Joe Ritchie : Got it. That’s super helpful. And then maybe just a follow-up question, a more financial-oriented question on HVAC margins for 4Q. So Patrick, thanks for all the color. I think we’ve got. We’re all set on the $16 million impact this quarter. But just for 4Q specifically. I know that it’s always a much lower volume quarter for the business. But the change sequentially from 20% plus, call it, low double digits seems very substantial. Are there any other moving parts that we really need to take into consideration for 4Q versus the 3Q margins you just posted?
PatrickGoris: The biggest element, and it’s what I’m going to share is from an overall company perspective, but it’s the same, of course, for HVAC, even the size of that segment. One, significantly lower sales sequentially due to the season that moves, of course, ready as well as some of the higher-margin businesses. In addition, you heard us talk about ensuring that field inventories are rightsized. So there is some downtime in some of our facilities as well to ensure that we start out 2024 with appropriate levels of inventory. And then we continue to make some investments and JV income is seasonally lower as well in the last quarter of the year as we see every year. I would say those are the biggest moving pieces, Joe.
Operator: Our next question comes from Noah Kaye with Oppenheimer.
Noah Kaye : I want to follow up on the commercial commentary. So I look at the multi-quarter commercial orders trends, kind of flattish here. How do you think about 4Q orders trends in commercial just based off of everything you just described?
David Gitlin : Well, look, last year, orders were up around low double digits. We’ll have to see orders here in 4Q. It’s too hard to tell just yet. But when you look at it, our backlog is up 40% on a 2-year stack. So I think that when we look at it by region, Europe has been almost surprisingly resilient. And we think about — I mentioned that heat pumps up 70% in the quarter for commercial heat pumps. So we see continued strong demand in Europe, especially for heat pumps. North America we actually had much elevated lead time and backlog levels given a couple of operational issues that we had that are now significantly improving. The team’s done a really nice job and making progress in some of our North American operational issues.
So as that continues to improve and lead times eventually get back to more normal levels, we’ll see orders start to increase there. And then China is kind of a mixed bag. China is under a little bit of pressure certainly on the real estate side. But as I mentioned, some of the infrastructure spend continues to be strong. We had a very recent win here for 6 chillers in China included a lot of our automated system. We’re pushing very hard on aftermarket connected devices there. So we’ll have to see. But I don’t see a huge rebound here in China and 4Q. But hopefully, as we get into next year, things start to stabilize a bit there on the — some key verticals.
Noah Kaye : Okay. And then, David, I think there’s been so much ink written about this. But since you’re closely tracking the performance of the Viessmann business and given how well it’s done year-to-date versus some of the headlines out there around heat pump demand. Just help us sort of reconcile the strength of the company’s performance year-to-date and what they’re doing now to position for all these different regulatory changes and what really drives your conviction that they’ll continue to see sales growth and strong performance in ’24 and beyond.
David Gitlin : Look, there’s so much to like there. I mean we’ve always known that as countries change regulation subsidy levels, that will have quarter-to-quarter impacts. We saw it in Italy last year that Italy had subsidy levels at 110% going back a couple of years and then they changed it to 90%, and that caused year-over-year headwinds in anxiety in Italy. That will smooth itself out over time. But if you’re trying to predict what’s going to happen as regulations change from 1 year to another, that will have some short-term swings. And I think that’s what’s being highlighted by some of Viesmmann peers. We’re seeing in the German legislation that we do think that the regulation has written will go through. There’s still a bit of a debate on the exact subsidy levels.
Those subsidy levels will be debated, I think, November 6 and 7 in Germany levels. We expect those will all be promulgated and go into effect in January of next year. If you see an increase in subsidy levels, that will have a natural belling effect on orders as consumers wait for those increased subsidy levels to go into effect. So will that have an impact potentially on 1Q for 1 business from here to there? Of course, it will. But when we step back, we say, is the transition to heat pumps in Europe here to stay? We are 100% confident in that. Is Viessmann the best positioned company because they are not a pure play either heat pump or boiler company? Yes, because they have not only mixed factories, they have mixed lines. So as boilers, there’s going to be more boilers next year than we had earlier anticipated, which I think there will be.
They make great margins on boilers and they’re able to swing their operational performance to support that. And then you look at all the other capabilities they bring to the table, when you combine with a world-class company, there are so many very obvious synergies and then a lot of hidden synergies as we apply their technology to our businesses across the world. And we bring in, say, for example, the Carrier brand into their channel, those are immediate revenue synergies that can offset like if there’s some 1Q heat pump headwind in Germany, you can look at all these other things, whether it’s additional solar PV battery cells, things like that, or revenue synergies. So we just feel so confident in the business, in the team, in the overall trajectory and the overall earnings profile of that business.
Operator: Our next question comes from Gautam Khanna with TD Cowen.
Gautam Khanna : I wanted to ask in the resi business, are you guys seeing any evidence of trading down an increase in repair versus replace? We’ve heard some of the HVAC OEMs talk about that. I don’t know if you’ve seen any evidence of that in the channel.
David Gitlin : Interesting, Gautam. We have not. And I actually asked that question. We were — I mentioned that a couple of days ago, I was with our top distributors. It’s something that when economies soften that you naturally look for. But we have not seen that. We haven’t seen the mixing down. We haven’t seen the trading down, replacing parts instead of entire systems. So for us, what we’re doing is, I think the team did a superb job in the switchover and the new SEER unit. We are now laser focused on positioning ourselves for the refrigerant change, which gives pricing some both price and mix benefits to offset some of the destocking that we saw throughout ’23 that we’ll see into — into the fourth quarter. But then I think when we start next year, a lot of that will be behind us as we position ourselves for the 454-B switchover. So no, Gautam, we have not seen any material evidence of that.
Gautam Khanna : Okay. Just a follow-up to an earlier question on the pricing alongside the new units coming out in ’25 or perhaps ’24, as you mentioned. Just curious, do you expect order of magnitude, the pricing on those units to be comparable to what you saw with the SEER change this year? Or do you think it’s enough cost is going to be designed out of the system such that we’re not going to get whatever it was, 10% to 15% pricing lift ultimately? I know that’s kind of — there’s been some talk about that, but I’m just curious what’s your best guess on kind of magnitude of pricing opportunity with that new unit.
