Carrier Global Corporation (CARR) Earnings Call Transcript & Summary

Hello, and welcome, everyone. I'm Sam Pearlstein, Vice President of Investor Relations, and I'd like to thank you for connecting and listening in to our Carrier and Viessmann Climate Solutions Webcast. Before we get started, I do have to remind all of you that we will be making statements regarding earnings, cash flow expectations and other forward-looking statements that are subject to risks and uncertainties. Carrier's SEC filings, Forms 10-K, 10-Q and 8-K provide details on important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements. Julian Mitchell from Barclays is here, will moderate today's session, but we will take some questions from listeners. [Operator Instructions]. And with that, I'd like to turn it over to Dave Gitlin, our Chairman and CEO.

Well, thank you, Sam, and welcome to all of the Carrier team members that are with us in the room today and those of you that are joining remotely, and same to the Viessmann team members that are going to be joining us remotely today. Thanks to our investors for the confidence that you've shown in us and for joining us today. Julian, thank you so much for coming down from New York and being with us today and a special thanks to Max. I have felt so fortunate to get to know Max over the past 1.5 years. I've learned so much from you personally. I cannot wait for Max to join our Board and for our phenomenal 2 companies to become one. I'm confident that everyone listening today will leave with the following 2 major takeaways. The first is that Viessmann Climate Solutions is the premier company in the fastest-growing market in our space globally. And the second is that the combination of Viessmann Climate Solutions and Carrier will create the world leader in intelligent climate and energy solutions, to coin a phrase, the global climate champion. And the result is tremendous value to our customers, our people and the planet for generations to come. So with that, let me turn it over to Julian.

Thanks very much, Dave. And maybe before we get into a lot of the specific questions for Max, any general comments on demand trends you're seeing at Carrier. There's a lot of movement in the macro backdrop right now.

Well, remember, Julian, our theme that we use both internally and externally is performing while transforming. And thanks to the folks not only in this room, but our 55,000 employees that are joining us virtually. That's exactly what this team has been doing. We'll talk about the transformation with Viessmann Climate Solutions through Max, and we'll talk about the business exits after, I guess, we talked Viessmann. But in terms of performing, we did our beat and [ raised ] at the end of last quarter. We wouldn't have done that unless we had confidence in our ability to hit those revised numbers for the remainder of the year, and we absolutely do. It's sort of in the category of no surprises for the third quarter. For the full year, we raised from low to mid-single digits to mid-single-digit growth rates, really driven by HVAC, which is now going to be in the mid- to high single-digit range for the full year despite resi volume being down a bit. You look at EPS, another year of double-digit EPS growth in some of our themes aftermarket, another year of double-digit growth. We talked about being price/cost positive. We raised that to $300 million of price/cost positive. Productivity, $300 million of productivity for the year, strong cash flow, $1.9 billion of cash flow for the year. So we feel very good not only about the third quarter, but for the remainder of the year.

Great. And maybe, Max, one question we get often from investors is, if the growth outlook is so strong in the European heat pump market and for Viessmann Climate, specifically, why sell now?

Well, first of all, let me thank you for having me here and the great opportunity to be with you all, especially the Carrier folks. I'm absolutely excited to be here. as the representative of the fourth generation of 106-year-old family business, I have always taken a long-term view, and I'm only motivated by maximizing my own impact. I'm not here to sell you anything. I'm just here to share my excitement with you on the formation of the global climate champion, ahead of the closing, obviously, complying to all antitrust rules. Please allow me to share some context and insights on our family business. I think it's important to understand the past in order to understand the future. My great grandfather, Johann, was a craftsman who founded the business in 1917, where he repaired all sorts of things, agricultural, textile machines to automobiles, all of that. But one of the most important activities that he was on was repairing and maintaining heating systems. My grandfather, Hans, was a self-taught engineer and by all humbleness, a great innovator. He, himself, accumulated more than 1,000 patents during his career. And he was always obsessed with transforming and disrupting an industry that was back then very much volatile, especially in the '70s and '80s, when our industry went through a global oil crisis. He introduced the first heat pumps in 1979. He introduced various solar solutions in the early '80s and laid the technological foundation for the future growth. My father, Martin, probably the most determined and dedicated entrepreneur, I know, always been very clear about his own values and how he conducts business. Based on these strong values he took over in the 1990s to internationalize our business, expanding into more than 70 countries. He builds 2 very important competitive advantages that are still relevant to this day. On the one side, he disrupted the industry by shifting the company to a direct-to-installer sales channel. And on the other side, he shaped an iconic brand that is not just consistent in its industrial but also in its corporate design that allowed us to gain a strong position, especially in Germany and Europe. That led to significant loyalty among our thousands of installation partners. I myself am an industrial engineer by training. I like to joke that I'm neither good at business nor at engineering. But that is actually where I'm coming from. I've always been fascinated by disruptiveness, especially disruptiveness from technology. I grew up around this family business and joined officially 8 years ago, and the reason why I joined at a fairly young age was that I realized that, that is the place where I can maximize my own impact to the utmost extent. And having said that, I realize that the world we live in, and especially future generations we live in, is under threat. And there is, obviously, something that we need to do about it, not just now but especially looking forward. So together with a very strong team that I was able to form, we set out to make use of two key secular trends. IoT and digitalization on the one side, decarbonization on the other side. And I think you've heard that before. And we created what we refer to as an integrated solution offering that consists of state-of-the-art heat pumps, battery storages, energy management systems as well as hydrogen-ready boilers. And they nicely tie it into one another, and that one platform that we formed allows us to scale the technology globally. Why am I telling you all of this? Because what unites my great grandfather, my grandfather, my father and myself, is the common understanding of how we lead our family company, and that is with responsibility. Responsibility for 14,000 family members for thousands of installation partners for the long-term success and for the generations to come. Not opportunistically, not egotistically, not short term-oriented. We grew the company in all relevant dimensions in the recent past. During the last 4 years, we achieved double-digit revenue and profitability growth. During the last 23 years, we lowered our CO2 emission footprint by over 50% in relative terms to our revenue growth. And the key recipe for that was that we always view change as an opportunity for growth. So we refer to ourselves as a family for positive change. Now closing the circle to your question, Julian, why do we sell our Climate Solutions business to Carrier now? Well, honestly speaking, I personally don't see this as a sale. I see this as a partnership, as a partnership for future growth. A partnership that allows us to do what I'm most motivated by and so has my family been maximizing our impact. And I couldn't be more excited about forming the next global climate champion. Becoming a major shareholder in Carrier Global, and joining the Board of Directors upon closing, certainly adds to my excitement. But honestly speaking, and Dave, I hope your mind. During the negotiations, I was pushing for an even higher equity portion because I am so strongly committed and strongly believe in the joint opportunities ahead of us. There's no combination in our industry with such a complementary global reach as well as relevance. And I can tell you that if we would have tried to maximize our financial return instead of our overall impact, we could have pursued different financially more attractive solutions as well as run the process, obviously, very, very different. So my father's and my personal motivation has always been how can we create the best future for our family business and maximize our impact for generations to come. And that is exactly where I'm here today. So let me summarize. The first thing, we have a unique market position as Europe's premium leader with the best direct customer and installation partner access. Second, we have a future-proof green energy offering, comprising of the state-of-the-art e-pumps that I mentioned before, PV battery storage is the right energy management system and a world-leading H2-ready boiler offering. And thirdly, we have a digital platform that connects all these pieces together and allows for scalability. So if you think about this, what we're building on, it's not just the offering, obviously, but it's also the strong brands that we're dealing with. There is Carrier, there's Toshiba, there is Viessmann, but they are also regional brands in Europe like Riello, and others that allow us to connect the dots nicely. And on top of that, I have to say that, that strong impact that we're generating for the building sector is not just amazing from a business perspective. But it's actually necessary in terms of decarbonizing the building sector because we all know that climate change is not a local or regional challenge. It's a global challenge that we can only count encounter with a global partnership like the one that we are about to form.

Great. Thanks very much for that comprehensive answer Max. Maybe just circling back to one element of the Viessmann climate offering, which I think is unique is the integrated elements of it. So you've got the traditional HVAC or heat pump equipment, then there's also solar and battery technology alongside it. Maybe help us understand what's the customer uptake like when you think about that combined offering because it's quite different from what we see, say it, base legacy Carrier, if you like, in terms of the offering.

So I'll be a little more brief on this one, Julian. We started our digital journey in 2015 because we believe that it will not just be about the uptake on selling hardware but it will be very much about the services that we can sell on top, especially the digital services and value-added services. So we anticipated large part of the trends to materialize and actually to present us with a major opportunity and that is based on what we also defined on our product portfolio, which was to maximize our cross-selling opportunities. And the unique thing about the way we conduct business with our installation partners directly versus other companies that are dealing with wholesalers is we're not just selling a product, we're always selling a solution. So it rarely happens that we would sell a single unit. We would always comprise that of various different components. And when you look at heat pumps, if you want to run them most efficiently, it's quite obvious that you ideally combine that with the decentralized energy generation using solar, for example. And if you do so, you ideally combine that with a battery storage. And then on top of that, you place an energy management system that optimizes the whole solution. And that's why we've been pushing in that direction. So to answer your question, it rarely happens that we only sell one product.

Got it. And when we look at what Viessmann is doing within the interconnected element. Is there a sense of sort of how much is in-house technology? How much is outsourced or using partners really across the core business and then the adjacent areas of solar and battery?

So just to give you an idea on battery storage, for example, people called us nuts to develop that ourselves. They said, well, you can source that from other parties. And we had a strong belief that if we want to maximize efficiency, we do not only need to understand the technology, but we need to integrate it in the best possible way. So we started a start-up in the company, if you like, that developed their own battery storage, their own battery management system, and we are actually also producing our battery storages ourselves. So the only thing that we're sourcing ourselves that are commodity by all means. And then we assemble them in a largely automated -- in a largely automated process, and that allows us to have the maximum integration from a technological perspective.

Perfect. And maybe switching back to the near term. Viessmann had very strong growth in the first half of the year. We've seen maybe from some peer reports the market outlook is shifting a little bit in other parts of Europe, perhaps. Maybe just any update on how Viessmann's business is trending here in the second half?

Well, if you look at the heat pump growth on a year-to-date basis, we're 40% above prior year. If you look at just the single month of September on a month-to-date basis, we're even above that. So I would say in the summary, we're doing okay.

Yes, that makes sense. And if we look at, I guess, the -- one question we often get around the strong growth outlook is drawing in a lot of competition, different players from around the world, adding new capacity in the European heat pump market. Does that concern you at all in terms of thinking about longer-term pricing dynamics or market share risk for the business?

Well, I think in short, I'm not concerned really. I think the main reason why we've been talking about this endeavor is that there is hyper growth in Europe, in the European market. And there is a firm and clear regulatory frame sets comprised of the European Green deal, Fit for 55, REPowerEU, and that is shaping specific subsidy schemes and regulatory frameworks in the relative and respective countries. And if you look at France or Italy or Germany, they're really leading the way on avoiding greenhouse gas emissions through shifting to different technologies or just applying different energy sources. And these 3 countries happen to be our main markets. And just to put it a bit into perspective, 200 million homes in Europe, out of which only 8.5 million use hydronic heat pumps. So let's just imagine that the market growth at a 20% growth rate towards 2030, and I'm not saying it will, I'm just hypothetically saying that. Even if the penetration is going to be then 20%, we will only see 40 million, and I'm saying only 40 million heat pumps being installed. So there is a huge growth area that we can leverage. So I'm not at all concerned by overcapacity that's been raised in the media quite extensively.

Just -- you mentioned the regulatory and sort of government support for some of the heat pump adoption rates in different countries. There have also been, I guess, some changes in markets such as the U.K. last week, Germany going on right now, Italy earlier in the year, where -- it looks to people as if the government support is maybe being diluted a little bit or governments are stepping back. Just wondered sort of how you think about the effect of that on the future growth of the business? Does it concern you that the government support may be easing a little bit?

Well, I mean, first of all, we've always been confronted with different regulatory environments, right? That's true for any business, especially if you've been around successfully for 160 years. I think the main point here is that we are not a heat pump company nor are we a boiler company. And that is very different without mentioning any names to some of our peers. So we can flex nicely between heat pumps and hydrogen-ready boilers. And in fact, we actually have set up our factories that they can switch back and forth between the different products. So I would say that even if there might be some change, we'd be able to adapt. But I guess the most important message is, we're looking at Italy, we're still talking 90% subsidy. We're looking at Germany, we're talking up to 70% subsidy scheme. So it's not like there is no support. It's quite the contrary. And most importantly, and I think that's very important to understand from a U.S. perspective, if the EU is setting a frame, countries need to adapt. They need to put it into legal action. And that frame is clearly said to what we know. So if I base there on these, honestly speaking, especially looking at Germany, they have adopted the European regulation and they said until 2025, they want 500,000 heat pumps to be installed. And obviously, that does not only come along with heat pumps or other substitutes but that obviously also allows some of the cross-sells that we talked about earlier on PV battery storages or if you like, district heating.

And if you think about the capacity additions required perhaps to match some of these market growth rates, the growth in demand coming up. How is the pace of that going at Viessmann itself in terms of adding production capacity? And when you look around sort of the broader market, it seems there's been some flux, big announcements on capacity additions, then maybe people stepping back a little bit more recently. Have your own investment plans changed at all in the last few months?

I think if you bear in mind how we've designed the product in the manufacturing side, it's certainly very unique in the industry. So a large part of our peers, not to be specific about that, they have built heat pump plans and they've had boiler plans. And if you've done that, you won't be able to flex. If you've designed the product, so our indoor unit on heat pumps is basically very, very similar to our boiler design. And the components we use are also very, very similar. So we can actually use that very concisely. In the end, and I think that's most important to bear in mind, we're in a decade of decarbonization. So there is a clear long-term outlook. And given the market position we're in and the developments we're seeing, I think when -- we're perfectly geared up to tackle any of the opportunities out there.

Got it. And if we look at the sales growth rate for the company, it's extremely strong year-to-date, as you said, including September. When you look at some of the demand fluctuations right now, coupled with the expansion in capacity of the company itself, how do you feel about the revenue growth rates of the business looking out 12, 18 months?

If you look at where we're coming from with a CAGR of 15% over the last couple of years, that is because we have adjusted and implemented a new strategy, a strategy that allows us to basically serve an even broader market. And actually tap into more cross-selling opportunities that we touched upon before. And that is, from my perspective, something that will allow us to grow even further. And the fact that we can flex back and forth and tap into the hydrogen-ready boilers, the heat pumps or district heating will obviously give us tremendous growth opportunities. There's never any linear development across markets, I think we all know that. So there is a back and forth. But the one thing that is different when I look forward is that apart from our own strength in the market, we have combined strength going forward together with Carrier. And we haven't factored any of these in there. And that leaves me very, very confident when I look at the future.

Great. Looking maybe below the revenue line for a second. I don't know if there's any color you could give on the profitability of the different large pieces inside the company, different margin rates or returns?

Yes. I mean when you look across on a country-by-country perspective, you would say the profitability level is fairly consistent.

And maybe bringing in Dave a little bit now as well. If we think about the synergy opportunities, you have the 200 million or so number out there in aggregate. Any details you can provide now or a little bit further along in the process looking ahead to the close?

Well, let me first say, Julian, again -- thanks to Max and Thomas Heim for their leadership because I think what our team members are getting a sense of is what great leadership looks like. And change is hard for people. And I think thanks to Max and Thomas and the rest of the leadership team. There's this excitement building with both -- both within Viessmann's Climate Solutions and Carrier about this combination. I think when you list to match, you can see why. And I think on the synergy side, you can look at both cost and revenue synergies. The revenue synergies are actually, I think, when we look back a few years from now, will be by far the most exciting and the most impactful. We -- in the EUR 200 million synergies, which we've talked about over the next few years, most of that is on the supply chain and operational side, more than 85%. We really haven't dimensionalized the revenue synergies. And that's where it gets very exciting. We actually reviewed it with our team a little bit this morning, and they were looking at it and we're looking at it in 3 dimensions. One is, some of the early wins that we can have just in residential light commercial business within Europe. Two is, when you start looking at geographically, both multichannel, multi-brand strategies as we look globally; and three, is the real transformational activities like the home energy management solutions that Max was talking about in Europe. How do we, in a very effective way with some of the channel complexities, bring that to places like the United States? So the revenue synergies internally, we've given ourselves a very, very big target to go after, and that's where it's really exciting how 1 plus 1 can be greater than 4, which is what Max and I talked about, I think, at our first dinner together. The cost synergies are just to go do, and we know how to do it. We -- in Toshiba, when we came together with Toshiba, there were skeptics. We said we'd do 100 million of synergies, and we've said it will be well north of 200 million. So we know how to do the cost synergies. In some cases, we buy from the same suppliers, in some cases, different. We can consolidate. In some cases, it's going to be buy-to-buy in a low-cost center of excellence. So there's a lot of opportunities that just create value for the enterprise. So we feel good about it.

Perfect. And if we look at the process itself of the close, any thoughts around the regulatory milestones or what investors should be sort of looking out for ahead of the close to make sure it's on track?

Well, we feel good. I mean, thanks to a lot of folks on both sides. We had, I think, around 15 filings or so. We're down to the European Commission, which is progressing well. We're still answering some -- the questions they have, but it's on the substance. We feel very positive that we'll be getting that approval shortly and close around the end of this year.

And if we circle back to the point on sales synergies. Something investors ask is around this Carrier win more from getting this heat pump technology and maybe pushing it in the Americas, for example. Does the Viessmann climate benefit because of that global reach, let's say, not just the Americas, but into Asia. Maybe any flavor around how we think about where the revenue synergies might be largest in the first 5 years after the close?

I think that some of the initial wins will be in Europe. When you look at some of the technology that someone like Toshiba would bring kind of at the high-end [ g-way ] at sort of the cost efficient. And you look at all the air-to-water capabilities, Toshiba uses R32, you guys have phenomenal technology with propane. So when you look at all the different size, air-to-water and air-to-air heat pumps in Europe and you look at all the capabilities that both teams have and you look at how complementary the technology capabilities are, there can be some very early wins in Europe. I think the ability to expand Viessmann, and obviously, the Carrier and Toshiba names into the Viessmann channel, I think, is very exciting as well. Viessmann will always be the high end, for sure, but we also look at the opportunities around Toshiba and Carrier branding capabilities. And then when you think about the United States, and is there going to be more growth in the U.S., for example, around air-to-water in places starting like New England. Will there be a convergence around water heaters and heating, as you go to more hydronic types of heating? That could be a trend that expands globally, not only in the United States but places like Asia. So I think very initially in the first 6 months, probably Europe, within the first year, you're looking, I think, at a global multichannel, multi-brand, multi-technology play.

And when you look at the competitive landscape, how confident are you that Carrier with Viessmann can sort of retain that edge? Do you see competitors sort of trying to move in similar directions? Or you think this is a genuinely unique offering that the combined entity will have?

I can give it a try. I'm sorry. I think actually to answer that question and to build a little bit on the top line synergies as well. The companies are -- the offering is so complementary. And there are so many of our installation partners, just want to lay their hands on some of the Toshiba products to introduce them alongside Viessmann. But I guess -- the thing that you have to realize when you look at Europe, the level of commitments and loyalty on the installation partner side is extraordinary. And I should add, that's actually not just true for Europe and that's also true for Asia. One of our Chinese installation partners called [ the kids fees and none ]. So it's not like that happens every day, but I think it just gives you a nice flavor of how close these ties are. So when you think about using that channel access for other products, and we've just talked mainly residential, but the same is also true for that commercial and a commercial offering. And given the fact that Carrier is the market leader on the commercial side in Europe, there's obviously a lot to lean in on and to build on. So it's -- what strikes me the most is that the stuff that is just that -- we just need to implement it after the close. And once we can dive into the details, it's just very, very extraordinary to combine that. The other thing that Dave has mentioned, having a strong portfolio of brands in Asia, in Europe, in the U.S., and then leveraging the different regional brands on a global scale, I think, is tremendous because it allows you to serve certain channels more dedicatedly but it also allows you to enter new channels that you probably haven't been before. And last but not least, which I can only judge from the outside. But I can draw an analogy to what we've done. The digital platforms that Carrier has built on the commercial side, in particular, and some of the stuff we have built on the residential side, especially the energy management system. That just allows to expand not just on a product basis but also on a value-added and digital services basis. And coming back to what motivates me the most, that will maximize the impact going forward.

Great. Maybe switching tack a little bit, Carrier's busy on the acquisition front, as we've heard, a lot of divestments and asset exits blooming as well. So Dave, I don't know if you could give any color perhaps around some of the splits of the different pieces that will be coming out of Carrier in the next 18 months?

Well, it's going extremely well. Frankly, thanks to a lot of folks in our corporate headquarters here in this room and a lot of folks that are working on this globally. If you think about it, you think about the combined EBITDA of what we'll be exiting between security and commercial refrigeration being in the market today, and then industrial fire being in the market within the next couple of weeks. We'll be in the market for divestitures with more than 70% of the EBITDA that we'll be exiting. It's been written, I think, accurately so that -- between the security in the industrial fire piece, you're looking at a bit over 400 million of EBITDA and then when you think about commercial refrigeration and you look at the exit rate that we'll have kind of 3Q into 4Q into next year, you're adding another 100 or so of EBITDA. And then what we've talked about is the public market exit for commercial and residential fire combined, which will be around a couple of hundred million of EBITDA. So 500 of the 700 or so, these are all rounded numbers, will be divested and in the market either now or within the next couple of weeks. And I would tell you the interest level across the board is extremely high. And then we talked about this public market exit. That can take a lot of different forms. It could be a spin. We're also looking at a potential split. There's other market analogies in the market today of companies that have done something very similar recently. And that, too, can be extremely attractive and help us achieve our objectives. Of course, we've talked about a clean exit, but it can also accelerate a buyback, which we've committed to our investors to do while we pay down debt as well. So that can take various forms, and that also -- the prep work is underway, and we'll be doing that in the late spring of next year.

Great. And on the security business, I think there was a press story a few days ago, talking about a sort of $3 billion-ish valuation for the business. Just wondered sort of if there was any comments you might have on that valuation.

Yes, I saw that. That was a reference to, I think, the combined -- if you -- security and industrial fire of $3 billion. We don't know where it came from, and I can tell you we'd be quite disappointed in that number.

Great. And looking at the exit of commercial and residential fire...

And I say that, Julian -- sorry to interrupt, but the level of interest, I mean these are phenomenal assets. We had to make the tough decision that -- and I'm talking to employees today that are in these businesses that they weren't tied to our core strategic thrust of being, as Max talked about, Global Climate Champion, global leader in Intelligent Climate Energy & Solutions, but in and of themselves. They're once-in-a-lifetime assets that a lot of both sponsors and strategics would be crazy not to bid aggressively on. So we are very pleased with the interest from both sponsors and strategics. They have high recurring revenues, they have great gross margins, great growth this year and great growth potential going forward. So very unique assets. So we're very cautiously optimistic about what we'll be yielding. But I'm sorry I interrupted you.

No. Sure. That's very good color. I was just trying to look at the commercial and residential fire businesses. That route, as you said, may be a little bit different. I guess, 2 questions really. One is if that business does come out on its own as a public company, split or spin as the mechanism, what kind of leverage is appropriate for that given the size, the profitability and so forth? And then I suppose, secondarily, as you get incoming interest from other parties, let's say, how does that sort of affect how you think about the process to split or spin or divest?

Let me take the second, Patrick can take the first piece. I think on the latter, we have all of our efforts going around this public market exit. I talked about a potential split -- scenario. Obviously, if someone came in and offer to buy those on all the right terms, and there have to be a whole series of right terms. We would always entertain any unsolicited proposals, but our prime path as of right now is that public market exit. And then Patrick, on the leverage?

Yes, not yet ready to provide specifics on the leverage of the new company, except that -- of course, we want to extract as much cash as possible. But two, we really want this to be a successful company for the long term. So we'll take all of that into account.

Perfect. And then perhaps I think we're about to switch to some general questions that Sam has. Maybe one last one for Dave around the divestments. Interest rates are fairly high. It has been a tricky M&A environment on and off. Why do you think that hasn't affected the demand necessarily or the interest in these assets?

They're really unique assets. Sometimes you have a once-in-a-generation opportunity to buy some companies that are incredibly well positioned in the markets that they're in. You take security, LenelS2, Supra, Onity, phenomenal enterprises, and they have very differentiated technology around mobile credentialing and other capabilities that Jurgen and Jeff and the team have really spent decades building up through a phenomenal portfolio. In the background, we've done some small acquisitions like BrokerBay to complement that. Industrial fire is a very unique asset with great technology in companies like Vetronix, and then commercial and resi fire, you think about brands that we all know that are so well positioned, Edwards, Kidde, GST in China. So unique assets that don't come along very often and whether you're a strategic or a sponsor, this would be a very unique time to get in, regardless of what's happening with interest rates, this is your time to kind of buy once-in-a-generation type assets. And the commercial refrigeration team, look, they had to deal with a tough market in the first couple of quarters in Europe. That happens sometimes in a business like that. But it's a demand-driven business. It's really set up for very strong growth in '24. And when you look across the commercial stationary refrigeration business, both in Europe and in Asia, they've seen good growth in China and in India. Again, very well positioned both the Linde and the PROFROID brands. So we are very encouraged by the initial interest we're seeing there as well.

And one last one on this. I think Patrick mentioned the balance sheet leverage of commercial and resi fire. How should investors think about the pace of Carrier delevering in the next 2 to 3 years as the splits and divestments play out?

Yes. So, Julian, you may recall, when we made the announcement about the acquisition of Viessmann, we thought that without any exits -- in proceeds from exits, we get back to about 2x net leverage by the end of 2025. Now 2 of the companies already in the market, industrial fires coming in the next few weeks. We see a scenario with these exits, of course, to significantly accelerate not only the deleveraging, but also the time at which we're back in the market repurchasing at least the equivalent number of shares that we issued -- that we will issue in January for the acquisition of Viessmann.

Thank you. And I think Sam has many questions probably coming in.

Yes, I do. There are number of questions. I'll try -- I don't know that we'll get to all of them, but we certainly will try to do a number of them. I guess, just to start, one of our investors asked us a question about selling the complete solutions of heat pump plus battery plus solar and intelligent control. And just -- is that more exposed to new construction and new builds? Or is that something that is more of a retrofit market?

I think that's a great question actually to us because it's not very intuitive. A couple of years back, it was almost impossible, I'm saying almost, to fill a heat pump to an existing building because it was just not technically feasible to get to a certain temperature range. And we've spent and I lost some hair over that along with my team. I won't talk about the hair dresser either way. But -- the point I was just about to make is that, we spend a lot of time on getting the heat pump technology to serve the existing building stock. And the majority of the growth right now in Europe comes from these high temperature heat pumps that use natural refrigerants. So they allow building owners to not only use heat pumps, but to also leverage PV and battery storages. So it's not limited to new build. It's actually quite the contrary. The majority of the market is actually on the building stock side, which presents us with even bigger potentials going forward.

And another question from an investor. You're clearly a leader in Germany, every country in Europe seems to operate a little bit differently. So can you tell us more about how you're positioned across Europe and the different countries?

So the teams have actually been saying, I wouldn't say joking, but saying that, that there are list of Viessmann in every country. And that's very much true because we really -- we really tailor to the local needs. So if you look at France, just to use that as an example, we have a factory in France that, for example, produces the battery storages, but we're really perceived as a French oriented, I wouldn't say base, but a French woven business for local partners. And the same is true in Poland, the same is true in Italy. So our teams engage with these folks in a very natural non-German dominated style. And that allowed us to become a relevant player in all the relevant markets.

One of the questions, this is from Noah Kaye at Oppenheimer. Question is, how do you see the new German heating law impacting the industry? First question is where is -- what's the status of it in terms of what does it take to get it to completely pass? And then what action steps would you take that might capitalize on the opportunities that arise from that law?

So I would say 3 things. The first 1 is, I think everybody was surprised to say, [indiscernible], how long it's taken the government to actually get it through Parliament despite some concrete version of it in the beginning of April. The second 1 is it's passed parliament. And the third message is, it will pass the upper house rather soon. That's what we're expecting to see. And I think there's a common agreement among the ruling parties that, that is the way to go. And that obviously presents the market with significant security and clarity to know what they're going to be focusing on. And I think it underlines that apart from the heat pump growth there will be hydrogen boilers that will be of relevance as well as district heating applications all over the place. And if I may say, Dave, we -- I always tend to answer these district heating questions on the basis of what would Viessmann do. But the more important part is what would Carrier do because Carrier being a large-scale heat pump manufacturer in the commercial sector, that obviously presents the Carrier side also with a huge growth opportunity.

And just related to the law, I know there's been a lot of discussion amongst investors about heat pump registrations and pauses as people have been waiting to see how the law unfolds. And how should we think about the market and how it would develop once it actually does get signed into law?

So 1 thing that I think is very important to bear in mind when you look at the past registration figures, especially last year, there's already been a bit of insecurity mid last year that increases the baseline significantly, especially in the month of July. I think that's always important to bear in mind when you do comparisons. The other part is exactly what the question implies. There has been a lack of clarity on where the law might move through the last couple of weeks and months. But that clarity is now put in place by the parliament and is supposedly going to be agreed on the upper house. And that is obviously going to influence that. But I think the most important part when looking at this is what would be a stable long-term outlook in terms of registrations. And I think we're seeing that there's a long-term growth perspective set by the regulatory frame.

That's helpful. Another question from an investor. Can you talk about Viessmann's readiness for a potential transition to natural refrigerants, both from a product portfolio and then an installer training perspective?

Well, let me tell you that was a tough one by all means. And I'm not going to do another hair joke, but that was really -- that was really a stretch to wrap our heads around this technology that it suits our quality standards. And I'm saying that because we are very clear about the quality standards that we apply in our products. If you take a look at our R&D facilities and [indiscernible] for example, the amount of time we spend, for example, on sound engineering, so they become less noisy and you can apply them in dense neighborhoods is quite significant. But that whole refrigerant thing -- when we -- 6 years back roughly, we had an in-depth discussion internally, which way we want to go. And we took a bold path and said, okay, if we want to maximize our impact in accordance to our purpose of co-creating living spaces for generations to come. The only way to achieve that is by being a relevant player on the natural refrigerant side across all the product categories. And that's exactly the path we embarked on, and that's -- these are the kind of products we've introduced. And just to give you a bit of an idea, the high temperature heat pumps that we've introduced over the last 2 years, they are on a 3-digit growth path right now, obviously, with a lower baseline, but there's a significant opportunity on the building stock side by applying natural refrigerants. So it's not just the sustainability aspect but it's also the thermodynamic aspect that allows you for higher performance and then respectively, higher temperatures. So we are really excited about this. But most importantly, we are really excited about the engineering that we put into it in order to make this a reliable system going forward.

And just to add to it that one of the reasons that I'm so confident that Carrier will be such a better company afterwards is the amount of entrepreneurial innovative spirit that exists within Viessmann, I think it would surprise many folks. And I thought it was so helpful for Max to go through that entrepreneurial spirit that's existed within the family going back 106 years. But I've had the real honor of going to Allendorf, Germany. And when you walk in there, you feel like you're in a start-up. And so whether it's Max's father Martin, as he talked about, having the courage to go on to direct to install or model being out in the front on designs with natural refrigerants or being the first in the world to combine solar PV and battery and heat pumps with the digital overlay for -- I think, for many of our investors that many of whom hired consultants to go study the market and understand the fundamental growth rates in the market, but who is best positioned in the market, they've come back and said, "It's Viessmann Climate Solutions. That innovation and entrepreneurial spirit is really profound.

And Dave, this may already answer 1 of the questions that did come in, which is, why is this the opportune time for Carrier and Viessmann to come together? Why is it better to do it now rather than 5 years or 10 years into the future?

First of all, you look at the hyper growth that Max talked about, is that, the sooner we're part of that growth train the better it is. Second is, it's an opportunity for co-innovation. The demands of our customers are changing so much. It used to be, in many parts of Carrier, a transactional business. We would sell a piece of equipment and we wouldn't have life cycle solutions. We wouldn't have digital sales that go on through the life of the product. It was more transactional and now we're moving to solution type sales. So as you look at providing your customers not just heating or cooling, but you look at your ability to provide them with carbon reduction, energy efficiency, healthy indoor environments. Our customers, whether it's homes or buildings are looking for much more holistic solutions. So we come back to this co-innovation of 1 plus 1 equaling 4.

Several questions have come in from investors. And I know Julian asked a question about capacity additions across the market. And just how do you think that unfolds in terms of the -- as the capacity ramps up, what that could mean for pricing in the market and just overall, the ability for the market to take all of that capacity?

I think 1 thing to bear in mind is that there are very different segments out there. And we are clearly positioned as a premium brand, and that premium demand that we're serving, we're serving that through innovation. And that innovation is appreciated by our customers, and we will continue to do exactly that going forward.

And several questions have just talked a little bit about orders. And I know just like Carriers business orders vary a lot month-to-month, and so not looking for what September orders would look like, but could you just talk about the backlog and how to think about what that means for demand as we go forward? That was specifically a Viessmann question.

So when you look at this -- when you look at the market environment with some of the regulatory uncertainty, obviously, that has an impact on customer behavior. But that certainty, especially when you talk about Germany, is now rebounding with a given regulatory environment. What's most important for our view is, a, the huge backlog that we have that is significant. But the other part is that we have a long-term outlook that is from our perspective, from what we expect to happen very, very positive.

And I guess some -- 1 of the questions from -- I guess, from 1 of our sell-side analyst question, just about market share and just talking about some of the growth numbers that you quoted about the first half and even in September, is just trying to think about how we should think about your share in the marketplace? And what does it take to actually win in the marketplace? And I don't mean that -- think of your share in a number, but in terms of trends and how it changes over time.

So I think -- well, might not be as tangible, but in a market like Europe, where you have a very small number of companies that sell directly to installers and you have the majority that go through wholesale, you see a lot of sell-in. And that sell-in leads to some of the influx that you've seen among our peers reporting, because that selling happened in the beginning of the year and did not really materialize for some of the wholesale business models. And so we are much more consistent in our developments and much more -- much less volatile because we don't sell in and then there is a lack of demand and then we wait for it, but we have a consistent interaction with our installation partners. And that's exactly what we're working on. As I said before, there is a significant backlog that we earned in the last couple of months, and that's also something that we're leveraging on to fuel the growth going forward.

And just more of a clarification. One of the questions we had was just in addition to being a Board member, what will Max's role be in the combined operations just to clarify?

So I'm not signing up as a successor to date, but I'm really happy to be in the same team because I have to say -- I was saying that earlier about my father about being clear, about his values and how we conduct business. And I have had the chance to get to know Dave very well. And I can tell you what you see here on the stage is exactly what you get. Very clear about the values, very forward-looking and visionary, and so I couldn't be happier to serve on that Board of Directors and working in one team.

And I think 1 last question because we're starting to get through most of these. And you mentioned the district heating solutions. Can you talk about really what -- where Viessmann is positioned with that and then how the combination with Carrier would allow us to do better there?

So district heating, obviously has very different elements to it. The 1 is the heat -- in some cases, actually heating and cooling -- the heat and cooling generation, that's mostly with Carrier from a large heat pump perspective. And it's a significant -- it's a significant relevance. If you think about where to apply district heating, I think you've all seen pictures of some of these marvelous cities in Europe with all the old architecture, right? And frankly speaking, most of them are currently heated decentrally apartment by apartment with natural gas. Going forward, if you want to decarbonize that, you will not be able to achieve that by plugging in a heat pump on an apartment to apartment level. But you will have to decarbonize that through centralizing the heating and cooling generation somewhere in the middle of a district, for example. So there's going to be a relevant growth in cities. So the 1 part is that generation piece. The other is the distribution piece. So how to distribute heating and cooling, and that's a very niche type of business. And then there are the what we call apartment transfer stations, which is basically allowing an individual apartment owner or person living in that apartment to utilize different temperatures on a heating basis as well as on a hot water basis. And that's exactly where we tie in nicely because that is being done by most of our installation partners who just switch back and forth between the different products.

And Gaurang, is there anything you want to add on the commercial heat pump side? Maybe, Patrick, if you?

Yes. Just on the commercial heat pump side, I think, just as we think about the opportunity, there's a lot of cogeneration heating opportunities with data centers, looking at heat pump installations across the board. And adding to what Max said, we are looking at expanding across that chain. And you can actually couple data centers, which is the market is exploring and growing, but you use the waste heat from data centers to actually couple into central heating plants and then supply the community from that standpoint. There are multiple operations and opportunities like that pretty much across Europe that we're seeing come up today.

Well, let me kind of close off a little bit where we started. First, thank you, Max. We've spent -- since we announced our partnership, we've got a lot of questions looking at it from your perspective, and we've done our best to answer. But to hear it directly from you has been incredibly powerful and important for not only our investors, but our employees, our customers and all of our constituents. So thank you so much for taking time out of your busy schedule to share with us that perspective, which I know I speak for our 55,000 people, just how impactful that was. Julian, we know how busy you are, thank you for coming down and moderating this. And thanks to the 55,000 employees at Carrier and 14,000 family members at Viessmann. We know that there's a lot going on with both companies. But once we become 1 at the end of this year, it truly will be what Max and I discussed at our very first dinner, which was Max said the very first time we met actually in Allendorf, it was that -- it will only make sense if 1 plus 1 is greater than 4. And the more we've gotten to know Max you and your team members, the more confident we are that 1 plus 1 will be at least 4. So my thanks to everyone with how phenomenally well everyone is doing. So thank you all for joining us today, and please enjoy the rest of your day.