Carrier Global Corporation (CARR) Earnings Call Transcript & Summary

Yes. No. It could be, but it's not. But I do think as we look at the opportunity to come in midlife or towards the end of life to a customer and offer value propositions, to have them replace an applied unit earlier than, say, the 30-year period, it really is around value propositions. I do think this area -- clearly, energy efficiency and digital and how you can improve their energy efficiency bills is an opportunity. But healthy buildings I think could be something that becomes quite sticky for a period of time, a sustained period of time. That offers a real opportunity there as well.

Got it. And I think one of your competitors has certainly talked a lot about it and I think started to see some quote activity around that healthy building space. Even though it's still early days, I guess as folks are starting to get back into buildings, case in point here or case in point where you guys are, that's becoming more topical. Are you guys seeing anything out there, even in kind of a funnel preorder that gives you some visibility into how that may evolve?

Absolutely. I can tell you that we launched this OptiClean unit. Just as an example, we launched it. We actually developed it in a few weeks. We launched it earlier this year, and we thought that we'd get some additional sales and see where it went. The demand has been far higher than we thought. It's helped us this year. As we look into next year, we think that there's continued opportunity there. So it's a bit of an example of the demand that we're seeing. The thing that we're trying to look at is -- so we are seeing upselling where someone buys a chiller and they buy a better filtration system that would be additive. We are seeing new sales of things like our OptiClean unit. Where we're really taking the healthy building initiative is to focus on holistic systemic offerings that can get a customer to a safe, healthy, sustainable building and then sustain it there. So how do you define that? How do you measure it? How do you give their customers the insight into where you really are in terms of -- so before you come into your building there in Times Square, you could look on your iPhone and see is that a healthy and safe environment? And you can look at various attributes like filtration levels or CO2 levels or whatever it is you're going to measure, and it can give you confidence before you go to a restaurant or drop your kids at school or come into an office building. So right now, it's a bit either episodic or anecdotal. Where we want to take it is to something that's much more holistic.

Got it. And I guess on that front, every building is a little different, especially in getting the implied space, much more of an engineered kind of offering. How do you kind of break it down into something that's either standard work and more easily deployed where you can attack the market or is just something where it's going to be a battle inch by inch because it's getting a sales force and technician force that's trained up, building out a bit of a capability there on the technical side as well? So I guess how do you think about the speed at which you can attack the opportunity knowing that you probably have more in front of you than some other folks?

Yes. I think about it in a few elements. First is the product offerings. And I think that we have, and we continue to look at how we expand our healthy, safe and sustainable building product offering. And I think there's an element that we've rolled out a lot, and there's more to come that really help us digitally be able to connect the dots in that regard. Then we look at our marketing, and we've been doing a series of webinars with customers to really explain to them the benefit. And I think that's come a long way, and I think that's piqued a lot of interest for some key customers. We have a partnership with Cushman & Wakefield whose boots on the ground, talking to customers every day. That's helpful. And then the third piece is the sales piece. So we've trained -- we have about 5,000 sales folks out there. We've trained folks on these additional offerings that we have that drive healthy and safe indoor environments. What we have to do is look at enabling our existing sales force to sell across our portfolio. And that's something that we have to continue to evolve. Because today, we sell either HVAC or F&S, but some of the offerings cut across those 2 portfolios. We have a group that sells across Carrier, we just need to evolve that, and that's what we're working on.

Got it. And then I guess the element of efficiency goes somewhat hand-in-hand with safe and healthy building. So I wouldn't want to separate the two. But if I think back to -- I want to say the 2Q call, you mentioned that you'd seen some progress on improving service attachment rates. Would you think of that as kind of a separate opportunity versus some of these efficiency upgrades? Or does that all kind of get thrown into the stew together?

It's all in the stew together. I mean we looked at -- when we look at our overall business model of driving much more life cycle sales, that is thematic across Carrier. I -- like I said before in modernizations, I do think that in all fairness, we're playing a bit of catch-up there. But I do think that we have focus on it. We have the playbook down. The leader of our aftermarket, Ajay Agrawal, he knows the playbook, the BUs are perfectly tied in. We've given incentives, the tool -- the toolbox to really grow this. On the applied side, we said we'd get to 30% attachment rates this year. We'll certainly achieve that. So we know what we got to do, and it ties into now that you have that customer intimacy, how do you use that to drive more sales around healthy, safe and sustainable buildings? And once you're in there, you're now talking about filtration systems and air changes per hour and how much outside air you're using. And there is an element around energy efficiency. And sometimes physics, there's a trade-off in there somewhere, but I think we can balance all that for the customer.

Got it. And then just understanding the world is a pretty big place. There's billions of square feet of cooled area to be attacked. I would imagine that as much as competitors may be having success, that doesn't necessarily mean that it's mutually exclusive with other folks participating. Are you running into some of your peers quite often? Or is it still pretty fragmented?

It's fragmented. We have -- honestly, I mean I think that for the aftermarket space, there is so much opportunity ahead. When we look at it -- and by the way, this is not just an applied discussion. This applies to the entire portfolio. It applies to part sales and residential. It applies to our Fire & Security portfolio, how we deal with refrigeration. And one of the keys for us to pick up additional revenues but share on the overall aftermarket side is not only our tiered offerings, but it's really using digital as a differentiator. So things like prognostics, diagnostics, remote control to drive energy efficiency. That's something that as the OEM, we have the ability to really differentiate ourselves, and that's an area we're really focused on and investing.

Got it. And then I guess behind this, depending on where you're at in the world, there's regulatory or kind of climate legislation element. Europe's obviously pushed pretty hard. The U.S., I think the Biden administration or Biden campaign has talked about some 4 million buildings of -- that need to be upgraded or should be upgraded. Where do you see yourselves positioning for that or trying to preposition? Is it getting in front of people for spec driving? Is it just being there with the right offerings and as the market gets identified, you come in? Maybe talk about how some of those elements come into play.

Yes. You look at the trend around obviously sustainability and climate change, we're trying to preposition ourselves to proactively talk to customers about how they can get out in front of whatever regulation or legislation is going to come, how do they drive more energy efficiency. And we've seen probably more progress in Europe. You're starting to see more of in the United States, depending on the election, there could be more of it. But we're seeing a lot of interest from customers not only on the energy efficiency side, but this healthy side, too, and the interplay between those 2 dynamics. So we see that as a real opportunity as customers look to become compliant with potential forthcoming regulation.

Got it. And not to leave out the transport side of the house because obviously Transicold is a pretty compelling franchise. But anything that prevents those markets from getting back to kind of normal or prior peak over the next couple of years? I mean I know I'm eating more during the COVID lockdown. So again, doing my part as small as it is. But presumably, your customers have a better view into food purchases and supply chains and restaurant activities and kind of all the complexity of what we may need going forward versus prior. Anything that you guys are -- have been able to observe as we've seen some settling out?

Yes. I think the opportunities there are -- clearly, it's a cyclical business. So if you look at the ACT numbers, this year, North American truck trailer, down 30%, 35%. Next year, you just get a natural snap back a bit. They're forecasting up 20% next year. But that's the cyclical nature of the business. I think the more strategic side of it is a couple of things. One is, when you look at food transportation, places like China. Today, in the United States, more than 90% of meat is transported in a refrigerated container, and it's less than 40% in China. So that's a trend that you would expect to change. So I think food safety is clearly a trend that's here to stay, especially in certain parts of the world. And then you look at pharma and vaccines. When there is a COVID vaccine, connecting the dots between the cold chain is inherent complexity to that. We really want to position ourselves in a sweet spot there to not only be part of the solution, but to help some of the key elements of the industry connect some of those dots. So we are focused on things like telematics and the overall cold chain solutions that we think because of our Sensitech business, the holistic offerings that we have, we can be a real player in connecting those dots.

Got it. And then just pivoting over to Carrier 600. You mentioned in your opening remarks some good momentum there, better realization this year than I think you originally planned for. I guess maybe, Tim, for you to kind of weigh in on pull forward versus the larger opportunity. And then if you wouldn't mind pairing that up with, Dave, some of your comments on areas of investment, which may be a source of drag but obviously, good return, so not a bad thing even if it's just bigger opportunities you're identifying.

Yes. So I'll start. Yes. I mean Carrier 600, in part, because we have a very aggressive person, Rishi Grover, that is leading the charge on that and with good cooperation and participation across the enterprise that we have found that we're -- we originally set out $600 million over a 3-year program. This year, we expect to deliver $250 million on it. So we're obviously ahead. Some of that was acceleration because of the COVID crisis and some of it was just that we aggressively went after it. We have not yet -- I mean we will probably soon come out with what our expectation is, whether we shorten the program, introduce the next program, expand that program or exactly what we do. But obviously, we're going to continue to drive it to realize what we can out of it. Talking about the investments, I mean we had set out at the beginning of this year that we expected to spend $300 million over the next 3 years. It was kind of staged at $150 million this year, $100 million next year and then $50 million in 2022. This year, because of the COVID crisis and the need to constrain a little bit, we scaled that back. Now we're at about $100 million this year. We still believe that $300 million is appropriate. There's enough good projects in the pipeline that we think that with good returns on the investment, that's appropriate to spend on that. Obviously, it will generate returns itself. And all that will be funded by the Carrier 600. So we have that plus some of the return -- to return to the bottom line. So that program continues and we're directionally, maybe a little bit different pacing, more aggressively on the Carrier 600 side and slowed back a little bit in the pacing on the investment side. So it kind of balances things out.

Got it. And then I know supply chain was a big part of that. And now, certainly, nothing is closer to the free square and bingo than supply chain now in the COVID environment. Anything that you guys have rethought or reprioritized now with a bit more supply chain scrutiny by everybody as we've gone through this?

We've been quite pleased with our supply chain. I mean at the very inception, we're sitting at late in March, and we're starting to think about the amount, what do we have, $1.5 billion coming in from China and serving some of our factories around the world. We became very concerned. We had -- we're very early in approaching our suppliers, making sure that where they had alternative sourcing in other countries as China first was down and made sure that we had supply coming out of there. And then obviously, China recovered pretty quickly so that replenished or we said that made that okay. But I would say the one thing perhaps that we learned out of it is just the focus on ensuring that there is dual -- early on, we thought about, well, maybe this focusing more concentration on a single supplier was good in terms of leveraging our spend and so forth. And we said maybe we need to think about diversifying. But then what we really went back to is we said, we need to make sure that our suppliers, the big suppliers, important suppliers that we're leveraging also have dual sourcing in geography -- well, in geography and different plants. So we're pretty much covered for the risk in that regard. And we've found that most of our big suppliers have that diversification. And so I would say that we don't have to rethink that much. It's -- and I would say, still supply chain is the big part of the Carrier 600 progress we've made. We made some progress in manufacturing in our plants, efficiencies and automation and so forth and some on the G&A, particularly with the cost containment this year, but some of that will come back. So the fundamental reduction, we still have lots of opportunity. We've made some good progress on it as well. But no, I would say that with the supply chain, some learning from it, but I would say it's still on track and still basically focused on where we had been.

Excellent. Well, I see we're out of time. Dave, Tim, Sam, I appreciate you making the time. Hope to do this all again next year and in person. Thanks for joining us this afternoon.

Thanks, Jeff.

Thank you very much.

Thanks for having us.

Thanks, everybody. Appreciate it.