Trane Technologies PLC Q4 2024 Earnings Call Transcript

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

Question: Chris Snyder - Morgan Stanley - Analyst : I wanted to ask on Service, with Q4 up low teens again, I think America was in the mid-teens in Q4. Service has now grown at a double-digit rate for the last three to four years. And Dave, I know you typically talk about high single-digit service growth. So I just wanted to get a sense for the outlook here and what's baked into this '25 guide on Service, which I know in the past, you said has usually lagged equipment by a couple of years.

Question: Chris Snyder - Morgan Stanley - Analyst : No, really appreciate that. And then maybe turning over to the Commercial HVAC equipment. Orders this quarter, high singles. A bit better than last quarter, low single comp seems to be the same. And I know there's always a lot of focus on data center, but what you guys do, obviously -- I think you talked to 13 or 14 commercial verticals. So was that improvement? Is that just a project lumpiness? Or when you look across those verticals, do you see positive rate of change across some of them?

Question: Julian Mitchell - Barclays - Analyst : Maybe just the first question around the organic sales guide through the year. So I think a lot of investors would have expected maybe a slow start to the year and then an acceleration because of resi HVAC recovering from the prebuy headwind and TK picking up a bit. But your organic growth guide looks very steady through the year, just 1 point less in Q1. So trying to understand, does that reflect not a big headwind from resi HVAC and TK in Q1? Or does it just reflect some conservatism when we're thinking about the half and the Commercial HVAC sales growth?

Question: Julian Mitchell - Barclays - Analyst : And then just my follow-up would be around the price volume outlook within the organic sales guide. So I think fourth quarter price was 1 to 2 points across the company, higher than that in the Americas. When we're thinking about the year ahead, is it a similar 1- to 2-point price tailwinds in the sales mix? And any concerns about customers, for example, in the resi channels pushing back on price increases?

Question: Andy Kaplowitz - Citi - Analyst : I wanted to ask Chris' question in a slightly different way. I know you have the 14 verticals. But are data center project bookings set to lead growth, for instance, in '25 versus 24? And like education-related bookings are holding up well, there's been some consternation about that. And just on the comps issue, like comps in North America continue to get a little more difficult when you still grow Commercial HVAC bookings in North America even against difficult comps?

Question: Andy Kaplowitz - Citi - Analyst : Very helpful, Dave. And then just focusing on margin. APAC margin was obviously surprisingly strong in Q4, maybe just comment on the durability of those margins in '25. And then I think your incremental margin dropped a little in Americas and EMEA in Q4. Is that just -- you mentioned transport mix, is that really what it is? But you also talked about investments quite a bit, could you quantify how much they were and what you're thinking for '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. JANUARY 30, 2025 / 3:00PM, TT.N - Q4 2024 Trane Technologies PLC Earnings Call

Question: Amit Mehrotra - UBS Equities - Analyst : Dave, can you talk about the margin -- just coming back to the service conversation at the front of the call, just trying to understand the margin opportunity in the Service business over time. I know there's a lot of investments in technology to make technicians more efficient, maybe predictive maintenance, I'm hoping if you could just speak to the runway there just given obviously the third of the business and the installed base is growing quite rapidly. And a few years from now, it could be quite larger. So if you can talk about that.

Question: Amit Mehrotra - UBS Equities - Analyst : And then just related to that, because obviously, paybacks are so compelling today, which is what's driving a lot of the growth. But there is this expectation power prices will continue to go up over the next several years, if the BrainBox acquisition probably allows the equipment to run even more efficiently. Can you just talk about how you think the payback map evolves over the next few years? Because there's the question you routinely get is, how long is it sustainable, but if paybacks can actually improve, I wonder if this growth can actually reaccelerate?

Question: Scott Davis - Melius Research - Analyst : Congrats on a very strong year. I want to go back -- I mean, you talked a lot about energy audits, it just makes a ton of sense. It seems like that's what drives the sales cycle. Do you measure internally the number of energy audits that you do each quarter? And is there such a thing as thinking about that as I'll, just call it, like frontlog debt? Energy audits are up X% this quarter and that gives you some additional confidence on the backlog -- or on the front log.

Question: Scott Davis - Melius Research - Analyst : Can you use AI now to do a digital twin meaningfully faster than you could in the past? Are we there? Are we at that point yet?

Question: Joe Ritchie - Goldman Sachs - Analyst : So look, for better or for worse, your stock at times sent to trade the sentiments surrounding AI, CapEx and data centers. I guess just maybe as you -- as you think through like the trajectory of your data center business from here, maybe just give us some color on how you think that you expect that to progress. And then also just on your Commercial HVAC backlog, are you still well above normal on that backlog in terms of how long cycle it is? Or is it starting to normalize? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 30, 2025 / 3:00PM, TT.N - Q4 2024 Trane Technologies PLC Earnings Call

Question: Joe Ritchie - Goldman Sachs - Analyst : Super helpful and let's you to go over to us for background. The quick question follow-up there, just maybe just a tariff question. Any comments on like how you see this playing out? And any thoughts and your potential exposure there?

Question: Steve Tusa - JPMorgan - Analyst : Always interesting times. So I guess just on this resi guide. Roughly, I don't know, 4%-ish on the mix benefit, which you'll call volume. A 1.5%, maybe 2% headwind from prebuy, this is all annual. So what are you thinking about like the market on like a volume basis this year, just like from an underlying demand and replacement events perspective, if you will?

Question: Steve Tusa - JPMorgan - Analyst : Yes, that makes sense. What do you guys see in light commercial? What's your expectation for the year on light commercial?

Question: Steve Tusa - JPMorgan - Analyst : Okay. And just sorry, one last thing, given Services is such a topic. Dave, you said like 8 to 10 times, I think, the multiplier on Services. That just seems like a big number for an asset that has like, I don't know, a 30-year useful life that basically people are spending that much money every like three years to service. Is that really like the considered an annuity? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 30, 2025 / 3:00PM, TT.N - Q4 2024 Trane Technologies PLC Earnings Call Or is that more like every five years, they do like a major refurb or something like that? Like how visible is that revenue? Because it just seems like a really big number for a guy or an equipment owner to spend relative to this initial buy?

Question: Jeffrey Sprague - Vertical Research Partners - Analyst : It's a little chilly. It's warmed up recently. But yes, we're not needing any HVAC in the -- well, we don't need an AC, we need some H., that's what we need.

Question: Jeffrey Sprague - Vertical Research Partners - Analyst : Yes. Yes. So a lot of ground covered, a little maybe nits for me. Just first on backlog. I think you include everything in backlog regardless of how far out it reaches. Maybe you could just give a little color on the backlog staging, what's deliverable into '25, and how far out it does reach.

Question: Jeffrey Sprague - Vertical Research Partners - Analyst : Right. And the majority doesn't mean 55% means 80 or 90 or something like that, it sounds like.

Question: Jeffrey Sprague - Vertical Research Partners - Analyst : Yes. And could you just also just really in the weeds on resi, how -- how do the two-step channel perform in the quarter versus your internal channels as we think about all the pre-buy generations we went through here?

Question: Nigel Coe - Wolfe Research - Analyst : Lots of questions on services, so here's another one. So I probably should know this, but what is the mix between predictive, connected type services versus, I guess, transactional servers, where there's a phone call from a customer where there's parts involved, et cetera? So just wondering what that mix is. And does it matter? I mean is there growth differential? Is there a margin differential between connected versus transactional?

Question: Nigel Coe - Wolfe Research - Analyst : Okay. And is there a margin differential between whether the contract is more transactionA2L? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 30, 2025 / 3:00PM, TT.N - Q4 2024 Trane Technologies PLC Earnings Call

Question: Nigel Coe - Wolfe Research - Analyst : Okay. And then a question on BrainBox. I can't be if -- I said BrainBox AI. It seems like it's quite a chunky deal. It looks like $30 million or so EV. So just wondering if you could just give any details on the size, growth profile? How you can like really really expand this business? And then a note accounting question for Chris, I think this sounds like a very tangible heavy business. So just curious if the intangible amortization is coming down when we think about that step down in the Trane amortization from 15 years ago?

Question: Deane Dray - RBC Capital Markets - Analyst : Maybe just circle back on the prebuy. It seems like it was relatively uneventful, at least in terms of how you were positioned. But if you just step back, anything that surprised you in terms of the demand, the timing? And there's always this nuance about competitive positioning, who cuts over first. But just the postmortem, was there anything that you'd call out in terms of what you were expecting or what didn't play out?

Question: Deane Dray - RBC Capital Markets - Analyst : Good to hear. And I also like hearing that you say 410 is going to be around for a while because I will be a user of that. So --

Question: Deane Dray - RBC Capital Markets - Analyst : It may happen to be one of your units. So that's good to hear. And then just second question, just circling back on China and that whole tightening the credit. It seems to have played out exactly the way you said you would be, getting the down payments and maybe some progress payments. But did you -- when I hear about tightening credit, it also makes me think that you actually turned down some customers or maybe shying away from particular verticals. So has there been any selectivity going on maybe related to this credit sensitivity?

Question: Tommy Moll - Stephens Inc. - Analyst : Chris, you called out early in the call that if we look at the first quarter earnings contribution as a fraction of the full year outlook you've provided, it's a bit higher than the average. I thought about it differently just given the transport and resi headwinds in the first quarter. So is there something we're missing that changes as you go into Qs two, three, four? Or is it perhaps some conservatism just about what's longer dated here? Just help us triangulate there.

Question: Tommy Moll - Stephens Inc. - Analyst : And then as a follow-up, I wanted to ask about the comment made on some recent investments in channel. I just want to ask if there's anything more you can share there. Dave, I think you mentioned one investment in Europe. But if there's anything you want to call out in terms of a strategy update there, please do. Or if this is same as before and just some opportunistic transactions, let us know that.

Question: Tommy Moll - Stephens Inc. - Analyst : Yes. So think of it as we've been 95% plus direct, and it's these last few percentage points of those independent channels that when they're ready, we're ready to fully bring them into the Trane business. I'll turn it back.