Carrier Global Corporation (CARR) Earnings Call Transcript & Summary

Great. Well, why don't we get started. So -- should -- good morning, everybody. Thank you for joining us at Baird Sustainability Conference. I'm Tim Wojs, and I cover commercial and residential building products here at Baird. And we're very delighted to have Carrier with us this morning. They're one of the largest HVAC companies globally, but they're kind of the new kid on the equity block, having spun out from UTX nearly a year ago. And Carrier really fits the sustainability theme well just given the drive globally to reduce building emissions and something we're going to really talk about today in more detail. So joining us from the company are President and CEO, Dave Gitlin; SVP and CFO, Patrick Goris; and then VP of Investor Relations, Sam Pearlstein. In terms of format, we'll have Dave give a few prepared comments, a state of the union, if you will, and then we'll run through Q&A. So feel free to e-mail me questions if you have any, and I'll do my best to get them answered. And with that, I'd like to turn it over to Dave. Dave, the floor is yours.

Tim, thank you so much for having us. Appreciate that. Look, we love the theme of your conference because at Carrier, as you kind of said, we're at the intersection of really 3 critical societal needs: healthy building, cold chain solutions and the theme that you have here today, sustainability. So with your permission, Tim, let me just say a few quick words on each of these because these 3 themes, they're multi-generational challenges. They're not fads during the pandemic. In fact, they've been with us for decades. They'll be with us for many decades to come. What COVID has done is really shine a light on their criticality. So first, if you take healthy buildings, trusting that the air that you breathe indoors is safe is deeply important. It's always been important. You wouldn't eat dirty food or drink dirty water, but even though we breathe 2,000 gallons of air per day, we breathe dirty air all the time because we can't see that it's dirty, so we're going to make it visible. So before you make a restaurant or a hotel reservation or you drop your kids off at school or you come into the office, you can have visibility to the air quality. And then if the air quality is not what it should be, we'll use our new digital offering to tie into the building control system to auto correct any deficiencies. We need to get our kids back in school and our customers back in indoor environments, so we've been working with the likes of Cushman & Wakefield, the American Hospitality & Lodging Association. We're partnering with WELL to help get their customers WELL certified, all because we want to play our part to give customers confidence and to make it safe for them to reenter indoor environments. And you see the same with cold chain. For many years, we've had problems with vaccine distribution. In fact, today, 25% of vaccines that get distributed are wasted, in part due to issues with cold chain distribution. And now with COVID, and you have billions of us waiting for our turn to get the vaccine, we know that we cannot let that happen. But it's been happening for decades. It's a problem and search for a solution. Of course, right now, that's immediate, but a sustained solution, and it affects not only vaccines, but also food distribution. Tim, today, 1/3 of all the world's food that gets produced never gets consumed in part due to issues with cold chain and spoilage issues. And by the way, 1 in 9 people go to bed hungry every night. So you can think about the impact that we could have on global hunger if we could eliminate food waste. So we need to address the cold chain challenges. I'm very excited about our new partnership with AWS, where we're launching our new Lynx platform because digital solutions, just like with healthy buildings, will be critical to addressing the gaps in the cold chain today. And then the third, the theme of today's conference, is climate change. Of course, your audience knows it's been a severe problem for years. And the good news is, thanks to this conference, Bill Gates's new book, Larry Fink's letter, senior political and business leadership globally, it's now getting a lot more focus. And you had mentioned it upfront, Tim, but our industry, frankly, is a major part of the problem, which means that we need to be a major part of the solution. 15% of all greenhouse gas emissions come from HVAC systems. And demand, of course, for air conditioning, is only going to increase in part due to climate change, in part due to the growing middle class. Frankly, it's a bit of a vicious cycle because climate change will drive the need for more air conditioning. More air conditioning will lead to more greenhouse gas emissions. You've got about 2.8 billion people living in the hottest parts of the world, and less than 10% of those people have air conditioning today. And you think about the United States and Japan, more than 90% of us have air conditioning. So HVAC is a key contributor to greenhouse gas emission today. Demand is going to grow, so we need a step change in technology and buying patterns, and it's the same on the cold chain side. 12% of global emissions today come from energy used to produce food that never gets consumed. In fact, if food waste were a country, it would be the third largest emitter of greenhouse gases behind the United States and China. So we're perfectly positioned to move the needle in a profound way, and we can get into it in the Q&A, but more energy-efficient HVAC systems, addressing cold chain challenges, and we've committed to reducing our customers' carbon emissions by more than 1 gigaton, more than 1 gigaton by 2030. That's 1 billion metric tons, and that's the annual greenhouse gas emissions of Japan. So it's not only good for the planet and it's good for generations that come after us, it's good for business. Our customers expect creative solutions here, and we're spending billions of dollars to innovate in this critical area. So a very timely conference, Tim. We appreciate you having us and pleased to get into the Q&A.

Yes. No, that's a great introduction. I appreciate that, Dave. If anybody has any questions, you can e-mail me at twojs@rwbaird.com. Maybe just kind of dovetailing off that last comment, Dave. On your 2030 goals, you have set some 2030 ESG targets, and I think it's around planet, your people and communities. And could you just talk a little bit about the key aspects of those and how investors and stakeholders will really be able to kind of track Carrier against your commitments? And maybe if you could kind of marry that with some of your 2020 goals that were set a few years ago and how you progress relative to those?

Sure, Tim. Let me start with the -- in 2015, we established goals for 2020, and we actually met or, in most cases, we exceeded all of them. We reduced greenhouse gas emissions by 19%. The goal we had set was 15%. A lot of it was using -- putting our money where our mouth is with more Carrier energy-efficient chillers, our building management system. We have an EcoEnergy business in-house. All played a part of the solution. We reduced water consumption. The number was 44%, and we exceeded our goal that we had set of 25%. Hazardous waste, 23%. Our goal was 10%. Recycling, we improved our recycling rate by 94%. We had set the goal -- it was 90%. So we really were very pleased with the progress over the last 5 years. But when you look ahead to our 2030 goals, I would characterize them more as revolutionary versus evolutionary. I mentioned this 1 gig -- more than 1 gigaton. It's not only a big goal, but I will tell you that we have high confidence in it. And we also targeted carbon and water neutrality in our operations, zero waste to landfill across our operations. Of course, we're going to really lean into diversity and inclusion. So the way we track it is that we have an ESG control tower with all of our committed metrics, we have owners, and we treat it just like we would, financial or operational commitments. We have owners, actions date, and then we track it on a monthly basis, and we're going to disclose our progress in our ESG report annually.

Okay, okay. That's great. And then thinking about kind of energy sustainability, I mean, really kind of 2 aspects there to maybe talk about. So first, what are the actions internally that Carrier is taking to reduce your own energy consumption and waste? And then what are some of those incremental opportunities over time? You talked about zero waste to landfill and more recycling. And then second, and maybe this is more appreciated by investors, but could you just talk about some of your internal initiatives basically by creating more efficient products and really kind of lowering the carbon emissions that your customers are generating?

Sure, Tim. And let me hit the first one first, which is when we think about our own operations, we talked about carbon and water neutrality in our operations, and it really comes from leaning into energy-efficient technologies. We're investing in renewables, closed-loop water system. So before COVID, I'll give you an example, I was in our Montluel facility in France, and we renovated our entire test lab to use our new high-energy -- high-efficiency, excuse me, AquaForce chiller, and we used our ALC, automated logic controls, system. So we have a variable speed chiller which is then inherently optimized to the energy needs that you need in the lab. And we also used a 1 -- a GWP of 1. It's an HFO, so we had been using a GWP of north of 1,400, and we've reduced that to a GWP that's less than 1. And we saw a 25% reduction in our annual energy consumption there. And we did something similar in our facility in India, and that was a combination of renewables. We invested in solar, energy-efficient compressors, like I just described. We converted a diesel generator to natural gas, installed LED lighting like we do in a lot of our facilities, and the team there saw a 40% reduction. So a lot of focus internally, but with our customers, it's a lot on new product introduction. If you look at the energy efficiency of commercial HVAC, over the last 4 decades, we've improved the efficiency of our chillers by about 15% per decade, and we're going to do the same this decade. So it's all design modification, variable speed fans, energy recovery. So one example, Tim, is our AquaEdge 19DV chiller. It captures waste heat and reuses it, and then it can essentially provide free cooling because it uses ambient cool there, and it bypasses the compressor. And we also use a low GWP refrigerant there as well. And we're seeing the same in resi. When I moved into my place here in Florida, we put in our Infinity system, and it's a 26 SEER for air conditioning, 24 SEER for our heat pump. So we're really leaning into that on the air conditioning side, and we're doing the same in our refrigeration business. We have a unit that we use for container that's just starting to get a bit of traction, I'd like to see more. But with our NaturaLINE unit, this uses CO2. It has a GWP of 1 for our new NaturaLINE container refrigeration unit. And in [ ETT ], we're leaning into the -- obviously, the electric theme overall. So we just introduced our Vector eCool unit, which is the first all-electric engine-less system. So what it does is it converts kinetic energy from the trailer, axle and the brakes into electricity. And then you store that electricity, that power, into a battery pack that really powers the refrigeration unit.

Well, that's pretty innovative. That's -- yes, that'd be nice to see some more progress on that.

Yes.

I guess, on refrigerant, since you mentioned it, there's a question here from the audience. Could you just talk about your view and some of your investments around refrigerant development and kind of alternative refrigerants over time?

Sure. I mean, we've looked at alternatives. Like the HFOs, we're starting to use that. Of course, you're starting to see in resi a little bit more usage of A2Ls. As we look out at what we thought was going to be 2023 for the new refrigerant requirement in the United States from CARB, looks like that's more like 2025. So we're still experimenting with different alternatives, but it looks like that's mostly going to -- most likely going to be an A2L solution. So we are investing a lot in -- with our partners in new refrigerant technology. And whether it's an A1, A2L or various alternatives like CO2, we want to really span the gamut of all the possibilities.

Okay, okay. That makes sense. When we think about energy efficiency just in terms of the conversations with the customer, could you maybe talk a little bit about how that's evolved over the last 5 to 10 years in terms of just how customers are thinking about energy efficiency? And how would you characterize the importance of that on the customer level today, particularly with carbon footprint reduction and the higher cost of actually reducing those carbon footprint?

Well, you nailed it, Tim, in the question because our customers are out there in traffic, in public with their own commitments. So they really have a pull for more energy-efficient solutions, not only because you can save money over time with reduced energy -- with more energy-efficient solutions, but because they want to do what's right for the environment as well. But in many cases, as you just said, it's more expensive upfront. So what we have seen is that public policy can play a huge role here. You look at the new requirements in New York, Local Law 97. It's going to place a carbon cap on most buildings that are larger than 25,000 square feet, and there's about 50,000 residential commercial properties across New York that fall into that category. So we're seeing customers there show interest in improved chillers and starting to invest in more electric heat pumps rather than -- and they don't want to buy carbon credits. I think they'd rather see more energy-efficient product in their buildings. And we saw it in China. China has actually done a lot of government incentives to move people from coal to electricity. And we saw that as we upgraded to a more modular heat pump in 2020, we saw a big increase of sales of those heat pumps in China. And I'm very optimistic and hopeful that the Biden administration will accelerate some of these climate policies as well. You think about the home. 50% of the electricity in your home comes from your HVAC systems, 50%. So the typical air conditioning sold today is usually at an entry level, that 13, 14 SEER level. It's about half as efficient as -- even if you can get up to the 16 to 18 SEER range, put aside the Infinity system at 26 SEER, even if we could get customers more to like that 16 SEER range, it could have a huge impact. We talk often about electric vehicles, and the government has given incentives for $7,500 per electric vehicle. But when you think about buildings -- for your home, they've given credits for about $500, not $7,500, about $500 per unit. And on the commercial side, a tax deduction for efficiency improvements of like $1.80 per square foot. If we just increase those credits for the home for moving to higher SEER units; for commercial buildings, the amount of tax deduction you get per square foot, you could -- even a modest credit could reduce greenhouse gas emissions by hundreds of millions of metric tons. So we're very hopeful that government can play a significant role here.

Yes. Okay. And just based on your intel and kind of your feelers out there when you think about kind of a new green deal that could come through with Biden, the question we get the most is, how does the minutia in the -- the devil's in the details and the minutia. How do you think that goes to market, I guess, if you will? Is that going to be run by state? Is that going to be some sort of federal tax credit? Any sort of kind of feeling or sway in terms of how you think that gets implemented?

It's too early to say. I do think that a national policy will go a long way for the industry. When you have different states with different requirements, for example, if all states are transitioning to different lower GWP refrigerants at different times, it can create challenges for the industry. So what you do want is more uniformity at a federal level, and you do want to see more tax credits and incentives at a federal level that really cuts across the country. We'll have to see. If you look at the $1.9 trillion stimulus package that Biden has there today, the good news for our industry is you do have money in there for vaccine distribution, about $20 billion. You have about $170 billion for schools reopening with money for ventilation. There's $350 billion for additional state and local aid. So we'll have to see how that all -- if the $1.9 trillion stimulus package goes through, how that gets applied federally and locally. But I do think there's a lot of momentum really across the political spectrum for more focus on energy efficiency. So we are hopeful that there is -- the administration does lean forward in this area.

Okay. Yes. I mean, it seems like a very big opportunity for you guys, so hopefully that gets through. Maybe just on social and kind of the government aspect. I mean, I think HVAC investors have generally concentrated on the E in the ESG. But from a social and kind of a government -- a governance perspective, could you just talk about what you've done in those 2 areas since you started at Carrier?

Yes, Tim. If you look at D&I, I would tell you that 2020 was the most profound year that I can recall. Really, a true reckoning, I would say, within Carrier. And I think corporations really across the country that -- there was a recognition that we need a significant change. We've made progress over time. You look at Carrier since 2017, we've improved to, now, we have more than 30% of our executives are female. We've committed through Paradigm for Parity to get that to 50% by the end of this decade, which we absolutely should be able to do. And 50% of my direct reports are diverse. But honestly, we have a really long way to go. So we've really come up with a multipronged strategy this year. We partnered with a couple of HBCUs, Spelman and North Carolina A&T. We've done a lot through the Carrier Way to try to create a truly inclusive culture. We're not there. We're on that journey, but we're excited to really lean into it. And the same is true on governance. I think that's an area from UTC that we inherited that was really a best practice within UTC. Governance is -- and the focus that UTC had that we've now carried over, it's kind of part and parcel of who we are that we really -- will remain a big part of who we are.

Okay, okay. Great. And then maybe just lastly on some of the ESG topics just in terms of kind of incentive compensation or management target. Are there any sort of -- has there been any sort of incorporation of ESG practices into kind of long-term incentive plans? Or any consideration?

There has been. What we have said is that ESG is an important consideration for IC. It can -- you have -- it's fairly formulaic, and we've actually changed some of our IC after the spin from UTC of how we want people to be focused. So at UTC, for example, there was not a sales component of incentive compensation, and now that's going to be a significant piece of our IC going forward as we emphasize top line. Of course, you still have operating, you have your EBIT and you have your cash flow. So it is a little bit formulaic that's tied to the financial metrics that we've laid out for our investors, but you can use discretion up or down, and one of the big pieces of discretion will be your ESG target. So when I meet with my direct reports and we review our performance as a team, we not only look at the financials. We look at how folks are doing on diversity metrics, our environmental metrics and commitments that we've just laid out here today.

Okay, okay. That's great to hear. Maybe just transitioning a little bit to some of the kind of normal kind of operational business questions. I mean it's been about, what, 11 months since the spin, and you spun out into probably one of the craziest markets of all time. Maybe if you kind of look back, I'm sure that was fun, but I mean as you kind of look back, where are the areas that you exceeded expectations kind of relative to the spin? And maybe where are there some more opportunities as you kind of look forward?

Well, I look back at 2020, and I'm incredibly proud of the team. I think the entire leadership team, but all 56,000 people really stepped up. We kept our operations running. We supported our customers. Of course, we had some challenges, but we went to great lengths to support our customers. We gained share in key areas like resi and applied light commercial. We launched the Carrier Way, which is our new culture, a new operating system that we call Carrier Alliance -- I mean a new partnership with our supply chain. Carrier Excellence is what we use in our operations. So a lot of new infusion of talent and culture and operating systems and killing some bureaucracy into the system that I think really took hold for the good of our people and our customers and our shareholders. And we went to great lengths to improve our balance sheet, that we can get into more detail on that, but we started with about $10 billion of net debt and ended the year with about $7 billion, and we sit on $3 billion of cash coming into the year. So I'm very pleased on a lot of levels, but the one word I think of when I think of Carrier right now is opportunity. I mean we have so much runway in every area when we look at our business. We've laid out our 3 pillars of growth, and we still have tremendous opportunity, grow the core and product adjacencies and really lean into the aftermarket in digital. I would call all 3 of those areas early phases of development. I mentioned healthy buildings, cold chain sustainability, huge macro opportunities for us. I'd call all of them early phases. Digital tools, we have a long way to go as we look at growing our aftermarket and really applying for -- the digital tools for differentiation. On the cost side, we're pleased with Carrier 700, but that's a program that we've got to continue to lean into and drive [Audio Gap] Carrier is still too complex, so we have a long way to go with simplifying the business, a number of legal entities and real estate and ERP systems. And we still have a lot of runway on our balance sheet and capital deployment and portfolio optimization, things that we have to assess whether they ought to be part of the portfolio and things we can add. So great progress, but lots of runway.

Yes. That's great, that's great. I mean, the flexibility you showed this year was pretty incredible, so that's good to see. Maybe in terms of Carrier 700, if you could just maybe discuss how that has evolved. It started at Carrier 500, and now it's Carrier 700. I guess, once we kind of get to the end of Carrier 700, how should investors think about kind of cost and productivity on a longer-term basis as well?

Yes. Do you want to take this or? I could take it. As you said, we started -- we were in the $500 million, $600 million range, and we're now at $700 million. I think the big increase that we saw has been on supply chain. Productivity is kind of a way of life. You expect a couple of percent a year. I will tell you that in 2020 and 2021, it's tricky right now. I mean, there's a lot of -- the operations team is constantly having to stickhandle its way through some supply chain challenges. So productivity, I'm very, very confident, as we roll out Carrier Excellence, that will continue to take hold. As we roll out more automation, that will take hold. But right now, on the productivity side, our #1 focus, frankly, is supporting our customers. I mean, we saw in the storm last week that there were challenges, there were sites going down, sites that rely on Texas natural gas that got impacted, so some short-term perturbations. By and large, we'll be fine. We'll manage our way through the challenges, but that's just something that we have to stickhandle our way through. I'd say supply chain, just huge opportunity there. We reduced from 4,000 suppliers to about 3,500 on the direct side. Opportunity there as we continue to partner, and you'll see more and more announcements along Carrier Alliance, partners that are on this journey with us, like I said, automation. And then the big one -- not the big one, but a big one is going to be G&A. We, at Carrier, just have -- we have too much G&A. There's no other way to say it. But we're trying to reduce it, not through just giving out headcount targets, but through a systemic way of creating low-cost centers of excellence. We've established 4 globally. We're going to be moving in a very systematic way towards the COEs, so I do think G&A is a big opportunity as well.

The only thing I would add, Tim, is that it doesn't stop after Carrier 700. Continuous improvement is -- doesn't stop when the program comes to an end, so there will always be a focus on continuous to drive improvements in our cost base and efficiencies. We might call it something else, but there is something after Carrier 700.

Carrier 1 billion sounds pretty -- has a nice ring to it.

I like the way you think.

Maybe on the investment side, could you maybe talk a little bit about how you're kind of basically taking some of these cost savings and reintroducing that into investment spend? And when you see kind of these spin-offs, there's technically kind of a reinvestment period that needs to be made, and you're trying to figure out what the right reinvestment level is. So if you could maybe just talk about where you are in the investment spectrum and kind of where you think you can get to or when you think you can get to that kind of investment flywheel where the investments you're making are starting to contribute to growth and productivity and things like that on a pretty regular basis.