I think this is the last one of the day, at least, for me. We're finishing out here with Carrier, and CEO David Gitlin, as well as Sam Pearlstein, IR rep. Dave's gonna open it up with a few comments, and then we'll go right to Q&A. Dave?
Steve, thanks so much. Thanks to you and JPMorgan for having us. Just a reminder of our key three themes. On the top line, we remain confident in consistent and outsized growth, driven by our purposeful shift to digitally enabled lifecycle solutions from leaning into key secular trends, such as being a world leader in the energy transition and, of course, continued pricing. On the bottom line, this year, we get back to basics with driving tenacious and disciplined cost reduction. We track every penny of our cost reduction initiatives and potential inflation headwinds through a digital platform. Internally, we have one source of the truth, and the team works it daily. The days of covering cost increases only with price are over.
We need to keep the price that we've achieved and selectively increase price where appropriate while we go aggressively at reducing materials and logistics costs, discipline and factory productivity, and continuing on our journey of significant G&A reductions. You know, we said $300 million of productivity plus $200 million of price cost positive this year, and it would not surprise you that we're pushing for higher numbers internally. Despite the challenges, I have confidence in our team to drive the results we expect of ourselves. On the balance sheet, we put ourselves in a strong position to play offense with capital deployment. We are working on acquisitions as always, and we'll see what happens there, and we remain steadfast in assessing our current portfolio. Finally, on the first quarter, Steve, no new news. We said $0.45-$0.50.
We reviewed that yesterday and again remain in that zone. Orders have improved through the quarter. January was a bit light, but quarter to date, we're flat to down 2% versus where we were in terms of orders last year. It's nice to see the sequential progress. But of course, that can swing week to week, so we'll keep a close eye on it. Also, just one comment, since the issues arose last week in the banking sector have continued into this week, I'll just address it up front. We have no material exposure to the regional banks or Credit Suisse. If looking for good news, rates have actually been coming down, which is good for many of our end markets and customers in those markets and potential acquisitions that may or may not happen down the road.
With that, Steve, we'll get into the Q&A.
I don't have exposure to Credit Suisse either.
Okay. I can imagine.
Unless JP Morgan does, then I have it indirectly.
Yes. No, no, you don't wanna get out over your skis...
Yeah.
-out there. Yeah.
Gonna discuss that different conference. Just on the quarter to date order trends, maybe if you could talk about anything moving around relative to you were down 10 in the fourth quarter, some bifurcation in businesses, anything, you know, within that profile, you know, those that were above and those that were below, moving around at all, quarter to date, just to wrap that.
Yeah.
that conversation.
At a high level, as you said, we were down about 10% in the fourth quarter. That's about what we saw in January. We saw nice progress in February. We didn't know if it was temporary. It's continued into March. If anything, the first couple weeks of March were better than what we saw in February. That's put us in a position where I think we're, like, the precise number quarter to date is down 2%. We're kind of in the zone of flat to last year. It's nice to see the sequential progress as we've gone through the quarter. The markets where we expected more strength is where we've seen better orders. Light commercial has continued to be very strong. Commercial HVAC strong.
Transport refrigeration, especially North American truck trailer continues to be. We continue to see strength. We actually saw resi orders pick up a little bit more recently. A couple weeks doesn't make a trend, but we expected weakness there. We saw a couple weeks of some level of strength there in resi. Overall, the areas where we thought we would see strength, we have. Then I would say the two areas of weakness which we saw in January that have continued is our commercial refrigeration business in, you know, our stationary business in Europe. Orders have been weak there, as expected. In our container business, which is, I think 2%-3% of our sales as a company, container orders have been weak in the first quarter.
It sounds like on the resi side, you guided the year, I think on a unit basis, down mid to high single digit. That sounds like it's intact. Maybe talk about what the feedback has been so far from the channel on the sources of demand. Has new housing, has that new housing completion dynamic really hit yet? Is it replacement? You know, is that profile in resi kind of what you would've expected? Any changes in the market views there?
No, it's been consistent. You know, we've seen some of our big home builders, report results and forecast the rest of the year, and some remain actually more bullish than our own forecast, which is, you know, we said that for the full year, that we had volume for new home construction for us down, 20%. But we've seen some of our key customers a bit more bullish than that. So that would be positive, if that, if that were correct. I would say really no new news on the resi side. As you said, for the full year, we said that resi would be flat, volume down mid to high, replacement down mid, single digits, and that would be offset by mix and price. We did announce an unexpected price increase in January.
We weren't anticipating that we would do that in January, in November, December, but we felt it was appropriate to do as we got into January. We've been very encouraged by the realization on the mix side with the new SEER unit, and we're very pleased with our new SEER product line. I will tell you that hats off to the technical team 'cause we positioned ourselves for differentiation with the new SEER unit. What the team has also done is anticipated very well the refrigerant change. I think we're gonna have much fewer changes than some of our peers when it comes into the technical changes for the new refrigerant change.
On that front, just to get this out of the way, what is it specifically that you guys did that perhaps others, you know, aren't doing?
Well, we did-.
Not all others. There are some.
No, no, there are others. Yeah. I think what we did is, we invested in a microchannel heat exchanger. We invested more in copper to aluminum, a bit more in the aesthetics, a bit more in just the overall product line that we're very, very pleased with in terms of the attractiveness on both the energy efficiency, and the appeal to our, to our dealer and home builder and our, and our end consumers. The other thing is it's fully anticipated, the low GWP refrigerant, the R-454B that we've designed around. It's gonna be a much less risky and a much simpler, lower cost, technical change when it comes time for the refrigerant change.
This whole debate around useful lives, I mean, you guys said in early 2020
Yeah.
Investor Day, you had, you know, guy in the basement who was running all the machines. You know, it's 15 years, and then it breaks, and they fix it and goes to.
Yeah.
-to 17 year useful life. Is that guy still around, and what is he saying?
I don't know.
What is?
He doesn't come up for air, so I've never met him. Yeah.
What is he saying? What is he saying today? Like, what's changed?
Uh, 'cause-
Useful lives seem like they're the data would imply the useful lives are shorter.
Yeah. You know, when we spun from UTC in 2020, we were talking about a 17.5 year useful life, and now we've been talking more like 15. Part of it is this whole work from home thing, that the units are running more during the course of the day. You know, we look at warranty data. We do surveys of many of our customers, and I don't wanna pretend it's a perfect algorithm, but the data would suggest that it's a shorter useful life for a bunch of those factors of people moving south. The unit's running hotter, running longer, would suggest it's closer to 15 days, and our data suggests that as well.
Years.
Years. Did I say days?
Yeah.
That'd be nice.
That's the next bull case, though. That's the next bull case.
Yeah.
15 days.
Yeah. I'd like to get our warranty to 15 days. No. No, 15 years. Thank you, Sam, for...
It's been a long day. When you think about the refrigerant transition, just one last one on that, do you expect a pre-buy on that product in 2024?
Yes, we do. You know, because, you know, it was a little bit unique with the SEER introduction for this year because of course you had in the south date of manufacturer, so that kinda skewed the whole pre-buy at the end of last year. I think as we get into the end of 24, we would expect some level of pre-buy prior to 25 'cause we know that we will be pricing that unit, of course, higher as we get into 2025. I think, look, we get, and maybe Steve, I'm getting in front of a potential question you'd ask, but in terms of destocking out in the field, I think if you look at it, you look at where we are in the cycle.
Right now, at this point in the year, usually the channel starts building up in anticipation of the season. If you were to see a level of destocking, you'd see it sort of towards the end of this year into early next year. Then as you start to restock for next summer, and then you'd have a restocking in it at the end of 2024 in anticipation of 2025. Could there be some level of destocking this year? Yes. What we have said is that if we were to see destocking, think about our profit at over $3 billion, call it $3.1 or so, that if we were to go back to the stocking levels of 2019, that would impact us by less than 1% of our total operating profit, so call it around $30 million.
This whole destocking discussion, which takes up a lot of oxygen and a lot of discussions, doesn't keep us up at night.
Right. That's on the resi side.
Resi side, yeah.
on inventories to make that clear. How big is heat pumps for you? I think the heat pump conversation kinda gets a bit far-flung because there's, you know, there's ductless, which, you know, kinda count as heat pumps, and there's ducted heat pumps, and there's hybrid, and as heat pumps get kinda like lumped in. How big is heat pumps for you, and maybe how do you guys map the market and the opportunity set as the IRA money starts to come through next year?
You know, we love our heat pump position. We've said that we're about $2 billion, but that excludes VRF. To your point, there's a lot of people reporting what their total heat pump sales are. There's a lot of stuff in and out of that. Heat, VRF is our heat pumps. You know, we just bought Toshiba. They have a couple billion of sales. Not all of that is heat pumps, but you know, a good chunk of that. You know, our heat pump position, including VRF, is well over $2 billion. You know, we look at the growth that we've been seeing. We're very well positioned in the United States 'cause we're clearly the market leader in the residential space.
We go the way of the overall market, and heat pumps orders were up 30% last year, North American residential. They were up a similar number in European commercial, where we're number one. We're very pleased with our position globally on heat pumps, and I think there's no question that's gonna continue to grow exponentially.
One last one just on pricing and resi. You guys put through another price increase. Should the yield on that be a little more normal? Obviously, the yields in the last couple of years have been, you know, ridiculously high on very significant price increases. Any changes in the view on the yields on that price increase this year may be more normal or?
It's hard to say just yet. I think that, as you said, the yields that we've gotten, you know, we've had six, seven price increases over the course of the last 18 to 20 months. The yield on those have been extremely high. We'll have to see what the realization rate is on the most recent one. If I had to guess, it would be somewhere between the levels we've been seeing recently and perhaps the more typical levels we would have seen before.
Directionally on your resi, if you're gonna be kind of flattish on revenue, in resi, what do your margins do this year? Just up or down or flat? You know, like you would expect to improve margins on that flat revenue.
Yeah. I think margins will be flattish in resi. I think that it's one of our higher margin businesses, and that team has done a phenomenal job. Even with the mathematical headwind you get from price cost being what it is, they've done a very good job at sustaining margins.
Got it. on the commercial side, pretty strong demand. Maybe just talk about first light commercial, what you're seeing there and the context of that, how supply constraints are playing out. We were hearing from the channel, maybe not you guys, where there were 50-week lead times. where are those today? Then just how is demand generally trending in light commercial?
Demand has been phenomenal in light commercial. Our biggest challenge is keeping up with the demand in light commercial. Demand that we saw last year that was great has continued into the first quarter this year. I can tell you without any question, we've picked up significant share in the light commercial. We've picked it up the right way by introducing new products that are 40% more energy efficient than the products they replaced, through customer intimacy and really gaining share, through all the, all the right ways to gain share. We said that this year would be up mid-teens. We're certainly well-positioned for that, and first quarter is looking very strong for light commercial.
Your lead times now and where are the, you know, the constraints? My guess is chips and boards and all that.
Yeah, it's some of that. You know, our lead times are certainly not at the 50-week level. They're less than that, but they're higher than what they traditionally would have been. I could tell you that when I think about light commercial, but more broadly, supply chain, we are in a far better position today than we were 6 months ago. I could tell you that last year was unlike anything that I've ever seen in my career because of just the magnitude of the number of issues and the frequency with which they were occurring. We really put our operations and supply chain team through so much last year just to keep up with the surprises. This year we are not back to normal.
We still have a certain number of acute suppliers that are impacting us, but far fewer surprises, and we're much more calibrated on the chip situation. The lead times for chips are still way higher than they historically would have been, but now we're more attuned to that. We've redesigned more than half of our critical integrated circuits, so we can better manage some level of redundancy on the chip side. Again, we're down to some key suppliers that are causing us a fair amount of pain, but we know who they are and we're making progress with them.
The price mix, split of that 15%, is it roughly 50/50?
Did we break out?
We didn't break it out. Part of it, you have the same challenge with the CR change in terms of what's price and what's mix.
Yep.
It's harder to do that, but there is volume growth in that assumption.
Just maybe a little less than resi? Is that fair?
Well, resi is gonna be down in volume this year.
Right. Right. I mean, the split.
Light commercial.
Yeah.
Oh. Oh.
Like the price capture versus resi.
It's probably in the same ballpark.
Okay, that helps. It's about $1.5 billion, that business? The light commercial business.
We haven't shared that.
You always do this, Steve. Huh? You always like, you know, you always find ways to get information out of people of...
It's in that ballpark. It's not part of our job.
It's a great business, though. I will tell you that the, I mean, like, it's. You're kind of in the zone, but what I will tell you is, you know, there are certain businesses that are in a moment of time where they're really clicking on all cylinders, and my hat's off to that team because it's gaining share, it's improving price, it's improving margins, it's taking costs out of the system, it's introducing new products, it's dealing with some real scale customers that historically would have been with a competitor that have moved over to us. We're very pleased with our light commercial situation.
When you think about the pie chart on the light commercial industry, maybe what are some of the end markets that are, you know, blowing and going for you guys? Then, maybe one or two. Doesn't sound like there are many, but one or two where you're seeing a little more risk?
Well, we like K-12, just very strong. You know, a reminder that the ESSER funding from the federal government, they've allocated $190 billion, and there's still $120 billion or so yet to be allocated. A lot of that, which is called this ESSER III, this last phase of the funding allocation, is towards more of the bigger projects, which plays right to our strength. There's a lot of funding available for K-12, and we have a very targeted approach for that space. Higher ed has been very strong as well. It's not just K-12. Many parts of healthcare remain strong. Quick serve restaurants have been doing well. Some of the discount retail has been very strong.
There's a lot of, you know, maybe, warehouse had been huge pocket, huge source of strength. That's, you know, slowed a little bit. Not that it's down significantly, but not as strong as it was.
Where are we cyclically on that market? I mean, the units are not back to peak. Sounds great. Is there any risk, as maybe the office markets roll over or anything like that? I mean, anything you see fundamentally out there that you'd be concerned about?
Not yet. I mean, I'll tell you that, the light commercial, all the indicators, have been strong. They've been strong now for a couple years, and we haven't seen any sources of weakness that would indicate there's some kind of pending downturn there.
Got it. On the applied side, you guys have, you know, really invested over the last couple of years, reestablished yourself, maybe not to the point that you would have expected on from a market share perspective as we were discussing a little bit earlier. What's the story in your applied business? Then maybe compare that to the demand picture there versus, you know, what you were just talking about in light commercial.
Demand is great. You know, we've gone through eight quarters of double-digit orders growth in the commercial applied business. I would say overall demand great. The services piece has been transformational because one of the biggest shifts across Carrier has been a very purposeful shift to not only winning on the upfront equipment side by having a differentiated product, but also making sure that we support the customer through the life cycle. That has been, I would say, if you were gonna say, what is the biggest change that you've seen at Carrier over these last few years that will continue, is really smoothing some of the cycles through a very conscious effort towards recurring revenues, aftermarket life cycle sales. We've seen great progress across the Carrier portfolio, and particularly in commercial applied HVAC space.
I would say on the share side that we had said at our investor day that we expected to grow 50 basis points a year. The reason that we have not done that is by our own decisions. We have made decisions to win what we wanna win the right things, and we have walked away from certain business because that's an area of the business that we really needed to and wanted to improve margins. Chris and Goran and the team have done a phenomenal job at improving margins in that business. We've kind of prioritized that over the 50 basis points a year, but in the middle of that, we have gained share for sure.
We think about the margin profile of those businesses. I've always thought of it as, you know, resi, light commercial, and then the applied stuff, obviously it's a bit more project related. You go into a conference room, you know, you compete with three other guys.
Mm-hmm.
Is that still kind of the profile where light commercial and resi are pretty similar, and then, applied is, you know, pretty materially below?
Yes. I will say that the applied margins have been approving materially, in part because of, you know, that as we've introduced new products that we find in many cases are differentiated, and as we've really leaned into making sure that we have the pricing discipline, we've also really emphasized the aftermarket piece, which comes with higher margins. That mix has been very favorable on the margin side. There's a long way to go, but, you know, we set targets for ourselves on the margin side a few years ago, and every year we've been on track to the margin profile we've set for ourselves.
How do you compete with, you know, to JCI's and YORK's credit, years ago, they were really focused on service. Obviously, their larger engineered products kinda lend themselves to more of a service, but, you know, they have, like, a pretty comprehensive stack, if you will, including the control systems. They're all over the building. I mean, they have 14,000-15,000 service techs. How do you compete with that? You know, you have, I think, 700 or so service locations, but how does your service tech infrastructure compare to that? How do you compete with the scale there?
Well, we have a couple of key competitors. I'll tell you, we compete extremely well with them. That there's no material gaps in any of our respective portfolios. There's probably a niche area in one specific application in one region of the world where someone may have a better offering than we do. I can assure you, there's many parts of the world where we have far better offerings. We're very, very pleased with our position. The number of technicians we have, I could tell you that we continue to add salespeople and technicians. The way of supporting of the equipment is becoming more digitized as well.
As you have more connected devices where you can do more remote diagnostics and more remote prognostics to anticipate failures, you're not just competing on the person with the most technicians wins. We're very, very pleased with the aftermarket progress that our commercial HVAC team is doing. I could tell you that in critical areas like heat pumps and data centers, we've been picking up a very significant share and very targeted share.
Can you just talk about Abound a bit and what, you know, what that is and any KPIs that you're looking at to judge the progress?
Yes. you know, one of the biggest decisions that we made as a company is that for our two ecosystems of focus, which is buildings and the cold chain, we wanted a digital platform for both. For buildings, it's called Abound, and we designed that very purposefully to make it agnostic, so it can interface with anyone's BMS. There are some of our competitors that have a similar offering. We're all cloud-based, but they purposely made it so it was more proprietary and only interfaced with their own building management system. We wanted to make it so it could overlay. It was cheap and easy and quick to install in a building like this. It would interface with anyone's BMS, and then it's all outcome-based for our customers.
If you can picture that in the past, Carrier would've been sitting across the table from the biggest retailers in the world, we would be with the head of facilities for the South, Southeast region of the United States. We're now sitting across the table from CEOs telling them that we can make a material difference for them to get to their own ESG commitments, and we can drive them huge amounts of savings on energy efficiency and help them get to sustainability targets. The way we do that is implement this digital tool across their entire footprint that on a single pane of glass, can give them visibility into their carbon emissions. If there is an issue where, say, their factories in India have higher carbon emissions than their factories in China, we can now use AI to take corrective action.
It may be that we have a new energy-efficient rooftop unit, or it may be that we have the equipment and the solutions to help correct it. We have an EcoEnergy business where we partner with folks like Home Depot, where we guarantee them certain energy efficiency savings for their North American footprint. We're rolling that out to our scale customers globally, and Abound is the key enabler. Once we have the platform, then you're continuously producing new applications. We have an application for indoor air quality. We have an application for net zero emissions. We have apps for, you know, prognostics, diagnostics. It just once you have the platform and you're in your customer's ecosystems, you keep introducing new applications on top of it.
How do we think about the, you mentioned that applied margins were improving 'cause of the services mix. Where does the service margin lie in that profile, in that continuum of, you know, those different elements?
We've said that at a high level, the services margin for all of Carrier is 10 percentage points higher than the rest of Carrier.
That's a gross margin comment.
Yeah. Gross margin. Yeah.
Okay. There is more SG&A in the services?
Um-
Under, you know, on that.
In parts of the service.
Yeah. Okay. Got it. On refrigeration. Obviously, you talked about the container business. How is transport looking from an orders and outlook perspective? Trane called for it to be down next year. You guys haven't really said anything on 2024. Maybe just an update on transport first.
We're very, very pleased with transport on the truck trailer side, both not only in North America, but what we're also seeing in Europe and certainly in China. You know, I have to give credit to our team in China where we picked up, you know, just enormous share. A smaller market but a growing market as you see China go towards more end-to-end cold chain solutions. Selling less food through local markets, but selling them through, you know, traditional supermarkets. The opportunity for cold chain growth in China is significant, and we have extremely positive, you know, extremely good share and growing share. North America, we're extremely well booked for, you know, the foreseeable future, and orders continue to be strong. Very well-positioned in North America, both on the truck and the trailer side.
The orders in Europe for truck trailer were a little bit lighter than what we saw in North America, but still our backlog there is extremely strong as we get, you know, through these coming quarters. It's a bit early to get into 2024. I saw what, you know, perhaps our peers said about next year, but I will tell you that ACT and others, I think, under forecast what 2023 looks like. When I look at our backlog position for 2023, it would not take a lot of, you know, significant orders in the second half of this year to start positioning us well for 2024. We'll have to see as we get into 2024, but very pleased with our situation for 2023.
Is there a particular fundamental reason why you think ACT? Because I think they're calling for it to be down in 2024 in North America. Is there a particular fundamental reason why, you know, if they revise that up by 10%, what do you think the fundamental reason for that would be?
I mean, look, the industry is just very attractive right now. You have a couple things happening. Number 1 is that one of the nice things about our portfolio right now is you see the shift to electrification, you're seeing significant mix-up. We mix up when you go from diesel reefer units to electric units. That will be a significant mix-up story for us. We see the same as you go from traditional as you shift over to heat pumps. That's a great mix-up story for us. It's a very attractive piece of what we see in the European residential heating space, where we're a very small player, but that makes that industry very attractive, both organically and potentially inorganically. Back to the transport side, you know, we're seeing just continued demand for transport fleets.
We're seeing more demand for our Lynx platform, which is the same as what we described for Abound for Buildings. We're seeing more subscription revenues as we have more digital sales to our transport customers as well. Teams performing well on the truck trailer side.
Just on the refrigeration piece, the stationary side, what are you seeing there? You know, maybe what's your view on, you know, improve versus perhaps sell that commercial refrigeration business? I think that's been a continuous conversation over the last several years. Where do we stand on that today?
Well, we're still in the improve phase, and we continue to assess, you know, not only that business. You know, we've been consistent that we will forever, we will assess every aspect of our portfolio very clinically and very dispassionately, and that's certainly on the list of something that we would assess. It does have lower margins, but right now we're in the self-help phase of really improving the margins of that business. You know, the team has done a lot. They did a lot in 2022 to position us for higher margins in 2023. We took a whole lot of G&A out. We went from each country having its own infrastructure in Europe towards a more regional approach.
We've been very deliberate at decreasing the amount of customization of the product line, improving the aftermarket margins, pricing the upfront sales appropriately to get the margins up. We were poised for the margin growth this year. We came into this year with orders much lower than we thought. Now we're scrambling, dealing with some level of cost takeout because the factories are dealing with some absorption issues. I think that, you know, as we look at it, we see really strong opportunity for margin expansion, and then we'll assess, as we always will, whether we keep it and continue to improve margins or divest it.
Is that a change at all from what you would have thought maybe nine months, 12 months ago? Or is this kind of a continuum of analysis around, you know, keep or sell?
Continuum.
Okay, got it. On that, continuing along that, fire and security.
Mm-hmm.
What are you guys seeing there? Obviously a better margin business, run pretty well. What are the synergies there with the rest of the portfolio? Is that something that, you know, you could ultimately look to monetize at some stage of the game?
You know, like the rest of our portfolio, we'll look at everything. The question we have to ask ourselves is, does the benefit of the revenue synergies with it being part of the portfolio outweigh the benefit we would get from somehow divesting it and reapplying that for a more focused company? That's an analysis that we've been doing since we spun, and we'll continue to do forever. There's a lot to like about the fire and security portfolio. Very high margins, a lot of differentiation. In many cases, there's only a few of us competing, and we have some great technology. We have a great team. We have a very attractive footprint. We have a very low cost, both make and buy footprint. There's some great parts of that business, but there is value to focus.
You know, we saw with the spin from United Technologies that I think we unleashed a lot of energy and value within Carrier when we became a standalone public company. I think Greg saw that opportunity and did the right thing. That's an assessment that we will continue to make as a team. In the meantime, we'll continue to improve the margins of fire and security, and we'll continue to invest in that portfolio 'cause it's a great collection of businesses.
How does it work with, you know, with the, with the commercial HVAC stuff? I mean, is there any... JCI talks about obviously the integrated offering. How much is the integrated offering present there, or They seem like a little bit more discrete businesses.
They are discrete. You know, there's certain technical synergies between. You know, if you think about a security system, it tells you where everyone is in the building. Knowing where people are in the building can play into how you think about ventilating for certain parts of the building. There's an interconnectivity between a fire and the fire system and how you might think about shutting off certain ventilation or airflow into parts of the building that might be on fire. There's sort of inherent natural technical synergies between the HVAC and the fire and security portfolio. You do typically have different channels. You typically have different decision makers within the building on which system. To really realize some of those synergies, there's some complexity there.
Having said that, again, a great set of businesses and we have made a very deliberate decision that we want to be the world leader in climate systems and solutions. There's a huge energy transition. There's a shift towards electrification and more renewable type solutions. We wanna position ourselves right in the epicenter of being the world leader in some of the building climate systems and solutions capabilities. Fire and security, great set of businesses, we'll continue to assess that. In the meantime, Jurgen and the team are doing a superb job really improving and improving the margins and capabilities of that business.
I wanna step back to one business in commercial HVAC. Europe HVAC, and maybe this is where you talk about a bit of if you did have capital to deploy into something strategic, you've mentioned this could be an area of interest. First of all, in commercial HVAC in Europe, how are you positioned there? Trane makes a lot of noise about how they're dominating there, and JCI has some products as well. How are you positioned first on the commercial side? How would you like to attack that market if you could deploy some capital there?
I'll tell you, last week I was with Didier and the team and, you know, the person that runs our commercial HVAC business in Europe and was with him and the team in France. I could not be more proud of that team. They've done phenomenal job in the factory. They've done a phenomenal job with the product portfolio, getting out in front of all the transitions that are taking place, you know, as you look at the need for heat pumps, especially in areas as you look at, you know, heat recapture and reuse in data centers. We look at an entire product portfolio mapping of every single area where there's demand, and do we have the right offering and do we have a competitive advantage?
We've picked up a lot of share in the European, commercial HVAC space. Then we look at getting out in front of some of the refrigerant chains that are gonna happen as that Europe's assessing F-gas and natural refrigerants, and we choose between propane for certain applications or ammonia or CO2. The interconnectivity between the technical team and the marketing team and the sales team and the production team is about as good as it gets. Very proud of the share and the performance of our European commercial HVAC team.
When you think about capital deployment, if you did bring in some cash from a divestor or even just, you know, lever the balance sheet a little bit, is Europe a place where you would wanna focus?
Yeah. Europe is extremely attractive in the sense that the residential heating space for Europe is one of the most attractive spaces in the HVAC-R industry in the world. You know, when we spun, we had two big Fs. We had VRF, which we now address with the Toshiba acquisition. We're not a major player in the residential space in Europe. We have a small Italian business that does a nice job, but the truth is, it's very small. It's relatively a small player in overall Europe. What's gonna happen in Europe is that as Europe weans itself off natural gas, especially with what's going on in Russia, and they have traditionally gotten 50% of their natural gas from Russia.
As they reduce that in a significant way, you're gonna see a tremendous transition to heat pumps. Heat pumps sell for 3x to 4x what you would sell a wall-hung boiler. A significant transition with a huge mix up. That market, under any scenario, has to grow significantly. We're looking to grow our position organically in that space using more of our Toshiba and our Chinese acquisition, Giwee, to sell more product in there, expand some of the Riello capabilities that we have with our Italian operations. It's clearly an attractive area from an M&A area. It just happens to be very difficult to break into.
Any questions out there? No, none?
Yeah, my guess is you have more.
Huh?
Yeah. You could go, yeah.
I have more. The margins, it appears that your price is really, it seems to be carryover from last year, but you guys put through, you know, a price increase in January 1 on resi, a price increase in March in commercial, I think. You know, are you assuming lower yields on that front, or it's sometimes the math is hard to do with carryover, but what are you assuming on a yield basis from the pricing in general?
Well, we said that we would be price cost positive by $200 million. I do think that the carryover math is a little bit more complex than when some people say, "I should get, you know, whatever you did in the first quarter of last year, I should get a certain, like, you know, at least one quarter of that this year." There's actually a little bit more to doing the price carryover analysis. Having said all that, we feel good about the price position. We announced a little bit more in January. We're gonna have to see how inflation plays out. We'll look at the commodities. Copper came into the year a little bit higher, then it came down a bit, so we did more than we planned to do in January.
If we have to do more as we go through the year, we will. The realization last year, I mean, you think about getting over a billion and a half of price on, say, $20 billion, so call it 7.5% realization. I don't see those rates of realization continuing, but I do think we'll get meaningful price and meaningful realization this year.
On the inflation side, I mean, you mentioned these metals are bouncing around a little bit. How do you feel like today relative to maybe how you felt a couple months ago about the, about the cost inflation?
Well, I think I feel better at overall our ability to go meaningfully attack the cost equation. The reality is, last year was very tough on the cost side. We experienced about $1.5 billion of cost headwind. You know, I have said, and apparently it offends people, so I apologize, but it's our God-given right to go get that cost back. You know, you look at $1.5 billion last year, $0.5 billion before. Now we have a single tool where we track every ounce. If a supplier says, "I have to increase it," it goes in the tool, and we have all kinds of approvals before we grant it. We're going hard after the tier one suppliers. Commodities, I think, are coming down.
Logistics is an enormous opportunity this year. I think we've just scratched the surface of logistics. Our plant managers need to get back to basics in driving productivity in the factories every day. G&A, we've gone from 9.5% to 7% of sales. We've just gotten started. There's a lot more G&A takeout. Look, we said $300 million of productivity this year. I can assure you we're pushing the team on more.
Longer term incremental margins, I mean, just remind us of how you guys look at that and, you know, should we think about taking it over a multi-year period, normalizing it, and then thinking about some catch-up on the back end of that?
No, we've said-.
As it normalize.
We've said 50 bips a year. You know, like, this year we have a little bit of headwind because of the Toshiba integration. If it weren't for that, we'd be at 50 bips this year. We've said 50 bips a year. We'll continue to invest in the business. You know, part of our algorithm for this year assumes another $100 million of R&D. You know, we were at $400 million of R&D in 2019. Last year was $540 million. We continue. That's more than a 10% CAGR increase on R&D as we continue to take share, invest in the portfolio. We'll be brutally aggressive on the cost side in a very structured way, and we'll be very selective and thoughtful on investments to increase the top line.
One more for you.
Sure.
Would you manage that 50 basis points and if you were doing 60, 70 basis points to reinvest and, you know, maybe go after some market share?
No, we don't necessarily sell for 50 basis points. We, you know, there may be some years where it's more than 50 basis points. We invest where we think it makes sense, where we can really make sure that we have the right payback. If some years it's higher than 50 basis points, that's certainly a fine thing.
Great. Thank you.
Okay.
Thanks a lot. Really appreciate it.
Thank you. Appreciate it, man.
Thank you, sir.
Yep.