Q3 2022 Carrier Global Corp Earnings Call
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Okay.
Good morning, and welcome to carriers third quarter 2022 earnings Conference call.
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 third quarter 2022 earnings Conference call with me here today are David <unk>, Chairman and Chief Executive Officer, and Patrick <unk>, Chief Financial Officer, we will be discussing certain non-GAAP measures on this call, which management believes are relevant in assessing the financial performance of the business. These.
non-GAAP measures are reconciled to GAAP figures in our earnings presentation, which is available to download from carriers website at IR Doc carrier Dot com.
Company reminds listeners that the sales earnings and cash flow expectations.
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. Once the call is open 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 over to our chairman and CEO , Dave Gitlin. Thank you Sam and good morning, everyone. Let me start by saying how proud I am of this tremendous carrier team, which continues to deliver strong and consistent results.
Turning to slide two for a summary of our Q3 results we.
We delivered 8% organic sales growth on the heels of continued traction on pricing.
Total company organic orders were up 3% in the quarter and our backlog is up about 10% year over year.
Importantly, we continue to deliver double digit aftermarket organic growth.
Adjusted operating profit was slightly better than we expected and price cost continues to be positive.
We're tracking to about $300 million of gross productivity about $100 million of which will come from G&A reductions.
We generated strong free cash flow in the quarter of approximately $700 million.
Supply chains are generally improving we have increased dual sourcing for critical components and supplier on time delivery has meaningfully improved the.
The improvements those steady have been later in the year than planned thus impacting our full year free cash flow forecast.
Our supply chain and working capital improve we expect to return to a 100% free cash flow conversion.
We successfully closed the Toshiba carrier acquisition during the quarter and we are making important progress on integration and are starting to realize synergies.
We still have plenty of capacity for additional value add capital deployment as our balance sheet remains very solid with approximately $3 billion of cash and no debt maturities until 2025.
Earlier this week, our board approved a $2 billion share repurchase authorization, which is on top of the $300 million remaining on the previous authorization.
We are confident in our strategy and long term prospects and remain committed to delivering shareholder value through disciplined capital allocation, including organic growth investments M&A dividends and share buybacks.
Moving to slide three.
I wanted to again emphasize our commitment to the value creation framework that we presented at our Investor day earlier this year.
Our team remains laser focused on these four principles of driving above market organic growth <unk>.
Expanding margins delivering strong free cash flow and disciplined capital allocation, we have a thorough goal alignment process a process that cascades, our critical focus areas to each of our 55000 team members individual performance goals.
We are making significant progress on our priorities as you can see on slide four.
Secular trends continue to drive sticky customer demand and one theme that certainly fits that definition is sustainability.
Our customers in both the commercial and residential verticals are motivated to achieve their ESG targets and reduce our carbon footprint and energy bills with government mandates policies and incentives further fueling this demand.
A key sustainability enabler is the shift to electrification and buildings and cold chain distribution.
Starting with buildings in the U S. The rapid transition to heat pumps will be further accelerated by the recently passed inflation reduction Act.
Today over 30% of our residential split sales include heat pumps in Q3, our residential heat pump shipments were up over 30% compared to last year.
We established our Tennessee facility is our North America, and heat pump center of excellence, and our expanding customer financing offerings through our new Eco home initiative.
In addition to heat pumps, we continue to lead through innovation with energy efficient solutions.
The cutover to our differentiated new 2023, SER two compliant units has gone well and our resi HVAC team has done a great job managing the production and inventory transition.
We recently hosted 8000 carrier and Brian dealers in Las Vegas, and our industry, leading dealer network is energized about the product lineup.
Our new outdoor indoor and outdoor units are complete redesign differentiated and performance.
<unk> and weight.
In addition, a 45% SKU reduction provides flexibility and operational efficiencies to the channel and to us.
We are driving aggressive cost reduction actions in our pricing the new more efficient units at least a 10% to 15% premium over previous generation products.
In Europe , where we are the leader in commercial heat pumps, Q2, and Q3 heat pump orders were up 30% and we anticipate the same magnitude for the full year.
And the <unk> acquisition enables us to accelerate product development in the heat pump segment and become a more significant player in the fast growing Asia via RF heat pump market.
We also continue to benefit from the shift to electrification in our truck trailer business.
With strong traction on our innovative vector equal units.
Customers now operate these units in 11 countries and our market leadership in this segment is being recognized.
Just recently vector equal or earn the top product of the year award from the environment and Energy Leader Awards program.
In addition to sustainability, we continue to lean into the opportunity presented by the increased focus on health and wellness. We are proud to partner with our friend Russell Wilson as we work with large scale customers to provide them with safe and healthy indoor environments.
Demand for our innovative solution continues to build in Q3 healthy building orders were up over 55% compared to last year and our pipeline increased to about $900 million.
Within the K through 12 vertical Q3 orders were up 20% and we are up about 35% year to date.
Our intense focus on digitalization.
For many reasons, but at its core we are transitioning carrier from an equipment centric provider to a solutions company with more aftermarket and recurring revenues.
The opportunity to use digital offerings to embed ourselves in our customers' ecosystems to help them achieve specific outcomes is tremendous.
Our abound in link digital platform sense, and collect data and interact with key building a cold chain system technologies to provide customers with the outcomes they desire.
<unk> not only provides healthy and sustainable solutions. We have also introduced new applications, including abound predictive insights that reduced the total cost of asset ownership by enabling smarter more predictive maintenance to optimize equipment health and performance.
My leadership team and I are interacting directly with scale customers and I can tell you that their willingness to make long term commitments to carrier is encouraging.
Recent abound wins include a nationwide drugstore chain that will add an additional 2500 stores to our growing portfolio of managed multi site retail locations and an installation at more than 100 commercial office buildings for a key scale customer.
Our efforts here are being recognized as about <unk> energy has received five awards in 2022 for innovation impact and customer service excellence and its ability to deliver positive outcomes.
Growing our bound sales will generate higher margin more predictable recurring revenues and a stronger pull for additional equipment sales and services.
And the same holds true for links in our cold chain initiatives, we continue to add capabilities to our links platform focused on providing our customers with greater flexibility visibility and intelligence across the cold chain.
Our advanced Reefer equipment insights and analytic models provide early and automated detection of refrigerant loss, enabling our customers to improve their asset uptime and operational performance and to protect the invaluable refrigerated cargo in.
In our North American truck trailer business Q3 saw a more than 60% six zero percent year over year increase in service revenues driven by thousands of new link subscription subscriptions.
We remain on track for 100000, new link subscriptions by yearend.
Our traction on solution selling.
Driving more recurring revenues is reflected in our continued aftermarket performance as you can see on slide five.
Aftermarket was up double digits organically in the third quarter and we continue to expect to realize over $7 billion in revenue by 2026.
Connected devices are a fundamental enabler we remain on track for about 20000 connected Chillers are attachment rate was 40% in the third quarter and.
And we expect to have 70000, chillers under blue edge contracts by year end.
We are also expanding our parts sales enabled by our <unk> platform, where we on boarded two new national accounts.
Our aftermarket playbook is deeply embedded in our DNA and we are seeing the results quarter over quarter.
Lastly on slide six we continue to be confident in our ability to drive shareholder value even in the face of economic uncertainty by staying true to our proven strategy.
We have consistently exceeded our expectations and we will utilize that same playbook in 2023 and beyond.
Driving strong and recurring growth through differentiated solutions that address secular trends and increased aftermarket opportunities eliminating.
Eliminating waste and driving tenacious cost reduction and remaining disciplined in our capital allocation to accelerate growth and return capital to shareholders.
As we close out Q4, and look ahead to 2023, we will control the controllable by doubling down on this proven playbook I am deeply confident in the carriers team ability to drive continued strong results. Despite challenges that may be thrown our way with that let me turn it over to Patrick Patrick Thank you, Dave and good morning, everyone.
Please turn to slide seven.
Reported sales of $5 5 billion were up 2% compared to last year and organic sales were up 8% driven by price with volumes flat.
The Chubb divestiture reduced sales by 10% and acquisitions substantially all Toshiba carrier increased sales by 8%.
Currency translation was a larger than expected headwind of 4% Alder.
All the segments, where price cost positive in the quarter.
Q3, adjusted operating margin was down 40 basis points compared to last year.
The margin impact of the Chubb divestiture and the TCG acquisition.
About 70 basis points, each offset each other.
Price cost although positive in the quarter is a margin headwind of about 30 basis points.
The adjusted effective tax rate of 23% is in line with what we now project our ongoing annual effective tax rate to be given the Toshiba acquisition.
Adjusted EPS of <unk> 70.
With stronger than expected and includes a <unk> <unk> benefit from Toshiba, which will reverse in Q4.
In essence timing of integration expenses.
For your reference we have the year over year Q3, adjusted EPS bridge in the appendix on slide 17.
Free cash flow in the quarter was $699 million.
While there has been some improvement in the supply chain component shortages continue to affect deliveries and shipments and inventory levels.
Before I move on to the segments, let me make a comment about the other income you see in our P&L.
As a result of the Toshiba carrier acquisition, we recorded a onetime gain of about $730 million in Q3, which in essence is the step up associated with the ownership stake we already had in Toshiba carrier.
This is not a taxable event.
We excluded this one time gain and amortization related to acquired intangibles from adjusted operating profit and adjusted EPS.
Moving on to the segments starting on slide eight.
<unk> reported sales were up 22% and of course reflect the impact of Toshiba, which added 12 points of year over year growth.
<unk> organic sales were up 13% driven by high single digit growth in residential and strong double digit growth in our light commercial and commercial HVAC businesses.
<unk> movement was down mid single digits in the third quarter and quarter and field inventory levels are up about 20% year over year.
We continue to work towards balanced year over year field inventory levels by year end as we transition to the new 2023 products.
Residential HVAC growth was all driven by price as volume was down mid single digits.
Our light commercial business grew over 20% in Q3 and field inventories remain down about 10% year over year.
Commercial HVAC had a very strong quarter with double digit growth in applied equipment aftermarket and controls.
All regions grew mid teens.
Sales in China were up more than 50% as we recovered from the impact of the Q2 Shanghai Lockdowns.
Adjusted operating profit for the HVAC segment was up 6% compared to last year.
As expected operating margin was down 260 basis points.
About 150 basis points impact from Toshiba consolidation and 90 basis points due to price cost.
The balance is unfavorable mix and lower JV income offset by good productivity.
We expect the HVAC segment to remain price cost positive for the full year and to deliver full year margins of about 15% consistent with what I shared with you last quarter.
The Toshiba acquisition has about a 100 basis point dilutive impact on full year 2022 margins for this segment.
Transitioning to refrigeration on slide nine.
Q3 reported sales include a significant headwind from currency translation. As this segment is very global organic sales were down slightly given significant supply chain constraints as truck trailer growth offset declines in container and commercial refrigeration.
With transport refrigeration or within transport refrigeration, North America truck and trailer saw strong growth in the quarter up high teens.
However, supply chain issues affected Europe truck and trailer leading to increased backlog and inventories.
Container sales were down about 20% year over year based on demand softness as well as tough tough comps.
Since the tech delivered another strong quarter with double digit sales growth.
Commercial refrigeration was flat year over year as our European food retail customers are pressured by high inflation.
And energy prices.
Adjusted operating margins were up 80 bps compared to last year, despite lower sales with favorable productivity price cost and currency translation.
More than offsetting the volume headwind.
The segment remains on track to deliver margins of about 12, 5% this year.
Moving on to fire <unk> security on slide 10.
Excluding <unk> sales from the third quarter of 2021 fight in security segment sales were up 6%.
Adjusted operating margins expanded 220 basis points in the quarter, mainly because of the chubb divestiture and productivity, which more than offset the impact of negative volume.
This segment is particularly impacted by supply chain challenges, especially in the higher margin access solutions business.
Cos was positive and this segment remains on track to deliver margins of about 16% this year.
Slide 11 provides more details on orders performance.
The total company organic orders were up low single digits for the quarter and backlog remains strong throughout all segments.
Similar to last quarter and as expected.
Resi HVAC orders were down in Q3 as the business continues to prioritize their order book and normalize the backlog that is still measured in months versus typically weeks.
Light commercial demand remained robust and orders were up almost 50% in the quarter.
Backlog is up three five X year over year within that business, which should position us for a good start to 2023.
And as I mentioned commercial HVAC saw double digit orders growth for the seventh consecutive quarter.
All regions within commercial HVAC saw double digit growth and the commercial backlog, excluding the <unk> is now up over 35% compared to last year and extends well into 2023.
Refrigeration orders were up mid to high single digits in the quarter driven by an almost tripling of orders in North America truck and trailer as we opened the order book for the first half of 2023 and September .
Given how we manage the order book.
Better year over year comparison for North America truck and trailer is properly looking at the year to date order performance.
Through nine months orders are up 27% year over year for North America truck and trailer.
The transport refrigeration backlog remains up almost 10% year over year as the North America strength more than offset some order weakness within the Europe truck and trailer business and container.
Commercial refrigeration orders were down over 20% organically as the European food retail customers are impacted by energy prices and inflation and as we continue to focus on improving profitability of this business.
Finally demand for a fight on security products remained healthy orders were positive in each of the businesses.
Except for access solutions, which has been most impacted by supply chain challenges.
Fire and security products backlog is up almost 40% year over year with double digit growth in all businesses, except residential fire in the Americas.
As you can see on both the left and right size of the slide we saw strong demand in many of our businesses. However, we have seen some weakness in a few areas such as in Europe , driven by Europe truck and trailer and commercial refrigeration. In addition, the weaker container orders impact Asia.
Excluding China given that this business mainly books orders in Singapore.
For reference with the addition of PCC.
China sales are about 9% of our total company business.
Now moving onto guidance on slide 12.
Compared to our prior guidance, we are reducing our full year expected sales by about $400 million.
With most of the reduction due to currency translation.
The balance due to slightly lower organic sales growth.
Accordingly, we now expect full year revenues of about 24 billion.
Versus the prior guide of $20 8 billion.
We now expect adjusted operating margin of 14, 2% up 60 basis points compared to last year and up 20 basis points compared to our prior guidance.
This reflects improved Q3 margin performance.
Currency translation is also a minor tailwind to margins compared to our July guidance.
We are increasing our full year adjusted EPS guidance range to the hint to the high end of our prior guidance or $2 30 to $2 35.
This is primarily due to the strong performance in the third quarter, including productivity that more than offsets the incremental earnings headwind from slightly lower volumes and currency translation.
We continue to expect the DCC acquisition to have a neutral impact on adjusted operating profit and adjusted EPS in 2022 with operating profit contribution to be mostly offset by the loss of equity income and integration expense.
However, as I mentioned earlier, the timing of the planned integration costs shifted from Q3 to Q4, causing a DCC adjusted EPS contribution in Q3, but a negative impact in Q4.
Lastly on free cash flow last quarter, we said, achieving our free cash flow target have become more challenging given continued supply chain headwinds.
While we did see supply chain improvements in Q3, the improvements are coming later than expected and so it will not be enough to reduce our inventories by year end to get to $1 $65 billion of free cash flow.
In addition, and to a lesser extent free.
Free cash flow was negatively impacted as we acquired cash from the acquisition of DCC, rather than receiving that cash through dividends from equity investments.
As a result, we now expect to generate closer to $1 4 billion in free cash flow.
This still includes approximately $200 million.
In tax payments related to the Chubb gain and a $100 million unfavorable impact from the expiration of the R&D tax credits.
In summary, another good another quarter of good performance enables us to increase our adjusted operating profit and adjusted EPS guidance.
The strength, we see in parts of our portfolio are helping to balance weakness in other areas such as Europe , and some consumer related end markets.
Supply chain improvements are coming later in the year than we expected and our leading to elevated inventory levels impacting free cash flow.
With that I'll turn it back to Dave for Slide 13. Thanks.
Thanks, Patrick we have delivered very solid performance year to date and remain confident in our ability to close out another strong year demand for our innovative products remains healthy and I'm excited for the opportunities that we have in front of us with that we'll open this up for questions.
Thank you.
Reminder, to ask a question. Please press star one one and again to ask a question. Please press star one one please standby, while we compile the Q&A roster.
And our first question will come from Jeffrey Sprague from vertical research partners. Your line is open.
Hey, Thank you good morning, everyone.
Good morning, Jeff.
Dave.
Toshiba is completely in the wheelhouse.
I was just wondering if you could give us a little bit more color on kind of a forward look.
Kind of 'twenty three.
What do you think you can do with the margins there.
The restructuring plan looks like.
Sure well, let me start and then Patrick can add some color I would say that as we've looked under the covers that Toshiba, we're even more encouraged by by what we see and the opportunity I think one one slight disappointment was price cost I think we should have reacted the company should have reacted a little bit earlier in the year to some of the.
Cost headwinds that we were seeing so when we closed on the deal we did have to come in.
And raise prices, but we are also as we said we were going to be aggressive on the cost side, we talked about $100 million.
Of run rate synergies and I can tell you there is opportunity on top of that the team is is going to drive that extremely aggressively and I think the most exciting thing.
As you look at the integration of the businesses. The Vrs business is fundamentally heat pump business, it's going to help us with our growth not only in Asia, but also in Europe , So really differentiated products the integration.
The team has gone extremely well and I think in terms of margins if you fast forward out.
Five years, or so I think youre looking at an EBIT Ross that's in the mid teens.
Right.
Just on the on the resi side of the equation.
I assume it's kind of in your guidance, but it sounds like we should be expecting some absorption pressure in Q4 as you work down inventories, but but also just curious.
Maybe the apparent mismatch between backlog being very extended but maybe inventories being seasonally higher than you'd like is that does that backlog now really kind of.
The new seer stuff and we should think about that being delivered in 2023.
Yes, I think that our we've been watching that.
It's very tricky balance between movement inventory levels and the cutover quite carefully movement was down kind of mid single digits in the quarter. Our key objective working very very carefully with our channel partners is to make sure that we end this year with inventory imbalance, that's something that's very important to our channel partners and to us.
And I am confident that we will.
The cutover to the new <unk> units has actually gone extremely well and as you know, Jeff we took a much more aggressive approach to drive more value add into the product. So we're now a 100% cut over to the to the new product in the south will be 100% cutover to the new products here as we get in about a month from now for the north so that.
Cutover is going very well almost all of the new product will be shipped next year and thats at about a 10% to 15% price premium so I <unk>.
We're trying to manage that inventory balance and we're still sitting at around four months of backlog when usually we would have four weeks. So we're carefully monitoring the fluid situation, but we feel confident where we are right now.
Definitely the absorption, yes, there is a little bit of a headwind there and I'd say that that extends to some of the other segments as well, but we just want to make sure that we exit the year, we had appropriate levels of inventory. So in some of our facilities will take a little bit more downtime that we expected just a couple of months ago.
Great. Thanks for the color guys.
Thank you.
Thank you one moment for our next question. Please.
And we will take our next question from Nigel Coe from Wolfe Research. Your line is open.
Thanks, Good morning, everyone.
Good morning.
So let's talk about residential.
So we're seeing some pretty divergent trends between heat pumps and AC units.
That will continue into 'twenty, three 'twenty four and beyond.
Some some of your competitors have weaker positions in heat pump. So you got a very strong position. So I'm. Just wondering are you seeing any share shifts.
As this pandemic plays out.
Yeah, I would say Nigel that if you look over.
Last 12 months I think its clear we picked up on it.
30, or so bps of share so I think that our position in heat pumps.
Has helped that.
And I do think that on the flip side, we are working again with our channel partners to manage their inventory levels as they head into next year I think at a high level.
When you look at overall <unk> for the first for the third quarter.
Had good price, we're sitting on backlog, we're managing the cutover watching movement in field inventories, but.
We do get as you know and I'm answering kind of more broadly Nigel in your heat pump question, but we get a lot of questions about resi.
And just a bit of a reminder for folks is that some perspective at say, 2025% of ourselves and I think the thing as we look at next year that'll be most acutely under pressure.
We'll be the residential new construction piece, that's a quarter of the residential business. So that means it's about 5% of our total business.
Which means that if if that residential new construction piece just pick a number was down 10% that would impact our top line by 5% and then you have these countervailing things like what Youre, bringing up which is we have a number of positive mixed stories, which is the shift to heat pumps, it's whether it's cooling only to heat pumps, where we're doing particularly well, especially.
Because we have outsized share in Florida and places in the South.
We have the new series units coming in and then we also have depending on how the inflation reduction Act plays out you have the heat pump mix from entry level to higher efficiency. So we are watching some of.
The concerns around volume overall, but there are some I guess encouraging counter forces that should position us well as we go into next year.
Okay, that's great and then Patrick you mentioned.
Some absorption issues.
We booked an inventory in the channel, but when we take a step back and think about the new <unk> units going into the south is there a learning curve to think about for those units as well.
I mean, obviously you you manufacture 15, CF a long time, but as you put these new incentives or learning curve impact there as well.
We started selling them in I believe it was July Nigel So I think yes, we worked on that we've worked on this for a long period of time and we're there so I don't see that at all.
As a headwind to our.
Through our performance in our facilities.
A couple of questions.
Points to the question you had about heat pumps.
Believe we are the number one in U S. Resi heat pumps, as we mentioned sales up 30% year over year in the quarter really well positioned there. We believe we're number one in Europe commercial HVAC each pumps, we mentioned there up 30% in the quarter and then of course with the CCC acquisition, we've been further strengthened.
Our heat pump position that we can benefit from not only in Asia, but also in Europe with the residential opportunity over there.
That's great. Thank you very much guys.
Thank you one moment for our next question. Please.
And our next question will come from Julian Mitchell from Barclays. Your line is open.
Hi, good morning.
Maybe just.
Just wanted to start off with the assumptions for the Q4.
Organic sales growth.
I think youre, assuming sort of mid to high single digit organic growth in the fourth quarter.
Companywide.
And then within that we assuming that's sort of HVAC.
High single.
That the right way to think about it and then are you embedding rajeev volumes get worse year on year.
Anh back in Q4.
Yes, Nigel sorry, Julien Patrick here Youre right for Q4, we expect organic growth to be high single digits a little.
Bit down from what we reported in Q3 or organic growth.
In terms of.
Volumes.
Versus price in Q4 again, we expect volume to be about flattish for most of the.
Organic sales growth driven by price and actually we do expect to have some volume growth in HVAC in the fourth quarter of the year.
Very modest.
Thanks, Patrick.
<unk> ICL business.
Got it and that HVAC slight volume growth.
We think you can sort of very strong commercial and then Rajiv volumes down mid singles similar to Q3.
General you would expect to see continued growth in commercial and light commercial to businesses that are doing really well with strong backlog. We would expect again to have volume within <unk> to be flat to slightly down.
That's helpful. Thank you and then just switching tack to.
Europe for a second.
We saw the orders down EMEA about 10% they've been down in the second quarter as well.
So how are you seeing kind of the broad.
Demand environment, there it looks like refrigeration in particular is being hit hard maybe something idiosyncratic to that market.
Just any broad perspectives on kind of how you see the pace of that Europe slowdown playing out.
Yeah, Julian it's kind of a mixed bag for us in Europe , and first I just mentioned for context, it's about 20% of our total sales youll recall, when we had chubb than before at Toshiba was closer to 27%. So our exposure to Europe is down from what it was a year ago, having said that we.
We have been pleased with the orders.
Key parts of our business commercial HVAC fire and security have done quite well on orders in Europe . The things. We watch as you said is really on the refrigeration side in both.
European truck trailer NCC and CCR European truck trailer I think that.
Our sense is as of right now our lead times have increased a bit because of supply chain. So our customers are pretty well booked for the coming months. So we're not as concerned right now about the orders trends because of the significant backlog as we look out some months on ETT, but of course, that's something we have to keep an eye on clear.
The CCR piece is down some of our customers there.
We're really affect by some of the energy prices. So.
That was down in part because of the market I think in part because we are going to great lengths to improve our margins. So there's probably a bit of a mix in there but too early to.
Say, that's a trend, but there are a couple of watch areas for sure there.
That's great. Thank you.
Thank you. Thank you John .
Thank you one moment for our next question. Please.
And our next question comes from Deane Dray from RBC capital markets. Your line is open.
Thank you and good morning, everyone.
Good morning, good morning, Jamie.
Can we start with the healthy building orders up 55% that's pretty impressive.
Frankly, we've been waiting for this type of surge post COVID-19.
Was there a particular driver here, where you saw these orders come through is there any of the government funding.
A boost but any color would be helpful.
Well.
K 12 is clearly helping.
And I think theres going to be impetus for them to continue to pick up the rate of spend in K through 12, So orders year to date in K through 12 up 35% I'll tell you a chunk of that.
Has to do with this drive for healthy buildings, we now sit on a pipeline.
Of $900 million, it's up 40%, but we signed I cant mention the name of the customer, but we have a customer in particular, that's a really respected key scale customer technology customer.
No.
That.
Is encouraging people to come back to the office and as they do that they have 100 office buildings theyre going to be putting a bound in in part they want to use it to give their employees confidence as they come back to the office around the indoor air quality, they're going to put the monitors in the lobbies there we're going to work to try to make it mobile accessibility. So you can see the.
A healthy indoor air quality metrics on your phone, we're working with them on that so we're starting to see more and more demand we had a nice win in China. It was about a $5 million. When we had an exhibition center there that had new air handling units, where there is a big focus in China ALC, our controls business has done well they had a key win in.
Georgia with a lot of IQ solution. So honestly I think it's a trend that's here to stay.
That's great to hear and then.
Follow up question on the chiller attachment rate of 40%.
Whats your expectation is that you would expect given the kind of payback that attachment rate would be higher at this stage, maybe it's still early but what are the reasons that customers are not giving you that order at the time of sale.
Well.
What I would say by the way just to clarify it's not it's not necessarily up 40% it's at.
40%, yes, yes, yes, I'm sorry, but.
Look we said that we were going to improve our attachment rate.
Five percentage points, a year and that would put us at year end and in the low <unk> and I just think we continue to drive that playbook.
When it comes off warranty we are there to get a long term agreement and we continue to see traction as we add salespeople and the right cities and the right locations with the right digitally enabled offering. So we're pleased with the progress we take a very strict interpretation of what we call an attachment rate because if we.
Look at after we sell a chiller do we get.
Predictable sales, that's 100% of the time, if that's what the definition is that we want to use it as a 100% because we always get part sales we always get service, we always get certain amount of sales we want a long term agreement that sticky that's recurring revenues and thats. The definition, we use and that under the Blue Etch PE book is growing five percentage points a year.
<unk> and the other one we really look at is total chillers under some form of LTA and Thats growing 10000, Chillers a year and that will be 7000 by year end.
Thank you.
Yes. Thank you.
Sure.
Thank you.
Our next question please.
And our next question will come from Joe Ritchie from Goldman Sachs. Your line is open.
Thanks, Good morning, guys.
Hey, Joe Good morning morning.
Hey, can we start on price cost looks like it was.
Positive across each of the segments, just any any potential quantification on how positive it was for the quarter and then as you're thinking about the carryover effect into 2023.
Maybe just provide some color on that as well.
Yes, Joe.
Price cost impact to margins in the quarter was unfavorable 30 basis points, but from a dollar perspective it was.
A favorable thing give or take about $50 million in Q3 alone.
With respect to carryover.
Based on prices that we have already implemented we would expect carryover next year to be several hundred million dollars.
At the same time I'll have to say, though that we would also expect some carryover inflation next year, especially inflation related related to purchases, where we have material pricing formula that is a little bit of a lag there. So the net impact to the P&L of the price cost called for next year will be lowered in just a few.
<unk> hundred million dollars of good news of course, we continue to target price cost neutral at worst and also say that for.
For next year of course.
We're looking forward to is a potential good impact from commodity cost tailwind.
Got it that's Super helpful. Patrick and then maybe just kind of my next question really focusing on the strength that youre seeing on the.
Commercial HVAC markets.
Obviously double digit orders now for seven quarters in a row there is a lot of concern.
Commercial is going to follow <unk> into a downturn, Dave I'd love to just kind of hear your thoughts on that.
What your expectations would be as we kind of head into 2023 as well.
Well, let me tell you what we're seeing Joe is that you mentioned the seven quarters of double digit orders growth and the nice thing is that it's across it's across the globe.
North American was up something like 20%, China was up double digits Asia Pacific outside of China was up close to 20% Europe was up double digits.
So it's pretty it's pretty broad based.
Certain verticals do better than others, but K through 12 health care data centers some of the industrial areas, especially even in China, where we pivoted from property to industrial very purposefully there. They continue to be quite positive. So we're quite well booked for next year and commercial HVAC, where our backlog is up.
30% year over year healthy buildings as strong as we said the shift to sustainability and the focus there is strong so.
And the other thing I would mention is that Abi as you know Joe is a nice leading indicator and thats been above 50, now for 20 months trade toggles between 50 to $53 54, but for it to be above 50 for 20 months in a row.
Is encouraging and then we have a lot of investments around a bound thats going to create a lot of pull for long term sticky revenues, but also some of our products. So I would tell you on <unk> and of course, the same is true for light commercial encouraging trends.
Great to hear thanks, guys.
Thank you Joe.
Thank you.
One moment for our next question.
Our next question will come from Josh Equivalency from Morgan Stanley . Your line is open.
Hey, Good morning, guys. This is actually the settlement on for Josh. Thanks for all the color and for taking our questions.
Just sort of looking at the various pieces of stimulus.
For next year.
How do you sort of thinking about that and how much do you think that sort of add to that.
<unk> pipeline or even addressable market for 2023.
Well Theres a couple of things at play I would say three things you have the inflation reduction Act you have the infrastructure Bill and then you have whats happening in K through 12, if we start with K through 12, the <unk> funds they've only spent.
Very little of the 190 billion that's been allocated towards the school. So I do expect as strong as our orders have been that spending continue to pick up which of course, regardless of economic cycles.
Government funded spending on K through 12 should withstand whatever happens in the broader economy. So that's encouraging on the inflation reduction act the big thing that will play out over the next couple of months.
Whether the $2000 a year incentive applies to both the kind of the mid tier mid tier sera units as well as sort of the higher ends here if that happens I think youre going to see a very broad based.
Upgrading from your entry level heat pumps to the to that mid tier heat pumps, which would be obviously good for the planet good for our customers energy bills and frankly, good for us as well and then just a broader infrastructure Act has provided some tailwind as well and then we see similar things happening in Europe .
I think regulation and incentives is very thematic for us it does help during different economic cycles.
Thank you.
Net foreign next question.
Our next question will come from Tommy Moll from Stephens, Inc. Your line is open.
Morning, and thanks for taking my questions.
Hey, Amit.
So as part of your value value creation framework, you've talked about using productivity to fund some investments and I wondered if you could.
Bring us in on what the planning could look like there for a potential recession scenario. So to the extent that volumes were pressured in a potential recession.
How much more difficult is it to realize some of those productivity objectives.
Are there different buckets of investments that would be.
<unk> priority.
Not willing to sacrifice versus more discretionary or relatively lower priority that could potentially get pushed out if necessary just some of the push and pull there would be helpful for your planning.
Yeah.
Yes, Tommy So let me start by talking about productivity for this year, we started out by saying that we would target $300 million in productivity and that remains our target for the year and frankly, we were on a path to.
To achieve that for the full year.
Now in case of a potential recession, a couple of things one is.
We continue to have tremendous opportunity to take cost out of our system, whether it's our factory footprint, where it is from a sourcing point of view, we still have way too many vendors that we intend to consolidate over time.
G&A opportunity. In addition, I will say that what we've been struggling with the last year or year and a half is tremendous inefficiencies in our factories shortages of parts.
Causing inefficient manufacturing operations.
Expedited freight logistics.
Whenever we look we have probably have significant pockets, where we are less efficient now than we were two years ago or maybe even three years ago. So if there would be a downturn not only would we expect to continue to go after cost that we see today, we would expect to get back to much higher levels of efficiency.
And some of our facilities and then of course, what we have not talked about which is the whole price cost equation. We expect we of course, we see important input costs come down we don't see a significant impact on this year, just because of our hedged or loss positions.
Clearly in an environment, where we might see a revenue decline, we would expect commodity input cost to further go down and we would expect to benefit from that as we've been very clear that we would have no intention of giving up price.
Very helpful. Thank you I wanted to pivot to the repurchase authorization that you announced I think it was another $2 billion that the board approved.
And.
Your cash flow guidance was reduced but youre still expecting a pretty significant hole for this year, especially in the back half.
How should we think about the cadence of repurchases the level of priority there any change to what you've communicated before or more steady.
Steady as she goes.
The way you can think about Tommy is from a capital deployment priority point of view.
Very clear and no change funding organic growth.
Inorganic for example, what we've done with PCC, a growing and sustainable dividend and then share repurchases.
You mentioned the $1 4 billion of free cash this year. So we're counting on a big.
Last quarter of the year that is not unheard of and as of today, we have $3 billion in cash and all in we expect to end the year with about $3 $3 billion in cash in terms of the new authorization. So in addition to the whats remaining of the prior authorization, we have about $2 3 billion left for share repurchase.
<unk>.
Think about that authorization, taking us through all of 2023 and into 2024 and the way we're thinking about this obviously is depending on opportunities for M&A or what the share price us or of course, the general macro outlook will either leaning more or we will pull back a little bit we have plenty of flexibility there.
Thanks, Patrick I appreciate it and I'll turn it back.
Thank you Tom.
Thank you one moment for our next question.
Our next question will come from Steve <unk> from Jpmorgan. Your line is open.
Hey, good morning, good morning.
Morning, Steve.
Just on the on kind of the market call for next year. So you mentioned new housing being down.
<unk>.
I guess, you didn't really touch on I didn't.
What I said, Steve is that if I gave right, but that said if I'm sorry, yes, yes.
Got it got it got it yes. So today, so that's kind of like.
It looks looks pretty likely given given what we're seeing in the data right, but you didn't say that true.
What's your I know, you've been saying that for a while.
Well I think new housing that would be obviously wanted to the debate is really around the replacement market.
What's kind of the feedback you're hearing from the channel on how.
How people feel about the.
<unk>.
The replacement side of that market for next year, whats kind of the latest and greatest there.
I would say it's early to say.
As you know, we're coming off some really strong years there.
So it's something that we're going to have to watch because theres just a lot of moving parts in the system. You have these three different mix changes that are playing out.
Mix of the higher seer or the mix from cooling only to heat pumps, the mix from potentially entry level heat pumps to the higher efficiency. One and then you have all of those underlying trends that we've seen that in some respects continue to.
Go into 'twenty three like people working from home in some cases mixing up whether it be some volume pressures on the replacement market potentially on the volume side, but theres a lot of things that whether you put it in price or mix or tailwind. So it's a bit it's a bit early to say exactly what's going to happen.
On the volume side for the replacement side.
Okay, and then just on like commercial it looks like Lennox bounce back a little bit in their production, but we're hearing that train.
Is.
Now having <unk>.
<unk> extended lead times.
Okay.
Whereas.
I assume you guys feel like you're taking market share there.
And is.
Are we right that there is still some choppiness in that supply chain, perhaps or others. You guys look like you're you're kind of scaling through that unlike commercial yeah.
Yes, I would tell you that we've all had our challenges I don't I don't want to pretend that we have been challenged free and you saw that kind of in the second quarter.
I would say that we have seen material progress when we're seeing orders up 50%, we're seeing sales up 25%, which we saw in the third quarter.
We're very very well positioned there I think if you look over a 12 to 24 month period, I think folks would agree that we've taken share and we continue I think the benefit from not only some operational performance, but we've introduced a new product that is 40% more efficient than the one that it replaced so I think new product.
A little bit of.
A little bit of continuous improvement on the operation side. It puts us in a position for light commercial Steve where our backlog is at record levels. You know Patrick said it in the script, but our backlog is up three and a half X.
Versus the third quarter of last year or so.
That does position us well, obviously for <unk>, but as we head into next year, sorry, one last quick one just on this.
Transport refrigeration stuff all in whats kind of the latest and greatest view on that obviously the orders are very strong in North America, but there's perhaps some timing around.
Opening up those order books, Europe looks a little weaker.
What's the ACD as it up next year, but they cut their number.
Moving around there what's the latest on your market view.
For that one into next year.
Globally.
Yes, it's fluid as you just said, Steve I mean containers definitely a watch item.
Container piece of the business that we are dealing with really tough comps because last year was a record year.
And this year, we did see we expected for Q3 was down something like 20%.
So container we continue to watch we've gotten some recent orders, but it's something that we do have to watch.
<unk> was up strong high teens and as Patrick said in his script, we can't really look at the strong orders in the third quarter, we have to look at it kind of year to date, where I think it was up in the mid twenties.
European truck trailer you look at that and the orders were down but I mentioned, the very strong backlog position. So it's a little bit early to say, but we know there's broader economic concerns in Europe . So too early to say there and I think a real positive helping transport is the shift to links and are sensitive.
Business doing quite well so.
The good news is global truck trailer, our backlog is up 15% year over year I saw the same stuff you just mentioned with ACC, taking down some of their numbers for.
For next year, but it would still would be positive over this year for <unk> and we're sitting on good backlog. So a bit early to say, but it's something that we are sitting on strong backlog.
Great. Thanks for all the color really appreciate it.
Thank you Steve.
Thank you.
And we'll take our last question from <unk> <unk> from Cowen Your line is open.
Okay.
Thanks, Good morning, guys.
Wanted to just follow up on your on your comments on resi next year. It sounds like the volume decline or increase or whatever is uncertain.
Can you talk a little bit quantitatively about.
Price cost.
You kind of snap the line on commodities today, and where your hedge positions are.
Where you think some of the other components may may shake out in terms of <unk>.
Inflation year to year.
So what kind of <unk>.
What's the size of that opportunity next year.
And then if you could just talk about pricing and what informs your confidence that pricing will hold if in fact industry volumes were down.
Mid to high single digits pick a number.
Well, let me start with the latter and then turn it over to Patrick for the farmer.
Look I would say for resi, but more broadly for carrier I think one of.
One of the big targets that we have for ourselves for next year is to maintain the pricing and we're going to have to keep an eye on commodities, but that should be copper steel and aluminum that should be.
Coming down for next year, so, it's a little bit too early to say, but that might be that that spread could be a pause a positive story for us as we as we go into next year not only for <unk>, but more globally. Patrick mentioned that we have some tier one carryover cost increases that we have to contend with from some of our <unk>.
Pliers and then.
Our job through carrier alliances to manage those suppliers and we will either have suppliers that support us on our journey or that don't and those that don't we're going to have to deal with aggressively in those that do will lean into and give them more business. So that's that's our job in terms of execution, but commodities I think we will certainly be down next year and we have to maintain.
Price, but in the middle of all of that is youre going to get our mix up from a number of these changes that we're not only seeing and rosy, but you're also seeing as you look at things like the shift to electrification in our transport business as well.
Patrick you want to hit the first part of Quantum's, Yes, we've touched a little bit on that on the on the potential tailwind from a commodity but as Dave said, it's significant it's too early for us to quantify.
Thank you.
Yes.
Okay, Thanks, well listen.
I just wanted to close by by saying.
Thanks to all of you on the call and thanks to the carrier team.
If you look at things over the last couple of years. This team has gone through the same kind of macro challenges all of our peers have gone through with Covid supply chain challenges, but I can tell you. It to a person that are 55000 people come in everyday determined to be best in class in everything we do and we're seeing it in our results and.
I know there is.
Certain folks have anxiety as they look at 'twenty three we have optimism because of this great team. So thank you everyone and of course Sam is available.
Thank you. This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.
The conference will begin shortly to raise your hand during Q&A you can dial one one.
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