Trane Technologies plc (TT) Earnings Call Transcript & Summary

Good morning, and welcome, everyone, to this session. I'm delighted to host Trane Technologies here at our UBS Global Industrials and Transportation Conference. This is day 1. So we're just getting started. And I'm very pleased to have the team here with us from Trane. Dave Regnery, President and COO. And as I'm sure many of you heard as of last week, designated CEO as of July 1, we have Chris Kuehn, CFO. We have the IR team with us, Zac Nagle and Shane Lawrence. Thanks all for joining. And before I hand it over to Chris for some opening statements and then Dave to comment on the transition announcement, I just want to make sure that the audience knows there's a little window that you see there on your screen, and I'll try to make this as interactive as possible. So please put in your questions, and I'll try to ask as many of those as possible. And with that, I'll hand it over to Chris.

Thanks, Markus. And it's great to be a part of the UBS conference. And I just want to say thank you to you and your team and pass along our appreciation for really putting together a successful event today for us. As you mentioned, last week's announcement was a big one for us. We announced that our CEO, Mike Lamach, has announced his intent to retire and Dave Regnery has been appointed as CEO of Trane Technologies effective July 1. Mike will serve as Chair of the Board through the transition until Mike's retirement from the company sometime in the first half of 2022. And really happy to have Dave with us here today, who I'll pass it over to in a moment to kind of share some of his thoughts. Dave has really been responsible for many of the strategies that have brought sustainable innovation to our customers and substantially grown the company -- company's value over time. Dave is the ideal person to lead Trane Technologies into the future as our climate innovator. With Dave's leadership, we will continue innovating rapidly to address complex and pressing sustainability challenges for our customers and for the planet. We're setting bold goals and challenging what's possible for a sustainable world. At our investor event in December, we outlined that we at Trane Technologies are on track to deliver $300 million of run rate transformation savings by 2023. And we reinvest those savings in both relentless innovation, and our improved cost structure, a proven formula for us for enabling sustainable operating leverage and margin improvement. This high-performance flywheel really delivers consistent market outgrowth and powerful free cash flow which we continue to deploy through our balanced capital allocation strategy. It's a false choice to believe that there is some sort of trade-off between being sustainable and being profitable. Our purpose-driven strategy is backed by long-term sustainability megatrends and our innovation continues to drive customer demand in our end markets. We can drive differentiated returns for our shareholders while taking bold action toward a more sustainable future. Now yesterday, Dave and Mike held a global town hall for all of Trane Technologies employees, really to comment around the CEO transition. And what I thought I'd share is a couple of thoughts that Mike shared with employees and with some of our top investors and analysts over the last couple of days. And the first was he wanted to make sure that he left the company in better shape than which he found it. And I think we can all agree that there's a big green check mark next to that goal over Mike's CEO tenure. And the second was making sure he had complete trust and confidence in the next CEO of the company, and he absolutely has that with Dave Regnery. So with that, let me turn it over to Dave for some of his comments, and then we'll turn it over to questions for you, Markus. Dave?

Thanks, Chris. And Markus, thanks for hosting the conference. It's certainly been a great success so far. As Mike and I, we've worked together now for 18 years in different roles and we've worked very closely together for the last 5 years as when I was promoted to Executive Vice President, and then later, Chief Operating Officer and President for Trane Technologies. I've been part of the strategy of our company for a very long time. And when we made the decision to spin off our industrial business, we took the approach that we were going to be the newco, the new company. And we really re-blueprinted our company. We developed a strategy where we wanted to make sure that our businesses were closer to the customer. We're able to make decisions in a rapid manner. We're able to innovate for our customers at a regional level. And we structured ourselves that way. I've been a codesigner, a co-architect of the strategy of Trane Technologies as we exist today for certainly the last 5-plus years. So I know a lot of times when a new CEO comes into a company, they sometimes want to make some radical changes and put their fingerprints on something and say, look, this is what I did as the CEO. I could ensure you that, that will not happen in this case. This is not going to be a revolution. That occurred when we spun off industrial. This is going to be an evolution of the strategy that Mike and I have laid out for our company. And I'd tell you that Trane Technologies is a little over a year old and we're just getting started. I mean we operated the first year and year few months plus in a COVID world. And I'm happy to see that at least here in the United States, we're starting to see some breaks in the clouds and the sun is coming out. And I know in other parts of the world, that's happening as well. And I know in other parts of the world, we're still struggling with the COVID virus and the pandemic. But we're super excited about the future. I couldn't be prouder and more humbled to be leading our company. We just have so many opportunities in front of us. We were in -- as Chris said, we were in a town hall meeting yesterday, and someone asked -- in the United States -- they asked what inning are you in as Trane Technologies? And I think Mike said we're still at batting practice. And my response was, now it's the top of the first. We're at bat, the bases are loaded, and we don't have any outs. So this is going to be a very bright future. I look forward to the opportunities for Trane Technologies, and I couldn't be more excited and again, humbled to be in this role. With that, Markus, I'll turn it over to you for whatever questions you may have or anyone in the audience has.

Great. Excellent. And I -- as you can hear from my accent, I'm still catching up on the baseball, but I think I got the gist of it here. Maybe before I get into the more near-term questions and the trends that we see in the business, You mentioned you were the co-architect of Trane over the last number of years. And what would you say has been the sort of secret sauce for that solid mid-single-digit through-cycle growth that you've seen?

Yes. I think it's a system of things, Markus. It's not just one element. It has to do with being able to innovate and being consistent with your investments in innovation. We're not episodic here. We've been investing for well over a decade at a high level. We're not -- we don't take a year off. We don't start and stop. That's a formula for being slow and inefficient. It's about having the right talent on the team, right? Culture is extremely important to us. Our purpose is we talk a lot about purpose to boldly challenge what's possible and to have our employees feel like we can influence an industry and that industry can have an impact on the globe. And that's the way we come to work every day. And it's -- we talk a lot about sustainability. We have our 2030 commitments out there. They're science-based targets. I was asked a question at a conference here today: is this new to you, ESG, and your sustainability commitments? I'm like, no way, this is what we've been doing for decades. We were the first to come out with next-generation global refrigerants back in 2012 time period, challenged what was possible. It wasn't about having just a low GWP refrigerant, but it was also increasing the efficiency of the products. So it's a system of things, Markus. It has to do with our direct sales force and our commercial side, how we train our sales force, how we empower our sales force, how we were able to execute quickly through our direct sales force. That's all part of it. Being able to find unique opportunities in M&A with technology and being able to scale that across our portfolio, we've been very successful at, and those will be things that you should expect to see for me as the CEO in the future.

Great. Excellent. And I'll come back to that, I think, on some of these points throughout the discussion. But maybe if I may, let's start with the more short-term dynamics. And I realize that you don't give specific intercompany -- intra-quarter company updates. But maybe broadly about the overall market environment, as you see it develop versus what you talked about in April during earnings. What sticks out? Is there any change in momentum? Or is it all pretty much as expected? And I'll follow up with specific questions on resi and nonresi.

Markus, I'll start, and then Dave can jump in, right? When we exited the first quarter going into the second quarter, very strong bookings growth in the first quarter. Backlogs were very strong, gave us a lot of confidence in terms of entering into the second quarter. But we really saw the optimism really around the vaccine distribution. We were just talking about this before with you and what you're seeing in Germany. So a lot of that was really cautious optimism even a month ago because so much has changed in the last month. Stronger verticals for us as you were talking around commercial, really around institutional, so education schools and health care have been very strong. Warehousing has been very strong. We see that continuing with the backlog exiting the first quarter. Indoor air quality interest has continued to be a theme from last year into this year, and we see that as a long-term trend for the company, not just here in 2021. We've sized it around 1% to 2% of revenues. And we think for 2021, we're probably closer to 2% of revenue growth just from indoor air quality solutions. That's been strong around education. And as offices are reopening and folks are evaluating how to come back to work, we're seeing that interest start to improve around office buildings as well. But you still have some harder hit verticals that are slower to recover. If you're in hospitality, you're in restaurants, you're in travel, we're starting to see that pick up a little bit, right? But it's all around connected with the -- hopefully, the optimism and deployment of vaccination. So it's still a mixed bag, I would say, but again, a little more optimism now. And hopefully, we'll continue to see this trend continue.

The only thing I would add, Markus, is Chris was talking about indoor air quality, one of the things we're seeing is -- and again, our approach on indoor air quality is really a comprehensive system audit, okay? So we're not just selling a point solution. We're looking at the entire system to understand its capability, understand how we can make the indoor environment as safe as possible with the existing infrastructure. We also give our customers a road map as to what the future could look like from infrastructure improvements to improve the indoor air quality and to reduce the energy intensity of the building. And that's a very important element, the energy intensity. When you do indoor air quality improvements, it typically has to do with filtration, increasing the density of the filter which causes -- it uses energy. As you push the air through the ducts, if the filter is more dense, obviously, you need more energy to push that air through. The other is the fresh air exchange. So as you're bringing more fresh air into the building, again, you need to condition that. So we've had customers that have come to us after improvements and saying, "Hey, my energy bill went up 20-plus percent." And what we're able to do now because we've done these audits is we understand where those points are, where you can make changes and reduce the energy consumption of the building. So we talk a lot about decarbonizing the built environment. This is a big component of that. The other -- only other point I'd mention is that as we've done these audits and they're completed in many of the education vertical for our customers, we are now starting to see customers come back for those day 2 activities. And those would be activities that would require additional infrastructure. And some of that is a direct response from some of the stimulus funding that's now becoming available to the education verticals.

Interesting. Can I maybe follow up on that because that opens a lot of interesting questions. I think one, around that number that you said sort of 1% to 2% growth, right? So -- and I fully get the opportunity around -- filter density versus impact on energy and what that has as repercussions, right? So how should I think about that incremental growth? Is that really on top of the market growth, right? So if I say, you kind of grew solidly mid -- high single digits historically, is that incremental? Or is that like another strong driver that would just keep HVAC growing at these sort of growth rates? Now help me understand how you kind of get to that 2% number.

Yes. Well, I mean, the 2% number, obviously, we have a backlog that we track, and we said for a long time now, we thought it would be 1% to 2%. I would tell you in 2021, it will be closer to the 2%. That's what our backlog supports. But we've always thought of our commercial HVAC as a multiple of GDP. And the reason why it's the multiple of GDP is because of some of the tailwinds on the megatrends. And we look at indoor air quality as one of those tailwinds. So -- and we don't see indoor air quality going away. We think it's going to be a tailwind for the foreseeable future, 400 billion square feet of commercial space that needs to be conditioned in some way or fashion. So there's a lot of opportunities out there. This will be with us for a while. I'd love to say that this is the last pandemic that I'll ever experience in my lifetime. I just -- I don't think I'd be truthful to myself if I believe that. So this is something that indoor air quality is the top of mind of many people. Certainly, as -- in different parts of the world, as people are looking to come back to an office environment, whatever the future of work is, come back to an office environment, and they're certainly asking their employers, what have you done to make this a safe environment. And that trend will continue into the future.

Great. Okay. So maybe if I come back to sort of more near term on the resi side. I mean it keeps going from strength to strength. But I'm wondering what's ultimately driving this at the moment, right? So it can't be the typical replacement cycle of replacing broken units. It feels like there could be some pull forward. Do you agree with that? Or how do you think about this generally? Is there a replacement cycle on the resi side? Or do you think about this differently?

Markus, I'll start. It's been a long time since we've really talked internally about a cycle. We really see higher correlations with more macroeconomic trends around consumer confidence and unemployment being drivers within residential. For 2021, it really is still -- we believe it's going to be a tale of 2 halves. The first half, very strong on easy comps. Second half of the year will be very tough comps given the recovery that began in the second half of 2020. There's a number of prognosticators out there in the full year. They're kind of calling 2021 up, say, mid-single digit for resi markets in the U.S. We wouldn't disagree with that. It's kind of where we'd be putting it. So the consumer remains strong in 2020 going into 2021. We're looking for those macroeconomic factors. And we do see the residential business is really a GDP plus business. Dave talked about multiple of GDP for the commercial HVAC business. We think we've got a plus business here for GDP in residential, and some of that is a lot of the investments we've made over time to keep up with all the regulatory changes.

And the other thing, Markus, I would add is that we've certainly seen coming through the pandemic, if you can remember the early days in res, right, I think the independents -- the IWDs, independent wholesale distributors were very conservative early days, right, about putting inventory into their barns as they call them. Just because they didn't know what was going to happen. And all of a sudden, the heat started to happen around this time last year, maybe a little bit earlier, and all of a sudden, demand really picked up. And I think that a couple of things that you could say is, okay, people are working from home. They realize that working from home in an environment that's not very comfortable is not something they want to do long term. And again, I think that whatever the future of work is you're going to probably have some sort of a variation where you'll have time in the office, you'll have time at home. And people want to make sure they're in a comfortable environment. And I see that really, as Chris said, I wouldn't -- I mean we look at replacement cycles. We certainly have that in our model, but there are other macro indicators that have a lot of correlation to what we're seeing right now.

Okay. Great. And then on the nonresi side, you mentioned earlier that you see signs of life in launching hospitality, et cetera. Again, speaking in -- select that baseball terms, like what inning are we there on those customers maybe coming back?

I think we're still in the dugout there, but I'll explain to you what that means after. I mean I think if you look at the office vertical, we are seeing some indoor air quality activity there, which is a good sign, right? People are wanting to get their people back to a safe environment. Hospitality, it's going to be a little bit slower, I think. It's certainly -- I mean I look at myself and say, someone who would probably spend 50, 60 nights a year in a hotel, and I think I've been in a hotel once. So it's going to take some time. I do think it will come back, but let's just hope that continued success that we've seen with vaccine distributions and people getting shots in the arm and COVID cases reductions, is all a positive sign. So I think as Chris said, we're cautiously optimistic about the second half. And I would just say that there are -- it differs depending on where you are in the world. And I know there are parts in the world and maybe they're even on the call here today that are still really struggling with this virus. So we all have to be cautious. We all can't let our guard down. And we just need to make sure that we pay attention to the details and not let this pandemic go on much longer.

Great. Okay. Maybe briefly on TK. I know most people think of that as a relative short -- very short cycle business, obviously, you gave some great, I think, detail there on the call on 2021. As you think about '22, truck trailer, APU on the one side, marine business on the other, how should we think about this? Is there -- has something changed there in the cycle on truck trailer in particular in recent years? Or how do you think about that market?

Chris, do you want…

Yes, I'll start. It's maybe similar to residential markets. Looking back the last -- if I talk about North America trailer, looking back, say, the last 6 years and then looking forward the next 2 years, we're really seeing that market, roughly 45,000 units, plus or minus 10%. So I think there has been structural change in these markets. And you can go back to electronic driver logs. You can go back to tax reform 4 or 5 years ago, putting further investment into trailer companies. You can go to the recent dynamics and just general growing trend of home delivery has certainly driven up the need for trailer units. And certainly, the pandemic has only expanded that. So you're right, we gave strong guidance for 2021 based on the ACT data. And for 2022, as you mentioned, ACT is calling up the North America market up 13% in 2022 versus 2021. So we see that the market has structurally moved, again, plus or minus maybe 45,000 units, plus or minus 10% off of that number. And it looks like it's got some growth continuing. We've got some great products in this space. We sometimes talk a lot about North America because of maybe the ACT data and the size. But Europe is an area as well where we have had significant innovation in that market. Last year, we started around middle of the year with 18 new product introductions over 18 months. So we're very much in the midst of that rollout right now. But we think that there's some structural trends here that will remain positive in Thermo King and trends for refrigeration. Dave, anything else you want to add?

I think you hit on it. The innovation side of things, Markus, is really exciting in our Thermo King space. I mean the Advancer product that we launched in Europe, we're very, very happy with the results that we're seeing. This product is 30% more efficient than what was the best in the market. And by the way, that was a Thermo King unit as well. So we're excited. I think that -- and those innovations are really across the globe that we're seeing in that business. So I mean, think of it, we're going to be a very strong year this year in 2021 in TK, as we laid out during our Q1 earnings results. The ACT is now coming out and saying that 2022 will be up 13% over what we saw this year, and they're even talking about 2023 being in that mid-40,000 level. So TK has some runway in front of it, for sure.

Okay. Great. Great. And then on price cost, which is my next topic here, by far, the #1 topic, I think, that I get to hear from clients also in the chat. We've seen the dynamics in Q1, obviously, where you have price increases ahead of seeing the inflation, right? And what's baked into now for the remainder of the year? I think you guided to 30% incrementals from Q2 and for the rest of the year. And we've heard obviously the flip side of commentary from some of your suppliers who they're kind of stuck with their pricing i.e. your cost and then try to increase prices later in the year now. How should we think about this? And how much wage inflation do you have in your assumptions? Maybe let's start there just to get the magnitude of what's in that 30% incremental number.

Yes, sure. If I start with wage inflation, Markus, we would have that fully baked in generally within the company. There's -- at the end of the first quarter, start of the second quarter, the impact of a wage inflation escalation takes effect. So that would be really part of any guide we would be looking at even earlier in the year. On commodities, absolutely. We're spending a lot of time in that space, and it's a volatile space, as we all know. You're right, we got ahead of commodity inflation in the first quarter with that early first round of price increases. We had them late fourth quarter last year, early first quarter this year. The continued volatility in the first quarter led us to a second round of price increases, largely around the first part of April to mid-April. So the strong price cost dynamic we had in the first quarter is particularly strong, where we saw that as being roughly flattish for the balance of the year, just given the volatility on commodity prices. An area that's also volatile because we can have better control around what we buy, right? The copper we buy we hedge and will enter any quarter period with about 75% of that copper you hedged in terms of price. Steel, we have about a 6-month lag or locked in pricing between what's in our inventory, which is around 3 months versus what we've locked in, in terms of price for suppliers. So we've got our playbook here in terms of how we mitigate inflation. Aluminum, a little bit less hedged than copper. But again, we've got a playbook we manage. But Tier 2 is volatile, right? The suppliers as you mentioned that they're providing us the motors and the gears and things we need for products. That's where we also continue to see volatility. But we see this as an opportunity with our suppliers and we have for years to make sure that this is a partnership. This isn't just a transactional relationship and all we're talking about is price. We want this to be a partnership in terms of what's their challenges, where can we help. It's actually rolling up as part of our transformation savings, too, when you think about supply chain and continuity there. But generally, when I think about HVAC and trends for refrigeration, the industry price is generally pretty sticky. So over the long run, I would say, price sticks. Could there be a quarter or 2 where we saw in the last round of inflation 3 or 4 years ago, where the price/cost spread was negative? Yes, that can happen from time to time. But we take the longer-term view that that generally writes itself -- price/cost we'd enter into any year, trying to get a 20 to 30 basis point spread. But again, it's volatile and we're managing in each and every day.

That's helpful. And how would you think about price elasticity just in case sort of like this inflation continues and intensifies even further here. Is there elasticity in the market that you could do more? Or at some point [indiscernible].

I could jump in there, Markus. I mean I think that, as Chris said, we've taken 2 price increases. That's not normal, okay? We have done that in the past, but commodity pricing is very volatile right now. All of us in the industry are facing the same constraints. I'm sure we're no different than other companies, whether they're in our space or in the auto industry, okay? Everyone has got tremendous amount of material inflation that we're seeing right now. It really is a day-to-day kind of management, and we have a very good process to manage this. A part of our operating system is being able to detect what's coming, what we have, what's our backlog look like, what's our inventory position and be able to really foreshadow what we need to do from a pricing standpoint. So as Chris said, we won't take a third price increase off the table. I always -- I was thinking that we'd have more normal activity in the commodity space already, and it hasn't happened. So we're watching it very closely. But I would tell you that we have a very detailed playbook in this space. And I think if you look at our past record on this, yes, we could have a quarter or 2 that maybe gets a little bit upside down. But for the long term, we have a very, very robust process on this. And I advise everyone to look for the long-term markets.

Markus, I'd say on Dave's point, input costs are fairly common, consistent across the peer group. I could say fairly disciplined pricing in the market, what we've seen so far. And then I don't want to discount though innovation, right? Dave will be the first to tell you and you have a choice to speak with a customer on price, do you want to have the same product in front of you or do you want the more efficient product that's going to be a better total cost of ownership for the customer to talk about. The innovation flywheel we've generated as well, we believe will allow for sticky price as well.

Got it. Okay. Great. Maybe I'll bubble up to sort of more longer-term questions here. And if I look at your business, it's relatively capital-light incrementals, you kind of guide through the cycle in the mid-20s range. If I think about the next 5, 10 years and this drive for more efficiency, drive for emissions reductions that you already alluded to, I see how that ultimately is a driver of the business, but does it also mean that sort of the R&D profile changes or anything changes in the capital intensity? Or how should we think about that longer term?

Yes, I think if we…

Go ahead, Chris.

You don't want to go first, Dave?

Yes, sure.

Yes. I mean we've designed the plan where we're taking those 30% gross margin incrementals and making sure we're reserving 5 points for our investment in innovation to get to the 25% net incrementals. We see that as a long-term investment since actually the company acquired Trane in 2008. We don't see it as an episodic investment. We think during the downturn last year, driven by pandemic, we continue to invest very heavily in the products and innovation flywheel that we have in the company. So I think anything that really reduces greenhouse gases and reduces energy intensity, we're going to keep investing in because we know that resonates with customers. But we see that 25% incremental really being around the long term, reserving enough for us to maintain the innovation that drives the market outgrowth that allows us to keep reinvesting in the business.

Yes. The only thing I would add, Markus, is, as Chris said, we've been investing for a long time at a high level. We've also been able to improve the process around innovation. So it's not just about the dollars you're investing, it's about the process that you're using. And our business operating system has allowed us to become very efficient. And I think last year, even in a pandemic, we launched more new products than we did the prior year. So our pipeline is very full. We had a meeting a couple of weeks ago where we asked each of our strategic business units to present their innovation pipeline. And we said we just want to -- we want you to limit the list to the top 10. And I wasn't keeping track, but I'm pretty sure there wasn't one that had just 10. And it was just so excited to see the passion of each of the teams and what they're able to -- what they're working on and really what the future holds for us. So our innovation pipeline is strong, and we're going to continue to innovate. And we've been very successful at it. We were the first in market in 2011, 2012 with next-generation refrigerants. I mean I can remember having people ask me, why are you doing this? There's no regulatory requirement. Why are you coming up with a low GWP refrigerant that has increased efficiency for your chiller. And the answer is, hey, look, our customers are asking for this and sustainability is a big part of who we are. And I think we all need to be very passionate about the fact that the future generations that they're going to live on our world, we need to be cautious of what we're doing and decarbonizing the built environment and making sure that we have green solutions. It's a big part of what Trane Technologies is all about, and I expect more of that in the future.

Great. That's actually a great segue to my next question because I wanted to talk about one of those innovations in heat pumps, which you flagged a lot recently, particularly with the momentum we saw in Europe. And we know that heat pumps has been a big thing in Europe on the resi side. But from what I understand is you're very confident on a new generation that you have on the commercial side that works across wider ranges, wider climate ranges, hot to cold. Can you maybe describe that innovation there a little bit because I get the sense that everybody says we have heat pumps, right? But what's different there? And how should I think about this because I know you guys don't -- I think, if I get this right, you don't do boilers. But ultimately, this is a system that replaces a chiller and a boiler. So what does that do ultimately to top line for Trane potentially?

Yes. Well, Markus, you kind of hit that. Everyone does have heat pumps, okay? The heat pump technology isn't novel to the industry. It's been around for a while. What we've been able to do is if you think about a conventional building, they typically have a chiller plant and they have a boiler plant. And typically, the boiler plant is using some sort of fossil fuel. What we've been able to do is we combine those, and we used -- we kind of used the heat pump as a metaphor as to really thinking about it as a system approach, and it's really a variable water flow system. And with some of the technology that we've implemented, we've been able to increase the operating map of how this system would have worked in the past, okay? These systems can be 4x more efficient than conventional thinking, 4x. So in a traditional heat pump, you used to have constraints around the ambient temperature in the environment you lived. So if it was a very cold environment, you would have a hard time having the efficiency level that you desire out of a heat pump. On the other side, the discharge water temperature was another constraint. And in certain areas, you need to be at a certain temperature so it can -- to ensure that bacteria is eliminated. So the magic number there in the U.S., 180 F. We've been able to, in our system, okay, and think of it as a system, don't think of it as just a chiller plant or boiler. This is a system where you can actually increase the operating map where these become very, very, very efficient solutions for end customers. And depending on the heat sink that you use, like you could use the air from the outside. If you use a water sink, you can even get higher efficiency levels. In some cases, we're using wastewater. In some cases, we're using the Adriatic Sea. It really depends, and it really is sitting down with the customer, understanding how they're operating and what potential that we could create for them that really is. You talked about decarbonizing the built environment. This is a great way to decarbonize the built environment. And we're super excited. And it's more than -- I don't want anyone on the call to think it's just a heat pump. The engineers and product management that helped develop this, they e-mail me more than they do today. It's not just the heat pump, it's a system of things with very sophisticated controls. And some of this was part of an acquisition we did 4 or 5 years ago. But then taking that technology making it additive to some of our technologies and then scaling it is something that we're really good at. And I would tell you that this is something that's -- it's very impactful to our customers, and it's very impactful to the environment which we live in.

Can I maybe ask a follow-up here? Assume I'm your customer. And what's my unit economics? So you say that it's 4x more efficient. But what's the upfront cost of that solution? Because effectively, I assume this is largely a replacement market, right? That's my assumption. So I want to replace the chiller and a boiler. Does this system, so to speak, cost more than that old chiller or if were to replace it with a chiller and a boiler, or does it cost more than just the chiller? Like where are we on a relative basis? I'm just trying to do the same thing here.

Well, first of all, the answer, I don't -- it depends, okay? Because I'd have to go and look. We've seen -- I have some examples where the payback is very fast, okay, because the total cost of ownership is so much lower, right? Think about it. You're not going to be -- your efficiency levels, the amount of energy you're consuming is so much less. So obviously, your total cost of ownership has a very accretive payback. It depends. And the reason why I say it depends is you need to work with your customer and understand what situation they're in. Do they need to replace the boiler today? Or is it a relatively new vintage? What does the chiller plant look like? At what time do you work with your customers to come up with the combination of the system? Do you put in a hybrid type environment today? So those are all types of the solutions that we have, that we work through with our customers. But I would tell you that there is some regulation in specific parts of Europe where they don't want fossil fuel any longer, right? They don't want the boilers. So it becomes a necessary for them to make a change. So this is -- we size the market in Europe between $1 billion and $2 billion, and it's a wide range. But we're still learning, too, but this is very exciting, and I would tell you that we're getting a lot of traction in this space. But please, don't just think of it as a heat pump I know we use that because I know everyone can understand the fact that heat pump is basically just running in reverse and taking -- creating heat -- taking heat from the outside or coal from the outside and bringing inside. This is different than that, okay? This is a system that think of it as a variable water flow system that's very sophisticated with controls and other aspects that work within this system to be able to create this solution.

Interesting. Okay. And is that something ultimately that you see also working in the China market? I know that there is obviously classic heat pumps quite successful there as well. And how about the U.S. or is this for the foreseeable future a European opportunity?

I think it would certainly be a global opportunity over time. I think in China, we're already getting inquiries about it. In the U.S., it's certainly gaining traction as well. But it's in its infancy in some of these things. Again, what inning are we in on this? It's very early, okay? Very early. And -- but I mean, if you could -- I mean if you could combine heating and cooling and put it into [a heat] system, right? And someone told me a long time ago, it's so much easier to move heat than to create heat. And in these systems, you're moving heat, you're putting heat where it's needed within a building. The efficiency levels are tremendous. So with that kind of value proposition, yes, sure, this is going to scale.

Okay. Great. Before I move off, there's one actually follow-up question here from the online chat. Apart from the heat pump, what are these other components that are critical to the system?

Yes. We're not going to disclose the system, okay, because that's part of the secrets that we've been able to acquire. I would tell you, it's very sophisticated controls. It's being able to input elements within the system based on the environment in which it's existing. So if I'm using a seawater as a heat sink, I may have one additive that I have to bring to the system. If I'm in a very cold environment, I may need a booster as part of the system. So it really depends on where you're located, where we have opportunities to get heat from or cold from, and that's how we would develop the system. But these are, think of it as a combined variable water flow system.

Got it. Okay. Great. Moving forward to more updates on that as we progress here. Maybe -- we have only 5 minutes left here, so I'll speak through some other questions that we have here. On capital allocation, you already mentioned sort of like a flywheel approach earlier on M&A, et cetera, as well. Some of your competitors now talk more broadly about sort of like this building management ecosystem, right? And how do you think about this? Because ultimately, HVAC is sort of like the big -- as you referred earlier, energy consumer in a building, right? So in a way, you could say you're at the core of trying to manage the energy. But how do you think about that ecosystem, your positioning in there? And what does that tell us maybe about M&A priorities within HVAC or outside of HVAC?

Yes. Our controls platform is really what -- or our building controls platform. I used to tell people years ago when I was running our commercial business for Trane, I used to tell them that we invest more in our building controls than we do our product. It's just nobody sees it because it's in the building controls, and half of them right now are in the cloud. So our controls platform is very robust. We're a leader in wireless controls. If you think about our technical stack that we've developed, we can connect to a product, we connect to a building, we connect to a campus. And really, I think that what you've seen over the pandemic-type environment is being connected, whether it's at the building, at the product, at the campus, has become extremely important for our customers. So we have an open protocol. We've always believed in an open protocol. We could create dashboards for our customers if they want to connect other things into that dashboard. It's not very complicated to have middleware that does that. These are available softwares that are relatively easy to program. I'm not sure I could do it, although I've tried. But this is an environment that we've invested a lot in. And we're very happy with our building controls platform the way it exists today. And like I said, a leader in wireless controls. If you think about how important that is in a retrofit market, not having to pull wires, okay, in an office structure is very, very important. And it's our norm now to be wireless, not to run wires.

Got it. Okay. Then maybe if I come back to growth and particularly on the commercial side, you mentioned sort of like a multiple of GDP, right? We talked about heat pumps in Europe. We talked about the education opportunity and some of the stimulus driving that. Can you maybe size that? Or what's the region where you expect most interesting growth over the next 3, 4, 5 years? Is that the U.S. with education and stimulus? So is that international areas on some of these innovations that you're pushing there? If you were to rank sort of like growth by region.

Yes. I don't think I'd do that right now, but I would tell you that the stimulus funding is starting to flow. I know we're short on time here. But I think what the variable there that's the unknown, Markus, is how much of that variable or that stimulus funds will be incremental to what normal investments would have been. I think everyone understands the importance of indoor air quality, especially in an education -- the education vertical. There's always been infrastructure money that's been spent there. How much will now be incremental above and beyond? We're starting to see our day 2 plans being implemented. And we have some really creative and neat solutions for the education vertical. One that I'll mention quickly is a dry hydrogen peroxide solution. And the neat thing about dry hydrogen peroxide is the molecules, the way they're formed, they actually have a half-life of 30 to 45 minutes, which means how long do they last in the atmosphere before they dissipate. And if you think about a school environment with 35 to 45 minutes, depending on the air flows in the space, they actually have the opportunity to settle on surfaces. And in a school environment, you are always having students changing classrooms. So now you could ensure that the air has been purified as well as the surface area. So it's a really neat solution that's part of our portfolio that we're seeing some traction on.

Great. Excellent. I have lots more questions. Maybe we can continue that in a different format at some point. But...

Markus, I told you, you have enough questions for 8 hours. So but we certainly enjoyed talking to you today. So it was a great...

Absolutely. Great. And Dave, Chris, Zac and Shane, thanks so much for taking the time out of your schedule and have great meetings now with investors, and talk to you soon. Thank you.

Thank you.

Thank you.

Bye.