Carrier Global Corporation (CARR) Earnings Call Transcript & Summary

So we're very happy to have up next here, which now starts our kind of the HVAC part of the day because it's Trane comes in right after this. But we're very happy about Carrier, Investor Relations Head, Sam Pearlstein; and Chairman and CEO, Dave Gitlin. Dave is going to make a couple of introductory comments here, and then we'll roll it into Q&A. Dave?

Thank you, Steve. Thanks so much for having us. It's great to be here in person. Just a few slides. A lot of you saw this from our Investor Day a few weeks ago. So I'll go through it quickly so we can get into the Q&A. But just a reminder of some of our key themes. It starts with why Carrier? We talked about secular trends that are going to drive continued sustained growth. Secular trends like sustainability, indoor air quality, actually, as I was coming up, the White House and EPA just issued an announcement that they're going to be launching a Clean Air in Buildings Challenge. This is coming from the highest levels of government pushing healthy indoor air environments. Cold chain, middle class, what these secular trends do is drive increased spend on the ecosystems that we're focused on buildings and cold chain. And then what we're going to do is drive innovation and digital differentiation to get more than our fair share of that incremental TAM that comes from these secular trends with a key focus on aftermarket growth. We have a strong balance sheet to play offense and then it results in a financial algorithm of long-term profitable growth with strong cash conversion. We talked a lot at our Investor Day about differentiation, and it's starts with the fact that Carrier starts from a position of strength. We have a channel, a brand -- many brands, an installed base technology differentiation that really puts us in a great position to go and take more than our fair share of that incremental TAM. And then we have the right investments, the team to play both digital offerings especially, you'll hear a lot from us on Abound is our digital platform that we use for buildings, links for cold chain to really drive differentiation through digital differentiation in those key 2 ecosystems to get more than our fair share of that incremental TAM. And the big theme for Carrier is that we've made a very conscious shift from being an equipment company to a solutions company. And that's why you see on the next slide, our big focus on aftermarket growth. Today, we only have 25% of our own aftermarket. That's a crime. That is our aftermarket, and we are going to go after our aftermarket with a vengeance. And you see it growing from $4.5 billion to $7 billion over these next 5 years, high single digits to the low double digit. It comes with higher margins. We said that our aftermarket margins are 10% higher than the Carrier overall margins, and we're going to use digital differentiation. We're going to use a playbook that is tried and proven in multiple industries, connected devices, driving attachment rights, driving additional coverage, using tiered offerings, working the right arrangements with our suppliers to make sure that we get more than our fair share of the TAM and make sure that we are driving the aftermarket growth that we would expect of ourselves. We talked a lot about ESG. And we use ESG to play offense and to drive it as a growth vector for us. I was reading in the Journal yesterday or the day before that in Europe, they import 90% of their gas. 45% of that comes from Russia and they have launched an initiative to cut their reliance on Russian gas by 2/3 this year. Part of it is through more energy efficiency in buildings. What does that mean for us? That means heat pumps. That means more energy-efficient solutions for HVAC offerings in buildings, it means electric reefer units, replacing diesel units for truck trailer. We are the first ones to market with a fully electric truck trailer unit in Europe. It's in 10 different countries, and we plan to grow that significantly. We talked a lot about operational excellence. Taking cost out is in our DNA. We know how to do it. We have a proven track record on this, and we really broke it into 2 categories. We said that we would be at least price cost neutral, pushing for price cost positive this year. We said that we would drive $1 billion of price increases this year to offset the inflationary headwinds. And then we also control the controllables. We've said 2% to 3% forever, driving 2% to 3% out of our cost base each year. Now to get 2% to 3% of your total cost base, you have to drive something like 5% or north of 5% of gross productivity in your factories and in your supply chain and the result is 50 bps of margin expansion a year. We've made great strides on our balance sheet. As many of you know, when we spun from United Technologies less than 2 years ago, we had $10 billion of net debt. As we sit here today, we have less than $4 billion. So we are -- we have more cash than we need to run the business, which puts us in a great position to play offense. You see our priorities on the left, investing in growth, organic and both inorganic. We're building out our pipeline to go play offense on M&A, and you see our priorities along the right. A couple of other points is that we said we'd do $1.6 billion of buyback this year. Through the end of the first quarter, that number will be something like $750 million. So we have been buying back our shares. We increased our dividend 25% this year. We said that we would pay down $750 million of debt this year. You may have seen an announcement a couple of days ago from us that we were paying down $1.15 billion. What that is, is we're paying down $1.15 billion, but we're going to issue another $400 million of yen-denominated debt as part of our Toshiba acquisition. So the net remains the same. No new news. We're paying down $750 million of debt this year. And the result is an algorithm that we're very pleased with and that we have very high confidence in, 6% to 8% organic sales, top line growth. We talked about 50 bps of margin expansion per year. Last year, we had 80 bps. This year, we've said 75. We think over the long term, we're -- it's in that 50 bps range. Double-digit EPS and cash flow equal to net income. And before we get into the Q&A with Mr. Tusa here, just 2 other comments. One is on the quarter. We had talked about $0.45 of EPS. January and February were a bit better than we had thought they were going to be, but March is always a very important month for us. So we're not spiking the ball. But things were trending a bit better than we had projected coming into the year. The second comment, and Steve, maybe you were going to ask this, but I'll perhaps preempt it a bit. But on Russia and the Ukraine, we have no sales or employees in the Ukraine. In Russia, we have 35 employees. It's a very immaterial part of our sales. It's about 0.5% of our sales. We have no Tier 1 suppliers there, but of course, our focus right now is supporting our people there, but also the entire situation, of course, is heart wrenching on multiple levels. And we, I think, like so many around the world stand in solidarity with the people of Ukraine, but it is an immaterial part of our business. So with that, Steve, we'll get into the Q&A.

Great. Thanks, Dave. Just winding back a little bit into the quarter comments. Any part of the business, I think you in the past have mentioned residential was doing a little bit better than expected. Maybe some color around what's going better here in the first quarter so far?

It's probably resi light commercial. Resi continues to be strong kind of across the board there. And light commercial is just a very encouraging situation between the verticals that we focus on there with K-12 and data centers and so on. Orders are very strong. Our backlog is very strong, movement from our distributors to our dealers remains very strong. Inventory levels are in check so light commercial continues to be encouraging.

I mean light commercial is obviously like blowout numbers in the -- like last year, I think in the second half of last year, a very strong kind of a little bit more magnitude -- sense of magnitude on those 2. So far trending into the first quarter, is light commercial -- yes, because I mean light commercial was up, I think, like 20% plus. What on those -- any sense of magnitude of how strong they are in the first quarter so far?

Well, what we said for the year is that light commercial would be up double digits, and we said for the year that resi would be up high single-digit, most of which coming from price. And both of those, the volume has been strong just through first 2 months.

Okay. So obviously stronger than that then for the first couple of months?

Yes, it's been encouraging.

Yes. Okay. You also mentioned and Patrick mentioned that you guys put through another price increase in March, I think 8% or 9% across 9%? What's the point of price when you're getting 9% across just where was this? Was it across all the businesses? Maybe a little more detail on that price increase.

Well, we are now, I think, on our fifth price increase in resi over the last 12, 18 months. So we've really had to lean in on price, and we've worked all of our price increases across the portfolio, I think, in a very constructive and transparent way with our customers. And the $1 billion of price we are expecting this year, we've mentioned that 80% of it is either carryover from last year or became effective on January 1. So this 9% is incremental to that 80%, further fills that gap, we need to get to our $1 billion. But that -- the $1 billion cuts across Fire & Security, which is pushing price refrigeration as being -- is pushing price, of course. And the 9% was applicable basically for North America HVAC. So it's cut across resi, light commercial in North America and the commercial applied business.

Got it. So that is not necessarily the full -- that's not going to be the full $200 million extra? Should we expect another one of these coming in June?

Well, I think all business units are having to drive incremental to hit that incremental 20%. And we have to keep an eye on inflation. We continue with a very fluid environment, of course. So we continue to watch all of the indicators around inflation and you expect more price increases out of the other business units and we'll have to keep an eye on whether further increases are coming.

So let's talk about the inflation side. You said $1 billion seems like a huge number. Steel was actually trending down. It's moved back up, maybe it's going to go back down again. I'm not sure. Is there a possibility that, that $1 billion is conservative if steel resumes its kind of downward trajectory? Or is just the timing of how that all phases in, that's more -- that would be more kind of '23 story as opposed to a '22 story. Maybe just frame the $1 billion and how you're thinking about the variability in that for the year?

Well, what I would have told you 2 months ago is the $1 billion was -- we purposely made it a bit on the conservative side. As I sit here today, I don't look at it as conservative. I would describe it as probably a point number. And we were trying to -- what we did is we took -- the rates that we saw in the 4Q for inflation that were a bit higher than what we projected coming into the fourth quarter. And we assumed that the inflationary headwinds that we saw in 4Q continue throughout the rest of the year. And we were sort of hoping that, like you said, steel in North America might come down, that could give us a bit of tailwind. And right now, as we look at it, we think those estimates are really right in the middle of the fairway. We are blocked on around 70%, 80% of copper and aluminum. We have different approaches we take on steel, especially in North America. We have to watch steel in Europe. It's not a huge percent of our steel buy, but it's a percent that we have to watch because of everything going on in Russia and the Ukraine. If you watch logistics costs, that's still kind of messy with things going on in China. So the cost of logistics for freight coming from Shanghai to say, L.A., is still at elevated levels. So we think it's appropriately calibrated, but we don't think it's conservative.

What's your rate as a percentage of cost of sales?

We've not shared them.

And then labor...

Expensive.

And then labor, you guys talked about that at all?

I don't think we have given a specific number on that.

But I guess these rates of inflation that you're seeing, just in general, is it kind of like a high single-digit type of rate across these cost components?

Well, if you think about $1 billion of inflation on the $20 billion business you're going with 5% or so. But our -- the good news is that we have shown effectiveness on the price side and multiple price increases, which is not fun for our customers, not fun for us, but it is something that we have to do and we'll continue to do. And we have shown a lot of effectiveness on controlling the controllables. So we said that we'd have $300 million of gross productivity, $100 million of G&A., that's not just a thought. Those are real actions behind it. There's specific targets by function, by area that we have to go drive. We're doing it in a strategic way with low-cost COEs. We're driving supply chain, which is tricky in this environment, but we're still working Carrier Alliance and then productivity in our factories, which is encouraging now because COVID-related absences across the world have gotten to pretty close to 0. I mean we do not have -- we have some absenteeism in a couple of our North American factories unrelated to COVID, but just the general environment. But outside of those couple of factories, absenteeism at very low levels, virtually none related to COVID, which enables us to drive better productivity.

And then on the kind of purchase component costs, I would assume those are pretty locked for the year. Like you have these long-term contracts and you may be getting surcharges here and there, but like that stuff that doesn't -- if steel goes down, it's not like Emerson is going to cut its prices on compressors for you until the next round. Is that a fair assumption...

We have a mix of suppliers, some under LTA, some that are more on a spot buy. I think where we -- we have some level of protection. It's where even with our blocking positions where it gets tough is if you have to buy either electronic components from brokerage market or you have to buy copper or aluminum in the spot market because your volume projections -- at your volume ends up being higher than what you thought it was going to be. But we -- right now, I will tell you that we watch it like everyone else, but we feel calibrated on our price cost balance.

Right. But I mean -- I guess I'm asking like the potential for some relief in the back half of the year on this -- the $1 billion of cost is a visible number. That's not a -- there's not a significant hedge in that.

No. We have -- I think we have some detail behind the $1 billion of cost, and we have a fair amount of detail behind the billion of price, and we have a lot of actions behind the $300 million of productivity.

Right. On somewhat related supply chain you mentioned having to pay a little bit more to get some electronic components. What are the 1 or 2 components that are bugging you these days? And relative to maybe a couple of months ago, would you say the situation is better, worse, the same when it comes to availability?

I would say if it's better, it's marginally better. It's about the same. It's a challenging environment. I would tell you that to a person, I'm super proud of our team because I think that we're managing it as well, if not better than others. But electronic components remain challenging. We're optimistic that the strategic deals we've done directly with the OEMs will help us as we get into the back half. More capacity, we're expecting to come online next year that should provide some relief as we go into next year. But electronic components remain challenging not only for us and the boards that we populate at our facility down in Mexico, but it remains challenging for our Tier 1 suppliers. So we do -- we go to great lengths to support our Tier 1 suppliers on the electronic components they need. So generally, we have issues that pop up almost every day, every week. We're managing them. And I think the number of issues is getting smaller.

Got it. Just sticking with the bottom line cost side, this productivity number that you guys put out there is pretty positive. Does that depend on volume? Or is that something that even in kind of a flat volume environment, there are things you can do to bring -- to drive that cost out of the [ system ]?

I think there's elements of that number that are independent of volume. We're going to drive G&A out of the system independent of volume. Productivity, obviously, you always get -- as you get more load in the factories that does help you with your absorption. So that is a bit sometimes volume-dependent, but supply chain, we got to keep driving. So there's an element that we'll get independent of volume.

Okay. Just jumping into the businesses. You mentioned -- you talked a bit about resi, you talked about light commercial. In the large kind of applied market here globally and in the U.S. What are you seeing on orders so far in the quarter here? And how do you see that playing out for the year?

I would tell you so far so good. Orders have been strong, really across the regions. North America is probably the strongest, not probably -- is the strongest in terms of orders, but Europe have been fine with what's going on in Russia and Ukraine, we watch it. Europe is about -- it was a higher percentage of our business before we sold Chubb. Now it's about 25% of our business. But across the board, Europe has been fine, especially on the applied side. And frankly, time has been strong. So we're pleased with orders. You look at some of the leading indicators like the Architectural Billings Index, you know, Steve, better than anyone what that is. It's been above 50 for about a year now, which is a good 6-month leading indicator of commercial construction activity. So I would tell you, commercial applied, it's like the rest of our business, orders strong, backlog is strong. Our challenge is just from a supply chain perspective supporting our customers.

And then within kind of the U.S. market for commercial, you can throw light commercial in here as well, what are the verticals? Any change in the leaders or laggards when it's come to the various verticals?

No, pretty consistent. Data center is very strong, K-12, a lot of pent-up spending and demand there. So we're very encouraged by K-12 commercial buildings starting to come back online, retail coming back online. So the verticals warehouse has been very strong for us. And frankly, you saw last year, we picked up 350 basis points of share in light commercial. Part of it was because I think operationally, we could perform. Part of it is that we've gone in a very effective way after some of the bigger national accounts, either on retail or warehousing and that served us well.

Got it. So retail and warehousing, you had particular success in taking share. Anything on data centers?

K-12.

Data centers, too. I feel like everybody is going after the data center market. You guys feel like you're after the market in data centers too?

We do in [ light ] commercial.

Okay. On the services front, maybe just walk through how your strategy -- everybody is talking about attachment rates declined in different ways why are you guys best positioned versus on the commercial HVAC side versus a JCI or a Trane who are going to tap their capabilities as well?

Well, what I will tell you is that when we talked about our $4.5 billion and having 25% of our own aftermarket, that's our own aftermarket. So we don't typically compete with some of our OEM peers to get the incremental 75% of that aftermarket that we're going after. I will tell you that having come, Steve, from aerospace a few years ago, there is a playbook to driving aftermarket. And if you miss one piece of the playbook, it doesn't work. So how you deal with your suppliers, how you deal with your customers, how you have tiered offerings, digitally enabled differentiation, connected devices so you're getting data off of your chiller so you can use prognostics and diagnostics to drive solutions. There is a whole playbook that Ajay Agrawal working with the BUs that's driving and driving it effectively. So we said aftermarket, double-digit growth this year, coming off double digits last year, attachment rate going. We were at like 19% 2 years ago. We all define it differently. We all look at it. We don't look at a time and material. We have a pretty strict definition for it. But we -- for our 330,000 chillers, we've gone from 19% to 38%, and that's going to grow 5% to 10%. So we feel good about attachment rates increasing. We said coverage, total number of chillers growing at least 10,000 units a year. And we're using digital differentiation to drive that customer stickiness and drive them to our elite offering. So we're very, very encouraged by the aftermarket growth, which is a major, major theme for Carrier. I mean that is a fundamental theme, which is driving higher margin, recurring revenues to dampen any cycles that may happen in any of the businesses.

So what are the mechanics of that? Obviously, that's not maybe all of the new equipment that gets put in, in any given year has that connectivity. But 300,000 units sitting out there, what is the mechanical process of which or electronic process with which you go in and enable it to be able to service it effectively at a reasonable margin for you guys and kind of change that business model? Just talk about how that proposal and then execution on that works.

There's a difference between units coming off the line and what's in the field. Units coming off the line, controller connected coming out of the gate. The 300,000 that are out in the field, you basically took an edge device, it might look like your smartphone and you attach it to the chiller, depending on the nature of the chiller it's an hour or 2 of installation, you now have a connected device. There's other ways to connect devices as well. You may be able to connect the building through other means and then connect the chiller. So not every single chiller needs it's own edge device on it. You can put Abound in the system and now you have connected devices. So there's different mechanisms to connected device. It's inexpensive. It's very -- it's an easy installation even if you do provide an edge device. But then it unleashes data, it creates a connectivity with your end customer, and it drives that...

And are they paying for that device? And then you guys -- or that you guys are saying, "Hey, we want to put this in because now we have this contract we want to..."

Either way. I mean, it depends on the nature of the agreement. We would be fine absorbing that cost for the right LTA. In some cases, they pay for it upfront. It's all about getting the right long-term agreement.

And then at that stage of the game, how long are you targeting these long-term agreements to be? And then what percentage of the installed cost of the machine or the cost of the machine do you get over the life of that contract, if you will?

The cost of installing the devices is -- it's not a huge material piece of the overall revenue that we...

Sorry, I meant the cost of the machine.

So usually, we get 5 to 10x aftermarket revenues from the initial OEM sales. So where you get the bulk of your revenue stream will be in those aftermarkets. And for the higher-end equipment, it can be up to 10x the revenues versus your upfront sale. Typically, say, 3-to 5-year agreements. But once we get an agreement, we have about 90% renewal rates. So the key is get in, get the equipment connected, get a long-term agreement and then support your customer effectively and usually, you'll get a renewal.

Right. And how many of these actual long term -- because I know that it's a little bit of a different definition we're working with maybe today versus 3 or 4 years ago. How many of these normal type of contracts would you say you have booked at this stage? Is it in line with the connected?

Yes. What I would tell you is that when we have 330,000 chillers, you have about 60,000 that are under some form of LTA.

Some form of LTA. Got it.

We said we're going to increase that 10,000 a year.

Okay. Got it. So that's kind of the standard that is living with you for 4 years, 10% attrition and that you're going to get. Okay.

And for [indiscernible]. Yes. I'd would like...

Yes. Okay. All right. That's a business model, I'm sure you know reasonably well from the aerospace days.

And it drives me crazy that it's not higher. I mean, I think that the reality is that we now put a phenomenal team in place, and there's not a lot of issues that get as much oxygen internally as this one. So this is something that we're going to drive and drive pretty [indiscernible]. .

Why -- I have my own views, but why do you think it isn't as high. And obviously, in elevators, it's a way of life and it's a business model. But in commercial HVAC it's been absolutely the opposite for years, I guess, up until maybe 5 to 10 years ago. But why do you think it's so different?

There's probably a host of reasons Steve. But what I would tell you is the #1 thing right now is just focus. I mean it has to become a part of your business model and focus, and it applies not only to our chillers, but it applies -- we have 1.8 million reefer units that are out there. Our transport refrigeration units that are out there that like a tiny percentage are under some form of long-term agreement. That's going to change and that has to change.

Right. On -- geographically, Europe has come up a lot on the heat pump side. Maybe just clarify how the resi heat pump opportunity over there, which I think has made a lot of -- there's been a lot of news in the last couple of weeks on that versus the commercial side because I think they're very different. We're getting a lot of questions about, but maybe how Toshiba helps you on the resi side? Or what's the difference between the 2 for the European heat pump opportunity?

The European -- the resi side is actually a bigger market and we have very little share there. So there's a couple of things that we're doing.

But that's not different. None of it needs to be cleared, none of the U.S. OEM it's not like you're fighting against the U.S. guys and you have low share, it's more of a geographic kind of global thing?

Yes. It's a Europe thing because in North America, a significant number of our splits are also heat pumps in the residential. Like 30% in the U.S. and North America. But in Europe, it's a lot of white space, I think, for all of us. So if you look at the resi side, we have a traditional boiler burner company, Riello in Italy that has an installed channel with a great potential to really leverage that channel and now we have the technology to really go attack the heat pump space. So we'll leverage Riello. We'll leverage the Toshiba acquisition because that is the sustainability play. Their condensing unit is going to help us significantly as we go after that residential heat pump market in Europe. And then we look at different relationships that we can build with others. But you look at the European market, you have a whole -- you have a tremendous opportunity, but you have effectively a channel play where the hot water and the heating will come typically from the plumbing section. The air conditioning typically comes from an electrical contractor, how that plays itself out potentially 3 for 1 and providing solutions across those different categories is a real opportunity for us. And we're going to go after it.

It's going to be clear, I'd say that's a kind of a ductless market versus a [indiscernible] market here in the U.S. because I think it's another thing people don't quite understand. It's very different. So then on the commercial side, how is it different on the commercial side because that is -- seems like an opportunity that's been in front of you guys for the last couple of years. Everybody is generally seeing demand -- pretty solid demand there.

Yes. And we're doing well, and we have great technology. So that is more of a traditional technology channel for us. We are very well positioned. We are very confident in our technical offering because we believe, and I'm sure that our peers that are going to come in after us would say something similar, but we feel that we have leading-edge coefficient of performance technology. So as you transition from traditional chiller/boiler to just a heat pump kind of technology that we've been deploying, we think that we have really world-class coefficient of performance input/output differentiation that is going to withstand the competitive landscape.

And is that reported through your commercial applied segment? Or would that be part of kind of global light commercial.

Commercial applied.

Commercial applied. Okay. Any questions out there for Dave? Moving on to resi, just taking a bit of a step back higher level. I think most of the OEMs are kind of punting on making a cycle call stating this is kind mid-single digits. You had actually a bit more to say than Nelson did when I asked the question, you said it still fits the useful life of some 15 years. Maybe just discuss what you guys [ can build ]. Like you said it was 17 because it got repaired after 15.

Well, I think Chris and I were consistent. But the -- what I would tell you is that we get this -- Steve, we get this question a lot, including from you. And there is -- there are a lot of people trying to figure out doing mathematical models to figure out exactly what's going to happen with the residential cycle. And that was happening last year. There were a lot of skeptics that because 2 years ago, we had 10% resi growth, they were saying, this year, I'm a little bit worried. What happened last year? We grew resi 20%. Carrier was up 15%. We grew our EPS 36%, and cash flow was at 114% in net income. We said this year, resi's going to be up high single digits, of course, the bulk of it from price. But all of the fundamental indicators that we've seen driving the growth that we've seen over the last couple of years, they're still there. There is still residential -- the new construction piece, we had said this year would be flattish, maybe there's some upside to that. You saw what Lennar said last night and this morning. So some of the indicators, their issue is and our issue is supporting our customers for the homebuilder side. Our people spending more time at home and maybe that has -- it does have an impact on the cycle, it's hotter. That impacts the cycle. People in the Northwest are buying air conditioning didn't used to have them. You have more people buying new homes. They do an inspection. It says replace your air conditioning, so maybe that accelerates some of the cycle. And then you have the SEER change in '23, the refrigerant change in '25. So there's just a lot of factors that are fundamentally encouraging that don't seem to end this quarter, next quarter. Movements, generally strong. Field inventories are not out of whack. Orders, even though the comparison may be a bit down, one quarter or another quarter, but orders remain generally robust. And then keep in mind that it's just over 20% of our total business. So it gets a lot of oxygen. But we talked about driving aftermarket consistently. We talked about F&S being up mid- to high single digits, refrigeration being up mid to high. We're taking share in applied. Light commercial is very strong. So we get sort of answering the unimpossible is what does resi look like in the second quarter of 2026, you don't know. But what I can tell you is a lot of the underlying factors are encouraging.

Are you seeing -- obviously, with resi outperforming your orders are growing so far in resi year to date. Is there a -- is -- are you seeing a quarter here where the comp is going to be so tough that orders will be down?

Oh, yes -- I think they -- like I think that as we sit here today, our orders are probably down 5% or so for this part of the quarter versus last year. It doesn't concern us right. Because the orders have been so strong. If you look at our backlog, our backlog is -- it is well beyond anything that we've ever seen. So we have very strong, very, very strong backlog. What we really watch and so we're not as much watching the order rates. Orders are very high, maybe versus last year, which was exceptionally high. Could the first quarter be down a couple of percent? Sure. But what we're really watching is movement, inventory levels, supporting our customers, supporting the right -- making sure the right distributors around the country have the right inventory they need to support their dealers. So we put in place a new playbook to make sure that our distributors have what they need when they need it. We are not followers. I mean, we are behind, where we need to be operationally, but I can tell you, we're going to tremendous lengths to support them, and we have a tremendous backlog right now.

How are you approaching strategically the '23 efficiency reg and the '25 refrigeration regulation? Are you guys kind of taking those one at a time? Or you're doing kind of like a big bang approach to these -- to the new platforms?

No, one at a time. What I can tell you though is that we -- the way we design the SEER changes for 2023 was with '25 in mind. So we don't want to implement the '25 changes prematurely because they do drive a bit of additional cost as you think about an A2L refrigerant and some other things we're going to add to that system to support the 454b, refrigerating for '25, but we -- we've done all the '23 changes knowing that we're going to add those to it. And what we're trying to do with '23 is drive differentiation. It's such -- when you're changing 95% of your bill of material, which is very unusual versus other industries, we want to drive cost out of the system. We're going from copper to aluminum in many parts of it that we haven't done in the past. We're driving differentiated controls, heat exchangers. So we really wanted to make it a differentiated offering, and we've allowed it for the '25 changes in this design.

And from the '22 product to the '25 product, should we think about the big step-up in the cost 10% to 15% for the '23 changeover. And then for '25 , it's just -- it's a little less than that? Or is it another 10% to 15% kind of step-up?

You haven't sized the second step, but your sizing of the first step is about right.

Okay. Yes. That makes sense. Any questions for Dave out there -- there we go.

Dave, can you talk a little bit more about how you're going to take that share in aftermarket because, obviously, the relationships, they're already your customers are buying from. So what does it take, either organically or inorganically to make those inroads?

When we look at taking a lot of that additional share, what we're doing is driving direct relationship with the customer to have digitally differentiated offerings that really provide them additional value-added solutions. So when we go to a building owner and we provide more -- we know the product, of course, because we designed it. We actually -- when you now connect the device, we have algorithms to use things like prognostics and diagnostics and other things that provide some level of differentiation. It may be that in certain parts of the world, we subcontract some of the work, which is fine. We may have different partners in the system that we say you can do the local [ rent earning ] or some of the on-site servicing, which can be fine as long as we have the ultimate agreement with the end customer. So is that a good answer?

And I guess what also people don't quite understand is how fragmented the market actually is. So like how many of the 300,000 is being serviced by somebody, how much of that 300,000 is just guys in trucks as opposed to the larger competitors that you'd see that to be better resource?

Yes, most of it.

Most of it?

Yes.

Yes. That's another thing that people kind of tend to forget. It's not like JCI came in and took 30% of your installed base.

Not at all. That's why it gives us such confidence that it's there and -- back to your question, Steve, why not earlier? I can't really give a phenomenal answer other than the opportunities in front of us, and we're going to go after it.

Right. I'm not sure any -- I mean, Trane, I think, was one of the first, but that wasn't even until like 8 or 9 years ago. So it was like a full couple of cycles. People didn't really -- they left it to the...

It's a great opportunity.

The little guys. One last one here just on transport refrigeration. You said very clearly at the Investor Day you guys took market share. Where and how -- I mean, I've always viewed this as a very good market for both of you guys and I don't see a ton of share shift every year. Where and how did you guys -- why did you guys -- why were you able to take market share in 2021? And how do you measure that? Is it in a certain product line or where do you see it?

Well, first of all, container was a great market and container was great for us. When you look at the truck trailer business in North America and Europe, I think, again, similar to resi, we were able to support our customers generally well. Not flawlessly, we had our issues, but I think like everyone in industrials globally. But I can tell you that I think we benefited operationally. And then I think we've done a lot with our customers to provide some level of differentiation. We've introduced new APUs. We've introduced new products with dual controls in different parts of the trailers. So I think that -- but it's the same playbook we're using in other parts of the business. Investing in R&D. You know, Steve, our R&D went from $400 million 2 years ago. Last year was -- in '19, it was $400 million. Last year, it was $500 million. This year is probably $40 million or so, north of that. So we continue to invest in R&D to drive differentiation, and we continue to invest in sales people and boots on the ground, and we continue to invest in digital solutions.

And how big is the aftermarket in digital? And what's the opportunity there on the transport side?

Transport is relatively low in terms of the aftermarket. So there is a big opportunity to penetrate that. Right now, it's really mostly parts is our aftermarket there.

And then lastly, at what point do you make that decision around the commercial refrigeration side? I think you're hell bent on getting margins there, but if it doesn't work out for whatever reason. Is that something that you could look to pivot away from at some point in the next 12 months or so?

It's something that we'll keep a keen eye on. Our focus right now is heads down, improve the margins. It's not as much focus on growth, that we have to really improve how we run that business. We will do that, and then we'll take stock over time. And if that trajectory is going to continue, then we'll stay at it. If we think it's worth more to someone else then we'll deal with it.

And then just one last one, which I wanted to ask before, but I forgot to ask. Your call on '23 resi? Volumes and kind of revenue, I mean...

We'll get into that later. Okay.

All right. Yes. Okay. Thanks.

Thank you. Thank you, Steve. Appreciate it.