Earnings Call Transcript
CARRIER GLOBAL Corp (CARR)
Earnings Call Transcript - CARR Q3 2023
Sam Pearlstein, Vice President, Investor Relations
Good morning, and welcome to Carrier's Third Quarter 2023 Earnings Conference Call. With me here today are David Gitlin, Chairman and Chief Executive Officer; and Patrick Goris, Chief Financial Officer. We will be discussing certain non-GAAP measures on this call, which management believes are relevant in assessing the financial performance of the business. These non-GAAP measures are reconciled to GAAP figures in our earnings presentation, which is available to download from Carrier's website at ir.carrier.com. The company reminds listeners that the sales, earnings, and cash flow expectations and any other forward-looking statements provided during the call are subject to risks and uncertainties. Carrier's SEC filings including Forms 10-K, 10-Q, and 8-K, provide details on important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements. Once the call is open for questions, we ask that you limit yourself to one question and one follow-up to give everyone the opportunity to participate. With that, I'd like to turn the call over to our Chairman and CEO, Dave Gitlin.
David Gitlin, Chairman and CEO
Thank you, Sam, and good morning, everyone. I am very proud of our team for delivering another strong quarter, enabling us to again increase our full-year guidance. HVAC environment and security sales were both up mid-single digits with the overall company delivering yet another quarter of double-digit aftermarket growth. Adjusted operating profit and adjusted EPS were both up over 20% year-over-year with adjusted operating margins up 240 basis points in the quarter. The HVAC and Fire & Security segments both delivered record adjusted operating margins in the quarter, approximately 21% and 18%, respectively. Free cash flow performance also continues to be strong, positioning us for some upside for our full-year guidance. Bottom line is we continue to perform while we transform, as you can see on Slide 3. We are a team that is very clear-eyed about macro challenges. We are focused on controlling the controllables, driving operational excellence, being tenacious about customer centricity, out-innovating our peers, and consistently delivering on our commitments. With 2 months left in the year, we are confident that in 2023, we will deliver mid-single-digit organic growth, 15% adjusted EPS growth, margin expansion despite the negative impact from consolidating Toshiba Carrier and strong free cash flow. Not only are we poised to close out 2023 on a strong note, we have significantly matured our productivity processes. So we will enter 2024 with even more rigor and detailed plans around our cost reduction activities positioning us for further margin expansion next year and beyond. We also have confidence in continued growth driven in part by our aftermarket and recurring revenue traction as you see on Slide 4. We're on track for 80,000 chillers under long-term agreements and 30,000 connected chillers by year-end. The attachment rate in Q3 was approximately 50%, nearly double pre-spin performance. Abound continues to gain market traction exemplified by new scale customers committing to our Abound Healthy Air Solution and Abound net zero management offerings in Q3. Additionally, we announced the launch of Lynx Logix, a new Software-as-a-Service application within our Lynx digital platform that helps predict and address supply chain disruption by automatically identifying trends, patterns, and issues in distribution networks and transportation lines. Customers clearly see the benefit of Lynx capabilities, and we now have over 100,000 paid Lynx subscriptions. Our playbook around digitally enabled life cycle recurring sales continues to yield encouraging results globally as we are well-positioned for another year of double-digit growth in 2023 and beyond. Our other major growth theme is around driving differentiated solutions to ensure sustainability leadership. You see examples of that on Slide 5. We continue to introduce industry-leading products into the market that help our customers achieve their sustainability targets while decarbonizing the planet for generations to come. Carrier Transicold introduced a new optimal line refrigerated container unit, which offers best-in-class energy efficiency versus the competition and is approximately 15% more fuel-efficient than our prior units. We also introduced a comprehensive new line of high and very high temperature heat pumps for use in industrial, commercial, and health care buildings as well as district heating. These key pumps reduced both carbon emissions and energy costs up to 80% versus traditional gas boiler applications. Additionally, our new Zero GWP refrigerant air-to-water high-efficiency heat pump will nicely complement Viessmann's offerings in the European market. And on top of these new product introductions, our existing business continues to gain momentum as European commercial heat pump sales were up 70% in Q3 and are up 40% year-to-date. Thanks to our sustainability product and service offerings, we are well on our way to achieving our Scope 3 commitment of reducing our customers' greenhouse gas emissions by more than one gigaton by 2030, having achieved approximately 270 million metric tonnes of reduction since 2020. We have and will continue to invest a disproportionate amount of our R&D in sustainability differentiation. We are pleased to have been recognized by Time Magazine, Newsweek, and many others for our sustainability leadership. Excitingly, the combination with Viessmann Climate Solutions will further accelerate our mission of becoming the world leader in intelligent climate and energy solutions, as you see on Slide 6. Last month, we had the pleasure of hosting Max Viessmann, Chairman and CEO of the Viessmann Group, in our headquarters for a webcast event to discuss his views on the future combination; we are profoundly confident and excited about the value creation opportunities ahead of us. The trend towards heat pumps in Europe is unambiguous and will continue for many years to come. Max confirmed that European decarbonization is a trend that is not changing and is well supported by government in Europe. While individual countries may adjust regulations and subsidy levels from year to year, we see a multi-year growth opportunity as those countries meet their commitments for emission reductions backed by EU and country-specific funding. Residential heat pump penetration in Europe is only about 8%, and 21 countries have subsidies to support 2030 and 2050 decarbonization goals. Viessmann Climate Solutions is also well positioned for continued share gains. Unlike some of its competitors, it has the advantage of providing solutions for all energy classes, heat pumps, gas boilers, hydrogen boilers while some of its competitors are pure-play heat pump or boiler providers. It has a connected ecosystem of offerings for an electric home such as solar PV, batteries, and a differentiated digital platform while also driving increased subscription sales. A good example is the Vitocal 250-A natural refrigerant air-to-water heat pump that won this year's award for the Best Heat Pump in Germany. Viessmann Climate Solutions is soon introducing a 19 kilowatts of output version that will now give it access to over 90% of the single-family home heating market. Additionally, the brand-new Vitocal 250-A Pro, also releasing in Q1, will offer heat pump outputs of up to 40 kilowatts, ideal for multi-family and commercial buildings. And based on our experience with Toshiba Carrier and that acquisition and integration, which is going extremely well, we are certainly confident in the cost synergies and already see potential for revenue synergies that go well beyond our deal model. In short, Viessmann Climate Solutions is the most attractive business in the most attractive segment in our space, and we cannot wait to come together as one business, which is likely to close in the first week of January 2024. Lastly, a brief update on our business exits on Slide 7. First, my thanks to our teams who are working literally around the clock and doing a superb job. We have many advisors, who together with our bankers, Goldman Sachs and JPMorgan on Fire & Security and Bank of America on Commercial Refrigeration, are focused on maximizing net proceeds and speed while ensuring a clean exit of these businesses. We are progressing very well with the prospective buyers for security, commercial refrigeration, and industrial buyers. The interest level has been extremely high, and we expect to be able to announce signed agreements before the end of Q1, hopefully sooner. The capital market transactions for the combined commercial and residential fire business are on track. These are superb assets with deeply committed and effective team members, and we remain very optimistic about the value that we will realize on these exits. 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. Sales in the quarter were $5.7 billion with organic growth of 3%, a 1% tailwind from foreign currency translation, and a 1% net contribution from acquisitions and divestitures. The latter was substantially all driven by one month of Toshiba Carrier before becoming organic at the beginning of August. Q3 adjusted operating profit of over $1 billion was up more than 20% compared to the prior year on 5% reported sales growth. Strong productivity and price cost helped us expand our adjusted operating margin by 240 basis points to 18.2%. That is despite a 30 basis point headwind related to the Toshiba Carrier consolidation. Reported earnings conversion was 65% in the quarter. Core earnings conversion that is excluding acquisitions, divestitures, and currency was far higher than that. Adjusted EPS of $0.89 is up 27% year-over-year and includes a tailwind from discrete tax items in the quarter. Free cash flow of about $950 million was up 35% compared to last year. Year-to-date, we have generated over $1.3 billion in free cash flow compared to about $400 million during the same period last year, reflecting improved working capital performance and higher earnings. Overall, a good quarter and better than we expected mainly as a result of better operating performance and the discrete tax items I mentioned earlier. Please turn to Slide 9. Q3 was another good quarter for HVAC. Organic sales were up 4%, driven by high single-digit growth in commercial HVAC, 30% growth in light commercial, and double-digit growth in aftermarket. North America residential HVAC sales were down low single digits in the quarter. Overall resi volume was down low double digits and revenues continued to benefit from price realization and positive mix from the 2023 year transition. Destocking is expected to continue in Q4, and we expect North America residential HVAC volumes to be down mid-teens for the full year. We expect field inventories to end 2023 also down mid-teens from the beginning of the year, which should position them at more appropriate levels heading into 2024. Offsetting lower expected residential volume in 2023, we now expect light commercial HVAC sales to be up about 30% versus about 20% in our prior guidance. Adjusted operating profit for the HVAC segment was up 33% compared to last year on 7% reported sales growth, driven by productivity and price costs. Adjusted operating margin reached a record high and was up 410 basis points compared to last year despite a 50 basis point headwind from the consolidation of Toshiba Carrier. You will see in the 10-Q later today that there was a one-time $60 million tax benefit from a joint venture that is included in equity income, so that was more than offset by other discrete items in the segment. In short, excellent financial performance of this segment in the quarter. Moving to Slide 10 for Refrigeration. Reported sales were flat in the quarter with organic sales down 3%, offset by a 3% benefit from foreign currency translation. Within transport refrigeration, global truck and trailer sales were up high single digits driven mostly by over 20% growth in European truck and trailer. Container continued to experience demand softness, however, and was down roughly 25% year-over-year. Commercial refrigeration sales were down about 10% in the quarter with orders for this business returning to year-over-year growth. Looking ahead to Q4, we expect the container business, commercial refrigeration, and the entire Refrigeration segment to return to organic sales growth. Adjusted operating margin for this segment was down 80 basis points compared to last year, mainly due to the lower volume in container and commercial refrigeration, which more than offset the benefits from productivity and price costs in this segment. Moving on to Fire & Security on Slide 11. Just like HVAC, this segment had good financial performance in the quarter. Reported sales were up 2%, with 6% organic sales growth and the 1% tailwind from foreign currency, partially offset by a 5% headwind from the KFI deconsolidation. Organic growth was broad-based with high single-digit growth in Industrial Fire & Security and mid-single-digit growth in commercial and residential fire combined. Adjusted operating profit was up 13% versus the prior year. Similar to HVAC, adjusted operating margins hit a record level and were up 170 basis points year-over-year, driven by volume, productivity, and price costs. Turning to Slide 12. Total company orders were down a little less than 10% in the quarter, mostly due to the declines in the shorter cycle businesses. Overall HVAC orders were down about 10% in the quarter with expected declines in residential and light commercial HVAC. Commercial HVAC orders were flat against a difficult comp. Last year, orders were up 15% to 20%, and the backlog remains robust, up over 40% on a 2-year stack and extends well into next year. Refrigeration orders were down approximately 15% to 20% in the quarter, largely driven by Transport. Very strong orders growth in international truck and trailer, up 60% year-over-year, was more than offset by over 50% order decline in North American truck and trailer. For North America truck and trailer, we opened the 2024 order book in Q2 of this year. For 2023, we opened the order book in Q3 of last year. On a year-to-date basis, North America truck and trailer orders are up low-single digits, which is probably more indicative of underlying demand. Commercial refrigeration and container orders in October give us confidence in the Refrigeration segment's return to organic growth in Q4. Orders in Fire & Security were up around 5% with particularly strong growth in industrial fire. We believe that lead times for the majority of our shorter-cycle businesses across our 3 segments have normalized with backlogs close to more typical levels. Our longer-cycle backlog continues to grow year-over-year. Now moving on to guidance on Slide 13. We expect full year sales to come in around $22.1 billion to $22.2 billion, including mid-single-digits organic sales growth. We are raising our full-year adjusted operating margin guidance to about 14.5%, driven by strong year-to-date performance. Within the segment, we are increasing our full-year HVAC adjusted operating margin guidance to about 16.5% while maintaining our Fire & Security guidance at 15.5%. Refrigeration's full-year adjusted operating margin is impacted by lower volume in container and commercial refrigeration and as a result, will likely end up a little lower than 13%. We are increasing our full-year adjusted EPS guidance by $0.10 compared to our prior midpoint to about $2.70. We have included a 2023 guide-to-guide adjusted EPS bridge in the appendix for your reference. In essence, improved operational performance drives about half the increase. The balance is mostly driven by a lower expected adjusted tax rate. Our full-year adjusted effective tax rate is now expected to be between 21.5% and 22% compared to our prior guidance of about 23%. As for free cash flow, we now expect to generate slightly more than $1.9 billion in 2023. Before I turn it back over to Dave, let me give you a couple of updates. You may recall that we will be funding the Viessmann acquisition through a combination of equity, cash on hand, and debt. The latter will be a mix of term loans and long-term debt. We previously shared that we hedged the cash portion of the consideration against currency trends. In the third quarter, we entered into a number of interest rate marks to mitigate interest rate exposure on the expected issuance of debt with maturities of 10 years and beyond. As a result, we do not expect a significant change in our cost of financing for Viessmann compared to our original business case. We expect to be in the market for the bond offerings in Q4 in advance of an early January close. As we communicated previously, we will be very focused on deleveraging post-acquisition, and we'll use free cash flow and proceeds from the business exits to do so. We continue to expect to return through share repurchases as soon as our net leverage returns to about 2x. One last topic. I'd like to share our current thoughts on how we will provide 2024 guidance in February, given the acquisition and the 4 business exits transaction. We currently expect that our 2024 guidance will include a full year of Viessmann Climate Solutions. The exact timing and the proceeds of the business exits are, of course, not known as of today. For context, there are specific rules that determine when a business can be treated as discontinued operations in the financial statements, and it is our current assessment that the Fire & Security businesses being exited will likely not qualify as discontinued operations for reporting purposes until all of these transactions have been executed. We do not expect commercial refrigeration to qualify for discontinued operations. Therefore, we intend to provide guidance consistent with how actual results will be reported. This means that we will include the earnings of the businesses to be exited into our 2024 guidance. We will then adjust guidance as needed for the exact timing of the exits and the use of the proceeds. By the time we provide guidance in February, we expect to have a better sense of timing and proceeds with several of the business exits. With that, I'll turn it back over to you, Dave.
David Gitlin, Chairman and CEO
Well, thank you, Patrick. In closing, Carrier continues performing while transforming. We had another strong quarter. And more importantly, we again increased our outlook for 2023 with mid-single-digit organic growth, margin expansion, double-digit adjusted EPS growth, and strong free cash flow performance, all broadly in line with the value creation framework that we shared with you at our latest Investor Day. So with just a couple of months more to go in 2023, we are, of course, already looking ahead to 2024 with continued confidence in strong top and bottom line growth and cash conversion. With that, we'll open this up for questions.
Operator, Operator
Our first question comes from Deane Dray with RBC Capital Markets.
Deane Dray, Analyst
We're hearing some commentary about higher inventory in the channel of heat pumps in Europe just all coming from some of the uncertainty about when some of these government stimulus programs will be passed. What's your sense of channel inventory? And how does that play out?
David Gitlin, Chairman and CEO
Viessmann Climate Solutions has performed well this year, with sales increasing by about 18% and heat pump sales rising over 35%. They've experienced strong margin growth and are on track with the financial projections we established for this year. Looking forward, we are confident in the earnings trajectory we've outlined. However, government adjustments to regulations and subsidies may impact the adoption rate of heat pumps. We've all noticed that backlogs reached unusually high levels across various sectors due to supply chain challenges. We expect Viessmann's backlog levels to return to more typical historical levels. In countries like Germany and Italy, we might see some fluctuations in order rates as legislation evolves. Nonetheless, the transition to heat pumps in Europe is undeniable, and fluctuations in oil and gas prices could further accelerate this shift. Viessmann is well-positioned to outpace the market, benefiting from their strong channel, cutting-edge technology, and recognized brand. Additionally, they are set to launch new products in Q1 that will open doors to previously untapped market segments and will provide comprehensive home energy management solutions. We are committed to maximizing synergies on both the top and bottom lines. After spending considerable time with Thomas, the leader of that business, and his team, we are increasingly optimistic about the value that this combination offers.
Deane Dray, Analyst
That's all really good to hear. And then second question, can you take us through some of the assumptions on what's going on in light commercial, up 30%? What are the drivers and visibility there, please?
David Gitlin, Chairman and CEO
Sales increased by 30% in the quarter. For the entire year, we initially expected light commercial sales to rise by 20%, but now we anticipate a 30% increase as well. Some sectors remain exceptionally strong, with K-12 orders up 25% in the quarter and the pipeline up by 50%. We are also seeing robust demand from several value-based retailers. However, some sectors may face challenges, like warehousing, high-end restaurants, and office space. Overall, the demand remains strong in key sectors, and our backlog is still high. Typically, we would have a 4 to 6-week backlog, but currently, it extends into the second quarter of next year. We will monitor inventory levels; demand and backlog are beyond historic levels, and these should normalize over time. We are looking at the EPA ruling, which includes a 3-year grace period for manufacturers, as we transition to 454. Overall, it has been a great year for our team, and we feel well-prepared as we approach the first quarter of next year.
Operator, Operator
Our next question comes from Julian Mitchell with Barclays.
Julian Mitchell, Analyst
Maybe just a first question around the North America residential HVAC market. So it looks like you're assuming perhaps that volumes there are down perhaps low double-digit, high single digit in the fourth quarter. I wanted to check if that's correct and how you're thinking about the slope of that getting back towards 0 next year. And also, when we think about next year, there's some discussion around the scope of the price effects tied to the refrigerants change, i.e., how much of your residential business might be affected by that change. Is it just the greenfield equipment? Or it's also the replacement equipment as well? And I'm assuming furnaces and parts are unaffected by that. Any color on that, please?
David Gitlin, Chairman and CEO
Sure, let me begin by discussing the current year and provide some insight into what we anticipate for the coming year in light of the recent EPA ruling. For this year, we expect a mid-single-digit decline in residential sales, with volume decreasing in the mid-teens. This suggests that residential sales in the fourth quarter will also see a mid-single-digit drop. We believe this quarter marks the conclusion of much of the destocking we've experienced, and we aim to finish the year with inventory levels lowered by at least 15% compared to last year. Our primary focus is always on supporting our customers, but we also intend to work closely with our channel partners to ensure that inventory levels entering 2024 are at least 15% lower than where we ended 2022. Recently, I met with about 100 key distributors in Dallas, where we discussed these issues and regulatory changes. We are aligned in our approach as we move forward this year, supporting our customers while positioning ourselves for next year. With the recent EPA ruling, there's positive news as the data regarding installation indicates that demand for 454-B systems will likely accelerate, leading to higher 454-B sales in 2024 than we initially expected, which is beneficial for our product mix. Thanks to our team’s efforts, we will be technically and operationally ready to implement the 450-4B sooner and ensure compliance. We believe that effectively managing this transition could provide us a competitive advantage, as we’ve already taken steps to reduce risk. We are urging the EPA to clarify their position, as the current drafting could allow dealers to replace only the outdoor unit with a 410-A alternative if it is not part of a system-level change. This could potentially be misinterpreted as allowing 410-A sales indefinitely, which we do not believe was their intent. Our discussions with the administration and key stakeholders have clarified their intentions, which are not aligned with the goal of transitioning to more environmentally friendly refrigerants. This situation could also add complexity to the channel and supply chain. As for your specific question regarding pricing for 454-B, our stance remains unchanged: we expect it to rise by 15% to 20% over two years, partly due to our usual annual price increase and the additional costs associated with the system. Overall, when combining price and mix for residential, we anticipate a 10% increase. Regarding 410-A pricing, we will also be implementing a price increase, driven by higher carrying costs resulting from the ruling's complexity, as well as a projected reduction in U.S. supply before 410-A. We are assessing how to handle 410-A replacements for outdoor units, considering treating it similarly to aftermarket replacements, which may involve limited warranty implications. In summary, the EPA ruling is beneficial for an accelerated transition to 454-B, though it introduces some uncertainty as we collaborate with our partners. Nonetheless, we are well-prepared to manage the switch effectively.
Julian Mitchell, Analyst
That's very helpful. And then just a quick sort of more financial question. The HVAC segment, I think, Patrick, you had mentioned some maybe temporary sort of headwinds and tailwinds moving around in that third quarter profit number. So maybe just a finer point on that. And I wanted to check that the guidance seems to embed a sort of low double-digit HVAC margin for Q4 and kind of sort of mid-20s operating leverage for the year whole inclusive of the Toshiba impact. Just wanted to check that those are sort of roughly the right thought processes.
Patrick Goris, Chief Financial Officer
Yes. The answers to your last two questions are affirmative. Regarding the HVAC margins, I mentioned earlier that there is a $60 million tax benefit within the joint venture income; for HVAC, it amounts to $160 million, which was somewhat balanced out by certain discrete items working against it. To summarize, there's been a significant expansion of margins in HVAC, increasing by 410 basis points year-over-year, even with the challenges from the Toshiba Carrier consolidation. This improvement is largely driven by solid pricing, cost management, and productivity, which are the key factors we see in that segment and that also apply to the overall company. There are minor challenges, as I noted, particularly from acquisitions, but the primary influences remain productivity and pricing costs.
Operator, Operator
Our next question comes from Jeffrey Sprague with Vertical Research Partners.
Jeffrey Sprague, Analyst
Patrick, thank you for the color on how you're thinking about the guide. I just want to get a little bit more into the deal, Matt, if we could. You're sitting on $3.9 billion in cash. I just wonder how much of that is sort of usable to consummate the deal versus cash that might be geographically stranded or other things? And I'm sure Viessmann is generating cash here. Does that go out the door to them as a closing adjustment? Or is that accessible to you to sort of self-fund the deal to some degree? And thirdly, just what are you looking at as kind of your blended funding cost based on the actions and locks that you took in Q3?
David Gitlin, Chairman and CEO
I'll start with the cash we have. We reported $3.9 billion at the end of Q3, and we expect that amount to increase by year-end. Around $1 billion of that will generally be needed to operate the business, so we don't plan on using that. The rest of the cash will be used for the acquisition. Regarding the cash at Viessmann, we've employed a lockbox mechanism, which is common for European deals. This means that all the earnings and cash generated within Viessmann as of January 1, 2023, will remain with them, and we will access that cash immediately upon acquisition. We plan to use some of that cash to pay down short-term obligations related to the acquisition. For the blended rate, we initially assumed a conservative rate of around 6% to finance the transaction. Based on our current understanding and the measures we've implemented, we believe we're close to that rate. Additionally, our overall cost of debt after the transaction is expected to be approximately 4% given today’s interest rates.
Jeffrey Sprague, Analyst
Great. And just back to the earlier point, so there's a $116 million gain in HVAC segment results in the quarter, but that is fully or mostly offset by what exactly?
Patrick Goris, Chief Financial Officer
Jeff, 1-6, $16 million tax gain within HVAC as equity income. That is all offset by some smaller other items. So $16 million.
Operator, Operator
Our next question comes from Joe Ritchie with Goldman Sachs.
Joe Ritchie, Analyst
Dave, can we maybe just talk a little bit about just the broader environment, the market is breaking out, given project financing concerns, higher rates environment, high rate environment, just what are your thoughts on all of the mega projects that have kind of moved forward? Ultimately, what needs for your business, whether you've started to see any of that or a substantial amount of that into your orders? Just any thoughts around that would be helpful.
David Gitlin, Chairman and CEO
Sure. I found the recent ABI report interesting, showing a 44% figure, which caused some anxiety. However, there wasn't as much excitement when the number was above 50 for three of the last five months, and it had been over 50 for nearly a year. We approach these metrics with a clear perspective and recognize our team's ability to adapt to areas of strength. Certain sectors remain very strong, and we see that our commercial HVAC segment has exceptionally high backlog levels heading into next year. This is partly due to orders related to education, such as K-12 driven by Ester funding, along with robust demand from advanced data centers. In industrial areas, even with pressures on real estate, particularly in China and US commercial real estate, we notice strong initiatives like the Chips Act and significant EV investments in China, where we are securing more than our fair share of new construction projects. This trend is supported by regulatory measures and decarbonization efforts. We maintain a balanced perspective; few anticipated that light commercial would increase by 30% this year, but that is the expectation. Looking ahead to next year, we will enter with a solid backlog in commercial HVAC, and we believe the residential sector in the US is nearing a bottom. We expect double-digit growth in the aftermarket, thanks to our successful strategies with Abound, Lynx, and other initiatives that drive recurring revenue and stabilize cycles. While our container business faced challenges that we anticipated, we see signs of recovery in Q4 and into next year. Overall, we have a balanced outlook and are entering next year with a strong backlog in long-cycle businesses, along with positive order trends in key sectors that position us for consistent growth.
Joe Ritchie, Analyst
Got it. That's super helpful. And then maybe just a follow-up question, a more financial-oriented question on HVAC margins for Q4. So Patrick, thanks for all the color. I think we've got. We're all set on the $16 million impact this quarter. But just for Q4 specifically. I know that it's always a much lower volume quarter for the business. But the change sequentially from 20% plus, call it, low double digits seems very substantial. Are there any other moving parts that we really need to take into consideration for 4Q versus the 3Q margins you just posted?
Patrick Goris, Chief Financial Officer
The biggest element, and it's what I'm going to share is from an overall company perspective, but it's the same, of course, for HVAC, even the size of that segment. One, significantly lower sales sequentially due to the season that moves, of course, ready as well as some of the higher-margin businesses. In addition, you heard us talk about ensuring that field inventories are rightsized. So there is some downtime in some of our facilities as well to ensure that we start out 2024 with appropriate levels of inventory. And then we continue to make some investments and JV income is seasonally lower as well in the last quarter of the year as we see every year. I would say those are the biggest moving pieces, Joe.
Operator, Operator
Our next question comes from Noah Kaye with Oppenheimer.
Noah Kaye, Analyst
I want to follow up on the commercial commentary. So I look at the multi-quarter commercial orders trends, kind of flattish here. How do you think about 4Q orders trends in commercial just based off of everything you just described?
David Gitlin, Chairman and CEO
Last year, we saw orders increase by low double digits. It's still early to assess the situation for orders in the fourth quarter. However, our backlog has increased by 40% on a two-year comparison. When examined regionally, Europe has shown surprising resilience, particularly with a 70% uptick in commercial heat pumps this quarter, indicating strong ongoing demand. In North America, we've experienced elevated lead times and backlog levels due to some operational challenges, but those are improving significantly. Our team has made great strides in resolving these operational issues, and as conditions normalize, we expect to see an increase in orders there. Meanwhile, China's situation is mixed; the real estate market is under pressure, yet infrastructure spending remains robust. Recently, we secured an order for six chillers in China, which includes many of our automated systems, and we're heavily focusing on aftermarket connected devices in that market. We don't anticipate a significant rebound in China for the fourth quarter, but we're hopeful that as we move into next year, key sectors will begin to stabilize.
Noah Kaye, Analyst
Okay. And then, David, I think there's been so much ink written about this. But since you're closely tracking the performance of the Viessmann business and given how well it's done year-to-date versus some of the headlines out there around heat pump demand. Just help us sort of reconcile the strength of the company's performance year-to-date and what they're doing now to position for all these different regulatory changes and what really drives your conviction that they'll continue to see sales growth and strong performance in '24 and beyond.
David Gitlin, Chairman and CEO
Look, there's so much to like there. I mean we've always known that as countries change regulation subsidy levels, that will have quarter-to-quarter impacts. We saw it in Italy last year that Italy had subsidy levels at 110% going back a couple of years and then they changed it to 90%, and that caused year-over-year headwinds in Italy. That will smooth itself out over time. But if you're trying to predict what's going to happen as regulations change from one year to another, that will have some short-term swings. And I think that's what's being highlighted by some of Viessmann peers. We're seeing in the German legislation that we do think that the regulation has written will go through. There's still a bit of a debate on the exact subsidy levels. Those subsidy levels will be debated, I think, November 6 and 7 in Germany levels. We expect those will all be promulgated and go into effect in January of next year. If you see an increase in subsidy levels, that will have a natural bell curve effect on orders as consumers wait for those increased subsidy levels to go into effect. So will that have an impact potentially on 1Q for 1 business from here to there? Of course, it will. But when we step back, we say, is the transition to heat pumps in Europe here to stay? We are 100% confident in that. Is Viessmann the best positioned company because they are not a pure play either heat pump or boiler company? Yes, because they have not only mixed factories, they have mixed lines. So as boilers, there's going to be more boilers next year than we had earlier anticipated, which I think there will be. They make great margins on boilers, and they're able to swing their operational performance to support that. And then you look at all the other capabilities they bring to the table, when you combine with a world-class company, there are so many very obvious synergies and then a lot of hidden synergies as we apply their technology to our businesses across the world. And we bring in, say, for example, the Carrier brand into their channel; those are immediate revenue synergies that can offset like if there's some 1Q heat pump headwind in Germany, you can look at all these other things, whether it's additional solar PV battery cells, things like that, or revenue synergies. So we just feel so confident in the business, in the team, in the overall trajectory and the overall earnings profile of that business.
Operator, Operator
Our next question comes from Gautam Khanna with TD Cowen.
Gautam Khanna, Analyst
I wanted to ask in the resi business, are you guys seeing any evidence of trading down, an increase in repair versus replace? We've heard some of the HVAC OEMs talk about that. I don't know if you've seen any evidence of that in the channel.
David Gitlin, Chairman and CEO
Interesting, Gautam. We have not seen any evidence of that. I actually asked this question recently when I was with our top distributors. It's usually something to watch for when economies soften. However, we haven't observed any mixing down or trading down, such as replacing parts instead of entire systems. Our team did an excellent job during the switchover to the new SEER unit. We are currently focused on positioning ourselves for the refrigerant change, which provides both pricing and mix benefits to counterbalance some of the destocking we experienced throughout 2023 and will continue to see in the fourth quarter. I believe that much of this will be behind us as we prepare for the 454-B switchover at the start of next year. So, to reiterate, we have not seen any material evidence of that.
Gautam Khanna, Analyst
Okay, I wanted to follow up on an earlier question regarding the pricing of the new units expected in 2025 or possibly 2024. I'm curious if you believe the pricing for those units will be similar to the changes we experienced with the SEER adjustments this year. Do you think there will be enough cost reductions made so that we won't see the same pricing increase of around 10% to 15%? I understand there's been some discussion about this, but I'd like to know your best estimate on the potential pricing opportunities with the new unit.
David Gitlin, Chairman and CEO
Yes, I believe there have been some skeptics regarding our projection of a 15% to 20% increase over the next two years. However, we are very confident in this expectation. We plan to raise prices for residential products, which is a standard practice for us. This will continue into next year and again in early 2025. Additionally, we will be adding costs to the system for enhancements like leak detection, sensors, and certain control components, making it reasonable for us to increase prices due to the added protections for the 454-B units. We entered this year anticipating benefits from price and product mix, and I believe these benefits might turn out to be slightly higher than initially expected, around 10%. We expect to see similar orders of magnitude in price and mix benefits with the 454-B unit.
Operator, Operator
Our next question comes from Brett Linzey with Mizuho.
Brett Linzey, Analyst
Yes. I just wanted to come back to the business exit update slide. You noted the resi commercial fire public trading late spring. Was hoping you could just put a finer point on what the nature and structure of that transaction might look like as it moves to the public markets?
David Gitlin, Chairman and CEO
It could take a few different forms. It might be a spin-off or a split. An example we looked at is Johnson & Johnson, which was recently in the market. We are preparing for various scenarios. We’ve discussed the idea of a clean exit, accelerating our buyback, and our commitment to reducing debt for our investors. With this public company exit, we aim to achieve all of these objectives. We will finalize the specific form as we move into early next year. The preparation remains the same regardless. I am very proud of the team because typically, a lot of this work would take longer. However, the team is diligently working around the clock to ensure we are ready for public trading in late spring of next year.
Brett Linzey, Analyst
Okay. Yes, makes sense. And just to follow up on the international truck and trailer sales up over 20%, strong quarter. A bit of a moderation in the order book. What is your level of visibility based on backlog, based on incoming order rates as we flip the calendar here to '24?
David Gitlin, Chairman and CEO
There are several factors affecting our international truck trailer segment, including a swift shift to electric vehicles in the truck market. We were pleasantly surprised by the low double-digit increase we observed overall in international truck trailer orders, which rose 60% in the third quarter. This growth is partly due to the transition towards electrification and mainly because our team has effectively supported customers amid strong market demand. We are optimistic as we head into next year, with positive performance in both the European truck trailer market and in China. In North America, despite attention on the ACT numbers, we anticipate our truck trailer business will see double-digit growth this year, even though the 2023 ATP is projected to decline by mid-single digits. We are taking a realistic view of ACT's forecasts for next year, but various factors, such as the electrification shift, pricing dynamics, and our focus on enhancing digital and recurring revenues, have resulted in impressive outcomes for us.
Operator, Operator
Our next question comes from Nigel Coe with Wolfe Research.
Nigel Coe, Analyst
I noticed you mentioned Toshiba's performance, which I believe is shown on Slide 3. Toshiba Carrier's performance is still strong, even though Europe and parts of APAC are struggling. I'm curious about what is contributing to the positive performance at Toshiba Carrier.
Patrick Goris, Chief Financial Officer
Nigel, the financial performance at Toshiba Carrier has been really strong. A lot of that is driven by the synergies. We mentioned, I think, last quarter that we're increasing the cost synergies from a target of $100 million run rate to $200 million. It is helping us significantly expand our margins in that business. To your point, the sales in Europe for that business were a little lighter for Global Comfort solutions. But the performance overall for that business is really strong. And the key driver there is really all the synergies that the team is driving. And we are nowhere near the actual run rate yet. And so we expect to benefit from that for the next couple of years as that expands.
Nigel Coe, Analyst
Okay. That's great. That's great to hear. And then I hate to go back to a question that's been asked a couple of times. But obviously, the HVAC margins this quarter were spectacularly strong when we even move back out the tax item. Obviously, Q4, and I think Q4 originally was meant to be sort of similar to Q1. It looks like it's coming in maybe a little bit weaker than Q1. So just wondering, I'm assuming price costs would have been a factor in the HVAC strength there. I'm just wondering why that's not going forward to Q4. So again, I mean, I know it's been answered, but maybe just a bit more color there, please?
Patrick Goris, Chief Financial Officer
Yes. Actually, I think that the HVAC margins for Q4 will be very similar to our Q1 margins. So I think they're very much aligned there. And as I mentioned in one of my prior answers, what we're going to see in HVAC in Q4, as we address the field inventories, we mentioned in our comments, we want the field inventories to end about mid-teens down versus the beginning of the year, a lot of it is going to happen in Q4. So we're going to see more downtime in our factories than initially planned. And that's going to impact some of the margins, of course, in that segment. We do expect price costs and productivity generally remain strong, but that is a headwind that we wouldn't have seen in the prior quarter, which is a destocking headwind affecting our factories.
Operator, Operator
Our next question comes from Josef Nieto-Phillips with Jefferies.
Steve Volkmann, Analyst
It's actually Steve Volkmann here. We got a lot going on this morning, obviously, sorry about that. So my question is kind of a big picture one, Dave. Where do you think we are in the adjustment of the backlog? Does it go back to kind of historical levels? Or does it sort of settle in above historical levels? And sort of where are we in that process?
David Gitlin, Chairman and CEO
I believe we are returning to historical levels. The events of the past few years have been quite unusual due to the supply chain challenges, although the underlying demand has remained strong. Consumers have been proactive, ensuring their orders are secured for when needed. For instance, in the light commercial sector, many replacements are anticipated during the summertime to prepare for the school year. Due to supply chain uncertainties, people are ensuring their positions are protected. We've seen a return to more historic levels in the shorter-cycle business. However, in longer-cycle businesses, such as our commercial HVAC sector, we still have a backlog that is up 40% compared to two years ago, along with elevated lead times and backlog levels. We expect these to start normalizing. If the underlying demand stays strong, depending on the sector, we will likely see continued growth in key businesses. Therefore, we anticipate some leveling off. This is why we don't focus too much on quarterly order fluctuations, as they can vary significantly now compared to the past. We've noted swings of up to 40% in orders, but we prefer to focus on our backlog levels and lead times to gauge the strength we expect.
Steve Volkmann, Analyst
Got it. And do you think we'll get sort of more normal by the end of '24? Or does it take longer than that?
David Gitlin, Chairman and CEO
No, I think that's about right. I mean, I think that some of the shorter-cycle stuff is starting to gather. We're seeing more normal lead times in resi. I think that's going to happen for Viessmann Climate Solutions, that they'll start to get their backlogs back to more normal levels as you get into the 1Q type timeframe. And then it just goes back to basics. So I think when you look at sort of the longer cycle stuff that's sort of by the end of '24, the shorter-cycle stuff is essentially there.
Patrick Goris, Chief Financial Officer
It will depend on our working capital situation. So far this year, we have performed significantly better compared to last year. We would need to make a notable impact on working capital, which is definitely our goal, but we aren't prepared to make any commitments until February when we provide guidance for next year.
Operator, Operator
And our last question comes from Andrew Obin with Bank of America.
Andrew Obin, Analyst
I really appreciate you guys fitting me in. Just a question on light commercial and just business mix, right? Because the growth in light commercial has been so spectacular. It's a good margin business, and then in the face of resi declines and sort of stadia growth in Applied. As you look at North America, what does the business look like right now, sort of the mix between resi light commercial and applied? And how structural and sustainable is this mix going forward? Because clearly, it's quite good for your margins.
David Gitlin, Chairman and CEO
The residential business is significantly larger than the light commercial segment. Light commercial has performed better than anticipated at the beginning of the year, and we are pleased with its performance. The order of business size is residential first, followed by commercial, then light commercial. We anticipate some inventory reductions in the fourth quarter and are transitioning to the new 454-B standard in residential. Currently, residential volumes are down in the mid-teens, while sales are experiencing mid-single-digit declines. We expect to see a recovery in this business next year. Light commercial will face challenging comparisons but remains strong in several verticals. The entire sector is focusing on connected devices and aftermarket opportunities, which are still in the early stages but present significant potential. On the commercial side, we continue to manage a substantial backlog. The controls sector has been performing exceptionally well, with double-digit growth in the aftermarket. With a strong backlog, we believe that lead times in North American commercial will eventually normalize, positioning us for growth as we move into next year. Well, look, let me just thank all of you, our investors, for their continued confidence, and let me thank our team. We have folks working tirelessly while we perform and continue to transform the business. So my hats off and thanks to the team. It's just not only working so hard, but working so well and together as a team. And with that, we'll conclude the call. And of course, Sam will be available for the rest of the day to everyone. Thank you all.
Operator, Operator
Thank you for your participation. This does conclude the program, and you may now disconnect. Everyone, have a great day.