Carrier Global Corporation (CARR) Earnings Call Transcript & Summary

All right. Good afternoon, everyone, again. We would like to welcome Carrier here to the Eighth Annual Crédit Suisse Industrial Conference. Joining me today is David Gitlin, Carrier's CEO; Patrick Goris, Carrier's CFO; and Sam Pearlstein of Investor Relations. I think what we're actually going to do is head straight into the fireside chat.

So maybe with that, David, kind of the first question for you, you spun out of UTX, right, really in the heart of COVID. You've been navigating it quite well in the last couple of quarters. How has that either accelerated some of the strategy you laid out for us earlier in the year or kind of shifted priorities and pushed anything potentially to the right?

Well, good afternoon, John. Thanks for having us. We -- when we look back at 2020, what I would tell you is the pandemic has really accelerated all the strategies we laid out as we were going -- preparing to go public. On the cost side, we said we were going to be aggressive. It's really forced us to even be more aggressive. So we had started at Carrier 600, of course, now it's Carrier 700. Very effective there. We had talked about transforming G&A in a profound way, and we've gotten great traction there. Really laid a foundation for next year when we're going to really initiate a process to reduce G&A in a significant way and really simplify the business, the number of JVs, the number of suppliers, number of legal entities. We've also shined a light on growth. And really, what the pandemic did is help us crystallize our focus on the 2 ecosystems that we're very focused on, healthy, safe and sustainable building and cold chain solutions. And we've also leaned into our 3 pillars of growth. We've had good share gains, which is our first pillar, really expansion into some new geographic areas, not that China is new, but we really wanted to lean into that. And I'm very proud of the China performance. And really pivot to services in digital, and we've seen great progress there. And then the last point I would make, John, is on the culture side, which is very significant, it's -- the pandemic has brought out the best in our team at all levels. We've initiated the Carrier way with a focus on agility, innovation. We were proud to receive one of the recognitions from Time Magazine as a top innovation of the year with our OptiClean unit, a focus on customers and outside-in performance culture. We have a no-excuse drive results culture. And we just issued our ESG targets a few days ago, really with a focus on sustainability and playing our role in climate change. So I think what we've really done in 2020 is really lay a very strong foundation, really good cash performance, and that's really positioned us well as we look ahead into '21.

Great. I guess long time no see, Patrick. Now you're here at Carrier. Maybe a question for you, kind of what were some of the things that attracted you the opportunity at Carrier?

John, thank you for having us. So it's been about 2 weeks now. And of course, very excited to be here. Frankly, it's a unique opportunity to join a 100-year-old startup company. It's an attractive industry, attractive market position and frankly, with tremendous potential. And only been here for a couple of weeks, but obviously, I sense a very strong focus on accelerating profitable growth, driving efficiencies, continuous improvement, free cash flow focus. And obviously, it's going to be my role to enhance that focus and drive execution. And so we can continue to deliver long-term superior financial performance for our share owners.

Great. Maybe first, kind of starting nearer-term before we talk about some of the big drivers in the industry. But we often get asked a lot of questions around the Q4 guide. I guess what you're guiding to from a profit level does seem to break a little bit from kind of the normal seasonality. So I guess, is there something happening in the fourth quarter this year that's driving the levels of profitability you're guiding to? Or we're still kind of in the midst of the pandemic, so there's a little bit of conservatism built in there. How should we think about that for Q4?

Yes. Let me provide you some of the moving pieces for the fourth quarter. Maybe before I do that, just to say, we still expect the full year to come in line with what we provided back in October, so about $17.3 billion in sales, about $2.2 billion in adjusted profit, perhaps $30 million, $50 million-ish better than that, and about $1.5 billion of free cash flow. So as you pointed out, John, for the fourth quarter, this implies our sales to be down a little bit year-over-year, but our operating earnings to be down a little over $100 million. So what are the moving pieces? One, we see a tailwind from Carrier 700. As we said before, we expect to deliver about $250 million or so million of savings there this year. The Q4 impact of that headwind is offset by a few items. One, I mentioned that our sales will be down a little bit in the fourth quarter, expect also lower JV income in the fourth quarter. Another headwind there is $75 million of investments that we expect to hit in the fourth quarter. You've heard us say that for the full year '20, we intend to reinvest $100 million in the business. It's very much back end-loaded, about $75 million of that is in the fourth quarter. And then finally, I would say, there are the -- about $25 million of additional public company costs and about $30 million of onetime items that impact us this Q4 versus the last year. So several moving pieces here, but that kind of explains about $100 million or a little bit more operating earnings decrease year-over-year on flattish sales. It's -- a lot of it is timing of the investments. And of course, the public company costs and some of the onetime items that I was referring to.

And John, if I may, just to add to what Patrick said, is that if you turn the clock back, we had come into the year saying that we would invest an incremental $150 million. And then we reduced it to $100 million. And we really loosened those reins as we got kind of into late 2Q, really into 3Q. And clearly, we could drop-through more EBIT in the fourth quarter if it weren't for the investments. That's a very purposeful conscious decision that we're making as we really pivot to growth and focus on setting ourselves up for '21 and '22, to have the kind of growth expectations that we have for ourselves and that investors have for us. So it's a very deliberate move by us to really make sure that we're playing offense, and we're investing for our future and that's what we're doing here in the fourth quarter.

Then I guess maybe a follow-up to that. As we think about these investments, I think you called out $300 million. Kind of what happens when we get there? I think that's a cumulative number. So first, maybe a clarification on that. And then do we step back down once you've made these reinvestments? Do we get them going higher? Do we plateau? How do we think about that longer term?

Yes. So John, what we said is $300 million would be our plan to reinvest in the business over a period of 3 years. We still believe that's a good number. As Dave just mentioned, we had targeted about $150 million for fiscal '20. Given COVID, we've reduced that to about $100 million. Our expectation for fiscal '21 is about that $100 million of incremental investment, '21 versus '20. And of course, we'll wait until February when we provide formal guidance, but that's the placeholder you can use for now. And frankly, even after we've reinvested the $300 million, if we find additional high-return investments beyond the $300 million, then we will obviously consider pursuing that. But this is the framework we have at this time for this year and for the next couple of years.

Great. So maybe just attacking that question in another way. Last quarter, you did talk a little bit about 2021. You articulated some of these temporary costs coming back. You talked about the investments, right? You gave some view of where you think incrementals will be. The question then also becomes that same formula as we think about beyond '21. Are there visibility into any detractors from that Carrier 700 dropping through to the bottom line that you would have now because I would assume that the formulas, we just removed the temporary costs, maybe you've plateaued investments, and we're really talking about a lot more of that Carrier 700 dropping through, is that right?

Yes. Let me provide the color for fiscal '21. And so for fiscal '21, what we've said is we would invest $100 million in our business. And the overall framework for fiscal '21 is also we were targeting about 30% incrementals or close to 30% incrementals for fiscal '21. In essence, that's the drop-through from our sales. You've heard us say, Carrier 700 now expected to yield about $200 million to $250 million in savings next year. We expect to reinvest about $100 million of that. For fiscal '21, we have an unusual headwind from the reinstatement of those cost actions that we had in fiscal '20. So for fiscal '21, we don't expect the fall-through of the Carrier 700 benefits. That would change, of course -- or could change, of course, in fiscal '22 because there would no longer be this headwind from the cost actions we took related to COVID. And so for the framework you can think of, fiscal '21, think of the Carrier 700 benefits being offset by reinvestments and the headwinds of the temporary actions we took in fiscal '20. After that, of course, we would expect more of the Carrier 700 savings to fall through to the bottom line.

Okay. Would love to shift the conversation now to indoor air quality. So one, thank you for taking a stab at trying to size what the opportunity is there. I think we've heard a couple of other companies also try to size that opportunity. Can you put a little bit more behind the $9 billion to $10 billion you talked about? Is that just indoor air quality? Is there some green stimulus that leaks into that number? How do we get comfortable that $9 billion to $10 billion is in the right ballpark?

Yes. John, we looked at the markets that we participate in and focus on the commercial markets. And we looked at that as a $90 billion to $100 billion overall market. And then we looked at what the incremental sales that we've been realizing associated with healthy buildings, and a lot of that is IAQ, but it includes some other things that we have, including parts of our Fire & Security portfolio, where we've been selling thermal scanning, contact tracing, other elements there. So we looked at kind of a healthy building incremental to it. And we've been -- our experience has generally been around 10% of incremental sales. We've had chiller sales, where on top of what we would have traditionally sold, we sold bipolar ionization or we sold different filtration systems on top of that. We also looked at introductions of new products like our OptiClean and other new products that we've been coming forward with. And what we've traditionally seen is this 10% incremental, and that's how we got to the $9 billion to $10 billion. I don't want to pretend there was more science behind it than that. I mean that's -- it's our best sense of what that market opportunity looks like. What we're really trying to do is get into the trenches to drive those sales. So on the last quarter, we talked about a pipeline of $150 million that we had line of sight to. We had realized about 1/3 of that. And we had -- we were developing confidence around the remaining $100 million of it. That pipeline now is $165 million. And a pipeline is not a pipe dream. It's real conversations with real customers. So only -- after only about 8 months at this, we have a pipeline of about $165 million. We see real wins every week. We had one in China just a week or so ago, where we were providing advanced airside products to Guangzhou Respiratory Center that included UV lights. So I mean, it's a very global phenomenon. It obviously applies to the verticals where you see the most density, so education, commercial buildings that are going to start welcoming folks back. Retail is going to be critical, restaurants, hospitality, hotels. So we're confident that it's going to be part of the new normal. I think of it, John, a little bit like after 9/11, that there were some fundamental shifts in security systems. It became the new normal for venues like sporting events or airports and other places. Security that wasn't there before became a new normal. And I think focus on indoor air quality in healthy buildings will be the new normal, and I think we're well positioned there.

Got you. And I think in your opening remarks or an answer to that kind of first question of mine, you talked about reducing the complexity, right, the JV structure. But I think also early on, you talked about kind of taking a dispassionate view around the portfolio. Where are we in that? And kind of when should we expect any kind of further update to that?

That's an ongoing process. You talk about the JV piece of that. We started with 58 JVs, 40 of which were minority, unconsolidated JVs. We've looked at all 58 of them. There are some that fit into the category. There's probably 5 to 10 that fit into a category that they are very small, very subscale, and we have to ask ourselves, does the potential benefit justify the amount of management distraction that goes into supporting those. And I think there's going to be, if you look at that category, there's going to be some that we exit. Then there are some that we look at and say we really like the relationship, we like the space that we're in, but we would prefer to be in a consolidating position. And those are discussions that don't happen overnight, and we continue to kind of work our way through those discussions with partners. Some we're very pleased with. We have a great partnership, for example, with Watsco, with distribution here in the United States for our resi business. And Al and his team have been very supportive for our growth initiatives. So we're pleased with that. And then there are some where we always look at, is there -- should we -- do we have the opportunity to unlock value, really hidden value that we continue to assess on a recurring basis. And then the rest of the portfolio, what I can tell you is that we said that we would take a very dispassionate look at it, and we continue to do that. And the question is for that -- all parts of our portfolio is, are they worth more to us than they would be in the hands of someone else? And then if we decide that you could create more value by divesting a part of the portfolio, what's the right timing to do that? So those assessments are ongoing. And then the flip side of that is that because our cash generation has been strong, are there bolt-ons we want to add? So we continue to look for acquisitions that are of the right size that are strategic.

Got you. I guess maybe thinking back along the lines of the investments, obviously, there's been a lot of new product introduction. You have put out several press releases. But are those -- is that $300 million also funding investments to make the sales force be able to sell digital and other solutions as buildings become more complex? Or is that purely a product number as we should think about it?

Yes. When we crafted it, we originally, and we still do, we really think about it in 3 categories. There's R&D, there's salespeople and there's digital. So we have been adding more R&D, and you'll see that as we get into next year, too. Patrick talked about an incremental $100 million of investments, that we have a lot of opportunities on the R&D side. We just introduced, in Europe, for example, a low GWP scroll air-cooled compressor that's for our chiller portfolio that's been very well-received after a very short period of time. So we see a lot of demand on the R&D side. We introduced about 100 new products this year. I think this year is going to be about 125 new products. So R&D will continue to increase. Digital spend is very strategic. As we think about our healthy building initiative, and we think about our cold chain initiative and our partnership with AWS there, you're going to see this continuous pivot to recurring revenues and digital solutions. That's going to be very thematic for Carrier for '21, but frankly, forever. That's the new normal, and that's a huge focus area for us. And Bobby George and his team have done a superb job really thinking through the future and really pivoting towards this digital model, working with Ajay Agrawal and our aftermarket team to really drive that. And then we have added salespeople. We've said that we would add 500 sales and sales support people this year. We're going to end up this year having done that and putting more feet on the street to really build that customer intimacy and drive top line growth that way as well. So it's a combination of all 3.

And then I guess, maybe sticking to that kind of digital theme, when I look at Carrier's controls business, right, again, Automated Logic, right, but you also have some really big competitors in that space. Where do you see Carrier playing in there? I mean is there an ability to kind of scale that business up and compete with the #1 to #3 players in that space? Or does something else have to change to really be able to move the controls beyond kind of the HVAC and the Fire & Security system, thinking more about the whole building?

Yes. You look at our ALC portfolio, and I think you're right. I don't think we're, in terms of size, #1 or 2, but I do think that we're not far down that list. I think we have the ability to continue to grow that business and improve our share position. We have great technology. We have a very strong market presence. We have the -- because of our portfolio, we have the ability to combine more real estate within the building than others because we have the F&S portfolio, of course, and we have the HVAC piece. So I think you're going to see continued investments in growth in the ALC business, but we're going to overlay it here in the coming months with other aspects of the building management system that can drive healthy building differentiation and frankly, solutions that not only can interface with our building management system, but with other building management systems as well. So the key is to be able to extract the relevant data from the building and be able to also use controls to influence that data. So an example I've used is CO2, measure it, see it, and then you can use some controls logic to either anticipate it and pre-ventilate or to actually measure it and then ventilate. So this is a key -- building management systems, digital and building controls is a huge focus area for us. We're happy with the products we have. We're continuing to invest in that area, and we have new offerings that will be coming out in the first half of next year.

Great. I was going to ask next about transportation, right? So I think there is certainly some buzz around vaccine deployment, but the big question is how much of that's kind of a onetime bump, right, that you can capitalize versus how much of it is other underlying growth in that market. So I don't know if maybe you can kind of walk us through how you're thinking about the capacity of that marketplace. And then, obviously, there's a lot of excitement also around kind of last mile delivery, too. So maybe you can talk a little bit about what you're seeing in Transicold there?

Sure. I think about the opportunity really in -- through 2 lenses. One is capacity, and the second is data. I think the latter is where the biggest opportunity is, frankly. I think that, clearly, the world is going to -- on the former, the world is going to need more capacity. And it's going to need it at the point of administration. So if you think about -- we were in discussions with one of the states here in the U.S. that was going to administer a lot of this through state fairgrounds, and they could really benefit from remote mobile pods, like you have -- picture a 40-foot container that we have that we would provide the cooling for minus-30 degrees C. It extends the life of the Pfizer vaccine or it can house Moderna and the other 3. So you're going to see in various locations around the world a lot of these -- I think there's going to be continuous demand for products like that, that provide that mobile pod, remote cooling capability at point of administration. I think the more transformative opportunity has to do with data because whether it's food delivery on the produce side or on -- today on vaccines, one of the big gaps we have is just a lack of a central repository for data from inception to end delivery or administration. And I really do believe that our partnership with AWS is transformative because all of those various handoffs, whether you're looking at food delivery, say, from South America to the United States, you can have 10 handoffs from 1 refrigerated environment to another always at ambient temperatures. You have a lot of potential breakpoints and you don't have one central repository for that data, and that's the same for vaccines. Today, 25% of vaccines get -- never get administered because of issues with the logistics channel or because of the cold chain. So there's clearly a problem statement, a huge opportunity, put the data onto the data lake that we'll develop with AWS, use their AI and ML services capabilities and then really give value-added services to our customers. So I think that, number one, we want to be part of the solution with the vaccine distribution. Number two is we do want to add capacity to support. But number three is really leverage this link platform that we're developing to make that, again, part of the new normal of how vaccines and food get distributed.

And then it seems like there's a common thread of collecting and analyzing data, right, that these machines or pieces of equipment are giving off. Do you have any way to help us think about what may be an attachment rate of that kind of analytical package would be, I don't know, say, for a chiller or for a reefer van? Like how many times does the customer take that service package or add-on value of analytics?

Well, I think it's still at early stages. And I think that the issue is that, today, it's -- it doesn't leverage the entire ecosystem. There are various truck and trailer customers that will kind of combine things like telematics with temperature data and try to leverage that into something that's value-added to them in their operation. The issue is how do we make that more holistic across the ecosystem, across the various handoffs. And I think if you look at the entire ecosystem and you leverage the full capabilities of data, it's a very low, I would say, I don't know, attachment rate, but it's a very low utilization of what the opportunity is. How many buildings today have the level of kind of automated controls that they could have in the future, especially when you look into measuring and notifying various folks of the full capability? And then you see the same with the cold chain. I think that it's just very suboptimized today. So I would say that when you look at the data opportunities, in many areas, you're in the first or second inning of what could be really transformative. And I believe you see that in many industries, but certainly, ours is going to be leveraging data and digital to really differentiate the underlying products and provide more value-added services to the customer.

And then maybe going back to some of your comments around that kind of healthy building, or thinking more holistically, I think COVID certainly has brought this into focus. I'm sure you are asked the question all the time, but obviously, now we have these vaccine announcements. Are your customers taking their foot off the gas at all on any of the conversations you're having around indoor air quality, wanting more of this data? Does it become less of a priority because of the vaccine, or you don't see that?

I haven't seen that. I mean we're going to have to see, but I do believe that it will be part of the new normal because I think that what's happened is people have become much more aware and concerned about indoor air environments, where they never used to even ask the question. So I think you're going to see -- you could imagine a scenario where before you make a restaurant reservation, that you can click and see, you have 3 choices, which has the best indoor air quality. And I think that even post the vaccine, that's going to be part of people's decision-making. And clearly, we got to get people back into commercial office buildings, but I think they're going to start -- tenants are going to start still asking those questions to give themselves confidence to welcome people back into commercial office buildings, before you drop your kids off at school, what is -- people always took indoor air quality for granted. They just assumed that duct work was clean and all that. Now what we've gotten questions on is, in January, for example, we'll be introducing a new home air purifier -- purification system, a B2C kind of air purification system that's coming forward. And a lot of the questions that I have gotten from customers, but frankly, even friends and family is, wait, how effective is it with COVID, but also, I have asthma, will it help with that, or I get allergies in the spring, will that help with that. So I think that you're going to see these multipurpose kind of units, that people say, look, COVID, not the first airborne-transmitted disease, won't be the last. So it's nice to kind of be prepared for whatever happens in the future. Indoor air quality is important, and this has shined a light on it. And I think that this is going to be -- I really think it's going to be a critical part of the new normal.

Great. And I'm just looking at the clock here. It looks like we have hit the allotted time. So I would like to take this opportunity to thank the Carrier team for being with us, and we look forward to continuing certainly this dialogue in the future. So thank you very much.

Thanks, John. Thanks for having us.

Thanks, John. Thank you.