Q4 2022 Carrier Global Corp Earnings Call
[music].
Okay.
Good morning, ladies and gentlemen, and welcome to Cara as fourth quarter 2022 earnings conference call.
I'd like to introduce your host for todays conference Sam Pearlstein, Vice President of Investor Relations. Please go ahead Sir.
Yeah.
Thank you and good morning, and welcome to carriers fourth 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 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 errors and 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. Our Q4 results for sales earnings and cash flow were all in line with our expectations as you can see starting on slide two.
We delivered organic sales growth of 5% supported by another quarter of double digit growth in light commercial and commercial HVAC.
Global truck and trailer and aftermarket.
Pricing remains strong and our realization continued to offset inflationary headwinds supply chain improvements continued allowing for a reduction of our past due shipments with further improvements anticipated in 2023.
Our backlog, which ended up mid single digits year over year up 40% on a two year stack and up to ask from 2019 remains at very healthy levels.
Adjusted operating margins of 10, 1% were flattish compared to last year. Despite a 70 basis point impact from the consolidation of the Toshiba joint venture.
We made great progress on our productivity initiatives in the quarter and our achieved our full year target of $300 million in savings.
Adjusted EPS was <unk> 40 in the quarter at the high end of our guidance range.
We generated about 1 billion of free cash flow in the quarter, ending 2022, with three 5 billion of cash, allowing us to continue to play offense with capital deployment as we head into 2023.
Moving to slide three.
I am proud of our team's accomplishments last year, we delivered on our full year outlook for sales adjusted operating margin and adjusted EPS, while significantly advancing our strategic priorities.
We drove 8% organic sales growth adjusted operating margin expansion of 60 basis points and adjusted EPS growth of about 15% when we exclude the impact of the Chubb divestiture.
But we did fall short of our original 165 billion free cash flow guide as we discussed in October resulting from supply chain and related inventory challenges. We did deliver on our revised guidance of $1 4 billion as a result of our strong Q4 performance.
No.
Our track record of delivering results without surprises continues and our team is poised to continue to deliver in 2023 in part because of key secular trends that drive demand as you can see on slide four.
Our customers continue to look to us for healthy and sustainable solutions, and we have differentiated offerings that meet their needs, particularly in the fast growing heat pump space.
Our North America residential heat pump sales grew 35% in the quarter in our European commercial heat pump sales were up 30%.
We expect those areas to only grow stronger as the inflation reduction act and the Repower EU initiatives propel increased adoption.
Additionally, toshiba's innovative and leading inverter technology continues to impress.
When combined with our multi rotary compressors heat pump efficiency and capacity dramatically improve.
Toshiba's technology and expertise are also helping us penetrate the attractive and growing residential heat pump market in Europe .
Our position in transport electrification is also market, leading we have units operating in 15 countries and plan to ramp significantly with more than half of refrigerated transport units sold to be electric by 2030.
The healthy building trends continued to be a positive in the quarter as orders were up over 80% and our pipeline increased to over $1 billion for the full year healthy building orders were up about 50%.
K through 12 also remains encouraging with our pipeline up about 60% year over year and with almost two thirds of the federal government's escrow funds yet to be allocated we expect further acceleration into 2023.
As we continue to distinguish ourselves as a climate systems and solutions company, we remain focused not only on achieving our own ESG goes, but also helping our customers achieve their as well.
We recently increased our previous aggressive 2030 net zero targets.
Committing to set greenhouse gas emission reduction targets in line with the science based target initiative criteria.
Additionally, carrier continues to be recognized in the ESG space, including distinguished recognition in London, where our customer's heating network will provide a 50% reduction in carbon emissions to network participants.
We also continued to perform on our aftermarket growth objectives as you can see on slide five.
When we became a standalone public company in early 2020, we emphasized increasing aftermarket growth rates from historical low single digit levels and last year, we produced another year of double digit aftermarket growth.
Our focus remains on providing differentiated digital solution through our abound and lynx platforms and connecting not only our new products, but also our significant installed base.
Our bound technology now monitors over 1 billion square feet and we recently on boarded over 100 commercial office sites for a key large scale customer.
We recently released the bound net zero management, which provides customers with an easy way to view track and analyze energy usage and emissions data across their global footprints and proactively identify conservation measures.
We've made similar progress with our innovative Lynx platform and launched several new capabilities in the quarter.
We expanded our reefer health capabilities to include early refrigerant leak detection and launched a managed services Lynx fleet offering for a major grocery retail chain in the U S.
We achieved our goal of having 70000 chillers under long term agreements by the end of 2022 and expect to increase that by another 10000 in 2023.
Importantly, we also achieved our objective of having 20000 connected chillers and plan to connect another 10000 this year.
We recently announced a strategic strategic collaboration agreement with Amazon Web services to jointly build market and sell carriers digital solutions.
Not only are we delivering on our financial and strategic imperatives. We are also making great progress on our portfolio optimization and executing on our capital deployment priorities as you can see on slide six.
Youll recall that at the time of our spin we carried approximately $11 billion of debt on our balance sheet and cash of about $1 billion.
Over the course of just two and a half years, we have reduced our net debt net debt levels nearly in half from that $10 billion level to $5 3 billion, while increasing our strategic organic growth investments by over $300 million.
We have also completed a number of compelling acquisitions highlighted by the consolidation of Toshiba carrier.
All acquisitions have been strategic and core to our business focused on enhancing sustainability leadership accelerating aftermarket growth driving digital and technology differentiation and expanding adjacencies and geographic coverage.
We've also been disciplined in evaluating our existing portfolio to ensure each business is core and that we are the best owner as a result, we optimized our portfolio by completing the sale of Chubb in our shares.
Completing the sale of Chubb and our shares and bear while also reducing our minority joint venture count from 41 to 29 since spin.
In addition to our portfolio moves we've been disciplined and proactive with our other capital deployment actions, we have steadily and consistently increased our dividend and have completed about $2 billion and share repurchases excuse me since spin.
All of this to say we have made great progress over the last few years, but that does not mean that we are done we are always evaluating evaluating acquisitions in our current portfolio for potential opportunities for simplification and value creation.
We will remain steadfast in our commitment to keep evaluating our portfolio as we enter 2023 and beyond.
Patrick will cover our 2023 guidance in more detail, but I will emphasize a few highlights on slide seven.
Focus remains very thematic for us all of our 52000 team members are aligned on our key priorities and those priorities remain consistent.
Carrier 2.0 is a term that we have been using internally, which represents a very purposeful shift from a primary focus on selling equipment to now using digital and innovation to provide our customers with sustainable and healthy outcomes throughout the lifecycle of our product and service offerings.
The result will be our continued pursuit of higher margin high aftermarket growth rates.
We remain focused on reducing costs and expect to get another $300 million in productivity in 2023.
We are clear eyed about the broader economic challenges and uncertainty in 2023 and have done our best to calibrate macro factors in our guidance that you see along the left of this slide.
We expect to deliver solid organic growth strong margin expansion, excluding TTC and high single digit to low double digit adjusted EPS growth.
Free cash flow in a very healthy balance sheet enable us to play offense on capital deployment with that let me turn it over to Patrick Patrick.
Thank you, Dave and good morning, everyone.
Please turn to slide eight in short Q4 was very much in line with our expectations and the guide we provided.
Reported sales were $5 1 billion.
With 5% organic sales growth driven by about 8% price with volume down a couple of points.
I'll provide a bit more detail on the future slide but in essence, we saw continued strong organic growth in HVAC fire <unk> security and global truck and trailer, which was partially offset by a very weak quarter in container and to a lesser extent commercial refrigeration.
The Chubb divestiture reduced sales by 10% and acquisitions substantially all Toshiba carrier increased sales by 8%.
Currency translation was a headwind of 4%.
All segments, where price cost positive or neutral in the quarter.
Q4, adjusted operating margin was about flat compared to last year, driven by a 70 bps margin headwinds related to the <unk> acquisition.
Strong productivity almost completely offset the margin headwinds related to the lower volume and the CCC acquisition.
Adjusted EPS of 40.
It was consistent with the upper end of our full year guidance range.
For your reference we have included the year over year Q4, adjusted EPS Bridge in the appendix on slide 20.
$1 billion of free cash flow in the quarter was also as expected and we generated about $1 4 billion for the full year.
Moving on to the segments starting on slide nine.
<unk> reported sales included a 16% benefit from the TTC acquisition.
<unk> organic sales were up 9% driven by low single digit growth in residential over 40% growth in light commercial and mid teens growth in commercial HVAC.
Sales growth was driven by both price and volume.
Residential movement was down about 10% in the fourth quarter and quarter and field inventory levels ended up higher than the flat year over year levels, we targeted.
Residential HVAC growth was driven by price.
Volume was down mid single digits.
Commercial HVAC had another very strong quarter with double digit sales growth in applied equipment aftermarket and controls.
All regions grew double digits.
Adjusted operating margin was up 60 bps with volume price cost and productivity more than offsetting a 100 bps margin headwinds related to PCC.
Full year operating margin for the segment was 15, 2% in line with the guide we provided post the <unk> acquisition, which had about a 70 bps dilutive impact on 2022 for this segment.
Transitioning to refrigeration on slide 10, organic sales were down 7% and currency translation was also a 7% headwind.
Within transport refrigeration, North America truck and trailer sales were up low teens and European truck and trailer was up high teens.
This continued strong performance was more than offset by container, which was down about 50% year over year, driven by demand softness as well as well as a tough comp in the prior year.
This is the second consecutive down quarter for the container business and historical down cycles for this business have less about four quarters.
Commercial refrigeration was down high single digits year over year as our European food retail customers continued to be pressured by inflation and energy prices.
Adjusted operating margins for this segment were up 60 bps compared to last year, despite lower sales with the margin headwind of lower volume more than offset by productivity and price cost.
Full year operating margin of 12, 8% was slightly ahead of our 12, 5% guide and expanded over 70 bps compared to 2021, despite lower sales as a refrigeration team manage price cost and delivered strong full year productivity to offset the impact of lower volume.
Moving on to fire <unk> security on slide 11.
As expected the Chubb divestiture had a significant impact on reported sales.
Organic sales growth was 6% driven by price with volume down low single digits.
Operating margin was short of our expectations for this segment due to continued high supply chain and logistics costs and operational performance challenges.
As a result full year operating margin of 15, 2% for this segment was short of our 16% operating margin guide.
Slide 12 provides more details on backlog and orders performance.
As our backlogs normalize and some of our shorter cycle businesses, such as residential HVAC, we expect order trends to adjust accordingly.
We've seen that trend over the last few quarters and in Q4, particularly as.
As you can see on the left side total company organic orders were down roughly 10% for the quarter and up compared to 2019 and 2020.
Backlog ended the year up mid single digits compared to last year with backlog growth in HVAC and fire and security, partially offset by backlog reduction in refrigeration.
As expected residential HVAC orders were down in Q4.
Light commercial demand remains robust as orders were up mid teens in the quarter.
The backlog is up well over to ask for that business.
Commercial HVAC saw double digit orders growth for the eighth consecutive quarter. The commercial backlog is now up 35% compared to last year and extends well into 2023.
Refrigeration orders were down roughly 10% in the quarter driven by market weakness in container and commercial refrigeration that was only partially offset by global truck and trailer.
North America truck and trailer continued to have strong orders in the quarter up over 100% compared to last year.
Global truck and trailer backlog is up high single digits as the strength in North America offset order weakness in Europe .
Container orders were down about 50% compared to a very strong fourth quarter last year.
Commercial refrigeration orders remain weak and reflect market softness.
Finally demand for our fire and security products was mixed.
Orders were positive and roughly half of the businesses, including residential fire and access solutions.
Fire <unk> security products backlog is up almost 30% year over year over year with double digit growth in all the businesses, except residential fire in the Americas.
Overall, we enter 2023 with strong backlogs and continued strong order trends in commercial and light commercial HVAC and North American truck and trailer.
Business is experiencing softer order intake includes container commercial refrigeration and residential HVAC.
Now moving onto our 'twenty three guidance on slide 13.
We expect reported sales of about $22 billion, including organic sales growth of low to mid single digits.
Most all the organic growth will be price as we expect volume growth to be flattish.
We expect currency translation to be about a point headwind, while acquisitions, primarily the impact of Toshiba carrier will contribute about 6% to the growth.
Adjusted operating profit is expected to be up compared to 2022 with operating margin at about 14%, including a 50 bps dilutive impact from Toshiba carrier.
We expect high single digit to low double digit adjusted EPS growth in 2023.
I will provide more color on that on the next slide.
We expect a 23% adjusted effective tax rate and full year free cash flow of about $1 9 billion.
We're at about 100% of net income.
Our free cash flow guidance assumes approximately $75 million of.
Cash restructuring payments and about $100 million tax headwind since Congress has not renewed the full expense of expensing of R&D.
As shown on the right side of the slide we expect mid single digit organic growth in HVAC as continued strong growth in light commercial.
Commercial HVAC and aftermarket are more than offset more than offset flat residential.
Reported HVAC sales growth should be in the low teen in the low double digits given the additional contribution from seven more months of consolidating so sheba carrier.
In refrigeration, we expect flattish organic sales as continued strong growth in global truck and trailer is offset by container and commercial refrigeration.
In security, we expect low single digit organic growth.
We expect the HVAC segment operating margin to be similar in 2022, despite absorbing about 100 bps of pressure from the consolidation of Toshiba and expect operating margin expansion in refrigeration and fire and security.
Let's move to slide 14, adjusted 2023, EPS bridge at our guidance midpoint.
Our operating profit is expected to be up about $200 million.
Despite flattish volume growth.
<unk> cost and gross productivity combined are expected operating profit tailwind of $500 million with $200 million coming from price cost.
And $300 million coming from gross productivity.
Annual merit adjustments and investments about amounts to about $200 million in total.
And we expect about a $50 million additional.
Headwinds of PCC integration costs.
There are some other minor smaller moving pieces, but that all that all adds up to roughly $200 million and increased adjusted operating profit.
Core earnings conversion, which excludes the impact of acquisitions divestitures and FX is about 35% at the guidance midpoint.
Moving to the right on the bridge some modest savings on net interest expense and a lower share count.
Set the expected higher tax rate and currency translation headwinds.
That gets us to our midpoint of about $2 55 for next year or 9% growth compared to 2022.
As usual, we provide estimates of other items in the appendix on slide 19.
On slide 15, you'll see that our capital allocation priorities remain the same in 2023, we expect about $400 million in capital expenditures, we recently announced another significant dividend increase and our dividend payout ratio is about 30%.
Finally, we target one $5 billion to $2 billion in share repurchases in 2023.
Before I turn it over to Dave Let me provide some additional color on the first quarter.
We expect a <unk> <unk> headwind from a higher effective tax rate of about 25% compared to 16% last year.
In addition, we expect our first order to be the weakest quarter from an organic revenue growth perspective, with organic sales growth flat in volumes down.
This reflects continued growth in the HVAC and fire and security segments and a decline in the refrigeration segment, driven by container and commercial refrigeration.
We expect residential HVAC to be down mid single digits in Q1.
Recall that our Q1 'twenty two residential HVAC sales were up an industry, leading 23%, so certainly a tough comp for that business.
Overall, we expect revenues in Q1 to be a little over $5 billion and adjusted EPS to be between 45 and 50.
We expect first half adjusted EPS to be about 45% to 50% of full year earnings the reverse of 2022.
And as usual free cash flow will be more weighted to the second half.
We expect organic revenue growth to sequentially improve after Q1 with easier comps in the second half of 2023 with that I'll turn it back to Dave for Slide 16. Thanks, Patrick We delivered strong performance in 2022 are in we are targeting another strong year. This year as we continue to execute and control the controllable we continue.
See opportunities to use our strong balance sheet to create value for our customers shareholders and the planet for future generations to come with that we'll open this up for questions.
Thank you, ladies and gentlemen to ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press Star One again research everyone. Please limit yourself to one question and one follow up please standby, while we compile the Q&A roster.
And our first question coming from the line of Julian Mitchell with Barclays. Your line is now open.
Hi, good morning.
Just wanted to start with maybe good morning, maybe start with the first quarter.
Outlook there.
So it sounds as if you.
<unk> got maybe the operating margins.
Firm wide down, perhaps sort of two to 300 points or so year on year.
Just wanted to check if thats. The case citizens is the bulk of that downdraft really coming in.
HVAC, presumably and if it is kind of what's the the.
Confidence that you can get back to full year margins in HVAC being flattish given the headwinds in the RAC for the year.
Julian Good morning, Patrick here.
<unk>.
Margins in Q1, we expect them to be down about 200 basis points and there are really.
Three elements to it one <unk>.
Acquisitions and that is HVAC specific expected to add over $500 million of revenue, but with very little operating profit contribution.
Two.
Volume mix as I mentioned is expected to be down in the first quarter Thats not.
That is really.
Not just in residential HVAC, but is also impacting of course, the refrigeration segment. That's the secondary contribution to the 200 bps or so margin contraction in Q1.
Third element this price cost, we expect price cost to be close to neutral in Q1, we'd actually is a headwind to margin expand it to margins in the first quarter.
And that is.
Across the three segments, so that gets to about a 200 bps margin contraction in the first quarter.
Andy.
Second quarter, we would expect to return to year over year EPS growth.
That's helpful. Thank you and maybe just.
And following up Patrick on the HVAC segment.
Overall for the year, so I think he talked about flattish.
Margins, there at that sort of 15% plus.
In that business and you've got organic sales guide.
Up about mid single digit for the year.
Just clarify for us.
You know what youre expecting there on your residential.
<unk> perhaps.
Within that guide.
And then any sort of waiting on things like the productivity savings that.
Just trying to understand where you get the offset in the HVAC molecule.
If there is a mix headwind in the PCC.
Margin headwind as well.
Okay.
Well Julien, let me start with a little bit of color on kind of <unk> and what we're seeing across the mix between resi and light commercial and commercial and then Patrick can give a little bit of color on the margins themselves. We do expect for <unk> in 2023, we're expecting flat sales flattish sales.
But we get there with volume being down potentially high single digits offset by mix and price. So when you think about <unk>, we're looking at new construction potentially down in 2025% now remember that's only about 2025% of resi, but some of our customers some of our customers are saying it could be much.
Better than that some are saying it's in that range. So we'll have to see as we get into the second half of the year, but we've calibrated.
Residential new construction down, 2025% and replacement down mid single digits, we are seeing.
That offset that gets us the flattish sales for the year are driven by mix and price. So we have some price carryover, we've just announced a new price increase of 6%. That's effective in March we're going to mix up this year as you know because of the new CRE units that are coming in that we're pricing, 10% to 15% higher.
And we're also seeing a mix up as we transition to heat pumps also in the mix is that we do see a strong year for light commercial which was as Patrick said up 40% in the fourth quarter that continues to be very strong and our backlogs in commercial with a nice mix with aftermarket up double digits controls up double digits, helping that.
Yes.
Patrick maybe on the <unk>.
Margins Julian we're comfortable with the margin outlook for HVAC in 2023 of about 15%.
You've mentioned about the aftermarket, but I did also mention that price cost is expected to be a tailwind for us of $200 million in the year that dials in some benefits from what we call deflation a lot of that sits in the HVAC segment. In addition, I mentioned that we are.
<unk> focused on delivering another $300 million of productivity in 2023, we did the same in 'twenty two and of course, given the size of the HVAC segment, a sizable size of course is in that segment as well. So we're comfortable with those 15% margins for the full year.
Great. Thank you.
Okay.
Thank you. Thank you.
Thank you one moment please for our next question.
And our next question coming from the line of Joe Ritchie with Goldman Sachs. Your line is now open.
Thanks, Good morning, guys.
Hey, good morning morning.
Can we can you talk on that price cost neutral comment Q1I guess, that's a little surprising to me.
Given that prices probably.
Good carryover effect.
From 2022, and then from a cost perspective I'm. Just wondering is there like higher cost inventory that's coming through is it a function of like the merit increases being more front end loaded just any more color you can provide on that price cost <unk> would be helpful.
Yes, and the short of it is and it's mostly in HVAC is the first quarter of 2022, we were locked in at some really attractive pricing from a field point of view.
The year over year impact is actually a net negative for us.
As I mentioned to Julian just earlier, we are dialing in a benefit from deflation net kicks in the second quarter of 2023 in Q1, we still have a headwind, particularly in steel that FX HVAC.
Got it that's helpful. Patrick and then I guess I'm, just going to stick on the margin and just want to understand.
Some of the operational challenges that you guys faced in the fire and security business this quarter.
And then also as I kind of think about the 2023 got it doesn't seem to imply that much margin growth in the segment. So maybe just kind of talk us through what some of the issues are and how those are supposed to rectify in 2023.
Yes, if I look at the margin performance in fire and security it was up year over year in the fourth quarter by 60 basis points and the way you can think about it is the absence of Chubb is a tailwind to margins.
Volume mix and price cost was a slight.
Headwinds to margins the net it was still a margin expansion of 60 basis points. The margins were lower than what we expected one supplier input costs and higher supply chain costs than what we expected to inventory.
Inventory is not aligned with where the business is today and that has some operational impacts which we.
Experienced in the fourth quarter of the year and so we have to work through that and Thats, what we expect for 2023 and therefore, we expect.
With minimal volume growth in 'twenty three.
To have margin expansion in fire and security the revenue growth, we expect in fire <unk> security in 'twenty, three is mostly price driven less volumes.
Got it thank you.
Thank you Joe.
Thank you one moment. Please next question.
And our next question coming from the line of Jeff.
Jeff spread with vertical research partners. Your line is open.
Thank you and good morning, everyone.
Good morning, Jeff Good morning, Jeff.
Dave and Patrick that color you gave on <unk>, obviously encompasses what's going on with field inventories, but maybe you could elaborate a little bit more on our inventories ended versus your expectation and how you think that kind of normalize over the balance of the year.
Yes, Jeff we had a target of getting filled inventories at the end of last year flat to where they ended 21 and they were actually a bit higher than than we had targeted not not excessively higher but just I would say a.
A bit higher.
And we do think that there will be destocking as we go through the year, obviously when youre in the first quarter. There is some level of stocking that happens.
Anticipation of the season, so we think the destock happens.
Throughout the year.
When we actually it's kind of interesting when we talk to our channel partners. There is still significant demand out there.
What happened in Florida, where we have some of our homebuilders continuously pushing on us for more products. So we have a bit of a <unk>.
Mix, taking place where there is demand for the new product, obviously everything in the south.
That we're shipping as the new product and we started that early they are starting to ramp in the north to get the new CRE units, there's still demand from some of our key homebuilder customers, but we do recognize that there is some still destocking thats going to take place through the course of the year. So we'll have to see how the year plays out you know that.
This business can swing based on a variety of factors relatively quickly. So we think we have been conservative in how we handicap the year and then we'll have to see how these next couple of quarters play out.
And then could you just elaborate a little bit more on what you're expecting on GCC, we get kind of the the arrest.
Arithmetic.
The headwind.
On margins as it comes into the fold, but in terms of your internal improvement plan their day.
Moving margins up over time, and what kind of actions you're taking to drive that.
Yes.
I will tell you we were in Japan, and very pleased with the progress that safe and the team are making on <unk>, We've said that we expect margins.
EBIT Ross margins to be in the mid teens as we get out five years. After the acquisition. We are certainly on track for that.
We had said $100 million of synergies I have a lot of confidence we're going to beat that number.
And if you look if you kind of get rid of all the noise of getting eliminating the minority income that we were picking up and the integration costs right.
Right now you are in the low teens as just a standalone business. So that team is making a lot of progress technology best in class, we talked about the rotary technology. The inverter technology, we are using that technology to penetrate the attractive residential heating space in Europe , there could be applications in North America, our prospects in <unk>.
China with.
With TTC look extremely strong despite some of the macro uncertainty in China, Japan, we've had to come in aggressive on pricing rightfully, so and we've been doing that and Theres a lot of cost takeout opportunities, especially in supply chain, where we see the team really looking at aggressive supply chain synergies between the two.
<unk> so.
I'm very pleased so far.
And by aggressive pricing in Japan, we'd be increases yes.
Yes aggressive rate means yes, good point.
Yes. Thanks.
Thank you.
Okay.
Thanks, Jeff.
Yes.
Thank you and our next question coming from the line of Nigel Coe with Wolfe Research. Your line is open.
Thanks, Good morning, everyone.
So it looks a lot and good morning, good morning, good morning.
Looks like.
Low to mid singles.
Competition from pricing, so would that be about 3%. So the gross pricing, but maybe $6 million for the for the full year is that right.
I'm just curious how much do you think comes is coming from carryforward from 2022 actions versus contribution from some of these price increases you're layering in in the first half of this year.
Nigel the bulk park number you have there.
Park I $600 million of carryover in pricing most of that in total pricing most of that is carryover, we have some new price increases.
We've announced as well we've dialed of course some of that in and we're looking at additional price increases as well.
I'd add Nigel.
It's fluid.
<unk> into the year and over the last few weeks we've announced.
New price increases that we feel that where appropriate <unk> announced a 6% price increase for North America light commercial and North American commercial we're looking at.
Up to 8% recent price increase we're going to raise prices in both North American truck trailer European truck trailer is probably in the low to mid single digit range. So.
We watch inflation trends rewatching elasticity curves, but we do think it's appropriate that we are going to need continued price increases certainly in the first half of this year.
And.
Normally if you announced the price increase of 56% you capture maybe 2% when you net off the normal promotions in.
I made some discounts in volume discounts that hasnt been the case in the last couple of years, but I'm just curious.
Sort of capture rate do you expect going forwards, but maybe if you could just also breakdown as well how you see the penetration segments in 2023, there's a lot of moving parts. There just curious with the easier comps you seen in the back half of the year in both the commercial and transport how you see the full year playing out.
Within that segment.
Yeah, let me start on pricing realization, a little bit of color on refrigeration and then Patrick will add to the phasing of the year.
Look our realization rate on pricing was very high last year. As you know we came into the year thinking that we'd get a $1 billion of price and when all was said and done last year that number was closer to $1 six so.
We've seen very high realization rates rates in pricing and we would expect that to continue as we go into 'twenty three.
On refrigeration I'll tell you at a high level you are looking at a bit of a mixed bag.
North American truck trailer has been very strong we saw our order rates in Q4 over 100% and Thats still without opening the order book effectively for the second half of this year and they were up 40% for the full year last year European truck trailer has we've calibrated.
That business, we think well, but they performed extremely well last year I think the thing that we're tracking in the refrigeration business.
Is the container business, which we know.
It was light Patrick mentioned, you're usually looking at about a four quarter cycle, we're coming off two of <unk>.
Down sales, we expect another couple so we expect to see that start to improve as we get in the second half of this year and commercial refrigeration was a bit light, but there will be pent up demand for commercial refrigeration. Some of the supermarket chains in Europe have been squeezing their budgets. They can't do that forever. So we do think that as we go through the year, we start to expect to see.
Commercial refrigeration come back and I'll tell you I know that both us and our keep here.
We have a huge amount of respect for both claiming that we've gained a lot of share and truck trailer. So mathematically that cant we both can be right.
But I will tell you that when we look at it customer by customer we look at our order rates.
I can tell you with huge confidence that we've gained share and truck trailer in Europe and in the United States and globally. So we feel very good about that business and we feel good about the snapback as we get into the second half as we start to see the recovery in container and our commercial refrigeration business.
Nigel couple of comments.
Refrigeration.
Sure.
Think of Q1 organic sales being down mid to high single digits.
Q2 down mid single digits, and then basically returning to mid single digit growth in the second half of the year.
And that is all related to what.
Dave just mentioned earlier about refrigerator container.
Our quarter that we assumed to be down at two more to go same with commercial refrigeration and we see continued strong performance in particularly North America truck and trailer.
And so that is how we've dialed in the plan for refrigeration, which we expect to be flattish from a full year perspective on an organic sales basis.
That's great color. Thank you very much.
Thanks, Andrew.
Thank you.
And our next question coming from the line of.
Josh <unk> with Morgan Stanley . Your line is now open.
Hey, good morning, guys.
Hey, Josh good morning.
So we've covered a lot of ground on the productivity I am sorry on the demand front, maybe just shifting over to productivity. I know you don't really talk about like carrier 700, or whatever kind of iteration were on these days as much now since the last analyst day and kind of have this price cost productivity formula just wondering how versus that 100 million.
Net of year, you would think about it for this year and kind of the totality of the pipeline in front of you do you feel like you've gotten through a lot of the opportunity since the initial separation.
Whats still what's still left to go.
We have a huge waste ago Josh.
What happened is we came out of the gates, we had good productivity than we saw over the last year a lot of the supply chain headwinds that were fairly unexpected that really hurt.
A lot of industries. So now as we're starting to come out of that I think we see significant opportunity what Patrick said effectively was 300, a productivity plus 200.
Price cost positive.
For a total of five between those two when.
When we look at it we think logistics is a big opportunity for us. This year, we're starting to see rates come back to more traditional levels for containers coming from Shanghai to La <unk>, we see global logistics, we paid a lot in high logistics costs in spot buys for electronics are spot buys for electronics are significantly down month over.
Month quarter over quarter, we expect that to continue we think theres a great opportunity with our tier one suppliers. You know we had been very aggressive on carrier Alliance and then we really had to slow some of that activity because our focus became getting parts to feed the lines in the shops and now we got to get back into our focus on having.
Partners that we can rely on it for the long term that share our desire for joining for joining growth. So we look at it we see opportunities for productivity in the factories continued take out of G&A, you'll recall that we used to be nine 5% as a percent of sales we got down to 7% at the end of last year more transfers of work.
To low cost places like Europe going to eastern Europe .
And all things direct material, which is a big percentage of our direct buy so we got away from calling a carrier 700, we said, 2% to 3% productivity forever and.
And we think we are in early phases of what are significant opportunities for cost takeout and address our guidance is very much aligned with what we shared at Investor day $300 million of gross productivity offset by about $200 million of investments in merit and a net $100 million falling through the bottom line that's in our guidance.
Got it that's helpful. I appreciate that net number Patrick.
And then just shifting gears over to <unk>.
Stimulus out there how do you guys think about some of the opportunities for IRR, whether residential or commercial this year.
Well, we look at the IRI.
It's still kind of going through final comments, we see that getting fully implemented towards the middle of the year, but the opportunity. There is very significant you have the 25 C tax credits, which can provide a homeowner up to $3200 really looking at $2000 for our heat pump and what was really significant there was they made that.
In the current drafting, especially in the key parts in the South that's eligible for the two stage heat pumps, which means that it really provides a meaningful incentive for a customer not only to shift from cooling only to heat pumps, but also to a two stage heat pump, which could be significant it used to be that 30%.
<unk>.
Of our split sales where heat pump, we're now at 35%, we're seeing our growth rates continue to start with <unk>.
And Youre seeing the same 30%, 35% in North America, 30% for commercial heat pumps in northern Europe . So we think that the inflation reduction act will be meaningful both in residential but also for commercial they doubled in that 117 90, they doubled the commercial building tax cred.
Up to $2 50 to $5.
Per square foot for energy efficiency system. So we think that will be meaningful as well and then there is a whole significant amount of incentives as you get into Europe , Europe , effectively dodged, a bullet because of the warm winter that it had this this past winter, but the supplies are not going to be what they need as they head into the winter of 2023.
And thats going to drive significant demand for heat pumps in both residential which is a space. That's very attractive that we're looking to continue to penetrate and commercial heat pumps, where we're number one in Europe .
The color I'll leave it there thanks guys.
Thanks, Jeff Jeff.
Thank you.
And our next question coming from the line of Rod Lindsay with Mizuho Group. Your line is now open.
Hey, good morning, all.
Hey, good morning wanted to I wanted to come back to the refrigeration segment appreciate all the sales detail there.
I was hoping you might be able to put a finer point on the profitability of that weaker container and commercial refrigeration I imagine that profit profiles.
Lower but any way to frame that or provide some context would be great.
The container.
Business is a really attractive business within.
Refrigeration our enormous installed base also enables us to go after significant aftermarket given the 1 million plus units that are out there that we're trying to connect and drive aftermarket revenue <unk>.
Commercial refrigeration today has lower operating margins and so they are below 10% there is probably close to 5% to 10%.
But we've taken out a lot of costs and so as we as we focus on productivity irrespective of volume growth. Once volumes starts to turn we expect there to be attractive incrementals in commercial refrigeration, so underlying profitability from an operating margin.
Significantly lower than the overall average of the segment, but one's volumes kick back in given the work that we've done we would expect to see attractive incrementals there.
Got it thanks, and then just shifting over to the gross productivity in order to $300 million, Patrick you said $50 million of offsets Toshiba.
Our the balance of those investment priorities and then are those signed and sealed for 2023 years of an opportunity to flex those up and down as needed.
Yes, No go ahead.
Look our priorities.
Really centered around our shift to carrier two point O, which is really around aftermarket enabling technologies digital capabilities. So we have been very purposeful in our plant setting to make sure that we have plenty of investment set aside for a bound for links for connecting our devices out in the field that's been our priority and then all three.
<unk> technical differentiation when it comes to more energy efficient chillers and more energy efficient products electrification in both heat pumps and in our truck trailer business. So as we do our water line process. There are some investments that we consider sacred because it's either a part of our conscious strategic shift.
Or because of differentiation for key product lines.
Okay, Great I'll pass it along thanks.
Thank you.
Thank you and our next question coming from the line of.
Ian Dray with RBC Your line is open.
Thank you and good morning, everyone.
Good morning, Dan maybe you could start with Patrick strong finish to the year on free cash flow hitting expectations on the revised guidance kind of take us through the dynamics, especially on working capital. It sounded like you ended up with higher inventory, where do you stand on like buffer inventory with supply chain.
Issues and how does that impact the outlook for 'twenty three on free cash flow.
Well, we expect $1 million $1 billion nine in 2023 for free cash flow, which actually does include a.
Tailwind from reduced inventories.
And so we know we ended the year with higher <unk>.
Inventories than in <unk>.
Tenant in the beginning of the year.
It's the main reason why we missed our 1.65 billion target for the year. So we ended the year I think it's fair to say with a few hundred million dollars of more inventory than we expected I would not call all of that buffer inventory. Some of that frankly is related to the length of the supply chain.
And the lead times that are still not coming back to what we are used to and so we're assuming that we'll see some continued improvement there in 2023, which will lead to about $100 million of soap.
Tailwind from lower inventories in 'twenty, three versus where we ended the year in 'twenty two.
That's real helpful. And then David you had an interesting comment earlier on a question.
Referencing elasticity curves and it seems like during Covid there everything was in Alaska, you saw no demand destruction anywhere.
But maybe it's an impact of normalization there could be some more competitive pressures, but just kind of take us through.
Some of your insights here on the elasticity curves in setting pricing what the reactions are because I don't know maybe we've lost some muscle memory about.
How that.
Is just part of the economics here.
Yes look we and our residential business we went through.
Something like six significant price increases in the span of 18 months. So I think that what we've seen over the last couple of years is an unusual pace of price increases that we've not only announced but that we've also realized we do think that as you head into 'twenty three 'twenty four you get back to more traditional.
Additional levels.
In the first half of the year.
Realize that inflation is not over.
And we've had to announce further price increases.
In January that perhaps even a couple months ago that we might not have anticipated because the inflationary pressures continue to be there. So.
It's not.
Equal in all segments, we think we'll probably get less pricing in the container segment right now than we will in commercial HVAC light commercial residential to some extent parts of our fire and security business, we probably across our brands of <unk>.
Implemented over the last couple of weeks 20 different price increases depending on the segment within fire and security and the brands. So we'll watch it but we in the first half of the year, we believe that the inflationary pressures are still there and we need to price accordingly.
That's really helpful. Thank you.
Thank you Dan.
Thank you and our next question coming from the line of Steve Tusa with Jpmorgan. Your line is now open.
The next one.
Hey, guys good morning.
Good morning.
Can you just talk about like the trend of what you see on.
Transport refrigeration orders as well as light commercial orders.
<unk> been very strong I know the light commercial market is is up nicely but.
Obviously, some very big numbers and in the context of.
50 week lead times in that industry.
Just curious as to how you see that trending because there could be some.
Perhaps unusual activity in that market in particular, but maybe how you see those orders trending over the next several quarters here.
Yes, I'll start.
Steve with light commercial light commercials, just been extremely strong we saw orders were up in the mid teens.
In the fourth quarter. If you look at overall 22022 orders were up 45% and demand is still strong for things like K through 12 value retail fast casual and quick serve restaurants. So.
All trends seem extremely positive the issue we have continues to be with light commercial keeping up demand, where we're implementing second lines second shifts and our focus is supporting our customers. The issue we have right now as far as the eye can see is not a demand one in light commercial.
On the transport side.
Orders were up extremely strong in the fourth quarter in North America, even with US trying to control opening the order book for the second half of 'twenty three.
North American orders were up two ex North American truck trailer Europe truck trailer was down a bit.
I would say mid to high single digits I believe.
We have of course seen orders very light in the container space, which is why we've calibrated that business down certainly in the first half of the year, but.
What's really encouraging is.
The North American truck trailer piece that demand remaining very robust there.
And then just one follow up on the resi side.
So you ended the year with inventories just a bit above what you expected in the channel.
Like.
How do you what signals are you looking for here.
For like demand this year, how confident are you and your distributors projections.
Make the assumptions youre, making I mean, how wide is the band of outcomes. There in your view given the situation.
Within inventory it just seems to me that like everybody is throwing out kind of flat to down but when you kind of asked for the underlying they talk about what happened in the fourth quarter and maybe what happened in January .
And any.
Anything thats informing your view and maybe a little bit of a of.
Of a ring fence around the band of outcomes there.
On volume well.
A good question, Steve, Yes, we try to calibrate it.
What I would say conservatively now we'll have to see when all is said and done if it turned out to be conservative, but we put volumes down high single digits for the year with.
When we looked at it we said.
New home construction down 2025%.
We have a couple of customers in particular that on their earnings call said that they expect to get to flattish for the year. So will the industry be down 20% to 25%, perhaps we have outsized share in the industry. So in many respects, we should go the way of the industry, but.
There is a wide range of outcomes, there where could it be flat could it be down 30, who knows anywhere in that but again, that's 2025% of our residential business. The new home construction and then on the replacement market you've been around this longer than I have but that can swing very significantly in a short cycle business because its fund.
Mentally replacement business in a few weeks in.
In the summer you're going to see demand really pick up significantly. So we think we've calibrated volume correctly there but.
We will have to see how the rest of the first half plays out again tough comps in the first quarter, but even just yesterday, we were doing a review of the resi and demand.
<unk> continues to be there from many of our key customers and some of our issues is just continuing to keep up with that demand.
Okay, great. Thanks, a lot for the color I appreciate it.
Thank you Steve.
Thank you and our last question on queue coming from the line of.
Gautam Khanna with Cowen Cowen Your line is open.
Okay.
Hey, good morning, guys.
Good morning, good morning.
Could you tell us how far out you are booking quoting truck trailer orders.
Yeah.
Yes second half of the year so we've.
We looked at it we're just.
We're just now opening our order book for the second half of the year.
Okay was that in Q4 or now in Q1.
Now now I think we might have taken one discrete order for Q3 and Q4 for a specific reason, but basically we only opened our order book now for Q for the second half.
Okay.
I was wondering if you could talk about inflation in the supply chain. This year on your tier two components. So.
Not commodities, but.
Just in aggregate what is the pressure you're facing from component suppliers and alike.
Yes.
Well I know not raw materials, but we do see on that piece, we should see some benefit they've been swinging quite a bit I know thats not the heart of your question, but.
We sort of back ourselves on the steel piece, which should be down from last year. Patrick mentioned, we have the hangover from really good pricing in the first quarter of last year on steel so as we get out of <unk>, we see the benefit of that.
Copper and aluminum down from last year, we did see a bit of an increase recently, but we still expect year over year benefit.
And then what we're going to see with our tier ones as you probably have.
Two categories you have some that have gotten a fair amount of inflation from us.
And our peers over the last 12 months that will continue to try to push inflation.
Then you'll have some that are thinking for the long term and trying to build long term relationships with us.
And that we won't get the level of inflation because they will look at trying to take volume from those that continue to push inflation. So for those that really want to be on their journey with us for the long term they will be the beneficiaries of volume that we will shift from those that are continuing to.
Inflation, our way so net net it is our job and I think our opportunity to really start to make a very conscious shift of our supply chain partners and we were on that path, we had to parse it a little bit because of some of the supply chain challenges, we saw last year, but I can.
Tell you for sure we're going to get back on that path in a very aggressive way here as we go into 'twenty three.
And just last one Dave you talked about price in resi I am curious.
Historically, and maybe whats your view on this cycle with respect to the minimum <unk>, the 10% to 15%.
Price point difference between the prior minimum do you think that holds or does that fade over time I'm just curious.
How sticky is that pricing on the minimums here.
And thank you.
Sticky, yes, we have very high confidence that 10% to 15% for the nuclear units will be sticky it's been sticky. Thus far we think it will remain sticky as we go through 'twenty three and beyond.
And look we've all taken slightly different approaches we took the approach for the new Sierra unit to do more redesigned rather than less and look for more differentiation and we've done that we've driven more of a copper to aluminum shift we've driven a micro channel heat exchanger, we've done a lot of aesthetic and.
It fit in.
Spacing and size. So we've done a lot to make that our new Sierra unit.
Very very attractive and differentiated and one of the big things will be some of the controls features as well. So we think that because of the value of our offering and because of what the customer is getting we think that pricing will be sticky.
Thank you.
Thank you.
Thank you I will now turn the call back over to management for any closing remarks.
Okay, well. Thank you everyone for joining we're excited about how we closed last year and even more excited about 'twenty three and with that we'll close the call and please reach out to Sam for any questions. Thank you all.
Ladies and gentlemen that doesn't go conference for today. Thank you for your participation you may now disconnect.
The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
[music].
Yes.
Okay.
Uh huh.
Okay.
Yes.
Okay.
Okay.