Good afternoon. Thanks for joining us at the 17th Annual Wolfe Transportation Industrial Conference. We're gonna continue with Carrier Corporation, and very pleased to welcome Dave Gitlin, Chairman and CEO of Carrier, and Patrick Gorris, Chief Financial Officer, to the stage. Dave, again, thanks for being here. Let me hand over to you for any opening remarks.
Well, appreciate that, Nigel. Thanks to you, thanks to Wolfe for having us, having us back. We could not be more excited about the journey that we're on as the global leader in intelligent climate and energy solutions. And those three 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, we're actually gaining share in every single market, taking costs out.
The team's performing very well in what's a challenging market. 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 CIMs are out. We're gonna start 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, with 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 in the 2Q.
That's great. Thanks, Dave. We're gonna touch on pretty much everything you've just mentioned in a bit more detail. Just on the commercial residential fire, 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 at some point. Were you surprised by the level of interest in that asset?
I'm not surprised, but I'm encouraged.
Yeah.
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.
Yeah. Okay.
Patrick mentioned on 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. Just to, in context, that was $200 million last year, $250+ this year.
Yeah.
Yeah.
Close to 300 now, actually.
Close to 300?
Yeah.
Keeps on going higher, Patrick. Is it gonna be 400 by the time we get this done?
Yeah.
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, you know, data center tailwinds-
... and other, you know, 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.
Yeah. I would say if, if we think about the year more broadly, there's probably two big areas that are better than we had planned. There's a couple areas that are a little bit softer than we planned, and probably two 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 continued to be strong, and Asia's 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 three strong years, that there's gonna be some level of softening, but we haven't seen it.
So first quarter was much better than we had thought it was gonna be. We were up over 20% in the first quarter, and we had planned the year down mid-single digits, and, you know, from our perspective, there's clearly upside to that. The two 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's about where we thought, high single digits for the year, and ref will land about where we thought.
Okay. So sounds like it could be a mid-single digit plus, as opposed to a 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 for the year.
Yeah, so overall, bouncing out, okay.
Yeah.
Are there any signs of softening in large commercial or, you know, 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 healthcare. Those are three verticals, but last year it was kind of all about renewables. So China's a very shifting market, but one thing I'm really proud of, our leaders there, Seth and 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, like, commercial, the down mid-single digits, looks like it's too low.
Yes.
Is it, 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 Vane 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 we're, you know, large accounts. So the team's performing very well, and I think that there's clearly upside. Could there be a positive sign for this year? Yes.
So what, what came in better for that business? Did you misjudge the economy, the non-res cycle? I mean, what, what, what came in better? Did you do you like 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, I do think that, coming off three really strong years, I think there's a natural skittishness on comps, and it's just the strength. Where we've seen strength, it's continued.
Yeah. 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 a third, third, third contribution from each of those buckets. Has that changed at all?
I think it's in the zone-
Yeah
... of how we, we kind of think about it. You know, the transition to R-454B, I think we had originally said it would be about 20% this year. It'll be a little bit less of the mix, but we said 15%-20% over two years between price and mix for the R-454B, and, you know, 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.
Yeah.
And so that team is performing extremely well. We saw, as we think of, I think about the first six weeks of this quarter, it's gotten kind of progressively better every couple of weeks. So movement was better in the last two weeks of April than it was in the first two weeks, and it was better in the first two weeks of May than it was the last two weeks of April. So I think the quarter's 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, no major, no major swings. Like, like always, like a lot of our businesses, you rely, June is the most important month of the quarter-
Sure
... so you can never be sure. But we look at inventory levels, movement, they're all about where we thought, and, you know, 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 R-454B product? I mean, now that they've seen it, they're touching it, they're installing it, do they want more of it, or is it a case of, "Okay, no, this is more about next year, we still want to have R-410A?
I think that it's really a story about Q4 into next year. 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 R-454B. So I think there's probably some level of dealer anxiety 'cause 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 we, I think we're transitioning in the market from destocking to maybe neutralizing, to maybe some inventory build ahead of the deadline on 31 December. Do you think? I think you're on record, Dave, as saying there's probably not going to be a significant pre-buy in the fourth quarter. Has that changed at all?
No, I think that's about right. I think there will be some, but I don't, I don't think it'll be too big. I think originally we were thinking again, about 20% of the volume this year. It's probably gonna be less, 10%-15% will be R-454B this year, and that's mostly in the fourth quarter. So a bit of pre-buy, but not, not too much, especially 'cause they clarified that it's the date of manufacture versus date of install.
Okay, great. So let's talk about data center. You, I think you, we mentioned, data center as about low double-digit proportion of your large commercial applied, business today, but going to 20%, soon, I think-
Yes
... is the word you used. Maybe just give us some color in terms of how Carrier plays, 'cause 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're seeing out there.
I'll take a couple more, and then I'm gonna direct all these-
Okay
... Patrick after this. But data centers is a tremendously exciting and unique opportunity. You know, if you think about us often winning 3-5 chillers at a time. We're winning in the hundreds 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 the 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 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?
Actually, 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 at our core business, we'll 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're 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, to capture the opportunity there.
When, Dave, when you said hundreds of chillers for a single order, are we talking here about, you know, a large 300-megawatt data center, let's say, that's the content you provide, or are we talking here about sort of frame agreements with some of the customers?
It's more frame agreements, but even a standalone data center will be. It can be 10x the number of chillers we might see in a traditional building.
Okay. That's extraordinary. One of the standout features of last quarter was the strength in the HVAC margins.
Mm-hmm. Yep.
Especially when you factor in the dilution from Viessmann in the first quarter. I think if we look at it organically, I think your margins are up 350 basis points or thereabouts.
Yeah.
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 years.
Yeah.
Maybe just talk about that.
Yeah. 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 lightest 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 than it was in prior years.
So we have a new operations leader within the company. He has added category managers. We have a productivity pipeline that is much more, I'd say, much more robust than it was just a year or two 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.
Okay.
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 basis points of margin expansion. We saw about 280 in Q1. So, there will be some, but obviously not to the same extent.
Okay.
But 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.
With-
So that well is not gonna dry up anytime soon.
Okay. But with the, you know, continued productivity pipeline you just mentioned, these been margins improving through the year?
Yep.
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 ready yet to change our-
Okay
... our outlook. Besides what we already did after the first quarter call.
Okay, and one more about the chiller 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?
No, that is-
that is an element of it, but it's not the biggest part of it.
Okay.
So it's not just, I call it, gravity, of what materials are doing or commodities are doing. As I mentioned, we have entire teams who, and much more robust than before, who are focused on driving these costs out.
Okay.
Same thing for our footprint, same thing for logistics. So yes, it did, it is, it is more than just, as we call, gravity of commodity prices.
Okay. And then, of course, copper is defying gravity with its, the spot prices are moving higher. You obviously, you hedge, so I wouldn't think it's gonna be an impact for this year, but what are you seeing in terms of that sort of hedge roll on, on copper right now?
Yeah. So, think about the current quarter, we tend to be almost 100% hedged, and then it's 75 for the next 50, for the next 25, and, and, and so on. So if copper stays where it is, there could be some level of risk to the plan, but it's measured in a couple of tens of millions rather than bigger numbers, and it gives us plenty of time. The hedges, in essence, give us time to react and do other things-
Sure.
- including pricing, and then, of course, there is the entire opportunity of copper to aluminum conversion that we're in the middle of as well.
Okay. That's still ongoing. That's been the theme for a long time.
It's absolutely. We expect to see some benefit this year, but the biggest benefit there, of course, there are still some tech, technology items we're working through. But the biggest benefit there, for sure, we will not see this year.
Okay, great. I'm gonna come back to the audience in about two minutes or so, for questions. So please, if you have any questions, please get those ready. David, I want to transition to Europe-
Maybe just talk more broadly about the Carrier portfolio in Europe. Obviously, we've seen a lot of weakness in Europe. Are there any signs of recovery or stabilization that you've seen out there?
When we look at Europe overall, the applied business is doing extremely well.
Yeah.
I would say, almost pleasantly surprised by the strength in sales and orders that we've seen on the applied side. When we look at refrigeration, it's probably a tale of two cities. There's a bit of pressure on the Commercial Refrigeration side. But the European truck trailer business has performed far better than some of the order rates that we've seen in North American truck trailers, so that's, that's been encouraging. I think the number one thing we obviously focus on is order rates, you know, related to the VCS business and how when we see the stabilization play out in the European residential light commercial business, and then when we start to see that recovery fully kick in.
Before we get on to VCS, I wanna say I've been shocked by the strength and resilience in the European applied business for yourself and Trane as well. So what is your perspective on what's going on in Europe? It just seems so disconnected from the macro.
Well, I think it's something that's a little bit unique about the applied business in general, is that what's good is great and what's bad is bad, you know? So data centers in Europe have continued to be very strong. We talk a lot about data centers in North America, but the team there has really leaned into the opportunity on data centers. There's been some strength in hospitality, some strength in healthcare. So I think one thing that we've worked on very hard as a team is agility. So how we incentivize folks, how we move 'em, even within certain geographic regions, within a country, within China or within Europe, there are certain countries and certain cities within those. Even within commercial real estate. Commercial real estate's weak overall, but for the A-listings, then tends to be very strong.
Typically, there's pockets of strength if you're very agile to focus on them, and the European team has done a good job at that.
Okay, great. Any questions from the audience? If so, raise your hands. I don't see any. My eyesight's not great, but... Nope. Okay, carry on. Maybe VCS, maybe just brings us up to speed on, on, you know, obviously, I think it was down, you know, down twelve, thirteen percent or thereabouts in, in the first quarter. What are you seeing in the order rates? Are we still on track for mid-teens in the first half with a recovery in the second half?
Yeah, I think that, what I would say at, at overall high level, we feel really good about the cost synergies. We've said $200 in year three, $75 in year one, and the team is performing very well. They're also, I think, given that the market's, softer than we had planned, Thomas Heim and the team are being very clear-eyed and taking appropriate cost out of the system to reflect some of the overall market conditions. And we're obviously not pleased that the market's softer than we had planned coming into the year, but what we are pleased is that we're taking cost actions, and we're taking fixed price out, that once the market does recover, will help the conversion as that does recover. And we feel really good about revenue synergies.
When you lift up a rock, you see more multi-brand, multi-channel, the technology sharing. We had a whole technology review last week in Allendorf, so the ability to make both companies better, we feel very encouraged by. You know, what we said was that the year would be flat to down mid-single digits. We said that 2Q would be similar to 1Q. That does rely on strengthening in June, so a bit early to say. And we also said that the second half would see a 20% improvement over the first half, which is sort of typical of the typical seasonality you'd see in that business. So we haven't seen anything that would cause us to change that, but clearly, we're relying on a strong June and a strong second half.
As we continue to watch some of the underlying metrics, like subsidy applications and the overall key indicators, we're being very clear-eyed on cost, and we're pressuring other parts of our system to continue to overdrive.
So there was a delay in the new subsidy system in Germany. I think the website went live in March, if I'm not mistaken.
Yes.
It's not the most easy-to-use portal. I'm not, I haven't used it, but-
Yes
... that's what I, that's what I hear. I mean, have you seen a nice recovery in those applications coming through since that went live?
You know, I think part of the reality of what's happening in Germany is that the subsidies get paid out starting in October, and you have about a six- to eight-week lead time. So it's sort of too early to say that we've hit that inflection point of subsidy applications, 'cause if you back out from October, you'd really expect to see the inflection point hit kind of June, July-ish, as you start getting ready, not only for the subsidies to be paid but the heating season. So we will continue to watch that inflection point. We think it sort of happens towards the end of this quarter into early the following quarter to set up that 20% increase we expect in the second half of the year.
In terms of just framing our second half, would three Q and four Q be relatively linear, or would four Q be heavier than three Q?
Oh, revenue-wise, I think pretty similar for VCS in Europe.
Yeah.
Year-over-year, very different because Q4 was weak last year.
Right. But dollar-wise-
Dollar, absolute term, similar, yes.
Very similar. Again, theorizing here, if there is a little bit of, I don't know, down 5, 6, 7, whatever, would there—do you think there's enough cost opportunity to preserve the EBITDA forecast for the year?
Within a few points, yes.
Yeah. Okay. Good. 'Cause I think there's an assumption that it's impossible to cut costs or preserve costs in Europe. I'd be curious, you know, where you're seeing the opportunities to overdrive on costs, this year?
Well, if you look at supply chain, for example, I think there's a lot of best practices that Viessmann has that we are. We, Carrier, are learning a tremendous amount from. I do think when it comes to things like supply chain, that is something that we have put together a formula around, that we're shoulder to shoulder with the VCS team, driving supply chain savings. There's always savings around things like G&A, logistics cost, some of how we think about the raw material buy, factory efficiency. So I think that there's a lot of opportunity on the cost side, and I think the VCS team is being very clear-eyed about the criticality of addressing some of the need to take costs out of the system.
Okay.
Also, in terms of context, we, before acquiring Viessmann, we had a residential-like commercial business in Europe.
Yeah.
Give or take, EUR 1 billion in sales. Basically, we've put that organization underneath Viessmann now. It's managed by the Viessmann management team. But basically, it also means there is duplication of a lot of different functions.
-a lot of overhead. And so there is a tremendous opportunity there to go after costs as well, besides logistics and besides purchasing materials.
So to be clear, the whole, the entire residential and commercial organization for Carrier in Europe is now under the VCS?
Correct.
Okay.
Yes.
Okay.
Yep.
Dave, you sound every time I hear you, you sound more bullish on the revenue opportunity for synergies between the two channels. I mean, any early successes that you've seen that we can highlight?
Yeah, I think some of the lowest hanging fruit is taking their channel and starting to put our brands into their channel. So, we have Italian brands like Riello and Beretta. We're putting those into, in some respects, into their channel. In some cases, we're bringing the Carrier brand. We're thinking about Toshiba Carrier for air conditioning. That has not been a big part of the Viessmann business. There is some white labeling that Viessmann has done, but there's an enormous opportunity around really introducing air conditioning into the European market in a much more aggressive way. So not only heat pumps but also air conditioning, and same in the United States. The Viessmann brand, primarily boilers here in North America, but we see, there's a new heat pump that's been, air-to-water heat pump, that could be applicable for New England, other parts.
Some of the lower-hanging fruit is the multi-brand, multi-channel, and then you start getting into integrated solutions, which I think will be much more transformational but take a little bit longer.
Okay. So in the last two minutes of the conversation, I want to go back to the commercial and residential fire divestment. I think you've committed to using the proceeds for buybacks. That's still the case?
Yeah.
100% of those proceeds, and you hope to have that by end of this year, closed?
Yep.
Okay, good.
Yep, in terms of buybacks, what we committed to is the 58 million equivalent shares issued for the Viessmann acquisition. We want to repurchase them as quickly as possible. Available for us to fund that is free cash flow this year, free cash flow next year, of course-
Mm-hmm
... plus the net proceeds of that last exit.
Right. Are there any... I mean, this, the KFI kind of process, does that have to be signed, sealed, and delivered by the court to get this done, or is that independent of this sales process?
No, that's, that's independent.
Okay, good. Excellent. And then I think about 2025, there's a fair amount of confusion about the, the underlying base of earnings for-
Yeah
for this year. And I think the 260 doesn't quite cover it because it doesn't have the deployment from some of the asset proceeds. So-
It doesn't have the benefit of the proceeds from Residential and Commercial Fire.
Okay.
There is a couple of pennies there of interest savings on the exit of, I think, Industrial Fire.
Yeah.
But the whole reason we put this together, there are so many moving pieces in and out, is to give an idea as to what the underlying earnings are of the core business that we're retaining. And so, basically, what we're sending the message is $2.60 is what we think the core is for this year. Our value creation framework says we want to grow adjusted EPS double digits every year.
Yeah.
We'd be therefore disappointed if it doesn't happen like that next year. Plus, there is the benefit of the proceeds of the last exit, plus the Free Cash Flow that we all intend to use towards share repurchases. And so we think there is a meaningful Adjusted EPS-
... growth opportunity for next year.
A lot of moving pieces. It'd be quite nice to have a nice simpler story, simpler bridge from next year.
Tell me about it, yeah.
I'm sure. I'm sure you're looking for that as well. We're out of time, but one more question. It's been quite a long time since the last Investor Day. I think it was 2022, if I'm not mistaken. A lot's changed since then. Any plans for an update?
Yeah, we'll do one early next year. Is that fair to say?
That's fair to say. Basically, what we've said is, in the middle of all these exits and the integration, probably not the best time to do another Investor Day. But once those pieces are settled, that's absolutely the opportunity, and early next year sounds about right. And typically, we get a lot of visitors in Florida that time of the year, too.
Well, just make sure, as I say, make sure it's West Palm Beach, not New York.
Yes.
Yes.
Done.
Absolutely.
Fair deal.
Okay. Well, thanks, guys. I appreciate the conversation. Thanks, Dave.
Thank you.
Thanks, Patrick.
Appreciate it.
Thank you.
Thank you.