Carrier Global Corporation (CARR) Earnings Call Transcript & Summary

Good afternoon and welcome to the post-lunch periods here at the Wolfe Conference. Very pleased to welcome back and start again with Carrier. CFO, Patrick Goris, on stage with me. Thanks, Patrick, for being here. And so is Sam Pearlstein, Head of IR. So I think we could just go into Q&A, right, Patrick, unless you want to make some opening comments?

No, Q&A is fine.

Q&A is good?

Yes.

Okay.

So normally, I want to start off with macro kind of trade environment. But I think given the announcements you've made over the last month or so, I think portfolio is sort of where I want to start with and I want to kick off with maybe Viessmann. And just maybe just first in -- first and foremost, how do you see the timeline for the closure of Viessmann? What are the some of the regulatory hurdles you need to go through and what we need to monitor there?

Yes. And if I just may provide some context as what we've done for the acquisition. If you can think about Carrier since the spin from United Technologies, we've worked on simplifying our portfolio. We sold the stake -- assets and equity investment we had in Beijer. We sold Chubb, what we thought noncore assets. And then what we've done is we've increased our stake or we've acquired businesses in higher growth areas. One was the acquisition of Toshiba Carrier, joint venture, gives us access to faster-growing VRF market. Technology we can use in different parts of the world. And then we announced earlier this year, which is what you were referring to, Nigel, the acquisition of Viessmann, which provides us basically with immediate access to residential heating and cooling in Europe, a much faster growing end market where Carrier has had very little exposure. So that being said, for context, there are no hurdles that we see that are not the usual hurdles. They are the normal regulatory requirements or approvals that we need. They're in Europe. They're in other parts of the world, including in Asia. That's why we came up with the timeline around the end of this year. And so that has not changed. Although these items are either filed already or are in process of being filed. And there is really no change there in terms of the timing.

Yes. I saw some headlines around the German relator, some of the public interests of acquiring crown jewel of the German industrial sector. I mean do you see any issues there?

We don't. But first of all, the reaction we think is understandable because we agree. You mentioned crown jewel. We think it is the crown jewel in this part of the market, not just in Germany, but in Europe in general. We actually have -- Viessmann has sales in Asia as well. They have sales in the United States. So it's much more than just a European player. They're always concerned if someone buys a national -- or the crown jewels of a country or an industry. But we've made it very clear that we're not there to, call it, overmanage the business. They are really good at what they do. We can learn a lot from Viessmann. We can use their technology in other parts of the world. We can use their channel to push through additional products that are already in our portfolio. And frankly, it's the key reason why the Viessmann management team will be the -- Viessmann management will be the management team of that business going forward. And we actually may fold some of our businesses within Europe underneath that management team because they've done such an outstanding job.

Right. And I think you mentioned one of the attractions of Viessmann partnering with Carrier is helping to expand and to invest and to make the necessary investments required to meet some of those targets. Maybe just talk about some of the investment spends you -- kind of the investments and capacity expansions you see over the next several years to support the forecast that you have out there.

Specific to Viessmann?

Viessmann Exactly.

So if you look at Viessmann investment profile, they have made some significant investments last year. This year is -- I think is about the peak because you basically have an entire industry of their entire business, which is shifting from boilers to heat pumps. So you need more capacity for heat pumps and less capacity over time for boilers. In all of our analysis and due diligence, this is the year where it's the biggest peak. The nice thing is, going forward, we think there will be less requirements than this year also because we have existing facilities in Europe. We have existing facilities in that region that we also acquired through the acquisition of Toshiba Carrier, and there is some space in those facilities. And so I do not expect that this would have a significant impact on our free cash flow conversion. Actually, if I look at Viessmann's free cash flow conversion, the last few years, was in that 90% to 95% range with some important investments. So there will be 1 or 2 years of some important investments, but I don't see a change in our free cash flow profile as a result of this. And there are some nice -- as I mentioned, some nice synergies there given our footprint in that region as well.

Sure. I see the clock start ticking, so we have to -- we have a lot of time here. We have a lot of time, still got 30 minutes to go, so that's good news. Okay, so [indiscernible]. So we talked about capacity. I mean how -- but how fungible is the boiler capacity with heat capacity? So as the heat pump (sic) [ boiler ] business falls off, can that capacity be easily repurposed for heat pumps?

I believe it is new equipment that you need. Hence, some of the capital investments required. Also it's interesting, the boiler business, we expect it to decline mid-single digits going forward. The boiler business is actually still growing in parts of the world. And so it's not like, for example, in Asia, in some countries, there, their boilers business is still growing. And so it's not a one-for-one reduction and that's why we expect also from an overall company point of view for Viessmann, we expect attractive revenue growth rates going forward. Yes, mid-single-digit decline in boilers, but we expect heat pumps to be growing at an attractive growth rate. So strong double digits, but the price per unit in heat pumps can be about 3x, 4x what it is for a boiler. So without any volume growth -- without any unit volume growth, you can see significant revenue growth. And the margin percent is about the same on a heat pump as it is for a boiler. And so it shows the attractiveness of the opportunity there.

Okay. So the boiler business would be falling off much faster than the single digits, but offset by -- in Europe, but offset by growth outside of Europe [indiscernible]?

It would decrease faster than mid-single digits in Europe. That's our assumption. But there is still some growth in other parts of the world.

Okay. Great. So the other part of the portfolio move is the Fire & Security assets and the commercial Refrigeration assets. Maybe talk about what -- how much progress you've made towards getting this done? I don't know what you can tell us, but in terms of how far down the path have you gone there?

All the work streams are in flight. The bankers are all engaged. And so clearly, we're in the process of going to market, as I say, as soon as possible, which I expect to be briefly after the summer or at the end of the summer. And CCR, commercial Refrigeration, I should say, that will be the same. So that's very clear there. And then on the Fire & Security side, frankly, we have some flexibility. Is it all at once or is it in parts? And so that's something that we're looking at to optimize, frankly, and we've been very clear. We have 3 priorities: One, we want a clean exit; two is proceeds; and then three is timing.

Okay. We're going to definitely talk about the clean exit in the second. But if you think about the Fire & Security package today, obviously, excluding the KFI business, that's gone into Chapter 11. But we think about the remaining portfolio, it's a mix of residential and commercial assets. Is that a natural bundle? Or do you think that they could be separable?

It could be separable, but there are differ ways of thinking about it. One way to think about is residential or commercial. Another way of thinking about it is the security businesses compared to the fire businesses. And so that's some of the work that we're doing now, what is the best way to have a clean exit, maximize proceeds and then timing. So there are different ways of [ doing this ]. And so it's still open whether we sell it all at once or in parts.

Okay. But when you say sell, it sounds like sale is more likely the spin at this point?

I said sell, I should have said exit. But clearly, the reason I said sell is because it's our preference.

Yes. For sure. And how would you -- I mean, I don't know, it sounds like you haven't gone -- you said the bankers were engaged. I'm not sure they are. They're not that busy right now. But as far as sort of the interest out there, how would you sort of characterize that?

Strong and we're not surprised. Frankly, we've had interest in incoming calls way before the announcement. And the reason, frankly, is if you look at Fire & Security, if you look at each of the businesses that are part of that segment, they tend to be #1 or #2 in their market. Tend to be high-margin businesses, tend to be businesses that don't require enormous amount of capital to support them. It's just that we don't believe we are the best owners of those businesses. So we've had significant interest in incoming calls. And so we're quite optimistic on the exits here.

Great. Maybe a couple more on portfolio before we get into the actual business. So the -- I think you said mid-2024 to have everything done by...

Over the course of '24.

Over the course of '24. It sounds like that could be sort of a conservative timeline. Do you think that you could maybe get it done by year-end?

This year-end might be a little bit aggressive. But if you -- as I mentioned earlier, if we -- late summer, if we want to be able to go to market, as I call it, could there be a scenario where we can see some exits earlier or at least some announcements? Could be. We just think -- we just shared over the course of 2024. We'd rather surprise to the upside than the other way around.

Sure. Absolutely. And then you mentioned the desire for clean exits. Obviously, KFI has been unplugged from that package. Given what you've done -- well, you haven't done it, your subsidiary has declared bankruptcy.

They filed for Chapter 11.

Chapter 11. Does that cleanly ring-fence that liability?

Actually, in our view, in Carrier's view, the location of the liability was always crystal clear. It was always in KFI and nowhere else. KFI has been in business for 35 years. It's a profitable business. It has good customers, good product lines. It has $200 million in sales. It just happened to have owned a business for 8 years ending in 2013 that manufactured AFFF. Carrier never owned that business. We never got any dividends from that business. We got that business as part of the spin. And so as it goes with either ring-fencing or containing liability, we think it's a very, very strong position we're in, and that's why we're comfortable where -- with the decision that the KFI Board has made. And obviously, this may impact whether this is a sale or a spin of some of the F&S businesses.

Okay. And just finally, this is my final question. And by the way, guys, I'm going to go out with questions...

We still have 30 minutes...

I know. It's like some kind of [indiscernible] But I will be going out to questions of the audience in a moment. But is it possible you can actually exit the remaining businesses -- the core businesses without the KFI approval? Or do you think some kind of resolution around KFI needs to happen before we can finalize the sales?

I think it is possible that we could exit parts of Fire & Security before, call it, a complete resolution on the Chapter 11 process. I'm not sure there would be a complete outcome or a complete exit without having a clear outcome there in terms of the discharge of any liabilities.

Okay. Very clear. Okay. I think that covers portfolio, unless there's any questions out there on portfolio?

Just had a quick question going back to your heat pump comment. You mentioned the pricing was 3x to 4x that of a boiler. Wondering are there any material differences in the aftermarket in servicing and maintenance when that shift happens? Like is it more captured in that upfront cost?

Yes. Actually, it's both. And the reason I mentioned this, so the initial cost is a multiple of. But one of the beauties about Viessmann is it's -- they're much more than just a heat pump company. They provide their customers an integrated solution, the solar panels, so generation of electricity. Two, they have a home battery storage, energy storage in their homes with batteries. Three, and they have the heat pumps, they have a sanitary hot water and then they have the home energy management systems that optimizes the energy generation, the storage and the usage. And so the initial sale of the heat pump is a multiple of. But if you then include all these accessories, that provides a significant additional revenue streams and then the opportunity to attach services to all of them. And so -- and by the way, this is something that really differentiates Viessmann because we don't see anyone else in Europe being able to provide that. And so it's much more than the initial heat pump sale. It's the overall package of solutions sold to customer. Being able to attach services and having a level of customer intimacy and basically a dependency of the customer on the company, that's very different than being just a provider of equipment. And then for us, of course, and I'm adding on to my answer, but the opportunity is to be able to provide the same thing in some other markets, including in North America residential, where we have a very attractive market share where no one provides that complete offering today. And that's something, of course, that we're looking into from a revenue synergy point of view.

Anything else? Okay. Let's continue. Maybe one more question on Viessmann. We get a lot of questions around the potential competition in the European heat pump market to really explode. So a lot of Asian -- very capable Asian competitors coming in. Daikin is obviously expanding capacity. How important is that installation network that Viessmann has? The 70,000-plus installs. Is that a wall garden? Are they exclusive to Viessmann? I mean what protects you from competition?

We think that installer base is critical. One, there is a shortage of installers. So we can -- or anyone can produce as many units -- or heat pump units as you want. Unless you have installers that are trained on your equipment, have the loyalty towards your brand, it's going to be really hard to find someone to sell them to. So the installers are critical. Viessmann -- and I think that model is somewhat similar to the U.S. Installers in the U.S. tend to have a primary brand, could be 80-something percent of their sales, then tend to have a secondary brand. But the relationships are decades old. I mentioned the training, the training academies. It's really hard to switch. And it's certainly hard to switch from the #1 premium brand in Germany. And so we, Carrier, when we looked at that market in Europe, we always said technology is not our biggest challenge to enter that market, it is the channel. And so channel is one. Two is, you may be able to provide or to manufacture and deliver a heat pump. But as I mentioned earlier, the energy transition is much more than selling heat pumps. The opportunity is for that entire integrated solution, and that's someone that we see Viessmann being the only one who provides that today. And so those are two really important elements. And then a third one is having the installed base. The customers know you, the customers know your brand. Viessmann, I think, for 17 years in a row, has been named the #1 brand in Germany from a customer loyalty point of view. Very hard to break and the key reason why we acquired them, obviously.