Q3 2023 Carrier Global Corp Earnings Call

Okay.

Good morning, and welcome to carriers third quarter 2023 earnings conference call I would like to introduce your host for todays conference Sam Pearlstein, Vice President Investor Relations. Please go ahead Sir.

Thank you and good morning, and welcome to carriers third quarter 2023 earnings Conference call with me here today are David <unk>, Chairman and Chief Executive Officer, and Patrick <unk>, Chief Financial Officer 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's dotcom the company reminds listeners that the sales earnings and cash flow expectations and any other forward looking statements provided during the call are subject to risks and uncertainties carrier's SEC filings, including.

Forms 10-K, 10-Q, and 8-K provide details on important factors that could cause actual results to differ materially from those anticipated in the forward looking statements. Once the polls 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 I am very proud of our team for delivering another strong quarter, enabling us to again increase our full year guidance.

<unk> and fire and security sales were both up mid single digits with the overall company delivering yet another quarter of double digit aftermarket growth.

Adjusted operating profit and adjusted EPS were both up over 20% year over year with adjusted operating margins up 240 basis points in the quarter.

The HVAC and fire and security segments, both delivered record adjusted operating margins in the quarter, approximately 21% and 18% respectively.

Free cash flow performance also continues to be strong positioning us for some upside for our full year guidance.

Bottom line is we continue to perform while we transform as you can see on slide three.

We are a team that is very clear eyed about macro challenges. We are focused on controlling the controllable is driving operational excellence being tenacious about customer centricity out innovating, our peers and consistently delivering on our commitments.

With two months left in the year, we are confident that in 2023, we will deliver mid single digit organic growth.

15% adjusted EPS growth margin expansion, despite the negative impact from consolidating Toshiba carrier and strong free cash flow.

Not only are we poised to close out 2023 on a strong note we have significantly mature and our productivity processes. So we will enter 2024 with even more rigor and detailed plans around our cost reduction activities positioning us for further margin expansion next year and beyond.

We also have confidence in continued growth driven in part by our aftermarket and recurring revenue traction as you see on slide four.

We're on track for 80000, Chillers under long term agreements and 30000 connected chillers by year end.

The attachment rate in Q3 was approximately 50% nearly double pre spend performance.

<unk> continues to gain market traction exemplified by new scale customers committing to our abound healthy air solution and about net zero management offerings in Q3.

Additionally, we announced the launch of links logic, a new software as a service application within our link digital platform that helps predict and address supply chain disruption by automatically identifying trends patterns and issues and distribution networks and transportation lengths customers clearly see the benefit of linked capabilities.

We now have over 100000 paid link subscription.

Our playbook around digitally enabled lifecycle recurring sales continues to yield encouraging results globally. As we are well positioned for another year of double digit growth in 2023 and beyond.

Our other major growth theme is around driving differentiated solutions to ensure sustainability leadership, you'll see examples of that on slide five.

We continue to introduce industry, leading products into the market that help our customers achieve their sustainability targets, while D carbon decarbonising the planet for generations to come.

Carrier Transco introduced the new optimal line refrigerated container unit, which offers best in class energy efficiency versus the competition and is approximately 15% more fuel efficient than our prior units.

We also introduced a comprehensive new line of high end very high temperature heat pumps for use in industrial commercial and health care buildings as well as district heating BT.

<unk> pumps to reduce both carbon emissions and energy costs up to 80% versus traditional gas boiler applications.

Additionally, our new zero GWB refrigerant <unk> to water high high efficiency heat pump will nicely complement <unk> offerings in the European market.

And on top of these new product introductions are existing business continues to gain momentum as European commercial heat pump sales were up 70% in Q3 and are up 40% year to date.

Thanks to our sustainability product and service offerings, we are well on our way to achieving our scope III commitment of reducing our customers' greenhouse gas emissions by more than one giga tonnes by 2030, having achieved approximately 270 million metric tons of reduction since 2020.

We have and will continue to invest a disproportionate amount of our R&D and sustainability differentiation.

We are pleased to have been recognized by time magazine, Newsweek and many others for our sustainability leadership.

Excitingly the combination with Dietzman climate solutions will further accelerate our mission of becoming the world leader in intelligent climate and energy solutions as you see on slide six.

Last month, we had the pleasure of hosting Mcafee, Eastman Chairman and CEO of <unk> group in our headquarters for a webcast event to discuss his views on the future combination.

We are profoundly confident and excited and the value creation opportunities ahead of us the trend toward heat pumps in Europe is unambiguous and will continue for many years to come.

Max confirm that European de Carbonization is a trend that is not changing and is well supported by governments in Europe.

Individual countries may adjust regulations and subsidy levels from year to year, we see a multi year growth opportunity as those countries to meet their commitments for emission reductions backed by EU and country specific funding.

Residential heat pump penetration in Europe is only about 8% and 21 countries have subsidies to support 2030 in 2050 decarbonization goals.

<unk> climate solutions is also well positioned for continued share gains. Unlike some of its competitors. It has the advantage of providing solutions for all energy classes heat pumps gas boilers hydrogen boilers, while some of its competitors are pure play heat pump or boiler providers.

It has a connected ecosystem of offerings for an electric homes, such as solar PV battery and a differentiated digital platform. While also driving increased subscription sales.

A good example is the veto kao $2 50, a natural refrigerant air and water heat pump that won this year's award for the best heat pump in Germany.

This may climate solution is too soon introducing a 19 kilowatts of output version.

I will now give it access to over 90% of the single family home heating market.

Additionally, the brand new Vito Cal $2 50, a pro also releasing in Q1 we.

We will offer heat pumps out outputs of up to 40 kilowatts ideal for multifamily and commercial buildings.

And based on our experience with Toshiba carrier in that acquisition and integration, which is going extremely well. We are certainly confident in the cost synergies and already see potential for revenue synergies, which go well beyond our deal model.

In short.

Bismal climate solutions is the most attractive business in the most attractive segment in our space and we cannot wait to come together as one business, which is likely to close the first week of January 2024.

Lastly, a brief update on our business exits on slide seven.

Yes.

Thanks to our teams who are working quite literally around the clock and doing a superb job. We have many advisers, who together with our bankers Goldman Sachs JP Morgan on fire and security and Bank of America on commercial refrigeration, our focus on maximizing the net proceeds and speed, while ensuring a clean exit of these businesses.

We are progressing very well with the prospective buyers for security commercial refrigeration and industrial fire the.

The interest level has been extremely high and we expect to be able to announce signed agreements before the end of <unk> hopefully sooner.

The capital market transactions for the combined commercial and residential fire business is on track.

These are superb assets with deeply committed and effective team members and we remain very optimistic about the value that we will realize on these exits.

With that let me turn it over to Patrick Patrick Thank you, Dave and good morning, everyone. Please turn to slide eight.

Sales in the quarter were $5 7 billion with organic growth of 3%.

1% tailwind from foreign currency translation, and a 1% net contribution from acquisitions and divestitures.

The latter was substantially all driven by one month of placebo carrier before becoming organic at the beginning of August.

Q3, adjusted operating profit of over $1 billion was up more than 20% compared to the prior year on 5% reported sales growth.

<unk> productivity and price cost helped us expand our adjusted operating margin by 240 basis points to 18, 2%.

That is despite a 30 basis point headwind related to the Toshiba carrier consolidation.

Reported earnings conversion was 65% in the quarter.

Core earnings conversion.

Excluding acquisitions divestitures and currency, what's far higher than that.

Adjusted EPS of <unk> 89.

Is up 27% year over year and includes a tailwind from discrete tax items in the quarter.

Free cash flow of about $950 million.

<unk> was up 35% compared to last year.

Year to date, we have generated over $1 3 billion and free cash flow compared to about $400 million during the same period last year.

The improved working capital performance and higher earnings.

Overall, a good quarter and better than we expected mainly as a result of better operating performance and the discrete tax items I mentioned earlier.

Please turn to slide nine.

Q3 was another good quarter for HVAC organic.

Organic sales were up 4% driven by high single digit growth in commercial HVAC, 30% growth in light commercial and double digit growth in aftermarket.

North America residential HVAC sales were down low single digits in the quarter.

Overall volume was down low double digits and revenues continued to benefit from price realization and positive mix from the 2023 tiered transition.

Destocking is expected to continue in Q4, and we expect North America residential HVAC volumes to be down mid teen for the full year.

We expect field inventories to end 2023 also down mid teens from the beginning of the year, which should position them at more appropriate levels heading into 2024.

Offsetting lower expected residential volume in 2023, we now expect Mike commercial HVAC sales to be up about 30% versus about 20% in our prior guidance.

Adjusted operating profit for the HVAC segment was up 33 compared to last year on 7% reported sales growth.

Driven by productivity and price cost.

Adjusted operating margin reached a record high and was up 410 basis points compared to last year. Despite a 50 basis point headwind from the consolidation of Toshiba carrier.

You will see in the 10-Q later today that there was a onetime $60 million tax benefit from a joint venture that is included in equity income.

But that was more than offset by other discrete items in this segment.

In short excellent financial performance for this segment in the quarter.

Moving to slide 10 for refrigeration.

Reported sales were flat in the quarter with organic sales down 3%.

Offset by a 3% benefit from foreign currency translation.

Within transport refrigeration global truck and trailer sales were up high single digits, driven mostly by over 20% growth in European truck and trailer.

Container continued to experience demand softness, however, and was down roughly 25% year over year.

Commercial refrigeration sales were down about 10% in the quarter with orders, but this business returned to year over year growth.

Looking ahead to Q4, we expect the container business commercial refrigeration and the entire refrigeration segment to return to organic sales growth.

Adjusted operating margin for this segment was down 80 basis points compared to last year, mainly due to the lower volume in container and commercial refrigeration, which more than offset the benefits from productivity and price cost in the segment.

Moving on to financing and security on slide 11.

Just like exactly this segment had good financial performance in the quarter ripped.

Reported sales were up 2% with 6% organic sales growth and a 1% tailwind from foreign currency.

Partially offset by 5% headwind from the <unk> deconsolidation.

Unknown Executive: Good morning and welcome to Carrier's third quarter, 723 Ernest Conference Call.

Organic growth was broad based with high single digit growth in industrial fire and security and mid single digit growth in commercial and residential fired combined.

Sam Pearlstein: I would like to introduce your host for today's conference, Sam Pearlstein, Vice President Vest Relations. Please go ahead, sir. Thank you and good morning and welcome to Carrier's third quarter of 2023 Ernest Conference Call. With me here today are David Gitlin, Chairman and Chief Executive Officer and Patrick Goris, Chief Financial Officer. We will be discussing certain non-gap measures on this call which management believes are relevant in assessing the financial performance of the business. These non-gap measures are reconciled to gap figures in our earnings presentation which is available to download from Carrier's website at ir.carrier.com.

Adjusted operating profit was up 13% versus the prior year.

To HVAC adjusted operating margins hit a record level and were up 170 basis points year over year, driven by volume productivity and price cost.

David Gitlin: The company reminds listeners of the sales, earnings and cash[inaudible] In Q3 University. Additionally, we announced the launch of Lynx Logic, a new software as a service application within our Lynx Digital Platform that helps predict and address supply chain disruption by automatically identifying trends, patterns, and issues in distribution networks and transportation links. Customers clearly see the benefit of Lynx capabilities, and we now have over 100,000 paid Lynx subscriptions. Our playbook around digitally enabled life-cycle recurring sales continues to yield encouraging results globally, as we are well positioned for another year of double-digit growth in 2023 and beyond. Our other major growth theme is around driving differentiated solutions to ensure sustainability leadership.

Turning to slide 12.

Total company orders were down a little less than 10% in the quarter, mostly due to declines in the shorter cycle businesses.

Overall, HVAC orders were down about 10% in the quarter with expected declines in residential and light commercial HVAC.

Commercial HVAC orders were flat against the difficult comp last year orders were up 15% to 20% and the backlog remains robust up over 40% on a two year stack and extends well into next year.

Refrigeration orders were down approximately 15% to 20% in the quarter largely driven by transport.

Very strong orders growth in.

International truck and trailer up 60% year over year was more than offset by over 50% order declines in North America reconcile.

For North America <unk>, we opened the 2024 order book in Q2 of this year with.

For 2023, we opened the order book in Q3 of last year.

On a year to date basis, North America truck trailer orders are up low single digits, which is probably more indicative of underlying demand.

Commercial refrigeration and casino orders in October give us confidence in the refrigeration segment returned to organic growth in Q4.

Orders in fire and security were up around 5% with particularly strong growth in industrial fire.

We believe that lead time to the majority of our shorter cycle businesses across our three segments have normalized with backlogs close to more typical levels are longer cycle backlog continues to grow year over year.

Now moving on to guidance on slide 13.

We expect full year sales to come in around 22, 1% to $22 2 billion.

Including mid single digit organic sales growth.

We are raising our full year adjusted operating margin guidance.

About 14, 5% driven by strong year to date performance.

Within the segment.

We're increasing our full year HVAC adjusted operating margin guidance to about 16, 5%, while maintaining our fire and security guidance at 15, 5%.

Refrigeration full year adjusted operating margin is impacted by lower volume in container and commercial refrigeration and as a result, we'll likely end up a little lower than 13%.

We are increasing our full year adjusted EPS guidance by <unk> 10, compared to a prime at midpoint to about $2 70.

We have included a two <unk>.

Included a 2023 guide to guide adjusted EPS Bridge in the appendix for your reference.

In essence improved operational performance drives about half the increase the bounds. It is mostly driven by a lower expected adjusted tax rate.

Our full year adjusted effective tax rate is now expected to be between 21, five and 22% compared to our prior guidance of about 23%.

As for free cash flow, we now expect to generate slightly more than $1 9 billion in 2023.

Before I turn it back over to Dave Let me give you a couple of updates.

You may recall that we will be funding. The recent acquisition through a combination of mix through a combination of equity cash on hand and debt.

David Gitlin: You see examples of that on slide files. We continue to introduce industry leading products into the market that help our customers achieve their sustainability targets while decarbonizing the planet for generations to come. Carrier Transical introduced a new optimal line refrigerated container unit, which offers best-in-class energy efficiency versus the competition and is approximately 15% more fuel efficient than our prior units. We also introduced a comprehensive new line of high and very high temperature heat pumps for use in industrial, commercial, and health care buildings, as well as district heating.

The latter will be a mix of term loans and long term debt.

We've previously shared that we hedge the cash portion of the consideration against currency swings.

In the third quarter, we entered into a number of interest rate marks mitigate interest rate exposure on the expected issuance of debt with maturity of 10 years and beyond.

As a result.

We do not expect a significant change in our cost of financing for <unk> compared to our original business case.

We expect to be in the market for the bond offerings in Q4 in advance of an early January close.

David Gitlin: These heat pumps reduce both carbon emissions and energy costs up to 80% versus traditional gas boiler applications. Additionally, our new zero GWP refrigerator and air to water high efficiency heat pump will nicely complement these offerings in the European market. And on top of these new product introductions, our existing business continues to gain momentum as European commercial heat pump sales were up 70% in Q3 and are up 40% year-to-date. Thanks to our sustainability product and service offerings, we are well on our way to achieving our scope-free commitment of reducing our customers greenhouse gas emissions by more than one gigaton by 2030. Having achieved approximately 270 million metric tons of reduction since 2020, we have and will continue to invest a disproportionate amount of RRD in sustainability differentiation.

As we communicated previously we will be very focused on deleveraging post acquisition, and we will use free cash flow and proceeds from the business exits to do so.

We continue to expect to return to share repurchase through share repurchases as soon as our net leverage returns to about two <unk>.

One last topic.

I'd like to share our current thoughts on how we will provide 2024 guidance in February given the acquisition and the four business exits transaction.

We currently expect that our 2024 guidance will include a full year of Eastman climate solutions.

The exact timing and the proceeds of the business exits.

Of course, not known as of today.

For context, there are specific rules that determined when the business is going to be treated as discontinued operations in the financial statements and it is our current assessment that the fire and security businesses being exited will likely not qualify as disc ops for reporting purposes until all of the transactions have been executed.

David Gitlin: We are pleased to have been recognized by Time Magazine Newsweek and many others for our sustainability leadership. Excitingly, the combination with Beaceman climate solutions will further accelerate our mission of becoming the world leader in intelligent climate and energy solutions as you see on slide six. Last month, we had the pleasure of hosting Max Beaceman, Chairman and CEO of the Beaceman Group in our headquarters for a webcast event to discuss his views on the future combination.

We do not expect commercial refrigeration to qualify for disc ops.

Therefore, we intend to provide guidance consistent with how actual results will be reported.

This means that we will include the earnings of the businesses to be exited into our 2020 for guidance.

We will then adjust guidance as needed for the exact timing of the exit and the use of the proceeds.

David Gitlin: We are profoundly confident and excited in the value creation opportunities ahead of us. The trend toward heat pumps in Europe is unambiguous and will continue for many years to come. Max confirmed that European decarbonization is a trend that is not changing and is well supported by governments in Europe. While individual countries may adjust regulations and subsidy levels from year-to-year, we see a multi-year growth opportunity as those countries meet their commitments for mission reductions back by EU and country-specific funds.

By the time, we provide guidance in February we expect to have a better sense on timing and proceed with several of the business exits with that I'll turn it back over to you day well. Thank you Patrick in closing carrier continues performing while transforming we had another strong quarter and more importantly, we again increased our outlook for <unk>.

123, with mid single digit organic growth margin expansion and double digit adjusted EPS growth and strong free cash flow performance all broadly in line with the value creation framework that we shared with you at our latest Investor day.

David Gitlin: University. Residential heat pump penetration in Europe is only about 8%, and 21 countries have subsidies to support 2030 and 2050 decarbonization goals. Vismic climate solutions is also well positioned for continued sharegames. Unlike some of its competitors, it has the advantage of providing solutions for all energy classes. Heat pumps, gas boilers, hydrogen boilers, while some of its competitors are pure-play heat pump or boiler providers. It has a connected ecosystem of offerings for an electric home such as solar PV, batteries, and a differentiated digital platform while also driving increase of subscription sales.

Just a couple of months more to go in 2023. We are of course already looking ahead to 2024 with continued confidence in strong top and bottom line growth and cash conversion with that we'll open this up for questions.

Thank you if you'd like to ask a question. Please press star one one if your question has been answered and you'd like to remove yourself from the queue. Please press star one again.

Our first question comes from Deane Dray with RBC capital markets. Your line is open.

Good morning, everyone.

Hey, we're hearing some commentary about higher inventory in the channel of heat pumps in Europe, just all coming from some of the uncertainty about when some of these government stimulus programs will be passed.

David Gitlin: A good example is the VitoCal-258 natural refrigerant air-to-water heat pump that won this year's award for the best heat pump in Germany. Vismic climate solution is soon introducing a 19 kilowatts of output version that will now give it access to over 90% of the single family home heating market. Additionally, the brand new VitoCal-258 Pro, also releasing a Q1, will offer heat pumps out outputs of up to 40 kilowatts, ideal for multi-family and commercial buildings.

Is your sense of.

Channel inventory and how does that play out.

Well, let me just first give you a little bit.

Color on just how riesman climate.

<unk> been doing year to date look their sales are up about 18% year to date heat pump sales were up over 35%.

<unk> had strong margin expansion there are still tracking to the financials that we had thought for this year.

David Gitlin: And based on our experience with Koshiba, Carrier, and that acquisition and integration, which is going extremely well, we are certainly confident in the cost energies and already see potential for revenue synergies which go well beyond our deal model.

And when we look ahead I can tell you that we are very confident in the overall earnings trajectory that we had put in our business case.

Clearly when you see governments adjust some of their regulations and subsidies from one year to another you may see some impact on the adoption rate.

David Gitlin: In short, Vismic climate solutions is the most attractive business in the most attractive segment in our space, and we cannot wait to come together as one business, which is likely to close the first week of January 2024.

Heat pumps, so I think what Youll see is what we all saw which is backlog has got to very high levels. We saw it throughout our portfolio I think every industrial company thought is that as we all face some of the supply chain issue backlogs were elevated way beyond typical levels I think that we will see those backlog levels for <unk> come back.

David Gitlin: Lastly, a brief update on our business access on flight seven. First, my thanks to our teams who are working quite literally around the clock in doing a superb job. We have many advisors who together with our bankers, Goldman Sachs and JP Morgan on Fire and Security and Bank of America on commercial refrigeration, are focused on maximizing the net proceeds and speed while ensuring a clean exit of these businesses. We are progressing very well with the prospective buyers for security, commercial refrigeration, and industrial fire.

In line with what would've been historic levels and I do think that when we look at countries like Germany, and Italy, you will see some short term.

Movement in some of the order rates as those legislations play themselves out but look there is number one there is no question in anyone's mind Youre going to see this continued transition to heat pumps overall in Europe, and it doesn't take minor swings in oil and gas prices to even accelerate that.

David Gitlin: The interest level has been extremely high and we expect to be able to announce signed agreements before the end of one queue, hopefully sooner. The capital market transactions for the combined commercial and residential fire business is on track. These are superb assets with deeply committed and effective team members and we remain very optimistic about the value that we will realize on these exits.

Second they could not be better positioned to outgrow the market, we've talked consistently about their channel their technology their brand and.

How differentiated they are especially when I mentioned in my prepared remarks about them, introducing new products, which exposes them to a completely new part of the market that they werent in before when these products come out in <unk> and they have the advantage of having complete home energy management solutions. So.

Patrick Goris: With that, let me turn it over to Patrick. Thank you, Dave, and good morning, everyone.

Patrick Goris: Please turn to slide eight. Sealed in the quarter, we're $5.7 billion with organic growth of 3%, a 1% deal in foreign currency translation, and a 1% net contribution from acquisitions and divestitures. The latter was substantially all driven by one month of Toshiba carrier before becoming organic at the beginning of August. Q3 adjusted operating profit of over $1 billion was up more than 20% compared to the prior year on 5% before the sales growth.

And in the background. It won't surprise you that we will push very hard to overdrive on top and bottom line synergies and we've had a chance to spend a lot of time with Thomas Hi, I'm, the leader of that business and his team the more time, we spend with them. The more excited we are and the more confident we are in the value proposition from that combination.

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

Patrick Goris: Strong productivity and price costs helped us expand or adjusted operating margin by 240 basis points to 18.2%. That is despite a 30 basis point headwind related to the Toshiba Carrier Consolidation, reported earnings conversion was 65% in the quarter. Core earnings conversion, that is excluding acquisitions, divestitures and currency, was far higher than that. Adjust the DPS of 89 cents is up 27% year over year and includes a tailwind from discrete tax items in the quarter.

Yes look I mean, we.

Sales were up 30% as you mentioned dean in the quarter and I think when we look at the full year. We had thought light commercial was going to be up 20% I think for the full year, it's going to be up 30% as well so.

When we look at it there are some verticals that just remain extremely strong and K through 12 orders were up 25% in the quarter. The pipeline. There is even up 50%, we still see strong demand in some of the value based retailers. There are some verticals that will be under some level of pressure things like warehousing and some things like higher end.

Patrick Goris: Free cashflow of about 950 million dollars was up 35% compared to last year. Year to date, we have generated over 1.3 billion dollars in free cashflow compared to about 400 million during the same period last year, reflecting improved working capital performance and higher earnings.

Restaurants, and office space, perhaps but the overall underlying demand, especially in some of the key verticals is strong and the backlog is still elevated normally you'd have kind of 4% to six weeks backlog and our backlog as we sit here today extends into the second quarter of next year. So we'll continue to watch.

Patrick Goris: Overall, a good quarter and better than we expected mainly as a result of better operating performance and the discrete tax items I mentioned earlier.

Tori level similar to what I said for <unk> is that that you did have.

Patrick Goris: Please turn to slide 9. Q3 was another good quarter for HVAC. Organic sales were up 4% driven by high single-digit growth in commercial HVAC, 30% growth in light commercial and double-digit growth in aftermarket. North America residential HVAC sales were down low single-digit in the quarter. Overall, Resid volume was down low double digits and revenues continued to benefit from price realization and positive mix from the 2023 Seared Transition. These stockings is expected to continue in Q4 and we expect North America residential HVAC volumes to be down mid-team for the full year.

Demand that was be in backlog beyond historic levels, those should normalize over time.

We will have to see as we get into next year. We're looking at the EPA ruling which is date of manufacturer where the three year Grace period. So there will be.

As we transition of $4 $55 454 be there as well, but overall.

A great year for that team and I think that.

We're pretty well positioned as we head into the first quarter of next year.

Thank you.

Thank you.

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

Thanks, very much and good morning.

Maybe.

Just a first question around the North America residential HVAC market. So it looks like Youre, assuming perhaps.

Patrick Goris: We expect field inventories to end 2023 also down mid-teams from the beginning of the year, which should position them at more appropriate levels heading into 2024. Offsetting lower expected residential volume in 2023, we now expect light commercial HVAC sales to be up to about 30% versus about 20% in our prior guidance. Adjusted operating profit for the HVAC segment was up 33 compared to last year on 7% reported sales growth, driven by productivity and price costs.

Volumes there are down.

Perhaps low double digit high single digit in the fourth quarter.

Wanted to check if that's correct and how youre thinking about the slope of that.

Getting back towards.

Zero next year.

And also sort of when we think about next year, there's some discussion around the scope of the price effect tied to the refrigerants change I E. How much of your residential business might be affected.

Patrick Goris: Adjusted operating margins reached a record high and was up 410 basis points compared to last year despite a 50 basis point headwind from the consolidation of Toshiba carriers. You will see in the 10Q later today that there was a one-time $60 million tax benefit from a joint venture that is included in equity income, but that was more than upset by other discrete items in this segment.

That change is it just the greenfield equipment or it's also the replacement equipment as well pay down I'm, assuming furnaces and parts are unaffected by that any color on that please.

Sure Julian let me, let me start with kind of the year and then get a little bit of color on what we see for next year in light of the <unk>.

Patrick Goris: In short, excellent financial performance for this segment in the quarter.

This recent EPA ruling I think for overall this year, we're looking at <unk> being down mid single digits with volume being down in the mid teens.

Patrick Goris: Moving to slide 10 for refrigeration, reported sales were flat in the quarter with organic sales down 3% offset by a 3% benefit from foreign currency translation. Within transport for refrigeration, global truck and trailer sales were of high single digits driven mostly by over 20% growth in European truck and trailer. Container continued to experience demand softness, however, and was down roughly 25% Commercial refrigeration sales were down about 10% in the quarter, with orders for this business returned to year over year growth.

That would imply overall sales in the fourth quarter down about mid single digits for <unk> and I think that this is the quarter of <unk>.

This is sort of the most.

And a lot of the Destocking that we've been seeing so we want to end this year with inventory levels.

Down at least in the mid teens versus where we ended last year. So our first priority is always being there for our customers, but we also want to be very purposeful and working with our channel partners on making sure that inventory levels going into 'twenty, four or at least down 15% versus where we ended.

Patrick Goris: Looking ahead to Q4, we expect the container business, commercial refrigeration, and the entire refrigeration segment to return to organic sales growth. Adjusted operating margin for this segment was down 80 basis points compared to last year, mainly due to the lower volume and container and commercial refrigeration, which more than offset the benefits from productivity and price cost in the segment.

2022.

I had the chance to be with.

About 100 of our key distributors on Tuesday, and Dallas, We talked a lot about this and the regulatory changes and I think we're all lockstep together to go and this year in a way that supports our customers and positions us for next year.

Patrick Goris: Moving on to firing security on slide 11. Just like age back, the segment had good financial performance in the quarter. Reported sales were up 2% with 6% organic sales growth, and the 1% sale went from foreign currency partially offset by a 5% headwind from the KFI deconsolidation. Organic growth was broad base with high single-digit growth in industrial fire and security, and mid single-digit growth in commercial and residential fire combined. Adjusted operating profit was up 13% versus the prior year, similar to age back, adjusted operating margin to a record level, and we're up 170 basis points year over year, driven by volume, productivity, and price cost.

I think when you look at the recent EPA ruling Thats just come over come out over the last week. The good news is that the data are installed ruling what that's going to do is accelerate $4 54 B systems demand.

And we will likely see more $54 54, b sales in 'twenty forward than we previously thought and that mix is favorable and I will say that thanks to the great work of our team.

We will technically and operationally be ready to cut in the 454 be sooner and to ensure that we comply. We also think that our ability to manage the cutover can be a competitive advantage because we were already accelerating this in order to reduce risks.

We are encouraged that the EPA did clarify there we are encouraging I will say the EPA to clarify their position.

The way, it's written it would effectively allow dealers to replace the outdoor unit only with a 410 a replacement if it's not part of our system level change and that could be interpreted as allowing <unk> sales indefinitely and we don't think that was their intent we've had a seat at the table with the administration with the dome with its CPA with bipartisan.

Patrick Goris: Turning to slide 12. Total company orders were down a little less than 10% in the quarter, mostly due to the declines in the shorter cycle businesses. Overall age back orders were down about 10% in the quarter, with expected declines in residential and light commercial age back. Commercial age back orders were flat against the difficult comp, last year orders were up 15 to 20%. And the backlog remains robust, up over 40% on a two-year stack, and extends well into next year.

And members of Governors and the Hill and we know what their intent is and the way. It's drafted is not consistent with the intent.

To transition to a more environmentally friendly refrigerant second it will create a bit more complexity in the channel and supply chain. So we are encouraging them to clarify.

Patrick Goris: Reprederation orders were down approximately 15 to 20% in the quarter, largely driven by transport. Very strong orders growth in international truck and trailer, up 60% year over year, was more than offset by over 50% order declines in North America truck and trailer. For North America truck and trailer, we opened the 2024 order book in Q2 of this year. For 2023, we opened the order book in Q3 of last year. On a year-to-date basis, North America truck trailer orders are up low single digits, which is probably more indicative of underlying demand.

Their position a bit and I think.

And we'll see how that plays itself out, but regardless specifically to your question Julien what we said on pricing for $4 54 beat stance, we said it would be up 15% to 20% over two years in part because of our typical annual price increase in part because of the extra cost associated with the system.

I'll tell you keep in mind this year.

We sort of breakout price and mix, but if you combine those together for resi with the seer change will be up 10% on price and mix combined so when we look at <unk>.

Specifically at 410% pricing, we will be raising price there as well.

Patrick Goris: Commercial refrigeration and container orders in October give us confidence in the refrigeration segments returned to organic growth in Q4. Orders in fire and security were up around 5% with particularly strong growth in industrial fire. We believe that lead times for the majority of our shorter cycle businesses across our three segments have normalized with backlogs close to more typical levels. Our longer cycle backlog continues to grow year over year.

In part because of the increased carrying costs driven by the complexity of that ruling but.

In part because that we will see a reduction of supply in the U S with <unk>, So we will need to.

I'll have to deal with pricing to adjust for that but we will also be looking at when we look at for it and a replacement for outdoor only looking at treating that similar to how we would treat and aftermarket replacement, which would have limited warranty applications and we're still evaluating that but we will look at that so net net EPA ruling more 54 be sooner.

Patrick Goris: Now moving on to guidance on slide 13. We expect full-year sales to come in around $22.1 to $22.2 billion, including mid-single digits organic sales growth. We are raising our full-year adjusted operating margin guidance to about 14.5% driven by strong year-to-date performance. Within the segment, we are increasing our full-year age-backed adjusted operating margin guidance to about 16.5% while maintaining our fire and security guidance at 15.5%. The refrigeration, full-year adjusted operating margin, is impacted by lower volume and container and commercial refrigeration, and as a result, we'll likely end up a little lower than 13%.

It's overall good a bit more uncertainty as we navigate this with our partners, but I don't think theres going to be a company more prepared to deal and addressed with the switchover.

That's very helpful. Thanks for all that color and then just a quick sort of more financial question.

HVAC segment, I think Patrick you had mentioned some maybe temporary sort of headwinds and tailwind moving around in that third quarter profit numbers. So maybe just to fine a point on that and I wanted to check that the guidance seems to embed sort of low double digit HVAC margins.

Q4.

Kind of sort of mid twenties.

Patrick Goris: We are increasing our full-year adjusted EPS guidance by 10 cents compared to our primary midpoint to about $2.70. We have included a 2023 guide-to-guide adjusted EPS bridge in the appendix for your reference. In essence, improved operational performance drives about half the increase. The balance is mostly driven by a lower expected adjusted tax rate. Our full-year adjusted effective tax rate is now expected to be between 21.5% and 22% compared to our prior guidance of about 23%. As for free cash flow, we now expect to generate slightly more than $1.9 billion in 2023.

Trading leverage for the year as a whole inclusive of the Toshiba impact just wanted to check that but those are sort of roughly the right.

What processes.

Yes, the answer to your last two questions.

Julien, yes on both counts in terms of the HVAC margins.

And pointed out that the transcript I would like to ask have said that.

So that is the $60 million tax benefit within JV income within HVAC, It's $106 16, and that was offset by some.

<unk> items that went the other way.

In summary, the large expansion of margins within HVAC 410 bps year over year.

Patrick Goris: Before I turn it back over today, let me give you a couple of updates. You may recall that we will be funding the beastman acquisition through a combination of to a combination of equity, cash on hand, and death. The latter will be a mix of term loans and long-term debt. We previously shared that we hedge the cash portion of the consideration against currency swings. In the third quarter, we entered into a number of interest rate marks to mitigate interest rate exposure on the expected issuance of debt with maturity 10 years and beyond.

Despite the headwind from Vascepa carrier consolidation.

It's really driven by strong price cost and productivity.

That is the main driver that we've seen that segment that also translates to the overall company. So some minor headwinds to that as I mentioned acquisitions, we always invested but it's a little bit there, but the main drivers productivity and price cost.

That's great. Thank you.

Thank you.

Thank you. Our next question comes from Jeffrey Sprague with vertical research partners. Your line is open.

Thank you and good morning, everyone.

Patrick Goris: As a result, we do not expect a significant change in our cost of financing for beastman compared to our original business case. We expect to be in the market for the bond offerings in Q4 in advance of an early January close. As we communicated previously, we will be very focused on de-leveraging post-acquisitions and will use fee cash flow and proceeds from the business exits to do so. We continue to expect to return sharey purchases as soon as our net leverage returns to about 2x.

Hey, Patrick Thank you for the color on.

How are you thinking about the guide just wanted to get a little bit more into the deal math, if we could you're sitting on $3 9 billion in cash I just wonder how much of that is sort of usable to consummate the deal versus cash that might be geographically.

<unk> or other things.

And I'm sure <unk> is generating cash here does that go out the door to them is it closing adjustment or.

Is that accessible to you.

Self fund the deal to some degree.

Patrick Goris: One last topic. I'd like to share our current thoughts on how we will provide 2024 guidance in February, given the acquisition and the four business exits transactions. We currently expected our 2024 guidance will include a full year of beastman climate solutions. The exact timing and the proceeds of the business exits are of course not known as of today. For context, there are specific rules that determine when a business can be treated as discontinued operations in the financial statements, and it is our current assessment that the firing security businesses being Exodus will likely not qualify as this cost for reporting purposes until all of the transactions have been executed.

And thirdly, just what are you looking at as kind of your blended funding costs based on the actions of locks that you took in Q3.

Patrick Goris: We do not expect commercial refrigeration to qualify for this cost. Therefore, we intend to provide guidance consistent with how actual results will be reported. This means that we will include the earnings of the businesses to be exited into our 2024 guidance. We will then adjust guidance as needed for the exact timing of the exit and the use of the proceed. By the time we provide guidance in February, we expect to have a better sense of timing and proceed for several of the business exits.

Yes.

I'll start Jeff with the cash that we have so we had $3 9 billion at the end of Q3, we expect that to grow further.

By the end of the year, you can think of about $1 billion of debt generally is what we need to run the business, which would be call. It not acceptable we would plan on using that for the remainder of the cash we would intend to use for the acquisition.

So that's one two with respect to cash at visa.

The type of acquisition, we have done is the lock box mechanism, which is difficult for European deals and in essence. It means that all the earnings and the cash generated within Eastman.

January 1st of this year 2023 remain within the Smith, and we get access to that day, we acquired them.

So we do expect at the time of closing.

Access to that cash and to use some of that cash again.

<unk> paid down some of the short term.

The terminals suite, we expect to use for example to fund the acquisition.

David Gitlin: With that, I'll turn it back over to you today. Well thank you, Patrick.

Last question you had was I think was about the blended rate.

David Gitlin: In closing, Carrier continues performing while transforming. We had another strong quarter and more importantly, we again increased our outlook for 2023 with mid-single digital organic growth, margin expansion, double-digit adjusted EPS growth, and strong free cash flow performance, all broadly in line with the value creation framework that we shared with you at our latest investor day. So with just a couple of months more to go in 2023, we are of course already looking ahead to 2024 with continued confidence and strong top and bottom line growth and cash conversion.

We assumed back in April a little bit of a conservative rate overall at about 6% to finance the transaction and based on everything we know now some of the locks we've put in place. We think we're very close to that number it would also mean that our.

Overall cost of debt weighted cost of debt post.

The transaction would be right around 4% based on where interest rates are today.

Great and just back to the earlier point. So there is a $116 million gain in HVAC segment results in the quarter, but that is <unk>.

Unknown Executive: With that, we'll open this up for questions. Thank you. If you'd like to ask a question, please press star 11. If your question has an answer and you'd like to remove yourself from the queue, please press star 11 again.

Fully or mostly offset by what exactly.

Jeff.

Deane Dray: Our first question comes from Dean Dre with RBC Capital Markets. Your line is open. Thank you.

16, one 6 million tax gain within HVAC as equity income that is all offset by some smaller items, so $1 6 million.

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

<unk> Okay great.

Thank you I'll leave it there I appreciate it thank you.

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

Hey, guys good morning.

Hey, Jeff Good morning.

Hey.

David Gitlin: Well, Dean, let me just first give you a little bit of color on just how Beesman Climate Solutions has been doing here today. Look, their sales are up about 18% here today. Heat pump sales are up over 35%. They've had strong margin expansion. They're still tracking to the financials that we had thought for this year. And when we look ahead, I could tell you that we are very confident in the overall earnings trajectory that we had put in our business case.

Dave can you, maybe just talk a little bit about just the broader environment. The market is breaking out giving project financing concerns.

Higher rates environment high rate environment, what are your thoughts on all of the Mega projects that have kind of move forward ultimately what that means for your business. What are you starting to see any of that.

Or a substantial amount of that into your orders just any thoughts around that would be helpful.

Yes look I think.

David Gitlin: Clearly, when you see governments adjust some of their regulations and subsidies from one year to another, you may see some impact on the adoption rate of heat pumps. I think what you'll see is what we all saw, which is backlogs got to very high levels. We saw it throughout our portfolio. I think every industrial company saw it is that as we all say some of the supply chain issues, backlogs were elevated way beyond typical levels.

It was interesting we saw Abi come out at 44 and exactly what you said Joe that there was that created a fair amount of anxiety, but there wasn't as much exuberance. When it was over 50 for three of the last five months and I went through a stretch where it was over 50 I think for almost a year straight so I think look.

We take we take those metrics.

When I think a sober view, but a very a look at.

David Gitlin: I think that we'll see those backlog levels for Beesman come back in line with what would have been historic levels. And I do think that what we look at countries like Germany and Italy, you will see some short-term movement in some of the order rates as those legislations play themselves out. But look, there's number one, there's no question in anyone's mind. You're going to see this continued transition to heat pumps overall in Europe.

The agility that we have as a team to pivot to where the strength is so we look at certain verticals that remain just extremely strong and we see it that we still have in commercial HVAC extremely elevated backlog levels going into next year and it's because.

Some of the orders we've seen in education, not only K through 12, with yes or funding, but also higher Ed very strong data centers, we look at some areas of industrial not only in the United States, but even though real estate remains under a lot of pressure in places like China commercial real estate in the United States under pressure.

David Gitlin: And it doesn't take minor swings in oil and gas prices to even accelerate that. Second, they could not be better positioned to outgrow the market. We've talked consistently about their channel, their technology, their brand, and how differentiated they are, especially when I mentioned in my prepared remarks about them introducing new products, which exposes them to a completely new part of the market that they weren't in before when these products come out in one queue.

See things like the chips Act that we see things like some of the EV type spending we're seeing in China, very strong and we're winning more than our fair share a lot of that new construction and thats driven by some of the regulatory environment D card trends so.

Look we take a very balanced view I don't think a lot of people were thinking that light commercial would be up 30%. This year, which it will be I think going into next year. We will go into next year.

David Gitlin: And they have the advantage of having complete home energy management solutions. And in the background, it would surprise you that we will push very hard to overdrive on top and bottom line synergies. And we've had a chance to spend a lot of time with Thomas Heim, the leader of that business and his team. The more time you spend with them, the more excited we are, the more confident we are in the value proposition from that combination.

Good backlog in commercial HVAC, we think that we're sort of bottoming out in some of the resi space in the United States, we see aftermarket growth double digits, we've done a really nice job with a bound and links and the whole playbook around driving more recurring revenues to smooth some of the cycles, we've come a long way there.

Deane Dray: That's all really good to hear.

Deane Dray: And then second question, can you take us through some of the assumptions on what's going on in like commercial up 30% what are the drivers and visibility there please? Yeah look I mean we sales were 30% as you mentioned Dean in the quarter and I think when we look at the full year we thought like commercial was going to be up 20% I think for the full year it's going to be up 30% as well. So.

And then I think with some of our businesses like container, we went through a rough patch in a container, which we fully expected and we see that starting to recover here in <unk> going into next year. So I think we will have a very balanced view, but we'll go into next year looking.

With good backlogs and the longer cycle businesses, and we still see orders trends in some of the key verticals that I think position us.

David Gitlin: When we look at it there are some verticals that just remain extremely strong K through 12 orders were up 25% in the quarter the pipeline there is even up 50%. We still see strong demand that some of the value based retailers there are some verticals that will be under some level of pressure things like warehousing and some of things like higher end restaurants and office space perhaps, but the overall underlying demand especially in some of the key verticals is strong.

For solid growth next year.

Got it that's Super helpful and then maybe just.

Follow up question, a more financial oriented question on <unk> margins for <unk>.

Patrick Thanks for all the all the color I think I think we've got where we're all set.

$15 million impact this quarter, but just for <unk>, specifically I know that.

Always a much lower volume quarter for the business.

The teens sequentially from 20% to call it low double digit seem very substantial are there any other moving parts that we really need to take into consideration for <unk> versus <unk> margins you just posted.

David Gitlin: And the backlog is still elevated normally you'd have kind of four to six weeks backlog and our backlog as we sit here today extends into the second quarter of next year or so we'll continue to watch inventory level similar to what I said for these minutes that that you did have you know demand that was be and backlogs beyond historic levels so should normalize over time. We'll have to see as we get into next year we're looking at the EPA ruling which is data manufacturer with a three year grace period so there will be you know as we transition a 455 454 B there as well but overall a great year for that team and I think that you know we're pretty well positioned as we headed to the first quarter of next year.

The biggest element.

What I'm going to share from an overall company perspective.

The same of course for HVAC, given the size of that segment.

Deane Dray: Thank you.

One significantly lower sales sequentially due to the season that includes of course.

Red <unk> as well as some of the higher margin businesses. In addition, you heard us talk about ensuring that field inventories are right sized. So there is some downtime in some of our facilities as well to ensure that we start out 2020 forward appropriate levels of inventory and then we continue to make some.

Julian Mitchell: Thank you our next question comes from Julian Mitchell with Barclays your line is open. Thanks very much and good morning. Maybe just a first question around the North America residential HVAC market so it looks like you're assuming perhaps the volumes there are down perhaps low double digit high single digit in the fourth quarter. Wanted to check if that's correct and how you're thinking about the slope of that getting back towards zero next year and also sort of when we think about next year there's some discussion around the scope of the price effect tied to the refrigerants change i.e, how much of your residential business might be affected by that change. Is it just the green field equipment or it's also the replacement equipment as well and I'm assuming furnaces and parts are unaffected by that any color on that please.

Investments in and JV income is seasonally lower as well in the last quarter of the year as we see every year I would say those are the biggest moving pieces Joe.

Great. Thanks, guys.

Thanks, Joe.

Thank you.

Next question comes from Noah Kaye with Oppenheimer. Your line is open.

Alright, thanks, very much I wanted to follow up on the commercial commentary so I look at the multi quarter commercial orders trends.

Flattish here, how do you think about for Q orders trends in commercial just based off of everything you just described.

Yes.

Well look.

Last year orders were up around low double digits, we'll have to see.

Excuse me orders here in <unk>, it's too hard to tell just yet.

But when you look at it our backlog is up 40% on a two year stack. So I think that when we look at it by region Europe has been almost surprisingly resilient and we think about I mentioned that he pumps up 70% in the quarter for commercial heat pumps. So we see continued strong demand.

Patrick Goris: Sure Julian let me let me start with kind of the year and then go a little bit of color on what we see for next year in light of the this this recent EPA ruling. I think for overall this year we're looking at resident being down mid single digits with volume being down in the mid teens. That would imply overall sales in the fourth quarter down about mid single digits for resi and I think that this is the quarter of I think this is sort of the most the end of a lot of the destocking that we've been seeing so we want to end this year with inventory levels down at least in the mid teens versus where we ended last year.

In Europe, especially for heat pumps North America.

We actually had much elevated lead time in backlog levels, given a couple of operational issues that we had that are now significantly improving the team's done a really nice job and making progress.

In some of our North American operational issue, so as that as that continues to improve and lead times eventually get back to more normal levels, we'll see orders start to increase there.

And then China is kind of a mixed bag China's under a little bit of pressure certainly on the real estate side, but as I mentioned some of the infrastructure spend continues to be strong we had a very recent win here for six chillers in China.

Patrick Goris: So our first priority is always being there for our customers but we also want to be very purposeful in working with our channel partners on making sure that inventory levels going into 24 are at least down 15% versus where we ended 2022. I had the chance to be with about 100 of our key distributors on Tuesday in Dallas. We talked a lot about this and the regulatory changes and I think we're all lock step together to go in this year in a way that supports our customers and positions us for next year.

We did a lot of our automated system, we're pushing very hard on aftermarket connected devices. There. So we'll have to see.

But I don't see a huge rebound here in China, and <unk>, but hopefully as we get into next year, if things start to stabilize a bit there on the on.

Some key verticals.

Okay. Thanks, and then David I think theres been so much written about this but since you are closely tracking the performance of the <unk> business and given how well it's done year to date versus some of the headlines out there around he bumped them and just help us reconcile the strength of the companies.

Patrick Goris: I think when you look at the recent EPA ruling that's just come over, come out over the last week. The good news is that the date of install ruling, what that's going to do is accelerate 454 B. The systems demand and we'll likely see more 50 or 54 B sales in 24 than we previously thought and that makes us favorable and I will say the thanks to the great work of our team.

Our performance year to date, and what they're doing now to position for all these different regulatory changes and what really drives your conviction that they'll continue to see sales growth and strong performance in 'twenty four and beyond.

Patrick Goris: We will technically and operationally be ready to cut in the 454 B sooner and to ensure that we comply. We also think that our ability to manage the cutover can be a competitive advantage because we were already accelerating this in order to reduce risk. We are encouraged that the EPA did clarify there, we are encouraging I will say the EPA to clarify their position because the way it's written, it would effectively allow dealers to replace the outdoor units only with a 410A replacement if it's not part of a system level change.

Look there is there is there is so much to like there I mean, we all we've always known that as country countries change regulation subsidy levels that will have quarter to quarter impacts we saw it in Italy last year that Italy had subsidy levels at 110% going back a couple of years and.

Then they changed it to 90% and that caused year over year headwinds and anxiety anxiety in Italy that will smooth itself out over time, but if you're trying to predict what's going to happen as regulations change from one year to another that will have some short term swings and I think thats whats being highlighted by some of these peers.

Patrick Goris: And that could be interpreted as allowing 410A sales indefinitely and we don't think that was their intent. We've had a seat at the table with the administration, with the DOE, with the EPA, with bipartisan members of governors and the Hill and we know what their intent is and the way it's drafted, it's not consistent with the intent to transition to a more environmentally friendly refrigerator and second, it will create a bit more complexity in the channel supply chain.

We're seeing in the German legislation that we do think that the regulation is written will go through there is still a bit of a debate on the exact subsidy levels. Those subsidy levels will be debated I think November 6th and seventh in Germany levels. We expect those will all be promulgated and go into effect.

Patrick Goris: So we are encouraging them to clarify their position a bit and we'll see how that plays itself out. But regardless specifically to your question Julian, what we said on pricing for 454B stands, we said it would be up 15 to 20% over two years in part because of our typical annual price increase in part because of the extra cost associated with the system. I will tell you keep in mind this year on, you know, we sort of break out price and mix, but if you combine those together for Rezzy with the sear change will be up 10% on price and mix combined.

In January of next year, if you see an increase in subsidy levels that will have a natural dulling effect on orders as consumers wait for those increased subsidy levels to go into effect. So that will that have an impact potentially on <unk> for.

One business from here to there of course, it will but when we step back we say is the transition to heat pumps in Europe here to stay we are 100% confident and that is <unk>. The best positioned company because they are not a pure play either heat pump our boiler company, yes, because they have not only mixed bag.

Patrick Goris: So when we look specifically at 410A pricing, we will be raising price there as well. In part because of the increased carrying cost driven by the complexity of the ruling, but in part because that we will see a reduction of supply in the US for 10A, so we'll need to, you know, we'll have to deal with pricing to adjust for that. But we will also be looking at when we look at 410A replacements for outdoor only looking at treating that similar to how we would treat an aftermarket replacement, which would have limited warranty implications and we're still evaluating that, but we will look at that.

<unk> they have mixed line so as boilers, if theres going to be more boilers next year than we had earlier anticipated, which I think there will be they make great margins on boilers and they are able to.

Their operational performance to support that and then you look at all the other capabilities they bring to the table. When you combined with a world class company. There are so many very obvious synergies and then a lot of hidden synergies as we apply their technology to our businesses across the world and we bring in say for example, the carrier.

<unk> into their channel those are immediate revenue synergies that can offset like if theres. Some <unk> heat pump headwind in Germany, you can look at all these other things whether it's additional.

Patrick Goris: So net net EPA ruling more 54B sooner. It's overall good a bit more uncertainty as we navigate this with our partners, but I don't think there's going to be a company more prepared to deal and address with the switch over.

Solar PV battery sales things like that or revenue synergies. So we just feel so confident in the business in the team and the overall trajectory and the overall earnings profile of that business.

Patrick Goris: That's very helpful. Thanks for all that color and then just a quick sort of more financial question. The HVAC segment, I think Patrick you'd mentioned some maybe temporary sort of headwind and tailwinds moving around in that third quarter profit numbers and maybe just a finer point on that and wanted to check that the guidance seems to embed a sort of low double digit HVAC margin for Q4. And a sort of mid 20s operating leverage for the year as a whole inclusive of the Toshiba impact just wanted to check that those are sort of roughly the right thought process.

Really appreciate the color. Thank you.

Thank you.

Thank you. Our next question comes from Guatemala with TD Cowen Your line is open.

Good morning.

Good morning, guys.

The resi business are you guys seeing any evidence of trading down and increase in repair versus replace we've heard some of the HVAC Oems talk about that I don't know if <unk> seen any evidence of that in the channel.

Interesting got them, we have not and I actually asked that question. We were I mentioned that a couple of days ago I was with our top distributors, it's something that when economies soften that you naturally look for it but we have not seen that.

Patrick Goris: Yes, the answer to your last two questions, Julian are yes on both counts. In terms of the HVAC margins, Sam pointed out that the transcript, the life transcript said that I said that it's a $60 million tax benefits within JV income, within HVAC. It's $1,616. And that was often by some discrete items that went the other way. But in summary, the large expansion of margins within HVAC, $410 this year over year, despite the headwind from the Shiba Kira consolidation, it's really driven by strong price cost and productivity.

We haven't seen the mixing down we havent seen the trading down replacing parts instead of entire system. So.

For us what we're doing is I think the team did.

Superb job and the switch the switchover in the new CRE unit. We are now laser focused on positioning ourselves for the refrigerant change, which gives pricing some both price and mix benefits to offset some of the destocking that we saw throughout 'twenty three that we'll see into 'twenty into the fourth quarter, but then I think when we start.

Patrick Goris: And that is the main driver that we see in that segment that also translates to the overall company. So some minor headwinds to that, as I mentioned acquisitions, we always invest a little bit there, but the main driver is productivity and price cost. That's great.

Next year, a lot of that will be behind us as we position ourselves for the 450 <unk> switchover. So no we have not seen any material evidence of that.

Julian Mitchell: Thank you.

Okay, and just a follow up to an earlier question on the pricing alongside the new the new units coming out in 'twenty, five or perhaps 24 as you mentioned.

Jeffrey Sprague: Our next question comes from Jeffrey Sprague with Vertical Research Partners. Your line is open. Thank you. Good morning, everyone. Patrick, thank you for the color on how you're thinking about the guide. I just want to get a little bit more into the deal math, if we could. You're sitting on $3.9 billion in cash. I just wonder how much of that is sort of usable to consummate the deal versus cash that might be geographically stranded or other things.

I'm just curious do you expect order of magnitude of the pricing.

Those units to be comparable to what you saw with the seer change this year or do you think it's.

Enough cost is going to be designed out of the system such that we are not going to get.

Whatever it was 10% to 15%.

Reising Lyft ultimately I know thats.

Kind of.

Some talk about that but I'm just curious what's your best guess on.

Jeffrey Sprague: And I'm sure Veeceman is generating cash here. Does that go out the door to them as a closing adjustment or is that accessible to you, you know, to sort of fund, self funded deal to some degree? And thirdly, just what are you looking at as kind of your blended funding costs based on the actions and locks that you took in Q3? Yeah.

Kind of magnitude of pricing opportunity with that new unit.

Yes, I think look there's been some skeptics on the whether we'd see the 15% to 20% over two years, we're very confident that we are going to.

<unk> increased price and Rajiv the normal price that we would have done anyway. We will continue to do that as we go into next year and we'll do it again.

Patrick Goris: I'll start Jeff with the cash that we have. So we have $3.9 billion at the end of Q3. We expect that to grow further by the end of the year. You can think of about a billion dollars of that generally is what we need to run the business, which would be call it not accessible. We wouldn't plan on using that remainder of the cash. We would intend to use for the acquisition.

In early 2025, as well and then on top of that you are adding some cost to the system for things like leak detection sensors.

And some parts of the controls and it would only be natural for us to.

Increased price based on some of the.

Additional protections that we're adding to the $4 54 B unit so.

Patrick Goris: So that's one, two with respect to cash at Veeceman. The type of acquisition we've done is a lock box mechanism, which is difficult for European deals. And in essence, it means that all the earnings and the cash generated within Veeceman as of January 1st of this year, 2023, remained within Veeceman. And we get access to that the day we acquired them. And so we do expect at the time of closing to have access to that cash and to use some of that cash again to pay down some of the short term.

We we came into this year expecting price and mix benefit and I think it will turn out to be even slightly higher than we thought around 10% and we expect to see kind of similar orders of magnitude on price mix benefit with the 450 <unk>.

Thank you.

Thank you.

Thank you. Our next question comes from Jeff Hammond with Keybanc capital markets. Your line is open.

Jeff Hammond your telephone may be muted.

Patrick Goris: The terminals we expect to use, for example, to fund the acquisition. The last question you had was I think was about the blended rate. We assume back in April, a little bit of a conservative rate overall at about 6% to finance the transaction. And based on everything we know now, some of the locks we put in place, we think we're very close to that number. It would also mean that our overall cost of debt, weight of cost of debt, post the transaction would be right around 4%.

Why do we go onto the next one.

Sure.

Our next question comes from Brett Linzey with Mizuho. Your line is open.

Hey, good morning, all.

Hey.

Alright, good morning, yes.

Just wanted to come back to the to the business exit update slide.

You noted the resident commercial fire.

Public trading late spring I was hoping you could just put a finer point on what the nature and structure of that transaction might look like as it moves to the public markets.

Patrick Goris: Based on where interest rates are today. Great, and just back to the earlier point, so there's a $116 million gain in HVAC segment results in the quarter, but that is fully or mostly all set by what exactly? Just $116 million, HAC came within HVAC as equity income, that is all set by some smaller other items, so $116 million. $116, okay, great, thank you, I'll leave it there, much appreciated.

Brian It could take a few different forms look it could be it's been it could be a split.

Patrick Goris: Thank you.

Yes.

The example, there would be J&J can view that was in the market recently. So that's an example that we benchmarked we're preparing for different.

Scenarios.

And look we've talked about a clean exit we've talked about accelerated buyback, we've talked about our commitment to our investors to pay down debt and what we're doing with this public company exit is achieving yes all of the above so we'll work on the specific form as we get in to early next year that prep as the same effectively.

Joe Richie: Thank you, our next question comes from Joe Richie with Goldman Sachs, your line is open. Hey guys, good morning. Hey Dave, can we maybe just talk a little bit about just the broader environment, the market is, you know, freaking out, giving project, financing concerns, higher rates environment, higher rate environment, just what are your thoughts on all the mega projects that have kind of moved forward ultimately what that means for your business, whether you've started to see any of that.

Either way and I'm very proud of the team because normally a lot of this work will take longer but the team is heads down working around the clock. So we can be ready for public trading in the late spring of next year.

Okay makes sense.

Just a follow up on the international truck and trailer sales up over 20% strong quarter and a bit of a moderation in the order book what is your level of visibility.

Based on our backlog based on.

Coming order rates as we flip the calendar here to 'twenty four.

Well Theres a couple of factors going on with international truck trailer you also have.

Joe Richie: Or substantial amount of that into your order, so something thoughts around that would be helpful. Yeah, look, I think it was interesting, you know, we saw ABI come out at 44 and exactly what you said, Joe, that there was, you know, that created a fair amount of anxiety, but there wasn't as much exuberance when it was, you know, over 50 for three of the last five months and it went through a stretch where it was over 50, I think for almost a year straight.

A very rapid transition to electric going on there as well on truck.

So I would tell you we were pleasantly surprised with.

The low double digit kind of increase.

The increase that we saw overall in international truck trailer.

Orders were up 60% in the third quarter for our international truck trailer business, partly because of this transition to some of the electrification and partly because of the team has done very well in supporting the customers in the overall market demand. So we feel well, we feel well positioned going into next year on European structure.

Joe Richie: So I think look, we take, we take those metrics with I think a sober view, but a very a look at the agility that we have as a team to pivot to where the strength is. So we look at certain verticals that remain just extremely strong and we see it that we still have in commercial HVAC, extremely elevated backlog levels going into next year. And it's because that some of the orders we've seen in education not only K through 12 with the extra funding, but also higher and very strong data centers.

And even China has done done well for us on the truck trailer side, and then North America truck trailer.

Despite.

Despite people can sort of focus on some of the ICT numbers, but.

People said look 2023, ATP down mid single digits for the year, our North American truck trailer would be up double digits. So we're taking a sober look at what <unk>, saying for next year, but there is a lot a lot of countervailing forces between again the shift to electrification.

Joe Richie: We look at some areas of industrial not only in the United States, but even though real estate remains under a lot of pressure in places like China commercial real estate in the United States under pressure. We see things like the chips act and we see things like some of the the EV type spending we're seeing in China very strong and we're winning more than our fair share a lot of that new construction and that's driven by some of the regulatory environment decarbed trends.

Mix and then this overall focus that we've had globally on links and more digitally enabled recurring revenues has yielded a lot of very strong results for us.

Joe Richie: So look, we take a very balanced view. I don't think a lot of people were thinking that like commercial would be a 30% this year, which it will be. I think going into next year, we'll go into next year, good backlog and commercial HVAC. We think that we're sort of bottoming them out in some of the resie space in the United States. We see aftermarket growth, double digits. We've done a really nice job with a bound and links and the whole playbook around driving more recurring revenues to smooth some of the cycles.

I appreciate the insight great quarter.

Thank you. Thank you.

Thank you.

Next question comes from Nigel Cook with Wolfe Research Your line is open.

Okay.

Thanks, Good morning, guys. Thanks for the questions.

So I think you called out I mean, we haven't explored this yet but the placebo performance I think you called out I think.

On slide <unk>.

<unk> I think it was maybe maybe slide slide three.

Toshiba carrier performance remained strong and we know Europe right now is really weak we know that parts of APAC is really weak. So just curious what's driving the upside to performance of carrier.

Joe Richie: We've come a long way there. And then I think with some of our businesses like container, we went through a rough patch and I container, which we fully expected. And we see that starting to recover here and for you going into next year. So I think we'll have a very balanced view, but we'll go into next year looking with good backlogs in the longer cycle businesses. And we still see orders trends in some of the key verticals that I think position us for solid growth next year. And we'll go into next year.

Toshiba carrier.

Yes Nigel.

Financial performance at Toshiba carrier has been really strong a lot of that is driven by the synergies.

We mentioned.

I think last quarter that we are increasing the cost synergy target of $100 million run rate for $200 million.

Patrick Goris: I got it, that's super helpful. And then maybe just follow a question and more financial worry into question on HVAC margins for 4Q. The Patrick, thanks for all the color. I think if we've got where we're all set on the $15 million impact this quarter, but just for 4Q specifically, I know that it's always a much lower volume quarter for the business, but the change sequentially from 20 plus percent, to call it low double digits, it seems very substantial.

It is helping us significantly.

Expand our margins.

In that business.

The <unk>.

Sales in Europe.

For that business were a little lighter for global comfort solutions.

But the performance overall for that business.

Really strong.

The key driver there is really all the synergies.

Driving and we're nowhere near the actual run rate yes.

So we expect to benefit from that.

Patrick Goris: Are there any other moving parts that we really need to take into consideration for 4Q versus the 3Q margins you just posted? The biggest element, and I'm going to share it from an overall company perspective, but it's the same of course for HVAC given the size of that segment. One significantly lower sales sequentially due to the season. That includes, of course, Reddy as well, some of the higher margin businesses. In addition, you heard a talk about ensuring that field inventories are right size.

For the next couple of years is that expense.

Okay. That's great. Thanks, Thanks, Patrick that's great to hear and then just.

To go back to.

A question that's been asked a couple of times, but obviously the HVAC margins. This quarter were spectacularly strong when we even when we back up.

Thanks, Adam.

Obviously, <unk> and I think <unk> was meant to be sort of similar to <unk>. It looks like it's coming in maybe a little bit weaker than <unk>.

I'm wondering I'm, assuming price costs would have been a factor in the attract strength I'm. Just wondering why that's not kind of fluids to <unk>. So again, I mean, I know, it's been answer, but maybe just a bit more color on that please.

Patrick Goris: So there is some downtime in some of our facilities as well to ensure that we start out 2024 with appropriate levels of inventory. And then we continue to make some investments and then JV income is seasonally lower as well in the last quarter of the year, as we see every year. I would say those are the biggest moving pieces, Joe. Great, thanks guys. Thank you.

Yes, actually I think that the HVAC margins for Q4 will be very similar to our Q1.

Joe Richie: Thanks, Joe.

Margins.

I.

I think they are very much aligned there.

Noah Kaye: Thank you.

As I mentioned.

One of my prior answers, what we're going to see in HVAC in Q4, as we address the field inventories as we mentioned in our comments if you want to field inventories to end above mid teens down versus the beginning of the year a lot of it is going to happen in Q4, So we're going to see more downtime in our factories in industry and that can impact.

David Gitlin: Our next question comes from Noah K with Oppenheimer. Your line is open. All right, thanks very much. I want to follow up on the commercial commentary. So, you know, I look at the multi quarter commercial orders trends and a flatish here. How do you think about 4Q orders trends in commercial just based off of everything you just described? Well, look, last year orders were up around low double digits. We'll have to see, excuse me, orders here in 4Q.

Some of the margins of course in that segment.

We do expect price cost and productivity generally remained strong but that is the headwind that we wouldn't have seen in the prior quarter, which is the destocking headwind affecting our factories.

Okay and would there be some incentive spending shifts.

The inventory it was it just purely <unk>.

David Gitlin: It's too hard to tell just yet. But, you know, when you look at it, our backlog is up 40% on a two-year stack. So I think that when we look at it by region, Europe has been almost surprisingly resilient. And we think about, I mentioned that heat pumps up 70% in the quarter for commercial heat pumps. So we see continued strong demand in Europe, especially for heat pumps. North America, we actually had much elevated lead time and backlog levels, given a couple of operational issues that we had that are now significantly improving the teams that are really nice job and making progress in some of our North American operational issues.

Factory, yes.

If this factory there are no okay great.

Great. Thanks, Patrick.

Yes.

Thank you.

Next question comes from Joseph Needle Phillips with Jefferies. Your line is open.

Good morning, guys, it's actually Steve Volkmann here.

Good morning.

We've got a lot going on this morning, obviously, sorry about that so my question is kind of a big picture one Dave.

Where do you think we are in the adjustment of the backlog does it go back to kind of historical levels or does it sort of settle in above historical levels.

Where are we in that process.

David Gitlin: So as that continues to improve and lead times eventually get back to more normal levels, we'll see orders start to increase there. And then China's kind of a mixed bag. You know, China's under a little bit of pressure, certainly on the real estate side. But as I mentioned, some of the infrastructure that's been continues to be strong. We had a very recent win here for six chillers in China, included a lot of our automated system.

I think it goes back to historical levels I think what what happened over these last couple of years is just very unique that.

David Gitlin: We're pushing very hard on aftermarket connected devices there. So we'll have to see, but I don't see a huge rebound here in China in 4Q. But hopefully as we get into next year, things start to stabilize a bit there on some keyword. Reckles. Thanks.

As you saw some of the supply chain challenges.

That and the underlying demand was strong the consumer has been strong you saw a lot of people getting getting in line to make sure that they had their orders positioned for when they need them I mean for example light commercial light commercial.

Sure.

School year, a lot of those replacements they want to see happen during the summer time, so people are making sure that with the supply chain uncertainty people were getting in the queue to have their position protected I think what you've now seen us in the shorter cycle business generally a return to more historical levels with some of the longer.

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

Cycle businesses like for Us commercial HVAC, we're still.

Again, where backlog is up 40% on a two year stack, we're still at elevated lead times, an elevated backlog levels I think that you would expect.

That to start to normalize, but if the underlying demand, which depending on the vertical remains strong you'll continue to see very strong growth in some of those key businesses. So I think there will be a leveling that's why we don't get overly fixated on.

David Gitlin: I mean, we all we've always known that as country countries, countries change regulation subsidy levels that will have quarter to quarter impacts. You know, we saw it Italy last year that Italy had subsidy levels at 110% going back a couple years. And then they changed it to 90% and that caused year over year headwinds and anxiety, anxiety and Italy. That will smooth itself out over time. But if you're trying to predict what's going to happen as regulations change from one year to another, that will have some short term swings.

On quarter to quarter orders, because they can swing wildly much more than they ever would have in the past, we talked about them being up 40% down 40%, we don't swing with those we look more at our backlog levels and and our lead time to make sure that we see the strength that we expect to see.

Got it and do you think we'll get sort of more normal by the end of 'twenty four or does it take longer than that.

No I think thats about right I mean, I think that some of the shorter cycle stuff is starting to get there. We're seeing more normal lead times in <unk> I think that's going to happen for visa climate solutions that they'll start to get their backlogs.

David Gitlin: And I think that's what's being highlighted by some of these peers. We're seeing in the German legislation that we do think that the regulation as written will go through. There's still a bit of a debate on the exact subsidy levels. Those subsidy levels will be debated. I think November six and seven in Germany levels. We expect those will all be promulgated and go into effect in January of next year. If you see an increase in subsidy levels that will have a natural dulling effect on orders as consumers wait for those increased subsidy levels to go into effect.

Back to normal more normal levels as you get into like the <unk> type timeframe and then it just goes back to basics.

So I think when you look at sort of the longer lead longer cycle stuff that sort of by the end of 'twenty for the shorter cycle stuff is essentially there.

Super and then Patrick as this happens is there a chance to generate net income our free cash flow above net income for another year.

David Gitlin: So that will, you know, will that have an impact potentially on one queue for, you know, one business from here to there, of course it will. But when we step back, we say, is the transition to heat pumps in Europe here to say we are 100% confident in that. Is Vismann the best position company because they are not a pure play either heat pump or boiler company. Yes, because they have not only mixed factories, they have mixed lines.

If we.

Of course, it will depend on what's happening with our working capital metrics. So far this year, we've done really well compared to the.

Obviously compared to last year generally has a whole lot more.

We would have to make a significant additional them into working capital slightly that's there.

Our objective would obviously not ready to commit to that before February when we provide guidance for next year.

David Gitlin: So as boilers, if there's going to be more boilers next year than we had earlier anticipated, which I think there will be. They make great margins on boilers and they're able to swing their operational performance to support that. And then you look at all the other capabilities they bring to the table. When you combine with a world class company, there are so many very obvious energies and then a lot of hidden synergies as we apply their technology to our businesses across the world.

Great. Thank you guys. Thanks.

Thanks, Steve.

Thank you and our last question comes from Andrew <unk> with Bank of America. Your line is open.

Yes. Good morning, really appreciate you guys fitting me in thanks.

Just a question on light commercial and just business mix right because the growth of our commercial has been so spectacular.

It's a good margin business and then in the face of resin declines in sort of steadier growth in <unk>.

David Gitlin: And we bring in say, for example, the carrier brand into their channel, those are immediate revenue synergies that can offset like if there's some one queue heat pump headwind in Germany, you can look at all these other things, whether it's additional solar PV, battery sales, things like that or revenue synergies. So we just feel so confident in the business in the team and the overall trajectory and the overall earnings profile of that business. Really appreciate the color. Thank you.

As you look at North America, what is the business looks like right now sort of the mix between rays of light commercial and applied and how structural is sustainable is this mix going forward because clearly it's quite good for your margins.

Well look the obviously raises a far bigger business then.

Light commercial and to your point, Andrew light commercial spin.

Far better than many thought.

That we're modeling it coming into the year and we've been very pleased with the performance there.

Gautam Khanna: Our next question comes from Guadamkana with TD Cohen. Your line is open. Good morning. Hey, what is it? You guys have seen any evidence of trading down, you know, an increase in repair versus your place. We heard some of the HVAC OEMs talk about that. I don't know if you've seen any evidence of that in the channel.

So.

<unk> is the biggest business followed by commercial followed by light commercial we think with some of the Destocking that we'll see in <unk>, we're kind of in the switchover to 450, <unk> and <unk>, we think they are.

We know volumes down mid teen sales down kind of mid single digits for Rajeev, we start to see recovery as we go into go into next year in that business.

David Gitlin: You know, interesting, Gautam, we have not. And I actually asked that question. We were, I mentioned that a couple of days ago, I was, those with our top distributors. It's something that when economies soften that you naturally look for, but we have not seen that. We haven't seen the mixing down, we haven't seen the trading down, replacing parts and set of entire systems. So, you know, for us, what we're doing is, I think the team did a superb job in the switch, the switch over in the new Siri unit.

Light commercial is going to face some tough compares but as I mentioned a lot of those verticals remain very strong in light commercial and they're also doing what the rest of the business is doing is very much leaning into connected devices in the aftermarket opportunity and frankly, it's a bit nascent in that space and we think theres a lot of opportunity there.

And then I think commercial we still are dealing with very significant backlog in the commercial side. The controls business has done extremely well aftermarket is doing very well double digits, there and with further growth. There. So we think that with the strong backlog.

David Gitlin: We are now with laser focused on positioning ourselves for the refrigerant change, which gives price and some both price and mixed benefits to offset some of the destocking that, you know, we saw throughout 23 that we'll see into 20 into the fourth quarter. But then I think when we start next year, a lot of that will be behind us as we position ourselves for the 454B switch over.

Eventually lead times will kind of come back to normal for the North American commercial business, but they are still elevated still strong backlog. So they are positioned for growth as we get into next year as well.

And just a follow up question on commercial are you guys seeing the impact from Mega projects, because my understanding is that.

Gautam Khanna: So, no, Gautam, we have not seen any material evidence of that. Okay, just to follow up to an earlier question on, you know, the pricing alongside the new, the new units coming down in 25 or perhaps 24, as you mentioned, you know, just curious, do you expect order of magnitude, the pricing on those units to be comparable to what you saw with the Siri change this year, or do you think it's, you know, enough cost is going to be designed out of the system such that we are not going to get, you know, whatever it was, 10 to 15% pricing lift ultimately, you know, I know that's kind of, there's been some talk about that, but I'm just curious, what's your best guess on?

These semiconductor fab factories required a lot of air conditioning track.

Data centers can you just talk about what youre seeing about growth and visibility in these higher growth verticals on the commercial side. Thank you, yes, Andrew that.

That's been very encouraging we've done very very well.

On many of the Mega factories and that includes both data centers. It includes some of the factories associated with the chips Act and some of the new construction activity there with all the Gen. AI type activity. So we have solutions not only that we're doing more creative solutions with the high temperature and very high temperature heat pumps, we mentioned we.

Gautam Khanna: Kind of magnitude of pricing opportunity with that new unit. Yeah, I think, well, you know, there's been some skeptics on the, you know, whether we see the 15 to 20% over two years, we're very confident in that, you know, we are going to increase price in Rezzy, the normal price that we would have done anyway, we will continue to do that as we go into next year and we'll do it again in early 2025 as well.

Introduced new offerings like our Mag bearing designed for the applied we have a business that we bought a couple of years back called and light that really complements our ALC controls business. So we can provide.

Sort of holistic controls to identify with specificity, whereas the heat getting generated in a data center and how we dissipate that heat most efficiently effectively and integrated AI tool in and of itself. So.

Gautam Khanna: And then on top of that, you are adding some cost to the system for things like leak detection, the sensors, and some parts of the controls, and it would only be natural for us to increase price based on some of the additional protections that we're adding to the 454B unit. So, you know, we came into this year expecting price and mixed benefit. I think it will turn out to be slightly higher than we thought around 10%, and we expect to see kind of similar orders of magnitude on price and mixed benefit with the 454B unit. Thank you.

We love to see the continued.

Construction with these mega projects, and we have gotten more than our fair share of new wins there.

Alright, great congrats on a strong quarter.

Thank you that concludes the question and answer session I'd like to turn the call back over to Dave for closing remarks.

Well look let me let me just thank all of you our investors for their continued confidence and let me. Thank our team we have folks working tirelessly, while we perform and continue to transform the business. So my hats off and thanks to the team. That's just not only working so hard we're working so well together as a team and with that we'll conclude the call and of course now.

Jeffrey Hammond: Our next question comes from Jeff Hammond with Keybank Capital Markets. Your line is open.

We will be available for the rest of the day to everyone. Thank you all.

Thank you for your participation. This does conclude the program and you may now disconnect everyone have a great day.

Unknown Executive: Jeff Hammond, your telephone may be muted. What are we going to the next one?

Okay.

Okay.

Yes.

Brett Linzey: Our next question comes from Brett Linzey with Mizzouho. Your line is open. Hey, good morning, all. Yeah, just wanted to come back to the, to the business exit update slide. You, you noted the rezzy commercial fire, you know, public trading late spring was hoping you could just put a finer point on what the nature and structure of that transaction might look like as it moves to the public market. Marcus, Brett, it could take a few different forms.

Okay.

Okay.

Yes.

Okay.

Okay.

Okay.

Okay.

Brett Linzey: Look, it could be a spin, it could be a split. We, you know, the example there would be J&J Canview, that was in the market recently. So that's an example that we benchmarked. We're preparing for different scenarios. And look, we've talked about a clean exit. We've talked about accelerating by back. We've talked about our commitment to our investors to pay down debt. And, what we're doing with this public company exit is achieving, yes, all of the above. So we'll work on the specific form as we get into early next year that prep is the same, effectively, either way.

Brett Linzey: And I'm, I'm very proud of the team, because normally a lot of this work would take longer, but the team is head down working around the clock so we can be ready for public trading in the late spring of next year. Okay, yeah, it makes sense. And just, just to follow up on the international truck and trailer sales up over 20% strong quarter, you know, a bit of a moderation in the, in the order book, what is your level of visibility, you know, based on backlog based on, you know, incoming order rates as we flip the calendar here to 24.

Brett Linzey: Well, there's a couple of factors going on with international truck trailer. You also have a very rapid transition to electric going on there as well on truck. So I would tell you, we were pleasantly surprised with the low double digit kind of increase that the increase that we saw overall in international truck trailer orders were up 60% in the third quarter for our international truck trailer business. Partly because of this transition to some of the electrification and partly because of the teams done very well in supporting the customers and the overall market demand.

Brett Linzey: So we feel well, we feel well positioned going into next year on European truck trailer and even China's done done well for us on the truck trailer side. And then North America truck trailer despite, despite, you know, people can sort of focus on some of the ACT numbers. But people said, look, 2023, ACT down mid single digits for the year are North American truck trailer will be of double digits. So we're taking a sober look at what ACT saying for next year.

Brett Linzey: But there's a lot, a lot of countervailing forces between again, the shift to electrification price mix and then this overall focus that we've had globally on length and more digitally enabled recurring revenues has yielded a lot of very strong results for us. Appreciate the insight. Great quarter.

Nigel Cook: Thank you.

Patrick Goris: Our next question comes from Nigel Cook with Wolf Research. Your line is open. Thanks, good morning guys, thanks for the question. So I think you called out, we haven't explored this yet, but the Shiba performance I think you called out, I think it's on slide 4, I think it was, maybe slide 5, no slide 3. The Shiba Carrier performance remained strong and, you know, we know Europe right now is really weak, we know the parts of APAC is really weak, so just curious, we're striving the upside or performance of Carrier, the Shiba Carrier.

Patrick Goris: And Nigel, the financial performance that the Shiba Carrier has been really strong, a lot of that is driven by the synergies. We mentioned, I think last quarter that we're increasing the cost synergies from the target of 100 million run rate to 200 million. It is helping us significantly expand our margins in that business. To your point, the sales in Europe for that business were a little lighter for global comfort solutions, but the performance overall for that business is really strong. And the key driver there is really all the synergies that the team is driving and we're not nowhere near the actual run rate yet.

Patrick Goris: And so we expect to benefit from that for the next couple of years, does that expand? Okay, that's great, thanks Patrick, that's great to hear.

Julian Mitchell: And then just, I hate to go back to a question that's been asked a couple times, but obviously the HVAC margins this quarter were spectacularly strong, you know, when we even move back up, you know, the tax item. Obviously 4Q, and I think 4Q originally was meant to be sort of similar to 1Q, looks like it's coming in maybe a little bit more than 1Q. Just wondering, I'm assuming price cost would have been a factor in the HVAC strength firm, just wondering why that's not coming forward to 4Q.

Julian Mitchell: So again, I mean, I know it's been answered, but maybe just a bit more color that piece. Yeah, actually I think that the HVAC margins for Q4 will be very similar to our Q1 margins. So I think they're very much aligned there. And as I mentioned, one of my prior answers, what we're going to see in HVAC in Q4, as we address the field inventories, we mentioned in our comments, we want the field inventories to end about mid-teens down versus the beginning of the year, a lot of that is going to happen in Q4.

Julian Mitchell: So we're going to see more downtime in our factories and initially fine. And that's going to impact some of the margins, of course, in that thing. We do expect price cost and productivity generally to remain strong, but that is the headwind that we wouldn't have seen in the prior quarter, which is the beef stocking headwind affecting our factories. Okay, and would there be some incentives for spending to shift the inventory or to just purely factory. No, if it's factory, there are no incentives. Okay, great. Thanks Patrick. Yep, thanks. Thank you.

Stephen Volkmann: Our next question comes with Joseph Nito Phillips with Jeffries. Your line is open. Good morning, guys.

Stephen Volkmann: It's actually Folkman here. We got a lot going on this morning, obviously, sorry about that. So my question is kind of a big picture. One day, where do you think we are in the adjustment of the backlog? Does it go back to kind of historical levels or does it sort of settle in above historical levels and sort of where are we in that process? I think it goes back to historical levels.

Stephen Volkmann: I think what happened over these last couple of years is just very unique that as you saw some of the supply chain challenges that and the underlying demand was strong, the consumer has been strong. You saw a lot of people getting, getting in line to make sure that they had their orders positioned for when they need them. I mean, for example, like commercial, like commercial for the school year. There are a lot of those replacements they want to see happen during the summer time.

Stephen Volkmann: So people were making sure that with the supply chain uncertainty, people were getting in the queue to have their position protected. I think what you've now seen is in the shorter cycle business, generally a return to more historical levels with some of the longer cycle businesses like for us commercial HVAC. We're still, you know, again, we're backlogged up 40% out of two-year stack. We're still at elevated lead times and elevated backlog levels.

Stephen Volkmann: I think that you would expect that to start to normalize. But if the underlying demand, which depending on the vertical remains strong, you'll continue to see very strong growth in some of those key businesses. So I think there will be a leveling. That's why we don't get overly fixated on quarter to quarter orders because they can swing wildly much more than they ever would have in the past. We talk about them being up 40 or 50 down 40%.

Stephen Volkmann: We don't swing with those. We look more at our backlog levels and and our lead time to make sure that we see the strength of the expectancy. Got it. And do you think we'll get sort of more normal by the end of 24 or does it take longer than that? No, I think that's about right. I mean, I think that some of the shorter cycle stuff is starting to get there. You know, we're seeing more normal lead times in Rezzy.

Stephen Volkmann: I think that's going to happen for recent climate solutions that they'll start to get their backlogs back to more normal levels as you get into like the one to type timeframe. And then it just goes back to basics. So I think when you look at sort of the longer lead, the longer cycle stuff, yeah, that's sort of by the end of 24, the shorter cycle stuff is essentially there.

Stephen Volkmann: Super. And then Patrick, as this happens, is there a chance to generate net income or free cash flow above net income for another year? If we, it will, of course, it will depend on what's happening with our working capital. And I think so far this year, we've done really well compared to the, obviously compared to last year, generally, the whole lot more. We would have to make a significant additional demand into working capital. Maybe that's our objective, but obviously not ready to commit to that before February, when we provide guidance for next year. Great. Thank you guys. Thank you.

Andrew Obin: And our last question comes from Andrew open with Bank of America. Your line is open. Yeah.

Andrew Obin: Good morning. Really appreciate you guys hitting me in. Thanks. Just a question on light commercial and just business mix right because the growth in light commercial has been so spectacular. It's a good margin business. And then in the face of residic lines and sort of steady growth in applied as you look in North America, what is the business look like right now, sort of the mix between regular life commercial and applied.

Andrew Obin: And how structural is sustainable is this mix going forward because clearly it's quite good for your March. Questions. Well, look, the obviously Rezzi's far bigger business than Light Commercial. And to your point, Andrew, Light Commercial has been, I know far better than many thought that we're modeling it, coming into the year and we've been very pleased with the performance there. So, you know, Rezzi's the biggest business followed by commercial followed by Light Commercial.

Andrew Obin: We think with some of the destocking that we'll see in 4Q or kind of, and the switch over to 4Q. 4Q or 54B and Rezzi, we think there, we know volumes down mid-teen, sales down kind of mid-single digits for Rezzi. We start to see, you know, recovery as we go into next year in that business. Light Commercial is going to face some tough compares, but as I mentioned, a lot of those verticals remain very strong and light commercial.

Andrew Obin: And they're also doing what the rest of the business is doing is very much leaning into connected devices and the aftermarket opportunity. And frankly, it's a bit nascent in that space and we think there's a lot of opportunity there. And then I think commercial, we still are dealing with very significant backlog in the commercial side. The controls business has done extremely well, aftermarket's doing very well, double digits there and we further growth there.

Andrew Obin: So we think that with the strong backlog, we think eventually, lead times will kind of come back to normal for the North American commercial business, but they're still elevated, still strong backlog. So their position for growth as we get into next year as well.

David Gitlin: And just a power question commercial, are you guys seeing the impact from mega projects because about understanding is that, you know, these semiconductor fab, the factories require a lot of air conditioning, HVAC data centers. Can you just talk about what you're seeing about growth and visibility in these high growth verticals on the commercial side? Thank you. Yeah, Andrew, that's been very encouraging, you know, we've done very, very well on many of the mega factories and that includes both data centers that includes some of the factories associated with the chip sacked and some of the new construction activity there with all the Genai type activities.

David Gitlin: So we have solutions, not only that we're doing more creative solutions with the high temperature and very high temperature heat pumps we mentioned, we've introduced new offerings like our mag bearing design for the applied. We have a business that we bought a couple of years back called in light that really compliments our our ALC controls business so we can provide sort of holistic controls to identify with specificity, where's the heat getting generated in a data center and how we dissipate that heat. Most efficiently, it's effectively an integrated AI tool in and of itself, so we love to see the continued construction with these mega projects and we've gotten more than our fair share of new ones there.

Andrew Obin: Great, congrats on the strong quarter. Thanks.

David Gitlin: Thank you for the question the intercession, I could turn the call back over days for closing remarks.

David Gitlin: Well, let me let me just thank all of you are investors for the continued confidence and let me thank our team, you know, we have folks working.

Unknown Executive: Priorously, while we perform and continue to transform the business so my hats off and thanks to the team that's just not only working so hard, but working so well and together as a team and would that will conclude the call and of course, now we'll be available for the rest of the day to everyone. Thank you all. Thank you for your participation.

Unknown Executive: This does include the program and you may now disconnect.

Unknown Executive: Everyone, have a great day.