Good morning, and welcome to Carrier's First Quarter 2022 Earnings Conference Call. This call is being carried live on the Internet, and there is a presentation available to download on Carrier's website at ir.carrier.com. I would like to introduce your host for today's conference, Sam Pearlstein, Vice President, Investor Relations. Please go ahead, sir.

Thank you, and good morning, and welcome to Carrier's first quarter 2022 earnings conference call. With me here today are David Gitlin, Chairman and Chief Executive Officer; and Patrick Goris, Chief Financial Officer. Except as otherwise noted, the company will be speaking to results from operations, excluding restructuring costs and other significant items of a non-recurring and/or non-operational nature often referred to by management as other significant items. The company reminds listeners that the sales, earnings and cash flow expectations and any other forward-looking statements provided during the call are subject to risks and uncertainties. Carrier's SEC filings, including Forms 10-K, 10-Q and 8-K, provide details on important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements. We will leave time for questions at the end. Once the call is opened up for questions, we ask that you limit yourself to one question and one follow-up to give everyone the opportunity to participate. With that, I'd like to turn the call over to our Chairman and CEO, Dave Gitlin.

Thank you, Sam, and good morning, everyone. I'll start with a summary of our Q1 results on Slide 2. Q1 was another strong quarter for us, and I am proud of how our team continues to execute in the face of global challenges. We delivered 12% sales growth, excluding the impact of Chubb. Organic orders growth remained strong at 10% and our backlog is up almost 30% organically versus last year. Adjusted operating profit was up 7% compared to last year and up high teens, excluding the impact of Chubb. Price/cost was neutral in the quarter better than expected. Free cash flow was a larger-than-expected outflow in the quarter, mainly due to supply chain shortages impacting inventory levels. We continue to expect to generate $1.65 billion of free cash flow this year. We remain focused on the priorities that you see on Slide 3, above-market organic growth, margin expansion, strong free cash flow and disciplined capital allocation. This slide summarizes our value creation framework as presented at our recent Investor Day, which not only forms the basis for our updates to our investors but also drives our priorities via our internal goal alignment process. I recently spent a week in Europe and a week in Asia and saw first-hand how our people globally are driving results tied to these priorities. From our world-class operations in our Singapore container factory to the tremendous innovation from our colleagues in Hyderabad and New Delhi, to the discipline and energy in our sites throughout Poland, it was encouraging to see the power of focus, culture and talented empowered teams coming together to provide solutions for our customers. I'll address our progress on the key elements of this value creation framework starting with growth on Slide 4. We continue to lean into the opportunities provided…

Thank you, Dave, and good morning, everyone. Please turn to Slide 8. As expected, reported sales were down due to the Chubb divestiture. Organic sales growth was better than our high single-digit Q1 guidance, with all segments growing organically. Residential and light commercial HVAC growth was stronger than expected, with resi up over 20% and light commercial up over 30% compared to last year. Both price and inflation were higher than we anticipated and price/cost was neutral. Productivity and higher JV income also contributed to strong adjusted operating profit, which was up 7% compared to last year despite lower reported sales. Core earnings conversion, excluding the impact of price/cost, was well over 50%. Adjusted EPS of $0.54 was also better than the guidance we provided in February given stronger sales, margins and a lower share count. For your reference, we added an adjusted EPS bridge in the appendix on Slide 19. Free cash flow was a use of $258 million versus than the use of $100 million we guided to on our Q4 earnings call. The primary driver was an increase in inventory. We continue to operate with higher safety stock and missing components are delaying shipments. We still expect to generate $1.65 billion in free cash flow for the full year, but this will be more back-end loaded as we expect supply chain conditions to improve in the second half. Let's turn to Slide 9 and cover our segments performance. HVAC organic sales were up 18% driven by continued very strong growth in residential, light commercial and our ALC/Controls businesses. Resi movement and field inventories for splits and furnaces were both up low single digits. Light commercial distributor movement was up double digits in the quarter with field inventories up modestly versus prior year. Within Commercial HVAC, Applied and…

Thanks, Patrick. We are pleased with a strong start to the year. Our backlog gives us confidence about continued strong growth, and the team continues to overcome unexpected macro challenges to deliver results for our customers and our investors. With that, we'll open this up for questions.

[Operator Instructions] Your first question is from Josh Pokrzywinski with Morgan Stanley.

So I guess, just maybe first question on the commercial side, where you saw some momentum. Dave, do you feel like some of the stuff we've been talking about here, maybe more structurally on whether it's indoor air quality or some of the stimulus money going into education, is hitting the system? Or are we still kind of on the other side of just easy COVID comps and kind of getting back to work there?

No, I think it has a lot to do with the secular trends and some of the initiatives that we've launched. You look at K-12, our orders were up 50% in the first quarter, which is, as you know, Josh, significant. Our pipeline grew 25% sequentially. So, we're starting to see SR2 and SR3 funds being released in K-12, and that's encouraging. Aftermarket was up double digits in our HVAC business. Controls was up north of 20%, which has been a big focus area for us. And then when we look more broadly at the underlying business itself, we now have seen, I think, 14 straight months where ABI was north of 50%. So, orders continue to be very strong. The global applied business was up 15%. North America was up over 20%. So, when we look at ALC, Controls, aftermarket trends, healthy buildings where the pipeline is now at 850 and then K-12, a lot of these underlying trends that we've talked about are dropping through.

Got it. That's helpful. And then just on the resi business, we're kind of price-on-price-on-price at this point in terms of the marketplace. I think you mentioned in terms of the movement versus sell-in. Inventories are at healthier, if not a little higher than usual. How should we think about kind of the sensitivity point to that end consumer for what is a pretty significant dollar increase in the price? Are you seeing any kind of pushback or elasticity of demand there?

Not yet. What we are seeing is, I guess really, record levels of price realization. We said that resi for us in the first quarter was up over 20%, more than half of that from price. So we have announced about 5 price increases in the last couple of years. And by the way, we have to because of the input costs that we're seeing. So really, what we're doing is dealing with the inflationary pressures we have through trying to stay out in front of it through price increases. But clearly, for resi, we watch movement very carefully. That was generally in line with field inventories, both up kind of in that low single-digit range if you focus on splits and furnaces. And orders were down modestly, but we expected that orders have been fine here in April. So there's a lot of pent-up demand for resi. Price realization has been strong. And then, of course, as we get into the back half of the year, we'll have to see how the switchover takes place as folks gear up for the 2023 introduction.

Your next question comes from Julian Mitchell with Barclays.

Maybe just to start off with the sort of price versus cost dynamic. So I think before you guided something like $1 billion of cost headwinds and $1 billion or so of price for the year. Just wondered sort of any updated thoughts on those 2 points and maybe what the impact from those 2 items was in the first quarter.

Yes. Julian, Patrick here. So clearly, Q1 was better than we expected at neutral versus negative. I'd say that for the full year, you do recall, we said $1 billion price, $1 billion inflation. Based on the current quarter and what we're seeing, it is likely that will do a little bit better than the $1 billion. Frankly, with all the price increases we've announced, we have -- we're on the -- on track for that $1 billion. It could be a little bit better than $1 billion, but at the same time, we've seen some of the input costs come up as well. And so for the time being, we continue to target price cost neutral for the year, but we understand that pricing will be likely a little bit higher than $1 billion, and so will inflation.

Thanks, Patrick. And in the first quarter, the cost headwind was, what, a few hundred million or so?

It was north of $300 million.

And then just my follow-up would just be around that Refrigeration business and kind of the slope for getting the margins kind of where you want them to be in that sort of 40 bps plus range. What are the main drivers for that? How quickly do we see that margin catch up?

Well, Julian, our expectation is that Q1 will be the low point for margins in Refrigeration. A big driver of margins in Q1 was price/cost. Price/cost was about a 150 or so basis point headwind for that segment in Q1. We expect price/cost to be neutral starting in Q2, and that will help improve the margins versus where it is today, where it's a more significant headwind. And so the good thing is as we've seen price realization improve in Refrigeration. Since -- frankly, since the second quarter of last year, price realization has improved every quarter and price realization in Q1 was almost double of what it was in Q4. So, I believe -- we believe we're on the right track there.

Next question comes from Andrew Obin with Bank of America.

Just a question on interest rates and distribution. One of the commentaries referred from the channel is that the reason the distribution is comfortable carrying as much inventory as it does right, is because the floor financing is pretty cheap. With interest rates going up, and I appreciate that you have one very, very large distributor -- but with interest rates going up, is this coming up with your discussions with distributors and this idea that structurally, regardless of how strong the cycle is, maybe they will carry less inventory just because, right, on an absolute basis, the interest payments will go up over time?

No. That has not been a major focus area for our discussions with our -- not only our distributors, but our dealer channel as well. The -- what we're seeing in resi right now is the same that we've been seeing for the last couple of years. So, I know there's sort of this general anxiety about residential. And the best that we can do is stay completely tied in with our channel partners to see what they're seeing. And what they're seeing is generally a strong consumer, the same trends that drove a 10% growth 2 years ago, drove 20% growth last year, drove north of 20% in the first quarter, generally continue. Housing starts were positive in the first quarter. They were up about 10%. This whole work-from-home phenomenon and that, which is more migrating to a hybrid work environment. That continues. We continue at Carrier to see share gains. We had probably about 100 bps of share gains in the last year or so, and that continued in the first quarter. And there's more demand for some of the higher-end units. The challenge we have is that the higher end you get, the more chips you rely on, and that's where we've struggled on the supply chain side. So a lot of the underlying trends have continued. I think the biggest discussion we have is not as much around interest rate impact, but it's just more around the switchover and the cutover that's going to take place in the second half of the year as we gear up for the 2023 units. And especially in the South, because that is such an unprecedented move where it's date of installation. So the distributors and dealers in the South want to end up with 0 inventory of today's units but have sufficient inventory to support the first quarter. And we -- that's going to be the switchover that is unprecedented and that could be great news as we get into the second half, it could not be. We have to see how that cutover takes place. The good news is that Chris and Justin are completely tied in on a daily basis with our channel partners, and we're managing their needs as best we can. Availability will still hurt many of our customers because we've been a little bit late. But I can tell you, I think, with confidence, we've been doing better than others and availability has helped us gain some share as well.

No, that's a great answer. I really appreciate it. Just a follow-up question. You mentioned a heat pump opportunity in Europe. Could you just size what the market TAM is? And what could this be for Carrier over time?

Well, I'll tell you, without giving you a specific number, Andrew, we are very, very bullish on the European heat pump market. I mean -- and I think that if you look at it, you look at it on the commercial side, -- we can say with confidence we're the market leader with commercial heat pumps in Europe. We have great technology. We have great channel partners. We're going to, of course, be -- we've added Giwee, we'll be adding Toshiba in the next few months. And what we saw in the first quarter alone was that commercial heat pump orders in the first quarter were up 30%. And it's helped by the fact that we introduced a great new product in the first quarter of last year, this low GWP air cooled chiller that we've talked about. So the key for us is to make a bigger play for resi heat pumps in Europe where we're not a real player today. So we're going to invest in that space. I think you should be confident of that because we know it's going to grow. They're probably going to add about 30 million heat pumps in Europe on the resi side by 2030. So we're not a player, but we'll be adding Toshiba, we have Giwee. We're adding a heat pump center of excellence using our Riello business in Italy and already has a channel. So we're going to be emphasizing resi heat pumps in Europe going forward.

Your next question comes from Nigel Coe with Wolfe Research.

Good quarter, good start of the year. Sorry, I joined the call a little late, so I apologize if this has already been discussed. Are we still tracking to $1 billion of price realization for this year? And I know that $1 billion you had in the plan and captured the April 1 price increase. But do you have any more price increases in the plan for this year?

Yes, Nigel, Patrick here. So what we said earlier was that with everything we've announced to date, we're comfortable that we'll realize $1 billion or more of price this year. And so it's likely, given our performance in Q1 that we'll do better than $1 billion this year. But we also believe that the inflation will be higher than the $1 billion we expected a quarter ago. And so we think that both price realization but also inflation will be higher than $1 billion. The good thing is with the prices we have announced, we think we're comfortable with the $1 billion -- or at least $1 billion of price realization this year. That's announced, not yet realized, of course.

What I would add, Nigel, is that when we talk price, I think a lot of our investors assume we fixate on resi. What we're seeing with prices it's across the portfolio. Jurgen and his team in Fire & Security, Tim and his team in Refrigeration, all pushing price in a very concerted way with I would say, more effectiveness than we've ever seen in our history. So clearly, Chris and the team in overall HVAC have done very, very well on the price side, which gives us great confidence in our numbers for the rest of the year. But it really is across the portfolio.

David, that's great. And then you mentioned the price/cost was negative in Refrigeration. Was that just transport refrigeration -- just to clarify, was that for the whole segment or just the transport side? And then that obviously implies that HVAC was positive for the quarter, if you can just confirm that. But my broader question on this price/cost is, if you were neutral overall in 1Q, why wouldn't you be better than neutral for the full year? I think the plan is to be neutral. But why wouldn't it be better given that 1Q is arguably your toughest comp?

It's early. I mean, that's -- I guess the short answer is that we -- Nigel, we expected Q1 to be negative, as you said, and it was neutral. It does give us confidence that we've taken aggressive pricing actions that bode well for the rest of the year. But we also have to keep an eye on inflation where there remains a lot of uncertainty. I think anyone's ability to predict inflation going out a few quarters is suspect. So we'll keep an eye on it. Right now, we feel very good about where we stand on price cost going through the year, but we do have to keep an eye on it and give us a few more months to see how things continue to play out.

That's fair. And sorry, what was residential price in the quarter?

We said residential was up over 20% overall sales, more than half of that driven by price.

Your next question comes from Steve Tusa with JPMorgan.

You guys had mentioned a couple of other items for the bridge. I think it was like a $300 million productivity number or something like that. Any changes on anything else moving around on as far as the annual bridge concerned? And then what was that number in the first quarter?

Steve, no change for the overall year. We still continue to target $100 million -- no, sorry, $300 million of productivity, $100 million of reinvestment. And productivity in the first quarter was over $50 million.

Okay. And then anything more on the second quarter as far as seasonality? I mean you mentioned the $100 million or so in China shifting out? And anything else in 2Q? Or should we expect a somewhat normal seasonality?

I'd say somewhat normal seasonality, Steve. I will say that last year, you may recall, the margins in HVAC were exceptionally high, I think they were almost 19%. We do not expect HVAC margins to be that high in Q2. We expect margins in HVAC to be up a little bit compared to Q1, but not to the extent that it was last year. And we expect our overall margins in Q2 to be maybe a few basis points below what it was last year.

Yes. And sorry, what is normal seasonality? I think these days, I don't know what normal is. But how do you guys see normal seasonality like maybe first half, second half when it comes to EPS? What is that typically?

Well, Q2 EPS is expected to be higher than in Q1, also because the volume -- the volumes tend to pick up in Q2 and Q3.

Right. Yes, I was looking for a little more precision there, but I guess I'll just take what I can get there. One last one. David, how exactly do you expect this to play out, the '23 transition? Maybe give us a little more precise color on like what you're currently thinking is the outcome when it comes to sell-in and with the new products and the old products over the course of the second half and into '23. Like what's the current strategy that you're taking on that front?

No, the current strategy is that we will be introducing the 2023 product really focused on the South starting in the next few months. So as we start getting into August, the products that they'll be receiving in the South will be the 2023 products because that's what they have to gear up to start selling right on January 1. We'll introduce that the new product for the North as we get closer to the end of the year because they'll be stocking inventory of today's units because that's data manufacturing in the North in the third and fourth quarter. So introduced the '23 product earlier for the South later for the North, and then we'll have to see the cut-over. We all watch inventory levels and movement levels, I would tell you, Steve, very, very carefully. And they remain generally in balance with what we expected. So we watch inventory levels not only with our distributor partners, but also what's being stocked in the dealer network as well. And we haven't we haven't seen anything alarming. We do expect year-end inventory levels be down year-over-year, depending, of course, what happens with movement in inventory over the next 6 months or so. But our expectation is year-end inventory levels would actually be down year-over-year. And we're going to stay super close with our partners on this transition.

And then, you would consider the move -- when you start selling those in and they're like 10% higher or whatever they are, you would consider the related revenue increase as mix as opposed to price, correct, when you layer those into the channel?

Well, movement, we've been seeing low single digits, not 10% on (inaudible).

On price, on the difference in price per unit, per unit, right, at the minimum level. Doesn't that price of that minimum unit go up for the new product?

Yes. Yes. The price -- yes, good point. The price of the new units we've said will be 10% to 15% higher than today's unit. So yes, that plays in.

And but that will be a mix, not price, correct?

Yes, that's the one way to look at it. Yes, that's right.

Your next question comes from Joe Ritchie with Goldman Sachs.

So, just -- maybe just elaborate a little bit more on China. You guys mentioned in April, the orders turned negative. I'm assuming that's because of lock down and then you've embedded this $100 million headwind for 2Q. Just give us a little bit more color on like what are kind of like the range of outcomes there and like what you're actually hearing and seeing on the ground?

Well, we're watching this one carefully, Joe. I mean what I'll say upfront is that China is important to us. We believe in China, it's part of our growth vector. We're a leader in transport, commercial fire, commercial HVAC, as you know. It is 8% of our sales. We kind of came into the year with our biggest concern being around real estate. But the good news is that only 1/3 of our sales in China are real estate and less than 10% of that is where the biggest focus area, which has been these multifamily residential. So that specific vertical where a lot of attention has been is less than 0.5% of our sales. What's happened over the last I would say, a couple of months is these lockdowns have had a significant impact on a lot of folks. We -- it's been really acute for us in Shanghai, where we have 4 of our factories in Shanghai, a couple in commercial HVAC, 1 for Riello, 1 for transport. And we have 130 suppliers in the region. We've applied for reopening under their exception rules. We're in the process. We track it daily. We're hoping that we get granted not only for us to reopen but for our suppliers. But -- it's not a good situation over there. And I think it's questionable how it's overall being managed. But for us, we need to just keep -- keep heads down, being compliant and pushing for reopening, and it's also having a knock-on effect on logistics. So, we do believe it's a timing issue. Like Patrick said, it could impact us a couple $100 million or so this quarter. We would expect it to recover as we get into 3Q. We do show an ability where there are shutdowns throughout COVID that we recover very quickly, and I'd expect the same to happen in China. Most of our product for China is for China or the Asia Pacific. Some things come into the U.S., but much less. But we really are pushing very hard for a rapid reopening in Shanghai, not only for China, but for the global market.

Yes. That was super helpful. I guess maybe one quick one, a quick follow-up on China. And then just if you're thinking about the kind of like proper decremental margin on the lost revenues? Is it kind of like a 25% to 30% range? And then the follow-on question, just on margins. But clearly, you're off to a better start than the annual guide. And so just any possible cadence that you can kind of give us throughout the year on kind of margin expansion to get to that 75 basis point number by year-end.

Yes, I'll start with the second half of the -- of your question, Joe. We think that Q2 and Q3 margins will be ahead of Q1, and Q4 will be slightly below where we were in Q1. That's our current cadence where we're looking at from a margin perspective. And as I mentioned on Steve's question, we do believe that Q2 margins may be slightly below where we were last year. And then on the decrementals related specific to China, we have really not shared what our incremental or decrementals are in that part of the world. So that's really not something I can get into.

Your next question comes from Deane Dray with RBC Capital Markets.

I'd like to keep the spotlight on some of the troubled geographies. I saw you took a $9 million impairment charge in Russia. What does that represent in terms of your investment, either assets receivable, people. And then for EMEA, orders up 10% to 15%, but there is concern now about slowing, and how much have you baked in that into your guidance?

Yes, Deane, I'll take the first one very quickly. Yes, you're right, we brought off $9 million of assets related to Ukraine and Russia. In essence, that is, we believe, all, if not most of our assets in that part of the world. So basically, we decided to look at all the assets we have in that part of the world and wrote these off. There might be a little bit of a hangover in Q2. But if it is, it's going to be in the few million dollars. We don't expect it to be higher than that.

Deane, on Europe. Keep in mind that last year when we had Chubb, it was close to 30% of our sales. And now without Chubb, it's closer to 22% of our sales. So Europe has become less exposure for us. What I will tell you is that we're watching this very carefully, but Q1 orders were very strong. They were up double digits. April orders have continued to be strong for us in Europe. So there's no tangible signs of weakness. But obviously, with everything going on in the world, we'll continue to watch it quite carefully.

That's helpful. And then as a follow-up, can you update us on any lost sales or past due because of supply chain issues. In the fourth quarter, I think it was $300 million to $400 million, you couldn't ship. What would be the comparable number this quarter? And you talked about missing components. We know that's an issue everywhere. But can you give any color in terms of which components and especially on the semiconductor side.

Yes. The number of overdue to our customer demand is about the same number as what you mentioned for 4Q. It's in the few hundred million dollar range that we could ship if we didn't have any supply chain issues. The root of a lot of our issues, I would tell you, 2/3 of our issue are chips. Chips cannot recover fast enough and they continue to be extremely painful for us. So I do believe our team is doing all the right things, which gives us some level of optimism as we get towards the second half of this year into next year. The things that we're doing to help ourselves as we get into 2H are, number one, the direct relationships with many of our key chip OEMs like TI and Microchip and STMicro and those. And they're doing their best to support us where I know they have a lot of customers that are pushing on them, but we're really establishing these direct relationships. And then, we're really -- we're redesigning many of our key chips. So we will have 30% of our critical IC's redesigned by the end of this quarter here in Q2 and then 50% by year-end. So that gives us a lot more optionality where we redesign around chips that are actually available. So that gives us some level of optimism while we wait for the capacity of our chip OEMs to come online in '23. But supplier on-time delivery and line stoppages, it's about what we've seen. There are some signs of hope. But chips are not only impacting us, they're impacting our suppliers as well. So that's the biggest thing that we need to watch in terms of availability.

That's great. I just would like to point out, it's more of a comment that, that sounds to us like some of the fastest redesign pace that we've heard that OEs are trying to do. So it sounds like you're making good progress there.

Well, we have a small army working on it globally. It's something that -- it's unfortunate, honestly, because what we've had to do is reallocate engineers that we want working on new product introduction to redesigning chips; so it is what it is. I think our engineering and operations teams are doing all the right things, but this cannot recover quickly enough.

Your next question comes from John Walsh with Credit Suisse.

Good start to the year. Maybe shifting gears a little bit. Question around the Fire & Security margin expectations for the balance of the year. Clearly, Q1, much better than you guys initially thought. I think it was actually guided down year-over-year in Q1. I didn't hear the 16% again for the full year, but assume that probably is still in the right ballpark. Just maybe help us understand how the rest of the year looks for Fire & Security from a margin perspective?

Yes, John. As you said, good start to the year. And if I look at the margins versus where we expected it to be, volume was a little bit better in that segment, but the big driver was price/cost. We -- price/cost in that segment was better than where we expected. So a good start to the year, but still too early for us to change our full year outlook. Clearly, there is an upward, call it, pressure in a good way to our margins in this segment, but still early in the year. And as I mentioned earlier, we're still seeing increasing inflationary headwinds. So good start to the year, better-than-expected price/cost, 16% clearly on path to do a little bit better than that, but too early for us to change our guidance.

Got you. No, that makes sense. And then maybe just a question around if you're seeing any market share shifts. I know one quarter is tough to kind of extrapolate, but applied, you've put up some really good growth. Curious if you think you're gaining share. I know that was an initiative. And then 1 of your competitors on Light commercial, I guess, kind of walked away from some new build stuff. I'm curious kind of what you're expecting there, and if you're seeing any market share shifts in either of those businesses?

Yes. Light commercial, I think it's clear we've gained significant share, by the way, while raising prices significantly. So -- we saw, I would tell you, over 400 basis points of share over the last year or so, and that continued into 1Q. We saw about 100 -- over 100 basis points of share gain in Q1. So proud of the team on Light commercial because it's been pricing, it's been operational performance, it's been innovation, it's been customer stickiness, it's been all the things that we push and the team is executing well in a strong market. And Applied is probably flattish; I think we've seen some share gains in China and North America, and Europe's may be slightly less than what we thought. But overall, I would tell you, Applied share is probably flattish in 1Q.

Your next question comes from Tommy Moll with Stephens.

I wanted to continue on the global applied HVAC business, so up mid-teens in the quarter, which is good to see. But what commentary can you give us about which parts of the world were on the stronger versus weaker side of that trend? And then as you think through for the rest of 2022, how do you see those trends unfolding? Or does the business feel like it's accelerating or kind of holding a good level of activity? How do you see that unfolding?

Yes. In the first quarter, Tommy, North America was the strongest. That was up around 20%, Europe was around 10% and Asia was around 10%. So overall, around 15% in the first quarter. We've sort of said high single digits across the board for the rest of the year, but we're going to have to keep an eye on it. China is the biggest watch item right now. China would probably be down for us in the second quarter because we do have a couple of facilities in Shanghai that we need to get reopened as soon as possible so we can support our customers. The good news on Overall Applied is; Number one, the underlying trends that we talked about at the beginning of the call, the underlying demand remains very strong. ABI metrics, as we mentioned, stays very strong. Aftermarket for HVAC up over 10%, the ALC/Controls business, high margins, really differentiated product lines that doesn't get enough credit, up double digits. So a lot of strength, especially in some key verticals like data centers and warehouse, education, health care, commercial buildings coming back online. So a lot to like there. I would tell you the one thing we got to watch very acutely right now is China.

Dave, that's helpful. Following up on M&A, noted Toshiba is on track to close by 3Q, I think you said. Is it safe to assume we're not likely to see another large-scale deal this year? And then a related point on potentially smaller scale investments, you recently announced the Venture Capital Group, and there were a couple of deals underneath that umbrella already. But what kind of cadence do you expect for those type of investments? And what's some of the underlying strategy you could highlight for us there?

Well, on the first, we continue to have plenty of cash and firepower for more M&A. So we're actively working our pipeline along the lines of what we talked about at our Investor Day with a huge focus on sustainability leadership, things that relate to aftermarket and our overall trends. So if we had the right deal, could we do a deal, obviously, north of $1 billion, we certainly could and would if it made sense. In terms of our Carrier ventures, we were very excited to launch it and announced a couple of important deals with OhmConnect and AddVolt, one on the energy management side, one on batteries as we think about our reefer [ph] unit. So right in the core of what we're focused on, -- and we have a pipeline, Jennifer Anderson and the team working a pipeline of a number of interesting investments we're looking at. And the cadence will be opportunistic and episodic. So -- it's not that we've set aside a certain budget for that team. These are typically around $5 million type investments. And if we see the right investments there, we'll make them. Patrick, anything to add to that?

No.

Your next question comes from Vlad Bystricky with Citigroup.

So, I just wanted to dig in on the strength you're seeing in the K-12 market a little. I think you said orders up 50% year-over-year or over 50% over year. So, can you just talk about how that market is evolving as Federal funds become more available? I mean, are you seeing -- is it sort of more broadening of orders? Or are you seeing larger, longer-duration district-wide type deployments accelerating?

Yes, we're seeing a transition to a more system-level sales. So, we had a key win recently, Vlad, in Ohio, for example, where we sold a broad suite of solutions. It included HVAC and included building management systems. They had some UV light upgrades to the school. So, we're seeing a transition. We were very fortunate to sell a bunch of OptiClean units and point solutions, and we're seeing a transition to more sustainable system-level solutions. Because what we're seeing from the school district is the realization that ventilation not only helps with things like indoor air quality and -- but 1 in 13 kids in schools have asthma. So obviously, it's important for COVID and the spread of airborne illnesses and diseases, but it also helps with asthma. It helps with cognitive functionality. We've done studies to show that better ventilation and lower CO2 levels, improve testing scores in schools. So, what we're seeing from the schools that we interact with is looking for a more structural, sustainable solution. And the good news is with -- especially with SR3 funds being released, they have the funding to make long overdue investments.

That's helpful. And it sounds like some good momentum that should be ongoing and continuing there. So that's exciting. Maybe just 1 follow-up for me, shifting to your productivity efforts. And I know your comments on sort of adding an additional 100,000 factory automation hours in 1Q was interesting, and you've talked about ramping that significantly through 2026. So just given what you've seen in the deployments you've done to date, is there a way that you can frame, sort of, how you're thinking about automation's impact on productivity annually over the next few years as you ramp those efforts?

Well, remember, what we said is that we said that we would increase our automation hours from 3 million to 6 million over the next -- between now and 2026. And remember, that's on a base of, say, 30 million or so manufacturing hours. So, it becomes a much higher percentage of our total hours. Obviously, you have to look at your variable costs that you're eliminating and replacing with automated hours. Obviously, there's an investment that goes with that. But you also see benefits around quality and some of the other things that get into other benefits and things. So, there's a lot of benefits that we're seeing from the automation investments. And we expect that to continue and continue at a pretty good clip. Anything you want to add, Patrick?

No.

Your next question is from Gautam Khanna with Cowen.

This is Jack Ayers on for Gautam today. I guess kind of just going back to the first question, I believe, on the resi HVAC cycle. I guess if you could maybe just provide your perspective on kind of what you're seeing. I know you guys got pretty good price yield this quarter. I guess like is there any concern going forward on the consumer behavior, maybe mixing down buying parts versus full system replacement. I guess just any color there would be helpful.

We've seen no evidence of that. It's something -- again, we watch this market, which is -- evolves on such a short cycle. We watch it very, very carefully. We've seen no evidence of mixing down. In fact, we've seen the opposite, a lot of desire for our higher-end Infinity systems. We've seen no evidence of replacing components versus entire systems. So, we'll have to watch it. Obviously, as you get into the higher SEER units, you're probably going to be looking at more system-level changes. And then as we get into 2025 with a new refrigerant, probably more system-level changes. So -- it's something we watch, but we've seen no evidence of.

Okay. Okay. That's definitely helpful. And then I guess just kind of switching gears to commercial, if I can just sneak another one in. I guess, like given the backdrop with rates going up, inflation kind of increasing here. Just at commercial, like orders were strong this quarter. comps are a little bit easier. We're still fairly early cycle here in commercial. I guess like when do you guys expect to see some of these macro backdrop sort of manifest themselves in some of these commercial orders?

While the underlying trends remain strong, our backlog is up in commercial, up of 30%. Orders up mid-teens again. Underlying trends like ABI, I think March was at the highest levels we've seen in over a year at 58%. So, we'll keep an eye on it. Again, we're specifically watching China right now. But a lot of the underlying trends, including things like aftermarket and controls continue to be encouraging.

The next question is from Brett Linzey with Mizuho.

Just wanted to come back to the chip redesigns and the progress you've seen on dual sourcing. Are you able to size how much revenue you think was held back this year, or at least last couple of quarters as a result of supply limitations? And how much of that unserved business now really shift to '23 as you get that chip capacity up and running?

Well, we'll have to see. What we've sized it at is a few hundred million of overdue to customer demand because of supply chain shortages. And 2/3 of that of our overdue relates to chips. How quickly we recover on that, we'll have to see. And then how much is this year and how much goes into next year, we're going to have to see if it's a fluid situation, Brett. But I can tell you that our team, I believe, is working all the right things, frankly, working around the clock in a very, very challenging environment. And it's not just chips, it's logistics. Some of the input material continues to be challenging. But at the same time, I do think our team is doing the right things. The key for, I think, the entire industry is chip capacity coming online as soon as possible. And some of the logistics dysfunctionality getting improved.

Brett, I would just add that, especially within Fire & Security, we are counting on some of the, call it, the backlog -- the past due backlog to improve in the second half of the year. And we are working on improving our supply chain and availability of chips, as Dave mentioned. And so, we are expecting some of that to turn into sales in the second half of the year, particularly in the F&S segment.

Got it. Makes sense. And just 1 follow-up on F&S, orders very strong on the product side, up 20%. Was hoping you could maybe unbundle that between Fire versus Security and then really residential versus commercial, industrial, fairly balanced or any outliers there?

No. I mean, it's been positive. Commercial Fire was up 20% plus. Industrial Fire is doing very well as POG comes kind of back. Residential Fire did very well. The issue that we have to really watch is the Access Solutions piece because they're most reliant on chips. So, demand has been strong in the Access Solutions piece, we're very well positioned. But the key is that operationally, we need more chips online so they can start recovering. And that happens to be quite a high margin business for us.

Thank you. And this concludes our Q&A session for today. I will pass it back to management for any final remarks.

Okay. Well, thank you, everyone. First, thanks to our team here at Carrier, our more than 50,000 people globally. Really proud of how the team has started this year and continues to execute despite the headwinds that get thrown our way. So very proud of our team, and thanks to all of you for joining. And of course, Sam will be available for any follow-up questions.

Thank you.

And with that, ladies and gentlemen, we conclude our program for today. Thank you for participating, and you may now disconnect.