Carrier Global Corporation (CARR) Earnings Call Transcript & Summary

All right. Good morning, everybody. Thanks for tuning in. I'm Steve Volkmann with Jefferies. I cover industrials here, including the HVAC space, and very pleased to welcome Carrier for a fireside chat to kick off this morning. And so we have two folks joining us from Carrier, Patrick Goris, SVP and Chief Financial Officer, on the left -- at least on the left of my screen; and Sam Pearlstein, who looks after Investor Relations. I think the program here is the guys will have just a few minutes of opening comments and then we're going to do kind of a fireside chat. And we'd love to have your input for that. [Operator Instructions] Alternatively, if it's easier, just send me an e-mail, svolkmann@jefferies.com. With that, Patrick and Sam, welcome. Thanks so much for joining.

Steve, thank you for having us this morning. It's good to be here. I just thought I'd make a couple of comments before we kick off with Q&A. First of all, clearly, we're -- we had a good quarter. We're pleased with the quarter we just had. We saw broad-based strength across all three segments and our businesses. Key item, of course, is the management of input cost and pricing. And as I think you've heard us talk about this on the earnings call, we continue to target to be price/cost neutral for this year and actually spend even more effort on price/cost for next year in 2022. As a result of a strong quarter and the outlook that we see, we have meaningfully raised our guidance for the second half of the year as well as the full year, whether it's organic sales, margin performance, free cash flow as well, so really excited about that. And then of course, we do all this while we continue to invest in differentiation. That did not come up on the earnings call, but this year, we're still investing about $150 million or so back into our business, selling resources, research and development, just to ensure that we continue to have a highly differentiated portfolio that, in turn, of course, will fuel growth in future periods to come. And then I'll end with a brief comment on the Chubb announcement. A lot of people put tremendous amount of work and effort into this, but we're very pleased with the outcome. It simplifies our portfolio. It's a win-win situation for us and for, of course, Chubb. We will be able to focus on our core business. And of course, it also generates quite some capital that we can put to use and deploy on higher share owner value opportunities. So overall, I'm quite pleased with the quarter and very much focused on delivering a very strong second half of the year. So with that, Steve, I'll turn it back over to you.

Great. All right. Good intro. And I might add, because I'm sure you wouldn't, but at least on my screen, you have been the biggest gainer through the earnings season with respect to kind of your peer group, I see. I keep myself saying, I like to have my 30-day trailing performance on my screen, and I see you're up almost 20%. So well done. Let's kick off, maybe follow up a little bit on some of the earnings trends that we saw, maybe start it off on residential. You had 34% growth, I think, in North American resi. And I think inventory still ended lower than you had hoped. So can you just -- was production constrained there? And how should we think about sort of channel inventory versus what people would like to have?

Yes. So maybe a little bit of a recap, so yes, we did have a very strong first half for resi. Resi first half is up now about 40%. We expect the second half, of course, given very strong comps, to be down about 5% to 10%. For the full year, we expect resi to be up about low-teens. Overall, as we said on the call, able to meet customer demand, and you're right, Steve, the ending inventory at the second quarter was a little bit lower than we expected, but it's mainly driven by what we see in terms of movement. In other words, it's mainly driven by strong demand that we see from customers. That doesn't mean that we have some operational issues here and there. We talked about the tight supply chain. But it's really driven by strong demand from our customers. When I look at the second half of the year, of course, that will include the effect of the price increase. And so we have announced our third price increase, which will go into effect during the third quarter. And so that is also kind of included in our second half of the year outlook for resi.

So when I think about that second half, I think you just said down 5% to 10%. Is that organic? And then I sort of layer pricing on top of that, which gets me back to somewhere around breakeven maybe? Or how to think about that?

Yes. The way you can think about it is the 5% to 10% is organic but includes the impact of the price increase.

Okay. So the report, it will be in that neighborhood then.

Yes. And if you think about how this changed compared to what we said a quarter ago, 1 quarter ago, we said first half will be up about 35%, second half, down about 20%. Now what we know is first half was up about 40%, second half, down about 5% to 10%. So in essence, delivered a stronger-than-expected first half and expect a stronger second half than we thought a quarter ago.

Okay. Good. And there's -- given the strength in resi and it certainly looks like it's going to continue, I think, longer than many of us initially expected. There's a debate brewing, I'm sure you know about, has the industry changed a little bit? Are replacement cycles faster now than they used to be? Is the equipment running harder due to more people stuck at home and/or hotter weather? And where do you guys come out on that?

Yes. I think Dave answered that question on the earnings call, and we know that some companies have done some detailed modeling on this. Do we think that some systems have been running longer than prior because of work from home? Yes. It's difficult to say what the impact is on that on the life of our -- on the replacement cycle, as I say. So obviously, everyone knows this is a short-cycle business. But at this point, there is nothing that we see that indicates that we see a significant drop-off, except, of course, we know that we'll have difficult comps in the second half of the year, given the exceptional performance we had in the second half of last year.

And Patrick, how much below kind of normal or preferred levels of inventory are in the channel now? I'm trying to think about how much restock we could have in '22.

I would think that where we ended up at the end of the second quarter, I think it was about 9% above the 2019 levels. And...

A little less than that.

A little less than that. We think we're pretty well balanced there. And so I do not see -- that's in resi-specific. I think generally quite well balanced. And of course, we work very closely with our partners. Of course, some of our partners always want more inventory, but we work with them to ensure that we believe they have the appropriate levels of inventory. On the light commercial side, our inventories are still down compared to where they were prior year. So there is still some restocking to do there.

Okay. So resi, about where it should be, not a big restock next year.

And the big question, of course, on resi, and it's a little bit early to start talking about next year, but clearly, what will have -- will likely have an impact next year in resi is the new regulations that come out in 2023. And so some -- in the past, we've seen some prebuy as a result of some regulations coming out. Again, it's still early to say, but that will likely have some impact on 2022.

Right, makes sense. Okay. And then obviously, you're going to have quite a bit of price sort of flow-through, even if you don't do anything else from here on out. I mean, if volume was flat in '22, how much additional price sort of rolls through '22, do you think?

Yes. So I mentioned we've now announced our third price increase. The first price increase of this year was a little bit more modest. The second one was up to 7% and the third one was about the same size as the latter one. And then the question is how much of that do you yield net? But if you add that all up, we don't -- we never get 100% of what we announced. It's a little bit less than that. But it gives you an idea as to what we would be able to expect assuming volumes are flat. I'm not really here making a prediction as to what next year's sales will be. But that's the answer to your question is that, given the price increases we've seen, there certainly is some price benefit next year that we'll see. And again, the primary objective of the price increases is to ensure that price/cost will remain neutral, not just this year but next year. And as I mentioned on the call, 2022 is really the main focus at this point.

Right. Okay. Good. And then maybe just the final in this topic is how should we think about incremental margins just sort of directionally in '22? Because I can see a scenario where the supply chain has eased up a little bit, maybe your productivity improves a little bit. You get a little bit better price/cost. I mean, is there any reason to think incrementals shouldn't be north of normal in '22?

Yes. I think it's probably a little bit early to talk about our incrementals for next year. What -- if I look back as to what we expect for this year, price/cost being a neutral obviously is a headwind to our conversion this year. So we're very much focused on passing on price increases. I'm not sure at this point what price/cost will be or the cost inflation will be next year. Of course, we're focused very much on making sure that the price sticks. If there is some tailwind from input costs next year, could that benefit us from a conversion point of view? Of course. I think it's too early to make a statement on that, given where we are today.

Okay. Fair enough, can't blame me for trying. So let's move maybe to commercial. I mean, light commercial, the smaller piece of commercial but up over 60%, I think, in the second quarter. I know it's easy comps, but what are you seeing end market-wise there that's driving that?

Yes. So as you mentioned, clearly we had some easy compares but still up in the second quarter. We were up the high-teens compared to 2019. And so again, a very strong recovery there. I would say that the installed base touches all the verticals that have rooftop applications. And if we think about the vertical specifically now, where we see some increased activity, it's anything related to warehousing, anything related to K-12, where we see some rooftop units as well, of course. And then what we also see now is anything related to retail and restaurants. And so we would see that those are the areas where we expect -- where we see strength in light commercial.

Okay. And is new product a factor here as well? I mean, I think you guys have sort of beefed that up in recent years.

Yes. We have a very strong portfolio in light commercial. So we believe we are very well positioned there. And clearly, I would think that, that would be a factor in our very strong performance in light commercial. And as I mentioned earlier, the interesting thing in light commercial is our inventories are still below what they were last year. And so I think this is an area where we might still see some benefit from restocking in the balance of the year.

And how is the outlook for the second half in this business?