Good morning and welcome to Carrier's First Quarter 2023 Earnings and Strategic Update 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 conference call to discuss the transactions we announced last night along with first quarter 2023 earnings. 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. There are two presentations available there, one for the strategic actions, and one for the first quarter 2023 results. 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 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.

Well, thank you, Sam, and good morning, everyone. A big day for us and we appreciate your flexibility joining us this morning on short notice. Today we are announcing a new Carrier, a new direction and an exciting transformation, a game-changing opportunity to acquire Europe's premier company in the most attractive market in our space, allowing us to capitalize on the energy transition in Europe. Combined with the planned exits that we are also announcing, Carrier will become a simpler, focused, pure-play leader in intelligent climate and energy solutions that generates higher growth and superior shareholder returns. Before we discuss this transformation in more detail, we will cover the highlights of our Q1 results on slide two. In short, good news, the team executed very well. We beat our forecast on the top line with 4% organic growth with double-digit growth in aftermarket controls commercial and light commercial HVAC and global truck trailer. Orders were modestly positive in the quarter with year-over-year orders performance improving as the year progressed. Adjusted EPS of $0.52 exceeded our projections and we generated significantly more free cash flow year-over-year. Based on our strong Q1 results, we now have confidence in the high end of our full year adjusted EPS guidance range. Before we discuss our exciting announcement about our future, let me take a brief look back on how far we've come already on slide three. I am so proud of our team's accomplishments since spin. In short, we do what we say we're going to do. Our commitments were to drive sustained growth, improved margins through rigorous cost reduction, increased aftermarket revenues, deliver strong free cash flow, innovate and ensure customer loyalty, energize our teams and culture and strengthen our portfolio and balance sheet. We have grown sales at an 8% CAGR since…

Thank you Dave. The enterprise value is €12 billion, which is about 13 times forecasted 2023 EBITDA assuming €200 million of run rate synergies. We are very pleased that the Viessmann founding family elected to take 20% of the transaction value in Carrier equity and that the family is making a long-term holding commitment. They share our excitement about the future -- the future value we believe this transaction will provide to our stakeholders. The number of shares are based on a VWAP prior to signing and are those fixed. The balance of the purchase price €9.6 billion will be funded through a combination of cash on hand and debt. With respect to cash we have $3.3 billion at the end of Q1 and we expect that to grow to about $4.5 billion by year-end excluding the impact of the acquisition since we paused share repurchases. We have fully committed financing in place for about €7 billion and have hedged the cash portion of the euro-based purchase price. Given Viessmann Climate Solutions growth profile, the acquisition is expected to add over 100 basis points to Carrier's overall revenue and EBITDA growth profile. We expect a high single-digit free cash flow yield starting in year five. While the acquisition is expected to be adjusted net income accretive in 2024, we expect the acquisition to be adjusted EPS accretive starting in 2025, because of the additional shares outstanding. Retaining solid investment-grade credit ratings is very important to us. Yesterday Moody's, S&P and Fitch have reaffirmed our current investment-grade ratings following the announcement of this transaction. Excluding proceeds from the business exits, we plan on deleveraging quickly following the transaction returning to about 2x net leverage in 2025 after which we expect to resume share repurchases. The timing and net proceeds of the business exits may of course accelerate the timing of both the deleveraging and the resumption of share repurchases. We expect to repurchase the equivalent number of shares issued to the Viessmann founding family as soon as we reach our target leverage. This could happen as soon as 2024. Finally, we remain committed to a sustainable and growing dividend and expect the transaction to close around the end of 2023.

Well, thank you Patrick. [Audio Gap] So the $1.1 billion business that we are exiting at high single-digit EBITDA margins last year, we have invested significantly in restructuring and improving the margins of the business, which will significantly benefit the business going forward. We expect to exit this business over the course of 2024. To be clear, we are retaining our cold chain solutions and transport refrigeration business which includes truck, trailer, container, Sensitech sensors and our Lynx platform and all the related aftermarket and digital offerings. So in summary on slide 25. These moves position us as a higher top and bottom line growth company. Had we made these transformational moves three years ago, Carrier's revenue CAGR would have been 2x the rate that we indeed achieved, mid-teens rather than 8%, thus giving us confidence that we are transforming into a sustained higher growth profile company. With Viessmann Climate Solutions, we are now positioning ourselves to be the Global Climate Solutions Champion. We are buying the premier asset in the premier market. We are standing by our commitment with our portfolio to be clinical and dispassionate and though we are selling tremendous franchises, the result will be a focused differentiated carrier that drives higher growth and returns for our shareholders and value for our employees and customers. And with that, we'll open this up for questions.

[Operator Instructions] The first question comes from Julian Mitchell with Barclays. Your line is now open.

Hi. Good morning and congratulations.

Thanks, Julian. Good morning.

Maybe just a first question around Viessmann itself. So, a couple of things. One was maybe if you could help us understand its market shares in the main businesses that you're most attracted to in it for example heat pumps. I think it's got close to maybe $1.5 billion $2 billion of sales and you talked about sort of a $5 billion TAM somewhere in the deck, but I'm not sure those are apples-to-apples. So maybe just help us understand the market share. And also, you talk about the appeal of it the uniqueness of the sort of one-stop shop aspect with the residential building. In the nonresidential world, the sort of the one-stop shop has been harder for equipment suppliers to get right. So maybe help us understand why in the residential world you're confident of that one-stop shop approach is the one that will drive share gains and returns?

Sure Julian. In terms of their positioning, what I'll tell you is that they are the number one premium brand across Europe. So in the premium market with heat pumps they're number one. Within Germany and heat pumps, they're number one. And across Europe, air-to-water heat pumps they are in the top five. In terms of the latter question, what they've done that is incredibly impressive is that they've designed -- you can think of it almost as the apple of their space because all of their products are seamlessly integrated into an ecosystem approach. So, if a homeowner can't afford to buy solar PV, battery and a heat pump all at the same time, they pre-designed them so they're all interoperable and interconnected at the time of installation. So what really makes them unique is their ability. So if you only install the heat pump in the battery and a year later you install Solar PV, it's been seamlessly integrated. So what they've done unique is have their products interoperable and it's underpinned by a digital solution. So you have this one based system that can control all of the various products and also provide greater management. Because if you fast forward to the future, we're all going to get to a point someday where you get home at the same time, you plug in your car, you turn on your heating system. You're putting a lot of reliance on the grid all at the same time. So being able to do grid management and have their products interoperable is very, very unique and they're the only one in the world that does it.

That's helpful. And then just my follow-up would be on the exit side of things Fire & Security and Commercial Refrigeration. Investors may be concerned that you’re buying Viessmann for sort of 17 times or so headline ex synergy EBITDA and worry about sort of the selling prices of F&S and commercial refrigeration versus that. So maybe help us understand kind of how you're thinking about the exit route for those in terms of spins or outright divestment and how you're confident that as we go through this process of sort of €4 billion of sales out €4 billion of sales in that the returns and sort of financial criteria looks okay?

Well a few things Julian. First of all, we think of it as buying 13x the fully synergized number. Second, we are going to be bringing in just on a base level more EBITDA than we're selling and then you add synergies to it and it's even more. And the growth rate of Viessmann is far higher than anything else on a sustained basis that we have in the portfolio, including the businesses that we're exiting. In terms of the price that, we'll realize on these divestitures we'll have to see. But what I'd remind folks is that when we sell Chubb we sold that for a 13x multiple. And as great as a business Chubb is with 240 branches, it's largely an installation and services business. Here you're dealing with especially on the fire and security side highly differentiated high gross margin businesses usually with three to five competitors in their spaces they're going to be hugely sought after and we're going to see how -- as we go through the process what's the best way to sell. We may sell it its entirety. We may do a spin. We may sell it off in various pieces some quicker than others. So we'll go through the process. But I think it would be very surprising for us to get anywhere close to -- the multiple on Chubb are lower we would expect it to be materially higher.

That's great. Thank you.

Thank you.

Please standby for our next question. The next question comes from Nigel Coe with Wolfe Research. Your line is now open.

Thanks. Good morning, and thanks for the questions.

Good morning.

So – good morning. I just wanted to talk about the -- maybe just dig into the free cash flow the high single-digit free cash flow target. Can you maybe just talk about the free cash flow profile for Viessmann over the past several years? Obviously the growth has been very impressive. How is the free cash flow and the CapEx been trending? Maybe more importantly going forward what sort of CapEx investment you see required to sort of execute on this plan?

Yes, Nigel, Patrick here. So 2023 is still ongoing of course. But the two prior years, we believe that their free cash flow conversion has been in the mid-90s so 90% to 95% of net income. And so clearly we believe that there is a continued path to have a combined company that will be in about 100% free cash flow conversion range. As to CapEx investments clearly given the significant opportunity in heat pumps there have been heavy capital investments made by Viessmann, including in 2023. We have that dial into our numbers. And as I said, we expect going forward to continue to be a company that converts about 100% of net income into free cash flow.

Okay. That's helpful. So let me just no extraordinary investment requirements. I mean, that's what I hear from that but maybe just clarify that. But just do you want to pick up on Julian's question about the format for the exits. Lots of questions about spin versus sale. Have you ruled out a spin at this point -- the sale of Fire & Security the preferred option? And if you do sell it seems like you've got the capacity to buy more than the 50-odd million shares you're issuing. So is that the upper limit of the buyback, or could that scale up?

It could scale up Nigel very clearly. And the first part of your comment was related to sale versus spin at the end of the day we're evaluating the exits and ultimately we'll pick whatever the exit is that delivers the best after-tax value for Carrier. And so whether that's the sale versus spin that is what we're focused on. And you're right. If it is a sale we certainly see a path with expected proceeds that would enable us to buy more shares than the equivalent shares issued to Viessmann family.

Okay. Thanks very much.

Thank you.

Please standby for our next question. The next question comes from Jeffrey Sprague with Vertical Research. Your line is now open.

Thank you. Good morning, everyone.

Hey, Jeff.

Just back to the deal math even, kind of, looking at the shares issue particularly given the $1 billion or so of cash you're going to generate year-to-date, it actually looks to me like there is a path to first year all-in EPS accretion. I just wonder if there's something in I don't know how these guys report. It's a private company, right? If we're talking IFRS or something else. Is there just something in the way they report where we've got to normalize the numbers to conform to a Carrier basis or how would you respond to maybe the potential of upside to what you're saying on accretion versus dilution?

Yes Jeff, we believe as we have shared on the slide that in year one, let's assume 2024 that we will be modestly dilutive. That would include -- and as I mentioned net income accretive adjusted net income accretive to the company, but given additional shares adjusted EPS modestly dilutive in year one accretive thereafter. Year one we do expect some integration or cost to implement some of the synergies. We think the cost to get to the synergies are relatively modest. We have $200 million of run rate synergies. We think the cost to get to these is maybe one-fourth of those. In addition to that, we have integration expenses that are probably about $100 million or so. We'll see some of that in year one and so that may impact the EPS dilution as well that you calculate in year one.

Okay. And then just on the exits Patrick, I think, you've appropriately said best after-tax path. Can you just give us a sense of what the tax basis is in the targeted companies? I would assume, it's low and certainly some of them, but perhaps not. And you do have obviously some legacy liability in there right kind of the whole PFAS question. So how might you address that as part of the exit equation?

Yes. If there is a sales path or assuming a sales path there would be -- we would expect there to be some leakage. We estimate maybe in the mid-teens given a modest tax basis in the assets. So that's the first part of your question. I think when you were referring to some of the legacy liabilities I assume you were referring to ASSS Jeff?

Yes. Yes.

Okay. So to the extent there is any ASSS liability at all, we believe it resides within Kidde-Fenwal. And just as we plan to exit Fire & Security, we plan to exit Kidde-Fenwal too and regardless of how we exit Fire & Security could spin well we expect to exit and at the end this to be a clean exit.

Thank you.

Thank you, Jeff.

Please standby for our next question. The next question comes from Joe Ritchie with Goldman Sachs. Your line is now open.

Thank you. Good morning. Congratulations, everyone.

Good morning, Joe.

Hi, Dave can you maybe just take a step back for us here and talk through how this deal came together? When we had dinner about a year ago you talked about wanting to scale into a European HVAC. I'm just also curious whether there's any potential risk associated with another bidder coming in it doesn't sound like it but just walk us through some of the history and that last piece of the question.

Yes. We -- Joe we have a pretty rigorous strat review process and it was clear from our very early days that when we spend we had two big gaps. We didn't -- we had VRF and we had European residential heating. So we wanted to start with VRF because of the underlying technology that it brings and we were fortunate with both Giwee and Toshiba to be able to enter that market. And then there was really all hands on deck on European residential heating. Clearly, no overlap no antitrust issues. And it was -- if you look across our space and you did a chart showing growth rates predictable growth rates over the next 10 years in every single space in which we compete the single most attractive market is European residential heating and we don't have a real presence there. So we started meeting with effectively every single company across Europe. I had dinners what I would say virtually every CEO in the space and they're a very, very impressive group. It's just very, very difficult to break into that market because they're traditionally multi-generation family-owned businesses. And Max and I had dinner about a year ago in Allendorf, Germany. And I think that we hit it off because we both had this common realization of the art of what's possible. They truly are world-class. I mean they are the leader. If you could pick any company to come together with an European residential heating, it would clearly be Viessmann. They have the best brand, the best channel, the best technology, they are a very, very unique asset with great people. And as we continue to develop the relationship, our whole premise was that one plus one has to be something greater than four. And if you look at the combination of Carrier and Viessmann Climate Solutions we said that we can do something that no other company in the world can do to create value for our people, our shareholders, our customers, and the planet. So, we probably had 15 dinners over the course of the last year as we continue to evolve what this relationship could be. I think the contract is very manages this idea of a potential interloper. Clearly, there'll be a lot of people interested in Viessmann, but we're just thrilled that Max had to share the same vision that we had in the art of what's possible for the future.

That's a super helpful answer. Thank you. And then -- and maybe just a quick follow-up to that. You've given us the projections on what you expect the heat pump market to do and your opportunity there. I'm just curious just on the core business, if you went back a decade on this on Viessmann business like what did Viessmann grow? How cyclical was it? And I'm really just trying to understand what the -- as we see the progress and the acceleration in the heat pump market, how we should be thinking about their growth rate?

Well, it's such a unique phenomenon with the shift to heat pump. So, they've traditionally grown the market is a lot like the US where it's an 80% replacement market. People need heating, heating fails, you replace it. The most amazing thing is given that 17 countries in Europe have either announced or banned fossil fuel heating. If you picture you're in a European home, you take a wall-hung boiler off the wall of your bathroom or our utility room, you're going to put in a heat pump and instead of spending a few K, you're going to spend 10K. So, if you pictured no unit rate of growth and the only thing you had was mixing up they'd be growing double-digits. Now, you put on top of that all of their other venues that they have for growth between solar PV and battery that's why they have consistently been growing over recent years in these mid-teens. And if you look at our forecast, it continues to grow at least double-digit rates for the foreseeable future. And I could tell you that there's many parts of our market. If you ask me what are they going to grow in 2025 it will be very difficult for me to answer that sitting here today. This is probably given the energy transition happening in Europe. I would say this is the most predictable sustained growth market in the world. We could give you very high confidence this is going to grow clearly double-digits in 2025, in 2026 because of the underlying dynamics of the mixing up that you're seeing and the additional value add that they provide.

Super helpful. I'll leave it there.

The next question comes from Tommy Moll with Stephens. Your line is now open.

Good morning and thanks for taking my question.

Hey Tommy.

Dave congrats on the deal and now I wanted to talk about resi North America if that's all right.

Yes.

Just kidding. Let's stick on Viessmann here. I was interested in any more context you could share on their direct-to-installer model. How long ago did they pivot in that direction? Is that primarily only within Germany, or does it also apply outside of Germany? Just any context you can give us there would be appreciated.

Sure. It started about 30 years ago with Martin Viessmann. Professor Dr. Martin Viessmann really had encouraged to see the value in going to this direct-to-installer model. And if you think about Europe in many cases both sell to distributors who sell to wholesalers who sell to installers who sell to the homeowner, both in Germany and many of its other countries, Viessmann Climate Solutions did establish this direct-to-installer model which has so many advantages in Germany and in Europe, not only the obvious that they -- from a margin perspective, but even more importantly is that they end up with a lot of customer intimacy. And what's also happening is that the demand for these heat pumps is so acute throughout Europe that their installers are struggling to just keep up with the underlying demand. So Viessmann themselves have been in there with the homeowners not only helping with some of the replacements, but helping with the new installations. So it has created so much value just having that direct installation customer intimacy. And again, it is not a model that they have that's unique to Germany they have it in many other countries as well. And I think one of the things that really attracted us many of the many things that attracted us to Viessmann, is they're in all the best countries. When you look at the countries that are making the most rapid transition to heat pumps, and you look at the countries that have the highest demand, it is countries like Germany and Poland and Italy and France. So they're really well positioned globally, but certainly within Europe.

That's helpful. Thank you, David. And I want to follow-up just talking about the market opportunity that you described which if you think about the spend on a per household basis it's a 20x multiplier potentially in a large and fast-growing market. But every other major player in the world is looking at the same market. So if you had to identify what is the core element of the Viessmann moat around this opportunity and how being part of Carrier potentially can help deepen that what would you point us to?

I put point to the channel. Anyone can develop technology. The hardest thing is to access the channel. And that's true in Europe it's true in the United States. You need access because it's not -- these are highly installed highly configured systems. So you need highly trained installers that actually have access to the homeowner. And that's what they have. Viessmann spend a lot of resources investing in training it's extensive installation network. So first is they have access and they have the best access because of their very unique channel model. The second thing is they have the brand that not only in Germany, but it has that German technology. There's a lot of pull for that Viessmann brand. Third is they have the technology. I mentioned Viessmann Invisible. I mentioned that how they've designed their digital overlay and their interconnected system. So they put a lot of energy into natural refrigerants and hydrogen enriched boilers. So a lot of what they've done to build a moat is interconnecting channel brand technology holistic and ecosystem level offerings to really make them a very, very unique asset again not just in Germany, but across Europe.

Thanks, Dave. I'll turn it back.

Thanks, Tommy.

Please stand by for our next question. The next question comes from Noah Kaye with Oppenheimer. Your line is now open.

Thanks, Dave, congratulations. I'm likewise intrigued by the commentary around the battery storage and solar PV opportunity. I think you said in your prepared remarks there was an opportunity to take some of those offerings more broadly across carriers. So I know maybe it's early days of thinking about this, but how might you actually implement that how much you architect similar offerings for the company in North America or other markets? Is this sort of a -- we learned at the start here and then build that over time?

Yeah, I think so. No. We have long been studying how do we connect these dots in North America. And we've been in discussions with solar providers. We've been having a series -- even with our Board just last week, a series of strategy discussions around battery because -- it's not whether it's when these systems get interconnected. When you think about an electric heat pump, you think about solar that relies on DC -- solar producing DC avoiding DC to AC conversion, DC feeding batteries for storage feeding into the heat pumps. These systems are inevitably going to be connected. There are probably more channel complexities in the US than there are in Europe. But we have been working on strategies to really enter the US with a holistic offering. What's really unique about Viessmann is they have a very unique battery capability. So they not -- they only buy the cells but they have a modular concept where they can actually customize the batteries to any size home for any demand they have. So their battery design and capabilities are a bit unique. That may be an initial easier part for the U.S. and then solar may follow. But the first order of business, expand all of their capabilities and investments throughout Europe. Second, we'll be take it to places like the U.S. and globally and we'll have to do that in a phased approach. But again, when we showed our $250 billion TAM at our Investor Day last year we never included Solar PV and Battery that just introduces close to another $50 billion TAM which is tremendous upside and importantly, differentiating.

Right. If we can talk about heat pump technology and development for a minute there are some differences obviously between your product portfolio and Viessmann they've been -- as you actually mentioned they've been a very vocal advocate for natural refrigerants. How do we think about some of the ways in which their portfolio complements your existing one? How do we think about maybe some product development synergies overtime?

I think that's one of the most exciting things. We haven't factored in any of the revenue synergies into the €200 million estimate that we gave. But you think about some of the things they do very well. They are very much out in front on natural refrigerants. I mentioned that in terms of their heat pump it actually uses 50% less floor space and it uses significantly less installation time which again when you have a shortage of qualified installers are across Europe that's enormously differentiating and that can provide a lot of value to us per carrier outside of Viessmann. The -- on the flip side with companies like Toshiba, we have world-class inverter technology. We've invested so much over the years in heat exchangers fans air handlers. So there's a lot of technology that we put with our 5,000 engineers today at Carrier a lot of resources into develop world-class compressor designs how we bring that into the Viessmann portfolio as well. So the technology synergies added on with the digital synergies because they have one base we have a bound a lot of the digital subscription type offerings and digital platforms will really cut across both entities seamlessly.

That's great color. Thanks.

Thank you. Thanks Noah.

[Operator Instructions] The next question comes from Deane Dray with RBC. Your line is open.

Thank you. Good morning everyone. I add my congratulations.

Thank you, Deane.

Dave, I just -- I might have missed this but for Patrick, are you going to move Fire & Security and commercial refrigeration to discontinue? What would that process fee and timing?

We will do that at the right point. My expectation is that several quarters away and there are some specific requirements that need to be met for us to get there. And so if it happens at all it's going to happen several quarters from now.

Got it. And then, maybe just give us a perspective on Viessmann how they fare during the whole supply chain pressures how did they do in price cost? And any sense about their backlog and past due?

Well, I would say they're very similar to what us, and many other companies experienced. I think the good news is that they'll be coming in with backlog because they experienced some of the same supply chain issues that we all experienced. They navigated it as well if not better than anyone. But look we all ran into some of the same constraints. They're price/cost positive. They've -- one of the very I think exciting -- many exciting things is that they clearly can charge a premium. They have they will continue to be able to do so. So pricing is not an issue for them. And I think that one of the exciting things on the combination is I think we'll bring a lot of value on the cost side with our supply chain. And then keep in mind that if you look at the last few years despite all the supply chain they've been growing 15% sales and EBIT CAGR between 2020 and 2023 and their margins have improved during this time. And in fact Max just told me two nights ago that their margins were exceeded their expectations for March. So they continue to under-promise and over-deliver and I expect that they will continue to do so.

That's really helpful. And can you just clarify in your answer to Tommy's question regarding the distribution model, just going directly to 75,000 installers if it works for them, that's great. I don't think you would try to fix something that's not broken. But how does that strike you in terms of efficiency?

Well, look it's extremely efficient in the European market. One of the things that is in Europe is -- which is a little bit different than the United States is that first you start with distributors then you have wholesalers. And the wholesalers there are typically agnostic. They will carry multiple different brands and they will provide the installer what the installer pulls for. Our distribution channel here in the United States it's typically exclusive. So our distributors are exclusively us and our brands. So I think it's an extremely efficient model there. Our only goal would be to expand it, expand it, invest in it, continue to grow it. And they've done a phenomenal job getting it from where it was 30 years ago to where it is today and we just want to invest in expanding it and continue to make it the truly differentiated channel that it is.

Thank you.

Thank you.

Please standby for the next question. The next question comes from Josh Pokrzywinski with Morgan Stanley. Your line is now open.

Hi, good morning guys. Congrats on the deal. Dave, so I know there's been a lot of stimulus and REPowerEU and elements like that that are encouraging the electrification of heat chartered by European IRA where does the product portfolio fit into that? I got to imagine it's on the virtuous side of it, but anything in particular that you're excited about in terms of their lineup that captures something that is going to be a policy target?

Well, if you think about -- there's really -- with all the different legislation throughout Europe either at an EU level or within the countries there's really two aspects to it whether it's the European Green Deal Fit for 55 or REPowerEU, it all really comes down to two things. One is the rapid adoption of renewables, and two is the rapid deployment of heat pumps. And Viessmann is the only one that's well-positioned in both of those. So what's really exciting is if you overlay that with the regulations that these 17 countries are passing, it's literally a once in a generation opportunity. You do not see markets where they're basically forcing you to transition from legacy, fossil fuel boilers to heat pumps and you're going to be charging about up to 4x the price for that replacement. That's a mix up that is unlike any other industry in the world that's anywhere close to our space. So -- it's why it is such a unique phenomenon and such an attractive and compelling reason to want to get in. And put Max's credit, they were the first to see the truly value add that you can create for the homeowner by interconnecting these systems I mentioned that your energy bill can be 80% less if you buy all of these systems together, which is a huge, huge number. And then you add on to it this existential risk with a year ago half of the gas for Europe coming from Russia. So the imperative to become energy independent and rapidly transition to heat pumps and renewables, it's not a nice to have it's a must-have for Europe. And we all know Europe dashed a bit of a bullet this past year because it was a fairly mild winter, but the clock is ticking on energy independence in Europe, so countries are pushing it and there is no one better positioned to lead in that transition than Viessmann.

Got it. That's helpful. And then just a follow-up on the pricing comment. I think from Deane's question. I think in the US, there aren't a lot of markets out there that have I'll call it lack of transparency to the end consumer the way resi HVAC does in a good way in terms of not a lot of pushback, not a lot of context what these things should cost. How does that work in Europe for the Viessmann product? Is it just, hey, a list price this is what you pay, or is there a little bit of configuration and extra costs that maybe cloud that a bit?

Yeah. I mean these are highly configured systems. So I think the dynamic is very much what you see in the United States. Even -- I'll just take a small example of battery. You can have different size home with different sized demands and that's why they have Viessmann innovated a modular design because every home is slightly different. So they are typically customized highly configured, highly technical and the price is really something that's between the homeowner and the installer. So there is a lot of variability and not as much I guess ubiquitous transparency.

Got it. Congrats again.

Thanks, Josh.

Please stand-by for the next question. The next question comes from Brett Linzey with Mizuho Group. Your line is now open.

Good morning and congratulations.

Thanks, Brett.

I wanted to just come back to the revenue synergies. I understand, you're not contemplating in the deal framework, but are you able to maybe dimension what the potential revenue synergies could look like as you propagate some of the legacy technologies in the different markets?

Yes. Internally Brett, we have some numbers that we put on it, but I think it's early days. We need to let the team get in there and really and drive them. And then as we get traction, we'll start to put more meat on the bone on dimensionalizing those. But if you think about it, their channel with the 75,000 installers that they have these intimate relationship with, that we could clearly introduce a second brand into their channel, whether it's Carrier Toshiba, that would be a very, very exciting opportunity. You think about their digital connectivity, they have a whole bunch of, I would say world-class digital solutions, they have smart thermostat that we could really use very much, throughout Europe but outside of Europe. We could bring that into North America. We could bring that into Asia. Because one of the things we've been working on is digital connectivity with our distributor and dealer network, but also potentially with the homeowner as well. So, as we bring their technology outside into our channel, we bring some of our brands into their channel and then we leverage our respective underlying technologies. I think the revenue synergies will end up being far more exciting when we look back five years from now, we will have gotten -- truthfully will have exceeded our cost synergies, because that's what we do. What we will end up being more excited about, is the revenue synergies.

Yes. No, that makes sense. Maybe just one on the quarter. HVAC orders were up double digits organically, commercial backlog up. I guess, as you think about the HVAC commercial business, I mean, are you seeing any cracks from the bank turmoil. And then I guess secondarily, with the supply chain is improving and the shipments out of backlog improving, where do you see backlog landing at the end of the year in the commercial business?

Well, look backlog, when we look at commercial HVAC, backlog was up 20% organically. We had very strong orders in the quarter for commercial HVAC, what we're seeing is continued growth across the globe frankly. We saw sales up mid-teens in the quarter. Aftermarket was up just under 20%. Controls was up just under 20% and commercial applied was up in the mid-teens. So, when we look at orders, we're very pleased with what we're seeing, especially North America. China orders were a bit down in the quarter, but we think that is timing. We think, we're very bullish on what we're going to see for China orders this year, because as that country starts to come back. And I'll tell you interestingly, in the middle of all the banking issues that we were all watching, March was the first month since September of last year, where the Architectural Billing Index was north of 50. So, I think, we all have -- we're all watching, whether or not that could create some constraints on demand. We've seen none of it in the underlying business.

Okay. Great. I'll leave it there. Thanks.

Thanks, Brett.

Please stand-by for the next question. The next question comes from Andrew Obin with Bank of America. Your line is now open.

Hey guys. Good morning and congratulations.

Thanks, Andrew.

Just a question, can you talk a little bit more about the solar, business because it's a fairly large chunk of the company. And I just want to understand better, what does the company does there? And I guess, how does it fit strategically with your HVAC vision? Thank you.

Well, the beauty of their solar PV that they've gotten into recently is, it's really part of a broader solution. There's a lot of players globally that do some level of solar PV. The issue with Viessmann is they're the only player kind of directly in our space that has it as a core offering. And the reason that's important is it's part of a broader ecosystem of offering. So it's not that people should think of them as a pure-play solar PV, someone should think about them as an energy management solution provider. So as more and more regulations are passed throughout Europe, they're saying here's how much heating you can use – you as a homeowner, here's how much carbon emissions that you're allowed to have. A typical homeowner has no idea how to navigate achieving certain targets that are being given. So what you really want is a one-stop shop. You want someone who can come in and say "I can help you achieve these objectives that you have instead of reducing your thermostat to 64 degrees in the middle of a cold winter, here's how you can achieve the objectives that the government has set up for you and it's that interconnectivity of a solar PV that seamlessly interacts with a wall-hung battery plus the heat pump plus a grid management, energy management, digital solution, it's that interconnectivity that makes it such an important part of their portfolio.

Got you. And just a question on synergies. And I completely appreciate that the deal is a lot more about heat pump market tripling in Europe and channel synergies, et cetera, et cetera and revenue synergies totally get it. But 5% recent deals were more like 8% to 10% in the industry. So I'm thinking about 5% and we've also been getting questions on the headline and the FT that Germany will review sale of Viessmann, how does that just basically buying a storied middles the German company, how does that figure into your approach to costs in this deal? And what can you do going forward? Thank you.

Well, what I'd say, Andrew is first your observation that 5% seems conservative, I would agree with. I do think your typical synergies are in the high single-digits and that's been I think our experience. I think that – so is it conservative that we would get to $200 million, the vast majority of which is by year three? Perhaps. I do think we were pragmatic and very focused on what we're trying to do with this integration. We are not coming in guns blazing. This is a very well-run business. This has as I mentioned one ERP system, this is a phenomenal business. So this is not about headcount reductions. They have 11,000 people. We are not coming in to reduce G&A heads. We're not coming in to close factories it's the opposite. We're coming in to invest in Germany, invest in the workforce, invest in growth because the worst thing you can do in the middle at the very outset of a huge growth opportunity is start to squeeze costs and not build for the capacity to keep up with the demand that is so clearly in front of them. So we got low-hanging fruit on the synergies with the in-sourcing procurement. That's an easy go do. We know how to do that, Viessmann knows how to do that together. We're just going to go make that happen. Well the number end up being higher we'll see. But our focus will be on those two pieces of the synergies. And then equally important will be driving the revenue synergies.

David and Sam Congratulations. I know how impossible these companies together. Congratulations on getting this deal done.

Thank you, Andrew.

Please standby for the next question. The next question comes from Nicole DeBlase with Deutsche Bank. Your line is now open.

Yes Good morning. Thanks for taking the questions, guys. Just a couple of more financial questions. So going back to I think Jeff Sprague asked this question towards the beginning of the call. Would you – do we need to make any adjustments to the EBITDA figure that you guys included in the slides as presumably Viessmann would need to transition from IFRS to GAAP?

Nicole, Patrick here. We believe that there is a good approximation of US GAAP. So from all the due diligence certainly good work, yes.

Okay. Thank you for confirming that. And then with respect to the synergies the $200 million, how should we think about the phasing of that? I think typically sourcing can take a little bit longer like tends to be towards the end of a synergy process in a deal. So is that more back-end loaded across the three years or will you start to get some of those synergies upfront? Thank you.

Yes Nicole, we expect that by year three, the vast majority of those synergies will be achieved. So think about 75%.

And what I'd say is the phasing is – the in-sourcing is a go do. There might be some minor tweaking to the product. But Toshiba is already in Europe. So in terms of qualification I don't see that as a major issue. So I think that in-sourcing will be I think relatively quick sourcing frankly could be relatively quick as well. So I think it's -- what typically takes longer is if you start closing factories and things like that that is not part of any part of our calculation. So I think achieving these relatively within the next couple of years is quite doable.

Thank you. I’ll pass it on.

Thank you.

Please standby for the next question. The next question comes from Steve Tusa with JPMorgan. Your line is now open.

Hi. Good morning. Congrats.

Thanks, Steve.

Good morning, Steve.

Any margin differences between these various businesses within Viessmann the pie chart there?

No, I'd say that the margins for things like boilers heat pump services are all similar. Batteries might be slightly lower or solar a bit lower than that. But I think the nice thing is that the margins on boilers and heat pumps because we are going through that transition are very similar.

Got it. And then just Patrick on the guidance any moving parts on bridge items? And then just any color on kind of the cadence first quarter to second quarter the seasonality that you guys expect this year?

Yes, Steve. So in essence our prior guide assumed $1.5 billion to $2 billion in share repurchases. We are pausing that. With that we lose about $0.04, $0.05 versus our February guide. That's being offset given Q1 performance, but also some adjustments on interest income, for example, that you see in the back of the slide deck. In terms of timing for the balance of the year, the way we think about this in February, I mentioned that first half adjusted EPS would be a little less than half of the full year. Given our performance in Q1, we think that first half and second half EPS will be very similar at the midpoint of our guidance of $2.55.

Okay. And then just any update on price cost and the spread there? What was that in the first quarter? And what do you expect now for the year?

So price cost was slightly positive in Q1, and we expect the Q1 price cost to be the most difficult for what we said in February. We expect price cost for the full year to be positive and we expect it also to have a slightly positive impact on margins.

And then one last one. How much price do you now expect for the year?

We still expect most of the organic growth for this year to be priced. So it's now in the call it in the $400 million $500 million range Steve.

Okay. Great. Thanks all the details and congrats again on the deal. I think everybody covered most of the questions I had. Thanks.

Thank you, Steve.

Thanks, Steve. And I was handed a note by Sam that my mic cut out during Fire & Security. And so I apologize for that. What I was basically saying is, what's on the slide that for Fire & Security, it's great businesses, great teams, great leading positions. You all know the brands and how the growth potential. I was clarifying that even though $3.6 billion of sales, we're going to retain the UTEC business, which makes controls for HVAC and refrigeration. So it's a natural part to keep in our portfolio. The business we're exiting therefore is about $3.1 billion and has EBITDA margins in the high teens. It's split between fire at $2.1 billion, securities around $1 billion. And like I said upfront, it's -- this was a very, very difficult decision. Jurgen and his team have done a phenomenal job creating a world-class business, that's highly differentiated, and it's a true unique asset that I know many, many will be extremely interested. But just because it's such a phenomenal business doesn't mean that it belongs in our portfolio. So we had to make a very tough decision to exit those businesses. And we'll use those proceeds as Patrick said, we'll pay down some debt. We'll do a buyback and then we'll continue to invest in our core business of being the global leader in intelligent, climate and energy solutions. So a tough decision but I think the right decision for the long term of the business. And with that we will leave it there. I do thank all of you for your flexibility moving this up a day. And I just want to reiterate my thanks to our employees and to the 11,000 Viessmann employees that will become part of our family. This is -- I think, this is a once in a generation opportunity to truly bring two world-class phenomenal organizations together to be an unambiguous global leader, and I couldn't be excited about the days that lay ahead. So, my thanks to all of you.

This concludes today's conference call. Thank you for participating. You may now disconnect.