Great. Well, thanks, everyone, for being here. It's my pleasure to have up next, Carrier Corporation, Dave Gitlin, Chairman and CEO, and Michael Rednor, who joined recently, a few months ago. Being here, with, you know, orders growth for Carrier has been very strong in recent quarters. Maybe how do you see the demand environment today? Do you think we could see, you know, decent order growth continue?
We do. You look at last year, our full-year orders growth was up in the low teens. And when we look at our portfolio, we feel good about double-digit growth in Global Commercial HVAC. And we should grow double digits in every region. Aftermarket up double digits. We've talked about Resi up high single digits, light commercial kind of in that low to mid range. And then when we think more broadly, we have two areas of the portfolio that have had lower growth: Resi, Light Commercial in Europe and in Asia.
Yep.
Both down quite significantly last year. Both of those areas sort of more flattish this year. So this year we guided to mid-single digit growth. Once those start to kind of get back up to that kind of mid range where at least they should be at a minimum, we think longer term certainly Viessmann's higher than that.
Mm-hmm.
But once those start to recover and the rest of the portfolio stays strong, then you get, you know, we're really where we have our growth algorithm at the high end of that 6% to 8% range.
Got it. And I think within, you know, the U.S. residential market, you've guided for high single digit growth this year. There's been a lot of noise in the investment community around the sort of pre-buy dynamics with the refrigerant change, seven weeks ago. Maybe help us understand, you know, how is that transition playing out from your perspective? How do you see distributor inventory levels and industry discipline?
We're very pleased with where inventory levels are in the channel right now, and we heard one of our distributors say a few days ago that they did not see any stocking amongst the dealer channel. So we feel very good about movement. We feel good about inventory levels. I think that this is a recurring discussion for a couple reasons.
One is we guided a little bit higher than our peers, and then two is that last year when you look at total volume was kind of up double digits versus 2023. On the former, or on the latter, excuse me, when you look at 2023 versus 2022, there was actually a fair amount of pull 2023 into 2022. If you smooth that, last year was really not up as much as I think is being perceived.
If you look at this year versus a more smooth between 2022, 2023, this year's volume's really up low single digits. It's not at an industry level. We don't think we're coming off of some very extreme high in 2024. We think that, you know, we feel very balanced in our guide and how we described it just last week in our earnings call.
Yeah. And the appetite or ability of the channel and end customers to accept the price increases that are necessary 'cause of the higher costs, you know, how are your conversations going on that front in terms of, you know, what channel partners, contractors are reacting to that?
They're going well. You know, we had said that our expectation is a realization of 10% on the 454B versus the 410A. We've actually. Our list price is slightly higher than that, and I think that, look, no one ever loves a price increase, but they know our cost of the product has gone up, that we've added, we've made changes to the controls. We've added some sensors, so I think people get it, and I think the market's gonna respond well to it.
Perfect. And when you look at the competitive landscape around the, the transition, do you see signs of anyone trying to make a grab for market share amidst it, or is the competitive landscape pretty steady?
We think it's steady. We know that some have lost share. We have gained share. We gained 100 basis points last year coming off years where we had gained share before. So we very much like our market position. We like our margins. We've. If you look at the pricing we've all kind of announced on the 454B, you know, perhaps we're at the upper end of that, but the range is very tight.
You know, some of our competitors that people were worried may go lower on price to gain back share that were lost. They've announced share in the high single digits. We've said 10. So it's not a huge range of difference on the pricing side. Our job is just those dealers that have converted to Carrier as part of our share gains, keep 'em and keep 'em happy. We've had nice wins on the multifamily side.
That's helped us with some of the share gain. Single family's good. So we feel good about our positioning. We feel very good about high single digits. We feel good about double-digit growth in the first quarter. I think what you're gonna see effectively happen is there's gonna be a phase. Movement was very good in January.
Yeah.
It was up about 15% in the fourth quarter, about the similar number in January. It slowed a little bit in February as we expected because you're gonna have a transition. We're gonna bleed off of the 410A. Then there's sort of this settling off. Whoever has 410A will sell a little bit more of it in, say, February. And then we'll start to kick in as we get towards the end of this quarter into next quarter on the 454B.
Perfect. And maybe switching over to European residential and the heat pump business or Viessmann more broadly, including that whole portfolio. You know, maybe help us understand kind of how you're thinking about Viessmann right now. There's a lot of concerns out there around, you know, what could happen to the subsidy environment in Germany post the elections in a few days. How's the Viessmann integration in general going aside from the demand dynamics?
Look, I will say, first of all, the integration has been a home run. It's the best-positioned company in a very important long-term growth market, and the combination is tremendous. So sometimes the integrations can be super messy. This has been the exact opposite where our teams have really meshed together like a glove. It's perfect. In terms of the market and the uncertainty around German elections and other uncertainties, we've tried to de-risk that. If you think about the German market, last year total units, boilers, heat pumps.
Mm-hmm.
Was down nearly 50% from the year before, total number of units, and that got you to about 720,000 total units.
Yeah.
Now we've said in our guide for Viessmann for Europe that the market would be down to flat, be flat to down, mid-single digits.
Yep.
But for Germany, we've actually had the market down 8% coming off a year where it was down like nearly 50%. So that 720 is something like 665,000 units. Now you're getting into numbers that total number of units Germany hasn't seen since kind of the years of the financial crisis. It's going back 15 years where the market's in that number. So there seems to be, obviously, the elections happening here in the next week or so. We.
Yep.
You know, elections, you know, we all, there's conventional wisdom on who gets elected.
Mm-hmm.
But we believe that we've kind of handicapped the market. If you think about subsidies, subsidies today are 40% to 70% depending on various factors, including income levels. If subsidies with the new administration, if there is a new administration.
Mm-hmm.
It comes down a little bit. Say it goes from 40% to 70% and 30% to 50%. We're not, because we're a premium brand, we're not often benefiting from the 70% range. That's not our typical customer base at the high end. So we think if it kind of stays in that zone, we feel balanced on our guide.
Got it. And how is that competitive landscape in Europe? I think people were very worried 18 months ago about capacity additions, some new entrants. I imagine a lot of that capacity just never got added. You know, how are the kind of industry peers behaving?
I think people are behaving rationally and pragmatically about capacity needs. When we first announced Viessmann, the worry was that it was such an attractive market, everyone was gonna be flying in, building capacity, and it would bring prices down.
Then we had a down year, and everyone was worried that everyone would go running for the hills and there'd be zero capacity. We have a brand new facility that Viessmann's built in Poland, probably the most automated facility that I've ever seen in my career. It's gonna be a best-in-class facility. So we're poised for the heat pump growth to recover.
If you look at, I think what could be a new frontier for us in Europe will be complete system home selling. And that, that's gonna be very exciting 'cause it kind of gets you away from a discussion on German gas ratios. And if I may, Julian, just give you kind of a little bit of context 'cause we're pushing this.
You're gonna hear, for those of you that are at the ISH show in Frankfurt next month, you're gonna hear more from us on this. But today, people are very reticent to put fossil fuel back in the home, whether it's gas or oil, because you have the tax coming out with ETS 2 in 2027. You have 55% renewables in Europe in 2030. So you would expect over time to see boilers decline.
Yep.
You will see an uptake in heat pumps. There's a little bit of dithering right now with subsidies and regulation, so it creates a little bit of short term, but almost for a fact, you will see heat pumps increase, boilers decrease. The new frontier is complete system selling where you get solar PV, heat pump, battery, digital overlay, 'cause your choice as a homeowner is, "I can spend $10,000 on a boiler."
Or if you look at a fully financed cost, just say it's in the range of spending $4,000 per year for that entire system fully financed, and your savings are, say, $3,000 a year, you're spending an incremental $1,000 versus spending $10,000 upfront, and at the end of 10 years, you own all of the entire system, and your home's worth a lot more 'cause it's a non-fossil home versus a fossil home. So you're gonna hear more from us. We're in the first inning on this, but we think that's an exciting new frontier for growth.
It's something, I think that point on systems, you know, you emphasized it in the recent earnings call. I imagine it's a broader thing beyond just Europe residential. Sort of what was the motive or catalyst for this system's push? Maybe help us understand more broadly at Carrier, what does it mean?
It's something that we're really gonna lean into from multiple perspectives: differentiation, recurring revenues, and higher margin recurring revenues. You know, we're gonna, we're gonna - this will be a big theme at our investor day, which we're gonna announce tomorrow. It will be May 19th, but I think I just did announce that it's gonna be May 19th , 8:30 A.M. But.
Right.
So, but that's gonna be a big theme because we started, if you think of Carrier product company, a lot of people thought, "Hey, you're a residential air conditioning product company.
Yeah.
Then five years ago, we said, "We're a product company for sure," but we put on top of that aftermarket, and we push ourselves internally double digit forever aftermarket in kind of help smooth the cycles, more recurring revenues, higher margin revenues, and increase our total TAM significantly 'cause we're still not getting our fair share of parts in our own aftermarket. So there's, when people say double digit forever seems like a, a lofty goal, it's honestly not given our starting point. Then we add on top of that product aftermarket systems.
That's getting into complete differentiation. In the United States, integrating battery with our heat pumps is differentiating for us in the home. But if you think about us shipping, you know, over 2 million, call it 2.5 million split systems a year just in North America, you add that incremental revenue from the battery. That could be significant.
It's differentiating, and it's solving a critical problem with the grid right now. So there's a huge amount of interest from the utilities. We're prototyping our system. Very exciting new frontier. Data centers, one-stop shop. We can tell our customers, "You worry about running the data center. We'll worry about all of your cooling needs through traditional cooling, liquid cooling, our BMS with our ALC business, and then Nlyte, the business we bought in the U.K. that does a lot of server management." We're doing the same I just mentioned in Europe, that system selling. So it's higher TAM, more recurring revenues.
On the aftermarket front, as you said, that's been a push really since the spin-out, just under five years ago. Viessmann maybe reduced that a little bit, but it sounds like the overall aftermarket, you're still firing on all cylinders across the commercial side. How much of the business is kind of aftermarket today? What sort of operating leverage do you see on aftermarket sales?
Today, it's just under 30%. I think it's in the range of 27%. We see that continuing to grow, you know. It's one of the reasons that we feel good about long-term getting in that 6% to 8% range. We said at the high end of that after we combined with Viessmann. Aftermarket, we think, will be a key enabler. One of the reasons we have so much confidence is that our playbook is just evolving.
You know, it used to be, "All right, part sales," and then we got into multi-tier Blu Edge agreements, and then we get into remote monitoring and making sure our devices are connected, and then making attachment rates instead of in the 20% to 30% range, we're trying to drive to 100%. Right now, we're in the 50s.
But we just see it's a whole new way of designing products, supporting our customers. And one of the great things about data centers growing this year. Last year was about $500 million of sales. This year will be about $1 billion of sales for us. But if you think about the multiplier from aftermarket to the OE, if you're putting 100, 200 chillers in it, how we support our customers in the aftermarket will be very, very exciting.
You know, you mentioned the investor day, and it's in sort of, you know, three or four months' time from the previous investor day. It sounds like that kind of six to eight organic growth range is very much intact. Operating margin-wise, kind of how are you thinking about things now, given all the portfolio moves? You know, what's the natural incremental margin we should expect, with this portfolio?
Look, the team's been, I think, doing a phenomenal job driving productivity. You know, you look at our conversion rate, it was close to 100%. You know, we started to say steady state, 30% conversion. Last year was close to 100%.
Yeah.
Last year, we grew our margins - what was it? 200 basis points, Mike?
Almost.
Almost 200 basis points just last year when we say our typical algorithm is 50 a year.
Yep.
This year, we've guided to 100 basis points of margin improvement. Now, part of that is just not having CCR as part of the portfolio, but part of it is just driving good old-fashioned productivity using our Carrier Excellence tools, and that's why we have confidence in sustained at least 50 basis points of margin expansion a year because it's kind of a back-to-basics driving true productivity.
Got it. And, you know, I think on the applied HVAC business, you know, there's been, I think you've had some issues maybe with capacity constraints on and off. What have you done to solve those? You know, how good do you feel about the capacity and, and sort of meeting customer needs there?
A lot of the growth is global, but in order to support our us customers, we did a short term and now a longer term. In the short term, we frankly imported some from Asia.
Mm-hmm.
Just because we were maxed out in our United States factory.
Yep.
What we're doing now to support the tremendous growth we see, and we see it in our backlog, our Charlotte, North Carolina facility, we're gonna increase that nearly 50%, you know, about 40%. And then the other facility that we've just added in North America will be about 50% higher capacity than the U.S. factory. So if you think about where we were just two in 2024.
Mm-hmm.
Our capacity for North America will have increased from 24 to 26 by 4x for water-cooled chillers. We're significantly increasing air-cooled as well. It's not with through-the-roof investments 'cause what we did with our other facility that we've just added for both air-cooled and water-cooled chillers is we repurposed it.
We used to do a lot of electronics boards. We've moved that into contract manufacturers and turned that into a dedicated air-cooled, water-cooled facility. Adding capacity, there's some CapEx that we've spent associated with it, but we think it positions us for share gains and really being able to seize that outsized growth.
Got it. And in terms of, I guess, the data center market specifically, what's the attitude to liquid cooling? Do you see it as a complement to the base kind of space cooling that you're very strong at?
Yeah. We think liquid cooling will probably over the next 10 to 15 years out on a CAGR basis outgrow traditional cooling a bit, but it's starting from something that's very small.
Yeah.
We've done a lot in the space where we've developed our own CDU internally that we're now in the marketplace selling. We have VC-type investments in a company, STL. Yesterday, we announced ZutaCore. STL is more single-phase, which is water. ZutaCore, which we announced yesterday, is two-phase, which is more of a refrigerant where we think ultimately the puck will go. And then last week, we announced Quantum Leap.
Yeah.
Which is that one integrated one-stop shop for all the cooling needs. So we do think liquid cooling, there will be demand for it. There will be point-of-use cooling direct-to-chip. That's, we're seeing it, frankly, even a bit more prevalent in China than the United States. So we're excited to not only offer it as a standalone offering, but also as an integrated offering.
Got it. And, you know, if we toggle back to margins a second, how large are kind of the stranded costs from the divestments you've made in the past 18 months? How quickly do those get worked down? And how are we thinking about the Viessmann acquisition margin-wise medium term?
Yeah. Maybe, maybe I'll take the stranded cost. So the good news is we've made great progress on it. I mean, the cost is pretty much out of the system. It was about $50 million, so that's gonna exit. It gets a little bit blended inside the P&L if you look at the corporate line 'cause of some other movements. But in general, we've made good, good progress getting rid of those costs.
Viessmann margins, we ended last year in the low teens on an EBITDA ROS, and we think that'll grow a couple 100 basis points this year to the mid-teen EBITDA ROS.
Perfect, and then longer term, we'll see how the synergies and market demand plays out.
Yeah. Last year, $75 million of synergies growing to $150 million up to north of $200 million. So I think that Thomas and the team did a lot of the tough actions to take a lot of fixed costs out of the system. So look, as volume returns, which it will, undoubtedly volume will return. As that happens, they're really poised for very good margins.
Yep.
We had originally said high, getting to a high-teen EBITDA ROS took a bit of a step backwards with the market last year.
Mm-hmm.
But there's no question we'll be getting into that range pretty soon.
Got it. And, you know, I suppose thinking sort of more broadly around that transaction, I, I know the sort of selling family. I think the lockup or a portion of the lockup expired at the beginning of the year. Any sort of perspectives around that? I know you have the buyback planned this year, and, and any thoughts around how we should look at that?
Look, I'm hesitant to speak for Max, but what I will tell you is this: that number one, and I'm talking about Max Viessmann, we are number one incredibly lucky and fortunate to have him on our, a phenomenal insight, perspective, collaboration. He introduces us to whether it's German or other politicians.
He gives us insights into what's happening not only in Europe but throughout the world on trends. So, he's very unique and an enormous asset to Carrier. He truly believes not only in Viessmann and the business that he and his father and those that came before him built, but he believes in Carrier and he believes in the combination. I've talked to him.
What he's told me is that he has no current plans to sell any shares, and I do know he's super committed to the journey that we're on together. And that's how he views it, and that's how I view it. Like, we are on a journey together, and you judge these combinations not over the course of a quarter or four quarters. You judge them over the course of time.
If someone had bought our Resi business in 2007, they would not have looked that great in 2008, right, during the financial crisis. But they would be frigging thrilled that they have that business five years later. High margin, very well positioned. We will be in the same exact position. Was our timing perfect? No, of course not. Never perfectly is. But I will tell you that great business, great team, the best-positioned company in a very long-term, growth market, and we're thrilled with the combination.
Perfect. And when we're thinking about kind of capital deployments in general, I think it's what? It's a $3 billion buyback, and then we should think beyond that, maybe smaller scale acquisitions. Is that the framework?
Yes. Yeah. That's exactly right, Julian. We did $2 billion last year. We said $5 billion total. We did about $1 billion before our earnings, which leaves $2 billion for the rest of this year, and that's on track. We are not in the in terms of M&A, we are not spending any energy on elephant hunting. We're not looking at.
Yeah.
Major, multi-billion-dollar-type acquisitions. Can we do $100 million or $200 million here and there? We certainly will where it makes sense, aligned with our priorities around controls and aftermarket and asset-light type kind of growth that we look at. But we're not looking at major acquisitions right now.
On the sort of cash generation front, you know, guided to high conversion this year, do you think that's a sustainable rate? I know in the past there was always the partnership structures maybe weighing on the cash flow. Kind of, how much has that been cleaned up?
Sure. I'll take that one. So, in general, if you think about cash flow this year, $2.4 billion to $2.6 billion was the guide.
Yeah.
And in terms of conversion, we're gonna come in right around 100%. To kind of the JV part of it, you're right. In any given year, you do have a little bit of a gap between the P&L expense versus the cash outlays. But we think for 2025, we're actually well calibrated there, and that's how we can kind of get to that 100%. Over the long term, yeah, maybe, maybe $100 million or so that kind of moves around. But, you know, 90% to 100% is a good place.
You know, you mentioned the investor day and kind of thinking about, you know, strategic planning and so forth. Maybe expound a little bit on the kind of performance targets in that supplemental equity grant and sort of how investors should think about that.
We will release our proxy in the next week or so. We did, a couple of us did get a supplemental award. I think that the way that our board framed that was in terms of a three-year EPS. There's a 26% EPS target in there. We will, it'll be in our proxy. I mean, frankly, I'll tell you the number that we, that is at the midpoint for that target is $3.60 for next year. I'm not saying that that's our guide.
Yep.
I'm not saying that that is what wakes me up and what motivates me. What I will tell you, what motivates our board, and I'm on the board, is to deliver the results that our shareholders rightly expect, to deliver results for our customers. And the reason that our board set that target is that there's a belief that that's what our company should be driving to.
And I think that number resonates in that respect that it's obviously not for the faint of heart. We grew our EPS last year about 16% or so, to go from $2.56 to $3 this year, which is the midpoint of our guide, would be about 18%. And then to go from $3 to $3.60, if we end up, you know, guiding and delivering that, would be another 20%.
So over that few years, you're looking at a CAGR in the high teens. But I know that when our board did that, it was they viewed it as we've invested a lot in the company. We believe that we want to incentivize you to drive the kind of results that investors expect us to drive to.
Perfect. And then last one, a quick one really. You know, tariffs always comes up this year. Any sort of thoughts around exposures and, and offsets for Carrier? Is it something you're concerned about?
Well, I'll tell you that the one area that we really focus on is Mexico.
Yep.
We're okay on Europe both, both ways, both directions. We're okay on Canada. We're okay on China. We're okay on raw materials and steel and aluminum. The one that we clearly have operations down in Monterrey, Mexico. We're very proud of those operations, by the way. Depending on what happens with tariffs, we have a three-prong approach.
We've notified our distributors that we would raise prices that day. Number two is that we will work with our suppliers to pay less to our supply chain, which quite honestly is only fair not only because we don't think we should be left holding the bag entirely, but number two is we pay in dollars. The peso would likely devalue. So we think that's partly justified.
So we consider them partners, but we think we should share in some of the pain that would come with that. Number three is we'd have to look at cost takeout elsewhere in the business. So, we're hopeful that 25% doesn't come into place. We will prepare for the worst, but hope for the best.
Great. Well, with that, I think we'll turn to audience response, questions, please. So the first one, do you currently own Carrier?
Oh, is there a question?
Oh, well, please, yeah.
Oh, question with John.
You can ask a question.
I think.
Okay. No, no. Well, anyway, going back to it, 60 odd percent not ownership. The second question is around general bias or attitude to Carrier at the moment.
We don't vote like an island.
No, no, no. You just have to sit there and accept the result.
You just sit there and be quiet.
50% sort of neutral-ish. Third question is around EPS growth for Carrier versus the multi-industry sort of group average. So above to in line. Fourth question is around usage of excess cash. So mostly share buyback. Penultimate question is around the P/E multiple that Carrier should trade at. So around the sort of market multiple. And then the last question is kind of why doesn't Carrier deserve a higher valuation? So a mix of kind of core growth and capital deployment. But with that, thanks so much, Dave.
Okay. Thank you, Julian.
Thank you.
Thank you, Mike.
Great.
Thank you.
Great to see you.
Thank you.
Thank you.
Thanks so much.