Carrier Global Corp

NYSE:CARR

Earnings Call Analysis

Carrier's Aggressive Growth and Solid Margins

In its Q4 2023 report, Carrier achieved a robust 33% adjusted EPS growth and an 80 basis point margin expansion on flat sales, with aftermarket growth in double digits. The integration of Viessmann Climate Solutions is expected to fuel additional mid-single-digit sales growth. Riding the wave of sustainability trends, Carrier forecasts over 50 basis points in adjusted operating margin expansion for 2024. Full-year guidance anticipates reported sales around $26.5 billion—with a mix of price and volume driving mid-single-digit organic growth—and adjusted EPS of $2.80 to $2.90. The firm closely watches portfolio transformations, expecting underlying free cash flow to rise roughly 10% but net free cash flow to be circa $700 million, due to various divestiture-related cash outflows. As they focus on deleveraging in 2024, a reinvigorated dividend and later share repurchases are planned.

A Strong Finish and Bright Prospects

Carrier ended 2023 on a high note, highlighting a remarkable transformation journey and a hearty welcome to 12,000 new team members from Viessmann Climate Solutions. The fourth quarter saw improved efficiency with an impressive 33% growth in adjusted EPS and a solid free cash flow exceeding $800 million, hinting at operational excellence and sound financial management.

Steady Growth and a Strategic Direction

Throughout 2023, Carrier demonstrated resilience with a 17% EPS growth on a modest 3% organic sales uptick, a clear indicator that the team's strategic planning and productivity are bearing fruit. The company has successfully refined its business model and is now geared towards bolstering growth and expanding margins as it steps confidently into 2024.

Sustainable Solutions Paving the Future

Sustainability stands at the forefront of Carrier's success, with European commercial heat pump sales rising 25% and a stunning growth in connected chillers from 5,000 to 30,000 in just three years. These strides not only represent commercial triumph but also Carrier's commitment to environmental stewardship, as they work towards a net-zero emissions target by 2050.

Viessmann Integration: A Synergistic Approach

The integration of Viessmann Climate Solutions is underway, promising mid-single-digit sales growth with expected high teens in adjusted EBITDA margins. This is anticipated to create value from cost synergies and foster significant revenue synergies that go beyond the initial business case. Although regulatory changes may affect early-year growth, Carrier is optimistic about regaining momentum in the latter half of 2024.

Fiscal Prudence and Deleveraging Strategy

Financially, Carrier envisions leveraging its business exits to drastically improve its net debt position, potentially cutting the net leverage ratio to around 2x by the end of the year. These strategic divestitures, combined with robust cash performance, paint a picture of a company focused on strong balance sheet management.

Forward-Looking Guidance Indicates Growth and Efficiency

For 2024, the company is eyeing mid-single-digit growth, riding on the back of sustainability trends and consistent aftermarket growth. This ambitious forecast is bolstered by the company's aim to achieve over 50 basis points of adjusted operating margin expansion, signaling Carrier's promise to continue its trajectory of excellence and efficiency.

Q4 Financial Highlights Show Strength Amidst Flat Sales

Carrier's financial acumen shone in the fourth quarter with an 8% uptick in adjusted operating profit and an 80 basis points margin expansion despite flat sales. The 33% jump in adjusted EPS to $0.53 underscores the company's ability to optimize its financials even in a challenging sales environment.

Earnings Call Transcript 2023-Q4

[Operator]

Good morning, and welcome to Carrier Fourth Quarter 2023 Earnings Conference Call. I would like to introduce your host for today's conference, Sam Pearlstein, Vice President of Investor Relations. Please go ahead, sir.

[Samuel Pearlstein, executive]

Thank you, and good morning, and welcome to Carrier's Fourth Quarter 2023 Earnings 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-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 Carrier's website at ir.carrier.com.

The company reminds listeners that the sales, earnings and cash flow expectations and any other forward-looking statements provided during the call are subject to risks and uncertainties. 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. [Operator Instructions]

With that, I'd like to turn the call over to our Chairman and CEO, Dave Gitlin.

[David Gitlin, executive]

Well, thank you, Sam, and good morning, everyone. Let me start by saying a heartfelt thank you to our team for delivering excellent results in 2023 while navigating such a significant and compelling portfolio transformation. I'd also like to thank and welcome our new 12,000 team members from Viessmann Climate Solutions.

Our formal kickoff last month had more energy, warmth and excitement than I have ever seen from day 1 celebrations. I profoundly believe that this will go down as the most impactful business combination that our industry has ever seen, and we are so excited to be on this journey together.

As you can see on Slide 2, the fourth quarter kept a strong finish to a great year for Carrier. In the quarter, we achieved 33% of adjusted EPS growth driving another quarter of double-digit aftermarket growth and 80 basis points of margin expansion on flattish sales. Importantly, free cash flow of over $800 million significantly beat our expectations, driven by continued strong performance in working capital. Overall, for 2023, I am so proud of what the team accomplished as you can see on Slide 3.

Our team has consistently shown an ability to outperform without excuses. Overcoming COVID headwinds to deliver strong results following our spin in 2020, persevering through supply chain challenges and delivering for our customers and shareholders despite significant portfolio moves.

For the year, we delivered 17% EPS growth on 3% organic sales growth, drove about 40% core earnings conversion improved our free cash flow performance by more than 50% year-over-year from $1.4 billion to over $2.1 billion. Not only did we deliver strong results in the year, we also took key actions on growth initiatives and detailed productivity planning to position 2024 for solid growth and margin expansion. This consistent performance has led to differentiated shareholder returns since we became a public company, as you can see on Slide 4.

As we prepared for our spin, our goal was to leverage our many strengths that Carrier established over the past century but also take advantage of the unique opportunity to create a new Carrier. We established a performance culture with innovation and customer intimacy at our core and simplified our business and portfolio. We have been disciplined on continuous improvement in productivity, invested in growth and have driven recurring revenues with a proven playbook. We sharpened our focus as an organization to lean into the long-term trends around sustainability and have accelerated our leadership in this space.

So we're proud of our track record. We're even more excited about our next chapter as we take our performance to the next level. Our mission is clear, to be the global leader in intelligent climate and energy solutions, as you can see on Slide 5. It starts with differentiated product introduction, some of which you see listed here. We are now focusing our 6,000 engineers on developing differentiated sustainable solutions for our customers, specific technologies that cut across our portfolio across the globe, such as AI and sensing algorithms, low GWP refrigerants, energy efficiency, low temperature heat pumps, electrification and integrated energy management solutions. We are poised to out-innovate and win, and we will continue to invest to ensure that we do so.

These efforts are reflected in our results as we gain share across our portfolio. European commercial heat pump sales were up 25% in 2023. Nearly 40% of our North America residential split systems were heat pumps and our market-leading electric transport refrigeration sales in Europe grew over 70%.

For sustainability leadership, we walk the talk. We have reduced our customers' emissions by more than 270 million metric tons on our way to our 1 gigaton Scope 3 commitment for 2030. We remain on track for carbon neutrality in our operations by 2030 and are using Abound across our footprint to help ensure that we achieve it.

We also laid out a clear road map to achieve net zero greenhouse gas emissions across our value chain by 2050 under the SBTi framework. In addition to sustainability, one of our other key themes is achieving consistent double-digit aftermarket growth, which we achieved again last year, as you can see on Slide 6.

Growing 12% last year represents our third consecutive year of double-digit growth. We now have approximately 30,000 connected chillers in the field versus 5,000 just 3 years ago. This has helped our attachment and our coverage rates with commercial HVAC now at 45% attachment for long-term service agreements, up from roughly 20% just 3 years ago. We know the playbook. It's working, and we are targeting another year of double-digit aftermarket growth this year and beyond.

In summary, we continue to perform while we are transforming, as you see on Slide 7. I already mentioned the energy and warm reception that we received from our new team members and many customers across Europe just a few weeks ago. Here is what is clear. Viessmann is an organization with a deep culture of excellence, excellence in its product design, customer intimacy, channel superiority, culture, team, all reflected in its deeply admired brand.

The tangible and intangible benefits from this combination will benefit our people, customers, investors and the planet for decades to come. We are also fortunate to now have Max Viessmann on our Board, who is already providing us with unique insights and perspectives.

When we look closer to 2024, we are planning for Viessmann Climate Solutions sales to be up mid-single digits off a 2023 year-end of about USD 4.2 billion with high teens adjusted EBITDA margins. This includes the benefit of our targeted first year cost synergies. Internally, we are targeting significant revenue synergies, which would all be upside to our business case.

Even though last year's regulatory and subsidy uncertainty in some European countries delayed order intake, which we expect to impact growth in the first half of 2024, we do expect Viessmann Climate Solutions to return to solid growth in the second half of this year, and we target achieving or exceeding our year 1 business case adjusted EBITDA by accelerating supply chain and other cost savings. So we're off and running. We are applying the playbook from our successful integration with Toshiba to ensure that we preserve Viessmann's superb team and culture while integrating to create tremendous value together.

Turning to our business exits on Slide 8. You all saw our announcements on Access Solutions and commercial refrigeration, which together will yield close to $6 billion or about $4.5 billion in net proceeds. We are making good progress on our industrial fire sale and still expect to announce a definitive agreement around the end of the first quarter. We are also preparing to exit our combined residential and commercial fire businesses via a sale or public market exit.

Given our cash performance and the progress of these business exits, we now have a path to achieve about 2x net leverage ratio by the end of this year, which is about a year earlier than we previously indicated.

Before I turn it over to Patrick, a quick word on our 2024 guidance on Slide 9. Even though GDP in many of our key markets looks to be less than 2%, we are planning for mid-single-digit growth. Sustainability megatrends and continued double-digit aftermarket growth enable us to significantly outgrow global economies. We will continue to be tenacious and disciplined on every aspect of productivity, and we are, therefore, targeting over 50 basis points of adjusted operating margin expansion.

With that, let me turn this over to Patrick. Patrick?

[Patrick Goris, executive]

Thank you, Dave, and good morning, everyone. Please turn to Slide 10. Q4 earnings were ahead of our expectations and the guide we provided in October, even though reported sales of $5.1 billion were about $150 million lower. Organic sales were flat and a favorable 1 point tailwind from currency translation was offset by the impact of divestitures.

Organic sales were lower than we expected, mostly in our North America residential HVAC business as lower volumes reflected demand and distributors drove down field inventories. Q4 adjusted operating profit was up 8% compared to last year despite flat sales driven by favorable price/cost and productivity, partially offset by investments. As a result, adjusted operating margin expanded by 80 basis points compared to last year.

Adjusted EPS of $0.53 was up 33% year-over-year and was ahead of our implied Q4 guide of $0.50. Compared to our expectations, HVAC margins were a little better, fight and security and refrigeration margins were a little light, and we benefited from discrete tax items and somewhat lower net interest expense.

Free cash flow of $829 million was about $150 million better than our October guide, and we generated $2.1 billion of free cash flow for the full year, which is 92% of adjusted net income. Excluding some of the M&A-related fees and cash restructuring spend, which are adjusted out of our results, we converted over 100% of adjusted net income into free cash flow in 2023.

Moving on to the segments, starting on Slide 11. The HVAC segment had another good quarter with significant operating margin expansion despite flat sales. Organic sales were down 1%, mostly due to North America residential HVAC sales being down high teens. This headwind was almost completely offset by continued exceptional growth in light commercial HVAC, high single-digit growth in commercial HVAC, including over 20% growth in the Americas and another quarter of double-digit growth in aftermarket.

North America residential HVAC volume was down in the high 20s, which was partially offset by continued price realization and the positive mix up related to the 2023 SEER transition. Our light commercial HVAC business finished a very strong year with another quarter of about 20% year-over-year growth. This business was up 35% for the full year, an industry best.

Adjusted operating margin was up 250 basis points year-over-year on flattish sales growth driven by price cost and productivity. This led to a full year operating margin for this segment of 16.6%. Overall, another great year for our HVAC business.

Transitioning to Refrigeration on Slide 12. As expected, organic sales for the segment returned to growth in the quarter and were up 6%. Within transport refrigeration, container was up significantly around 60%. Our global truck and trailer business was up low single digits with North America and Europe flat and strong growth in Asia.

Our Sensitech business, which provides comprehensive visibility solutions for tracking and monitoring temperature-sensitive products was up high single digits. Commercial refrigeration was down high single digits year-over-year. Operating margin contracted 160 basis points year-over-year due to investments in a few onetime items such as warranty and insurance.

Moving on to Fire & Security on Slide 13. Organic sales were down given a very tough compare in Access Solutions, partially offset by strength in industrial fire, which was up almost 20%. Adjusted operating profit was down 7% versus the prior year, driven by volume mix and currency, partially offset by favorable price cost. The revaluation of the Argentinian peso impacted margins by over 100 basis points. Full year operating margin for this segment was about 15%.

Turning to Slide 14. As you can see on the left side of the chart, backlog for our longer-cycle commercial HVAC business continues to increase, while backlogs in our shorter-cycle businesses continue to normalize. Total company orders were down low single digits in the quarter, mostly as a result of our North America truck and trailer orders being down significantly compared to last year.

In Q4 of 2022, North America truck and trailer orders were up an exceptional 120% year-over-year as we opened the 2023 order book. Excluding North America truck and trailer, Carrier's organic orders were up mid-single digits in Q4. HVAC orders returned to low single-digit growth as residential HVAC orders were up mid-teens, which more than offset the decline in light commercial orders, which were down roughly 40% as lead times continue to improve in that business.

Commercial HVAC orders were up low single digits, and the longer-cycle backlog remained strong, up around 30% on a 2-year stack and extending well into the second half of 2024. Refrigeration orders were down about 20% in the quarter, with global truck and trailer orders down roughly 50%, reflecting the very tough comp in North America, I mentioned earlier. This was only partially offset by a return to growth in orders -- in the container business, where orders were up nearly 60% and low single-digit growth in commercial refrigeration.

Overall, we enter 2024 with robust longer-cycle backlogs in commercial HVAC and a return to orders growth in key businesses such as residential HVAC and container.

Moving on to Slide 15, guidance. Let me start with some key assumptions embedded in guidance related to our portfolio transformation. We have included a full year of Viessmann Climate Solutions as we closed the acquisition on January 2. You may recall that we previously communicated that our business exits will remain in continuing operations until they close. Therefore, with definitive agreements in place for the sale of both Global Access Solutions and commercial refrigeration, our guidance assumes a midyear exit date, and so both businesses are included in 2024 guidance through the end of June.

Accordingly, our guidance assumes the net proceeds from these 2 exits will be used to pay down debt. We include industrial fire and residential and commercial fire for the full year 2024 into our guidance and we will do so until there are definitive agreements in place, and we have a good estimate as to the likely exit date.

Now to details of the 2024 guidance. We expect reported sales of about $26.5 billion, including mid-single-digit organic sales growth with about equal contribution from price and volume mix. We expect mid-single-digit organic growth for Viessmann Climate Solutions to contribute about 20% to reported sales growth and the deconsolidation of KFI along with the divestitures of Global Access Solutions and Commercial Refrigeration to represent about a 5% headwind to reported sales.

Adjusted operating margin is expected to be between 15% and 15.5%, up over 50 basis points compared to '23, driven by price, volume and productivity. Productivity includes an $80 million benefit from restructuring actions we executed earlier this quarter as we simplify our structure given our transformation. The impact of Viessmann Climate Solutions and overall company operating margin is about neutral. Core earnings conversion that is excluding the impact of acquisitions, divestitures and FX is over 30%.

Incorporating an estimated 23% adjusted effective tax rate, this gets us to an adjusted EPS guidance range of $2.80 to $2.90, which includes about a $0.07 headwind from the Viessmann acquisition as we expected.

Underlying free cash flow is expected to be up about 10% compared to 2023. Reported free cash flow will be lower given some of the portfolio transformation activities. Similar to 2022, when we exited Chubb, cash flow from operations will be impacted by tax payments related to the gains on the sales of these business exits. Given the large expected gains on the 2 transactions already announced, we expect free cash flow to net about $700 million. This includes about $1.7 billion of cash outflows related to the expected tax payments on the gains of Access Solutions and Commercial Refrigeration, transaction fees related to all 4 exits and the Viessmann transaction and additional restructuring.

Similar to 2023, we expect higher than typical restructuring charges in 2024 about $100 million pretax. Seasonally, we expect our free cash flow to be back half weighted. Unlike the tax payment on the gain of the business exits, proceeds from the divestitures will show in the cash flow statement as investing activities and therefore, do not impact free cash flow.

As shown on the right side of the slide, we expect mid-single-digit organic growth in all 3 segments. Fire & Security operating margin of about 14% reflects the absence of the higher-margin Global Access Solutions business in the second half of the year.

Now moving to Slide 16, 2024 adjusted EPS bridge. This chart shows how adjusted EPS increases from $2.73 to $2.85 at the midpoint. Our guidance includes the benefit of volume leverage and strong productivity leading to over 30% core earnings conversion and over 50 bps of margin expansion. Think of the dark blue as our core business representing all the businesses we will retain and the lighter blue representing the 4 businesses we are exiting.

We expect the earnings of our core business to be up close to 15% in 2024 despite the dilutive impact of Viessmann. You can see the net contribution from Viessmann Climate Solutions and the net impact of losing 6 months of earnings from Access Solutions and Commercial Refrigeration offset by interest savings from the proceeds. We expect the headwind from tax as we return to a 23% adjusted effective tax rate.

On the far right, you see that our full year 2024 guide includes about $0.30 of adjusted EPS related to businesses being exited. The $0.30 of course, does not reflect the benefit of the redeployment of expected net proceeds from the exits of industrial fire and residential and commercial fire.

As usual, we provide estimates of other items in the appendix on Slide 20. With respect to capital deployment in 2024, we recently announced a dividend increase payable starting with the February dividend. And our focus this year will be on deleveraging through free cash flow generation and net proceeds from the exits. As we return to about 2x net leverage, we do intend to resume share repurchases.

Finally, before I turn it over to Dave, let me provide some additional color on the first quarter. We expect low single-digit organic revenue growth with about 50 bps of margin expansion. We had $0.10 year-over-year adjusted EPS headwind, including $0.06 from Viessmann, $0.02 from last year's gain on the sale and refrigeration and $0.01 each from the KFI deconsolidation and a higher tax rate. We, therefore, expect Q1 revenues of a little less than $6.5 billion and adjusted EPS to be right about -- right at about but not above $0.50.

We do expect organic revenue growth sequentially improve throughout the year with easier comparisons in the second half of 2024. We expect a little less than 50% of full year adjusted EPS to be realized in the first half of the year and the balance in the second half.

With that, I'll turn it back over to Dave.

[David Gitlin, executive]

Thanks, Patrick. In closing, we delivered strong results in 2023 and are geared up to do so again in 2024. This is a big year for us as a company, and we will remain [ head sound ] focused on execution and we will start realizing the tremendous benefits that we'll see from the combination of Viessmann and as a sustainability-focused higher-growth pure-play company. In 2024, we will continue to perform while we transform.

With that, we'll open this up for questions.

[Operator]

[Operator Instructions] The first question comes from Jeffrey Sprague with Vertical Research.

[Jeffrey Sprague, analyst]

Dave, can you address just a little bit more kind of color and detail how you see things playing out and Viessmann through the year? Obviously, the German political chaos and uncertainty on the incentives are clearly in play and impacted the end of the year in 2023. So just a little bit more color on what you're expecting in Germany in particular, how you might offset that in other countries. And just how do we get comfortable with the business cycling higher in the back half of '24?

[David Gitlin, executive]

Well, Jeff, we feel well positioned as we look at January, February, and then we do need to see that order book increase as we go into March heading into 2Q. What we did see is exactly what you just said. Some of the dithering that we saw around legislation in countries like Germany and elsewhere did put a slight pause on new orders for a period of stretch in 3Q heading into 4Q.

We now have clarity. We see the regulation coming out of the European Union, which is now looking like they're going to add a new provision that talks about not only getting to 55% renewables and reduction in greenhouse gas emissions by 2030, but now 90% by 2040. You can't get there without more regulation around heat pumps.

So we got more definitive legislation in Germany in January, which has those subsidies in the 40% to 70% range depending on a variety of factors. We have more certainty in countries like France and Italy. We have a new administration in Poland, which should unleash some of the EU funding. So as we look at the year, we think France and Poland will be up double digits, Germany, probably in the mid-single-digit range. Italy will be down a bit.

To your point, Jeff, the sales are a bit back-end I would say the EBITDA is a bit more back-end loaded for us, probably 60%, 65% in the second half when synergies start to -- we start to accumulate more synergies, especially from supply chain in the second half. So the bottom line of what we're watching orders. We're starting to see activity pick up now, now that German legislation is definitized. We saw heat pump applications increase. We saw preorder activity on our website increase as we got into January. So that was very encouraging. So we're looking at orders. We're looking at clearly filling that second half growth. We're looking at full year EBITDA, which should be at or frankly, a little bit ahead of our original business case. And we're going to be aggressive on some of those supply chain synergies to set up the second half EBITDA growth over the first half.

[Jeffrey Sprague, analyst]

Great. And just pivoting a little bit for Patrick. Patrick, can you just give us, I don't know, as precise as possible how much actual revenue and profit then is actually in the 2024 guide for security and commercial refrigeration?

[Patrick Goris, executive]

Yes. For the full year?

[Jeffrey Sprague, analyst]

Yes. Well, it's going to be gone in the second half for your guide, right? Like how much revenue and profit is actually embedded in the first half guide for those 2 businesses that are leaving?

[Patrick Goris, executive]

Well, we lose for the full year, we'll lose about 5% of the exits and think of the business as being more or less evenly loaded for the full year. So think of the first year being about $1 billion, give or take. And from a profitability point of view, probably a little bit more profit in the -- yes, and I would say, from a margin point of view, similar to what we shared as the margin profile of these businesses. So give or take $1 billion, Jeff.

[Operator]

The next question comes from Julian Mitchell with Barclays.

[Julian Mitchell, analyst]

Thanks for giving a lot of clear detail amidst many moving parts. In terms of, I guess, my first question, on the core sort of HVAC segment guide on Slide 15, you've got the sales guided up sort of mid-single digits for the full year. Maybe just any more detail on that in terms of, for example, price versus volumes? And maybe what you're assuming for that U.S. resi HVAC business within that sales guide, please?

[David Gitlin, executive]

Yes, Julian, the way I look at it is resi and our sort of global commercial HVAC business, if you kind of think about it those 2 ways. Those will both probably be up in the high single-digit range. And North American the light commercial business in North America will probably be down mid-single digits.

[Julian Mitchell, analyst]

And any thoughts on the price volume within the segment for the year?

[David Gitlin, executive]

Yes. I would say for price for HVAC, you're looking at about 2% to 2.5% of price, the rest volume mix.

[Julian Mitchell, analyst]

And then just a quick follow-up on Viessmann Climate Solutions. You talked about that mid-single-digit sales growth guide for the year in aggregate. Wondered if any color within that, not so much by region, which you addressed and not so much by sort of seasonality, which you addressed, but more perhaps in terms of how much of that growth guide is volume-based. And if you give any color across the -- some of the products, perhaps, I think investors get very nervous about heat pumps and so forth, but maybe any flavor as to some of the other products like boilers and so forth?

[David Gitlin, executive]

Yes, it's more volume than price. You're probably looking at a couple of points of price to rest volume. I would say a few things with respect to organic growth for Viessmann, where I know some of our peers are talking about lower growth than we are. And here's, I think, some of the reasons, Julian, I would say that we have high confidence in the mid-single-digit growth.

Number one is that, we're not a heat pump pure play. So we have the ability to flex with boilers depending on kind of what the market conditions are. We are anticipating share gains. Viessmann's introduced new products. There's a new product line in that 16 to 19 kilowatts, which will now give us access to more than 90% of the single-family residential market in Europe, where before that sort of higher capacity part of that segment, we did not have a product offering for and all the way much higher than that, which gets into the multifamily.

So we're looking at not only share gains, but we're also looking at products that introduce us into new parts of the market. The geographic mix, we think, plays favorable as we see Germany start to certainly recover in the second half. We'll push on the services. And I do think there's going to start to be some level of benefit on the revenue synergies internally. We're targeting a fairly significant number for ourselves that we haven't put into our underlying model.

So we'll start to see recovery of heat pumps taking place. We'll still see some more boiler sales. PV may slow a little bit, which would be something that we'll watch, but it is on the lower margin side for us as a business. So all in all, I've had a chance to spend a lot of time with the Viessmann leadership team and the salespeople, and we're starting to see now that we have more clarity around the regulations a lot of activity picking up that we do have confidence will certainly benefit us with growth in the second half.

[Julian Mitchell, analyst]

That's helpful.

[Operator]

The next question comes from Andrew Kaplowitz with Citigroup.

[Andrew Kaplowitz, analyst]

David, Patrick, I think you mentioned the expectation of sales up high single digit in resi for the year. Can you break out between price and volume? And then can you talk about the progress you're seeing on rolling out 454B? And then where did inventory in the year in resi versus your target? I think you were talking about down mid-teens?

[David Gitlin, executive]

Well, Andy, it's Dave. Let me try to break it out. I think that, look, we'll expect for resi a few points of price, the rest will be volume mix. Remember, we talked about price for the 454b units being up 15% to 20% over 2 years. And the way you can think about that is a few percent of just basic price this year, a few percent of price next year. Remember, we announced a 6% price increase effective for March for our resi business.

And then on top of that, you're probably looking at about a 10% or so price difference for the 454B units versus the 410A. And look, I'm proud of the team. I think that we're going to start shipping units as early as March. We'll start for the 454B. We're going to start on some of the new build side because our homebuilders don't want a mixed subdivision, so to speak. So they're going to start taking 454B units a little bit earlier, we'll get some out for national heat pumps for training purposes. I think when all is said and done this year, probably be 80% will be the 410A and about 20% will be the 454B. And I'm sorry, Andy, did you have another piece in there that I failed to address?

[Andrew Kaplowitz, analyst]

Just where inventories in the channel sort of end of the year?

[David Gitlin, executive]

Yes. This was a big one for us. We wanted to end down mid-teens and we ended up down 16% year-over-year in inventory. So that was a fairly purposeful effort by us working very closely with our distributors. That was one of our biggest targets in 4Q. Now 4Q resi ended up being a little bit lighter than we had thought, partly for that reason as we were making sure that we got -- as much of the destocking behind us in 2023 as possible. And I think we achieved that. Could there be a tiny bit more destocking here in 1Q, yes. But I think that's behind us over the next month or 2, and then we're back to more typical levels.

[Andrew Kaplowitz, analyst]

Great. And then sort of the mid-single-digit growth guidance for HVAC, you answered Julian's questions about the mix. But commercial HVAC orders actually reaccelerated a bit up 5%. Are you seeing sort of reacceleration anything in certain key markets for you guys? And then alternatively on the like commercial side, you talked, I think, David, about down mid-single digits and visibility to that sort of kind of decline in '24.

[David Gitlin, executive]

Yes. When we look at orders, we've actually been -- it's been robust in the Americas for a while. You look at our sales for and orders for the Americas, both last year were up double digits. When we look at sales in commercial HVAC and the Americas close to 20%. We had very strong double-digit growth in commercial HVAC in Europe. I would say it's been a little bit surprisingly strong. Orders still there were fine in the fourth quarter there as well. And it's partly driven by this continuous demand for data centers. We see positive growth on some of the industrial side in Europe. Asia is still pretty solid. China orders in the fourth quarter were lower than we would have liked. So China is kind of a watch item. But I will say in terms of commercial HVAC in China, we used to be 70% real estate and 30% industrial and infrastructure. it's now 75-25 the reverse. So we're seeing very strong demand for EV production. The data centers continues to be strong in China. So China is clearly property is a weak a weak spot, and I think that will continue, but the rest is strong. So we're actually banking on strong growth in China this year, and we have some level of optimism because we continue to go where the customers are.

[Andrew Kaplowitz, analyst]

Appreciate the color, guys.

[Operator]

Next question comes from Deane Dray with RBC Capital Markets.

[Deane Dray, analyst]

It's kind of hard to see through the fog of all the moving pieces here, but we're hearing more about resumption of seasonality. Just what's baked into the guide regarding what we would typically see as seasonality?

[Patrick Goris, executive]

I would say, Deane, in general, no different than prior years. So we expect, as always, Q2 and Q3 to be, by far, our biggest quarters generally driven, of course, by what's happening in residential HVAC. And then from a seasonality point of view, more on the cash flow side, that's typical, very back-end loaded, so heavy in Q3 and in Q4.

In terms of the EPS split last year, we did about 48% in the first half, 52% of our full year EPS in the second half. This year, our current guide assumes it's very similar, maybe 1 point lower in the first half offset in 5 points higher than the second half, so 47.53%. But I would say, besides that, no big differences in seasonality than we typically see.

As Dave mentioned, for Viessmann specifically, we expect it to be second half -- more weighted towards the second half, one, because of the expected volume pickup, given the order activity we're seeing but also given the cost synergies that we expect to kick in, particularly in the second half of the year.

[Deane Dray, analyst]

Great. That's really helpful. And then Dave, lots of discussion this quarter across the industrials about all of these mega projects, $1 billion plus. It sounds like most of these are still in sort of the front log discussion stage. Where are you positioning and what do you expect to be with regards to win rates and so forth?

[David Gitlin, executive]

Very strong, Deane. We feel very well positioned with the mega projects with some of our scale customers that we really -- we've established a central group to go target some of our bigger scale customers, data centers is just unbelievably strong. It's -- when we look at it, we've talked about the property market being a little bit less than 10% of our commercial HVAC business in the Americas, data centers is bigger as a percentage for us than the real estate market. That's in the low double-digit percentage for us as a company.

And we've recently introduced new products. We have a new air-cooled chiller that's helped us get significant wins, both in the United States and in Europe. Europe has seen 10x growth in data center space over the last 2 years. So when we look at CHIPS Act bringing some of the production back, we look at data centers. There's other verticals that are strong to education, K-12 has been strong, higher ed, retail in some parts of retail, even health care continues to be strong. So we feel very well positioned overall in commercial HVAC. I would tell you, we picked up share last year in the Americas. And in Europe, we were probably flattish in share in Asia. So we feel well positioned with these mega projects.

[Deane Dray, analyst]

That's very helpful.

[Operator]

The next question comes from Noah Kaye with Oppenheimer.

[Noah Kaye, analyst]

First question, the guidance for mid-single-digit organic growth in the Refrigeration segment for '24. Can we talk a little bit about the assumptions to get there? And particularly what you're assuming on a regional basis for transport refrigeration?

[David Gitlin, executive]

Yes. Yes. I'll take that. This is Dave. Well, first of all, we're looking at a strong rebound in the container business, both in terms of the market and in terms of share. So we think that for us, the container business will certainly be well north of double digits. For the global truck trailer business, that's up in the low single-digit range. The North American truck trailer market, if you look at ACT, that market is down double digits. But remember, last year, it was down significantly, and we actually grew last year, and it's partly because people look at ACT, and that's just a small piece of it. That is the sheer volume for trailers. It excludes things like truck, APUs, pricing mix that we get from electrification.

So even though that the market says -- I think the market could be down double digits, ACT, I think, is saying 37,000 units this year from 42,500 or so last year. We actually think that we'll end up probably flattish in both NATT, maybe kind of give or take a point or 2. And then I would say flattish on the European truck trailer side as well. Europe would probably be down maybe 1 point or 2, but we continue to see strength in Asia truck trailer. And we see commercial refrigeration business starting to rebound this year, and we're looking at double-digit growth in that business.

[Noah Kaye, analyst]

Extremely helpful, Dave. I think when we adjust free cash flow profile back for the onetime cash outflows looking at core free cash flow conversion north of 90%. I guess as we move past some of these transformation initiatives, how do we think about the core free cash flow conversion on a go-forward basis? Is there still that potential to get to 100%? And what are you going to be focused on over the course of this year to get you there?

[Patrick Goris, executive]

Yes. We're always focused on free cash flow conversion. As I mentioned this year in 2023, if you adjust for items like restructuring and some of the M&A-related fees which we adjust out, so they're not part of our adjusted income, we're actually well over 100% of free cash flow conversion. So some of it relates back to you take it over GAAP income or adjusted net income.

Now for 2024, our guide for free cash flow. I mentioned $700 million, that includes $1.7 billion of those items. So take $2.4 billion, we expect 2024 to be elevated from a CapEx perspective as well, which is embedded in that guide for 2024. And a key reason for that is that within our Viessmann Climate Solutions business, we're finalizing some of the larger projects. And so we think that our CapEx outlook for 2024 of about $550 million is probably about $75 million or so million higher than what the underlying run rate would be.

And so that's an element in 2024. But obviously, taking into account the cash spend on restructuring, we would always target to be at 100% free cash flow conversion. And I think in 2023, if you take that into account, we absolutely didn't.

[Operator]

Next question comes from Joe Ritchie with Goldman Sachs.

[Joseph Ritchie, analyst]

Dave, I want to focus my first question just on Viessmann. So what were kind of like the exit trends for 2023? And then just embedded in that mid-single-digit number for the year, kind of what's expected in the first half of the year? I know it's expected to be a slower start.

[David Gitlin, executive]

Yes. Look, we did see that orders were lighter in the second half, and that did impact -- I would say the fourth quarter came in a little bit lower than we thought. It was still up mid-single digits versus the fourth quarter of last year. But when we look at the calendarization of this year, from a sales perspective, you're probably looking at about 45% or so of the sales in the first half and about 55% of the sales in the back half.

When you look at the EBITDA, it's more -- a little bit more weighted towards the back half because that's when we see our synergies start to come in. But as I was mentioning earlier, Joe, I think the encouraging piece is once we got the definitive legislation out of Germany, and you can apply for the subsidies, which become retroactively beneficial effective in -- as of January, we did see -- it was kind of like a tale of 2 cities. You saw activity on the Viessmann web pages picked up. You started to see energy amongst the installers. And you started to see heat pump applications increase. So clearly, some of that dithering we saw on the legislative side impacted new orders. Now that we have a level of certainty, we're very confident that we'll start to see the heat pump orders and sales pick up in the second half. And Patrick, are you going to add something?

[Patrick Goris, executive]

Yes, Joe, I was just going to say, for Q4 of 2023, Viessmann sales were down about mid-single digits. And then so for Q1 of this year, we expect them to be about flattish with a pickup in the second half of 2024 as Dave just mentioned.

[Joseph Ritchie, analyst]

No, that's perfect. That's good color. And I guess just I know we've already kind of talked through the resi HVAC inventory cycle and where we are. I'm just curious just across the rest of your portfolio. Can you maybe just provide some color on inventories I'm specifically curious on the security business and what you're seeing in that business right now.

[David Gitlin, executive]

Well, Look, we -- on the security side, as Patrick said, we've guided for half the year. We feel calibrated on where we are for -- for where we are in the first half. And I think that we're sort of back to more normal levels of backlog in security.

When we look at other parts, I mean, for our commercial HVAC side, we're still looking at backlog up 30% on a 2-year stack. So we're well -- we have very good coverage going into the second half of this year. So we feel good about the growth projections that we have for commercial HVAC. And not -- when we look at the light commercial piece, we're watching the inventory levels in the channel. It's partly helped frame our when we said we think of sales down in the mid-single-digit range, it's partly because we're watching that.

Now I will say we actually, even with our 2024 forecast, it would still be lower than the kind of numbers we saw in 2019, 2018. So we're watching the inventory levels, but we still have very strong coverage heading into 2Q and beyond. So we'll keep an eye on that, but -- and we obviously have a tough compare there. And remember, light commercial is about 5% of all of Carrier. But we'll watch the inventory levels, but we are encouraged by the coverage that we have.

[Operator]

The next question comes from Nigel Coe with Wolfe Research.

[Nigel Coe, analyst]

And I echo Julian's comments, thanks for making a pretty complex setup a little bit easier for us. Just want to go back to Viessmann. And the comments about 45-55, Patrick, I think you mentioned that -- based on our model, we got 50-50 roughly for 2023. So I just want to make sure that's sort of more normal seasonality. And then can you just maybe comment on where we finished up on EBITDA for Viessmann, I think, EUR 0.7 billion as sort of the benchmark.

And the spur of the question really is, I think, Patrick, you mentioned Viessmann be fairly neutral to margins in 2024. I've got EBITDA margins in the 16.5%, 17% range for '24. So I just want to make sure that's where you see the Viessmann margins for '24?

[Patrick Goris, executive]

Okay. Quite a few things there. Nigel, I'll start with the -- where Viessmann ended in 2023. We had said about EUR 4 billion and about $700 million in EBITDA. So EUR 4 billion in sales. .

[David Gitlin, executive]

$700 million.

[Patrick Goris, executive]

In EBITDA. On both items, they came in slightly below. So sales were close to EUR 3.9 billion and EBITDA came in about $50 or so million below that. So that's where Viessmann ended the year. In terms of VCS margins for the full year, from an operating margin point of view, Viessmann embedding our guide is right at mid-teens. So right at the, call it, middle of mid-teens. And I think from an EBITDA margin point of view, they're in the high teens. So their EBITDA margin is slightly accretive to the overall company. The operating margin is basically right in line with the company average as well.

[Nigel Coe, analyst]

Okay. I'll follow up offline. I thought the depreciation was quite low there, but we'll follow up offline. And just a quick follow-on...

[Patrick Goris, executive]

To that point, that there was a step-up in the fixed assets as part of the transaction and that boosted the depreciation.

[Nigel Coe, analyst]

Okay. That makes total sense. And then just thinking about -- Dave, you talked about the ability for Viessmann to pivot between heat pumps and boilers. Just wondering about the mix impact there because my understanding is heat pumps are much higher ticket price than boiler. So just wondering if there's a mix impact we should consider as well?

[David Gitlin, executive]

Yes. I think on the margin side, they're both very similar. But clearly, on the sales side, we're looking at about 3x the price for heat pumps than you're seeing for boilers. So when we look at that heat pump growth, we think long term, you're looking at heat pump growth more than 20%. It remains to be seen whether obviously, a bit of a tough compare last year, whether we'll get that 20% growth in 2024, but the mix that we see between expected heat pumps and boilers is baked into our mid-single-digit guide for them for the top line for this year.

[Operator]

The next question comes from Jeff Hammond with KeyBanc Capital Markets.

[Jeffrey Hammond, analyst]

Just a couple of cleanups on HVAC. One, just on resi, maybe speak to sell-through versus sell-in, what are you thinking for the market versus absence of destock? And then the light commercial down mid-single digits, is that purely comps? Or are you seeing order weakness there?

[David Gitlin, executive]

Well, I -- look, on the latter 1 first, comps is a part of it and orders is just it's very difficult to look at orders because we're seeing such enormous swings in orders. So you can look at a certain quarter with orders down 30% or 40%. What we're actually looking more at for light commercial is coverage. We're looking at just fundamental demand that we're seeing out in the marketplace and how much backlog we have to support that demand, and then we look at the underlying verticals.

So as we look at the first half of 2024, we have good coverage for the sales that we expect, and that goes into way beyond where it normally would go. It goes into the second quarter. So we're watching inventory levels. We have generally pretty good coverage. We do know that some verticals remain quite strong, like K-12 and things like some of the lower-end retail parts of the business. And then we're watching new orders come in to feed the second half of the year in the light commercial space. Please remind me what was your question on resi.

[Jeffrey Hammond, analyst]

Just on resi, what you think market demand is? Yes.

[David Gitlin, executive]

Yes. I think we're now back to a point, which would have been more like what we would have been used to pre-COVID, which is you'll start to see sales and movement start to feel very similar to each other. We sell into the channel, what moves from our channel partners and to the dealers. So we should start to see more of a 1:1 match for movement, our sales and our movement from our distributors. We're sort of back to more normal levels.

And you think about the market over these last handful of years, look at a market level, you're looking at total shipments on ducted splits of back in 2018, '19 of around $6.5 million. And this year, you're looking at about $6.5 million. So it feels like we're kind of in the zone of where we would have been pre-COVID and we'll grow from there. Last year was a bit of a reset year coming off a couple of years where we got up into that $8 million range. And now we're sort of back to more traditional levels, and we feel good about the growth rates that we have projected for resi for this year.

[Jeffrey Hammond, analyst]

Okay. And then just on the commercial resi fire business, when do you think you'll have resolution and what's kind of the lean spin versus sale at this point?

[David Gitlin, executive]

Yes. When we think about -- we're looking at combining the commercial and the residential fire in an exit together. And I'll tell you right now, our #1 priority is we want to make sure that we do everything we can to close security, close the commercial refrigeration as effectively and as soon as we can, working with the buyers. And that's a little bit more than half of the EBITDA that we're exiting.

The next priority we have in line is industrial fire and that's frankly progressing very well. We're looking at hopefully an announced deal here within the next couple of months. Then we're doing all the prep work right now internally for commercial and resi fire, and we're preparing it both ways. We're preparing it as though we could do a sale with the [ QEV ] and all the work associated with that. And we have a whole prep activity around a public market exit.

And in the meantime, we're heads down focused on improving the underlying performance of what are really great franchises in those businesses like Kidde and Edwards. And at the end of the day, which way we'll go sale or public market exit, it just comes down to maximizing long-term shareholder value, and we continue to assess that internally.

[Jeffrey Hammond, analyst]

Okay. Great. Appreciate the color.

[Operator]

The next question comes from Stephen Tusa with JPMorgan.

[C. Stephen Tusa, analyst]

Congrats on closing the Viessmann deal?

[Patrick Goris, executive]

Thank you. We're excited by it.

[C. Stephen Tusa, analyst]

Dave, you mentioned $6.5 million ducted splits. What were you talking about versus the $8.5 million? What exactly data point are you talking about there?

[David Gitlin, executive]

Yes, Steve, I know you've talked different. That's like total split volume for North America.

[C. Stephen Tusa, analyst]

So how does that differ from the HRI data?

[David Gitlin, executive]

For the industry? We can take it off-line, Steve, if you have different...

[C. Stephen Tusa, analyst]

Okay. And then just for -- when we kind of roll forward into '25 can you just help us with what -- how much -- what that profile looks like, how much OP rolls off and then the interest savings would that how should we kind of maybe put what you're talking about this year in context for next year?

[Patrick Goris, executive]

Yes, Steve. It might be helpful to look at the EPS bridge we included in our deck for this. And the way I'm thinking this is our core business this year, the dark blue one grows by about 14 or so percent year-over-year. Next year, assuming, of course, we exit all the businesses -- at the end of this year, that would be a $0.30 dilutive impact that we would lose. What's not embedded there is, of course, is the offset related to the redeployment of the net proceeds.

So core business $2.55 this year per our guide. We would be disappointed, of course, and if we could not continue to grow that at double digits. Add to that, the redeployments of the net proceeds. In addition to that, free cash flow given that we would be close to 2x net level, we'd be back in the market doing repo. And so I think we would be positioning ourselves for our core business to grow at attractive rates after this year. Hope I answered the question?

[C. Stephen Tusa, analyst]

Yes. So kind of take like $2.55 and then like grow at it at about 10%-ish?

[Patrick Goris, executive]

This year, we're doing 14% in our core business, excluding the impact of the Viessmann dilution, so we'd be disappointed if it'd be less. But -- so yes, somewhere in the teens. On top of that, the redeployment of the net proceeds and the free cash flow we generate, we intend to repurchase the equivalent shares issued to the Viessmann family. And so there is -- I think there's a lot of earnings power available to us.

[C. Stephen Tusa, analyst]

Yes. Okay. That helps. And then just one last one. What was price cost for the quarter?

[Patrick Goris, executive]

Price cost for the quarter.

[C. Stephen Tusa, analyst]

Yes. The net. So what was pricing for the quarter and then the net, yes.

[Patrick Goris, executive]

No, understood. I don't have an exact number, but it was significantly favorable because for the overall company point of view, our margin expanded 80 basis points. That was basically all due to price cost and productivity. I embed productivity in there, Steve. It was probably -- that was over 200 bps offset by some unfavorable mix and investments.

[Operator]

The next question comes from Brett Linzey with Mizuho.

[Brett Linzey, analyst]

Just wanted to come back to Asia and specifically China, you gave a little bit of color there, but fourth quarter orders up 20%, 25% there. Could you just give the complexion between the buildings markets versus transport markets in that order number and some of the activity you're seeing there.

[David Gitlin, executive]

Yes. We -- well, first of all, we saw extremely high. It was around 20% orders in China, Brett. The ref orders were extremely high, but it's a relatively small number amongst -- for the business overall, but that was that was very high. And we had a little bit of headwind on the commercial HVAC side in China and then F&S was kind of in the mid-single-digit range.

So we were very pleased, I would say, overall, with the orders in China. It's about 9% of our sales when we picked up Toshiba. We picked up a little bit more on the residential and light commercial business. And we have a lot of new product launches in that space. So kind of like what I said with Viessmann before where we introduced a new product that gets us into a new market, some of the revenue synergies that the team's worked on between Toshiba and Giwee to really introduce some new products into the China market, we think as we know and we anticipate that we'll continue to spend helping us a lot.

And I think the big thing is this pivot between what was real estate and property now to some of the more industrial pieces like EV, electronics, infrastructure, manufacturing [ strong ] we actually have China for us up in '24, I think it's in the high single-digit range. Obviously, we all know China will have to continue to watch. But if we feel like if we play in the right spaces in China, we're well positioned.

[Brett Linzey, analyst]

Okay. Great. And then just a follow-up to that. You identified the significant synergies at Viessmann. You've had some time for the integration here, maybe put a finer point on the sizing and the timing of those and what really is that new branding, new products and so on? Any context would be great.

[David Gitlin, executive]

Yes. We -- what I would do is I would put the revenue synergies, and we'll start to dimensionalize those for our investors here over time. But -- it's a little bit early. But what I would do is put the -- I would put the revenue synergies in 3 categories. One is multichannel, multibrand. Viessmann has -- I think everyone would agree, the single best channel for the residential market in Europe.

So direct to installers, more than 80,000 installer relationships, and we're looking at introducing a secondary brand, potentially the Carrier brand into that channel. And then there's more we can do with the Toshiba brand in Europe as well. So that's an example. And is there more we can do with the Viessmann brand in places like China or in India or in the United States and North America. So multi-channel, multi-brand.

The second 1 is just pure innovation. They have -- Viessmann has a phenomenal digital tool that they use with their installers. Is there more that we can do to drive services growth through the digital tools that we have within Carrier or that we have within Viessmann or even some of that heat pump technology, could you see more air to water in the United States, especially for homes in places like New England that have radiated heat today or might we see more of a trend even though it's a bit of a niche market around geothermal in the United States.

And then the last is what I would call integrated offerings like complete home energy management systems, which Viessmann does very well today in Europe, is that an opportunity for us in the United States, and things like district heating, where we could do a commercial heat pump combined with the apartment transfer units that Viessmann has. So we see a lot of opportunity. We've given a very kind of audacious aggressive target for ourselves internally. And as we get some wins on the board, we'll start to more dimensionalize that for our investors.

[Brett Linzey, analyst]

Okay. And that's not baked in this year, right? Back half?

[David Gitlin, executive]

Correct. Okay. Well, let me -- let me wrap things up. First of all, thank you all for joining. For us, it's a big day. We're actually here in the New York Stock Exchange. We will be a little bit overdue because we were going to ring the bell when we spun as a public company back in in 2020, but it was COVID, the New York Stock Exchange, which was shut down. So we're excited to have our -- many of our key leaders here with us, and we'll be ringing the bell here shortly. We have customers with us in the building today, which we're excited to spend time with them. And we are so excited about not only 2024, but the future of this company. We are so well positioned around the sustainability trend, and I'm so proud of what this team has accomplished since our spin, but I assure you that our best days are ahead. So thank you all for joining, and Sam, as always, available for questions.

[Operator]

Thank you for participating. This does conclude the program. You may now disconnect. Everyone, have a great day.