Operator:

Good morning, and welcome to Carrier's First Quarter 2024 Earnings Conference Call.

Samuel Pearlstein:

Thank you, and good morning, and welcome to Carrier's First Quarter 2024 Earnings Conference Call. With me here today are David Gitlin, Chairman and Chief Executive Officer; and Patrick Goris, Chief Financial Officer.

David Gitlin:

Thank you, Sam, and good morning, everyone. We've had an exciting start to the year. We welcomed 12,000 new team members from Viessmann Climate Solutions to the Carrier family, made great progress on our business exits and delivered very strong financial results, positioning us for yet another year of significant margin expansion and solid growth.

David Gitlin:

Thanks, Patrick. We delivered very strong results in the first quarter, and are confident that we will continue to perform while we transform. With the integration of Viessmann Climate Solutions, the completion of our exits and the superb progress on our base business, we continue to position ourselves as the global leader in intelligent climate and energy solutions.

Operator:

[Operator Instructions] Our first question comes from Julian Mitchell with Barclays.

David Gitlin:

Sure, Julian. Let me start and Patrick can add. Well, we did say actually flat to down mid-single digits for the full year previously, of course, up mid-single digits. We expect for Q2 will be -- the absolute sales number should be about the same as Q1, which, in that case, would put Q2 year-over-year down about 10% to 15%. Our forecast assumes in the second half that revenue would be up about 20% compared to the first half.

Patrick Goris:

Yes. Overall, for the year compared to our earlier guide, we think light commercial and commercial HVAC will be a little bit better. In terms of the year-over-year margin for HVAC as a segment, we do expect Q2 to be up about 100 basis points year-over-year. Q3 will probably be somewhat similar, and then we expect Q4 to be better year-over-year as well.

Jeffrey Sprague:

Dave, interesting to hear resi and commercial fire now prioritizing sale with kind of year-end close, right? So it sounds like you're close to something -- and so maybe you could address that? And is there something happening on PFAS to kind of expedite this and get it to kind of a sale process that can close? Obviously, we all saw JCI settled something in the MDL a couple of weeks ago.

David Gitlin:

Well, Jeff, frankly, I'm really glad you asked that because I do want to address it head on, and I want to be clear that look, I've notified both our Board and the Boeing Board that I am 100% committed to Carrier. I'm really honored to be on the Boeing Board. I'll do everything I can to support that important company as a Board member.

Andrew Kaplowitz:

You talked about data centers, low-double digits, global HVAC sales could be 20% over time. I think you said that data centers doubled this quarter in terms of backlog. So could you talk a little bit more about Carrier's position in the data center market? Maybe what you think your share is, where Carrier is in terms of liquid cooling and how to think about the shape of bookings going forward as '24 evolves? Do you see data center bookings continue to increase from what you booked in Q1?

Andrew Kaplowitz:

Very helpful. And Dave, maybe give us just a little more color into the productivity you drove in Q1. And what you're thinking for the rest of the year? I know you've guided to 30% incrementals in pass, but obviously did 100% there. I obviously understand you raised your margin guidance. But how sustainable is the kind of productivity acceleration you saw in Q1? And given rising material costs, how do you think about sort of the offset there with pricing?

Operator:

Our next question comes from Tommy Moll with Stephens Inc.

Thomas Moll:

And Dave, a follow-up on light commercial HVAC trends in Americas. Orders were down meaningfully, but obviously on a tough comp. Can you just refresh us on your revenue expectation there this year and describe any aspect of the demand environment?

Deane Dray:

Just circle back on Viessmann. People were holding their breath about destocking. So just kind of where does that all shake out? And your line of sight on the resumption of the various European country incentives. I know you touched on that, in the prepared remarks. But what's the typical lag once the Germany reinstatates, Italy reinstates, I think they have done that already. But what's the typical lag between you start getting those orders?

David Gitlin:

Well, I think you answered it perfectly well, Deane. I do think that Viessmann clearly plays in the premium end of the market. So I do think that even though there will be more competition at the entry tier level and the mid-tier, we think that because of the brand, the technology differentiation, the unique channel, we don't see that as a major threat directly to Viessmann.

Noah Kaye:

Dave, I'd like to stick with VCS. You highlighted early on the new product introductions, expanding the TAM by $5 billion. Would just love some more color on those product introductions. Curious to know to what extent they were developed in kind of any kind of synergy or technology road map coordination with legacy Carrier? And to what extent that's an opportunity going forward across the portfolio?

David Gitlin:

Well, a lot of it is data centers. That's been very, very strong. Higher ed still remains strong. Healthcare, like hospitals, remains strong. When you look at it, it varies a little bit by region. We've seen some changes in China, for example. What was very strong in China was EV, solar production, all things renewables, that's now shifted in China. So we're now seeing strength in China from things like infrastructure and some of the other aspects of decarbonization.

Operator:

Our next question comes from Nigel Coe with Wolfe Research.

David Gitlin:

Yes. Look -- and Nigel, I mean you were expecting it because I said it. So very fair. So we've changed. We are 100% prioritizing a sale. We completed about, I think, a 15-page teaser. We've discussed that with a number of interested buyers. The interest has been very high. So we've been extremely pleased with the reaction because it's a great set of assets.

Nigel Coe:

Okay. That's great color. And then back to VCS. I mean based on the comments, Patrick, you made about the dilutive impact on the segments, I'm backing into maybe a 14.5% operating margin, maybe 15.5% EBITDA margin. For the quarter, is that right? And I'm just wondering if that is correct, if my math isn't too wonky, what is the path to high teens for the full year?

Operator:

And our next question comes from Stephen Tusa with JPMorgan Chase & Company.

Patrick Goris:

Yes, that's right, Steve. We adjust out the intangible amortization and some of the step-ups as well.

Patrick Goris:

Yes, Steve, you're right. In essence, at the time of the February guide, of course, we didn't have all the detail to provide the best accurate estimate of the DNA. And so inventory and backlog step-up was not yet fully included there. And also since then, we refined the difference between the intangibles and then the goodwill, and that impacts the amortization as well. So you can think of that being the new driver.

Patrick Goris:

Okay. And then Steve, following up on your questions about price. Price for the quarter was about 2%. For the overall company, we expect that to be about the same for the full year. So about half of our organic growth price.

Operator:

Our next question comes from Gautam Khanna with TD Cowen.

Patrick Goris:

Right. So if you look at Slide 23 of the deck that we posted, our core business this year is up 12% -- or in Q1 was up 12%. For the full year, we expect our core business, including the dilution from Viessmann in year 1, the growth to be 17%. And our value creation framework says that we'd like to grow our business double digits every year.

Gautam Khanna:

And what would your opinion of free cash conversion in '25 be off of that approximately $3 number?

Gautam Khanna:

And just a quick follow-up on resi. There's been a lot of chatter about repair versus replace and potential trading down. Have you seen any evidence of that? I know it's early in the cooling season, but any opinion on...

Operator:

Our next question comes from Brett Linzey with Mizuho.

David Gitlin:

Yes. Look, I mean, it's a question we get because it's been so strong for so long. So -- last year, we were up 35%. We knew we'd have a tough comp coming in into this year. But I think it's a very nice combination of share gains, the underlying verticals that have been strong, generally remaining strong, the team performing. And of course, we don't talk about it as much, but we'll have the same 454B dynamic here, where we see the same kind of base price and mix increase that we're mentioning for resi, we see for light commercial. So that 15% to 20% over 2 years.

Brett Linzey:

Okay. Great. And then just shifting over to container up 50%. I guess is the worst behind us here? What are you hearing from some of those customers? And then anything on sort of the sequential trends through the -- in the last couple of quarters?

Andrew Obin:

Just a question on the buyback. You guys alluded that you have capacity to start the buyback in '24. How is it incorporated in your current outlook? Just trying to understand that? Or is that where the margin of safety comes for the guide?

David Gitlin:

Yes. Andrew, I have to say I've been so proud of Thomas and the team working with the central apps folks at Carrier to be incredibly and appropriately aggressive on cost. And if you look at the actions that Thomas has taken, what's been very important for that -- for our 12,000 new colleagues at Viessmann that fully understand this is it has nothing to do with the combination with Carrier. It's all actions that business would have taken because of the overall market conditions.

David Gitlin:

I think it's a fair description, Andrew. I -- look, I think cost synergies, we have a very specific definition we use. It's cost that's taken out because of the combination. So there's a bunch of examples of that where we both buy from the same supplier, and we have the ability to go renegotiate with those suppliers or the ability to get more work to certain suppliers.

Operator:

Good morning, and welcome to Carrier Fourth Quarter 2023 Earnings Conference Call. I would like to introduce your host for today's conference, Sam Pearlstein, Vice President of Investor Relations. Please go ahead, sir.

David Gitlin:

Well, thank you, Sam, and good morning, everyone. Let me start by saying a heartfelt thank you to our team for delivering excellent results in 2023, while navigating such a significant and compelling portfolio transformation. I'd also like to thank and welcome our new 12,000 team members from Viessmann Climate Solutions. Our formal kick-off last month had more energy, warmth, and excitement than I have ever seen from day one celebrations. I profoundly believe that this will go down as the most impactful business combination that our industry has ever seen, and we are so excited to be on this journey together. As you can see on Slide 2, the fourth quarter capped a strong finish to a great year for Carrier. In the quarter we achieved 33% of adjusted EPS growth, driving another quarter of double-digit aftermarket growth and 80 basis points of margin expansion on flattish sales. Importantly, free cash flow of over $800 million significantly beat our expectations, driven by continued strong performance and working capital. Overall for 2023, I am so proud of what the team accomplished, as you can see on Slide 3. Our team has consistently shown an ability to outperform without excuses, overcoming COVID headwinds to deliver strong results following our spin in 2020, persevering through supply chain challenges, and delivering for our customers and shareholders despite significant portfolio moves. For the year, we delivered 17% EPS growth and 3% organic sales growth, drove about 40% core earnings conversion, improved our free cash flow performance by more than 50% year-over-year, from $1.4 billion to over $2.1 billion. Not only did we deliver strong results in the year, we also took key actions on growth initiatives and detailed productivity planning to position 2024 for solid growth and margin expansion. This consistent performance has led to differentiated shareholder returns since we became a public company, as you can see on Slide 4. As we prepare for our spin, our goal was to leverage our many strengths that Carrier established over the past century, but also take advantage of the unique opportunity to create a new Carrier. We established a performance culture with innovation and customer intimacy at our core and simplified our business and portfolio. We have been disciplined on continuous improvement in productivity, invested in growth, and have driven recurring revenues with a proven playbook. We sharpened our focus as an organization to lean into the long-term trends around sustainability and have accelerated our leadership in this space. Though we're proud of our track record, we're even more excited about our next chapter as we take our performance to the next level. Our mission is clear, to be the global leader in intelligent climate and energy solutions, as you can see on Slide 5. It starts with differentiated product introductions, some of which you see listed here. We are now focusing our 6,000 engineers on developing differentiated sustainable solutions for our customers. Specific technologies that cut across our portfolio, across the globe, such as AI and sensing algorithms, low GWP refrigerants, energy efficiency, low temperature heat pumps, electrification, and integrated energy management solutions. We are poised to out innovate and win and we will continue to invest to ensure that we do so. These efforts are reflected in our results as we gain share across our portfolio. European commercial heat pump sales were up 25% in 2023. Nearly 40% of our North America residential split systems were heat pumps, and our market-leading electric transport refrigeration sales in Europe grew over 70%. For sustainability leadership, we walk the talk. We have reduced our customers' emissions by more than 270 million metric tons on our way to our 1 gigaton Scope 3 commitment for 2030. We remain on track for carbon neutrality in our operations by 2030 and are using a bound across our footprint to help ensure that we achieve it. We also laid out a clear roadmap to achieve net-zero greenhouse gas emissions across our value chain by 2050 under the SBTI framework. In addition to sustainability, one of our other key themes is achieving consistent double digit aftermarket growth which we achieved again last year as you can see on Slide 6. Growing 12% last year represents our third consecutive year of double digit growth. We now have approximately 30,000 connected chillers in the field versus 5,000 just three years ago. This has helped our attachment and our coverage rates with a commercial HVAC now at 45% attachment for long term service agreement up from roughly 20% just three years ago. We know the playbook, it's working, and we are targeting another year of double-digit aftermarket growth this year and beyond. In summary, we continue to perform while we are transforming, as you see on Slide 7. I already mentioned the energy and warm reception that we receive from our new team members and many customers across Europe just a few weeks ago. Here is what is clear. Viessmann is an organization with a deep culture of excellence. Excellence in its product design, customer intimacy, channel superiority, culture, team, all reflected in its deeply admired brand. The tangible and intangible benefits from this combination will benefit our people, customers, investors, and the planet for decades to come. We are also fortunate to now have Max Viessmann on our board, who is already providing us with unique insights and perspectives. When we look closer at 2024 we are planning for Viessmann Climate Solution sales to be up mid-single digits off a 2023 year end of about $4.2 billion, with high teens adjusted EBITDA margins. This includes the benefit of our targeted first-year cost synergies. Internally, we are targeting significant revenue synergies, which would all be upside to our business case. Even though last year's regulatory and subsidy uncertainty in some European countries delayed order intake, which we expect to impact growth in the first half of 2024, we do expect Viessmann Climate Solutions to return to solid growth in the second half of this year. And we target achieving or exceeding our year one business case adjusted EBITDA by accelerating supply chain and other cost savings. So we are off and running. We are applying the playbook from our successful integration with Toshiba to ensure that we preserve Viessmann’s super team and culture while integrating to create tremendous value together. Turning to our business exits on Slide 8. You all saw our announcements on Access Solutions and Commercial Refrigeration which together will yield close to $6 billion or about $4.5 billion in net proceeds. We are making good progress on our Industrial Fire sale and still expect to announce a definitive agreement around the end of the first quarter. We are also preparing to exit our combined residential and commercial fire businesses via a sale or public market exit. Given our cash performance and the progress of these business exits we now have a path to achieve about 2 times net leverage ratio by the end of this year, which was about a year earlier than we previously indicated. Before I turn it over to Patrick, a quick word on our 2024 guidance on Slide 9. Even though GDP in many of our key markets looks to be less than 2%, we are planning for mid-single digit growth. Sustainability mega trends and continued double digit aftermarket growth enable us to significantly outgrow global economies. We will continue to be tenacious and disciplined on every aspect of productivity, and we are therefore targeting over 50 basis points of adjusted operating margin expansion. With that, let me turn this over to Patrick. Patrick?

David Gitlin:

Thanks, Patrick. In closing, we delivered strong results in 2023 and are geared up to do so again in 2024. This is a big year for us as a company, and we will remain heads down, focused on execution, and we will start realizing the tremendous benefits that we'll see from the combination of Viessmann and as a sustainability focused, higher growth, pure play company. In 2024, we will continue to perform while we transform. With that, we'll open this up for questions.

Jeffrey Sprague:

Thank you. Good morning, everyone. Hey, good morning. Dave, can you address just in a little bit more kind of color and detail how you see things playing out in Viessmann through the year. Obviously, the German political chaos and uncertainty on the incentives are clearly in play and impacted the end of the year in 2023. So just a little bit more color on what you're expecting in Germany, in particular, how you might offset that in other countries? And just how do we get comfortable with the business cycling higher in the back half of 2024?

Jeffrey Sprague:

Great. Thank you. And just pivoting a little bit for Patrick. Patrick, can you just give us, I don't know, as precise as possible, how much actual revenue and profit then is actually in the 2024 guide for security and commercial refrigeration?

Jeffrey Sprague:

Well, it's going to be gone in the second half for your guide, right? How much revenue and profit is actually embedded in the first half guide for those two businesses that are leaving?

Jeffrey Sprague:

All right, thank you. Thank you very much.

Operator:

Please stand by for our next question. The next question comes from Julian Mitchell with Barclays. Your line is now open.

David Gitlin:

Yes, Julian, the way I look at it is, resi and our sort of global commercial HVAC business, if you kind of think about it those two ways, those will both probably be up in the high single digit range, and North American -- the light commercial business in North America will probably be down mid-single digits.

David Gitlin:

Yes, I would say for price for HVAC, you're looking at about 2% and 2.5% of price. The rest, volume mix.

David Gitlin:

Yes, it's more volume than price. You're probably looking at a couple of points of price, the rest volume. I would say a few things with respect to organic growth. For Viessmann, where I know some of our peers are talking about lower growth than we are, and here's, I think, some of the reasons, Julian, I would say that we have high confidence in the mid-single digit growth. Number one is that, we're not a heat pump pure play. So we have the ability to flex with boilers depending on kind of what the market conditions are. We are anticipating share gains. Viessmann has introduced new products. There's a new product line in that 16 kilowatts to 19 kilowatts, which will now give us access to more than 90% of the single-family residential market in Europe, where before that sort of higher capacity part of that segment, we did not have a product offering for, and all the way much higher than that, which gets into the multifamily. So, we're looking at not only share gains, but we're also looking at products that introduce us into new parts of the market. The geographic mix we think plays favorable, as we see Germany start to certainly recover in the second half, we'll push on the services, and I do think there's going to start to be some level of benefit on the revenue synergies. Internally, we're targeting a fairly significant number for ourselves that we haven't put into our underlying model. So, we'll start to see recovery of heat pumps taking place. We'll still see some more boiler sales. PV may slow a little bit, which would be something that we'll watch, but it is on the lower margin side for us as a business. So, all in all, I've had a chance to spend a lot of time with the Viessmann leadership team and the salespeople, and we're starting to see now that we have more clarity around the regulations, a lot of activity picking up that we do have confidence will certainly benefit us with growth in the second half.

David Gitlin:

Thank you.

Andrew Kaplowitz:

Good morning, everyone.

Andrew Kaplowitz:

Dave or Patrick, I think you mentioned the expectation of sales up high single digit in resi for the year. Can you break that out between price and volume? And then can you talk about the progress you're seeing on rolling out 454-B and then where did inventory in the year in resi versus your target? I think you were talking about down mid-teens.

Andrew Kaplowitz:

It's just where inventory is in the channel sort of ended the year?

Andrew Kaplowitz:

Great. And then sort of the mid-single-digit growth guidance for HVAC. You answered Julian's questions about the mix, but commercial HVAC orders actually reaccelerated a bit up 5%. Are you seeing sort of reacceleration or anything in certain key markets for you guys? And then alternatively on the light commercial side, you talked [indiscernible] down mid-single digits and visibility to that sort of kind of decline in 2024. When we look at orders, we’ve actually been -- it's been robust in the Americas for a while. You look at our sales for -- and orders for the Americas, both last year were up double digits. When we look at sales in commercial HVAC in the Americas, close to 20%. We had very strong double-digit growth in commercial HVAC in Europe. I would say, it's been a little bit surprisingly strong. Orders still were fine in the fourth quarter there as well. And it's partly driven by this continuous demand for data centers. We see positive growth on some of the industrial side in Europe. Asia is still pretty solid. China orders in the fourth quarter were lower than we would have liked, so China is kind of a watch item. But I will say in terms of commercial HVAC in China, we used to be 70% real estate and 30% industrial and infrastructure. It's now 75-25, the reverse. So we're seeing very strong demand for EV production. The data centers continue to be strong in China. So China's clearly properties are weak spot, and I think that will continue, but the rest is strong. So we're actually banking on strong growth in China this year, and we have some level of optimism, because we continue to go where the customers are.

David Gitlin:

Thank you. One moment for our next question. Next question comes from Deane Dray with RBC Capital Markets. Your line is now open.

David Gitlin:

Hey, Deane. Good morning.

Patrick Goris:

I would say, Deane, in general, no different than prior years. So we expect, as always, Q2 and Q3 to be, by far, our biggest quarters, generally driven, of course, by what's happening in residential HVAC. And then from a seasonality point of view, more on the cash flow side, as typical, very back-end loaded, so heavy in Q3 and in Q4. In terms of the EPS split, last year we did about 48% in the first half, 52% of our full-year EPS in the second half. This year our current guide assumes it's very similar, maybe a point lower in the first half, offset by a point higher than the second half, so 47%, 53%. But I would say besides that, no big difference in seasonality than we typically see. As Dave mentioned, for Viessmann specifically, we expect it to be a second half -- more weighted towards the second half, one, because of the expected volume pick up given the order activity we're seeing, but also given the cost synergy that we expect to kick in, particularly in the second half of the year.

David Gitlin:

Very strong, Deane. We feel very well positioned with the mega projects with some of our scale customers that we really -- we've established a central group to go target some of our bigger scale customers, data centers is just unbelievably strong. It's -- when we look at it, we've talked about the property market being a little bit less than 10% of our commercial HVAC business in the Americas, data centers is bigger as a percentage for us than the real estate market. That's in the low double-digit percentage for us as a company. And we've recently introduced new products. We have a new air-cooled chiller that's helped us get significant wins, both in the United States and in Europe. Europe has seen 10 times growth in data center space over the last two years. So when we look at CHIPS Act bringing some of the production back, we look at data centers. There's other verticals that are strong to education, K-12 has been strong, higher ed, retail -- in some parts of retail, even health care continues to be strong. So we feel very well positioned overall in commercial HVAC. I would tell you, we picked up share last year in the Americas. And in Europe, we were probably flattish in share in Asia. So we feel well positioned with these mega projects.

David Gitlin:

Thank you.

Noah Kaye:

Good morning. First question, the guidance for mid-single-digit organic growth in the Refrigeration segment for 2024. Can we talk a little bit about the assumptions to get there? And particularly what you're assuming on a regional basis for transport refrigeration? Thanks.

Noah Kaye:

Extremely helpful, Dave. I think when we adjust free cash flow profile back for the onetime cash outflows looking at core free cash flow conversion north of 90%. I guess as we move past some of these transformation initiatives, how do we think about the core free cash flow conversion on a go-forward basis? Is there still that potential to get to 100%? And what are you going to be focused on over the course of this year to get you there?

Noah Kaye:

Appreciate that. Thanks, Partick.

Operator:

One moment for our next question. Next question comes from Joe Ritchie with Goldman Sachs. Your line is open.

David Gitlin:

Good morning.

David Gitlin:

Yes. Look, we did see that orders were lighter in the second half, and that did impact -- I would say the fourth quarter came in a little bit lower than we thought. It was still up mid-single digits versus the fourth quarter of last year. But when we look at the calendarization of this year, from a sales perspective, you're probably looking at about 45% or so of the sales in the first half and about 55% of the sales in the back half. When you look at the EBITDA, it's more -- a little bit more weighted towards the back half because that's when we see our synergies start to come in. But as I was mentioning earlier, Joe, I think the encouraging piece is once we got the definitive legislation out of Germany, and you can apply for the subsidies, which become retroactively beneficial effective in -- as of January, we did see -- it was kind of like a tale of two cities. You saw activity on the Viessmann web pages picked up. You started to see energy amongst the installers. And you started to see heat pump applications increase. So clearly, some of that dithering we saw on the legislative side impacted new orders. Now that we have a level of certainty, we're very confident that we'll start to see the heat pump orders and sales pick up in the second half. And Patrick, are you going to add something?

Joe Ritchie:

Got it. That's perfect. That's good color. Thank you both. And I guess just I know we've already kind of talked through the resi HVAC inventory cycle and where we are. I'm just curious just across the rest of your portfolio. Can you maybe just provide some color on inventories? I'm specifically curious on the security business and what you're seeing in that business right now.

Joe Ritchie:

Helpful. Thank you, guys.

Operator:

One moment for our next question. The next question comes from Nigel Coe with Wolfe Research. Your line is open.

Patrick Goris:

Okay. Quite a few things there. Nigel, I'll start with the -- where Viessmann ended in 2023. We had said about EUR4 billion and about $700 million in EBITDA. So EUR4 billion in sales.

Patrick Goris:

In EBITDA. On both items, they came in slightly below. So sales were close to EUR3.9 billion and EBITDA came in about $50 or so million below that. So that's where Viessmann ended the year. In terms of VCS margins for the full year, from an operating margin point of view, Viessmann embedding our guide is right at mid-teens. So right at the, call it, middle of mid-teens. And I think from an EBITDA margin point of view, they're in the high teens. So their EBITDA margin is slightly accretive to the overall company. The operating margin is basically right in line with the company average as well.

Patrick Goris:

To that point, that there was a step-up in the fixed assets as part of the transaction and that boosted the depreciation.

David Gitlin:

Yes. I think on the margin side, they're both very similar. But clearly, on the sales side, we're looking at about 3 times the price for heat pumps than you're seeing for boilers. So when we look at that heat pump growth, we think long term, you're looking at heat pump growth more than 20%. It remains to be seen whether obviously, a bit of a tough compare last year, whether we'll get that 20% growth in 2024, but the mix that we see between expected heat pumps and boilers is baked into our mid-single-digit guide for them for the top line for this year.

David Gitlin:

Thank you.

Jeff Hammond:

Hi. Good morning, guys. Just a couple of cleanups on HVAC. One, just on resi, maybe speak to sell-through versus sell-in, what are you thinking for the market versus absence of destock? And then the light commercial down mid-single digits, is that purely comps? Or are you seeing order weakness there?

Jeff Hammond:

Just on resi, what you think market demand is? Yes.

Jeff Hammond:

Okay. And then just on the commercial resi fire business, when do you think you'll have resolution on what's kind of the lean spin versus sale at this point?

Jeff Hammond:

Okay. Great. Appreciate the color.

Operator:

One moment for our next call. The next question comes from Stephen Tusa with JPMorgan.

Patrick Goris:

Good morning.

Patrick Goris:

Thank you. We're excited by it.

David Gitlin:

Yes, Steve, I know you've talked different. That's like total split volume for North America.

David Gitlin:

For the industry? We can take it off-line, Steve, if you have different...

Patrick Goris:

Yes, Steve. It might be helpful to look at the EPS bridge we included in our deck for this. And the way I'm thinking this is our core business this year, the dark blue one grows by about 14% or so percent year-over-year. Next year, assuming, of course, we exit all the businesses -- at the end of this year, that would be a $0.30 dilutive impact that we would lose. What's not embedded there is, of course, is the offset related to the redeployment of the net proceeds. So core business $2.55 this year per our guide. We would be disappointed, of course, and if we could not continue to grow that at double digits. Add to that, the redeployments of the net proceeds. In addition to that, free cash flow given that we would be close to 2 times net leverage, we'd be back in the market doing repo. And so, I think we would be positioning ourselves for our core business to grow at attractive rates after this year. Hope I answered the question?

Patrick Goris:

This year, we're doing 14% in our core business, excluding the impact of the Viessmann dilution, so we'd be disappointed if it'd be less. But -- so yes, somewhere in the teens. On top of that, the redeployment of the net proceeds and the free cash flow we generate, we intend to repurchase the equivalent shares issued to the Viessmann family. And so there is -- I think there's a lot of earnings power available to us.

Patrick Goris:

Price cost for the quarter?

Patrick Goris:

No, understood. I don't have an exact number, but it was significantly favorable because for the overall company point of view, our margin expanded 80 basis points. That was basically all due to price cost and productivity. I embed productivity in there, Steve. It was probably -- that was over 200 bps offset by some unfavorable mix and investments.

Patrick Goris:

Thank you.

Brett Linzey:

Thanks. Good morning. Just wanted to come back to Asia and specifically China, you gave a little bit of color there, but fourth quarter orders up 20%, 25% there. Could you just give the complexion between the buildings markets versus transport markets in that order number and some of the activity you're seeing there.

Brett Linzey:

Okay. Great. And then just a follow-up to that. You identified the significant synergies at Viessmann. You've had some time for the integration here, maybe put a finer point on the sizing and the timing of those and what really is that new branding, new products and so on? Any context would be great.

Brett Linzey:

Okay. And that's not baked in this year, right? Back half?

Brett Linzey:

Thank you.

Operator:

Thank you for participating. This does conclude the program. You may now disconnect. Everyone have a great day.

Operator:

Good morning, and welcome to Carrier's Third Quarter 2023 Earnings Conference Call. I would like to introduce your host for today's conference, Sam Pearlstein, Vice President, Investor Relations. Please go ahead, sir.

David Gitlin :

Thank you, Sam, and good morning, everyone. I am very proud of our team for delivering another strong quarter, enabling us to again increase our full year guidance. HVAC environment security sales were both up mid-single digits with the overall company delivering yet another quarter of double-digit aftermarket growth. Adjusted operating profit and adjusted EPS were both up over 20% year-over-year with adjusted operating margins up 240 basis points in the quarter. The HVAC and Fire & Security segments both delivered record adjusted operating margins in the quarter, approximately 21% and 18%, respectively. Free cash flow performance also continues to be strong, positioning us for some upside for our full year guidance. Bottom line is we continue to perform while we transform, as you can see on Slide 3. We are a team that is very clear eyed about macro challenges. We are focused on controlling the controllables, driving operational excellence, being tenacious about customer centricity, out innovating our peers and consistently delivering on our commitments. With 2 months left in the year, we are confident that in 2023, we will deliver mid-single-digit organic growth, 15% adjusted EPS growth, margin expansion despite the negative impact from consolidating Toshiba Carrier and strong free cash flow. Not only are we poised to close out 2023 on a strong note, we have significantly matured our productivity processes. So we will enter 2024 with even more rigor and detailed plans around our cost reduction activities positioning us for further margin expansion next year and beyond. We also have confidence in continued growth driven in part by our aftermarket and recurring revenue traction as you see on Slide 4. We're on track for 80,000 chillers under long-term agreements and 30,000 connected chillers by year-end. The attachment rate in Q3 was approximately 50%, nearly double pre-spin performance. Abound continues to gain market traction exemplified by new scale customers committing to our Abound Healthy Air Solution and Abound net zero management offerings in Q3. Additionally, we announced the launch of Lynx Logix, a new Software-as-a-Service application within our Lynx digital platform that helps predict and address supply chain disruption by automatically identifying trends, patterns and issues in distribution networks and transportation lines. Customers clearly see the benefit of Lynx capabilities, and we now have over 100,000 paid Lynx subscriptions. Our playbook around digitally enabled life cycle recurring sales continues to yield encouraging results globally as we are well positioned for another year of double-digit growth in 2023 and beyond. Our other major growth theme is around driving differentiated solutions to ensure sustainability leadership. You see examples of that on Slide 5. We continue to introduce industry-leading products into the market that help our customers achieve their sustainability targets while decarbonizing the planet for generations to come. Carrier Transicold introduced a new optimal line refrigerated container unit, which offers best-in-class energy efficiency versus the competition and is approximately 15% more fuel efficient than our prior units. We also introduced a comprehensive new line of high and very high temperature heat pumps for use in industrial, commercial and health care buildings as well as district heating. These key pumps reduced both carbon emissions and energy costs up to 80% versus traditional gas boiler applications. Additionally, our new Zero GWP refrigerant air to water high-efficiency heat pump will nicely complement Viessmann's offerings in the European market. And on top of these new product introductions, our existing business continues to gain momentum as European commercial heat pump sales were up 70% in Q3 and are up 40% year-to-date. Thanks to our sustainability product and service offerings, we are well on our way to achieving our Scope 3 commitment of reducing our customers' greenhouse gas emissions by more than one gigaton by 2030, having achieved approximately 270 million metric tonnes of reduction since 2020. We have and will continue to invest a disproportionate amount of our R&D in sustainability differentiation. We are pleased to have been recognized by Time Magazine, Newsweek and many others for our sustainability leadership. Excitingly, the combination with Viessmann Climate Solutions will further accelerate our mission of becoming the world leader in intelligent climate and energy solutions, as you see on Slide 6. Last month, we had the pleasure of hosting Max Viessmann, Chairman and CEO of the Viessmann Group, in our headquarters for a webcast event to discuss his views on the future combination, we are profoundly confident and excited in the value creation opportunities ahead of us. The trend towards heat pumps in Europe is unambiguous and will continue for many years to come. Max confirmed that European decarbonization is a trend that is not changing and is well supported by government in Europe. While individual countries may adjust regulations and subsidy levels from year-to-year, we see a multiyear growth opportunity as those countries meet their commitments for emission reductions backed by EU and country-specific funding. Residential heat pump penetration in Europe is only about 8%, and 21 countries have subsidies to support 2030 and 2050 decarbonization goals. Viessmann Climate Solutions is also well positioned for continued share gains. Unlike some of its competitors, it has the advantage of providing solutions for all energy classes, heat pumps, gas boilers, hydrogen boilers while some of its competitors are pure-play heat pump or boiler providers. It has a connected ecosystem of offerings for an electric home such as solar PV, batteries and a differentiated digital platform while also driving increased subscription sales. A good example is the Vitocal 250-A natural refrigerant air to water heat pump that won this year's award for the Best Heat Pump in Germany. Viessmann Climate Solution is soon introducing a 19 kilowatts of output version that will now give it access to over 90% of the single-family home heating market. Additionally, the brand-new Vitocal 250-A Pro also releasing in Q1, will offer heat pumps outputs of up to 40 kilowatts, ideal for multifamily and commercial buildings. And based on our experience with Toshiba Carrier and that acquisition and integration, which is going extremely well, we are certainly confident in the cost synergies and already see potential for revenue synergies, which go well beyond our deal model. In short, Viessmann Climate Solutions is the most attractive business in the most attractive segment in our space, and we cannot wait to come together as one business, which is likely to close the first week of January 2024. Lastly, a brief update on our business exits on Slide 7. First, my thanks to our teams who are working quite literally around the clock and doing a superb job. We have many advisers, who together with our bankers, Goldman Sachs and JPMorgan on Fire & Security and Bank of America on Commercial Refrigeration, our focus on maximizing the net proceeds and speed while ensuring a clean exit of these businesses. We are progressing very well with the prospective buyers for security, commercial refrigeration and industrial buyers. The interest level has been extremely high, and we expect to be able to announce signed agreements before the end of 1Q, hopefully sooner. The capital market transactions for the combined commercial and residential fire business is on track. These are superb assets with deeply committed and effective team members, and we remain very optimistic about the value that we will realize on these exits. With that, let me turn it over to Patrick. Patrick?

David Gitlin :

Well, thank you, Patrick. In closing, Carrier continues performing while transforming. We had another strong quarter. And more importantly, we again increased our outlook for 2023 with mid-single-digit organic growth, margin expansion, double-digit adjusted EPS growth and strong free cash flow performance, all broadly in line with the value creation framework that we shared with you at our latest Investor Day. So with just a couple of months more to go in 2023, we are, of course, already looking ahead to 2024 with continued confidence in strong top and bottom line growth and cash conversion. With that, we'll open this up for questions.

Deane Dray :

We're hearing some commentary about higher inventory in the channel of heat pumps in Europe just all coming from some of the uncertainty about when some of these government stimulus programs will be passed. What's your sense of channel inventory? And how does that play out?

Deane Dray :

That's all really good to hear. And then second question, can you take us through some of the assumptions on what's going on in light commercial, up 30%? What are the drivers and visibility there, please?

Operator:

Our next question comes from Julian Mitchell with Barclays.

David Gitlin :

Sure, Julian. Let me start with kind of the year and then give a little bit of color on what we see for next year in light of this recent EPA ruling. I think for overall this year, we're looking at resi being down mid-single digits with volume being down in the mid-teens. That would imply overall sales in the fourth quarter down about mid-single digits for resi. And I think that this is the quarter of -- I think this is sort of the most -- the end of a lot of the destocking that we've been seeing. So we want to end this year with inventory levels down at least in the mid-teens versus where we ended last year. So our first priority is always being there for our customers, but we also want to be very purposeful in working with our channel partners on making sure that inventory levels going into '24 are at least down 15% versus where we ended 2022. I had the chance to be with about 100 of our key distributors on Tuesday in Dallas. We talked a lot about this and the regulatory changes. And I think we're all lock-stepped together to go in this year in a way that supports our customers and positions us for next year. I think when you look at the recent EPA ruling that's just come over -- come out over the last week, the good news is that the data of install ruling, what that's going to do is accelerate 454-B systems demand, and we'll likely see more 454-B sales in '24 than we previously thought, and that mix is favorable. And I will say that thanks to the great work of our team, we will technically and operationally be ready to cut in the 450-4B sooner and to ensure that we comply. We also think that our ability to manage the cutover can be a competitive advantage because we were already accelerating this in order to reduce risk. We are encouraged that the EPA did clarify their -- we are encouraging, I will say, the EPA to clarify their position. Because the way it's written, it would effectively allow dealers to replace the outdoor unit only with a 410-A replacement if it's not part of a system level change. And that could be interpreted as allowing 410-A sales indefinitely, and we don't think that was their intent. We've had a seat at the table with the administration, with the DOE, with the DPA, with bipartisan members of governors and the Hill, and we know what their intent is. And the way it's drafted, it's not consistent with the intent to transition to a more environmentally friendly refrigerant. Second, it will create a bit more complexity in the channel and supply chain. So we are encouraging them to clarify their position a bit. And I think and we'll see how that plays itself out. But regardless specifically to your question, Julian, what we said on pricing for 454-B stands. We said it would be up 15% to 20% over 2 years, in part because of our typical annual price increase, in part because of the extra cost associated with the system. I will tell you, keep in mind this year, we sort of break out price and mix. But if you combine those together for resi with the zero change, we'll be up 10% on price and mix combined. So when we look specifically at 410-A pricing, we will be raising price there as well, in part because of the increased carrying costs driven by the complexity of the ruling, but in part because that we will see a reduction of supply in the U.S. before 10-A. So we'll need to -- we'll have to deal with pricing to adjust for that. But we will also be looking at when we look at 410-A replacements for outdoor only, looking at treating that similar to how we would treat an aftermarket replacement, which would have limited warranty implications, and we're still evaluating that, but we will look at that. So net-net, EPA ruling more 54-B sooner is overall good, a bit more uncertainty as we navigate this with our partners, but I don't think there's going to be a company more prepared to deal and address with the switchover.

PatrickGoris:

Yes. The answer to your last 2 questions, Julian, are yes on both counts. In terms of the HVAC margins, Sam pointed out that the transcript -- the life transcript said that I said that it's a $60 million tax benefit within JV income, within HVAC, it's $160 million, and that was offset by some discrete items that went the other way. But in summary, the large expansion of margins within HVAC, 410 bps year-over-year, despite the headwind from Toshiba Carrier consolidation, it's really driven by strong price cost and productivity. And that is the main driver that we see in that segment that also translates to the overall company. So some minor headwind to that. As I mentioned, acquisitions. We always invested with us a little bit there. But the main driver is productivity and price costs.

Jeffrey Sprague :

Patrick, thank you for the color on how you're thinking about the guide. I just want to get a little bit more into the deal, Matt, if we could. You're sitting on $3.9 billion in cash. I just wonder how much of that is sort of usable to consummate the deal versus cash that might be geographically stranded or other things? And I'm sure Viessmann is generating cash here. Does that go out the door to them as a closing adjustment? Or is that accessible to you to sort of self-fund the deal to some degree? And thirdly, just what are you looking at as kind of your blended funding cost based on the actions and locks that you took in Q3?

Jeffrey Sprague :

Great. And just back to the earlier point, so there's a $116 million gain in HVAC segment results in the quarter, but that is fully or mostly offset by what exactly?

Operator:

Our next question comes from Joe Ritchie with Goldman Sachs.

David Gitlin :

Yes. Look, I think it was interesting. We saw ABI come out at 44% and exactly what you said, Joe, that there was -- that created a fair amount of anxiety, but there wasn't as much exuberance when it was over 50 for 3 of the last 5 months and it went through a stretch where it was over 50, I think, for almost a year straight. So I think, look, we take those metrics with, I think, a sober view, but a very look at the agility that we have as a team to pivot to where the strength is. So we look at certain verticals that remain just extremely strong, and we see that we still have in commercial HVAC extremely elevated backlog levels going into next year. And it's because that some of the orders we've seen in education, not only K-12 with the Ester funding, but also higher end, very strong data centers. We look at some areas of industrial, not only in the United States. But even though real estate remains under a lot of pressure in places like China, commercial real estate in the United States is under pressure, we see things like the Chips Act and we see things like some of the EV type spending we're seeing in China very strong, and we're winning more than our fair share of a lot of that new construction. And that's driven by some of the regulatory environment, decarb trends. So look, we take a very balanced view. I don't think a lot of people were thinking that light commercial would be up 30% this year, which it will be. I think going into next year, we'll go into next year, good backlog in commercial HVAC. We think that we're sort of bottoming them out in some of the resi space in the United States. We see aftermarket growth double digits. We've done a really nice job with the Abound and Lynx and the whole playbook around driving more recurring revenues to smooth some of the cycles, we've come a long way there. And then I think with some of our businesses like container, we went through a rough patch on container, which we fully expected, and we see that starting to recover here in 4Q going into next year. So I think we'll have a very balanced view. But we'll go into next year looking with good backlog in the longer-cycle businesses, and we still see orders trends in some of the key verticals that I think position us for solid growth next year.

PatrickGoris:

The biggest element, and it's what I'm going to share is from an overall company perspective, but it's the same, of course, for HVAC, even the size of that segment. One, significantly lower sales sequentially due to the season that moves, of course, ready as well as some of the higher-margin businesses. In addition, you heard us talk about ensuring that field inventories are rightsized. So there is some downtime in some of our facilities as well to ensure that we start out 2024 with appropriate levels of inventory. And then we continue to make some investments and JV income is seasonally lower as well in the last quarter of the year as we see every year. I would say those are the biggest moving pieces, Joe.

Noah Kaye :

I want to follow up on the commercial commentary. So I look at the multi-quarter commercial orders trends, kind of flattish here. How do you think about 4Q orders trends in commercial just based off of everything you just described?

Noah Kaye :

Okay. And then, David, I think there's been so much ink written about this. But since you're closely tracking the performance of the Viessmann business and given how well it's done year-to-date versus some of the headlines out there around heat pump demand. Just help us sort of reconcile the strength of the company's performance year-to-date and what they're doing now to position for all these different regulatory changes and what really drives your conviction that they'll continue to see sales growth and strong performance in '24 and beyond.

Operator:

Our next question comes from Gautam Khanna with TD Cowen.

David Gitlin :

Interesting, Gautam. We have not. And I actually asked that question. We were -- I mentioned that a couple of days ago, I was with our top distributors. It's something that when economies soften that you naturally look for. But we have not seen that. We haven't seen the mixing down. We haven't seen the trading down, replacing parts instead of entire systems. So for us, what we're doing is, I think the team did a superb job in the switchover and the new SEER unit. We are now laser focused on positioning ourselves for the refrigerant change, which gives pricing some both price and mix benefits to offset some of the destocking that we saw throughout '23 that we'll see into -- into the fourth quarter. But then I think when we start next year, a lot of that will be behind us as we position ourselves for the 454-B switchover. So no, Gautam, we have not seen any material evidence of that.

David Gitlin :

Yes. I think, look, there's been some skeptics on the -- whether we see the 15% to 20% over 2 years. We're very confident in that. We are going to increase price in resi. The normal price that we would have done anyway. We will continue to do that. As we go into next year, and we'll do it again in early 2025 as well. And then on top of that, you are adding some cost to the system for things like leak detection and sensors and some parts of the controls, and it would only be natural for us to increase price based on some of the additional protections that we're adding to the 454-B units. So we came into this year expecting price and mix benefit. I think it will turn out to be even slightly higher than we thought, around 10%. And we expect to see kind of similar orders of magnitude on price mix benefit with the 454-B unit.

Brett Linzey :

Yes. I just wanted to come back to the business exit update slide. You noted the resi commercial fire public trading late spring. Was hoping you could just put a finer point on what the nature and structure of that transaction might look like as it moves to the public markets?

Brett Linzey :

Okay. Yes, makes sense. And just to follow up on the international truck and trailer sales up over 20%, strong quarter. A bit of a moderation in the order book. What is your level of visibility based on backlog, based on incoming order rates as we flip the calendar here to '24?

Operator:

Our next question comes from Nigel Coe with Wolfe Research.

PatrickGoris:

Nigel, the financial performance at Toshiba Carrier has been really strong. A lot of that is driven by the synergies. We mentioned, I think, last quarter that we're increasing the cost synergies from a target of $100 million run rate to $200 million. It is helping us significantly expand our margins in that business. To your point, the sales in Europe for that business were a little lighter for Global Comfort solutions. But the performance overall for that business is really strong. And the key driver there is really all the synergies that the team is driving. And we are nowhere near the actual run rate yet. And so we expect to benefit from that for the next couple of years as that expands.

PatrickGoris:

Yes. Actually, I think that the HVAC margins for Q4 will be very similar to our Q1 margins. So I think they're very much aligned there. And as I mentioned in one of my prior answers, what we're going to see in HVAC in Q4, as we address the field inventories, we mentioned in our comments, we want the field inventories to end about mid-teens down versus the beginning of the year, a lot of it is going to happen in Q4. So we're going to see more downtime in our factories than initially planned. And that's going to impact some of the margins, of course, in that segment. We do expect price cost and productivity generally remain strong, but that is a headwind that we wouldn't have seen in the prior quarter, which is a destocking headwind affecting our factories.

PatrickGoris:

No, this is factory. There is no incentive.

Steve Volkmann :

It's actually Steve Volkmann here. We got a lot going on this morning, obviously, sorry about that. So my question is kind of a big picture one, Dave. Where do you think we are in the adjustment of the backlog? Does it go back to kind of historical levels? Or does it sort of settle in above historical levels? And sort of where are we in that process?

Steve Volkmann :

Got it. And do you think we'll get sort of more normal by the end of '24? Or does it take longer than that?

Steve Volkmann :

Super. And then Patrick, as this happens, is there a chance to generate net income or free cash flow above net income for another year?

Operator:

And our last question comes from Andrew Obin with Bank of America.

David Gitlin :

Well, look, the -- obviously, resi's far bigger business than light commercial. And to your point, Andrew, light commercial has been, I know, far better than many thought that we're modeling it coming into the year, and we've been very pleased with the performance there. So resi is the biggest business, followed by commercial, followed by Light commercial. We think with some of the destocking that we'll see in 4Q, we're kind of in the switchover to 454-B in resi. We think there, we know volumes down mid-teens, sales down kind of mid-single digits for resi. We start to see recovery as we go into next year in that business. Light commercial is going to face some tough compares. But as I mentioned, a lot of those verticals remain very strong in light commercial. And they're also doing what the rest of the business is doing is very much leaning into connected devices and the aftermarket opportunity. And frankly, it's a bit nascent in that space, and we think there's a lot of opportunity there. And then I think commercial, we still are dealing with very significant backlog in the commercial side. The controls business has done extremely well. Aftermarket is doing very well, double digits there and with further growth there. So we think that with the strong backlog, we think eventually, lead times will kind of come back to normal for the North American commercial business. But they're still elevated, still strong backlog. So they're positioned for growth as we get into next year as well.

David Gitlin :

Yes, Andrew, that's been very encouraging. We've done very, very well on many of the mega factories, and that includes both data centers. It includes factories associated with the Chips Act and some of the new construction activity there with all the Gen AI type activities. So we have solutions not only that we're doing more creative solutions with the high temperature and very high temperature heat pumps we mentioned. We've introduced new offerings like our mag bearing design for the Applied. We have a business that we bought a couple of years back called Nlyte that really complements our ALC controls business so we can provide sort of holistic controls to identify with specificity, where is the heat getting generated in a data center and how we dissipate that heat most efficiently. It's effectively an integrated AI tool in and of itself. So we love to see the continued construction with these mega projects, and we've gotten more than our fair share of new wins there.

David Gitlin :

Well, look, let me just thank all of you, our investors, for their continued confidence, and let me thank our team. We have folks working tirelessly while we perform and continue to transform the business. So my hats off and thanks to the team. It's just not only working so hard, but working so well and together as a team. And with that, we'll conclude the call. And of course, Sam will be available for the rest of the day to everyone. Thank you all.

Operator:

Good morning, and welcome to Carrier's Second Quarter 2023 Earnings Conference Call. I would like to introduce your host for today's conference, Sam Pearlstein, Vice President of Investor Relations. Please go ahead, sir.

David Gitlin:

Thank you, Sam, and good morning, everyone. Our theme at Carrier remains "performing while transforming," and I am proud of our team as we are progressing well with both. You see that strong performance in our Q2 results on Slide 2. Organic sales growth grew 6% with both HVAC and Fire & Security up 9%. We drove strong double-digit growth in light commercial and commercial HVAC, global truck and trailer, controls and aftermarket. Within Fire & Security, growth was broad based across security, residential, commercial and industrial fire. Total company backlog remains well above historical levels, up 30% on a two-year stack. Adjusted operating profit and adjusted EPS were up 12% and 13%, respectively, and free cash flow was strong at over $300 million. Price/cost was increasingly positive in Q2, Toshiba Carrier performance came in stronger than expected, and we are on track to deliver $300 million of gross productivity this year. As a result of our strong first half performance, we are raising our full year guidance for organic growth, adjusted operating margins and adjusted EPS. A key driver of our sustained organic growth and robust backlog is the result of our team leaning into secular trends around sustainability and healthy buildings, as you see on Slide 3. With our clear and unwavering focus on being the global leader in intelligent climate and energy solutions, we continue to see traction from our sustainability-driven growth initiatives. Resi heat pump sales in North America have been up double-digits year-to-date, we saw another quarter of over 20% growth in commercial heat pump sales in Europe, and electric transport units doubled in Europe. Our healthy buildings pipeline is up over 2x to $1.6 billion, driven in part by K-12 in the U.S., where orders were up over 20% in the quarter. We are clearly positioned at the core of a transition to a more sustainable planet. We published our 2030 ESG report yesterday in which we now disclose sustainability progress through the CDP. After completing our portfolio moves, about half of our sales will relate directly to clean tech, and we expect that proportion to continue to increase. We remain on track to reduce our customers' carbon emissions by more than 1 gigaton by 2030, while achieving carbon neutrality in our own operations. Our laser-focus on digitally-enabled aftermarket solutions continues to gain traction as you see on Slide 4. Q2 saw yet another quarter of double-digit aftermarket growth with the first half up mid-teens compared to last year, and we remain on track to deliver double-digit growth this year and beyond. The playbook is working

David Gitlin:

Okay. Thanks, Patrick. Let me first correct something that I misstated on the business exits. We expect to have commercial refrigeration and security in the market in September, industrial fire a month or so later, and then resi and commercial fire will follow. So, just in summary before we get into the Q&A, Carrier continues performing while we are transforming. Despite resi HVAC declines, we've realized mid-single-digit organic growth in the first half of 2023; secular trends and our aftermarket focus continue to drive demand; price/cost improvements and productivity are helping operating margins and funding growth investments; Toshiba performance is well ahead of schedule and giving us further confidence in the upcoming Viessmann integration; our exciting portfolio moves are tracking to schedule; and we are raising full year guidance for organic growth, adjusted operating margins and adjusted EPS. And, with that, we will get into the questions.

Jeffrey Sprague:

Thank you. Good morning, Dave and Patrick.

Jeffrey Sprague:

Good morning. Dave, would love your view on kind of the political wrangling in Germany on the heat pump related incentives and how that plays into or does not play into your view on kind of Viessmann growth as you look forward in the next couple of years.

Jeffrey Sprague:

And then, also, maybe you could elaborate a little bit more on the link you're indicating between [TFC] (ph) and Viessmann. And, I guess, the sport -- the spirit of my question, right, is, Viessmann is not about headcount reductions and, culturally, those are difficult, and I don't think a big part of what you've done at [TFC] (ph), but you are seeing better synergy capture. So maybe just elaborate a little bit on what you mean by that playbook and lessons learned that you're going to apply to Viessmann?

Jeffrey Sprague:

Great. Thank you.

Operator:

Thank you. Our next question comes from Steve Tusa with JPMorgan. Your line is open.

David Gitlin:

Good morning, Steve.

Steve Tusa:

Just turning towards resi and light commercial. On the resi side, where do you see channel inventories now relative to where you were in the first quarter?

Steve Tusa:

And then, light commercial, these are pretty big numbers, you're catching up on backlog, obviously, but even backlogs up a lot. I mean, like, what's the driver of that? And is that like a tough comp for next year at all? These are like some pretty big numbers on light commercial.

Steve Tusa:

Got it. Great. Thanks a lot.

Operator:

Thank you. Our next question comes from Julian Mitchell with Barclays. Your line is open.

Patrick Goris:

Julian, on the first question, you can think of operating profit being very similar in Q3 than in Q2. A key difference will be the effective tax rate, we think, will be closer to 25%. And basically, that gets you to an EPS that's very similar, maybe $0.01 or $0.02 below. And so then you have after that normal drop-down in Q4 that you were referring to. So that's kind of the sequence. In terms of organic growth for the full year, we are now at mid-single digits, which is better than the low- to mid-single which we had before. Similar organic growth in Q3 that we expect as we've seen in Q2. And then the balance, of course, would be in Q4, which means that Q4 would be a little weaker. That's our current assumption.

Patrick Goris:

Julian, that is what we were looking at it. Then, I think, it depends to what businesses we're looking at. If you look at some of our shorter-cycle businesses and we've seen that the best example is probably residential HVAC. Typically, we would have four maybe six weeks in backlog. A few quarters ago, we were talking of backlog more than one quarter. And so, as supply chains have normalized, we've seen the backlog normalized for, for example, residential HVAC. We're back in that four to six-week range and you don't get to that without an adjustment of the order intake, and that's why we've seen some of the big declines in orders year-over-year as those backlogs normalize. So, I would expect that some -- for some of our short-cycle businesses, we will see a more back to normal backlog level. At the same time, there are some longer-cycle businesses, like commercial HVAC, those are businesses that have backlogs of six months, in some cases longer, and there we see continued growth and we see continued strong demand.

Julian Mitchell:

Great. Thank you.

Operator:

Thank you. Our next question comes from Deane Dray with RBC Capital Markets. Your line is open.

David Gitlin:

Good morning, Deane.

Patrick Goris:

Okay. Deane, Patrick here. In terms of the quarter, you can think of the 6% organic growth we had, think of that as pricing being about 4 points, and think of volume and mix, so we put the mix up as part of the volume/mix as being the remainder 2 points. So, that's kind of the overview for the quarter. For the full year, we think that the price realization -- it won't be 4%. We think it will be a little less than 4% for the full year, probably closer to 3%, which is, of course, to be expected as we lap some of the price increases from last year. And then, the second part of your question was?

Patrick Goris:

Yes. You may recall that in Q1, we mentioned that price/cost was modestly positive. It has a few tens of basis points positive impact on our segment operating margin, and we said that Q1 would be the weakest price/cost of the year. You can think now of price/cost being closer to $300 million positive versus $200 million the prior guide, and it's about 100 bps benefit for the full year year-over-year, so better than in Q1, which is basically what we expected. In terms of the equation, both price -- is a little bit better. On the cost side, we're seeing some pluses and minuses. The area where we probably see the best, the most favorable impact is on logistics.

Patrick Goris:

Yes, we're seeing [similar] (ph) materials, there are some plus and minuses there, but logistics and freight is probably the area where we see the biggest benefit on the cost equation.

David Gitlin:

Well, we are so fortunate to have a phenomenal team in both Fire & Security and commercial refrigeration. Jurgen and his team in Fire & Security, Tim working with Marcus on commercial refrigeration, they're true professionals. And they know what we know, which is that the opportunity for these businesses in the hands of someone who's either a strategic or a sponsor who is the core of what they do, will create value for their people for generations to come. So, we are very lucky. It's one of the reasons why the decision was so tough, because we're parting with team members that come to work every day, put their heads down and do a phenomenal job for their customers and create value. They're performing very well. So, we're lucky to have great people. We work closely with them to paint the vision for the future for them in their businesses. Phenomenal franchises, phenomenal brands. I've been very, very pleased with the level of interest, and we've shared that with both respective teams. So, we know it's just like when Carrier spun, there was a fair amount of uncertainty as we spun from UTC. But we knew that, and Greg knew that, us as an independent company would create value for us and our customers and the same will be true for them.

David Gitlin:

Thank you.

Nigel Coe:

Thanks. Good morning, everyone. Thanks for the question.

Nigel Coe:

I just want to go back to price and maybe mix, Patrick. Obviously, light commercial is 60% growth. How much of that would have been price and mix? And maybe the $300 million of price/cost, if you can just maybe be a bit more granular in terms of how that phases through the year?

Nigel Coe:

That's great. Thanks, Patrick. And then my follow-on is coming back to the portfolios. I mean, based on the indication of interest you've clearly seen from both PE and strategics, are you at a point now where you can rule out the spin process? Do you think there's a buyer out there potentially for the whole package of assets, maybe excluding commercial refrigeration, but the whole Fire & Security assets? And I know there's many parts to this question, but is the KFI Chapter 11 still a gating factor for the fire sales? Thanks.

Nigel Coe:

Okay. Thanks, Dave.

Operator:

Thank you. Our next question comes from Joe Ritchie with Goldman Sachs. Your line is open.

David Gitlin:

Good morning, Joe.

David Gitlin:

Joe, it varies a little bit by business. Light commercial has come down, but it's still above normal. It looks like resi is getting closer to normal. It's closer, kind of Patrick said in that four to six range -- four to six-week range would be normal. And starting to kind of approach those levels that we've seen in the past for resi. And commercial HVAC still has a very strong backlog. That would be above normal, and it almost varies by region. In places like Europe and China, it's a little bit closer, but higher than traditional backlog levels. But in the United States, we've had some operational challenges in our Charlotte facility, which the team is working very hard to address, has been making a lot of progress on some of the underlying issues. But until we get those fully in the box, we'll continue to see elevated backlog levels that go well beyond this year into next year. So, it's nice to have the backlog, but we still do need to make in that particular site more progress on the supply chain issue. So, in general, it's getting closer to traditional levels, but it kind of varies by region, by business, and it varies a little bit based on our supply chain overall performance. What I will add, Joe, is that one thing that we're doing is doubling down on the basics. We brought in a new team to help with our [SIOP] (ph) processes, our sales inventory operations planning, because we're in an environment where there is some fluidity on the demand side, and we still have some longer lead times for things like chips. So, we need to have very agile demand and materials planning, so we can give our customers what they want and what they need when they need it and not get stuck in the middle with inventory levels, and that's been a whole focus area for us internally.

David Gitlin:

Yeah. I think that with respect to commercial, Patrick mentioned that -- I think, Joe, the question is about commercial HVAC?

David Gitlin:

Yeah. I think that -- look, it was nice to see over the past four weeks or so, we've seen that demand positives. You look at the commercial HVAC business, we still have, in some cases, as I mentioned in North America, for example, backlogs that go well above -- well beyond historical levels and that does have an effect on incoming orders. So, as those backlog levels will start to moderate, especially in North America, we do expect that the demand will continue to be there. You look at ABI, it was over 50, the Architectural Billing Index was over 50 in both May and June. It's been over 53 in the last four months. And I think when I look at the job that Gaurang and the team are doing, they've been very agile. We talk a lot about when you fish, you go where the fish are. When you go -- when you're in a business like ours, you go where the customers are. So, K-12 has been strong, healthy buildings. Industrial activity has been strong. Data centers continues to be positive. Healthcare is positive. And then, we transition away from some of the areas which show some areas of weakness. So, commercial and residential real estate in parts of China were weak. We pivoted hard to industrial infrastructure, and that's been driving a lot of demand. So, we feel good about the backlog, and it's nice to see the order rates over the last month or so.

David Gitlin:

Thank you.

Josh Pokrzywinski:

Hi. Good morning, guys.

Patrick Goris:

Good morning, Josh.

David Gitlin:

Well, yeah, I think that, clearly, we've seen the areas that have been a bit weaker, it's some areas of retail. But, interestingly, some of the lower end retail has been positive. So not all retail, but some areas of retail in our applied business and areas of commercial real estate have been weaker. And that's -- and you know this Josh, but remember that commercial real estate is less than 10% of our North American applied business. So, we watch it. We watch some of the reaction that we were going to see with the regional banks. But there's been nothing terribly acute. And, I think, on the flip side, some of the areas that continue to be very positive is K-12. I mean, we still have a significant amount of that extra funding to be spent. Higher ed has been extremely strong. And then you look at industrials, chipset, bringing some new construction back to the United States, and that space has been positive. Data center is good, healthcare good. So, we look at it globally. I think, in general, the theme is around real estate is a watch item. I will tell you on the flip side, it's encouraging. That ABI is about a six-month leading indicator for new order activity. So, to see ABI showing some growth, it could indicate that folks see an eventual moderating of rates, which should drive some new construction activity on the real estate side six months out. So, we'll have to watch and see if that happens. But in the meantime, some of the other verticals have been strong. And, as you mentioned, warehouse has been a bit on the weaker side, I would say.

David Gitlin:

It's hard to exactly dimensionalize it. But I will say what happened is the legislation got passed, and then we went into a bit of a low period while that was actually getting effectuated. And in some cases, you're dealing with not only the IRS, but a state-by-state implementation. So, I think, that I would call like 2023 the year of things getting codified. 2024 is going to be the year where we start to really see the benefit of it. And I think it's going to kick in really in the first quarter of '24, and we're very pleased with how it's gotten codified overall, which has been that the $2,000 incentive for heat pumps in the United States getting applied to that mid-tier level, which was very important to see the kind of take rate that you would want to see to have the impact you would want on consumers, but also on the planet. There still is one area where how they define some of the levels for heat pumps in the North and the South. There's a variance there. We'd like the definition that we're seeing in the South applied equally to the North, because in the background we're working on the technology for cold weather heat pumps. So, there's still some, I think, improvement to be made in the legislation for the northern part of the country. But I expect we'll start to see, I think, a tangible benefit as we get into 2024.

David Gitlin:

Thanks.

Noah Kaye:

Hi. Good morning, guys. Thanks. I just wanted to get maybe a deeper update on the regulatory approval process for Easton. You mentioned on track to close by year-end. But maybe just take us through where the regulatory approval key steps are at? And any potential for slippage around those timelines?

Noah Kaye:

Okay. Great. Switching to different topic, aftermarket and services. Aftermarket another double-digit quarter. Services sales up 16%. And, Dave, you mentioned in the prepared remarks around embedding generative AI and Abound in the digital platform. And I was wondering if you could maybe help tie together for us some of those investments and the sales traction you're seeing. How does AI and generative AI actually help increase penetration of digital and aftermarket?

Noah Kaye:

That's really interesting. Thanks for the color.

Operator:

Thank you. Our next question comes from Stephen Volkmann with Jefferies. Your line is open.

David Gitlin:

Well, look, I think that I do see pricing continuing, but being more at historical levels. I mean you have to keep in mind that you look at pricing over the last couple of years. We were dealing with, I think, close to a couple of billion dollars of price over the last two years, and we're going to continue to see, I think, Patrick said around $600 million of price this year. So, I think, that we will be in the normal what we assume to more typical levels on price. We don't certainly see price reductions, but we see continued price increasing. But not at the kind of pace that, of course, we've seen over the last couple of years. Mix continues to be positive. We'll continue to see the 2023 benefits that we saw in the SEER change extend into next year on the residential light commercial side. We also see mix benefits on the Refrigeration side, the same transition that we're seeing on the HVAC side, we're seeing in places like United States and Europe as they transition to lower-emission diesel-powered truck and trailer units, but also a transition to electric. That mix up is very beneficial to the truck/trailer side as well. And then, as we get into the parts of 2024 that extended to 2025, in North America, we'll have the refrigerant change as well, which would be a further mix up. So, mix will continue to be positive on both -- on all aspects of the business, and then we'll resume normal pricing levels. But in the background, it's our job to drive productivity. So, we talked about 2% to 3% net productivity forever. The team is driving a few hundred million this year. And one of the things that our new Head of Operations, Adrian Button, and the team are doing very well is not only looking at productivity for 2023, but we have one source of the truth, one digital platform that everyone looks at every week, and we're using that digital tool to set ourselves up for 2024 productivity as well. So, we get really good line of sight going well beyond 12 months.

Patrick Goris:

Well, the key reason why this year is margin dilutive is instead of recording equity income as we did prior to the acquisition, now we're consolidating the entire P&L. So, this year, I mentioned that their operating margin would be -- it's already at the double-digit level, so a little bit lower than the company average. I would expect that to continue to improve. And next year, it might not yet be at the overall company average, but I would expect to get significantly closer to it. But the main reason why it is dilutive this year is because we basically consolidate $2 billion of revenue with $100-million-plus-ish of incremental operating profit. That's the dilutive impact.

David Gitlin:

Thanks, Steve.

Vlad Bystricky:

Good morning, guys. Thanks for taking my call.

Vlad Bystricky:

Hey. So, I just wanted to ask about the uptick in China orders in the quarter. I know a year ago, comps got easier. But China is one market, I think, we're just trying to understand a little better what the trends are in there. Can you just talk about what you're seeing in terms of underlying demand trends in China? And how you're thinking about the potential to maintain positive orders momentum there going forward over the next couple of quarters?

Vlad Bystricky:

Okay. Great. That's really helpful, Dave. And then just as my follow-up, maybe shifting to North America. I know you mentioned, and you've seen obviously good strength in the K-12 vertical. One question or concern that we hear from some investors is around potentially peak-ish spending in that K-12 market, just given the strength we've seen there. So, can you talk about how you're thinking about growth runway in the K-12 vertical broadly going forward? And whether you are seeing any signs of sort of increased budget constraints in -- from those customers?

Vlad Bystricky:

I appreciate the color, guys. Thanks.

Operator:

Thank you. I'd like to turn the call back over to Dave for closing remarks.

Operator:

Thank you for your participation. This concludes the program. You may now disconnect. Everyone, have a great day.

Operator:

Good morning and welcome to Carrier's First Quarter 2023 Earnings and Strategic Update Conference Call. I would like to introduce your host for today's conference, Sam Pearlstein, Vice President of Investor Relations. Please, go ahead, sir.

David Gitlin:

Well, thank you, Sam, and good morning, everyone. A big day for us and we appreciate your flexibility joining us this morning on short notice. Today we are announcing a new Carrier, a new direction and an exciting transformation, a game-changing opportunity to acquire Europe's premier company in the most attractive market in our space, allowing us to capitalize on the energy transition in Europe. Combined with the planned exits that we are also announcing, Carrier will become a simpler, focused, pure-play leader in intelligent climate and energy solutions that generates higher growth and superior shareholder returns. Before we discuss this transformation in more detail, we will cover the highlights of our Q1 results on slide two. In short, good news, the team executed very well. We beat our forecast on the top line with 4% organic growth with double-digit growth in aftermarket controls commercial and light commercial HVAC and global truck trailer. Orders were modestly positive in the quarter with year-over-year orders performance improving as the year progressed. Adjusted EPS of $0.52 exceeded our projections and we generated significantly more free cash flow year-over-year. Based on our strong Q1 results, we now have confidence in the high end of our full year adjusted EPS guidance range. Before we discuss our exciting announcement about our future, let me take a brief look back on how far we've come already on slide three. I am so proud of our team's accomplishments since spin. In short, we do what we say we're going to do. Our commitments were to drive sustained growth, improved margins through rigorous cost reduction, increased aftermarket revenues, deliver strong free cash flow, innovate and ensure customer loyalty, energize our teams and culture and strengthen our portfolio and balance sheet. We have grown sales at an 8% CAGR since 2020. And since 2021, we have expanded margins by 150 basis points and have driven an adjusted EPS CAGR of 19%. We have effectively driven significant productivity, growing our aftermarket double digits annually and have introduced over 400 new products over the past three years. We launched important new platforms for our building and cold chain ecosystems Abound and Lynx, with both getting superb traction with our customers. We dramatically improved our portfolio, positioning ourselves in the fast-growing VRF market with the acquisition of Toshiba's HVAC business and Giwee, while completing the sale of Chubb and our bearer shares. We improved our balance sheet, reducing our net debt by 50% from $10 billion to $5 billion all while doing $2 billion of share buyback and increasing our dividend payout ratio from 17% in 2020 to a targeted 30% this year. This outstanding performance has been made possible by our world-class workforce and agile new stand-alone culture. As a result of all of that, Carrier stock price has appreciated 229% since our spin date compared to 66% appreciation for the S&P 500. So with our foundation firmly in place and a track record of execution, we are now announcing a purposeful shift in our strategy, which is what you see on slide four. We have a very clear and compelling vision, to be the world leader in intelligent climate and energy solutions. Strategically, we are positioning ourselves in the fastest-growing geographies, with highly differentiated channel access and the most comprehensive and differentiated suite of sustainable technology and services. Digitally enabled life cycle solutions will increase aftermarket and recurring revenues. Our energized team will continue to drive unparalleled customer loyalty and superior shareholder returns. This strategic shift in our vision has led us to the decision to further focus our portfolio and align it with faster-growing end markets, which leads to the announcement that we're making today on slide five. The first is the acquisition of Viessmann Group's Climate Solutions business, the premier company in the highest growth segment in the heat pump and energy transition markets. This will also expand our capabilities as a one-stop shop for renewable and climate management solutions. We are also announcing that we are initiating the process of exiting our fire and security and commercial refrigeration businesses. The former decision was easy, combining with the best asset in the best market could not be more compelling and exciting. The latter decision was tough. We love these businesses and our people in them. We have tremendous brands, gross margins, market positions and customer stickiness. But we saw the benefit of focus as we spun from UTC and we are confident that further focus will create additional tremendous value. The result will be a new Carrier, with higher revenue and EBITDA growth profiles, leading market positions globally with a portfolio unlike any other company in the world. So let me start with an overview of Viessmann Climate Solutions business on slide six. Viessmann Climate Solutions with 11,000 team members as part of the family-owned Viessmann Group, who have established market leadership over its 106-year-old history. The company has made a purposeful shift from fossil fuel boilers, such that now 70% of its portfolio consists of premier heat pumps, digitally enabled services, solar PV and battery offerings. It also has highly differentiated boiler business that includes state-of-the-art hydrogen-ready offerings. About 40% of its sales are in Germany, with very strong positions in France, Poland and Italy. Those four countries make up more than 50% of the heat pump installed base in Europe with 20% annual heat pump growth rates. The combination of Carrier and Viessmann's Climate Solutions creates a tremendous game-changing opportunity. And as a result, the Viessmann founding family is showing great confidence in the combined entity, taking 20% of the purchase price and equity which has been fixed at signing. And we look forward to Max Viessmann joining our Board of Directors. Furthermore, we are excited to welcome the tremendous Viessmann team to the Carrier family to help us realize our shared vision. Carrier and Viessmann share a very similar journey as you see on slide seven. A phrase that we have used a lot to describe Carrier is a 100-year-old startup. Interestingly, Viessmann is very much the same. Both companies had visionary founders, who largely created and shaped the markets that we're in and both of our businesses have evolved into agile, rapid innovation, climate-focused, digital industrial leaders. Together, we are establishing a new global climate champion and that is one of the many reasons why Viessmann Climate Solutions just fits like a glove, as you see on slide eight. Thanks to the generations that came before as a Carrier, we have established market-leading positions globally. But when we spun, we had two strategic gaps, BRF, which we have now addressed with the acquisitions of Toshiba and Giwee and European residential light commercial heating, which we are now addressing with the premier asset in the space. These transformative moves position Carrier with market-leading positions now globally. So as we look at slide nine, you see the three primary rationales for this tremendously exciting acquisition. First, it is the most attractive market in our space globally. Second, Viessmann Climate Solutions is the premier asset in that market. And third, it positions our portfolio to expand into integrated renewable offerings in a unique and differentiated way. So I'll address each of these three elements starting on slide 10, explaining why the market itself is so attractive. The megatrends that you see here are reshaping our industry. Climate change and sustainability, energy, security and the rapid adoption of green energy solutions accelerated by government, regulations and incentives. These secular trends are indeed global but are clearly most acute in Europe. Europe has long been out in front on sustainability. The Paris Agreement and the European Green deal set a target for a 55% reduction in greenhouse gas emissions by 2030. Fit for 55, targeted 40% renewable energy in Europe by 2030, which was recently raised to 45%, when the EU passed REPowerEU following the Russian invasion of Ukraine. REPowerEU also aims to double the current rate of individual heat pumps to reach 10 million additional units over the next five years. Likewise, 17 European countries have announced or implemented bans on newly installed fossil fuel heating systems for homes, which has been supported by government subsidies. The result is the massive growth that you see on Slide 11. There are 8.5 million heat pumps in European homes, which is expected to increase 25% annually to 40 million by 2030. Residential battery sales are also projected to increase over 20% annually during this time frame with a double-digit annual increase in residential solar PV sales as well. Carrier does not offer solar PV and home battery solutions today. So Viessmann Climate Solutions offering provide Carrier the perfect opportunity to pursue an incremental fast-growing annual TAM of $35 billion. The shift to heat pumps is unique and compelling given the mix-up opportunity that you see on Slide 12. First is the rapid adoption of heat pumps, from selling about one million per year, going up to 10 million per year in 2030. Now factor in the positive mix impact with heat pump selling for as much as 4x per unit compared to boilers. The result of that combination is that the EU residential heat pump market is expected to grow revenues 25% annually for the coming years. The opportunity is tremendous. So turning to Slide 13. Let me provide some additional color on why Viessmann Climate Solutions is the premier company in this space. Thanks to Professor Dr. Martin Viessmann, who represents the third generation of the founding family and his courageous move 30 years ago. Viessmann Climate Solutions is one of the very few companies in Europe that primarily sells directly to installers. 75,000 of them, with whom they have deep, long-standing relationships. This highly differentiated channel allows for best-in-class customer intimacy, rapid innovation in response to the customer desires and digital connectivity. Likewise, the Viessmann brand is iconic and highly trusted across Europe. It has often been compared to as the Mercedes of residential heating brands. During German Chancellor Olaf Scholz's most recent New Year's address, he singled out Viessmann as a shining example of the innovative side of Germany. It has the highest ranked heating and energy brand in Germany and has been the most trusted OEM for almost two decades. The result, thousands of customers recognize and demand Viessmann climate solutions and are willing to pay a premium for it. Its excellent reputation is largely driven by its track record of product leadership and premier innovation as you see on Slide 14. Viessmann Climate Solutions has leaned in to the use of natural refrigerants and as heat pumps require 50% less floor space and installation time. They also developed a new integrated heating solution called Viessmann Invisible, a patented concept which optimizes space and aesthetics by integrating the heat pump, air handler, water tank and accessories into a decorative indoor panel. They are at the digital forefront providing innovative heating as a service offerings and generating subscription-based recurring revenues. The result, outside top and bottom line growth as you see on Slide 15. We expect approximately €700 million of EBITDA on €4 billion of sales in 2023. Fast forward to 2025, we expect those numbers to increase to over €900 million and €5 billion respectively. That's double-digit top and bottom line growth and it's nothing new for them. They've done it in the last few years and we expect it to continue going forward. So best asset in the best market. What's equally exciting is that the combination positions Carrier to enter an entirely new market, given that Viessmann Climate Solutions has effectively established and ecosystem approach as you see on Slide 16. Viessmann has done a masterful job of creating common and distinctive designs across its product portfolio, that all interact seamlessly with one another so the consumer becomes attached to its ecosystem with multiple interoperable products, digital and value-added services. Max Viessmann and his team have effectively implemented this strategy. Its solar PV battery, and heat pump systems can all be installed at different times, but are then seamlessly interconnected and interoperable, all underpinned by their common digital platform one base. One base gives the customer an easy, reliable and quick way to operate their energy system via an app. The platform bundles devices and electronic applications, into one single climate and energy solution for the home. The beauty as you see on Slide 17, is that Viessmann Climate Solutions is the only company in the industry with such a comprehensive solution level offering. When you combine Viessmann Climate Solutions unique market position and breadth of offerings, with Carrier's technology and global channels, the opportunity for us to create unique value to our homeowner and other customers and importantly the planet is truly differentiated. Homeowners in Germany with boilers spend on average €2,200 per year, on gas heating. Switching to an electric key pump, can reduce the owner's cost by over 20% to €1,700 per year. If those same homeowners implemented a complete renewable solution, with solar PV, battery storage, heat pumps and an energy management solution with effective grid management and controls, they could -- annual heating bills by 60% to 80% to about €700 per year. Those same owners same homeowners would also reduce their individual carbon footprint by about 50%. So the world continues to be more electrified, integrated solutions provide a step change in customer value and benefit to our planet. This broad suite of offerings, introduces a new addressable market to Carrier, as you see on Slide 18. Heat pump sells for about 4x the price of a boiler. When you add solar PV, battery and accessories and services, the installed price can be as high as 15 to 20x the installed price of a stand-alone boiler. The result is Carrier's ability to now pursue a 35 billion fast-growing market opportunity. The key to success is effectively integrating and coming together as one team. We have done it so effectively before, and I have no doubt that we'll continue to do it again, as we see here on Slide 19. Viessmann Climate Solutions is a highly integrated successful well-run business. It has tremendous people, one ERP system, one brand, a deep well-established channel and a strong operations and innovation. We have been very impressed with Thomas Heim, Viessmann Climate Solutions CEO and his leadership team. Thomas will lead Carrier and Viessmann Climate Solutions, Center of Excellence for our combined residential and light commercial European business, which will continue to be headquartered in Allendorf, Germany. After completing the acquisition and business exits, the vast majority of our business will be HVAC. As a result, Chris Nelson and I have collaboratively agreed to streamline the organization. Our superb HVAC business leaders, will now report directly to me and Chris will be departing Carrier next month. He has served the company for 19 years, so well, and we wish him nothing but the best. Another reason for confidence in the integration is how well our cultures align as you see on Slide 20. A passion for customers and results, unwavering commitment to our people values and purpose, innovation, community and a deep passion for the environment. Together, we will achieve important and compelling sustainability targets. We are aligned and cannot wait to move forward together as one team. Our base business case, includes the cost synergies that you see on Slide 21. We have identified €200 million of cost synergies the vast majority of which will be achieved by year three and we have a track record of over achieving our projections. On Toshiba, we committed to 100 million of synergies and we are tracking to do meaningfully better than that. Viessmann Climate Solutions is a rapidly growing business, so this is not about employment reductions. Rather about 85% of the cost synergies are driven by procurement and in-sourcing. For example, we anticipate in-sourcing differentiated inverter drives from Toshiba, heat exchangers from our facilities in Spain and Poland as well as other components like rotary compressors and vents. Cost synergies are expected to increase Viessmann Climate Solutions margins by over 200 basis points within three years. There were also revenue synergy opportunities, which we have not included in our base estimates, such as introducing multi-tier offerings into Viessmann Climate Solutions channel and leveraging its digital ecosystem offerings and technologies more broadly across Carrier's channel. Now I will turn it over to Patrick to take you through the transaction itself on Slide 22.

David Gitlin:

Well, thank you Patrick. [Audio Gap] So the $1.1 billion business that we are exiting at high single-digit EBITDA margins last year, we have invested significantly in restructuring and improving the margins of the business, which will significantly benefit the business going forward. We expect to exit this business over the course of 2024. To be clear, we are retaining our cold chain solutions and transport refrigeration business which includes truck, trailer, container, Sensitech sensors and our Lynx platform and all the related aftermarket and digital offerings. So in summary on slide 25. These moves position us as a higher top and bottom line growth company. Had we made these transformational moves three years ago, Carrier's revenue CAGR would have been 2x the rate that we indeed achieved, mid-teens rather than 8%, thus giving us confidence that we are transforming into a sustained higher growth profile company. With Viessmann Climate Solutions, we are now positioning ourselves to be the Global Climate Solutions Champion. We are buying the premier asset in the premier market. We are standing by our commitment with our portfolio to be clinical and dispassionate and though we are selling tremendous franchises, the result will be a focused differentiated carrier that drives higher growth and returns for our shareholders and value for our employees and customers. And with that, we'll open this up for questions.

Julian Mitchell:

Hi. Good morning and congratulations.

Julian Mitchell:

Maybe just a first question around Viessmann itself. So, a couple of things. One was maybe if you could help us understand its market shares in the main businesses that you're most attracted to in it for example heat pumps. I think it's got close to maybe $1.5 billion $2 billion of sales and you talked about sort of a $5 billion TAM somewhere in the deck, but I'm not sure those are apples-to-apples. So maybe just help us understand the market share. And also, you talk about the appeal of it the uniqueness of the sort of one-stop shop aspect with the residential building. In the nonresidential world, the sort of the one-stop shop has been harder for equipment suppliers to get right. So maybe help us understand why in the residential world you're confident of that one-stop shop approach is the one that will drive share gains and returns?

Julian Mitchell:

That's helpful. And then just my follow-up would be on the exit side of things Fire & Security and Commercial Refrigeration. Investors may be concerned that you’re buying Viessmann for sort of 17 times or so headline ex synergy EBITDA and worry about sort of the selling prices of F&S and commercial refrigeration versus that. So maybe help us understand kind of how you're thinking about the exit route for those in terms of spins or outright divestment and how you're confident that as we go through this process of sort of €4 billion of sales out €4 billion of sales in that the returns and sort of financial criteria looks okay?

Julian Mitchell:

That's great. Thank you.

Operator:

Please standby for our next question. The next question comes from Nigel Coe with Wolfe Research. Your line is now open.

David Gitlin:

Good morning.

Patrick Goris:

Yes, Nigel, Patrick here. So 2023 is still ongoing of course. But the two prior years, we believe that their free cash flow conversion has been in the mid-90s so 90% to 95% of net income. And so clearly we believe that there is a continued path to have a combined company that will be in about 100% free cash flow conversion range. As to CapEx investments clearly given the significant opportunity in heat pumps there have been heavy capital investments made by Viessmann, including in 2023. We have that dial into our numbers. And as I said, we expect going forward to continue to be a company that converts about 100% of net income into free cash flow.

Patrick Goris:

It could scale up Nigel very clearly. And the first part of your comment was related to sale versus spin at the end of the day we're evaluating the exits and ultimately we'll pick whatever the exit is that delivers the best after-tax value for Carrier. And so whether that's the sale versus spin that is what we're focused on. And you're right. If it is a sale we certainly see a path with expected proceeds that would enable us to buy more shares than the equivalent shares issued to Viessmann family.

Patrick Goris:

Thank you.

Jeffrey Sprague:

Thank you. Good morning, everyone.

Jeffrey Sprague:

Just back to the deal math even, kind of, looking at the shares issue particularly given the $1 billion or so of cash you're going to generate year-to-date, it actually looks to me like there is a path to first year all-in EPS accretion. I just wonder if there's something in I don't know how these guys report. It's a private company, right? If we're talking IFRS or something else. Is there just something in the way they report where we've got to normalize the numbers to conform to a Carrier basis or how would you respond to maybe the potential of upside to what you're saying on accretion versus dilution?

Jeffrey Sprague:

Okay. And then just on the exits Patrick, I think, you've appropriately said best after-tax path. Can you just give us a sense of what the tax basis is in the targeted companies? I would assume, it's low and certainly some of them, but perhaps not. And you do have obviously some legacy liability in there right kind of the whole PFAS question. So how might you address that as part of the exit equation?

Jeffrey Sprague:

Yes. Yes.

Jeffrey Sprague:

Thank you.

Operator:

Please standby for our next question. The next question comes from Joe Ritchie with Goldman Sachs. Your line is now open.

David Gitlin:

Good morning, Joe.

David Gitlin:

Yes. We -- Joe we have a pretty rigorous strat review process and it was clear from our very early days that when we spend we had two big gaps. We didn't -- we had VRF and we had European residential heating. So we wanted to start with VRF because of the underlying technology that it brings and we were fortunate with both Giwee and Toshiba to be able to enter that market. And then there was really all hands on deck on European residential heating. Clearly, no overlap no antitrust issues. And it was -- if you look across our space and you did a chart showing growth rates predictable growth rates over the next 10 years in every single space in which we compete the single most attractive market is European residential heating and we don't have a real presence there. So we started meeting with effectively every single company across Europe. I had dinners what I would say virtually every CEO in the space and they're a very, very impressive group. It's just very, very difficult to break into that market because they're traditionally multi-generation family-owned businesses. And Max and I had dinner about a year ago in Allendorf, Germany. And I think that we hit it off because we both had this common realization of the art of what's possible. They truly are world-class. I mean they are the leader. If you could pick any company to come together with an European residential heating, it would clearly be Viessmann. They have the best brand, the best channel, the best technology, they are a very, very unique asset with great people. And as we continue to develop the relationship, our whole premise was that one plus one has to be something greater than four. And if you look at the combination of Carrier and Viessmann Climate Solutions we said that we can do something that no other company in the world can do to create value for our people, our shareholders, our customers, and the planet. So, we probably had 15 dinners over the course of the last year as we continue to evolve what this relationship could be. I think the contract is very manages this idea of a potential interloper. Clearly, there'll be a lot of people interested in Viessmann, but we're just thrilled that Max had to share the same vision that we had in the art of what's possible for the future.

David Gitlin:

Well, it's such a unique phenomenon with the shift to heat pump. So, they've traditionally grown the market is a lot like the US where it's an 80% replacement market. People need heating, heating fails, you replace it. The most amazing thing is given that 17 countries in Europe have either announced or banned fossil fuel heating. If you picture you're in a European home, you take a wall-hung boiler off the wall of your bathroom or our utility room, you're going to put in a heat pump and instead of spending a few K, you're going to spend 10K. So, if you pictured no unit rate of growth and the only thing you had was mixing up they'd be growing double-digits. Now, you put on top of that all of their other venues that they have for growth between solar PV and battery that's why they have consistently been growing over recent years in these mid-teens. And if you look at our forecast, it continues to grow at least double-digit rates for the foreseeable future. And I could tell you that there's many parts of our market. If you ask me what are they going to grow in 2025 it will be very difficult for me to answer that sitting here today. This is probably given the energy transition happening in Europe. I would say this is the most predictable sustained growth market in the world. We could give you very high confidence this is going to grow clearly double-digits in 2025, in 2026 because of the underlying dynamics of the mixing up that you're seeing and the additional value add that they provide.

Operator:

The next question comes from Tommy Moll with Stephens. Your line is now open.

David Gitlin:

Hey Tommy.

David Gitlin:

Yes.

David Gitlin:

Sure. It started about 30 years ago with Martin Viessmann. Professor Dr. Martin Viessmann really had encouraged to see the value in going to this direct-to-installer model. And if you think about Europe in many cases both sell to distributors who sell to wholesalers who sell to installers who sell to the homeowner, both in Germany and many of its other countries, Viessmann Climate Solutions did establish this direct-to-installer model which has so many advantages in Germany and in Europe, not only the obvious that they -- from a margin perspective, but even more importantly is that they end up with a lot of customer intimacy. And what's also happening is that the demand for these heat pumps is so acute throughout Europe that their installers are struggling to just keep up with the underlying demand. So Viessmann themselves have been in there with the homeowners not only helping with some of the replacements, but helping with the new installations. So it has created so much value just having that direct installation customer intimacy. And again, it is not a model that they have that's unique to Germany they have it in many other countries as well. And I think one of the things that really attracted us many of the many things that attracted us to Viessmann, is they're in all the best countries. When you look at the countries that are making the most rapid transition to heat pumps, and you look at the countries that have the highest demand, it is countries like Germany and Poland and Italy and France. So they're really well positioned globally, but certainly within Europe.

David Gitlin:

I put point to the channel. Anyone can develop technology. The hardest thing is to access the channel. And that's true in Europe it's true in the United States. You need access because it's not -- these are highly installed highly configured systems. So you need highly trained installers that actually have access to the homeowner. And that's what they have. Viessmann spend a lot of resources investing in training it's extensive installation network. So first is they have access and they have the best access because of their very unique channel model. The second thing is they have the brand that not only in Germany, but it has that German technology. There's a lot of pull for that Viessmann brand. Third is they have the technology. I mentioned Viessmann Invisible. I mentioned that how they've designed their digital overlay and their interconnected system. So they put a lot of energy into natural refrigerants and hydrogen enriched boilers. So a lot of what they've done to build a moat is interconnecting channel brand technology holistic and ecosystem level offerings to really make them a very, very unique asset again not just in Germany, but across Europe.

David Gitlin:

Thanks, Tommy.

Noah Kaye:

Thanks, Dave, congratulations. I'm likewise intrigued by the commentary around the battery storage and solar PV opportunity. I think you said in your prepared remarks there was an opportunity to take some of those offerings more broadly across carriers. So I know maybe it's early days of thinking about this, but how might you actually implement that how much you architect similar offerings for the company in North America or other markets? Is this sort of a -- we learned at the start here and then build that over time?

Noah Kaye:

Right. If we can talk about heat pump technology and development for a minute there are some differences obviously between your product portfolio and Viessmann they've been -- as you actually mentioned they've been a very vocal advocate for natural refrigerants. How do we think about some of the ways in which their portfolio complements your existing one? How do we think about maybe some product development synergies overtime?

Noah Kaye:

That's great color. Thanks.

Operator:

[Operator Instructions] The next question comes from Deane Dray with RBC. Your line is open.

David Gitlin:

Thank you, Deane.

Patrick Goris:

We will do that at the right point. My expectation is that several quarters away and there are some specific requirements that need to be met for us to get there. And so if it happens at all it's going to happen several quarters from now.

David Gitlin:

Well, I would say they're very similar to what us, and many other companies experienced. I think the good news is that they'll be coming in with backlog because they experienced some of the same supply chain issues that we all experienced. They navigated it as well if not better than anyone. But look we all ran into some of the same constraints. They're price/cost positive. They've -- one of the very I think exciting -- many exciting things is that they clearly can charge a premium. They have they will continue to be able to do so. So pricing is not an issue for them. And I think that one of the exciting things on the combination is I think we'll bring a lot of value on the cost side with our supply chain. And then keep in mind that if you look at the last few years despite all the supply chain they've been growing 15% sales and EBIT CAGR between 2020 and 2023 and their margins have improved during this time. And in fact Max just told me two nights ago that their margins were exceeded their expectations for March. So they continue to under-promise and over-deliver and I expect that they will continue to do so.

David Gitlin:

Well, look it's extremely efficient in the European market. One of the things that is in Europe is -- which is a little bit different than the United States is that first you start with distributors then you have wholesalers. And the wholesalers there are typically agnostic. They will carry multiple different brands and they will provide the installer what the installer pulls for. Our distribution channel here in the United States it's typically exclusive. So our distributors are exclusively us and our brands. So I think it's an extremely efficient model there. Our only goal would be to expand it, expand it, invest in it, continue to grow it. And they've done a phenomenal job getting it from where it was 30 years ago to where it is today and we just want to invest in expanding it and continue to make it the truly differentiated channel that it is.

David Gitlin:

Thank you.

Josh Pokrzywinski:

Hi, good morning guys. Congrats on the deal. Dave, so I know there's been a lot of stimulus and REPowerEU and elements like that that are encouraging the electrification of heat chartered by European IRA where does the product portfolio fit into that? I got to imagine it's on the virtuous side of it, but anything in particular that you're excited about in terms of their lineup that captures something that is going to be a policy target?

Josh Pokrzywinski:

Got it. That's helpful. And then just a follow-up on the pricing comment. I think from Deane's question. I think in the US, there aren't a lot of markets out there that have I'll call it lack of transparency to the end consumer the way resi HVAC does in a good way in terms of not a lot of pushback, not a lot of context what these things should cost. How does that work in Europe for the Viessmann product? Is it just, hey, a list price this is what you pay, or is there a little bit of configuration and extra costs that maybe cloud that a bit?

Josh Pokrzywinski:

Got it. Congrats again.

Operator:

Please stand-by for the next question. The next question comes from Brett Linzey with Mizuho Group. Your line is now open.

David Gitlin:

Thanks, Brett.

David Gitlin:

Yes. Internally Brett, we have some numbers that we put on it, but I think it's early days. We need to let the team get in there and really and drive them. And then as we get traction, we'll start to put more meat on the bone on dimensionalizing those. But if you think about it, their channel with the 75,000 installers that they have these intimate relationship with, that we could clearly introduce a second brand into their channel, whether it's Carrier Toshiba, that would be a very, very exciting opportunity. You think about their digital connectivity, they have a whole bunch of, I would say world-class digital solutions, they have smart thermostat that we could really use very much, throughout Europe but outside of Europe. We could bring that into North America. We could bring that into Asia. Because one of the things we've been working on is digital connectivity with our distributor and dealer network, but also potentially with the homeowner as well. So, as we bring their technology outside into our channel, we bring some of our brands into their channel and then we leverage our respective underlying technologies. I think the revenue synergies will end up being far more exciting when we look back five years from now, we will have gotten -- truthfully will have exceeded our cost synergies, because that's what we do. What we will end up being more excited about, is the revenue synergies.

David Gitlin:

Well, look backlog, when we look at commercial HVAC, backlog was up 20% organically. We had very strong orders in the quarter for commercial HVAC, what we're seeing is continued growth across the globe frankly. We saw sales up mid-teens in the quarter. Aftermarket was up just under 20%. Controls was up just under 20% and commercial applied was up in the mid-teens. So, when we look at orders, we're very pleased with what we're seeing, especially North America. China orders were a bit down in the quarter, but we think that is timing. We think, we're very bullish on what we're going to see for China orders this year, because as that country starts to come back. And I'll tell you interestingly, in the middle of all the banking issues that we were all watching, March was the first month since September of last year, where the Architectural Billing Index was north of 50. So, I think, we all have -- we're all watching, whether or not that could create some constraints on demand. We've seen none of it in the underlying business.

David Gitlin:

Thanks, Brett.

Andrew Obin:

Hey guys. Good morning and congratulations.

Andrew Obin:

Just a question, can you talk a little bit more about the solar, business because it's a fairly large chunk of the company. And I just want to understand better, what does the company does there? And I guess, how does it fit strategically with your HVAC vision? Thank you.

Andrew Obin:

Got you. And just a question on synergies. And I completely appreciate that the deal is a lot more about heat pump market tripling in Europe and channel synergies, et cetera, et cetera and revenue synergies totally get it. But 5% recent deals were more like 8% to 10% in the industry. So I'm thinking about 5% and we've also been getting questions on the headline and the FT that Germany will review sale of Viessmann, how does that just basically buying a storied middles the German company, how does that figure into your approach to costs in this deal? And what can you do going forward? Thank you.

Andrew Obin:

David and Sam Congratulations. I know how impossible these companies together. Congratulations on getting this deal done.

Operator:

Please standby for the next question. The next question comes from Nicole DeBlase with Deutsche Bank. Your line is now open.

Patrick Goris:

Nicole, Patrick here. We believe that there is a good approximation of US GAAP. So from all the due diligence certainly good work, yes.

Patrick Goris:

Yes Nicole, we expect that by year three, the vast majority of those synergies will be achieved. So think about 75%.

Nicole DeBlase:

Thank you. I’ll pass it on.

Operator:

Please standby for the next question. The next question comes from Steve Tusa with JPMorgan. Your line is now open.

David Gitlin :

Thanks, Steve.

Steve Tusa :

Any margin differences between these various businesses within Viessmann the pie chart there?

Steve Tusa :

Got it. And then just Patrick on the guidance any moving parts on bridge items? And then just any color on kind of the cadence first quarter to second quarter the seasonality that you guys expect this year?

Steve Tusa :

Okay. And then just any update on price cost and the spread there? What was that in the first quarter? And what do you expect now for the year?

Steve Tusa :

And then one last one. How much price do you now expect for the year?

Steve Tusa :

Okay. Great. Thanks all the details and congrats again on the deal. I think everybody covered most of the questions I had. Thanks.

David Gitlin:

Thanks, Steve. And I was handed a note by Sam that my mic cut out during Fire & Security. And so I apologize for that. What I was basically saying is, what's on the slide that for Fire & Security, it's great businesses, great teams, great leading positions. You all know the brands and how the growth potential. I was clarifying that even though $3.6 billion of sales, we're going to retain the UTEC business, which makes controls for HVAC and refrigeration. So it's a natural part to keep in our portfolio. The business we're exiting therefore is about $3.1 billion and has EBITDA margins in the high teens. It's split between fire at $2.1 billion, securities around $1 billion. And like I said upfront, it's -- this was a very, very difficult decision. Jurgen and his team have done a phenomenal job creating a world-class business, that's highly differentiated, and it's a true unique asset that I know many, many will be extremely interested. But just because it's such a phenomenal business doesn't mean that it belongs in our portfolio. So we had to make a very tough decision to exit those businesses. And we'll use those proceeds as Patrick said, we'll pay down some debt. We'll do a buyback and then we'll continue to invest in our core business of being the global leader in intelligent, climate and energy solutions. So a tough decision but I think the right decision for the long term of the business. And with that we will leave it there. I do thank all of you for your flexibility moving this up a day. And I just want to reiterate my thanks to our employees and to the 11,000 Viessmann employees that will become part of our family. This is -- I think, this is a once in a generation opportunity to truly bring two world-class phenomenal organizations together to be an unambiguous global leader, and I couldn't be excited about the days that lay ahead. So, my thanks to all of you.

Operator:

Good morning, ladies and gentlemen, and welcome to Carrier's Fourth Quarter 2022 Earnings Conference Call. I would like to introduce your host for today's conference, Sam Pearlstein, Vice President of Investor Relations. Please go ahead, sir.

David Gitlin:

Thank you, Sam, and good morning, everyone. Our Q4 results for sales, earnings and cash flow were all in line with our expectations, as you can see starting on Slide 2. We delivered organic sales growth of 5%, supported by another quarter of double-digit growth in light commercial and commercial HVAC, global truck and trailer and aftermarket. Pricing remained strong and our realization continued to offset inflationary headwinds. Supply chain improvements continued, allowing for a reduction of our past due shipments with further improvements anticipated in 2023. Our backlog, which ended up mid-single digits year-over-year, up 40% on a two-year stack and up 2x from 2019 remains at very healthy levels. Adjusted operating margins of 10.1% were flattish compared to last year, despite a 70-basis point impact from the consolidation of the Toshiba joint venture. We made great progress on our productivity initiatives in the quarter and achieved our full year target of $300 million in savings. Adjusted EPS was $0.40 in the quarter at the high end of our guidance range. We generated about $1 billion of free cash flow in the quarter ending 2022 with $3.5 billion of cash, allowing us to continue to play offense with capital deployment as we head into 2023. Moving to Slide 3. I am proud of our team's accomplishments last year. We delivered on our full year outlook for sales, adjusted operating margin and adjusted EPS while significantly advancing our strategic priorities. We drove 8% organic sales growth, adjusted operating margin expansion of 60 basis points and adjusted EPS growth of about 15%, when we exclude the impact of the Chubb divestiture. Though we did fall short of our original $1.65 billion free cash flow guide, we discussed in October, resulting from supply chain and related inventory challenges we did deliver on our revised guidance of $1.4 billion as a result of our strong Q4 performance. So, our track record of delivering results without surprises continues, and our team is poised to continue to deliver in 2023, in part because of key secular trends that drive demand, as you can see on Slide 4. Our customers continue to look to us for healthy and sustainable solutions, and we have differentiated offerings that meet their needs, particularly in the fast-growing heat pump space. Our North America residential heat pump sales grew 35% in the quarter to a European commercial heat pump sales were up 30%. We expect those areas to only grow stronger as the inflation Reduction Act and the RePower EU initiative propel increased adoption. Additionally, Toshiba's innovative and leading inverter technology continues to impress. When combined with our multi rotary compressors, heat pump efficiency and capacity dramatically improve. Toshiba's technology and expertise are also helping us penetrate the attractive and growing residential heat pump market in Europe. Our position in transport electrification is also market-leading. We have units operating in 15 countries and plan to ramp significantly with more than half of refrigerated transport units sold to be electric by 2030. The healthy building trends continued to be a positive in the quarter as orders were up over 80% and our pipeline increased to over $1 billion. For the full year, healthy building orders were up about 50%. K-12 also remains encouraging with our pipeline up about 60% year-over-year, and with almost two-thirds of the federal government's ESR funds yet to be allocated, we expect further acceleration into 2023. As we continue to distinguish ourselves as a climate systems and solutions company, we remain focused not only on achieving our own ESG goals, but also helping our customers achieve theirs as well. We recently increased our previous aggressive 2030 net-zero targets, committing to set greenhouse gas emission reduction targets in line with the science-based target initiative criteria. Additionally, Carrier continues to be recognized in the ESG space, including distinguished recognition in London, where our customers' heating network will provide a 50% reduction in carbon emissions to network participants. We also continued to perform on our aftermarket growth objectives, as you can see on Slide 5. When we became a stand-alone public company in early 2020, we emphasize increasing aftermarket growth rates from historical low single-digit levels. And last year, we produced another year of double-digit aftermarket growth. Our focus remains on providing differentiated digital solutions through our Abound and Lynx platforms and connecting not only our new products, but also our significant installed base. Our Abound technology now monitors over 1 billion square feet, and we recently onboarded over 100 commercial office sites for a key large-scale customer. We recently released the Abound Net Zero management, which provides customers with an easy way to view, track and analyze energy usage and emissions data across their global footprint and proactively identify conservation measures. We've made similar progress with our innovative Lynx platform and launched several new capabilities in the quarter. We expanded our reefer health capabilities to include early refrigerant leak detection, and launched a managed services linked fleet offering for a major grocery retail chain in the U.S. We achieved our goal of having 70,000 chillers under long-term agreements by the end of 2022 and expect to increase that by another 10,000 in 2023. Importantly, we also achieved our objective of having 20,000 connected chillers and plan to connect another 10,000 this year. We recently announced a strategic collaboration agreement with Amazon Web Services, to jointly build, market and sell Carrier's digital solutions. Not only are we delivering on our financial and strategic imperatives, we are also making great progress on our portfolio optimization and executing on our capital deployment priorities as you can see on Slide 6. You'll recall that at the time of our spin, we carried approximately $11 billion of debt on our balance sheet and cash of about $1 billion. Over the course of just 2.5 years, we have reduced our net debt levels nearly in half from that $10 billion level to $5.3 billion while increasing our strategic organic growth investments by over $300 million. We have also completed a number of compelling acquisitions highlighted by the consolidation of Toshiba Carrier. All acquisitions have been strategic and core to our business focused on enhancing sustainability leadership, accelerating aftermarket growth, driving digital and technology differentiation and expanding adjacencies and geographic coverage. We've also been disciplined in evaluating our existing portfolio to ensure each business is core and that we are the best owner. As a result, we optimized our portfolio by completing the sale of Chubb and our shares -- completing the sale of Chubb and our shares in Bayer while also reducing our minority joint venture count from 41 to 29 since spin. In addition to our portfolio moves, we've been disciplined and proactive with our other capital deployment actions. We have steadily and consistently increased our dividend and have completed about $2 billion in share repurchases since spin. All of this to say, we have made great progress over the last few years, but that does not mean that we are done. We are always evaluating acquisitions in our current portfolio for potential opportunities for simplification and value creation. We will remain steadfast in our commitment to keep evaluating our portfolio as we enter 2023 and beyond. Patrick will cover our 2023 guidance in more detail, but I will emphasize a few highlights on Slide 7. Focus remains very thematic for us. All of our 52,000 team members are aligned on our key priorities, and those priorities remain consistent. Carrier 2.0 is a term that we have been using internally, which represents a very purposeful shift from a primary focus on selling equipment to now using digital and innovation to provide our customers with sustainable and healthy outcomes throughout the life cycle of our product and service offerings. The result will be our continued pursuit of higher margin, high aftermarket growth rates. We remain focused on reducing costs and expect to get another $300 million in productivity in 2023. We are clear-eyed about the broader economic challenges and uncertainty in 2023 and have done our best to calibrate macro factors in our guidance that you see along the left of this slide. We expect to deliver solid organic growth, strong margin expansion, excluding TCC and high single-digit to low double-digit adjusted EPS growth. Strong free cash flow and a very healthy balance sheet enable us to play offense on capital deployment. With that, let me turn it over to Patrick. Patrick?

David Gitlin:

Thanks, Patrick. We delivered strong performance in 2022, and we are targeting another strong year this year as we continue to execute and control the controllables. We continue to see opportunities to use our strong balance sheet to create value for our customers, shareholders and the planet for future generations to come. With that, we'll open this up for questions.

Julian Mitchell:

Hi. Good morning. Just wanted to start with maybe start with the first quarter outlook there. So it sounds as if you've got maybe the operating margins firm-wide down perhaps sort of 200 to 300 points or so year-on-year. Just wanted to check if that's the case. And is the bulk of that downdraft really coming in HVAC presumably? And if it is, kind of what's the confidence that you can get back to full year margins in HVAC being flattish given the headwinds in resi for the year?

Julian Mitchell:

That's helpful. And maybe just following up, on the HVAC segment overall for the year. So I think you talked about a flattish margins there that sort of 15% plus in that business, and you've got organic sales guided up about mid-single digit for the year. Maybe just clarify for us what you're expecting there on your residential volumes, perhaps within that guide? And then any sort of weighting on things like the productivity savings, just trying to understand where you get the offset in that HVAC margin, if there's a mix headwind and a TCC margin headwind as well?

Patrick Goris:

Yes. On the margins, Julian, we're comfortable with the margin outlook for HVAC in 2023 of about 15%. Dave mentioned about aftermarket. But I did also mention that price cost is expected to be a tailwind for us of $200 million in the year. That dials in some benefits from what we call deflation. A lot of that sits in the HVAC segment. In addition, I mentioned that we're focused on delivering another $300 million of productivity in 2023. We did the same in '22. And of course, given the size of the HVAC segment, a sizable size, of course, is in that segment as well. So we're comfortable with those 15% margins for the full year.

Operator:

Thank you. One moment please for our next question. And our next question coming from the line of Joe Ritchie with Goldman Sachs. Your line is open.

Patrick Goris:

Yes. The short of it is, and it's mostly in HVAC is the first quarter of 2022, we were left in at some really attractive pricing from a steel point of view, and the year-over-year impact is actually a net negative for us. As I mentioned to Julian just earlier, we are dialing in a benefit from deflation that kicks in the second quarter of 2023. In Q1, we still have a headwind, particularly in steel that affects HVAC.

Patrick Goris:

Yes. If I look at the margin performance in Fire & Security, it was up year-over-year in the fourth quarter by 60 basis points. And the way you can think about it is the absence of Chubb is a tailwind to margins. Volume mix and price/cost was a slight headwind to margins. The net was still a margin expansion of 60 basis points. The margins were lower than what we expected. One, supply input costs and higher supply chain costs than what we expected; two, inventories not aligned with where the business is today. And that has some operational impacts, which we experienced in the fourth quarter of the year. And so we have to work through that. And that is what we expect for 2023. And therefore, we expect with minimal volume growth in ’23 to have margin expansion in Fire & Security. The revenue growth we expect in Fire & Security in '23 is mostly price driven, less volume driven.

Operator:

And our next question coming from the line of Jeff Sprague with Vertical Research Partners. Your line is open.

David Gitlin:

Yes, Jeff, we had a target of getting field inventories at the end of last year, flat to where they ended '21. And they were actually a bit higher than we had targeted, not excessively higher, but just I would say, a bit higher. And we do think that there will be destocking as we go through the year. Obviously, when you're in the first quarter, there's some level of stocking that happens in anticipation of the season. So we think the destock happens throughout the year. When we -- we actually -- it's kind of interesting. When we talk to our channel partners, there are still significant demand out there. There's what happened in Florida where we have some of our homebuilders continuously pushing on us for more products. So we have a bit of a mix taking place where there's demand for the new product. Obviously, everything in the South that we're shipping is the new product, and we started that early. They're starting to ramp in the north to get the new SEER units. There's still demand from some of our key homebuilder customers, but we do recognize that there is some still destocking that's going to take place through the course of the year. So we'll have to see how the year plays out. You know that this business can swing based on a variety of factors, relatively quickly. So we think we've been conservative in how we've handicapped the year, and then we'll have to see how these next couple of quarters play out.

David Gitlin:

Yes. I will tell you, we were in Japan and very pleased with the progress that safe and the team are making on TCC. We've said that we expect margins -- EBIT ROS margins to be in the mid-teens as we get out five years after the acquisition. We are certainly on track for that. We had said $100 million of synergies. I have a lot of confidence we're going to beat that number. And if you look -- if you kind of get rid of all the noise of getting -- eliminating the minority income that we were picking up and the integration costs. Right now, you're in the low teens. That's just a stand-alone business. So, that team is making a lot of progress. Technology, best-in-class. We talked about the rotary technology, the inverter technology. We're using that technology to penetrate the attractive residential heating space in Europe. There could be applications in North America, our prospects in China with TCC look extremely strong despite some of the macro uncertainty in China. Japan, we've had to come in aggressive on pricing rightfully so, and we've been doing that. And there's a lot of cost takeout opportunities, especially in supply chain, where we see the team really aggressive supply chain synergies between the two companies. So very pleased so far.

David Gitlin:

Yes, aggressive. I mean, yes, good point. Yes.

Operator:

And our next question coming from the line of Nigel Coe with Wolfe Research. Your line is open.

Patrick Goris:

Nigel, the ballpark number you have there, it's in the ballpark, $500 million, $600 million of carryover in pricing. Most of that -- in total pricing, most of that is carryover. We have some new price increases that we've announced as well. We've dialed of course, some of that in, and we're looking at additional price increases as well.

Nigel Coe:

And normally, if you announce a price increase of 6%, you capture maybe 2% when we need net of normal promotions and I made some discounts and volume discounts. That hasn't been the case in the last couple of years. But I'm just curious what sort of capture rate do you expect going forward? But maybe if you could just also break down as well how you see the Refrigeration segment in 2023? There's a lot of moving parts there. Just curious with the ease comps you've seen in the back half of the year in both commercial and transport, how you see the full year playing out within that segment?

Patrick Goris:

And Nigel, couple of comments on refrigeration. Think of Q1 organic sales being down mid to high single digits, Q2 down mid-single digits and then basically returning to mid-single-digit growth in the second half of the year. And that is all related to what Dave, just mentioned earlier about container. Four quarters that we assume to be down, two more to go. Same with commercial refrigeration, and we see continued strong performance in particularly North America Truck and Trailer. And so that is how we've dialed in the plan for refrigeration, which we expect to be flattish from a full year perspective on an organic sales basis.

Operator:

And our next question coming from the line of Josh Pokrzywinski with Morgan Stanley. Your line is open.

David Gitlin:

We have a huge ways to go, Josh. We -- what happened is we came out of the gate, we had good productivity than we saw over the last year, a lot of the supply chain headwinds that were fairly unexpected that really hurt a lot of industries. So now as we're starting to come out of that, I think we see significant opportunity. What Patrick said effectively was $300 million of productivity plus 200 of price/cost positive for a total of five between those two. When we look at it, we think logistics is a big opportunity for us this year. We're starting to see rates come back to more traditional levels for containers coming from Shanghai to L.A. We see global logistics. We paid a lot in high logistics costs, in spot price for electronics, our spot price for electronics are significantly down month-over-month, quarter-over-quarter. We expect that to continue. We think there's a great opportunity with our Tier 1 suppliers. We had been very aggressive on Carrier Alliance, and then we really had to slow some of that activity because our focus became getting parts to feed the lines in the shops. And now we got to get back into our focus on having partners that we can rely on for the long term that share our desire for joint growth. So we look at it. We see opportunities for productivity in the factories. Continued takeout of G&A. You'll recall that we used to be 9.5% as a percent of sales. We got down to 7% at the end of last year. More transfers of work to low-cost places like Europe going to Eastern Europe. And all things direct material, which is a big percentage of our direct buy. So we got away from calling a Carrier 700. We said 2% to 3% productivity forever. And we think we're in early phases of what are significant opportunities for cost takeout.

Joshua Pokrzywinski:

Got it. That's helpful. I appreciate that net number, Patrick. And then just shifting gears over to some of the stimulus out there. How do you guys think about some of the opportunities for IRA, whether residential or commercial this year?

Operator:

And our next question coming from the line of Brett Linzey with Mizuho Group. Your line is now open.

Patrick Goris :

The container business is a really attractive business within refrigeration. Our enormous installed base also enables us to go after significant aftermarket given the 1 million-plus units that are out there that we're trying to connect and drive aftermarket revenue. Commercial refrigeration today has lower operating margins, and so they're below 10%. They're probably close to 5% in to 10%. But we've taken out a lot of costs. And so as we focus on productivity irrespective of volume growth, once volume starts to turn, we expect there to be attractive incremental in commercial refrigeration. So underlying profitability from an operating margin significantly lower than the overall average of the segment. But once volumes kick back in, given the work that we have done, we would expect to see attractive incrementals there.

David Gitlin :

Look, our priorities really center around our shift to Carrier 2.0, which is really around aftermarket enabling technologies, digital capabilities. So we have been very purposeful in our plan setting to make sure that we have plenty of investment set aside for a bound for Lynx for connecting our devices out in the field. That's been our priority. And then all things technical differentiation when it comes to more energy-efficient chillers and more energy-efficient products, electrification in both heat pumps and in our truck trailer business. So as we do our waterline process, there are some investments that we consider sacred because it's either part of our conscious strategic shift or because of differentiation for key product lines.

Operator:

And our next question coming from the line of Deane Dray with RBC. Your line is open.

Patrick Goris :

Well, we expect $1.9 billion in 2023 for free cash flow, which actually does include a tailwind from reduced inventories. And so, we know we ended the year inventories than we intended in the beginning of the year. Frankly, it's the main reason why we missed our $1.65 billion target for the year. So, we ended the year, I think it's fair to say with a few hundred million dollars of more inventory than we expected. I would not call all of that buffer inventory. Some of that, frankly, is related to the length of the supply chain and the lead times that are still not coming back to what we are used to. And so we're assuming that we'll see some continued improvement there in 2023, which will lead to about $100 million or so tailwind from lower inventories in '23 versus where we ended the year in '22.

David Gitlin :

Yes. Look, we -- in our residential business, we went through something like six significant price increases in the span of 18 months. So I think that what we've seen over the last couple of years is an unusual pace of price increases that we've not only announced that we've also realized. We do think that as you head into '23 and to '24, you get back to more traditional levels. But in the first half of the year, we've realized that inflation is not over. And we've had to announce further price increases in January that perhaps even a couple of months ago that we might not have anticipated because the inflationary pressures continue to be there. So it's not equal in all segments. We think we'll probably get less pricing in the container segment right now than we will in commercial, HVAC, light commercial, residential to some extent. Parts of our Fire & Security business, we probably across our brands have implemented over the last couple of weeks, 20 different price increases depending on the segment within Fire & Security and the brand. So we'll watch it, but we've -- in the first half of the year, we believe that the inflationary pressures are still there, and we need to price accordingly.

Operator:

And our next question coming from the line of Steve Tusa with JPMorgan. Your line is open.

David Gitlin :

Yes. I'll start, Steve, with light commercial. Light commercial has just been extremely strong. We saw orders were up in the mid-teens in the fourth quarter. If you look at overall 2022, orders were up 45% And demand is still strong for things like K-12, value retail, fast casual and quick serve restaurants. So -- all trends seem extremely positive. The issue we have continues to be with light commercial keeping up demand, where we're implementing second-line second shift. And our focus is in our customers. The issue we have right now as far as the I can see, is not a demand one in light commercial. On the Transport side, orders were up extremely strong in the fourth quarter in North America, even with us trying to control opening the order book for the second half of '23. North American orders were up 2x, North American Truck Trailer. Europe Truck Trailer was down a bit. I would say mid- to high single digits, I believe. We have, of course, seen orders very light in the container space, which is why we've calibrated that business down, certainly in the first half of the year. But -- what's really encouraging is the North American Truck Trailer piece, the demand remaining very robust there.

David Gitlin :

Well, it's a good question, Steve. Yes, we try to calibrate it what I would say conservatively, now we'll have to see when all is said and done, if it turned out to be conservative, but we put volumes down high single digits for the year with -- when we looked at it, we said new home construction down 20%, 25%. I -- we have a couple of customers in particular that on their earnings call said that they expect to get to flattish for the year. So will the industry be down 20% to 25%, perhaps we have outside share in the industry. So in many respects, we should go the way of the industry. But there's a wide range of outcomes there where could it be flat? Could it be down 30%? Who knows anywhere in that. But again, that's 20%, 25% of our residential business, the new home construction. And then on the market, you've been around this longer than I have, but that can swing very significantly in a short cycle business because it's fundamentally a replacement business. And a few hot weeks in the summer, you're going to see demand really pick up significantly. So we think we calibrated volume correctly there, but we'll have to see how the rest of the first half plays out. Again, tough comps in the first quarter. But even just yesterday, we were doing a review of the resi and demand is -- continues to be there from many of our key customers and some of our issues are just continuing to keep up with that demand.

Operator:

And our last question in queue coming from the line of Gautam Khanna with Cowen. Your line is open.

David Gitlin :

Yes, second half of the year. So we looked at it. We're just now opening our order book for the second half of the year.

David Gitlin :

Now. I think we might have taken on discrete order for Q3 in Q4 for a specific reason. But basically, we only opened our order book now for the second half.

David Gitlin :

Well, I know they're not raw materials, but we do see -- on that piece, we should see some benefit. They've been swinging quite a bit. I know that's not the heart of your question, but we sort of block ourselves on the steel piece, which should be down from last year. Patrick mentioned, we had the hangover from really good pricing in the first quarter of last year on steel. So as we get out of 1Q, we see the benefit of that. Copper and aluminum down from last year. We did see a bit of an increase recently, but we still expect year-over-year benefit. And then what we're going to see with our Tier one’s is, you probably have two categories. You have some that have gotten a fair amount of inflation from us and our peers over the last 12 months that we'll continue to try to push inflation. Then you'll have some that are thinking for the long term and trying to build long-term relationships with us and that we won't get the level of inflation because they will look at trying to take volume from those that continue to push inflation. So for those that really want to be on the journey with us for the long term, they will be the beneficiary volume that we will shift from those that are continuing to push inflation our way. So net-net, it is our job, and I think our opportunity to really start to make a very conscious shift of our supply chain partners. And we were on that path. We had to pause it a little bit because of some of the supply chain challenges we saw last year. But I can tell you for sure, we're going to get back on that path in a very aggressive way here as we go into '23.

David Gitlin :

Sticky. Yes. We have very high confidence that, that 10% to 15% for the new units will be sticky. It's been sticky thus far. We think it will remain sticky as we go through '23 and beyond. And look, we've all taken slightly different approaches. We took the approach for the unit to do more redesign rather than less and look for more differentiation, and we've done that. We've driven more of a copper to aluminum shift. We've driven a microchannel heat exchanger. We've done a lot of aesthetic and fit and spacing and size. So we've done a lot to make that our new SEER unit, a very, very attractive and differentiated -- And one of the big things will be some of the control features as well. So we think that because of the value we're offering and because of what the customer is getting, we think the pricing will be sticky.

Operator:

I will now turn the call back over to management for any closing remarks.

Operator:

Ladies and gentlemen, that concludes our conference for today. Thank you for your participation. You may now disconnect.

Operator:

Good morning, and welcome to Carrier's Third Quarter 2022 Earnings Conference Call. I would like to introduce your host for today's conference, Sam Pearlstein, Vice President of Investor Relations. Please go ahead, sir.

David Gitlin:

Thank you, Sam, and good morning, everyone. Let me start by saying how proud I am of this tremendous carrier team, which continues to deliver strong and consistent results. Turning to Slide 2 for a summary of our Q3 results. We delivered 8% organic sales growth on the heels of continued traction on pricing. Total company organic orders were up 3% in the quarter, and our backlog is up about 10% year-over-year. Importantly, we continue to deliver double-digit aftermarket organic growth. Adjusted operating profit was slightly better than we expected, and price cost continues to be positive. We are tracking to about $300 million of gross productivity, about $100 million of which will come from G&A reductions. We generated strong free cash flow in the quarter of approximately $700 million. Supply chains are generally improving. We have increased dual sourcing for critical components and supplier on-time delivery has meaningfully improved. The improvements, though study have been later in the year than planned, thus impacting our full year free cash flow forecast. As supply chain and working capital improve, we expect to return to 100% free cash flow conversion. We successfully closed the Toshiba Carrier acquisition during the quarter, and we are making important progress on integration and are starting to realize synergies. We still have plenty of capacity for additional value-add capital deployment as our balance sheet remains very solid with approximately $3 billion of cash and no debt maturities until 2025. Earlier this week, our Board approved a $2 billion share repurchase authorization, which is on top of the $300 million remaining on the previous authorization. We are confident in our strategy and long-term prospects and remain committed to delivering shareholder value through disciplined capital allocation, including organic growth investments, M&A, dividends and share buybacks. Moving to Slide 3. I want to again emphasize our commitment to the value creation framework that we presented at our Investor Day earlier this year. Our team remains laser-focused on these four principles of driving above-market organic growth, expanding margins, delivering strong free cash flow and disciplined capital allocation. We have a thorough goal alignment process that cascades our critical focus areas to each of our 55,000 team members individual performance goals. We are making significant progress on our priorities, as you can see on Slide 4. Secular trends continue to drive sticky customer demand and one theme that certainly fits that definition is sustainability. Our customers in both the commercial and residential verticals are motivated to achieve their ESG targets and reduce their carbon footprint and energy bills with government mandates, policies and incentives further fueling this demand. A key sustainability enabler is the shift to electrification in buildings and cold chain distribution. Starting with buildings. In the U.S., the rapid transition to heat pumps will be further accelerated by the recently passed Inflation Reduction Act. Today, over 30% of our residential split sales include heat pumps. In Q3, our residential heat pump shipments were up over 30% compared to last year. We established our Tennessee facility as our North American heat pump center of excellence and are expanding customer financing offerings through our new EcoHome initiative. In addition to heat pumps, we continue to lead through innovation with energy-efficient solutions. The cutover to our differentiated new 2023 SEER 2 compliant units has gone well, and our resi HVAC team has done a great job managing the production and inventory transition. We recently hosted 8,000 Carrier and Bryant dealers in Las Vegas and our industry-leading dealer network is energized about the product lineup. Our new outdoor indoor and outdoor units are complete redesign differentiated in performance, size and weight. In addition, a 45% SKU reduction provides flexibility and operational efficiencies to the channel and to us. We are driving aggressive cost reduction actions and are pricing the new more efficient units, at least a 10% to 15% premium over previous generation products. In Europe, where we are the leader in commercial heat pumps, Q2 and Q3 heat pump orders were up 30%, and we anticipate the same magnitude for the full year. And the TCC acquisition enables us to accelerate product development in the heat pump segment and become a more significant player in the fast-growing Asia VRF heat pump market. We also continue to benefit from the shift to electrification in our truck trailer business with strong traction on our innovative vector equal units. Customers now operate these units in 11 countries, and our market leadership in this segment is being recognized. Just recently, vector equal earned the top Product of the Year Award from the Environment and Energy Leader Awards program. In addition to sustainability, we continue to lean into the opportunity presented by the increased focus on health and wellness. We are proud to partner with our friend, Russell Wilson as we work with large-scale customers to provide them with safe and healthy indoor environments. Demand for our innovative solution continues to build. In Q3, healthy building orders were up over 55% compared to last year, and our pipeline increased to about $900 million. Within the K-12 vertical, Q3 orders were up 20% and we are up about 35% year-to-date. Our intense focus on digitalization goal for many reasons, but at its core, we are transitioning carrier from an equipment-centric provider to a solutions company with more aftermarket and recurring revenues. The opportunity to use digital offerings to embed ourselves in our customers' ecosystem to help them achieve specific outcomes is tremendous. Our Abound and link digital platform sends and collect data and interact with key building and cold chain system technologies to provide customers with the outcomes they desire. Abound not only provides healthy and sustainable solutions, we have also introduced new applications, including Abound predictive insights that reduce the total cost of asset ownership by enabling smarter, more predictive maintenance to optimize equipment health and performance. My leadership team and I are interacting directly with scale customers, and I can tell you that their willingness to make long-term commitments to Carrier is encouraging. Recent Abound wins include a nationwide drugstore chain that will add an additional 2,500 stores to our growing portfolio of managed multisite retail locations and an installation of more than 100 commercial office buildings for a key scale customer. Our efforts here are being recognized as the Abound EcoEnergy has received 5 awards in 2022 for innovation, impact and customer service excellence and its ability to deliver positive outcomes. Growing Abound sales will generate higher margin, more predictable recurring revenues and a stronger pull for additional equipment sales and services. And the same holds true for Lynx and our cold chain initiatives. We continue to add capabilities to our Lynx platform focused on providing our customers with greater flexibility, visibility and intelligence across the cold chain. Our advanced refer equipment insights and analytic models provide early and automated detection of refrigerant loss, enabling our customers to improve their asset uptime and operational performance and to protect the invaluable refrigerated cargo. In our North American truck trailer business, Q3 saw a more than 60%, 60% year-over-year increase in service revenues driven by thousands of new Lynx subscriptions. We remain on track for 100,000 new Lynx subscriptions by year-end. Our traction on solution selling driving more recurring revenues is reflected in our continued aftermarket performance, as you can see on Slide 5. Aftermarket was up double digits organically in the third quarter, and we continue to expect to realize over $7 billion in revenue by 2026. Connected devices are a fundamental enabler. We remain on track for about 20,000 connected chillers, our attachment rate was 40% in the third quarter, and we expect to have 70,000 chillers under BluEdge contracts by year-end. We are also expanding our parts sales enabled by our Breeze platform where we onboarded two new national accounts. Our aftermarket playbook is deeply embedded in our DNA, and we are seeing the results quarter-over-quarter. Lastly, on Slide 6. We continue to be confident in our ability to drive shareholder value even in the face of economic uncertainty by staying true to our proven strategy. We have consistently exceeded our expectations, and we will utilize that same playbook in 2023 and beyond, driving strong and recurring growth through differentiated solutions that address secular trends and increased aftermarket opportunities, eliminating waste and driving tenacious cost reduction and remaining disciplined in our capital allocation to accelerate growth and return capital to shareholders. As we close out Q4 and look ahead to 2023, we will control the controllables by doubling down on this proven playbook. I am deeply confident in the Carrier's team ability to drive continued strong results despite challenges that may be thrown our way. With that, let me turn it over to Patrick. Patrick?

David Gitlin:

Thanks, Patrick. We have delivered very solid performance year-to-date and remain confident in our ability to close out another strong year. Demand for our innovative products remains healthy, and I'm excited for the opportunities that we have in front of us. With that, we'll open this up for questions.

Jeffrey Sprague:

Dave, now that Toshiba is completely in the wheelhouse, I just wonder if you could give us a little bit more color on kind of the forward look into kind of '23 and what you think you can do with the margins there and kind of what the restructuring plan looks like?

Jeffrey Sprague:

And just on the resi side of the equation. I assume it's kind of in your guidance, but it sounds like we should be expecting some absorption pressure in Q4 as you work down inventories. But also just curious maybe the apparent mismatch between backlog being very extended, but maybe inventories being seasonally higher than you'd like. Is that backlog now really kind of the new SEER stuff and we should think about that being delivered in 2023?

Patrick Goris:

Jeff, on the absorption, yes, there is a little bit of a headwind there. And I'd say that extends to some of the other segments as well. We just want to make sure that we exit the year with appropriate levels of inventory. So in some of our facilities, we'll take a little bit more downtime than we expected just a couple of months ago.

Nigel Coe:

Let's talk about residential. So we're seeing some pretty divergent trends between heat pumps and AC units, and I'm guessing that will continue into '23, '24 and beyond. Some of your competitors have weaker positions in heat pumps. So you've got a very strong position. So I'm just wondering, are you seeing any share -- shifts as this dynamic plays out?

Nigel Coe:

And then, Patrick, you mentioned some absorption issues as you looked at inventory in the channel. Just -- but when we take a step back and think about the new 15 SEER units going into the South, is there a learning curve to think about for those units as well? I mean, obviously, you manufacture 15 SEER for a long time, but as you put the new incentive, is there a learning curve impact there as well?

Operator:

And our next question will come from Julian Mitchell from Barclays. Your line is open.

Patrick Goris:

Yes. Nigel -- sorry, Julian Patrick here. You're right. For Q4, we expect organic growth to be high single digits. A little bit down from what we reported in Q3 for our organic growth. In terms of volumes, versus price in Q4. Again, we expect volume to be about flattish. So most of the organic sales growth driven by price. And actually, we do expect to have some volume growth in HVAC in the fourth quarter of the year, very modest.

Patrick Goris:

Generally, we would expect to have seen continued growth in commercial, in light commercial 2 businesses that are doing really well with strong backlog. We would expect again to have volume within resi to be flat to slightly down.

David Gitlin:

Yes, Julian, it's kind of a mixed bag for us in Europe. And first, I just mentioned for context, it's about 20% of our total sales. You'll recall when we had Chubb and before Toshiba was closer to 27%. So our exposure to Europe is down from what it was a year ago. Having said that, we have been pleased with the orders in key parts of our business. Commercial HVAC, fire and security have done quite well on orders in Europe. The things we watch, as you said, is really on the refrigeration side in both European truck trailer and CCR. The European truck trailer, I think that -- our sense is, as of right now, our lead times have increased a bit because of supply chain. So our customers are pretty well booked for the coming months. So we're not as concerned right now about the orders trends because of the significant backlog as we look out some months on ETT. But of course, that's something we have to keep an eye on. Clearly, the CCR piece is down. Some of our customers there are surely affected by some of the energy prices. So that was down in part because of the market, I think, in part because we are going to great lengths to improve our margins. So there's probably a bit of a mix in there, but Too early to say that's a trend, but there are a couple of watch areas for sure there.

Deane Dray:

Can we start with the healthy building orders up 55%. That's pretty impressive. And frankly, we've been waiting for this type of surge post-COVID. Was there a particular driver here where you saw these orders come through? Is there any of the government funding, adding a boost? But any color would be helpful.

Deane Dray:

And then a follow-up question on the chiller attachment rate of 40%. What's your expectations? Is that -- you would expect, given the kind of payback that attachment rate would be higher at this stage, maybe it's still early. But what are the reasons that customers are not giving you that order at the time of sale?

Deane Dray:

At 40%.

Operator:

And our next question will come from Joe Ritchie from Goldman Sachs. Your line is open.

Patrick Goris:

Yes, Joe. The price growth impact to margins in the quarter was unfavorable 30 basis points. But from a dollar perspective, it was a favorable thing, give or take, about $50 million in Q3 alone. With respect to carryover based on prices that we have already implemented, we would expect carryover next year to be several hundred million dollars. At the same time, I'll have to say though that we would also expect some carryover inflation next year, especially inflation related to purchases where we have material pricing formulas. There is a little bit of a lag there. So the net impact to the P&L, the price cost called for next year will be lower than just a few hundred million dollars of good news. Of course, we continue to target price cost neutral at worst. And I'll also say that for next year, of course, what we're looking forward to is a potential good impact from commodity cost tailwinds.

David Gitlin:

Well, let me tell you what we're seeing, Joe, is that you mentioned the 7 quarters of double-digit orders growth. And the nice thing is that it's across the globe. North American was up something like 20%. China was up double digits. Asia-Pacific outside of China was up close to 20%. Europe was up double digits. So it's pretty broad-based. Certain verticals do better than others, but K-12, health care, data centers, some of the industrial areas, especially even in China, where we pivoted from property to industrial, very purposefully there. They continue to be quite positive. So we're quite well booked for next year in commercial HVAC, where our backlog is up 30% year-over-year. Healthy buildings is strong, as we said, the shift to sustainability and the focus there is strong. So -- and the other thing I would mention is that ABI, as you know, Joe, is a nice leading indicator. And that's been above 50% now for 20 months straight, toggles between 52%, 53%, 54%, but for it to be above 50% for 20 months in a row, is encouraging. And then we have a lot of investments around Abound that's going to create a lot of pull for long-term sticky revenues, but also some of our products. So I would tell you on see HVAC and of course, the same is true for light commercial encouraging trends.

Gustavo Gonzalez:

This is actually Gustavo Gonzalez on for Josh. Just sort of looking at the various pieces of stimulus into next year. How are you sort of thinking about that? And how much do you think that sort of adds to sort of the demand pipeline or even addressable market for 2023?

Operator:

Our next question will come from Tommy Moll from Stephens Bank. Your line is open.

Patrick Goris:

Yes, Tommy. So let me start by talking about productivity for this year. We started out by saying that we would target $300 million in productivity, and that remains our target for the year. And frankly, we're on a path to achieve that for the full year. Now in case of a potential recession, a couple of things. One is -- we continue to have tremendous opportunity to take cost out of our system, whether it's our factory footprint, whether this is from a sourcing point of view, we still have way too many vendors that we intend to consolidate over time or G&A opportunity. In addition, I will say that what we've been struggling with the last year or 1.5 years is tremendous inefficiencies in our factories, shortages of parts, causing inefficient manufacturing operations, expedited freight, logistics, wherever we look, we probably have significant pockets where we are less efficient now than we were two years ago or maybe even three years ago. So if there would be a downturn, not only would we expect to continue to go after cost that we see today, we would expect to get back to much higher levels of efficiency in some of our facilities. And then, of course, what we have not talked about, which is the whole price/cost equation. We expect -- we -- of course, we see important input costs come down. We don't see a significant impact on this year just because of our hedged or our lock positions. But clearly, in an environment where we might see a revenue decline. We would expect commodity input costs to further go down, and we would expect to benefit from that as we've been very clear that we would have no intention of giving up price.

Patrick Goris:

The way you can think about it, Tommy, is from a capital deployment priority point of view, very clear and no change. Funding organic growth in organic, for example, what we've done with TCC, a growing and sustainable dividend and then share repurchases. You mentioned $1.4 billion of free cash this year, so we're counting on a big last quarter of the year that is not unheard of. And as of today, we have $3 billion in cash. And all in, we expect to end the year with about $3.3 billion in cash. In terms of the new authorization. So in addition to the -- what's remaining of the prior authorization, we have about $2.3 billion left for share repurchases. Think about that authorization taking us through all of 2023 and into 2024. And the way we're thinking about this, obviously, is depending on opportunities for M&A or what the share price does or, of course, the general macro outlook, we'll either lean in more or we'll pull back a little bit. We have plenty of flexibility there.

Steve Tusa:

Just on the kind of the market call for next year, so you mentioned new housing being down and I guess you didn't really touch on

Steve Tusa:

Yes. Got it. Yes. So that's kind of like looks pretty likely given what we're seeing in the data, right? But you didn't say that, True. What should

Steve Tusa:

Well, I think new housing is the obvious one. It's the debate is really around the replacement market. What's kind of the feedback you're hearing from the channel on how people feel about the replacement side of that market for next year? What's kind of the latest and greatest there?

Steve Tusa:

And then just on like commercial, it looks like Lynx bounced back a little bit in their production, but we're hearing the train is now having materially extended lead times. Where is -- I assume you guys feel like you're taking market share there. And is are we right that there's still some choppiness in that supply chain, perhaps or others? You guys look like you're kind of scaling through that unlike commercial.

Steve Tusa:

Sorry, one last quick one. Just on this -- the transport refrigeration stuff. All in, what's kind of the latest and greatest view on that? Obviously, the orders are very strong in North America, but there's perhaps some timing around opening up those order books. Europe looks a little weaker. What's the ACT has it up next year, but they cut their number, some stuff moving around there? What's the latest on your market view for that one into next year, globally?

Operator:

And we'll take our last question from Gautam Khanna from Cowen. Your line is open.

David Gitlin:

Well, let me start with the latter and then turn it over to Patrick for the former. Look, I would say for resi, but more broadly for Carrier. I think one of the big targets that we have for ourselves for next year is to maintain the pricing and we're going to have to keep an eye on commodities, but that should be copper, steel and aluminum that should be coming down for next year. So it's a little bit too early to say, but that might be -- that spread could be a positive story for us as we go into next year, not only for resi, but more globally. Patrick mentioned that we have some Tier 1 carryover cost increases that we have to contend with from some of our suppliers. And then our job through Carrier Alliance is to manage those suppliers, and we'll either have suppliers that support us on our journey or they don't. And those that don't, we're going to have to deal with aggressively. And those that do will lean into and give them more business. So that's our job in terms of execution. But commodities, I think, will certainly be down next year, and we have to maintain price. But in the middle of all of that is you're going to get a mix up from a number of these changes that we're not only seeing in resi, but you're also seeing, as you look at things like the shift to electrification in our transport business as well. Patrick, do you want to hit the first part of Gautam's questions?

David Gitlin:

Okay. Well, listen, I just want to close by saying thanks to all of you on the call, and thanks to the Carrier team. If you look at things over the last couple of years, this team has gone through the same kind of macro challenges all of our peers have gone through with COVID supply chain challenges. But I can tell you through a person that our 55,000 people come in every day determined to be best in class in everything we do and we're seeing it in our results. And I know there's certain folks have anxiety as they look at '23. We have optimism because of this great team. So thank you, everyone. And of course, Sam is available.

Operator:

Good morning, and welcome to Carrier's Second Quarter 2022 Earnings Conference Call. This call is being carried live on the Internet, and there is a presentation available to download from Carrier's website at ir.carrier.com. I would like to now introduce your host for today's conference, Sam Pearlstein, Vice President, Investor Relations. Please go ahead, sir.

David Gitlin:

Thank you, Sam, and good morning, everyone. I'd like to start by saying how proud I am of the Carrier’s team ability to deliver strong results amidst the current backdrop of inflation, continued supply chain challenges and COVID lockdowns overseas. Our team's hard work, fueled by our high-performance culture, resulted in another quarter of solid organic sales and adjusted operating profit growth, capping a strong first half and enabling us to raise our full year adjusted EPS guidance. Looking specifically at our Q2 results on slide two, we delivered 7% organic sales growth, expanded operating margins by 130 basis points and increased adjusted operating profit by 4% year-over-year despite the Chubb divestiture. Price/cost was positive in the quarter, and we now expect to be price/cost positive for the year. Our backlog is up 20% compared to last year. Aftermarket performed particularly well and was up double digits. Free cash flow improved meaningfully compared to last quarter, but was the use of cash. Turning to slide three, the value creation framework that we outlined at our Investor Day has not changed, driving above-market organic growth, expanding margins, delivering strong free cash flow and disciplined capital allocation. We recognize that there are concerns about slowing economies. In such times, we do not need a new playbook. We doubled down on the playbook that we have. We are focused on controlling the controllables, and our track record demonstrates that we execute in the face of challenges. We are playing offense, investing in growth, particularly digitally enabled aftermarket solutions. We have effectively driven price and aggressively driven cost out of the system, and our strong balance sheet provides us with plenty of flexibility for value-added capital deployment, including investments that will benefit from the compelling multiyear secular trends of healthy and sustainable environment as you see on slide four. Indoor air quality is critical to our health, safety and cognitive performance. Studies show that improved ventilation and filtration reduce the spread of microscopic particulates including COVID, by up to 80%. But IAQ does more than prevent the spread of airborne illnesses. 8% of children suffer from asthma and improved ventilation in schools reduces their symptoms. Students also performed better with improved indoor air quality, 60% of K-12 classrooms have inadequate ventilation today. Studies show that cognitive performance improves by 2x, when optimizing CO2 and VOC levels. Proper filtration systems are equally important and can prevent harmful outside air, whether from forest fires or pollution, from entering the classroom or the home. IAQ is no longer a nice-to-have. It's critical to our health and safety and our ability to perform. We are responding to the challenge. K-12 orders were up over 35% in the first half of the year. In Q2, we saw a 20% year-over-year increase in healthy building orders, and the pipeline remains at over $800 million. Some key wins include a new US theme park featuring air handling units, antimicrobial coating and UV light technology at an industrial manufacturing facility upgrade in China with air handling units and HEPA filtration. Carrier also won the opportunity to partner with a large school district in North Carolina to provide holistic HVAC solutions for three new schools that were prioritized into air quality. Customers not only want healthy air environments in their schools, office buildings and restaurants, but also in their homes. And our diversified portfolio offers unique solutions. For example, our Kidde business recently introduced a series of smart, healthy and connected products that includes the industry's first integrated smoke, carbon monoxide and indoor air quality detectors. We are also excited about our recent Healthy Homes partnership with Procter & Gamble. We will start by educating our respective consumers on the benefits of healthy homes with a vision towards joint marketing and promotion activities in the future. On sustainability, the last nine years rank among the 10 warmest years on record. Recently, we saw record temperatures in the UK and Germany, where less than 5% of homes have air conditioning. Demand for AC is increasing in those countries and we are poised to support this demand in a sustainable manner. Addressing increased demand for air conditioning with sustainable solutions is critical to help reduce emissions and fight climate change. Therefore, we remain committed to providing innovative energy-efficient solutions using low GWP refrigerants and coupling them with digital capabilities to optimize asset utilization and energy efficiency. A proof point of our progress on differentiated solutions is in our North American light commercial business, where our rooftop units will now feature our innovative EcoBlue technology. This technology improves performance and efficiency, while decreasing installation and maintenance costs through our exclusive patented beltless direct drive vein axial fan system, an industry first for rooftop units. Our units equipped with EcoBlue are up to 40% more energy efficient compared to the industry's traditional belt drive fans in a similar footprint, a real game changer. It's the same with heating, where various factors are driving an accelerated shift away from fossil fuels and toward heat pump solutions. This shift presents a significant opportunity and we start from a position of strength. We have the market-leading position in European commercial heat pumps, and are the leading player in residential and light commercial heat pumps in North America with over 30% of our residential split today comprising heat pumps. We are also investing in effective and low-temperature heat pump solutions. We have successfully completed all of the requirements for the Department of Energy's residential cold climate heat pump challenge, where we validated a coefficient of performance higher than 2.1 at an ambient temperature of 5 degrees Fahrenheit, and we are now commercializing that solution for market introduction. Including the heat pump revenues of Toshiba Carrier, an acquisition that we expect to close in early August, we will have about $2 billion of annual heat pump revenues globally and we are confident that the combination of Toshiba Carrier, Giwee, and our Riello business in Italy will enable us to grow in the European residential heat pump market with compelling product offerings. We see the same shift to electrification in our transport refrigeration business with demand for our all-electric vector equal units steadily increasing. Dawson Group, along with many other transport companies, added Carrier Transicold Vector eco units to their fleet to be more efficient and sustainable. We are expanding our market leadership position in this space. Regarding digitalization, we continue to enhance our Abound and Lynx platforms to further differentiate our life cycle solution offerings. Abound continues to gain traction in verticals ranging from commercial office and university buildings to data centers to national retailers with our focus remaining on providing scale customers with the solutions that they desire. Our Advanced Lynx Digital platform aimed at significantly improving the cold chain through enhanced visibility and increased connectivity received a silver ranking from the Edison Awards for excellence in supply chain innovation. Like Abound, we are adding new features to Lynx. Our recent Lynx fleet rollout incorporates customer feedback and provides key alerts and metrics around fuel and battery levels and asset run hours. These notifications shown in a summary dashboard, helped to minimize unit downtime and low loss, ultimately reducing our customers' operational costs. We remain on track to have 100,000 Lynx subscriptions by the end of this year. Another critical growth driver is higher-margin aftermarket and recurring revenues, which you see on slide five. Aftermarket has been up double-digits through the first half of the year, and we're on track for another year of double-digit growth. All of our three segments saw double-digit aftermarket growth in Q2. Commercial HVAC is now up to over 15,000 connected chillers, putting us ahead of schedule for 20,000 connected chillers this year. We also remain on track for 70,000 chillers under BluEdge LTAs by the end of this year. In residential and light commercial, the team continues to see expanded adoption of the Breeze platform by new national account customers to playbook is working. Before I turn it over to Patrick, a bit more color on the Toshiba Carrier acquisition on slide six. TCC's technology positions us well to accelerate the VRF international light commercial and heat pump opportunities. TCC's pioneering inverter technology, coupled with its rotary compressors allow for dynamic and intelligent balancing of air-conditioning demand, thereby providing customers with greater energy efficiency, longer life and quieter system operation. We will deploy our multi-brand, multichannel strategy to further penetrate critical markets. And our complementary global footprints, and supply chains give us confidence in achieving run rate synergies of $100 million. We created a new business unit within the HVAC segment, Global Comfort Solutions, with a strong leadership team based in Tokyo. Global Comfort Solutions will include the TCC and Giwee acquisitions, as well as our European Riello business and the light commercial business outside of North America. The team has been working on detailed execution plans, and collectively, we're ready to go. With that, let me turn it over to Patrick. Patrick?

David Gitlin:

Well, thanks, Patrick. We are pleased with our performance through the first half of the year. Our backlog instills confidence in our outlook for the second half, and I am confident in our team's ability to keep driving strong results. With that, we'll open this up for questions.

Joe Ritchie:

Thanks. Good morning, everyone.

Patrick Goris:

Good morning, Joe.

David Gitlin:

Let me start with the latter piece, and then Patrick can discuss the pricing on the first part. Our goal, Joe, is to keep the price increases that we've gotten. You'll recall we came into the year expecting $1 billion of pricing this year, which about $20 billion of sales would have been about 5%. We're now looking at $1.5 billion of price, which is a 7.5% or so realization for the year. And our expectation is that we maintain that price, not just in resi, but across the portfolio. In some parts of the business, we needed more discipline in any case on pricing, like in our commercial refrigeration business where the team has done a nice job. So our expectation is that we certainly retain price as we get into the second half of this year, into next year. And then we'll see about the commodities. If they continue to come down, things like copper, steel and aluminum, that should be some tailwind as we get into next year, but we'll have to see on that piece. But we're pretty well blocked for the second half of this year, but our hope and expectation is that, if they remain low, it would be a bit of a tailwind as we get into 2023.

Joe Ritchie:

Got it. That’s helpful. And then -- and you guys commented that, it sounds like things started to pick up in the June timeframe. Can you maybe just talk a little bit about the trends as you were exiting the quarter? And then as -- obviously, it's still pretty early in 3Q, but as we kind of had started the July timeframe.

Joe Ritchie:

Helpful. Thanks guys.

Patrick Goris:

Thank you.

Julian Mitchell:

Hi, good morning. Maybe just a first question around the orders outlook. So the orders were flattish in Q2 after what had been four or five quarters of extreme strength. So just wondered if the orders development was broadly in line with what you were thinking, how we should think about that orders year-on-year trend in the back half. And I suppose particularly interested in transport refrigeration, where I think the ACT data has been fine. You obviously had a pretty steep decline in orders. So maybe how are you thinking about that in particular as well for the back half on orders?

Julian Mitchell:

That’s helpful Dave. Thank you. And then maybe just a question on the -- we can see what the sort of second half EPS implied in the full year guidance is. Just wonder if there's any points you'd highlight around the sort of split of earnings between the third and fourth quarter? Any dynamic in terms of margin trends year-on-year perhaps between Q3 and Q4 because of price cost, for example.

Julian Mitchell:

Great. Thanks Patrick.

Operator:

Thank you. And our next question comes from the line of Nigel Coe from Wolfe Research. Your question please.

David Gitlin:

Good morning.

Patrick Goris:

Sure. Hi Nigel. The way you can think about this is in our current P&L and our outlook we had back in April, we had about $0.02 for the full year amortization of intangibles related to acquisitions. With the acquisition of TCC, our amortization expense will likely go up by about $100 million. And what's kind of interested is, we already own today economically 60% of the overall interest in Toshiba. So, our amortization expense would go up significantly, including for the part that we already own of Toshiba. We have decided to exclude the amortization related to acquisitions going forward, and so compared to the prior guidance, that is a $0.02 improvement in adjusted EPS. Of course, the impact going forward would be significantly higher because of the large increase in amortization expense that I just mentioned.

David Gitlin:

I think it's a bit of both. We came into the year pretty well-priced. We had to do a bit more to get to the $1 billion. And we've actually announced subsequent price increases as the year has gone along. So we announced a recent price increase for our North American commercial, light commercial HVAC business. Refrigeration both Fire & Security have had to announced price increases during the course of the year. And then I will say that our realization has been a bit higher than we had planned. So I think it's a combination of within your price announced increases plus realization.

Patrick Goris:

Nigel, one with respect to copper, steel, aluminum, clearly, we're seeing the trends there. I think it's too early for us to say that some other components, call it, that we purchased for resi HVAC that we've seen in the end of the cost increases. Obviously, that is something that we're very much negotiating. But I don't -- I would not say that besides steel, copper, aluminum, that were on the downward trend.

Patrick Goris:

Thank you, Nigel.

Operator:

Thank you. And our next question comes from the line of Tommy Moll from Stephens. Your question please.

David Gitlin:

Hi, Tommyy.

Patrick Goris:

Well, Tommy, first of all, with respect to Q2, the margins came in a little bit better than we expected. Of course, the gain helped with that. That was about 80 or so bps. But I will also say that for Q2, we still saw a headwind on price cost from a margin perspective. So price cost positive from a dollar operating profit perspective, but price cost for the HVAC segment was still about 100-point headwind on operating margin in the quarter. For the balance of the year, HVAC margins will, of course, be impacted by the consolidation of TCC. We expect for the full year now the margins of HVAC to be down to be closer to 15% versus 16% prior guide. And including for Q3, we still expect a sizable headwind from price cost on HVAC margins.

David Gitlin:

The direct answer is not really. I mean, we saw orders decline in China, but we wouldn't blame that on the macro, we would blame that on the COVID-related lockdowns. I think if we had to look for one area that came in a little bit lower than we expected, it was in CCR and to some extent, in European truck trailer orders in the quarter. And I would say a couple of months, it's too early to call a trend. But the thing in particular with CCR that we have to watch is, how much is self-induced because of our pricing discipline and how much is market related. And the true answer is we don't know just yet, because this is probably the most aggressive we've been in that company's history. So we'll have to keep an eye on that. But by and large, North America remains strong. Southeast Asia, which we don't talk a lot about, was extremely strong. China was weak, but we expected it. We'll have to see how the rest of 3Q plays out. And again, resi and truck trailer, it wasn't alarming because a lot of that was us managing the order book and inventory levels.

David Gitlin:

Thanks, Tommy.

Operator:

Thank you. One moment of our next question. And our next question comes from the line of Deane Dray from RBC. Your question, please.

David Gitlin:

Hey, Deane. Good morning, Deane.

Deane Dray:

Hey, Dave, that statistic a lot of headlines with the UK on average household only 5% with some form of air conditioning. How prepared is Carrier for this expected ramp in kind of new capacity? And are you seeing any of that demand given the past couple of months?

Deane Dray:

Yes. That’s great to hear. And then the K-12 opportunity, summer is the prime time for construction activity. So if there should be a lot going on right now. Is there -- how does this compare to previous cycles, especially given the indoor air quality mandate. But I just concern that if -- are there -- is there a shortage of construction labor, parts, anything that might hamper what should be some significant installation time in the cycle over the summer.

Deane Dray:

All good to hear. Thank you.

Operator:

Thank you. And our next question comes from the line of Gautam Khanna from Cowen. Your question please.

David Gitlin:

Yes, let me first comment on resi. We've seen -- and I think that the industry has seen an ability to appropriately increase price given all the commodity headwind and retain it. And we think that would continue into next year because what you're going to see next year is a switch over to the 2023 higher SEER units, which is going to come with a 10% to 15% price increase. So, we will have to watch the elasticity curves. I think it's clear to say that we won't continue with the same kind of price rate increases that we've been seeing. I think we've had six increases over the last 18 months or so. And obviously, that will subside, but we do not see today prices declining. In fact, as we get into next year, we'd expect an increase given the SEER shift. But more broadly, I think that all of us have been in a situation with our peers where we've had no choice, but to raise prices. And fortunately, we're in markets where we sell essential products and whether it's life safety equipment or whether it's -- we're transporting critical vaccines or foods to certain parts of the world or whether it's when your air conditioner breaks, when it's really hot outside, you're going to replace it. So, I think we've seen an ability to increase price and retain it, and we do not expect going into next year of price reductions. We'll watch the elasticity curves for sure. But right now, we do not see price decreases.

David Gitlin:

Yes. What we saw at the end of the second quarter was we were waiting on controls and some of our reefer units that had been in inventory for a while, and we saw those get delivered and we were able to release those units to the field. So, that was encouraging. At a more macro level, we have not seen the sustained improvement on the supply chain that we expect to see yet. We're still dealing with chip issues in a significant way, and that contributes to about two-thirds of our problem. We said last quarter that we would redesign 30% of our critical components by the end of last quarter, 50% by the end of the year. We continue to do that, but we continue to see challenges, not just with chips, but things like motors and other suppliers continue to surprise us. And that does cause productivity issues in the factories, and it does cause us to hurt our customers where today, we are sitting on hundreds of millions of overdue to our customers. So we are counting on supply chain improving as we get into really 4Q leading into next year, and we're going to need that to make sure that we hit our cash numbers in the back half. And we also are still looking at logistics. The good news is that spot rates have come down, the bad news is that because of supply chain challenges, we're having to do a bit more airfreight than usual. So we're anticipating improvement as we get into the back half of this year, and I think the team is doing the right things, but it does continue to be a challenge.

David Gitlin:

Thank you.

Steve Tusa:

Hey guys, good morning.

Steve Tusa:

So just on the price cost, can you just give us the absolute price and cost numbers for the second quarter? And then you gave us the price for the year, but what's the cost estimate for the year? And then I have a follow-up.

Steve Tusa:

And then for the year, what are you expecting now on cost, I think it was $1 billion before? What are you expecting now on cost?

Steve Tusa:

Got it, got it.

Steve Tusa:

Right, right. Yeah, that makes sense. And then, Patrick, I think in response to Julian's question, you said the second half would be kind of a 50-50 weighting 3Q, 4Q when it came to EPS. I guess, I'm a little bit surprised because 4Q usually is seasonally weaker, and I just want to make sure I'm doing the math right. That's like $0.55-ish for both quarters.

Steve Tusa:

Okay, that makes a lot more sense. Okay. And then one last one, just for the resi market this year, what's your most -- what's your kind of most up-to-date view on what you expect from the resi market volume-wise for the year?

Steve Tusa:

Okay. Awesome. Thanks for the color. Appreciate it.

Operator:

Thank you. One moment for our next question. And our next question comes from the line of Andrew Obin from Bank of America. Your question, please.

David Gitlin:

Good morning, Andrew.

David Gitlin:

Well, we work with folks, our friends at TI and NXP and Microchip and others. And right now, we are trying to really, for our critical shortages, design around chips that are available. We do know that our partners are building capacity as we get into next year, and that's hopefully going to come on sooner rather than later. I think over time, the CHIPS Act once that goes through, will be beneficial. But for now, it's a fairly tactical exercise around redesigns while we really anxiously anticipate and await the additional capacity coming online next year into 2024.

Patrick Goris:

Actually, Andrew, I think that one of the benefits we may see is with the new regulations. We estimate that over half of the resi market is at the lowest SEER level, with the new regulations in 2023, it means that we think that a little over half of the market will mix up, if you want. Meaning 10% to 15% price increase and from a margin perspective, positive from a margin dollar perspective and at least neutral from a margin percent point of view. And so, we think that may be the biggest driver from a mix shift point of view.

Patrick Goris:

Yes, but we're already in production for those new units, and we're starting to sell them this month.

Patrick Goris:

Thank you, Andrew.

John Walsh:

Hi. Good morning, everyone.

Patrick Goris:

Good morning, John.

Patrick Goris:

Yes. Actually, if you look at Fire & Security, there are two items that we expect to benefit us in the second half of the year. One, organic growth rates are expected to be higher for Fire & Security in the second half of the year versus the first half of the year. And then the second element is price cost. For Fire & Security, you may recall that in Q1, Fire & Security was price cost neutral. We expect price cost to be favorable in the back half of the year -- for the back half of the year. And so we think that a combination of these two will be the main driver of improved margin performance for that segment.

David Gitlin:

Yes, we believe structural, we're trying to the best of our ability avoid surcharges or things that are ephemeral in nature. So, it's structural. It's actual price increases that we intend to sustain. And the second part of the question?

David Gitlin:

Yes, that's something that we've really tried to be much more intelligent about and using -- creating more algorithms, kind of akin to what was what we used to do a bit more on the aerospace side and really look at the elasticity curves more at a part number level. So, I think the team's gotten much better models on pricing on the parts side. And I think that's been an area that we've had a lot of focus and success with.

David Gitlin:

Thanks John.

Vlad Bystricky:

Morning guys. thanks for taking my call.

Vlad Bystricky:

So, maybe just as a follow-up on Fire & Security, obviously, a lot of talk about the chip situation. on the HVAC side. But can you talk about the supply chain and electronics component availability in Fire & Security and whether that's any different than what you're seeing on the HVAC side and how you see that resolving?

Vlad Bystricky:

And that's -- it's good to hear that you have line of sight to some improvement there. I’ll be watching that. I guess just shifting to Toshiba Carrier, obviously, a big deal for you. Can you talk about as you look to close the acquisition in August, what opportunities do you see to do things differently that you couldn't have done under the historical JV construct? And then also any color on the timeline to achieving those $100 million in synergies.

Vladimir Bystricky:

Sounds good. Very exciting. Thank you guys.

David Gitlin:

Okay, well, thank you, everyone, for joining in. While I know it's a busy morning, of course, we and Sam are around for questions. So thank you all.