Trane Technologies Plc Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Purpose-driven Strategy: Trane Technologies is at the heart of sustainable resilient infrastructure, with high-efficiency solutions helping customers save energy and reduce costs.
• Q3 Performance: Record quarterly bookings of $6B (13% organic growth), 170 basis points adjusted operating margin expansion, 15% adjusted EPS growth, robust free cash flow.
• Americas Commercial HVAC: Third consecutive quarter of record bookings, ~30% growth, strong in core and high-growth verticals like data centers, applied solutions bookings up over 100% in Q3.
• Residential: Bookings and revenues declined as per September update.
• EMEA and Asia Pacific: Commercial HVAC in EMEA had high teens bookings growth and mid-single digits revenue growth; Asia Pacific had mid-30s bookings growth and low teens revenue growth.
• Services: Constitutes ~1/3 of revenues, low double digits YTD growth, low-teens CAGR since 2020

Segment Performance

• Commercial HVAC: Q3 was strong with record bookings. Americas Commercial HVAC had ~30% year-over-year growth in bookings, with applied bookings more than doubling. EMEA Commercial HVAC bookings increased by high teens, and Asia Pacific Commercial HVAC bookings were up mid-30s. Equipment revenue in Americas Commercial HVAC grew low teens, and Services grew low double digits. Residential bookings and revenues declined ~30% and 20% respectively. Americas Transport refrigeration bookings were up low teens, while revenues were flat. EMEA Transport bookings rose by high single digits, while revenues declined by low single digits. Services constitutes approximately 1/3 of total enterprise revenues, with low double digits year-to-date growth and a low-teens compound annual growth rate since 2020.
• Residential: Bookings and revenues declined approximately 30% and 20%, respectively, consistent with the September update.
• Transport Refrigeration: Americas: bookings up low teens, revenues flat; EMEA: bookings up high single digits, revenues down low single digits.
• Services: Durable growth driver, low double digits YTD, low-teens CAGR since 2020

Guidance

• 2025 organic revenue growth ~6%, adjusted EPS range $12.95-$13.05 (up 15%-16% Y/Y).
• 2025 Q4 expected organic revenue growth ~3%, excluding Residential ~7%, adjusted EPS range $2.75-$2.85.
• 2026 guidance to be provided in Q4, expects strong growth in Commercial HVAC, Residential (tale of 2 halves), Americas Transport (tale of 2 halves), and Services

Risks

• Residential Market Slowdown: Impacting bookings and revenues.
• Americas Transport Softening: ACT forecast for 2025 softened, with Q4 down over 30%.
• Timing of Deliveries: Some customer delivery dates moved from Q4 to 2026.
• Supply Chain/Construction Pace: Potential impacts on shipment timing

Q: I wanted to ask about Americas margins. You guys put up a 40% incremental almost in Q2. Q3 was like 50% despite negative mix away from Resi. So I guess kind of my question is really on the service margins. As the company adds technology and fixed assets to the service or aftermarket business, is there an opportunity for service incremental margins to improve versus history because it feels like we're effectively kind of replacing more variable human costs with more static fixed costs, whether it be technology or something else? Any thoughts there would be helpful.

A: Chris Kuehn: Very happy with the Americas margin performance in the third quarter. Operating income margins were nearly 22%, up 120 basis points on a year-over-year basis. And when you think about service, we've described service margins to be higher than the segment average. They're higher than equipment margins. And we continue to invest strongly in that space across front-end tools, service technicians, sales account managers. And I think we like the path that those margins should be ongoing forward. There's absolutely an opportunity for those margins to expand. David Regnery: Yes. And the only thing I would add, Chris, we're also investing heavily in our training organization. And we just opened a new training center here in North Carolina. And it's just we want to make sure our techs have the best tools in front of them in front of our customers. We want them to be the smartest as they can be. And all of our connected solutions, our training, it all adds up to technicians that are more productive. And by the way, our Service business is growing at a very nice rate as a result of that.

Q: I wanted to ask about organic growth between the applied equipment and light commercial. I know together, those grew low teens. Hoping you can give us a little bit more color on just the applied equipment side. And just given where the backlog and orders are for the equipment, obviously, the sustainable growth opportunity in service. Those 2 are kind of 50% of the business. Do you think growth can be maintained at the current levels, accelerate, decelerate because you have large numbers? Like what should be the right expectation prospectively for those growth rates for those 2 particular parts of the business?

A: David Regnery: Yes. Look, applied was very strong, okay, very strong. Unitary was positive. I guess that's a good news, but it was -- it has not been a big contributor this year to our growth. We'll see how it plays out next year. As far as services goes, look, our Service business is very consistent. And we continue to put up nice growth rates there. We have -- if you go back to 2020, our compound annual growth rate, as I said in my prepared remarks, it's in the low teens, which is very, very strong. And by the way, that doesn't happen by accident, okay? We have a very detailed operating system around our Service business that allows us to do that. And if you think about all what's happening with our applied solutions and the installed base continuing to grow, look, the future is very, very bright for our Service business.