Q4 2021 Carrier Global Corp Earnings Call
Good morning, and welcome to carriers fourth quarter 2021 earnings Conference call.
This call is being carried live on the Internet and there was a presentation available to download from carriers website at IR Dot carrier Dot com.
I would like to introduce your host for todays conference Sam Pearlstein, Vice President of Investor Relations. Please go ahead Sir.
Thank you and good morning, and welcome to carriers fourth quarter 2021 earnings Conference call with me here today are David <unk>, Chairman and Chief Executive Officer, and Patrick <unk>, Chief Financial Officer, except as otherwise noted the company will be speaking to results from operations, excluding restructuring and other cigna.
African items of a nonrecurring and nonoperational nature, often referred to by management as other significant items. The company reminds listeners that the sales earnings and cash flow expectations and any other forward looking statements provided during the call are subject to risks and <unk>.
Certainties carrier's SEC filings, including forms 10-K, 10-Q, and 8-K provide details on important factors that could cause actual results to differ materially from those anticipated in the forward looking statements. We'll leave time for questions at the end once the call is opened up for questions. We ask that you limit yourself to one question and one follow up to <unk>.
Everyone the opportunity to participate with that I'd like to turn the call over to our chairman and CEO , Dave Gitlin.
You Sam and good morning, everyone before we get into our <unk> results, Let me start on slide two.
On Sunday, we announced that we reached a definitive agreement to acquire toshiba's controlling stake in Toshiba Carrier Corporation, our longstanding HVAC joint venture.
This is an important and compelling deal for us that we believe will create significant value for our customers employees and shareowners by enhancing our position in the fast growing variable refrigerant flow and international light commercial markets.
We established our minority JV with Toshiba and $19 99.
Carriers had distribution responsibility with Toshiba, having design and production responsibility.
Together, we have successfully grown TTC to be a world leader with over $2 billion in sales.
This acquisition will enable us to accelerate growth and profitability in this business by consolidating design production and distribution under one roof, realizing synergies and leveraging our global scale to deliver even more differentiated products and solutions to customers globally beef.
Before we talk more about the strategy behind this deal let me have Patrick quickly discuss the financials Patrick.
You, Dave and good morning.
Under the terms of the agreement we will acquire substantially all of Toshiba's interest in PCC for about $900 million.
As you can see on the slide Toshiba owns about 60% of TCT.
Taking into account direct and indirect ownership structures of TC PCC subsidiaries. So see this economic interest in PCC has fluctuated between 30% and 50% over time.
Toshiba is retaining a 5% interest in PCC or less than a 5% economic interest.
DTC generated 2021 calendar year sales of about $2 1 billion.
And approximately $250 million of EBITDA.
We have been recording equity income associated with the <unk> joint venture and have collected dividend payments as well.
After the transaction closes we will of course, no longer record equity income, but will instead fully consolidate <unk> financial statements.
Adjusting for intercompany sales and for the equity income that we recognize today.
We expect to add about $2 billion to consolidated sales EBITDA of about $160 million and operating profit of approximately $90 million before purchase price adjustments such as intangible amortization.
The $90 million operating profit is a reasonable proxy for the economic EBITDA we are acquiring.
Expected cost synergies of about $100 million will help us increase <unk> EBITDA margins.
This acquisition is aligned with themes you have consistently heard from us prop.
Profitable growth simplification focus and improved free cash flow let.
Let me turn it back to Dave to slide three and the strategic rationale behind the transaction.
Patrick first and foremost we have been consistent in communicating our determination to become a more significant player in the fast growing brs market in.
In 2015, the global via RF market was about half the size of the applied market. Since then via RF is growing at more than two X. The rate of the applied market and we project <unk> to continue to outpace supply growth going forward.
Prs growth as no surprise it is highly efficient electric sustainable modular has lower installation costs and enables individuals zoned controls and segregated billing.
With the acquisition of TTC last year's <unk> acquisition, and our own via RF organic growth. Our consolidated Brs sales will have increased four X on an annualized basis since our spin less than two years ago.
Second as you would expect from Toshiba PCC has highly differentiated technology made possible by its impressive 750 engineers.
It's proprietary inverter technology and its award winning three stage rotary compressor technology provide world class efficiency levels.
Third the Toshiba brand is deeply admired globally and we have signed a long term product license to the Toshiba name, which will align well with our multi brand multichannel strategy.
And finally, <unk> has an excellent complementary global manufacturing footprint with new facilities in China, and Poland and impressive factories in India, Thailand and Japan.
We are very excited about this deal and expected to close by the end of Q3.
Now turning to Q4 results on slide four.
Q4 was another strong quarter wrapping up our first full year as an independent public company.
Organic sales in the quarter were up 11% driven by continued strength in residential and light commercial HVAC and transport refrigeration.
Operating profit and free cash flow came in as expected.
Order strength continued and led to record backlog positioning us well for 2022.
We also saw continued aftermarket growth, which has been a major focus area for us and the team continues to establish a more resilient supply chain for the future.
Progress in 2021 was very important as we target increased dual sourcing of critical components increased automation and new direct relationships with chip manufacturers on security of supply.
We have been balancing rising input costs with price increases to reach our goal of being at least price cost neutral in 2022, and our operations team has gone to tremendous lengths to support our customers.
Thank all of them for their outstanding efforts.
I'm proud that the team finished the year well capping a full year of strong financial performance during which we exceeded all of our expectations as you can see on slide five.
We came into 2021 projecting organic sales to be up about 5% and we ended up with organic sales up 15%.
Adjusted operating margins grew 80 bps over 2020, despite the supply chain and fleet and inflationary challenges and we invested an incremental $150 million to support continued growth.
Adjusted EPS increased 36% year over year, well above our initial expectations.
Finally free cash flow of $1 9 billion converted at 114% of net income.
In addition to our strong financial results, we successfully executed on our strategic focus areas as you can see on slide six.
SG and sustainability remain Paramount for us and we've made great progress last year towards reducing net scope, one and two emissions on our way to carbon neutrality in our operations by 2030.
We also progressed on our scope three goal of reducing our customers' carbon emissions by more than one gigaton by 2030 by introducing a greater number of electric and heat pump technologies, lower GWB refrigerant offerings and more energy efficient solutions for our customers.
On healthy buildings, we booked about $500 million in orders last year and the pipeline has grown to about $700 million more than triple what it was at the end of 2020.
We continue to see strong traction and momentum in verticals like K through 12, where orders were up high teens in 2021, and the year end pipeline is up double digits sequentially from Q3.
Further validating the high demand for indoor air quality solutions that help rebuild confidence that society reenter schools office building stores hotels and restaurants.
Providing customers with data on air quality is one way to build that confidence and our digital and intelligent capabilities are critical Differentiators. We made strong progress on our two platforms of focus abound and links.
On a bound we saw adoption by customers in the sports education, and health care sectors and on links we continued to expand our offerings with links fleet and subscription activations in EMEA truck trailer and container globally, adding more than 15000 units in Q4 alone.
We are very focused on delivering lifecycle solutions and exceeded our stretch aftermarket targets, we saw double digit aftermarket sales growth ending the year with more than 60000, Chillers under long term agreements and we plan to add another 10000 this year.
We continue to take a very structured and balanced approach to capital deployment.
With the net proceeds from the Chubb divestiture on January 3rd we have reduced our net debt from over $9 billion at spin to about $4 billion.
We completed four exciting acquisitions, and we continue to build out our pipeline.
We increased our annual dividend by 25% in December and we continue to repurchase our shares.
We also drove gross cost savings through our carrier 700 initiatives to help reduce the impact of inflationary headwinds the entire organization remains focused on driving out discretionary costs as controlling the controllable is even more paramount in this inflationary environment.
Slide seven describes our overall view on 2022.
Given our strong backlog.
Overall constructive economic environment, and our strategic positioning we see another strong year of financial performance with organic sales up high single digits on top of the 15% that we generated in 2021.
We expect continued margin expansion despite dilution from price cost in acquisitions, we anticipate approximately $1 billion of inflationary headwinds in 2022 and are therefore targeting at least $1 billion or 5% of price realization. This year over 80% of which is carryover from actions taken last year and.
Price increases that became effective in January of this year.
Excluding chubb from last year's results, we expect another year of double digit adjusted EPS growth and strong free cash flow.
Our focus areas heading into 'twenty to remain the same.
We will continue to drive innovation and differentiation in our pursuit to be the world leader in healthy safe sustainable and intelligent building and cold chain solutions.
We will continue to take concrete actions to increase our already top quartile ESG performance.
And used sustainability solutions to drive recurring revenues and growth.
We are targeting another year of double digit aftermarket growth, while not losing our progress on tenacious cost reduction.
Our commitment to disciplined capital allocation remains unchanged with our strong balance sheet, enabling us to play more offense going forward.
Before I turn it over to Patrick I wanted to provide an update on our upcoming Investor day on.
On February 22nd members of our leadership team will provide a deeper dive into our attractive growing markets and how we plan to continue to outperform in those markets.
With that Patrick.
Thank you Dave.
Please turn to slide eight Q4 benefited from solid organic growth throughout the segments residential.
Residential and light commercial HVAC and transport refrigeration, where important growth drivers in Q4 with organic sales growth well into the double digits.
We realize more price than expected in the quarter, but that was more than offset by continued and increased inflationary challenges.
Similar to Q3 supply chain constraints impacted our factory efficiency levels, and our ability to ship product, but it has left backlogs well positioned to deliver growth in 2022.
Adjusted operating profit grew 14% year over year and margins were up 20 bps over last year.
Increased year over year investments offset the absence of onetime cost items, we incurred in Q4 of 2020.
Price cost finished about $30 million negative for the quarter versus our October estimate of about neutral Q.
Q4, adjusted EPS of <unk> 44, <unk> benefited from <unk> of discrete tax items.
As expected free cash flow was $775 million in Q4, and $1 9 billion for 2021.
We repurchased $4 7 million shares in the fourth quarter and about $10 4 million shares for the year in line with what we shared with you in October .
Let's turn to slide nine and cover our segments performance.
HVAC organic sales were up 14% driven by continued very strong growth in residential light commercial and our Aoc controls business.
<unk> sales were up high teens and movement was up 6%.
Residential and light commercial demand remains very encouraging.
Orders continued to grow leading to very strong backlogs as we entered 2022.
Distributor movements was up 15% in our light commercial business, leading to field inventories for that business being down low single digits compared to last year.
Commercial HVAC was up mid single digits in the quarter and was impacted by supply chain challenges, particularly in North America.
Our aftermarket business grew mid single digits for the quarter and was up double digits for the year.
We met our goal of achieving at least 60000, Chillers and our service contracts by the end of 2021.
Price cost was slightly positive in this segment, but a headwind to margin.
Acquisitions increased sales by about $90 million for HVAC, but did not contribute operating profit given intangible amortization and integration costs.
Moving to refrigeration on slide 10.
Organic sales were up 17% as a result of widespread growth throughout the segment.
Truck trailer was up almost 30% and container was up over 30%.
Electrification capabilities are an important differentiator for us in this segment as we lead the industry with electric 300 units currently operating in 10 countries and additional capabilities being launched.
Commercial refrigeration was up low single digits, driven by solid growth in Asia offset by flattish EMEA sales.
Sensitive tick and aftermarket were both up double digits.
Margins were down 10 bps in the quarter compared to last year.
Price realization is improving in this segment, but is not yet offsetting increased input costs.
In addition, operating performance in commercial refrigeration remains a significant opportunity.
Moving to fire and security on slide 11.
Organic sales were up 3% as products grew 6%, while chubb was down 3%.
Operating margins expanded by about 60 bps in the quarter.
Seamless for refrigeration price realization is improving but price cost was negative.
Mix was a tailwind to margin for this segment as was the absence of onetime items in the fourth quarter of 2020.
Slide 12 provides more details on orders performance.
Excluding Chubb company organic orders were up about 20% for the quarter.
As I mentioned residential and light commercial orders remained very strong in the quarter even against difficult comps.
Commercial HVAC orders remained strong as well with backlog for this business up over 30% compared to last year.
Refrigeration saw a mid single digit decline in orders for the quarter, mostly because we worked with customers to support demand, but did not reopen the second half 2022 order book.
January of this year in other words timing and we've already noticed a sequential pickup in orders in January .
Backlog remains up about 30% in both transport and commercial refrigeration compared to last year.
Order intake for our fire and security products that remained very healthy at over 10%.
Growth was led by commercial fire industrial fire and access solutions.
As you can see on the right side, we saw continued strength in all regions, except China.
Covid related measures implemented in China impacted order intake in late Q4.
That seems to have improved since the start of the year.
We've seen some delayed projects booked in commercial HVAC in China saw double digit order growth in January .
Moving onto slide 13.
We saw a 13% increase year over year in adjusted EPS.
Within operational performance the benefits from higher volume and the absence of 2021 time items was partially offset by investments.
<unk> costs was a two penny headwind compared to last year.
The effective tax rate was a seven year over year benefit and mostly relates to discrete tax items.
Finally, we saw a slight pickup from lower interest that gave us an extra penny compared to last year.
For your reference we include a full year 2021, adjusted EPS bridge in the appendix.
Moving on to 2022 guidance on slide 14.
Note that our guidance excludes the impact of the pending PCC acquisition.
We expect reported sales of about $20 billion and organic sales up high single digits on top of the 15% organic growth we generated in 2021, we.
We expect price to contribute about five points of the organic growth and volume 2% to three points.
Acquisitions are expected to add about $200 million in sales with minimal operating profit given intangible amortization and integration costs.
Adjusted operating profit is expected to be up compared to 2021 on about $600 million of lower reported sales.
Operating margin is expected to expand by about 75 bps helped by the sale of Chubb and despite a $1 billion in price realization offset by $1 billion of increased inflation.
We expect all businesses within HVAC about high single digits organic growth in 2022.
We expect mid to high single digit growth in both refrigeration and fire and security.
You can see expected adjusted operating margins for each segment on the bottom right.
For fire and security the significant margin expansion reflects the higher margin products business now that Chubb has been sold.
I'll cover adjusted EPS on the next slide, but just want to point out that our free cash flow guidance includes about $200 million in tax payments for the gain on the sale of Chubb and also assumes about $100 million of.
Cash restructuring payments also on slide 21, you will find additional information about 2022 guidance.
Let's move to slide 15, 2022, adjusted EPS bridge at our guidance midpoint.
As we've mentioned before the chip sale is a 24%.
Headwinds to adjusted EPS next year.
Operational performance is expected to deliver 24 of adjusted EPS growth next year that is about $250 million of adjusted operating profits.
At a high level.
Think of about $120 million or so of volume leverage and about $300 million of productivity, partially offset by about $100 million each for investments and merit increases.
As I mentioned earlier price cost are expected to offset.
Obviously at about $300 million productivity will be a major driver of earnings in 2022 and includes about $100 million of G&A reductions.
Investments in 2022 will be focused on enhancing our digital capabilities R&D and technology is enabling continued to G&A cost reductions.
Currency and net interest expense or a small headwind and tailwind respectively, and the benefit of share repurchases offset a higher expected adjusted effective tax rate of about 22%.
That gets us to a midpoint of about $2 25 for next year.
We've talked a lot about carrier 700, and our cost reduction mindset. This year. So we wanted to provide more insight on that on slide 16.
The carrier 700 program was created over two years ago in a low inflation environment, which obviously does not apply to date.
Excluding the significant material inflation challenges, we faced in 2021, we actually made great progress on our carrier 700 initiative by driving approximately $300 million of gross productivity savings.
Since we historically included material inflation in our carrier 700 numbers are net savings we're about neutral for the year.
Moving forward in starting in 2022, we will measure our gross productivity efforts, excluding the impact of inflation.
We plan to manage price to offset inflation.
As I mentioned, we expect to drive about $300 million of cost reductions in 2022.
We will provide further detail on our long term opportunity for continued productivity at our upcoming Investor day, but the bottom line is that cost takeout cost takeout remains a key focus area at carrier and we will continue to fund investments annual Merit and drive margin expansion.
Bench.
Moving on to slide 17, our priorities for capital deployment remain the same.
As you can see on the right side of the slide we have already committed to $3 $75 billion of capital deployment for 2022, and we will remain disciplined in capital allocation to maximize long term shareowner value.
The last topic I wanted to quickly touch on is the outlook for Q1 of 2022.
We expect to see organic sales growth in each of the three segments, leading to high single digit organic growth for the company.
We expect price cost to be modestly negative in Q1 at a level similar to Q.
Q4.
With an adjusted effective tax rate of about 15% based on known discrete tax items benefit in Q1, we expect adjusted EPS to be approximately 45.
Free cash flow is expected to be a use of cash in Q1 of about $100 million.
Q1 is typically like.
And includes tax payments relate related to the chip sale and timing of the incentive compensation payout.
In closing Q4 wrapped up another strong year for carrier with double digit organic growth and 36% adjusted EPS growth.
Thank you to all of our colleagues and partners managing and supporting strong demand in a very challenging supply chain environment.
With that I'll turn it back over to you Dave for Slide 18.
Patrick So we are very pleased with our 2021 performance, but it is time to look forward and as we do so we are very bullish on the strategic and financial opportunities that lie ahead with that we'll open this up for questions.
If you'd like to ask a question at this time. Please press. The Star then the number one key on your Touchtone telephone.
To withdraw your question press the pound key.
Our first question comes from Julian Mitchell with Barclays.
Hi, good morning.
Just one more.
Just wanted to start off perhaps with the margin sort of cadence through the year at the HVAC and refrigeration segments.
Maybe help both were down year on year in Q4 refrigeration only slightly.
Maybe help us understand kind of how you see those.
<unk> in the Q1 guide and how quickly you get back.
Back to growth to drive that sort of 40 bps of expansion.
Yes, Julian Patrick here, so maybe I'll start with providing a little bit of additional color on the Q4.
<unk> margins as you mentioned they were down a 100 100 bps year over year.
Think of volume being a tailwind to.
Segment margin of 100 bps.
Think of acquisitions, where we added almost $100 million of revenue, but given also intangibles operating profit is still slightly negative that's almost 100 basis points headwind to margin for HVAC.
Price cost, while slightly positive as I mentioned for this segment is actually half.
Point, there 50 bps.
Headwind for this segment as this JV income JV income is down year over year, that's another half a point of headwind and then investments offset mostly.
Offset the Q4 2020 items we had.
And so that gets you basically the 100 bps of headwind year over year for HVAC in terms of 2020 and the characterization there with 22 2022 I should say.
We provide color about the overall company rather than by segment for.
For Q1, we think that the segment margins will be similar to what they were in 'twenty, one maybe a little bit lower a few tenths of a point.
For Q2, we think it will be similar and so we think that Q3 Q4 margins will be a little better in 'twenty two than they were in 2021 and of course that reflects what we're expecting from a price cost point of view, we expect Q1 to be still slightly.
Negative price cost I mentioned in my comments, we expect Q2 at this point to be about neutral and in Q3 Q4, we expect to be slightly positive.
That would help our margins across our segments.
That's very helpful.
Thank you for that detail.
And then maybe.
Yeah.
One other points around.
Situation.
Mentioned in the slide 10 commercial refrigeration below expectations.
Just help us understand kind of.
The sort of scale and margin rate of that business.
And what you're doing how you do expect that to perform and then any commentary on transport refrigeration. How you expect bookings to play out obviously one of your peers sort of frightens people I think with some of my comments.
Yes, Julian firsthand, our commercial refrigeration business. It is one of our lower margin businesses.
Kind of been in that mid to high single digit range from a margin perspective, and we've been consistent that we need to improve that business. So we had a lot of focus on it we're pushing the team for significant margin expansion. This year, but I would tell you. It's one of the businesses that last year did not perform at the levels that we would've.
Expected now we are being more aggressive than we had been in the past on the price side. We are pushing operational performance, we are pushing differentiation and digital performance, we're rolling out links.
So Tim why it and David Apple and the team are really focused on doing the right things to improve the business, but thats a key focus area for us and we know that we.
We need to do it but we have confidence around our plans in 'twenty two to really.
Improve the margins of that business.
For overall transport refrigeration I mean, the fundamentals remained strong as Patrick said upfront.
We did toggle back on our order book Order book purposely in the fourth quarter, we have plenty of backlog, we're working with our customers to make sure that we were taking the orders at the right time to support their needs when they need them. So we reopened the order book here in January January orders.
We're consistent with what we expected them to be we feel good about our backlog position in both north North American truck trailer and European truck trailer. So the overall market seems like in a good place to US right now our overall focus for transport Frigerator and just generally are supporting our customers.
We still remain challenge on chip side and some other input challenges. So we're spending a little bit more than we have in the past operationally, it's driving some inefficiencies in the factories, but we are our focus right now is supporting our customers, but the business feels positive to us Julien.
Great. Thank you.
Our next question comes from Nigel Coe with Wolfe Research.
Thanks, Good morning, everyone.
Good morning.
So lots of details, especially in your answer to Jason's question.
Just curious.
On the $1 billion, that's just the raw material bucket. So that excludes other source of inflation and then maybe just Patrick.
Patrick if you can maybe break out the price the billion dollars I think last quarter, you talked about three to 400 carryforwards. So would that mean 400 from the Gen. One price increases and then another 202.
To be sourced from somewhere else.
Yes. So the first question I think on the $1 billion.
<unk> $600 million, so related to commodities tier one and tier two.
And think of the remaining $400 million being other components as well as freight and so that's the that's the $1 billion.
In terms of price realization of $1 billion.
Colby said last last quarter, we said that the carryover, we expect that 'twenty two to be $3 50 to 400 as you mentioned, we actually did better than we expected in Q4 on pricing, we actually delivered about $50 million to $60 million better than what we expected on on price and it also means that the carryover is bad.
And Thats why we say of the overall $1 billion that we target for this year.
But $200 million of that is either carryover or the prices that we have announced and that become effective in January of this year.
Great. Thanks, Thanks, Patrick.
<unk>.
And then just thinking about the obviously steel is a really important inputs and we're seeing some really encouraging signs on the on the futures and spot price HRC is down.
What are you building for steel specifically, India into your guide are you assuming any benefits at all or are we just moving towards home prices.
Yes, Michael.
We were not going to get into the details of what we're assuming for steel aluminum and copper I would just say that for aluminum and copper.
About 70% locked.
For the year in terms of hedges and also we've also have some protection on the steel side as well with some agreements with some of our vendors, but we're not going to get into the specifics.
Rates, we got locked into.
Fair enough very helpful. Thanks, Patrick.
Thanks.
Our next question comes from Deane Dray with RBC capital markets.
Thank you and good morning, everyone.
Good morning, Hey, I don't think you called it out in your prepared remarks, but you had 11% organic revenue growth, but did you have any supply chain issues, where you couldnt make any shipments maybe customers werent ready you didn't have parts, but.
Can you size for us what shipments might've been missed.
Yes, what I would tell you is that we certainly did have some supply chain issues. What I will tell you is that the bookings have been extremely positive.
We do have some overdue sales to our customers, it's probably in the $2 million to $300 million range.
That we could have gotten had we not had the supply chain issues.
But I would tell you that despite that.
We go in we went into this year with record backlogs and.
I will tell you that I'm very very proud of the operation team and go into great lengths to support our customers. Despite the challenges.
Right.
And then just congrats on the Toshiba acquisition, and we know via RF is a priority does this complete the platform for you do you need more manufacturing at least.
In North America, but just where does that stand in terms of build out.
Well, it's kind of one step at a time, but I will tell you is that our sales and vrs. After we close on the Toshiba acquisition will be up Forex.
From the time that we spun so organic growth on our own <unk> business that we had has been has been very positive then we added <unk> now we're going to close on Toshiba in the coming months.
We're going to be.
Integrating 6000 phenomenal Toshiba employees into the system, we're going to have a multi brand multi channel strategy, we have to kind of let the dust settle on that and then we'll assess where we go from there but.
Our goal in all of our businesses, where our leadership and will drive that in all segments.
Got it very helpful. Thank you.
Thank you.
Our next question comes from Jeff Sprague with vertical research.
Thanks, Good morning, everyone.
Hey, good morning, Joe.
Good morning morning, first just a clarification Patrick your comment about the Q1 margins being similar to Q1 'twenty one.
Q1, 'twenty, one had chubb and at last year I, just want to make sure we're comparing to kind of the margin with Chubb, where you're making some adjustment relative to no folio change.
<unk> to our reported margins from last year, so, including the externally reported once and as I said similar maybe a few 10 bps lower.
Okay, great. Thanks for that.
And then.
Dave <unk>, Patrick maybe just coming back to placebo I know, it's early and you don't own it yet but.
Can you give us a little more color on.
No.
What you might be able to do relative to your own investment spending I guess on <unk>.
Thinking of the fleet average of margins now in Europe Vrs undertaking.
And what.
What what synergy or what R&D, you might be able to now avoid that you have on the docket internally.
And just kind of the overall margin trajectory that you would expect out of.
Out of the Brs effort.
Yes, if you look at what we what we've said Jeff is that the business that we're going to be inheriting.
Inheriting is a little over $2 billion of sales call. It $2 1 billion of sales of $250 million of EBITDA. So you have the margins on the base business, there and we said that we would have $100 million of synergies.
So we will grow margins through synergies and will also grow margins as we would expect with all of our images all of our businesses through.
Through topline growth and of course.
The aggressive cost reduction actions that we've taken all parts of our business. So we do see the RF margins growing we do know that we have one of our peers in the vrs space with margins in the mid Twenty's, we won't be at that level in the next year or two but.
We also see that we have significant room for margin expansion and the other thing is that there is some really nice one of the big things with the <unk> acquisition is our focus on sustainability they come to the table with phenomenal heat pump capabilities. We can use that technology in other parts of our business for example, <unk> as we start the <unk>.
Transition boilers and burners into more of a heat pump based business. We can use that the geely and Toshiba technology to bring up the margins of that business. So we see this as margin expansion for the base <unk> business and helping the butter carrier margin X story.
Great I'll leave it there thank you.
Thanks sure. Thank you Jeff.
Our next question comes from Andrew <unk> with Bank of America.
Hi, guys good morning.
Good morning.
Just a question on product transition.
2022, and how this will sort of impact.
The cadence right.
And I'm thinking what should we be thinking about second half of 'twenty two as we sort of try to manage the channel trying to manage production and trying to reduce new product.
A new sort of SER regulations, how will we see it on the revenue side. This year will there be anything unusual in terms of annual cadence. Thank you.
Yeah, Andrew if I understand the question, it's really about North American <unk> and as we transition to the new seer requirements for 'twenty three do you expect an element of pre buy.
I think it'll be at the margin.
We're expecting our resi business to be up high single digits. This year I mean, the bulk of that is coming we're getting very good price realization in that business. So the bulk of it is from price you may get a point or two from volume.
There could be a bit of pre buy in the north because that state a manufacturer, we're not really banking on much pre buy there.
No.
What I will tell you is that what we focused on for 2023 was differentiation things like copper to aluminum and other key technical.
<unk> attributes that we think would distinguish us in anticipation of 2023 so.
Products ready the manufacturing sites are ready and we just got to kind of get ready for that ramp as we get into the latter part of this year.
Great and just a follow up question on Toshiba.
Should we think going forward the integration of Toshiba and give me because.
Similar technology, a different price point.
You maintain two separate brands so will there be some form of integration because im thinking of the RF heat pumps, how will that play out I would also from manufacturing standpoint. Thank you.
Yes.
We'll actually have a three brand strategy will have Toshiba carrier and Geely and RV RF space, what we're going to do and Tim and Chris will get into this more on our February 22nd Investor day, but he is going to create a third segment under arm. So he'll have the traditional commercial.
Applied business will have residential light commercial and then we're going to have a third business that has that Vrs international light commercial heat pump business in it for globally and that will include the Toshiba business, the gaming business and some other aspects of our heat pump business.
And then we can work our multi brand multi channel strategy for that business globally.
Alright, thank you.
Thank you Andrew.
Our next question comes from Tommy Moll with Stephens.
Good morning, and thanks for taking my questions.
Tom.
Wanted to start on on Toshiba and just following up on the multi brand strategy here. So youll now have three under the same umbrella.
In terms of channel or the product portfolios.
Sitting next to one another.
The operational advantages you want to realize here with the three brands like I said under under one umbrella.
But what's great about one of the many things Tammi that's great about this acquisition as we try to work customer back.
We have as part of the TCG TTC joint venture we've been responsible for almost all the distribution globally. So we get that customer input, but the design and production has largely been under toshiba's responsibilities. So theres been a bit of a breakpoint there now having it all under one roof, we get the customer input what.
<unk> features are they looking for what brand and what <unk>.
Technologies would be most suited for that application and then we can feed that back into the design and the production of the product so depending on where we are in the world I can tell you that Toshiba is very well recognized and respected globally certainly in China and elsewhere. So that brand plays great we've been growing the.
Carrier brand under <unk> now in the mix. So we can work this multi brand strategy and operationally Toshiba comes to the table with a great footprint. They have brand new factories in China are brand new factory in Poland, which plays well for putting more load from light from carrier into those factories as well they are <unk>.
Facilities in Thailand, Japan, and India, So a great footprint. So theres a lot of complementary footprint actions that we can take on both sides and of course the supply chain piece. We have this is what we do for a living HVAC. This is this is one of obviously more than half of our sales are in this space, so integrating them into our overall supply chain.
Can drive a lot of.
Cost synergies and operational improvements as well.
Appreciate it Dave shifting gears to the 22 outlook.
I Wonder if you could provide any detail on the $300 million of gross productivity just any timing context, you can provide or any of the buckets underneath that.
Fly chain factory and in G&A that you could provide would be helpful. Thank you.
Yes, Tommy Patrick here, so I'd.
Say that and I mentioned this in my comment that clearly the G&A element of our productivity for next year is going to be much larger than it was in 'twenty, one at $100 million.
And a lot of these actions have already been implemented and so I'd say that that is something where we do not have.
Big hockey stick in the year.
There will be continued savings on the factory side as well as on the <unk>.
Correct site, the direct material side, including a healthy amount of carryover and so I'd say that Q1 will be.
Closer to 15 actually Q1 will be close to about 20% of the full year number of productivity. We're looking at and so I would say not a huge hockey stick throughout the year, but we are assuming an improvement in factory efficiencies.
Starting in Q2 versus where we were in Q4 and early Q1, and so thats certainly something that we are working hard on <unk>, because we are assuming a sequential improvements and factory efficiencies.
Thank you Patrick I'll turn it back.
Thanks, Tom.
Our next question comes from Josh Puncture Pinsky with Morgan Stanley .
Hi, good morning, guys.
Josh.
So a lot of good detail, but maybe a couple of questions here on residential so I know orders in a kind of a seasonally lower quarter might not be as telling but thank you are comping like a 20% number from last year with with the 50 this quarter.
Sort of getting kind of into.
Serious numbers here and you said the movement was a little lower than sell in like how do you anticipate.
Distributors sort of react as the channel stabilizes like is there a risk that they overshoot or as your lead times start to come down is that something that gives them confidence to sort of trust the system rather than pilot on in their warehouses.
Well, let me just give you a few.
Data points, Josh that.
The number obviously, we focus a lot on movement in inventories movement in the fourth quarter was up 6% it's continued to be fine.
January so.
One key thing is that movement from our distributors to our dealers has continued to be positive.
Inventories, we don't see getting away from us. So we mentioned that splits in the core in the fourth quarter were up say mid single digits, but largely.
And balance to what we would have expected we come into the year with our backlog up almost three <unk> year over year. So very strong backlog inventories generally imbalanced movement seems okay. We watch the order rates, but frankly orders will be down probably.
Probably in the first quarter here, just given compares and given the overall backlog situations. So that doesn't alarm us what we watch more.
Inventory levels and movement, which both which both seem to be generally where we would expect them to be.
Got it that's helpful and then just on Toshiba.
Obviously picking up the growth of your product category, there, but maybe help us with kind of the breakdown of aftermarket versus new construction like are you picking up a lot more niche in your construction exposure.
And then what is the structural kind of all in difference in free cash conversion at the organizational level as part of the transaction.
Well.
Patrick can take the cash piece I mean, what I will mention on that is they they are just coming off having built an entirely new factories in China and Poland. So capex over the last couple of years was was inflated versus the levels that.
That you would expect so capex will come down and I think cash will get more imbalances on a going forward basis.
The.
It's a nice balance between OE and aftermarket will get into some of that more and more of that color in February but the great News I would say is that.
The technology and the brand.
Josh I really some special if you look at the inverter technology, which has enabled this three stage rotary compressor, which really is differentiated in the marketplace you combine that with our global distribution channel. There is the potential to make a really really positive and big impact on the global via RF markets. So we could not be more excited.
About how we can grow the business, how we can improve the margins how we can really create a competitive advantage with our multi brand multi channel strategy. So this is a deal that we've wanted to do for a number of years, we had the timing worked out great and we could not be more excited about it.
Patrick anything you want it just on the on the free cash flow for the PCC.
Dave mentioned they've had some several years.
Big investments in new facilities.
Our estimate is that for 2021, the free cash flow conversion there was closer to about 80%. Once you normalize capex. We see no reason why it would be similar to us which is about 100% conversion of free cash flow and of course once we go through the integration there might be some onetime costs associated with that but.
It is all the work that will be done over the next several months.
Awesome great detail. So you guys can do.
Thank you.
Our next question comes from Joe Ritchie with Goldman Sachs.
Alright, Thanks, Scott and good morning, everyone.
Morning, Joe.
Hey, guys can we maybe just start on the investment I think we originally had you guys doing roughly around $150 million incremental last year I'm, just curious where that shook out what you expect for 2022, and then maybe get some more kind of qualitative color just around.
How far you are along in your sales force expansion initiative.
Yes, Joe so.
<unk> for 2021 full year investments were $150 million 150 incremental to 2020, which is exactly what we shared with you when we initiated guidance one year ago for 2021 and that was.
Heavily weighted towards selling about half of it and then digital and R&D capabilities for 2022, we as I mentioned in my comments, we are targeting $100 million of investments and <unk>.
Similar.
I would say.
Similar split in terms of.
Digital capabilities, R&D and selling although I'd say that it's probably a little bit more weighted in 'twenty, two towards digital and R&D versus selling and I think if you want to add some color on selling yes, what I would tell you Joe is that I think that.
A chunk of the selling is just carryover for hires that we made last year. So I don't see 'twenty two being a year of significant add to our sales force I think that we felt like we had to get to a certain level make sure that we integrate our salesforce appropriately appropriately train them incentivize them make sure that we are getting.
The drop through that we expect so I think that we're in a bit of a settling out period on that I don't see significant head count adds to our sales force because we like where we are going into 'twenty two.
Got it that's Super helpful. And then clearly since you guys became a standalone entity there was a lot of focus.
Around leveraging and what you could potentially do from a portfolio standpoint, you guys have been extremely active I'm. Just curious as you kind of think about the portfolio today, yes, just any thoughts on maybe additional actions on pieces of the portfolio that maybe are I don't know below segment average I'm. Just curious how are you guys thinking about portfolio.
Optionality today, given all the changes that have occurred in last couple of years.
Well, then I think Joe is that we've put ourselves in position for that Optionality. We started when we spun from UTC less than two years ago.
<unk> $10 billion of net debt and now we have a little less than four so we are in a position.
To do a lot of things on the capital allocation side, we obviously have Toshiba, we talked about increasing the dividend by 25% for this year, we talked about the share buyback of around $1 6 billion and we have plenty of firepower for.
Additional acquisitions. So we've done a lot of work in building out the pipeline of course, our focus right now is integrating closing on and then integrating Toshiba.
We continue to look.
For other.
Acquisitions, and we want to make sure that they are in the fairway and focused on our key areas of strategic priority is healthy safe sustainable and intelligent building in cold chain solutions.
And there are again, we're building out the pipeline we continue to look at our current portfolio and make sure that everything in our current portfolio fits with us and we're the better owner and we will continue to look on the outside and always prune and we have a lot of <unk>.
Lot of self help capabilities and we will continue to stay active.
Makes sense. Thanks, so much.
Thank you.
Our next question comes from Steve Tusa with Jpmorgan.
Yes.
Hey, guys good morning.
Hey, good morning.
So just on this on this on the pricing what was the absolute price capture for the company on a dollar basis in <unk>.
A little over $200 million Steve.
Okay, and so you are saying that.
The $1 billion for 'twenty two includes $800 million of carryover and then the stuff that you are initiating on Jan one. So I guess does that mean the extra 200 is stuff that you kind of are thinking about for les.
Later in the year I mean, how much visibility do you do you have on that on that 200 extra $200 million and am I looking at that the right way.
Steve you are looking at it the right way and in terms of visibility I think this is something over the next couple of months not six months from now.
Okay.
It is more concrete than.
And then we're thinking about it.
Okay got it.
And then just one last one just on the on the HVAC Incrementals in the fourth quarter I. Appreciate there's a lot moving around can you just remind us of what the.
I think we had like a $100 million of like what you guys called some unusual headwinds in <unk> 'twenty or is that kind of still the right number to put in the bridge.
For this year or just wanted to kind of clarify that yes.
Yes, I will do so.
Last year Q4 was closer to 50 for the overall company and HVAC being the largest segment got got a majority of that and that was mostly not completely offset by incremental investments in this segment in Q4 of 'twenty, one and then other items I mentioned was up.
We have about a half a point headwind in HVAC because of price cost, even though price cost was slightly favorable and then.
JV income in acquisitions, whereas slight headwind as well for HVAC in Q4 to 'twenty, one wasn't there some contract renegotiation charge or something like that in <unk> 'twenty as well.
There was something contract related was part of that was sort of the 50 part of that Oh.
Got it okay. Okay, great alright, thanks, guys appreciate it.
Thanks, Steve.
Our next question comes from Vlad by sticky with Citigroup.
Good morning, guys. Thanks for taking my call.
Yes morning, Glenn.
So.
Lots of ground has been covered already obviously, maybe can you just comment a bit.
Good order momentum here can you comment on what you're seeing in market share across the portfolio, particularly in <unk>.
And how you're balancing your margin expansion objectives versus driving faster growth and taking market share.
Well obviously.
We want to make sure that we get margin expansion, but we've seen very good price realization.
And I think a lot of the share gains that we've seen are in part because of the investments we've made in things like digital differentiation technology differentiation.
And the additional sales force we've had but we've also worked very closely with our distribution partners to kind of improve those relationships and how we support our customers and frankly, our operational performances.
I think really helping us in our ability to support the demand Thats out there we gained about 130 bps in share and splits last year.
We gained about 350 basis points in light commercial and that is not.
The on the pricing side through anything we're doing there in fact.
I would tell you we've been I think appropriately aggressive on the on the pricing side given some of the dynamics, we're seeing on the input side. So we have to do both we have to grow the business. We're focused on differentiating the business and we have to have margin expansion I think we've done a nice job of balancing those.
Okay.
That's really great color and helpful and then maybe just.
Continuing on on the growth front, you've talked in the past about opportunity in resi HVAC.
To drive stronger parts sales in that business can you talk about what kind of traction you're seeing with initiatives and how much of a tailwind that can be over the next couple of years.
It's been it's the same with the rest of our businesses that we want to provide lifecycle solutions for our customers and to drive additional parts on the resi side. It has to do with how we work with our suppliers, how we work with our distribution partners. Our dealers our end customers. So we've tried to take a series of actions and a new playbook.
To make sure that we can get customers the parts they need when they need them.
At the price points they need them. So it's been it's been frankly, a focus area and its been some nice tailwind for us.
That concludes today's question and answer session I would like to turn the call back for closing remarks.
Okay well. Thank you all for joining we're looking forward to seeing you here down at Palm Beach Gardens on February 22nd. Thank you all thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
Sure.
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