Great. Moving right along here with Trane. We have CFO Chris Kuehn and CEO Dave Regnery. Thanks for joining us, guys. Really appreciate it. A lot of HVAC content here at this conference. Maybe just to start, higher level, what are you seeing out there broadly? Then we'll kind of dig into the businesses, maybe just a preamble of high level what you see, what you're seeing out there.
First of all, thanks for having us, Steve. It's always a great conference, and thanks for everyone for joining us. I think it's still morning. I'm checking the time zone that I'm on. Look, we had a very strong 2022. Our organic revenue growth was up 15%. Our EPS growth was 21%. Strong free cash flow conversion. Fourth quarter was very strong. Organic revenue growth was up 16%. We ended the fourth quarter with a backlog that was approximately 3x what would be normal. It was close to $7 billion. We're seeing growth really on a global basis. Commercial HVAC businesses are doing very well right now, and we continue to execute at a very high level.
Maybe just starting with the largest business on commercial, talk about some of the trends there and what you're seeing by the various parts of U.S. applied, global applied, like commercial equipment.
Yeah. If you think about the $7 billion of backlog, the majority of it is in our commercial HVAC business. Very strong demand. We're seeing really growth across many verticals. Think of it as high-tech industrial. Think of it as education. Think of it as healthcare. Think of data centers, which is included in office. Those continue to be very, very strong verticals for us. In Europe, we're seeing growth there really with our thermal management systems, which is really a way that I think you've probably all heard me before, but if you think about the way heating and cooling was done before, you would have a chiller plant, or a chiller plant, and you would have a boiler plant. Those two would not interact. What we've been able to do is combine that into one system.
When you combine it into one system, you eliminate the need for fossil fuel for heating. Our business there, really on the back of innovation, is growing at a very nice rate. In the fourth quarter, we had revenue growth of over 40%. We do not anticipate that every quarter, but it was a very strong year for us again in Europe. For the full year, the revenue was up north of 20% organic. Very strong there. A lot of demand for our solutions. In Asia, our business in Asia in 2022 did very, very well. I mean, it was up 12% organically, and that is despite having the lockdown situation that occurred throughout the year in China. China is about half of Asia for us. Despite that, we still performed very well.
Part of our commercial HVAC business on a global basis is our service business, and our service business continues to execute at very high levels. For the last six years, we've had compound annual growth rate of high-single-digits. Last year, that was 10%. By the way, that compound annual growth rate includes the pandemic year, which we had a lot of restrictions on us as to even having access to buildings, and the business was flat. Our service business, which today represents about a third of the company's revenue, continues to perform at a very, very high level.
How fast do you think the European market has grown in the last, call it off the base of 2019? How fast has your growth been? How much market share do you think you've gained?
Yeah. I do not think the market, you could argue whether the market's grown at all in Europe. I would tell you our business last year was up 20%. What was it since 2019? You would have to help me out with that, Chris, but.
I would certainly say probably high single digit over that time, if not stronger, commercial HVAC.
You're saying you guys have your product versus the competitor's product. How do they stack up, and how are you winning there? Because that's a pretty significant difference in growth, obviously, versus the market.
Yeah. I think it really is based on the fact that our thermal management system, which eliminates the need for fossil fuel. It is a unique solution that we have in the marketplace.
Can you talk about just how that works and the.
Yeah. I mean.
The value proposition versus perhaps a competitor that's providing a different solution? What is the competitor providing?
About five years ago, we used to talk about, maybe seven years ago, we used to talk about, and this is on applied systems, okay? This is in unitary applied systems. We used to talk about heat recovery systems. About six years ago, we acquired a company called Thermocold in Europe, and they had what we called four-pipe chillers, which was simultaneous heating and cooling. We moved from heat recovery to simultaneous heating and cooling, and now we have moved to thermal management systems, which is really that simultaneous heating and cooling, but we have developed ways to elevate the leaving water temperature so you could have heating in all climates.
Right. And the competing product for somebody else would be, what would that solution be?
Yeah. It depends on the competitor, but they're probably selling some heat recovery system or potentially what they would call a heat pump, but this is actually able to get basically, think about, we now have the ability to eliminate fossil fuel in all geographic climates. In the past, that was not possible. When we start talking about decarbonizing the built environment, think about it. 15% of all greenhouse gas is for heating and cooling of buildings. 15%. The majority of that is heating. The reason why the majority of that is heating is the efficiency you get out of heating and the fact that it is fossil fuel.
When you start using a vapor compression cycle, which is used in HVAC, you have a coefficient of performance or the energy performance of the unit, or the efficiency of the unit, that could be 3x-4x that of a conventional boiler. That's the innovation that we've been able to drive in the marketplace.
We just installed that, Dave, in one of our facilities in the fourth quarter.
Yeah. We have a facility in France, and we've eliminated the need for fossil fuel. We also do process, we do painting in that facility. Think about it. This is process heating as well, and we've eliminated the need for fossil fuel there.
What is so complex about this technology that you guys, I'm trying to kind of connect the dots with.
Yeah. It's sophisticated controls, number one. Number two, it has to do with the way you cascade the system to be able to for your ability to achieve these higher temperatures. If you were doing a turbine inlet cooling job, right, you used to run chillers in series, right? You'd go through one chiller, you'd get one temperature, you'd go through the next chiller, you'd get a different temperature, either higher or lower, depending on which way you're going. We took some of that technology embedded into these thermal management systems. We call it a cascading system, but it's not just the physical components of the system. It's how you control the system. The controls is really where the secret sauce is.
The brand of this product, just remind us of what the brand is, like what's the go-to-market name? Is it?
It's a Trane Technologies product. It's Synthesis, we would put that under.
Got it. As far as this technology and its use in North America, first of all, what applications is it being used in vertically in Europe? Then talk about how you bring that technology in North America.
It could be used in all. It could be used in all applications. Okay? Anywhere where you have a need for heating, it could be used. So we're using it in hospitals. We're using it in our own manufacturing location. It obviously works in the industrial space, office buildings, for sure. As far as North America goes, North America is a little bit further behind, but this technology is scalable on a global basis. We acquired a company in North America about four or five years ago called Arctic. They have some of that capability. We're taking some of our controls capability and moving it to North America so this becomes an option here for our customers here in North America.
Can you talk about the North America market? What are you seeing in the various verticals and where's the growth in commercial HVAC equipment? On the large stuff first.
Yeah. As I said, we've seen strength across many verticals in North America. Education was very strong for us in 2022. Some of that is fueled by the policy with the ESSER funding. Our equipment business in the education vertical, incoming order rates last year were up 40%. We're also seeing a lot of nice activity in data centers. Think of the high-tech industrials. Think of EV battery plants as well as chip manufacturing. By the way, there's still policy in front of us as far as IRA goes that will help that, as well as the Chips and Science Act.
Just for people's knowledge, how do you break your business down between commercial and institutional type markets?
Yeah. From the equipment side, we say it's about 50/50.
How big is data center now for you guys as a vertical?
Yeah. Data centers is one of those, it's not a vertical technically. It's part of office. And we don't break it out, but we're actually helping. We're trying to influence others to break it out as a separate vertical.
When you think about the commercial real estate fundamentals here in the U.S., especially on the office side, I think people are getting a little more nervous, obviously, with what happened last week. How do you see those playing out into your business?
As far as residential or?
Commercial fundamentals. Are there any risks around commercial real estate? It sounds like everything is great. Are there any risks around commercial real estate that you have to manage?
If I looked at office as a vertical, obviously, it's not as robust as it once was. I think we all understand what's happening with what central banks are doing with interest rates. I think we all understand that we're going through a transition and what the future of work will be in the coming years. I do believe that hybrid work structures will become more the norm, which is great for work-life balance. With a hybrid work structure, you still really need a lot of the same space that you have. Actually, what happens is it often gets reconfigured, so it's more geared towards teaming. We see that happening in some areas, but we'll see how that plays out in the long term.
On the light commercial side, any major differences in the trends there? What are you seeing versus in North America applied growth rates and light commercial growth rates?
We had strong growth in both applied and unitary in 2022. I think everyone's aware that in the light unitary space, the light unitary space was impacted by the SEER change. That went very smoothly for us. We added a lot of features to our product through that change. We now have a feature in light unitary where in the past, we only had this on certain sizes, but we now have the option within all light unitary to have it be a hybrid product. What that means is it has the capability to have dual fuel capability. You could run the unit in a heat pump mode, and based on the ambient temperature on the outside, you can move it to fossil fuel if you so desire.
If you think about it, if you're in Buffalo, New York, you could, if it got to maybe 10 degrees Fahrenheit outside, you might switch it to fossil fuel, and then you could optimize that vis-à-vis the control algorithms within the system. I really believe this is going to be a feature that our customers are really going to like. I mean, think about it. You could run in heat pump mode for the majority of the life of this unit. Again, you think about that 15% of all greenhouse gas from heating and cooling. This is just another innovative solution that will allow us to reduce that.
The split between your business now, between applied and unitary, is it still roughly 50/50 in North America?
I think that's about right.
That's about right. I mean, you got to remember, 30% if you think about our commercial HVAC business, 50% in the Americas, 50% is services, okay? 50% is equipment. Take the equipment, 25% applied, 25% unitary.
Got it. As far as lead times there, I know that some of the industry has had problems supplying. Where do you guys stand on the light commercial supply chain and how you're managing through that?
Yeah. Let me start with lead times. I think lead times in the entire industry are extended right now, and we're no exception to that. It really depends on the product as to what the lead time is, but they're extended right now. We watch it very closely. We're very competitive, but they're extended. As far as supply chain goes, as I said on our fourth quarter earnings call, supply chain is getting better. It's getting better slower than any of us want. Our team does a great job managing it, but it's going to be several quarters before supply chain gets back to what I would call normal. Several quarters. Okay.
The lead times for light commercial, I mean, there were some we were talking to in the channel that were saying it's like 50 weeks, which is like a, it's kind of like a fake lead time, right? I mean, nobody's going to wait 50 weeks for a light commercial product, but I would assume those have come in significantly, but are still extended?
I don't know if we were ever at 50, but they're extended from what would be normal.
Yeah. Normal would be like a couple of months?
It depends on the product. Okay. Light commercial could be a pretty broad category. So depending on the sophistication that you have in the product, but they're extended. I mean, if it was 8 weeks, it could be 12 weeks.
Do you think that that market, when the growth rates you're projecting for this year, how are you thinking about that market growing, the U.S. light commercial? I know Carrier said mid-teens. How do you guys see that market growing this year?
Look, we see growth in terms of our revenue growth. Steve, what we thought about commercial HVAC, both in Europe and in the Americas, we see that as high single-digit growth for the year. It is really constrained from a supply chain perspective, right? We expect that to get better each quarter, just like we saw in 2022. Could it be stronger than high-single-digits? Maybe. Right now, as we started out the year with our guidance at the beginning of February, we see both Europe and Americas commercial HVAC up high-single-digits.
When you think about that backlog you guys have in commercial and on the equipment side, is light commercial, how does it break down between light commercial and applied? I would assume the applied is obviously larger, just longer-term projects.
I don't know if you have the exact breakdown.
Not, but just like extent of difference in the.
I would not, to your point, Dave, I do not think, A, we have not broken it out, but B, I do not think it is that much different from what we have seen in the past in terms of the order rates coming in. Both sides, applied and light commercial, are seeing extended lead times, right? That is playing into the backlog.
Yeah. The backlog is weighted towards applied for sure.
Got it. How do you think about your controls approach on the solution side? What do you guys, how do you guys differentiate?
Yeah. I think controls is one of those areas that is often confusing for people, right? Let me just try to break this down. Think about controls at a unit level. Those would be controls on the product itself. It is the intelligence of the products. Then you would think about controls at a system level. Think of that as like a chiller plant. You would think of controls at a building level. That is a building management system or BMS it is referred to. We play in all three of those areas. As far as I will start with the BMS side of it, that is where 12 years ago, I think I am dating myself a little bit here. We were not very competitive in that space.
I was running our commercial HVAC business at the time, and I said, "I'm going to invest more in my controls business than I am in my equipment business." People thought we were crazy. I knew we had to be different. What we did was we developed wireless technology, which is leading in the marketplace today. We also knew that we wanted to be open protocol. We did not want to have this proprietary protocol that the customer would always have to come back to us for service. That may sound good, but it was not really compelling to the customer. We invested in this, and today we are absolutely the leader in wireless technology. We lead with that. Pulling wires through the ceilings of buildings is the past. That is not who we are.
Our meshing system in our wireless is leading, right? It's really creative what our engineers have been able to develop there. And it's open protocol. So our BMS system has been very successful. There's a theory out there that if you get the BMS system, you get all the systems underneath it. That's false. Okay? We often get the BMS system, and I'd love to say 100% of the time we get the chiller plant system, but that's not always the case. By the way, there's some pretty big competitors out there that only sell the BMS side of things. Obviously, they don't even have many of the subsystems.
If you're going to create a BMS system to network it together or dashboarding, as it's referred to in the industry, you usually use middleware to connect different systems to that dashboarding to make the operator of the building more knowledgeable. We don't lose orders to people because we don't have the BMS and vice versa.
What's the brand for your BMS? What do you typically go to market as in the BMS? Is that Building Advantage? Building Advantage is something different.
We haven't used Building Advantage for years, Steve.
Right. So what is the brand?
It's everything's Trane Technologies or Trane, okay, but then you have subsystems and the subnames underneath it.
Got it. Okay. So it's the Trane branded BMS.
Absolutely.
Okay. On the other controls front, any innovation there on the actual chiller plant and the chiller unit level that's come in the last several years?
We're always looking to optimize it. We're always looking to have our product more connectable coming out of the factory. Think of all of our unit controllers now. We use Symbio on our unit controllers, but they're all connectable out of the factory. We've always been a leader in factory-mounted controls in all of our products. We've now taken it to a new level now because we want it not only to be the intelligence for the unit, but we want to make sure that we connect to it remotely. Obviously, when you think about just to go back to the 15% of all CO2 is for heating and cooling buildings, a lot of that is because the building's not operating the way it's designed. By being connected to that, you could always ensure that the building is, in fact, operating at the engineered levels.
Pivoting from that front to services, how are you guys differentiating yourselves there? I mean, you're growing, you said, high-single-digits. That industry is growing maybe not that fast, but how are you guys managing to take market share there or grow faster than the market?
Yeah. We have a very sophisticated think about our business operating system. We have a business operating system around our service business. It is very detailed as to how we manage our service business. If you think about all of our service technicians, our company employees, they are all trained in our factories. We give them the best tools to be the smartest in front of their customer, how they interrogate a machine, the software that they use. Our service business is geared towards our applied systems. Okay? We are not pulling wires through ceilings. Okay? We are out there with applied systems. Now, what has changed is as you become connected to more assets, you become even more intelligent. What was happening, we will say, five or six years ago was a service technician would get called because something was, think of it as, on or off, not working.
Today, service technicians get called in many cases because energy consumption is wrong within the building. That is kind of the migration that is happening within the service business. We have a very detailed program to run our service business. If you ever went to one of our sales offices, you would see the MDIs managing daily improvement around service. It is vast. It is anywhere from how we train our service technicians to how we renew a service agreement. It may sound simple, but it is not. You just need to, there is a process that you go through to really enhance your ability to win in the future.
One other point of differentiation there, Dave, you mentioned service agreements. We do not include service agreements, multi-year service agreements in our backlog. Think of that as primarily equipment backlog contracting, but one, two, three-year service agreements, those are not in the backlog.
Right. On the services side, can you talk a little bit about your infrastructure there, like whether it's field offices, service reps?
No service reps. It's all company employees.
Sorry. Your company employees, what's the feet on the street for that business? Or what's the?
It's always changing, but think of it in the 5,000-4,500 range on a global basis.
Is that growing over time, or is that something you?
Absolutely. Because our installed base is growing. We're always recruiting technicians and always training technicians. They're all deployed geographically within a wherever we have an office, we have service techs that are attached to it. There would be a, think of it as a service coordinator for so many service technicians. They would be deploying where the service techs should be operating.
Any stats around the fleet that you're monitoring and servicing? What's kind of the installed base that you're—Otis gives us some numbers, very interesting to kind of look at and analyze. Is there a number of?
I mean, I think we have.
Connected fleet that you have or?
We have over, I believe it's over 30,000 connected buildings now. We have well over a couple of million assets that are connected. I don't have the exact numbers, but that would be the magnitude that we're talking about.
This is an industrial conference, but I guess I have to bring up AI. How are you guys applying AI to?
That's a great question.
Improve its?
I was just out of.
Good CEO question.
Yeah. It's a good CEO question, but.
Fifteen minutes left, so.
Let's talk about this for 10 minutes. I was just down in one of our larger offices in Texas, and we have a great controls team there. They were showing me what they're doing with their connected buildings and how they're using AI to improve building performance. It is so cool what they're doing. I mean, literally, if you think about it, if you're connected to these assets, right, and you're metering different aspects of what's happening in the building, with AI, you have so much more capability of understanding what to move when to optimize performance. It's simple things like it's 62 degrees outside. You should be using this much energy in your building. You're using too much energy in your building. Derive the fact that your dampers aren't working on your air handling system. Right?
Why would you ever be using this amount of energy if you should be relying on free cooling? We understand the logic that was installed there. We know how it was engineered. Free cooling isn't working. Call a technician. Let's get out there. Let's take a look at it. Let's understand. We don't have a sensor on the dampers. Okay? We derived that through our intelligence. So that's where that market is moving to. It was just really exciting to be in Dallas because they were so excited about first of all, it was 45 degrees in Dallas, so they were very excited about they all have winter jackets on. It was just so much fun being with the team there and seeing what they're doing and how they're really taking intelligence and bringing it to a new level.
When we go out and we do energy audits, we learn so much about what does not work properly in a building, and then we take that and we build it into our AI algorithms. You would be shocked what does not work in a building. Sometimes it is just knowledge that the operator of the building has. We are able to now take that. We could derive it. We could run formulas around it to understand how a building should be performing. Think of it as the digital twin, but the digital twin using AI for building performance.
On the residential side, what's your latest thinking around the cycle and how the next few years are going to play out here with the refrigerant regulation coming along?
Yeah. I mean, I think we've been pretty clear. We think residential in 2023 will be down in the mid-single digit range. By the way, residential is 20% of our business. I'll start with that. We think it'll be down in the mid-single digit range from a unit volume standpoint. From a dollar standpoint, think of it as plus or minus low-single-digits. We'll see how it plays out during the year. As far as the SEER change, everything happened as planned. We spent a lot of time with our independent wholesale distributors, which is about half of our residential business, making sure that they did not end up with stranded inventory just because of the way that legislation was rolled out. I think we're in pretty good shape there. As far as the there is a refrigerant change that's going to happen. It's 2025.
We've been dealing with refrigerant changes for a long time. I think the first one, maybe you and I, Steve, met on was probably back in 2013, okay, when we were changing from 123 in our applied space. Refrigerant change is not foreign to us. In fact, we have a lot of scientists that work actually with the OEMs of the refrigerant and making sure we understand how it's going to perform in our product and optimize it so that in the past, it used to be thought of that if you had a next-generation refrigerant that had a lower GWP, you would degradate the performance of your equipment. We reversed that. We enhanced the performance of our equipment with low GWP refrigerants. We like pushing the envelope and challenging what's possible there. From a technical standpoint, we're not concerned at all about the refrigerant change.
From a pre-buy standpoint, I think it's a little bit too early to call that. The next refrigerant that will be used in the resi space, and by the way, the way the industry works there, you typically have one refrigerant in that space. It's classified as an A2L, so it's slightly flammable. That would require different sensors on the equipment to make sure if there was a leak, it would become detected. We'll see what happens with the pre-buy. I think it's a little early to call that if there is one at all.
I guess when it comes to product development, there have been varying degrees of approach to innovation. Some tried to combine the SEER change with the refrigerant change. Others have basically said that they're providing just a part of the system that they think is a better solution, at least for the near term. Where do you guys land in all this?
From the SEER change?
Yeah. How much more would you have to chop technology-wise to bridge from the new M1 product to the refrigerant, to one that can handle the new refrigerant? There are some claiming they have more modest tweaks to go versus others that are claiming the industry has a lot of work to do. Where do you guys come out on this?
First of all, the SEER change, a lot of our portfolio already hit that SEER change. It was not a big change for us. Obviously, when we do any kind of a change, we always have lots of creative ideas in our pipeline. We pull a lot of those forward if we have any regulatory change and add them to the products. I talked a little bit about what we did on the light unitary side with a hybrid system now for that entire portfolio or dual fuel system. In the residential space, we certainly looked at opportunities there to simplify our product offering at intelligence. Okay? We have some really cool systems now, especially on the variable speed products within residential.
One of the biggest, and I'll answer your question in a minute, but one of the biggest questions or one of the biggest problems on a residential is the install because of the variability of the dealer that's doing the install. We developed a system now for the high-SEER products with variable speed. We actually get a report card. As the homeowner, you would get a report card from your dealer saying that all the systems are operating as the way they were designed. It would be looking at static pressure, it would be looking at leaving air temperatures, etc. It's a really cool way to make sure that the installation is, in fact, occurring the way it is.
As far as the refrigerant change, like I said, we're not, yeah, I'll be on the modest side as to what work has to be to make sure that we're ready for that. There's some work on the product, but we got that figured out. Then there's obviously some work on the factory side just to make sure that you could safely charge these units in the factory.
Got it. As far as the cycle is concerned, what's your take on how this looks over the next, call it, three to four years in resi?
I mean, we've been saying for a long time that we look at, over time, we look at our residential business as a GDP-plus business. There'll be cycles. Obviously, as you raise interest rates, new construction is going to go down. Existing home sales will go down. Over time, look at this business as a GDP-plus business. We continue to push innovation there too. I mean, a lot of times it's like this Link System that we have out now where you get a report card as to making sure the dealer that I hired installed this product the way it was designed is very, very important.
On the transport refrigeration side, you have a pretty good backlog. I think we're at a relatively high level just cyclically, but not too far off of what you think is normalized. Maybe talk about what you're seeing there. You guys put out a chart, I guess, in line with ACT that shows it's going to be down next year. What's the level of visibility on that?
Yeah, sure. ACT, North America, calling 2023 roughly flat, maybe up a point in terms of the trailer market, Steve. I think the bias there may be things shift more to the right throughout the year. That has kind of been the history as we have seen it. We like those charts we have been adding to the earnings presentations because it really shows our outgrowth versus the markets over the last couple of years, both in EMEA and in North America. A lot of that is the innovation that we have driven through the portfolio and the investments we have made well over time. You are right, ACT is calling 2024 down, I think, 10%-11%. Then they are calling 2025 up 10%-11% thereafter.
It looks to be, at least from that North America trailer market, the bellwether for broader markets, it's going to be a 40,000+ unit market for a long period of time. The last seven of nine years, it's been 45,000 units, ± 10%. Those are really healthy markets. We think that we've got the right innovation. We certainly have the right teams in both of those regions. The innovation just keeps coming. When you think about electrification of that portfolio, one of the reasons why we've got a little bit higher investment this year, one of those components is electrification of the portfolio, which we've started with hybrid products and ultimately testing now on the West Coast with some customers, fully electrified transport refrigeration units.
Kind of a flat market that bounces around, but you guys outperform, essentially. Is that kind of?
I think we've demonstrated that for sure the last two years if you look at our results.
Right.
The need to transport perishables isn't getting smaller. Okay? I mean, look what's happening in the pharmaceutical space, right? Next year's flu vaccine will be an mRNA vaccine, right? Precision temperature control required for transportation. If you have anything that requires precision temperature control for transportation, it's right in the sweet spot of our Thermo King business.
Turning to the margins, maybe talk about what you're seeing on inflation and on the flip side of that, pricing. What's the outlook for that?
What I would say is we're targeting for 2023, 20-30 basis points price over cost, Steve. That's been our typical target before we went through the last couple of years of significant inflation. We're targeting the 20-30 basis points improvement. On the price side, look, we're comping against very high levels in 2022. We realized 9.5 points of price in 2022. When you think back pre-pandemic, a good year for price would be 50 basis points or less. I think we've led in pricing over the last couple of years. We like the performance each quarter in 2021 and 2022, price over cost on a dollar basis. We're seeing revenue guide of 2023 at 6%-8% organic. Estimates maybe in that 2-2.5 point range of that 6% -8% is going to be really coming from price.
Again, tough comps on a year-to-year basis and just includes what we've got for any type of price increases here in that first month of January. Let's see how it plays out throughout the year.
As far as your raws, what you're thinking as far as raw materials are concerned, relatively stable, I think, is what you said.
Yeah. We went in and said, "Look, we do not expect any incremental inflation or deflation on the year." Certainly, we have been watching the markets as we see—let me step back. We have hedging strategies. We think about our Tier 1 componentry. So copper and aluminum, we are hedging four quarters out. Think of that as 75% hedge the first quarter out, then drops down to say 60%, 50%, 40% as you get to four quarters out. We continue to execute through that strategy, and it smooths out a bit of the glide path when you see inflation, and it smooths out when deflation were to incur. Steel, we lock in for about six months in terms of price. So any deflationary effects in the first quarter, we really see that starting in the third quarter.
Think of that size of spend as around $750 million for us on the Tier 1. Okay? Tier 2 components, that spend is around $5 billion. Okay? That is where we are seeing certainly more inflation coming from labor inflation from our suppliers, energy inflation from the supply base. I would say then the third componentry is really around freight and logistics. Those costs we have seen coming down. When we bundled it all together, we just really saw a flattish environment on incremental inflation for the year and ultimately still targeting for the 20-30 basis points of price cost.
Any other parts of the bridge investments? What are you doing on the investment side?
Yeah. So think of a normal year investing 30-40 basis points on investments. It really drives that market outgrowth. We love that example on Thermo King to really show market performance versus our performance. That's a good example there. This year, though, we're taking that 20-30 basis points of price over cost, and we're adding it to the investment incrementals as well. So think of incremental investments in that 60-70 basis point spread. That's allowing us to do further around electrification, decarbonization, factory automation, supply chain resiliency. We can still drive at or above our long-term incremental target, 25%+ is our guide for the year. We're able to drive some higher investments and also commit to 25% or better incrementals in 2023.
When it comes to the mix, because the rest is kind of volume mix that drops out, when it comes to the actual mix impact, is that pretty stable on the year, or is that positive because of what's happening with the SEER change?
SEER change is a small piece of that, and we're trying just to get the margin neutral on that price increase on the residential SEER change. That's kind of our guide for the full year. Let's be margin neutral there, not trying to make any more or less. Let's see how mix kind of plays out. I think we've certainly seen services being strong on a year-to-year basis. We like that services business. We do think that those volume mix drive strong incrementals, call it in that 30% range, which then we're putting five points back into investments. That gets us to the math of the 25% or better incrementals.
Right. That makes sense. Just lastly on capital deployment, you've made a couple of technology acquisitions that have really worked out well, obviously, the one in Europe you were talking about. Anything out there that you feel like you need to have or you'd want to do from an acquisition perspective or just buybacks?
I would say, first of all, we like being a pure play. It took us a long time to become a pure play. So we like being a pure play. But we're always looking at technologies, and we have great channels, right? At the end of the day, we don't have to do anything, right? We have a great portfolio of products. We have a great service business. We have a great controls business. We have great channels to market on a global basis. We don't have to do anything, but we'll always look for technologies or how we could augment our channel to make it even stronger going forward. And as a major global player in HVACR, we get to see everything. So we'll be very disciplined in our approach.
Great. I think that's it. Thanks, guys.
All right. Thank you.
Thank you.
Thanks, everyone.