Trane Technologies (TT) Q2 FY26 earnings call: guidance and Q&A

Has the company overcorrected on inventory levels, leading to the current high bookings?

Inventory levels are currently at a good spot, with year-to-date sell-in approximately equal to sell-through. There was no overcorrection; prior production adjustments were made to align inventory.

“I don't think I -- we do -- we track the the IW independent wholesale distributors inventory pretty closely. I think we were in a good spot. Look, that was -- if you remember correctly from the fourth quarter, that's kind of where we -- unfortunately, we had to take 30% of our our production days out of the cycle to get the inventory where it needed to be. We came into the year with the right level. And the good news is it's still at the right level, which is reassuring for us in the back half of the year.”

asked by Scott Davis · answered by David Regnery

Will cost issues mitigate, leading to improved incremental margins going forward?

Margins are expected to be stronger in the second half, with sequential improvement in price versus inflation headwinds. Investments in capacity and the Stellar acquisition were pulled forward, impacting Q2 leverage but supporting long-term growth.

“Yes. That's how we got the guide slated for this year, margins are stronger in the second half and comps do matter. In the second quarter last year, we had organic leverage up around 40%. So you're right, it does get better in the second half. I mean, price versus all inflation. It was a headwind in the second quarter as we thought. We're having our guide, it will be a bit of a headwind in the second half of the year as well. It does sequentially get better from Q2 to Q3 than to Q4.”

asked by Scott Davis · answered by Christopher Kuehn

Can management provide more color on the commercial HVAC pipeline, the contribution from acquisitions, and strength in verticals beyond data centers?

The commercial HVAC pipeline remains very strong, particularly in the Americas and Europe. Growth is broad-based across 11 of 14 verticals year-to-date, with most showing double-digit growth. Stellar contributed one of four orders over $100 million in Q2.

“I sit here today and I look at our pipeline, and it's still really, really strong, which is just great for the future. The only thing I would add there is the pipeline in Europe has really started to increase. And again, in Europe, we had -- think of it as commercial HVAC, excluding the Middle East, we had orders up over 20%, but we also have a very, very strong pipeline there.”

asked by Andrew Kaplowitz · answered by David Regnery

Has the conversion of backlog changed, especially with the increasing mix towards data centers?

Backlog conversion is strong, with applied revenue up over 40% in Q2 and projected to continue in the second half. The record backlog provides significant visibility, with approximately $6 billion already for 2027 and beyond.

“On the conversion, if you look at our revenue growth in the second quarter for Applied, it was up over 40%. And -- so you can see the backlog is starting to flow through. And if you look at the back half of the year, based on our current guide, we're projecting that 40% to carry forward to the back half of the year.”

asked by Christopher Snyder · answered by David Regnery

Given the record backlog, is the company approaching capacity constraints or turning away orders?

The company is not turning away orders. Applied capacity has been expanded fourfold over the last three years, with ongoing brick-and-mortar investments (e.g., Stellar, Grand Rapids) to ensure sufficient capacity for future demand.

“We're not turning away orders, okay? We kind of I think I mentioned probably 2 quarters ago, we've expanded our applied capacity 4x over the last 3 years. That expansion continues to happen. So we have several -- first of all, we deploy our lean principles. So we're always looking to do more with what we have. But with that said, we also have brick-and-mortar investments that we're making -- we talked about Scalar already. We also have in Grand Rapids, we're making some investments.”

asked by Amit Mehrotra · answered by David Regnery

How confident is the company in customers' ability to take delivery of data center products, given narratives of project delays and power connection issues?

The company is confident in its guidance, which assumes some level of 'leakage breakage.' While some job sites may experience movement, it's not alarming, and some customers also request early shipments.

“Run. Look, we have a lot of confidence in the backlog. And as we think about our guide, we always assume some level of leakage breakage in the guide, right? We know not everything goes perfectly. We do a great job with our suppliers, but we're also making sure that we've got a little bit of breakage in there. So could there be some things in shift? It is just part of site construction and otherwise, but I'd say that we're confident in our guide.”

asked by Varun Govindaraj · answered by Christopher Kuehn

Can the company bifurcate residential performance between replacement and new construction, and comment on pricing in the market?

The company is heavily focused on the replacement market, with residential new construction (primarily custom homes) representing a smaller portion (in the teens). The residential team executed very well, leading to a raised full-year outlook for mid-single-digit growth.

“I think you know, we're heavily focused on the replacement, not undue construction. That said, we do have, I don't know, maybe it's we'll say, in the teens as a percentage of the business is residential new construction. But we're -- think about -- when we talk about residential new construction, we're usually talking about the think of the smaller builders that are building custom homes.”

asked by Joseph Ritchie · answered by David Regnery