Carrier Global Corporation

Good morning and welcome to Carrier's second quarter 2020 earnings conference call. This call is being carried live on the internet and there is a presentation available to download from Carrier's website at ir.carrier.com. I would like to introduce your host for today's conference, Sam Pearlstein, Vice President of Investor Relations. Please go ahead, sir.

Thank you and good morning and welcome to Carrier's second quarter 2020 earnings conference call. With me here today are David Gitlin, President and Chief Executive Officer, and Tim McLevish, Chief Financial Officer. Except as otherwise noted, the company will be speaking to results from operations excluding restructuring costs and other significant items of a non-recurring and or non-operational nature, often referred to by management as other significant items. The company also reminds listeners that the earnings and cash flow expectations and any other forward-looking statements provided during the call are subject to risks and uncertainties. Carrier's SEC filings, including Carrier's registration statement on Form 10 and the reports on Forms 10Q and 8K, provide details on important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements. This morning, we'll review our financial results for the second quarter of 2020, discuss the full-year 2020 outlook, and we'll leave time for questions at the end. Once the call is opened up for questions, we ask that you limit yourself to one question and one follow-up to give everyone the opportunity to participate. With that, I'd like to turn the call over to our President and CEO, Dave Gitlin.

Thank you, Sam, and good morning, everyone. Here is the quick summary. The second quarter was better than we expected, driven by our continued cost reduction actions, progress on our top-line initiatives, and improvement in the U.S. in June. We are raising the low end of our prior outlook for sales, adjusted operating profit and cash flow, enabling us to add back some targeted growth investments that we had previously scaled back. Before we get into details on our Q2 results and the outlook for the rest of the year, let me start with some context. Slide two shows the four priorities that we established at the outset of the COVID pandemic. Our team has continued to respond aggressively and effectively on all of them. It starts with protecting and supporting our people. Our operations and field teams have continued in the workplace with limited interruption, and we have gone to great lengths to ensure a safe environment for our people. We have distributed 2.5 million masks, instituted thermal screening for 100% of our employees at our scale locations, and deployed Carrier's Healthy Building Program solution in our facilities to provide our people with as safe an environment as we possibly can. Our second priority has been to maintain business continuity to support our customers. While we experienced some short-term shutdowns, by the end of the second quarter, our factories and suppliers had resumed operations, and we are now more than 95% of our production capacity availability. Our third priority is to effectively manage cost and cash. Carrier 600, our program targeting $600 million of run rate savings within three years, had initially targeted $175 million of savings in 2020. After one cue, we increased that to $225 million of savings this year, and we are now tracking to $250 million of recurring in-year savings. We also announced one-time cost actions of $300 million. We remain on track there delivering $115 million in Q2. On cash, we have close to $5 billion of liquidity. We have $2.7 billion in cash on the balance sheet, and we have access to a $2 billion revolver. With updated covenants on that revolver and our term loan, we are very comfortable with our liquidity position. We are pleased that Q2 cash flow was materially higher than we had internally projected and And we are now comfortable projecting at least $1.1 billion of free cash flow up from our prior estimate of at least $1 billion. We also declared our first dividend in Q2, demonstrating our confidence in the business. And fourth, we remain laser-focused on ensuring that we position Carrier to emerge stronger from this pandemic. We are accelerating implementation of our strategic initiatives and investing in two key emerging trends – healthy, safe, and sustainable buildings and cold chain solutions. The COVID pandemic has underscored the role of buildings in helping ensure public health, and we moved quickly to launch our Healthy Buildings program. You see on slide three where we stand on all our overall strategic priorities and our progress as a public company. As a standalone company, we launched the Carrier Operating System and the Carrier Way, and both are yielding early results. Our operating system includes a disciplined global deployment of lean in our factories. I was recently in our Charlotte factory, and it was night and day versus a year ago. In just one year, our efficiency in that factory has improved by almost 15 percent. Our quality has improved by over 25 percent, and our on-time delivery improved from 85 percent to 95 percent, despite the challenging environment. The carrier way speaks to our behaviors, culture, and values. There is a new energy within Carrier that is focused on customers, winning, agility, speed, and innovation, and that combination is resulting in some key new wins. And as we advance in our mission of creating solutions that matter for people and our planet, we recently released our first ESG report that highlights our progress on our environmental targets, our commitment to effective and ethical corporate governance, actions to significantly improve our diversity and inclusion, and helping to establish Carrier as the employer of choice. ESG is not a side activity at Carrier. Its core to our business always has been, and we take pride in being leaders in this effort. We've also been consistent in focusing on our three strategic pillars to drive sustained growth. In order to strengthen and grow our core business, which is our first pillar, we continue to invest in R&D, salespeople, and digital. We originally planned to spend an incremental $150 million in these three key areas this year, and after COVID hit, we scaled it back to $75 million. As we said, our incremental strategic investments would increase as we achieve more traction during the year. So with our improved outlook, we are bringing our incremental strategic investments up to approximately $100 million for this year. In terms of innovation, we continue to drive key new product introductions. For example, in Q2, we launched the Infinity 26 air conditioner and Infinity 24 heat pump that have the highest energy efficiency ratings amongst all ducted systems. Carrier Transicold launches innovative vector multi-temperature trailer refrigeration unit that addresses a key market need and initial demand has been very positive. And in our fire and security business, KIDA is launching new TruSense smoke detectors that are first-to-market compliant with the new UL standards and will significantly reduce nuisance alarms. And we are on track to add the 500 sales and support people that we previously planned. In our second pillar, which includes geographic expansion, we continue to make strong progress in China, with a key VRF win with the Sanya International Sports Industrial Park And also in China, our GST Fire business had an important win with Hongxing Lier's 1.3 million square foot commercial complex. And in the third pillar, driving aftermarket and digital, we introduced the BlueEdge service platform providing customized tiered solutions across the business. We remain on track to achieving 30% attachment rates in our commercial HVAC business this year, helped by the launch of our Assurance One program, and digitally-enabled lifecycle offerings are a clear focus for us, and we're seeing traction. Our new digital platform for our residential and commercial national accounts achieved $100 million in e-commerce revenues in June. Our super business signed a contract with six St. Louis-area realtor associations to provide subscription-based access solutions to over 9,500 key holders, and British supermarket retailer Asta signed a long-term support and telematics deal in conjunction with its order of more than 165 carrier transit cold vector refrigeration units. And we are truly leaning in on the global imperative around healthy and safe buildings. We have a comprehensive product offering that includes all aspects of indoor air quality, including filtration, ventilation, and humidity, along with sensing and controls. We've complemented this with our fire and security portfolio to include touchless, and traceability offerings. And our Linnell S2 business announced a strategic collaboration with FLIR Systems, the world's largest and leading company specializing in thermal imaging cameras, where we will resell FLIR's EST thermal imaging screening solutions with Linnell S2's on-guard access control system. We are integrating these multiple healthy and safe building offerings to provide our seven targeted verticals with a one-stop shop solution. Society needs confidence in the safety and health of indoor environments, and customers are increasingly turning to Carrier for critical solutions as they reopen. As recent proof points, we signed a healthy buildings deal with Cushman and Wayfield to collaborate on deploying leading-edge Carrier solutions, and we are working with Emory University to upgrade IAQ sensing and controls in their intelligent building focused on customer health and experience. We continue to fund these exciting growth initiatives through tenacious progress on Carrier 600 and G&A transformation. We remain focused on our overall business simplification that makes us more agile and externally focused. We launched Carrier Alliance to reduce our 6,000 suppliers and align with fewer more strategic partners. We are reviewing our 58 JVs for opportunities to improve our focus on growth initiatives. We have approved a project in our commercial HVAC business to digitize our internal and customer-facing interface points in our European operations. And we are assessing our overall back office footprint for reduction and consolidation by moving to a back office shared service center of excellence model. So lots of exciting progress strategically. Let me give you some color on orders on page four. We shared trends back in Q1 that showed the U.S. and Europe still struggling with while China had returned to prior year levels. Here, we show detailed color on what we're seeing in this very fluid environment. Recall that the U.S. and EU make up 80% of our sales. In those regions, April and May were weak as expected, with April orders down 25% and May down 15% year-over-year on a combined basis. The surprise was the strength of U.S. orders in June, up 40% from last year. U.S. strength was led by Resi, where we saw orders up 100% in June, helped by an increase in cooling degree days, pent-up demand, and suppressed inventory levels. Also in the U.S., fire and security products orders grew in the high single digits in June after being down 30% to 40% in April and May, and commercial HVAC orders were up low single digits in the U.S. in June after being down 25% in April and May. The encouraging trends that we saw in June have carried forward to July where us and China orders have been up more than 20%. The EU orders have been down modestly compared to last year while South Asia remains very challenged. But despite a couple of good months of order trends, COVID cases continue to rise and economic visibility is uncertain. Therefore, we will continue to focus on what we control. effectively managing the business during times of uncertainty and volatility, and remaining flexible and opportunistic. With that, let me turn it over to Tim, and I'll come back to summarize before we open it up for Q&A.