All right, welcome back, everyone. We are very excited to have Trane Technologies with us today. We've got Dave Regnery, who is the Chairman and CEO, and Chris Kuehn, who is the EVP and CFO, with us. Dave, as I walk over here, maybe I'll just ask you, you've been at the helm of Trane for almost two years. I know time flies when you're having fun. Can you talk about what, if anything, you've changed regarding Trane's strategy over the last two years and reflect on what maybe you're most proud of and what, if anything, Trane could still improve upon as we go into 2023?
Yeah, thanks. It's hard to believe it's two years. Time flies when you're having fun, right? Look, when I took over as the CEO and the Chair early on, I said, "Look, I've been fundamental to the blueprinting of Trane Technologies as a pure-play climate innovator." This transition between Mike Lamach and myself started well before it was announced. I said, "Don't expect a lot of dramatic changes to our strategy." Hopefully, you haven't seen these dramatic changes that sometimes you see when a new CEO gets named. What you have seen is consistent performance and being able to execute at a very high level. Our business operating system enables us to do that. I always tell people, "It's a system of things that makes Trane Technologies a great company." I could talk about innovation.
I could talk about a lot of things. I always start with our culture. That is what allows us to differentiate ourselves as Trane Technologies. I am very proud of the performance that we have been able to demonstrate. In 2022, our organic revenue was up 15%. Our EPS had a growth of 21%. Our book-to-bill in the year was 109%. We exited the fourth quarter with a record backlog of close to $7 billion. We have a very strong guide for 2023. I could go on and on about how proud I am of what this team has been able to execute. It has been a great two years. I am a little bit flabbergasted when people remind me it has been two years because it seems like it was just yesterday. I am having a lot of fun. It is funny. This is a funny story.
I was in Charlotte. We have a group of CEOs that get together periodically. It is really all about how we could create economic mobility in the greater Charlotte area. There are a lot of CEOs of publicly traded companies that are in Charlotte. I was with this group, and we were having a break. We were just talking amongst ourselves. One of the fellow CEOs said, "Boy, the last two years have been the hardest I've ever experienced as CEO." I am thinking to myself, "I wonder if my job's going to get easier because these have been the first two years of my career." Anyways, it is a great job. I think the team is executing at a very high level. Hopefully, everyone here sees it in our results.
That's great to hear, Dave. Maybe I'll just ask you, you kind of mentioned this a little bit. I think Trane is one of the most innovative, if not the most innovative, of the global HVAC companies. The megatrends, decarbonization, digitization, they're ramping up. What's Trane doing to make sure you stay at the forefront of innovation?
Yeah. I mean, this is one of those parts of that system of things that makes us a great company, right, is innovation. And we relentlessly invest in innovation. This isn't like a flash in the pan. We're not going to be episodic. We're going to be very consistent about how we execute or how we invest and then how we execute, right? Because it's not just about the dollars you invest. It's the process that you have behind that. And we've been able to really hone that process over a long period of time. I would tell you, one of the things that I always point to that differentiates a little bit us versus some of our competitors is the fact that when we go at innovation, we're always looking at a system level. So we're not out there at a component level or a product level.
We're always thinking about the system of HVAC. What's that solution look like? If you look at, I'll use Europe as an example, where a traditional way to heat and cool a building is you have a chiller plant and you have a boiler plant. Our clever engineers said, "Wait a second. It's HVAC, heating, ventilation, air conditioning. Let's look at that system and how could we combine that system?" Now we have a thermal management system that basically eliminates the need for fossil fuel for heating in buildings. It's all electric now. You do not need fossil fuel to heat a building. You do not need it. We have that technology. Think about it. 15% of global greenhouse gas is from heating and cooling of buildings. Most of that comes from heating.
If we could eliminate fossil fuel from heating, we would dramatically, dramatically change the landscape on decarbonizing the built environment. This technology exists today. It's not like we have to wait, right, in case you didn't know the world's getting warmer. It's just, I'm very proud of what our team's been able to create. Expect more of it in the future. It's not just on our Trane side. I could talk about Thermo King and get just as passionate about some of the inventions we have there and what we're working on with electrification and how we're continuing to push the envelope to make sure that the planet that we all live on here is better for the next generations that are going to be here.
Trust me, Dave, we're going to get to those things. Let me just step back, though, and ask you about the current environment for a second, if I could. Maybe Chris can chime in. Last quarter, you reported, with all the strength, you still reported flattish bookings, which, again, is a very tough comparison. You go into 2023 with record backlog, $7 billion. You talked about ending this year with $6 billion of backlog. Are you essentially telling us that there's still a good chance you have multi-year earnings visibility here? How resilient do you think your earnings growth will be when we start seeing these lead indicators come down like the ABI or Dodge momentum?
Yeah, anyone I start, and Dave can jump in. Look, I think it's really important to focus also on the absolute dollars because those tough comps, as you mentioned, 2021, we saw 27% bookings growth for a full-year basis. Fourth quarter, we had $4 billion of bookings. We had revenue of $4.1 billion. While you look at the revenue growth of 15%, the backlog really did not move much in the fourth quarter. What we tried to do for 2023 is we said, "Okay, if we look to the end of the year, we expect backlog to be probably $6 billion or stronger." Okay? We ended 2022, entering 2023, with $6.9 billion. A little bit of context around that. If we were to have flat bookings in 2023, okay, that's $17.5 billion.
Based on our revenue guide for 2023, we would actually grow backlog by the end of 2023. It'd be over $7 billion. Our guide of a ballpark, let's say, call it $6 billion or stronger, that assumes revenue or bookings decline of around 6%. Do we think that could occur? It could. If we end 2023 going into 2024 with $6 billion of backlog, that's still two times the normal level of our backlog entry in a year. It gives us a lot of visibility into the forward look and the demand.
Helpful. Let me ask you about, I think we talked a little bit about sort of innovation. Let's move to sort of pricing of that innovation and price versus cost. You talked about 2%-2.5% carryover pricing into 2023. What are your expectations for sort of driving additional pricing if you need to? I mean, as you know, copper's bounced a little bit. Steel's bounced. How do you think about that? And stepping back, you guide to 25% organic incremental margin. How do you think about contingency in that forecast if supply chain headwinds or inflation is worse than you thought?
Yeah, I'll start. Look, we feel really confident on our 2023 guide. I'll start there. We're not planning for really any inflation deflation. We're kind of planning on a flat basis, on a year-over-year basis, Andy. There are pockets of where we've seen costs come down, certainly around logistics and freight. There have been some opportunities there. Steel has retreated a little bit. That pocket of savings or lower costs we saw third quarter, fourth quarter, early fourth quarter last year around copper and aluminum, to your point, those have bounced back, right?
Yeah.
What we are seeing, though, we're also seeing a lot of inflation around wage and energy in our tier two. In this order of magnitude, our tier one spend, copper, aluminum, steel, it's around $750 million of annual spend. Our tier two spend, when you think about motors, compressors, metal fab, that's over $4 billion of spend. When you start seeing the wage inflation, energy inflation on a much bigger base, that's where we bundled it all together, came out and said, "We think it's going to be roughly flattish on inflation deflation." We've got price increases that were put in place December, early January. That's just based on our full-year outlook for 2023. We're targeting 20-30 basis points of price over cost in 2023. It's allowing us to do even further investments.
We can certainly talk about that as well because we've got a great pipeline of investments and want to keep that always flowing. I am really proud. I know Dave is too, around the business operating system that we've driven for pricing every quarter in 2021, every quarter in 2022. We were price over cost on a dollar basis. The resilience of that operating system, I think, really showed through.
Yeah. The strength of our business operating system, right here, we're talking about our product growth teams led by our product management teams, just exceptional performance that we've seen over the last several years. I mean, just think about the amount of inflation that we've seen and the fact that we've always been able to stay ahead of that. I mean, they look around corners. That is what we talk about. That is what I talk about when I talk to them is, "What are we seeing around the corners?" If we continue to see persistent inflation, and I know we'll see if that happens, I'm very confident that that team will be ahead of it.
Chris, just to follow up on one thing you said, it's interesting, right, because it's like you're kind of going to a more normalized year on price versus cost. That 20-30 is kind of what you usually do.
It is. It is. I hope the viewpoint in 2023 is we do not need to have three rounds of price increases like we saw in 2021 and we saw in 2022. Look, the business operating system is nimble enough that if we have to react, we will react to that. We are targeting that 20-30 basis points. I hope we get to something more normal. It is not just pricing for cost, right? It is pricing around innovation. We are always making sure we are looking at a total value to the customer. When you think about our products that are more energy efficient, less reliant on fossil fuels, and the cost of those have only gone up, that has been an area that I think has been a lot of success in driving a lot of demand.
I know what you're going to say, but if demand were to slacken, like if you look at residential, for example, you're not going to give back price or you think it's pretty sticky.
We think it's sticky. The history in the industry would suggest that our pricing holds and sticks over that environment.
Yeah. Okay. Maybe just delving into some of the underlying markets a little bit more. Obviously, North American commercial HVAC, really, really strong market. Q4 bookings were plus low teens. Revenue was mid-teens growth. I know you've talked about strength in a number of verticals, but how are you thinking about sustainable growth rates in sort of North American commercial? Do you expect any difference between applied and unitary markets? What end markets do you think will be the biggest driver of growth in North America?
I think the verticals that I called out on our fourth quarter call will continue, at least in the mid to long term. I mean, data centers are going to continue to grow. What we're seeing in the education with some of the stimulus funding that's happening there with ESSER, that will continue to be with us for the really, I mean, I think now they've extended that. I think it's if an order is accepted by September 2024, you have to 2026 to get it installed. That will continue to be. I think we're seeing in the high-tech industrial space, we're seeing certainly nice activity there. Think about battery plants for electric vehicles, a lot of cooling capacity required. I think in front of us that we haven't yet seen is things like IRA once those funds start to move forward.
That will impact both residential and commercial as well as the CHIPS and Science Act. That will be another that's a little bit further out, but that's all in front of us.
Dave, could I ask you approximately how big the education vertical is for you guys now? Because, again, I think it's a little bit underrecognized how much money is out there.
Yeah. I get asked that question a lot. I don't answer it, but let me do my best here. Look, if I think about our commercial HVAC business in North America, right, 50% of the business is service, 50% is equipment. If you think about the equipment, think about it, 50% institutional, 50% commercial. And there's probably like 14 different verticals that fit under those two broad categories. We have strength in all of those verticals. That's one of the strengths that we have as a company is we're not overdependent on any particular vertical. We have expertise that exists in all those verticals. Education, we've had a lot of success, okay? I think I called it out on our fourth quarter call. I mean, our equipment order rates were up 40%, 4-0 in 2022.
A lot of that has to do with the approach that we take with our customers and the relationships that we have. If you remember, if you go back three years ago, and I never really want to go back three years ago, but in the beginning of COVID, right, we were talking about indoor air quality audits, right? We're still doing audits today, but we were helping many of our customers in the education vertical think through how they make their school safe today and what it would look like long term. The long term was kind of a roadmap as to what capital improvements you would need to make over time. ESSER funding comes in. I'll get it wrong. Elementary, Secondary School Emergency Relief Act. The funding became available.
We pulled those roadmaps out and basically went back to the customer and said, "Let us help you get funding because you already know what you have to do." These were shovel-ready projects for many of the schools. That is one of the ways that we took something, a policy, ESSER funding, which on the surface is somewhat complex, made it simple for our end customers and helped them through the journey. You could see the success we're having.
Speaking of complex, you talked about the IRA, right? I think implicit in sort of maybe Chris said it on the call, like in the second half of the year, IRA might start to ramp up for you guys as sort of states begin to set their own rules. I mean, what, if anything, is in your guide for IRA? And what kind of visibility do we have to the states actually getting their act together so that money can start to come?
I mean, I think the way IRA is going to work is you're going to have federal funds that will go down to the states. The states have a framework that they're going to be operating within to qualify for this funding. That framework will be a little bit different probably by each state. Okay? We do not know that, but that would be a good assumption to make. We're still actually helping clarify a lot of this. Okay? We're a company that has such a broad portfolio of products that we'll be able to serve whatever the end solution is. We just want to make sure the end solution is optimal. Originally, this came out, and I think you may know this, Andy, but we only want certain very high-tier product to qualify. Okay, we can do that, right?
If you want it to be for a more lower income, that may not make sense, right? Maybe you want to lower that SEER requirement. At the end of the day, a heat pump is still going to have a dramatic impact on the decarbonization of the home. We are helping people clarify that. We are hopeful that towards the back half of the year, and it may go into the fourth quarter, we are going to start to see some of that funding be released. It will be state by state. As far as do we have it in our guide, we do not know what the impact is going to be there. We have not baked this in because we are not really sure what the impact would be. It would impact both residential and commercial, okay? Are we optimistic on our guide?
We think we could, we have a 6%-8% for the enterprise. And we're very confident with that number.
Dave, maybe you could help us with the state of the North American residential market. I know it's not a huge portion of your business, but I feel like between you guys and your peers, it's kind of, I don't know, all over the place, it's maybe too strong. What you've said to us is you think for you guys, the market will be down, mid to low digits in unit terms in 2023, pricing and share gains, where you guys will lead to relatively flattish revenue. That's kind of what you guide to. Can you give any color into your visibility? I think you mentioned higher than usual backlog. You still have that. You mentioned that your distributors, your independent wholesale distributors, are in a relatively good inventory position.
I feel like maybe one or two of your peers have said something different than that. Any update on?
Yeah. I mean, first of all, residential is about 20% of the enterprise. So it's.
Asked it after commercial, Dave. I asked it after.
I know you did. Just to size it, okay? If you think about our residential business, about half of that or 10% of the enterprises, we go through independent wholesale distributors. When we're talking about what's the inventory level, we're looking at that 10%, okay, or about half of the residential business. The fourth quarter and really part of the third quarter, we were very—we're always in touch with our channel partners, but we were very intense in helping them with the phase-in, phase-out of their inventory. As the regulatory change happened, depending on where you were located, we wanted to ensure that no one got stuck with stranded inventory. In the south, it's install date. If you have it in your inventory, you won't be able to sell it after a particular date.
We did not want anyone to be stuck with inventory that they would be calling others to figure out what they're going to do with, right? That is a bad trail that that would lead down. We spent a lot of time helping them with what we call phase-in, phase-out. We do it all the time with our new product introductions. Some of our channel partners needed more help than others, but that was okay. We think their inventory is in a good position right now because of that. It was not about us shipping additional product to them in the fourth quarter. It was more about how do we make sure that they have the right mix and the right inventory that can set them up for success in the future. That was the emphasis.
As far as what's their inventory level, we think it's in a good position, right? We do a lot of work there on making sure that we don't want our channel partners to be set up for an unsuccessful year. We spend a lot of time helping them with their inventory needs.
You have reasonably good visibility into replacement markets. Obviously, we'll see what happens here.
Yeah, we'll see what happens. I mean, at the end of the day, we all know what's happening with interest rates, right? We'll see what, I guess, the Fed's going to be releasing some news here if they haven't already, but soon. We'll get that commentary. As interest rates go up, obviously, new home sales will go down and existing home sales will go down. That shouldn't be a secret to anything. It is going to tighten. Our guide is that we believe that the unit volume will be down in that mid-single digit range. We feel as though we'll be flattish, plus or minus 1%-2% is kind of what we baked into our guide for residential. Again, it's 20% of our business. If it was down an additional 10%, it'd be a 2% impact to the enterprise.
Let me ask you about China. You highlighted strong China demand in Q4. Can you talk about what you're seeing as the country moves past zero COVID and stuff? How are you thinking about the sustainability of growth in 2023? I know a few years ago, you changed your strategy there. You went direct. How is that helping?
Yeah. China is one of those areas where first of all, our team in Asia had a great 2022, all right? Their revenue growth was up 12%. Their organic revenue growth was up 12%. If you think about the challenges that were faced in Asia, specifically in China, right? That is about half of our business is China for Asia. I mean, just unbelievable obstacles that they faced that they were able to overcome to achieve 12% organic growth. As far as where as the economy opens up, we are cautiously optimistic as to what that is going to bring. I was on the phone last night, I guess it was two nights ago with the China team. They are very optimistic as a team. They have a lot of innovation that they are working on.
I think you're going to see that where we're strong in China has consistently been strong for a period of time. Think of data centers, think of these projects that take longer times to close or to influence. A longer-term infrastructure project, you tend to have to go to the engineers, the architects, become basis of design, really do more of a selling effort or making sure you sell to all the different owners of the decision. If you're going to just a distribution model, that's very, very difficult. That's why we made the pivot probably seven years ago to say, "Look, we're going to just go and develop our direct sales force in China specific." We have. That's now seven years. We have a very mature sales force there. They're able to have that longer appetite to close orders.
That is why we have been so successful there for many years now with these longer-term projects to close. As far as reopening goes, I think you are going to see it more in the hospitality section immediately, right? I mean, restaurants are open in China now. People are starting to go back to restaurants, malls, and they are starting to go back. Remember how long it took us here in the U.S. to kind of stop wearing our masks when we went to the grocery store? Maybe some of us still do, which is okay. It took some time. They have been really "reopened" now for really only less than three months. They are still in the beginning of that process. It will take some time. We are optimistic, but cautiously optimistic in China.
If I go back, Dave, like five, six, seven years ago, you were pretty small in Europe. Pretty small. You've grown it pretty quickly. I know you talked about thermal management systems. Let's talk about that. What changed in Europe for you guys? Was it really just the innovation on the thermal management system side? Was it that it's become a little more of a cooling market? Where is your European business five years from now? It's come a long way in five years.
I've been part of the long-term journey in Europe. I was there when it was maybe not so relevant. I'll tell you what, that team there, the innovation that they've been able to drive and how they look at problems and turn them into opportunities is the best I've seen in our company. I've been saying that for years. We're going to continue to drive that business. The leadership team there is just, we're winning today or we're going to continue to win tomorrow. I know people always think of the HVAC, and I'll talk just the commercial side of HVAC in Europe, right? At the end of the day, they're not that dissimilar in size versus North America. They're smaller, but not that dissimilar. There's a tremendous opportunity. There's more players there. Our innovation there is leading.
It's hard to replicate because of the investment that we're putting there. We're going to continue to win. I'm very confident in that statement.
Dave, could I just ask you, the thermal management system capability, it seems like a great fit for Europe. What can you do with it in the U.S.?
I think it's a global fit. Okay? I think it's about being able to understand the technology that exists today so you no longer need fossil fuel to heat buildings is a global fit. We need to look at it as a global fit. We have solutions here in the Americas. They're a little bit behind where Europe is as far as the adoption of those solutions. This is something that we all need to realize that you do not need fossil fuel to heat a building or a home. The sooner everyone recognizes that, the greater the impact's going to be on the carbon footprint that exists for the built environment. This is a global opportunity. A global opportunity.
We tend to have conversations with some of your competitors where they talk a lot about sort of their service capability beefed up by digital over the last few years, right? And you know sort of the promotions that they have. For you guys, service has been the backbone of your company, a little greater than 30% of business, high single-digit growth rate. Maybe compare and contrast Trane right now and this sort of pitch that, "Hey, I can sell a whole healthy building." Why do you do well when you're an HVAC provider against these, "Hey, I can sell you a whole healthy building as we sit here in 2023?
Yeah. I mean, at the end of the day, you're right. Service is about a third of the enterprise. It's been growing at a, I think the compound annual growth rate is high single digits for the last six years. Last year it grew 10%. It was double digits. We continue to invest in this business. That's why it keeps performing well. I'm not trying to create a roadmap so everyone can follow what we do. I would just tell you, we invest heavily. We were talking about being connected to buildings and assets years ago, right? At the time, people were like, "Oh, is that to improve the productivity of their service business?" No, it was actually to improve the energy efficiency of the asset that was being used. Being broke in the service in the HVAC world is no longer the product doesn't work.
It's broke now when it uses too much energy. We were out there talking about digital twins. I used to have to explain to people what was a digital twin and why it was important. We are going to continue to invest in the business. I will not get too specific as to how we would do it. I would just tell you, we have a very detailed way of operating our service business. We love being connected to the assets. We love the opportunity that it presents. We have a very strong building management control system. We operate many buildings around the world because of that. This is a growth opportunity today, and it will be well into the future.
Dave, just one thought there. Everybody sort of asks your peers around attachment rates, and we do not seem to ask you guys because you are basically 100% attachment.
I don't know what they mean by attachment rates.
If I remember correctly, China was a little lower attachment for you guys, but you were sort of working on that. How do you want us to think about attachment rates?
When we sell an applied system, right, we always want to be connected to that system so we could ensure that it's operating the way it was designed. All of these systems are under warranty for some period of time. Of course, we're going to be attached to it. We want to make sure that it's performing the way it was designed. Unfortunately, these are mechanical products, so sometimes things happen that have to be adjusted. We want to make sure we're there and the customer is very pleased with the solution that they purchased. We're 100% attached to our applied systems out of the box. Of course, we would have to be.
As far as our competitors, I'm not going to comment on specific competitors, but when you talk about attachment rates, again, these are terms that get loosely thrown around, and I'm not sure what they mean or how they're tracking it. I personally stayed away from talking about what that would be because it's just going to confuse many of you and other customers, to be quite fair about it. At the end of the day, we have high single-digit growth in our service business on a compound annual growth rate across the world, okay? That's over six years now. Our performance kind of speaks for what I'm preaching about up here.
To your early question on backlog, though, just to be clear, our backlog does not include service. The $6.9 billion, while we may have one, two, three-year service agreements, that's not in the backlog calculation. We book it and we revenue it in the period in which it's earned. That could be a little bit of a difference on how peers may include or not include that in the backlog.
Yeah, that's helpful. I want to open it up to the audience in a second, but let me ask you about TK, about Thermo King. The last couple of years, I think you've taken a nice share, both in the Americas and EMEA. Maybe talk about the key drivers of that sort of market outperformance. I do have to ask, I think your main peer mentioned at Seed, it saw container-related near-term weakness, which you did not cite as a big concern. Is that because it is a relatively small portion of TK, or how concerned are you around potential cyclicality at TK over the next couple of years?
That's a long question. First of all, our Thermo King business has performed very well on a global basis for the last several years. I would say that we lead there, like we lead with the rest of our company around innovation, right? If you have a product that's 30% more efficient than anything else on the market, it's not very—I tell the sales team, they disagree with me. It's not very hard to sell, right? If I could go show you, let's go side by side, put two units there, see which one runs out of fuel first, right? Pretty simple test. I mean, these products, people want them, right? If you could save 30% of your diesel consumption, you're going to go with that solution. They're more expensive, but the payback is obviously very accretive for the bottom line of these trucking fleets.
We're a very diversified portfolio in Thermo King. It's not like it was 10 years ago where we were so reliant on just trailer. It's now truck, trailer, auxiliary power units, air, marine, rail. These are all part of the portfolio of our Thermo King products.
Containers, any?
Containers, it is a smaller portion of our business, but we've actually had some pretty neat innovations there as well. We invest in our portfolio. If we have it in our portfolio, we're going to invest in it regardless of what the size of it is because we always look for where the opportunities are.
Questions from the audience? Any questions? Anybody want to ask a question? All right. I will continue. Free cash flow. You usually have done a great job with free cash flow, a little bit of pressure in 2022. We know that was partly related to strong Q4 shipments and timing of collection and receivable. You can talk about visibility in terms of getting at or above 100%, which I think is your guidance for 2023.
Yeah, Andy. I was certainly going into the earnings call a little nervous with 91%, but as I step back and I see how others have reported, I feel really good that we had a very strong year in terms of free cash flow for the company. The three-year average of free cash flow is 110% conversion to net income. So it's just part of the business operating system for us to always, A, the business generates a lot of cash, and B, how do we manage working capital? To your point, in the fourth quarter, we saw just revenues come in a little later in the quarter in terms of growth and commercial and the Thermo King businesses, and then some specific inventory investment around $40 million to drive resiliency and supply chain resiliency. Those are the right investments to make.
What it means is we'll probably start the first quarter a little bit stronger in free cash flow, just given natural timing. I'm confident we've got a plan to go after 100% or greater free cash flow this year. That's how we'd look at every year in terms of a target, just given the powerful cash flow that the business drives, which gives us a lot of optionality. What do we do with that cash, which is the fun part of the job of where we decide to deploy it? We'll have some modest working capital investment where great standard work around receivables, payables, inventory, and where do we want to be invested and have some resilience. That's a good investment to make as well.
Yeah. I mean, some of the investments that we made in inventory, and we have made some investments in inventory, really paid dividends. I mean, look at—I’ll go back to China. We were talking about China before. There was really rolling blackouts in China for an extended period of time where people were basically locked in their homes. We wanted to make sure that if one of our suppliers went down, regardless of where they were, we would have enough safety stock so we could run our factory. You see the results that we’ve been able to demonstrate there. That’s an example of—I know people often talk about, well, we’re making an investment in inventory. You’re adding basically safety stock. Here’s where we added the safety stock. You could look back at it and say, they’re brilliant, right?
You could say that if you want. At the end of the day, it really was the right investment to make. As Chris said, we put more inventory in place in the fourth quarter because I was very nervous about the reopening of China. Could that have an impact on the suppliers that are providing, especially on the tier two suppliers that are in China? I did not want to go back to any kind of a rolling shutdown or lockdowns in China. That is why we did that.
Dave and Chris, you guys have been pretty clear about how you're going to spend the cash, right? You've given us a good roadmap. Maybe talk about sort of your key priorities on the M&A side and just in the sense that you've been relatively quiet in M&A, I guess is how I'll say it. Could you do a bigger deal? You just look at smaller bolt-ons? What do you think about M&A in 2023?
I would say we're disciplined in our M&A, okay? We don't have to do anything with the portfolio that we have. We have great products. We have great service. We have great controls. We have a great service business. We have a great footprint. That said, we're always looking at technologies. We're always looking at where we could bolster our portfolio. These smaller tuck-ins, okay, we leverage quite—we scale quite quickly. I mean, we acquired Alco Technologies, Air Technologies in Europe. It's really going to add nicely to our portfolio there. We'll scale that business quite nicely. It's relatively small, again, like less than 1% revenue for the enterprise, but it's the technology we like. With our channel and the strength of our channel, these bolt-ons become scalable very fast.
I just want to ask you, you mentioned increased investments in 2023, things like advanced manufacturing, automation, digital electrification. Any more color on sort of the returns on these investments while you're ramping up now, or is it just—it's going to be related to my next question about megatrends, which.
Want me to start?
Go ahead.
Look, we've got a great pipeline of investments, and we've said we may not necessarily be in any one year the best organic leverage company because we want to make sure we're funding those investments. We know that creates the flywheel that we've been able to drive above market growth for many years now. We are just having higher investments around Factory of the Future and automation, looking at our existing four walls and how do you get more capacity out of that, redirecting maybe some of the workforce out of tasks with moving equipment and materials to ultimately driving more output. That is a great investment to make. Investments on the digital space, think of that as not only supporting the connected buildings growth each and every year, but our frontline sales technicians, our service technicians, they're out there working with the customers.
Let's make it easier for them to engage and find solutions. We are making investments there as well, Andy. Electrification of the portfolio, right? You mentioned Thermo King, and we like adding those slides so far into the earnings deck around our performance of Thermo King. The outcome in 2021 and 2022 on the growth versus the market is because of many years prior building those innovations and those investments. That is the flywheel we keep driving now. After that, we are doing some resiliency moves within the company. Think about footprint moves that will drive more resiliency to have places of more concern around weather events and concerns. We would have some resiliency there to ultimately have an offset if something were to occur. We like those investments. They drive great outgrowth, and it will contribute to our 68% growth in the year.
Got it. And then one more question.
I'll add on, but you won't get to your last question.
Thank you. Just we're asking all the companies this. What are the top two or three innovations, megatrends, or structural changes affecting your company over the next five years? Are there any emerging industry trends that are perhaps being overlooked in the current discourse?
I would tell you that the megatrends around decarbonization and sustainability are only going to intensify, right? The planet continues to get warmer, right? There was a study released that said the last seven years were the warmest in history, at least as long as records have been kept on the planet, the warmest seven years. The harsh reality of it is they could be the coldest seven years for the rest of our lives unless we do something about it. We need to take action, and we need to take action now. As an overarching megatrend, that has to be a focus for everyone around the world. I think you're going to see electrification of the portfolio, elimination of fossil fuel for heating.
Those are all ways to achieve the goal that we all need to be able to get to, which is to lower the rate of global warming and stop it. We have a lot of work to do around the world. I would tell you, as a leader in HVAC, we're doing our best to influence our entire industry because we know our industry can have an impact on the world.
It's a great time to stop.
We ran out of time, but I could talk more. But hey, thanks for coming today. Thanks for being interested in Trane Technologies, and hopefully look forward to talking to many of you on the one-on-ones.
Thanks, Dave and Chris. Appreciate it.
Thanks, Andy.