Trane Technologies plc (TT) — Q1 2026 Earnings Call Transcript

Thanks, operator. Good morning, and thank you for joining us for Trane Technologies First Quarter 2026 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 note that statements made today are forward-looking and may differ materially from actual results as detailed in our SEC filings. This presentation also includes non-GAAP measures explained in our news release and presentation appendix. Joining me today 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?

Thanks, Zac and everyone, for joining today's call. Please turn to Slide 3. I'll start with a few thoughts on how our purpose-driven strategy continues to fuel strong performance over time. The dynamic global environment and rising demand for power is pushing customers to think differently about energy. With our leading innovation, Trane Technologies is uniquely positioned to win. Our high-efficiency systems and smart controls help customers save energy, lower operating cost and increase resiliency, proving that sustainability and performance go hand-in-hand. Our strategy is built on a strong foundation, our robust business operating system, a powerful cash flow engine and an uplifting, engaging culture. This formula positions us to deliver differentiated long-term value to our people, our customers, our shareholders and our communities. Please turn to Slide 4. Q1 was another strong quarter, marked by exceptional enterprise organic bookings, up 24% and a record backlog of $10.7 billion, up over 30% versus year-end 2025. We delivered organic revenue growth of 3%, led by our Americas Commercial HVAC business and double-digit global services growth. This strong performance translated to adjusted EPS growth of 7%. Our Commercial HVAC businesses delivered outstanding performance, particularly in the Americas, where our commercial HVAC bookings reached an all-time high, up approximately 40% year-over-year, with Applied Solutions bookings up over 160%. Our third consecutive quarter of applied bookings growth of greater than 100%. The strength of our Commercial HVAC business is further underscored by our combined Americas and EMEA backlog, which is up approximately $2.7 billion over year-end 2025. This includes approximately $1 billion from our acquisition of Stellar Energy, a leader in modular data center cooling solutions. We are exceptionally well positioned for continued growth in 2026 and beyond. Our exceptional bookings and record backlog provides strong visibility to continued market outgrowth and revenue growth acceleration in the second half of the year. Our robust and rapidly growing Commercial HVAC pipeline across key verticals, including long-term capacity and master purchase agreements in data centers, bolsters our confidence in the long-term outlook. Our services business, which represents one-third of our enterprise revenue, continues to be a consistent and durable growth driver, boasting a low teens compound annual growth rate since 2020. Additionally, we anticipate residential market tailwinds in the second half of 2026 driven by improving market fundamentals and easier prior year comparisons. The Americas transport market also continued improvement in fundamentals, strengthening the outlook for a late 2026 and 2027 recovery. Operational excellence is core to everything we do, and we expect to mitigate tariff and inflationary pressures through our business operating system. Altogether, we are raising our full year revenue and EPS guidance, which Chris will cover shortly. Please turn to Slide 5. As discussed in our Americas segment, Commercial HVAC continued its standout performance with bookings up approximately 40% and revenues up high single digits. In high-growth verticals like data centers, customers expect innovative, highly engineered solutions tailored to their unique needs. This plays directly to our strengths, including leading innovation, system expertise, proven operational excellence and the capacity to grow with our customers as their needs rapidly expand. These factors and the expertise of our direct sales force enabled us to capture a significant share of these opportunities. Turning to residential, bookings were up low single digits, while revenues declined mid-single digits, exceeding our expectations entering the quarter. In Americas transport refrigeration, bookings were up double digits and revenues were up low single digits, significantly outperforming end markets, which saw truck, trailer and APU segments down double digits in Q1. EMEA results were solid and consistent with our expectations, excluding headwinds from geopolitical events in the region. In Asia Pacific, Commercial HVAC bookings were up high 20s and revenues grew low single digits in the quarter, led by the rest of Asia, where bookings were up approximately 50% and revenues were up low single digits. Now I'd like to turn the call over to Chris. Chris?

Thanks, Dave. Please turn to Slide 6. Dave covered many key points from this slide earlier, so I'll keep my comments brief. Organic revenue growth for the enterprise was solid, up 3%, led by services growth, up double digits. Enterprise organic leverage was in the high teens and adjusted EPS growth was 7%, demonstrating the effectiveness of our business operating system and driving operational excellence throughout the P&L. Please turn to Slide 7. Margins across the segments were largely in line with our expectations, with the Americas and Asia operating margins up 10 basis points and 90 basis points, respectively. EMEA margins were impacted by expected first-year acquisition and integration-related costs and lower revenues than forecast in the Middle East. We also maintained high levels of business reinvestment across the portfolio in the quarter, driving our flywheel of innovation and growth. Now I'd like to turn the call back over to Dave. Dave?

Thanks, Chris. Please turn to Slide 8. Our outlook for 2026 remained strong, supported by our record bookings and backlog. Our Americas Commercial HVAC business is executing at a very high level, significantly outperforming end markets. We expect continued strength in data centers and other core markets like higher education, government and health care, just to name a few. Our Q1 book-to-bill was approximately 150% and our backlog is up nearly 70% year-over-year, strengthening our visibility into 2026 and beyond. Based on our exceptional backlog and the timing of customer deliveries, we expect approximately 10% revenue growth in Q2 against a tough prior year comp of mid-teens growth. We expect revenues to accelerate to low teens growth as we move through the second half of the year. In residential, we had a strong start to the year. We expect Q2 to be flattish, pivoting to growth in the second half aided by easier prior year comps. At this early stage in the year, our outlook remains prudent with flat revenues expected for 2026. Turning to transport, market fundamentals continue to improve and are increasingly supportive of a recovery in late 2026 and healthy growth in 2027. Our market forecast remains largely unchanged, with a mid-single-digit decline expected for full year 2026. We expect Q2 to be down roughly mid-teens based on the timing of large customer deliveries within the year. As we've discussed previously, given our strong mix of large customers, orders and revenues can be uneven from quarter-to-quarter. We significantly outperformed the transport markets in the first quarter and expect to outperform for the year. Turning to EMEA, our results to date and expectations for the year are largely unchanged, excluding impacts related to the Middle East. First and foremost, we have prioritized the safety of our employees in the region. We do expect continued headwinds in the second quarter of approximately $50 million in revenues, representing an estimated $0.05 EPS impact in Q2. We continue to monitor the situation closely. In Asia Pacific, China remains challenging with dynamic macro conditions. We expect the rest of Asia to be stronger than China in 2026. Overall, our outlook for the region remains flattish for 2026. Now I'd like to turn the call back over to Chris. Chris, over to you.

Thanks, Dave. Please turn to Slide 9. Our 2026 guidance reflects the market dynamics we've discussed, and operational excellence driven by our business operating system. It also incorporates our value creation flywheel, continued investment in innovation, market outgrowth, healthy leverage and strong free cash flow. We're increasing our organic revenue growth guidance to approximately 7%, the high end of our prior range of approximately 6% to 7%. Our reported revenue guidance moves to approximately 9.5% with unchanged estimates for approximately 2 points of M&A and 50 basis points of favorable FX. We're also increasing our adjusted EPS guidance range to $14.75 to $14.95, or approximately 13% to 15% of adjusted EPS growth, up from $14.65 to $14.85 prior. For Q2 2026, we expect approximately 5% organic revenue growth and adjusted EPS in the range of $4.20 to $4.25. For additional details, please refer to Slide 16. Please turn to Slide 10. We remain committed to our balanced capital allocation strategy, focused on deploying excess cash to maximize shareholder returns. First, we strengthened our core business through relentless reinvestment. Second, we maintain a strong balance sheet to ensure optionality as markets evolve. Third, we expect to deploy 100% of excess cash over time. Our approach includes strategic M&A to enhance long-term returns and share repurchases when the stock trades below our calculated intrinsic value. Please turn to Slide 11. We are on track to deploy between $2.8 billion to $3.3 billion in 2026 through our balanced capital allocation strategy. This includes approximately $900 million for dividends reflecting a 12% increase to $4.20 per share annualized in 2026. We deployed or committed approximately $340 million year-to-date for M&A and strategic investments. Our share repurchases year-to-date through April stand at approximately $300 million, and we still have approximately $4.4 billion remaining under our current share repurchase authorization, providing significant optionality. Our M&A pipeline remains active, and we will continue to be disciplined in our approach. Overall, our strong free cash flow, liquidity, balance sheet and substantial share repurchase authorization offer excellent capital allocation optionality as we move forward. Now I'd like to turn the call back over to Dave. Dave?

Thanks, Chris. Please turn to Slide 13. The Americas transport refrigeration market remains dynamic, but the long-term outlook is strong. ACT projects the market to bottom in the first half of 2026 and recover late in the second half. ACT also expects a sharp rebound beginning in 2027 and continued expansion through the end of the decade. We expect growth as well, but anticipate a more gradual slope to the recovery. We're managing the down cycle effectively, outperforming end markets and continuing to invest in innovation, so we're well positioned as the market strengthens. Please turn to Slide 14. In closing, our strategy is aligned to powerful secular tailwinds that position us to outperform. Megatrends around sustainability, digitalization, and rising energy demand are intensifying the need for our systems and services. Through breakthrough innovation and the strength of our people, we're delivering superior performance for our customers and advancing a more sustainable future. With our proven business operating system, record backlog and strong demand, we are well positioned to deliver differentiated shareholder value in 2026 and beyond. And now we'd be happy to take your questions. Operator?

I wanted to ask about the Americas applied orders. Just kind of keep getting better despite the bar already being very high. I think this quarter, you're up 160%. I guess my question is, are customers ordering with longer lead times than they were 6 or 12 months ago? When you guys look at this backlog, is the delivery schedule meaningfully different versus a year ago? Just trying to figure out a part of the strength is there's some extension in those lead times.

A little bit of confusion; let me try to clear it up. We have published lead times for all of our products. The published lead time on unitary products can be relatively short; in many cases we have stocked products, so it could be next day, all the way up through our applied solutions where you could have lead times around 30 weeks. From a lead time perspective, we're very competitive. We also offer a majority of our applied products with quick-ship programs, which if a customer had an emergency, we'd be able to respond to at a premium. So that's the lead time side of it. If you're asking when customers are ordering the products, that's a different question. In the past, on average we'd talk about 6 to 9 months. In some verticals, we are seeing that extend. Could it be 12 months, 18 months in some cases? Yes, depending on the customer and how much visibility they want us to have to ensure our supply chain is ready. So if you're asking from a customer standpoint, for sure it's a little bit longer. Customers want the security that their order is in and we're able to execute to it. From the lead times we publish that we can meet, that is as it's always been.

I appreciate you highlighting that distinction between the customers' ordering horizon and your published lead times because it does seem quite important. Maybe if I could just follow up on some of the cost and tariff changes that are in the market. Any impact on your back half price expectations in response to that? And more broadly, we hear a lot about difficulty or challenges of producing in the U.S. and others say it's uneconomical. You guys have proved the opposite. Can you talk about the advantages of producing in the United States? How have you been able to compete effectively while facing higher labor costs associated with domestic production?

Chris, thanks for the questions. I'll start and Dave will jump in. Tariffs and inflation are a dynamic environment with many changes since our last earnings call in January. On a net basis, we are expecting more inflation, including from raw materials and tariffs, than was estimated 90 days ago. We do expect inflation will put some near-term pressure on price-costs. However, we expect to manage this for the full year and it's baked into our guide. I'm not going to size the dollar impact for competitive reasons. For context, we've had an in-region, for-region manufacturing strategy for well over a decade at Trane Technologies. At the end of 2025, we had 21 factories in the Americas: 20 in the U.S. and one in Mexico. Since then, we've acquired Stellar Energy, which added production in Florida, and we're expanding capacity with a new site to open later this year in Texas. Over 95% of our products sold in the U.S. are manufactured and/or assembled in the U.S. We've had a strong track record managing through inflation and tariffs. There may be some short-term pressure, but it's managed in our guide. We'll continue to leverage our business operating system to mitigate inflationary impacts, including tariffs, over time. We'll work with suppliers to mitigate cost, look at alternative sources of supply, and price where necessary to offset cost. Our guide was around 1.5 points of price in January; it's probably a bit higher now, closer to 2 points at the enterprise level, but we'll continue to mitigate costs where we can and price where needed.

Chris, to follow up on how we stay competitive: our business operating system is a big advantage. We are strong operators at Trane Technologies. We like our plants in the United States and we like creating jobs here, and we do it in a very competitive way. Every time I visit one of our plants, I see continuous improvements and I get excited about the future for our company. We have over 21 plants in the Americas and we are very competitive, which you can see in our results.

Just wanted to start off with a question on operating leverage. Organically it was high teens in the first quarter and you've got that mid-20s baseline for the year. Maybe walk us through how we should think about the operating leverage playing out through the balance of the year organically. And I suppose the inorganic headwind to that shrinks progressively? Is that the fair way to look at it?

In the first quarter, leverage was consistent with our expectations. We did a bit better in the residential business and saw a headwind from the Middle East conflict impact. It was around high teens organic leverage in Q1. We see that improving as we move through the year: second quarter in the mid-20s range, and then mid- to high-20s in the second half. Organic leverage should accelerate as top line grows and converts to the bottom line in the second half, consistent with our January guide. We have even more conviction about the second half of the year and the guide. With easier comps in residential, growing top line, and transport improving, we expect to see strong leverage in the second half with the Americas Commercial HVAC executing on backlog and customer delivery timing.

One more point on residential: as we discussed on our fourth quarter earnings call, we're level-loading production. In the past we ramped up factories early in the year and then declined after the peak season. We've changed our playbook to level-load, so we're taking an absorption impact in the first half of the year, but that will come back in the back half of the year.

That's helpful. Maybe a follow-up on the residential HVAC side: any differences you're seeing in one-step versus two-step movement there? What's your confidence in the inventory level in the channel? Any early reads on the summer selling season as it starts soon?

We're very happy with our first quarter in residential. It came in a bit better than we anticipated, down mid-single digits. As for inventory, as we said on our fourth quarter call, we thought it was set properly in the independent wholesale distributor channel, and at the end of the first quarter we still say it's set properly. No change there. We have desired inventory levels and we're optimistic. At the end of the fourth quarter we thought residential could be down 5% for the year; we've now modified that to flattish. We're only in Q1, but early signs are we're executing well. We're more bullish than we've been for a while in residential and the team is doing a great job executing. We'll see how the rest of the year plays out.

Last quarter you talked about applied orders widening out beyond just data centers. Can you give a little color on that? What particular markets — I'm assuming that continued given the orders up 160% has to be pretty broad-based. Can you talk about some of the non-data center verticals that were strong for you?

Yes, it was broad-based, which is always encouraging. Data centers were very strong; however, from a revenue standpoint we had growth in the majority of the verticals we track, at least in the Americas. Nine of the 14 verticals had positive growth, so this is broad based. We have not lost focus on our core even though data centers are very strong. Over 95% of our account managers or sales force do not call on data centers and have deep domain expertise in other verticals. That expertise allows us to win. Mega projects continue to grow, data centers continue to grow, and our order rates continue to grow. It's going to be a great year for Trane Technologies.

To add on backlog: growth in the first quarter was about $3 billion. Of that, roughly $1.2 billion was from acquisitions, about $1 billion of which was Stellar Energy. That means we had about $1.7 to $1.8 billion of backlog growth from our core organic business. We typically see plus or minus a couple hundred million dollars in backlog swings each quarter, so this is very strong momentum in orders, backlog, and the pipeline remains very strong.

Are you operating full out in your factories and applied facilities right now? Are you fully capacitized or do you still have a little flex?

There is flex in some factories. We are operating at a high level, but capacity depends on the definition. The majority of our factories were running two shifts in many cases; some were only running one shift. So we have the ability to add shifts. We have expanded capacity over the last three years and have plans to continue expanding. We're making those investments now. Stellar added capacity, and we're expanding some applied factories as well.

We did raise our CapEx target for the year. Historically CapEx has been around 1% to 2% of revenue. We raised it to 2% to 3% of revenue to capture expanded production in Florida and Texas for Stellar and to stay ahead of growth, especially in our applied commercial HVAC business. We're still targeting greater than or equal to 100% of free cash flow even with the higher CapEx spend for the year.

Data centers continue to be strong. If you look globally at a market like Asia Pacific, it's still a tough market in China, but you did have 50% growth ex-China in bookings there. Do you see that broad-based growth outside China led by data centers or other end markets, and how should we think about that?

Data centers are strong globally, though outside the U.S. they tend to be smaller in size. They're strong everywhere. Our Asia team is calling Asia flat for the year, but outside of China we had nice growth and orders and a robust pipeline. I'm optimistic we could do a bit better than flattish in Asia Pacific for the year. In Europe, results were relatively strong in Q1 with orders and revenue as expected, so we're not concerned about Europe; that team continues to innovate. The Middle East is where we have the headwind we discussed earlier. The good news is our employees in the Middle East are safe and we're monitoring the situation closely.

I'm curious about your continued outperformance in Americas transport, pretty strong in Q1 versus the market. You expect a recovery late this year, maybe more gradual than ACT. Can you talk about why you continue to outperform, new products in the market, and the outlook as you move forward?

We continue to invest in innovation even in down markets; that is what makes great companies over the long term. Our innovations, product efficiency and quality drive outperformance. If you look at the trucking industry, Thermo King is the gold standard for a reason, and that team executes well. We're seeing signs of market improvement and expect a recovery in the back half of the year, with 2027 looking strong. ACT expects a sharp rebound beginning in 2027 and continued expansion, and we see growth too but perhaps on a more gradual slope. We're well positioned and the transport team executed well in Q1.

Dave, can you talk about what you think your TAM is within data centers and how Stellar may change that? When I think of Trane and data centers, I think large applied chillers, but now there are modular systems with Stellar and the conversion is very good. What does that do for your competitive offering within data centers and what does it do for your TAM?

Let me start with Stellar. It's a great business and we're excited to have it in the Trane Technologies family. Today Stellar specializes in building modular chiller plants for data centers. If we think about where we see Stellar in two to three years, consider it a business that could be a $1 billion business with mid-teens plus EBITDA serving many verticals, not just data centers. Skilled labor scarcity isn't unique to data centers; modular solutions help alleviate those shortages across verticals. We're excited about the acquisition. Today it has about $1 billion in backlog, roughly half of which ships in 2026. Expect modest accretion in 2026 as we invest heavily in the business. We're deploying our operating system to scale Stellar. We also added LiquidStack, expanding our offering in CDUs and bringing future-facing technology. As far as our position in data centers, we like it. We're viewed as thermal management experts. We work with hyperscalers, chip manufacturers and other influencers on reference designs and data centers of the future. Our breadth of expertise brings us into those conversations. TAM keeps expanding as the vertical evolves, and we continue to push innovation. It's a very strong vertical today and will be for the foreseeable future.

Maybe a follow-up: can you talk about data center service revenue and when you expect that to kick in? Services are one-third of the business mix today. How much of that is already data centers and how should we think about service revenue as data center mix increases?

With the end in mind, the service opportunity tied to data centers is still largely in front of us despite the growth in recent years. We've been in the data center vertical for decades, but historically it was one of many verticals. Complex applied systems require OEM connection and service and maintenance; data centers do not want downtime. Ensuring systems operate efficiently and rotating through products is very important. On Stellar modeling, we expect about $500 million of revenue from Stellar this year. The base business we acquired was around $350 million, which was part of our January guide for about 2 points of revenue contribution from M&A. We also anticipated about 25% growth off of that base. In April, we captured the entire $500 million in our guide; about $50 million incremental revenue was captured in April. It's an exciting business with a strong pipeline. We expect investments to scale it from $350 million to $1 billion-plus in two to three years.

One other comment on services: we invested in a large training facility in North Carolina that is one of the largest of its kind. I spoke to a class there where technicians were getting certified in data center commissioning. The talent and excitement among our technicians was impressive. We're making sure we're ready for the service opportunity in data centers and it's going to be a very engaging growth area for us.

There's a lot of conversation about behind-the-meter power and resulting changes in HVAC infrastructure in data centers. Can you talk about absorption chiller technology at Trane? What do you have, do you need to add capacity, and does technology need to evolve to support behind-the-meter needs?

Behind-the-meter needs are not only in data centers but in other buildings as well. Absorption chillers are a technology that's been around for some time and are getting renewed attention in data centers. There are also other technologies we are working on that use less water and can provide similar benefits—think of adiabatic cooling solutions implemented in clever ways. We're also working on direct current in data centers and other innovations. Some larger chip manufacturers publish reference designs that are instructive on what technologies could be used in the future. The behind-the-meter trend will happen across buildings, and we believe buildings will become smarter and more resilient. Our agentic AI software tools will help make buildings smarter by reducing energy waste—many buildings waste about 30% of the energy they pay for. Solving that problem delivers strong paybacks to customers and is beneficial for the environment. It's green for green: great for savings and great for the planet.

One more on data center: how has dialogue changed with customers since these acquisitions, and how does it increase your service presence inside data centers? How should we think about that?

Our dialogue with end customers hasn't fundamentally changed; we lead with deep domain expertise and direct relationships. We have the broadest portfolio in the industry and think at a system level rather than a product level. The service organization is a differentiator: when hyperscalers or colocation providers see our service capacity and training they appreciate the depth of expertise. That alleviates a major concern about service readiness; customers want confidence that if something went wrong, we'll be there.

Maybe just to go back to transport and the outlook. Can you give us more insight on what drives your back-half conservatism versus ACT? Are you seeing anything in the pipeline to drive that or are you leaving upside for the year?

We use several models, including ACT, and don't base everything on a single forecast. We expect an uptick in the back half of the year. The fleet is quite old, and units eventually must be replaced because they cost too much to operate if not replaced. Spot rates exceeding contract rates are a positive signal. We're bullish that the market will start to come back; when it does, it should come back relatively strongly. We don't have the same inflection timing as ACT; we think ACT may be a bit aggressive because OEMs may struggle to respond to a rapid increase. We expect a trough in the second quarter and upside in the back half of the year and into 2027. This business has had tough years but it's a great business and we expect to be very successful in transport refrigeration.

On improvements you've made to the reference design for large-scale data center deployments—heat recovery integration, larger air-cooled chillers—how far in front of the market are these innovations? Are you already seeing this reflected in order rates or your pipeline?

Reference designs are out there and their adoption can vary—12 to 24 months is a reasonable horizon. Buildings and chillers will be smarter; we're doing a lot of work around that concept. Think of taking different elements not traditionally part of a system and embedding them: chillers that know when to run in free cooling mode versus vapor compression, understanding weather patterns and microgrid impacts, knowing when to cycle units—all of which improves efficiency. Water flow dynamics within closed loop systems, velocity, pressure and system complexity matter. Our technical engineers work with hyperscalers and others on these details. Small changes can make a big difference to a data center's bottom line.

I want to revisit that AI reference design you've been highlighting, Dave, and also confirm some guidance points. The residential outlook is flat for the year, flat for Q2, and the back half looks conservative. I also noticed ACT raised their reefer builds for the full year but you didn't raise your market outlook. What explains that disconnect?

On the Thermo King side, we didn't change our outlook based on ACT raising their number. We use ACT among other sources, including our internal models. Their revision didn't materially change our outlook. We thought ACT's update may not be fully accurate at the end of Q4, so their increase didn't change our view. We're off to a good start in the first quarter; some of the strength was timing of large customers. At the end of the day, we're starting to see growth signs at Thermo King that we haven't seen in a while, and I'm proud of the team's execution.

On residential, we raised the full year guide to roughly flattish versus flat to down 5% in January. We're off to a strong start, but it's the first quarter. We're about to enter the cooling season and call Q2 flattish, with mid-single-digit growth in the second half. Inventory in the channel remains in a good spot, just like 90 days ago. We have confidence in the full year guide.

Nigel, let me know if you need a unit.

I just replaced mine, but maybe another year or two. On the DC power question and the AI reference design, do you want to be a DC power equipment provider or do you mean your equipment will be DC-power native? And on AI reference design, to what extent is that driving higher content for Trane—chillers and integrated units versus selling pieces?

On DC power, we want our systems to work on DC power; we're not necessarily becoming a DC power equipment supplier, but we will ensure compatibility. On the reference design, chillers are typically part of those designs. We think at a system level based on the breadth of our portfolio and are not wed to a single component. When we work with influencers in the data center vertical on reference designs, we're plugging and playing different products and derivatives that could be part of our NPD pipeline. We're very happy with our position in data centers and expect to be a major part of that vertical going forward.

I'd just like to thank everyone for joining today's call and wanted to let folks know we'll be around for questions, as always. So please feel free to give us a call. Also we're looking forward to seeing many of you on the road here in the second quarter, and we'll speak to you at the end of the second quarter on our earnings call. Thanks again. Bye.