Okay, great. So we're going to wrap up this trio of industrial fireside chats with Trane. And very pleased to welcome back to the Wolf Conference, Chris Kuhn, CFO of Trane, and Donnie Simmons, who's the president of the Americas for Trane Technologies. And the Americas is, what, two-thirds of the business, Donnie? Yeah, a little higher than that. A little bit higher than that. Yeah, math is never my strong suit. But great to have you both here. Yeah, thanks for taking the time. Chris, I think maybe spend a minute or so just setting the scene and then we'll get into Q&A.
Yeah, Nigel, thanks for having Donnie and I and Pat here at the conference. Good to be back in New York. We know it's gonna be a very warm day in New York and maybe a warm couple of days this week. So look, a company had a strong start to the year, maybe a highlight in the first quarter for us where bookings were up 24%. Think of that in Donnie's space, commercial HVAC bookings were up 40% in the first quarter, Applied bookings are up over 160%, so we had a really good start to the year. Backlog reached $10.7 billion at the end of the first quarter. That's up nearly $3 billion from the start of the year. And think of that as two-thirds organic and about one-third from acquisitions. And of the acquisitions, about $1 billion of backlog came from Stellar Energy, which we're really excited about and we'll probably talk about here this morning on modular chiller solutions that are in the data center vertical today. Services had a very strong start to the year, up low double digits. It's had a low double-digit CAGR for the last five-plus years and a strong start in the first quarter. And we ultimately raised our guidance on the top line and the bottom line for the year based on the start of the year. We do expect strong acceleration into the second half of the year, led by our commercial HVAC businesses. Think of that as the timing of backlog converting to revenue. And when customers want products on their job site, you request on job dates. and that's what we reaffirmed kind of in the end of April was that acceleration we expect in the second half of the year in commercial and easier comps and residential and transport as well so we're expecting strong growth as we go into the second half of the year and with that I'll turn
it back over to you Nigel. Thanks Chris. Of course being 95 degrees today in New York is good for business right so you must be quite pleased to hit the streets and feel that hot air and finally we're certainly sweating on the way over here this morning so you mentioned the second half acceleration and I think that makes a lot of sense in terms of the moving pieces a couple of points I mean in terms of the five percent on the mystical digits your corner for 2q any any moving pieces you can call it out
for that sure overall I mean we expect the the continued progress in our commercial HVAC business and and continued strength there I mean we think about you know we talked about our transport markets you know being a bit stronger in the first quarter but we're holding essentially what we expect here in the first half and for the full year and in transport and then residential residential where we you know where we had a first quarter that was stronger than what we had expected we did increase our guide for the full year in residential and we do feel like our inventories have normalized and we talked about that in the in the first quarter so we're you know we're cautiously optimistic there that with with residential now expected to be flattish for the full year we're in a good spot and commercial HVAC continues to be strong so we had we had a very strong first quarter and we expect the first half and the second half to continue to strengthen and the commercial is as you
mentioned Chris straight kind of back offload in terms the growth profile that's something we've seen from a lot of your competitors as well that this back half loading of the growth profile, let me just talk about, you know, what's causing that back half, your first half, second half, you know, mid teens plus type
organic growth commercial. Sure, look, I mean, first off, I think with commercial we have to talk about both sides of the business. We talk about our services business being half the business and we've had low double digit growth for the last five, six years in services, so automatically we get that. We've also talked about the fact that we see the unitary markets as being flattish for the full year so that continued that that scale up and growth comes from our applied business as well as our services business and so that first half versus back half and getting to that mid-teens is just meeting the customer requirements and what the customer delivery requirements are
throughout the year that's really what's driving that change it's similar for me as well i think about the second half order growth profile last year it just really inflected upwards in Europe commercial HVAC and America's commercial HVAC and that timeline just suggests deliveries more in the second half of this year.
Yeah and do you find the I think you talked to this on the on the on the last ends call the the project timelines for in the data center segment is extending so we know backlog conversions are a little bit longer than it has been
historically? Yeah we have I mean if you look over the last couple years that certainly changed i don't think it's anything drastic and in terms of i think i think about it as the customers are giving us more visibility into what their uh what their it's so that they can secure the supply chain that they need so it's you know now moved to 12 to 18 months instead of you know 9 to 12 months and so it has extended out um overall but that's more of a visibility for the supply base than more than anything else and so for us it's helpful and for our supply chain it's helpful because the more visibility that we have so when we're getting orders that are coming in past our lead times the lead times for this equipment is six to nine could be six months it could be less and so when we're getting orders 12 months to 18 months in advance it gives us a lot ability to plan accordingly and make sure that we're able to meet those delivery requirements
yeah obviously a lot of inflation uh is you know emerging and has been has been in place and i'm I'm sure that continues. When you got longer, your backlogs, how do you protect margins? I'm assuming you price with the contract, but what protections do you have against spikes in inflation?
Yeah, we, I mean, as part of our business operating system and we've been doing this for a long time, we've had multi-year agreements with customers for a long period of time and we're always building escalations in to make sure that we're protected throughout. And then for the majority of those contracts, we also have things like tariff protection. If something were to change abruptly that we weren't anticipating, that we're able to make sure we're able to recover that as part of that process in the contract.
On the cost side, we continue to hedge base metals and we'll go out 12 to 18 months for copper and aluminum. And that'll get adjusted for volumes as we see volumes growing to the future. But at least for us, it just smooths that that inflationary curve and it gives us better insight on what the cost is going to be. So then on Donnie's side, if you're delivering product a year or 18 months out with a cost escalator, we just get a more precise view of what that cost will be with that hedging strategy. And on steel, it's about a six-month hedge. You're locking in steel consumption. You've got a six-month lock on price. And then after that, you're a little bit more exposed. But then that just kind of keeps rolling on a six-month basis for steel.
Has the hedging strategy changed over the last several years? Because I always felt there's like 12-month hedges, but now it seems like we're at the extent.
A little bit further out on copper and aluminum. And so think of it as you're right, Nigel, going from 12 to maybe in that range of anywhere 15 to 18 months. And it really comes down to the forecastability of what we think for volumes. But we're generally, if you're a year to 18 months out, you're probably hedging 20, 30 percent of the expected buy. And the closer in, you're probably 75, 80 percent of the buy. But we'll just keep executing through that strategy and smooth the ups and the downs.
I'm going to shock you. I do want to talk about data center, touch on data center. Before that, residential is a real hot topic. Maybe just give us a little bit of color in terms of what you see in real time, because 1Q is very encouraging, still vary your days in the season, but just give us some of the current terms of the conversations with your contractors and distribution partners, and do you lean more optimistic or pessimistic based on what you've seen so far?
We lean more optimistic, especially with what we saw in the first quarter. We expected the first quarter to be much lower than what we came in. We were down low single digits. But if you think about that in terms of a year-over-year compare from last year, that's actually a significant improvement if you look at it on a two-year basis. And so last year we had a lot of challenges in the first half of the year. We had really three major factors. We had a refrigerant transition that was a challenge. We had shortage in canisters and part of that process that really impacted the market in the second quarter of last year. We had really weather delays, which was kind of a shorter season last year, which was also an impact. And we had at least maybe one, maybe even two pre-buys is the way we talk about it last year. One associated with refrigerant, the other associated with the pricing associated with that change, as well as the tariff impact. So there are multiple dynamics that hurt last year. That makes this year for at least, you know, seeing what we saw in the first quarter is a positive trend. And that's why we did raise our overall guide for the residential market. Now, we're saying flattish for the year. That gets a lot easier in the second half of the year for us, just from a compare standpoint, because the second half of last year was very challenging for the overall market based on the inventory build. We do feel like the inventory is normalized in terms of our channel and what that looks like. And so overall, we're optimistic in terms of the market.
It was an aggressive plan in the fourth quarter to take production days out that Donnie and his team said, let's go ahead and kind of, quote, unquote, take that medicine here as soon as we could. So we took about a third of the production days out in the fourth quarter. We felt at the end of 2025, inventory in the channel is at a good level. We reaffirmed that at the end of the first quarter. And to Donnie's point on the flattish guide for the year, it implies volumes will still be a bit negative. there'll be some positive price but again first quarter is uh maybe the the least important quarter of the year in terms of residential we know it's getting warm out there and we'll see
how the year plays out yeah no question but your guide doesn't seem down like low single-digit mid-single-digit volumes this year give or take yeah you know faddish about um it feels like again just extrapolating from the the most insignificant quarter of the year 1q does feel like we could be up modestly on volumes this year is that is that fair donnie do you think do
you think we could be up on volumes i think we'll see it's a little too early to tell through the first quarter certainly that came in better than what we expected and we feel like we've guided appropriately for what we can see at this point in time if it is we're ready right um donnie's
team has level loaded production this year which is something different than um what we would typically do the industry typically ramps in the first quarter second quarter building inventory being ready for the season we've intentionally level-loaded the factories so what that means is first half it's a little bit of a headwind when you think about absorption in the factories there's less absorption in the first half that's a tailwind in the second half of the year so in addition to the easier comps based on what we saw in the industry in the second half of last year there's also a tailwind coming through in terms of absorption from level-loading
factories. Is there anything in 1q though Donny that could have accounted for just you know a little bit better and distributors getting ahead of price
increases or concerns around the impact of tariffs uh i mean we didn't see any any pre-buy in the first quarter we did announce a price increase in the first quarter for for april but we didn't see anything significant from that in terms of the change so certainly don't feel like there's any any dynamics there that would have caused anything to be different i believe really what happened is that our impact that we took in the fourth quarter of last year with taking productions days out really getting aggressive on the inventory. We also changed our production strategy where we went into this year with a mindset of having a flat production for the full year, where in the past we would ramp up production. We would do a lot to kind of build inventory in the channel and then let that bleed off at the end of the year. This year we approached it very differently and said we're going to go in and be more productive. We're going to drive a flat production strategy and manage the inventory throughout that process. And I think that the benefits of that probably where we just didn't take into account in the first quarter that's great have
you announced as of earnings call you hadn't announced a price increase for resi maybe just bring some speed in terms of that and then but I do want to talk about the fact that train I think you called out has you know one plants in Mexico right of the 19 or so 20 very different footprint to some of your competitors. So just wondering, you know, how that competitive advantage in the world of tariffs, Section 232 tariffs, how you monetize that advantage?
Yes, certainly. So to answer your first part of your question, pricing, we announced up to a 5% price increase in April, which we announced in the first quarter. And we expect to get 2% realized from that, you know, throughout the year. From a manufacturing strategy, we've always had an in-region, for-region manufacturing strategy. And so certainly Mexico is part of the region, but our footprint is predominantly in the United States. And so we have one factory in Mexico, we have 21 factories and then growing in the United States. And so there certainly is a different impact when you think about 232 on our business, residential product the majority of our residential product is manufactured in the US between Texas Georgia and in New Jersey and so we're well positioned from
that standpoint but I guess your competitors have to force to go out with much more aggressive price increases I think you know some of the competitors have gone out with high signature price increases the plan to realize you know five percent so it feels like there's a price divergence in the market train at the low end some of the competitors at the high end do you think that causes some assisting some share shifts um this year
well what i'll say is when donnie talked about the price increase in the first quarter it was effective april 1st and we know that there's new intelligence that came out in terms of tariffs and inflation and that's also inclusive of you know raw materials and base metals so we'll run our business operating system and ultimately evaluate what those cost inputs are and we'll evaluate first how do we mitigate those costs. Again, having the majority of our factory and assembly manufacturing operations in the U.S., we'll continue to keep moving that in region for region strategy for suppliers. But then we'll look at pricing as an option if we need to. So we don't want to get in front of our businesses in terms of anything they may be doing. I'm aware that some competitors have announced maybe some price increases more recently. But at this point, we're going to run it through our business operating system see what we can do to mitigate and then we'll evaluate anything further okay let's move on data center um and i'd be really
curious first of all before we get into the uh kind of any views on pipelines etc how is train strategy evolving because you know i think at the very basic level you know the view is that train and you can better just ship chillers into the data center but you know you've made some some pretty smart acquisitions so you're stellar could be a stellar acquisition how does that what are the kind of the lego pieces you're building here to to put together a more integrated
offering so i'll start with um you know we always approach our customers from a system perspective and so we're working with our customers on the system and how to make that system more efficient And so the innovation pipeline that we have in the data center space is rapidly growing and it's rapidly changing. So where typically we would have a new product that would launch, say, historically in a two to three year time frame, we're now doing that in 12 months. So we're working on concepts with our customers and then developing those. And then when you look at how we've grown the portfolio, when we've moved kind of downstream into the stellar acquisition, think about modular chiller plants, where it's part of the system, but we're also able to make our customers more efficient because of labor constraints. We're able to produce a better product for them in terms of a modular chiller plant that has production quality in a factory as opposed to stick built in the field. So that adds productivity to our customers. It helps them with the challenges that they have from an overall supply chain standpoint. And then you look further downstream in LiquidStack and the capability for us to enhance our capabilities from a total system standpoint when you get into liquid cooling. and the expertise that we acquired when we acquired liquid stack we're really proud of and a very robust innovation pipeline there that continues to help make sure that we're positioned well to have that system conversation with our
customers we met with your team at the recent conference in DC and you know one of the things that they were highlighting was the reference designs that you have for the AI factories, how important is that in terms of drive and share?
Look, it's an extremely important aspect of our business is to make sure that we're working on those reference designs. And we're not the only ones creating reference designs, right? But it is extremely important because it gives a roadmap point of view in terms of what that, you know, the design of that factory should be. And it gives a third party validation of what that should look like and so it's not just trained saying here's a reference design it's it's you know in that case it's nvidia as well saying this is the appropriate design for this for this uh system do you find
the customers that come into you still very much on a product basis so chiller you know craw cdu
separate or no no it's a system approach and that's that's really what these reference designs are all about is to make sure we're approaching it from a system point of view so that we can drive efficiency in the total system. And we're not having individual conversations. We're talking about the complete system. It doesn't mean that we don't have customers that only buy chillers or only buy crawls. Certainly we have that, but predominantly when you're looking at our approach
to the market, our approach is that system approach. What they're also talking about is the ability not only to build out the product and the time frame that they want but also tell us about your commissioning capabilities tell us about your service capabilities after the products installed and so we made some significant investments within our service fleet which we had for years and our service technicians we have about 7 000 globally and 4 500 in the americas where they are direct serving really the applied markets and one of the verticals being data centers we just opened up a new service technician training center in david north carolina it's a state-of-the-art service technician training center and we've actually brought customers through it who were concerned about commissioning in the field given the the labor shortages and they've come back and said we're comfortable training that you've got the right technology or the right people they think about the order even more broadly than just the equipment the readiness for commissioning and we've been able to show that we've got i think
the best people on the street for that yeah okay um maybe just remind us donnie on the the deal math for Stella I mean what what is what is it coming in that's in terms of revenues in a Martian profile and where do you see that I think the backlog was
quite quite high yeah we brought in a billion dollars a backlog with the business think about that as this year we're gonna have 500 million dollars in revenue from that business and eventually we see that business getting to a mid-teens EBITDA level. So we're very positive in terms of what that brings us overall.
Yeah, for this year with the $500 million, we said it's going to be marginally, modestly accretive on the bottom line. And the reason being because of all the investments we need to put in to scale it from a revenue business last year in 2025. It was about a $350 million revenue business. To even 500 million this year, that's a scale. And to Donnie's point, we see this in two to three years being a billion-dollar revenue business, mid-teens, plus EBITDA. So scaling it to that regard not only means let's look at the current production facilities in Florida, but we're adding another production facility in Texas. It's kind of one of the reasons why we raised our CapEx guide from 1% to 2% to 2% to 3% of revenue for this year. are still very modest at the end of the day for investments, but that's where we're going to bring that business operating system to scale. And think about procurement, think about how to run lines. Donnie's been doing this for years in terms of, you know, running businesses and understanding how to bring that business operating system in. At the same time, learn from what those teams have done well. Procurement opportunities, how do we run lines at the space that we need to and then set up a brand new factory running the way that we need. That's going to be a really nice opportunity for us but think of that investment this year probably carrying over a bit into first part of next year to make sure that we've got the capacity
we need to grow the business what's really exciting about that business for me as an operator in the business like think about a modular chiller plan it's like three times the size of this room from a footprint standpoint okay one section is think about that as three sections one section is your chiller plant one section is your electrical and one section is your mechanical so piping so you're making those in a production environment in the field those would typically be stick built you'd build it up from the ground up we're making it a production environment flowing those through a factory in three sections and then putting together at the end and then fielding and then just modually you know connecting them in the when we actually install them in the field so it's a it's it's a transformational change in the industry we're the only ones that have factories that are flowing product like this down the factory floor and we're starting another factory right now in texas so we'll have two very large factories producing these modular chiller plants and what's exciting about that is beyond data center data center is one aspect but we have chiller plants are constructed for every vertical market you can think of and we now have that capability to provide that same value to those customers in the other markets the other vertical markets we talked about healthcare K through 12 when you office office I mean any one of these verticals industrial we can apply that same capability to serve those markets as well any questions from the audience so
please put your hand continue so I guess the only problem you have in commercial is if the comps keep getting tougher yet you keep on comp in the comp so the treadmill gets faster you keep on running faster that's one way to look at it confidence in continuing to show double-digit autogross I'm not quarter by quarter I'm talking about just generally speaking just comp in that comp
look I think for us certainly the second half comps become more challenging for us, but we're really happy and excited about the pipeline of opportunities that we have. So there's no deterioration in our pipeline. And so we don't guide on our, you know, what we would expect from an order rate standpoint. And the second half comps will be more challenging, but you know, like I said, the pipeline is strong. So we have a lot of positive coming.
And we'll remind investors, growth rates are important. Look at absolute dollars as well. and then look at the revenue growth rates and tie them all out together. And again, we think about it and going into each and every year, top quartile, top line growth, top quartile, EPS growth, and then driving 100% of cash flow to operating earnings to net income. And keep with that philosophy, I think we'll be in good shape. That's how we see 2026 playing out.
So maybe not triple digit growth anymore, but very healthy double digits, okay. But would you be surprised if, I mean, the question we get is, you know, at some point, do we start to consume backlog? It doesn't seem like that's on the cards, but just.
Yeah, let's see how it plays out. I mean, we've added, again, as I said earlier, about $3 billion of backlog in the first quarter. We typically add a few hundred million dollars. And again, two-thirds of that was organic, and a third of that was from acquisition. But to Donnie's point, the pipelines remain robust. On the data center side, those orders can be uneven in terms of size. As we said in the first quarter, we had roughly the same number of those larger orders, over 100 million, a couple of those in the first quarter, just like we did in the fourth quarter. So it can be uneven with the timing of that, but what it does, it gives us a lot of visibility. And from that, we can make investments and have a lot of confidence in terms of what we need to be ready for from customers. But just a reminder, on the data center side, when you think about our direct sales force, which is a common model we have in the Americas and in Europe and in Asia for commercial HVAC, over 95% of our account managers do not call on data center customers. They call on the 13 other verticals that we serve that are largely served from applied, also unitary product. But, you know, it's a small group of folks that call on data center customers, the hyperscalers, the colos. It's, I don't know, 30, 40 customers plus or minus off of that. And so think about our direct sales force. After three years, they're commissioned sales agents for the company, direct to the company. They're calling on all those other verticals. And I'll tell you, Donnie spends a lot of time with our Salesforce, me less so, although the last two weeks I've been in the New York office and I've been in the Florida office, the West Palm office with our direct Salesforce. And I couldn't be excited, more excited about the pipelines that they see around education, higher ed, hospitals and infrastructure that just needs to be upgraded. They're focused on that each and every day. so while data centers will be strong and we will we've been strong in data centers for decades we're also making sure that we're cultivating and growing and all the other verticals that
are out there that can serve our products and and the the the driver of those pipelines in those areas um because we don't see that strength really in the pip data necessarily is it is it decab uh electrification what are the what the drivers of that strength i mean i think those are certainly
components to it i mean the the driver for us is a system view and how do we help save our customers money and we all we often talk about the fact that 30 of energy used in a building is wasted after the meter so the buildings are operating inefficiently so for us focusing on that with our customers and how we can create a payback for them to reduce their overall operating costs is what drives the pipeline that we have. Any leaky buckets in those 13 verticals right now? Yeah, there's some leaky buckets. I mean, you know, there's spotty. I mean, you think about life sciences, K through 12 is slower, but really think about that in the context of the past few years where there was a lot of momentum and growth in K through 12. So, you know, we do see lodging is a bit slow as well, but overall there's a lot of strength you know we see strength strength in health care we see strength in in retail we see strength in office there's a lot of strength the government was strong government first quarter yeah question
the ones you have to make it the mic please thank you thank you you talked
about the advantages you get from the stellar acquisition could you also just spend a minute talking about the advantages of the liquid stack
acquisition please certainly so liquid stack gives us advantages in terms of our ability to to to participate in the liquid cooling aspects of the market and the expertise that we get from that team that was part of the acquisition and the innovation pipeline that that they have that will enable us to just continue to to advance our full capabilities and in in the system design for our customers
And then maybe my final question would be on transports actually, transportation. Yeah. You know, we're seeing, you know, a lot of momentum in freight rates, seems like there could be a pretty powerful cycle form in there. Any views on that? Have we seen any evidence of that cycle forming?
So, look, we've talked about the fact that the second half of the year we expect to see growth in the transport markets. all the underlying factors are going in the right direction spot rates are increasing utilization fleet utilization is increasing fuel prices actually help this market overall so we certainly are excited about the fact that we've been in a four-year downturn of an 18-month downturn you know like we're in year four and we talked about it last year but we're even more confident now that we see that uh see that finally coming back fleets are at their oldest uh they've
ever been in 30 40 years so at some point uh that's where the excitement is so i think we're aligned with the external data where they think production will be and we're aligned that there'll be growth in 2027 maybe not to the same scale of growth that some of them are calling but there's going to be growth in 2027 and let's see how this year plays out but we're excited to have that part of the portfolio the residential portfolio in the second half of the year growing and then to the continued growth in the commercial HVAC portfolio, the exit rates in 2026 should be much stronger going into 27.
Right, and I think on transport too, the last thing is that we just have to be cautious. Like, it'll take some time for the supply chain to be able to ramp up and meet the demand in the market, and specifically trailers. Like, so the trailer manufacturer's ability to ramp up and meet that requirement will impact how steep that climb is as well.
Thanks, Donny. Great discussion. And thanks again for being here.
Thanks, Nigel. Appreciate it. Thank you.