Carrier Global Corporation (CARR) Earnings Call Transcript & Summary

I think we're about to get started. So all right. Hi, everybody. Hopefully, everybody is well fed. Excited to have our post-lunch conversation with Carrier. Obviously, a lot of news with Carrier recently. We are excited to have the Chairman and CEO, Dave Gitlin; as well as VP of Investor Relations, Sam Pearlstein, here with us today. Guys, thanks for coming.

Thank you, Joe.

I know you have some prepared remarks today. So why don't you get after it?

Okay. Well, Joe, thanks so much for having us back to the Goldman conference. Our key theme at Carrier is performing while transforming. In terms of transformation, we will create tremendous value as we become the industry's leading climate and energy solutions provider. Viessmann is the best company and the highest growth market in our industry. And together, we will become the global climate champion with integrated solar PV battery heat pump and home energy and grid management solutions. We will also be exiting our Fire & Security and stationary refrigeration businesses as we become a pure-play, simpler-focused higher-growth, higher-margin business. So while we transform, I can assure our customers and investors that we will not lose focus as a company. In fact, we are doubling down on it. double-digit aftermarket growth, 1Q was up high teens. Strong growth in commercial and light commercial HVAC, Fire & Security and global truck trailer. EPS in 1Q was higher than we expected, giving us confidence in the high end of our full year guidance range. Productivity of $300 million for the year, plus $200 million of price cost positive, both of which are tracking extremely well. Free cash flow, better than we expected and 1Q sets us well up for $1.9 billion for the full year equal to net income. So Joe, exciting times at Carrier. And together with Viessmann, we will be global leaders in the energy transition to provide our customers, our employees, investors and importantly, our planet for generations to come, enormous value. So Joe, with that, we'll get into the Q&A.

Yes. No, Dave, appreciate that. And look, let's just start with Viessmann. Why was Viessmann the right asset for you? And then also, when you think about kind of like your confidence in the deal economics that you're underwriting, you talked about double-digit growth and double-digit EBITDA like over the next decade. What gives you confidence that, that's actually going to materialize?

Well, let me start with the market in Europe. I will tell you it is by far a once-in-a-generation opportunity is what the transition that's happening in Europe because rarely will you see a situation where you have fundamentally a replacement business, 80%, 90% of the residential heating business in Europe is replacement. And then you have regulation that's essentially forcing a transition from traditional gas boilers and oil boilers to heat pumps. And when you make that transition from fossil fuel to electric heat pumps, you're mixing up 3 to 4x. So it de facto, it has to grow. And it has to grow in kind of that double-digit range almost by definition. And then you go in that market and you say, look, who are the key players in there? And we mentioned last time, Joe, that we met with essentially every single player in the European market. You look at who's got the best geographic presence. You come back to Viessmann, really strong in Germany, which is, of course, the most attractive market, but they're very well positioned in Poland, Italy, France. Then you look at who has the best channel. I don't think anyone can debate that Viessmann has, by far, the best channel access in all of Europe. 75,000 installer direct relationship. That is inherently a moat. So you talked about who could be potential entrants into that market. Viessmann has a very attractive moat because of their tremendous installer relationships. They have a premium brand. They're called the Mercedes of the industry because they get paid a premium because they have such a respected brand, not only in Germany, but throughout Europe. And then there's the technology, not only the technology for the heat pump technology and things like Viessmann Invisible, their digital solution, their subscription-based revenue. But you also look at the fact that they have integrated solutions, solar PV, battery, heat pumps, all intertwined, not only in terms of how they mechanically connect, but they have a One Base digital solution that provides effectively an Apple-type ecosystem that really connects their installers and the homeowners back to Viessmann.

That's super helpful. And I guess, as you think about their leading position, how do you kind of think about their share in the market today? And how close or how formidable are their competitors?

They are the #1 premium brand. They're the #1 share in Germany, #1 premium share throughout Europe. Their overall share is extremely attractive. It's just, I think, just south, if you look across Europe, just a little bit less than 20% overall. So they have great share. And I do think they have very differentiated offerings. So when we were kind of making the rounds meeting with various folks, one of the things that is really attractive is that the only impediment to growth that you could see in the foreseeable future is the number of qualified installers. They train the installers themselves. They have academies, they have a bus. They have a whole methodology for training installers that is very differentiating because they have an approach where they have a fully certified installer working side by side with a new installer that really gives them a competitive market advantage.

That's helpful. So you talked about the opportunity in the air to water pump market, right? But there's other pieces of the portfolio that they have as well. Talk about those other pieces and whether there are some pieces that may be you're really excited about or maybe some other pieces that maybe that really won't be part of the portfolio over the long term?

Well, the other piece as you think about the traditional gas boilers, those are probably going to decline over time in the mid-single-digit range. But you have heat pumps growing in the 20-plus percent range. And their margins are very similar between boilers and heat pumps. So you will inherently naturally see a slow decline of boilers over time, which is totally fine. They actually have phenomenal technology on the boiler side with hydrogen and rich boilers, but we would expect a decline there way more than offset when you're looking at 20% increases. I mean you think about Europe selling 1 million heat pumps a year today going to 10 million a year in -- by 2030.

Got you. And then clearly, it sounds like there are potential revenue synergies across your portfolio. Maybe talk about like what the opportunity is outside of Europe. I know the real focus right now has been Europe, but what's the opportunity for this business outside Europe?

Well, if I may, just one thing within Europe is that one of the most natural revenue synergies is they have this phenomenal channel. Most installers are -- it's just like the United States. There's an 80% brand and maybe a 20%. Viessmann is only Viessmann. It's the only brand that they care -- is the only brand that they use. But what we could naturally do is introduce either Toshiba or Carrier into their channel as a secondary brand for many of their installers. Outside of Europe, we have long wanted to get into that full energy management solution for the home, that interconnectivity between solar PV battery and heat pumps, but also that relation with the grid and entire energy management solution. So we think about taking their portfolio of offerings to places like the United States, Asia, other parts of the world. That is one of the most exciting things. They also have great digital capabilities. Their One Base technology is some of the best in the world. Their smart thermostats are highly differentiated. So as we look to introduce things like sanitary hot water or some of their complete integrated solutions outside of Europe, I think it's very compelling.

So it's interesting. Clearly agree with you, like if you've got a well-entrenched installer network, that can certainly be a competitive moat for you. I'm curious, like are there -- I know it's still early stages, but are there some learnings from the way they go to market with their installer base that you're already thinking about with your own footprint here in the U.S.?

Well, the markets are different. The wholesalers in Europe are agnostic. So they will carry many different brands. And then you essentially have the pull from the installer community. In the United States, our distributors, which are analogous to the wholesalers over in Europe, are single brand. So our distribution network is exclusive to Carrier Bryant Payne, our brands. So it is a slightly different dynamic, and it's one that really works. I mean we have, obviously, a very strong share in the United States. The share has been increasing. Our margins are very attractive, and the relation between us and our distributors fundamentally works.

So you mentioned as part of this like -- this is one step of the transformation. The other step is taking a look at Fire & Security, exiting that piece of the business as well as commercial refrigeration. I'm curious, what's the interest been like so far? I know that you have an ambition for that business to be an attractive asset for somebody. What are you hearing so far? I know it's early days.

A lot of inbounds. It wouldn't surprise you to know that on both the strategic and the PE side, these are incredibly attractive assets. And frankly, we love them. We hate the idea of parting with them. It's just the right thing to do for the portfolio and for us as a company. But on both the Fire & Security side, we've gotten, I think, pretty much every player has made has approached us so far. We've said we'll need a bit of time before we kind of formally launch the process, but the interest from both the strategics and the sponsors is incredibly compelling. And part of it is, if you look at the underlying assets in there, in the security portfolio, you have things like LenelS2, which is extremely well positioned, especially in the United States, very high-margin business, is very distinguished from some of its competitors. And then you have things like when you have the Supra business, which is very high market share. You have parts of our fire portfolio like Edwards, Kidde, extremely well-positioned franchises that are high margin -- high gross margin potential to grow significantly. So they're attractive to a lot of potential buyers.

When you think about the entire portfolio, what -- based on what you're hearing and what you -- how you expect that business to grow over time, do you think that the entire portfolio is going to go together? Do you think it's going to be sold off in parts or spun off in parts? Like how are you thinking about that dynamic today?

Well, just to be clear on one thing, commercial refrigeration, that stationary piece will be sold separately. So that is its own work stream, that will be a divestiture, and that will be sold, I think, quicker most likely than the Fire & Security piece. Within Fire & Security, it's really TBD. There's scenarios where it gets sold entirely together. There's a scenario where you sell it in pieces, security goes one way. And then even within Fire, you could imagine a scenario where industrial, residential, some of the commercial pieces go in different direction. And you can imagine where all or some of it even gets spun. So we're going through that analysis. We have three priorities for the Fire & Security sale. One is it will be a clean exit; two is that we will maximize value; and three is that speed matters, but it's going to go in that order. Those are our orders of priorities.

Under what parameters would you really just say, okay, let's spin the business?

We'll have to look at what maximizes long-term shareholder value.

Okay. Great. And then are there any dissynergies that we should be aware of at this point from exiting either of the two large businesses that you've just described?

No. It's really at the margin. We've been working on a strategy to really leverage being in the building as a whole, looking at that connectivity between security and HVAC, between security and fire, between fire and HVAC. And the truth is technically and intellectually, there are pockets of synergies. We can put an IAQ sensor in a fire detector or smoke detector. At the end of the day, quite honestly, it's at the margin. What we actually are going to do on the other side is if you think about our future portfolio kind of we're not thinking of it as HVAC-R. It's kind of 85% will be what's today's HVAC business, 15%, the refrigeration business. We're thinking about it as this intelligent climate and energy solutions. So we won't define ourselves as HVAC-R because some people say, well, you may get now the trading multiple of one of your peers that's a pure-play HVAC-R. We think we're very differentiated in that type of portfolio because we now have solar, we'll now have battery. We have a much more holistic offering. So we think that when we look at the opportunity, it's to really shrink down a lot of the corporate costs significantly. So whatever the corporate costs are that are associated with the portfolio we have today, we're going to really address that with a fair amount of vigor and then become a much more streamlined, focused portfolio.

Sounds good. Look, when we met in February, I know that -- I think I caught you on the back of like a big day that you're meeting all your division heads. You guys had -- talking about cost reduction in a significant way. Specifically -- and I remember you mentioning Fire & Security and commercial refrigeration as a focus. Does the exit change anything from a kind of margin enhancement perspective, at least in the near to medium term? And talk to us a little bit about how those productivity initiatives are going.

They're going great. I mean honestly, the productivity is just in our DNA as a company. And it always has been. And I think what we've done is really brought not only more focus to it, I think we brought more structure to it. So for example, we have every single one of our productivity initiatives in one common digital tool across all of Carrier and we can, at any point, go in there and search it by any single metric that we're driving, whether it's G&A, it's footprint, it's productivity in the factories, it's supply chain, it's indirect supply chain. We can sort it by region, by business across the globe, and we get a weekly report on how everything is progressing, and it's even raw materials. So I will tell you that we have a new operations leader, Adrian Button, who has joined us. He's brought great focus to it. And him working together with the businesses, there's just an engine there that drives it. And it's also aggressive on the G&A side. I'll give you an example, commercial refrigeration, the business that we'll be divesting in Europe has done a very nice job of shrinking down the number of individual country leaders they have going to a more regional approach, driving increased margins through just tenacious and very thoughtful, aggressive cost reduction, and it's across the board.

So just to be clear, some of the initiatives you had in place for both Fire & Security and commercial refrigeration are continuing to go.

For sure, 100%. It's the right thing for both of those businesses. It's the right thing for Carrier long term. That, again, that's just how we run the business. We said that we'd get $300 million of productivity this year. It wouldn't surprise you to know that we are tasking ourselves with a higher number than that internally, and we're pushing that extremely aggressively. So those businesses stay the course and across Carrier continue to drive it. And I think that now that some of the supply chain issues have subsided a bit, we can get back to running the business the way we know how, because there was a stretch where we were truly chasing parts to keep the lines moving, whether it was chips or other electronic components, motors, whatever it was. Now that, that has the number of surprises and the number of issues have reduced, we're getting back into takt time, driving literally seconds and minutes out of the operation, getting back into true productivity and now looking at a completely different approach with our supply chain. We have too many suppliers. We have too many suppliers that are not necessarily on this journey with us. And we've said that we're going to partner with fewer suppliers. We'll still have -- we want to shrink down the single points of failure that we have globally, where we will have more of a regional approach, but there's an opportunity to consolidate suppliers with low-cost suppliers that are on the long-term journey with us.

So this past quarter, one of the big themes that we saw was that you started to see some of this easing in supply chain across broader sectors of our industrial coverage and a lot of companies ended up putting up pretty nice revenue growth this quarter. As you kind of think about your own supply chain, it seems like it's been a little bit more gradual. Like how -- what -- are you starting to see as much easing across your supply chain? Are you starting to like feel less of the pinch points? Or just give us some perspective on what's been happening over the last...

Yes, I would say that we're on par, if not better than our peers in terms of the supply chain management. I don't think there are situations we're being outgrown for issues driven by lingering supply chain issues. It's not that it's behind us. We still will have issues with, like I mentioned, chips or other suppliers. But I will tell you that we actually feel good about the fact that we can now start to shrink down some of our lead times and get orders within more traditional type periods of time as we continue to drive the improvements there.