Earnings Call Transcript
CARRIER GLOBAL Corp (CARR)
Earnings Call Transcript - CARR Q2 2022
Operator, Operator
Good morning, and welcome to Carrier's Second Quarter 2022 Earnings Conference Call. This call is being carried live on the Internet, and there is a presentation available to download from Carrier's website at ir.carrier.com. I would like to now introduce your host for today's conference, Sam Pearlstein, Vice President, Investor Relations. Please go ahead, sir.
Sam Pearlstein, Vice President, Investor Relations
Thank you, and good morning, and welcome to Carrier's second quarter 2022 earnings conference call. With me here today are David Gitlin, Chairman and Chief Executive Officer; and Patrick Goris, Chief Financial Officer. Except as otherwise noted, the company will be speaking to results from operations, excluding restructuring costs and other significant items of a non-recurring and/or non-operational nature, often referred to by management as other significant items. The company reminds listeners that the sales, earnings and cash flow expectations and any other forward-looking statements provided during the call are subject to risks and uncertainties. Carrier's SEC filings, including Forms 10-K, 10-Q and 8-K, provide details on important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements. Once the call is opened up for questions, we ask that you limit yourself to one question and one follow-up to give everyone the opportunity to participate. With that, I'd like to turn the call over to our Chairman and CEO, Dave Gitlin.
David Gitlin, Chairman and CEO
Thank you, Sam, and good morning, everyone. I'd like to start by saying how proud I am of the Carrier’s team's ability to deliver strong results amidst the current backdrop of inflation, continued supply chain challenges, and COVID lockdowns overseas. Our team's hard work, fueled by our high-performance culture, resulted in another quarter of solid organic sales and adjusted operating profit growth, capping a strong first half and enabling us to raise our full year adjusted EPS guidance. Looking specifically at our Q2 results on slide two, we delivered 7% organic sales growth, expanded operating margins by 130 basis points, and increased adjusted operating profit by 4% year-over-year despite the Chubb divestiture. Price/cost was positive in the quarter, and we now expect to be price/cost positive for the year. Our backlog is up 20% compared to last year. Aftermarket performed particularly well and was up double digits. Free cash flow improved meaningfully compared to last quarter, but was the use of cash. Turning to slide three, the value creation framework that we outlined at our Investor Day has not changed, driving above-market organic growth, expanding margins, delivering strong free cash flow and disciplined capital allocation. We recognize that there are concerns about slowing economies. In such times, we do not need a new playbook. We doubled down on the playbook that we have. We are focused on controlling the controllables, and our track record demonstrates that we execute in the face of challenges. We are playing offense, investing in growth, particularly digitally enabled aftermarket solutions. We have effectively driven price and aggressively driven cost out of the system, and our strong balance sheet provides us with plenty of flexibility for value-added capital deployment, including investments that will benefit from the compelling multiyear secular trends of a healthy and sustainable environment as you see on slide four. Indoor air quality is critical to our health, safety, and cognitive performance. Studies show that improved ventilation and filtration reduce the spread of microscopic particulates, including COVID, by up to 80%. But indoor air quality does more than prevent the spread of airborne illnesses. Eight percent of children suffer from asthma, and improved ventilation in schools reduces their symptoms. Students also performed better with improved indoor air quality; 60% of K-12 classrooms have inadequate ventilation today. Studies show that cognitive performance improves by two times when optimizing CO2 and VOC levels. Proper filtration systems are equally important and can prevent harmful outside air, whether from forest fires or pollution, from entering the classroom or the home. Indoor air quality is no longer a nice-to-have; it's critical to our health and safety and our ability to perform. We are responding to the challenge. K-12 orders were up over 35% in the first half of the year. In Q2, we saw a 20% year-over-year increase in healthy building orders, and the pipeline remains at over $800 million. Some key wins include a new US theme park featuring air handling units, antimicrobial coating, and UV light technology, an industrial manufacturing facility upgrade in China with air handling units and HEPA filtration. Carrier also won the opportunity to partner with a large school district in North Carolina to provide holistic HVAC solutions for three new schools that were prioritized into air quality. Customers not only want healthy air environments in their schools, office buildings and restaurants, but also in their homes. Our diversified portfolio offers unique solutions. For example, our Kidde business recently introduced a series of smart, healthy, and connected products that includes the industry's first integrated smoke, carbon monoxide, and indoor air quality detectors. We are also excited about our recent Healthy Homes partnership with Procter & Gamble. We will start by educating our respective consumers on the benefits of healthy homes with a vision towards joint marketing and promotion activities in the future. On sustainability, the last nine years rank among the ten warmest years on record. Recently, we saw record temperatures in the UK and Germany, where less than 5% of homes have air conditioning. Demand for AC is increasing in those countries and we are poised to support this demand in a sustainable manner. Addressing increased demand for air conditioning with sustainable solutions is critical to help reduce emissions and fight climate change. Therefore, we remain committed to providing innovative energy-efficient solutions using low GWP refrigerants and coupling them with digital capabilities to optimize asset utilization and energy efficiency. A proof point of our progress on differentiated solutions is in our North American light commercial business, where our rooftop units will now feature our innovative EcoBlue technology. This technology improves performance and efficiency, while decreasing installation and maintenance costs through our exclusive patented beltless direct drive vane axial fan system, an industry first for rooftop units. Our units equipped with EcoBlue are up to 40% more energy efficient compared to the industry's traditional belt drive fans in a similar footprint, a real game changer. It's the same with heating, where various factors are driving an accelerated shift away from fossil fuels and toward heat pump solutions. This shift presents a significant opportunity and we start from a position of strength. We have the market-leading position in European commercial heat pumps and are the leading player in residential and light commercial heat pumps in North America with over 30% of our residential split today comprising heat pumps. We are also investing in effective and low-temperature heat pump solutions. We have successfully completed all of the requirements for the Department of Energy's residential cold climate heat pump challenge, where we validated a coefficient of performance higher than 2.1 at an ambient temperature of 5 degrees Fahrenheit, and we are now commercializing that solution for market introduction. Including the heat pump revenues of Toshiba Carrier, an acquisition that we expect to close in early August, we will have about $2 billion of annual heat pump revenues globally, and we are confident that the combination of Toshiba Carrier, Giwee, and our Riello business in Italy will enable us to grow in the European residential heat pump market with compelling product offerings. We see the same shift to electrification in our transport refrigeration business, with demand for our all-electric vector equal units steadily increasing. Dawson Group, along with many other transport companies, added Carrier Transicold Vector eco units to their fleet to be more efficient and sustainable. We are expanding our market leadership position in this space. Regarding digitalization, we continue to enhance our Abound and Lynx platforms to further differentiate our life cycle solution offerings. Abound continues to gain traction in verticals ranging from commercial office and university buildings to data centers to national retailers with our focus remaining on providing scale customers with the solutions that they desire. Our Advanced Lynx Digital platform aimed at significantly improving the cold chain through enhanced visibility and increased connectivity received a silver ranking from the Edison Awards for excellence in supply chain innovation. Like Abound, we are adding new features to Lynx. Our recent Lynx fleet rollout incorporates customer feedback and provides key alerts and metrics around fuel and battery levels and asset run hours. These notifications shown in a summary dashboard helped to minimize unit downtime and loss, ultimately reducing our customers' operational costs. We remain on track to have 100,000 Lynx subscriptions by the end of this year. Another critical growth driver is higher-margin aftermarket and recurring revenues, which you see on slide five. Aftermarket has been up double digits through the first half of the year, and we're on track for another year of double-digit growth. All of our three segments saw double-digit aftermarket growth in Q2. Commercial HVAC is now up to over 15,000 connected chillers, putting us ahead of schedule for 20,000 connected chillers this year. We also remain on track for 70,000 chillers under BluEdge LTAs by the end of this year. Before I turn it over to Patrick, a bit more color on the Toshiba Carrier acquisition on slide six. TCC's technology positions us well to accelerate the VRF international light commercial and heat pump opportunities. TCC's pioneering inverter technology, coupled with its rotary compressors allow for dynamic and intelligent balancing of air-conditioning demand, thereby providing customers with greater energy efficiency, longer life, and quieter system operation. We will deploy our multi-brand, multichannel strategy to further penetrate critical markets. Our complementary global footprints and supply chains give us confidence in achieving run rate synergies of $100 million. We created a new business unit within the HVAC segment, Global Comfort Solutions, with a strong leadership team based in Tokyo. Global Comfort Solutions will include the TCC and Giwee acquisitions, as well as our European Riello business and the light commercial business outside of North America. The team has been working on detailed execution plans, and collectively, we're ready to go. 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 $5.2 billion were down as expected due to the Chubb divestiture. Currency translation was a higher than expected headwind of 3%. All segments grew organically in the quarter, resulting in 7% organic growth for the total company. The impact of the Shanghai lockdowns on Q2 sales was in line with our expectations, roughly $100 million. All segments realized significant price in the quarter more than offsetting higher than anticipated inflation. Q2 adjusted operating profit was up 4% compared to last year despite lower reported sales. Adjusted operating profit in the quarter includes the benefit of about $35 million or $0.03 of favorable one-time items. Our results included gains on the sale of two Toshiba Carrier joint ventures and one refrigeration joint venture. These transactions are consistent with our plans to simplify Carrier and reduce the number of minority owned joint ventures. Even excluding these one-time items, operating profit was stronger than expected, mainly as a result of productivity and better price-cost despite currency headwinds. Q2 adjusted operating margin was up 130 basis points compared to last year, whereas price/cost was positive in Q2, it was still dilutive to margins. Adjusted EPS of $0.69 was stronger than expected, mainly due to better than expected margins. For your reference, we have a year-over-year Q2 adjusted EPS bridge in the appendix on slide 17. Free cash flow was the use of $34 million. We paid about $70 million of taxes on the gain related to the Chubb sale in Q2. In addition, stronger than expected sales in June, particularly the second half of June, led to higher receivables. Inventories were relatively flat sequentially. Supply chain challenges have not yet subsided and continue to affect our inventory levels. Starting with slide 8, we will cover our segment's performance in more detail. HVAC organic sales were up 8%, driven by double-digit growth in residential and our ALC controls businesses. Q2 residential movement was flat. After the weak May, movement was up very strongly in June. Residential HVAC growth was driven by price. Our light commercial business was down mid-single digits due to supply chain challenges and a tough comparison as Q2 of last year grew over 60%. Light commercial demand remains very strong. As we expected, commercial HVAC saw modest low single-digit growth in the quarter due to the impact from the Shanghai lockdowns. Adjusted operating profit for the HVAC segment was up 5% compared to last year driven by strong productivity, favorable price-cost, and the higher equity income from the TCC gains I mentioned earlier, which are reflected in equity income in this segment. Operating margin was down 70 bps compared to last year, mainly due to the impact of price-cost and lower volumes, which offset strong productivity and the margin impact of the one-time gains. We expect the HVAC segment to remain price-cost positive for the full year. The consolidation of TCC will dilute margins of this segment by about 100 basis points this year as we will no longer record equity income related to TCC but instead will consolidate its entire income statement and incur about $20 million in upfront integration costs. Our current expectation of HVAC's full-year 2022 operating margin is, therefore, about 15%. Moving to refrigeration on slide nine, organic sales were up 9% in the quarter, driven by high single-digit growth for both transport and commercial refrigeration. This is despite an almost 40% reduction in China refrigeration sales related to the lockdowns and related project delays. Within transport refrigeration, container was up low single-digits on top of last year's almost 40%. North America and Europe truck trailer saw double-digit growth as some of the component shortages that held up deliveries in Q1 were resolved in Q2. Sensitech continues to deliver solid results as it grew low teens in the quarter. Adjusted operating margins were up 230 basis points compared to last year, mainly due to volume, productivity improvements, and the small one-time gain on the sale of a joint venture. Commercial refrigeration margins were up almost 300 basis points sequentially. We are pleased with the progress this segment made in the quarter. Moving on to Fire & Security on slide 10, excluding Chubb's sales from the second quarter of 2021, Fire & Security segment sales were up 4%. Adjusted operating margins expanded 310 basis points in the quarter, mainly because of the Chubb divestiture and strong productivity. Price/cost was positive in this segment as well. Slide 11 provides more details on orders performance. Total company organic orders were flattish for the quarter. Backlog remains at very healthy levels throughout all segments. As we expected, residential HVAC and transport refrigeration orders were down in the quarter as both businesses continue to proactively manage their order book. Backlog for both residential and North America truck trailer refrigeration continued to grow sequentially. Light commercial orders were up about 25% in the quarter, signaling continued strong demand in that business. Commercial HVAC also saw solid continued demand in the quarter, marking its sixth consecutive quarter of double-digit orders growth with growth across all regions and backlog up about 20% compared to last year. Refrigeration orders were down approximately 20% in the quarter. The segment's backlog remains up almost 10% year-over-year with transport refrigeration backlog of mid-teens along with a slight decline in commercial refrigeration backlog as we are very much focused on the profitability of that business. Demand for Fire & Security products remains healthy, up about 10% to 15%. As you can see on the right side, order activity was flattish in the Americas and down in EMEA. China orders were down in the quarter, primarily due to the Shanghai lockdowns, but the Asia region, excluding China, saw strong demand. Before talking about guidance, I wanted to provide an update on capital deployment. In the quarter, we repurchased about $275 million worth of shares, consistent with our plan to complete the remaining authorization by the end of the year. Year-to-date, we've repurchased about $1 billion. We borrowed approximately $400 million under the yen denominated term loan earlier this week that will be used to partially fund the $900 million TCC acquisition. The balance will be funded by cash. Consistent with what we shared with you in February, our full-year debt reduction will be about $750 million. The divestitures I referred to earlier further simplify our portfolio and are expected to yield approximately $75 million in after-tax proceeds, which we expect to collect in the second half of the year. Our actions will continue to be consistent with the capital deployment priorities we laid out at our Investor Day, and our balance sheet provides plenty of flexibility for continued balanced value-add capital deployment. Now moving on to guidance on slide 12. Performance in the first half of 2022 has been better than expected. In addition, our updated guidance now includes the impact of consolidating TCC into our financials. Last quarter, I mentioned that we expected price to exceed $1 billion for 2022. We now expect the year-over-year impact from price to be closer to $1.5 billion. The additional revenue from price will be mostly offset by the unfavorable impact of currency translation and slightly lower volume as a result of supply chain challenges. We expect the TCC acquisition to add about $800 million in revenues this year. With that, we are increasing our adjusted EPS guidance range by $0.05 to $2.25 to $2.35. This is primarily due to the strong performance year-to-date, lower net interest expense and a lower share count, offset by a headwind from foreign exchange. The earnings impact of higher price is largely offset by increased input costs. We do not expect an adjusted EPS impact from TCC this year, as operating profit contribution is expected to be mostly offset by the loss of equity income and integration costs. As we expected, excluding the equity income from these joint ventures and consolidating the income statement, we will reduce full-year 2022 operating margin by about 30 to 40 basis points. In addition, because equity income is our share of after-tax income, consolidating TCC will increase our effective tax rate for the full year 2022 by about 25 to 50 basis points. Importantly, this does not change our actual tax expense or the dollars of income, but only changes the tax rate calculation. We continue to expect to generate approximately $1.65 billion in free cash flow this year. Achieving this target has become more challenging, given continued supply chain headwinds, but the team is focused on better working capital performance in the second half. Lastly, as we shared in the press release this morning, effective with the close of TCC we will exclude the impact of intangible amortization related to M&A activity from Carrier's adjusted operating profit, adjusted net income, and adjusted EPS. The nature of this acquisition requires us to step up the value of the 60% economic interest in the joint venture we already own, which would drive unusually high amortization. We believe this adjustment provides investors better information to evaluate our operating performance. We estimate the full year 2022 adjusted earnings will now exclude about $20 million or $0.02 of intangible amortization related to acquisitions compared to our prior guidance. For your benefit, we included a guide-to-guide adjusted EPS bridge on slide 18. So overall, another good quarter and an improved outlook for 2022. With that, I'll turn it back over to you, Dave.
David Gitlin, Chairman and CEO
Well, thanks, Patrick. We are pleased with our performance through the first half of the year. Our backlog instills confidence in our outlook for the second half, and I am confident in our team's ability to keep driving strong results. With that, we'll open this up for questions.
Operator, Operator
Certainly. And our first question comes from Joe Ritchie from Goldman Sachs. Your question, please.
Joe Ritchie, Analyst
Thanks. Good morning, everyone.
David Gitlin, Chairman and CEO
Good morning, Joe.
Patrick Goris, Chief Financial Officer
Good morning, Joe.
Joe Ritchie, Analyst
Hey, everyone. It was a solid quarter. I'm wondering if you could break down the residential HVAC performance this quarter. It seems like the revenue was mainly driven by price increases. Can you clarify how much pricing has changed in this segment, as well as in the broader HVAC business? Was there any growth in volume this quarter? Additionally, with commodity prices declining, how do you feel about your ability to maintain those price levels? How do you expect this to impact margins moving forward?
David Gitlin, Chairman and CEO
Let me start with the latter piece, and then Patrick can discuss the pricing on the first part. Our goal, Joe, is to keep the price increases that we've gotten. You'll recall we came into the year expecting $1 billion of pricing this year, which about $20 billion of sales would have been about 5%. We're now looking at $1.5 billion of price, which is a 7.5% or so realization for the year. Our expectation is that we maintain that price, not just in residential but across the portfolio. In some parts of the business, we needed more discipline in any case on pricing, like in our commercial refrigeration business where the team has done a nice job. So our expectation is that we certainly retain price as we get into the second half of this year, into next year. And then we'll see about the commodities. If they continue to come down, things like copper, steel, and aluminum, that should be some tailwind as we get into next year, but we'll have to see on that piece. But we're pretty well blocked for the second half of this year, but our hope and expectation is that, if they remain low, it would be a bit of a tailwind as we get into 2023.
Patrick Goris, Chief Financial Officer
So, Joe, on the first part of your question, for the HVAC segment, most of the organic growth was price. And so volume was actually slightly negative there. And that's, of course, impacted by the commercial HVAC performance, which was, as we expected, given the Shanghai lockdown. And we expect commercial HVAC growth to pick up in the second half of the year.
Joe Ritchie, Analyst
Got it. That’s helpful. You mentioned that things started to pick up around June. Can you discuss the trends as you were finishing up the quarter? Also, it's still early in the third quarter, but could you share some insights about the beginning of July?
David Gitlin, Chairman and CEO
We observed a significant increase in residential activity, especially in June, where movement rose by about 10% compared to the weaker performance in April and May. This is an aspect of the residential sector that we monitor closely, so it was encouraging to see this uptick in June. The trend has continued into July, which is promising as we aim to keep our inventory levels balanced by year-end. We are making considerable efforts to manage inventory while supporting our customers. It's reassuring to note that movement has remained strong over the past few months. Additionally, other areas of our business have improved as we recovered from supply chain disruptions throughout June. We are still facing challenges, particularly related to chip shortages, which account for roughly two-thirds of our issues. However, in sectors like transport refrigeration, we began to see improvements in control systems towards the end of the quarter, which contributed positively to our output in June.
Joe Ritchie, Analyst
Helpful. Thanks guys.
David Gitlin, Chairman and CEO
Thank you.
Patrick Goris, Chief Financial Officer
Thank you.
Operator, Operator
Thank you. Our next question comes from Julian Mitchell from Barclays. Please go ahead with your question.
Julian Mitchell, Analyst
Hi, good morning. Maybe just a first question around the orders outlook. So the orders were flattish in Q2 after what had been four or five quarters of extreme strength. So just wondered if the orders development was broadly in line with what you were thinking, how we should think about that orders year-on-year trend in the back half. And I suppose particularly interested in transport refrigeration, where I think the ACT data has been fine. You obviously had a pretty steep decline in orders. So maybe how are you thinking about that in particular as well for the back half on orders?
David Gitlin, Chairman and CEO
Yeah, Julian, let me give some color on orders. If you take about half of our business, orders were up double digits. Commercial HVAC has been up double digits now for six quarters in a row. So we're very pleased with the orders that we're seeing in commercial HVAC. And underlying that, we look at ABI, which you know the Architectural Billing Index has been north of 50 for 17 straight months. So that's very encouraging. Our F&S business, which doesn't get as many questions, they had double-digit orders, like commercial had double-digit orders. I think it was in the range of 25%. So there was more of a supply chain issue supporting the output, but orders have been extremely strong in light commercial. The real two areas that kind of gave Carrier an overall flattish were residential and truck trailer. On residential, we usually measure backlog in terms of weeks, say, four weeks or so in terms of backlog. We're sitting at about four months. So as backlog normalizes, we've been saying now for many quarters in a row that we expect year-over-year orders to come down for residential and that is not the metric that we track. We track movement, we track inventory levels. We expect orders to decline, but we're still sitting on very strong backlog. And in truck trailer to your specific question there, we have been managing the order book, especially in North American truck trailer with our customers. So it's something that we're very well-positioned in terms of our backlog in truck trailer. We watch those ACC metrics for next year. I think it used to be in the double-digit range. It's probably high single digits is what they're saying for right now, but the backlog is good. So the two areas, residential and truck trailer are things that we're being quite purposeful in. And then we expected container to be down, and it was down given the very, very tough compares. And the last thing I'll mention is CCR. CCR orders were challenged a bit, but what we have to figure out is how much of that is driven by the market and how much is driven by us. We were very clear with our team that we expect to improve margins on CCR and we're going to bid things at the right margins, and we're not going to bid things at the wrong margin. So we did see orders decline a little bit, but we also saw a significant improvement in margins, which is encouraging to see. So, Julian, we're sitting on backlog levels that are up more than 20% over last year. We will continue to watch orders in light of what everyone is concerned about with economic slowdowns. But for us, what we see is nothing less than what we expected in some cases, actually beyond what we expected.
Julian Mitchell, Analyst
Thank you, Dave, that's helpful. I’d like to ask about the implied EPS for the second half based on the full year guidance. Can you highlight any insights on how earnings might split between the third and fourth quarters? Are there any trends regarding margins year-on-year that we should be aware of, particularly between Q3 and Q4 in relation to price and costs?
Patrick Goris, Chief Financial Officer
Yes, so Julian, Patrick here. We actually expect organic growth to be pretty similar in Q3 and Q4, close to 10% each, maybe a little bit below. It’s not unusual for us to see just over 50% of our second half of the year in Q3. Therefore, we anticipate a slightly higher EPS in Q3 compared to Q4, while maintaining a similar overall growth rate.
Julian Mitchell, Analyst
Great. Thanks, Patrick.
Patrick Goris, Chief Financial Officer
Thanks Julian.
Operator, Operator
Thank you. And our next question comes from the line of Nigel Coe from Wolfe Research. Your question please.
Nigel Coe, Analyst
Thanks. Good morning. Good morning Dave, Patrick, and Sam.
David Gitlin, Chairman and CEO
Good morning.
Nigel Coe, Analyst
Good morning. Lot to have this morning. Sorry Patrick, I didn't quite understand the amortization point. Are we now sort of on a for FY 2022 on a cash EPS basis. And the principle of my question is the add back, you've got a lot more amortization through your P&L. So, I'm not quite sure why it's $0.02, not something a little bit higher than that. So, if you can just clarify that, that would be great.
Patrick Goris, Chief Financial Officer
Sure. Hi Nigel. The way you can think about this is in our current P&L and our outlook we had back in April, we had about $0.02 for the full year amortization of intangibles related to acquisitions. With the acquisition of TCC, our amortization expense will likely go up by about $100 million. And what's kind of interesting is we already own today economically 60% of the overall interest in Toshiba. So, our amortization expense would go up significantly, including for the part that we already own of Toshiba. We have decided to exclude the amortization related to acquisitions going forward, and so compared to the prior guidance, that is a $0.02 improvement in adjusted EPS. Of course, the impact going forward would be significantly higher because of the large increase in amortization expense that I just mentioned.
Nigel Coe, Analyst
Okay. And the reason why we haven't got accretion from Toshiba in the back half of the year, obviously, ex-amortization is because of the integration cost that you're absorbing in the P&L. Okay, that's very clear. Thanks Patrick. And then on the step-up in pricing from $1 billion to $1.5 billion, was that due to additional price actions that you didn't have in place as of April, or was it due to just better yields on the announced price increases?
David Gitlin, Chairman and CEO
I think it's a bit of both. We came into the year pretty well-priced. We had to do a bit more to get to the $1 billion. And we've actually announced subsequent price increases as the year has gone along. So we announced a recent price increase for our North American commercial, light commercial HVAC business. Refrigeration and both Fire & Security have had to announce price increases during the course of the year. And then I will say that our realization has been a bit higher than we had planned. So I think it's a combination of within your price announced increases plus realization.
Nigel Coe, Analyst
And then just based on where commodities are right now, the way they're trending, do you anticipate that we're now beyond the price increases? And maybe if we could just focus more on the residential business here, that would be helpful.
Patrick Goris, Chief Financial Officer
Nigel, regarding copper, steel, and aluminum, we are clearly observing the trends there. It is too early for us to determine the trends for other components we purchase for residential HVAC to know if we have reached the end of cost increases. This is certainly something we are actively negotiating. However, I would not conclude that aside from steel, copper, and aluminum, we are on a downward trend.
Nigel Coe, Analyst
Understood. Thanks very much.
Patrick Goris, Chief Financial Officer
Thank you, Nigel.
David Gitlin, Chairman and CEO
Thanks Nigel.
Operator, Operator
Thank you. And our next question comes from the line of Tommy Moll from Stephens. Your question please.
Tommy Moll, Analyst
Good morning and thanks for taking my questions.
David Gitlin, Chairman and CEO
Hi, Tommy.
Tommy Moll, Analyst
I wanted to drill down on HVAC margins. If I recall correctly, last quarter, you guided us for this quarter as 2Q down year-over-year, and you gave some factors there. Can you give us any similar insight into 3Q, if not quantitative, then maybe qualitative?
Patrick Goris, Chief Financial Officer
Well, Tommy, first of all, with respect to Q2, the margins came in a little bit better than we expected. Of course, the gain helped with that. That was about 80 or so bps. But I will also say that for Q2, we still saw a headwind on price-cost from a margin perspective. So price-cost positive from a dollar operating profit perspective, but price-cost for the HVAC segment was still about 100-point headwind on operating margin in the quarter. For the balance of the year, HVAC margins will, of course, be impacted by the consolidation of TCC. We expect for the full year now the margins of HVAC to be down to be closer to 15% versus 16% prior guide. And including for Q3, we still expect a sizable headwind from price-cost on HVAC margins.
Tommy Moll, Analyst
That’s helpful. Thank you, Patrick. And Dave, I wanted to circle back to some of your commentary around orders. You walked us through some of the parts of the business where orders trended down in the second quarter and you gave some reasons why. But you also alluded to what I think a lot of investors are focused on, which is just is there any sign of an economic slowdown that you're seeing in your business? And you gave us some reasons why that might not be the case, just simply looking at your order trends. But are there any macro signs that you can point to that may have moderated a bit or maybe falling short of what you would have expected even if we're not currently seeing it in the orders of the P&L?
David Gitlin, Chairman and CEO
The direct answer is not really. I mean, we saw orders decline in China, but we wouldn't blame that on the macro, we would blame that on the COVID-related lockdowns. I think if we had to look for one area that came in a little bit lower than we expected, it was in CCR and to some extent, in European truck trailer orders in the quarter. I would say a couple of months, it's too early to call a trend. But the thing in particular with CCR that we have to watch is how much is self-induced because of our pricing discipline and how much is market related. The true answer is we don't know just yet, because this is probably the most aggressive we've been in that company's history. So we'll have to keep an eye on that. But by and large, North America remains strong. Southeast Asia, which we don't talk a lot about, was extremely strong. China was weak, but we expected it. We'll have to see how the rest of Q3 plays out. And again, residential and truck trailer, it wasn't alarming because a lot of that was us managing the order book and inventory levels.
Tommy Moll, Analyst
Appreciate it, Dave. That’s helpful and I’ll pass it back.
David Gitlin, Chairman and CEO
Thanks, Tommy.
Patrick Goris, Chief Financial Officer
Thanks, Tommy.
Operator, Operator
Thank you. One moment for our next question. And our next question comes from the line of Deane Dray from RBC. Your question, please.
Deane Dray, Analyst
Thank you. Good morning, everyone.
David Gitlin, Chairman and CEO
Hey, Deane. Good morning, Deane.
Patrick Goris, Chief Financial Officer
Good morning.
Deane Dray, Analyst
Hey, Dave, that statistic a lot of headlines with the UK on average household only 5% with some form of air conditioning. How prepared is Carrier for this expected ramp in kind of new capacity? And are you seeing any of that demand given the past couple of months?
David Gitlin, Chairman and CEO
Well, it's one of the reasons that we're very excited to close on Toshiba. Toshiba really positions us in that kind of multifamily, in that light commercial space globally in places like Germany and the UK. So obviously, we're not a major player in Europe for single-family homes. But when you get into the multifamily homes, our Toshiba technology, and Giwee to some extent, position us very well. And then for the larger, obviously, commercial HVAC, we would say that we're doing extremely well. So we're positioned well for that demand in Europe. And then it's the same on the heat pump side, which is as we get into these winter months, we would say that we're number one in commercial HVAC heat pumps in Europe, and that's going to be a big trend that people are going to be talking a lot about is the transition to heat pumps in Europe as well. So when you see parts of the world that have never had air conditioning before, whether it's Portland, Oregon and Seattle or now London and Frankfurt, you're going to see us leaning into that AC space, but also with more sustainable solutions as well, because, obviously, we want to be part of the solution, not part of the problem, on climate change.
Deane Dray, Analyst
It's great to hear that. The K-12 opportunity looks promising, and summer is typically a peak season for construction activity, so there should be a lot happening right now. How does this situation compare to past cycles, especially in light of the indoor air quality mandate? I'm concerned about potential shortages of construction labor or parts that could impact what should be a significant installation period during the summer.
David Gitlin, Chairman and CEO
Yes, the current macro concern in the US is labor constraints. However, we are very optimistic about the K-12 sector and don’t believe it will significantly hinder our opportunities. There is a total of $190 billion in ESSER funding for K-12, with $140 billion still unallocated. The majority of the funding, specifically from SR3, will go towards larger appropriations. Our K-12 orders increased by 35% in the first half of the year, and among the sectors likely to thrive during an economic downturn, K-12 is well-positioned due to the available funding. We've dedicated a team to this area, and they are performing well, so we remain very encouraged by the K-12 space.
Deane Dray, Analyst
All good to hear. Thank you.
David Gitlin, Chairman and CEO
Thank you, Deane.
Operator, Operator
Thank you. And our next question comes from the line of Gautam Khanna from Cowen. Your question please.
Gautam Khanna, Analyst
Yes, thank you. I have two questions. First, I'm interested in the price elasticity in the residential business, considering all the price increases announced by the industry and the decline in commodities. Do you believe the industry will be able to maintain prices next year? If there are any pricing pressures, where do you expect them to arise? Will it be in the commercial sector? What insights can you provide on that? Then I have a follow-up.
David Gitlin, Chairman and CEO
Yes, let me first comment on residential. We've observed that the industry has managed to increase prices despite the challenges posed by commodity costs, and we’ve been able to maintain these prices. We anticipate this trend will continue into next year, partly due to the transition to the 2023 higher SEER units, which will come with a price increase of 10% to 15%. Hence, we will need to monitor the elasticity curves. It's important to note that we will not sustain the same rate of price increases we've experienced recently; there have been six increases over the past 18 months, and while that trend will lessen, we don’t foresee a decline in prices at this point. In fact, as we move into next year, we expect prices to rise due to the SEER shift. More broadly, we have all faced situations where we had to raise prices, but we are fortunate to be in markets where we sell essential products. Whether it’s life safety equipment, transporting critical vaccines or food, or replacing an air conditioner during a heatwave, these products will always be in demand. Thus, we’ve successfully implemented price increases and expect to maintain them going into next year. We will keep a close watch on the elasticity curves, but currently, we do not anticipate any price decreases.
Gautam Khanna, Analyst
Thank you. And just as a quick follow-up, David, you made some comments early on about supply chain improving and controls. And I just wondered if you could maybe give us some metrics around where the supply chain has gotten better, where it hasn't and what your visibility on the areas are that it happens. How is it going to trend over the next couple of quarters? Thanks.
David Gitlin, Chairman and CEO
Yes. What we saw at the end of the second quarter was we were waiting on controls and some of our reefer units that had been in inventory for a while, and we saw those get delivered and we were able to release those units to the field. So, that was encouraging. At a more macro level, we have not seen the sustained improvement on the supply chain that we expect to see yet. We're still dealing with chip issues in a significant way, and that contributes to about two-thirds of our problem. We said last quarter that we would redesign 30% of our critical components by the end of last quarter, 50% by the end of the year. We continue to do that, but we continue to see challenges, not just with chips, but things like motors and other suppliers continue to surprise us. And that does cause productivity issues in the factories, and it does cause us to hurt our customers where today, we are sitting on hundreds of millions of overdue to our customers. So we are counting on supply chain improving as we get into really Q4 leading into next year, and we're going to need that to make sure that we hit our cash numbers in the back half. And we also are still looking at logistics. The good news is that spot rates have come down; the bad news is that because of supply chain challenges, we're having to do a bit more airfreight than usual. So we're anticipating improvement as we get into the back half of this year, and I think the team is doing the right things, but it does continue to be a challenge.
Gautam Khanna, Analyst
Thank you.
David Gitlin, Chairman and CEO
Thank you.
Operator, Operator
Thank you. And our next question comes from the line of Steve Tusa from JPMorgan. Your question please.
Steve Tusa, Analyst
Hey guys, good morning.
David Gitlin, Chairman and CEO
Hi, Steve.
Steve Tusa, Analyst
So just on the price/cost, can you just give us the absolute price and cost numbers for the second quarter? And then you gave us the price for the year, but what's the cost estimate for the year? And then I have a follow-up.
Patrick Goris, Chief Financial Officer
Yeah, Steve. So in Q1, I said that price was over $300 million. In Q2 price overall company was about $450 million. And it was a price cost positive, but still dilutive to margins. So if you do the math, it's maybe a couple of pennies.
Steve Tusa, Analyst
And then for the year, what are you expecting now on cost? I think it was $1 billion before? What are you expecting now on cost?
Patrick Goris, Chief Financial Officer
We expect price to be about $1.5 billion. And again, we expect price cost to be positive; it's going to be pennies; it's not going to be a dime. So it's below that and still price on margin dilutive by about 40 bps for the overall company.
Steve Tusa, Analyst
Got it, got it.
Patrick Goris, Chief Financial Officer
Just for your info, on a two-year stack, we're about neutral now to slightly positive.
Steve Tusa, Analyst
Right, right. Yeah, that makes sense. And then, Patrick, I think in response to Julian's question, you said the second half would be kind of a 50-50 weighting 3Q, 4Q when it came to EPS. I guess, I'm a little bit surprised because 4Q usually is seasonally weaker, and I just want to make sure I'm doing the math right. That's like $0.55-ish for both quarters.
Patrick Goris, Chief Financial Officer
Steve, I said to Julian or I mentioned a little over 50%. So I think close to 60-40.
Steve Tusa, Analyst
Okay, that makes a lot more sense. And then one last question, what is your current outlook for residential market volume for the year?
David Gitlin, Chairman and CEO
I would say that volume is going to be up like low single digits. Overall, residential we were up 20% in the first half. Second half will be about 10%. So call the full year about 15%. We had previously said residential was going to be, I think, high single digits. So in that 8% to 10% range, it's now going to be closer to 15%. The bulk of that from price, but we do expect some volume in the low single digits.
Steve Tusa, Analyst
Okay. Awesome. Thanks for the color. Appreciate it.
David Gitlin, Chairman and CEO
Thank you.
Operator, Operator
Thank you. One moment for our next question. And our next question comes from the line of Andrew Obin from Bank of America. Your question, please.
Andrew Obin, Analyst
Hi. Yes, good morning.
David Gitlin, Chairman and CEO
Good morning, Andrew.
Andrew Obin, Analyst
Just a question, going back to the whole chip supply, how much visibility do you have into next year? And are you counting more on existing capacity freeing up, coming out of places like Asia, or new incremental capacity being added in North America, how do you think about improving chip supply going forward? What's the biggest driver?
David Gitlin, Chairman and CEO
Well, we work with folks, our friends at TI and NXP and Microchip and others. And right now, we are trying to really, for our critical shortages, design around chips that are available. We do know that our partners are building capacity as we get into next year, and that's hopefully going to come on sooner rather than later. I think over time, the CHIPS Act once that goes through, will be beneficial. But for now, it's a fairly tactical exercise around redesigns while we really anxiously anticipate and await the additional capacity coming online next year into 2024.
Andrew Obin, Analyst
I have a follow-up question. It appears that, not just for you but for everyone, the mix is shifting towards lower SEER units due to chip availability. How much of an improvement can we expect structurally on a like-for-like basis as the mix improves and chips become more available next year, eventually leaning towards high-end products? How should we consider the impact of this mix in the future? Thank you.
Patrick Goris, Chief Financial Officer
Actually, Andrew, I think that one of the benefits we may see is with the new regulations. We estimate that over half of the residential market is at the lowest SEER level, with the new regulations in 2023, it means that we think that a little over half of the market will mix up, if you want. Meaning 10% to 15% price increase and from a margin perspective positive from a margin dollar perspective and at least neutral from a margin percent point of view. And so, we think that may be the biggest driver from a mix shift point of view.
Andrew Obin, Analyst
Right, but that assumes you can get the chips available.
Patrick Goris, Chief Financial Officer
Yes, but we're already in production for those new units, and we're starting to sell them this month.
Andrew Obin, Analyst
Terrific. Thanks a lot.
Patrick Goris, Chief Financial Officer
Thank you, Andrew.
Operator, Operator
Thank you. One moment for our next question. And our next question comes from the line of John Walsh from Credit Suisse. Your question, please.
John Walsh, Analyst
Hi. Good morning, everyone.
David Gitlin, Chairman and CEO
Hey, John.
Patrick Goris, Chief Financial Officer
Good morning, John.
John Walsh, Analyst
Hey. So a lot of ground covered on HVAC and refrigeration. I wanted to talk a little bit about the Fire & Security margin. I think last quarter, you kind of suggested you were looking a little bit better than the 16% you had put out there. Wondered if we could just get a little bit of a bridge back H2, H1 on the fire and security margins.
Patrick Goris, Chief Financial Officer
Yes. In the Fire & Security segment, we anticipate two factors will contribute positively in the second half of the year. First, we expect organic growth rates to be higher in the second half compared to the first half. The second factor is price-cost dynamics. In the first quarter, Fire & Security was neutral in terms of price-cost, but we expect this to be favorable in the latter half of the year. We believe that these two elements together will significantly enhance margin performance for this segment.
John Walsh, Analyst
Great. And then just going back to pricing, if we could talk about the commercial pricing in HVAC, is this all structural? Are there any kind of fuel surcharges or things that might reverse out? And then just anything around spares pricing as well there on the commercial side? Thank you.
David Gitlin, Chairman and CEO
Yes, we believe structural; we're trying to the best of our ability avoid surcharges or things that are ephemeral in nature. So, it's structural. It's actual price increases that we intend to sustain. And the second part of the question?
John Walsh, Analyst
Just around the ability to also push through on non-contractual pricing outside of service or spare parts at that.
David Gitlin, Chairman and CEO
We have been focused on improving our approach by creating more algorithms, similar to what we did in the aerospace sector, and analyzing elasticity curves at the part number level. The team has developed better pricing models for parts, which has been an area of significant focus and success for us.
John Walsh, Analyst
Great. I'll pass it along. Thanks.
David Gitlin, Chairman and CEO
Thanks John.
Operator, Operator
Thank you. And our next question comes from the line of Vlad Bystricky from Citigroup. Your question please.
Vlad Bystricky, Analyst
Morning guys. thanks for taking my call.
David Gitlin, Chairman and CEO
Hey Vlad.
Vlad Bystricky, Analyst
So, maybe just as a follow-up on Fire & Security, obviously, a lot of talk about the chip situation on the HVAC side. But can you talk about the supply chain and electronics component availability in Fire & Security and whether that's any different than what you're seeing on the HVAC side and how you see that resolving?
David Gitlin, Chairman and CEO
Yes, I would say, Vlad, it's actually been even more acute for Fire & Security than it has been for HVAC. In particular, in one of our highest margin businesses, which is Access Solutions. We've had very strong demand in parts of that business, whether it's for LenelS2 or our BlueDiamond or even our Onity and Supra businesses, which are quietly very well-positioned businesses, high margin. The team is doing a great job, and we're really plagued by chips in those businesses. Our supplier partners know it. They've been working with us to support us, but that's where a lot of our overdue has been. So, we talked about coming into the year, as Patrick said, at about a 16% ROS. The expectation is to be a bit higher than that. The reliance is on recovering on some of our higher-margin businesses that have been really impacted by chips. We are anticipating a recovery as we get into Q4 there. I mean, it's not just it's not just hope. There are specific part numbers that we track that we know when they're going to get redesigned when we line of sight to it, but it has to happen over the next few months.
Vlad Bystricky, Analyst
It's encouraging to know that you are expecting some improvement. I’ll be monitoring that closely. Turning to Toshiba Carrier, which is obviously a significant deal for you, could you discuss the opportunities you anticipate in the acquisition process happening in August? What changes do you foresee that wouldn't have been possible under the previous joint venture structure? Additionally, could you provide some details on the timeline for realizing the $100 million in synergies?
David Gitlin, Chairman and CEO
Sure. I have to say, we are very excited. We mentioned early in August that we expect to close early next week. So we are preparing and ready to proceed. The team has been working on integration for the past six months, and we have collaborated effectively with Toshiba Corp and the TCC team. What we have discovered is that as a joint venture partner, being a minority partner, we did not have control over design or production or the joint venture as a whole. Our role was primarily in distribution globally. However, as we assess the situation now, we have traveled internationally and found a significant demand for this product line. It features exceptional inverter technology, allowing the use of rotary compressors, which are cost-effective, and it has distinct technology and a strong brand, particularly in markets like China where Toshiba will be our premium brand, followed by Carrier and then Giwee. So as we get into things like European heat pumps, especially for residential, we're talking to some of the OEMs there that are really pulling for our compressor and condensing unit designs. We were traveling in the Middle East where we see there's so much excitement, and they can't wait for us to close. So I can tell you that the excitement on the product line is building. Toshiba has brand-new facilities, TCC in places like Poland and China that we can really leverage across our portfolio, and there's also phenomenal supply chain opportunities between the two companies. So we said $100 million on a run rate basis over the next, I would say, five years or so. And we're confident that we're going to achieve that.
Vlad Bystricky, Analyst
Sounds good. Very exciting. Thank you guys.
Operator, Operator
Thank you. This does conclude the question-and-answer session. I'd like to hand the program back to management for any further remarks.
David Gitlin, Chairman and CEO
Okay, well, thank you everyone for joining in. While I know it's a busy morning, of course, we and Sam are around for questions. So thank you all.
Operator, Operator
Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.