Carrier Global Corporation

Good morning, and welcome to Cary's third quarter 2020 earnings conference call. This call is being carried live on the Internet, and there is a presentation available to download from Cary's website at ir.cary.com. I would now 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 Cary's third 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 third 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. You may ask further questions by reinserting yourself into the queue if time permits. And with that, I'd like to turn the call over to our President and CEO, Dave Gitlin.

David Gitlin Thank you, Sam, and good morning, everyone. Before we get going, let me first comment on the upcoming CFO transition that we announced last week. Patrick Gores, currently the CFO at Rockwell Automation, will be joining us as our CFO in a couple of weeks. At that point, Tim will take on the role of senior advisor, helping us with a smooth transition to Patrick and taking on specific key projects until his retirement in mid-February. For context, when we hired Tim, he was very clear with us that his role would be to help effectively stand us up as a public company, including building the finance team and function, strengthening the balance sheet, helping us establish our strategic priorities and working with the rating agencies and investment community, and charting the course for his successor. Doing all that and more, Tim has been the perfect CFO at the perfect time. I can't thank him enough for everything he has done for me personally and for Carrier. After a thorough search, I could not be happier to have Patrick joining us. I suspect most of you know him well. During his time at Rockwell, Patrick transformed the finance function, helped drive industry-leading top and bottom line performance, and a shift toward a recurring revenue model. And he was instrumental in guiding strategic capital allocation and portfolio optimization. We look forward to welcoming Patrick to the carrier team. With that, please turn to slide two where I'll discuss our Q3 highlights. In short, Q3 was a very encouraging quarter. Sales of $5 billion were up 4% year-over-year and substantially exceeded our expectations. Adjusted operating profit was up 6% year-over-year. We had strong incrementals in the quarter, putting our reported year-to-date decrementals at 30%, but operationally at 26%, factoring in the $53 million of additional public company costs. Our performance was driven by continued strength in North America residential HVAC, which was up 46 percent in the quarter, and by continued traction on our cost and growth initiatives. In RESI, this was our highest quarter ever for both sales and operating profit. We are pleased with our free cash flow generation in the quarter, which was $880 million, primarily driven by higher net income and better working capital performance. And we realized $300 million of cash before taxes from our sale of 9 million shares in Bayer. We continue to aggressively reduce costs via a strategic, disciplined approach, including reducing G&A and simplifying the back office. As a result, we are now raising carrier 600 to carrier 700, which calls for 700 million of recurring cost takeout by the end of 2022. This will allow us to fund investments and growth while driving margin expansion. we remain on track to invest an incremental $100 million in growth initiatives this year. Based on our Q3 strength, we are again raising our 2020 full-year outlook on sales, adjusted operating profit, and free cash flow. Given that we had $3.8 billion of cash at the end of the quarter, we plan to pay down $1.5 billion of debt in the fourth quarter. Next year, we expect to do more while supporting our dividend and preserving flexibility for M&A opportunities. Pivoting now to slide three on our progress on our overall priorities. We put in place a playbook that is gaining traction. Adoption of the Carrier Way has created a profound cultural transformation, which is resulting in an agile, innovative, aggressive, winning-focused organization, all of which is helping fuel our growth agenda. It starts with ensuring a performance culture, putting our customers first, and through a rigorous deployment of carrier excellence and our supplier excellence program, our on-time delivery has increased to 96% and our quality and performance has improved 30% year-to-date. We continue to invest in our growth initiatives. We have added an incremental 450 sales and sales support personnel this year and have introduced a number of innovative offerings, including the first fully autonomous all-electric engine-less refrigerated trailer system in Europe, and a new multi-purpose cloud-connected commercial fire detector that combines smoke detection with advanced sensing capabilities. And in terms of services aftermarket and digital initiatives, our commercial HVAC business closed the quarter at a 27% attachment rate globally, on track to achieve 30% by the end of this year. We have signed over 300 Blue Edge contracts since the program launched in June. We are also continuing to drive connected offerings across the network. For example, in the commercial refrigeration business, we completed a very successful pilot on our condition-based maintenance program, improving uptime by about 33% and improving technician productivity by over 20%. In fire and security, Our KIDA Fire Systems business shipped its first orders for IntelliSight, a remote health monitoring service for industrial fire alarm and suppression system control units. At a carrier enterprise level, we are truly leaning into the emerging trends around healthy, safe, and sustainable building and cold chain solutions, which you see on slide four. Starting with healthy, safe, and sustainable buildings. Our strategy here is to be the leading one-stop shop provider, which is driving strong customer interest and new product introductions that continue to gain traction. We obtained independent validation through a rigorous testing process that our Infinity air purifiers capture and kill technology inactivates 99% of coronavirus trapped on the filter, the first of its kind. Orders for those filtration systems were up 140% year over year in the third quarter. We also have orders for nearly 15,000 OptiClean units, and we are working an active pipeline for thousands more. Through our relationship with Cushman and Wakefield, we were able to upgrade a Denver area office campus with air purification systems with needlepoint bipolar ionization technology for every rooftop unit on its campus, along with Service by Carrier's Blue Edge platform. And we just signed a strategic HVAC deal at the 50-floor, one-court square tower in Long Island City, which we estimate will save up to 20% in energy costs annually and deliver improved comfort and air quality. For the healthy building space overall, we now have an active pipeline of potential order activity of $150 million, and we're still in the early stages of putting the comprehensive strategy in place to maximize our offerings and capture the opportunity ahead of us. Similarly, we recently launched our healthy, safe, and sustainable cold chain program. I am thrilled with our new relationship with Amazon Web Services, with whom we are partnering to develop a robust and powerful data ecosystem for cold chain operations. We also introduced carrier pods monitored by our Sensitech business to support added mobile cold chain capacity and cargo insights. With key partners, we're working to connect the dots to provide a one-stop shop approach for cold chain solutions for both food and pharma distribution. So we've made progress on our financial results, our performance culture, strategic growth initiatives, and capital allocation. Before I turn it over to Tim, let me give you some color on current order trends. Slide five outlines our three segments, which we have broken into two key business lines each. We also provide color by geographic region, starting with HVAC. You see here that our residential and light commercial orders were up 60 percent year-over-year in the quarter, driven by resi. Movement from distribution to dealers was strong, and distribution inventory levels are now in balance. For commercial HVAC, Orders improved from down about 15% in Q2 to almost flat in Q3. In our refrigeration segments transport business, order trends indicate that Q2 was the bottom for our truck trailer business. Unit order rates more than doubled from June to September. Container orders were down in Q3, but these tend to be lumpy, and we have seen solid October orders. Commercial refrigeration orders were also down in the quarter, but improved sequentially from Q2. For fire and security products, orders improved from down 20% in Q2 to down about 10%. We saw improvement in commercial and residential fire, China and the controls business, while the small and medium-sized business, oil and gas, and hospitality markets were weak. The FNS field business orders improved from down almost 30 percent in Q2 to down around 5 percent in Q3. Installation and nonrecurring service orders were down around 10 percent, given the discretionary nature of that work, while recurring service and monitoring orders were flat. Our business has reflected the bifurcated macroeconomy, where residential, healthcare, education, data centers, and warehouses have remained strong, while the oil and gas small and medium businesses and hospitality verticals remain challenged. Fortunately, the latter verticals are a much smaller part of our portfolio. We see the same bifurcation geographically, where the U.S. and China remain strong, Europe is recovering, and Asia, excluding China, is very challenged. While we're encouraged by Q3 order trends, we recognize the continued global uncertainty, and we remain prepared to adapt. With that, I'll turn it over to Tim and then come back to summarize before Q&A.