Trane Technologies plc (TT) on Q1 2022 Results - Earnings Call Transcript
Operator: Good morning. Welcome to the Trane Technologies Q1 2022 Earnings Conference Call. My name is Chantel, and I will be your operator for the call. The call will begin in a few moments with the speaker remarks and the Q&A session. At this time, all participants are in a listen-only mode. To allow time for everyone to ask a question, please limit yourself to one question and one follow-up. I will now turn the call over to Zach Nagle, Vice President of Investor Relations. Zach Nagle: Thanks, operator. Good morning, and thank you for joining us for Trane Technologies first quarter 2022 earnings conference call. This call is being webcast on our website at tranetechnologies.com, where you'll find the accompanying presentation. We are also recording and archiving this call on our website. Please go to slide 2. Statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities law. Please see our SEC filings for a description of some of the factors that may cause actual results to differ materially from anticipated results. This presentation also includes non-GAAP measures, which are explained in the financial tables attached to our news release. Joining me on today's call are Dave Regnery, Chair and CEO; and Chris Kuehn, Executive Vice President and CFO. With that, I'll turn the call over to Dave. Dave? Dave Regnery: Thanks, Zach and everyone, for joining us on today's call. Let's turn to slide number 3. I'd like to open with a few comments on our purpose-driven strategy, the engine that enables us to deliver differentiated shareholder returns over time. Our strategy is firmly rooted in our purpose to challenge what's possible for a sustainable world and aligned to the mega trends that are only getting stronger. We are seeing the impact of climate change on the world every day, including more extreme weather events and far-reaching effects on air quality, water quality, food production and human health. The science is clear. There is no time to wait. The world must take action now to limit global warming and mitigate the effects of climate change. That's where our purpose meets our strategy. Trane Technologies is already taking action to dramatically reduce emissions through innovative solutions that drive electrification, energy efficiency and emissions reductions for commercial buildings, homes and transport. We have set aggressive science based emission reduction targets that continue to push our innovation further and faster. Customers continue to choose us as their partner in achieving their sustainability goals while improving performance and efficiency. Our relentless approach to innovate, strong customer focus and purpose-driven culture enable us to consistently outgrow our end markets. This in turn helps us drive strong margin and powerful free cash flow to deploy through our balanced capital allocation strategy. The end result is strong value creation across the board, for our customers, for our team, for our shareholders and for the planet. Moving to slide number 4. While we'll cover the details of the quarter and our outlook throughout our discussion today, the primary message I'd like investors to take away from today's call is that the company has never been in a stronger position to deliver highly differentiated financial performance and shareholder returns over the long-term. Our end markets are strong. And our innovation leadership is at the apex of powerful secular mega trends of energy efficiency and de-carbonization, which is enabling us to win customers at an unprecedented pace. Our business operating system remains at the core of everything we do and is delivering strong price realization to offset the impact of inflation, which is running at multiples of even the highest historical levels. And our balance sheet, liquidity position and ability to deliver strong free cash flow provides a solid financial foundation. We have exceptional firepower and optionality to not only navigate near-term macro challenges, but to flourish as they abate. Our strong performance in the first quarter is ahead of our initial guidance expectations on both incremental price to offset higher inflation and on volume growth, while it's still early in the year and the macro environments remain very dynamic, our performance in Q1 and serves to increase our confidence that we're on pace to meet or exceed our full year guidance. Our booking levels remain extremely high, reflecting strong share gains in virtually every area of our business, with supply chain challenges impacting throughput in the near term. The absolute booking levels we've delivered over the past year have been extraordinary. There was a tendency to focus on bookings growth trends, but growth trends may be misleading when absolute numbers move step functions higher than any historical reference period. We encourage investors and analysts to consider both absolute bookings and bookings growth to get a fuller picture. Our first quarter provides a prime example. Organic sales were up 12%, while organic bookings were up about half that amount, up 6%. A fairly normal reaction to bookings growth being half the level of revenue growth might be to assume that the book-to-bill ratio would be negative and that backlog would be lower as a result. However, given our tremendous bookings growth in Q1 of 2021 of over 30%, absolute bookings in the first quarter of 2022 were still extremely high at $4.3 billion. Even with strong revenue growth of 12%, absolute revenues in the first quarter of 2022 were $3.4 billion. It maybe counterintuitive, but bookings exceeded revenues by more than $800 million. Our book-to-bill was extremely strong at 129% and our backlog grew more than 50% year-over-year. Backlog also grew $800 million or 15% sequentially from Q4 to Q1. Given extremely high levels of bookings throughout 2021, we believe this is an important area to watch to gauge strength as we move forward. With $16.8 billion in bookings and $14.1 billion in revenues in fiscal 2021, the dynamic I referenced as an example from Q1 will be present throughout the year. As I look at our business, the strong secular trends, our leading innovation, unprecedented customer demand, and record backlogs and the financial health of our company, I'm very bullish about the future. We have all the fundamental ingredients to deliver differentiated financial performance and strong shareholder returns over the long term. Please turn to slide number 5. On Earth Day, we released our 2021 environmental, social and governance report. The report highlights our notable progress towards our science-based greenhouse gas emissions reduction targets, diversity and inclusion commitments and other sustainability goals. I am proud of the progress we made last year. We exceeded or met nearly all of our annual targets on our glide path towards our 2030 sustainability commitments. We reduced carbon emissions, energy use, waste and water. In addition, we increased the representation of women in leadership and workforce diversity reflective of our communities. I encourage you to read the full report. It's available on our website. Building on the momentum captured in our 2021 report, I'm happy to announce that we recently learned that our 2050 net zero targets were validated by the science-based target initiative. At this time, we are the first company in our industry and one of only 11 companies globally to have 2050 net zero targets validated. This is another example of how we are leading and challenging what is possible for a sustainable world, and we encourage like-minded companies to join us. Looking forward, I am confident we will continue to innovate, take bold actions and transform the world for a better tomorrow today. Please turn to Slide number 6. Customer demand for our climate-focused innovation continues to grow. We delivered another quarter of robust organic bookings, up 6% in the first quarter. Organic revenues were also strong, up 12%. Supply constraints are impacting each of our segments, with particular tight supply as we move up the food chain on product complexity. Generally speaking, the more intelligent and complex the product, the more chipsets they require and the more constrained the supply in the near term. Given extremely high levels of demand and backlog more than double historical norms, unconstrained revenues would be significantly higher in every segment. As mentioned previously, our bookings in the quarter totaled $4.3 billion, far exceeding our revenue of $3.4 billion, which were in part constrained by global supply chain and other macro challenges. With these robust bookings, our backlog grew to a record $6.2 billion. Our Americas Commercial HVAC business continues to deliver extremely strong bookings. Over the past four quarters, bookings growth has averaged nearly 30%, and Q1 bookings were up approximately 35%. Strength was broad-based, with applied and unitary each up more than 50%. Service bookings were also strong, up mid-teens. Demand for our comprehensive solutions remained strong and contributed to our low-teens organic revenue growth in commercial HVAC Americas. The residential HVAC markets also remained strong. Our residential HVAC team delivered mid single-digit bookings growth and low-teens revenue growth in the quarter. As expected, Transport Americas bookings were down in the quarter on tough prior year compare and because we intentionally constrained demand in order to manage inflationary risks. Unconstrained demand would be much stronger, but customers understand the dynamics and are working closely with us on slots. Bookings remained at healthy levels, with bookings in excess of revenues in the quarter and adding to backlog sequentially from Q4. Revenues were strong, up mid-teens. Turning to EMEA. We continue to see strong demand for our innovative products and services that help reduce energy intensity and greenhouse gas emissions for our customers. EMEA commercial HVAC bookings were up low teens and revenues were up low single-digits. As expected, transport bookings were down on tough prior year compares. Similar to our America Transport business, we are intentionally constraining demand in order to manage inflationary risks. Absolute bookings remained at healthy levels, with bookings in excess of revenues and backlog up sequentially from Q4. Revenues were strong, up high single-digits. Our Asia Pacific team delivered strong bookings and revenue growth of 14%, supported by broad-based growth in China and across the region. Now I'd like to turn the call over to Chris. Chris? Chris Kuehn: Thanks, Dave. Please turn to Slide number 7. Organic revenue growth in the quarter was driven by both strong volume growth and continued strong price execution. Turning to margins. We drove strong core incremental margins of approximately 30%, on solid volume growth of 5%. Volume growth was stronger than expected due to our outstanding performance by our teams and partnership with our suppliers in what remains a choppy supply chain environment. Strong price execution through our business operating system also enabled us to neutralize the impact of higher inflation on a dollar basis, but it was about a 100 basis point headwind to margins in the quarter. Productivity was significantly impacted by continued supply chain challenges, including choosing to incur expedited freight costs and spot buys, consistent with our customer-focused business model. In addition, we continue to make strong incremental business reinvestments, supporting our sustainability focused strategy. All in, adjusted EBITDA and operating margins declined 70 basis points. Adjusted EPS grew 11%, driven primarily from higher adjusted operating income. Please turn to Slide number 8. We discussed the key revenue and margin dynamics for the enterprise on the prior page. The dynamics impacting revenue and margins were similar across each of our business segments, with volume growth, strong price realization, incremental business reinvestments, and innovation and macro challenges impacting productivity and cost inflation as consistent drivers. Our Americas segment delivered strong price execution, slightly ahead of material inflation and offsetting expected negative impacts from negative price/cost in both our EMEA and Asia Pacific segments. Consistent with our prior guide, we expect price/cost to improve throughout 2022 in each region. And we expect to be price/cost positive on a dollar basis for the full year for the total company. Now I'd like to turn the call back over to Dave. Dave? Dave Regnery : Thanks, Chris. Please turn to Slide number 9. As we've discussed throughout the call, underlying demand for our innovative products and services have never been higher, with unprecedented levels of bookings and backlog across our businesses. Commercial HVAC Americas has significantly outperformed the broader markets over a number of years through relentless innovation for our customers. We're driving unprecedented demand, with orders up nearly 30% over the past four consecutive quarters, which is indicative of our clear market leadership. And we're exiting the first quarter with another quarter of record backlog, up more than 70% year-over-year and more than double historical norms. End markets remain strong, with a variety of economic indicators pointing to growth in 2022. Unemployment is low. And indicators like the Architectural Billing Index, which has been over 50 since February of 2021, remain favorable. Demand remains strong in data center, warehouse, education and health care. Everyday we see customers establishing their own sustainability targets, creating decarbonization road maps and helping them to achieve their targets with our customized system-based approach. We're helping our K-12 customers deploy federal stimulus funds to improve the indoor air quality of schools. We see both decarbonization and indoor air quality as multiyear tailwind for our business, given our deep customer relationships and expertise. Demand for our residential products remains strong. We entered the second quarter with tailwinds from record backlog and expected strong price realization. We see headwinds from lapping tough growth compares from 2021. Turning to Americas Transport. AC projects continued market growth through their forecast horizon of 2023. I'll talk more about transport outlook in our topics of interest section. Turning to EMEA. While we have muted expectations for market growth, with a volatile geopolitical backdrop continuing, demand for our sustainability-focused systems and services remain strong, and we continue to see good opportunities for market outgrowth. Turning to Asia. We are monitoring the COVID lockdowns in China and their broader impact on the region. Outside of Shanghai, we have a plant impacted by the lockdowns that provide equipment or components to support our customers in China and the rest of Asia. Our guidance assumes China reopens mid-May. And any revenue impact due to the China lockdowns during Q2 will be recouped in the second half of the year. For the year, we continue to see underlying strength in China's data center, electronics, pharmaceutical and health care markets. Outside of China, the picture is mixed, with COVID-related lockdown still impacting market expansion in some countries. Our direct sales model is differentiated in the region and provides good opportunities for market outgrowth in both equipment and services. Now I'd like to turn the call back over to Chris to outline our guidance for Q2 and full year 2022. Chris? Chris Kuehn: Thanks, Dave. Please turn to Slide number 10. Based on the market outlook Dave just outlined and our strong bookings and backlog, we are on track to deliver strong financial performance in 2022. We are updating our full year organic revenue growth guidance to approximately 10%, primarily to reflect additional strong price realization to offset persistent material inflation. Our adjusted EPS outlook remains unchanged, between $6.95 and $7.15. We continue to expect a stronger second half, with an improving supply chain and product redesigns coming online that will help us serve our customers better and provide added resiliency to our supply chain. Our updated operating leverage outlook of approximately mid-teens contemplates both additional price realization and additional material inflation. We continue to expect price cost to be slightly positive for the year on a dollar basis. We expect free cash flow to remain strong and equal to or greater than 100% of adjusted net income. Our outlook includes capital expenditures of approximately 2% of revenues and high ROI projects in support of our profitable growth objectives and our sustainability commitment. These high ROI projects include manufacturing automation, supply chain resiliency as well as investments to further decarbonize our operation. Our free cash flow outlook also includes modest investment in working capital, with a particular focus on strategic inventory to support continued growth. Please turn to Slide number 11. While we traditionally provide annual guidance, given the dynamic macroeconomic environment, we believe it may be constructive to provide an outlook for the second quarter based on what we see today. For the second quarter, we expect core organic revenue growth of approximately 10% to 12%. As mentioned previously, our second quarter Asia Pacific revenues are expected to be negatively impacted by the lockdowns in China by approximately $80 million to $100 million, a headwind of approximately 2% to 3% for the total company. Our guidance assumes China reopens mid-May. And any revenue headwinds due to the China lockdowns during Q2 will be recouped in the second half. Net, we expect our organic second quarter revenues to be up high single-digits and expect continued strong price realization. At this stage, we expect to offset inflation with price on a dollar basis, which carries a heavy margin headwind for the quarter. We see macro supply chain challenges continuing to hamper productivity. We also expect continued expedited freight costs and spot buys as we focus on meeting our customers' needs for sustainable solutions. As we discussed on the prior slide, our full year outlook contemplates a stronger second half, with an improving macro environment. We'll continue to update our full year outlook as the year goes along. Please go to Slide number 12. We remain on track to deliver $300 million of run rate savings from business transformation by 2023. Importantly, we continue to invest in these cost savings and high ROI projects to further fuel innovation and other investments across the portfolio. We've highlighted some of our innovation for decarbonization on Slide 21 of this presentation for your reference. Please go to Slide number 13. We remain committed to our balanced capital allocation strategy, focused on consistently deploying excess cash to opportunities with the highest returns for shareholders. First, we continue to strengthen our core business through relentless business reinvestment. Second, we're committed to maintaining a strong balance sheet that provides us with continued optionality as our markets evolve. Third, we expect to consistently deploy 100% of excess cash over time. Our balanced approach includes strategic M&A that further improves long-term shareholder returns and share repurchases as the stock trades below our calculated intrinsic value. Please turn to Slide number 14, and I'll provide an update on our capital deployment in 2022. In the first quarter, we deployed $506 million in cash, with $350 million of share repurchases and $156 million to dividends. Our Board also authorized an additional $3 billion for share repurchases, bringing our total remaining share repurchase authorization to $4 billion as of the end of the first quarter. Turning to M&A. We completed a small channel acquisition in April, and our M&A pipeline remains active. All in, we're on track to deploy approximately $2.5 billion in cash in 2022, inclusive of $1.9 billion between M&A and share repurchases. Our strong free cash flow, liquidity and balance sheet continue to give us excellent capital allocation optionality and dry powder moving forward. Now I'd like to turn the call back over to Dave. Dave? Dave Regnery: Thanks, Chris. Please go to Slide number 16. Global transport markets are expected to remain healthy through 2023. ACT has recently moderated their expectations for transport growth in North America for 2022, largely driven by expected OEM trailer supply chain constraints. European forecasts have moderated somewhat also, reflecting current OEM supply constraints and uncertainty related to the conflict in the Ukraine. Weighted average transport market growth in America is 8%, down about four points. EMEA market transport growth is forecasted to be flat, down about three points from our previous outlook. After clear share gains in truck, trailer and APU globally in 2021, we're expecting global outgrowth in 2022 as well. Please go to, slide number17. We've updated the transport growth outlook slide for North America in the slide deck for reference and additional transparency. ACT continues to call for a nine-year average for North America trailers, in the mid-40,000 unit range through 2023, with the pandemic in 2020 being the only significant outlier. Please go to, slide number 18. Energy efficiency, decarbonization and sustainability megatrends are only growing stronger. We are uniquely positioned to deliver leading innovation that addresses these trends, and accelerates the world's progress, supported by our business transformation and our engaging uplifting culture. Despite a number of persistent macro challenges, Q1 was a record quarter for us, which provides a solid foundation as we move into the rest of the year. While it's still early in the year, our first quarter performance and our outlook for the second quarter have us well positioned to meet or exceed our full year guidance. We're seeing unprecedented levels of demand for our innovative products and services. And our backlog has never been stronger. We're executing our business operating system well. And expect to continue to successfully navigate macro challenges with a customer-first mindset. We believe we have the fundamental ingredients, to deliver strong performance across the board in 2022 and beyond, and to continue to drive differentiated shareholder returns over the long-term. And now, we'd be happy to take your questions, Operator? Operator: [Operator Instructions] Our first question comes from Scott Davis with Melius Research. Your line is open. Operator: Our next question comes from Joe Ritchie with Goldman Sachs. Your line is open. Operator: Our next question comes from John Walsh with Credit Suisse. Your line is open. Operator: Our next question comes from Andy Kaplowitz with Citigroup. Your line is open. Operator: Our next question comes from Julian Mitchell with Barclays. Your line is open. Operator: Our next question comes from Josh Pokrzywinski with Morgan Stanley. Your line is open. Operator: Your next question comes from Steve Tusa with JPMorgan. Your line is open. Operator: Our next question comes from Nigel Coe with Wolfe Research. Your line is open. Operator: Our next question comes from Andrew Obin with Bank of America. Your line is open. Operator: Our next question comes from Deane Dray with RBC. Your line is open. Operator: We have run out of time for the Q&A session on today's call. I will turn the call back over to Zach Nagle for closing remarks. Zach Nagle: Great. I'd like to thank everyone for joining on today's call. As always, we'll be around to answer questions in the coming days and weeks. And we look forward to helping you to see you soon on the road, and be safe. Thank you. Operator: This concludes today's conference call. You may now disconnect.TT Ratings Summary
TT Quant Ranking
Related Analysis
Trane Technologies plc Reports Strong FY 2024 Start: Growth and Market Leadership
Trane Technologies plc (NYSE:TT) Showcases Strong Start to Fiscal Year 2024
Trane Technologies plc (NYSE:TT) has demonstrated a remarkable start to the fiscal year 2024, with its first-quarter earnings report revealing significant strides in bookings, revenues, and earnings per share (EPS). The company's ability to exceed $5 billion in bookings, a 17% organic increase, sets a new record and underscores its robust growth trajectory. This performance is further bolstered by a 14% growth in organic revenues and a substantial 230 basis points expansion in adjusted operating margins. The adjusted EPS also saw an impressive 38% increase, reflecting the company's operational efficiency and profitability.
A closer look at the drivers behind Trane Technologies' success reveals the pivotal role of its commercial HVAC businesses globally, particularly in the Americas. The Americas commercial HVAC business alone reported a 30% increase in bookings, with equipment bookings surging by more than 40% and services by over 15%. This broad-based growth across nearly all vertical markets highlights the company's strong market position and its ability to meet diverse customer needs. The applied solutions portfolio, known for its high margin services revenue potential, has been a significant growth leader, indicating the company's strategic focus on high-value offerings.
The company's forward-looking stance is evident in its Q1 ending backlog, which stood at $7.7 billion, marking a 10% increase from the end of 2023. The backlog for 2025 and beyond grew by $800 million to a total of $1.8 billion, enhancing visibility for future growth. This strong backlog, coupled with raised guidance for full-year revenue and EPS, reflects Trane Technologies' confidence in its continued performance and strategic investments in product innovation, increased capacity, and digital and automation technologies.
Trane Technologies' optimistic outlook is further supported by its stock performance and market position. Currently trading at $319.29, the stock has experienced a steady increase, with a notable 1.4% rise over the past four weeks. This positive momentum is mirrored in the company's Zacks Rank #3 (Hold) and a VGM Score of A, positioning it as an attractive option for investors. The upward revision of the Zacks Consensus Estimate for Trane's earnings to $10.20 per share for fiscal 2024, along with an average earnings surprise of 4.5%, underscores the company's strong financial health and potential for continued growth.
In conclusion, Trane Technologies' Q1 2024 earnings report and its stock performance present a compelling narrative of growth, strategic investment, and market leadership. The company's focus on innovation, efficiency, and sustainability, combined with its solid financial metrics and optimistic revenue and EPS guidance, make it a noteworthy contender in the HVAC industry. As Trane Technologies continues to build on its strong start to the year, it remains a stock to watch for investors seeking to capitalize on momentum in the stock market.
