Good morning, and welcome to Carrier's First Quarter 2024 Earnings Conference Call. I would like to introduce your host for today's conference, Sam Pearlstein, Vice President of Investor Relations. Please go ahead, sir.

Thank you, and good morning, and welcome to Carrier's First Quarter 2024 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. [Operator Instructions] With that, I'd like to turn the call over to our Chairman and CEO, Dave Gitlin.

Thank you, Sam, and good morning, everyone. We've had an exciting start to the year. We welcomed 12,000 new team members from Viessmann Climate Solutions to the Carrier family, made great progress on our business exits and delivered very strong financial results, positioning us for yet another year of significant margin expansion and solid growth. Starting with the highlights of our strong first quarter results on Slide 3. On low-single-digit organic sales growth, we drove 280 basis points of adjusted margin expansion and 19% adjusted EPS growth. I am very proud of the team. We have made enormous progress on our lean journey and driving sustained productivity, and we are seeing it in our results. Our formula is working, drive productivity tenaciously, simplify the business, reduce overhead, invest in growth, all while increasing margins. Our performance and transformation all tied to our clear North Star, to be the global leader in intelligent climate and energy solutions, and we are making great progress on our vision, as you see on Slide 4. We provide our customers with differentiated sustainability solutions. For buildings, our North American small rooftop units have the highest efficiency in the market, with the smallest footprint. Our water cool chillers, with magnetic bearings, provide best-in-class efficiency with the ability to match cooling loads with variable demand during the course of the day. For homes, Viessmann's newly launched heat pumps expand our addressable market in Europe by approximately $5 billion and in typical Viessmann fashion, deliver 15% to 25% energy savings versus competitors and are the quietest on the market. For the cold chain, our new HE19 trailer reefer unit reduces fuel consumption by 30% compared to our previous offerings and by 10% compared to our competition. And our new OptimaLINE container unit consumes roughly 15% less energy than…

Thank you, Dave, and good morning, everyone. Please turn to Slide 9. We had a good start to the year. Q1 earnings were well ahead of our expectations and the guide we provided in February. Reported sales of $6.2 billion were up 17%, with organic sales up 2% and a 15% net contribution from acquisitions and divestitures, substantially all Viessmann Climate Solutions. Q1 adjusted operating profit of $927 million was up 44% compared to last year, driven by favorable price and productivity and the contribution of Viessmann Climate Solutions, partially offset by investments. Strong price and productivity also drove adjusted operating margin expansion of 280 basis points compared to last year, despite the about 50 basis point dilutive impact from Viessmann. Core earnings conversion, that is excluding the impact of acquisitions, divestitures and currency, was well over 100% in the quarter. Adjusted EPS of $0.62 was up 19% year-over-year and was well ahead of our Q1 guide of $0.50. March was particularly strong, representing 50% of Q1 earnings. Compared to last year, price and productivity more than offset the impact of increased investments and the expected $0.06 dilution from Viessmann Climate Solutions. We have included a year-over-year adjusted EPS bridge in the appendix on Slide 23. Compared to our Q1 expectations, productivity came in stronger, and we benefited from the timing of a few items, including tax, amounting to about $0.05. Free cash outflow of $64 million was in line with typical seasonality and also reflects payments of M&A-related fees. Moving on to the segment, starting on Slide 10. HVAC reported sales growth of 25% reflects the contribution of Viessmann Climate Solutions and 2% organic sales growth. Organic sales in the Americas were up mid-single digits, driven by continued strength in commercial and light commercial, each up around 20%. This…

Thanks, Patrick. We delivered very strong results in the first quarter, and are confident that we will continue to perform while we transform. With the integration of Viessmann Climate Solutions, the completion of our exits and the superb progress on our base business, we continue to position ourselves as the global leader in intelligent climate and energy solutions. And with that, we'll open this up for questions.

[Operator Instructions] Our first question comes from Julian Mitchell with Barclays.

In terms of, I guess, the first question, maybe on VCS, no surprise. You talked about sales down low-double digits in Q1 and sort of down low-single digits for the full year as a whole. Maybe help us understand sort of year-on-year, how we should think about the second quarter playing out within that? And then for the year as a whole, how much of that decline is driven by that solar PV business as opposed to the sort of core HVAC part of VCS?

Sure, Julian. Let me start and Patrick can add. Well, we did say actually flat to down mid-single digits for the full year previously, of course, up mid-single digits. We expect for Q2 will be -- the absolute sales number should be about the same as Q1, which, in that case, would put Q2 year-over-year down about 10% to 15%. Our forecast assumes in the second half that revenue would be up about 20% compared to the first half. So this would be typical seasonality. If that were to happen, that would cause us to be down about 5% for the year. If orders pick up and we see better than seasonality pick up in the second half, then we would get closer to flat. As we think about the full year, we still expect positive growth in heat pumps. That's probably up in the mid-single-digit range. We do see boilers down probably in the low-double-digit range. You asked about solar PV, that's probably down more than 30% for the year, which, as we said, has lower margins. And Thomas and the team are doing a superb job with aftermarket. That was up mid-teens in the first quarter, and we think that will continue for the full year.

That's very helpful. And then just a quick follow-up on the HVAC segment. So I think, Patrick, you talked about the full year margins in HVAC being up about 100 points year-on-year. Is that kind of a similar year-on-year rate, we should expect each quarter for the balance of the year? And I just wondered if you made any changes to the assumptions within HVAC? I think you called out stronger growth assumed now for light and applied commercial HVAC?

Yes. Overall, for the year compared to our earlier guide, we think light commercial and commercial HVAC will be a little bit better. In terms of the year-over-year margin for HVAC as a segment, we do expect Q2 to be up about 100 basis points year-over-year. Q3 will probably be somewhat similar, and then we expect Q4 to be better year-over-year as well.

Our next question comes from Jeffrey Sprague with Vertical Research Partners.

Dave, interesting to hear resi and commercial fire now prioritizing sale with kind of year-end close, right? So it sounds like you're close to something -- and so maybe you could address that? And is there something happening on PFAS to kind of expedite this and get it to kind of a sale process that can close? Obviously, we all saw JCI settled something in the MDL a couple of weeks ago.

Yes. Look, we feel that we've been progressing with PFAS very well. The Chapter 11 with KFI has gone exactly kind of as we expected and gone well. And we've been in mediation with the plaintiffs, and that's been progressing well. So we looked at the JCI. Of course, their settlement was for the water claims cases. It didn't cover PI. But I think in terms of us, we're very pleased overall with the progress that the legal team has been making on PFAS. And then in terms of the sale of our residential and commercial fire business, we should be in the market with an offering memorandum probably in 2 weeks. The business is performing extremely well. The EBITDA this year is tracking higher -- much higher than it was last year, and it's progressing -- the business is performing well. And for a whole variety of reasons, we're prioritizing sell. We're not excluding the possibility of a public market exit, but we're prioritizing a sale. We should be in the market with the offering memorandum in a couple of weeks, and we're hoping to close by the end of this year.

Great. And the biggest question I get on Carrier actually maybe, hits a little close to home. But Dave, you have a recent kind of deal with the company incentive program and the like. Are you there for good? Is the door still cracked open to consider something else. Every other day, I get asked if you're going to Boeing.

Well, Jeff, frankly, I'm really glad you asked that because I do want to address it head on, and I want to be clear that look, I've notified both our Board and the Boeing Board that I am 100% committed to Carrier. I'm really honored to be on the Boeing Board. I'll do everything I can to support that important company as a Board member. But given my commitment to Carrier, I've removed my name from consideration as a potential CEO of Boeing. And I'm not only committed to Carrier, I have to tell you, I'm so excited to be part of this journey. I mean rarely in your career, do you get to be part of such a transformational journey. And I don't know what inning we're in, but we're in the early innings on what I think will go down as one of the biggest transformations ever, and I'm so excited to be on the journey with 70,000 or so team members at Carrier. So I'm staying put 100% committed to Carrier, and I do appreciate you asking that, Jeff.

Our next question comes from Andy Kaplowitz with Citigroup.

You talked about data centers, low-double digits, global HVAC sales could be 20% over time. I think you said that data centers doubled this quarter in terms of backlog. So could you talk a little bit more about Carrier's position in the data center market? Maybe what you think your share is, where Carrier is in terms of liquid cooling and how to think about the shape of bookings going forward as '24 evolves? Do you see data center bookings continue to increase from what you booked in Q1?

Yes. I think, frankly, we got some really good quarters, Andy, in just even a couple of weeks ago in April. So this is a unique moment in time. It's exponential. Today, I would say in the U.S. We have low share. This is both for water cooled and air cooled chillers, but we think we're incredibly well positioned from a technology perspective. The key for us has not been technology. It's all been about expanding our capacity. So we're maxing out all of our facilities globally, and we're also going to be expanding our capabilities to support this in Mexico as well. So we -- our focus is making sure we're there for the -- all of our customers, especially some of the scale customers that are really leaning into this. It's not like anything we've seen. In some cases, we sell a few water cool chillers at a time. And here, we're looking at selling hundreds in a single order. So we feel very well positioned. We see the growth being exponential. We've invested in liquid cooling. We made a VC-type investment in SLT, which is strategic thermal labs. So that's really positioning us for the liquid cooling space for direct-to-chip cooling, we're seeing strength globally. Probably 70% of our sales are in North America, but we've done extremely well, both in Asia and in Europe. And this is a market that we have a dedicated Tiger team strictly focused on this space because it is such a unique moment in time.

Very helpful. And Dave, maybe give us just a little more color into the productivity you drove in Q1. And what you're thinking for the rest of the year? I know you've guided to 30% incrementals in pass, but obviously did 100% there. I obviously understand you raised your margin guidance. But how sustainable is the kind of productivity acceleration you saw in Q1? And given rising material costs, how do you think about sort of the offset there with pricing?

Yes. I have to tell you that Adrian Button and operations team working with our businesses, it is the best that I have felt since I've been at Carrier about our ability to achieve sustained productivity. We have one single source of the truth. Every single one of our productivity actions globally is in one database. We can sort it 20 different ways. We all are marching to the beat of the same drum. I would say materials is doing particularly well. That's probably 50% of our productivity. Logistics is still a tailwind. That's probably 10 or so percent, we're really taking out a lot of overhead, which is a significant piece. And the factories are now resuming to productivity after a couple of years of negative productivity. So we're also coming into the year and every quarter with a lot more productivity spoken for. So I feel tremendous about the progress. Yes we've seen some copper headwind. Price is getting up to like $4.50, but we got a little bit of offset from steel and aluminum. So I think we're very -- we're probably about half hedged on copper for the year. So I feel very -- very, very well calibrated on the year on productivity and also calibrated as we go forward beyond this.

Our next question comes from Tommy Moll with Stephens Inc.

Dave, I wanted to start with an update on A2L. What can you give us there in terms of when you plan to start or ramp production on the pricing front? Any revision or a reaffirmation of what you expect to capture over this year and next? And then if there's a bogey you want to throw out, one of your competitors in the U.S. did yesterday, just in terms of how much of the demand the new product might represent next year, that would be helpful as well.

Yes, I think, first of all, yes, we would reaffirm what we've said about 15% to 20% price increase over 2 years. I mean that includes low-double-digit base price increase, 454B versus the 410A. And then you'll get a few percent of base price this year and next year. So I know there's some skeptics on that. We're already selling the 454B units. We shipped our first in the first quarter. Obviously, it won't be that much over the short term. But we already have a price point in the marketplace for them. We feel confident in the 15% to 20% over 2 years. I had previously said that we thought that about 20% of our mix this year would be 454B. I think it's going to be less than that. But to the extent we ship less 454B, I think that for us for the year will be offset by probably a little more prebuy than we thought on the 410A. So we feel good overall about this year calibrated at resi at the high-single digits. I saw what one of our peers said yesterday about the mix next year. I think it -- look, it's early to say. I think they were suggesting in the 60% range for 454B. I think it will be more than that. I think you'll have some prebuy at the end of this year on the 410A, and that will cover into some percentage of the volume into 1Q, maybe a tiny bit into 2Q, but I think the bulk of the year will transition to 454B. So I don't know if it's in the 70% range, but it's -- I think it's a bit higher than 60%, but it remains to be seen.

And Dave, a follow-up on light commercial HVAC trends in Americas. Orders were down meaningfully, but obviously on a tough comp. Can you just refresh us on your revenue expectation there this year and describe any aspect of the demand environment?

It's hard to look at year-over-year quarters, yes. Quarters -- orders in the quarter were down significantly. We look more at how we're positioned for the year. I think that we had said that sales for light commercial would be down mid-single digits this year, which assumed volume down high-single digits. Given that our first quarter was up a little north of 20% on sales, and we still have good backlog. Patrick said it. But I clearly think there's upside to that number. And there's still verticals that remain strong. You look at K-12, some of that value-based retail, some healthcare space like some of the urgent care centers, some of the quick-serve restaurants, they're still strong. So even though we expect year-over-year orders to decline, that base business remains very strong. And by the way, we keep -- we keep taking share and taking share of the right way based on technology differentiation. So still a good vertical for us. And again, I think, upside to our original guide on light commercial.

Our next question comes from Deane Dray with RBC.

Just circle back on Viessmann. People were holding their breath about destocking. So just kind of where does that all shake out? And your line of sight on the resumption of the various European country incentives. I know you touched on that, in the prepared remarks. But what's the typical lag once the Germany reinstatates, Italy reinstates, I think they have done that already. But what's the typical lag between you start getting those orders?

Well, look, I think in terms of the first piece. Because we're direct to installer, we don't see the same destocking that many of our peers do. So I think that the way we look at it is that piece is largely behind us. We're now back to traditional book and ship business. So the significant backlog that existed -- like many of us, we saw the same thing in our U.S. resi business, you had just an untypical -- atypical high level of backlog a year, 1.5 years ago, that's now back to normal levels. When we look at what's kind of happening in Germany, and I think it's true in other countries that once the legislation gets promulgated, you do typically see and we're experiencing there's a bit of a lag between the subsidy definitization being finalized and new applications. So the question is why would both boilers and heat pumps be down? I think that many customers in Germany know and throughout Europe know that, long term, you're going to transition to heat pumps. They wanted to make sure that the new legislation was going to stick and that there wouldn't be change. Obviously, the market is a little bit tight in Europe overall -- on the overall economy. But now that the legislation is clearly firm, we do expect to see orders start to pick up. And what our expectation is orders start to pick up as we get into May and June that position us for the heating season as we get into September and October.

That's really helpful. And then one of the other questions that we get on the dynamics of the heat pumps in Europe as -- what about this threat of some of the Asian players coming in at a discount product? And would that matter? Would it take share -- and our view is that there's always been a good, better, best stratification of brands in HVAC, and Viessmann is at the high end. You rattled off some of the future comparisons. But just what -- is there a risk about new entrants into the European heat pump market?

Well, I think you answered it perfectly well, Deane. I do think that Viessmann clearly plays in the premium end of the market. So I do think that even though there will be more competition at the entry tier level and the mid-tier, we think that because of the brand, the technology differentiation, the unique channel, we don't see that as a major threat directly to Viessmann. I will add, by the way, that I was talking to the CEO of a major German company. And he was so impressed with the combination of Carrier and Viessmann Climate Solutions together, he said that if you look at German brands. If Viessmann is not #1, it's in the top 5 most respected brands in the country. And he was saying to me, kind of unsolicited how powerful this combination will be. So we'll preserve the Viessmann brand at the very high end. We are introducing Carrier in the mid-tier range both for heating and for cooling. So we think that's a unique space. And of course, we have Toshiba. So yes, there will be some new entrants in the market, but we feel not only is Viessmann protected on the high end, but we're actually seeing a bit of price tailwind as well.

Our next question comes from Noah Kaye with Oppenheimer & Company.

Dave, I'd like to stick with VCS. You highlighted early on the new product introductions, expanding the TAM by $5 billion. Would just love some more color on those product introductions. Curious to know to what extent they were developed in kind of any kind of synergy or technology road map coordination with legacy Carrier? And to what extent that's an opportunity going forward across the portfolio?

Yes. Look, no, I wish I could take some form of credit, but this was done well before our watch. I mean this was Viessmann, over a period of time, developing products for the 16 to 19-kilowatt range, which is in that very high-end single-family home which is a new market for them, which they introduced in the first quarter. And here in the second quarter, they introduced 19 up to 40 kilowatts, which gets you into that small multifamily residential space. So very, very attractive new -- very attractive new product introductions. I mentioned this $5 billion TAM that they now position themselves for. So again, it's one of the many reasons why you can see headline articles about heat pumps being down in Germany in the many tenth percentage range, while we'll be like flat or even heat pumps could be up for us this year. One of the reasons is the new TAM. I will say, though, on the latter part of your question when it comes to revenue synergies, we are actively working on a whole bunch of technologies. And that's why I said that we could see revenue synergies in the hundreds of millions, and we put virtually zero in our business case. I think that's going to -- when we look back 5 years from now, I think we'll look and say that was one of the best upside to the business case that we saw. Even in North America, Viessmann has just introduced -- traditionally in North America, Viessmann was a boiler sale company. They've just introduced an air-to-water heat pump for North America, which could be very attractive in places like New England and Canada and some other discrete locations. And we can leverage their technology with our channel to go really attack the market in the United States. So a lot of interesting upside there.

Very interesting. And just on applied strength. I mean how much of this is just the data center story? How broad-based is it? Maybe you can talk on some of the other verticals where the demand just continues to sustain?

Well, a lot of it is data centers. That's been very, very strong. Higher ed still remains strong. Healthcare, like hospitals, remains strong. When you look at it, it varies a little bit by region. We've seen some changes in China, for example. What was very strong in China was EV, solar production, all things renewables, that's now shifted in China. So we're now seeing strength in China from things like infrastructure and some of the other aspects of decarbonization. So some of the areas of strength will move. Data centers is strong globally. And then what's frankly been strong other than some changes within China remains strong. And what's been weak like commercial office has generally remained weak.

Our next question comes from Nigel Coe with Wolfe Research.

I want to go back to the C&R fire sale. I've got to say we were expecting a capital markets transaction, Dave. So just wondering if you had some indication of interest for that asset that gives you confidence in that sale process? And maybe, Patrick, if you could maybe size that business, we've got $2 billion of revenues, about 10% EBITDA margin, maybe it sounds like it's having a good year. So maybe just give us a projection for 2024.

Yes. Look -- and Nigel, I mean you were expecting it because I said it. So very fair. So we've changed. We are 100% prioritizing a sale. We completed about, I think, a 15-page teaser. We've discussed that with a number of interested buyers. The interest has been very high. So we've been extremely pleased with the reaction because it's a great set of assets. I mean you could see our Fire & Security business is performing very well. You're looking at Edwards very differentiated, GST very differentiated, Kidde very differentiated. You have a phenomenal set of brands that are uniquely positioned in their various spaces. So we'll see exactly where it ends up, but I am very pleased with the level of interest thus far, and we'll send out our offering memorandum in 2 weeks, Patrick, on the financials?

Yes, Nigel, you can think of that business being roughly $2 billion, I'm rounding. And the current run rate EBITDA is in about the mid-200s now. So much better, and so we're happy with the improvement we're seeing in that business.

Okay. That's great color. And then back to VCS. I mean based on the comments, Patrick, you made about the dilutive impact on the segments, I'm backing into maybe a 14.5% operating margin, maybe 15.5% EBITDA margin. For the quarter, is that right? And I'm just wondering if that is correct, if my math isn't too wonky, what is the path to high teens for the full year?

Yes. So from an operating profit margin point of view, Nigel, you can think of Q1 being about 12.5%. And for the full year, again at the EBIT low it will be around 15%. Actually, we think maybe a little higher than that. So in line with the overall company average, but below the average for the HVAC segment. And that's at the EBIT level. And you can probably add a couple of points for that 2, 3 points to get to EBITDA.

And our next question comes from Stephen Tusa with JPMorgan Chase & Company.

Just on that EBIT comment, that's EBITA, right, excluding the amortization when you say EBIT?

Yes, that's right, Steve. We adjust out the intangible amortization and some of the step-ups as well.

Yes, you guys said, I think previously, you added a bunch to D&A versus the prior guidance. Is that just truing up some of the financials on Viessmann?

Yes, Steve, you're right. In essence, at the time of the February guide, of course, we didn't have all the detail to provide the best accurate estimate of the DNA. And so inventory and backlog step-up was not yet fully included there. And also since then, we refined the difference between the intangibles and then the goodwill, and that impacts the amortization as well. So you can think of that being the new driver.

Got it. And then sorry, just on resi, just to follow up on the 454 A2L. Did you guys -- I think -- you guys are like -- at least we had heard your amongst the earlier movers on that. You already have a product in the channel, which is congratulations on that. That's definitely ahead of some of your peers. Did you kind of -- have you been pivoting at all as far as evaluating the market and working the 410A product in there as the demand changes? Like how fluid is that situation? That's kind of the first question. And then just a very quick follow-up for Patrick. Can you just give us the price and inflation for the first quarter? And then just any updates on that for the year for the bridge?

Yes. Let me -- yes, Steve, let me start on the A2L. Our strategy is to -- we did it with the SEER change. We're doing it with the A2L change, derisk everything, get way out in front. We don't want any technical producibility, capacity, any issues as we get into the end of this year. Our #1 priority is to support our customers to make this a seamless transition. So we are getting way out in front, not only on shipping the product, but on training our dealers. We had 1,000 dealers -- over 1,000 dealers together last week. We had closer to 10,000 together for a discussion probably about 18 months ago. So we are getting all over in terms of the preparation. And I do think that -- as I mentioned, I think it will be less than 20% A2L this year, probably a bit of prebuy on 410, but I do think it will be higher than that 60% that I know others mentioned for next year.

Okay. And then Steve, following up on your questions about price. Price for the quarter was about 2%. For the overall company, we expect that to be about the same for the full year. So about half of our organic growth price. In terms of price and net productivity combined, that includes the headwinds of material inflation, for example, that combined was about $200 million in Q1, and we expect that to be about $600 million for the full year in our current guidance.

Our next question comes from Gautam Khanna with TD Cowen.

I was wondering if -- just talking about 2025 in that bridge, is the growth algorithm still kind of north of 10% earnings growth off of the adjusted base? If you could just talk through kind of your '25 expectations, given the bridge that you provided on what the remainco is and the like? Just off of what basis, if you will?

Right. So if you look at Slide 23 of the deck that we posted, our core business this year is up 12% -- or in Q1 was up 12%. For the full year, we expect our core business, including the dilution from Viessmann in year 1, the growth to be 17%. And our value creation framework says that we'd like to grow our business double digits every year. So management, I think, would be very disappointed if our core business would not grow at least double-digit EPS in 2025. And on top of that, as you can see on that slide, there are the additional levers, redeploying net proceeds from industrial fire for half a year. That's going to be net -- that's going to be debt reducs, [indiscernible] for industrial and commercial fire. I mentioned earlier, run rate EBITDA of $250 million, you can assume a multiple on that and some tax leakage. That would be available for redeployment, including buybacks, plus free cash flow generated in 2024 and 2025 ex dividend, again, available for deployment, including buybacks. And so a long way of saying, we think there is significant earnings growth power available to us.

And what would your opinion of free cash conversion in '25 be off of that approximately $3 number?

We -- I haven't provided the $3 number, but whatever the number is, we target about 100% of net income.

And just a quick follow-up on resi. There's been a lot of chatter about repair versus replace and potential trading down. Have you seen any evidence of that? I know it's early in the cooling season, but any opinion on...

Yes, sorry to interrupt. No, we have not seen any evidence of that. We ask that ourselves a lot, and we have not seen evidence of that.

Our next question comes from Brett Linzey with Mizuho.

I wanted to come back to light commercial. Obviously, it's been a source of strength for a few years here, orders did take a step down in the first quarter. But you did talk about the light commercial being a profit outperformer for the year. Maybe just some detail on the expectations on some of those moving pieces.

Yes. Look, I mean, it's a question we get because it's been so strong for so long. So -- last year, we were up 35%. We knew we'd have a tough comp coming in into this year. But I think it's a very nice combination of share gains, the underlying verticals that have been strong, generally remaining strong, the team performing. And of course, we don't talk about it as much, but we'll have the same 454B dynamic here, where we see the same kind of base price and mix increase that we're mentioning for resi, we see for light commercial. So that 15% to 20% over 2 years. There won't be the same kind of prebuy. There might be a little bit on the small rooftop units, but -- so you would expect to see an even higher mix next year for 454B, which gives you a tailwind as you go into light commercial next year. And these verticals continue to be strong. So we think it will be slightly better than down mid-single digits this year, given more than 20% in the first quarter.

Okay. Great. And then just shifting over to container up 50%. I guess is the worst behind us here? What are you hearing from some of those customers? And then anything on sort of the sequential trends through the -- in the last couple of quarters?

Yes, I do think the worst is behind us, Brett. I mean we were up significantly in the fourth quarter. We were up about 50% in the first quarter. I think for the full year, it's probably up in the 30% range. And then you look at -- the other thing that we've done, which is very important, is we've introduced a new digital platform for that space as well called Lynx, which instead of just being an equipment provider, we're now getting subscription-based recurring revenues. And we have 130,000 subscriptions for something that we just introduced a few years ago. So hats off to the team there as well. And that will help smooth some of the cycles in that business.

Our next question comes from Andrew Obin with Bank of America.

Just a question on the buyback. You guys alluded that you have capacity to start the buyback in '24. How is it incorporated in your current outlook? Just trying to understand that? Or is that where the margin of safety comes for the guide?

Yes, Andrew, thank you for your question, and I'll provide some context on this. So since the acquisition, we paid down about $500 million in term loans in Q1. And the 3 exits that we have announced will yield about $5.5 billion in net proceeds. So that's our expectation. And what we communicated is that all of this will be used for deleveraging, although we may keep some as cash as it may be economically more attractive than just paying down some of the debt. But excluding -- if I look at the buybacks for this year, we have not included them in our guide for the year. But given the timing of our free cash flow, generally, it would be second half weighted. And as you probably recall, our free cash flow tends to be very heavy in Q3 and in Q4. So not included in our guide. As we resume it in the second half of the year, there might be some benefit. I think the benefit will be much more meaningful in 2025 than it will be in 2024.

And just a follow-up on Viessmann. What's your ability if -- for whatever reason, second half orders do not pick up as you expected, what's your ability to accelerate restructuring at Viessmann? Because I guess you guys kept the outlook for restructuring flat versus last quarter. Are you gated or limited in any way what you -- on the timing what you can do in Germany? Are there levers on cost at Viessmann that you can still pull in '24?

Yes. Andrew, I have to say I've been so proud of Thomas and the team working with the central apps folks at Carrier to be incredibly and appropriately aggressive on cost. And if you look at the actions that Thomas has taken, what's been very important for that -- for our 12,000 new colleagues at Viessmann that fully understand this is it has nothing to do with the combination with Carrier. It's all actions that business would have taken because of the overall market conditions. So they've been very aggressive on all elements of takeout of cost, not just on basic G&A, but they've been aggressive on materials, logistics costs, value engineering, which is part of the benefit and insourcing part of the benefit of coming together with Carrier. And they're going to continue to take cost. So there's a lot of levers that, that business can and will pull to take costs out of the business. There are certain kind of natural limitations in the agreement that we had with them, but those are not things that are in any way going to affect the ability for that business to take the appropriate cost actions.

So when you talk about cost synergies, that excludes whatever actions, as you have alluded, Viessmann would have taken these actions, regardless given the market conditions? Is that the fair point that there's $200 million by year 3, we have, but at the same time, Viessmann can accelerate internal cost control given the market conditions? Is that the right way to think about it? Sorry.

I think it's a fair description, Andrew. I -- look, I think cost synergies, we have a very specific definition we use. It's cost that's taken out because of the combination. So there's a bunch of examples of that where we both buy from the same supplier, and we have the ability to go renegotiate with those suppliers or the ability to get more work to certain suppliers. We have a whole lot of value engineering between Toshiba, Carrier, GWA and Viessmann. So there's things that cost takeout that we can do because we're now part of the same family. We see it with some of our factory optimization. So yes, there's cost takeout that they're doing on their own, and then there's cost synergies on top of that. Yes, thank you. And just to close it out, I want to end by thanking our customers who always support us and our team who is doing a phenomenal job. So thank you also to our investors. And as always, Sam will be available all day for questions. Thank you, all.

Thank you for your participation. This does conclude the program, and you may now disconnect. Everyone, have a great day.