Carrier Global Corporation (CARR) Earnings Call Transcript & Summary

Well, good afternoon, everyone. Welcome to Day One of Oppenheimer's 19th Annual Industrial Growth Conference. I'm Noah Kaye, Managing Director in Oppenheimer Sustainable Growth and Resource Optimization research practice. Very happy to welcome back the management team of Carrier. Patrick Goris, CFO, and I have to congratulate the soon-to-be CFO of the resi and commercial fire business, Sam Pearlstein. Gentlemen, welcome, thanks for being here.

Thanks for having us.

Excellent. So Patrick, I thought maybe you could just start us off with a few short remarks around the state of the business today and where you think investors should be focused in terms of the company's transformation and trajectory going forward.

Great. Noah, Again, thank you for having us. Maybe very quickly on the first quarter, obviously, off to a very good start with the acquisition of Viessmann Climate Solutions. I think the integration is really off to a good start as well, a lot of great activity there, but also on the financials. We started the year out really well. Adjusted EPS up over 20% or about up 20% year-over-year. Strong productivity and price driving our operating margins up 280 basis points. While at the same time, we're continuing to reinvest in our business. So reinvesting meaning R&D, commercial resources, anything that can help our differentiation going forward. In addition to that, I'd say the business exits are on track. We've identified -- we announced 3 of the 4 exits having definitive agreements, we expect those to exit over the next several months. And that leaves residential and commercial fire. And there, we've said that we are now prioritizing clearly a sale as an exit transaction. We expect that to happen in the second half of this year as well. And so with the business exits, the expected proceeds, we expect to reduce our leverage by the end of the year by about 2x, which also means that we expect to be back in the market in terms of repurchasing shares just as we committed to when we announced the acquisition of Viessmann Climate Solutions. So overall, good outlook for the year. We increased our outlook for our core business, as we call it, at the time of [ our ] most recent guidance. And maybe at the end of the day, if you look past the big transformation we're going through, we're going to be a company that's simpler to understand, simpler to run, even more exposed to the secular trends we see out there, energy efficiency, sustainability, electrification, reduced food waste and a company that is going to be much more easier and much streamlined with still tremendous opportunities for market expansion and margin expansion going forward. So very excited to be here and answering any of the questions you may have.

That's great, Patrick. And let's actually start with that subject of portfolio transformation. Maybe just walk us through the first quarter plus of the Viessmann integration. What have you learned incrementally about the business and the market dynamics in the EU from actually operating Viessmann?

Yes. Maybe about Viessmann itself first. We've always said since the time that we announced the acquisition, that we think we're acquiring or combining with the premier company in that region in the residential, light commercial space. That's exactly what we're seeing. If you look at the brand, their technology, the people, the channel, we've been very, very impressed with everything that we've seen. I Would also say that we're not just the one saying it. Just I think a few weeks ago, there is a haustec.de, a German Reader's Choice Awards. All the companies in our industry could submit only 4 entries for -- to get the rewards, Viessmann -- all of 4 Viessmann's entries won their first prize in their category. So it's a top company, very complementary to what we do. And so very pleased to have them on board. And the integration, besides the day-to-day activities, which is, of course, ongoing, a tremendous amount of work going on from a technology point of view because now we're in a very attractive position, I think, where we can look at the technology that we already had, Carrier, the technology we acquired from Giwee and from Toshiba and now Viessmann and see what can we use best-in-class from the different companies and what -- and how do we scale that globally across the HVAC business in some instances, who knows, across the transport refrigeration business as well because, of course, there are some overlaps there as well. So a lot of work being done by our teams from commercial side, of course, the synergy side as well. We talked about cost synergies, over $200 million. We'll see -- we expect to see about $75 million of that this year. Revenue synergies of course, clearly, a focus as well, was never in our business case. But as Dave mentioned just on the most recent call, we expect them to be. Our current pipeline is in the many hundreds of millions of dollars, and I personally believe that over the years, the benefits from those revenue synergies will be larger than the cost synergies associated with this deal. And so very excited about all of this. So we've learned a lot, and there is nothing that we don't like about it, on the contrary, we are very pleased with where we are and the work that the teams are doing together.

So the guide for the year was for modestly lower sales year-over-year at Viessmann, but you had a similar level of EBIT to what you originally targeted. And of course, please correct us if we're wrong in any part of this. I think on the call, it was mentioned, the company, Viessmann, being more aggressive on cost to help deliver earnings on target. So hoping we could get a little bit more granular on the bridge. What should VCS margins look like this year? And where can margins get to once we've -- given full effect to these cost synergies?

Yes. So what we said on the most recent call is that we expect Viessmann's top line to be flat to down mid-single digits. This year, our Feb guide had them up about mid-single digits. The operating profit is slightly lower in our current outlook than it was back at the February call, we lost about, I think, $0.03 of EPS, of course, associated with our lower revenue guide. And if you think about it, a reduction in revenue, a much more modest reduction in operating profit; a, accelerating some of the cost synergies that we just talked about, high focus on the revenue synergies as well, but then also some of the revenue reduction that we've seen at Viessmann is in their lowest margin business on the solar PV. And so more than half, I think, of the year-over-year revenue drop that Viessmann saw in Q1 was in solar PV, which has very low margins because it's a pass-through. So that's so far Q1. If I fast forward to this year, from a margin performance point of view, we expect Viessmann's operating margin -- adjusted operating margin to be about 15% so very much in line with the company and add a few points to that to -- for EBITDA, so you get to high-teens EBITDA margins. And the only thing I would add to this, Noah, is that all the work we're doing now, so accelerating the synergies, driving cost out will set us up even better for more attractive incrementals when volumes do pick up. Add Viessmann in, their current outlook is for that to happen in Q4 of this year or latest Q4 of this year. Our current outlook for Viessmann has the second half about 20%, 30% higher than the first half of the year. But if we go back in time, that tends to be general seasonality for Viessmann. And so we'll see whether this is a typical year or not, but that's kind of how we've built in Viessmann Climate Solutions in our current outlook for the year.

Yes. And your view is now on how this solar PV and storage offerings fit in the portfolio. Obviously, solar and storage has been something we've covered for a decade plus. It's got a unique growth and incremental profile, shall we say, versus HVAC. So how do you think about optimizing that business and bringing it to other geographies potentially?

Nothing there has changed. And I think it's one of the reasons why we believe that over time, those revenue synergies can significantly outweigh the cost synergies because if you look at what Viessmann has been able to do in Europe is to go to a residential owner and sell the solar, the battery offering, sanitary hot water and the heat pump and then the home energy management system. And revenue per household if a household owner goes for this entire portfolio is significantly higher. It's a multiple than if the homeowner would just buy a heat pump or a boiler. And the beauty is they can do this over time. They don't have to buy all of this all at once. And so the opportunity for us to do something similar for residential applications in other parts of the world is really attractive to us. Also given, of course, the market positions we have in other regions of the world, including in our home market in the U.S. So whether it will look exactly the same as to how Viessmann does it in Europe is to be seen, but the principle of home energy management systems and integrating the solar with the battery, home energy management system and then, of course, the heating and the cooling equipment, clearly the same. And that is something that could provide very meaningful revenue synergies.

So as you said, incremental conviction that the company will exit resi and commercial fire through a sale rather than a spin. Maybe just talk through on how the process has emboldened to give you that conviction, that visibility?

We've always worked from day one on a dual track. We -- there were times where we said it's more likely one exit versus another. But in reality, we always prepped for both a sale and a public market exit. Where we are today, we just think that the best outcome for our shareholders is -- and from a value-enhancing point of view, is a sale. And that's what we're focused on. And so that is our primary focus today. The business is performing much better this year than it did last year. So our business leaders there have done really well. As I mentioned, I think on the most recent call, run rate EBITDA is about $250 million. And frankly, there is a path of getting it closer to $300 million. And so the process is ongoing and actually the confidential information memorandum is going out today. And so that that's all in the works, progressing well. And I would expect, given the positions of those businesses in their respective markets, residential fire with Kidde, commercial fire, including Edwards, leading brands, iconic brands, we would expect there to be significant interest in those businesses.

Sam, that sounds like a great setup for you. So looking forward to that unfolding. I guess, Patrick, maybe you could just give us the playbook for the rest of the year around the total proceeds from the divestitures that have been announced, how you're going to repay the debt, which pieces? And then how quickly you look to buy back the -- I think it was 58 million shares issued to the Viessmann family.

So we can think about it, we announced 3 out of the 4 exits having definitive agreements. For those 3 deals, gross proceeds of about $7.2 billion, net proceeds of, give or take, $5.5 billion. What we have said is that $5.5 billion would go towards deleveraging the company. And so we will first pay down our term loans, they carry the highest interest rate. After that, we'll see what we will pay down, what makes the most economical sense. We actually might decide to keep cash on the books for a little while, because in today's environment, the cash may earn more than some of our debt, but we'll see. We're going -- we're working through that now. And so it really means that once the $5.5 billion is redeployed towards deleveraging, any free cash flow and proceeds from residential and commercial fire, the fourth exit would be available for additional capital deployment, including share repurchase. And so what this means is that we expect that starting later this year, with free cash flow funded cash. And then, of course, with the proceeds from residential and commercial fire, when these come in, that we'd be in a position to make some meaningful share repurchases. And of course, it's our objective to repurchase those 58-point-something million shares as fast as possible because that's the commitment that we have made and we expect to start, as I said, the latter half of this year. We have not embedded any benefit of that in our EPS outlook for this year, frankly, because I think it will be minimal because it will be very back-half loaded. But clearly, it means that we expect a much more significant pickup in 2025 or benefit in 2025 from those share repurchases.

So this is a sort of a high-level question. And I think you touched on it a bit earlier but would love your more expanded thoughts. The spin from United Technologies clearly enabled the company to become more focused and allocate capital to growth opportunities. And clearly, when we look at the net effect of these divestitures, this is kind of the next chapter of that story. And so where do you see the greatest opportunities now when this becomes a more focused company in terms of product development productivity, competitive strengths. Maybe you can talk through those 3 areas.

The way I think about, call it, Carrier post all of these transactions, so simpler company, more exposed to end markets with very important sector trends, as I mentioned in the beginning of the call and with leading positions in our markets across the different geographies, residential, light commercial, commercial HVAC and transport refrigeration. So strong positions in each one of these markets. And as I also mentioned, now with the opportunity to use the technologies that we have acquired together with our existing technology to take the best-in-class, create more scalable global platforms that we can then use across our portfolio. So tremendous commercial opportunities, opportunities from a technology point of view, use best-in-class, modularize and scale it. You brought up productivity. I think even though we've done a lot of great work, I think, to date in terms of driving cost out and expanding our margins, that it remains a tremendous opportunity ahead of us. Even with the exits, there will be opportunities to continue to enhance our footprint, to continue to enhance our logistics network, our warehousing network, continue to drive out cost and simplify what we do internally. So I think we'll be in a very attractive position, not just from a commercial point of view with leading technologies in the markets in which we operate with additional opportunities or attractive opportunities to grow including, as we just mentioned, the Viessmann capabilities, expanding that to different parts of the world, but with very attractive opportunities to continue to simplify our company and drive out cost. And so it's -- frankly, it's part of the excitement of being part of this team because we will have several attractive levers to continue to use and drive value for our shareowners.

Maybe just a follow-up to that. The company has signed up for 50 bps a year expansion. I guess when you think about this opportunity is set around productivity as well as the shift in the portfolio towards potentially higher growth, higher-margin products, better mix. How do we think about those 2 levers of productivity and favorable mix in terms of the ability to drive incrementals going forward?

Yes. The -- I think what you were referring to was the value creation framework we shared with investors a year -- 1.5 years or 2 years ago, and that value creation framework cost for over 50 bps of margin expansion per year. Obviously, we'd like to do better. Our current outlook for this year is to do about 100 bps of margin expansion. Frankly, we would expect or we target internally, of course, to do every year, more than 50 bps. Can it be every year, 100 bps? Who knows? Clearly, we'd like to do as much as we can, but, and I say, but we need to make sure that we continue to reinvest in our business to drive our technology differentiation. And that's something that, of course, is really important. And so we do believe we can continue to expand our margins like this year, 100 bps, while reinvesting in our business. Of course, we'd like to do that every year going forward. And I think my comments about the opportunity for continued productivity can be seen in the light of the company is comfortable that they can at least expand -- they can expand their margin by at least 50 bps a year going forward. And of course, we'd like to do better than that. We'd rather over-deliver than overcommit.

Well, let's talk a little bit about growth for the RemainCo. And I think we should start there with data center just given the focus from investors. On your recent earnings call, you noted data center was low double digit as a share of global applied and controls and could grow to 20% in the next few years. I think some of the questions we get around, this relates to liquid cooling and their role in the portfolio and evolution potentially towards water-cooled chillers versus air-cooled chillers in the space. Maybe just unpack for us how your customer mix, your offerings and your wallet share opportunity are evolving?

The way I'd like you to think about it is that we've been doing business with data centers for a long period of time. And so these companies have required cooling for a long period of time, and we have been providing that to them. What's different now, I think, is that the demand is accelerating globally. In addition to that, given the latest chips, of course, the cooling requirements, they haven't changed, but they have increased. And so -- what this means is that our traditional business will continue to do really well, we think, with data centers. And on top of that, we have this additional opportunity with respect to liquid cooling that we're looking at as well. So we've had some important recent wins with all kinds of customers in the space. We can -- we are comfortable we can do more than that. And if you look -- you mentioned what we have in offerings, we have the air cooled, we have the water cooled, we have the handlers, we have the fans, we have all that. What we're also investing in organically and inorganically is liquid cooling. And more recently, I think it was a few weeks ago, we made an announcement where we made an investment in Strategic Thermal Labs. That's direct liquid cooling towards the chip. What is maybe less well known is actually we made an investment in -- we -- not made an investment. We actually acquired a company Nlyte in 2021 that is focused on data centers as well. It was just recognized last week as a leader in the category for data center infrastructure management. And so we have both, software that's applicable in the space, and we have the traditional HVAC capabilities in this space. And now it's a question of how quickly can we, through organic, inorganic investments and partnerships, enhance our liquid cooling capabilities that are very complementary.

Well, I think you just asked the question, how quickly can you do that? How do we think about it...