Carrier Global Corporation (CARR) Earnings Call Transcript & Summary

Good morning, everyone. I'm Sam Pearlstein, Vice President of Investor Relations, and I'd like to welcome you all to the Carrier Investor Day. Here's our cautionary statement. I want to remind you all today that we'll be making statements regarding earnings, cash flow expectations and other forward-looking statements that are subject to risks and uncertainties. Carrier's Form 10 and UTC's 10-K and 10-Q filings provide detail on factors that could cause actual results to differ materially from those anticipated in forward-looking statements. With that out of the way, I want to give you a sense of the agenda today. We're going to start with David Gitlin, providing the company overview before turning over to Chris and Matthew to talk about Commercial and Residential, respectively. We plan to hold off questions until the end, and we'll bring all the presenters back up on stage. After the break, we're going to have David discuss the Refrigeration segment; Jurgen, the Fire & Security segment; followed by Tim to provide more details on the financials. Afterwards, we're going to bring all 6 presenters back up. We'll take as many questions as time allows, and we're going to finish by 12:15, followed by a reception. First speaker is Dave Gitlin, who's been with UTC for 23 years in a variety of roles, most prominently leading UTAS and Collins. I got to know him during many of those years covering the company on the sell side, and now I'm excited about joining him here at Carrier. And with that, I'd like to turn it over to Dave Gitlin, Carrier President and CEO.

Okay. Well, thank you, Sam, and good morning. Welcome to Carrier's Investor Day. It's great to see so many familiar faces, and I look forward to meeting those of you that I don't know. These are exciting times at Carrier. We are on track for an early April spin. And I will tell you that there is tremendous energy in our company. You see our new tagline here. And we have lots of important content for you today, but I hope that when you leave here, it will be very apparent to you that change is in the air. This is one of the most important years in our company's proud history, and we are seizing this unique opportunity. Because when you have a company that goes back over a century, and now you're going to become a public company, you have an opportunity to step back and define your vision, and that's exactly what we're doing. What is our vision? What is our road map to get there? We can define our priorities and our strategic imperatives. We can ensure that our capital allocation approach and our portfolio analysis is deliberate, and it's aligned with our vision and our priorities. We've taken this opportunity to define a new culture, a new management system that we've already deployed and a new operating system that makes winning and growing and performing a habit. And we put together a leadership team that I know will deliver results. There is a change and an energy that is incredibly energizing, and I am confident that these changes will yield results for you, our shareholders. So a summary of our investment thesis on Slide 4. First, our industry will see sustained growth because there are 4 key megatrends that will drive sustained demand for our products. So it starts with the fact that our industry is poised for growth. Then the question becomes, why Carrier? And the answer is very straightforward. It's that we start in all aspects of our business, we start from a position of strength, and there is great runway ahead. You take market share. We're #1 or 2 in just about every segment in which we compete globally, and there's an opportunity to pick up share and also grow into adjacencies. Performance. We've generally had solid performance, but there's runway to make sure that we consistently deliver on our commitments and on our results. Growth. If you look over the last 5 to 10 years, we've generally had very consistent growth, but there is an opportunity to consistently increase that growth on a consistent basis. Same with cost reduction. It's generally been quite solid, but we're taking this opportunity with new talent, new focus, new process maturity to make sure that we drive even more cost reduction. And you'll be hearing from us today on Carrier 600. That is our commitment to take out $600 million of cost over 3 years, and that's the same with margin. We have very solid margins, frankly, especially in some of our key segments, very strong margin, but there's certainly room for margin expansion, and it's the same with our portfolio. We have a super portfolio that we're very proud of, but there's runway ahead. So looking at Carrier, overview on Slide 5 in some more detail. You can see here that we're just under $19 billion of sales, and the numbers on this page reflect 2019 actuals restated just to a stand-alone Carrier, which now adds about $225 million of public company costs and a few other adjustments, and Tim will describe both of those in his section. Before these adjustments, we were about a 16% ROS. You see here, 14.2%, reflecting these pro forma adjustments. Our EBIT is about $2.6 billion, EBITDA of about $3 billion, and the segment presidents will take you through each of their financials, solid margins, but again, room for margin expansion in each of the segments. And I will tell you, there is room to take out some of the central costs, which we will do. When you look at some of our splits along the right, 85% of our sales today are in the United States and Europe. So there's an opportunity for us to have a higher presence in some of the higher growth parts of the world like Asia Pacific, and you will see us doing that. We are 70% OEM, 30% aftermarket. So there's room to drive more aftermarket sales, which we will do. And 80% of our people are located outside the United States. So we are a very global company, very good low-cost presence and also good proximity to our end customers. So before I get more specific on Carrier, let me talk to you about these 4 key megatrends on the next slide. It starts with climate change and regulation. Today, HVAC contributes 15% of the world's greenhouse gas emissions, and demand for air conditioning is only going to increase, in part, because the world is getting warmer, but in part because population and incomes are increasing. So at Carrier, we recognize that we can and, frankly, we must be part of the solution to actually decrease emission in the face of rising demand. We must drive more energy-efficient products, and that's exactly what we're doing. And frankly, regulations will mandate it in any case. So when you look at our U.S. HVAC residential portfolio in 2023, those units will be 10% -- nearly 10% more efficient than today's unit. So what does that mean for the business? This is a very unique phenomenon because what it drives is a structural product refresh. By 2023, 2024, 95% of our U.S. residential and commercial HVAC product portfolio is impacted. So when you're doing a relatively significant redesign of your product portfolio like that, that enables you to make sure that as you do the redesign, you differentiate yourself, you design it for connectivity, you design it for low cost, a huge opportunity to differentiate and to drive new revenues. Urbanization. Every day, there are 400,000 people moving to urban areas, every day. So what does that mean for us? That drives criticality of our cold chain solutions because people want to get fresh produce from the farms into the city. Think about this, in China the regulation is that you only need smoke detectors in common areas. So what you'll see in these multifamily high-rises in the cities throughout China, you will have smoke detectors generally in the hallways, but not in the living spaces. In China, there are 800 million people living in these urban areas with multifamily high-rises, imagine a smoke detector and a carbon monoxide detector in all of those living spaces. Growing middle class. As incomes rise, families want security systems and fire protection systems for their families. They want fresh food on their table and they want air conditioning for their families. And digitalization, think about 25 billion connected devices. That's a 400% increase over 10 years. We just signed a deal with AWS with Amazon to be our preferred cloud provider. So we can use data and AI to drive customer value and new revenues. So look, the market is poised for strong growth. We at Carrier are confident that we will outgrow a growing market, and it starts, in part, because of the market position that you see on this next slide. This spin from UTC, it's about focus and it's about value creation. We start with great positions and iconic brands. You look at HVAC. We are the clear leader in U.S. residential and light commercial. In Refrigeration, we're the leader in all 3 key segments: North American truck trailer, European truck trailer and the container business. The Fire & Security business is a bit more fragmented, but we have great leadership positions in fire detection and alarm and access control in the field business. So there's opportunities for us to grow, where today we are the market leader. And frankly, there's an opportunity for us to grow, where we're not #1, like the global applied business or APUs or commercial security systems. One of the keys is that our global infrastructure and our scale and our customer-centric approach, it really does enable us to drive best-in-class results, and you see that on Slide 8. You can think about this as our winning and our growth formula. It starts a path with winning new business, having the most sought after products, having the right channel, having the right salespeople. At Carrier, we have 3,600 engineers. We have 7,000, either awarded or pending, patents. We launch more than 100 new products a year. It's a rapid innovation cycle. Having the right products and then having the right channel. We're very proud of our channel. Matthew, when he gets into the resi section, he will tell you that we have our dealers in the United States for HVAC resi, have a 15% higher Net Promoter Scores than competitive network dealers. You need the right products. You need the right channel, and you do need salespeople. And this year, we are investing in salespeople. We will be adding 500 new net new salespeople this year. So it starts with winning. You cannot get to the next box down about taking costs out, unless you win. Unless you're in the arena, and you're fighting every day and you're winning, and that's exactly what we're going to do. And then you take cost out of the product tenaciously. And that's exactly what we know how to do. And the good news is we don't need to go build a new low-cost center of excellence greenfield somewhere in the world. 75% of our manufacturing hours today are in low cost, and we have 27 low-cost COEs located strategically throughout the world. 50% of our buy is low cost, and we have an opportunity to increase that number. You win, you take out cost and then you support your customers in the aftermarket. It starts with having a strong installed base, and because Carrier is so ubiquitous, we have a very strong installed base. We have 29 million air conditioning units in the United States that are out there. David in Refrigeration has delivered 1.1 million container units over the past 20 years. So we have the units out there. The key is to leverage technology and service offerings to support our end customers. So for example, today, not a plan, but actually, today, in our Singapore monitoring center, we are monitoring and anticipating and fixing issues remotely. And the good news is that where we do that in our Singapore monitoring center, we have a 100% renewal rates with our customers. The bad news is it's a relatively -- it covers a relatively small percentage of our portfolio. All we need to do is scaling. We know the formula. It starts with winning. It starts -- then to take costs out. You support the customers, you use those revenues to drive up margins and to reinvest in the business. And the beauty is that we have the team, we have the processes, and we have the culture to make this happen. And you see that on the next slide. I joined Carrier in June, and I have spent a lot of time on the leadership team because I truly believe that leadership matters. And you'll hear from the 4 key P&L leaders today, great industry experience, great leadership. And then when you look at the functional leaders, 7 of 10 are new in the past 6 months. And you can think of it as 3, 3, 2, 2. 3 of them are in the same roles, great leaders, Nadia Villeneuve leading HR and Bobby George leading digital and Mary Milmoe in communications. Great talent. Three, we consciously decided that for our next phase as a public company, we wanted to go outside and bring in people with public company type experience. So I wanted a CFO, who had been a CFO with a public company before. It just so happened, I got a CFO who's been a CFO with 4 public companies before. So you'll be hearing from Tim McLevish, who I can tell you that when we were going through the courting process, I actually interviewed about 10 different CFO candidates, and I kept having dinners and meetings with Tim, asking a lot of questions of each other. And then we had a moment, one night at dinner where he just said, look, after all is said and done, I cannot miss an opportunity to be part of something that is so unique and so special. Let's go do this together. And it was very similar with Kevin O'Connor, who's joined us as our GC, who brings great gravitas and experience to the General Counsel role; and same with George King, who came from Arconic to Carrier to lead Business Development. And then 2, from Collins, Ajay Agrawal, leading Strategy and Services; and Rishi Grover leading Operations. I have worked with them over many years, and I can tell you for a fact that they know how to drive results. They know how to drive strategy, and they will get results. And same with the 2 from Pratt & Whitney, who I've known for a number of years, Chris Kmetz leading Engineering; Eva Azoulay, who's joined us to lead Transformation and G&A, huge confidence in them and our entire leadership team. Then you look at the right. We have implemented a new management system where we've aligned on our priorities. We've cascaded those. We have dashboards. We've put rigor around the management system and around the operating system. The operating system is founded on ACE. Those of you that have covered UTC, you know that it's a great operating system for driving quality and lean. We've customized it a bit to make it more agile for a commercial-only division, and our foundation is the Carrier way. We took the opportunity to define a new culture. And we wanted to be 100% sure that it's authentic. It's not words on a piece of paper that we don't live by every day. It's authentic, and it's about being the best at everything we do for our shareholders, our employees, our customers. And it's about making winning and performing a habit. Now as part of our culture, we will be driving a high ESG score, and you see that on Slide 10. People often ask, are you focused on profits or sustainability. The answer at Carrier is yes. Sustainability is not a side activity for us. It's core to our business, and we take pride in leading the way for future generations. Also internally, you can see here, what we've done in our own factories to reduce our carbon footprint. We actually signed an agreement last week to partner with The Nature Conservancy. We'll be working together with them and engaging our employees to help make the cities of tomorrow sustainable. In the middle, UTC has always invested in our employees, and Carrier will surely continue to do so. And we truly believe that diversity in the workplace drives better results. We have increased our women in senior leadership roles by 75% since 2012. It's now 30% of our leaders are women. We're on our way to 50%. And even though it's not reflected in our presenters today, between 40% and 50% of my direct reports and our executives are diverse. More to do, but progress being made. And also on safety. I believe we are a benchmark in the industry. We have reduced recordable injuries by 75% since 2006. And on the right, we are very, very proud of the Board that we've assembled. With John Faraci as our Executive Chairman; JP Garnier as our lead director and the rest of these truly world-class Board members that you see here. And one key takeaway is in the bottom right. Management incentives aligned with shareholders' incentives. We have always been focused on shareholder value. But now with a more focused company, it's even clearer accountability where it's easier to correlate the performance of our Refrigeration business unit to the Carrier stock price. That drives empowerment, focus, accountability at all levels of the organization. And I can assure you that when it comes to incentives, the compensation structure of our leadership and the shareholders will be directly correlated. The key for us is to drive profitable growth, and you see that on Slide 11. I'm going to pause on this chart a little bit to make sure that I explained it well because it's a really, really important chart. We are laser-focused on 3 areas of growth, all funded by Carrier 600. So we'll talk about larger strategies. But when it comes to an organic strategic road map, this is it. 3 areas of focused growth funded by Carrier 600. So no matter what site you visit in Carrier in the world, you could go into that site and say, tell me what you're specifically doing in each of these 3 categories of growth? What is your piece of Carrier 600? And they will be able to answer it. And you will see that and hear it today from our P&L leaders that will each talk to you about what they're doing in each of these 3 categories of growth and what their piece of the Carrier 600 is. So when you think about Carrier, the first bucket here is strengthening and growing the core. What we're going to do this year is invest more in R&D and invest more in salespeople to make sure that we can pick up share. So if you look at us over the last 5 to 10 years, our sales CAGR has been about 3%. What you're going to hear from me in a few minutes, is what I'm going to tell you is over the mid-single -- over the midterm, we're going to be growing mid-single digits. So the question is, you've been growing generally about 3, which is a little bit higher than our weighted GDP, and you're going to be growing mid- in the future, how do I get from here to there? And the answer is this. Number one is we are going to make the right investments. We are going to invest in things like R&D and salespeople and digital to help drive that growth. But also, it's because of these 2 other categories, Bucket 2 and Bucket 3 that you see on this slide, where I would say historically, we've primarily been focused on this first category of strengthening and growing our core. And we've done it well, and now we have market-leading positions. In the future, we're going to focus as well on this second category. So what's the second one? These are very targeted adjacencies or geographies that we're not participating in today, but that are right in our wheelhouse. The only thing they require is focus, focus. You put a team together of 10 or 15 people, you have a dedicated team, with a leader, with a mandate, with a budget, with deliverables and you focus on it. So a few examples of what we're talking about. VRF. We've talked about variable refrigerant flow. It's a $12 billion market, it's growing high single digits, and today, we are a very small player in it. That will change. It won't change this quarter, and it won't change next because if it were easy, we would have done it. It's complicated. But I can tell you that we have a dedicated team that's doing a number of role-playing exercises, figuring out how we significantly grow in this area, and we will. The B2C business for smoke detectors in China, an example I mentioned before. We are the market leader in the United States for this B2C business [indiscernible] business, and we basically have no share in China. All it requires is a slight tweak to our product. We got to make sure that we have the right channel and the right infrastructure to go drive it in China, but that's a business that with the right focus, we can and will drive. David, in the Refrigeration section, we'll talk about warehouse refrigeration. There's a huge pull for CO2 today. We have differentiation in CO2. It's lower cost, it's lower maintenance, it's better for the environment. We just need to focus on it. The third category is services and digital. I mentioned that Ajay Agrawal has joined us from Collins. He's now over at Carrier. I will tell you, and those of you that have covered us, know that we've done a lot in terms of our aftermarket strategy on the aerospace side. And we hear that Carrier have done a lot and are doing a lot more, and a lot of that energy and strategic focus is coming from Ajay. He has put together an aftermarket council within Carrier. He's working closely with the BU presidents that you'll hear from today to really focus on this area. There is so much opportunity to drive revenues in the aftermarket and in digital. I'll give you an example, in Chris' business in commercial HVAC. When a chiller comes off warranty, we should get a long-term agreement, 100% of the time. We can provide the most value to the end customer. 100% of the time, we should get the long-term agreement. We have peers that are getting attachment rates of 50%, and we're at 25%. That has to change, and that will change. We're also working digital. We're working tiered offerings from basic to platinum, giving the customers what they need to be successful, so we get end customer stickiness. So I am very confident in our growth strategy. One of the key enablers is digital, and you see that on Slide 12. Bobby George leads this critical area for us, and a key trend in our industry, and frankly, most industries, is a shift towards intelligent and connected and autonomous products. One of the keys to leading in this transformational shift rather than getting disrupted by it is data. You need access to data, you need to be able to use it seamlessly to drive operational improvements, customer value and new revenues. But to do that, to really leverage the data, you need to be able to connect the dots through a digital thread. So when you look at this slide, it starts in the lower left with run. You could think about that as connecting the digital thread internally. So now you have a thread between engineering and manufacturing supply chain services. I mentioned that we just signed a big deal with AWS. A few weeks ago, we were out with Andy Jassy and his team. We will be moving 70% of our workloads to the cloud in the next 36 months. So now you've aggregated the data. You can now access the data. You can create data lakes and cloud-based solutions and then leverage the data to drive operational efficiency and improve product design and better service offerings. Then as you move up the digital value chain, you get to grow. Think about that as extending the digital threads to your customers. You're now talking about things like remote controls and monitoring and prognostics, diagnostics, driving new revenue streams. And you can see here on this slide, we're rapidly increasing usage of our customer portal. And then as you go up the right, now you're in to transform. Transform is about connecting the digital thread to entirely new ecosystems. Being a leader in creating an intelligent building or a smart home or really connecting the dots between the cold chain. So one of the key is to funding growth and funding this digital transformation is Carrier 600, which you see on Slide 13. So those of you that have covered us, you know that we know how to drive cost reduction. And I will tell you, I don't like to look back. I do want to look forward, but I am going to just take one last look back to just give you the same kind of confidence that I have that when we say we're going to drive $600 million of cost out over the next 3 years, that it will happen. So those of you that remember, when we -- when UTC Aerospace Systems came together with Goodrich back in 2012, we said that we would drive $375 million of synergies. We stopped counting at $600 million. And then back in 2015, I was afraid that we would lose that energy and that focus and that momentum in that playbook. So in 2015, we launched something that we called UTAS 500, which was $500 million of cost takeout over 3 years, which we did. And then we were about to launch a new program, and the business came together with Rockwell Collins, and that team will exceed the synergies there. It's a playbook that we know well. One of the key leaders of developing the playbook and implementing it was Rishi Grover, who is now leading operations for Carrier. He's overseeing it, and he knows how to drive results, working with the businesses, working with the extended operations team. This is a playbook that we know how to do. It starts with supply chain. More than half of the savings will come out of the supply chain. At Carrier, we have 6,000 suppliers, product suppliers, not indirect, just product suppliers. We have 6,000, and the top 30 make a 30% of our spend. So we have to drive consolidation, and we have to drive consolidation and low cost. In the factory in the middle. It's about implementing lean, tenaciously and it's about automation. Automation. I was in our factory in Athens, Georgia a couple of weeks ago where we do our North American truck trailer units. And on a typical frame, there's about 150 rivet nuts that used to get manually fitted. We've now automated that process. We've reduced the labor cost for that process by 80%, and we're at 99% first-pass yields. And then G&A. I will tell you just straight up. Our G&A is just too high, too high as a percent of sales, and the absolute number is too high, and we will drive that down. But we can no longer rely on brute force. You typically will get high G&A when you have a very decentralized business with a lot of sites replicating various back-office type services like HR, finance and other things. So we have now brought in Eva Azoulay to lead transformation and G&A to a new playbook because the brute force one is done. We did it last year. I joined halfway through the year. The financial sales forecast wasn't what we thought it was going to be. We mandated a headcount reduction. We said we were going to take out 1,000 indirect labor in the second half of last year, we ended up taking out 1,300 people, which is not fun, but we had to do it. But that playbook is done. What we have to do is be a lot more strategic about G&A reduction, using standardization, automation, spans and layers, low cost. What we want is to leverage low cost and funds and do it in a much more focused strategic way. So our leaders are off thinking about strategy and growth and customers, and we can manage a lot of that back-office activity centrally and in a low-cost place using automation. So look, Carrier 600, we know how to do this, we will do it. But not only do we need to execute, we do know that we have the potential for further value creation through a disciplined approach to our portfolio, which you see on this next slide. So on the outside chance, I can preempt the question here. Let me try to tell you how I think about the portfolio. Number one, it starts with execution. That is our focus as a team. We know that we can increase shareholder value by performing, performing in 2020 and meeting our commitments in 2020, setting ourselves up for the kind of growth that we all expect of ourselves as we go forward, but it starts with focus and execution. Number two, we will take a very clinical look at our current portfolio. We will put all parts of our portfolio through a disciplined set of criteria. So look, I'm relatively new to Carrier. I don't come in with any preconceived notions, and there's others that are new, and there's others that have been here, but we are all disciplined, rigorous, dispassionate. Greg often said that he was and Akhil and Neil, we're our own activists, and that's going to be the same at Carrier. We will be our own activists. And we will put all parts of our portfolio through these lenses. Are we the right owner? Does the business strategically fit? Does it meet our financial expectations of sustained growth and margin expansion and cash conversion? If we determine that there's parts of our portfolio that don't fit these criteria, we'll deal with it. And then third, as a pure play, we know that there's more transformational opportunities that are out there. We'll evaluate those. We'll look at those. I can tell you that I've seen firsthand how the right combinations can create shareholder value, but it does need to be the right partner, the right price, the right terms. And frankly, it has to be at the right time. My commitment to you is that we will be disciplined. We'll be clinical, and we'll be thoughtful and that you can count on us to do the right thing here. But like I said, our primary focus is on performance. So let me give you a little bit more color on our 2020 outlook on Slide 15. We expect sales this year to be up slightly. Resi feels pretty good, up mid-single digits. Commercial HVAC will be up low single digits. It's tamped down a bit by our exposure to Europe and the Middle East. The overall sales at Carrier this year, especially in the Refrigeration business is constrained by North American truck trailer and European truck trailer will both be down this year. What David and his team are doing in Refrigeration is to drive growth in telematics and growth in that Bucket 2 category that I was just talking to you about like warehouse refrigeration to get that business to flattish. And in our Fire & Security business, last year, in the second half of last year, we did wind down our U.S. residential intrusion business in the United States. If it were not for that, we'd be up 2% to 3% in Jurgen's business in Fire & Security. But because of that, you can see we're up slightly. On the EBIT side, we'll be up $25 million to $75 million this year. Now we actually have $250 million of tailwind coming into the year. $75 million of price and volume, and we actually have $175 million of cost reduction. I mentioned Carrier 600 over 3 years. So you average $200 million a year over that time, but we'll start to increase a little bit more in years 2 and 3. This year is $175 million of it. So you have $250 million of tailwind. But it's offset a bit by -- we are going to make $150 million of incremental investments this year, and it's about evenly split between R&D, salespeople and digital. And then we do have about $50 million of onetime headwind, mostly from things like incentive comp compares and group insurance. There's another point I want to make on calendarization. We do expect more sales and EBIT momentum and that growth to accelerate in the second half of this year, accelerating into '21. We have tougher compares in the first half. You'll recall in the first quarter of last year, we were still seeing significant growth in transport refrigeration, which was up about 10%. And resi was up pretty strong in the first quarter of last year, first half as there was a prebuy for gas furnaces out in front of the [ pan ] energy regulation changes. So we kind of came into the year with our plan being a bit back-end loaded, and that will probably be exasperated a bit by the coronavirus. So just a couple of words on that. Number one is we are deeply focused on supporting our employees. We have 6,800 team members in China, we have 900 factories, and we have 1,000 suppliers in China. And I can assure you, we're doing everything we can to support our people and their families. From a financial perspective, it's about 8% of our sales are in China, it's about $1.5 billion, and we export about that same number, about $1.5 billion from our own factories and from our supplier factories. Now we were all as a team on the phone with our teams in China last night because today was the day that the factory's February 10 were reopening. So we had planned to reopen around January 28 after the Lunar New Year. We probably lost a couple of weeks in there. So the couple of weeks, it's not the issue we're dealing with. The issue we're dealing with is there's still people in quarantine. Transportation within the country is still not great. Some of the projects with our customers on the construction side will probably have a slow ramp. There's going to be some supply chain disruption waiting for parts. So the way we're looking at it right now is that there will be a bit of movement from the first half or at least the first quarter into the second quarter, but our plan today assumes a full recovery in 2020. The other thing I'll tell you is we have a war room setup, we are reviewing it by partner. We're doing everything we can to mitigate any impact. So 2020. This is a year of focus. It's a year of making sure that we deliver on our commitments that I'm laying out here today, and it's a year of making sure we make the right investments to set ourselves up for the growth that we see ahead and that growth over the medium-term is what you see on Slide 16. Over the medium term, we expect sales at a steady-state basis to be up mid-single digits. I mentioned that before, mid-single-digit growth. And you can think about medium term, over 3 to 5 years. Steady-state growth driven by the formula that I laid out for you before. We expect EPS to grow high single digits, driving margin conversion. And on cash, we do project free cash flow to grow faster than earnings, and we are driving for 90% to 100% cash conversion. So here's the story. What we expect of ourselves, and you should expect of us is to drive industry-leading financial results. We are investing this year. We are putting the people and the processes and the metrics in the portfolio and other ingredients in place to make sure that we do so. So in closing on 17. Even though Willis Carrier invented the modern air conditioning in 1902, we're viewing this as the first inning. There is a change in the air that is palpable. We know at Carrier that we control our future. This is a great business with a great foundation and a proud history, and the most exciting thing is that our best days are ahead of us. So with that, let me turn it over to our President of our commercial HVAC business, Chris Nelson, and we'll all be up at the end for Q&A. Chris?

Thank you, Dave. My name is Chris Nelson, and I am the President of Carrier's Commercial HVAC business. I can't tell you how excited I am to be here with you all today as we kick off this new chapter in our company's history. And I'm going to kick off the discussion about our overall HVAC segment, which is about $10 billion in annual revenue, and it's split 60% commercial and 40% residential. Matthew Pine and I, Matthew is the President of Carrier's residential business, are going to tag-team this presentation. But before I get started, I'd like to share a little bit about my background. I've been with Carrier, the Carrier Corporation for about 16 years now. And all of that time with Carrier has been in HVAC. I started out in product development worked into different roles within sales and marketing, and then spent a fair number of years running our North American HVAC businesses at Carrier. Fairly recently, I was given responsibility for Carrier's global commercial HVAC business. And that's where we're going to start is with Carrier's global commercial HVAC business. And I believe that, that is very appropriate because commercial is not only the business upon which the Carrier Corporation was founded, but it's also the business that helped found the industry. So it will be very difficult for me to overstate Carrier's legacy as both a leader and an innovator in this space. But change is in the air, and we're not focused on the past, but how we drive and build upon this legacy as we move forward as an independent company. So I'd like to start by giving a brief overview of this business. At the highest level, it's a fairly simple business. We design, make, manufacture and sell heating and cooling equipment for application and commercial buildings. And then we provide service, aftermarket and control support for those products in the field. So the businesses or the activities are very linked. First, we need to win the initial installation and then we work to convert that to a service opportunity. Not only so it provides recurring revenue to the business, but also -- so we maintain a great relationship with our customers and building owners on a go-forward basis. So what does it take to be successful in this business? First, on the equipment side, you need great products and great technology in order to compete and win that initial installation. And then to turn into a service opportunity, you need the network and infrastructure to provide the service coverage that our customers are looking for. And then great tools and technicians to then deliver on that service promise. I will show you throughout the presentation how Carrier in the commercial HVAC space is able to do both of those things. So now I'll transition for a couple of high-level statistics about the business. First, it's about a $6 billion business on an annual basis. And it's, from a geographic perspective, about 50% North America and 30% Europe. 30%, as Dave mentioned, is a fairly high percentage. And what it does is it reflects our leadership in that marketplace that we're so proud of. The balance of the business or 20% is in Asia. And we believe that really presents a great opportunity for us moving forward as we look to increase our mix of business in Asia in that large and growing market with a specific focus on China. So moving on, you heard earlier a little bit about the megatrends that will support Carrier's overall growth. Similar to that, Carrier commercial HVAC will benefit from industry trends that will drive long-term sustainable growth in the markets that we serve. And I'd like to take a few minutes to be able to connect the dots between how a trend drives real and measurable growth in the industry and how Carrier is well positioned to take advantage of and benefit from that growth in the industry. And I'd like to do so by focusing on one area and that's climate and regulation. As concerns about climate change grow around the globe, more and more countries are adopting increasingly stringent minimum efficiency standards. This, in turn, drives higher demand for high-efficiency equipment. That's great because these products, they consume less energy and less electricity. These are the types of products that this planet needs. In addition, they are not only higher efficiency, but they're higher value. So as the market moves to a higher efficiency mix, there is inherent top line growth that will be driven in the industry. And currently, 25% of Carrier sales are in this high-efficiency segment. So we have the products currently to be able to benefit from this trend to higher efficiency. And we will continue to develop and launch new higher efficiency products that will continue to allow us to benefit from this trend towards higher efficiency. As you look at the other trends that are listed on this page, they will drive the same type of real, tangible growth in the markets that we serve. And we know that Carrier is equally as well positioned to benefit from these trends in the marketplace. So we serve markets with solid growth fundamentals. And overall, we are a global leader in the commercial HVAC space, and that is a great place to start. I mean, I can't think -- when you're thinking about going off and becoming an independent company, that is a wonderful position to start from. But what's really exciting is, as you take a step back from the overall commercial HVAC market and break it down into the segments that comprise that market, you can see that there are clear opportunities for us to improve our position, improve our performance and thereby, grow at a faster rate than our underlying markets. So I'll take a look at those segments real briefly. So starting at the top of the page, the Unitary segment. We are the overall global leader in commercial unitary products. And this is driven in large part to -- thanks to our success and leadership in that market in North America. We are continuing to build upon that strength that exists in that market portfolio by launching great products and continuing to build out our channels to market with the specific focus on the international markets to take those great products to our customers. As I move down, and Dave hit upon this a little bit earlier, and replied, point blank, we're not where we want to be. We're currently the #3 player, but we have a target to become the leader within 5 years. And with the plans that we have in place, we know that this target is attainable. The driver for the growth is going to be launching new products and an investment in the sales force. I'll hit more upon this later as we talk about our growth strategy within commercial HVAC. I'll move down now to service. Service is something we have not traditionally talked a lot about within Carrier. But it's important to know in the commercial HVAC business, we have a large and profitable service and aftermarket business, and it represents a great opportunity for growth in the near term as we move forward, not only by driving the increased attachment rates, as Dave pointed out earlier in the presentation, but also our growth in service is closely linked to our strategy to grow in the applied market because these applied products have the largest service content opportunity out of all products in the commercial portfolio. So not only can we increase our attachment rate, but as we get a larger installed base and we win more of those initial installations, we have a greater opportunity and a playing field to grow that service business. In addition, our margin rates in our service and aftermarket business are higher than our average margins in the commercial business. So as we increase our mix of business in service within commercial, we have an opportunity to raise our average margins. I'll conclude on this page by talking very briefly about variable refrigerant flow or VRF. Dave hit upon it earlier. It's a large market. We have very low penetration. And we have an opportunity to grow this organically, and we have plans and we're taking actions right now to do so. And like Dave said, it will be a gradual build that we will build upon as a key growth lever going forward. So before I talk about the strategies for growth, I would like to take a quick step back and hit regulatory. Why? Because I believe that the regulatory changes that are coming are an outstanding opportunity for Carrier to enable growth moving forward in the next 5 years. Over those 5 years, every player in the commercial global HVAC market is going to need to, in some way, upgrade, refresh or improve their product line in 2 key areas: First, we'll have to transition to new, lower global warming potential refrigerants. And second, we'll have to then increase the average efficiency level of our products in order to comply with those increasingly stringent minimum efficiency standards that I referenced earlier. Within Carrier, we estimate that, that will impact approximately 95% of our products in the portfolio, and that's a great opportunity. Because in times of regulatory change, there are winners and there are losers, and Carrier will be a winner. Why? First, we're a global manufacturer with global scale. And as we refresh our product line and upgrade it for the pending regulatory changes, that scale will make it possible for us to efficiently and cost effectively make those changes across the entirety of our global platform. Second, this represents an outstanding opportunity for us to insert new technology at scale across the entire global product line. We have been investing in new technology in the recent years within Carrier from variable-speed compression to gain actual air management, to communicating controls and the application of new refrigerants, Carrier has developed the building blocks for the future. And we are looking forward to the next 5 years because we believe we have a product road map that will drive growth for years to come. So now Dave outlined the Carrier growth strategy. And unsurprisingly, since he said you'd be able to find it everywhere within Carrier, we're very well aligned with that strategy. And actually, what you see here is the exact same 3 buckets of growth that Dave hit on earlier. So if I start all the way to the left, and grow the core for commercial HVAC, it's really all about applied share gain. I just finished talking to you about the new products that we are going to launch as a part of the regulatory refresh, but as or more importantly, we will make investments in our sales force capacity as well. Our existing sales force is outstanding. We have global reach and global scale. And our salespeople boast best-in-class sales force productivity. However, simply put, we need more salespeople, more feet on the street in order to have the capacity to grow at the rates that we want to moving forward. So we are going to make targeted investments in regions where we know we are underpenetrated and have an opportunity to improve our position. Initially, we'll start out with a significant focus in both China and North America. As I move to the middle in the product extension, here I'm going to talk more about VRF. I talked a little bit earlier and said that we have plans in place to grow this organically. In fact, we have a plan to grow it at double digits over the next 5 years. And these aren't just plans we've already started. We recently launched a new Carrier branded VRF solution in the China market, and we're making the investments in the channel to be able to bring those products to our customers in that region. In addition, we will be launching Carrier branded VRF solutions in key regions around the globe throughout 2020 and making the investments in the channel to take those products to our customers and grow in those regions. So we have solid plans in place to grow that business organically, and it is a very important focus for us, so we will also evaluate inorganic opportunities as they present themselves over the coming years. Moving to the far right, service. Dave talked about the imperative within service -- within Carrier overall to grow the service business. And with where we started as a base with our nice business in service currently within commercial HVAC, we know this represents a big opportunity for us. Not only because it's a large and growing market with a nice growing installed base, but because we can see -- and we know some of our key competitors are roughly 2x our size in this space. So we know that we have an opportunity to improve our position. I talked a little bit at the beginning about what it takes to be successful in this business. First, I talked about having the infrastructure and network to provide the coverage that our customers are looking for. Within Carrier, we have hundreds of service branches worldwide in more than 40 different countries. And we'll be looking to expand this network in the coming years to both enable and drive growth in the service business to allow us to drive a higher attachment rate and grow that service business. Second thing I highlighted was having great tools in order to both win the service opportunity and deliver on that service promise. And at Carrier, we believe that the right way for us to differentiate and win in the future in the service business is by an investment in digital tools. An excellent example of that is Carrier Smart Service. It is a cloud-based, AI-enabled service analytics platform. In fact, it's the brains behind the Singapore Monitoring Center that Dave highlighted earlier. Those brains allow us to remotely diagnose chiller performance, health and efficiency, translate them into both predictive and proactive service opportunities and then give them to both the carrier service technician as well as the building owner. We've been rolling this out over the past year plus in key markets, and we've seen great results. In our targeted markets, we've seen Carrier Smart Service customers have an increased retention rate of up to 15%. And we've seen up to a 15% increase in pull-through in the service business as well. So said another way, our customers are staying with us longer and they're trusting us to do more work outside the initial scope of our service agreement. I think this provides compelling evidence that these digital tools and others like it, are going to be a way for us to drive service growth moving forward within Carrier. Dave mentioned that each of us was going to have the opportunity to talk about a case study in our business. And I'm very excited about the one that I get to present because it highlights one of the things that I love most about this business. And that is, with a well-established channel, targeted investments have an opportunity to pay back quickly. Said another way, you can spend a little bit and get a lot back. The example I'm going to use here is our new air-cooled chiller platform. We recently launched this new platform, inserted new technology, that being variable speed, screw compression, filled an existing product gap, and in doing so, set the industry standard from both efficiency and footprint standpoint. Since launch, sales have grown nicely, but more importantly, we moved from the overall #3 player in the air-cooled segment globally to the #1 player, all with roughly a 2-year payback. This reflects and highlights the types of opportunities that exist within the commercial HVAC portfolio with disciplined and consistent investment. So how are we going to fuel these investments? The answer is Carrier 600. In commercial HVAC, it's -- our Carrier 600 contribution is really all about supply chain. In fact, roughly 60% of our savings are going to come from increased supply chain efficiency. Which makes sense because we have a relatively high percentage of our cost of goods sold -- the cost of goods sold, that comes from purchase components and raw material. So how are we going to do it? I mentioned earlier, our approach to platform management. As we move forward in a regulatory refresh, we're going to drive to increasingly higher level of component commonality across our global platforms. This, onto itself, will not drive the cost reduction, and we'll need to leverage that improved scale at the component level into better procurement costs, and that's exactly what we are doing. We have a plan to go supplier by supplier vendor by vendor and reach out to negotiate better pricing due to that improved scale. So in summary, this is a great business, it has global scale and global reach and the iconic Carrier brand, which is synonymous in the commercial HVAC space with both innovation and leadership. We have clear opportunities to improve our position and grow in excess of already growing markets. And we're going to do that by accelerating our investment and growth in the service business, and focusing on key investments in both products and our sales force to drive growth in those segments. And we're going to fuel it all with cost productivity driven by Carrier 600. With that, I'm going to turn it over to, and introduce, Matthew Pine, who is my partner in running the business, and he's responsible for our Carrier Residential business.

Thank you, Chris. As Chris said, I'm Matthew Pine. I'm the President of the Residential HVAC business. Very happy to be here with you today. I've been with Carrier about 8 years so I'm the young guy on the team. So I've been in the industry, though, for 20 years, so I have a lot of experience in this industry. I look forward to spending the next 15 or 20 minutes walking you through the Residential business. We are the industry leader in residential in North America. We have strong brands, strong products and a strong distribution network. We're focused on growth, specifically in under-penetrated markets and under-penetrated geographies within the U.S., specifically. And then lastly, we're making big investments in R&D and digital for near-term and long-term growth funded by cost excellence, which I'll talk about more in a moment. Really, residential starts with brands, and we have the iconic Carrier brand in our portfolio. We also have a very strong brand portfolio that has other brands like Heil, Tempstar, Bryant, Day & Night, which really give us access to multiple tiers in the industry from the value tier to the mid-tier to the premium across all market segments, which really translates into leadership. We're #1 across the 3 major categories for residential. For packaged products, for gas furnaces and AC and splits, we're #1. We have grown market share over the past 3 years, however, we're really going to accelerate that growth in 2020 and we've got plans to do that. And then lastly, distribution. We have the most comprehensive distribution network in North America. Additionally, we have the most trusted. You heard Dave talk about our Net Promoter Score, which is a measure of customer satisfaction. Our Carrier dealers are 15% higher in customer satisfaction versus the competition, which is a great metric. We have a lot of confidence in our channel partners and our go-to-market distribution strategy. Let's pivot to trends. There's 3 trends I want to highlight here. But listen, we see growth in the residential space over the next 3 years, full stop. And it really starts with the replacement cycle. I know there's a lot of talk around the replacement cycle. And we actually had been building our model since 1982. And believe it or not, the guy that started it is still with us in Syracuse, New York, 4 decades later. So we got a lot of confidence in it. And what it says is really, our mean average life of a system is about 17.5 to 18 years. And so when you think about that, the average life is around 14, but it gets extended, it pushes to the right because a lot of consumers, they don't just replace their system, they actually fix their system. And so it pushes the mean out to about 17.5 years on average. And so if you look at that and you add that to 2005, it really says, we've got about 3 more years of really solid growth in this space. And that's our point of view on it. And then there's another commentary around a cliff. We don't really see a cliff because the replacement cycle looks like a normal distribution curve, like a bell curve. So we don't see a cliff, but we will start to cycle down at some point here in later years. The other thing I'd point out is, if you look at 2022, that is elevated, and the reason that 2022 is elevated, is there's going to be a pre-ship ahead of the DOE energy regulations in the U.S.. Much like in 2005, you see that elevation, that's largely because of a pre-ship before '06. So that will happen. Housing starts, there's a great low-interest environment right now. The Fed has been making moves to make it very attractive for housing. We have housing starts up 3% in our model. Coming out of a really strong Q4. They really ramped up the back half of 2019. And builder confidence is at a 20-year high. And that really bodes well for us because 25% of our sales are in new construction, which is above the industry average. That's going to benefit us. Unemployment rate, the unemployment rate is a 50-year low, high 3s. That has a direct correlation to consumer confidence. I don't see that -- we don't see that slowing down anytime soon, and when you have a strong consumer and you add up the other trends, we see growth in the industry. Let's talk about differentiation with our product portfolio for residential. We have a very strong breadth of offering, but we also had meaningful differentiation. We are launching a new green speed, air conditioning and heat pump unit in Q2 of this year. It will extend our heating leadership, we have heating leadership in this space today, it will give us cooling leadership. We will have leadership in sound, and we will have digital leadership. And what do I mean about digital leadership with an air conditioner and residents? Well, we borrowed some technology from my friend Jurgen at Fire & Security called Mobile Credentialing. And if everybody in here has a mobile app for their hotel, it allows you to check into your app, bypass the desk and credential into your room. We're bringing that technology into residential and giving that to our technicians so they can credential into the unit, when they're on the job site. That gives them all the diagnostic information and specifically, which is an industry first, allows them to download software from their phone to the unit. Think about that today, when a technician goes out to replace the unit or work on the unit, a lot of times they have to take out the printed circuit board and then put a new one on or try to flash it in the field. So having an app that downloads the software right on site, saves a lot of time and energy and really drives time-on-rent savings and productivity, which is a key differentiator going forward. We've seen tremendous growth in our ductless product line, really going back 4 years, we were mid-single-digit share 4 years ago, we're high-teens share now. So we've seen significant growth in this space. We have a great product lineup, and we have the industry-leading 42 SEER system for the ductless product in North America. And then the gas furnaces, we have the most comprehensive gas furnace lineup in the marketplace today. And what does that mean the most comprehensive? Well, really, it allows you to really truly optimize the system. When a contractor is in with a consumer, they can really dial in the system, because we have enough of a broad enough offering of SKU counts to dial-in the efficiency and also dial in the comfort level for the consumer. And then lastly, I'll talk about the mobile app, the digitalization of our space, I talked about mobile credentialing and the software download, but also, we're getting lots of signals off of some of our equipment that will give analytics to the technician to improve time on ranch, help them with diagnostics and then using fault trees to get the problem solved right the first time. In a lot of cases, we find that 50% to 80% of our parts that come back have no fault found. So huge opportunity for us to drive better customer satisfaction and drive out cost and productivity. Let's pivot to growth strategies for residential. I talked about underserved markets. We play in every market. However, there are markets where we're underserved today. And I'll give you an example of one, manufactured housing, we had very little presence in. We have a package unit -- package units make up roughly 15% of that market. So a very small portion of the market, which can be up to 350,000 units. So we worked on a product design and then we partner with Clayton Homes, which is a Berkshire Hathaway company and the leader in manufactured housing, and we signed a long-term contract with them. It really started in Q4, but really will be an earnest in 2020. And we're super excited about that relationship. You heard Chris talk about regulation. For resi, we've got refrigerant changes on the horizon, and it's going to be a state-by-state thing, it looks like potentially, so there'll be a decision to be made on how you address California, how are you going to address Canada and then other states around the climate alliance. But we're focused on refrigerants. We announced our refrigerant back at the end of 2018. We're already in development. We feel good about it. It's low GWP. And we think it will take us into the 2030s with the design. And then we've got the regulations around energy efficiency in 2023. We're doubling down. We've got a second staff of engineers for 3 years working on this. And so we believe we're going to have the right cost, the right product and the right application to win and be able to grow the base. A couple of other points I'd like to make on this slide is, we're seeing -- again, we have really a strong presence around North America. However, there are pockets, when you dig in, and it could be at the state level, it's probably down to a county level, where we have opportunities to grow share, where our share is not at the national average. So we put together a team within residential to go out and work with our distributors to focus on areas that we can improve our share. And so we have that -- already that flywheel is already in motion, and that's going to pay dividends in the years to come. Ductless is becoming more and more a prevalent part of our industry. You can see we've had tremendous growth in this space over the past 4 years. We're working on a hybrid system, where we take a traditional ductless outdoor with a ducted indoor. And the team in Atlanta has actually got some unique IP, Intellectual Property, around this design that we believe gives us a competitive advantage in the marketplace. And then lastly, connected platforms. We are really focused on driving connected thermostats into the home. We've got a great strategic partnership with ecobee out of Toronto, Canada. They've been a long-term partner of ours. To really continue to drive that digital engagement, get data from the home and help the technician be more productive. That's really where the value is created going forward. We've got to make the technicians more productive, because there is a large mass of technicians needed in our space. We just don't have enough technicians. So we've got to make our contractors more productive. We're going to be accelerating our product innovation. We're making big investments in R&D in residential. We're going to spend 30% more in R&D in 2020 than we did in 2019 alone. And you can see, Dave talked about 95% of the platform being refreshed. We're going to have almost 100% residential. And you can see with the air conditioner and heat pump, we're going to open up the patient, if you will, for the regulation, and we're going to get the cost right, we're going to get the design right. We're doing Voice of Customer as we speak. And we're going to win in that space. Material substitution, I'll give you an example, much like Chris did on a case study around how we're going to drive meaningful material substitution on the outdoor unit. And then we've got to get digital connectivity down through the breadth of the offering so we can get every unit to bring information to the technician, so they can be productive. On our gas furnaces and coils, we implemented some new blower technology for the fan energy ratings last year, that Dave talked about that went into effect in July. That we put in discrete models to test and also to get those to meet the regulation. We're now going to take that technology and proliferate it across our entire furnace platform, driving more efficiency and sound. We're going to work on the key transfer technology for our coils to drive air conditioning efficiency. And then lastly, much like on the outdoor unit, we're going to be driving digital connectivity with our gas furnace platform. Now with the regulation, every gas furnace is smart. And so we're going to take advantage of that. And then wrapping up on the product innovation with small package product, we're taking a design that actually came from David's business in refrigeration, it's called a vane axial fan, then Chris stole it and put it into commercial rooftops. And now we're going to bring it into resi. It's got great application for resi. It's going to drive down decibels and sound, which is a big deal for those units on a consumer's house, and it's going to drive more efficiency. We're going to get that product line ready for ultra-low NOx in California for October, the package unit's products come up in October of this year. We're way ahead of the game, and we'll be ready to go for that regulation. And then we're going to be really increasing the efficiency with a packaged unit product line with variable speed technology insertion there. And again, how are we going to fund it? Again, Dave talked about consistency. It's going to be Carrier 600. Residential is going to make up roughly 25% of Carrier 600. You can see G&A, factory and supply chain productivity as well as material productivity are going to be our focus, and we're well on our way. We started this journey, really the back half of 2019, getting focused, getting the teams aligned and getting some inertia. A couple of examples that we've already began to get some inertia on is supply chain, for example, in the resi business for North America and commercial, for that matter. We're working together hand in glove. We built a command center in Indianapolis, Indiana, to focus on our freight specifically, our outbound free. And what we found is, really turn the lights on and digitize our supply chain. And we found out we weren't optimizing loads properly. And we weren't always adhering to the routing guide compliance to drive the lowest provider for shipping. And so we put the control tower in place, we turned on some DCs, and we've already seen a 5% improvement in our outbound freight savings. We'll have the rest of those turned on by mid-2020, and then we're going to turn our focus on inbound freight, which is another issue we've got to focus on. And then lastly, factory productivity. You heard Dave talk about lean and automation. We're using the tools, the Carrier-A system, and we've got teams around this right now. We will get $25 million of cost out of resi in the next 3 years, full stop. And then we've got a really strong pipeline behind it, but we're going to go after and we're going to do it and we've got clear sight of the products or the programs to get there. So wrapping up, I'll give you a case study around Carrier 600, we know how to do this very well. Back in 2014, we had a coil design in our fan coil, which gets matched with the heat pump for air conditioning and heating, there was copper and aluminum. We changed it to aluminum, and obviously, there's a lot of benefits by moving to aluminum from a cost perspective. We saved 13% when we made this move back in 2014, and really the kicker is we saved 24% in the quality. We improved quality by 24% by moving to all aluminum. So we're taking -- a lot of the people we're still around, we're taking these teams -- we've taken these teams and we're focused on outdoor design right now. So we're going to be launching in mid-2020 an all-aluminum outdoor coil, starting in Collierville, Tennessee. Probably take us around 2 years to get to run rate, but run rate is going to be $20 million to $30 million of savings. And we feel really good about this design, and we're in process of launching that, like I said, mid-year this year. So wrapping up for residential, as part of HVAC, we're the clear leader in the industry, we've got work to do to grow share, we're on it. We're going to grow in 2020 and further. We've got strong brands, we've got strong products, and we have the best distribution network in the industry. We're focused on underserved markets. I gave you examples of manufactured housing and we're going to focus on geographies where we have less market share. We are investing heavy in R&D and digital, and we're going to fund it through Carrier excellence, through the Carrier 600 program. With that, I will wrap up, and I will take us to break. Thank you. [Break]

All right. So good morning, everyone. I understand that UTX shares is trading up a bit. And I will do my utmost best over the next 15 minutes not to reverse that. So my name is David Appel, I'm head of the Global Refrigeration business. I joined Carrier 3 decades ago, and I've been in my current role for the last 10 years, and I'm delighted today to talk about this great business. So refrigeration is a $3.8 billion global business, with an adjusted operating profit of 13.5%. Today, we operate across 2 broad segments. 2/3 of what we do is in transport refrigeration, and 1/3 is in commercial, and in terms of product mix, 75% of what we do is in equipment and 25% is in services and digital. So looking across the businesses, from the left to right, starting with transport refrigeration. So here, we operate under the Carrier Transicold and the Sensitech brands. We have container that sells refrigeration container units to the world's largest shipping lines. We have truck trailer for refrigerating trucking fleets and we have Sensitech, which is our digital cargo monitoring and tracking business that covers the food and pharmaceutical industries. These are all great businesses with industry-leading brands and solid profitability. So next is our commercial refrigeration business. Our commercial refrigeration business operates under the Carrier MV-12 swap brands in Europe and Asia in food retail, so think of supermarkets, hypermarkets and convenience stores. We have a solid share position in this business with room to improve overall profitability. So let's talk about what we do. While we make things cold, we preserve, we protect and we extend the world's food and pharmaceutical supply and we know how to win. The cold chain is about moving perishable goods from the point of production to the point of use. And at each step of the cold chain, we do have industry-leading products and technology that helps ensure the safety and quality of perishable goods as they move along the cold chain. Now here is a visual representation of what we call the farm to fork culture. So starting in the upper left-hand corner. So here, this is where we have our pre-cooling equipment that is used to put perishable food into a temperature-controlled environment as quickly as possible, post harvest. Next is long-haul transport. Long-haul transport can be over the ocean in refrigerated containers or it can be over-the-road in refrigerated trailers. Next, we have intermediate or inter-city distribution, and shown here at 3:00, is our refrigerated truck unit, very popular in Europe. Following that is our point-of-sale food retail where we have refrigerated display cabinets available through our commercial refrigeration business. And finally, we have last-mile delivery, where we have refrigeration units for light commercial vehicles and vans. Now supporting all of this, supporting all of this is our global service and digital business, which is comprised of aftermarket parts, labor-based service contracts includes our fast-growing digital business such as Sensitech, which monitors and tracks the condition of perishable goods as it moves along the cold chain. And it includes our wireless telematics devices that are used to track the performance of mobile assets. Our global services in digital business today is $1 billion, with great opportunity to grow, and no one else, no one else in the industry has all the capabilities that we have under a single roof. Carrier set up to win in this space. Today, we are 1.5x the size of our next nearest competitor in combined refrigeration sales. We have a broad network of more than 1,300 dealers, distributors and service centers operating around the globe 24/7 supporting our customers, and we do benefit from a large and growing installed base. Where today, we have more than 1.2 million refrigerated container and trailer units operating around the globe, our Carrier commercial refrigeration equipment is installed in 50,000 food retail locations in Europe and Asia, and where this year, our Sensitech business will track more than 15 million perishable cargo shipments. Innovation is in our DNA. For more than 50 years, we have been developing industry-leading technology in support of the global cold chain. Major Carrier inventions include things like the first-ever refrigerated container unit, our all-electric drive for trailer, and the first of its kind natural refrigerant system. And we are accelerating our pace of innovation. New product launches include things like our new high-efficiency trailer unit, our new state of the art controlled atmosphere devices to extend the perishable -- the shelf-life of perishable goods and our new real-time cloud-based cargo monitoring platform. So let's talk about growth. So we are, in segments, better growing sustainably well into the future. And this is how we kind of look at things. Globally, we know population is going to grow 25% over the next 30 years. And we, like other businesses, we know we will ride that growth curve, but unlike other industries, there is -- there is a greater societal demand for refrigeration to extend the world's food supply and to feed more people. Today, nearly 1 billion people go hungry every day, and that's because, in part, 1/3 of all the food that is produced worldwide is wasted, when refrigeration is a key answer. So as the world considers how it will feed 9.7 billion people by the year 2050, it increasingly points to the accelerated adoption of sustainable cold-chain technology. Urbanization is more people move in the cities and further away from where food is produced. The cold chain gets longer and more transport refrigeration capacity is required. We see increasing regulations with respect to low noise, low emission, sustainable refrigerants. And this will continue to drive demand for our innovative green technology. And as our customers ask for more real-time data for data analytics and prognostics, we do see increasing pull for our digital technology and tools across our businesses. So solid long-term fundamentals support sustained growth. So let's take a look at a couple of growth curves. Shown here, Container, North America trailer, 2 key transport refrigeration segments. Now if you look at this, the compound annual growth rate in units over this 23 years has been a solid 4% and 3%, respectively, and oh by the way, and oh by the way, up to 2x that for Carrier, up to 2x that for Carrier when we consider our share gain over this 23-year period. Now more near term. So here, I'm talking 2016 to 2019, if you look, we've been in a pretty solid growth cycle. But as many of you here know, our segment, transport refrigeration is cyclical. So let's take a moment to remind ourselves why that is? Well, we sell to big shipping lines. We sell to trucking fleets. And they buy when the economy is strong, and they hold back when the economy weakens or when they see potential overcapacity in their segment. They are sensitive to things like freight rates, fuel prices, fleet age, utilization of all the things that go to determine the underlying profitability of their businesses and ultimately, their ability to invest. So at the moment, this is how we see things. Let's start with containers. So the container segment was actually down last year. We estimate about 10%. It was up in 2018, up 28%, but this year, we're kind of looking at a flattish market, overall flattish. But if you look at the total demand, we do expect it to be over 100,000 refrigerated container units. And if you look at history, over 100,000, that's not too bad. Now North America trailer, a little bit of a different story. North America truck trailer, 2 back-to-back all-time record highs. 2018, 2019 huge demand. Industry analysts. And here, I'm talking about industry analysts. I'm talking about ACT, FDR, who look and study this segment. They, right now, are projecting that the North America trailer segment will be down this year, trailer production, trailer production will be down on average 20%. So for us, we do expect some pretty tough compares in the first half of this year. Followed by more favorable compares as we move into the second half and into 2021. Now keep in mind, we have seen -- we have managed through these cycles before. And it is true that within the transport Refrigeration segment, we have solid long-term fundamentals, and what's also true that in this segment, what goes down does come up. Whether that's going to be in the second half of this year or in 2021. And for us, the story absolutely does not end here, because we see a lot of opportunities to grow in other parts of our business and that's what I'm going to talk about next. So like other parts of Carrier, you've heard -- you've had Jurgen speak about it this morning. We're laser-focused on our 3 growth strategies. #1, strengthen and grow the core, with industry-leading technology for us, like our best-in-class high-efficiency trailer unit. We see opportunities and product extensions like our fuel savings, auxiliary power units, which all by the way, that's a business we -- has tripled since we applied it 3 years ago, and has solid long term potential. Warehouse refrigeration, Dave mentioned it, is another big opportunity for us, and I'll talk about that on the next slide. Now moving to the right, Services and Digital. $1 billion business that has been growing for us mid-single digit, year-on-year and here we're targeting to grow our digital business in terms of cargo monitoring and telematics. And we're targeting to grow after-market parts by leveraging our large and growing installed base. So this year, we do expect that the focus in these areas will help offset the softness that we see in our core transport refrigeration business and position us for further growth as we transition into 2021 and beyond. So case study. Now on this slide, I do want to give you a very specific example. A very specific example of a growth strategy that we are leveraging across our product portfolio. So across our product portfolio, so from food retail to warehouse refrigeration, container and truck trailer. So 15 years ago, we launched -- Carrier launched the first of its kind natural refrigerant system, using CO2 in a food retail application. These systems called compressor racks are used to provide cooling to a storage refrigeration system and are typically located in the back and what we call a mechanical look. We remove CO2 from what is already in the atmosphere, and we use it in our refrigeration systems. CO2, by the way, is an efficient, low-cost refrigerant with a global warming potential index of only 1, meaning thousands of times lower than many traditional refrigerants. We pioneered, we pioneered this technology, and our customers love it because they know it's sustainable, and they know it's future-proof against new regulatory standards for refrigerants. To date, we sold more than 10,000 of these systems in Europe, and we see a big opportunity to extend the reach of this technology upstream into warehouse applications as well as into container and potentially truck trailer. In Europe alone, warehouse refrigeration is a $1 billion segment, where CO2 has an inherent design advantage over incumbent technology in terms of cost and serviceability and where we can expect more growth. Carrier 600. So we've been talking about Carrier 600. I've talked about top line, I'd now like to move on to costs. Now for us in refrigeration, of that Carrier 600 number, we represent 25% of that cost savings, and we are targeting efficiency improvements in 3 areas. #1 factory, where we see opportunities to optimize our factory footprint and decrease our levels of automation. Supply chain. So for us, this is where 80% to 85% of the total cost savings, we expect to get, over the next 3 years will come from. And we are targeting a minimum 2% material productivity per year through low-cost sourcing, through design and supplier rationalization. And in terms of G&A and overhead, we see opportunities to improve our process times using digital tools, we see opportunities to optimize the efficiency of our back-office through shared service and to approve our overall field service productivity as we grow the business. So let me wrap up and say the following: We have industry-leading businesses; we have a broad network of dealers, distributors and service centers located throughout the world; and we have a large and growing installed base. Our technology is world-class. We have a solid pipeline of new products, and we are accelerating our pace of change. Our businesses are supported by solid long-term fundamentals, and we have plenty of runway to grow our top and bottom line. So for us, change is in the air and we are truly excited about the future of the refrigeration business. So thank you very much. Please check to see what happened to the UTC share price. In the meantime, I'd like to turn things over to Jurgen Timperman, President of our Fire & Security Business. Thank you very much.

Thank you, David. My name is Jurgen Timperman and I'm the President with Fire & Security at Carrier. By means of introduction, I've been in the industry for the last 15 years, spent most of my time on the product side of the business. And I've been with Carrier for the last 10 years. And before that, I was with GE in different roles in different businesses and came to Carrier through the GE Fire & Security acquisition back in 2010. Pleased to be here this morning with you at the New York Stock Exchange and really have an opportunity to talk to you about our segment and our strategy. And at Fire & Security, I want to start out by saying that we're in the business of producing and selling high-quality, market-leading products and services that protect people and what they care most about, their loved ones and their assets. And that's really why all of us at Fire & Security, believe that what we do really matters. With that, I want to just start with a quick overview of our segment and our business. Overall, we're about $5.5 billion business about 60% of that is products, about 40% is Field. We're evenly split geographically, if you look at the top right, with Products more weighted in the Americas and Field more weighted in Europe. In terms of the customer and segments that we serve. On the bottom right, you'll note that we're primarily in commercial buildings and applications. And at the same time, we are the leader in residential fire globally with Kidde and we're going to talk more about the great opportunities there for growth in the future. We showcased here a few representative products and services, on the bottom left. Starting with products in fire, our main focus is around detection and alarm with -- in residential, commercial and industrial applications. We also have a leading suppression portfolio and the highlight here is our Marioff high-pressure water mist offering. In security, our core business is really centered around electronic access solutions, providing integrated security solutions for commercial buildings, businesses and critical infrastructure. In ending controls, we're primarily focused on HVAC equipment controls, and we enjoy selling to my colleagues here today, any day in the week, we also enjoy selling to many of the HVAC competitors out in the industry. Now switching to the field side, that's really our job business, and we really do 3 things there. It's about installation, servicing and monitoring of Fire & Security sites all around the world. A business as well with a large installed base with more than 1.3 million sites under service in more than 800,000, mostly commercial, monitoring lines. Now just a few comments on growth, for those of you who have followed us for a while, we've historically seen low single-digit growth in Fire & Security, with growth in products outpacing growth in field. Our outlook, as you've seen from Dave, is to be slightly up in 2020 with the impact of the wind-down of our North America residential infusion business at the end of last year. Now our goal is to accelerate growth to support the company's mid-single-digit outlook for the midterm. And what's going to be different going forward from the past for us is really very similar to what you heard from Dave for Carrier. That is that as a stand-alone carrier, we will invest in our own future to drive growth with a focus on innovation feet-on-the-street and digital. And we'll talk more about what that looks like for us in the coming pages. Now in terms of the megatrends, we see the very same compelling megatrends that are driving growth for carrier drive growth for Fire & Security. We'll talk more about digitalization as part of our case study, that's a big deal for our companies. I want to focus the conversation here, really around regulatory. And so for the fire businesses, that's an extremely important area. Now codes and standards are being issued for fire by government and regulatory agencies all around the world, we see more and more countries adopting them, and we see the speed with which they get updated accelerate over time, as governments really grow more conscious about the protection of their population. Now we're -- in countries where standards are in place, we see relatively low penetration for fire products in a number of cases, though. And that's really a function of enforcement and awareness. Now let me give you a few examples of what that really means and why that's important for us in terms of growth. Now take the U.S. We have here, one of the most established fire codes in the world. And despite that, we see the number of homes adequately protected for fire safety, according to the NFPA standards, to be less than 30%. And think about that, less than 30%. NFPA being the National Fire Protection Association. Now what does that mean? Well, think about your own homes. It means that in an average home to be adequately protected for fire safety, one ought to have a smoke center in every bedroom, in every hallway, in every common space like your living room. One ought to have a carbon monoxide sensor to avoid accidental poisoning by carbon monoxide in wintertime, typically, outside every sleeping area. And one ought to have a minimum number of fire extinguishers, one at every level in the house and likely one in higher-risk areas, like your kitchen or your garage. And so less than 30% means that either of these things are not there or they're there and they're not there in enough quantities or that they're actually there, but they're not functioning maybe because the battery is depleted or they're simply too old. Now the second example is China, and I think Dave mentioned that earlier, where we see in the residential housing, social housing, we see basically codes really focusing on the common parts of the building. And I think the opportunity really there is to go and further penetrate within the home. So growth potential exists in this space, and we see regulatory and awareness creation really as key items for us going forward. Now moving to our segment position. I want to start out with the first takeaway here that we have a very strong base to grow from. When you look at the segments we play in, we're a leader in each one of them. Now as you might know, Fire & Security is a relatively fragmented space. And I think we believe that, that provides a lot of opportunity, both for organic and inorganic growth going forward. Now on the product side, starting with fire, we've got the largest combined residential, commercial and industrial Fire business globally, focused on detection and alarm and suppression. Now with brands like Kidde, the leader in global residential fire, like GST and Edwards, leading in commercial fire, respectively, in China and in North America, like Det-Tronics, the leader in flame detection for high hazard applications globally and like Marioff, the leader for high-pressure water mist in the world. In security, we're the leader in electronic access control with LenelS2. If you include intrusion detection and electronic locks in this segment, we're actually #2 overall. Thirdly, in HVAC equipment controls, again, #2 with key brands like UTEC. And then lastly, in field, that's our Chubb business. If you look at our global position, we're overall #2. If you look at the top 6 countries, really making up the bulk of our sales, we reckon we're a leader there. Now with that as context, let's get into our growth strategy. And I think consistently with what you've seen here before, you find the same 3 buckets back. The first remark I want to make here that the difference for us with future growth versus historic growth, it's about 2 things. It's about one, accelerating innovation in R&D and in innovation. Two, it's really about buckets 2 and 3 and accelerating growth in both of these areas. And we know that in the places where we have done so in the last 2 years, if I look at LenelS2, globally or I look at commercial fire with GST in China, we have seen the type of growth rates that we like with last year's performance being in that mid-single-digit to high single-digit area. So a few more comments on each one of the 3 areas. Strengthening and growing the core. It's about continuing to grow our North America residential fire business with Kidde. We're leading in this space. We see continued opportunity for growth there on the back of the under-penetration that I mentioned earlier. Second, accelerating innovation, and that's really about -- we've under-invested in a number of areas historically, and we're fixing that. We're increasing our R&D spend by 10% year-over-year and we're going to continue to do so in the coming years. We've seen it work with access control in the LenelS2 world and in fire, particularly, we consider platforming as a key opportunity going forward. Now many industries have done that like the automotive world. For us, it's really about doing things more efficiently in fewer places when -- leveraging our global engineering footprint and also use that as an opportunity not only to accelerate innovation, but also to get further cost out of our products. And finally, on the core, it's about being more selective. And I think that you heard Dave mention the wind-down that we did at the end of last year in North America residential and solutions business under Interlogix. I think this was really around focusing on higher growth, higher-margin areas like LenelS2 in the security space with access control. The middle bucket, it's about 2 things for us. It's about doubling down on Asia, particularly, in China. We're leading with GST in commercial fire, and we see continued opportunity for growth there. We had above-industry performance last year and I think we're looking at the opportunity of further penetrating within the home as the next step in that business. Second, it's about HVAC equipment controls. You see that we enjoy great share in North America, and the opportunity really lies in the rest of the world. And here, we have -- last year, combined our global controls companies under one leadership and one single global business with the goal to go after this opportunity. Now lastly, it's about digital and service. And so digital, I will talk to you about on the next slide. I want to highlight and close out this page with the bottom right, and it's really what we're doing in our Chubb business to drive growth. We're focused there on our top 6 countries and really driving growth in our services portfolio by doing 2 things: adding feet-on-the-street in targeted geographies, as well as implementing digital tools to improve our sales force effectiveness. Now let's talk digital. And so from having run the security companies globally for several years, I want to start out with the fact that this is not new. We have had an intense focus on digital, cloud and software for many years. And we've been in the cloud for almost 2 decades, I would say, with a great number of our companies. Now our strategy has been to take our core capability of cloud-based access and identity management and really taking that across critical customer segments to help address unique challenges people had, and also on the back of that, drive profitable growth. And you see a number of examples on the slide here in our Supra business with our eKey offering. Today, we have more than 800,000 realtors that are using a cloud-based suite of services to go about doing their business every single day, including using their handhelds to get access to the properties to do showings. Onity with DirectKey. Today, we have provided many of the large hotel providers in the world and consumers the ability to not only get into the room using their handhelds, but also interact with the services of the hotel and truly bypass the front desk. And then most recently, we have taken the capability with Blue Diamond in our LenelS2 business. And have really, I think, used that as a way to grow not only by providing folks with the ability to use their handhelds as a secure credential to navigate the building, but also interact in a more seamless way with the facility and its services. So we're just getting started in LenelS2. I think if you think about the opportunity and the installed base, more than 50,000 systems globally and a penetration of more than 50% with Fortune 100 companies. So you've seen here that this is the type of effort that has driven the outcome that we're looking for in terms of top line and bottom line, and we're excited about looking to continue to take that across our installed base, not only in Fire & Security, but also in targeted parts of Carrier. Now how will we fund these initiatives? And the answer here is simple. Again, consistent, I think, with what you've seen all morning, it's called Carrier 600. Now for us, the 3, at Fire & Security, the 3 largest areas are around footprint consolidation, they're around supply chain productivity and they're around cost reduction in the G&A area. So you see here based on the statistics, basically, we know how to do that. And I think what's even more exciting about this is that we see continued great opportunities going forward in each one of these areas, whether it's more footprint consolidation, whether it's more productivity with initiatives, new initiatives like the platforming that I talked about on the fire side or whether it's targeted opportunities to take cost out, like in our field business, where we're targeting a few percentage points of sales as an opportunity by implementing digital tools in the right places. And I think the example I'll give you here is really about the implementation of handheld and dispatch planning tools for the fuel tech out there and what it does is, I think, create an opportunity to spend more time with customers, less time on the road and an opportunity, for example, when being able to quote real time to basically do the repair the same day versus having to come back the next day. So in closing, I want to leave you with the following: we are a leader in every one of the core segments we play in; we have a great set of brands and a great set of customers; we have a phenomenal installed base that we're looking at leveraging for growth through digital and services; we're going to continue to be laser-focused on productivity, we know how to do that; and we're going to invest in the right places. And it's really for us about innovation, about feet on the street and about digital. I hope you're as excited as I am about the future of the segment. And in the spirit of higher safety, I can't help it, please don't forget to check when you get home tonight and make sure you have the fire safety devices you need to keep your family safe. And if not, buy Kidde. So thank you for your time. And with that, I'm going to hand it over to my friend and colleague, Tim.

Thank you for joining us today. My name is Tim McLevish. I joined Carrier back in October of last year, and -- as the Chief Financial Officer. And prior to that, I had spent a number of years with a number of different public companies, most importantly, among them, were -- I was Chief Financial Officer of the Mead Corporation, then went on to be a similar CFO of Ingersoll-Rand, and then went to Mead also as Chief Financial Officer and most recently I was Chief Financial Officer of Walgreens. So let me tell you, the spin of Carrier from United Technologies will be my fourth corporate spin-off, and I will tell you I'm very excited to be a part of it. From my prior experiences enabling newly independent companies to focus their attention and resources on their customers, their businesses and their opportunities have enabled them to grow and prosper, creating considerable shareholder value. So I want to start by telling you a little experience I had a few years ago on a large spin-off. Back in 2016, Conagra Corporation, a major global leader in consumer packaged goods had a business in their portfolio called Lamb Weston, which similarly was a global leader in the processing of frozen potatoes for quick-serve restaurants and also for food service. Admittedly, it didn't fit very well in that portfolio, and they made the decision to spin it. I had a bit of a unique perspective and kind of a 360 view because I had sat on the Board of Conagra when it was deciding to do that spin, and then I sat on the Board of Lamb Weston after the spin was completed. And I will tell you that there was a stark contrast of the discussions around -- from the management team and our focus. There was a stark contrast at the Board level, the conversations there. And there was a stark contrast in the resources applied to the businesses between Lamb Weston, as a division of Conagra, and then Lamb Weston as a stand-alone company. As a result, the performance of Lamb Weston was a dramatic improvement, not that it was bad to begin with but they really stepped up their game and considerable shareholder value was created. And I would encourage you to take a look at the ticker LW on your charts, then you'll see that the value creation was very considerable. So back to Carrier. You heard from my colleagues, the strong foundation we have with ubiquitous brands, leading market positions, well-invested assets, a focused strategy and a strong experienced leadership team to deliver on our solid execution plan. As we become independent and focused, I am confident we will grow faster, expand margins and improve cash flows, all creating considerable shareholder value. From a sales standpoint, we ended 2019 at $18.6 billion. Going into 2020, we have some headwinds, including the closure of our residential intrusion business and continued softness in the trailer market, as you heard from David earlier. On the positive side, HVAC volumes will be up. We are targeting modest price increase, and we'll expand adjacencies and services all for a sales outlook of up slightly for the year. As we look past 2020 to the medium term, first, we expect strong macroeconomic trends to support stable industry growth. In addition to growing the base, we are launching core strategic initiatives, many of which you've heard about today. The benefits of those investments in sales, technology, new products, geographic expansion, digital and aftermarket are expected to drive mid-single-digit growth for Carrier. From an operating profit and cash flow standpoint, 2020 will be a transition, investments and foundation building for the company. As we separate from United Technologies, we'll take on costs associated with the spin and public company and additionally invest in our future as has been laid out by my colleagues. Our adjusted operating profit in 2019 was about $3 billion. But to put that on a comparable basis, our pro forma 2019 would be $2.6 billion. The $400 million delta is largely comprised of $225 million of stand-alone public company costs and a variety of other individual items that you can see identified in the appendix of the presentation today. Let me -- I guess, there's been some confusion about our stand-alone public company costs by some comments that have been made. Let me provide a little bit of clarity. First, let me kind of walk you through something you probably already know. But the Form 10 starts with Carrier as a division of United Technologies then what is represented as a carve-out business. It is the carve-out of United Technology and includes some costs and perhaps some benefits associated exclusively with Carrier from the United Technology total. And then from there, it goes on to do a pro forma, which adjusts for all of the things necessary to do -- to be a stand-alone public company. So go back to the carve-out part of Carrier is -- there's about $115 million of stand-alone costs reflected in there, which are kind of direct costs associated with Carrier that has been then reflected from United Technologies. And so that, we expect, on a pro forma basis, there's another $110 million to total to $225 million that I just talked about. So back to our 2020, our expectation is that we will deliver improvement on the base of that $2.6 billion of $25 million to $75 million for the year. And all of our investments that you heard about today will be funded by our Carrier 600, costs savings program. Then moving on to the medium term. We will grow our operating profit at a faster rate than sales by leveraging our top-line growth. We expect we'll get higher margins on our new products, technologies and aftermarket and will continue to improve our cost structure. And generally, the flywheel will spin up as we invest some back and drop some to the bottom line, delivering adjusted operating profit in excess of sales growth. Looking at cash. Our Form 10 reflected 2019 free cash flow of $1.8 billion. In 2020, after all public company and spin-related costs and expenditures, we expect to deliver between $1.3 billion and $1.4 billion, which is a net income conversion of about 80% to 85%. In our medium term, we expect to grow cash faster than our earnings aided by more normalized CapEx, working capital improvements and improved joint venture conversion rates. Now I want to move on for a minute to our capital allocation priorities. First, we believe that the strategic and operational profile of Carrier dictates an investment-grade credit rating. We expect to maintain balance sheet and financial policies consistent with this. And as you saw on our Form 10, our annual highest dividend initially will be $550 million. This represents a payout ratio of approximately 30% of our adjusted net income, and we expect our Board will support a healthy and competitive dividend policy going forward. We have been rated investment-grade by 2 major agencies, although initially, our ratios will not be fully meet the standards required by them for those ratings. Therefore, in the first couple of years, we'll focus some of our free cash flow on debt reduction to bring them into line. But once these are aligned, we will then discuss a share repurchase program with our Board. And we will be balanced and disciplined in all of our sources and uses of capital, including acquisitions and divestitures, with a focus on risk/reward and strong economic discipline And now I will summarize and repeat some of our 2020 guidance and identify a few of the assumptions that we're good with. Dave presented earlier, our sales forecast of being up slightly across the enterprise in 2020. HVAC will be up low single digits; Fire & Security, up slightly; and Refrigeration, flattish. As you have heard, we expect operating profit growth of $25 million to $75 million for both actual and constant currency as our current FX outlook is about flat with 2019. So no net difference. Our initial share balance is expected to be established at approximately 880 million shares. And until we go to market with our bond offering and determine our final debt balance, we cannot provide interest specificity. The Form 10 in the pro forma statement identified $11.1 billion of gross debt, and interest expense of $370 million. Remember, this $370 million reflects a full year of interest and at an assumed interest rate and debt balance, and this will be fluid until the spin is completed in the next quarter. We expect initial tax rate of just over 26%. And CapEx will be higher than normal between $350 million and $400 million, where a typical is more in the $300 million range. This is a result of increased changes of our product required by regulation, spin-related expenditures and other of the growth initiatives you've heard about. And as I mentioned earlier, we expect free cash flow to be between $1.3 billion and $1.4 billion for the year. Our expectations for 2020 reflect solid performance, but it is a foundation building and investment year for us, and we will be investing to change the trajectory for the future. Let me map our investments that you've heard about today into our growth model. We will invest in sales, R&D, new products and new geographies to grow sales faster than the market. We will leverage those sales, generate higher margins with new products, price to the value we bring and manage our cost structure through Carrier 600 to grow operating profit faster than sales. We will pay down debt to improve our leverage ratios, to reduce interest expense and also to lower our tax rate to grow EPS faster than operating profit. And we will prudently manage capital expenditures, working capital and our JV cash to grow cash flow faster than earnings. This will result, as Dave pointed out earlier, in a Carrier with mid-single digits sales growth, high single-digit EPS growth and free cash flow growing faster than earnings. With that, I'd like to invite my colleagues up to take your questions.

Okay, guys. We are going to go through Q&A. We are going to have everybody direct the questions at Dave, he will decide if he wants to pass on, get everybody else involved. If you can do me a favor, wait for the microphone for the webcast. Please state your Name & Company, and then we can go ahead from there. Julian, go ahead. Instead of just standing there.

Julian Mitchell of Barclays. Maybe 2 quick questions. The first one of that GBP 600 million of savings. How much do you think can be retained in the bottom line and not reinvested? And then on the free cash flow, there is a big drop in 2020. I understand that CapEx is elevated, but are there any other sort of onetime factors that are weighing on it this year and what slope of free cash recovery should we think about?

Let me take a crack, Julian, at the first, and then Tim will do the second question on cash. I think when we look at the Carrier 600 savings, I think it will be a balance between using it to reinvest in the business and having it drop through. I think what we -- the target that we're setting for ourselves is to grow our margins 50 basis points a year. So we will be seeing drop-through as we go forward, not only through increased sales and the drop-through that we'll get in hopefully higher margin sales, but also as we kind of modulate investments over time. Tim, on cash.

So the largest piece of the change, as you might imagine, is the interest. You saw that full year's interest is expected to be $370 million. We obviously won't have that outstanding for the full of the year, and there may be a bit of difference. We haven't established when our interest will be paid and, obviously, we'll accrue it for the P&L. But for the balance sheet, it will be dependent on the actual payment. So there is -- the biggest component is that the -- somewhere between $100 million and $150 million worth of Capex, as you point out, will be another piece of it. And then the kind of the second tranche of the public company expenses, that $110 million that we talked about will be the third component. Some of that will be -- I mean, there's a few other small things, but that's the preponderance of it. And some of that will be off. If you add that up, it's going to add up to more than the $400 million delta, 4 or 5, but it's -- there's some tax benefit associated with some of those expenses, obviously, we get some interest rate tax deduction.

Jeff?

Thank you, Jeff Sprague from Vertical Research. First, just picking up kind of on the first point, the reinvestment. Do you see this as kind of a multi-year catch-up that needs to be done. Obviously, you're trying to get a bit of a running start here, but would you envision that you're kind of at steady state by the end of kind of this 3-year window? Or is there more of a heavy lift on the other side of that?

I think this will be kind of that, the peak in terms of the year-over-year increase in investments. I mentioned an additional $150 million this year. The way we look at that, it probably comes down from that $50 million a year. So I think the incremental investment next year is more like $100 million and then down $50 million from there and the year afterwards. So we still -- we do need to continuously reinvest in the business. One of the interesting things about this space is that a relatively small investment can yield a quick payback and pretty good returns quickly. So we'll continue to invest, just not as this year-over-year increase that we saw this year.

And Dave, this is probably for Tim, but just track you in terms of what you're thinking about the balance sheet, what you have to do to kind of satisfy the rating agencies that you are within the metrics that would allow you to open up the aperture on share repurchase?

Yes. So if you look at the statistics, we're somewhere between $1.25 billion, $1.5 billion higher of debt than would be fully reflective. There's one agency that is particularly the constraining factor. And to get within their parameters, there's probably $1.25 billion, $1.5 billion of debt reduction necessary. We do have strong remaining cash flows, you kind of subtract out the dividends. And a big piece of that will go to dividend or to debt reduction over the first couple of years. Once we get past the first couple of years, I think we'll be in good shape, and we'll be having discussions about share repurchase.

Go to Steve.

Steve Tusa from JPMorgan. I think working capital in Form 10 was kind of a big drag in -- maybe there's some allocation dynamics there. You mentioned working capital will be an opportunity. What should we expect as you guys grow is kind of the normal level of working capital drag on an annual basis? Then I have a quick follow-up.

Well, it was a drag this year because we kind of cleaned up some balance sheet elements. We adopted some new accounting standards and so forth. But on a going-forward basis, I think we will continue to shift. I won't say that working capital is fundamentally broken within the company, but I will say there are some clear opportunities as I've seen in every company I've been. We will focus on that, and we'll gradually bring it back into the line to realize what we -- the potential we can. Accounts payable in generally, I mean, we have some pretty good accounts payable terms. Receivables becomes an opportunity for us and inventory as well, some opportunity.

Yes, I'd say -- just to add to it, Steve. The inventory turns are, frankly, better than other places I've been. So I think, overall, pretty good turns, but there's definitely an opportunity for turn improvement, especially as we drive to a bit more linearity in a more seasonal business. That's one of the key focus areas for us. I think the biggest opportunity is with our AR overdue.

And then just on portfolio. Carrier's kind of an iconic brand across all the verticals. Is there any hurdle towards -- do you view resi and light commercial and then secondarily, the commercial business, as kind of a product portfolio? Or are they so separate that if I came to you and wanted to take the resi business off your hands, you'd be able to kind of carve that off without having real channel conflict.

Yes, resi is pretty iconic for us. It's very core. So we view, obviously, I think that HVAC-R is very quite interconnected. And quite honestly, we really like the hand we've been dealt. I mentioned that we would put every aspect of the portfolio through these rigorous lenses and we will. But certainly, if someone kind of came and said, we'd like to take your resi business off your hand, that would be a short discussion.

Nigel?

Nigel Coe from Wolfe. You talked about going from #3 to #1 in Global Applied, seems aspirational, I'd say. And I think you mentioned your service business is roughly half the size of Ingersoll's business. So given how integral services are to Applied, kind of how do you get #1 without significant investments in your service capability?

I guess, I'll fill that one. Actually, if you look at the gap, I wouldn't say that the target to become a leader in 5 years is aspirational. I mean, the gap, when you take a look on a global basis, and the data that we have for whether it be Eurovent or AHRI in the U.S., the gap is not that large. It's a few points. So it's kind of a disciplined, continued investment in our product line to make it 50 basis points type of thing a year. We think that's completely within our control. And is a doable target, like I outlined. Now you're right. Service and Applied are very linked. And when I talk about the difference in size between us and some of our key competitors, it's important to understand that what we're focused on is investing in our business at the local level because we're not necessarily competing against what you think about the multinational OEMs, it's local service providers. And I think we have an opportunity through investment in digital as well as branch structure and our service salespeople to close that gap. And it very clearly supports growth in the Applied segment as well.

And then as a follow-on on the JV structure. So you've got a number of JVs, principally with Toshiba and Midea. You talked about improving cash flow conversion, I'd be interested to know how you improve that because there's always a difficulty to do that. But are we happy? Are you happy with the structure of these JVs going forward?

Yes. We actually have 58 joint ventures, and about half of them are where we have a minority position. Just like I said with the portfolio that we're going to put all parts of the portfolio through these rigorous lenses, we'll do the same with our JV structures. The JVs that you mentioned with companies like Toshiba and Midea go back decades. We're very -- these are phenomenal partners. We love the relationship we have. In many cases, we're really emphasizing growth and that's a big theme that we want you to take away from today is growth. We would like, in some areas that have historically been a minority position, to be in an area where we can consolidate, and we can consolidate in some of the high-growth areas. So we'll look at all of our JVs, but I can tell you that the relationships we have are strong. Anything you want to add to that?

I think just the only other thing is that we have -- certainly, the Toshiba and Midea are the highlights, but another key area for our JVs are in local go-to market. So if we take a look at a minority joint venture in a Middle Eastern company, get their country to give us access to market. And we think that those are a differentiator and really provide us an opportunity to be successful across the globe, and they've been something that we have had in the company for a long time. And then we'll continue to improve as we go forward.

And can I respond to the conversion. I mean we are targeting 90% to 100% conversion. We have some structural problems, the JVs being one of them, our pension income being the second one. But we aspire to continue to address that and move up in the chain. I would expect our joint ventures to assembly that if they're not paying out 100% of their earnings as dividend up to us, and I would expect to have the conversations to improve that ratio as well.

Go to Deane, right here next to you.

It's Deane Dray from RBC. I might have missed this, but will there be a period after the separation where you will exclude separation costs? How long do you think that duration would be, you would separate costs? Or will this be all paid as you go?

Yes. Well, we have -- I mean, there's a whole bunch of different things. I mean, one of which is we talked about the kind of the $225 million worth of stand-alone costs. Certainly, I mean, we took this clone and cleanse approach to whatever is sitting at UTC and what we need to bring in and know what we need to add to it. But as we go forward, we will scrutinize that and scrub it, and we think there's an opportunity to bring that public company standalone cost down. We're focused on that. And then there is kind of the transition costs. And yes, we will incur somewhere in the $80 million worth of TSA costs in 2020, and extending a little bit probably the first quarter into '21. And there will be some exit costs as we put the replacement for those actually into our company. Some of those will also be incurred, so there's maybe $100 million worth of combination of TSA costs and exit costs, but we would expect by the second quarter of 2021, that would be behind us.

And Deane, let me try to -- and Tim, correct me if I say this wrong, of course. But I think within the $225 million, it includes ongoing TSA costs that after the TSA ends after a year, we would sort of pick up on our own. Outside of the TSA, there will be onetime exit costs that would be on top of it, and we would report that separately.

That was very helpful. And then as a follow-up for Matthew on residential. Or Dave, you can decide if it goes to Matthew.

It's going to Matthew. Let me actually wait, go ahead.

There is no mention of distribution. And so the decision had been made several years ago with distributors being sold to Watsco. And just give us a sense of whether the pluses and minus of that structure, and might there be an investment in distribution on a go forward?

Yes. Listen, we're very happy with our relationship with Watsco, with the CE joint venture. And really, it allows us to focus on being an OEM. I mean being a distributor and being an OEM are very different business models. And we need to focus our capital and our OpEx into developing great products, great manufacturing, great engineering and that's what we're choosing to do. And working with partners like our CE joint venture with Watsco to allow them to go out and execute hand in glove with us in the field. And that's -- it's working for us very well, and it's a strategy we're going to continue with.

Josh?

Josh Pokrzywinski from Morgan Stanley. 2 questions. I guess, first, Dave, on some of the big growth initiatives that you're focused on, BRF, China and cold chain, I think, we're higher on the list. From a mix perspective, I think other folks who have made pushes there talked about incremental margins being a little bit lower. Is that something we should look at as kind of a netting item with Carrier 600 or some of the other initiatives, that hey, just keep in mind that the drop here may not be as high initially.

Honestly, I'd say it's a mix. When you look at our overall growth initiatives, some will actually come with higher margins than the base business, especially as we lean forward on that sort of bucket 3 items, services and digital that ought to come with higher margins than some of the base products. Some areas in this bucket 2 item where we're expanding into an adjacency, it may be a little bit lower margin. But I think steady state, our plan is to -- that 14.2%, our plan is to improve that. And on balance, we will be able to.

And then just a follow-up on kind of the components of Carrier 600. I was surprised to see that supply chain factory were bigger pieces. I would've thought kind of coming out of a bigger company, maybe SG&A is just kind of allocated unfairly down to the divisions. I guess -- is there some reason why that was not focused on earlier, hearing about he [ schooled ] forever, one would've thought that maybe those 2 buckets have less opportunity. Is there a cost to achieve or some other kind of focus that UTC didn't apply to take that out earlier.

Well, more than half of Carrier 600 is supply chain. But keep in mind that 85% or so of our cost of goods sold is buy. So we are very weighted towards the buy element. So it's only natural that a lot more of the savings will come from really going after the supply chain in a very structured and creative way. G&A, I think, is really going to leverage a new muscle for us. As we look at this more strategic approach to really take down G&A. Like I said, it's just too high a number. It's about 9% of our sales. It's just G&A, and it will come down. I think it's -- what we're going to do differently is really look at a really transformational type approach to it. And driving factory lean and driving automation, we're probably really in the first inning on automation. There's a huge opportunity of automation ahead. We now have a group centralized focusing on it. We're deploying some specific tools in some of the sites that are taking hold, and we just see that as a growth area for us ahead.

John?

John Walsh with Crédit Suisse. A question kind of around management incentives. And obviously, there are multiple programs, but looking through the Form 10, you did call out absolute EBIT and absolute free cash flow growth. Just wanted to kind of understand why those were the metrics you chose? And maybe any other views you have on that?

Yes. When it comes to overall management incentives, what you saw in the Form 10 is that coming out of the gates as a new public company, we've basically taken a lot of what we have done at UTC and said that's going to be our initial framework. It's really going to be up to us and our Board to work together and think about how we may want to modify that as we get into '21 and beyond. The pieces you mentioned, that relates to our incentive comp piece. Historically, UTC is focused on EBIT and cash as the IC piece. LTIP has typically been more weighted towards total shareholder return and some of those elements. We'll look at all of that. When it comes to IC, might we want to put sales as an element of that as we really emphasize top line growth, that's something we're debating. We'll work through with our Board and our comp committee, and you'll see more as we get into '21.

Great. And then maybe just a follow-up on residential. Looking at the growth you're looking for -- out in 2023 around some regulatory changes. You referenced the 2006 time period. As I remember that there was a pretty significant change in SEER standards at the time, like a 3-point jump. Just -- I thought the industry was moving towards kind of smoothing some of those regulatory impacts. Just curious why you think there'd be such a big kind of step change out in 2023?

Yes, Matthew.

Yes. So this one's more national in nature. So you had the '06 then you had 2015, which was regional. And back in regional, really only the south markets got the increase in efficiency. So you fast forward to this model, the entire country gets it. So the north goes from [ 13 to 14 ], and the south goes from [ 14 to 15 ]. Now without getting into a lot of engineering and design, when you start to get it around it [ 14.5 to your 15 ], you start to hit a cost curve, and that becomes the challenge that we all are trying to solve for. So that's why it's going to be a challenge.