Earnings Call Transcript
CARRIER GLOBAL Corp (CARR)
Earnings Call Transcript - CARR Q4 2022
Samuel Pearlstein, Vice President of Investor Relations
Thank you, and good morning, and welcome to Carrier's Fourth Quarter 2022 Earnings Conference Call. Joining me today are David Gitlin, Chairman and Chief Executive Officer, and Patrick Goris, Chief Financial Officer. We will be discussing certain non-GAAP measures during this call, which management believes are important for evaluating the financial performance of the business. These non-GAAP measures are reconciled to GAAP figures in our earnings presentation, which can be downloaded from Carrier's website at ir.carrier.com. The company wants to remind listeners that the sales, earnings, and cash flow expectations, along with any other forward-looking statements mentioned during the call, are subject to risks and uncertainties. Carrier's SEC filings, including Forms 10-K, 10-Q, and 8-K, offer details on significant factors that could lead to actual results differing materially from those expected in the forward-looking statements. With that, I would 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. Our Q4 results for sales, earnings and cash flow were all in line with our expectations, as you can see starting on Slide 2. We delivered organic sales growth of 5%, supported by another quarter of double-digit growth in light commercial and commercial HVAC, global truck and trailer and aftermarket. Pricing remained strong and our realization continued to offset inflationary headwinds. Supply chain improvements continued, allowing for a reduction of our past due shipments with further improvements anticipated in 2023. Our backlog, which ended up mid-single digits year-over-year, up 40% on a two-year stack and up 2x from 2019 remains at very healthy levels. Adjusted operating margins of 10.1% were flattish compared to last year, despite a 70-basis point impact from the consolidation of the Toshiba joint venture. We made great progress on our productivity initiatives in the quarter and achieved our full year target of $300 million in savings. Adjusted EPS was $0.40 in the quarter at the high end of our guidance range. We generated about $1 billion of free cash flow in the quarter ending 2022 with $3.5 billion of cash, allowing us to continue to play offense with capital deployment as we head into 2023. Moving to Slide 3. I am proud of our team's accomplishments last year. We delivered on our full year outlook for sales, adjusted operating margin and adjusted EPS while significantly advancing our strategic priorities. We drove 8% organic sales growth, adjusted operating margin expansion of 60 basis points and adjusted EPS growth of about 15% when we exclude the impact of the Chubb divestiture. Though we did fall short of our original $1.65 billion free cash flow guide we discussed in October, resulting from supply chain and related inventory challenges, we did deliver on our revised guidance of $1.4 billion as a result of our strong Q4 performance. So, our track record of delivering results without surprises continues, and our team is poised to continue to deliver in 2023, in part because of key secular trends that drive demand, as you can see on Slide 4. Our customers continue to look to us for healthy and sustainable solutions, and we have differentiated offerings that meet their needs, particularly in the fast-growing heat pump space. Our North America residential heat pump sales grew 35% in the quarter and European commercial heat pump sales were up 30%. We expect those areas to only grow stronger as the Inflation Reduction Act and the RePower EU initiative propel increased adoption. Additionally, Toshiba's innovative and leading inverter technology continues to impress. When combined with our multi-rotary compressors, heat pump efficiency and capacity dramatically improve. Toshiba's technology and expertise are also helping us penetrate the attractive and growing residential heat pump market in Europe. Our position in transport electrification is also market-leading. We have units operating in 15 countries and plan to ramp significantly with more than half of refrigerated transport units sold to be electric by 2030. The healthy building trends continued to be a positive in the quarter as orders were up over 80% and our pipeline increased to over $1 billion. For the full year, healthy building orders were up about 50%. K-12 also remains encouraging with our pipeline up about 60% year-over-year, and with almost two-thirds of the federal government's ESR funds yet to be allocated, we expect further acceleration into 2023. As we continue to distinguish ourselves as a climate systems and solutions company, we remain focused not only on achieving our own ESG goals but also helping our customers achieve theirs as well. We recently increased our previous aggressive 2030 net-zero targets, committing to set greenhouse gas emission reduction targets in line with the science-based target initiative criteria. Additionally, Carrier continues to be recognized in the ESG space, including distinguished recognition in London, where our customers' heating network will provide a 50% reduction in carbon emissions to network participants. We also continued to perform on our aftermarket growth objectives, as you can see on Slide 5. When we became a stand-alone public company in early 2020, we emphasized increasing aftermarket growth rates from historical low single-digit levels. And last year, we produced another year of double-digit aftermarket growth. Our focus remains on providing differentiated digital solutions through our Abound and Lynx platforms and connecting not only our new products but also our significant installed base. Our Abound technology now monitors over 1 billion square feet, and we recently onboarded over 100 commercial office sites for a key large-scale customer. We recently released the Abound Net Zero management, which provides customers with an easy way to view, track and analyze energy usage and emissions data across their global footprint and proactively identify conservation measures. We've made similar progress with our innovative Lynx platform and launched several new capabilities in the quarter. We expanded our reefer health capabilities to include early refrigerant leak detection and launched a managed services linked fleet offering for a major grocery retail chain in the U.S. We achieved our goal of having 70,000 chillers under long-term agreements by the end of 2022 and expect to increase that by another 10,000 in 2023. Importantly, we also achieved our objective of having 20,000 connected chillers and plan to connect another 10,000 this year. We recently announced a strategic collaboration agreement with Amazon Web Services to jointly build, market and sell Carrier's digital solutions. Not only are we delivering on our financial and strategic imperatives, but we are also making great progress on our portfolio optimization and executing on our capital deployment priorities as you can see on Slide 6. You'll recall that at the time of our spin, we carried approximately $11 billion of debt on our balance sheet and cash of about $1 billion. Over the course of just 2.5 years, we have reduced our net debt levels nearly in half from that $10 billion level to $5.3 billion while increasing our strategic organic growth investments by over $300 million. We have also completed a number of compelling acquisitions highlighted by the consolidation of Toshiba Carrier. All acquisitions have been strategic and core to our business focused on enhancing sustainability leadership, accelerating aftermarket growth, driving digital and technology differentiation, and expanding adjacencies and geographic coverage. We've also been disciplined in evaluating our existing portfolio to ensure each business is core and that we are the best owner. As a result, we optimized our portfolio by completing the sale of Chubb and reducing our minority joint venture count from 41 to 29 since the spin. In addition to our portfolio moves, we've been disciplined and proactive with our other capital deployment actions. We have steadily and consistently increased our dividend and have completed about $2 billion in share repurchases since the spin. All of this to say, we have made great progress over the last few years, but that does not mean that we are done. We are always evaluating acquisitions in our current portfolio for potential opportunities for simplification and value creation. We will remain steadfast in our commitment to keep evaluating our portfolio as we enter 2023 and beyond. Patrick will cover our 2023 guidance in more detail, but I will emphasize a few highlights on Slide 7. Focus remains very thematic for us. All of our 52,000 team members are aligned on our key priorities, and those priorities remain consistent. Carrier 2.0 is a term that we have been using internally, which represents a very purposeful shift from a primary focus on selling equipment to now using digital and innovation to provide our customers with sustainable and healthy outcomes throughout the lifecycle of our product and service offerings. The result will be our continued pursuit of higher margin, high aftermarket growth rates. We remain focused on reducing costs and expect to get another $300 million in productivity in 2023. We are clear-eyed about the broader economic challenges and uncertainty in 2023 and have done our best to calibrate macro factors in our guidance that you see along the left of this slide. We expect to deliver solid organic growth, strong margin expansion, excluding TCC and high single-digit to low double-digit adjusted EPS growth. Strong free cash flow and a very healthy balance sheet enable us to play offense on capital deployment. 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 8. In short, Q4 was very much in line with our expectations and the guide we provided. Reported sales were $5.1 billion, with 5% organic sales growth driven by about 8% price with volume down a couple of points. I'll provide a bit more detail on a future slide, but in essence, we saw continued strong organic growth in HVAC, Fire & Security, and global truck and trailer, which was partially offset by a very weak quarter in container and, to a lesser extent, commercial refrigeration. The Chubb divestiture reduced sales by 10% in acquisitions and, substantially all Toshiba Carrier increased sales by 8%. Currency translation was a headwind of 4%. All segments were price/cost positive or neutral in the quarter. Q4 adjusted operating margin was about flat compared to last year, driven by a 70-bps margin headwind related to the TCC acquisition. Strong productivity almost completely offset the margin headwinds related to the lower volume and the TCC acquisition. Adjusted EPS of $0.40 was consistent with the upper end of our full year guidance range. For your reference, we have included the year-over-year Q4 adjusted EPS bridge in the appendix on Slide 20. $1 billion of free cash flow in the quarter was also as expected, and we generated about $1.4 billion for the full year. Moving on to the segments, starting on Slide 9. HVAC reported sales included a 16% benefit from the TCC acquisition. HVAC organic sales were up 9%, driven by low single-digit growth in residential, over 40% growth in light commercial and mid-teens growth in commercial HVAC. Sales growth was driven by both price and volume. Residential movement was down about 10% in the fourth quarter and quarter-end field inventory levels ended up higher than the flat year-over-year levels we targeted. Residential HVAC growth was driven by price as volume was down mid-single digits. Commercial HVAC had another very strong quarter with double-digit sales growth in applied equipment, aftermarket, and controls. All regions grew double digits. Adjusted operating margin was up 60 bps with volume, price/cost, and productivity more than offsetting a 100 bps margin headwind related to TCC. Full year operating margin for this segment was 15.2%, in line with the guide we provided post the TCC acquisition, which had about a 70 bps dilutive impact on 2022 for this segment. Transitioning to refrigeration on Slide 10. Organic sales were down 7% and currency translation was a 7% headwind. Within transport refrigeration, North America Truck/Trailer sales were up low teens and European Truck/Trailer was up high teens. This continued strong performance was more than offset by container, which was down about 50% year-over-year driven by demand softness as well as a tough comp in the prior year. This is the second competitive down quarter for the container business and historical down cycles for this business have lasted about four quarters. Commercial refrigeration was down high single digits year-over-year, as our European food retail customers continue to be pressured by inflation and energy prices. Adjusted operating margins for this segment were up 60 bps compared to last year despite lower sales with the margin headwind of lower volume, more than offset by productivity and price cost. Full year operating margin of 12.8% was slightly ahead of our 12.5% guide and expanded over 70 bps compared to 2021, despite lower sales as our refrigeration team managed price costs and delivered strong full year productivity to offset the impact of lower volume. Moving on to Fire & Security on Slide 11. As expected, the Chubb divestiture had a significant impact on reported sales. Organic sales growth was 6%, driven by price with volume down low single digits. Operating margin was short of our expectations for this segment due to continued high supply chain and logistics costs and operational performance challenges. As a result, full year operating margin of 15.2% for this segment was short of our 16% operating margin guide. Slide 12 provides more details on backlog and orders performance. As our backlogs normalize in some of our shorter-cycle businesses, such as residential HVAC, we expect order trends to adjust accordingly. We have seen that trend over the last few quarters, and in Q4, particularly. As you can see on the left side, total company organic orders were down roughly 10% for the quarter and up compared to 2019 and 2020. Backlog ended the year up mid-single digits compared to last year, with backlog growth in HVAC and Fire & Security, partially offset by backlog reduction in refrigeration. As expected, Residential HVAC orders were down in Q4. Light commercial demand remains robust as orders were up mid-teens in the quarter. The backlog is up well over 2x for that business. Commercial HVAC saw double-digit orders growth for the eighth consecutive quarter. The commercial backlog is now up 35% compared to last year and extends well into 2023. Refrigeration orders were down roughly 10% in the quarter, driven by market weakness in container and commercial refrigeration that was only partially offset by Global Truck and Trailer. North America Truck and Trailer continued to have strong orders in the quarter, up over 100% compared to last year. Global Truck and Trailer backlog is up high single digits as the strength in North America offset order weakness in Europe. Container orders were down about 50% compared to a very strong fourth quarter last year. Commercial refrigeration orders remain weak and reflect market softness. Finally, demand for our Fire & Security products was mixed. Orders were positive in roughly half of the businesses, including residential fire and access solutions. Fire & Security Products backlog is up almost 30% year-over-year with double-digit growth in all the businesses, except residential fire in the Americas. Overall, we entered 2023 with strong backlogs and continued strong order trends in commercial and light commercial HVAC and North American Truck and Trailer. Businesses experiencing softer order intake include container, commercial refrigeration, and residential HVAC. Now moving on to our '23 guidance on Slide 13. We expect reported sales of about $22 billion, including organic sales growth of low to mid-single digits. Almost all the organic growth will be priced as we expect volume growth to be flattish. We expect currency translation to be about one point headwind while acquisitions, primarily the impact of Toshiba Carrier, will contribute about 6% to the growth. Adjusted operating profit is expected to be up compared to 2022 with operating margin at about 14%, including a 50 bps dilutive impact from Toshiba Carrier. We expect high single-digit to low double-digit adjusted EPS growth in 2023. I'll provide more color on that on the next slide. We expect a 23% adjusted effective tax rate and full year free cash flow of about $1.9 billion or about 100% of net income. Our free cash flow guidance assumes approximately $75 million of cash restructuring payments and about $100 million tax headwind, since Congress has not renewed the full expensing of R&D. As shown on the right side of the slide, we expect mid-single-digit organic growth in HVAC as continued strong growth in light commercial, commercial HVAC, and aftermarket are more than offset by flat residential. Reported HVAC sales growth should be in the low teens, given the additional contribution from seven more months of consolidating Toshiba Carrier. In Refrigeration, we expect flattish organic sales as continued strong growth in Global Truck and Trailer is offset by container and commercial refrigeration. For Fire & Security, we expect low single-digit organic growth. We expect the HVAC segment operating margin to be similar in 2022 despite absorbing about 100 bps of pressure from the consolidation of Toshiba, and expect operating margin expansion in Refrigeration and Fire & Security. Let's move to Slide 14, adjusted 2023 EPS bridge at our guidance midpoint. Our operating profit is expected to be up about $200 million, despite flattish volume growth. Price/cost and gross productivity combined are an expected operating profit tailwind of $500 million, with $200 million coming from price/cost and $300 million coming from gross productivity. Annual merit adjustments and investments amount to about $200 million in total, and we expect about a $50 million additional headwind of TCC integration costs. There are some other minor smaller moving pieces, but that all adds up to roughly $200 million in increased adjusted operating profit. Core earnings conversion, which excludes the impact of acquisitions, divestitures, and FX, is about 35% at the guidance midpoint. Moving to the right on the bridge, some modest savings on net interest expense and a lower share count offset the expected higher tax rate and currency translation headwinds. That gets us to our midpoint of about $255 million for next year or 9% growth compared to 2022. As usual, we provide estimates of other items in the appendix on Slide 19. On Slide 15, you'll see that our capital allocation priorities remain the same. In 2023, we expect about $400 million in capital expenditures. We recently announced another significant dividend increase, and our dividend payout ratio is about 30%. Finally, we target $1.5 billion to $2 billion in share repurchases in 2023. Before I turn it over to Dave, let me provide some additional color on the first quarter. We expect a $0.06 headwind from a higher effective tax rate of about 25% compared to 16% last year. In addition, we expect our first quarter to be the weakest quarter from an organic revenue growth perspective with organic sales growth flat and volumes down. This reflects continued growth in the HVAC and Fire & Security segments and a decline in the Refrigeration segment driven by container and commercial refrigeration. We expect residential HVAC to be down mid-single digits in Q1. Recall that our Q1 '22 residential HVAC sales were up an industry-leading 23%, so certainly a tough comp for that business. Overall, we expect revenues in Q1 to be a little over $5 billion and adjusted EPS to be between $0.45 and $0.50. We expect first half adjusted EPS to be about $0.45 to $0.50 of full year earnings, the reverse of 2022. And as usual, free cash flow will be more weighted to the second half. We expect organic revenue growth to sequentially improve after Q1 with easier comps in the second half of 2023. With that, I'll turn it back to Dave for Slide 16.
David Gitlin, Chairman and CEO
Thanks, Patrick. We delivered strong performance in 2022, and we are targeting another strong year this year as we continue to execute and control the controllables. We continue to see opportunities to use our strong balance sheet to create value for our customers, shareholders, and the planet for future generations to come. With that, we'll open this up for questions.
Operator, Operator
And our first question coming from the line of Julian Mitchell with Barclays. Your line is open.
Julian Mitchell, Analyst
Hi. Good morning. Just wanted to start with maybe the first quarter outlook there. So it sounds as if you've got maybe the operating margins firm-wide down perhaps sort of 200 to 300 points or so year-on-year. Just wanted to check if that's the case. And is the bulk of that downdraft really coming in HVAC presumably? And if it is, kind of what's the confidence that you can get back to full year margins in HVAC being flattish given the headwinds in residential for the year?
Patrick Goris, Chief Financial Officer
Julian, good morning. Patrick here. The margins in Q1 we expect them to be down about 200 basis points, and there are really three elements to it: One, acquisitions, and that is HVAC specific, expected to add over $500 million of revenue, but with very little operating profit contribution. Two, volume mix, as I mentioned, is expected to be down in the first quarter. That's not just in residential HVAC, but is also impacting, of course, the refrigeration segment. That's the secondary contribution to the 200 bps or so margin contraction in Q1. The third element is price cost. We expect price cost to be close to neutral in Q1, which actually is a headwind to margin in the first quarter. And that is across the three segments. So that gets to about a 200 bps margin contraction in the first quarter. In the second quarter, we would expect to return to year-over-year EPS growth.
Julian Mitchell, Analyst
That's helpful. And maybe just following up on the HVAC segment overall for the year. So I think you talked about a flattish margin there at sort of 15% plus in that business, and you've got organic sales guided up about mid-single digit for the year. Maybe just clarify for us what you're expecting there on your residential volumes, perhaps within that guide? And then any sort of weighting on things like the productivity savings, just trying to understand where you get the offset in that HVAC margin, if there's a mix headwind and a TCC margin headwind as well?
David Gitlin, Chairman and CEO
Well, Julian, let me start with a little bit of color on kind of residential and what we're seeing across the mix between residential, light commercial, and commercial, and then Patrick can give a little bit of color on the margins themselves. We do expect for residential in 2023. We're expecting flat sales, flattish sales, but we get there with volume being down potentially high single digits, offset by mix and price. So when you think about residential, we're looking at new construction potentially down 20%, 25%. Now remember, that's only about 20% to 25% of residential, but some of our customers are saying it could be much better than that; some are saying it's in that range. So we'll have to see as we get into the second half of the year, but we've calibrated residential new construction down 20%, 25% and replacement down mid-single digits. We are seeing that offset that gets us the flattish sales for the year driven by mix and price. So we have some price carryover. We've just announced a new price increase of 6% that's effective in March. We're going to mix up this year, as you know, because of the new SEER units that are coming in and we are pricing 10% to 15% higher, and we're also seeing a mix up as we transition to heat pumps. Also in the mix is that we do see a strong year for light commercial, which was, as Patrick said, up 40% in the fourth quarter, that continues to be very strong. And our backlogs in commercial with a nice mix with aftermarket of double digits, controls up double digits, helping that piece. Patrick, maybe comment on the full year.
Patrick Goris, Chief Financial Officer
Yes. On the margins, Julian, we're comfortable with the margin outlook for HVAC in 2023 of about 15%. Dave mentioned about aftermarket. But I did also mention that price cost is expected to be a tailwind for us of $200 million in the year. That dials in some benefits from what we call deflation. A lot of that sits in the HVAC segment. In addition, I mentioned that we're focused on delivering another $300 million of productivity in 2023. We did the same in '22. And of course, given the size of the HVAC segment, a sizable amount, of course, is in that segment as well. So we're comfortable with those 15% margins for the full year.
Julian Mitchell, Analyst
Great. Thank you.
Operator, Operator
Thank you. One moment please for our next question. And our next question coming from the line of Joe Ritchie with Goldman Sachs. Your line is open.
Joe Ritchie, Analyst
Thanks. Good morning, everyone. Can we discuss the comment about price cost neutrality in Q1? I'm a bit surprised by that, considering there was likely a significant carryover effect from 2022. From a cost standpoint, I'm curious if higher cost inventory is being factored in or if merit increases are affecting costs more upfront. Any additional insights on the price cost neutrality in Q1 would be appreciated.
Patrick Goris, Chief Financial Officer
Yes. The short of it is, and it's mostly in HVAC, is the first quarter of 2022, we were left in at some really attractive pricing from a steel point of view, and the year-over-year impact is actually a net negative for us. As I mentioned to Julian just earlier, we are dialing in a benefit from deflation that kicks in the second quarter of 2023. In Q1, we still have a headwind, particularly in steel that affects HVAC.
Joe Ritchie, Analyst
Got it. That's helpful, Patrick. And then I guess I'm just going to stick on margins and just want to understand some of the operational challenges that you guys faced in the Fire and Security business this quarter. And then also, as I kind of think about the 2023 guidance, it doesn't seem to imply that much margin growth in the segment. So just maybe just kind of talk us through what some of the issues are and how those are supposed to rectify in 2023?
Patrick Goris, Chief Financial Officer
Yes. If I look at the margin performance in Fire & Security, it was up year-over-year in the fourth quarter by 60 basis points. And the way you can think about it is the absence of Chubb is a tailwind to margins. Volume mix and price/cost was a slight headwind to margins. The net was still a margin expansion of 60 basis points. The margins were lower than what we expected. One, supply input costs and higher supply chain costs than what we expected; two, inventories not aligned with where the business is today. And that has some operational impacts, which we experienced in the fourth quarter of the year. And so we have to work through that. And that is what we expect for 2023. And therefore, we expect with minimal volume growth in '23 to have margin expansion in Fire & Security. The revenue growth we expect in Fire & Security in '23 is mostly price-driven, less volume-driven.
Joe Ritchie, Analyst
Thank you.
Operator, Operator
And our next question coming from the line of Jeff Sprague with Vertical Research Partners. Your line is open.
Jeffrey Sprague, Analyst
Thank you. Good morning everyone. Dave and Patrick, that color you gave on residential, obviously encompasses what's going on with field inventories. But maybe you could elaborate a little bit more on how inventories ended versus your expectation? And how you think they kind of normalize over the balance of the year?
David Gitlin, Chairman and CEO
Yes, Jeff, we aimed to have field inventories at the end of last year remain flat compared to where they ended in 2021. They were actually slightly higher than our target, but not by much. We anticipate that there will be destocking throughout the year. In the first quarter, some stocking occurs in preparation for the season, so we expect destocking to continue as the year progresses. Interestingly, when we engage with our channel partners, there is still significant demand. In Florida, for example, homebuilders are continually requesting more products from us. There is a mix of demand for new products, particularly as we began shipping the new products in the South early on, and we are starting to ramp up in the North with the new SEER units. We recognize that while there is still demand from some key homebuilder customers, certain destocking will occur throughout the year. We will need to monitor how the year unfolds, as this business can change quickly due to various factors. We believe we've been cautious in our expectations for the year and will see how the next couple of quarters develop.
Jeffrey Sprague, Analyst
And then can you just elaborate a little bit more on what you're expecting on TCC. We get kind of the arithmetic of the headwind on margins as it comes into the fold. But in terms of your internal improvement plan there, Dave, moving margins up over time and what kind of actions you're taking to drive that?
David Gitlin, Chairman and CEO
Yes, I can tell you that we were in Japan and are very pleased with the progress that Safe and the team are making on TCC. We expect EBIT ROS margins to be in the mid-teens five years after the acquisition, and we are certainly on track for that. We had projected $100 million in synergies, and I am confident we will exceed that. If you exclude the noise from minority income and integration costs, we are currently in the low teens with just the standalone business. The team is making significant advancements, with best-in-class technology including rotary and inverter technology. We are leveraging this technology to enter the appealing residential heating market in Europe. We also see strong prospects in North America and China for TCC, despite some macroeconomic uncertainties. In Japan, we've had to implement aggressive pricing, and we are actively pursuing numerous cost reduction opportunities, particularly in the supply chain, where there are substantial synergies between the two companies. I am very pleased with our progress so far.
Patrick Goris, Chief Financial Officer
And by aggressive pricing in Japan, we see increases.
Jeffrey Sprague, Analyst
Thank you.
Operator, Operator
And our next question coming from the line of Nigel Coe with Wolfe Research. Your line is open.
Nigel Coe, Analyst
Thanks. Good morning everyone. It seems like we're seeing a low to mid-single-digit contribution from pricing. Would that be around 3%? We expect gross pricing to reach about $600 million for the full year. Is that accurate? I'm interested in understanding how much of that is a result of actions taken in 2022 compared to the price increases we're implementing in the first half of this year.
Patrick Goris, Chief Financial Officer
Nigel, the ballpark number you have there, it's in the ballpark, $500 million, $600 million of carryover in pricing. Most of that in total pricing, most of that is carryover. We have some new price increases that we've announced as well. We've dialed, of course, some of that in, and we're looking at additional price increases as well.
David Gitlin, Chairman and CEO
I'd add, Nigel, it's fluid. We came into the year. And over the last few weeks, we've announced new price increases that we feel that were appropriate. Residential announced a 6% price increase. For North America, light commercial and North American commercial, we're looking at up to 8% recent price increase. We're going to raise prices in both North American Truck Trailer and European Truck Trailer, probably in the low to mid-single-digit range. So, we watch inflation trends. We watch our elasticity curves, but we do think it's appropriate that we are going to need continued price increases certainly in the first half of this year.
Nigel Coe, Analyst
And normally, if you announce a price increase of 6%, you capture maybe 2% when we need net of normal promotions and I made some discounts and volume discounts. That hasn't been the case in the last couple of years. But I'm just curious what sort of capture rate do you expect going forward? But maybe if you could just also break down as well how you see the Refrigeration segment in 2023? There's a lot of moving parts there. Just curious with the ease comps you've seen in the back half of the year in both commercial and transport, how you see the full year playing out within that segment?
David Gitlin, Chairman and CEO
Let me begin with an update on pricing realization and refrigeration, and then Patrick will discuss the year's phasing. Our pricing realization rate was very high last year; we anticipated a $1 billion increase but ended up with around $1.6 billion. We expect these high realization rates to continue into 2023. In terms of refrigeration, the situation is somewhat mixed. The North American Truck Trailer market has performed very well, with order rates exceeding 100% in Q4, despite the order book still being closed for the second half of the year, and it was up 40% for the full year. We have optimized our European Truck Trailer business, which also did extremely well last year. We're currently monitoring the container segment, which has seen lower sales. As mentioned, there's typically a four-quarter cycle, and we are coming off two quarters of declining sales, but we expect improvements in the second half of the year. Moreover, while commercial refrigeration has been somewhat slow, we anticipate a surge in demand, especially since supermarket chains in Europe are currently tightening their budgets, which is not sustainable in the long run. Therefore, we predict a recovery in the commercial refrigeration market as the year progresses. Both our company and a respected competitor have indicated that we've gained market share in Truck Trailer. Although mathematically, both claims cannot be true, I can confidently say that based on our analysis of customer orders, we have indeed increased our share in Truck Trailer across Europe, the United States, and globally. We are optimistic about this sector and look forward to recovery in the container and commercial refrigeration markets in the second half of the year.
Patrick Goris, Chief Financial Officer
And Nigel, couple of comments on refrigeration. Think of Q1 organic sales being down mid to high single digits, Q2 down mid-single digits, and then basically returning to mid-single-digit growth in the second half of the year. And that is all related to what Dave just mentioned earlier about container. Four quarters that we assume to be down, two more to go. Same with commercial refrigeration, and we see continued strong performance in particularly North America Truck and Trailer. And so that is how we've dialed in the plan for refrigeration, which we expect to be flattish from a full-year perspective on an organic sales basis.
Nigel Coe, Analyst
Thank you, very much.
Operator, Operator
And our next question coming from the line of Josh Pokrzywinski with Morgan Stanley. Your line is open.
Joshua Pokrzywinski, Analyst
Hi, good morning everyone. Dave has discussed a lot regarding demand. Now, shifting to productivity, I know you haven't focused much on Carrier 700 or its current iterations since the last Analyst Day. You mentioned a price/cost productivity formula. I'm curious about how you view that $100 million net per year in relation to this year and the overall opportunities in the pipeline. Do you feel you've addressed many opportunities since the initial separation, and what else remains?
David Gitlin, Chairman and CEO
We have a long way to go, Josh. Initially, we began strong with productivity improvements compared to last year, but faced unexpected supply chain challenges that impacted many industries. As we move past those issues, I believe we have significant opportunities ahead. Patrick mentioned that we can achieve $300 million in productivity and $200 million from price/cost improvements, totaling $500 million. We view logistics as a major opportunity for this year, with rates returning to more typical levels for containers from Shanghai to Los Angeles. We paid high logistics costs for electronics, but those spot prices have dropped significantly month-over-month and quarter-over-quarter, and we expect that trend to continue. We see great potential with our Tier 1 suppliers. We had been active with our Carrier Alliance but had to pause some efforts to focus on getting parts to keep production running. Now, we need to refocus on building long-term partnerships that align with our goals for shared growth. We see opportunities for increased productivity in our factories and continued reductions in general and administrative expenses. Last year, we reduced our G&A from 9.5% to 7% of sales. We are also shifting work to lower-cost regions, such as Eastern Europe, and will address direct material costs, which make up a large portion of our direct purchases. We moved away from aiming for Carrier 700 and set a goal of 2% to 3% productivity improvements indefinitely. We believe we are just beginning to tap into significant cost-saving opportunities.
Patrick Goris, Chief Financial Officer
And Josh, our guidance is very much aligned with what we shared at Investor Day, $300 million of gross productivity, offset by about $200 million of investments in merit and a net $100 million falling through the bottom line. That's in our guidance.
Joshua Pokrzywinski, Analyst
Got it. That's helpful. I appreciate that net number, Patrick. And then just shifting gears over to some of the stimulus out there. How do you guys think about some of the opportunities for IRA, whether residential or commercial this year?
David Gitlin, Chairman and CEO
We are still finalizing our comments on the Inflation Reduction Act and anticipate full implementation by mid-year, which presents a significant opportunity. The 25C tax credits can offer homeowners up to $3,200, specifically around $2,000 for a heat pump. Notably, the current draft includes key provisions for two-stage heat pumps in the South, which provides a strong incentive for customers to transition from cooling-only systems to heat pumps, and particularly to two-stage heat pumps, which could be impactful. Previously, 30% of our heat pump sales were in the split category, and we've now increased that to 35%. Our growth rates are steady, showing a similar trend of 30% to 35% in North America and maintaining 30% for commercial heat pumps in Europe. We believe the Inflation Reduction Act will have significant positive effects on both residential and commercial sectors. Additionally, the commercial building tax credit under the 179D has been increased from $2.50 to $5 per square foot for energy efficiency systems, which will also be impactful. Moreover, Europe is facing supply challenges as it heads into the winter of 2023, which is expected to boost demand for heat pumps in both residential and commercial sectors, where we hold a leading position.
Operator, Operator
And our next question coming from the line of Brett Linzey with Mizuho Group. Your line is now open.
Brett Linzey, Analyst
Good morning, all. Let me come back to the Refrigeration segment. I appreciate all the sales detail there. I was hoping you might be able to put a finer point on the profitability of that weaker container and commercial refrigeration. I imagine that profit profile is much lower. But any way to frame that or provide some context would be great?
Patrick Goris, Chief Financial Officer
The container business is a really attractive business within refrigeration. Our enormous installed base also enables us to go after significant aftermarket given the 1 million-plus units that are out there that we're trying to connect and drive aftermarket revenue. Commercial refrigeration today has lower operating margins, and so they're below 10%. They're probably close to 5% to 10%. But we've taken out a lot of costs. And so as we focus on productivity irrespective of volume growth, once volume starts to turn, we expect there to be attractive incremental in commercial refrigeration. So underlying profitability from an operating margin significantly lower than the overall average of the segment. But once volumes kick back in, given the work that we have done, we would expect to see attractive incrementals there.
Brett Linzey, Analyst
Got it. Thanks. And then just shifting over to the gross productivity. You noted the $300 million. Patrick, you said $50 million to offset Toshiba. What are the balance of those investment priorities? And then are those signed and sealed for 2023? Or is there an opportunity to flex those up and down as needed?
David Gitlin, Chairman and CEO
Look, our priorities really center around our shift to Carrier 2.0, which is really around aftermarket enabling technologies, digital capabilities. So we have been very purposeful in our plan setting to make sure that we have plenty of investment set aside for Abound, for Lynx, for connecting our devices out in the field. That's been our priority. And then all things technical differentiation when it comes to more energy-efficient chillers and more energy-efficient products, electrification in both heat pumps and in our truck trailer business. So as we do our waterline process, there are some investments that we consider sacred because it's either part of our conscious strategic shift or because of differentiation for key product lines.
Brett Linzey, Analyst
Its ok, great. I’ll pass it on, thanks.
Operator, Operator
And our next question coming from the line of Deane Dray with RBC. Your line is open.
Deane Dray, Analyst
Thank you. Good morning everyone. Maybe we could start with Patrick. Strong finish to the year on free cash flow, hitting expectations on the provided guidance. kind of take us through the dynamics, especially on working capital. It sounded like you ended up with higher inventory. Where do you stand on like buffer inventory with supply chain issues? And how does that impact the outlook for '23 on free cash flow?
Patrick Goris, Chief Financial Officer
Well, we expect $1.9 billion in 2023 for free cash flow, which actually does include a tailwind from reduced inventories. And so, we know we ended the year inventories than we intended in the beginning of the year. Frankly, it's the main reason why we missed our $1.65 billion target for the year. So, we ended the year, I think it's fair to say with a few hundred million dollars of more inventory than we expected. I would not call all of that buffer inventory. Some of that, frankly, is related to the length of the supply chain and the lead times that are still not coming back to what we are used to. And so we're assuming that we'll see some continued improvement there in 2023, which will lead to about $100 million or so tailwind from lower inventories in '23 versus where we ended the year in '22.
Deane Dray, Analyst
That's really helpful. Dave, you made an interesting comment earlier about elasticity curves. It seems during COVID everything was elastic, and there was no demand destruction. However, with normalization, there might be some competitive pressures. Can you share your insights on the elasticity curves and how they influence pricing and reactions? I'm wondering if we’ve lost some of the understanding of how this fits into the overall economics.
David Gitlin, Chairman and CEO
In our residential business, we experienced six significant price increases over 18 months. The unusual pace of price increases we've seen recently is both announced and realized. As we move into 2023 and 2024, we expect a return to more traditional levels. However, in the first half of the year, it's clear that inflation is still a factor. Consequently, we had to implement further price increases in January, which we may not have anticipated a couple of months ago due to ongoing inflationary pressures. This situation varies across different segments; for instance, pricing outlook appears less favorable in the container segment compared to commercial, HVAC, and light commercial areas, along with some residential aspects. Within our Fire & Security business, we've executed around 20 price increases recently, depending on the specific segment and brand. We continue to monitor the situation, but in the first half of the year, we recognize that inflationary pressures persist, necessitating appropriate pricing strategies.
Deane Dray, Analyst
It will helpful. Thank you.
Operator, Operator
And our last question in queue coming from the line of Steve Tusa with JPMorgan. Your line is open.
Steve Tusa, Analyst
Good morning. Can you just talk about the trend of what you see on Transport refrigeration orders as well as light commercial orders? Those have been very strong. I know the light commercial market is up nicely, but obviously, some very big numbers in the context of 50-week lead times in that industry. Just curious as to how you see that trending because there could be some perhaps unusual activity in that market in particular. But maybe how you see those orders trending over the next several quarters here?
David Gitlin, Chairman and CEO
Yes. I'll start, Steve, with light commercial. Light commercial has just been extremely strong. We saw orders were up in the mid-teens in the fourth quarter. If you look at overall 2022, orders were up 45%. And demand is still strong for things like K-12, value retail, fast casual, and quick-serve restaurants. So, all trends seem extremely positive. The issue we have continues to be with light commercial keeping up demand where we're implementing second-line second shift. And our focus is in our customers. The issue we have right now as far as the I can see, is not a demand one in light commercial. On the Transport side, orders were up extremely strong in the fourth quarter in North America, even with us trying to control opening the order book for the second half of '23. North American orders were up 2x; North American Truck Trailer. Europe Truck Trailer was down a bit. I would say mid to high single digits, I believe. We have, of course, seen orders very light in the container space, which is why we've calibrated that business down, certainly in the first half of the year. But what's really encouraging is the North American Truck Trailer piece, the demand remaining very robust there.
Patrick Goris, Chief Financial Officer
Regarding the residential side, you finished the year with inventories slightly higher than expected in the channel. What signals are you monitoring for demand this year? How much confidence do you have in your distributors' forecasts that influence your assumptions? What range of outcomes do you anticipate, considering the current inventory situation? It appears that many are suggesting a flat to declining trend, but when you dig deeper, they reference developments from the fourth quarter and possibly January. Can you share what insights are shaping your perspective and how you’re narrowing down the range of outcomes for volume?
David Gitlin, Chairman and CEO
That's a good question. Yes, we try to approach it conservatively. We'll see in the end if it proves to be conservative. We expect volumes to decline in the high single digits for the year. When we analyzed it, we noted that new home construction might drop by 20% to 25%. Some of our customers mentioned on their earnings calls that they anticipate remaining relatively flat for the year. While the industry could indeed be down by 20% to 25%, we may maintain our market share. Generally, we should follow industry trends. However, there is a wide range of potential outcomes; it could be flat or down by 30%—it’s hard to say. This 20% to 25% is related to our residential new home construction business. As for the market, you've been in this longer than I have, but it can vary greatly in a short-cycle business since it primarily involves replacements. A few strong weeks in the summer can lead to a noticeable increase in demand. We believe we've assessed our volume accurately, but we will need to observe how the first half of the year unfolds. The first quarter will present tough comparisons, but just yesterday, we were reviewing residential demand, which remains strong among many of our key customers. Our challenge is just to keep up with that demand.
Operator, Operator
And our last question coming from the line of Gautam Khanna with Cowen. Your line is open.
Gautam Khanna, Analyst
Good morning. Can you tell us how far out your Truck Trailer orders are?
David Gitlin, Chairman and CEO
Yes, second half of the year. So we looked at it. We're just now opening our order book for the second half of the year.
Gautam Khanna, Analyst
Okay. And was that in Q4 or now in Q1?
David Gitlin, Chairman and CEO
Now. I think we might have taken on discrete orders for Q3 in Q4 for a specific reason. But basically, we only opened our order book now for the second half.
Gautam Khanna, Analyst
Okay. That's helpful. And I was wondering if you could talk about inflation in the supply chain this year on your Tier 2 components, so not commodities. But just in aggregate, what is the pressure you're facing from component suppliers and the like?
David Gitlin, Chairman and CEO
We recognize that while these aren't raw materials, we anticipate some benefits. The fluctuations have been notable. While this may not directly address your question, we have been cautious regarding steel, which is expected to decrease compared to last year. As Patrick mentioned, we experienced a lingering effect from favorable pricing for steel in the first quarter of last year, and we expect to see improvements as we move beyond Q1. Both copper and aluminum are down from last year. Recently, we noticed a slight uptick, but we still foresee year-over-year advantages. Regarding our Tier one suppliers, there are two main categories. Some have been significantly affected by inflation from us and similar companies over the past year, and we will keep pushing for inflation in those cases. On the other hand, some suppliers are focused on long-term partnerships with us and may not raise prices to retain business from those who continue to push for inflation. For suppliers who are committed to a long-term journey with us, they will benefit from the volume we shift away from those maintaining higher inflation rates. Overall, it is our responsibility and opportunity to make a deliberate shift in our supply chain partners. We were making progress on this front but had to pause due to supply chain challenges last year. However, I can assure you that we are committed to aggressively pursuing this strategy as we enter 2023.
Gautam Khanna, Analyst
And just last one, Dave. You talked about price and resi. I'm curious historically, and maybe what's your view on this cycle with respect to the minimum here? The 10% to 15%-point difference between the prior minimum. Do you think that holds or does that fade over time? I'm just curious like how sticky is that pricing on the minimums here? Thank you.
David Gitlin, Chairman and CEO
We have a strong belief that the pricing for the new units, which is in the range of 10% to 15%, will remain stable. It has been stable so far, and we anticipate it will continue to be stable throughout 2023 and beyond. Our approach has involved more redesign and differentiation, resulting in a shift from copper to aluminum and the integration of microchannel heat exchangers. We've made significant improvements in aesthetics, fit, spacing, and size to enhance the attractiveness of our new SEER unit. Additionally, the new control features will further add value. Given the value we're providing and what customers are receiving, we believe the pricing will remain stable.
Gautam Khanna, Analyst
Thank you.
Operator, Operator
I will now turn the call back over to management for any closing remarks.
David Gitlin, Chairman and CEO
Okay. Well, thank you, everyone, for joining. We're excited about how we closed last year and even more excited about '23. And with that, we'll close the call, and please reach out to Sam for any questions. Thank you all.
Operator, Operator
Ladies and gentlemen, that concludes our conference for today. Thank you for your participation. You may now disconnect.