Trane Technologies Pricing Spineometer: 5 of 5 Vertebrae
Trane Technologies, a heating and air conditioning manufacturer, had a banner FY 2022. Revenue increased 13% to $16.0 billion while earnings before interest and taxes increased 20% to $2.4 billion over year prior.
Pricing was clearly on the mind of executives and investors in the 2 February earnings call. Improved revenue was attributed to higher prices and strong volume. Moreover, price increases outstripped input cost increases over the year on a dollar basis, though not on a percentage basis, leading to higher dollar profits, though lower gross margins.
(Pricing Technical Note: Trane’s prices increases are what is known as raising prices on a “nuanced” basis in response to input cost inflation. The “nuanced” price increase in response to input inflation results in constant to higher profits as measured in currency, but same to lower margins as measured in percentages. It is contrasted with the “aggressive” and the “complaisant” approaches to profit and margin management under input inflation. Aggressive responses keep margins on a percentage basis constant to increasing and profits on a dollar basis increase. Complaisant responses absorb much of the input inflation leading to shrinking margins on a percentage basis and shrinking profits on a dollar basis.)
Chris Kuehn, CFO, called out pricing’s relation to costs over 2022 stating: “Robust volume growth, positive price realization and modestly positive productivity more than offset persistent material and other inflation in the quarter.” In envisioning 2023, he continued, “First, we’re expecting modest incremental price and solid volumes to offset material and other inflation and drive strong incremental margins.
Kuehn moreover indicated a preparedness to dynamically manage list prices stating: “We’re not planning on multiple price increases in 2023, but we do remain nimble to react to how we see input costs playing out during the year.”
Dave Regnery, CEO, directed focus on the overall position of the firm in relation to external marketing environment changes. He spoke of the megatrend towards energy efficiency, the impact on the environment from climate change, and Trane’s role in drive a low-carbon green economy with their Gigaton Challenge, a goal to reduce carbon emissions by their customers by one billion tons by the year 2030. Supporting this claim, Trane is producing increasingly energy efficient heating and air conditioning units and green portions of the Inflation Reduction Act are driving demand in the States while carbon emissions pledges and reductions in natural gas imports from Russia both contribute to demand increases in Europe for these units.
With new product development, annual to more frequent price changes, market variations between different operating geographies, and competitive dynamics revealed in negotiations, strong price management will require a pricing team.
Research into the quality of Trane’s pricing team indicated a positive state of affairs. Pricing professionals were identified with titles of analyst, manager, director, and vice president. Pricing professionals worked on channel pricing, price setting, strategic customer pricing, pricing strategy, and the issue of international strategy and price coordination. Pricing professionals were distributed across business units and geographies.
The review of pricing at Trane opened a few new inquiries: (1) While most pricing professionals at Trane worked in the States and across the Americas, fewer were identified in the EMEA and APAC than one would expect in proportion to revenue. (2) Given the high importance of new product development in driving Trane’s “flywheel” of investing customer revenues into green innovation, how is Trane incorporating pricing into the new product development (NPD) lifecycle and their value story to their customers?
Given the importance and capability of pricing at Trane Technologies as indicated in financial reports, management comments, and our pricing team research, and given their performance, we have come to the following conclusion as of April ‘23.
Trane Technologies Pricing Spineometer: 5 out of 5 Vertebrae.
TT (Trane Technologies plc) X from 179 on the day prior to their earnings call to 183 one week later. 2022 revenue of $16.0 B with a 15% operating margin and P/E ratio near 22.
Currently, a 1% improvement in price would yield a 6.6% improvement in EBIT holding all else constant for Trane Technologies.
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