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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, and welcome to Carrier's Fourth Quarter 2020 Earnings Conference Call. This call is being carried live on the internet, and there is a presentation available to download from Carrier's website at ir.Carrier.com. 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 fourth quarter 2020 earnings conference call. With me here today are David Gitlin, President and Chief Executive Officer; and Patrick Goris, Chief Financial Officer. Except as otherwise noted, the company will be speaking to results from operations, excluding restructuring costs and other significant items of a non-recurring and/or nonoperational nature, often referred to by management as other significant items.
The company also reminds listeners that the 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 forward-looking statements.
This morning, we’ll review our financial results for the fourth quarter and full year 2020, discuss the full year 2021 outlook, and will leave time for questions at the end. Once the call is opened up for questions, we ask that you limit yourself to one question and one follow-up to give everyone the opportunity to participate. With that, I'd like to turn the call over to our President and CEO, Dave Gitlin.
Okay. Thank you, Sam, and good morning, everyone. I'll provide a quick summary of our fourth quarter performance on Slide 2, and Patrick will provide more color. In short, no surprises. Sales were up 2% on a reported basis, flat organically, as residential HVAC remained very strong, with a 25% year-over-year increase. We produced $453 million of adjusted operating profit, executing on the cost actions that we planned and communicated, including accelerated growth investment, incremental public company costs, and some one-time items that Patrick will cover. And we are very pleased with our free cash flow generation in the quarter. Excluding the Beijer tax payment of $272 million, we would have exceeded our forecast by about $100 million. Importantly, we continued to consistently execute on our long-term strategic growth agenda, while maintaining strong traction on our Carrier 700 and G&A cost reduction initiatives. All of this positions us well for 2021 and beyond.
Turning to Slide 3, before we dive into 2021, let me provide a broader look back at 2020. I look at 2020 as both a foundational and a transformational year for Carrier. With the spin from UTC, it was clear that we had a unique opportunity to create tremendous value, but to do so, we needed to create a new Carrier. We started with our culture, and took an intentional and deliberate approach to launching the Carrier Way. Our culture reinforces our value, and is centered around customers, agility, innovation, talent, and winning, and the energy level within Carrier is tremendous. In addition to culture, we have invested in and promoted existing employees, while infusing the team with key outside talent, who have brought fresh perspectives and proven leadership.
We also launched several new initiatives designed to further enhance the agility and effectiveness of our organization. For example, we launched Carrier Excellence, our new operating system, Carrier Alliance, our new supply chain program, and we undertook a holistic and structural approach to driving sustained G&A reductions and simplicity across the business. We put a disciplined process in place to drive $600 million of recurring cost savings over three years, Carrier 600. And given our strong progress, we recently increased our target to $700 million under the renamed Carrier 700.
We also dramatically improved the balance sheets and spend. We now have increased financial flexibility to invest in growth, execute both on M&A, and return capital to shareholders. In December, we announced a 50% increase in the dividend. And today, we announced a share repurchase program. And we leaned in to becoming ESG leaders, committing to significant, achievable, and important goals, such as, by 2030, reducing our customers carbon footprint by more than one gigaton, and achieving carbon neutrality in our operations, commitments that are not only good for the environment, but also good for business.
We also made progress on our profile commitment to improving our diversity representation, and creating a truly inclusive culture. And we reframed our focus to position Carrier as a growth company. While the COVID pandemic in 2020 presented unprecedented challenges, it also served to reinforce our position as the world leader in healthy, safe, and sustainable building and cold chain solutions. With this as our enterprise strategy, supplemented by our three-pillar approach to driving sustained growth, we are confident in our topline opportunities for 2021 and beyond.
Slide 4 shows the flywheel that I used in our last earnings call to help explain how our key focus areas, will drive shareholder value. As COVID shined a light on the criticality of healthy, safe, and sustainable buildings and cold chains, we acted on our ambition to become a world leader in both. There has been a tectonic shift in how business, government, and society value the safety of indoor environments, and the importance of robust systems for distributing food and medicine. There has also been a groundswell of recent focus on sustainability, all of which represent opportunities for Carrier's business now and in the future.
On the building side, we introduced new products like our OptiClean unit that Time Magazine recognized as a top innovation of 2020. More recently, as part of our healthy home strategy, we introduced an air purifier for the home. This is our first direct to consumer product focused on improving air quality. And we also are now selling Carrier one-inch filters directly to consumers. Overall, we have over $100 million of orders for healthy building products and services, and have a pipeline of more than $200 million.
The next milestone is the release of a new digital solution that we're calling Abound that will work with building management systems to provide visibility to indoor air quality and other key healthy building indicators. Using machine learning, this solution will connect to building control systems and auto mitigate deficiencies. The overall goal is to work with our customers to give their patrons and tenants confidence to reenter indoor environments. As an example, we recently signed a sponsorship with the American Hotel and Lodging Association, where Carrier will help define the AHLA Safe Stay guidelines for guests and staff around indoor air quality and contactless solutions. And then we'll play our part to help hotels implement those solutions.
On the refrigeration side, we continue to see traction on connected cold chain offerings that address the critical challenges inherent to food and pharmaceutical distribution. Sales at our industry-leading cargo monitoring Sensitech business, were up about 10% in the fourth quarter, and we entered 2021 with a backlog that is up over 170% over the same period last year. And we continue to push for adoption of our cloud-based Lynx platform that we are co-developing with AWS to extend our current digital offerings.
Our growth levers are further fueled by delivering against our three strategic pillars. First, in terms of growing the core, we can say with confidence that we gained share in many of our core markets. We met our objective of adding over 500 sales and sales support people, invested over $400 million in R&D, enabling us to introduce over 120 new products last year. We continue to have key new wins. Our team never needed to be pushed to win, just given the freedom and the investments needed to get back to our market-leading roots. We also continued to push product extensions, such as VRF and geographic coverage, with a focus on increasing sales in China. Our third pillar, growing services in digital, has yielded very strong initial results, as we push our business models to focus more on recurring revenues.
To kick start progress, we focused last year on our conversion rates. That is, converting new OEM units coming off warranty to long-term agreements. We started the year at 20% conversion rates. We committed to end the year at 30%, and we did. Going forward, our focus will be on overall coverage. That is, of our overall installed base of chillers in the market, how many of those are under some sort of long-term agreement? Today, we have coverage of about 50,000 units, and our plan is to increase that by about 10,000 units per year. We have similar objectives in other parts of our business as well.
Increased coverage is enabled by digital solutions. Our truck trailer segment launched eSolutions 2.0, with a web-based dashboard that provides critical fleet information, enhanced visibility, and improved geo-fencing. And in F&S, we launched our Edwards EST4 network, fire alarm, and emergency communications platform, to tie multiple remote buildings together, to provide more flexibility and cost-effective solutions to our customers. We also continued to invest in and grow our ALC building automation and controls business, where customers have embraced our open architecture solutions. 50% of our 2020 sales in that business came from recently introduced products, and we are complementing that with continued investments in our channel and field network.
From its culture and our growth mindset, we are taking a very disciplined approach to capital allocation. In the span of just nine months, we reduced our net debt from about $10 billion to approximately $7 billion, and ended the year with over $3 billion of cash. Our balance sheet improvement now opens the door to bolt-on M&A. our acquisitions will align with our focus on healthy, safe, and sustainable building and cold chain solutions, and more broadly with the three pillars of growth that we have laid out.
Before I turn it over to Patrick, let me give you some color on how we're thinking about 2021 on Slide 5. Our outlook for the year reflects our objective of being a consistent, mid-single digit organic growth company. We expect sales to grow 6% to 8%, and that includes 2% tailwind from FX. And with strong conversion, we expect adjusted EPS to increase by about 14% at the midpoint. We’ll continue to invest in growth, while we project improving margins by about 70 basis points, and producing strong free cash flow of about $1.6 billion.
While we are starting this year with continued uncertainty around the global economic recovery as the pandemic continues to impact people and economies around the world, we are optimistic that the uncertainty will subside as we get into the second half of the year, following more widespread vaccine distribution. The good news for our first half is that our backlog is solid, given the strength in orders in 4Q that has continued very well into January. As we get into the second half of the year, we expect some of the businesses that were acutely challenged by the pandemic to start to recover, particularly in retail, hospitality, and small to medium-sized businesses.
So with that, let me now turn it over to Patrick. Patrick?
Thank you, Dave, and good morning, everyone. Good to be with you on the call today, and very excited to be part of the Carrier team. I've spent the last two months gaining a deeper understanding of our strengths and the opportunities we have in front of us. I see tremendous opportunities to create value, given our focus on innovation, accelerating profitable growth, driving internal efficiencies, free cash flow generation, and capital deployment and portfolio management. I will sharpen this focus and drive execution so we can continue to deliver long-term superior financial returns to shareowners.
Let me share some detail around the quarter. Please turn to Slide 6. As Dave discussed, Q4 was broadly in line with our outlook. As you can see on the right side, we exceeded the outlook we gave you an October for sales and adjusted operating profit. Sales of $4.6 billion were up 2% versus the prior year, and flat organically. Currency was a two point tailwind for sales in the quarter, about $100 million, but with little profit contribution. The sales growth was driven by continued strength in our residential HVAC business, which was up 25% in the quarter.
We saw continued sequential improvement across our other businesses. As expected, adjusted operating profit of $453 million, was down versus the prior year, as Carrier 700 cost savings were more than offset by the reversal of some temporary costs actions related to COVID-19, the expected $75 million of investments, about $25 million of incremental public company costs, and about $50 million of one-time items in the quarter. These one-time items were about $20 million higher than we expected, and included a pre-spin vendor contract termination, and legal and related costs. Free cash flow of $38 million in the quarter, included $272 million in tax payments related to the sale of the Beijer shares. We anticipated $50 million to $60 million of that from the September sale, but the remainder associated with the December transaction, was not captured in our October outlook.
Moving on to the full year. Sales of $17.45 billion, were above our most recent outlook of about $17.3 billion, due to currency translation. Full year adjusted operating profit was $2.23 billion, just over our October guidance. And excluding the tax payments for the sale of Beijer shares, we would have exceeded our free cash flow targets by about $100 million.
Let's now look at how the segments performed, starting on Slide 7. HVAC organic sales were up 4% in the quarter, driven by the 25% increase in residential. As expected, field inventory levels have now normalized, and we should see more typical growth trends in that business going forward, but recognize there will be a much easier compare in the first half versus the second half of 2021.
Commercial HVAC sales were down mid-single digits organically. Light commercial was down 10% and continued to lag, but the rate of decline improved sequentially. Turning to refrigeration. Sales of $949 million were down 3% on an organic basis, but improved sequentially. This was by far the best quarter from a year-over-year perspective for this segment. Organic sales of the fire and security segment, also continued to improve sequentially in Q4, and were down 5% compared to last year. We saw a 6% decline in the products business, and a 2% decrease in the field business. Within the product businesses, which represents about 60% of the segment sales, residential and commercial fire continued to be solid, while access solutions in our industrial businesses remained challenging.
Now, let me review the order activity we saw in the fourth quarter, because that is important to understand what is driving our 2021 outlook. As you can see on Slide 8, our residential and light commercial businesses continued to see strong orders, driven by residential. We intentionally worked with our channel partners to exit 2020 with more normalized inventory levels. Backlog in residential is up almost threefold compared to a year ago, and puts us in a solid position for shipments in the first half of 2021. Commercial HVAC orders were about flat compared to last year, and we exited 2020 with backlog up mid-teens year-over-year. For refrigeration, order activity for the truck trailer business continued to improve sequentially. North American truck trailer orders were up well over 100% in the quarter, and Europe was up about 10%. Container orders up almost 50%, pointing to a recovery in 2021.
Commercial refrigeration orders were up mid-teens organically, as the business is also seeing pent-up demand. Strong order intake and backlogs exiting the year, positioned the refrigeration segment for the strongest growth of the three segments in 2021. Order intake for our fire and security segment also continued to improve sequentially. Product orders were down low single digits. Like prior quarters, industrial end markets and global access solutions, remain weak. Field orders were up low double-digits year-over-year, and we exited 2020 with record backlog for installations in this business. Overall, a generally improving order trend gives us confidence in our ability to deliver solid growth in 2021.
Please turn to Slide 9, as I walk you through our 2021 outlook. Based on current exchange rates, we expect reported sales to be up 6% to 8%. We expect organic growth of 4% to 6%, and a currency translation tailwind of about 2%. We expect HVAC and fire and security organic growth to be low to mid-single digits, and expect refrigeration to be up low teens. We expect adjusted operating margin to expand by about 70 basis points at the midpoint to around 13.5%. We expect our full year adjusted effective tax rate to be about 25%, one point lower than last year. And adjusted EPS is expected to be between $1.85 and $1.95. This represents about 14% EPS growth at the midpoint. We expect about $1.6 billion in free cash flow, which represents about 95% conversion, despite higher capital spending, and about $100 million more in interest payments.
Moving to slide 10, let's walk through the pieces in our 2021 adjusted EPS bridge. Adjusted EPS growth will come almost entirely from operational performance, as the increased volume converts to earnings. Core earnings conversion, which excludes the impact of currency, the 2020 Beijer sale, and the 2020 Q4 items, is about 30%. We anticipate additional benefits from Carrier 700 of about $225 million in 2021, and expect the absence of COVID related inefficiencies and disruptions in our factories and supply chain, to benefit us by about $125 million. Offsetting that is about $200 million of cost containment snapback, and about $150 million of planned incremental investments.
We previously talked about the three-year plan as $100 million of investment in each year of 2020, 2021, and 2022. We are accelerating some investments into 2021. And therefore, currently expect incremental investments in 2022 to be only $50 million. We expect the net impact of pricing and input costs to be neutral for the year. Interest expense will be a headwind in 2021. We raised most of the debt in late February 2020, so we did not have an entire year's worth of interest expense last year.
Lastly, we currently have some restrictions in our debt covenants on the total number of shares we can repurchase. And so, while we target repurchasing about 5 million shares in 2021, the average number of shares used for EPS in 2021 will still be above 2020. And so, that represents about a $0.02 headwind ‘21 versus ’20. Page 16 of the slide deck includes some additional items related to our 2021 outlook.
Let's shift focus to the balance sheet and our leverage profile on Slide 11. Carrier completed the spin in April, with substantial leverage. Since that time, we've been able to reduce leverage significantly through strong free cash flow performance and the sale of our stake in Beijer. We repaid the entire $1.75 billion term loan in the fourth quarter, and net debt to adjusted EBITDA improved from about 3.4 at the time of the spin, down to about 2.8 at the end of fiscal 2020. We expect 2021 year end’s net debt just north of $6 billion, which would bring our net debt to adjusted EBITDA ratio closer to 2.1 by the end of 2021, that is assuming no impact from potential acquisitions or divestitures. The bottom line is that we're in a much stronger position today, given the improved health of our balance sheet, which provides more flexibility with respect to capital deployment.
That takes us to Slide 12. During 2020, it was clear that the focus had to be on reducing leverage. As we enter 2021, we plan a more balanced capital deployment, while remaining within our overall capital structure of an investment grade credit rating. We expect 2021 CapEx to be about $375 million. Dave talked about some of our priorities with respect to inorganic investments. We're not putting a dollar amount placeholder here, but we will be opportunistic on bolt-on M&A that help achieve our strategic objectives and meet our financial criteria.
We plan to reduce debt by $500 million in 2021. And in light of our pending redemption, we will not have any debt maturing until 2025. In December, we announced a dividend increase, and we now expect 2021 dividend payments to amount to about $425 million. And today, the Board authorized a share repurchase program of $350 million, and our outlook for ‘21 incorporates repurchasing about 5 million shares this year.
Before I turn it back to Dave, let me just add that the volatile quarters in 2020, should lead to some unusual comparisons in 2021. We expect strong double-digit organic growth in the first half of 2021, and closer to flat organic performance in the second half, given the residential comparisons. In addition, we expect the first quarter to have the lowest incremental margins for the year, probably in the high teens, due to having more Beijer income in last year's Q1 than other quarters, a larger currency conversion headwind, and some prior year deferred comp favorable items.
With that, I'll turn it back to Dave.
Okay. Thank you, Patrick. Our results demonstrate that we successfully navigated through 2020. We remain focused on driving key strategic growth initiatives, alongside aggressive cost actions that will fuel future investment and innovation. Our balance sheet improvement provides additional flexibility to create shareholder value through bolt-on M&A, dividends, and share buyback. All of these factors, combined with the tailwinds from important megatrends, position us well for strong top and bottom line growth in 2021 and beyond.
So with that, we'll open this up for questions.
Thank you. [Operator Instructions] Our first question comes from Stephen Volkmann with Jefferies. You may proceed with your question.
Hi, good morning guys. Thanks for taking the question. I'm hoping you can just talk a little bit more about the commercial HVAC business. Obviously strong backlog headed into ’21, but orders kind of flattish. Maybe you can give us a little bit more color, either by market or by type of product, or anything that - to sort of give us a sense of the cadence on commercial HVAC. Thank you.
Yes. Good morning, Steve. Yes, we are pleased with the backlog being up in the mid-teens, but clearly, there are some watch items there. The ABI, being at about 43 in December, has been below 50 since April. So we have a watch on it. Remember that commercial new construction is about 15% of our overall business. The things that give us a lot of confidence are, some verticals remain very strong globally, data centers, warehouses, education, healthcare, have all been strong. Number two is, we are seeing traction in our whole focus on indoor air quality, healthy buildings. We have a pipeline of $200 million there. So it's clearly a watch item, particularly North America.
I was pleased. China has continued to be strong. Europe, we actually saw coming back. You may recall earlier in 2020, I felt like we weren't gaining the share in Europe that we had been in North America, China. The team made a number of changes in Europe, and we're seeing traction there. So, signs of life in Europe. Orders were up about 5% there in the fourth quarter. Asia Pacific actually showing a bit of strength towards the end of last year for the first time in eight or nine months. So signs of progress, but clearly a couple of watch items, probably the biggest being North American new construction.
Great. that's helpful. And do you feel like people are able to get out into the field now and do more of the kind of service maintenance, upgrade stuff that is probably - sort of represents pent up demand for 21, or is that still on the com?
No, we do. The good news for the aftermarket is that we actually come in - HVAC services backlog ended the year up about 20%. So we are seeing people get out there, even in Europe where it's a bit spotty and some markets are more closed than others. Even though they've been distributing the vaccine in England, we still see some pockets of closed down locations there. Same with Germany. But by and large, we are getting our field support and our technicians out into buildings, certainly in the United States. So, we're looking at double-digit HVAC aftermarket growth in 2020, and it'll be fueled by folks getting back into the buildings.
Super. Thanks. I'll pass it on.
Thank you. Our next question comes from Joe Ritchie with Goldman Sachs. You may proceed with your question.
Thanks. Good morning, everybody. Hey, can you guys maybe provide a little bit more color around the $50 million charge that you took this quarter, and then whether all of came through on HVAC margins this quarter?
Yes, Joe, Patrick here. So really one big item, as part of those one-time items is, as I mentioned, a vendor contract renegotiation. Think of it as a pre-spin contract that we had from another UTC umbrella. We think we can do better than that specific contract. So we decided to terminate it. There were costs associated with that that we incurred in the quarter. We'll benefit from that in future years, and the NPV obviously was positive on that transaction. That was by far the biggest item within the $50 million. And I would say that clearly HVAC had the biggest part of that one-time cost of about $50 million in the quarter. So clearly, HVAC margins were impacted by that more than the other segments.
Okay. That's helpful, Patrick. And maybe my just - my one follow-up, maybe just sticking with HVAC margins. I think that was probably the area where we're hearing the most from investors today. Can you guys just kind of parse out what really kind of happened within the quarter outside of this one contract, because margins still would have been down outside of - you've seen growth in the quarter? And I recognize that you spent about $75 million in investment. But maybe just kind of parse out what were kind of the key drivers for the margins in HVAC this quarter?
Sure. So within HVAC, currency helped us. Currency translation was a tailwind on sales of about $40 million. So basically with no operating profits to the contribution. We did see a benefit of the higher volume, particularly in Resi, which was up 25%. Mix was actually a headwind in the quarter, and actually that relates to commercial HVAC. The applied equipment piece of commercial HVAC returned to growth. We saw that up low single digits, which is a good thing. We saw good growth in China.
We have not yet seen service in aftermarkets return to growth. Service in aftermarket was down year-over-year in the fourth quarter. They tend to have better margins. Now, the good thing is, backlog for service in aftermarket was up double-digits for us in the quarter. So that bodes well for future periods. Other items that impacted the HVAC margins in the quarter, one, you referred to investments. Investments were up $75 million in the quarter for the overall company. HVAC saw the vast majority of that. And so that, together with the one-timers that I referred to earlier, is really the story around HVAC margins. For next year, we expect for the full year, HVAC margins to be close to 16%.
Okay, great. Thank you.
Thank you. Our next question comes from Nigel Coe with Wolfe Research. You may proceed with your question.
Thanks. Good morning. And Patrick, good to hear your voice again. (Indiscernible), but here we are. So I think you just kind of addressed the HVAC margin issue quite well, but when you say the vast majority of the investment spending, are we talking about like over 50 of that 75 would have been within that segment? Just trying to size the impact of that investment spend.
Yes. North of 50 million would have impacted the spend, Nigel.
And then the nature of this investment spending, is it primarily headcount spending? And I'm wondering if the (K full) of that 150, if it's mainly just the analyzation of what is being spent in the second half of this year.
Yes. Nigel - good morning, Nigel. It's Dave. Yes. Recall that we really look at our investments in three categories. We said that we'd add - the first is selling and salespeople. We said we'd add 500 sales and sales support people last year. We ended up adding more like 550. And a lot of that, we started to see in the fourth quarter. We also invested in R&D. that was a big chunk of it. We had tapped the brakes a little bit on some of our investments in 2Q. We started to release it in 3Q into 4Q. So we did accelerate R&D investments.
And also the third piece is digital, a little bit less than the R&D side, but we're going to come out with some new digital products here at the beginning of the second quarter, especially tied into healthy building. So we really tried to lean forward because that's what we see as one of the most transformational opportunities, has to be - has to do with a digital offering that's going to be an extraction layer that has - that gives customers visibility into things like indoor air quality. So we really accelerated some of our investments there in the fourth quarter.
And then Nigel, of the 150 million, about half of it would be carryover from investments made late in 2020.
Thank you. One question from sort of the attach initiative, you’re (indiscernible) increasing in the install base of chillers being serviced. What is driving that uptake? What are you doing differently today than you weren’t doing this time last year? And then secondly, as part of that, would you be pointing towards double-digit service growth going forward?
Well, certainly, we feel positive about double-digit service growth in ‘21. And we'll have to see as we get into ‘22 and beyond, but you look at that - we have a relatively small percentage of our say chillers under some form of long-term agreement. It's less than 25%. And the reality is, it should be something that's exponentially higher. One of the ways to do it is having those chillers be connected. So we're going out of our way to add edge devices to the chiller so we could have more of a two-way communication with the customer. So we can not only do things like diagnostics and prognosis - diagnostics and prognostics, but other value-added services, such as energy efficiency through making the devices connected.
So connecting the devices is one. Adding the salespeople is another key one. One of the reasons we were successful in our conversion rates last year, was simply putting people in the building, working with the building operator to say, while it's under warranty, or while it's under an agreement with someone else, there's value-added services that we can provide. So increasing our sales forces in a very targeted way, so for example, in China, at some of the tier two cities, in the North America at some of the underserved regions that we have today. So really it's a lot of blocking and tackling. I am very confident in the double-digit aftermarket growth this year.
Great. Thanks, guys.
Thank you. Our next question comes from Jeff Sprague with Vertical Research. You may proceed with your question.
Thank you. Good morning, everyone. I was wondering if you could address a little bit more of what you're expecting on the price cost side. Was it an issue in the quarter? You did go through a lot of the margin dynamics in Q4, but I don't think you mentioned price costs. But more importantly, as you look forward into 2021, what do you see and what do you have modeled?
Yes, Jeff. For 2020, price realization was really about flat. Our lead for ‘21, we’re very closely monitoring commodity prices, especially steel, copper, aluminum. We expect price to offset commodity inflation in 2021. We announced our price increase during the normal cycle, which is early in our first quarter. And then from a blocking or locking point of view, currently over 75% of our 2021 requirements are locked or blocked. If prices stay high, of course this could be a watch out in for 2022, but we'll be continuing to look at this closely and looking, of course, at continued recovery through pricing as well. So overall, neutral for fiscal ‘21.
And I'm also just wondering kind of new core independent Carrier. You provided in the appendix kind of the outlook on corporate expense and the like. Are we largely at run rate, though, coming out of Q4 on public company costs, anything that's left over on TSAs, that sort of thing? Maybe you could just address what, if any, kind of nuances or headwinds we should be thinking about as you kind of get into your full - first full independent year here.
Yes. Jeff, I think this will be de minimis in fiscal 2021. There might be a little bit in the first quarter, but really not a big number for the full year.
And I would add, Jeff, that look, we've been clear that our G&A is just too high. So, it's - we have a very structured focus around taking G&A out. It's not something that you can kind of do the right way overnight. What we're trying to do, rather than just give kind of headcount targets or things like that, we're trying to make structural changes. We have a leader that reports to me, Eva Azoulay, who's leading a whole low cost center of excellence approach. We're outsourcing some aspects. We’re moving some of the work to low cost COEs, and we're really trying to reduce our G&A in a structured way. ‘21 is a lot of putting that in place. So we'll start to see a lot of the benefit of it as we get into ‘22 and beyond. So our G&A should come down for sure. And $100 million of the Carrier 700 is G&A. So we expect to start seeing that drop through, certainly as we get into ‘22.
Great. Thanks, guys.
Thank you. Our next question comes from Steve Tusa with JPMorgan. You may have proceed your questions.
Hey, good morning. Can you just clarify what the raw material impact is, just so we have an idea of what those two components are? Just following up on Jeff's question.
Oh, for the full year?
Yes.
Yes. We see a headwind of several tens of millions of dollars.
Okay. Got it. And then what did Carrier’s 700 ultimately come in at for the year on the benefits side?
Carrier 700 came in at 250 in fiscal ‘20. We expect ‘21 to be about 225.
Okay. Got it. And then just one more on resi. You said your backlog was up like 3x. Is there any buy-in there ahead of those price increases that's influencing that number? I mean, that just seems like a pretty big number for December - the year-end, December 31st.
Yes. Certainly, we were pleased with backlog coming in 3x higher than it was at the same time last year, Steve. What we've really worked very purposefully on with our distributors, is to make sure that we were trying to match our flow to them with their movements at the dealer base. So, as Patrick said, we had sales in the fourth quarter up 25%. Movement from the distributors into the dealers was about 20%. Inventory was up around 10% coming out of last year into this year. So fairly normalized.
We saw order strength continue to be very, very strong in January. Now, part of it is that you know that we have a good position with new home construction. That was up about 8% last year. We expect it to continue to be strong this year, but we're working very closely with our channel partners to make sure that we're giving them what they need when they need it. And there's just a lot of demand in the system, but we're trying to modulate that to make sure we're there to support them so they can support the dealer network.
Got it. Okay. Thanks.
Thank you. Our next question comes from Jeff Hammond with KeyBanc Capital Markets. You may proceed with your question.
Hey, good morning, guys. So Slide 10, great color on the different moving pieces in costs. Just wondering how you think of cadence for investments. And you gave good color on incrementals on 1Q, just how some of those moving pieces impact kind of cadence and incrementals as you kind of move through the year.
Yes. Jeff, I think from an investment point of view, you can expect that to be fairly even throughout the year in 2021. From a incremental point of view, as I mentioned, Q1, a little weaker than the other quarters.
Okay. And then just on kind of the first half, second half, I understand - I mean, I guess that things have been - were improving through 2020, but outside of residential being so strong in the second half, where else do you see “tough comps” to kind of get you to that flat dynamic in the second half?
I think it's really driven by residential in the second half. So obviously we had a very strong resi second half in 2020, with very high growth rates. As we lap these, some of those headwinds get partial - get offset by what we expect to be a pickup in light commercial, commercial HVAC in our fire and security business. And so, that's really the - what we're counting on in the second half of the year, there is a recovery related to COVID that helps offset some of those headwinds in resi.
Yes. Jeff, I’d add that I think we really view this as a tale of two halves. You look at the first half, we're coming in with very strong backlogs. Orders, Patrick mentioned, were up 15% in the fourth quarter. Some were quite high, like in our transport refrigeration business, very strong there. So we like our opening backlog position. Orders continued to be very strong in January almost across the portfolio. So we expect that the backlog in orders to carry us through the first half. Clearly you have the compares, but as you get into the second half, there's pent up demand in some of the key verticals that have been acutely challenged.
So, our light commercial business, we start - we would expect to see recovery as we get into the second half of this year. You start looking at some parts of our fire and security business that were hurt by small and medium sized businesses and the impact of retail and some of the big box retail impacts that we've seen. So we expect that first half carry through with backlog, second half as economy starts to reopen and there's some pent up demand, we expect that to give us some lift in the second half. Tough compares, but progress in some acutely impacted verticals.
Okay. If I could sneak one more in, just selling versus sell-through, your sense for residential as you look at your independents, or just kind of what your distributors are telling you, what sell-through was in 4Q.
Well, we looked at - we were looking at 20% movement in 4Q from our distributors into the dealer. So we were trying very hard to really match our sell in and sell out. It was a little bit higher on what we sold to them than what they moved out, but not materially. So there is significant demand in the channel. I would say that one thing that is positive is that we have gained share. It's always complicated when you look at share on a quarter-to-quarter basis with all the different moving parts on selling, either direct to dealers or selling through independent distribution.
But if you just step back and look at 2020 as a whole, our resi sales were up 10%, and you're looking at probably a market that was up 7% to 8%. So we feel positive that we're gaining share the right way. Our partnership with our distribution partners has been very positive. New construction is - new home construction has been positive. So, we feel positive about where we are and where we're going on Resi. And we're trying to be very careful to not get out over our skis, ourselves or our distribution partners.
Great. Thanks a lot.
Thank you. Our next question comes from Deane Dray with RBC Capital Markets. You may proceed with your question.
Thank you. Good morning, everyone. And Dave, congrats on being named Chairman.
Thank you, Deane. Appreciate that.
First question for Patrick. You don't often hear about covenants that restrict buybacks. I know it does happen, but the expectation, if you're going to be at 2.1 net leverage by year end, you would think those covenants would not be in play and maybe they can get rolled back. I know you negotiated covenants last year. Might this be an opportunity as well?
Yes. Under our current covenants, we have those restrictions and those remain there until the end of the year. We could decide to renegotiate them. The other factor that's at play here is that our current capital structure, we're kind of growing into our existing credit ratings. And so by the end of the year, our capital structure will be much more aligned with our existing credit rating. And so, this would not be the time to buy back significantly more shares, as we're trying - as we’re still working our way into our existing credit rating. And so that's the other element that's at play here, Deane. We could renegotiate it, but there's still the credit rating that's in play as well. And it's clearly our intention to remain a solid credit rated company.
Appreciate that. And just, if you could expand on the opportunities in bolt-on M&A. it's interesting, the covenants don't restrict that, it would appear. Just what's the funnel look like, especially like across the product lines?
Deane, we're in the process of building up that pipeline. We’ve had some that we've been working. We’re adding more to the pipeline. So it's something that as we continue to look at the portfolio, there's still some things that we would say that we're assessing whether or not they would be of more value in the hands of others. And then we look at our overall strategic priorities, healthy, safe, and sustainable buildings, is a big ecosystem, the cold chains and other ecosystem, our three pillars of growth. We want to grow the core. We want to look at adjacencies. We’re underrepresented in China. We’re underrepresented in BRF. So those are areas. And anything that builds out our services in aftermarket offerings as we continue to shift to recurring revenue. So we have some things in the pipeline that we've been working. We're trying to add to that pipeline as we go.
That's helpful. Thank you.
Thank you. Our next question comes from Vlad Bystricky with Citigroup. You may proceed with your question. Vlad, your line is on mute. Please unmute.
Hi. Good morning, guys. Sorry about that. So, lots of great color on the quarter as always. One thing that was a little surprising is, looking at the order trends, it looks like APAC, outside of China, was actually stronger than China in terms of orders. Can you talk about what drove that strength in APAC outside of China, and how you're thinking about the sustainability of the strong order growth in the APAC region?
Yes. I would say that the whole Southeast Asia is still fragile. I mean, it actually caught us a bit by surprise because it had been quite negative in the second and third quarter. Even places like India, we started to see traction. Other places, Singapore, Australia. Hong Kong is still a mixed bag because of a multitude of reasons there. But we were pleasantly surprised by some of the traction we started to see in parts of Asia outside of China. And look, China has just remained just continuously strong, really across the portfolio, on the cold chain side, both in commercial refrigeration and transport refrigeration.
Overall, look at Carrier, our China - in the fourth quarter, China sales were up 10%. Orders were up about 5% in China. Particularly strong in refrigeration, where it was up about 20%. So we remain very, very bullish on China overall, and it was nice to see progress in Southeast Asia, but it's still a watch item. We’ve got to see more vaccine distribution in places like India, and then we'll get more confidence on the sustainability.
Okay, great. That's helpful. And then just thinking about the ‘21 free cash flow outlook, can you just maybe help to level set us in terms of how you're thinking about the seasonality of free cash flow in 2021?
Yes. Vlad, we would expect - and which is typical for our business, that the first quarter would be our weakest quarter of free cash flow. And that the second half would generally be stronger than the first half. So generally Q1, we’d expect to be our lowest quarter of free cash flow, followed by stronger quarters and a significantly stronger second half than the first half. And that's, of course, related to some of the seasonality in our business, especially in HVAC.
Right. Some more typical seasonality than we normally see.
Correct.
That's helpful. Thanks. I'll get back in queue.
Thank you. Our next question comes from Julian Mitchell with Barclays. You may proceed with your question.
Thanks. Good morning. Maybe I'm just trying to hone in a little bit on the Q1 context, and understand that in general, this year's seasonality may be a little bit different, at least on earnings, if not cash flow, than normal. So any extra color on that. But if I start with Q1, you'd mentioned the high teens incremental. That compares with, I guess, the full year guide of more like 25%. For revenues in Q1, should we be thinking that sort of up high single digit, and so you end up with about 50 bps of margin expansion against 70 bps for the year as a whole? Is that roughly the right framework?
Yes, we do expect double-digit organic growth in the first quarter, and we do expect margin expansion as well in the first quarter. And as I mentioned earlier, we think that the timing of the investments is pretty even throughout the year.
And also, Julian, again, because of the strong Q4 orders that continued into January, our coverage for Q1 is solid. So we feel positive about that.
Thank you very much. And then just thinking about the free cash flow guide for the year as a whole, understood the context on seasonality that you just provided, Patrick, but for the year as a whole, if I back out the Beijer tax payments, it looks like you're guiding for around flattish operating cash flow year-on-year in ‘21. Just wondered about any moving parts within that. You have that $100 million interest expense, I think, called out. Maybe help us understand what you're dialing in for the working capital scale of headwind.
Yes. Actually, so for the full year, free cash flow, we expect it to be about flat year-over-year. Obviously, adjusted net income is expect to be up year-over-year. That's a tailwind there. There are two items that are large offsets. You mentioned one of them. Interest table is - we will make an extra $100 million of interest payments. And in CapEx, we expect also to be up about $65 million. And so that offsets most of the adjusted net income. We do expect working capital overall to be a slight tailwind. On the headwinds associated with free cash flow, we expect comp and benefits to be a little bit of a headwind there in fiscal ’21. So those are the biggest pieces. It's really higher adjusted income, offset by $100 million extra interest payment, and $65 million additional CapEx. And then some minor items to make it flat year-over-year. Thanks, Julian.
Perfect. Thanks.
Thank you. Our next question comes from Gautam Khanna with Cowen & Company. You may proceed with your question.
Yes. Hi, guys. This is Dan on for Gautam. Thanks for the question. Could you discuss how you see permanent restaurant and brick-and-mortar closures impacting the near term versus longer term fire and security demand? If that has any impact on your long-term view of that business. Thank you.
Yes. I look at it. The - it impacted (indiscernible) as we start to see some of the brick-and-mortar. We saw very strong e-commerce sales in our residential smoke detector business, but we did see an impact on more of the brick-and-mortar piece of that business. So we are expecting, with the vaccine distribution, some recovery there as we get into the latter part of 2021. Another piece of the business is some of the security portfolio that some of that piece of that business is tied a little bit to - more towards SMB and small and medium sized businesses. So if you take our S2 business, for example, we start - we would expect to see that to start open up with pent up demand with the SMB side of the business as we get into the second half of the year.
Okay. So you would expect the pent up demand aspect to be stronger than say, like - I don't know, what do they say, like one third of restaurants may have closed permanently now?
Yes. I mean, I think, look, the restaurant closures, I mean, it's something that we watch, not only for our fire and security business, but our light commercial business. We look at that business. That was down 10% in the fourth quarter, and we have that business up mid-single digits this year. So we do - clearly there's been a big impact on that whole industry, but we do expect to see some pent up demand as people start to reenter society in the second half of the year.
Okay. That's really helpful. Thanks.
Thank you. Our next question comes from Josh Pokrzywinski with Morgan Stanley. You may proceed with your question.
Hi. Good morning, guys. I think first question on service versus equipment in commercial. I think, maybe relative to some of your peers out there, those folks were a little bit more sanguine on service and saw equipment kind of lagging behind. You seem to have a bit of the opposite experience, but I know you're still sort of working your way up the curve on service market share. Is there something about either the timing of being able to actually schedule that, or the nature of the service you guys are winning that would suggest that there's sort of a lag? Just curious that that building access phenomenon, I suspect is kind of similar for everybody, and that seems to be impacting you more, but you're doing better on equipment. A lot of moving pieces there, but yes, I guess, it kind of comes down to, how do you feel about either timing or kind of the nature of service maybe versus the broader market?
Yes. On the equipment side, look, we've added the salespeople. We've introduced some new products. It's not really putting a new machine, a new construct in place. It was really accelerating, doing what we know how to do, with more focus and energy. So the ability to turn that in an effective way, has been positive and a bit easier than it has been on the aftermarket for us, because it hasn't traditionally been as big of a focus area for us as it has been perhaps for a couple of our peers that have done well in this area. So, I would say on the aftermarket, we added a new head of aftermarket, Ajay Agrawal. He’s been working tightly with the new heads of aftermarket that we put in place in the BUs and the BU presidents.
And now we’ve put in place a playbook that we know works, but it's not a playbook that you can effect overnight. So adding the sales and sales support people, adding a blue edge tiered offering, adding digital offerings that can really differentiate the overall offerings. So a lot of this playbook of how we think about pricing parts and how we can provide more value-added to our customers, that playbook is in the process of being rolled out. But when we talk about a 20% increase in our chiller coverage this year, that's a pretty big percentage. And a lot of 2020 was putting that foundation in place. 2021, for us, is the show-me year. And now we’ve got to kind of go realize a lot of that foundation that we put in place last year.
Okay. And then on the portfolio side, clearly asset prices are high out there. I know parts of fire and security, namely Chubb, got a peak under the hood a couple of years ago now. What’s the appetite to maybe explore some dispositions, just given that multiples are fairly high in the marketplace?
Look, we said consistently that we would be very objective as we look at our current portfolio, and that's continued. We started that process day one, and that's going to continue really forever. So we look at all aspects of the portfolio, whether they're worth more to someone else than they are to us, and whether they fit in our long-term strategy. And that applies - I mean, you mentioned Chubb. It applies really across the board. So we will continue to assess. We will continue to do what's right for our shareholders. If we make that determination, we will look at what to sell and what's the right time to sell. And then the exciting thing for me is that we now have the balance sheet flexibility to start looking more aggressively at bolt-on M&A. So, we're hopeful to see some of that in ‘21 as well.
All right. Thanks guys.
Thank you. And I would now like to turn the call back over to Dave for any further remarks.
Okay. Well, thank you. Thank you, everyone, for joining. Sam is around to take your questions, and we appreciate all of the focus and attention this morning. Thank you.
Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.