Earnings Call Transcript
CARRIER GLOBAL Corp (CARR)
Earnings Call Transcript - CARR Q4 2021
Operator, Operator
Good morning, and welcome to Carrier's Fourth Quarter 2021 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 introduce your host for today's conference, Sam Pearlstein, Vice President of Investor Relations. Please go ahead, sir.
Sam Pearlstein, Vice President of Investor Relations
Thank you, and good morning, and welcome to Carrier's fourth quarter 2021 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 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. We'll leave time for questions at the end. 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. Before we get into our Q4 results, let me start on slide two. On Sunday, we announced that we reached a definitive agreement to acquire Toshiba's controlling stake in Toshiba Carrier Corporation, our longstanding HVAC joint venture. This is an important and compelling deal for us that we believe will create significant value for our customers, employees, and shareholders by enhancing our position in the fast-growing variable refrigerant flow and international light commercial markets. We established our minority joint venture with Toshiba in 1999. Carrier had distribution responsibility, with Toshiba having design and production responsibility. Together we have successfully grown TCC to be a world leader, with over $2 billion in sales. This acquisition will enable us to accelerate growth and profitability in this business by consolidating design, production, and distribution under one roof, realizing synergies, and leveraging our global scale to deliver even more differentiated products and solutions to customers globally. Before we talk more about the strategy behind this deal, let me have Patrick quickly discuss the financials. Patrick.
Patrick Goris, Chief Financial Officer
Thank you, Dave. And good morning. Under the terms of the agreement, we will acquire substantially all of Toshiba's interest in TCC for about $900 million. As you can see on the slide, Toshiba owns about 60% of TCC. Taking into account direct and indirect ownership structures of TCC subsidiaries, Toshiba's economic interest in TCC has fluctuated between 30% and 50% over time. Toshiba is retaining a 5% interest in TCC, or less than a 5% economic interest. TCC generated 2021 calendar year sales of about $2.1 billion and approximately $250 million of EBITDA. We have been recording equity income associated with the TCC joint venture and have collected dividend payments as well. After the transaction closes, we will, of course, no longer record equity income but once that we fully consolidate TCC's financial statements. Adjusting for intercompany sales and for the equity income that we recognize today, we expect to add about $2 billion to consolidated sales, EBITDA of about $160 million and operating profit of approximately $90 million before purchase price adjustments such as intangible amortization. The $90 million operating profit is a reasonable proxy for the economic EBITDA we are acquiring. Expected cost synergies of about $100 million will help us increase TCC's EBITDA margins. This acquisition is aligned with themes you have consistently heard from us; profitable growth, simplification, focus, and improved free cash flow. Let me turn it back to Dave for slide three and the strategic rationale behind the transaction.
David Gitlin, Chairman and CEO
Thanks, Patrick. First and foremost, we have been consistent in communicating our determination to become a more significant player in the fast-growing VRF market. In 2015, the global VRF market was about half the size of the applied market. Since then, VRF has grown at more than 2x the rate of the applied market, and we project VRF to continue to outpace supply growth going forward. VRF's growth is no surprise; it is highly efficient, sustainable, modular, has lower installation costs and enables individual zone controls and segregated billing. With the acquisition of TCC, last year's Giwee acquisition, and our own VRF organic growth, our consolidated VRF sales would have increased 4x on an annualized basis since our spin less than two years ago. Second, as you would expect from Toshiba, TCC has highly differentiated technology made possible by its impressive 750 engineers. Its proprietary inverter technology and its award-winning 3-stage rotary compressor technology provide world-class efficiency levels. Third, the Toshiba brand is deeply admired globally, and we have signed a long-term product license to the Toshiba name that will align well with our multi-brand, multi-channel strategy. Lastly, TCC has an excellent complementary global manufacturing footprint with new facilities in China and Poland and impressive factories in India, Thailand, and Japan. We are very excited about this deal and expect it to close by the end of Q3. Now turning to Q4 results on slide four. Q4 was another strong quarter, wrapping up our first full year as an independent public company. Organic sales in the quarter were up 11% driven by continued strength in residential and light commercial HVAC and transport refrigeration. Operating profits and free cash flow came in as expected. Order strength continued, leading to record backlogs, positioning us well for 2022. We also saw continued aftermarket growth, which has been a major focus area for us, and the team continues to establish a more resilient supply chain for the future. Progress in 2021 was very important as we target increased dual sourcing of critical components, increased automation, and new direct relationships with chip manufacturers on security for supply. We have been balancing rising input costs with price increases to reach our goal of being at least price cost neutral in 2022. Our operations team has gone to tremendous lengths to support our customers. I thank all of them for their outstanding efforts. I am proud that the team finished the year well, capping a full year of strong financial performance during which we exceeded all of our expectations.
Patrick Goris, Chief Financial Officer
As you can see on slide five, we came into 2021 projecting organic sales to be up about 5%, and we ended up with organic sales of 15%. Adjusted operating margins grew 80 bps over 2020, despite the supply chain and inflationary challenges, and we invested an incremental $150 million to support continued growth. Adjusted EPS increased 36% year-over-year, well above our initial expectations. Finally, free cash flow of $1.9 billion converted at 114% of net income. In addition to our strong financial results, we successfully executed on our strategic focus areas, as you can see on slide six. ESG and sustainability remain paramount for us, and we made great progress last year towards reducing net Scope 1 and 2 emissions on our way to carbon neutrality in our operations by 2030. We also progressed on our Scope 3 goal of reducing our customers' carbon emissions by more than one gigaton by 2030. We introduced a greater number of electric and heat pump technologies, lower GWP refrigerant offerings, and more energy-efficient solutions for our customers. Unhealthy buildings, we booked about $500 million in orders last year, and the pipeline has grown to about $700 million, more than tripled what it was at the end of 2020. We continue to see strong traction and momentum in verticals like K-12, where orders were up high teens in 2021, and the year-end pipeline is up double digits sequentially from Q3. This validates the high demand for indoor air quality solutions that help rebuild confidence as society reenters schools, office buildings, stores, hotels, and restaurants. Providing customers with data on air quality is one way to build that confidence. Our digital and intelligent capabilities are critical differentiators. We made strong progress on our two platforms of focus; Abound and Lynx. On Abound, we saw adoption by customers in the sports, education, and healthcare sectors. On Lynx, we continue to expand our offerings with Lynx fleet and subscription activations in EMEA truck/trailer and container globally, adding more than 15,000 units in Q4 alone. We are very focused on delivering lifecycle solutions and exceeded our stretch aftermarket targets. We saw double-digit aftermarket sales growth, ending the year with more than 60,000 chillers under long-term agreements, and we plan to add another 10,000 this year. We continue to take a very structured and balanced approach to capital deployment. With the net proceeds from the Chubb divestiture on January 3, we have reduced our net debt from over $9 billion to about $4 billion. We completed four exciting acquisitions and continue to build out our pipeline. We increased our annual dividend by 25% in December and continue to repurchase our shares. We also drove growth cost savings through our Carrier 700 initiatives to help reduce the impact of inflationary headwinds. The entire organization remains focused on driving out discretionary costs, as controlling the controllables is even more paramount in this inflationary environment.
David Gitlin, Chairman and CEO
Slide seven describes our overall view on 2022. Given our strong backlog and overall constructive economic environment and our strategic positioning, we see another strong year of financial performance with organic sales up high single digits on top of the 15% that we generated in 2021. We expect continued margin expansion despite dilution from price costs and acquisitions. We anticipate approximately $1 billion of inflationary headwinds in 2022 and are therefore targeting at least $1 billion or 5% of price realization this year, over 80% of which is carryover from actions taken last year and price increases that became effective in January of this year. Excluding Chubb from last year's results, we expect another year of double-digit adjusted EPS growth and strong free cash flow. Our focus areas heading into '22 remain the same. We will continue to drive innovation and differentiation in our pursuit to be the world leader in healthy, safe, sustainable, and intelligent building and cold chain solutions. We will continue to take concrete actions to increase our already top quartile ESG performance and use sustainability solutions to drive recurring revenues and growth. We are targeting another year of double-digit aftermarket growth while not losing our progress on tenacious cost reduction. Our commitment to disciplined capital allocation remains unchanged, with our strong balance sheet enabling us to play more offense going forward.
Patrick Goris, Chief Financial Officer
Before I turn it over to Patrick, I wanted to provide an update on our upcoming Investor Day. On February 22, members of our leadership team will provide a deeper dive into our attractive growing markets and how we plan to continue to outperform in those markets. With that, Patrick? Thank you, Dave. Please turn to slide eight. Q4 benefited from solid organic growth throughout the segments. Residential and light commercial HVAC and transport refrigeration were important growth drivers in Q4, with organic sales growth well into the double digits. We realized more price than expected in the quarter, but that was more than offset by continued and increased inflationary challenges. Similar to Q3, supply chain constraints impacted our factory efficiency levels and our ability to ship products, but it has left backlogs well positioned to deliver growth in 2022. Adjusted operating profit grew 14% year-over-year, and margins were up 20 bps over last year. Increased year-over-year investments offset the absence of one-time cost items we incurred in Q4 of 2020. Price costs finished about $30 million negative for the quarter versus our October estimate of about neutral. Q4 adjusted EPS of $0.44 benefited from six cents of discrete tax items. As expected, free cash flow was $775 million in Q4 and $1.9 billion for 2021. We’ve repurchased 4.7 million shares in the fourth quarter, and about 10.4 million shares for the year in line with what we shared with you in October. Let's turn to slide nine and cover our segments' performance. HVAC organic sales were up 14% driven by continued very strong growth in residential, light commercial, and our ALC controls business. Residential sales were up high teens and movements were up 6%. Residential and light commercial demand remains very encouraging as orders continued to grow, leading to very strong backlogs as we entered 2022. Distributor movements were up 15% in our light commercial business, leading to field inventories for that business being down low single digits compared to last year. Commercial HVAC was up mid-single digits in the quarter and was impacted by supply chain challenges, particularly in North America. Our aftermarket business grew mid-single digits for the quarter and was up double digits for the year. We met our goal of achieving at least 60,000 chillers in our service contracts by the end of 2021. Price cost was slightly positive in this segment but was a headwind to margin. Acquisitions increased sales by about $90 million for HVAC but did not contribute operating profit given intangible amortization and integration costs. Moving to refrigeration on Slide 10. Organic sales were up 17% as a result of widespread growth throughout the segment. Truck trailer was up almost 30% and container was up over 30%. Electrification capabilities are an important differentiator for us in the segment, as we lead the industry with electric trailer units currently operating in 10 countries and additional capabilities being launched. Commercial refrigeration was up low single digits driven by solid growth in Asia, offset by flattish EMEA sales. Sensitech and aftermarket were both up double digits. Margins were down 10 bps in the quarter compared to last year. Price realization is improving in this segment but is not yet offsetting increased input costs. In addition, operating performance and commercial refrigeration remains a significant opportunity. Moving to fire and security on Slide 11. Organic sales were up 3% as products grew 6%, while Chubb was down 3%. Operating margins expanded by about 60 bps in the quarter. Same for refrigeration, price realization is improving, but price cost was negative. The mix was a tailwind to margin for this segment, as was the absence of one-time items in the fourth quarter of 2020. Slide 12 provides more details on orders performance. Excluding Chubb, company organic orders were up about 20% for the quarter. As I mentioned, residential and light commercial orders remained very strong in the quarter even against difficult comps. Commercial HVAC orders remained strong as well, with backlogs for this business up over 30% compared to last year. Refrigeration saw a mid-single-digit decline in orders for the quarter, mostly because we worked with customers to support demand but did not reopen the second half 2022 order book until January of this year. In other words, timing. We've already noticed a sequential pickup in orders in January. Backlog remains up about 30% in both transport and commercial refrigeration compared to last year. Order intake for our Fire & Security products remained very healthy at over 10%. Growth was led by commercial fire, industrial fire, and access solutions. As you can see on the right side, we saw continued strength in all regions except China. COVID-related measures implemented in China impacted order intake in late Q4, but that seems to have improved since the start of the year. We've seen some delayed projects booked, and commercial HVAC in China saw double-digit order growth in January. Moving on to Slide 13. We saw a $0.13 increase year-over-year in adjusted EPS. Within operational performance, the benefit from higher volume and the absence of 2020 one-time items was partially offset by investments. Price/cost was a $0.02 headwind compared to last year. The effective tax rate was a $0.07 year-over-year benefit and mostly relates to discrete tax items. Finally, we saw a slight pickup from lower interest that gave us an extra $0.01 compared to last year. For your reference, we included a full year 2021 adjusted EPS bridge in the appendix. Moving on to 2022 guidance on Slide 14. Note that our guidance excludes the impact of the pending TCC acquisition. We expect reported sales of about $20 billion in organic sales up high single digits on top of the 15% organic growth we generated in 2021. We expect price to contribute about 5 points of the organic growth and volume 2 to 3 points. Acquisitions are expected to add about $200 million in sales, with minimal operating profit given intangible amortization and integration costs. Adjusted operating profit is expected to be up compared to 2021 on about $600 million of lower reported sales. Operating margin is expected to expand by about 75 bps, helped by the sale of Chubb and despite $1 billion in price realization offset by $1 billion of increased inflation. We expect all businesses within HVAC to have about high single-digit organic growth in 2022. We expect mid- to high single-digit growth in both Refrigeration and Fire & Security. You can see expected adjusted operating margins for each segment on the bottom right. For Fire & Security, this significant margin expansion reflects the higher-margin product business now that Chubb has been sold. I will cover adjusted EPS on the next slide, but just want to point out that our free cash flow guidance includes about $200 million in tax payments for the gain on the sale of Chubb, and also assumes about $100 million of cash restructuring payments. Also, on Slide 21, you will find additional information about 2022 guidance. Let's move to Slide 15, 2022 adjusted EPS bridge at our guidance midpoint. As we've mentioned before, the Chubb sale is a $0.24 headwind to adjusted EPS next year. Operational performance is expected to deliver $0.24 of adjusted EPS growth next year, which is about $250 million of adjusted operating profits. At a high level, think of about $120 million or so of volume leverage and about $300 million of productivity, partially offset by about $100 million each for investments and merit increases. As I mentioned earlier, price costs are expected to offset at about $300 million, productivity will be a major driver of earnings in 2022 and includes about $100 million of G&A reductions. Investments in 2022 will be focused on enhancing our digital capabilities, R&D, and technologies enabling continued G&A cost reductions. Currency and net interest expense are a small headwind and tailwinds, respectively, and the benefit of share repurchases offset a higher expected adjusted effective tax rate of about 22%. That gets us to our midpoint of about $2.25 for next year. We've talked a lot about Carrier 700 in our cost reduction mindset this year, so we wanted to provide more insight on that on Slide 16. The Carrier 700 program was created over two years ago, in a low inflation environment, which obviously does not apply today. Excluding the significant material inflation challenges we faced in 2021, we actually made great progress on our Carrier 700 initiative by driving approximately $300 million of gross productivity savings. Since we historically included material inflation in our Carrier 700 numbers, our net savings were about neutral for the year. Moving forward and starting in 2022, we will measure our gross productivity efforts, excluding the impact of inflation. We plan to manage price to offset inflation. As I mentioned, we expect to drive about $300 million of cost reductions in 2022. We will provide further detail on our long-term opportunity for continued productivity at our upcoming Investor Day, but the bottom line is that cost takeout remains a key focus area at Carrier and will continue to fund investments, annual merit, and drive margin expansion. Moving on to Slide 17. Our priorities for capital deployment remained the same. As you can see on the right side of the slide, we have already committed to $3.75 billion of capital deployment for 2022 and will remain disciplined in capital allocation to maximize long-term shareholder value. The last topic I wanted to quickly touch on is the outlook for Q1 of 2022. We expect to see organic sales growth in each of the three segments, leading to high single-digit organic growth for the company. We expect price costs to be modestly negative in Q1 at a level similar to Q4, with an adjusted effective tax rate of about 15% based on known discrete tax items benefiting Q1, we expect adjusted EPS to be approximately $0.45. Free cash flow is expected to be a use of cash in Q1 of about $100 million. Q1 is typically light and includes tax payments related to the Chubb sale and timing of the incentive compensation payout. In closing, Q4 wrapped up another strong year for Carrier with double-digit organic growth and 36% adjusted EPS growth. Thank you to all of our colleagues and partners, managing and supporting strong demand in a very challenging supply chain environment. With that, I'll turn it back over to you, Dave, to slide 18.
David Gitlin, Chairman and CEO
Thanks, Patrick. So we are very pleased with our 2021 performance, but it is time to look forward. And as we do so, we are very bullish on the strategic and financial opportunities that lie ahead. With that, we'll open this up for questions.
Operator, Operator
Our first question comes from Julian Mitchell with Barclays.
Julian Mitchell, Analyst
Hi, good morning. Just wanted to start off perhaps with the margin sort of cadence through the year at the HVAC and refrigeration segments. Maybe both were down year-on-year in Q4, refrigeration only slightly. But maybe help us understand kind of how you see those margins in that Q1 guide? And how quickly you get back to growth to drive that sort of 40 bps of expansion?
Patrick Goris, Chief Financial Officer
Yes, Julian, it's Patrick here. I'll begin by discussing the Q4 HVAC margins. As you noted, they declined by 100 basis points year-over-year. Volume contributed positively to segment margins by 100 basis points, and acquisitions added nearly $100 million in revenue. However, due to intangibles, operating profit remains slightly negative, which impacts margin by nearly 100 basis points. While price cost was slightly positive for this segment, it actually resulted in a 50 basis point headwind due to lower JV income, which also decreased year-over-year by another half point. Investments largely offset the Q4 2020 items, leading to the total 100 basis points of headwind year-over-year for HVAC. Looking ahead to 2022, I want to provide insights on the overall company rather than just by segment. For Q1, we anticipate segment margins to be comparable to '21, possibly slightly lower by a few tenths of a point. We expect Q2 margins to be similar, while Q3 and Q4 should show improvement in '22 compared to 2021, reflecting our expectations regarding price costs. We foresee Q1 to remain slightly negative in terms of price costs, but anticipate Q2 to be about neutral. By Q3 and Q4, we expect to see slight positivity, which would benefit margins across our segments.
Julian Mitchell, Analyst
That's very helpful. Thank you for that detail. And then maybe one other point around refrigeration. You mentioned in slide 10 commercial refrigeration below expectations. Maybe just help us understand kind of the scale and margin rate of that business? And what you do, how you do expect that to perform? And then any quick commentary on transport refrigeration. How you expect bookings to play out? Obviously, one of your peers sort of frightened people, I think, with some of their comments.
David Gitlin, Chairman and CEO
Yes, Julian. Regarding our Commercial Refrigeration business, it has lower margins, typically in the mid- to high single-digit range. We recognize the need to enhance this business and are focused on it. We're aiming for significant margin growth this year, but last year it underperformed our expectations. We're taking a more aggressive approach to pricing and working on improving operational performance, differentiation, and digital capabilities. The team is dedicated to implementing the right strategies for improvement, and we are confident in our plans for '22 to boost margins. In terms of overall transport refrigeration, the fundamentals remain strong. As Patrick mentioned, we intentionally reduced our order book in the fourth quarter. We have a substantial backlog and are collaborating with customers to ensure we align orders with their needs. We opened the order book again in January, and the orders met our expectations. We are pleased with our backlog in both North American truck trailers and European truck trailers, and the overall market appears to be in a good position. Our main focus is supporting our customers, although we still face challenges with chips and inputs, leading to some operational inefficiencies in our factories. However, we remain optimistic about the business, Julian.
Julian Mitchell, Analyst
Great. Thank you.
Operator, Operator
Our next question comes from Nigel Coe with Wolfe Research.
Nigel Coe, Analyst
Thanks. Good morning everyone. So lots of details, especially in your answer to Julian's question. Just curious, just to confirm the $1 billion, that's just the raw material bucket, so that excludes other sources of inflation? And then maybe just, Patrick, if you maybe break out the price, the $1 billion. I think last quarter, you talked about $350 million, $400 million of awards. So would that mean $400 million from the Jan 1 price increases and then $200 million to be sourced from somewhere else?
Patrick Goris, Chief Financial Officer
Yes. So the first question, I think, on the $1 billion, think of $600 million related to commodities, Tier 1 and Tier 2, and think of the remaining $400 million being other components as well as freight. And so that's the $1 billion. In terms of price realization, the $1 billion. On the call, we said last quarter that the carryover we expected for '22 to be $350 to $400 million, as you mentioned. We actually did better than we expected in Q4 on pricing. We actually delivered about $50 million, $60 million better than what we expected on price, and it also means that the carryover is better. And that's why we say of the overall $1 billion that we now target for this year, all but $200 million of that is either carryover or the prices that we have announced and have become effective in January of this year.
Nigel Coe, Analyst
Great. Thanks, Patrick. Steel is a crucial input, and we are seeing some positive signs with the futures and spot prices for HRC decreasing. What are your assumptions regarding steel in your guidance? Are you anticipating any benefits, or are you just projecting current prices moving forward?
Patrick Goris, Chief Financial Officer
Yes. Nigel, we were not going to get into the details of what we're assuming for steel, aluminum, and copper. I would just say that for aluminum and copper, we're about 70% locked for the year in terms of hedges. We've also have some protection on the steel side as well with some agreements with some of our vendors, but we were not going to get into the specific rates we got locked into.
Nigel Coe, Analyst
Fair enough. Thanks, Patrick.
Operator, Operator
Our next question comes from Deane Dray with RBC Capital Markets.
Deane Dray, Analyst
Thank you. Good morning everyone. I noticed you mentioned an 11% organic revenue growth, but I'm curious if there were any supply chain issues that affected your ability to make shipments. Were there instances where customers weren't ready, or were there parts shortages? Can you provide insight into any missed shipments?
David Gitlin, Chairman and CEO
Yes, Dean, what I'd tell you is that we certainly did have some supply chain issues. What I will tell you is that the bookings have been extremely positive. We do have some overdue sales to our customers. It's probably in the $200 million to $300 million range that we could have gotten had we not had the supply chain issues. But I would tell you that despite that, we went into this year with record backlogs. And I will tell you that I'm very, very proud of the operations team for going to great lengths to support our customers despite the challenges.
Deane Dray, Analyst
Great. And then just congrats on the Toshiba acquisition. We know VRF is a priority. Does this complete the platform for you? Do you need more manufacturing at least like in North America? But just where does that stand in terms of build-out?
David Gitlin, Chairman and CEO
Well, it's kind of one step at a time. What I'll tell you is that our sales in VRF, after we close on the Toshiba acquisition, will be up 4x from the time that we spun. So organic growth on our own VRF business that we had has been very positive. Then we added Giwee. Now we're going to close on Toshiba in the coming months. We're going to be integrating 6,000 phenomenal Toshiba employees into the system. We're going to have a multi-brand, multi-channel strategy. We have to kind of let the dust settle on that, and then we'll assess where we go from there. But our goal in all of our businesses is leadership, and we'll drive that in all segments.
Deane Dray, Analyst
Got it. Very helpful. Thank you.
Operator, Operator
Our next question comes from Jeff Sprague with Vertical Research.
Jeffrey Sprague, Analyst
Thanks. Good morning everyone. First, just a clarification. Patrick, your comment about the Q1 margins being similar to Q1 '21 had Chubb been last year. I just want to make sure we're comparing to kind of the margin with Chubb you're making some adjustment relative to the portfolio change?
Patrick Goris, Chief Financial Officer
Compared to our reported margins from last year, so including Chubb, the external reported ones. And as I said, similar, maybe a few 10 bps lower.
Jeffrey Sprague, Analyst
Okay, great. Thanks for that. And then Dave and/or Patrick, maybe just coming back to Toshiba. I know it's early, and you don't own it yet, but can you give us a little more color on what you might be able to do relative to your own investment spending? I guess I'm kind of thinking of the fleet average of margins now in your VRF undertaking and what synergy or what R&D you might be able to now avoid that you have on the docket internally and just kind of the overall margin trajectory that you would expect out of the VRF effort.
David Gitlin, Chairman and CEO
Yes. Based on what we've communicated, the business we will be acquiring has over $2 billion in sales, approximately $2.1 billion, with $250 million in EBITDA. This indicates the margins on the base business. We expect to achieve $100 million in synergies, which will enhance margins. Additionally, we anticipate margin growth from overall sales increases and our proactive cost-cutting measures across all business areas. We foresee an increase in VRF margins. We recognize that one of our competitors in the VRF sector operates with margins in the mid-20s. While we don't expect to reach that level in the next couple of years, we believe there is considerable potential for margin improvement. Furthermore, a key advantage of the Toshiba acquisition is its strong focus on sustainability. They bring exceptional heat pump technology, which we can leverage in other areas of our business, such as transitioning boilers and burners towards heat pump solutions. By incorporating the technologies from Giwee and Toshiba, we aim to enhance the margins of that segment. Thus, we regard this as an opportunity to expand margins for the core TCC business, contributing to the overall margin growth of Carrier.
Jeffrey Sprague, Analyst
Great. Thank you.
Operator, Operator
Our next question comes from Andrew Obin with Bank of America.
Andrew Obin, Analyst
Yes, good morning. Just a question on product transition in 2022 and how this will sort of impact the cadence, right? And I'm thinking what should we be thinking about second half of '22 as we sort of try to manage the channel, try to manage production, trying to reduce new product ahead of new sort of SEER regulations? How will we see it on the revenue side this year? Will there be anything unusual in terms of annual cadence? Thank you.
David Gitlin, Chairman and CEO
Yes, Andrew, if I understand the question, it's really about North American residential, and as we transition to the new SEER requirements for '23, do you expect an element of pre-buy? I think it will be at the margin. We're expecting our residential business to be up high single digits this year. I mean, the bulk of that is coming. We're getting very good price realization in that business. So the bulk of it is from price. You may get a point or two from volume. There could be a bit of pre-buy in the north because that's state of the manufacturer. We're not really banking on much pre-buy there. So what I will tell you is that what we focused on for 2023 was differentiation, things like copper to aluminum and other key technical attributes that we think would distinguish us in anticipation of 2023. So the products are ready, the manufacturing sites are ready, and we just got to kind of get ready for that ramp as we get into the latter part of this year.
Andrew Obin, Analyst
Great. And just a follow-up question on Toshiba. So how should we think going forward the integration of Toshiba and Giwee because similar technology, different price points, will you maintain two separate brands? Or will there be some form of integration? Because I'm thinking VRF heat pumps, how will that play out? And also from a manufacturing standpoint? Thank you.
David Gitlin, Chairman and CEO
Yes. We will actually have a three-brand strategy. We'll include Toshiba Carrier and Giwee in our VRF space. Chris will elaborate on this during our February 22 Investor Day, but he's going to establish a third segment under his leadership. This will encompass the traditional commercial applied business, residential light commercial, and a third business focusing on the VRF and international light commercial heat pump market globally. This segment will incorporate the Toshiba and Giwee businesses, along with other areas of our heat pump business. We will then implement a multi-brand, multi-channel strategy for this business worldwide.
Andrew Obin, Analyst
Thank you.
Operator, Operator
Our next question comes from Tommy Moll with Stephens.
Thomas Moll, Analyst
Good morning and thanks for taking my questions. I wanted to start on Toshiba and just following up on the multi-brand strategy here. So you'll now have three under the same umbrella. Just in terms of channel or the product portfolios, as they sit next to one another, what are the operational advantages you want to realize here with the three brands, like I said, under one umbrella?
David Gitlin, Chairman and CEO
One of the great aspects of this acquisition is that we focus on the customer perspective. Through the TCC joint venture, we have handled nearly all global distribution, allowing us to gather customer insights. However, the design and production responsibilities have mainly been with Toshiba, which created some disconnect. Now that everything is unified, we can better understand customer needs regarding features, brands, and technologies suitable for specific applications. Toshiba has a strong global presence, especially in China, which enhances its brand value. We have also been expanding the Carrier brand under VRF, with Giwee now included, allowing us to implement a multi-brand strategy. Operationally, Toshiba has an impressive manufacturing footprint, with new factories in China and Poland that can accommodate increased production for Carrier. They also have facilities in Thailand, Japan, and India, creating complementary operations on both sides. Additionally, since HVAC is our core business and represents over half of our sales, integrating Toshiba into our supply chain can yield significant cost savings and enhance operational efficiencies.
Thomas Moll, Analyst
Appreciate it. Dave, shifting gears to the '22 outlook. I wonder if you could provide any detail on the $300 million of gross productivity. Just any timing context you can provide or any of the buckets underneath that supply chain, factory, and G&A that you could provide would be helpful. Thank you.
Patrick Goris, Chief Financial Officer
Yes, Tommy, Patrick here. I mentioned earlier that the G&A component of our productivity for next year will be significantly larger than in 2021, which was $100 million. Many of these actions have already been put into place. Therefore, I believe we won't see a large increase throughout the year. We expect to continue saving on both the factory and direct material sides, including a considerable amount of carryover. I would estimate that Q1 will represent about 20% of the total productivity we're aiming for this year. While we don’t anticipate a significant increase during the year, we do expect an improvement in factory efficiencies starting in Q2 compared to Q4 and early Q1. We're focused on achieving this improvement in factory efficiency.
Thomas Moll, Analyst
Thank you, Patrick. I’ll turn it back.
Operator, Operator
Our next question comes from Josh Pokrzywinski with Morgan Stanley.
Josh Pokrzywinski, Analyst
Hi, good morning, guys. So a lot of good detail, but maybe a couple of questions here on residential. So I know orders in kind of a seasonally lower quarter might not be as telling, but think you're comping like a 20% number from last year with the 50 this quarter sort of getting kind of into serious numbers here. And you said the movement was a little lower than sell-in. Like how do you anticipate distributors sort of react as the channel stabilizes? Like is there a risk that they overshoot? Or as your lead times start to come down, is that something that gives them confidence to sort of trust the system rather than pile it on in their warehouses?
David Gitlin, Chairman and CEO
Let me share some data points, Josh. In the fourth quarter, our movement increased by 6%, and it has remained strong into January. One important highlight is that the transfer of goods from our distributors to dealers has been positive. We are managing our inventories well and don't see any issues arising there. We reported that our splits in the fourth quarter rose by mid-single digits, which aligns with our expectations. As we entered the year, our backlog was nearly three times higher than it was this time last year, indicating a very strong backlog with balanced inventories. While we monitor order rates, we anticipate that orders will be lower year-over-year in the first quarter due to comparisons and the current backlog situation. This does not concern us. Our main focus is on inventory levels and movement, both of which appear to be in line with our expectations.
Josh Pokrzywinski, Analyst
Got it. That's helpful. And then just on Toshiba, obviously picking up a growth of your product category there. But maybe help us with kind of the breakdown of aftermarket versus new construction? Like are you picking up a lot more in new construction exposure? And then what is the structural kind of all-in difference in free cash conversion at the organizational level as part of the transaction?
David Gitlin, Chairman and CEO
Patrick can address the cash aspect. I want to point out that they've recently built entirely new factories in China and Poland, which has led to an increase in capital expenditures over the last couple of years compared to expected levels. Capital expenditures will decrease, and I believe cash flow will stabilize moving forward. There's a good mix between original equipment and aftermarket, and we'll provide more details on that in February. The positive news is that our technology and brand are exceptional. The inverter technology, which supports our 3-stage rotary compressor, truly stands out in the market. When you pair that with our global distribution channel, there's significant potential to make a major impact on the global VRF market. We're very enthusiastic about our growth opportunities, margin enhancement, and establishing a competitive edge with our multi-brand, multichannel strategy. This deal has been a goal for several years, and the timing has finally aligned, which has us very excited. Patrick, do you have anything to add?
Patrick Goris, Chief Financial Officer
On the free cash flow, as Dave mentioned, they've had several years of big investments in new facilities. Our estimate is that for 2021, the free cash flow conversion there was closer to about 80%. Once you normalize CapEx, we see no reason why it would be similar to us, which is about 100% conversion of free cash flow. Of course, once we go through the integration, there might be some one-time costs associated with that, but that is all the work that will be done over the next several months.
Josh Pokrzywinski, Analyst
Awesome, great details.
Operator, Operator
Our next question comes from Joe Ritchie with Goldman Sachs.
Joe Ritchie, Analyst
Thanks. Good morning everyone. Hey guys, can we maybe just start on the investments? I think we originally had you guys doing roughly around $150 million incremental last year. I'm just curious where that shook out, what you expect for 2022 and then maybe just some more kind of qualitative color just around how far you are along in your sales force expansion initiative?
Patrick Goris, Chief Financial Officer
Yes, Joe. For the full year of 2021, we made investments of $150 million, which was in addition to the investments from 2020, as we indicated when we set our guidance for 2021 last year. A significant portion of that was allocated to selling, with the remainder going towards digital and R&D capabilities. For 2022, we are planning to invest $100 million, with a similar distribution among digital capabilities, R&D, and selling. However, I would say that this year we will likely focus slightly more on digital and R&D compared to selling.
David Gitlin, Chairman and CEO
Yes. What I would tell you, Joe, is that I think that a chunk of the selling is just carryover for hires that we made last year. So I don't see '22 being a year of significant adds to our sales force. I think that we felt like we had to get to a certain level, make sure that we integrate our sales force appropriately, appropriately train them, incentivize them, make sure that we are getting the drop-through that we expect. So I think that we're in a bit of a settling out period on that. I don't see significant headcount adds to our sales force because we like where we are going into '22.
Joe Ritchie, Analyst
Got it. That's super helpful. And then clearly, since you guys became a standalone entity, there was a lot of focus around deleveraging and what you could potentially do from a portfolio standpoint. You guys have been extremely active. I'm just curious, as you kind of think about the portfolio today, just any thoughts on maybe additional actions on pieces of the portfolio that maybe are, I don't know, below segment average? I'm just curious how you guys are thinking about portfolio optionality today given all the changes that have occurred in the last couple of years?
David Gitlin, Chairman and CEO
One of the positive aspects, Joe, is that we've positioned ourselves for that flexibility. Since we spun off from UTC less than two years ago, we reduced our net debt from about $9 billion to $10 billion down to just under $4 billion now. This puts us in a strong position for capital allocation. We have plans with Toshiba, and we've discussed increasing the dividend by 25% this year along with a share buyback of approximately $1.6 billion. We also have ample resources for further acquisitions. We have made significant progress in expanding our pipeline. Currently, we are focused on integrating Toshiba, but we are also keeping an eye out for potential acquisitions. We want to ensure that any targets align with our strategic priorities in healthy, safe, sustainable, intelligent building solutions, and cold chain solutions. We are actively reviewing our current portfolio to ensure that it aligns with our goals and that we can be the best owners of those assets. We will keep looking outward for opportunities while also refining our existing operations.
Joe Ritchie, Analyst
Make sense. Thanks so much.
Operator, Operator
Our next question comes from Steve Tusa with JPMorgan.
Steve Tusa, Analyst
Hey guys, good morning. So just on the pricing, what was the absolute price capture for the company on a dollar basis in Q4?
Patrick Goris, Chief Financial Officer
A little over $200 million, Steve.
Steve Tusa, Analyst
Okay. So you're saying that the $1 billion for '22 includes $800 million of carryover and then things you're starting on January 1? Does that mean the additional $200 million is something you're considering for later in the year? How much visibility do you have on that extra $200 million? Am I understanding that correctly?
Patrick Goris, Chief Financial Officer
Steve, you are looking at it the right way. In terms of visibility, I think this is something over the next couple of months, not six months from now. So it is more concrete than we're thinking about it.
Steve Tusa, Analyst
Okay. Got it. And then just one last question regarding the HVAC incrementals in the fourth quarter. I understand there's a lot happening. Can you remind us if the unusual headwinds in the fourth quarter of 2020 were around $100 million? Is that still the figure to consider for this year? I just wanted to clarify that.
Patrick Goris, Chief Financial Officer
Yes, I'll do so. Last year, Q4 was closer to $50 million for the overall company. HVAC being the largest segment got the majority of that. That was mostly not completely offset by incremental investments in the segment in Q4 of '21. Other items I mentioned were about a 0.5-point headwind in HVAC because of price cost, even though price/cost was slightly favorable. The JV income and acquisitions were a slight headwind as well for HVAC in Q4 '21.
Steve Tusa, Analyst
Wasn't there some contract renegotiation charge or something like that in 4Q '20 as well?
Patrick Goris, Chief Financial Officer
There was something contract-related that was part of that.
David Gitlin, Chairman and CEO
That was part of the $50 million.
Patrick Goris, Chief Financial Officer
Part of that $50 million.
Operator, Operator
Our next question comes from Vlad Bystricky with Citigroup.
Vlad Bystricky, Analyst
Good morning, everyone. Thank you for taking my call. A lot has already been discussed. Could you provide some comments on the positive order momentum? What are you observing in terms of market share across the portfolio, especially in HVAC? Additionally, how are you managing your goals for margin expansion while also pursuing faster growth and increasing market share?
David Gitlin, Chairman and CEO
Well, obviously, we want to make sure that we get margin expansion, but we've seen very good price realization. I think a lot of the share gains that we've seen are in part because of the investments we've made in things like digital differentiation, technology differentiation, and the additional sales force we've had. We've also worked very closely with our distribution partners to improve those relationships and how we support our customers. Our operational performance; is I think, really helping us in our ability to support the demand that's out there. We gained about 130 bps in share and splits last year. We gained about 350 bps in light commercial, and that is not at the on the pricing side through anything we're doing there. In fact, I would tell you, we've been appropriately aggressive on the pricing side given some of the dynamics we're seeing on the input side. So we have to do both. We have to grow the business. We're focused on differentiating the business, and we have to have margin expansion. I think we've done a nice job of balancing those.
Vlad Bystricky, Analyst
Okay. That's really great color and helpful. And then maybe just continuing on the growth front. You've talked in the past about opportunities in resi HVAC to drive stronger parts sales in that business. Can you talk about what kind of traction you're seeing with that initiative? And how much of a tailwind that can be over the next couple of years?
David Gitlin, Chairman and CEO
We want to provide lifecycle solutions for our customers across our business. To increase parts sales in the residential segment, it's essential that we collaborate effectively with our suppliers, distribution partners, dealers, and end customers. We have implemented a new strategy to ensure that our customers receive the parts they need promptly and at the right price. This area has been a key focus for us and has provided a positive boost.
Operator, Operator
That concludes today's question-and-answer session. I'd like to turn the call back for closing remarks.
David Gitlin, Chairman and CEO
Okay. Well, thank you all for joining. We're looking forward to seeing you here down at Palm Beach Gardens on February 22. Thank you all.
Patrick Goris, Chief Financial Officer
Thank you.
Operator, Operator
This concludes today's conference call. Thank you for participating. You may now disconnect.