Sustainability, the Sweet Spot for Growth

We spend a lot of time worrying about big-picture headwinds like excessive inflation, and slowdowns, but some companies seem to defy those headwinds. Take Trane Technologies that's a major player in the heating, ventilation, and air conditioning space, with a refrigerated trailer kicker, you've seen them on the road, you just don't know it. You'd think this company would struggle given their exposure in new construction or the overall weakness in freight for the trailer business but Trane keeps putting up excellent numbers. At the beginning of the month they reported a blowout quarter and also issued phenomenal full-year forecast. Even in the recent market-wide selloff, the stock held up pretty well. How did they pull it off? Let's check in with David Regnery, he is the Chairman and CEO of Trane Technologies to get a better sense of the story. Hey, welcome to Mad Money. This is fantastic. Thanks for having me on the show.   For the other people out there including my daughter that said dad, can you find me a company to make the planet cleaner? I got in front of me a man that says our goals are decarbonization and sustainability. You've got the floor. They absolutely are. Our company is really founded in our purpose; which is to challenge what's possible and innovate for a sustainable world.  And, if you think about it, what we look at in our industry, heating and cooling of buildings represents about 15% of all global greenhouse gases. 1. 5. percent. 1.5. heating and cooling of buildings. If you add on food waste, it's another 10%. And if you think about food waste, the majority of It comes from the way it's being transported. So we're in a sweet spot in Trane Technologies where we have 25% of the greenhouse gas that we can go after and really decarbonize it. It's incredible. You said something unbelievable in the conference call I won't forget. Being broken means too much energy. Explain that to people. What we did was we realized early on that if you think about a building and ten years ago, we used to think it's not cooling, it's not heating properly. Something is broken in the system that's now transformed to we're connected to buildings we're connected to assets and now something is broken when it's consuming too much energy. So we don't roll a technician necessarily just when something isn't properly that isn't working binarily we roll a truck when something is using too much energy. Your passion is clearly to make it so that there is less carbon, and it seems like that you have a huge amount of technology a lot of really fantastic scientists that work at your company right now. We sure do. We have scientists that this is an incredible story. Usually, you don't find the incumbent that's a disruptor; what we were able to do is in a traditional building, you have a cooling plant, usually a chiller plant and you have a heating plant, usually a boiler. What our team did was combine the two into one system. We call it a thermal management system. We have eliminated the need to use fossil fuel for heating. When you think about the 15% of carbon for heating and cooling of buildings, the majority of that comes from the heating side because it's fossil fuel and the efficiency levels you get by combining these systems, they could be 3 to 4 times more efficient than the conventional system. I know you mentioned that in conjunction also with Europe which we know is far ahead of the United States in terms of fighting global warming. That must be a very good seller. Yeah, I mean, our business in Europe is just a fantastic fourth quarter. Our revenue growth in the fourth quarter for our commercial HVAC in Europe was up 40%. 4. 0.  That's incredible since everyone thinks that   Europe is moribund but obviously not.  Now you make a lot of money once the product is in. You have a consistent service revenue, I mean, you're not just saving the world you're making a lot of money for shareholders.  That's right. I mean, 30% of our revenue is from services. It's now becoming more connected. It's becoming more digitized and it's just a fabulous business that we're very proud about here at Trane Technologies. On your conference call your CFO said something very unusual. He said our shares remain attractive trading below our calculated intrinsic value. Most CEOs and CFOs are never willing to say the stock is cheap. They say, "Jim, that's up to you." You've done some work on this; you've modeled what your company should be worth. We sure have, we're always looking at our intrinsic value and we have a lot of firepower to buy back shares. More than $3 billion? More than $3 billion. And when we're in that situation, we have a balanced capital allocation strategy, so we're going to pay a competitive dividend, we're going to always look to reinvest in our company. The way we've been successful is through this relentless innovation and it creates a flywheel. We're always going to look at great investments and then we'll certainly look at share buy back and M&A to make sure we deploy 100% of our free cash flow. When I first met Trane, you were part of a major conglomerate, a conglomerate, by the way, that was run by a very good person. Are you able...a company like Trane lost in a conglomerate is a company that can't grow. I mean, you are just Trane now and it works, doesn't it? I look at -- I’m very proud of our success in 2022 organic revenue is up 15% our EPS growth was 21%. We delivered against strong cash flow this business is very vibrant. It's growing and the mega trends around sustainability continue to intensify. You also made it clear you had some supply chain issues. Those are in the past. And you, by the way, you're not raising the alarm. You're not saying inflation is going to be such a negative that you have to asterisk your numbers this year. That's correct, Jim. I would tell you supply chain; our team has done a fantastic job with the supply chain. Unfortunately, it's not 100% fixed. It's not back to what I would call normal. But it will get better over time and we're seeing a gradual improvement. People should understand when you build a chip factory, when you build a battery plant, and when you build a data center, that's your bread and butter. There is a lot of cooling capacity required when you build as you just said. Can you tell us about what the, I always laugh at it,  but the inflation reduction act might mean for your company? Yeah, I mean, the short answer is it will be a tailwind. I think that you have 2 components of that; one is a tax credit that's been implemented. The other is the rebate, which is where funds are going to flow from the fed to the states and each state will have a little bit different framework that they will operate in. We think that's a tailwind in the back half. 2024, 2023 is schools. That's their funding. Right. So, in 2022, in the education vertical, our equipment orders were up 40%. 4-0. These are better than tech numbers, people. This is what you're looking for in this environment. I want to congratulate you. Trane is a great company, you've done fantastic work.  Dave Regnery is the Chairman and CEO of Trane Technologies, TT. I’ve always loved this business. And Thermo King too. You've done great stuff. Thank you very much.