Trane Technologies plc 2026 Q3 Earnings Call

Good morning, and thank you for joining us for Trane Technologies' third quarter 2026 earnings conference call. Our webcast and slide presentation are available at tranetechnologies.com, where a replay will also be archived. Today's discussion includes forward-looking statements. Key risk factors are detailed in our SEC filings. We also use non-GAAP measures. Explanations and reconciliations are in our press release and presentation appendix. Joining me on today's call are Dave Regnery, Chair and CEO, Chris Kuehn, Executive Vice President and CFO, and joining us for Q&A is Donny Simmons, Executive Vice President and Chief Operating Officer. With that, I'll turn the call over to Dave.

Dave? Thanks, Pat, and good morning, everyone.

Please turn to slide number 3. Our focus strategy is aligned to powerful mega trends and continues to propel strong performance. Today, global energy systems are stretched, and buildings still waste about 30% of the energy they pay for. If we want a sustainable and resilient energy future, efficiency isn't optional, it's imperative. Customers choose Trane Technologies because we solve this problem at scale. Our smart systems, advanced controls, and deep service expertise allow buildings and industry to optimize their energy footprint in real time. This enables our customers to boost performance, reduce cost, and reduce emissions, and help create more resilient energy systems. When you combine this strong customer demand with our leading innovation and talented team, we are well positioned to deliver differentiated long-term value for our shareholders. Please turn to slide number 4. Q3 was another strong quarter.

Enterprise organic bookings grew 20%, fueled by robust growth across all segments. Our commercial HVAC businesses delivered outstanding performance, with global applied bookings up over 40%, driving our backlog to $12.5 billion. Organic revenue grew 16%, led by the Americas, and with growth across all segments. Our service business, which represents about one-third of enterprise revenue, continues to be a resilient growth driver, with low teens compound annual growth rate since 2020. All in, we delivered adjusted EPS growth of 25%. This includes a tax benefit of about $0.10 due to timing. Excluding this tax benefit, our underlying adjusted EPS growth is up 23%. We also delivered exceptional free cash flow, reaching $2.8 billion year to date, and now expect to deliver free cash flow greater than 100% of net earnings for the full year.

Given our robust backlog, strong pipeline, and proven execution, we are raising our full-year revenue guidance and reaffirming our EPS guidance. Please turn to slide number five. Our third quarter results were driven by standout performance in the Americas segment. Commercial HVAC delivered exceptional bookings, up low double digits, and strong organic revenues up low 20s. As expected, Applied Solutions revenues ramped significantly, with growth exceeding 60%. Services in the Americas continues to be a key growth engine, up 10%. The residential business exceeded our expectations with both bookings and organic revenues up approximately 20%. Our transport business also gained momentum, with bookings up in the high 30s and revenues up high single digits. In EMEA, our performance was solid and in line with our expectations. Excluding the Middle East, segment bookings were up over 50% and revenues grew high single digits.

Our team in Asia Pacific delivered strong results outside of China, with bookings in the rest of Asia up 70% and revenues up in the high teens. China now represents one-third of our Asia Pacific segment. Now I'd like to turn the call over to Chris.

Chris? Thanks, Dave. Please turn to slide number six.

As Dave highlighted, enterprise organic revenue grew a strong 16%, supported by robust equipment and services growth. Adjusted EPS increased 25%, underscoring the power of our business operating system. We are capitalizing on unprecedented demand, which has created near-term supply chain and inflationary pressures that we are actively mitigating. A prime example is our recent acquisition of Cancoil, one of our key suppliers, which strengthens our supply chain and bolsters our heat transfer expertise. Leverage in Q3 improved versus Q2, and we are confident we will see further leverage improvement in the fourth quarter, driven by both higher price and productivity. Please turn to slide number seven. Our third quarter performance reflects solid execution in a dynamic environment and strategic reinvestment for future growth.

Operating income margins in the Americas expanded by 50 basis points on strong volume growth that helped offset inflationary and supply chain headwinds. In EMEA, we delivered solid performance in Europe with segment margins impacted by the continued conflict in the Middle East. Excluding the Middle East, our commercial HVAC business leveraged above 25%. Asia Pacific margins were impacted by challenging markets in China, balanced by notable strength in the rest of Asia. With that, I'll turn the call back over to Dave.

Dave? Thanks, Chris. Please turn to slide number 8.

Commercial HVAC Americas continues to set the pace with another quarter of exceptional bookings and backlog. Data centers continue to be a powerful driver, and our core markets also remain strong. Year to date, we delivered growth in 11 of our 14 verticals. As a result, we are raising our full-year commercial HVAC organic revenue outlook. In residential, we are also raising our full-year outlook, reflecting our strong year-to-date performance. Transport markets continue to show improvement, and we expect strong revenue growth in the fourth quarter, leading into a 2027 recovery. In EMEA, we continue to expect flattish organic revenue growth for the full year, with commercial HVAC offsetting headwinds in the Middle East and transport. In Asia, we expect strong demand in the rest of Asia to offset challenges in China. With that, I will turn the call back to Chris.

Chris? Thanks, Dave. Please turn to slide 9.

For the full year, we are increasing our organic revenue growth outlook to approximately 11% and reaffirming our adjusted EPS guidance range of $15.20 to $15.30. For the fourth quarter, we expect organic revenue growth in the mid-teens with adjusted EPS of approximately $3.40 to $3.50. This includes a $0.10 headwind from a higher fourth quarter tax rate, which neutralizes the third-quarter benefit and keeps our full-year effective tax rate forecast unchanged at 19%. Looking at the balance of the year, we are updating our full-year price realization expectation from 1.5 points to approximately 1 point, primarily reflecting timing and mix across our shorter cycle businesses. We expect price to accelerate in the fourth quarter to approximately 1.5 points at the enterprise and close to 2 points in the Americas segment.