Trane Technologies plc (TT) Q3 2025 Earnings Call Transcript

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Overview

The earnings call summary and Q&A responses indicate a positive outlook. The company has raised revenue and EPS guidance, expects strong growth in commercial HVAC and transport refrigeration, and has a solid free cash flow conversion. While there are challenges in residential HVAC, management anticipates improvement. The Q&A section highlights strong pipelines, innovation in data centers, and positive impacts from M&A. Despite some vague responses, overall sentiment is positive, suggesting a stock price increase.

Key Financial Performance

Record Quarterly Bookings $6 billion, representing organic growth of 13% year-over-year. Reasons for change: Elevated backlog, robust customer demand, and strong financial performance.

Adjusted Operating Margin Expansion 170 basis points. Reasons for change: Strong productivity levels and prudent cost controls.

Adjusted EPS Growth 15% year-over-year. Reasons for change: Robust growth in Commercial HVAC and Services businesses, strong productivity levels, and cost controls.

Free Cash Flow Robust (specific figure not provided). Reasons for change: Strong operational performance.

Americas Commercial HVAC Bookings 30% year-over-year growth. Reasons for change: High demand in core and high-growth verticals like data centers, and applied bookings more than doubling.

Americas Commercial HVAC Backlog $7.2 billion, increased by over $800 million or approximately 15% compared to year-end 2024. Reasons for change: Strong execution and expanding pipeline of projects.

Residential Growth Declined approximately 30% in bookings and 20% in revenues year-over-year. Reasons for change: Softer residential markets and channel inventory normalization.

Transport Refrigeration Bookings (Americas) Up low teens year-over-year. Reasons for change: Outperformance despite end markets being down over 25%.

Transport Refrigeration Revenues (Americas) Flat year-over-year. Reasons for change: Market challenges but strong execution.

EMEA Commercial HVAC Bookings Increased by high teens year-over-year. Reasons for change: Strong demand and market outperformance.

EMEA Commercial HVAC Revenues Grew by mid-single digits year-over-year. Reasons for change: Consistent performance and market demand.

EMEA Transport Bookings Rose by high single digits year-over-year. Reasons for change: Market outperformance.

EMEA Transport Revenues Declined by low single digits year-over-year. Reasons for change: End markets down mid-single digits.

Asia Pacific Commercial HVAC Bookings Up mid-30s year-over-year. Reasons for change: Strong growth in China and solid performance in the rest of Asia.

Asia Pacific Commercial HVAC Revenues Grew low teens year-over-year. Reasons for change: Rebound in China and strong volume growth.

Organic Revenue Growth (Americas) 4% year-over-year. Reasons for change: Strong volume growth in Commercial HVAC and positive price realization, offset by Residential business decline.

Adjusted EBITDA Margins (Americas) Increased by 90 basis points to over 23%. Reasons for change: Strong productivity and cost management.

Organic Revenue Growth (EMEA) 3% year-over-year. Reasons for change: Volume growth in Commercial HVAC and Transport businesses.

Adjusted EBITDA Margins (EMEA) Declined by 60 basis points. Reasons for change: Year-1 M&A-related integration costs and intensified channel investments.

Organic Revenue Growth (Asia Pacific) 9% year-over-year. Reasons for change: Strong volume growth and price realization.

Adjusted EBITDA Margins (Asia Pacific) Improved by 230 basis points. Reasons for change: Strong volume growth in China and productivity.

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Operating Highlights

High-efficiency solutions: Helping customers save energy and reduce operational costs while being environmentally friendly.

Innovation in Commercial HVAC: Record quarterly bookings of $6 billion, with a 13% organic growth year-over-year. Applied bookings more than doubled in the Americas.

Services business: Constitutes approximately 1/3 of total revenues, growing at a low double-digit rate year-to-date.

Americas Commercial HVAC: Bookings surged 30% year-over-year, with applied bookings growing over 100%. Backlog increased by $800 million or 15% compared to year-end 2024.

EMEA Commercial HVAC: Bookings increased by high teens, while revenues grew by mid-single digits.

Asia Pacific Commercial HVAC: Bookings up mid-30s, with strong growth in China and solid performance in the rest of Asia.

Adjusted operating margin expansion: Expanded by 170 basis points, with 15% adjusted EPS growth and robust free cash flow.

Cost management: Prudent cost controls and strong productivity levels implemented early in Q3.

Capital allocation: Deployed $2.4 billion year-to-date, including dividends, M&A, share repurchases, and debt retirement.

Focus on high-growth verticals: Targeting data centers and other high-growth verticals with innovative, highly engineered solutions.

Residential market strategy: Navigating a 20% revenue decline in Q3 and Q4 due to market normalization.

Long-term growth in Transport refrigeration: Investing in innovation to prepare for market recovery expected in 2026 and 2027.

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Risk or Challenges

Residential Market Slowdown: The residential market slowdown is the most significant change impacting the company's outlook. Bookings and revenues in this segment declined approximately 30% and 20%, respectively, in Q3, with expectations for Q4 revenue to be down approximately 20%. This has resulted in a combined revenue impact reduction of approximately $250 million for 2025.

Transport Refrigeration Market Decline: The Americas Transport refrigeration market is experiencing a significant downturn, with ACT's forecast for 2025 now down more than 30% in Q4. This has led to a revenue decline of approximately 10% in this segment, despite the company's efforts to outperform the market.

Timing of Customer Delivery Dates: In the Commercial HVAC Americas business, some customer delivery dates have shifted from Q4 2025 into 2026, impacting revenue growth for the current year by approximately 2 percentage points.

M&A Integration Costs in EMEA: Adjusted EBITDA margins in EMEA declined by 60 basis points due to year-1 M&A-related integration costs. While these investments are aimed at long-term growth, they are currently impacting near-term margins.

Channel Inventory Normalization: In the Residential segment, channel inventory normalization continues to impact revenue, contributing to the $250 million revenue shortfall for 2025.

Economic Sensitivity in Residential and Transport Segments: Both the Residential and Transport segments are highly sensitive to economic conditions, with the Residential market slowdown and Transport market decline significantly affecting the company's financial performance.

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Guidance & Outlook

Commercial HVAC Growth: Continued strong growth expected in Commercial HVAC businesses, which make up 70% of total revenues. Elevated backlog, up more than $800 million from year-end 2024, positions the company well for 2026 and beyond. High-growth verticals like data centers are key drivers.

Residential Market Outlook: Residential market expected to face challenges in the first half of 2026 due to tough comparisons, with improvement anticipated in the second half against easier comps. Long-term industry outlook remains healthy with a GDP-plus framework.

Americas Transport Business: Soft markets expected in the first half of 2026, with recovery anticipated in the second half. ACT projects trailer market to grow over 20% in 2026 and exceed 40% growth in 2027.

Services Business: Services business, comprising about 1/3 of enterprise revenues, is expected to remain a key growth driver in 2026 and beyond. Growth opportunities are particularly strong in Commercial HVAC, with a growing installed base and increasing mix of applied solutions.

2025 Adjusted EPS Guidance: Adjusted EPS guidance for 2025 is $12.95 to $13.05, reflecting a 15% to 16% year-over-year increase. Organic revenue growth for 2025 is anticipated at approximately 6%, with Q4 organic revenue growth expected at 3%.

Capital Allocation Strategy: Company plans to deploy 100% of excess cash over time, focusing on strategic M&A, share repurchases, and reinvestment in the business. Approximately $5 billion remains under share repurchase authorization.

Innovation and Digital Services: Rapidly growing connected services portfolio is seeing increased demand for digital performance optimization and demand-side management, particularly in the Energy Services business.

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Shareholder Return Plan

Dividends paid year-to-date: Approximately $840 million

Capital deployment target for dividends in fiscal year 2024: Included in the $260 million from M&A and $100 million from share repurchases made early in the year

Share repurchases year-to-date: Approximately $1.25 billion

Remaining share repurchase authorization: Approximately $5 billion

Capital deployment target for share repurchases in fiscal year 2024: Included in the $260 million from M&A and $100 million from share repurchases made early in the year

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Key Q&A

Q:What are the opportunities for service incremental margins to improve as the company adds technology and fixed assets to the service or aftermarket business?

A:Management is optimistic about the opportunity for service incremental margins to expand. They highlighted that service margins are higher than equipment margins and that investments in front-end tools, service technicians, and training are contributing to growth. A new training center in North Carolina was also mentioned as part of these efforts.

Q:Is there anything in the applied orders growth of over 100% that feels one-time or worth calling out?

A:Management noted that data center orders contributed significantly to the growth, with several large orders over $100 million. They acknowledged that data center orders can be uneven across quarters but emphasized the strong pipeline and robust demand.

Q:Why wouldn’t Americas Commercial HVAC equipment growth follow the reacceleration in bookings and set up for stronger growth in 2026 versus 2025?

A:Management expressed confidence in continued strong growth for the Americas Commercial HVAC business, supported by a consistent 3-year revenue stack of 50% and a strong backlog. They also highlighted balanced strength across verticals such as data centers, healthcare, higher education, and government.

Q:What is the outlook for Residential HVAC inventories and when might they be rebalanced?

A:Management is hopeful that Residential HVAC inventories will be rebalanced by the end of the year or at least by the first quarter of 2026. They cited anomalies in 2025, such as prebuys, refrigerant changes, and a short summer, as factors contributing to inventory buildup.

Q:Why has the operating leverage guidance increased despite a slight reduction in organic revenue guidance?

A:The increase in operating leverage guidance is attributed to strong cost management, leveraging scenario plans, and preserving investments for future growth. Management emphasized that they are managing all parts of the P&L and maintaining investments critical for long-term success.

Q:What was the price contribution to firm-wide revenues in the third quarter, and how is price discipline holding up in the Residential Americas market?

A:Price contributed slightly above 3 percentage points to firm-wide revenues in the third quarter. Management stated that the industry has remained disciplined in the Residential Americas market, and they are managing inflationary inputs to maintain a positive price-cost spread.

Q:What is the growth outlook for applied equipment and light commercial, and can growth be maintained at current levels?

A:Management reported strong growth in applied equipment and consistent growth in services, with a compound annual growth rate in the low teens since 2020. They are optimistic about the future, citing a detailed operating system and a growing installed base as key drivers.

Q:Can the company achieve accelerating revenue and earnings growth in 2026 given the current momentum in Commercial HVAC and potential improvement in Residential markets?

A:Management is optimistic about achieving top quartile financial performance in 2026, supported by strong Commercial HVAC backlog and order momentum. However, they acknowledged that the first half of 2026 will face tough comparisons due to down markets in Residential and Transport.

Q:Are applied bookings extending into 2027, and what are the lead times for these projects?

A:Most applied bookings are expected to ship within the next 15 months, with only a small portion extending into 2027. Management noted that lead times are generally 12-18 months, and they have expanded chiller capacity by 4x since 2023 to meet demand.

Q:What is the significance of the thermal management system design for NVIDIA, and what opportunities does it present?

A:Management highlighted their collaboration with NVIDIA as an example of innovation in the data center vertical. They emphasized the importance of working with technical leaders to develop advanced solutions and noted that such innovations are also being applied to core markets.

Q:What is the timeline for margin improvement in the EMEA region, and what factors are contributing to current margin pressures?

A:Margin improvement in EMEA is expected to continue into 2026. Current pressures are due to recent M&A with lower initial margins and investments in sales and service portfolios. Management expects sequential margin improvement and stronger revenue growth in the fourth quarter.

Q:What are the expectations for consolidated margins in 2026, and are there any variances to the typical planning cycle?

A:Management expects to maintain their long-term framework of 25% or better incrementals. They acknowledged that the first half of 2026 will face challenges in Residential and Transport markets but emphasized strong pipelines and investments to drive growth.

Q:What is the nature of the projects being won in the data center vertical, and are modular data centers becoming more common?

A:Management noted that modular data centers have been a trend for some time, reducing labor requirements on job sites. They emphasized their strong position in the data center vertical and the innovation driving their success in this market.

Q:What is the visibility for institutional business growth in 2026, and are there any signs of slowdown in this segment?

A:Management reported strong pipelines across all verticals, including institutional segments like healthcare and higher education. They have not observed a slowdown in institutional business and remain bullish on future growth.

Q:What are the company’s plans for expanding service capabilities in the data center vertical?

A:Management emphasized their strong commissioning capabilities and the ability to deploy resources to ensure data centers are operational on time. They highlighted this as a competitive advantage and a key strength in their service offerings.

Q:What is driving the step-up in EMEA bookings, and is the data center opportunity contributing significantly?

A:Management acknowledged data center orders in EMEA but noted that they are generally smaller than those in the U.S. The step-up in bookings is attributed to broader market strength rather than a significant contribution from data centers.

Q:What is the price/mix versus volume split in North America Residential HVAC, and what are the expectations for 2026 price increases?

A:In the third quarter, Residential HVAC revenue was down 20%, with volumes down 30% and price/mix contributing positively by 10 points. Management plans to evaluate cost inputs and market conditions before determining 2026 price increases.

Q:How is the integration of BrainBox AI impacting service margins, and what are the growth prospects for connected services?

A:The integration of BrainBox AI is enhancing service margins through advanced AI-driven building optimization. Management highlighted strong growth prospects for connected services, citing a pilot project that delivered over 30% energy savings for a customer.

Q:What is the company’s approach to M&A, and are there specific areas of focus for future acquisitions?

A:Management plans to remain opportunistic and disciplined in their M&A approach, focusing on opportunities that align with their strategic goals. They highlighted software-centric acquisitions as a potential area of interest.

Q:What is the geographic distribution of data center demand, and how does it vary by region?

A:Data center demand is strong in the U.S., with larger projects compared to EMEA, where data centers are generally smaller. Significant activity is also noted in the Middle East, particularly Saudi Arabia, and in parts of Asia like Singapore and Australia.

Q:What is the status of investments in liquid cooling start-ups, and how are they contributing to innovation?

A:Management highlighted their investment in LiquidStack as a successful partnership that fosters innovation. They emphasized the collaborative nature of these investments and their contribution to advancing cooling technologies.

Q:What is the year-over-year growth in Commercial HVAC backlog, and how does it compare to enterprise backlog trends?

A:Commercial HVAC backlog is up mid- to high single digits year-over-year, while the enterprise backlog is roughly flat. The mix of backlog continues to shift more towards Commercial HVAC.

Q:What is the difference in performance between captive and independent distribution channels in Residential HVAC?

A:Sell-through in Residential HVAC was down high single digits, while sell-in was down slightly more than 20%. The performance difference between captive and independent channels was not explicitly detailed.

Q:Review of Unclear Management Responses

A:Management avoided providing specific details on certain topics, such as the exact timeline for Residential HVAC inventory rebalancing, the precise impact of M&A on 2026 earnings, and the specific contributions of data center orders to EMEA bookings. Additionally, they used vague language when discussing the potential for accelerating revenue and earnings growth in 2026, emphasizing general optimism without concrete projections.

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Earnings Word Cloud

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The earnings call summary presents a mixed picture: strong commercial HVAC growth and raised guidance are positive, but declining margins and revenue in Asia Pacific, along with unresolved issues in the transport business, offset these gains. The Q&A reveals strong market positions and resolved supply issues, but management's lack of specifics on growth rates and financial metrics introduces uncertainty. Considering these factors, the stock price is likely to remain stable, leading to a neutral sentiment rating.

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