Carrier Global Corporation (CARR) Earnings Call Transcript & Summary

All right. We're back. Second presentation of the day with Carrier. We have CEO, Dave Gitlin; CFO, Patrick Goris, and I think Sam is in the background there at the head of the table. As usual, feel free to e-mail, IB or throw your questions in through the event website, and we'll be sure to get those answered. We're going to launch right into the Q&A here.

Guys, thanks for joining me. We are going to kind of -- like before we move forward, we're going to take a bit of a step back. And maybe this is a question for Patrick, but the -- a bit surprising to us was the not necessarily -- the revenue performance in the fourth quarter was very good. Really, the decremental margins were I think a little bit weaker than most people were expecting, despite the fact that you guys had guided there. I think, in general, people thought you'd get better core leverage on the sales. Patrick, can you maybe kind of like just talk a little bit about what drove that and, in particular, kind of the mix dynamics there to the extent there were any? And this would be excluding the investment you talked about, that's all visible and we understand all that stuff. But maybe kind of some of the mix impacts that you guys experienced?

Sure, Steve, and thank you for having us. So a quick recap, Q4, as we mentioned on the call, pretty much as we expected. Currency was about $100 million tailwind for us versus what we expected, but it has very little earnings conversion. Now back to margins, as you mentioned, we had $75 million of investments in Q4 year-over-year. Most of that did hit our HVAC segment. Then in addition to that, we had the -- about $25 million of incremental public company costs, similar to what we saw in Q2 and Q3. And then we had about $50 million of onetime items, and those onetime items were about $20 million higher than what we had in our October guide. And there were really 2 big items in that $50 million, 1 that vendor contract renegotiation from the UTC days. We terminated that, we think we can do better. So that was $30 million of that. And the remaining $20 million was legal and related items. So that's kind of the margin perspective. If I look at mix in the quarter, mix, particularly within HVAC, was a headwind, and that really relates to commercial HVAC. So commercial HVAC was down. But within commercial HVAC, equipment did actually well. So equipment returned to growth, aftermarket and service was still down year-over-year. Now we built a backlog in aftermarket and services in commercial HVAC, so that bodes well for future periods. But equipment being up -- equipment having lower margins, and then equipment was up. All the growth in equipment was in Asia. North America equipment was still down year-over-year. And so within HVAC, particularly commercial HVAC, that's the mix headwind that we referred to.

So that would be kind of like applied versus unitary, if you will? So like applied is definitely not as good as U.S. unitary?

Correct. That's the way you can think about it, Steve. And then the good thing is, as I mentioned, backlog build on aftermarket and services, and that bodes well, of course, for future periods.

Is there -- usually, I would think that resi would be a pretty good mix. And you guys really did a good job in resi this year. Anything there regarding mix around more builders or different types of customers that may have not been as high margin as maybe your most rich type of sale?

Not in Q4, no. And so clearly, we saw the benefit of resi, attractive incremental margins, but all the, call it, margin headwinds that I talked to you about in Q4 kind of offset that.

Okay. Moving forward, inching forward here into the first quarter, maybe this one is for Dave, what are you seeing here so far in kind of the major verticals?

Yes, no surprises. Patrick had said that we'd be up double digits in the first quarter, we're tracking to that. Resi has come out of the gate strong. We had said that Q4 ended strong. We started the year with a very, very strong backlog. We said it was 3x over where it was at the same time last year. So we came in with a good backlog. The strength in orders we saw in the fourth quarter have continued in January and February into early March. So we're pleased with the order trends. So resi feels strong. Commercial HVAC, the things that have been strong, continue to be strong. Data centers, warehouses, education, health care, all those verticals continue to be positive. And they're supplemented by our focus on healthy buildings' indoor air quality. We talked about a couple of hundred million dollar pipeline. So we continue to lean into that area. We'll be coming out with a new digital offering here in April that I think will continue to catapult that as a market of -- that's really here to stay. So commercial sales on the HVAC side will be up. They have been up year-over-year in the quarter. Refrigeration is tracking really where we thought. Strong orders across the transport portfolio. That's in North American, European truck trailer. I would say, a bit of the surprise has been the strength in container. Containers, I think it's an indication that markets are reopening and that trade has been strong. So the container market for us has been very strong year-to-date, so that's been positive. F&S, we always thought would be -- we'd see some nice growth this year. We thought it'd be a little bit back-end loaded because -- partly because of the comparison, partly because of some of the industrial businesses. Hospitality would pick up in the back half of the year. So F&S is probably flattish in the quarter, but there's really nice strength in HVAC and refrigeration that get us to that double-digit growth in the first quarter.

What are you seeing in terms of orders that split between applied and unitary? I mean the unitary bookings numbers from some have been pretty solid, but the revenues and the activity remain weak. I know there's a bit of quotation activity out there. What are you seeing between those 2 types of business?

What's nice about the unitary business is we started with very low inventory in the channel. So as we start to see orders pick up, we should be able to convert that quickly into strong movement from us into our distributors and then out into the field. So I'd say it's -- the light commercial orders are slightly down year-to-date, but that's an area that there is a lot of pent-up demand. 80% of that business, as you know, Steve, is replacement. So we do anticipate seeing some nice pickup there. We've said the year is going to be up mid-single digits. I'm a bit optimistic there could be some room on top of that, but -- as we start to see societies reopen, especially here, of course, in the United States. So orders haven't been positive yet year-to-date, but you could see there's going to be -- there's likely to be some upside to that.

That's specific to light commercial.

To light commercial.

Got it. Specific to like commercial. Okay, got it. When we think about the resi business, where will we be on channel inventory after the first quarter here? I mean you guys are going to have a pretty big first quarter. The inventories, in my view, were kind of more in line-ish at the end of the year. I know one distributor that's -- he hasn't necessarily taken the product, but he's secured his orders through August. What -- how do we stand on kind of that channel inventory at the end of entering kind of the selling season?

Well, we watch that, of course, as you know, very carefully. We thought -- inventory levels were in balance as we came into the year, but orders have continued to be very strong. So the good news is movement has been very strong. So movement from our distributors to our dealers has been very, very solid. But despite that, the orders have been even a bit higher than the movement. So we are seeing a bit more inventory in the channel than we had at the start of the year, but it's something that we monitor. And we do work with our distributors to try to give them what they need when they need it to try to avoid having inventory levels get away from us.

Right. So I mean this is -- well, I mean, if you're in balance at the end of the fourth quarter and you grow very highly in the first, I mean, you will be pretty fully loaded heading into the year. Or is there a -- are those -- is a lot of that going to builders? Or is there some sort of other dynamic that's going on there? Because I don't think the end demand is growing strong double digits here in the first quarter, maybe it is. I've seen Hardy up 7%, which is pretty solid, but not strong double digits.

Yes. Like I said, movement has been very good. On the new construction side, you know that we're -- we have very strong share on the new construction side, which has continued to be very strong. But despite the strong movement, with the kind of orders that we've been seeing, you would naturally see a pickup of inventory levels, not the kind that covers the entire year, but we're very well covered. We were more well covered for the second quarter than we normally would be. So inventory levels have increased, but not to a point that's alarming. It's just a point -- it's just to a point that we actually work distributor by distributor to say, look, here's your orders, here's what we have. And we try to manage it distributor by distributor because our #1 priority is supporting our customers. And that's not something to say for effect, it's reality. I think we picked up share last year in part because we could operationally perform and give the customers what they needed when they needed, and we're working that in the first quarter as well.

Yes, for sure. You guys definitely took a little market share in 2020, which we'll get to in a second. Just to wrap kind of the first quarter, Patrick, I think there's some margin moving parts here with regards to Bayer in Q1. And there was a deferred cost item or something in last year's quarter. Anything that stands out on the bridge that you'd want people to be aware of here on the quarter year-over-year margin wise?

Steve, a couple of things. So on the earnings call, I mentioned that our Q1 conversion would be in the high teens, that's reported conversion. So we think that core conversion, when I adjust for Bayer and currency, will be obviously better than that in the 20s. With respect to Bayer, if I look at Bayer, that's the investment, of course, that we divested last year. And so that -- we won't have that in Q1. And then the deferred comp you mentioned it's really mark-to-market adjustments to our deferred comp. If I take those 2 items combined, that's $30 million of an impact year-over-year in Q1 that accounts for more than 5 points of conversion. Add to that, that we expect currency to have the highest impact in Q1. And you know currency, we gain on the top line, we gain some earnings, but we don't have 30% conversion on currency, so take that into account. And that's why I say that Q1 conversion will be lighter compared to the other quarters of the year. I'd say -- so that's what we expect to play out. The only other thing I'd say is that we are seeing some higher logistics costs this quarter than we expected. And so, obviously, we were not the only ones, but clearly, we're seeing that, a little bit more airfreight than we would have expected. But everything else pretty much playing out in line with what we expected.

Does production in resi being so strong, does that help you at all from a conversion perspective this quarter?

It always helps the plants a little bit if you load them more, but that might be at best timing within the year. And so I don't think that would have a material impact. Of course, in this quarter as well because of some of the storms we had in Texas, we also had some inefficiencies associated with that. So that might just be a wash, Steve. So I'm not sure there is a big tailwind for more production in Q1. We planned for a lot of production in Q1, so I don't think that, that will be a, call it, variance.

Has your view on commodity costs and the impact changed at all over the last 1.5 months? Just remind us what you're assuming on the cost.

No, it has not. We continue to expect price to offset commodity inflation in 2021. Well over 75% of aluminum, copper, steel requirements for the year are blocked. The price increases were announced. Through 2 months, our net price increase -- net price realization, I should say, is in line with what we expected. And of course, we target to do better than neutral. Our outlook for the year assumes neutral. And I'd say that, of course, we keep a very close eye on what's happening with commodity prices. We probably have more '22 in mind now than just '21. And we're also taking that into account as to what we do from a pricing perspective. This would not be the first time that we implement multiple price increases in 1 year.

Right. And I guess the degree -- Dave, the degree of acceptance, is there a range by business? I mean usually resi is higher than commercial and fire and security. I mean is there a range of kind of acceptance here on these, or degree of pricing upside by business?

Yes. I think your -- go ahead.

No, go ahead.

I think your assessment is right. Actually, we're taking a very targeted and structured look at pricing across the portfolio. So clearly, you've seen in the past where we've seen this kind of commodity headwind in resi. We have had to do multiple price increases, and it has stuck. So that's an area that we're certainly going to have to look at. And then within the F&S portfolio, it's such a broad portfolio that we look basically product by product to look at areas where it will most likely stick. And so we're taking a pretty measured approach to price increases. But with the kind of commodity headwinds we're seeing, especially in copper and steel, we really have no choice but to look there.

Right. And when it comes to those -- the commodity headwinds, what's the number again that you're using for the just commodity headwind for the year?

So Steve, on the call, I mentioned that it was several tens of millions of dollars for 2021, and that's after the impact from some of our blocking. So if it weren't for that, it would be significantly higher than that.

That would be the hedging?

Correct. Yes, correct, Steve.

Okay. Got it, okay. When we think about these investments that you're making, Dave, maybe just can we split them between kind of product, geographic and then kind of services? And I guess you could put digital in there somewhere. I mean where are -- this is going to be a big year for investments. So how are those kind of broken apart? What's maybe biggest bucket, what's smallest bucket?

Well, the biggest bucket is selling right now. We were -- we really did have to add to our sales force. We said that we'd add 500 sales and sales support people last year, we ended up adding a little over 550. And we continue to add to selling. So we've said that we were doing $150 million of incremental investments this year. I would say about $100 million of that is just on selling. And the rest is split between R&D and digital. Probably $35 million or so R&D, $15 million digital. So we are -- I can tell you that we're pleased with our R&D spend. We're seeing a lot of opportunities for differentiation across the portfolio. We're introducing new applied products. In the F&S, what's kind of nice is that you're dealing with, especially on the product side, high-margin businesses that you can make relatively minor investments to pick up share that drops through at a high number. So we're investing there and, of course, in refrigeration with a focus on more electric. And then in digital, we're really going on offense on the digital side. Bobby George and the team there is really looking at some differentiated offerings. And we're excited about this new offering that we're going to be calling Abound that's going to be coming out in mid-April that really is going to, I think, really catapult this focus on healthy buildings and create a lot of customer pull for new IAQ type offerings.

That is -- and that's a commercial product, obviously, it sounds like?

Yes. Yes, and it's going to be a...

Yes. Sorry, go ahead.

No, it's going to be a commercial product -- commercial offering. And the real intent is that it's an open architecture product that can interface with anyone's building management system where you have sensors throughout the building that can give you indications of various indoor air quality parameters, whether it's your ventilation levels, your CO2. It can look at particulate matter in the air, and it's going to make that visible to tenants. So before you go into -- JPMorgan into the commercial office, you can look at your iPhone and see what are the levels of some of the key indoor air quality parameters. And then it can interface with the control systems of the building to correct any deficiencies of the IAQ level. So if you see a buildup of CO2, you can increase ventilation. If you see an increase of particulate matter, you can bring in more outside air. So we think it's going to really drive stickiness to the whole focus on healthy buildings and into air quality.

And I guess, is there -- is that a revenue opportunity on its own? I would assume this is kind of to pull in products, maybe even catalyze equipment replacements. What's kind of the business model behind this? And how do you look at sales and margins resulting from a product like this? You called it Abound?

Abound, yes. Because it's Abound with possibilities. And it's both, there is going to be a subscription to it. So -- but it's also, as you said, it's going to pull through product as well. So what we're trying to be is the one-stop shop ecosystem for our customers for healthy, safe and sustainable buildings. So what -- it's a part of that ecosystem creation. So yes, there will be subscription-type fees associated with it, but the bigger focus is to drive more long-term differentiated agreements that'll tie into a service type agreement. We have these tiered offerings. It could help drive customers to some of our lead offerings where in the future state, we want them to turn the keys over to us, let them worry about managing other parts of the building, and we can work with the customer to manage off assets of IAQ and the safety of the indoor air environment.

Do you feel as though you have a -- is your entitlement to that as strong as others? You definitely have the -- some equipment in there. Your control system is not necessarily spoken of in kind of the echelon of some of the traditional BMS players that are out there. Does that matter that you guys are coming up the curve more on the building management system versus these seemingly more established players, or am I wrong? Do you guys have like a very competitive building management system that you think can go toe-to-toe with Metasys and some of these other ones, Honeywell and Schneider and the like? Because they've traditionally been more dominant in that space.

Yes. I would say we actually designed the system, recognizing the fact that we're not #1, 2 or 3 in the building management system space. So that's why we specifically designed it so it was easy to interface with anyone's building management system. It's agnostic, it doesn't need to tie in with the automated logic controls. That's our building management system offering that we have within Carrier. So it doesn't need to tie in with that. It's open architecture and interfaces with anyone's. I will say, though, that we've made a lot of progress in our building management space with the ALC offering. That team has come a long way. It's a high-margin product. We're seeing increases in share. We're investing a bit in the channel there to kind of continue to grow that. So we see a lot of opportunity there. We do think it's a very strategic area for us to try to keep focusing on growing. But we do think Abound can help really bring us more into the building, recognizing the fact that we are not one of the top 3 BMS players of sorts.

How big is your BMS business? I mean I always had it around $500 million, something like that. Is that...

Yes, that's about right.

Okay. Got it. Just tying a loose end on the margin bridge, how big is your G&A today? And what do you think the entitlement is? I mean you guys have done such an unbelievable job on cost. Some of that is G&A, some of that is supply chain. How big is G&A kind of end of '20? And how much more opportunity is there on that front?

Yes, Steve, you can think of our G&A being a little over $1.7 billion. Carrier 700 actually is mostly savings on materials, some savings on our factory footprint. Within Carrier 700, there is about $100 million of G&A savings over 3 years, so now we're in year 2. We see opportunity to do more than $100 million. And when I say this is -- there is a lot of complexity within our business, and we see, therefore, a lot of opportunity to simplify. We have over 500 different legal entities. We have lots of different ERP systems. And so we just started to implement automation, moving work to hubs, lower-cost locations, shared services. We just started on that journey, and we all know how powerful that can be and how much savings that can drive. So I -- we see opportunity to drive additional savings in G&A.

Got it. Okay. With the drop-off of investment in '22 and continued execution on G&A, why can't the incrementals in '22 be like a lot higher than 30%? Will there be more investment programs?

Yes. So well, our first focus, of course, is to deliver our '21 commitment in the core conversion of about 30%, as we said. You're right, we're anticipating savings of $150 million this year. That -- from the $300 million initial program, that leaves another $50 million of investments in '22. All else equal, that's what we would expect to invest next year. If there are additional opportunities we see for high-return investments, we may move that $50 million up. If I look at Carrier 700 savings, we anticipate about $225 million in '22. So all else equal, we would expect our conversion to be higher in '22 than in '21. I'd just say 2 things. One, if we see additional opportunities for investments, we may increase them beyond $50 million. And then in '22, and that's minor, but not all of our temporary cost reduction actions are coming back in '21. So there might be some additional headwind there in '22. But I think that's in the few ten millions of dollars. It's not going to offset the Carrier $225 million in '22.

Dave, when it comes to really executing on the services strategy, nobody wants to own the building. Given you have these, I would say, margin tailwinds in '22, and you say you'd look to invest. Investing sometimes means giving clients a bit of a better deal to kind of gain installed base and expand that relationship and get your products spec-ed in for the long term. Is that a part -- is that something you consider an investment? I mean actually, in aerospace, that's kind of the way it works, right? I wouldn't say price, but is, I guess, discounts or pricing, is that considered an investment if you have some money to work with within the framework of strong incrementals?

We haven't book kept it that way. But from a business model perspective, if you look at our applied business, we are #3. We've committed to get to #1 within 5 years. And you really have to look at it as a life cycle type business. So as you know, the upfront sale of a chiller has lower margin than we see on the light commercial or on the residential side. But if you have confidence that you're going to convert that into long-term agreements, you can -- it does help you increase your market share on the upfront sale, knowing that you're going to have confidence you're going to see the revenues over the life cycle. So it is one of the reasons that we are really leaning into these tiered offerings and to driving our stickiness with these higher attachment rates, higher conversion rates and overall coverage. So it's not that we're going to be reducing price on the chillers, but it does help us look at the life cycle approach.

Right. And how long are these contracts typically? I mean you're looking at -- I think JCI said last year upwards of 3 to 5 years. It used to be 1 to 2 and they'd turn. But is that kind of the length of the contracts that you're kind of thinking about now? Or is it even longer than that?

No, that's about right.

Okay. Got it. Looking at resi, so great momentum from '20, carried into '21 here. You guys are definitely back on the horse when it comes to share, in my view, pretty clearly. How do we think about the cycle? This is going to be like -- there's like 8 seasons within the cycle here. I mean it's first half, second half. And then in '22, there's a potential for a prebuy. How do we look at things through, I guess, the end of '22 in your view? Maybe take it by halves, I don't know.

Yes. I know you need...

What's your view on '21 and '22 and prebuy, I guess, in '22 in the cycle, is, I guess, the question.

Well, if you look -- if you put aside the really unprecedented lumpiness year-over-year comparison within any particular quarter. If you look back at last year, we were up 10%. We think the market was up sort of high single digits. So as you said, we picked up some share, and 10% is a very solid year, but not completely unprecedented. Clearly, the second half for us was extremely strong. Third quarter up close to 50%, 25% in the fourth quarter. This year, we're going to be up north of 20% in the first half. It could be closer to 30% as we see how things shake out in the first half. And the second half is down 20%. So what we've said for '21 is that if you put aside all the year-over-year comparison quarter-to-quarter, when all is said and done, this year for us will be up low to mid-single digits, which is sort of a typical year. So last year, a little bit higher than usual, but about 10%. This year, low to mid. We think next year, we'll have to see how it plays out on the replacement side. We're -- 25% of our business is new, about 75% is replacement. The new side continues to be very strong, and we have very strong share there. So we're pleased with that. There should be a little bit of prebuy ahead of the '23 changes as we get into '22. It's not going to be overwhelming, but you would expect some prebuy in advance of the '23 changes. And then '23, you start to see some of the benefit of the higher-priced, higher-SEER units. We should see a bit of tailwind from the healthy home opportunity. We've come out with some offerings there. That should give us a little bit of tailwind as well. But we'll have to see how the cycle plays out in '22, '23. But right now, the signs are overall strong. Obviously, very increased orders we saw at the end of last year that have continued. So as I said earlier, we really are trying to take a measured approach to make sure the inventory levels don't get away from us in the channel.

What's your percentage now of multifamily within that 25% of housing?

We don't really track that as much, Steve, because when you get into multifamily, it can cut across the portfolio. Some of it's just some -- it could be a basic split unit all the way up to light commercial up into the applied space. So it's not something we look as much at.

Got it. Okay. And I guess prebuy, you mentioned there will be some. I mean do you think like 5%, 2%, 10%? What's your kind of initial guess?

It's -- I would -- the word I would use is light prebuy. I mean it's -- I don't have a -- I wouldn't quantify it just yet. We'll have to see. And I think it will be a little bit situational dependent. But it -- I think it will depend on the dynamics at the time, but I don't think it will be a hugely material number.

What's your strategy around the '25 refrigerant changeover? I think you guys were all gearing up for kind of the '23 in California. Now it looks like it may be '25 nationally, correct me if I'm wrong. But is that something you have to kind of develop and tool up for today? Or is that already -- or do you wait a couple of years to deal with that?

Yes. We have been spooling up for a '23 change there with CARB, and it does appear to be '25, as you said. So that does give us a bit more breathing room on that. We've clearly been working on an A2L solution, the 454B. We still do experiment off to the side with our compressor supplier and our refrigerant supplier on an A1 possibility. So there are some issues we're working through there, but our primary path is the A2L. And we'll continue to experiment to see if we can make an A1 solution work.

And you don't need to switch compressor suppliers for this?

No.

Okay. Got it. On the commercial side, how do you guys define attachment rate, again? Maybe just walk through how you define it? Where you expect it to go? And then what kind of growth that ultimately drives?

Yes. Steve, we've been looking at 2 different terminologies, attachment rate and overall coverage. Attachment rate we defined as after we sell the initial chiller, are we signing a long-term agreement after the warranty period expires? And that went from 20% to 30% last year. Now if you were to define it as do we have aftermarket revenues after we sell an initial chiller? Of course, it'd be 100% because we sell parts and we do sell discrete things. So we actually take a strict definition that we expect an LTA coming off the warranty, and that's how we're defining attachment rate. And we do see continued momentum on that 30% as we get into this year and beyond. My goal would be 100%. As you said before on aerospace, that's the expectation is that you sell something on the new OEM side, you get some kind of LTA that comes out of it. We're not going to get to 100% overnight, but that's the thought process that we have internally. Our bigger focus is overall coverage. If you look at the amount of chillers that we have out there in the marketplace, less than -- really well less than 25% of those are under some kind of LTA. So to really move the needle on our aftermarket revenues, what we want to do is increase the overall coverage. Those are our units. We're the OEM. Those should be under some form of LTA with us. We can work with other partners either in the channel or outside the channel, third-party providers. They can do some of the wrench turning or other things in situ, but we should be using our digital tools to differentiate our offering as the OEM to provide an LTA to the customer. We've targeted internally and we've said externally that we're targeting 10,000 additional units this year. That is not -- that's the same number we're tracking to internally. So it was a stretch we said internally. We put the number out there publicly because we expect to drive ourselves to 10,000 additional units of coverage this year. It's not going to be easy, but it's what we're driving.

And sorry, your installed base is on the -- so the 10,000 units, what does that apply? What percentage of your installed base is that?

It's very -- well, we have over 300,000 units out there. We haven't been specific on the number of units, but it really does -- if we do 10,000 a year, that really can start to move the needle over time.

And that's applied or that's unitary as well?

That's applied.

Yes. Okay. Yes, that makes sense. Sorry, stupid question. On the applied side, what product are you kind of most excited about it? My biggest disappointment is not being able to go to the AHR Expo this year? What new product are you most kind of excited about on the applied side?

Really, on the applied side, we have a next-gen, air-cooled, low-GWP chiller. It's both a chiller and a heat pump in the EU. So it's using an R32 low-GWP refrigerant. On the heat pump side, which you know is a very attractive market in Europe, so we really want to lean into heat pumps in Europe, but it really covers the span up to 500 kilowatts. And then chillers covers a very broad range from, say, 60 kilowatts all the way up to 950. But air-cooled screw, low-GWP. We think it will have best-in-class efficiency, which will be very critical because we're really leaning into -- sustainability is very thematic across Carrier, so we continue to focus on that. It's EcoDesign compliant. So that's one. We have others, Steve, that will be coming out. A mag-bearing offer that will come out soon as well. So we are investing -- part of that R&D portfolio that I mentioned is going to that chiller space for a couple of these new offerings.

Yes. That's -- the Europe opportunity is -- I mean it was stagnant for years. It seems like everybody is very bulled up on what's happening over there. We have a question on the line here. Watsco announced the TEC acquisition this morning, Carrier Enterprises. Can you just talk a little bit about what that is? What the revenue base is for that one? And what's going on there?

We're excited about it. I would tell you that we work very closely with Al and the Watsco team to really build that relationship. And I think it's been a very positive win-win for both of us. We're both focused on growth. They've made a bunch of very positive changes that I think contributed to the share gains we saw last year. They were very direct rightfully so, that we need to make some changes, whether it was a branding strategy, a product strategy maybe on the lower SEER side. So we had very direct discussions with each other on things we both needed to improve that would benefit both of us. And we both made the changes, and we've seen the benefit from that. And part of Watsco's business model and overall Carrier Enterprises is to look at some other acquisitions. TEC is a phenomenal distributor. Skip Mungo and the team in the Chicago area are really best-in-class. So we worked with the Watsco team. Watsco has done a nice job managing that acquisition into the portfolio. It will be consistent with CE slightly -- there's some slight nuances to it. But it will be something that we're very, very excited about. And we're so glad that Skip will stay part of it. And part of the Watsco approach is to let these distributors, who have built these phenomenal franchises over many decades, multi-generations in many cases, let them go operate their business in a very effective way. We have great share in that area, and we're excited to work with Al and Skip on that integration.

You guys had also mentioned recently that you were kind of more seriously evaluating your VRF strategy, at least enhancing it in some way. I mean Toshiba has been a partner for a long time. Anything going on there that's a bit of a change in direction?

Well, look, we are very interested in expanding our VRF presence. You know it's about the same size as the chiller space, and it wasn't that long ago where it was half the size. So the CAGR of the VRF space is growing exponentially higher than the base chiller space. We know that you have a mix in the space where there's some players in the VRF space that actually have very good margins. So we've looked at how do you position yourself to grow and to grow with the kind of margin drop-through that we expect. So we're looking at various strategies. We have an organic strategy that we continue to lean into. But the reality is we don't design the product, we don't manufacture the product, so we're largely part of a distribution channel. And we want to become more of a player in the base design and base production of the product. So it's not -- if it were an easy solution, we would have done it 5, 10 years ago. So we're looking at various plays we can make there to get into the game in a more effective way and then expand it over time. We have very constructive discussions with Toshiba. They've been a very strong partner for decades. And we work with Midea as well. We talk to them in very constructive ways. And we look at other alternatives as well to become a bigger player in VRF.

And this would be on the commercial front, because I know there's a residential side of this as well that's actually moving up from kind of the appliance category, if you will. Would this be mostly on commercial?

It is. But like you said, it will be interesting to see where that whole space go when you get into VRF and ductless. Is there an ultimate play that -- where it becomes a bigger technology solution for the residential space? Maybe. So that's why our focus is becoming a market leader in that space over time. It's not going to -- I mean when you're about 1% of the market, you can't start thinking too much about becoming market leaders. But the way we think of ourselves is we have to become technology leaders, we have to have production capabilities, we have to have the channel capabilities, and then we can then drive the right kind of growth and profitable growth over time. The truth is we need to get in. We need to get in the game in an effective way, and that's what we're looking at.

But that seemingly requires like either buying in part of the JV or doing something more strategic, right? I mean it's not -- you're not just going to come out with a new Carrier system on your own. It seems like your -- you need to do something strategic there to kind of give it a shot in the arm.

That -- yes. I think that when we talked about bolt-on M&A, what we've said is that we want to focus on healthy, safe and sustainable building cold chain solutions. And we have this 3-pronged approach to growth. Growing the core, product adjacencies. And VRF clearly fits in that second category of growth, so that would be one that would -- you would naturally consider for bolt-on M&A. And then the third is services and digital. So we'll continue to work on our organic strategy, but that would lend itself to inorganic as well.

Got it. Guys, I really appreciate it. I think we're out of time here. I could talk about HVAC all day and all night, but maybe we'll be able to do that over a beer at some point in person. But I really appreciate your time with us. Hope you enjoy the rest of the day, and best of luck this selling season and through the rest of the year, and we'll talk in April.

Thank you, Steve.

Thank you, Steve. Take care.

Appreciate it.