Carrier Global Corporation (CARR) Earnings Call Transcript & Summary

Good afternoon. Thanks for joining us at the 17th Annual Wolfe Transports and Industrials Conference. We're going to continue with Carrier Corporation, and very pleased to welcome Dave Gitlin, Chairman and CEO of Carrier; and Patrick Goris, Chief Financial Officer, to the stage. So Dave, again, thanks for being here. And let me hand over to you for any opening remarks.

Well, appreciate that, Nigel. Thanks to you. Thanks to Wolfe for having us back. We could not be more excited about the journey that we're on as the global leader of an intelligent climate and energy solutions. And those 3 words, intelligence, all things AI, data centers, connected devices, we see tremendous opportunity from all things intelligence. Climate, at our core, is a sustainability company. And then when we think about energy, that's a little bit the new frontier for us as we think about grid resilience. And as part of that, we're ecstatic about welcoming Viessmann to the family earlier this year. We'll talk about the market, I'm sure, but gaining share, growing the -- we're actually gaining share in every single market, taking cost out, the team is performing very well in what's a challenging market. And then all of our divestitures are progressing to plan. We're close on closing on Access Solutions, followed by Industrial Fire, followed by Commercial Refrigeration. And now we're in the market with our Residential and Commercial Fire. The NDAs are signed, the [ sims ] are out, we're starting -- we're going to start a management presentation soon. And we're hoping to close on that by the end of this year. So when we get into 2025, we will have our portfolio changes behind us, and we're poised for very strong execution through the rest of this year into next. We've been clear on capital allocation priorities. We've been paying down debt, starting a buyback later this year. And we feel balanced on where we are on this year. The team performed very well in the first quarter, and that's continued here into 2Q.

That's great. Thanks, Dave. I'm going to touch on pretty much everything you just mentioned in a bit more detail. Just on the commercial front, you mentioned NDAs have been signed, so books are out there. Obviously, the initial plan was for that to be a capital markets transaction, I think. So were you surprised by the level of interest in that asset?

I'm not surprised, but I'm encouraged. The -- there's a lot of interest, probably most likely a sponsor, that if you think about the portfolio we're selling, these are once-in-a-lifetime franchises to get. Edwards, our Commercial Fire business here in the United States, high margin, very well positioned. Kidde is very well positioned. Kind of a duopoly and very well -- very good market share and very good technology we have in the Kidde business here, primarily in North America. And then GST, the Fire business that we have in China, is incredibly well positioned over there, and then great businesses off in Europe. So I know there's a lot of interest, and rightfully so. These are once-in-a-lifetime assets to get with a great team.

Yes.

And Patrick mentioned in the earnings call that the EBITDA has been north of $250 million. So we feel we're encouraged by the interest and optimistic about the price.

Great. And just in context, that was $200 million last year, $250 million-plus this year?

Yes. Close to $300 million now, actually.

Close to $300 million?

Yes.

It keeps on going higher, Patrick. Is it going to be $400 million by the time we get this done?

Yes.

That's great. So well, good luck with that process.

Thank you.

Spinning back to 1Q. We had a lot of moving pieces across the portfolio, continued strength in large commercial. You mentioned data center tailwinds and other tailwinds there. I think residential performed better than planned, and then we had some headwinds in some of the transport businesses. Maybe just bring us up to speed in terms of what you're seeing right now through the second quarter?

Yes. I would say, if we think about the year more broadly, there's probably 2 big areas that are better than we had planned. There's a couple of areas that are a little bit softer than we planned and probably 2 that are right in the fairway. So what's stronger will be Global Applied. It's not only data centers, but we have strong backlog. The aftermarket related to the Applied business is performing well. We see strength in North America, which has been very strong. Europe has been -- continued to be strong, and Asia has been strong. So the Global Applied business will be better than we planned this year with certainly upside there. Light Commercial. We keep thinking that we're coming off 3 strong years that there's going to be some level of softening, but we haven't seen it. So first quarter was much better than we had thought it was going to be. We were up over 20% in the first quarter. And we had planned the year down mid-single digits. And from our perspective, there's clearly upside to that. The 2 areas that -- the 2 markets that are a little bit weaker than we had planned would be residential in Europe and residential in China. And I will tell you that both teams are gaining share, taking the right kind of cost out to reflect some of the market conditions they face. But we think the top line in both of those areas will be a little bit lighter than we had put in our original plan. But the stuff that's good will be at least enough, in our minds, to offset the stuff that's a little bit weaker than we planned. And then U.S. resi is about where we thought, high single digits for the year, and ref will land about where we thought.

Okay. So it sounds like it could be a mid-single digit plus as opposed to mid-single minus for the full year for core growth, that is?

I wouldn't say that. I think we're kind of in the zone right now on the top line.

Yes. So overall [ balancing ] now is okay?

Yes.

Are there any signs of softening in large commercial -- in commercial applied when you look across the spectrum of end markets? Anything in the front log? Or...

No. Europe and U.S. are particularly strong. The issue with China is it's overall strong, but we're seeing a very significant shift of mix almost overnight. The high-level mix we've had over the last few years in China was a shift from residential to industrial and infrastructure. Now we have a much more specific look at it. And the things that are particularly strong this year, data center semiconductor and health care, those are 3 verticals. But last year, it was kind of all about renewables. So China is a very shifting market. But one thing I'm really proud of our leaders there, Stephan, Titus and the team, is that we've shown an ability to flex very -- and be very agile to shift to the areas of strength. So I think they'll be fine. What we're pushing that team is to use the Applied business to offset some of the weakness that we're seeing on the residential side in China.

Okay. And then you mentioned light commercial, the down mid-single digits, it looks like it's too low.

Yes.

Is it significantly better such that we can actually see some growth in this business this year?

We could, we could. We'll have to see how we close out the first half, but the backlog continues to be strong. Orders are strong. It's actually -- if you look at how you want to run a business, there's not a lot to complain about right now with light commercial. We've gained a lot of share. We've probably been the price leader. We've had technology differentiation with the main Axial Fan that's been 40% more energy efficient than the unit that it replaced. We're driving more efficiency in the same volume, so we can fit into multiple chassis. So large accounts. So the team is performing very well, and I think that there's clearly upside. Could there be a positive sign for this year? Yes.

So what came in better for that business? Did you misjudge the economy or the nonres cycle? I mean, what came in better? Do you guide retaining share or gaining share?

Well, we are gaining share. We've continued to gain share. We gained it in the first quarter over the last 12-month lag. And I do think that coming off 3 really strong years, I think there's a natural skittishness on compares, and it's just the strength -- where we've seen strength, that's continued.

Yes. Okay. Just maybe just double clicking on U.S. resi, I think down 3% in the first quarter. I think you were expecting that to be down high singles initially. So that came in a lot better, still a pathway to high singles for the full year. Has the mix between volumes and price mix changed? I think it's roughly 1/3, 1/3, 1/3 contribution from each of those buckets. Has that changed at all?

I think it's in the zone of how we kind of think about it. The transition of 454B, I think we had originally said it would be about 20% this year. It will be a little bit less of the mix. But we said 15% to 20% over 2 years between price and mix for the 454B, and we're excited about that for next year as well. We shipped our first unit March, April. We wanted to get way out in front really for risk mitigation purposes. And so that team is performing extremely well. We saw -- as we think -- I think about the first 6 weeks of this quarter, it's gotten kind of progressively better every couple of weeks. So movement was better in the last 2 weeks of April than it was in the first 2 weeks, and it was better in the first 2 weeks of May than it was the last 2 weeks of April. So I think the quarter is kind of progressing generally consistent with what we would have thought.

Okay. So no weather impacts to worry about?

We haven't seen anything. No major swings. Like always, like a lot of our businesses, you rely at June is the most important month of the quarter. So you can never be sure. But we look at inventory levels, movement, they're all about where we thought. And we have reason with some of the order rates and inventory levels and recent movement that we're positioned for a good June.

What are you hearing from the channel on the 454B product? I mean, I know that they're seeing it, they're touching it, they're installing it. Do they want more of it? So is it a case of, okay, this is more about next year. We still wouldn't have bought any.

I think that it's really a story about 4Q into next year. I don't -- I think people are just -- I think we've gotten out in front on not only shipping units, but we have a complete training protocol that we've done with our distributors and our dealers. We've made sure that the channel is ready to not only have the right maintenance practices but transportation practices for the 454B. So I think there's probably some level of dealer anxiety because it's new. But overall, the feedback we get, because usually, our dealers will carry Carrier as a primary brand, someone as secondary. The feedback we've gotten is certainly amongst best-in-class in terms of getting way out in front of risk mitigation and getting the channel ready for this.

Okay. So I think we're transitioning in the market from destocking to maybe neutralizing. So maybe some inventory build ahead of the deadline on 31 December. Did you think -- I think you're on record, Dave, as saying there's probably not going to be a significant prebuy in the fourth quarter. Does that change at all?

No, I think that's about right. I think there will be some, but I don't think it will be too big. I think, originally, we were thinking, again, about 20% of the volume this year. It's probably going to be less 10% to 15% will be 454B this year, and that's mostly in the fourth quarter. So a bit of prebuy, but not too much, especially because they clarify that it's the date of manufacture versus date of install.

Okay. Great. So let's talk about data center. I think you mentioned data centers about low double-digit proportion of your large Commercial Applied business today, but going to 20% soon, and I think it's the word you used. Maybe just give us some color in terms of how Carrier plays. Because I think there's a bit of confusion about where the HVAC guys play, how liquid cooling sort of influences the market for you guys and maybe just talk about some of the projects you've seen out there.

I'll take a couple more, and then I'm going to direct all these to Patrick. Data centers is a tremendously exciting and unique opportunity. If you think about us often winning 3 to 5 chillers at a time, we're winning in the 100 range. So it's just a very unique opportunity. We feel incredibly well positioned in every facet to win, whether it's technology, ability to support in services agreements for the long term. The issue that we are working incredibly aggressively on is capacity. We have our facility that's doing a great job in North Carolina here in the United States. About 70% of data centers will be in the Americas. So we're maxing out in both test lab and capacity in our U.S. operations. We're investing to build out the water-cooled chiller capability down in Mexico. We have tremendous operations in Monterrey, and we'll be investing to expand there as well. And then we're importing as well, and we have a great facility in France to support Europe. So we are looking to max out the capacity at every single air-cooled and water-cooled chiller facility that we have globally to support the globe, to support this unique opportunity.

Okay. Patrick, do you have anything to add to that? Anything to add?

One element we can talk about is, we've been doing data centers for a very long period of time. And so every country where we do business in commercial HVAC, where they have data centers, we have customers in the data centers, whether it's Japan, China, Europe or in the U.S. And so our core business will continue to do really well and grow faster than we think it has done. And then there is the additional opportunity, which is whether it's a liquid cooling or different types of cooling, that we are looking into it as well, which would be additional growth we can capture. And that is, for us, those are investments in technology, organic, inorganic and partnerships. And so we're looking at all of that to capture the opportunity there.

And then, Dave, when you said hundreds of chillers for a single order, we're talking here about a large 300 megawatts, let's say, data center. That's the content you provided. We're talking here about sort of frame agreements with some [ groups ].

It's more frame agreements. But even a stand-alone data center will be -- it can be 10x the number of chillers we might see in a traditional.

Okay. That's extraordinary. One of the standout features of last quarter was the strength in the HVAC margins, and especially when you factor in the dilution from Viessmann in the first quarter. I think if you look at it organically, I think your margins are up 350 basis points or thereabouts. Maybe just talk about some of the drivers of that performance. Because I think your full year guide embeds something a lot weaker through the balance of the year. So maybe just talk about that.

Yes. And so the biggest drivers, by far, were price and productivity. And to understand the expansion we saw in the first quarter, it's helpful to look at the prior year. In the first quarter of last year, you may recall, our productivity was the light as it was in Q1. And we said, don't worry, we know productivity will pick up as the year progresses. In Q1, we still had some contracts in place, hedges, for example, that meant that the material savings were not as big in Q1 last year as they were in subsequent quarters. So what has happened in Q1 of this year is a couple of things. One is the comp I referred to. The second item is our incoming productivity pipeline for this year has been much stronger as it was in prior years. So we have a new operations leader within the company. He has added category managers. We have the productivity pipeline that is much more -- I'd say, much more robust than it was just a year or 2 or ago. And so it's a combination of continued good price, very strong productivity year-over-year, and of course, the benefit of having a very strong, dedicated ops team that drives productivity. The margin expansion in future quarters will be there, but it won't be there at the same extent because. For the overall company, we're targeting about 100 bps of margin expansion. So about 280 in Q1. So there will be some that obviously not to the same extent. But the -- I think the important takeaway from this is that there continues to be significant opportunity for cost out and productivity at Carrier. And I think we have a much more robust organization and processes to drive that going forward. So that well is not going to dry up anytime soon.

But with the continued productivity pipeline that you just mentioned, Viessmann margins improving through the year, it seems that there might be a hint of conservatism in your margin outlook. Is that fair?

I'm not sure I would go there at this point. Our job is to deliver at least the 100 bps margin expansion that we've committed to in our current guide, which is well better than the over 50 that we normally target. And obviously, our objective is to do better than that. But with 4 months behind us, we're not really yet to change our outlook, besides what we already did after the first quarter call.

Okay. And one more bite of the cherry here. So I think you mentioned -- Dave, I think you mentioned that half of the productivity savings is material productivity. Is that primarily the impact of the hedges and the material costs? Or are there other things going on?