Earnings Call Transcript - CARR Q3 2022

Sam Pearlstein, Vice President of Investor Relations

Thank you, and good morning, and welcome to Carrier's third quarter 2022 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. With that, I'd like to turn the call over to our Chairman and CEO, Dave Gitlin.

David Gitlin, Chairman and Chief Executive Officer

Thank you, Sam, and good morning, everyone. Let me start by saying how proud I am of this tremendous Carrier team, which continues to deliver strong and consistent results. Turning to our Q3 results, we delivered 8% organic sales growth on the heels of continued traction on pricing. Total company organic orders were up 3% in the quarter, and our backlog is up about 10% year-over-year. Importantly, we continue to deliver double-digit aftermarket organic growth. Adjusted operating profit was slightly better than we expected, and price cost continues to be positive. We are tracking to about $300 million of gross productivity, about $100 million of which will come from G&A reductions. We generated strong free cash flow in the quarter of approximately $700 million. Supply chains are generally improving. We have increased dual sourcing for critical components and supplier on-time delivery has meaningfully improved. The improvements, though steady, have been later in the year than planned, thus impacting our full-year free cash flow forecast. As supply chain and working capital improve, we expect to return to 100% free cash flow conversion. We successfully closed the Toshiba Carrier acquisition during the quarter, and we are making important progress on integration and are starting to realize synergies. We still have plenty of capacity for additional value-add capital deployment as our balance sheet remains very solid with approximately $3 billion of cash and no debt maturities until 2025. Earlier this week, our Board approved a $2 billion share repurchase authorization, which is on top of the $300 million remaining on the previous authorization. We are confident in our strategy and long-term prospects and remain committed to delivering shareholder value through disciplined capital allocation, including organic growth investments, M&A, dividends, and share buybacks. Moving to Slide 3, I want to again emphasize our commitment to the value creation framework that we presented at our Investor Day earlier this year. Our team remains laser-focused on these four principles of driving above-market organic growth, expanding margins, delivering strong free cash flow, and disciplined capital allocation. We have a thorough goal alignment process that cascades our critical focus areas to each of our 55,000 team members' individual performance goals. We are making significant progress on our priorities, as you can see on Slide 4. Secular trends continue to drive sticky customer demand and one theme that certainly fits that definition is sustainability. Our customers in both the commercial and residential verticals are motivated to achieve their ESG targets and reduce their carbon footprint and energy bills with government mandates, policies, and incentives further fueling this demand. A key sustainability enabler is the shift to electrification in buildings and cold chain distribution. In the U.S., the rapid transition to heat pumps will be further accelerated by the recently passed Inflation Reduction Act. Today, over 30% of our residential split sales include heat pumps. In Q3, our residential heat pump shipments were up over 30% compared to last year. We established our Tennessee facility as our North American heat pump center of excellence and are expanding customer financing offerings through our new EcoHome initiative. In addition to heat pumps, we continue to lead through innovation with energy-efficient solutions. The cutover to our differentiated new 2023 SEER 2 compliant units has gone well, and our resi HVAC team has done a great job managing the production and inventory transition. We recently hosted 8,000 Carrier and Bryant dealers in Las Vegas and our industry-leading dealer network is energized about the product lineup. Our new indoor and outdoor units are complete redesigns differentiated in performance, size, and weight. In addition, a 45% SKU reduction provides flexibility and operational efficiencies to the channel and to us. We are driving aggressive cost reduction actions and are pricing the new more efficient units at least a 10% to 15% premium over previous generation products. In Europe, where we are the leader in commercial heat pumps, Q2 and Q3 heat pump orders were up 30%, and we anticipate the same magnitude for the full year. The TCC acquisition enables us to accelerate product development in the heat pump segment and become a more significant player in the fast-growing Asia VRF heat pump market. We also continue to benefit from the shift to electrification in our truck trailer business with strong traction on our innovative vector equal units. Customers now operate these units in 11 countries, and our market leadership in this segment is being recognized. Just recently, vector equal earned the top Product of the Year Award from the Environment and Energy Leader Awards program. In addition to sustainability, we continue to lean into the opportunity presented by the increased focus on health and wellness. We are proud to partner with our friend, Russell Wilson as we work with large-scale customers to provide them with safe and healthy indoor environments. Demand for our innovative solution continues to build. In Q3, healthy building orders were up over 55% compared to last year, and our pipeline increased to about $900 million. Within the K-12 vertical, Q3 orders were up 20% and we are up about 35% year-to-date. Our intense focus on digitalization has many reasons, but at its core, we are transitioning Carrier from an equipment-centric provider to a solutions company with more aftermarket and recurring revenues. The opportunity to use digital offerings to embed ourselves in our customers' ecosystem to help them achieve specific outcomes is tremendous. Our Abound and link digital platform sends and collects data and interacts with key building and cold chain system technologies to provide customers with the outcomes they desire. Abound not only provides healthy and sustainable solutions, we have also introduced new applications, including Abound predictive insights that reduce the total cost of asset ownership by enabling smarter, more predictive maintenance to optimize equipment health and performance. My leadership team and I are interacting directly with scale customers, and I can tell you that their willingness to make long-term commitments to Carrier is encouraging. Recent Abound wins include a nationwide drugstore chain that will add an additional 2,500 stores to our growing portfolio of managed multisite retail locations and an installation of more than 100 commercial office buildings for a key scale customer. Our efforts here are being recognized as the Abound EcoEnergy has received five awards in 2022 for innovation, impact, and customer service excellence and its ability to deliver positive outcomes. Growing Abound sales will generate higher margin, more predictable recurring revenues and a stronger pull for additional equipment sales and services. And the same holds true for Lynx and our cold chain initiatives. We continue to add capabilities to our Lynx platform focused on providing our customers with greater flexibility, visibility, and intelligence across the cold chain. Our advanced refer equipment insights and analytic models provide early and automated detection of refrigerant loss, enabling our customers to improve their asset uptime and operational performance and to protect the invaluable refrigerated cargo. In our North American truck trailer business, Q3 saw a more than 60% year-over-year increase in service revenues driven by thousands of new Lynx subscriptions. We remain on track for 100,000 new Lynx subscriptions by year-end. Our traction on solution selling driving more recurring revenues is reflected in our continued aftermarket performance, as you can see on Slide 5. Aftermarket was up double digits organically in the third quarter, and we continue to expect to realize over $7 billion in revenue by 2026. Connected devices are a fundamental enabler. We remain on track for about 20,000 connected chillers, our attachment rate was 40% in the third quarter, and we expect to have 70,000 chillers under BluEdge contracts by year-end. We are also expanding our parts sales enabled by our Breeze platform where we onboarded two new national accounts. Our aftermarket playbook is deeply embedded in our DNA, and we are seeing the results quarter-over-quarter. Lastly, on Slide 6, we continue to be confident in our ability to drive shareholder value even in the face of economic uncertainty by staying true to our proven strategy. We have consistently exceeded our expectations, and we will utilize that same playbook in 2023 and beyond, driving strong and recurring growth through differentiated solutions that address secular trends and increased aftermarket opportunities, eliminating waste, and driving tenacious cost reduction while remaining disciplined in our capital allocation to accelerate growth and return capital to shareholders. As we close out Q4 and look ahead to 2023, we will control the controllables by doubling down on this proven playbook. I am deeply confident in the Carrier's team ability to drive continued strong results despite challenges that may be thrown our way. With that, let me turn it over to Patrick.

Patrick Goris, Chief Financial Officer

Thank you, Dave, and good morning, everyone. Please turn to Slide 7. Reported sales of $5.5 billion were up 2% compared to last year, and organic sales were up 8%, driven by price, with volumes flat. The divestiture reduced sales by 10% and acquisitions, substantially all Toshiba Carrier increased sales by 8%. Currency translation was a larger-than-expected headwind of 4%. All the segments were price/cost positive in the quarter. Q3 adjusted operating margin was down 40 basis points compared to last year. The margin impact of the divestiture and the acquisition at about 70 basis points each offset each other. Price cost, although positive in the quarter, is a margin headwind of about 30 basis points. The adjusted effective tax rate of 23% is in line with what we now project our ongoing annual effective tax rate to be given the Toshiba acquisition. Adjusted EPS of $0.70 was stronger than expected and includes a $0.02 benefit from Toshiba, which will reverse in Q4, in essence, timing of integration expenses. For your reference, we have a year-over-year Q3 adjusted EPS bridge in the appendix on Slide 17. Free cash flow in the quarter was $699 million. While there has been some improvement in the supply chain, component shortages continue to affect deliveries and shipments and thus, inventory levels. Before I move on to the segments, let me make a comment about the other income you see in our P&L. As a result of the Toshiba Carrier acquisition, we recorded a one-time gain of about $730 million in Q3, which, in essence, is the step-up associated with the ownership stake we already had in Toshiba Carrier. This is not a taxable event. We exclude this one-time gain and amortization related to acquired intangibles from adjusted operating profit and adjusted EPS. Moving on to the segments, starting on Slide 8. HVAC reported sales were up 22% and reflect the impact of Toshiba, which added 12 points of year-over-year growth. HVAC organic sales were up 13%, driven by high single-digit growth in residential and strong double-digit growth in our light commercial and commercial HVAC businesses. Residential movement was down mid-single digits in the third quarter, and quarter-end field inventory levels are up about 20% year-over-year. We continue to work towards balanced year-over-year field inventory levels by year-end as we transition to the new 2023 products. Residential HVAC growth was all driven by price as volume was down mid-single digits. Our light commercial business grew over 20% in Q3 and field inventories remained down about 10% year-over-year. Commercial HVAC had a very strong quarter with double-digit growth in applied equipment, aftermarket, and controls. All regions grew mid-teens. Sales in China were up more than 50% as we recovered from the impact of the Q2 Shanghai lockdowns. Adjusted operating profit for the HVAC segment was up 6% compared to last year. As expected, operating margin was down 260 basis points with about a 150 basis point impact from the Toshiba consolidation and 90 basis points due to price cost. The balance is unfavorable mix and lower JV income, offset by good productivity. We expect the HVAC segment to remain price cost positive for the full year and to deliver full year margins of about 15%, consistent with what I shared with you last quarter. The Toshiba acquisition has about a 100 basis point dilutive impact on full year 2022 margins for this segment. Transitioning to refrigeration on Slide 9, Q3 reported sales include a significant headwind from currency translation as this segment is very global. Organic sales were down slightly, given significant supply chain constraints as truck trailer growth offset declines in container and commercial refrigeration. Within transport refrigeration, North America truck trailer saw strong growth in the quarter, up high teens. However, supply chain issues affected European truck trailers leading to increased backlog and inventories. Container sales were down about 20% year-over-year based on demand softness as well as tough comps. Sensitech delivered another strong quarter with double-digit sales growth. Commercial refrigeration was flat year-over-year as our European food retail customers are pressured by high inflation and energy prices. Adjusted operating margins were up 80 bps compared to last year despite lower sales with favorable productivity, price cost, and currency translation more than offsetting the volume headwind. The segment remains on track to deliver margins of about 12.5% this year. Moving on to Fire and Security on Slide 10. Excluding previous year sales, the Fire and Security segment sales were up 6%. Adjusted operating margins expanded 220 basis points in the quarter mainly because of the divestiture and productivity, which more than offset the impact of negative volume. This segment is particularly impacted by supply chain challenges, especially in the higher-margin access solutions business. Price cost was positive, and this segment remains on track to deliver margins of about 16% this year. Slide 11 provides more details on orders performance. The total company organic orders were up low single digits for the quarter, and backlog remained strong throughout all segments. Similar to last quarter and as expected, residential HVAC orders were down in Q3 as the business continues to prioritize their order book and normalize the backlog that is still measured in months, versus typically weeks. Light commercial demand remained robust and orders were up almost 50% in the quarter. Backlog is up 3.5x year-over-year within that business, which should position us for a good start to 2023. As I mentioned, commercial HVAC saw double-digit orders growth for the seventh consecutive quarter. All regions within commercial HVAC saw double-digit growth and the commercial backlog, excluding NORESCO, is now up over 35% compared to last year and extends well into 2023. Refrigeration orders were up mid- to high single digits in the quarter, driven by an almost tripling of orders in North America truck trailer as we opened the order book for the first half of 2023 in September. Given how we manage the order book, a better year-over-year comparison for North America truck trailer is properly looking at year-to-date order performance. Through nine months, orders are up 27% year-over-year for North America truck trailer. The transport refrigeration backlog remains up almost 10% year-over-year as the North America strength more than offset some order weakness within the European truck trailer business and container. Commercial refrigerated orders were down over 20% organically as the European food retail customers are impacted by energy prices and inflation. And as we continue to focus on improving the profitability of this business. Finally, demand for our Fire and Security products remained healthy. Orders were positive in each of the businesses, except for access solutions, which has been most impacted by supply chain challenges. Fire and Security products backlog is up almost 40% year-over-year with double-digit growth in all businesses except residential fire in the Americas. As you can see, on both the left and right side of the slide, we saw strong demand in many of our businesses. However, we have seen some weakness in a few areas such as in Europe, driven by European truck trailer and commercial refrigeration. In addition, the weaker container orders impact Asia, excluding China, given that this business mainly books orders in Singapore. Now moving on to guidance on Slide 12. Compared to our prior guidance, we are reducing our full-year expected sales by about $400 million with most of the reduction due to currency translation, the balance due to slightly lower organic sales growth. Accordingly, we now expect full-year revenues of about $20.4 billion versus the prior guide of $20.8 billion. We now expect adjusted operating margin of 14.2%, up 60 basis points compared to last year and up 20 basis points compared to our prior guide. This reflects improved Q3 margin performance. Currency translation is also a minor tailwind to margins compared to our July guidance. We are increasing our full-year adjusted EPS guidance range to the high end of our prior guidance or $2.30 to $2.35. This is primarily due to the strong performance in the third quarter including productivity that more than offsets the incremental earnings headwind from slightly lower volumes and currency translation. We continue to expect the TCC acquisition to have a neutral impact on adjusted operating profit and adjusted EPS in 2022 with operating profit contribution to be mostly offset by the loss of equity income and integration expenses. However, as I mentioned earlier, the timing of the planned integration costs shifted from Q3 to Q4 causing a TCC adjusted EPS contribution in Q3, but a negative impact in Q4. Lastly, on free cash flow. Last quarter, we said achieving our free cash flow target has become more challenging given continued supply chain headwinds. While we did see supply chain improvements in Q3, the improvements are coming later than expected, and so it will not be enough to reduce our inventories by year-end to get to $1.65 billion of free cash flow. In addition, and to a lesser extent, free cash flow is negatively impacted as we acquired cash from the acquisition of TCC rather than receiving that cash through dividends from equity investments. As a result, we now expect to generate closer to $1.4 billion in free cash flow. This still includes approximately $200 million in tax payments related to the Chubb gain and a $100 million unfavorable impact from the expiration of the R&D tax credits. In summary, another good quarter of good performance enables us to increase our adjusted operating profit and adjusted EPS guidance. The strength we see in parts of our portfolio are helping to balance weakness in other areas such as Europe and some consumer-related end markets. Supply chain improvements are coming later in the year than we expected and are leading to elevated inventory levels impacting free cash flow. With that, I'll turn it back to Dave.

David Gitlin, Chairman and Chief Executive Officer

Thanks, Patrick. We have delivered very solid performance year-to-date and remain confident in our ability to close out another strong year. Demand for our innovative products remains healthy, and I'm excited for the opportunities that we have in front of us. With that, we'll open this up for questions.

Operator, Operator

And our first question will come from Jeffrey Sprague from Vertical Research Partners. Your line is open.

Jeffrey Sprague, Analyst

Dave, now that Toshiba is completely in the wheelhouse, I just wonder if you could give us a little bit more color on kind of the forward look into '23 and what you think you can do with the margins there and kind of what the restructuring plan looks like?

David Gitlin, Chairman and Chief Executive Officer

Sure. Let me begin, and then Patrick can provide additional details. As we've examined Toshiba, we are even more optimistic about the opportunities ahead. One minor disappointment was regarding price adjustments. We should have responded earlier this year to some of the cost challenges we faced. Therefore, when we finalized the deal, we needed to increase prices. However, as we mentioned, we plan to be proactive on the cost side. We previously discussed $100 million in expected synergies, and I can assure you there are additional opportunities beyond that. The team will pursue these aggressively. The most exciting aspect, when considering the integration of the businesses, is that the VRF business is essentially a heat pump business. This will contribute to our growth, not just in Asia but also in Europe, with truly differentiated products. The integration with our team has gone exceptionally well. Looking ahead to five years from now, I envision an EBIT ROS in the mid-teens.

Jeffrey Sprague, Analyst

And just on the resi side of the equation. I assume it's kind of in your guidance, but it sounds like we should be expecting some absorption pressure in Q4 as you work down inventories. But also just curious maybe the apparent mismatch between backlog being very extended but maybe inventories being seasonally higher than you'd like. Is that backlog now really kind of the new SEER stuff and we should think about that being delivered in 2023?

David Gitlin, Chairman and Chief Executive Officer

Yes, we’ve been monitoring the challenging balance between inventory levels and the transition very closely. Movement decreased by mid-single digits this quarter. Our main goal, collaborating closely with our channel partners, is to ensure we end this year with an inventory imbalance, which is crucial for both us and our partners, and I’m confident we will achieve that. The transition to the new SEER units has gone extremely well. As you know, we adopted a more aggressive strategy to add value to the product. We are now fully transitioned to the new product in the southern region, and we expect to be completely transitioned in the north in about a month. This transition is progressing well, and almost all new products will be shipped next year at a 10% to 15% price premium. We are working to manage our inventory balance, and we currently have about four months of backlog instead of the typical four weeks. We are carefully monitoring this dynamic situation, but we are confident in our current position.

Patrick Goris, Chief Financial Officer

Jeff, on the absorption, yes, there is a little bit of a headwind there. And I'd say that extends to some of the other segments as well. We just want to make sure that we exit the year with appropriate levels of inventory. So in some of our facilities, we'll take a little bit more downtime than we expected just a couple of months ago.

Operator, Operator

And we'll take our next question from Nigel Coe from Wolfe Research. Your line is open.

Nigel Coe, Analyst

Let's talk about residential. So we're seeing some pretty divergent trends between heat pumps and AC units, and I'm guessing that will continue into '23, '24 and beyond. Some of your competitors have weaker positions in heat pumps. So you've got a very strong position. So I'm just wondering, are you seeing any share shifts as this dynamic plays out?

David Gitlin, Chairman and Chief Executive Officer

Yes. I would say, Nigel, that if you look over the last 12 months, I think it's clear we picked up, I don't know, 30 or so basis points of share. So I think that our position in heat pumps has helped that. And I do think that on the flip side, we are working again with our channel partners to manage their inventory levels as they head into next year. I think at a high level, when you look at overall residential for the third quarter, we had good price. We're sitting on backlog. We're managing the cutover. We're watching movement in field inventories. But we do get, as you know, and I'm answering kind of more broadly, Nigel than your heat pump question, but we get a lot of questions about residential overall. And just a bit of a reminder for folks is that some perspective, it's, say, 20%, to 25% of our sales. And I think the thing, as we look at next year that will be most acutely under pressure will be the residential new construction piece. That's a quarter of the residential business. So that means it's about 5% of our total business, which means that if that residential new construction piece, just pick a number, was down 10%, that would impact our top line by 0.5%. And then you have these countervailing things like what you're bringing up, which is we have a number of positive mix stories, which is the shift to heat pumps. It's whether it's cooling only to heat pumps where we're doing particularly well, especially because we have outside share in Florida in places in the South. We have the new SEER units coming in. And then we also have, depending on how the Inflation Reduction Act plays out, you have the heat pump mix from entry level to higher efficiency. So we are watching some of the concerns around volume overall, but there are some, I guess, encouraging counterforces that should position us well as we go into next year.

Nigel Coe, Analyst

Patrick, you mentioned some absorption issues regarding inventory in the channel. When we consider the new SEER units being introduced in the South, is there a learning curve associated with those units as well? You've been manufacturing 15 SEER for a long time, but with the introduction of the new incentives, could there be an impact from a learning curve?

Patrick Goris, Chief Financial Officer

We started selling them in, I believe it was July, Nigel. So I think, yes, we've worked on this for a long period of time, and we're there. So I don't see that at all as a headwind to our performance in our facilities. Maybe a couple of questions or a couple of points to the question you had about heat pumps. We believe we are the number one in U.S. residential heat pumps. As we mentioned, sales are up 30% year-over-year in the quarter. We're really well positioned there. We believe we're number one in Europe, commercial HVAC heat pumps. We mentioned they're up 30% in the quarter. And then, of course, with the TCC acquisition, we even further strengthened our heat pump position that we can benefit from not only in Asia but also in Europe with the residential opportunity over there.

Operator, Operator

And our next question will come from Julian Mitchell from Barclays. Your line is open.

Julian Mitchell, Analyst

Maybe I just wanted to start off with the assumptions for the Q4 organic sales growth. So I think you're assuming sort of mid- to high single-digit organic growth in the fourth quarter company-wide. And then within that, are we assuming that sort of HVAC is up high single? Is that the right way to think about it? And then are you embedding resi volumes get worse year-on-year in HVAC in Q4?

Patrick Goris, Chief Financial Officer

Yes. Julian, Patrick here. You're right. For Q4, we expect organic growth to be high single digits. A little bit down from what we reported in Q3 for our organic growth. In terms of volumes, versus price in Q4, again, we expect volume to be about flat. So most of the organic sales growth will be driven by price. And actually, we do expect to have some volume growth in HVAC in the fourth quarter of the year, very modest.

Julian Mitchell, Analyst

And that HVAC slight volume growth, are we thinking sort of very strong commercial and then residential volumes down mid-single, similar to Q3?

Patrick Goris, Chief Financial Officer

Generally, we would expect to see continued growth in commercial, in light commercial – the two businesses that are doing really well with strong backlog. We would expect again to have volume within residential to be flat to slightly down.

Julian Mitchell, Analyst

And then just switching back to Europe for a second. We saw the orders down in EMEA about 10%. They've been down in the second quarter as well. So how are you seeing kind of the broad demand environment there? It looks like refrigeration, in particular, is being hit hard, maybe something idiosyncratic to that market. Just any broad perspectives on how you see the pace of that Europe slowdown playing out?

David Gitlin, Chairman and Chief Executive Officer

Yes, Julian, the situation in Europe is somewhat mixed for us. For context, Europe accounts for about 20% of our total sales, down from around 27% when we had Chubb before Toshiba. Despite this decrease in exposure, we are pleased with the orders in key segments of our business. Commercial HVAC and fire and security have performed well in terms of orders in Europe. However, we are closely monitoring the refrigeration sector for both European truck trailer and CCR. Currently, our lead times for European truck trailers have lengthened slightly due to supply chain issues, but our customers are well booked for the coming months, so we aren't overly concerned about order trends at this moment given the significant backlog we have looking ahead. Nonetheless, it's something we need to keep an eye on. On the other hand, the CCR segment has seen a decline, with some customers impacted by rising energy prices. This decrease is partly due to market conditions and partly because we are actively working to enhance our margins. There seems to be a combination of factors at play, but it is too early to definitively identify a trend, although there are a couple of areas we need to watch closely.

Operator, Operator

And our next question comes from Deane Dray from RBC Capital Markets. Your line is open.

Deane Dray, Analyst

Can we start with the healthy building orders up 55%. That's pretty impressive. And frankly, we've been waiting for this type of surge post-COVID. Was there a particular driver here where you saw these orders come through? Is there any of the government funding adding a boost? But any color would be helpful.

David Gitlin, Chairman and Chief Executive Officer

K-12 is clearly making a positive impact, and I believe there will be motivation for them to increase their spending in this area. Year-to-date orders for K-12 have risen by 35%, partly due to the focus on healthy buildings. We currently have a pipeline of $900 million, which has grown by 40%. One notable customer, although I can't disclose their name, is a highly respected technology company that is encouraging employees to return to the office. They have 100 office buildings that will be incorporating Abound to enhance employee confidence regarding indoor air quality. They plan to install monitors in the lobbies and aim to make air quality metrics accessible on mobile devices. We're collaborating with them on this initiative. Additionally, we have seen increasing demand, including a significant $5 million win in China involving a new exhibition center with advanced air handling units. Our controls division, ALC, has also performed well, securing a key project in Georgia focused on indoor air quality solutions. Overall, I believe this trend is here to stay.

Deane Dray, Analyst

I have a follow-up question regarding the chiller attachment rate of 40%. What are your expectations? Given the payback, would you anticipate that the attachment rate would be higher at this point, or is it still too early? What are the reasons customers are not placing that order at the time of sale?

David Gitlin, Chairman and Chief Executive Officer

Well, what I would say is that, by the way, just to clarify, it's not necessarily up 40%. It's at 40%. Yes, yes, I'm sorry. But look, we said that we were going to improve our attachment rate by percentage points a year, and that would put us at year-end in the low 40s. And I just think we continue to drive the playbook, where when it comes off warranty, we are there to get a long-term agreement. And we continue to see traction as we add salespeople in the right cities, in the right locations with the right digitally enabled offering. So we're pleased with the progress. We take a very strict interpretation of what we call an attachment rate because if we look at, after we sell a chiller, do we get predictable sales, that's 100% of the time. If that's what the definition is that we want to use, it's 100% because we always get parts sales, we always get service to it. We always get a certain amount of sales. We want a long-term agreement that's sticky, that's recurring revenues, and that's the definition we use, and that under the BluEdge paybook is growing 5 percentage points a year. And the other one we really look at is total chillers under some form of LTA, and that's growing 10,000 chillers a year, and that will be 7,000 by year-end.

Operator, Operator

And our next question will come from Joe Ritchie from Goldman Sachs. Your line is open.

Joe Ritchie, Analyst

Can we start on price cost? It looks like it was positive across each of the segments. Just any potential quantification on how positive it was for the quarter? And then as you're thinking about the carryover effect into 2023, maybe just provide some color on that as well.

Patrick Goris, Chief Financial Officer

Yes, Joe. The price growth impact to margins in the quarter was unfavorable 30 basis points. But from a dollar perspective, it was a favorable thing, give or take, about $50 million in Q3 alone. With respect to carryover based on prices that we have already implemented, we would expect carryover next year to be several hundred million dollars. At the same time, I'll have to say though that we would also expect some carryover inflation next year, especially inflation related to purchases where we have material pricing formulas. There is a little bit of a lag there. So the net impact to the P&L, the price cost called for next year will be lower than just a few hundred million dollars of good news. Of course, we continue to target price cost neutral at worst. And I'll also say that for next year, of course, what we're looking forward to is a potential good impact from commodity cost tailwinds.

Joe Ritchie, Analyst

And then maybe just kind of my next question, really focusing on the strength that you're seeing on the commercial HVAC market. Obviously, double-digit orders now for seven quarters in a row. There's a lot of concern that like commercial is going to follow residential into a downturn. So Dave, I'd love to just kind of hear your thoughts on that and what your expectations would be as we head into 2023 as well?

David Gitlin, Chairman and Chief Executive Officer

What we're observing is that the orders have shown double-digit growth for seven consecutive quarters, and this trend is apparent globally. North America increased by about 20%, while China and the Asia-Pacific region outside of China also saw double-digit growth, and Europe showed similar results. Different sectors perform variably, but areas like K-12 education, healthcare, and data centers, along with some industries in China, are performing well. We've seen a 30% year-over-year increase in our commercial HVAC backlog, indicating a strong forecast for next year. The push towards healthier buildings and sustainability is also robust. Additionally, the ABI, a key leading indicator, has remained above 50% for 20 consecutive months, fluctuating between 52% and 54%, which is promising. We're making significant investments in Abound, which should foster long-term, stable revenue growth alongside our products. Overall, trends in HVAC and light commercial sectors remain encouraging.

Operator, Operator

Our next question will come from Gustavo Gonzalez from Morgan Stanley. Your line is open.

Gustavo Gonzalez, Analyst

Just sort of looking at the various pieces of stimulus into next year. How are you sort of thinking about that? And how much do you think that sort of adds to the demand pipeline or even addressable market for 2023?

David Gitlin, Chairman and Chief Executive Officer

Well, there's a couple of things at play. I would say three things. You have the Inflation Reduction Act, you have the infrastructure bill, and then you have what's happening in K-12. If we start with K-12, the ESR funds, they've only spent very little of the $190 billion that's been allocated towards the school. So I do expect as strong as our orders have been that spending will continue to pick up, which, of course, regardless of economic cycles, government-funded spending on K-12 should withstand whatever happens in the broader economy. So that's encouraging. On the Inflation Reduction Act, the big thing that will play out over the next couple of months is whether the $2,000 a year incentive applies to both the kind of the mid-tier SEER units as well as sort of the higher-end SEER. If that happens, I think you're going to see a very broad-based upgrading from your entry-level heat pumps to that mid-tier heat pumps, which would be obviously good for the planet, good for our customers' energy bills, and frankly, good for us as well. And then just the broader Infrastructure Act has provided some tailwind as well. And then we see similar things happening in Europe. So I think regulation and incentives are very thematic for us. That does help during different economic cycles.

Operator, Operator

Our next question will come from Tommy Moll from Stephens Bank. Your line is open.

Tommy Moll, Analyst

So as part of your value creation framework, you've talked about using productivity to fund some investments. And I wondered if you could bring us in on what the planning could look like there for a potential recession scenario. So just to the extent that volumes were pressured in a potential recession, how much more difficult is it to realize some of those productivity objectives? And are there different buckets of investments that would be highest priority not willing to sacrifice versus more discretionary or relatively lower priority that could potentially get pushed out if necessary? Just some of the push and pull there would be helpful for your planning.

Patrick Goris, Chief Financial Officer

Yes, Tommy. So let me start by talking about productivity for this year. We started out by saying that we would target $300 million in productivity, and that remains our target for the year. Frankly, we're on a path to achieve that for the full year. Now in case of a potential recession, a couple of things. One is we continue to have tremendous opportunity to take cost out of our system, whether it's our factory footprint or sourcing point, we still have way too many vendors that we intend to consolidate over time or G&A opportunities. In addition, I will say that what we've been struggling with the last year or 1.5 years is tremendous inefficiencies in our factories, shortages of parts, causing inefficient manufacturing operations, expedited freight, logistics, wherever we look, we probably have significant pockets where we are less efficient now than we were two years ago or even three years ago. So if there would be a downturn, not only would we expect to continue to go after cost that we see today, we would expect to get back to much higher levels of efficiency in some of our facilities. And then, of course, what we have not talked about, which is the whole price/cost equation. We expect to see important input costs come down. We don't see a significant impact on this year just because of our hedged or our lock positions. But clearly, in an environment where we might see a revenue decline, we would expect commodity input costs to further go down, and we would expect to benefit from that as we've been very clear that we would have no intention of giving up price.

Tommy Moll, Analyst

I wanted to pivot to the repurchase authorization that you announced. I think it was another $2 billion that the Board approved and your cash flow guidance was reduced, but you're still expecting a pretty significant haul for this year, especially in the back half. So how should we think about the cadence of repurchases, the level of priority there? Any change to what you've communicated before or more steady as she goes?

Patrick Goris, Chief Financial Officer

The way you can think about it, Tommy, is from a capital deployment priority point of view, very clear and no change. Funding organic growth in organic, for example, what we've done with TCC, a growing and sustainable dividend, and then share repurchases. You mentioned $1.4 billion of free cash this year, so we're counting on a big last quarter of the year that is not unheard of. And as of today, we have $3 billion in cash. All in, we expect to end the year with about $3.3 billion in cash. In terms of the new authorization, in addition to the what's remaining of the prior authorization, we have about $2.3 billion left for share repurchases. Think about that authorization taking us through all of 2023 and into 2024. And the way we're thinking about this, obviously, is depending on opportunities for M&A or what the share price does or, of course, the general macro outlook, we'll either lean in more or we'll pull back a little bit. We have plenty of flexibility there.

Operator, Operator

Our next question will come from Steve Tusa from JPMorgan. Your line is open.

Steve Tusa, Analyst

Just on the kind of the market call for next year, so you mentioned new housing being down and I guess you didn't really touch on.

David Gitlin, Chairman and Chief Executive Officer

I didn't. What I said, Steve, is that if I gave you.

Steve Tusa, Analyst

Yes. Got it. Yes. So that's kind of like looks pretty likely given what we're seeing in the data, right? But you didn't say that, True. What should.

David Gitlin, Chairman and Chief Executive Officer

No, you've been saying that for a while.

Steve Tusa, Analyst

Well, I think new housing is the obvious one. It's the debate is really around the replacement market. What's kind of the feedback you're hearing from the channel on how people feel about the replacement side of that market for next year? What's kind of the latest and greatest there?

David Gitlin, Chairman and Chief Executive Officer

I think it's too early to tell. We are coming off a period of strong performance, so we need to monitor the situation closely because there are many factors at play. There are three significant changes happening: the shift towards higher SEER ratings, the transition from cooling-only units to heat pumps, and the move from entry-level heat pumps to more efficient models. Additionally, trends we observed in 2023, like remote work, may affect volume in the replacement market. While there may be some volume pressures, numerous factors could act as tailwinds, whether considered in terms of price or mix. Thus, it’s still uncertain what will happen regarding the volume in the replacement market.

Steve Tusa, Analyst

It seems that Lynx has improved its production a bit, but we're hearing that the train is now experiencing significantly longer lead times. I assume you believe you're gaining market share in that area. Are we correct in thinking that there are still some issues with the supply chain, or possibly other factors? It appears that you are managing to navigate through that, unlike in the commercial sector.

David Gitlin, Chairman and Chief Executive Officer

Yes, I would tell you that we've all had our challenges. I don't want to pretend that we've been challenged for you. And you saw that kind of in the second quarter. I would say that we have seen material progress. When we're seeing orders up 50%, we're seeing sales up 25%, which we saw in the third quarter. We're very, very well positioned there. I think if you look over a 12-, 24-month period, I think folks would agree that we've taken share. And we continue, I think, to benefit from not only some operational performance, but we've introduced a new product that is 40% more efficient than the one that it replaced. So I think new product a little bit of continuous improvement on the operations side. It puts us in a position for light commercial, Steve, where our backlog is at record levels. Patrick said it in the script, but our backlog is up 3.5 times versus the third quarter of last year. So that does position us well, obviously for Q4, but as we head into next year.

Steve Tusa, Analyst

Sorry, one last quick question. Regarding transport refrigeration, what is the latest update on that? The orders in North America are very strong, but there might be some timing issues with opening those order books. Europe appears to be a bit weaker. The ACT predicts growth next year, but they reduced their forecast, and there are some changes happening there. What is your current market outlook for that sector moving into next year, on a global scale?

David Gitlin, Chairman and Chief Executive Officer

It's fluid, as you mentioned, Steve. The container part of the business is certainly something we need to keep an eye on. We're facing tough comparisons because last year was a record year, and we expected a decline in Q3, which was approximately 20%. We're monitoring the container situation closely; we've received some recent orders, but it's still a point of concern. NATT showed strong growth in the high teens. As Patrick noted in his remarks, we can't solely focus on the strong third-quarter orders; we need to consider the year-to-date performance, particularly in the European truck/trailer sector, where orders are down. However, we do have a very strong backlog position. It's a bit too early to draw conclusions, especially given the broader economic concerns in Europe. On a positive note, the transition to link in our Sensitech business is performing well. The good news is that our global truck trailer backlog is up 15% year-over-year. I noticed that ACT has revised some of their projections for next year, but NATT remains positive compared to this year, and we're in a good position with our backlog. While it's still early to predict, we have a strong backlog to rely on.

Operator, Operator

And we'll take our last question from Gautam Khanna from Cowen. Your line is open.

Gautam Khanna, Analyst

I wanted to follow up on your comments about residential for next year. It seems uncertain whether there will be a decline or increase in volume, but could you provide some quantitative insights on price cost if we look at commodities today and your hedge positions? Also, how do you anticipate other components will change in terms of year-to-year inflation? What is the potential opportunity for next year? Additionally, can you discuss pricing and what gives you confidence that it will remain stable even if industry volumes drop in the mid- to high single digits?

David Gitlin, Chairman and Chief Executive Officer

Let me begin with the latter point and then hand it over to Patrick for the former. Regarding residential and more broadly for Carrier, one of our major goals for next year is to maintain pricing. We need to monitor commodity prices, particularly copper, steel, and aluminum, which are expected to decrease. While it’s a bit early to definitively say, this shift could be favorable for us as we move into next year, not just for residential but on a global scale. Patrick noted that we are facing some cost increases from our Tier 1 suppliers, which we must manage carefully through Carrier Alliance. We will either work with suppliers who support us or address issues aggressively with those who do not. Our aim is to collaborate more with supportive suppliers. Overall, we anticipate that commodity prices will decline next year, and maintaining price is crucial. However, we will also experience various changes, especially regarding the shift to electrification in our transport business. Patrick, would you like to address the first part of Gautam's questions?

Patrick Goris, Chief Financial Officer

Yes. We touched a little bit on that on the potential tailwind from the commodity. But as Dave said, it's significant. It's too early for us to quantify.

David Gitlin, Chairman and Chief Executive Officer

Okay. Well, listen, I just want to close by saying thanks to all of you on the call, and thanks to the Carrier team. If you look at things over the last couple of years, this team has gone through the same kind of macro challenges all of our peers have gone through with COVID and supply chain challenges. But I can tell you through a person that our 55,000 people come in every day determined to be best in class in everything we do, and we're seeing it in our results. And I know there's certain folks have anxiety as they look at '23. We have optimism because of this great team. So thank you, everyone. And of course, Sam is available.

Operator, Operator

Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.