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Operator
Good morning and welcome to the Trane Technologies Q3 2020 earnings conference call. My name is Mariama and I will be your operator for the call. The call will begin in a few moments with the speaker remarks and the Q&A session. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. we ask that you kindly limit yourselves to one question and one follow-up question. If you have additional questions, you may re-enter the queue. I will now turn the call over to Zach Nagel, Vice President of Investor Relations.
Mariama
Thanks, Operator. Good morning, and thank you for joining us for Terrain Technologies' third quarter 2020 earnings conference call. This call is being webcast on our website at traintechnologies.com, where you'll find the accompanying presentations. We are also recording and archiving this call on our website. Please go to slide two. Statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities law. Please see our SEC filings for a description of some of the factors that may cause our action results to differ materially from anticipated results. This presentation also includes non-GAAP measures, which are explained in the financial tables attached to our news release. Joining me on today's call are Michael Mach, Chairman and CEO, Dave Rigneri, President and COO, and Chris Kuhn, Senior Vice President and CFO. With that, please go to slide three, and I'll turn the call over to Mike. Mike?
Michael Mach
Thanks, Zach, and thanks, everyone, for joining us on today's call. Before we move into the details of our third quarter results, I'd like to momentarily step back and provide broader perspective on the unprecedented level of change we've seen around the world, both in business and in our daily lives, and why this is particularly relevant for trained technologies. At present, we appear to be seeing an acceleration of COVID-19 cases in most parts of the world, particularly in the northern hemisphere. As the weather turns colder and more activities and time is spent indoors, We're at a very critical phase in the course of this pandemic, and we can't let our guard down. Proper hygiene, distancing, and the wearing of masks will all remain critical defensive actions in order to contain and eventually eliminate the spread of the virus. Overall, our best estimate is that there is 1.7 trillion square feet of residential and non-residential building space in the world. over 400 billion square feet of this represents non-residential communal space importantly in developed economies people spend on average of 90 percent of the day indoors which reinforces the need for healthy indoor environments building owners tenants and every occupant of an indoor space are certainly looking at the overall health of the physical environment with a new sense of responsibility and concern and there's no doubt all will be contemplating and taking some action to renew or bring indoor spaces to better overall air quality standards. Systemic, holistic actions to assess and improve the health and safety of indoor environments is paramount right now and requires an industry-wide response for support. Over the past quarter, we formed our Center for Healthy and Efficient Spaces, modeled after the Center for Energy Efficiency and Sustainability that we formed over a decade ago. to convene internal and external experts to collaborate and deliver innovation, thought leadership, market education and communication, and to enhance the policies and standards required to meet the present and future challenges we're all facing. HVAC systems already drive 40% or more of a building's total electricity demand. However, we know that many indoor air quality strategies and enhancements can have a negative impact of further increasing building electrical demand by 15% to 40%. This represents a significant challenge for energy efficiency, energy costs for owners. So as we help raise the overall indoor air quality of spaces, is critical that we find additional ways to mitigate the economic impact to our customers through the implementation of more efficient systems controls and broad-based energy conservation measures that we can take on their behalf which is critical to offsetting the unintended consequences of increasing overall carbon emissions through hvac systems energy demand at train technologies we want to be part of creating a better new normal We will challenge the status quo to create a new normal where communities thrive, where equality is foundational, and where the environment is protected for future generations. We're putting a stake in the ground that trained technologies will lead by example by setting historic and ambitious commitments and taking action to change our company, our industry, and the world. Our Gigaton Challenge commits to reducing our customers' carbon emissions by one gigaton, or a billion metric tons, by the year 2030. To give you an idea of size and scale, that's equivalent to about 2% of the world's annual emissions. That's just our company alone. As other companies join us, we can bend the curve on global warming. We're also committed to creating opportunity for all with the goal to achieve gender parity and leadership by 2030 in racial and ethnic diversity that is reflective of our communities. Our transformation plan for trained technologies is another example of how we're creating a new, better normal for our team, customers, and shareholders, executing against the new blueprint that culminated in May after approximately one year of analysis and planning. Setting these and other bold plans in action, our talented team around the world has exhibited all the commitment and passion for change that has marked our last decade. Our goal is simple, to create a new normal where opportunity is accessible for all, where healthy food, water, and medicines are moved to people who need them, where emissions trend down and blue skies trend up. Our business sits right at the intersection of making those things happen. With our unique positioning as a focused climate innovator, transformed and fit for purpose, we can tackle these pressing and complex challenges and drive differentiated returns for shareholders. Moving to slide four, as everyone listening to this call today can attest, the global COVID-19 pandemic continues to present ongoing challenges to virtually every aspect of our daily lives. As much progress as we've made, the questions we were all contemplating months ago regarding the depth and duration of the downturn and the speed and shape of the recovery are still very much with us. While there are several promising vaccines in process, timing, availability, and mass distribution capabilities that might radically change the trajectory of the pandemic remain open questions. Despite these ongoing challenges, our teams remain focused and agile. effectively navigating an evolving landscape to meet the needs of our customers in order to deliver strong financial results for our shareholders in the third quarter. We outperformed our end markets broadly, delivering strong bookings growth, positive revenue growth, robust margin expansion, strong EPS growth, and exceptional free cash flow. Continued strong performance gives us confidence to once again raise our outlook for 2020 revenues and leverage, along with that for raising our outlook for operating income and EBITDA as well. Not only do we expect our current outlook for 2020 revenues of down roughly 6% to significantly outperform our prior outlook of down 10% to 15%, we also expect to see some improvement in the fourth quarter as well. Assuming the current course and speed of the global economic recovery, we now expect the fourth quarter revenues to be down just 5%, despite tough comps for our North American HVAC business and continued weakness in global transport markets. Additionally, we have improved our outlook for due leverage in quarter four in 2020 to better than gross margin levels based on expectations for continued strong execution. Our prior outlook was for gross margin due leverage in the low 30% range for 2020. We continue to take aggressive actions to emerge stronger and to thrive as business conditions improve and new opportunities develop. We maintained high levels of business reinvestment and innovation and growth programs throughout the third quarter and expect to further accelerate our investments in the fourth quarter. We have a strong slate, high ROI projects in our core business as well as opportunities to accelerate investments in new IAQ and cold chain storage solutions. We set a course to accelerate a stranded cost and other fixed cost reduction initiatives in the first half of the year in order to deliver more bottom line savings in both 2020 and 2021, and we are on track to deliver these savings. We remain in a very strong financial balance sheet and liquidity position, and we will be delivering strong free cash flow in 2020. You will recall we paused elements of our balanced capital allocation strategy through the third quarter in favor of capital preservation and optionality. Exiting the third quarter, based on strong performance and the current course speed of the global economic recovery, we're well positioned to bring all elements of our balanced capital allocation strategy back into play at this time. Our core strategy remains unchanged. secular megatrends of energy efficiency and sustainability are becoming more pressing every day and these trends are now elevated with increasing need to ensure the health and safety of the environments we work and live in we excel at addressing these megatrends and challenging what is possible for a sustainable world redefining a higher standard for what the world considers normal this passion powers us forward to deliver top-tier financial performance and differentiated returns for our shareholders. Now I'd like to turn the call over to Dave to discuss our bookings and revenue performance in the quarter. Dave? Thanks, Mike. Please go to slide five. Third quarter impacts of the global pandemic drove further contraction from 2019 levels in the majority of our key end markets. Despite these headwinds, our global teams remain focused and agile and delivered positive revenue and 7% bookings growth in the quarter. In the Americas, the economy is slowly progressing forward, but the situation remains tenuous. Our Americas segment delivered growth in both bookings and revenue in the third quarter, up 8% in bookings and 2% in revenues. In the Americas, our commercial HVAC business has remained resilient through 2020. with Q3 bookings down low single digits and revenue remaining flat with prior year. Services continue to outperform equipment, but remain challenged by pandemic-specific downturn impacts, primarily related to low building occupancy rates and other building closures related to ongoing health and safety concerns. Our teams have been effective and efficient at adapting to the changing landscape and capturing opportunities to outgrow market conditions in areas such as indoor air quality assessments and services. Strong performance in our residential HVAC business enabled us to take advantage of strong growth in both replacement and new construction markets in the third quarter. Residential bookings were up more than 30%, and revenues were up high teens in the quarter. Backlog remains at record levels entering Q4. Our transport refrigeration business outperformed the overall markets, which were down more than 30% in the quarter. Revenues were down over 20%. Bookings were positive in the quarter, up low single digits. Turning to EMEA, the overall EMEA market continues to be challenged, but teams continue to execute well. EMEA delivered positive bookings growth of 6% in the quarter, with growth in both commercial HVAC and transport refrigeration. Revenues again outgrew underlying market conditions, down 6% overall. Commercial HVAC bookings were up high single digits, while revenues were down mid-single digits. Services outperformed equipment, but are still constrained by pandemic-specific downturn impacts noted earlier. Immediate transport bookings were positive in the quarter, up low single digits. Revenues were down high single digits, outperforming the broader transport markets, which were down more than 20%. Asia Pacific results continue to be next, with overall bookings down 5% and revenues down 2%. China continues to show signs of relatively steady improvement, having made the most progress against the pandemic. Growth in China was more than offset by declines in the rest of Asia, where a number of countries have yet to turn the tide on the pandemic and begin on the path of recovery. Now I'd like to turn the call over to Chris to discuss the results of our quarter in more detail. Thanks, Dave. Please turn to slide six. Dave provided a good overview of our revenues on the prior slide, so I'll focus my comments on margins. Adjusted EBITDA margins were strong, up 80 basis points, with operating leverage better than gross margin rates. We delivered strong margin expansion through focused execution of our recession playbook to adapt to evolving market conditions. Productivity was very strong across the board in the quarter, reflecting strong execution and cost containment right sides for the revenue declines we expected to see. Top line execution exceeded our expectations heading into the quarter, which benefited margins given tight cost controls in each segment. Price costs remained positive in the quarter, while mix remained a significant headwind, given steep declines in transfer revenues in both the Americas and EMEA. We also maintained high levels of business reinvestment in employee safety measures, innovation, and technology. Please turn to slide seven. Turning to the regional segments, I'll once again focus my comments on margins, as Dave provided a good overview of revenues earlier. In the Americas region, strong residential revenues, productivity, cost containment, and price more than offset headwinds from transport mix, driving solid margin expansion. Similarly, the EMEA and Asia Pacific regions delivered strong productivity and cost containment to improve margins versus 2019. Please turn to slide eight. We've consistently been able to raise our outlook for revenues and leverage from our initial scenario view at the outset of the pandemic, and we are raising it once again heading into the fourth quarter of 2020. Assuming current course and speed of the global economic recovery, we now expect 2020 revenues to come in down approximately 6%, with better than gross margin deleverage. This compares favorably to our prior outlook for 2020 revenues to be down 10% to 15%. We expect Q4 revenues to be down approximately 5% with better than gross margin deleverage. We continue to operate from a position of strength and intend to continue to play aggressive offense through the downturn in order to emerge an even stronger company post-pandemic. In terms of our outlook for Q4, we wanted to provide some additional items that may help with your modeling. We operate a CapEx-like business model of 1% to 2% of revenues, and we are likely investing on the lower end of that range for 2020. We expect free cash flow to remain strong and equal to or greater than 125% of adjusted net earnings for 2020. Quarterly interest expense is expected to be consistent at $62 million in the fourth quarter. Our tax rate remains in the 19% to 20% range for 2020, And lastly, our share count is expected to be approximately 243 million shares for 2020. Now, I'd like to turn the call back over to Dave to provide our market outlook. Dave? Thanks, Chris. Please turn to slide number nine. As we've highlighted, North America Commercial HVAC has significantly outperformed the broader markets through the third quarter through strong focus, agility, and execution. We're seeing high levels of interest in and strong conversion for comprehensive indoor air quality assessments, and momentum in this space continues to build. The universe of opportunity is huge based on billions of installed square footage that could ultimately be evaluated and addressed, but the opportunity is still early stages. For Q4, we expect our North America commercial HVAC business to be down between 5% and 10%. primarily driven by the extremely tough comps the business faces. Q4 2019 revenues were up nearly 20%, which is essentially equivalent to two years of 10% growth all in one year. Tough comps aside, our North America commercial HVAC business remains healthy and resilient, and we expect backlog to be roughly flat in 2020 versus the end of 2019. despite significant declines in the non-residential markets in 2020. Turning to residential, we saw record bookings in revenue in third quarter, which puts us in a strong backlog position entering the fourth quarter. Residential is still a book and turn business, and it's unclear how November or December will shake out at this point. So too early to call Q4 at this stage. Turning to North America transport, we're seeing some positive trends in freight rates and order rates, and we're aligned with ACT that the overall transport market growth rates are likely to improve sequentially from Q3 to Q4. ACT is calling for the market to be down roughly 20% in Q4, so we're expecting continued headwinds for our North America transport business in the quarter. Turning to EMEA, the recovery continues to be relatively soft and country-dependent. Some countries are bracing for another round of restaurant and other venue lockdowns and border closures. It's too early to call the recovery broadly in Europe, and we'd expect both commercial HVAC and transport markets to be challenging in Q4. Transport markets will be especially challenging as the market outlook calls for a 25% decline in the fourth quarter, which will only be amplified by border and venue closures should they occur in parts of Europe. Turning to Asia, we continue to be encouraged by the recovery in China, which we expect to have solid growth in Q4. However, we expect to see similar results to the third quarter in the rest of Asia, in which revenue declines more than offset growth in China. Please turn to slide number 10. At the time we announced the industrial RMT transaction, we quickly mobilized the transformation office to focus on streamlining our organization to remove $100 million of stranded costs from the business by 2021. As Mike discussed earlier, we are on track to achieve $100 million in 2020 and $140 million in 2021. As we've discussed, we expect one-time expenses of approximately $100 to $150 million to eliminate the stranded and other fixed costs. We have spent approximately $91 million year-to-date with $15 million in Q3. Now I'd like to turn the call back over to Chris to discuss our balanced capital allocation strategy. Chris? Thanks, Dave. Please go to slide number 11. As Mike mentioned earlier, we paused on elements of our balanced capital allocation strategy through the third quarter in favor of capital preservation and optionality. Exiting the third quarter, based on our strong free cash flow generation and our current outlook, we're in a strong position to bring all elements of our balanced capital allocation strategy back into play. Our balanced capital allocation strategy is focused on consistently deploying excess cash to the opportunities with the highest returns for shareholders. Despite economic conditions, we continue to strengthen our core business with healthy levels of business investments and high ROI technology, innovation, and operational excellence projects, which are vital to our continued growth, product leadership, and margin expansion. We remain committed to maintaining a strong balance sheet that provides us with continued optionality as our markets evolve. We have a long-standing commitment to a reliable, strong, and growing dividend that increases at or above the rate of earnings growth over time. We continue to pursue strategic M&A that further improves the long-term shareholder returns, and we continue to see value in share repurchases as the stock trades below our calculated intrinsic value. All in, we expect to consistently deploy 100 percent of excess cash over time. Now, I'd like to turn the call back over to Dave and Mike to cover key investor topics of interest and to close with a summary of key points. Thanks, Chris. Please go to slide number 13. Indoor air quality is generating tremendous interest in the market, and our pipeline for services and system enhancements is growing daily. Fundamentally, our customers are turning to us for our unmatched expertise, direct service channel, and remote monitoring services to improve the safety of their buildings and build the confidence of their building occupants. We offer a holistic, layered, fully customizable approach which balances key contributors to indoor air quality with energy intensity. At this stage, we're seeing solid activity for more modest-sized projects aimed at immediately addressing the most pressing challenges for reopening buildings. As Mike highlighted at the outset, we believe indoor air quality represents a long-term secular tailwind for trained technologies, as businesses and consumers alike have come to think differently about the health and safety of the air they breathe everywhere. With an eye on the longer term, we launched our Center for Healthy and Efficient Spaces during the quarter. The center is focused on driving long-term strategy and innovation within our business and influencing the establishment of codes and adoption of standards in the built environment. Please go to slide number 14. Another topic we know is on the minds of investors, revolves around transport markets in 2020 and 2021. For 2020, the North American market is expected to be down about 35%, and our numbers clearly show we're outperforming the markets. The same applies for EMEA, where the markets are expected to be down roughly 25% for 2020. We're on pace to outperform in EMEA as well. Turning to 2021, we are positive on the markets and consistent with the market outlooks from ACT and IHS. which calls for transport markets to be up approximately 31% in North America and 11% in EMEA. Now I'd like to turn the call back over to Mike for closing remarks. Mike? Please go to slide 15. We've mentioned that we intend to hold an investor event in December, and we've firmed up what that event will be. We're looking at the morning of December 14th, and we hope all of you can join us. It should be a great event. While the pandemic continues to present unprecedented challenges to visibility and how the markets will evolve over the near to medium term, rather than conduct a traditional investor day with three-year top-line and bottom-line targets, we believe it will be more concrete and constructive to talk about the things we control, which are the transformational activities associated with the new training technologies that we've been working on for the past year. We're going to take a couple of hours on the morning of the 14th to focus on the self-help story as Trane Technologies supports continued margin expansion and growth across our business that is not dependent on how our current end markets perform. We've touched on some of these we've been working on, and this will be a deeper dive in order to provide investors with continued confidence in our margin expansion and innovation story. This will be a virtual event given the current environment. We'll follow up with additional details on the event, but please be sure to save the date. Please go to slide 16. I believe it was Peter Drucker who said that culture eats strategy for breakfast, and we couldn't agree more with that idea. The topic of what happens or changes with an organization's culture has been top of mind for many of these days and certainly for me. As we went through the very difficult work of the industrial separation and formation of the Reverse Morris Trust, we blueprinted the new train technologies and worked through and weathered the impact of the pandemic to this point. We've had plenty on our plate because of newly created train technologies. I'm proud to say that through all of this, the pride, energy, and optimism that is emblematic of our culture has only gotten stronger. We recently received feedback from 90% of our associates globally, nearly 35,000 people in this year's engagement survey, with over 60,000 verbatim comments provided. The results were overwhelming. Our engagement index achieved top quartile again of all companies and improved year over year, with pride in our company, energy for what we do in the world, and optimism about training technology's future at the core of the feedback received. I'm proud of our people, our entire team, and our shared inspiration that one company can change an industry, and our industry can change the world. As I said at the outset of the call, energy efficiency and sustainability megatrends are only growing stronger as time passes. And fundamentally, we excel when these global megatrends and sustainability intersect with our innovation and capabilities, which drives high demand for our products and services. The increased focus on the health and safety of spaces and our holistic approach to helping our customers navigate solutions to improve indoor air quality is another opportunity for trained technologies to make a difference in the world. We've been investing heavily for years to build franchise brands and to advance our leadership market positions to enable consistent, profitable growth and we intend to press our advantage during this downturn to leverage our strong financial and competitive positioning and to invest heavily in the future of trained technologies. Our message to our investors is unambiguous. We are stepping up to the challenges of today and tomorrow, and we will never stand still, and we're certainly not going to slow down. Our results in the marketplace are the ultimate barometer. we're not only focused on relentless investments in innovation and growth but investments in blueprinting and transforming into a leaner fit for purpose pure play company through the elimination of our stranded costs and the execution transformation initiatives that will fundamentally improve the margin profile of the company over the long term lastly we remain committed to dynamic and balanced deployment of capital. We have a strong track record of both delivering strong free cash flow, deploying excess cash to deliver top-tier shareholder returns over the years. With that, Chris, Dave, and I will be happy to take your questions. Operator?
Operator
Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. Please remember to limit yourselves to one question and one follow-up. Please stand by while we compile the Q&A roster. Your first question comes from Julian Mitchell with Barclays. Your line is open.
Julian Mitchell
Hi, good morning. Good morning. Maybe just the first question around the commercial HVAC environment in the Americas. Because I suppose, as you point out, the end market indicators, things like project starts are down or weak. Your own backlog, though, you think is stable into year end. So when I think about that, would you think that the negative impact of those end market indicators and starts, you're already moving past the worst of that? Or do you think that will hit your backlog more? early, mid next year, or alternatively, there's just no real trend to call out because of COVID. You're just taking kind of each quarter as it comes and the market's just too choppy to call a trend line.
Michael Mach
Yeah, Julian, it's probably a little bit too early to understand the trend line there. But, you know, remember that probably 15, 20% of our business is really affected by dodge, you know, data that put in place data that you read. and a lot more that is predicated on how we're doing with creating demand around retrofits and indoor air quality. So I do think you're correct. I do think we exit the year relatively flat in terms of our backlog. And based on everything that we've been through this past year, it's somewhat of an achievement to end with a flat backlog. So, you know, I... I think with the current course of speed going into, you know, 21, we've got enough strength, enough health in many of our markets to, you know, to have a decent year in 21 around growth.
Julian Mitchell
Thanks. And then maybe just a quick question. A follow-up question around the residential market. Any perspectives on what the total market you think is doing this year and the extent to which you think that sets a high or normal or low bar for next year? And any updates on your thoughts on that replacement cycle in U.S. resi?
Michael Mach
Well, it's a strange year because demand was really shoved around, pushed around. I think everyone went into a recession playbook and a pandemic playbook is a bit different as people generally felt so good about their jobs and investing in indoor air quality at home. And so you saw a drive toward not only replacing systems, but even mix for us that went up versus down through that. So I don't think that that continues indefinitely. I think it begins to normalize probably in quarter four, certainly in quarter one. The unique thing is we're moving in from what was really an extended peak season into really the build that we would normally do in the fourth quarter and beginning of the first quarter for the traditional peak season that we would see a cooling season as well next year in 21. So I think the best way to look at that is to look at 2020 as a bit of an anomaly. And I think we move into a more normalized 21. You know, everything that we're seeing around the setup for 21 would be that we see a little bit of growth in 21. But, again, it's all predicated on the current, of course, the speed of the economy and certainly how people feel about employment and overall consumer confidence as we get further into the end of 20 and into early 21. Of course, that business is really a book-and-turn business, and we were book-and-turning everything we could build in the fourth quarter. Our teams did an outstanding job about it. being able to meet demand that we didn't forecast and get that turned into revenue and nice margin expansion for the quarter. So I want to compliment the execution there. But again, I think it normalizes.
Julian Mitchell
Very helpful. Thank you. Thank you.
Operator
Your next question comes from Jeff Sprague with Vertical Research. Your line is open.
Michael Mach
Thank you. Hello, everyone. Jeff, how are you doing? doing great thanks um just uh back on the commercial question uh the the growth that you're seeing in services i think you said low single digit uh in the quarter um is it your view that's a kind of a pretty steady run rate for the situation that we're in or was it some catch-up from site access in in q2 Yeah, Jeff, this is Dave. I'll start, and Mike and Chris can add on. But we're very happy with our service businesses, really, globally. They've outperformed equipment despite the pandemic. And there's a lot of office buildings that are still thinly occupied. There's a lot of buildings that are not occupied at all with closures. We have schools that vary some degrees of when students are actually coming back. So despite all of that, our service business is still growing and it's outperforming our equipment business. Yeah, I'd say building availability is still a headwind. IAQ is certainly a tailwind. But none of that, I think, is a positive setup for the service business. And I always said a service business was a great, you know, antidote to a recession. Of course, the pandemic is different in that if access to buildings is denied, it's tough to grow a service business. But we're very busy on the IAQ front. And as buildings continue to open, there'll actually be some deferred service, deferred maintenance that I would expect we'd see there as well. And then I'm wondering on the IAQ, you know, thanks for the additional framing of maybe the square footage that could be a target. So it sounds like it's still, you know, early days, as you know. But I think, Dave, you mentioned you are starting to book some midsize projects. Is there anything we can kind of glean there, like what that means? A midsize project would increase your service opportunity and building XYZ by some percentage or something? and just some kind of rough framework to kind of get our head around the dollar opportunity here. Yeah, I mean, I would tell you that we continue to see strong customer demand and momentum in indoor air quality, number one. And just to take a step back, When we do an assessment, Jeff, it's not a check the box. These assessments take hundreds of hours to complete. And we take a very holistic approach when we look at the building. So it's not just changing out one item within a system. It really has to be a systems approach. Otherwise, you can make some very bad decisions for the end customer. Our audits follow ASHRAE's best practices. We ensure the building equipment is operating. the way it was designed. You then start looking at opportunities to improve the indoor air quality, whether that be on the filtration side, whether that be on the fresh air exchange side. We also look at sensors to improve humidity levels, temperature occupancy. That's all part of what we would do for our customers. What we do is we lay out for our customers a very layered approach. So we'll tell the customer what we will do on day one, right, to get the building operating the best it can with the current assets in place. and then we'll give them a roadmap for the future and that roadmap could be if they wanted to increase the fresh air exchanges to a greater degree they may need additional cooling capacity it could be as michael alluded to earlier on the energy side where there's energy projects that could actually reduce the the tax that we put on the uh the building to bring the indoor air quality up when we say modest projects we're talking about what we call day one projects and that is let's get your building as healthy as we can get it with your current set of assets today and then we'll give you that roadmap for the future Jeff, that's why I think it's a long-term play, because everyone needs to do something right now, and then ultimately, if the building wasn't designed to do what it needs to do, or you're at system limitations of what those standards should be, or the building may have changed use over some period of time and never was adapted, those are all necessary investments that need to be made. One of the things, and I just offer this because people on the phone are just some advice on this, The opposite of a holistic approach is sort of a point solution. And one of the point solutions that we're seeing that's a little bit problematic is a lot of people have gone and just moved to really dense filter medium. And what's happening there is you're not getting often enough airflow out to spaces. And as you do that, you're actually making the situation worse, you know, at the ends of duct lines and buildings. And so you're not getting the air changes per hour. And in fact, the systems and fans may not have the capacity to support that. Then we're going back in at that point and putting some math modeling around what's the maximum filter media you could change? How do we impact that by maybe maximizing actual air changes? How do we get humidity for an aerosol contaminant so it's a little bit heavier, falls faster? What can we use to kill it that wouldn't create... environmental problems for occupants, and those are all of the things that holistically we try to put together, as well as the back-end energy conservation measures to mitigate the effect of all this.
Jeff
Great. Thanks for that, Keller. Best of luck.
Operator
Your next question comes from Josh Prokowinski with Morgan Stanley. Your line is open.
Jeff
Hey, good morning, all. Hey, Josh. Good morning.
Michael Mach
Mike, with some of these upgrades that are coming through, especially, you know, the holistic stuff around IAQ, you know, appreciate kind of the global square footage numbers that you threw out there. And, you know, certainly the size and energy efficiency opportunity on the installed base is pretty large.
Jeff
I think in the past you've talked about in the applied world, kind of that dollar of equipment and $5 of parts and services through the lifespan. Any way to dimensionalize, you know, what these upgrades are worth in the context of that dollar? Is it, you know, is it $0.10? Is it $0.90? Like, just maybe give us a sense for how much these things cost, you know, relative to just, you know, full-op purchasing a new system.
Michael Mach
yeah for for a dollar spent in an applied system you know it's a 30-year life cycle we'd see a range of 8 to 12 times that um in terms of the service and retrofit potential around that so that that's probably what you're referring to there josh and i think that's true i i think the urgency probably um you know on the front end to do something in terms of the dave explained you know plan and that that plan has to be consistent with someone's overall financial capacity to execute the plan, we've got to work with customers to be able to do that. So Dave said day one, what are the mitigating things we can do? Day two and beyond, what are the things that would need to happen in these systems to really put them at a standard or a busting class? I think also, too, as people look at buildings, particularly tenants and landlords trying to lease buildings, there's going to be some tendency to be inquiring about this stuff and understanding to what degree have you made modifications or what does the building need to do to perform at a standard that should be best and healthy for occupants. And so that's going to play into this as well. So I think we'll be busy doing some asset planning for customers in longer term. I think that it probably accelerates some of the retrofits. It'll also have the impact of things that are in design and things that are not yet in design but will be built in the future, probably built to a higher standard, not just the installed modeled standard, but the maintenance standards as well. Because it's really critical, as you know, that energy can drop, as an example, from model to actual, it can drop 30% in a matter of just a couple of years through customers overriding system points. This is analogous to that, right? You can do all this great work around filters and outdoor air exchanges and dampers and linkages, but if you're not maintaining that stuff, you fall back right to where you were. So maintenance will be improved going forward, I think, as well as the ability to monitor the stuff remotely because there's just so much out there to look at. You're going to have to do this digitally and look for anomalies in the systems. Got a compliment. Just pivoting quickly over to the transport side of the house. Any sense for what the opportunity could look like or any inquiries customers are making about vaccine distribution and transportation there and the capacity that might be needed to support that? Yeah, Josh, this is Dave. I'll take that, you know, and just take a step back. Thermo King business, we have a complete line of products and services that is for the whole cold chain for distribution, whether that's air, truck, trailer, marine, rail, last mile, refrigerated containers. There are several vaccines, I'm sure everyone's aware, that are being worked. Some are in phase three trials right now. It's unclear as to which will be first to market. And depending on the vaccine, they have different temperature requirements for distribution. So it ranges from a deep freeze, which could be as cold as minus 80 C, to frozen, which would be minus 10 C, to just like a pharmaceutical, which would be like 2 C. The markets have sufficient capacity for a trailer over the land. Where we see opportunities is really in three spaces. One is in air. And we've been in the air business for decades. We have all the approved certifications, whether it's FAA or ESA, which is the equivalent in Europe. We also see some opportunities in last mile, and we see a big opportunity in deep freeze cold storage. And we just have a new product that we introduced there a few months ago. This is a product that in a typical hospital, your deep freeze capability is really about the size of your refrigerator at home. And our solution there is about 60 times the volume that a deep freeze you'd find in a hospital could hold. So that's going to be a big opportunity for Thermo King. You know, who we're talking to, we're talking to pharma companies, distribution companies, 3PL, government, healthcare providers. You know, we're talking to everyone. And, you know, we're going to be ready with a distribution solution, storage solution, when that time comes, and hopefully it's soon when we start distributing vaccines. The portable solution that's got the 60x capacity of the current market capability is still a mobile unit, and when you pair that with our rental and logistics capability through our rental businesses, we've got the opportunity to move these around. as they're needed. I'm really proud of the work the team did here to take every pharma manufacturer and vaccine, work with them specifically around their requirements and exactly how eventually these vaccines can be packed and distributed, but also understanding exactly what their supply chain looks like and where the breakpoints could be in the cold chain so that we can map out the capacities for every pharma company going through every distribution model all the way through to a CVS or a Walmart, for example, here in the U.S., about how people would eventually be inoculated. So in doing that, it's allowed us to be able to look at constraints, look at capacities, and make sure that We're selling product to the people that actually need it as opposed to just, you know, selling product into capacities that may not be required. That would be a real mess if that happened. We're being very conscientious about, you know, sort of observing that capacity to put it into the best place.
Dave
Appreciate it. Thanks, Mike. Thanks, Nick.
Operator
Your next question comes from Steve Tusa with JP Morgan. Your line is open.
Dave
Good morning. We're a long way from the dry ship R-22 changes, if you remember those days, Mike. i'm trying to do stupid you don't have to it's been been nothing but up into the right that congrats on continued execution share game et cetera uh... on uh... just thinking about all this kind of air quality stuff in the opportunity i mean what what needs to come together uh... from your perspective as a catalyst to kind of unlock some of this i mean i think ASHRAE is very busy trying to figure out standards. You've got, obviously, the messaging around the election, around green new deals and ESG. How fragmented is this? Right now, it sounds very fragmented. What brings it all together and catalyzes customers, do you think, to get off the sidelines?
Michael Mach
Yeah, I think it just comes down to first looking at the behavioral science behind all this and what we as consumers and building occupants and building owners and tenants think about space going forward. And so it's not going to require somebody to kind of convene that into one demand or code or standard, although I think what will happen is initially, particularly in the developed economies, there'll be immediate look back to looking at buildings and whether or not they're operating at standards. And then what do you do to mitigate that? I think it creates a step up where codes don't exist or don't exist to the stringent level of a standard, where those become, you know, implemented much more quickly than perhaps would have happened. But particularly for us, when you think about our non-residential opportunity, which is the bulk of our global business. We're really only in the res business, if you will, in the U.S. and Canada. If you think about that, these are sophisticated building owners, applied maybe more institutional critical systems. They get it. They get it immediately, and they know to open a factory, a hospital, a university, a research center, they're going to have to be at least at whatever the best standard is. So I don't think anything actually has to happen. Of course, anything that could happen that would create more focus on driving codes and implementing them faster would be additive to that.
Dave
So, I mean, you think that even without that, that there's enough, you know, will to kind of fund some of these big investments that would move beyond just something like, you know, the ancillary at the margin for your business?
Michael Mach
Yeah, if you think about even just, again, our non-res business being in the tens of billions of square feet that we've got as an installed base, that's a great starting point. and um in situations like this where you can't get to everybody immediately right away that's why honestly it has to be an industry response solving you know for 1.7 trillion square feet of space you're going to go to the people that get it first and i want to do something about it and so you know we're going to be selective about who we're talking to and how long we're talking to them before somebody does something right it's a it's a function of making sure that you disqualify opportunity as readily as you qualify opportunities when you've got that much opportunity in front of you so we're going to spend our time prioritizing with the people that want to act on it quickly and making sure that we're going to where the action will be taken which which of course is going to drive outcomes for health and it's going to drive revenues for us Great. Thanks for the color. Congrats again. Thank you.
Operator
Your next question comes from Scott Davis with Milius Research. Hello.
Mariama
Hey, Scott.
Jeff
Hello. Good morning.
Mariama
Thank you.
Jeff
I'm going to collect a question this quarter, but when you think about the resi side, Do you guys have any visibility into how people are financing units? Once upon a time, I know home equity loans were real popular, and then there were specialty finance companies.
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