Trane Technologies plc (TT) Earnings Call Transcript & Summary

Hey, good morning, everybody. Next up, we have Trane Technologies with us here today. Really excited to have Chairman and CEO, Mike Lamach. We've got President and COO, Dave Regnery; and we have the CFO, Chris Kuehn. Thank you all for being here with us today.

Thanks, Joe. Appreciate it. You guys may be on mute still. Just check your screens if you could.

Beautiful. Like an SNL skit. Joe, we're looking at you, man.

Nice work there, Chris. So maybe just kind of kicking it off, guys. Look, really great start to the year for you guys. Posted one of the best results, I think, in our coverage this quarter. I want to spend a little bit of time around your approach to your investments. Mike, you've talked about this a lot, how you tend to focus more on market outgrowth as opposed to like episodic type investments. Just maybe step us through your approach, where you're really investing your dollars today and where you see it making a difference.

Yes, Joe, probably it makes sense to step back a ways because we've been working really at this whole notion of changing the way we do strategic planning for over a decade, and it really started with this notion of being very intellectually honest, very fact-based, having a fair amount of organizational humility to go do a good strategic plan, figure out where we want to really invest our dollars. We've adopted this white paper technique we've had for years around trying to make it very succinct. It invariably gets down to a set of investment choices. Those choices could be investments in the organization and in the channel, if you will. It could be new product development. It could be technology. It could be in productivity. They're all over the map. The one, I think, most interesting in terms of your question is around new product development, new technology introduction. And what we find here is that this focus around having a fewer number of strategic choices and really thinking about horizon 1, 2 and 3, sort of horizon 1 being what the businesses can get at maybe in an 18-month period; horizon 2, out a few years; and then long-term horizon, has helped us in terms of being able to: one, focus near, from a business unit perspective, around what's going to grow share in margin or create a new segment of a market. And we've had several of these emerge for us over the past couple of years that are brand new markets for us. Those are exciting because you're not taking share, if you will, from a traditional competitor. You're growing in areas that are brand new. All the way through to the long term, typically, new technology introduction stuff that we do. And here, it's a combination of using networks of excellence that we have across the company to look at the things that might be disintermediating to ourselves or to our industry and trying to get in front of those as well. And that framework led us to the product growth team, successes that we've had, which we continue to really enforce that structure today in a way that I think has been very powerful. And how we've learned and adapted that, even the different parts of the organization, how we put engineering and procurement together around driving productivity or driving some of the modularization we're doing in systems. So all that together has been just a phenomenal system that's evolved over time. It's never been episodic, to your point. It's been something that we continually to try to get that flywheel moving as fast as we can. Even the $300 million in productivity we talked about in the new organizational change, this ability to reinvest a lot of that back into innovation as well as the cost structure but spin that flywheel faster. Dave and I spent Monday and Tuesday, along with Chris, in innovation reviews for about half the business units. And we've got to limit these guys to top 10 because there's a lot going on. And it's exciting because not only is the innovation exciting, but the time for us to get things done is 30%, 50%, 70% faster than it would have been, say, 2 or 3 years ago, as we're continuing to improve the process and cycle times. But as we're doing more modularization of some of the things we're doing, we're getting faster just even around the subsequent things that we do after the initial launches of product. So Thermo King is one. It's pretty interesting. We were just there yesterday in terms of the meeting. And they've got their 18 launches in 18 months. We're 5 months into this at this point in time. This is in Europe alone, right? So this is a pretty big deal. But one of these -- the first one we did was a product called the Advancer. And we launched it in Europe for the trailer refrigeration market. It's a product that is 30% more fuel efficient than the product it replaced, which was the best in the market, which was ours at the time. It's a 30% reduction in maintenance cost for the fleet owners. We produced it in Galway, Ireland. And in Ireland, that factory uses no landfill, zero-waste landfill. We use 60% less to manufacture that product in terms of energy than we used to manufacture it. And we were just certified maybe a week ago by the National Standards Authority of Ireland for being carbon neutral. And we're the first in Ireland to achieve the status, and we're one of the first people in Ireland to achieve the status. So the beautiful thing is this -- it's almost a fallacy about being green and being profitably sustainable and being profitable. Because the flywheel says if you do both together and you've got this purpose-driven strategy around it, you can dramatically grow above. And so yes, it's exciting.

Yes. That's -- I mean that sounds great. By the way, if you ever want to take any of the investors out or take myself out, I'm happy to go. Always happy to get on Galway.

You've got a deal.

So that's a really interesting notion though, that the one that you just made, Mike, around the investments that you're making, the flywheel continuing and you're doing it in a green way. It was a great example that you gave. I think one of the other things that popped out from that description was just how many opportunities there are, right? Like that's -- it's -- you have to limit to 10. So maybe as you kind of think about maybe just the next 12 months and what those opportunities are -- because I know you're picking up your investments through the year, the next few quarters, maybe talk about some other investments that you're making, Thermo King, obviously, notwithstanding.

Yes, I'll start and then I'll get Chris or David here pretty quick. But one of the things that we do as part of these innovation reviews and is part of the strategy are these long-range multigenerational product plans. And product for us is a universal term for investment in services or in digital or in physical product. And so when we look at these multigenerational product reviews, we're always looking beyond the current innovation or the state of technology today, and then we're trying to take new technology and we separate it from new product development in a way that we always prove the technology first before we actually introduce it into new product development because a surefire way to slow down new product development is not have the technology ready when you think you need it, right? Like something, sales and testing, you don't get quite what you thought you're going to get out of it. So we're constantly pushing the envelope on new product development, pushing the envelope separately on new technology introduction. And then they join together in this multigenerational product plan that we would have for anything that we do. So you get a strong sense then for the business case. It's the value creation plans we have for each "product." And therefore, we have a view out, gosh, 18 months to at least 3 years, 5 years in some cases or in a couple, even longer, about where we're going to be investing. It just happens that some combination of the multigenerational product plans and some new segments and new markets that we think we can open up because the technology is allowing us to do that. Electrification of heat is a really good idea there or maybe disintermediating industrial heating and cooling, which we're getting systems and temperatures now to be able to work at these sorts of standards, create whole new opportunities for us. So it's just a function of the number of projects that we've got coming, the readiness of the organization to adopt, the technology and NPD. They're going to drive a little bit more back half spending, which we think is great, right? Again, it's moving the flywheel faster. Dave, Chris, let me open up for you, guys.

The only thing I would add, Mike, is the pipeline is very full. We did limit everyone to 10 projects, Joe, but I'm not sure everyone followed that. I wasn't counting, but there are a lot of great projects there. The whole electrification of heating in Europe, I mean that's a concept that if you just take a step back and understand how it was, how heating and cooling was done in conventional buildings, it was really siloed and you had a chiller plant and you had a boiler plant. And it was thought of as just independent. And the efficiency of one was measured. The efficiency of the other was measured. What our teams have been able to do, and it's more than just a heat pump product, they've been able to combine those plants into one. And we've always had a systems approach, and that's kind of how we lead, is looking at the entire system, not just a particular product. And as you take those systems together, what we've been able to create there is really special. And it's more than just the product. It's the controls, it's other aspects as well but it's really special. And we developed this term, total energy ratio. And it's new to the industry because these plants were always in silo. But if you think about it from a coefficient of performance standpoint, you had a chiller plant that was typically at 3.2. You had a boiler plant that was at 0.8. You combine those 2 and divide it by 2, you have an energy ratio of 2. We're able to take that energy ratio up to 8 in many cases. So this is something that it's great for our customers. It obviously has an impact on their bottom line. It's really green for our planet. And there's a lot of innovation that we have built around that and more to come. So that would be an example.

Yes, David, if I could build on it, I mean, if you take this -- like we're in our fifth generation now around this product and system in Europe and you move from like a traditional heat pump, what we're able to do now is we're circulating water through buildings, variable water flow versus refrigerant. As refrigerants get greener, they're often more flammable, a little higher pressure. They can cause some issues there. So we're circulating water through buildings. We're utilizing the ability to manage through to the control system the opportunity to heat and cool simultaneously because a lot of building loads are going to have simultaneous loads. Europe is a 90% heating market, 10% HVAC market. We're now able, through the innovation, to get heat up to, like, the 185-degree Fahrenheit range. So now we're actually -- rather than just a closed-loop system, even able to do potable water at that level once you get past the 180 degrees. So all of a sudden, you've got this, they've said, combined heating and cooling plant, but we're doing it at industrial and city scale. So we've got entire cities convert to this sort of district heating, district cooling scenario or individual buildings. So again, the heat pump is a very simple term that people think about as a residential heat pump. Some people even think about it as taking a chiller and putting heat recovery on it. That's like table stakes, right? If you're in the HVAC business globally, you got to have that. But these 4-pipe variable water flow chillers, combining these plants together, doing it at 4x the efficiencies of the stand-alone systems, having the controls work in a way that you can do these things simultaneously, really a breakthrough. We've got these temperatures now where we can pretty much do this down to minus 20 degrees Celsius in terms of ambient. So think about bringing that to Northern China, parts of the U.S. that really weren't suitable for this type of technology. And it's a net zero. If you green the grid, and we're using next-generation refrigerants, and we're doing 4x efficiency from the stand-alone systems, it's a net zero solution from the get-go, and that's just been exciting.

Now that sounds great. You sold me. Both you guys sold me on it. The -- and I know you guys have talked about this as a potential $2 billion opportunity. But you've been at it -- to your point, Mike, you've been growing double digits in this market now for the last 5 years. Has something really changed over the course of the last, call it, 6 to 12 months? Because it's just getting a -- I don't want to say hype, that's the wrong word, but it's just getting a lot more -- it is getting a lot more hype in terms of what the opportunity could be. So has there been an inflection in terms like whether it's the regulatory environment in Europe that's really spurring investment? And how do your customers look at this?

Well, if you think about it, Joe -- sure, think about it as a convergence of things, right, which really shouldn't happen accidentally. It should happen because it's a strategy here. But the strategy is, first, get the technology to actually work. The second is you've got this combination of heat pump subsidies in parts of Europe. And you've got, in other parts of Europe or even in combination, fossil fuel restrictions that have happened in Europe, the inability to use a fossil fuel boiler to create heat. So therefore, the term electrification of heat or the greening of heat has come up. So you got this combination, the technology being ready, us really pushing those codes, those standards, the art of what's possible, and then the EU is stepping in and saying, we're going to issue both subsidies and restrictions around this stuff, and then it's a transformation. Germany, moving from net carbon neutral from 2050 to 2045 and even yesterday talking about 2038, certain applications is indicative of this being the solution. Again, if 90% of the HVAC business in Europe is heating and you want to really address the 25% of carbon emissions that happen from HVAC systems in buildings, why not take those to 0 immediately, right? Take it to 0. This is what we're offering here. And I think it's a game-changer. But it's a combination, also having the channel capable of modeling and putting these things together and the ability to service these complex systems really lends itself toward our structure. I can't imagine us moving this fast in some sort of a distribution methodology where it's third-party distribution. Whether it's this or indoor air quality, one of the things that we're able to do really quickly is get everybody on board really quickly with the ability to model indoor air quality, the trade-off between energy efficiency and filtration, as an example. If we're to model these 4-pipe variable water flow systems versus conventional systems, we can do that just very quickly across the board with a sophisticated direct channel that we are engaging.

That's great to hear. I guess just level setting for the audience. I guess how big is your heat pump business today? And then secondly, you talked about the China opportunity being 10x that of Europe. So maybe just talk about your penetration into China.

Yes. There's reasons we don't talk about the size of these businesses and they're good reasons because they're growing rapidly. But look, let's just say that the heat pump business today is larger than $100 million, coming from 0 to more than $100 million. It's probably 25%, 1/3 of the equipment business in Europe. And I just think that the total available market really now is the entire heating market that we wouldn't have been in, potentially even the potable water market, if you think about the ability to get to these temperatures. So this is really opening up entire swaths of the market that we weren't even in 2 years ago. China, no surprise. It's 10x the physical environment of the U.S. in terms of square footage in place. I've been going to China for, gosh, 30 years, and I could tell you that the way buildings were constructed, 30, 20, even 10 years ago would have been to lower codes and standards, less, if any, eye towards sustainability. And so what you're finding, I think, in China is buildings are degrading more quickly. As the Chinese government has gotten on board with sustainability and standards, there's a need to retrofit these buildings. And so we want to be in a position, not in the residential business, but in really that commercial and that applied business that we're successful with that we're talking about here, the ability to kind of help set these standards, kind of de facto standards around what's possible. And again, because a lot of the way that China -- the Chinese competitors work, it's often through distribution through third parties. And these are not systems that you're going to get 2,000 distributors to get on board conceptually or technically and go through the long product cycles to go develop these projects. And so this is, again, why a bit of a moat comes around the technology with the way we can go to market with this stuff, which is more sophisticated than many of the local players there.

Got it. That's helpful. Maybe switching gears. You mentioned IAQ. Obviously, a lot of discussion around the education stimulus as well. Just help provide context to the audience how those conversations are going. And then when you think about the K-12 stimulus, are you starting to see some traction today? When do you really expect to see the spending come through for your business?

Yes, Dave, go ahead.

Yes. I'll start. So IAQ, we still have lots of inquiries for our audits. And again, Joe, we take a systems approach on this like we do with really everything we talk about with Trane Technologies. So we do comprehensive audits. We make sure that we take care of the building as safe as we can. Today, we call it day 1, and then we create a road map for our customers for the longer term to make sure that they can continue to improve through infrastructure improvements that not only will improve the indoor air quality but will also reduce the energy intensity of the building. And there's a trade-off there. Many times, indoor air quality solutions actually use more energy. So we're very cognizant of that. We're developing some really neat solutions that will allow us to kind of leapfrog that mentality that it has to be more energy. We saw a lot of activity early on in the education vertical, as you would expect, for indoor air quality. We're getting a lot more activity. We're still -- that's still strong. We're also seeing some strength in office as well as people are now starting to realize with, at least in North America with vaccines becoming more prevalent, people are thinking of coming back to work. And what's that environment going to look like and how do they make sure that they've created a safe environment for their employees. The stimulus funding, yes. That's kind of like the day 2. Our strategy coming in was we were going to have a day 1 for our customers then into day 2, which is those infrastructure improvements. They have -- our customers have road maps now as to how they need to -- what infrastructure improvements they need to make over a time period. We're starting to see funds flow there. The stimulus is really going to be -- we call it 3 seasons, right? It lasts for 3 years. When you think about work in schools, and it -- infrastructure work typically happens when students are not in school, which is usually the summer months. So we're going to see some activity this year. And obviously, that will go on for the next 2 years as those funds get depleted over a 3-year period. So activity is strong.

Yes. No, it's great to hear. Maybe since we are talking about activity and trends and maybe just focus on North America commercial for a second, saw that the orders on the HVAC side were up in the first quarter, mid-single digits. I know Lat Am was a little bit softer. Just talk to us about what you're kind of seeing in North America. And then if you can even touch on just Lat Am, I know it's a smaller piece of your business. Any thoughts around like the verticals where you're seeing strength and potentially some softness?

Yes. I think the strength continues in data centers and warehousing, okay? So that's been strong for a while. That strength continues. Education is a vertical that certainly has picked up. Health care as well, we're seeing strength in. And we're starting to see signs of office coming back, right? I think the indoor air quality audits, we're looking at that as kind of the leading indicator that says, this is going to start to take place. So that's the -- and if you look at it at a higher macro level, you have other signs, too. Like ABI 2 months in a row, above 50, in fact, hit a 13-year high. Those are all good signs for work to come. So we're cautiously optimistic in North America. We want to -- we need to get everyone vaccinated, right? So we could start to go back to whatever the new normal is going to be. Latin America, it's really just -- it's still the impact of COVID and still the impact of very low vaccine distribution. It's just -- it's -- some countries like Brazil are really being impacted there, and that's had a big impact on our business.

And Dave, I got a question from the audience going back to the education component. So the question was, when you think about K-12, and I guess maybe even higher education to that degree, how do you differentiate on whether it's unitary versus applied and what you're actually selling into the schools?

Yes. I mean, obviously, there's 2 different markets, right, new construction, right? You have to model the building properly to understand what the best solution is. And obviously, we have probably one of the broadest portfolios in the industry. So we're able to do that with our sophisticated modeling capabilities. So as we work with the engineers, we work with the architects, we'll model the space, we'll understand how that space is going to be used and then come up with the right solution. And these are applied systems, okay? So there's -- everyone is -- could be potentially a little bit different. On the replacement market, it's more difficult to do that, okay, because you already have an infrastructure in place. So there, it becomes more of a like-for-like. We tend to make improvements in the like-for-like. There's a lot of things that have changed over time. Remember, applied systems can last 20, sometimes 30 years. So just think about 20 to 30 years what's changed. Lighting has changed from you have LED lighting now, which have a lot less heat. So we'll look at all that when we model a major infrastructure change to make sure that the customer is getting the right solution.

And maybe just a follow-on there, Dave. Like when you think about the -- where the opportunity is going to come from on the stimulus side with education is -- I mean is it your sense that predominantly, it's going to be replacement, I would think?

Yes, really -- because otherwise, I'm not -- I think it's still -- there was just a report I actually got in my inbox today. It's like over 100 pages as to how to apply for stimulus and what's covered and what's not. So anything that takes 100 pages, you can understand the complexity there. But logically, you would think it would be on the retrofit side because that's where the need is. The new construction would probably be under a new construction bond issue or something of that nature.

Sure. Chris, we've got to get you in here. So the incremental margin is obviously very, very strong this past quarter. I had one of your peers yesterday kind of call a high watermark for incrementals in 1Q. Part of that, obviously, is inflationary-driven. So maybe kind of talk through how you see your incrementals for the rest of the year. And then also, any comments -- any additional comments on inflation and how you're managing?

Yes. Thanks, Joe. Q1 was strong in terms of leverage. We're modeling and forecasting for the balance of the year, Q2 to Q4, 30% operating leverage. It'll be a little bit lower than that from a reported basis because we've got some recent M&A activity that is accretive in the first year but not as accretive on the operating leverage line. So organic leverage, around 30% for the balance of the year; full year, 35%. With what Mike talked about in the beginning around our flywheel and the investments and transformation, our mid- to long-term target is 25% organic leverage over the mid- to long term. So this year will be a stronger year than that. Q1 was stronger for many reasons. One was just the price/cost effect was particularly strong in the first quarter. We got ahead of material inflation and that really came through in the first quarter. In our North America businesses, we saw price increases in that November-January time frame for the first round. We've since put in a second round of price increases that went effective the beginning of April. But just given that continued volatility on commodity prices, we're expecting that price/cost equation to really just narrow and really be flattish from Q2 to Q4 for the balance of the year. So maybe it's flattish on the full year basis, but it's something we're monitoring really daily, weekly to ultimately keep staying ahead of that. So strong incrementals, Q1; above our long-term midterm targets for the full year at 35% organic; and again, 30% organic from Q2 to Q4.

Got it. And Chris, maybe just thinking -- staying with you for a second and thinking about the longer-term 2022 and beyond, you guys have -- you've announced a pretty significant cost-out plan, part of it being kind of fixed cost-oriented and the other piece being really focused on your supply chain and IT. Just talk us through the opportunities that you see there. What does it kind of mean for your bottom line performance maybe in the context of incremental margins as we think about 2022 and 2023?

Yes. Great question. I mean it's giving us a ton of confidence, Joe, on elevating our past performance up to the 25% organic leverage target incrementals that we're seeing over the mid- to long term. So that transformation savings is, again, driving a lot of that commitment on the 25% or better. And you mentioned IT and supply chain. A lot of these actions really got started in the middle of 2019 with us getting ready for the separation of the company and the RMT transaction closing. So we feel like we got really ahead of how we want to design the organization, look at the organization as the spin-off company, as the newco. And with that, went through over 600 cost centers across the globe, every region, every business unit impacted. And by second quarter of 2020, we had our plans in place, and now let's go execute. So things we're doing in the IT space, for example. Maybe I'll give you kind of 2 examples. One is looking at the rationalization of certain applications. They tend to add over time and accumulate. We've done a nice job kind of identifying those that we can cancel, we can exit and ultimately bring some cost savings back into the company. Another is just thinking about what's core to the company versus what could be done better with, let's say, a third party. And so we continue to look at that as opportunities in the company. At the same time, trying to put more decision-making back into the hands of our regional leaders, where they're on the ground day in and day out. They see what can work for their markets. And so part of the transformation has been shifting a material portion of kind of centrally led activities into the regions, where we're really seeing them being able to really cost effectively manage those services. So a lot of confidence. We've got, I think, $180 million of run rate savings in the model for 2021. That's out of the $300 million. So it gives us a lot of confidence that we'll hit the $300 million by 2023.

And just to add, Dave had a really great idea in the organizational modeling of putting together parts of the engineering organization with parts of the procurement organization. If you think about the really hard to get but really big productivity savings between those 2 things, they often involve fundamental design changes and lots of drawings changes. And you tend to have engineering organizations working on a set of priorities. You have procurement working with set priorities. All of it's good. You can be successful doing that. These really big ideas, we modeled it after product growth teams where we got the same priorities between those groups and these bigger changes. We're on to the second of 8 different waves that we think we can do across the company. We're seeing really strong success. I would say, Dave, what, 8% to 15%, 8% to 20%, sometimes of success doing this. This is going to be a multiyear plan for us. And probably when we finish, we'll come back around and do it again because I think it just makes a lot of sense to do this. So that's a big opportunity. I think that we solved that through the organizational model and utilizing product growth team type thinking around common goals and objectives and priorities for the engineering and sourcing teams.

That's great to hear. I remember when you guys rolled out the product growth teams, at least that terminology to us a long time ago at one of your Investor Days. It seems like it's been really, obviously, helpful for the company. And great to hear that there seems like there's a multiyear margin opportunity here. I did get a question from the audience also, Chris, coming back to you for a second on just inflation. I know you guys typically will hedge copper 6 months out. Like what are your hedges like today? And what's your visibility?

Yes. Thanks, Joe. So we would enter any quarter about 70% hedged on copper, and we're looking at those hedges really on a rolling 12-month basis. So over a 12-month period of time, could be anywhere from 50% to 60%. But going into any quarter, it's probably about 70% hedged. Same type of approach we did apply for aluminum, although the hedges is lower in terms of percentage lock. And then steel, I think you mentioned, we've a bit of a 6-month lag here in terms of when we're seeing the demand, where we're putting the buy-in and when the actual steel shows up. So there's a bit of a lag there on the steel pricing. But obviously, something that we're looking at very closely. We've had a second round of price increases, a lot of knowledge out there and expectations of where copper prices could go over the next 3 months to 6 months. And unfortunately, it's probably not going down. So we're monitoring that, executing through the lock-in pricing strategy. We'll think about price increases as we go through the year and see if anything else is needed. But I would add, another factor here on pricing and mitigation, it also comes back to innovation. And with the innovative products, it does come back to us being able to price appropriately when the customer sees lower energy intensity, certainly, greenhouse gas emission benefits. But the combination of those 2 make it for an easier conversation with the customer when we have to have a pricing conversation.

Yes. That was my follow-on to that. Are you guys getting much pushback? It just seems like -- from a lot of the companies that we've talked to the last couple of days, it seems like customers recognize what the environment is like and have been -- I think nobody loves price increases. But I would imagine that there's been some receptivity to it. I'm just wondering if you're getting a lot of pushback to your pricing.

In the commercial HVAC business and in TK, there's been so many product launches and innovations, that on a comparative basis, it's probably easier because of Chris' point, which is you can always share energy efficiency and maintenance savings partly between you and the customer and still get a substantial price increase, including commodities. Residential, the input costs are largely the same and the efficiencies are set in the marketplace. And so there is where you tend to see more set price increases. And -- but it's -- really, we're all dealing with the same input factors there. And you try to compete on different dimensions. Maybe it's dealer connectedness or elements of our digital strategy in res. Dave, you're going to add something there?

I was just going to add pricing conversations, Joe, you kind of hit it. They're never easy, okay? I go back in my sales days. But I would tell you that innovation, as Mike and Chris have both said, it makes that conversation -- it turns it into a different conversation, okay? It's not about the price. It's about the benefit that's being provided. And those conversations are always more encouraging than just saying I'm going to take the list price up.

Yes. That makes sense. We haven't really talked much about resi. Obviously, been a white hot comp market for many in the last several quarters. How are you thinking about resi for the remainder of the year? Or is the restock into the channel still occurring into 2Q? Any thoughts around that?

Yes. I mean it's going to be a tale of 2 halves here, right? We have a very strong first half. The second half is going to have some very tough comps against it. If you look at it in totality for the year, the mid-single-digit growth rates is what we believe will happen there. I believe the industry believes that as well. As far as inventory stocking levels, we're not -- I mean, if it was at last year at 3 months of inventory, if it's at [ 3.5 ] or -- it's not anything that spikes out to us as a concern. Obviously, the industry is going to be a lot more -- they saw what happened last year. They want to make sure that -- this is on the independent side, IWDs, so we're 50-50. I think you know that. So 50% of our business is these independent wholesalers. They saw what happened last year. They don't want to get caught out. So they are stocking their barns, as they call them, a little bit forward but it's not anything that spikes for us.

Okay. Shifting quickly to just TK. So Mike, it was really helpful to get that example earlier. I guess as I kind of think about the next 2 years, let's say, I know it's a relatively short-cycle business for you. But are you starting to get growing confidence that 2022 could be another really good year for TK just given where orders are for some of your customers?

Yes. Actually, Dave and I was just discussing this morning. I think we've got just increased confidence. Dave, maybe you want to take them through the numbers here?

Yes. I mean 2022 ACT, at least in the North America trailer market, they increased to [ 51.1% ], which is 13% above what they see in 2021. And if you go into 2023, because they have a 2-year projection, that number is in the mid-40,000 range. And in our Thermo King business, we've seen every year in the last 9 years, except for 2020, in that 40,000 range, okay? So if they're right in their 2022, 2023, it will be 9 years of 40,000-plus, plus or minus 5%. So we're confident in that business. We're confident. Certainly, for this year, we think ACT has its size right, some constraints on the OEM side, the trailer manufacturers. But overall, we believe they have it sized correctly. And I'll just...

I think, Dave, I can -- from investors, I think they'd look at bookings, right? And it's so choppy around what people see for bookings that the inference is it happens with revenue. But to Dave's point, if you snap a line around 45,000 units and set in 2015 through 2023, 90% of the time, we're going to see that number at 45,000 units plus or minus 10%. That's a really, really good market. It's a huge step change where it was in 2014. And I think it's indicative of just sort of what we're seeing around fresh food and delivery kind of coming into the markets. And by the way, it's happening all over the world.

And just one other thing on Thermo King, Joe. It's a pretty diverse business. We're seeing a lot of activity in home delivery as well. So it's not just about -- I know trailer is the number that gets published but there's growth in the APU side, auxiliary power unit, as well as in the home delivery side as well. And we're also seeing nice improvements in our pharma distribution as well.

Yes. We just launched in North America an all-electric small truck, small van, sort of that last-mile delivery, which is pretty exciting too. And just a really efficient version of that from a power management drawdown, just overall capability. It's really something -- I think, it's going to grow rapidly for us.

Nice. That's -- no, that's great. Maybe one last one as we're going to be bumping up on time here. I saw you raised your capital allocation target to $2.5 billion from $2 billion plus prior, M&A potentially being a key driver. I think, Mike, I know you said like you don't need to do like -- there doesn't need to be wholesale consolidation necessarily in the space. But just some thoughts around where you're prioritizing your investment from an M&A standpoint.

Yes. Look, if you think about whether it's organic or acquisitive, anything that reduces the energy intensity of buildings to transport refrigeration, which could be technology, generally speaking, or anything in the channel, right, that we would be missing that gets us access to a market perhaps that we don't have is interesting to us here. Don't have to do anything but we've seen great value in that. We've seen more, like, extraordinary cash flow ROICs on the technology front, taking a technology, bolting it into a platform that we have and then scaling it really quickly across 5,000 sales engineers and technicians. That's been a home run. Kind of triple-digit CFROIC would not be something that would be surprising to us. But the channels have been 30%, 40% CFROICs as well. We were able to take a service business and do more with the service business than potentially what was being done with that business. It's been good for us in addition. But it's a really nice pipeline for us at this point in time. And I would say that the lean is more toward technology. But oftentimes, you're getting a channel with technology, that's fine for us as well.

Makes sense. Mike, Dave, Chris, thanks so much for joining us today. It's always great to see you and spend some time with you. I hope you have a great rest of your week.

Looking forward to seeing you in life, real life, Joe.

Yes. Come to Galway. Galway, here we come. Bye, guys.

Thanks. Bye now.