TT.N - Q3 2024 Trane Technologies PLC Earnings Call

Question: Andy Kaplowitz - Citi - Analyst : Great. And let me just ask you about China in the context of. You obviously had somewhat high decremental margins there. Some of that is the choices you've made. Do you -- again, you've been in China for a long time. You moved to direct sales, and everything was good once you did that. Do you see this as a more structural issue? Or is it really just cyclical? And if it is either way, can you take more cost out of that business? Or how should we think about that to offset higher decrementals?

Question: Andy Kaplowitz - Citi - Analyst : Appreciate the color, guys.

Question: Andy Kaplowitz - Citi - Analyst : Yeah. See you soon.

Question: Joe Ritchie - Goldman Sachs - Analyst : Hey, guys. Good morning.

Question: Joe Ritchie - Goldman Sachs - Analyst : Doing great, Dave. Thanks. Yes, look, we talked about office. We talked about data centers. Clearly, the commercial HVAC business is humming along. Can you maybe just kind of talk a little bit about some of the mega project activity, how that's coming through, whether it's semiconductor plants, I know there's been some delays on EV plants. Just any commentary around that would be helpful.

Question: Joe Ritchie - Goldman Sachs - Analyst : Got it. That's helpful. And look, I know you're not talking about a prebuy on the residential side of the business and yet the industry is seeing pretty significant growth in the back half of this year in resi and a few of your competitors are talking about how much of the kind of [R-54B] is going to go through their system next year. With one saying 65% of their business, the other one is saying 90% of their business I'm just kind of curious as you kind of think about your resi business since the next year, like how much of it do you think is going to be the 410A product that you'll manufacture this year versus the R-54B product that will be hitting the market next year. Any thoughts?

Question: Joe Ritchie - Goldman Sachs - Analyst : Helpful. Thank you very much.

Question: Nigel Coe - Wolfe Research - Analyst : Thanks. Good morning, everyone. Thanks for the question. Look, I know I know APAC and China are very small for you, so [I'll probably come] back to this. But I guess the surprise is that it took so long because we've seen terrible markets in China now for some time. So -- you mentioned you've been outperforming. That makes sense, but obviously, the string broke this quarter. So it seems -- if you have to gauge how much of this is elective, enforcing more stringent credit procedures versus genuine deterioration in the market. How would you sort of gauge that? And I'm guessing that this correction has to cycle through into 2025. There's no kind of spring back here. Just any thoughts there.

Question: Nigel Coe - Wolfe Research - Analyst : Okay. That's great. And then a follow-up for Chris. Not asking the '25 guidance, but maybe just some of the moving pieces. On corporate, running at $330 million now it was as low as [$250 million] back in 2022, 2021. So any sense on what would be a good run rate for corporate. And then it looks like amort comes down in '25. So I think some of the Trane acquisition, amort starting to roll off. Is that correct? And then finally, just on interest. We got a refi coming up in November, I think, very small, but should we expect interest expense to go up a little bit next year?

Question: Nigel Coe - Wolfe Research - Analyst : That's great. Thanks, Chris.

Question: Sahil Manocha - RBC Capital Markets - Analyst : Hi. Good morning. This is Sahil Manocha on for Deane Dray. My question is on weakness in China, understanding it's a smaller part of the business, but have you taken any write-downs of receivables or increased reserves? And how might the Chinese government stimulus actions play out? And are there any verticals in China doing particularly worse?

Question: Joe Ritchie - Goldman Sachs - Analyst : That's really helpful. And then one more on data centers. Could you provide an update on your liquid cooling investment in liquid stack?

Question: Sahil Manocha - RBC Capital Markets - Analyst : All right. Thank you very much.

Question: Andrew Obin - BofA Global Research - Analyst : Hey, guys. Good morning.

Question: Andrew Obin - BofA Global Research - Analyst : I am going to sort of belabor this China point a little bit more. My understanding was that for you, China was mostly industrial exposure. And I think the prior explanation for the fact that your performance in China was better was because you did not have exposure to these non-residential office buildings. I just want to understand if that's the right way of thinking about it. And yeah, right, because, as I said, the commercial weakness was there. Your response was we're not really on this commercial developments. We're playing mostly on the industrial side. But did I just understand it wrong?

Question: Andrew Obin - BofA Global Research - Analyst : No, I understand, but the answer is that all along your China business was mostly commercial real estate nonindustrial facilities, not factories, not data centers. It's 90% commercial real estate. Just want to get that point. Is that correct?

Question: Andrew Obin - BofA Global Research - Analyst : No, that's exactly what I was asking. Yes, that was my understanding. Okay. Okay. Okay, fine. So it's really industrial weakness. It's weakness outside the real estate market that's getting you down.

Question: Andrew Obin - BofA Global Research - Analyst : Okay. Thank you. No, that's exactly what -- and maybe just A2L pricing. There's been a lot of data points. I think those of you that Daikin, right, because they use a different refrigerant maybe is not going to increase their prices as much. I think your peers are sort of saying high single digits, around 10% maybe. What do you guys, and I apologize if I missed it, but what do you guys fall in on this A2L pricing into '25? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 30, 2024 / 2:00PM, TT.N - Q3 2024 Trane Technologies PLC Earnings Call

Question: Andrew Obin - BofA Global Research - Analyst : Terrific. And I really appreciate this clarification in China. Thanks a lot.

Question: Tommy Moll - Stephens Inc. - Analyst : Good morning, and thank you for taking my questions.

Question: Tommy Moll - Stephens Inc. - Analyst : Doing fine. Thank you. We've talked a lot about China. So I wanted to circle back on one of the positive topics from today, which is the backlog you've called out for 2025, which was up sequentially by a pretty large amount. And I'm just curious, as you look at the composition there, is there anything we can learn in terms of what verticals are particularly strong why customers may be ordering a little bit earlier in the cycle than in the past? Just anything we can glean. Obviously, you've talked about next year is a strong one for commercial HVAC. But maybe if we go one layer deeper there, what can we learn?

Question: Tommy Moll - Stephens Inc. - Analyst : Which leads to my follow-up, Dave. Office got a little airtime earlier. And so if we just discuss these commercial trends ex data centers, which we've covered, and think about office and some of the other verticals that we don't talk about as much. Am I hearing you correctly that it feels like the rest of that commercial business has actually gotten stronger in terms of the orders as 2024 has progressed?

Question: Tommy Moll - Stephens Inc. - Analyst : Thank you, Dave. I'll turn it back.

Question: Noah Kaye - Oppenheimer & Co., Inc. - Analyst : Thanks, and I will give it to one question. Dave, in the past, we've talked a little bit about a cascading impact of policies going from, say, ESSER to CHIPS and IRA. And I know there are a lot of fundamental drivers here around decarbonization and improved efficiency paybacks. But just at this point, as we look at '25 and your comments around the pipeline of activity, to what extent are those policy impacts actually impacting the pipeline or the bookings you're seeing. Just help us level set what kind of impact they're actually having on the business?

Question: Noah Kaye - Oppenheimer & Co., Inc. - Analyst : All right. Thanks, Dave. Appreciate it.