Trane Technologies plc (TT) Earnings Call Transcript & Summary

Good afternoon. My name is Andrew Obin, and I'm Bank of America's multi-industrial analyst, covering Trane Technologies. With us today, we have company's President and COO, Dave Regnery; and Chris Kuehn, Senior VP and CFO. We're going to start out with Chris making some introductory remarks. And after that, we're going to go into fireside chat mode. [Operator Instructions] We've actually been able to be pretty good about incorporating folks' questions into our dialogue. So don't be shy. And with that, I'll turn the presentation over to Chris. Chris, take it away. Thank you.

Andrew, thanks so much. It's really great to be part of the Bank of America conference this year. Dave and I are missing the opportunity to being in London, but your team has done a great job to host investor events virtually this year. So we really do appreciate it. Looking back on the past year, we've delivered resilient financial performance through 2020, demonstrating the strength of our sustainability strategy and the maturity of our business operating system. It's a little bit over a year ago that we actually launched Trane Technologies and closed on the RMT transaction. At that time, we committed to deliver $100 million in annualized cost savings by 2021. But we didn't stop there. We spent the better part of a year re-blueprinting the entire organization, keeping what worked and then changing what we wanted to expand on, starting with a white piece of paper, a blank sheet of paper for the company. So after working on this, we ultimately tripled our original commitment. We're at $300 million of annualized savings that will be realized by 2023. And these savings really bolster our ability to continue leading in our innovation, which drives our market outgrowth. It solves complex problems for customers and earns a premium price with our customers as well. It's also driving a lot of our strong leverage and our commitments going forward. From the onset of the pandemic, we've really been playing aggressive offense to emerge stronger through the end of this pandemic. We're investing heavily in our people and our business operating system and all of our innovation, really, for our customers here. And I know we'll probably talk a little bit about that today on the fireside chat. 2020 is a challenging year, but we ended it with positive organic bookings growth despite significant declines in the majority of our end markets, significantly investing in our business, relentless investment throughout all of last year and the prior years and actually led deleverage just down 13% in 2020, very favorable versus our gross margins and our target deleverage. We also delivered exceptional free cash flow last year. It was $1.7 billion. And we continued our track record of, over the last 5 years, free cash flow conversion to earnings being 116%, and we're going to enter this year with a target again of 100% or better conversion of free cash flow to earnings. We're optimistic about 2021, in part because we've got an expectation for an improved pace of global vaccine production, distribution, administration and really efficacy. We're continuing to realize the benefits of targeted innovation for our growth and profitability and, ultimately, executing to the options and favorability we'll see from our transformation plan. All in, on our last earnings call, we talked about 2021 with organic revenue growth, strong growth of 5% to 7% for the year and organic operating leverage of approximately 30%. And on top of that, we guided to growth from the 1.5 points for acquisitions, and ultimately, really seeing the compounding value of our technology and channel acquisitions, improving the top line of the company. And again, we're going to convert cash at 100% or better of earnings. All of that fuels our balanced capital allocation strategy. It's giving us a lot of optionality to really deploy cash to the best return to our shareholders. We can certainly spend time on the priorities as we go through the questions, but what I'll do is I'll kind of advance this to basically saying we just expect to really continue to deploy excess cash to shareholders -- 100% of excess cash to shareholders over time and providing the highest returns for shareholders. With all that being said, we really do approach the future with some optimism, especially as we're seeing the rollout of vaccines. And what I'll do, Andrew, I'll turn it back to you, and Dave and I are available to answer your questions.

Well, thank you so much, and you guys have been the mainstay of this event, I think, for almost past 20 years. So I really, really do appreciate having you guys come year after year after year. So really, thank you. Thank you very much. Thank you for coming again. So the big question, post-COVID themes. What have been the biggest changes to your business model and customer behavior in the aftermath of COVID? I know it's very open-ended question, but that's sort of the key question we're getting on HVAC and Trane Technologies, in particular.

Sure.

Chris, I'll start, if you don't mind. And Andrew, thanks, and we're glad to be back at your conference again this year. We just -- we're not in London this year, but we'll make it work from our newfound friend here, the virtual reality, right? And look, if you talk about themes of COVID, really 3 come to mind for me. First one is indoor air quality. The second one is connected equipment, buildings, campuses or service capability. And the third is mRNA vaccines. And if you go deeper on each of those, on indoor air quality, we've been experts in indoor air quality for decades -- multiple decades. We've developed a very comprehensive, holistic system view audit for indoor air quality. We're not with point solutions, we're looking at the entire system. We provide our customers what we call day 1, where we do a comprehensive audit, and then we understand how to make that building as safe as possible with the current constraints that the customer may have and make sure all the equipment is performing at the way it was designed. We ensure that the mission hasn't changed for the customer, the purpose of what they're using the facility for. We'll often make changes to the amount of ventilation that is coming into the building or pressure exchange, and we also could change density of air filters within the building. We have a very sophisticated modeling capability, which allows us to balance the amount of indoor air that's coming in and pressure that's coming in with the filtration to ensure that the system is not compromised and operates at a -- at their full capacity. We've seen a lot of point solutions out there where customers jump to a point solution or increase the density of their filters. And in many cases, that may not be right for their system. So we've had to correct some of those. We also provide our customers with what we call day 2, which is, okay, your building is operating the best we can get it to operate today. What are the longer-term investments that you should be making to improve the indoor air quality for your building? And by the way, making sure that we account for the energy intensity of that building and how can we improve the energy intensity. Many of the ways to improve the indoor air quality require us to use more energy. So if you're -- whether you're going to bring more fresh air, as you bring that fresh air, you need to condition that air. If you're going to have denser filters, you need to be able to force the air through the ducts, which takes more energy. We're really good at understanding that. We're really good at finding alternative ways and the rest of the building to reduce the intensity of that building to compensate for those additional energies. Second one I mentioned is connected solutions, right? We've been at connected buildings now for years, connected assets, connected campuses. Obviously, with COVID, that's become a top of mind. If you think about a hospital, unfortunately, if someone is sick in a hospital, many people can't go visit them. Well, think about a technician for a hospital. They don't want technicians necessarily there. Being remotely connected, we're able to adjust most things that need to be adjusted remotely. And if not, if we do have to dispatch a technician, we can often do it with a reduced time frame in the space. So the technician knows exactly what has to be accomplished and brings the right equipment with them to make sure that, that task is performed. The third area I mentioned, Andrew, was mRNA vaccines. As you're aware, these vaccines require deep freeze condition for transportation and storage. We believe that the science around mRNA vaccines is not going to go away. It's been studied for a long time. It's now in mass distribution with 2 of the pharmaceutical companies that are distributing vaccines. We think that's going to continue in the future. And as far as the COVID vaccine is concerned, the dry ice solution works very well when you have just in time, meaning supply is there for demand. We see that demand will actually -- supply will outpace demand, and you're going to have needs to store vaccines to a greater extent than what we're seeing today. The only other comment I would make is on indoor air quality. We've been asked a lot of questions about, hey, does it go away when vaccine distribution takes mainstream? We don't believe that indoor air quality, it goes away. We think it's top of mind today. It will stay top of mind for an extended period of time.

Maybe to follow up on this comment on indoor air quality because, as you have highlighted, sort of changes make very profound implications on how you run the system and how much stress you put on the system. I think we were talking about the latest stimulus plan, for example. Maybe that's a good example that sort of focuses on air circulation in schools as part of their reopening, right? So as you upgrade all these systems, clearly, the system are not really designed, not really optimized to run in this way. So how do you optimize these systems for the new air quality requirements that you just have to put in brand-new system that will operate differently? Or do you end up running the existing system harder and eating up the energy requirement, right? Because there are many ways for you to help your customers here. So maybe you can just sort of give us an example, like educational system and all this money coming into air quality in the educational system post the stimulus. How do you see customers in the educational verticals addressing these challenges?

Yes. It's a great question. Let me give you some examples of what we found as we've gone into our air qualities. And I'll start with -- we had a customer of that call. This wasn't in education, but I'll get back to your question on education. This particular customer was a -- the owner of a mall, shopping mall. And what they did was they went out and they put the densest filter that they could within their system. They realized that after about a week, their system wasn't operating properly. The reason why the system wasn't operating problem was because they didn't have enough energy to move the air through the ducts, and the environment actually became very stale, right? So we went out there and looked at it. And we're like, what happened? And we were told to upgrade to the heavy filters. Well, that may be the right...

That's exactly what I was asking, yes.

But only in the system. So we have examples where a lot of people jump to point solutions early on. And we look at this from a more holistic system view, right? And you have to look at the entire system. There are ways to balance a system, and we really are experts at it. We have over 5,000 technicians, and they know how to do this, okay? We've been doing it for decades. So that's an example of a point solution that did not work. As far as the vertical around education, I think everyone is aware that there's been a lot of government stimulus focused specifically at getting children back to school in a safe environment. There's actually been 3 different tranches of funds that have been approved. The first one started with the CARES Act, and that was really around -- and by the way, these are very large numbers. The CARES Act was $30 billion that was targeted at education. That was really focused at cleanliness, social distancing. In December, the Trump administration passed another law. It was targeted at $80 billion focused at the education vertical. And then as of March this year, the Americans Rescue Plan of 2021 targets $168 billion towards the education vertical. That's based on government report that was issued that said that 41% of school districts across the United States have underperforming HVAC systems installed within their education schools. So think about it, 41% of schools not performing the way they were designed, inadequate airflow, not necessarily a healthy, safe environment for students to learn. That's why the government has been so specific on the funding dedicated directly to the education vertical. And our indoor air quality, Andrew, audits that we've been doing, we give the customer the day 1. We make the school as safe as we can today. We also provide a road map, so when these funds become available, these school districts are able to capitalize and be able to almost become first in line for the funding that's available. If you know the schools, we typically do infrastructure work in schools between depending on where you live in the country between the May and the end of August time period. So it's a pretty short window there where we could do projects. Obviously, you want to do these projects when students are not in the classroom. So we have a short window here. Again, the lawmakers were pretty knowledgeable about that. These funds, at least the last 2 tranches, do not expire until September of 2023. So think of it as 3 seasons of schoolwork that could be done that could absorb these funds to make sure that there's a safe environment for our students to go back to.

This is great. So maybe we can just sort of talk about applied and commercial unit, although they're somewhat different. But what's the outlook for key commercial verticals? And just maybe you can also help us if and how Trane's exposure to key verticals in the U.S. differ from the industry makeup. So warehouses -- thinking warehouses, data centers. And maybe as long as we're talking sort of applied and unitary within the commercial framework, maybe we can just sort of talk about key geographies as well. So maybe key verticals in the U.S. and key geographies around the world.

Sure. I'll start, Chris, but please add in here.

Sure.

First of all, we'll start in North America. And if you think about the different verticals, we're very diverse, okay? So we're not really overweighted in any one vertical. With that said, there are verticals that have strength, okay? The data centers for one, warehousing for another. They were strong in 2020. We anticipate that strength to continue into the future. If you look at verticals that have been weak, okay, at least in 2020 and will continue into 2021, you think of office, you think of retail. Those verticals are really going to be dependent on vaccine distribution and really the start-up of restaurants again and people going back to the office to work. And we think that we're pretty optimistic that the second half of the year, that will happen. I think we're all aware that a lot of restaurants, unfortunately, closed. I hope many of those restaurants reopen as the vaccine distribution continues. If you look at some of the verticals that could have potential to grow. Certainly, think about education. We just talked about the funding that was designated to education. So that's certainly one that could have some growth for it in 2021. The other one would be health care. That's another vertical that we think there's -- there could potentially be upside. Now Dodge, which only represents a small percentage of our business, has both of those verticals, at least the last report that I saw, slightly down, but we think there could be potential there. If you look outside of North America, I'll start in Asia. We think that in China, it'll be -- it was strong in 2020 as they were the first economy to really come out of COVID, and they did it in a way where they were really able to restart their economy. We see that trend continuing in 2021. So we expect a solid year in China. The rest of Asia Pacific is really going to be vaccine-dependent and how fast the vaccine can be deployed and those economies can restart. In Asia Pacific, they -- a lot of these economies play off with one another. So the stronger outside of China becomes, the stronger China will become, and the recovery will be even stronger there. If you look at Europe, I think Europe is going to be very vaccine-dependent as well. I think you're reading about certain countries going into lockdown situations again. I think as the vaccine starts to be distributed and administered, we're hopeful that the back half of Europe will show an uptick. That said, I would tell you that in Europe, some of the technologies that we've been able to introduce has really helped us along. And we anticipate that not only in 2020, but into the future as well, specifically around electrification of heating with our heat pump technologies.

Yes. I'd add the first half from a North America perspective, we would expect to see tougher comps. Asia had a pretty good first quarter of 2020 until the pandemic hit the North American market. So we see that as a tougher comp in the first half and some optimism about the second half with the reopenings and distribution of the vaccine, which continues to really be moving forward, I think, at a better pace. Asia, to Dave's point, with the lockdowns and how tough Q1 was a year ago in China and the rest of Asia, we'd expect the Asia region to have some easier comps and probably a stronger first half of the year.

And in terms of Europe, I think it sort of touches -- this probably goes also into climate change. But between COVID and climate change, do you see European market sort of structurally changing in terms of view of HVAC?

We see the electrification of heating continuing to expand in Europe. There are some countries that have already have codes in place to eliminate or significantly reduce the ability to burn fossil fuels and -- fossil fuel and boilers. With our heat pump technology, we've been able to eliminate the need for a boiler, and we see that trend continuing.

Yes. I'd add Europe is a market, Andrew, that we've, over the last 5 or 6 years, think about Europe as fairly a flat market. We've been outgrowing the market with innovation. It's actually a great example in the portfolio of the investment we made early on, maybe bolt on some technology acquisitions as well and then allows us to really outgrow the market, and we would see that kind of continuing going forward with just the really strong growth that region has had and really great management team to execute in the region as well.

I know your question, Andrew, was around the HVAC, but I would tell you, those same investments are happening in our Thermo King business as well. And we recently introduced our new trailer platform there, which is 30% more efficient than the best that was on the market. And by the way, the best that was on the market was Thermo King. So we reinvested our product. It's 30% more efficient. It's 40% faster pull down. That's how you reach the temperature in the container, which is a productivity play for our customers. And -- but the best thing about it is it takes us 60% less energy to produce that product. So we're super excited about that.

Maybe shifting to another topic that -- of interest, residential and clearly, that's North America. And specifically, how should we think about residential HVAC until the second half of '21? How do you think the second half will play out? And will we see a sequential deceleration from the first half? And just generally, how do you see the drivers for the resi HVAC cycle beyond '21? And interesting conversation, you do have a different view. How should we think about the upgrade replacement cycle in the U.S.?

Yes. I'll start, Andrew, and then Dave can jump in. So yes, we see the residential markets for 2021 really being a first half/second half story. The first half, much easier comps versus where we were a year ago. Markets going under lockdown in that mid-March time frame. We took our factories proactively off-line to make sure our people were safe and we can get the social distancing. And then April and May, early part of June, it was pretty rough going. The heat hit in mid-June of last year and had some people started buying again, and that continued all the way through July through -- even through the fourth quarter. So we do see the first half being easier comp in the residential space. We entered 2021 with a very strong backlog, which gives us a lot of visibility to the first quarter, which ties into the guidance we provided. But the second half is really going to be a tougher comp story, certainly dependent on -- as we see things opening up in the markets, but hard to call here really for first half, second half. Full year, we're still thinking up low single digits for overall market share. Your comment on cycles, though, it's interesting. I've been in the company about 6 years now, and I don't think I've been in one conversation around the residential cycle. And the reason being is that we really see our business and that market correlated to where is consumer confidence and, ultimately, unemployment rates. Those economic drivers and macroeconomic drivers really correlate well to the market, and we're seeing those continue to improve here as we start coming out of this pandemic and vaccines getting into people's arms. So overall for the year, we still think it could be a positive market growth, first half/second half dynamics. And ultimately, we're just kind of thinking that we've got the right power here to deliver to customers throughout the year.

And -- yes. Sorry.

I was just going to add, the only thing I would add, Andrew, is the fact that one of the phenomenons we saw in 2020 was we saw consumers or homeowners really concerned about the comfort of their homes, spending more time in their homes. They really understood the value proposition of variable speed technologies and higher SEER products. So that was a nice trend to see in 2020. We believe that will continue in the future.

Got you. And what do you think about sort of the inventory in the channel or on the resi side, right? Because it seems that -- the data seems to indicate that it's rising. Is it a good thing? Is it a bad thing? What does it mean for the summer?

Yes. From our view, look, there's always a range of inventory. I think we're still in maybe one end of the range, but we're still within the normal range of kind of inventory as we start entering 2021.

Yes. I think, Andrew, it's a normal range, but I do think that many of the independent wholesale distributors probably do not want to repeat last year. So they may go a little heavier leading up to peak season. Obviously, there's a bit of a constraint here. It's called the 4 walls that they have to be able to stock product, and so it's not unlimited. But it wouldn't surprise me if they were a little bit heavier than they were last -- certainly last year at this time, where they kind of got caught out, as Chris described earlier.

Got it. Can we talk about sort of maybe commercial parts and services outlook? Clearly, a key part of the strategy. You chose to acquire some distributors to further consolidate your ownership of the channel. Can you just give us more color on your thought process here and just the overall evolution of the business model to drive accelerated growth at Trane? Because this seems to have been a huge differentiator for you over the past several years. And where can it go? How high can you take aftermarket as a percent of revenues in the long run?

I'll start, Andrew. Certainly, services outperformed equipment as we even look back over the last year, and we would expect it to now perform over the longer term. We did deploy some capital last year to -- in the fourth quarter to some channel acquisitions in North America. These were trained franchise owners that really were established, I think, in the '50s and the '60s, when that was the model to sell in Trane. And over the last several years, we've been buying back 1 or 2 of these franchises. To really align with our strategy, we want to be 100% direct in the North America channel. We're probably 95% plus today. So these recent acquisitions just keep us getting closer and closer to being 100% direct commercial HVAC channel in North America. Another acquisition we did actually in January was to buy back a distributor in the Australia and New Zealand region. I think about 20 years ago, the company made a decision pre-acquisition of buying or sell a brand to exit that market and go to a distributor model. We came back in, bought it back at a pretty good price. And when I think about Australia and New Zealand, hot market and also a very sustainability-focused market as well. So that's exactly where we want to play in terms of the company's focus on sustainability and reducing energy intensity of the world and reducing greenhouse gases. So we would continue to lean in on M&A on that strategy. We see the returns on our channel acquisitions being very strong over the last 3 to 4 years. I would tell you that our returns from a cash flow ROIC perspective are in the 30% to 40% range for the channel acquisitions. And then on the technology side, where we've taken early stage technology, brought it into the Trane company and then partnering it up with a very strong channel, we've seen cash flow returns on invested capital for those acquisitions really being 80% or better. And we've got a lot of examples there where we want to keep leaning in to keep driving the portfolio organically and inorganically.

And so how high can the business model -- how high can we take aftermarket as a percent of revenue in the long run? Do we know the answer?

I don't know we really have a cap on it. I think right now, we think about equipment and services being roughly split 50-50, but we would expect services to continue to grow. When we talk about indoor air quality, some of that work is impacting services today, right, from an audit perspective, but it's also impacting equipment sales, too. Dave laid out kind of the approach we take of a system of things and not the point solution approach. We're seeing those revenues happen both in services and in equipment today.

All right. Got you. This is great. And so maybe we can talk about transport refrigeration recovery. What is the shape of recovery in the U.S. and Europe for the transport market? Any updates there? And I know people always ask this question. I'll try it again. But the business cost structure evolution over the year is just sort of directionally fixed versus variable because I think people have certain preconceptions how the business works, but we always get those questions, as I know you do.

Yes. I'll start, and Dave can jump in. Look, the Thermo King business is a phenomenal business to be in, not just you think about the tailwinds in that space with home delivery and the Amazon effect. Those are just natural tailwinds. Electronic logs for drivers, driver shortages, all of that just kind of shows that there's strong investment in that stage. In fact, if you look back the last -- and I'll talk about North America trailer first because it does get a fair amount of the attention. If you look back the last 6 years and then projected for the next 3 years, the North America trailer market is really around 45,000 units a year, plus or minus 10%. So it's at an elevated level. We think that's sustainable going forward. And that's why we thought, with the complexity of how this market is in our business, this is why we try to give a little more guidance here in the last earnings release. So when we think about overall Americas markets, taking truck trailer and auxiliary power units as well as blending in marine, bus, rail, air, it's a very diversified portfolio, and that's been expanding over the last 10 years. We see the Americas markets being up, close to 26% on a year-over-year basis. And on a similar basis in EMEA, we think about those same markets, truck trailer, APU and then marine, bus, rail and so on. Weighted average growth of being around 8% in the EMEA markets as well. So I think we've done a great job diversifying the portfolio. Very strong growth expected in 2021. And I would say those transformation savings, the $300 million that we're driving for the -- by 2023, we've already got $140 million of it secured. That's actually benefiting all businesses. So your question on fixed variable costing, we're seeing that cost coming out in our commercial, in our residential and in our transport businesses are all going to be benefited from that. But it's also a business we want to keep investing into. We've had some great innovations here. Dave talked about, one, we're 30% energy-efficient over our prior unit. It's a place where you just want to keep investing relentlessly.

If I could just add one comment on Thermo King. This is like one of those facts that you can kind of scratch your head when you hear it. 26% of all food production is wasted, 26%. And if you look into the detail as to why, it has to do with the supply chain. So the Thermo King business is obviously in the business of making sure that perishables are transported in a safe, efficient way. So there's still a lot of runway to make sure that we don't waste 26% of the world's food production.

And as long as we're sort of in that area, you guys -- I'll take another crack at it. You guys have talked about sort of deep freeze storage for the vaccines. Do you guys care to quantify the market in any way, shape or form? I know many have tried.

I think we're in the early innings, Andrew, on that. Dave, you may want to explain -- you've done a great job kind of explaining how we got a product from existing portfolio to be adapted for the cold chain for vaccine distribution.

Yes, yes. We had a niche product that we've been selling for years that we -- basically, we did some modifications to it. The product was designed originally to transport sushi around the globe. So with sushi, you have to flash-freeze it. This was a niche product. Our engineers took it, repositioned it, made some modifications, and we basically created cold storage containers that can reach minus 70 degrees C. And your question about -- Chris kind of hit out, we're in early innings. This is going to be a supply and demand. One of the -- you asked me what I saw different about COVID, one of them was mRNA vaccines. mRNA vaccines require a different storage capability than traditional vaccines. We think that the vaccine that's for COVID right now, you're going to have more supply than maybe you have demand hopefully soon, but that's going to come. And that's going to -- you're going to need a place to store that. So we think we're well positioned for that. We could provide health care providers with flexibility in their operations, and we're pretty excited about what we've been able to create here.

So what I'm hearing is that the way we should be thinking about mRNA vaccines is that it's a new industry approach. It's a brand-new product that didn't really exist before, and it's going to become more prevalent, and that takes you way beyond COVID.

That's certainly everything that I've been reading, okay? I'm not in the -- physician, but many of the articles and publications that I've been reading suggest that this is kind of a breakthrough where the medical community is really looking at as a breakthrough.

Yes. Unfortunately, it may not be the last pandemic or virus we have to go face here going forward. So the -- making sure the infrastructure exists to handle the next one better than how we've all had to handle the one for the past year, we think there's also a bit of a tailwind, too.

No. That surely would be a good thing if we handle it better going forward.

I agree.

So a question on -- we sort of touched on stimulus and infrastructure bill. Just to understand, in terms of your forecasting construct, how much of the stimulus is in it? And what are your expectations for potential infrastructure bill? And once again, how does that shape your medium-term view on the outlook for the company?

Yes. Andrew, I would say, from an IAQ perspective, we really see this as 1% to 2% tailwind over many, many years, right? And that obviously includes the education vertical that Dave talked about, but there's also 400 billion square feet of commercial space that has to be actioned and air quality assessed. So we see this is a 1% to 2% revenue lift over many years. Specific to the stimulus, we really don't have any of that right now in our guidance for 2021 given how fresh that bill was passed just last week. But on the 1% to 2%, we've got that baked into our guidance for 2021 for the year on overall IAQ products and assessments and, ultimately, upgrades.

So it's very interesting. This heat pump thing is a very big topic. It keeps coming up through the conference. I definitely have -- I promise that I will have people accommodate it. So have several questions on the heat pump business ask about the future plan size on heat pumps and can we see HVAC similar to heat pumps, will Trane grow aggressively its heat pump business as the only no carbon solution to replace oil and gas for heating and hot water in homes and commercial properties. And as I said, this team has been prevalent for the past couple of days, so maybe that's a good way sort of big picture discussion to end our session.

Yes. I'll talk a little bit about heat pump technology. This was -- what really fueled our innovation here was an acquisition we did about 4, 5 years ago, a company called Thermocold. We took their technology and really scaled it within our product. We enhanced it and scaled it. We're probably on our fourth or fifth generation of applied heat pump technology. And the efficiencies that we're able to achieve are just -- they're incredible. They're on a traditional heat pump, it's about 300% to 350% more efficient than a fossil fuel burning boiler. We have applications. I was recently with the team -- via Zoom with the team in Italy. We had an application where they went with a water-to-water heat pump solution. So we actually were using the Adriatic Sea as a source of heat, and we're extracting the heat from the Adriatic Sea and using it to heat a building. That particular case was, I think it was 500x more efficient than the boiler it replaced. So just think about the impact that this technology in being able to, what we call, expand the operating map or where our heat pump can be applied, the impact that we can have on the on the efficiency levels that customers are seeing as well as the impact on the global CO2 that's being created.

Well, I think we are out of time. Once again, thank you for coming to our conference, albeit virtually this year. Hopefully, some things go back to being in person next year.

We love that.

Yes. I know that I definitely enjoy the in-person experience. And for everybody else, if you have questions, feel free to reach out to me and my team or to team at Trane Technologies. Thank you for being here, gentlemen.

Thanks, Andrew. Thanks, everyone, for joining us.

Thank you, everyone. Stay safe.