Trane Technologies plc (TT) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the JPMorgan 2020 Industrial Conference fireside chat session with Trane Technologies. Joining us today is Mike Lamach, Chairman and CEO; Chris Kuehn from -- SVP and CFO; Zach Nagle, Vice President and Investor Relations, as well as JPMorgan analyst, Steve Tusa, the host of this call. I would now like to turn the call over to Steve Tusa. Please go ahead.

Great, great. Thanks, operator. And everyone, thanks again for dialing in for, I think, the fourth call of the day, and I've lost count over the last couple of days. But with us for the next 40 minutes will be Ingersoll Rand. We've got Mike, Chris and Zach on the line. Guys, thanks for joining us. As usual, do send me e-mails, any questions you may have, we'll cover those. But with that, I'm going to pass it over to Mike here to give a bit of a preamble, and then we'll jump right into Q&A from there. Mike?

Steve, I've got some breaking news, though. It's going to be Trane Technologies on this call.

Oops. Sorry about that. Trane Technologies.

Man, I'm going to say it 5 times in the next 10 minutes, so don't worry. Steve, thanks for making this happen. Thanks for making it happen this year again and for making this work virtually. We're happy to be here again. It is the first conference since we've become Trane Technologies and very proud of the work that's happened over the last year. You think about running the company, separating the company, supporting integration with Gardner Denver and then the transformation work, it all really went better than I think anyone would've expected. I couldn't be more proud of the team. If you have seen our logo, you'll know there's a lot of purple in our future. There's a little bit of story behind the purple. When you think about Trane and its red logo and Thermo King and its blue logo, both iconic brands, we put them together, we got purple. It's a fresh new look, but the strategy essentially remains unchanged. The focus that we've got around sustainability is the core message. It's integral to the culture of the company, which I'm very proud of that culture, and how we view innovation and our role in solving some of the world's problems for our customers. Just as a reminder for those who don't know, when you think about the challenges in the world today around national resource scarcity, urbanization and climate change, 15% of the world's carbon emissions come from heating and cooling buildings, and that grows to 25% by 2030. Another 10 points of carbon emissions come from global food loss, and the numbers continue to grow. So HVAC is a meaningful business in terms of being able to reduce energy intensity and carbon emissions in the world. And technology solves that problem. And as a pure-play climate innovator, we're in an extremely unique position to lead the movement to reduce greenhouse gas emissions and lower energy intensity in buildings. We committed last year reducing carbon emissions by 1 gigaton of CO2 by 2030. That would be like the eighth or ninth largest country on the planet and we -- if we were a country. We've called it a gigaton challenge, and we've been encouraging other like-minded companies to join us by committing to their own gigaton challenge. And it's the belief that one company can change the industry and industry can change the world, and we want to be that company. So we're rethinking heating and cooling. It's one of the top solutions to reduce greenhouse gas emissions. We're pushing the boundaries of how to heat and cool buildings, home and some transportation. And it's what we've been doing for a long time, where these global megatrends intersect with innovation and advanced technologies along the way. So I look back over the past several years, these tailwinds are only growing stronger, have a greater sense of urgency. And even with the outbreak of the coronavirus, I would say there's probably more opportunity for the safe movement of food and perishables in growing and emerging economies as well. And Steve, I just -- final comment here that -- I would say that we look forward to continuing on the 2019 track record, in the past track record around top quartile EPS growth and cash flow generation. We intend to maintain the discipline we've had around capital allocation in the past going forward. And I know that at some point, we'll talk about COVID-19 as we continue here, but I would just ask investors to think about the long term here. Sustainability is a great place to be. HVAC is a place to be within that, and we want to be investor's choice for playing sustainability in HVAC going forward. We think that we've got a great track record and story, and I think the future's incredibly bright. So Steve, I'll turn it over for you -- to you.

Great. Thanks, Mike. And you know me, I like to focus on the long term. But just backing up a bit and talking about what's topical in the discussion today. We're asking all the companies just to give us -- there are, obviously, a lot of companies not talking about the full year but at least letting us know kind of what they're seeing, putting some context around what types of influences the current dynamics around what's happening in China and globally are having on kind of the day-to-day for you guys. So if you could just a little bit of context, how big you are in China, perhaps as a start, and then any other color around what you're seeing here in the near term from coronavirus.

Yes. I mean -- yes, sure. I mean, the focus like all companies should be around, first of all, keeping their employees and communities safe. And so far, we've not had any reported cases here. We're doing twice a day every day calls around supply chain. And to this point, we've been in good shape around the supply chain, although we understand logistics, particularly airfreight, it's tightening up as companies get prepared for potentially a longer delay here. There's some tightening there. But so far, so good on that. Italy is interesting in that it's a machining center, and it's a precision machine component producer to many industries around the world, including HVAC. So that was a new one a few weeks ago that we're keeping a close eye on, but we haven't had any issues here around supply chain. Context-wise, on the quarter, you have to remember that first quarter for us is typically 10% to 12% of full year EPS. March is generally half or more of the first quarter and the last day -- 10 days of March are usually half of March. So we haven't seen the better part of the quarter yet as we sit here on March 11. So a lot will depend on what happens here, and I can't give any updates here because I don't have anything to give in that regard. China, for us, is about 5% of total revenue. Asia Pacific is about 10%. China, for us, supplies a lot of Asia Pacific. So that's the exposure we have in China. But other than that, Steve, the long-term fundamentals and dynamics look pretty good. Commercial HVAC is our biggest business. Our biggest business is in North America with commercial HVAC. Demand drivers there continue to be strong as usual. Steve, did we lose you?

Sorry. Sorry. Just hit the mute button. When I think about that China business and I chop it up into its constituent pieces, just at a high level, the percentage of that, it is services versus kind of rest of world. I would assume it's still relatively small when you think about the commercial HVAC business there as a percentage of -- that is tied to services, given -- you put investments in there. I'm sure it's ramping pretty nicely. But how do I think about that split relative to the rest of the world, services versus equipment for China?

Yes. So China is about 1/3 service, 2/3 equipment, dramatically up from where it was, say, 3 years ago, but it's 1/3. And for a lot of what we saw in China over the past, say, 3 or 4 weeks, services were shut down as well, too, right? I mean, buildings and cities were quarantined. So there wasn't a lot of movement. You have even service personnel moving in and out of buildings. A lot of what we do in China from an equipment and service perspective, I would say the majority of all we do is institutional and industrial HVAC. So we're not really exposed to light commercial or residential. So the feeling is, here, these are mostly projects that are longer term in nature. And so the backlog of what wasn't shipped in January, February, early part of March, eventually will ship, whether that's in March or later on in the second quarter, I think, it'll ship. The services, some will be deferred service and some will just be lost service. But our exposure is limited to, say, 5% of revenue for the company. And then we're further limited, I think, because most of what we do is going to be project-based to longer-term projects.

And I guess from a supply chain perspective, I know all you guys -- I think the thematic is all you guys have been dealing with this, given the tariffs, so it's probably set a little bit of a different base for this shock in China. And anything on the supply chain side that's kind of moving around on you?

No. I think we've gotten deep into the supply chain, tier 3, tier 4, really, components coming into subassemblies. And I think we've got a good understanding there by part number, by supplier. And to this point, we've been able to mitigate that. It's interesting the leaner the company is, in fact, the more exposed they are to these sorts of issues. So I think longer term, we'll probably look at some of what we're doing and potentially moving stuff even closer to the supply -- to the using plant. So that's probably an implication into the future is that leaner companies will probably shrink the supply chains even shorter to be more localized.

Right. Right. Right. Okay. So no major disruptions on that front?

No, no.

Steve, one thing on the China -- Steve, real quick one just on the China piece. China supplies about 10% of Asia. So that portion would be impacted as well. We talked about the 5% China is -- of the mix, but I didn't want to miss that component of it as well.

Okay. Great. Thanks for that clarity. So when you think about the rest of the business, just starting with residential. We had Lennox yesterday talk about how the first quarter started relatively weak from a weather perspective. There are obviously potentially differences in different regions of the country, et cetera, et cetera. Are you seeing that kind of the weather impact your results on the residential side? You're early in the year, acknowledging that it's not that important of a time period annually?

Well, I think 2 things. One is weather normalizes pretty rapidly, pretty quickly. So you never want to get in the business of bridging the weather or forecasting weather as far as I'm concerned. The second part about that really is when I talked about the mix of the quarter in March and the back half of March, residential is the poster child for that. I mean we haven't seen the better part of the quarter because we haven't seen the last 10 days of March, so. But I'm not seeing anything here that would lead me to believe that it's not a low single-digit business -- market for 2020, which is the guidance we gave a month ago, I'm not seeing anything to believe that, that would be different. I mean the wildcard here would be if the coronavirus really is not contained and if it really does impact consumer confidence, all -- a recession, albeit mild, that's where we would see an impact would be on that 10% of our business, which is residential. So not looking at that today, not seeing anything that would take us off our low single-digit view, and again, weather normalizes pretty quickly.

What was embedded in that view for kind of the quarter when you thought about resi? Was it -- was resi still going to grow this quarter? Or was that -- were you going to start the year down in resi for whatever reason?

Yes. We didn't give a view around -- quarter-by-quarter guidance for the business units. It was a full year view. And we wouldn't look at the first quarter -- the first quarter, you're really building products and inventory into the channel because a lot of our channel is our own channel. You don't realize revenue on that. So it's really seasonally unimportant and something that we just don't really look at as being an indicator for the full year. But the demand drivers for the full year, again, I come back to that, I think we feel pretty good about that, Steve.

Okay. When you think about the longer-term kind of cycle dynamics in HVAC, a couple of schools of thought is -- have emerged. Some is built on kind of the echo boom of the housing bubble. You guys have talked about a bit of an extended useful life on the equipment, smoothing out this cycle. I mean you're guiding to low single digits this year off of a reasonably easy weather comp. I would think this late in the cycle, what is the reason for that to accelerate? Are we now late in the cycle to the point where it's now downshifted to more of a low single-digit market versus perhaps mid to high we saw over the last 5 to 6 years? Any change in your thinking on the residential HVAC cycle and what drives that?

Yes. See, just to remind everybody, we're talking about residential HVAC, again, 10% of the portfolio. But on that particular cycle itself, we used to look at very complicated models, and you've seen versions of this, Steve, where we try to predict the curve and the replacement demand. What's happened over the last, say, 3 to 5 years is the amount of connected controllers that we've got data on coming back through the service network where consumers opt in would give us a much stronger sense as to sort of where equipment is in terms of useful life and failure and failure modes and so on and so forth. And we're finding that what we're able to use in terms of predictive modeling for us is going to be stronger with the data that we're picking up through those connected systems. And again, this points to sort of a 2% kind of a unit market. Price should be -- take it up a little bit, and mix could take it up or down depending on how the consumer feels about the future. So I worry less about some replacement rate based on the history of when things were sold and thinking more about what we're seeing in terms of the life of systems and repair habits and the demand coming in for repair components. So that, to me, is more useful. And I think that what we're looking at in 2020 and 2021 for that matter probably is, again, a low single-digit environment. I don't see anything falling off here over that time frame. The other thing, though, is if it did fall off as a result of recession or concerns around coronavirus, as an example, we, for the first time, this year, this season have 2 entry-level value products going into the value channel. Now we've never had that before. So the tendency is when consumers would mix down in that environment. We're now exposed to 50% of the market opportunity that we wouldn't have been exposed to in the past. And that's exciting for us, frankly.

Right. So you're continuing to kind of -- I thought that expansion started with Ameristar. You're obviously expanding the brands here. You expect to kind of take a bit more share there with this brand expansion.

Yes. It's a little bit of a fine point, Steve, because Ameristar is actually -- it's a value product to the premium channel. Most of our premium dealers use Ameristar as their value product. And that section of the market to the value dealer, both premium and value product, it's $6 billion. But the $6 billion market, which is the value product to the value seller or dealer or to the premium dealer in the value segment, is a $6 billion market in and of itself. That, we had no exposure to. Ameristar actually was still going into the premium channel, albeit a value product. And that was a success for us, and that's what really motivated us to really expand the strategy further.

Sorry. You said resi was 10% of your book. I mean I thought as a percentage of the Trane Tech now was -- it was a little bigger than that.

I'll go back do the math, but -- about the residential product and pull out all the parts out of that and you're going to get to something that maybe 12%. We could fine-tune it. But I'm in the ballpark of 10% to 15% anyway.

How much is parts for you guys in resi?

Well, parts for resi and commercial put together is $1 billion, $1 billion-plus?

Correct.

Okay, got it. And is resi like 1/3 of that or something like that?

I don't have the breakout because the customers don't really identify themselves that way, Steve. If they come into -- through a residential shop, that's one thing. But they often come into a parts store or they come in through a light commercial contractor, it doesn't identify.

Right. Okay. That makes sense. One last one on resi. What's your take on what happens here in a couple of years with the DOE regs and the refrigerant regulations? Is there -- I know Carrier's kind of talked about a pre-buy. What's your view on what happens in kind of the 2022-2023 time period and the potential volatility around those rules?

Well, the bigger thing is this is, again, a fundamental macro tailwind to the industry is you're going to get, even on the residential side, increasing codes of standards around efficiencies and choice of refrigerants, which are going to drive more complex, more expensive systems that are more energy efficient. So it's good for the industry. And then the playbook on that or the rules of engagement likely will evolve over time. We'll be well in advance of that with multiple refrigerant options that go into the mix. And then we'll just see sort of where the economy is at that point in time and how dealers want to look at that. And if there's a strong sense that they want to load up on earlier version of refrigerant, we'll do that. If not, we'll pass on it. But there's no playbook today that would make any sense to outline about something that'll happen in 2023.

Okay. Got it. And then just shifting over to technology, and I think this is an interesting one, especially for you guys. But what struck me at the AHR Expo this year was the innovation around hybrid ductless products that basically -- these are ductless products that were targeted at the replacement market for the unitary ducted replacement market. I know that Daikin has a product they're very excited about, and you guys have been growing, I believe, very strongly with your Mitsubishi-Trane JV. Maybe talk about what -- how you view that technology, the penetration potential and how that JV is going, and that'll kind of shift this over in the discussion around commercial.

Well, we launched a hybrid solution about 2 years ago, which would've been using ductless outdoor units with ducted indoor units. We've had great success with that. So I understand that Daikin launched something. We were a couple of years out. It's been a great story. We always believe that hybrid solutions would make sense, that optimizing customers' system, utilizing the best technology for the application, was going to lead to some combinations of applied unitary ducted and ductless all being on the same project with controls wrapped around it. So hybrid solutions have been in the portfolio for a couple of years. They've been a big winner for us over the last couple of years, and we're really delighted with the joint venture that we've got with Mitsubishi. It's been a great partnership.

So when you go to market on the residential side, are you -- with the Mitsubishi JV, I mean, are you -- are there competing products on that front in the channel when it comes to this hybrid product?

We offer the dealer all the products, right? So it could be ducted, ductless or hybrid, and all of those options are available to our dealers. And again, it's based on the application and what the homeowner's looking for, to retrofit or new. There's a degree of difficulty around the retrofit. If it's a first time air conditioning install into a retrofit, oftentimes, it's easier to do that with ductless, but it depends. So -- but the key is offering the full range of solutions through the dealer, all Trane or Trane-Mitsubishi branded.

Right. Okay. So you both have -- there is some overlap on the product offerings from what you guys produce yourselves versus the Mitsubishi guys?

I'm not sure about the question, Steve. I mean everything is -- so all of what the Mitsubishi-Trane -- all of what Mitsubishi sells goes through that joint venture, and all of it is part of the joint venture. And then in addition to that, we sell multiple technologies into the market. So we've got an opening price point, mini-splits for ductless, all the way up through the complicated, large commercial VRF systems that we would do with Mitsubishi and everything in the middle.

Right. Right. Right.

I don't look at it -- Steve, I don't look at it as overlap so much as it's -- we've got the market covered. And where there's overlap, it's the right amount of overlap to create coverage in the market.

And do you make those -- the ones that you make, you make those on your own or you privately -- you kind of private label somebody else's? Like you actually make those entry-level mini-splits?

Both. We make and we source, and we use a joint venture. So we have 3 really bites at the apple.

Got it. Okay. Got it. That makes sense. On the commercial side of that, I guess it's pretty clear that you guys are growing pretty fast in that JV. I mean solid double digits last year from what I've heard. Is that -- what's growing faster there? Is it the commercial side or the residential front? And how would you view the future opportunity for each of those to kind of -- that penetrate? Which one will probably -- which one adds the most over the next couple of years? Which one is a critical mass to add the most over the next couple of years?

Yes. The market growth rate last year was in the low teens. Frankly, the ducted unitary growth rate was in the low teens. So these growth rates have normalized somewhat. Being that's a new product for us and an entry into an existing market, we grew at multiples of the teens growth rate. And I would say that it was mostly targeted at some of the lighter commercial applications, more so than it would've been at the larger commercial applications. And then with residential, you're seeing a lot of first-time air conditioning and a lot of additions, where a dealer might take a home addition, disconnect it from the property. It could be a garage, a full pavilion, whatever it might be, and that might be suitable for ductless. So we've seen a lot of growth there as well. But it's become -- yes, it's a great business.

Right. And I guess when you think about the JV, it is -- it seems to me like it's outperforming the market, at least, kind of what we've heard. Is there a kind of -- are there other parts of the business that would be complementary for you guys to perhaps partner on? How do you look at that relationship over time?

Well, yes, to your first point, I think we've been triple the market growth for at least 2 or 3 years that we've been operating it. So we've had tremendous growth. And it's always the theory that when you put great technology with a great channel, you have a great outcome. And that's been our solution for everything commercial that we do has been build great product, wrap controls and digital around it, sell it with people that know how to get that into the market and the value proposition sold and the total cost of ownership understood by the customer. Service it yourself because it's complicated. You can put performance guarantees around it, and you can benefit from the service margins, which are accretive. And all that just makes the point that when you wrap great technology and great channel together, good things happen. We're looking at other markets where the partnership might work as well. Of course, relationships today are complicated, right? We supply to each other. We partner with each other, and we compete with each other in certain markets. And that's okay. We've got that relationship with many other companies that are out there as well, and that's just the way the world works in this day and age. But there are markets like Japan, as an example, where there's an opportunity for applied product with not a lot of applied leadership with some of the Japanese OEMs, where the ability to offer the Mitsubishi channel some of the applied product would be an area that could make sense as an example.

Great. Can you talk about just commercial equipment markets and what you're seeing here in the U.S.? What is -- where does your backlog stand relative to kind of history at this time of the year? And how do we think about kind of the pipeline for orders going forward in the next 12 to 18 months?

No change there, Steve, to what we talked about. It should be a good, healthy market led by K-12, university and hospitals along with some government. So institutional projects are moving along as expected. Bookings are solid. Backlog is way up over prior year. We could probably get you a number on that, but it's in the teens, I'm sure.

Yes. About 17%.

17% higher backlog, so that's a bit strong. And even a place like Europe, where we've had great success with next-generation product, reducing greenhouse gas emissions there and growing at multiples of the market, we continue to see outsized growth in Europe, where the demand drivers aren't as strong sort of in base retrofits in -- and construction and activity. But we're doing really well in terms of share gain in the marketplace.

Yes. That's pretty dramatic. So your backlog coverage for this year, I mean, how do we think about that in any given year? When you come into the year, what's kind of normal for you guys for commercial equipment?

Well, year-over-year 17% is 17%. I mean that's how we would look at it. You come in with a strong book of business. And for a book of business that fundamentally should turn in a 9- to 18-month period, it's a great place to be. So I've always felt like we had firm footing on the commercial North American piece, which is 40% of our business, right? So it's just a substantial part of the business. And then again, Europe, for all of the puts and takes that we see in Europe, there is no lack of urgency around next-generation refrigerants, lowering, building, energy intensity, electrification of heat in Europe. And we were out last month just visiting and opening a big sales meeting out in Europe. Just the amount of innovation that our teams are putting out in Europe, we looked at a brand-new chiller coming out in Europe, it was -- it'd have to be a -- technology called -- it was an air screw chiller, 12% more efficient to the next best competitor in the marketplace. And that sort of thing just is -- you put it in the hands of capable people being able to get the value proposition sold in the marketplace with a service organization capable of making sure the customer is happy down the road. That's the formula. We just need to keep investing in technology and really driving lower energy intensity, lower greenhouse gas emissions. That is, I think, where we can really play and make a difference.

So when we think about -- and then just lastly, on services. Anything within services other than maybe some performance contracting type of business perhaps that you guys do? Anything in there that you would highlight as being a bit more cyclical than maybe people appreciate that you want to call out here if things get a little choppy?

Yes. Steve, remember, 2, that performance contracting, the services are booked -- the services from performance contracting are booked as services, and the equipment is booked as equipment, okay? So the services is a pretty good number, irrespective of performance contracting. Large performance contracts always have service agreement attached to them if, in fact, we're guaranteeing something. We can't guarantee something without having a service contract. So that's the way that, that works. And now you're seeing higher and higher take rates. China is a great example of where the linkage rates are 75%, 80%, 80-plus percent for new equipment sold. So it's rapidly looking like Europe and North America in terms of systems being connected to services down the road.

Right. Right. So let's just back up a second -- sorry, one more on Thermo King. So Thermo King, about $100 million of China exposure. Is that about the right number?

That's in the ballpark, yes.

So in this environment, given that we've already kind of seen a reset on the orders there, we're going to see a reset on the revenues, is this a business that if we do have a bit of a recession scenario with the backdrop we have today that, that business is already down, so you're kind of already reflecting some of the weakness in that business?

Steve, you lost me with the Thermo King. You were talking about $100 million in China. I see that as an opportunity. If you think about some of the codes of compliance around safe food, food movement and perishables, the market of -- in units in China is about 1/10 the size of the market in the U.S. for a population that is 5x larger. You think about how big the transport refrigeration market could be in China alone, and it's this sort of thing that kind of points to codes of compliance around food, transport and perishables. So it's not a tomorrow thing, but it's certainly, I think, in the midterm, long term, pointing to more regulation around that. And we're a leader in China, even with the business being the size that it is. So you want Thermo King outside of China? Or where do you want to go in China?

Yes. I guess I'm just saying if China does have a challenging period with a bit of a downturn, I would assume that those revenues go down. Maybe longer term, they bounce back hard because of the awareness here. But then just outside of China, thinking about the risk to your portfolio in a potential mild recession scenario, Thermo King is one, to me, that already seems to be down and kind of operating at a very low level. Is that how to kind of think about that asset?

Yes. There's 2 things. First, I just want to go back to China for a second. You just have to remember, we're not in the residential or light commercial business and we're not really exposed to -- our exposure is infrastructure, hospitals, universities, schools and labs, and that's the sort of thing that are project-based. And so the chillers that we have and the applied systems in backlog today eventually are going to shift to projects when they're ready in China. I think that, that recovers as soon as people are actually receiving equipment again. With Thermo King now specifically globally, and I'm going to talk about North America first, specifically, because that's, I think, where the pressure was and the guidance we gave in 2020, think about 4 stages in the market of recovery, one, which is sort of early cycle where you're recovering a balance; the second being in undersupply; the third being when you're at the late cycle and you've got that balance; and the fourth where you're in oversupply. We're about 1/3 of the way into the early cycle balance recovery. And what I'm looking at here is the ACT data would suggest that it's a 35,000 unit replacement market. So if ACT is 37,500 and 35,000 are the units up for replacement, you got a high level of coverage before you need to provide any new capacity into the market. We're also about 5 quarters into the downturn there, which historically is 6 to 8 quarters long. So that feels about right. And then we're looking at utilization of Class 8 trucks, which is about 86% with the latest data that I saw. 91% generally is considered sort of that breakeven point between late recovery and undersupply. So we're really approaching this point where you've got this undersupply situation happening. So I do feel like this is behaving the way that we would have hoped it would've behaved. And I think that we're on track with the guidance that we gave at the beginning of the year.

Got it. Just stepping back and thinking a little bit longer term here. Your margins in -- it's my understanding that your margins in residential and then unitary HVAC are in line with kind of the best-in-class out there from an EBITDA perspective. Is that correct?

Yes. I think so.

That would suggest that you're kind of assuming services is a decent margin business, that your commercial equipment margins perhaps are comfortably below your average. Is there any reason why the commercial -- first of all, is that correct? And then is there any reason why those commercial equipment margins can't migrate their way up to where your company average is today over time?

No. In fact, the variance around an average, I mean, it's got to be an average, something's low, something's high. I mean there's obviously a fairly tight range in there. There's not sort of an extraordinary range of commercial equipment all the way up through, say, TK product to begin with. But you're right to say that the opportunity, we think, would be on the commercial side of the business. Equipment's got good margin with it, and of course, it carries service. You don't get service without the equipment. So you kind of have to think about commercial holistically around that. But we would certainly think in the transformation work that we're doing, that there's more of an outsized opportunity in commercial than there would be around TK as an example. We think all things can improve. But on the margins, I would say that commercial would be the place that we would look for more incremental than, say, a TK.

Got it. One more question coming from the e-mail. In the 10-K, your Climate backlog is down mid-teens. What -- how do you kind of reconcile that versus the up 17% backlog? Maybe just -- is that a sliver of the business you're talking about? I mean transport's down, but it shouldn't have that big of an impact on that type of swing. Maybe just give us a little color on what the difference is.

Yes, Steve. I think one of the things is that when we're talking about backlog build, it's up year-over-year significantly, which bodes well for the first half of the year. And as Mike mentioned, we'll probably extend 9 to 12 months. But in any given quarter, backlog is about 1 quarter's worth of total revenue. So it's not like we have 4 quarters of backlog built in, and therefore, we don't have to book and burn any business. We've got to book and burn a lot of business, in fact, 3 quarters' worth throughout the year to be able to make our number. And we're really facing the challenge of tough compares all year long. I think commercial last year was double-digit growth, if not low teens in total for the year. So the tough comps start to catch up with you.

Right. I guess we'll revisit that one off-line. Okay. I think that's all the time we have. Guys, thanks so much for joining us and being flexible with the dial-ins and things like that. Best of luck, and I guess we'll talk to you on earnings.

Thank you.

Thanks, Steve. Good talking to you.

Thanks, guys.

This concludes today's conference call. You may now disconnect.