Q1 2022 Carrier Global Corp Earnings Call
Good morning, and welcome to <unk> first quarter 2022 earnings conference call.
It is being carried live on the Internet and there is a presentation available to download from <unk> website at IR Dot Gary Dot com.
I would like to introduce your host for today's conference samples team Vice President of Investor Relations. Please go ahead Sir.
Thank you and good morning, and welcome to carriers first quarter 2022 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 costs.
Other significant items of a nonrecurring <unk> 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 uncertainties 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 will 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 give everyone the opportunity to participate with that I'd like to turn the call.
All over to our chairman and CEO , Dave Gitlin.
Thank you Sam and good morning, everyone I'll start with a summary of our Q1 results on slide two.
Q1 was another strong quarter for us and I am proud of how our team continues to execute in the face of global challenges.
We delivered 12% sales growth, excluding the impact of Chubb.
Organic orders growth remained strong at 10% and our backlog is up almost 30% organically versus last year.
Adjusted operating profit was up 7% compared to last year and up high teens, excluding the impact of Chubb.
Price cost was neutral in the quarter better than expected.
Free cash flow was a larger than expected outflow in the quarter, mainly due to supply chain shortages impacting inventory levels. We continue to expect to generate $1 65 billion of free cash flow this year.
We remain focused on the priorities that you see on slide three.
Above market organic growth margin expansion strong free cash flow and disciplined capital allocation.
This slide summarizes our value creation framework as presented at our recent Investor day, which not only forms the basis for our updates to our investors, but also drives our priorities via our internal goal alignment process.
I recently spent a week in Europe , and a weak in Asia and saw firsthand how our people globally are driving results tied to these priorities.
From our World class operations in our Singapore container factory to the tremendous innovation from our colleagues in Hyderabad in New Delhi to the discipline and energy in our sites throughout Poland.
It was encouraging to see the power of focus culture and talented empowered teams coming together to provide solutions for our customers.
I'll address our progress on the key elements of this value creation framework, starting with growth on slide four.
We continue to lean into the opportunities provided by the secular trends presented at our Investor day that we are confident will drive above market growth, despite macro uncertainty and supply chain challenges.
Unhealthy indoor environments, we saw $125 million worth of orders in Q1, and our healthy buildings pipeline is now $850 million up more than 20% sequentially from the fourth quarter.
We continue to play offense on ESG and sustainability.
The combination of the upcoming Toshiba acquisition, and our newly announced European Heat pump design center of excellence position us favorably to enter the attractive European residential heat pump market.
This will complement our leadership in global commercial heat pumps as an example, our Li Lo GWB heat pump chiller orders in Europe were up over 30% in the first quarter.
Electrification is equally critical and transport refrigeration, where we recently added Woolworths Australia's largest supermajor supermarket chain.
We now have more than 10 countries, where our vector equal all electric reefer units are in service.
In terms of digitalization, our key focus remains on rapid adoption of our abound and linked platforms.
We've incorporated energy monitoring and alert reporting capabilities into our bound platform and achieve key wins across verticals, including education retail and industrial.
There are now over 750 million square feet monitored by about.
This includes an important recent win with Harvard Th Chan school of public health.
Our digital capabilities are receiving more widespread recognition for example, within the abound platform. Our cortex solution recently won several key awards, including the 2022 artificial intelligence Excellence award organized by the business Intelligence group and the AI Breakthrough Awards 2021 best predict.
<unk> analytics platform.
Cortex offers predictive insights and autonomous actions to optimize equipment performance and building operations and is currently connected to over 300000 pieces of building equipment from multiple Oems.
This is a good example of how our digital platforms deliver customer value across a diverse installed base.
We have also expanded our links capabilities, including asset tracking prognostics and temperature alarms and we remain on track to have 100000 linked subscriptions by the end of this year.
We remain confident that the increasing middle class will continue to drive demand for our products in countries, such as India, where income levels are increasing and penetration levels of our portfolio of solutions remain low.
In addition to the tailwind from the secular trends, we continued to accelerate growth in our core businesses through innovation and differentiation, which you can see on slide five.
After releasing 21 new products in Q1, we remain on track for more than a 125, new product introductions in 2022.
Our innovation pipeline is centered around our core strategy of healthy safe sustainable and intelligent building and cold chain solutions.
One example is that we recently introduced a smoke carbon monoxide detector with embedded indoor air quality sensors with all the data connected both to smart home ecosystems.
Our R&D efforts on disruptive technologies are progressing well.
One example is our traction on the department of Energy's challenge to improve the efficacy of heat pumps at cold ambient temperatures.
Our unit is currently under test at the Oak Ridge National Labs.
We have demonstrated the expected performance with a better than required coefficient of performance at ambient temperatures of five degrees Fahrenheit using our forthcoming low GWB refrigerant.
We are working to commercialize our solution to increase adoption of heat pumps over oil and gas fueled heating systems in colder regions.
I am pleased to announce that we have a new chief Technology Officer, <unk> recently led Honeywell Aerospace as 10000 engineers and previously held critical roles at Borgwarner and Bosch.
His experience driving customer solutions across a broad range of cutting edge technologies at the intersection of hardware and digital position him perfectly to help take our innovation efforts to the next level.
Another critical growth driver for us is aftermarket and recurring revenues, which you see on slide six.
After 11% growth in 2021 aftermarket sales were up high single digits in Q1.
Across carrier and within each segment, we have detailed kpis across the vectors that you see here.
Parts capture service coverage digital solutions, and healthy and sustainable offerings.
We remain committed to delivering on our full year kpis, including having 70000 chillers under long term agreements and 20000 connected chillers by year end.
So our growth drivers remain encouraging.
Turning to margin expansion on slide seven.
At our Investor day, we committed to over 50 basis points of margin expansion per year.
With 2022 projected to be closer to 75 basis points and we exceeded that in the first quarter growing adjusted operating margins by 110 basis points.
We remain on track to deliver the $300 million of gross productivity savings that we committed to for 2022.
Related to that productivity improvement, we are very purposeful about building a more resilient supply chain and we are tracking to our commitments around dual sourcing of critical components and increasing factory automation.
With that let me turn it over to Patrick Patrick.
Thank you, Dave and good morning, everyone.
Please turn to slide eight.
As expected reported sales were down due to the Chubb divestiture organic sales growth was better than our high single digit Q1 guidance with all segments growing organically.
Residential and light commercial HVAC growth was stronger than expected with Ritchie up over 20% and light commercial up over 30% compared to last year.
Both price and inflation were higher than we anticipated and price cost was neutral.
Productivity and higher JV income also contributed to strong adjusted operating profit, which was up 7% compared to last year, Despite lower reported sales.
Core earnings conversion, excluding the impact of price cost was well over 50%.
Adjusted EPS of <unk> 54 was also better than the guidance we provided in February .
Given stronger sales margins and a lower share count.
For your reference we added an adjusted EPS bridge in the appendix on slide 19.
Free cash flow was a use of $258 million.
And the use of $100 million, we guided to on our Q4 earnings call.
The primary driver was an increase in inventory.
We continue to operate with higher safety stock and missing components are delaying shipments.
We still expect to generate $1 $65 billion in free cash flow for the full year, but this will be more backend loaded as we expect supply chain conditions to improve in the second half.
Let's turn to slide nine and cover our segments performance.
<unk> organic sales were up 18% driven by continued very strong growth in residential light commercial and our ALC controls business.
<unk> movement and field inventories for splits in furnaces were both up low single digits.
Light commercial distributor movement was up double digits in the quarter with field inventories up modestly versus prior year.
Within commercial HVAC applied and controls grew double digits.
Adjusted operating margins were up 120 basis points compared to last year, mainly due to volume leverage and mix.
Price cost was slightly positive for this segment as better than expected price realization more than offset higher material and freight costs.
We expect this segment to remain price cost positive this year.
Moving to refrigeration on slide 10 organic.
Organic sales were up 1% in the quarter a bit lower than expected due to supply chain challenges, mostly affecting truck and trailer.
As expected <unk>.
<unk> was down mid teens compared to our record quarter last year.
<unk> was up mid single digits.
<unk> refrigeration was up mid single digits, driven by solid growth in EMEA and sensitive continues to do well and was up double digits.
<unk> operating margins were down 130 basis points compared to last year, mainly due to lower volume and price cost.
Price realization is improving in this segment and is expected to be neutral in Q2.
Moving on to fire <unk> security on slide 11.
Excluding <unk> sales from the first quarter of 2021 Finance security segment sales were up 8% with strong broad based growth this year.
Adjusted operating margins expanded 160 basis points in the quarter, mainly as a result of the Chubb divestiture.
Price cost was neutral in this segment better than expected.
Slide 12 provides more details on orders performance.
Total company organic orders were up about 10%.
As expected residential HVAC orders were down modestly in the quarter with light commercial orders about double last year's levels.
Commercial HVAC orders also remained very strong strong with backlogs for this business up over 30% compared to last year.
Refrigeration orders were flat in the quarter transport orders were down modestly as we continue to actively manage our Q4 order book for the truck and trailer business.
Backlog remains up about 30% in both transport and commercial refrigeration compared to last year.
Order intake for our fire and security products remained very healthy up about 20% growth was widespread throughout the portfolio.
As you can see on the right side, we saw continued strong orders growth in all areas of the world.
Order strength continued in all regions as in April with the exception of China, which was down year over year.
Moving to an update on capital deployment on slide 13, we had quite some activity in Q1, we collected $2 9 billion from the Chubb sale <unk>.
We purchased about $740 million worth of shares and paid down $1.15 billion worth of debt.
In addition, we announced the acquisition of our JV with Toshiba for about $900 million.
We continue to expect this acquisition to close by the end of Q3.
Integration planning for the acquisition is progressing.
Our actions continue to strengthen our credit metrics and provides plenty of flexibility for value add capital deployment.
We continue to target $1 6 billion of share repurchases for 2022, and expect to issue $400 million of yen denominated debt prior to the <unk> acquisition.
Total debt reduction for 2022 remains $750 million.
Systems with what we shared with you in February at our Investor Day.
Now moving on to guidance on slide 14.
We had a good and better than expected start to 2022, but we're just one quarter behind us we are maintaining our guidance for organic sales growth adjusted operating margin adjusted EPS and free cash flow.
From a cannibalization perspective, we expect the lockdowns in Shanghai to impact Q2 sales by about $100 million mainly.
Mainly in commercial HVAC and truck and trailer as both businesses heavy manufacturing footprint in that area.
This assumes businesses open up in the next few weeks and we currently do not expect this to impact our full year with that I'll turn it back to Dave to Slide 15. Thanks, Patrick we are pleased with our strong start to the year, our backlog gives us confidence about continued strong growth in the team continues to.
Overcome unexpected macro challenges to deliver results for our customers and our investors.
With that we'll open this up for questions.
Thank you.
To ask a question you will need to press star one on your telephone to withdraw the question Christa <unk>, our pankey as a reminder, we ask that you limit yourself to one question and one follow up.
Yes first question is from Joseph <unk> with Morgan Stanley . Please go ahead.
Hi, good morning, guys.
Good morning.
So I guess just maybe first question on the commercial side, where you saw some momentum.
Dave do you feel like some of the stuff we've been talking about here, maybe more structurally on whether it's indoor air quality or some of the stimulus money going into education.
Is hitting the system or are we still kind of on the other side.
Just easy Covid comps and kind of getting back to work there.
No I think it has a lot to do with the secular trends in some of the.
The initiatives that we've launched do you look at K through 12, our orders were up 50% in the first quarter, which is as you know Josh significant our pipeline grew 25% sequentially.
So we're starting to see <unk>, two and <unk> three funds being released in K through 12 and Thats encouraging.
Aftermarket was up double digits in our HVAC business controls was up north of 20%, which has been a big focus area for us.
And then when we look.
More broadly.
At the underlying business itself. We now have seen I think 14th straight months, where Abi was north of 50. So orders continue to be very strong the global applied business was up 15% North America was up over 20%.
So when we look at ALC controls aftermarket trends healthy buildings, where the pipeline is now at $8 50, and then K through 12, a lot of these underlying trends that we've talked about are dropping through.
Got it that's helpful. And then just on the resi business, we're kind of a price on price on price at this point in terms of the marketplace.
Yes, I think you mentioned in terms of the movement versus sell in inventories are at healthy year, if not a little a little higher than usual.
Should we think about kind of the sensitivity point to that end consumer.
For what is a pretty significant dollar increase in the price are you seeing any kind of pushback or.
Yes.
<unk> of demand there.
Not not yet what we are seeing is I guess really record levels of price realization.
We said that <unk> for us in the first quarter was up over 20% more than half of that from price. So.
We have announced.
About.
<unk> price increases in the last couple of years and by the way we have to because the input costs that we're seeing so really what we're doing is.
Dealing with the inflationary pressures, we have through trying to stay out in front of it through price increases, but clearly for <unk>. We watch moving very carefully that was generally in line with field inventories both up kind of in that low single digit range. If you focus on splits and furnaces.
And orders were down modestly, but we expected that orders have been fine here in April so theres a lot of pent up demand for Ramsey price realization has been strong and then of course as we get into the back half of the year, we'll have to see how the switchover takes place as folks gear up for the 2023 introduction.
Okay. Thanks, Dave.
Thank you Josh.
Your next question comes from Julian Mitchell with Barclays. Please go ahead.
Hi, good morning.
Maybe just.
Just to start off with the sort of price versus cost dynamic. So I think before you had guided something like $1 billion of of cost headwind and a 1 billion also a price for the year.
Just wondered sort of any updated thoughts on those two points and maybe what the impact from those two items was in the first quarter.
Yeah, Julian Patrick here, So clearly Q1 was better than we expected at neutral.
Versus negative.
I would say that for the full year you do recall, we set a $1 billion priced $1 billion inflation.
Based on the current quarter and what were seeing is <unk>.
Likely that we'll do a little bit better than the $1 billion frankly with all the price increases we've announced.
We have we are on the on track for that $1 billion.
It could be a little bit better than a $1 billion, but at the same time, we've seen some of the input costs come up as well and so for the time being we continue to target price cost neutral for the year, but we understand that pricing will be likely a little bit higher than $1 billion in social inflation.
Thanks, Patrick and in the first quarter the cost headwind was what a few hundred million also.
It was north of $300 million.
Yes.
Thank you and then just my follow up would just be around.
That refrigeration business and can I have the slope forgetting the margins kind of where you want them to be in that sort of 40 bps plus range.
What are the main drivers for that how quickly do we see that margin catch up.
Well.
Julian our expectation is that Q1 will be the low point for margins in refrigeration.
A big driver of margins in Q1 was price cost.
Price cost was about.
150, or so basis point headwind for that segment in Q1, we expect price cost to be.
Neutral starting in Q2 and that will help improve the margins versus where it is today, but it's a more significant headwind and so.
The good thing is as we've seen price realization improve and refrigeration.
Since frankly since the second quarter of last year price realization has improved every quarter and price realization in.
Q1 was almost double of what it was in Q4.
So I believe I believe we're on the right track there.
Great. Thank you.
Thanks Julien.
Your next question comes from Andrew <unk> with Bank of America. Please go ahead.
Hi, yes, good morning.
Good morning.
Just a question on interest rates and distribution one of the commentaries we are apart from the channel.
There is on the distribution is comfortable carrying as much inventory as it does right.
It is because the floor financing it's pretty cheap.
With interest rates going up and I. Appreciate that you have one very very large distributor, but with interest rates going up.
Is this coming up with your discussions with distributors and this idea that structurally regardless of how strong the cycle is maybe they will carry less inventory just because right on an absolute basis. The interest payments will go up over time.
No that has not been a major focus area for our discussions with our not only our distributors, but our dealer generous cherilyn as channel as well.
What we're seeing in resi right now is the same that we've been seeing for the last couple of years. So I know, there's sort of this general anxiety about residential and the best that we can do is stay completely tied in with our channel partners to see what they're seeing and what they're seeing is generally a strong consumer.
The same trends that drove a 10% growth two years ago drove 20% growth last year drove north of 20% in the first quarter. Generally continued housing starts were positive in the first quarter. They were up about 10%. This whole work from home phenomenon, which is more migrating to a hybrid work environment that continues.
We continue at carrier to see share gains we had.
About 100 bps of share gains in the last year or so and that continued in the first quarter and there is more demand for some of the higher end units. The challenge. We have is that the higher and you get the more chips you rely on and Thats, where we have struggled.
On the supply chain side, so a lot of the underlying trends have continued I think the biggest discussion we have is not as much around interest rate impact, but it is just more around the switchover in the cutover thats going to take place in the second half of the year as we gear up for the 2023 units and especially in the south because that as such.
An unprecedented move where it state of installation so.
The the distributors and dealers in the South one I want to end up with zero inventory of today's units, but have sufficient inventory to support the first quarter.
And we that's that's going to be the switchover that is unprecedented and that could be great news as we get into the second half it could it could.
<unk>, we have to see how that cut over it takes place. The good news is that Chris and Justin are completely tied in on a daily basis with our channel partners and we are managing their needs as best we can availability, we still hurt many of our customers because we've been a little bit late but I can tell you I think with confidence we have been doing better than us.
Others and availability has helped us gain some share as well.
No those are great outside I really appreciate it.
Just a follow up question, you mentioned ship pump opportunity in Europe .
Size, what the market Tam is and.
Could this be for carrier overtime. Thank you.
Well I'll tell you without giving you a specific number Andrew we are very very bullish on the European heat pump market I mean, I think that if you look at it you look at it on the commercial side.
We can say with confidence where the where are the market leader with commercial heat pumps in Europe .
We have we have great technology, we have we have great channel partners, we're going to of course be added we've added key we will be adding Toshiba in the next few months.
And what we saw in the first quarter alone was that commercial heat pump orders in the first quarter were up 30% and it is helped by the fact that we introduced a great new product in the first quarter of last year. This low this low GW.
Air cooled chiller that we've talked about so the key for US is to make a bigger play for resi heat pumps in Europe , where we're not a real player today.
We're going to invest in that space I think you should be confident of that because we know it's going to grow theyre, probably going to add about $30 million heat pumps in Europe on the resi side by 2030, So we're not a player but we will be adding Toshiba we have D. We are adding heat.
He pump center of excellence, using our <unk> business in Italy, and that already has a channel. So we're going to be emphasizing <unk> heat pumps in Europe going forward.
Fantastic. Thanks, so much.
Thank you.
Your next question comes from Nigel Coe with Wolfe Research. Please go ahead.
Thanks, Good morning.
Good morning, good quarter good stuff.
So I joined the call little late so I apologize. If this has already been discussed we still second $2 billion of price realization for this year and I know that $1 billion you had in the plan.
<unk> kept it at the April one price increase but do you have any more price increases.
In the plan.
For this year.
Yes, Nigel Patrick here so.
What we said earlier was that with everything we've announced to date.
We are comfortable that we will realize $1 billion or more of price. This year and so it's likely given our performance in Q1 that we will do better than $1 billion. This year, but we also believe that the inflation will be higher than the $1 billion, we expected a quarter ago and so we think that both price realization, but also.
<unk> will be higher than the $1 billion. The good thing is with the prices we have announced.
We think we're comfortable with the $1 billion or at least $1 billion of price realizations. This year.
That's announced not yet realize of course, what I would add Nigel is that when we talk price I think a lot of our investors assume.
Fixate on <unk>, what we're seeing with prices, it's across the portfolio Juergen and his team in fire and security Tim and his team in refrigeration all pushing price in a very concerted way with I would say more effectiveness than we've ever seen in our history, So clearly, Chris and the team and an overall HVAC you've done.
Very very well on the price side, which gives us great confidence in our numbers for the rest of the year, but it really is across the portfolio.
Thanks, David that's great and then.
You mentioned price cost was negative in refrigeration.
Was that just transport refrigeration, just clarify was that for the whole segment or just the transport side and then that will obviously implies that HVAC was positive for the quarter. If you can just confirm that but my broader question on this price cost is if you're a neutral overall in <unk> why wouldn't you be.
Better than neutral for the full year I think that's I think the plan is to be neutral, but why would it be better given that <unk> is arguably your toughest comp.
It's early I mean, that's the I guess the short answer is that we Nigel we.
<unk> Q1 to be negative as you said and it was it was neutral.
It does give us confidence that we've taken aggressive pricing actions that bode well for the rest of the year, but we also have to keep an eye on inflation, where there remains a lot of uncertainty I think anyone's ability to predict inflation going out a few quarters as suspects. So we'll keep an eye on it right now we feel very good about where we stand on price costs going through the year.
But we do have to keep an eye on it and give us a few more months to see how things continue to play out.
Unless the I'm, sorry, what was residential price in the quarter.
We said residential was up over 20% overall sales more than half of that is driven by price.
Got it thanks, guys. Thank you.
Thank you. Your next question comes from Steve Tusa with Jpmorgan. Please go ahead.
Hey, good morning.
Good morning, Dave.
You guys had mentioned a couple of other items for the bridge I think it was like $300 million productivity numbers, something like that and any changes on anything else moving around on as far as the annual bridge concern and then what was that number in the first quarter.
Steve No change for the overall year, we still continue to target $100 million.
Sorry, $300 million of productivity $100 million of reinvestment and productivity in the first quarter was.
Over $50 million.
Okay, and then anything more on the second quarter as far as seasonality I mean, you mentioned.
The $100 million or so in China is shifting out.
And anything else in <unk> or should we expect somewhat normal seasonality.
I would say somewhat normal seasonality.
We will see that last year, you may recall the margins in HVAC were exceptionally high I think they were almost 19% we do not expect HVAC margins to be that high in Q2, we expect margins in <unk> to be up a little bit compared to Q1, but not to the extent that it was last year and we expect our overall.
Margins in Q2 to be maybe a few basis points below.
What it was last year.
Yes, and sorry, what what is normal seasonality.
I think these days I don't know what what normal is but but how do you guys see normal seasonality like maybe first half second half when it comes to the EPS what is that typically.
Q2, EPS is expected to be higher than in Q1 also because the volumes the volumes.
The volume set to pick up in Q2 and Q3.
Yes, I was looking for a little more precision there but.
I guess I'll just I'll just take what I can get there one last one day.
David how exactly do you expect this to play out the 23 transition maybe give us a little more.
Precise color on like what what you are currently thinking is the outcome when it comes to sell in.
And with the new products in the old products over the course of the second half and into 'twenty three like what's the current strategy that youre, taking on that front.
The current strategy is that we will be introducing the 2023 product really focused on the south starting in the next few months. So as we start getting into August the products that they will be receiving in the south will be the 2023 products because that's what they have to gear up to start.
<unk>.
On January one.
We will introduce that the new product for the north as we get closer to the end of the year, because they'll be stocking inventory of today's units because that state of manufacturer in the north in the third and fourth quarter. So introduce the 'twenty three product earlier for the South later from the North and then we will have to see the cutover.
<unk>.
We all watch.
Inventory levels and movement levels I would tell you, Steve very very carefully and they remain generally in balance with what we expected. So we watch inventory levels not only with our distributor partners, but also what's being stocked in the dealer network as well.
And we haven't we haven't seen anything.
Alarming, we do expect year end inventory levels to be down year over year, depending of course, what happens with movement in inventory over the next six months or so but our expectation is year end inventory levels would actually be down year over year, and we're going to stay Super close with our partners on this transition.
And then you would consider the move when you start selling those in and they are like 10% higher or whatever they are you would consider the related revenue increase as mix as opposed to price correct. When you layer those in to the channel.
Well movement, we've been seeing low single digits not 10%.
The price on the difference in price per unit per unit right that the minimum level doesn't that price of that minimum unit go up.
For the new product.
Yes, yes, the price yes, good point the price of the new units, we have said will be 10% to 15% higher than today's units. So yes that plays in but.
But it will be a mix not price correct.
So based on your account and look at it.
Yeah, Great Alright, thanks, guys I appreciate it.
Thank you. Your next question comes from Joe Ritchie with Goldman Sachs.
Hi, Thanks, good morning, everyone.
Hey, good morning.
So maybe just elaborate a little bit more on China, you guys mentioned in April the orders turn negative I'm, assuming that's because of the lockdown.
You have embedded.
$100 million headwind.
Headwind.
For QQ.
A little bit more color on like what are kind of like the range of outcomes, there and like what you're actually hearing and seeing on the ground.
Well, we're watching this one carefully Joe I mean, what I'll say upfront is that China is important to us we believe in China as part of our growth vector. We're a leader in transport commercial fire commercial HVAC as you know it is 8% of our sales.
We kind of came into the year with our biggest concern being around real estate, but the good news is that only one third of our sales in China are real estate and less than 10% of that.
Is where the biggest focus area, which has been as multifamily residential so that that specific vertical where a lot of attention has been.
Is less than 5% of our sales what's happened over the last I would say a couple of months as these lockdowns have had a significant impact on a lot of folks.
It's been really acute for us in Shanghai, where we have four of our factories in Shanghai a couple in commercial HVAC one for <unk>, one for transport and we have 130 suppliers in the region.
We've applied for reopening under their exception rules. We're in the process. We track. It daily we are hoping that we get granted not only for us to reopen but for our suppliers.
But.
It's not it's not a good situation over there and I think its questionable.
How its overall being managed but for us.
We need to just keep keep heads down being compliant and pushing for reopening and it's also having a knock knock on effect on logistics. So.
We do believe it's a timing issue like Patrick said, it could impact us a couple of.
$100 million or so this quarter, we would expect it to recover as we get into <unk>.
We do show an ability where there are shutdowns throughout COVID-19 that we recover very quickly and I would expect the same to happen in China. Most of our product for China is for China, or the Asia Pacific Some things come into the U S, but much less but we really are.
Pushing very hard for a rapid reopening in Shanghai, not only for China, but for the global market.
Yes, Thanks, and that was Super helpful. I guess, maybe one quick one quick follow up on China and then.
If you're thinking about kind of like proper decremental margin on the lost revenues is it kind of like a 25% to 30% range and then the follow on question just on margin, but clearly you are off to a better start than the annual guide.
So just any any possible cadence you can kind of give us throughout the year on kind of margin expansion.
You get to that 75 basis point number by year end.
Yes, I'll start with the second half of the of your question, Joe We think that.
Q2, and Q3 margins will be ahead of Q1 and Q4 will be.
Slightly below where we were in Q1, that's our current cadence where we're looking at from a margin perspective, and as I mentioned.
Steve.
Question, we do believe that Q2 margins, maybe slightly below where we were last year.
And then on the Decrementals related specific to China, we have really not shared what our incrementals or decrementals are in that part of the world. So that's really not something I can get into.
Okay, great. Thank you.
Thank you. Thank you.
Your next question comes from Deane Dray with RBC capital markets. Please go ahead. Thank.
Thank you and good morning, everyone.
One thing.
I'd like to keep the spotlight on the some of the troubled geographies.
You took a $9 million.
Impairment charge in Russia, where does that.
Represent in terms of your investment easier assets receivable.
People and then for EMEA orders up 10% to 15%, but there's concern now about slowing and how much have you baked in.
That into your guidance.
Yes, Deane I'll take.
The first one very quickly.
You're right, we brought off $9 million of assets related to Ukraine and.
And Russia in essence that is.
We believe.
All if not most of our assets in that part of the world. So basically we decided to look at all the assets we have in that part of the world and and royalties off there might be a little bit of a hangover in Q2, but if it is it's going to be in a few million dollars. So we don't expect it to be higher than that.
Dean on Europe .
Keep in mind that last year, when we had chubb it was close to 30% of our sales.
And now without Chubb, it's closer to 22% of our sales so Europe .
Has become less exposure for us.
What I will tell you is that we are watching this very carefully but Q1 orders were very strong they were up double digits April orders have continued to be strong for us in Europe . So there is no tangible.
Signs of weakness, but obviously with everything going on in the World will continue to watch it quite carefully.
That's helpful and then as a follow up can you update us on any any lost sales are past due.
Because of supply chain issues in the fourth quarter I think it was $300 million to $400 million you Couldnt ship, what would be the comparable number this quarter and you talked about missing components.
We know that's an issue everywhere.
Can you give any color in terms of which components, especially on the semiconductor side.
Yes.
The number of overdue to our customer demand is about the same number as what you mentioned for <unk>. It's in the few hundred million dollars range that we could ship if we didn't have any supply chain issues.
The root of a lot of our issues I would tell you two thirds of our issue our chips.
Chip's cannot recover fast enough and they continue to be extremely painful for us.
So I do believe our team is doing all the right things, which gives us some level of optimism as we get towards the second half of this year into next year the things that you know.
That we're doing to help ourselves as we get into two H are number one the direct relationships with many of our key chip Oems like Ti and Microchip and SD micro in those.
And there they're doing their best to support us.
I know they have a lot of customers that.
Are pushing on them, but we're really establishing these direct relationships and then we're really.
We're redesigning many of our key chips. So we will have 30% of our critical.
<unk> redesigned by the end of this quarter here in Q2, and then 50% by year end. So that gives us a lot more optionality, where we redesign around chips that are actually available. So that gives us some level of optimism, while we wait for the capacity of our chip Oems to come online in 'twenty three.
But supplier on time delivery and line stoppages.
What we've seen there are some signs of hope, but chips are not only impacting us there impacting our suppliers as well. So that's the biggest thing that we need to watch in terms of availability.
That's great I, just would like to point out is more of a comment that that sounds to us like the some of the fastest redesigned pace that we've heard that the oes are trying to do so.
Like Youre, making good progress there. Thank you while we have we have a small army working on it globally, it's something that it's unfortunate honestly because what we've had to do is reallocate engineers that we werent working on new product introduction to redesigning chips. So it is what it is I think our engineering and operations teams are doing all the right.
Thanks, but this cannot recover quickly enough.
Great. Thank you.
Thank you.
Your next question comes from John Walsh with Credit Suisse. Please go ahead.
Hi, good morning, and good start to the year.
Thanks, John Good morning.
Hi.
Maybe shifting gears a little bit question around the.
The fire and security margin expectations for the balance of the year.
Clearly Q1, much better than you guys initially thought.
I think it was actually guided down year over year in Q1.
I didn't hear the 16% again for the full year, but assume that probably is still in the right ballpark just maybe help us understand how the rest of the year looks for fire and security from a margin perspective.
Yeah, John as you said good start to the year and if I look at the margins versus where we expected it to be volume was a little bit better in that segment, but the big driver was price costs.
Price cost in that segment was better than where we expected. So good start to the year, but still too early for us to change our full year outlook clearly there is an upward call it.
Pressure in a good way to a margin in this segment, but still early in the year and as I mentioned earlier.
We're still seeing increasing inflationary headwinds.
So good start to the year better than expected price cost.
16% clearly on path to do a little bit better than that but too early for us to change our guidance.
Got you and no that makes sense.
And then maybe just a question around.
If youre seeing any market share shifts I know one quarter is tough to kind of extrapolate but.
Applied you've put up some really good growth curious if you think you're gaining share I know that was an initiative and then one of your competitors on light commercial I guess kind of walked away from some new build stuff.
Curious kind of what you're expecting there.
And if youre seeing any market share shifts in either of those businesses.
Light commercial I think it's clear we've gained significant share by the way while raising prices significantly. So we saw I would tell you over 400 basis points of share over the last year or so and that continued into <unk>. So about 100 over 100 basis points of share gain in Q1, so proud of.
The team on light commercial because it's been pricing it's been operational performance. It's been innovation, it's been customer stickiness, it's been all of the things that we pushing the teams executing well in a strong market.
And.
Applied is probably flattish I think we've seen some share gains.
In China, and North America, and Europe's maybe slightly less than.
What we thought but overall I would tell you applied shares probably flattish in <unk>.
Great. Thank.
Thank you very much.
Thank you. Thank you.
Your next question comes from Tommy Moll with Stephens. Please go ahead.
Good morning, and thanks for taking my questions.
Hey, Tommy.
I wanted to continue on the global applied HVAC business, so up mid teens in the quarter, which is good to see but.
What commentary can you give us about which parts of the world.
On the stronger versus weaker side of of that trend and then as you think through for the rest of 2022.
How do you see those those trends unfolding or the <unk>.
Business feel like it's accelerating or kind.
Holding a good.
Level of activity, how do you see that unfolding.
In the first quarter, Tommy North America was the strongest that was up around 20% Europe was around 10 in Asia was around 10.
Overall around 15% in the first quarter, we've sort of said high single digits across the board for the rest of the year, but we're going to have to keep an eye on it China is the biggest watch item right now.
China would probably be down for us in the second quarter, because we do have.
A couple of facilities in Shanghai that we need to get reopened as soon as possible. So we can support our customers.
The good news on overall applied is number one the underlying trends that we talked about at the beginning of the call.
Underlying demand remains very strong Abi metrics as we mentioned stays very strong aftermarket for HVAC up over 10%. The ALC controls business high margin really differentiated product lines that doesn't get enough credit up double digits. So a lot of a lot of strength, especially in some key verticals.
Like data centers and warehouse education healthcare commercial buildings coming back online so.
A lot to like there I would tell you. The one thing we got to watch very acutely right now is China.
Thanks, David Thats helpful.
Following up on M&A.
Noted toshiba's on track to close by <unk> I think you said.
Is it safe to assume we're not likely to see another large scale deal. This year and then a related point on potentially smaller scale investments you recently announced.
The venture capital group and there were a couple of deals underneath that umbrella already.
But what kind of cadence do you expect for those type of investments and what's some of the underlying strategy you could highlight for us there.
Well on the first we continue to have plenty of cash and firepower for more M&A. So we're actively working our pipeline along the lines of what we talked about our Investor day with a huge focus on sustainability leadership things that relate to aftermarket and our overall trends. So if we had the right deal.
We do a deal obviously north of $1 billion, we certainly could and would if it made sense in terms of our carrier ventures. We were very excited to launch it and announced a couple of important deals with AUM connect and advil one on the energy management side one on.
Batteries as we think about our reefer unit so right in the core of what we're focused on.
And we have a pipeline Jennifer Andersen and the team working a pipeline of a number of interesting investments, we're looking at and the cadence will be opportunistic and episodic. So it's not that we have set aside a certain budget for that for that team.
These are typically around $5 million type investments and if we see the right investments there will make them.
Patrick anything to add to that no.
Thank you, Dave I'll turn it back.
Thanks Tommy.
Thank you. Your next question comes from Brad <unk> with Citigroup. Please go ahead.
Good morning, guys.
Good morning, Glenn.
So.
I just wanted to dig in on the <unk>.
Strength youre seeing in the K 12 market a little I think you said orders up 50% year over year over 50% over a year can you just talk about.
How that market is evolving as federal funds become more available I mean are you seeing is it sort of more a broadening of orders or are you seeing larger longer duration district wide type deployments accelerating.
Yes, we're seeing a transition to a more system level.
Sales. So we had a key win recently led in Ohio for example, where we sold <unk>.
<unk> suite of solutions that included HVAC and included building management systems. They had some UV light upgrades for the school. So we're seeing a transition we were very fortunate to sell a bunch of <unk> units and point solutions and we're seeing a transition to more sustainable system level solutions, because what we're seeing from the.
The school districts.
Is the realization that ventilation not only helps with things like indoor air quality, and but 1% to 13 kids in schools have asthma. So obviously, it's important for COVID-19 .
And the spread of airborne illnesses and diseases, but it also helps with asthma. It helps with cognitive functionality, we've done studies to show that better ventilation and lower <unk> improve testing scores in school. So what we're seeing from the schools that we interact with is looking for a more structural sustainable solution.
And the good news is with especially with Essar three funds being released.
They have the funding to make long overdue investments.
That's helpful.
It sounds like some good momentum that should be ongoing and continuing there.
Maybe.
Maybe just one follow up from me shifting.
To your productivity efforts.
I thought your comments on sort of adding an additional 100000 factory automation and one was interesting and you've talked about.
Ramping that significantly through 2026, so just given what you've seen in the deployments you've done to date is there a way that you can frame sort of how youre thinking about automation impact on productivity annually over the next few years as you ramp those efforts.
Well remember what.
What we said is that we said that we would increase our automation hours from 3 million to $6 million.
<unk> the next between now and 2026 and remember that's on a base of say $30 million or so manufacturing hours. So it becomes a much higher percentage of our total hours and obviously you have to look at your variable cost that you are eliminating and replacing with automated hours. Obviously, there is an investment that goes.
With that but you also see benefits around quality and some of the other things that get into other benefits and things. So theres a lot of benefits that we're seeing.
From the automation investments and we expect that we expect that to continue and continue at a pretty good clip anything you want to add Patrick.
Perfect. Thanks, guys.
Thank you.
Thank you. Your next question is from Gautam Khanna with Cowen. Please go ahead.
Hey, guys. This is this.
This is jack on for Gautam today.
I guess I guess kind of just going back to the first question I believe on the resi HVAC cycle.
I guess, if you could maybe just provide your perspective on kind of what youre seeing.
I know you guys.
Pretty good price.
Yield this quarter.
Yes, Mike.
Is there any concern.
Going forward.
The consumer behavior may be mixing down buying parts versus system replacement I guess, just any color there would be helpful. Thanks.
We've seen no evidence of that is something again, we watch we watch this market which is.
Evolves on such a short cycle, we watch we watch it very very carefully we've seen we've seen no evidence of mixing down in fact, we've seen the opposite a lot of desire for our higher end Infinity systems, we've seen no evidence of replacing components versus entire system. So.
We will have to watch it obviously as you get into the higher Seer units you are probably going to be looking at more system level changes and then as we get into 2025 with the new refrigerant, probably more system level changes. So it's something we watch, but we've seen no evidence of.
Okay. Okay. That's definitely helpful. And then I guess, just kind of switching gears to commercial if I can just sneak another one in.
I guess like given the backdrop with rates going up in place and kind of increasing here.
Just a commercial like orders were strong this quarter.
Comps are a little bit easier, we're still fairly early cycle here and commercial I guess like when when do you guys expect to see some of these macro backdrop sort of manifest themselves in some of these commercial orders.
While the underlying trends remain strong our backlogs up in commercial up 30% orders up mid teens.
Again underlying trends like Abi.
I think March was at the highest levels, we've seen in over a year at 58 so.
We'll keep we'll keep an eye on it again, we're specifically watching China right now, but a lot of the underlying trends, including things like aftermarket and controls continue to be encouraging.
Okay. Thanks, Dave.
Thank you.
Thank you.
The next question is from Brett Linzey with Mizuho. Please go ahead.
Yeah.
Brett you there.
Please check your mute button.
Hi, good morning, all.
Good morning, just yeah, just wanted to come back to the chip Redesigns and the progress you've seen on dual sourcing are you able to size. How much revenue. You think was held back this year or at least in the last couple of quarters as a result of supply limitations and.
How much of the Unserved business now really shifts to 'twenty three as you get that ship capacity up and running.
Well, we'll have to see what we've sized it at as a few hundred million dollars of overdue to customer demand because of supply chain shortages in two.
Two thirds of that of our overdue relates to chips.
How quickly we recover on that we'll have to see and then how much is this year and how much goes into next year, we're going to have to see it's a fluid situation, Brett, but I can tell you that.
Our team I believe is working all the right things frankly, working around the clock and a very very challenging environment and it's not just chipsets logistics.
Some of the input material continues to be.
Challenging.
But at the same time I do think our team is doing the right things. The key for I think the entire industry is chip capacity coming online as soon as possible and some of the logistics dysfunctionality getting improved.
Brett I would just add that especially within fire and security we are counting on some of the call. It the <unk>.
Backlog the past due backlog to improve in the second half of the year and we are working on improving our supply chain and availability of chips.
As Dave mentioned and so we are expecting some of that too.
<unk>.
Turning to sales in the second half of the year, particularly in the F&I segment.
Got it makes sense and just one follow up on SNS order is very strong on the product side of 20% was hoping you could maybe unbundle that between fire versus security and then really residential versus commercial and industrial fairly balanced or any outliers there.
No I mean, it's been it's been a.
Positive commercial.
<unk> was up 20% plus industrial fire is doing very well as <unk> becomes kind of.
Back residential fire did very well the issue that we have to really watch is the access solutions piece because they are most reliant on chips. So demand has been strong in the access solutions piece, we're very well positioned.
But the key is that operationally, we need more chips online. So they can start recovering and that happens to be quite a high margin business for us.
Great. Thanks for the color.
Thank you. Thank you.
And this concludes our Q&A session for today I will pass it back to management for any final remarks.
Okay, well. Thank you everyone first thanks to our team here at carrier or more than 50000 people globally really proud of how the team has started this year and continues to execute.
The headwinds that get thrown our way so very proud of our team and thanks to all of you for joining and of course and will be available for any follow up questions.
Thank you.
And with that ladies and gentlemen, we conclude our program for today. Thank you for your participating and you may now disconnect.
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Yes.
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