Trane Technologies plc (TT) Earnings Call Transcript & Summary

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 Kuehm. Maybe just to start, Dave, if you want to give a couple of opening remarks.

Let's get to the Q&A. But first of all, thanks for coming today. Look, when I saw all the investors that we're 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 Train technologies and not only all about the success we've had in the past, but really where we're going in the future. And we're the company that's basically doubled our top line in the last 6 years. And we have so many opportunities in front of us. And I know we're going to get a lot of questions on data centers, and that's all -- that's fine. I just want everyone to know. We're more than data centers, okay? So 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. So with that, I'll quickly turn it over to you, Tim.

So we'll wait 5 minutes on a data center question. But maybe just start within commercial HVAC. I mean, you have kind of consistently talked about having 14 different kind of verticals that you track and you're seeing a lot of growth kind of across the board. Maybe just kind of go through the heat map and kind of where are you seeing better growth, where maybe things a little bit sluggish?

Yes. 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're able to go really, really deep on all of these different verticals. And we said at the end of -- during our third quarter call that we've seen growth in 11 of 14 verticals. So look, data centers is very, very strong. I think we all know that. But we're also seeing a lot of great activity in industrial, high-tech industrial Health care is very strong for us. Even some of the expectation verticals are very strong as well. So it's broad-based growth that we're seeing. It's not just data centers, but data centers are very, very strong.

And on that point, like if you think about reshoring, you think about pharma, what are -- how are the complexity. How is the cooling kind of complexity changing? And how does that kind of [indiscernible] what strategy?

I think our systems continue to become more and more advanced, okay, from an energy efficiency point. 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. So think of smarter 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 environment all things that are very, very applicable to train technologies and our -- the breadth of our portfolio really allows us to capture those opportunities in all these different verticals.

And I guess like when you think about like decarbonization kind of globally? I mean, where are you in kind of the -- I guess where is the market in terms of just [ decarb ] or is that kind of a continuous kind of opportunity for [indiscernible].

It depends where we are in the world, okay, number one. And obviously, here 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 listened 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. So that's not changing. And most people have forgotten that 30% 30% of all the world's energies for heating and cooling of buildings, 30%. And we know because we've done hundreds of thousands of energy audits that most buildings operate very inefficient. In fact, most buildings waste about 30% of the energy that they pay for. So I mean, if you think about it, it's just like, oh my gosh, you're paying for this, and forget about the transmission. That's a different problem that we're solving. But after the meter, right? So where buildings are actually paying for it, they're wasting 30%. And that's the opportunity that we have. So 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've got to save a lot of money. It's going to be very accretive to you. And by the way, your carbon footprint is going to be reduced. If I was in Europe, we'll be leading with sustainability. I just came back from -- I was in Monday, I was in England, and we are still selling jobs there where we're replacing boilers with heat pumps. And 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 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, and it's important to make sure that we all understand how we can make our carbon footprint lower for the future of our planet. And I would tell you that, that will change here in the United States. And when it does, I want you to be very leery about all the companies that were out there 2.5, maybe 3 years ago, talking about sustainability and their sustainability commitments and then stop talking about it. Now when they start talking about it again, I want you all to remember, Train technologies never stopped talking about it, and it's still very, very important to us. In fact, we just had a town hall meeting on a quarterly basis with all of our employees, and we were talking about our 2030 sustainability commitments. And we're talking about the gigaton challenge. If you remember, we had this in 10 years, we had cumulatively save our customers a gig a ton of carbon. And 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 road map to get there. We knew technology would be part of it, and it's proven not true. Today, we will surpass that number. I'm super proud of what we've been able to accomplish as a company.

And how does something like -- how does something like brain box kind of help you in that? It's a small acquisition. But I mean, it seems like it's pretty powerful.

Yes. I mean think of it as Agentic controls. So 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're redesigned at. With rain box, you're getting -- 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 brain box, 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 brain box. So that's one aspect of brain box. The other is cloud BMS. We're a leader in cloud with brain box. 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 very -- it's a great acquisition. We're super excited to -- I guess it's been 2 years?

Yes, it will be 2 years and think about that last ARIA, the first service tax, right? Services is 1/3 of the enterprise revenues. It's been growing the low teens CAGR for the last 5 to 6 years. And we think about productivity and investments you put into that fleet, there's 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. BrainBox has been a great acquisition for us.

It has. It has definitely Maybe we'll go into the data centers for a few minutes? 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 designs. I know how we're designing data centers for tomorrow. And I would tell you that if that -- as these trade-offs become more prominent in this space, in this vertical, you're going to see a company like train technology is leading. This plays to our strength. And 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. We -- 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. And 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 5 years ago when I brought this up, people tell me we were nuts that it's low grade, it's a 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 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 reduced utility rate. Those are the types of things that you're going to start seeing happen more and more. And 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 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 train technology. So 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 and maybe they just know more and they get smarter, which is a good thing. They're flexible. I don't see this slowing down.

And 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, chipsets from now. So how do you kind of see the technology road map 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 chiller 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 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. So let me give you a real-life example. So 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 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 [indiscernible] cooling would be another one where you'd sit there and say, "I'm not going to design I'm going to design for 95% use. If I happen to have an extreme, I'll use [indiscernible] cooling to get there versus having everything designed at that extreme level. So those are the things that are happening right now, and those are part of the reference design of the future. And 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 is going to look like. So 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 meat or adding to the grid, how does that make it more sustainable. This is all -- you'll hear more and more about this as we continue to evolve in this space. Data centers are not going 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. And 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, right? If you think about, if you follow data centers today, the PUE of a data center today, it's -- whether it's 1.1 or 1.2 , they're very efficient. Data centers years ago were at close to 2 or over 2. So there's a whole opportunity there that is just not even really been tapped yet about how you take old data centers that have power okay, 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.

And have you seen -- when you're talking to your customers, I mean, it sounds like you have, but like, 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. And so are you starting to see customers start to say, hey, how can you help us reduce the power needed for cooling then we can actually get more.

All of that makes your power usage go down, right? If you're 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's 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 and when you have a signed PO, you have a clear line of sight to build. All right? I think you'll hear -- you're 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. And there's 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.

And then how do you think about the replacement kind of opportunity? Because I mean this is -- the equipment that you're putting in these facilities is not like in this hotel, right, in terms of usage. And so you're going to have a lot more run time. They're going to kind of be used all the time. How do you think about the replacement opportunity? And then when does service start to kind of kick in?