Trane Technologies plc

At this time, all participants are in a listen-only mode. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star then one on your telephone keypad. And if you'd like to withdraw your question, please press star one again. As a reminder, please limit yourself to one question with one follow-up. I'll now turn the call over to Zach Nagel, Vice President of Investor Relations.

Thanks, Operator. Good morning, and thank you for joining us for Training Technologies' fourth quarter 2021 earnings conference call. This call is being webcast on our website at trainingtechnologies.com, where you'll find the accompanying presentation. We are also recording and archiving this call on our website. Please go to slide two. Statements made in today's call that are not historical facts are considered forward-thinking 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 our action 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 Regneri, Chair and CEO, and Chris Kuhn, Executive Vice President and CFO. With that, I'll turn the call over to Dave. Dave?

Thanks, Zach, and everyone for joining us on today's call. Let's turn to slide number three. Today, I'd like to open with a few comments on our purpose-driven sustainability strategy. which is the engine that enables us to deliver differentiated shareholder returns over time. Secular sustainability megatrends continue to intensify. Climate change is causing more extreme weather events, which threaten vulnerable people and economies around the world. Scientists say it is still possible to meet the targets set under the Paris Agreement, but it is getting more difficult as time passes. We need to act today. And that's what Train Technologies is doing. We have set aggressive science-based emission reduction targets that continue to push our innovation further and faster. That innovation is transforming the way the world heats and cools buildings, improves indoor air quality and safely transports food and medicine. As we scale today's technology, and innovate for tomorrow, we can dramatically reduce emissions and accelerate the world's progress. We are committed to making a difference, relentlessly and over the long term. This unyielding approach enables us to consistently outgrow our end markets, which 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 four. Our global team delivered a strong close to 2021. Despite persistent macro challenges related to cost inflation, tight supply chains and logistic markets, and labor availability that continue to restrict capacity and negatively impact productivity. In the fourth quarter, we delivered 27% bookings growth, 11% organic revenue growth, and 32% adjusted EPS growth. This includes approximately $80 million of $150 million of revenue that was pushed out of the third quarter, which was at the high end of our guidance range of $50 to $75 million. On balance, 2021 was another very strong year for us, with record performance across key financial metrics. Bookings, revenue, backlog, EBITDA margins, and adjusted EPS all hit record levels. price realization also reached record levels, demonstrating the power of our business operating system and enabling us to more than neutralize the impact of widespread and persistent inflation for the year. With record demand for our innovative products and services and backlog nearly double the level it was at this time last year, we are extremely well positioned for 2022 and beyond. We anticipate macro challenges to continue to constrain capacity and to negatively impact productivity, and those impacts are reflected in our revenue and EPS guidance. They are also reflected in how we're thinking about the cadence of the year, with the second half expected to be much stronger than the first half. With continued strong demand and supply constrained by the macro environment, we expect backlog to remain at elevated levels throughout 2022 and into 2023. Please turn to slide number five. Looking at our initial guidance for 2021, we effectively met or exceeded all of our targets and delivered another year of strong financial performance. We delivered 11% organic revenue growth. 140 basis points of adjusted operating margin expansion, and 37% adjusted EPS growth. We also delivered strong free cash flow and returned $1.7 billion in capital to shareholders through dividends and share repurchases. Please turn to slide number six. Our relentless investments in innovation and our unwavering focus on serving our customers enables us to deliver consistently strong performance and differentiated returns for our shareholders over the long term. Demand for sustainable solutions continues to accelerate, and our innovation leadership is positioning us to outperform end markets. This will only intensify as the world decarbonizes. We're confident our leadership in sustainable innovation will continue to deliver differentiated financial performance and shareholder returns into the future. Please turn to slide number seven. In addition to our financial metrics, our ESG performance is core to our purpose and our strategy. Beginning in 2021, we revised our annual incentive compensation plan for approximately 2,300 leaders to link directly to ESG metrics, including reducing carbon emissions and increasing the diversity of our workforce. These metrics are on our glide path to achieving our 2030 sustainability commitments. And I am happy to report that we exceeded each milestone in 2021. job well done by the team. Please turn to slide number eight. Customer demand for our climate-focused innovation continues to grow. We delivered another quarter of robust organic bookings growth, with growth across all segments. Customer demand was high throughout 2021, with organic bookings up 27%. for both the quarter and the year, driving record backlog in each segment entering 2022. Organic revenues were also strong, up 11% for the quarter and the year. Overall, Booking's growth far exceeded revenue growth, which was in part constrained by global supply chain and other macro challenges referenced earlier. Our Americas commercial HVAC business delivered robust bookings growth in the quarter, with orders up mid-20s. Strength was broad-based, with applied, unitary, and service each up more than 20%. Demand for comprehensive end-to-end indoor air quality solutions remained strong and contributed to high single-digit organic revenue growth in commercial HVAC Americas. The residential HVAC markets also remained strong, and our residential HVAC team delivered bookings growth over 30%. Revenues were up mid to high teens in the quarter, adding to growth of more than 20% in the fourth quarter of 2020. Sell-through across our channels was also strong, up high teens. With full-year organic bookings up over 70% and full-year organic revenues up over 30%, our America's transport refrigeration business significantly outperformed the North America transport markets. During the fourth quarter, we extended our 2022 order book through the third quarter of 2022, which contributed to bookings growth of more than 40%. We continue to thoughtfully manage our 2022 order book in order to mitigate inflationary risks. Fourth quarter organic revenue growth was consistent with full year growth, up 30%. 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. Our EMEA teams delivered 13% organic bookings growth in the quarter, with strong growth in both commercial HVAC and transport refrigeration. With full-year organic bookings up over 40% and full-year organic revenues up over 20%, our EMEA transport refrigeration business significantly outperformed the markets in 2021. During the quarter, EMEA transport refrigeration bookings and revenues were both up high teens. Our Asia-Pacific team delivered strong bookings growth of 18% and revenue growth of 4%, supported by broad-based growth in China and across the region. Now I'd like to turn the call over to Chris. Chris? Thanks, Dave. Please turn to slide number nine. Organic revenue growth in the quarter was driven by both strong volume and continued strong price execution of over 5% incremental price. Turning to margins, price over material inflation was modestly positive in the quarter, capping full-year positive price cost. Productivity was significantly impacted by continued supply chain, logistics, and labor availability challenges, which were exacerbated in recent weeks with the rapid spread of the Omicron variant. In addition, we continue to make strong incremental business reinvestments. Adjusted EBITDA and operating margins improved 30 and 10 basis points, respectively. Adjusted EPS grew 32%, driven primarily from a higher adjusted operating income. Please turn to slide number 10. 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, as we've highlighted here. with strong price realization, incremental business reinvestments and innovation, and macro challenges impacting productivity and cost inflation as consistent drivers. Both the Americas and EMEA segments delivered higher revenues with modest margin declines. Margins were impacted by the macro challenges we've outlined. For the full year, both Americas and EMEA segments delivered strong margin expansion, with EBITDA margins expanding 100 basis points and 240 basis points, respectively. Our Asia Pacific segment delivered good leverage and margin expansion in the quarter, with EBITDA margins expanding 170 basis points for the full year. Now, I'd like to turn the call back over to Dave. Dave? Thanks, Chris. Please turn to slide number 11. Commercial HVAC Americas has significantly outperformed the broader markets over a number of years through relentless innovation for our customers. Our unwavering focus on solving our customers' most complex problems, compounded by the strength in underlying market conditions, powered the business forward in 2021 and yielded record backlog entering 2022. And markets continue to improve with a multitude of economic indicators pointing to growth in 2022. GDP forecasts remain strong, unemployment is low, and indicators like Architectural Billing Index, which has been over 50 since February, remain largely favorable. Demand remains strong in data center, warehouse, education, and healthcare. We're benefiting from increased demand across our K-12 customers, with federal stimulus funds supporting both current and future growth. we see this as a multi-year tailwind for our business given our strong position in the education market and our direct sales force with deep relationships in this vertical demand for our residential products was unprecedented in 2021 contributing to record revenue looking at 2022 we see tailwinds from record backlog entering the year and expect strong price realization and we see headwinds from lapping tough growth compares from 2021. I'm proud of our residential team that has continued to meet customer demand while ramping capacity after a February weather event in our Texas facility. The team remains on track for capacity expansion in advance of the 2022 cooling season. Turning to America's transport, we significantly outgrew strong end markets in 2021, as we outlined earlier. ACT continues to project continued market growth through their forecast horizon of 2023. I'll talk more about the transport outlook in our Topics of Interest section. Turning to EMEA, while we have muted expectations for market growth, demand for our sustainability-focused systems and services remains strong, and we continue to see good opportunities for market outgrowth. Our transport refrigeration business significantly outgrew end markets, delivering over 20% full-year revenue growth as compared to 13% market growth in the region. Turning to Asia, we expect growth in China in 2022, supported by strength in data center, electronics, pharmaceutical, and healthcare. Outside of China, the picture is mixed with COVID-related partial lockdowns still impacting market expansion in some countries. Our direct Salesforce model is differentiated in the region and provides good opportunities for market outgrowth in equipment and services. Now, I'd like to turn the call back over to Chris to outline our guidance for 2022. Chris? Thanks, Dave. Please turn to slide number 12. Based on the market backdrop Dave just outlined and our strong backlog entry in the year, we expect to deliver strong financial performance in 2022 with high single-digit organic revenue growth and adjusted EPS between $6.95 and $7.15. Our operating leverage outlook of approximately 20% contemplates a stronger second half with improving macro dynamics, particularly around inflation and an improving supply chain. We expect price cost to be slightly positive for the year, but negative through the first half as we lap strong price and more modest inflation from the first half of 2021. The macro environment remains dynamic, and we expect tight supply chains, logistics, and labor availability to restrain revenue growth and margins, especially in the first half of the year. We expect free cash flow to remain strong at equal to or greater than 100% of adjusted net income. Our outlook includes capital expenditures of approximately 2% of revenues, which is at the high end of our typical 1% to 2% range. Relentless incremental business reinvestment is never episodic for us, and it's how we innovate ahead of the competition year after year. Entering 2022, we are planning incremental investments in high ROI projects in support of our profitable growth objectives and our 2030 sustainability commitments. These high ROI projects include manufacturing automation, supply chain resiliency, as well as investments to further decarbonize our operations. Our free cash flow outlook also includes modest investment in working capital, with particular focus on strategic inventory to support continued growth. Given inherent challenges in accurately forecasting FX rates and the fact that we're transparent about our organic bookings and revenue each quarter, our guidance excludes potential FX impacts. Our FX exposure is largely translational in nature, and each point of revenue would translate at approximately OI rates. Net, as a reference, each point of negative FX would translate into about $0.05 of EPS headwind. Please turn to slide number 13. While we traditionally provide annual guidance, given a dynamic macroeconomic environment, we believe it may be constructive to provide an outlook for the first quarter based on what we expect to see today. Based on backlog, orders, and the dynamic macro backdrop we've outlined, we currently expect organic revenues to grow in the low to mid single-digit range with flattest unit volumes and strong price realization. First quarter margins are expected to be challenged due to negative incremental price-cost dynamics, considering very strong price versus cost in the first quarter of 2021. You'll recall we were able to get well ahead of inflation in the first quarter with strong price realization, which was part of the reason we were able to deliver very high operating leverage of nearly 50% in Q1 of 2021. inflation was relatively modest in the first quarter of 2021 and really began to ramp aggressively in the third and fourth quarters we exited q4 with peak price and peak cost for 2021 with price at unprecedented levels of more than five percent net while we expect to carry over strong pricing from the fourth quarter of 2021 into the first quarter of 2022 we're also lapping strong price from q1 of 2021 which dampens the incremental carryover price. Likewise, we expect a carryover peak inflation from the fourth quarter of 2021 into the first quarter of 2022, but to lap more modest inflation from the first quarter of 2021. The equation is a bit more complex than this, but to keep it simple, this essentially means that we'll see almost the full impact of the carryover inflation. The end result is we expect to be upside down on price costs in the first quarter by $30 million to $40 million. This pricing dynamic improves as we move through 2022, and additional pricing actions taken in 2022 come online and are realized. As we've outlined, macro challenges related to supply chain, tight logistics, and labor constraints exacerbated by the Omicron variant are expected to negatively impact productivity. While it's difficult to predict the negative impact on productivity in a very dynamic environment, we expect a considerable impact in the first quarter. All in, our outlook is for adjusted operating income to be down approximately $35 million year-over-year in Q1 as we work to balance all the pieces. As we discussed on the prior slide, our full-year outlook contemplates a stronger second half with easing inflation and an improving macro environment. We'll update this outlook as the year goes along. There are a couple of items for Q1 that I also wanted to highlight to help with your models. First, interest expense is expected to be approximately $56 million, reflecting 2021 debt retirements. The other item I'd highlight is the estimated Q1 adjusted effective tax rate of approximately 17%, which we've assumed is flat with 2021. The Q1 tax rate is traditionally low, impacted by higher stock-based compensation in the quarter. The full year 2021 guidance remains 19 to 20%. Please go to slide number 14. We remain on track to deliver $300 million of run rate savings from business transformation by 2023. Importantly, we continue to invest these cost savings in high ROI projects to further fuel innovation and other investments across the portfolio, as discussed earlier. Please go to slide number 15. 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 are calculated intrinsic value. Please turn to slide 16, and I'll provide an update on our capital deployment in 2021 and our outlook for 2022. During 2021, we deployed $2.4 billion in cash, with approximately $1.4 billion to M&A and share repurchases. We paid $561 million in dividends and $425 million to pay down debt. Looking to 2022, we expect to deploy approximately $2.5 billion in cash, inclusive of $350 million in share repurchases we executed in January of 2022. Our look also includes our announcement that we intend to raise the quarterly dividend to $2.68 per share annualized. When combined with the dividend increase of 11% in 2021, the annual dividend is expected to be up 26% since launching as a pure play climate control business in March 2020. 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? Thanks, Chris. Please go to slide number 18. I'd like to spend a couple minutes providing an update on the transport refrigeration markets. Both Americas and EMEA had robust market growth in 2021, and our Thermal King businesses thrived. We pushed through macro challenges and significantly outgrew the markets in both regions. On the left side of the slide, you can see that the North America trailer, truck, and APU markets combined grew 19%, while Thermal King Americas grew more than 30%. In EMEA, market growth for trailer and truck combined was 17%, while Thermal King EMEA also grew more than 30%. On the right side of the slide in the highlighted box, you can see that the total weighted average market growth for the Americas and EMEA transport refrigeration markets in 2021 was 15% and 13%, respectively. Thermal kink growth for the Americas and EMEA was more than 30% and more than 20%, respectively. We're extremely pleased with the tremendous market outgrowth each of these businesses delivered in 2021. Market projections for 2023 call for continued growth in both regions, with particular strength continuing in North America. There's one other important dynamic I'd like to highlight while we're discussing transport refrigeration and moving into 2022. Our teams delivered tremendous booking growth in both regions in 2021, as we discussed on slide eight. Our bookings growth was more than twice our revenue growth, even as our revenue growth far exceeded the growth of our end markets, resulting in record backlogs. Nat, we expect this dynamic to result in bookings declines during the year as we work through backlog extending well into 2022 and go up against tough compares every quarter. We'll highlight these dynamics with our earnings calls for transparency as we move through 2022. Please go to slide number 19. We added a second transport refrigeration slide to the deck last quarter to add more color around the North America trailer market from both backward and forward looking perspectives. We're not going to spend a lot of time on it today, but we think it's a helpful reference slide for 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 20. 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, 2021 was a record year for us with top quartile EPS growth, accompanied by strong free cash flow and balanced capital deployment. We're seeing unprecedented levels of demand for our 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?