2024 Guidance and Destocking Impact
Q: Has anything changed in your guidance; what's the impact of destocking?
A: The main change is the continued destocking in residential HVAC, which is extending beyond our initial expectations and will likely continue into 2024. We expect residential HVAC, about 30% of the PES segment, to be down 15–20% in Q1 and improving through the year but down overall. We anticipate destocking to end in the first half, both in residential HVAC and factory automation, with a slight uplift in the second half. First-half sales growth will be down year-over-year, while second-half growth will be up year-over-year.

Conservative Resi HVAC Outlook vs. Customers
Q: Your resi HVAC outlook seems more conservative than customers like Carrier; why?
A: Markets are still murky, and we're not seeing trends that support volume growth in 2024 yet. We're taking a prudent approach based on current market conditions. While Carrier may be guiding for mid-single-digit volume growth, we're planning for resi HVAC to be down and are not factoring in any impact from GWP implementation at this time. Any upside from market improvements will be reflected in future guidance when we see consistent trends.

Confidence in 25% EBITDA Margin by 2025
Q: Are you confident in achieving a 25% EBITDA margin by 2025?
A: Yes, we are confident in reaching a 25% EBITDA margin exiting 2025. For 2024, we expect a margin of 22%, with the Industrial exit adding about 100 basis points of uplift to approximately 23%. In 2025, we anticipate another $65 million of synergies, market growth, and continued improvements through 80/20 initiatives, lean operations, and new product development, all contributing to our margin expansion.

Free Cash Flow Guidance
Q: Why is free cash flow guidance $700 million instead of $800 million?
A: We're being conservative in our 2024 free cash flow guidance. The decline from $800 million is partly due to our outperformance in 2023 on inventory reduction, where we generated $255 million versus the expected $200–$225 million. We expect another $50 million in 2024, which is a year-over-year headwind. Despite this, we anticipate free cash flow per share of about $10, with a free cash flow yield of over 7%.

Sale of Industrial Business Impact
Q: Is Industrial included in your guidance, and how does its sale affect debt?
A: Yes, the Industrial Systems segment, contributing about $500 million in revenue and $40–$45 million in adjusted EBITDA for 2024, is included in our guidance. Upon closing the sale, expected in the first half, we anticipate net proceeds of approximately $360 million, which we'll use to pay down debt. The loss of EBITDA will be offset by interest savings of around $26 million annually, resulting in a net impact of about –$0.10 to our guidance.

IPS Margin Progression and Synergies
Q: How will IPS margins progress amid mix headwinds?
A: While some mix headwinds will dissipate, the primary driver of margin uplift in IPS for 2024 is the realization of synergies, particularly in gross margin. We're seeing 75–80% of our synergies in the IPS segment through footprint rationalization and product line simplification, which will enhance margins despite any mix challenges.

Plant Move Costs Now Behind
Q: Are the plant move costs impacting margins now behind you?
A: Yes, the costs associated with plant moves are now behind us. In Q4, we incurred $4 million in costs, below our initial expectation of $6 million. We do not expect these costs to repeat as we move through 2024.

Restructuring and Integration Costs
Q: Were the heavy restructuring investments in Q4 all integration-related?
A: Mostly, yes. The restructuring in Q4 was primarily related to integration activities for IPS and AMC. There were some additional costs in PES due to product line setups associated with rationalization efforts, but overall, it was focused on integration, contributing to the targeted $90 million of synergies.

End-Market Variables from Q1 to Q2
Q: What are key demand variables as you move from Q1 to Q2?
A: Key variables include general industrial markets—if destocking improves faster, we could see uplift. Residential HVAC could also show improvement from Q1 to Q2. We have strong momentum in medical, data center, and aerospace markets. Additionally, if alternative energy incentives are clarified and projects released, this could contribute positively between the two quarters.

Cautious on January Order Improvements
Q: January orders were better; why not adjust guidance?
A: One month doesn't make a trend. While January was a bit better, we prefer a prudent approach, planning for orders to be down mid-single digits. If positive trends continue, we'll reflect that in future guidance, but currently, we're not modeling an improvement based on a single month.

Managing Organizational Strain
Q: How do you manage strain as you drive the organization hard?
A: We focus on living our values and over-communicating our goals and objectives. We address challenges and headwinds by working with our teams to develop mitigating plans. We have a plan-do-check-act culture, ensuring we execute on plans while maintaining engagement with our 35,000 associates worldwide for successful outcomes.