Trane Technologies plc (TT) Earnings

Management highlights

- Core Strategy and Market Tailwinds * Elevated energy prices are increasing customer demand for Train Technologies' energy-efficient smart building solutions, which use integrated controls and agentic AI to optimize real-time performance and resilience. * The company's strategy is built on a robust business operating system, strong cash flow generation, and a strong corporate culture, focused on delivering long-term differentiated shareholder value. * The company is positioned to capitalize on powerful megatrends driving demand for sustainable, efficient building solutions. - Operational Execution * The company continues to prioritize operational excellence, which underpins all performance results. * Record backlog provides strong visibility for accelerating revenue growth in the second half of 2026 and sustained outperformance into 2027 and beyond. * 90% of total backlog is concentrated in commercial HVAC, which has grown ~90% YoY, and backlog conversion is on track, with 40% YoY revenue growth in the applied commercial HVAC segment in Q2 expected to continue into the second half. * The company is pulling forward investments to expand capacity, integrate recent acquisitions (including Stellar), and develop new product innovations to meet strong demand, with capital expenditures expected to equal 2-3% of 2026 revenue. * The company uses a structured, collaborative process with supply chain partners, including sharing long-term demand forecasts and providing lean manufacturing support, to manage capacity as volumes grow. - Capital Allocation * Management maintains a balanced capital allocation strategy: first, reinvest in the core business to support growth; second, maintain a strong balance sheet for strategic optionality; third, return 100% of excess cash to shareholders over time via dividends and share repurchases, plus disciplined strategic M&A to expand capabilities. * Total 2026 capital deployment is targeted at $2.8 to $3.3 billion. The annual dividend was increased 12% to $4.20 per share earlier in 2026, and $840 million in shares have been repurchased year-to-date, with $3.8 billion remaining under the current repurchase authorization.

Guidance

- Management raised full-year 2026 guidance, reflecting stronger-than-expected year-to-date performance, record bookings/backlog, and broad-based growth, while fully absorbing the headwinds from the Middle East conflict in EMEA. - Full-year 2026 organic revenue growth guidance is raised to approximately 9%. Third quarter 2026 organic revenue growth is expected to be approximately 10%. - Full-year 2026 adjusted EPS guidance is raised to a range of $15.20 to $15.30. Third quarter 2026 adjusted EPS is expected to be approximately $4.70. - Margin expansion is expected to accelerate sequentially through the second half of 2026: ~50 basis points of year-over-year expansion in Q3, and over 100 basis points of expansion in Q4, led by the Americas segment. EMEA margins will remain under pressure in the second half due to the Middle East conflict. - Residential full-year 2026 guidance is raised to mid-single digit revenue growth, up from prior expectations of flat to slightly down growth, with expected tailwinds in the second half from strong market fundamentals and easier annual comparisons. - The current 2026 guidance assumes 30% YoY revenue decline in the Middle East for the second half of 2026, consistent with Q2 performance. - Management expects a stronger exit growth rate at the end of 2026 compared to the end of 2025, with $6 billion of backlog already in place for 2027, providing strong early visibility into next year's performance.

Segment performance

1. Americas Commercial HVAC: Organic revenue up low teens year-over-year (YoY), bookings up 50% YoY to an all-time high, with Applied bookings up 130% YoY (fourth consecutive quarter of triple-digit growth). Margins remain healthy despite ongoing capacity and innovation investments. This segment is the primary driver of overall company growth. 2. Americas Residential: Organic revenue up low teens YoY, bookings up high 20% YoY, performing above management expectations. Year-to-date sell-in equals sell-through, with distributor inventory held at healthy targeted levels. 3. Americas Transport (Thermo King): Market fundamentals are improving, with positive signals including high rejection rates, positive spot-contract spread, and 10 consecutive months of rising utilization. The business is expected to transition from a headwind to a growth contributor in late 2026 and 2027. 4. Services: Contributes approximately 33% of total enterprise revenue, with a low teens compound annual growth rate since 2020, delivering consistent, durable growth. 5. EMEA: Excluding the impact of the Middle East conflict, commercial HVAC bookings up mid 20% YoY and revenue up mid single digits YoY. Margins were pressured by the conflict; the Middle East represents ~15% of the EMEA segment and <3% of total company revenue, with revenue down ~30% YoY in Q2. Management took cost restructuring actions to align the cost structure in Q2. 6. Asia Pacific: Bookings up 31% YoY, organic revenue up 10% YoY, with healthy margins. Non-China Asia (particularly India, Malaysia, Thailand) is driving strong growth, with the company adding channel capacity to capture additional opportunity. Overall company: Enterprise organic revenue grew 9% YoY; adjusted EPS increased 11% YoY; enterprise organic bookings grew 37% YoY, driving a record total backlog of $12.1 billion, up 70% YoY, with $6 billion of backlog scheduled for 2027 and beyond.

Risks & headwinds

- The ongoing Middle East conflict has negatively impacted EMEA revenue and margins, with Q2 Middle East revenue down 30% YoY, and continued negative impacts expected in the second half of 2026. - Supply chain constraints may emerge as total production volumes grow to meet record backlog and demand, though management noted current constraints are manageable and the company has robust processes to work with supply chain partners to expand capacity. - Large data center projects may face delivery delays due to external issues such as delayed power grid connections and permitting, though management has already included reasonable project slippage assumptions in its guidance. - Inflation remains an ongoing headwind for input costs, though the company has structured processes to offset inflation through productivity improvements and strategic pricing. - Near-term margin leverage may be pressured by the company's decision to pull forward long-term investments in capacity, acquisition integration, and innovation to support strong demand.

Analyst Q&A

• Q: Given the very strong residential bookings growth this quarter, did inventory get overcorrected lower, and do you need to rebuild inventory now? /

  A: Independent wholesale distributor inventory was intentionally cut by 30% of production in Q4 2025 to get to appropriate levels entering 2026. Inventory remains at the correct targeted level entering the second half of 2026, and year-to-date sell-in is approximately equal to sell-through, so no major inventory correction is needed.

• Q: Commercial HVAC bookings are extremely strong, even outside of the well-known data center vertical. Is the pipeline still growing, how broad-based is growth, and how have recent acquisitions like Stellar performed? /

  A: The commercial HVAC pipeline remains as strong as management has ever seen, with growth accelerating not just in the Americas but also now in Europe. All 14 tracked commercial verticals in the Americas grew over 20% YoY in Q2, with 11 of 14 verticals up year-to-date, most with double-digit growth, so growth is very broad-based not limited to data centers. Stellar, the recent modular chiller acquisition, already secured one of the four $100 million+ orders the company won in Q2, and is on track to hit its 2026 revenue target of $500 million.

• Q: With backlog growing to $12.1 billion, over 50% of this year's revenue, will you need to turn away orders due to capacity constraints? /

  A: Management has already expanded applied commercial HVAC capacity 4x over the past three years, and continues to make brick-and-mortar capacity investments in Grand Rapids and to integrate acquisitions like Stellar. The company combines lean productivity improvements with planned capacity expansions to stay ahead of demand, and is not turning away any orders currently. The strong pipeline growth is not limited to the Americas, with the EMEA commercial HVAC pipeline reaching an inflection point after years of weaker performance.

• Q: What is the current trend in data center thermal management product preferences, particularly for chillers, and what is Train Technologies' product roadmap to meet changing demand? /

  A: The market has shifted towards air-cooled closed-loop chillers, in large part to reduce water consumption that is a common point of criticism for data centers. Today's air-cooled technology can deliver efficiencies similar to or better than traditional water-cooled systems, and the company's flexible portfolio can support any customer design requirement, including higher water outlet temperatures for modern high-density designs and free cooling / variable compression smart control optimization. The company works directly with hyperscalers on custom design, covering the full thermal management system (chillers, air handlers, CDUs) to meet evolving customer needs.