Carrier Global Corporation

Good morning and welcome to Carrier's fourth 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 Perlstein, Vice President of Investor Relations. Please go ahead, sir.

Thank you and good morning and welcome to Carrier's fourth quarter 2020 earnings conference call. With me here today are David Gitlin, President and Chief Executive Officer, and Patrick Gores, 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. Carriers' SEC filings, including Forms 10-K, 10-Q, and 8-K, provide details on important factors that could cause actual results to differ materially from those anticipated in forward-looking statements. This morning, we'll review our financial results for the fourth quarter and full year 2020, discuss the full year 2021 outlook, and we'll leave time for questions at the end. Once the call is opened 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.

Okay, thank you, Sam, and good morning, everyone. I'll provide a quick summary of our fourth quarter performance on slide two, and Patrick will provide more color. In short, no surprises. Sales were up 2% on a reported basis flat organically, as residential HVAC remained very strong with a 25% year-over-year increase. We produced $453 million of adjusted operating profit, executing on the cost actions that we planned and communicated, including accelerated growth investment, incremental public company costs, and some one-time items that Patrick will cover. And we are very pleased with our free cash flow generation in the quarter. Excluding the bare tax payment of $272 million, we would have exceeded our forecast by about $100 million. Importantly, we continue to consistently execute on our long-term strategic growth agenda while maintaining strong traction on our Carrier 700 and G&A cost reduction initiatives. All of this positions us well for 2021 and beyond. Turning to slide three. Before we dive into 2021, let me provide a broader look back at 2020. I look at 2020 as both a foundational and a transformational year for Carrier. With the spin from UTC, it was clear that we had a unique opportunity to create tremendous value. But to do so, we needed to create a new carrier. We started with our culture and took an intentional and deliberate approach to launching the carrier way. Our culture reinforces our value and is centered around customers, agility, innovation, talent, and winning. And the energy level within carrier is tremendous. In addition to culture, we have invested in and promoted existing employees while infusing the team with key outside talent who have brought fresh perspectives and proven leadership. We also launched several new initiatives designed to further enhance the agility and effectiveness of our organization. For example, we launched Carrier Excellence, our new operating system, Carrier Alliance, our new supply chain program, and we undertook a holistic and structural approach to driving sustained G&A reductions and simplicity across the business. We put a disciplined process in place to drive $600 million of recurring cost savings over three years, Carrier 600, and given our strong progress, we recently increased our target to $700 million under the renamed Carrier 700. We also dramatically improved the balance sheets and spin. We now have increased financial flexibility to invest in growth, execute bolt-on M&A, and return capital to shareholders. In December, we announced a 50% increase in the dividend. And today we announced the share repurchase program. And we leaned in to becoming ESG leaders, committing to significant, achievable, and important goals, such as by 2030, reducing our customer's carbon footprint by more than one gigaton and achieving carbon neutrality in our operations. Commitments that are not only good for the environment, but also good for business. We also made progress on our profound commitment to improving our diversity representation and creating a truly inclusive culture. And we reframed our focus to position Carrier as a growth company. While the COVID pandemic in 2020 presented unprecedented challenges, it also served to reinforce our position as the world leader in healthy, safe, and sustainable building and cold chain solutions. With this as our enterprise strategy, Supplemented by our three-pillar approach to driving sustained growth, we are confident in our top-line opportunities for 2021 and beyond. Slide 4 shows the flywheel that I used in our last earnings call to help explain how our key focus areas will drive shareholder value. As COVID shined a light on the criticality of healthy, safe, and sustainable buildings and cold chains, we acted on our ambition to become a world leader in both. There has been a tectonic shift in how business, government, and society value the safety of indoor environments and the importance of robust systems for distributing food and medicine. There has also been a groundswell of recent focus on sustainability, all of which represent opportunities for carriers' business now and in the future. On the building side, we introduced new products like our OptiClean unit that Time Magazine recognized as a top innovation of 2020. More recently, as part of our healthy home strategy, we introduced an air purifier for the home. This is our first direct-to-consumer product focused on improving air quality, and we also are now selling carrier one-inch filters directly to consumers. Overall, we have over $100 million of orders for healthy building products and services and have a pipeline of more than $200 million. The next milestone is the release of a new digital solution that we're calling Abound that will work with building management systems to provide visibility to indoor air quality and other key healthy building indicators. Using machine learning, this solution will connect to building control systems and auto mitigate deficiencies. The overall goal is to work with our customers to give their patrons and tenants confidence to reenter indoor environments. As an example, we recently signed a sponsorship with the American Hotel and Lodging Association, where Carrier will help define the AHLA safe stay guidelines for guests and staff around indoor air quality and contactless solutions, and then we'll play our part to help hotels implement those solutions. On the refrigeration side, we continue to see traction on connected cold chain offerings that address the critical challenges inherent to food and pharmaceutical distribution. Sales at our industry-leading cargo monitoring Sensotech business were up about 10% in the fourth quarter, and we entered 2021 with a backlog that is up over 170% over the same period last year. And we continue to push for adoption of our cloud-based links platform that we are co-developing with AWS to extend our current digital offerings. Our growth levers are further fueled by delivering against our three strategic pillars. First, in terms of growing the core, we can say with confidence that we gained share in many of our core markets. We met our objective of adding over 500 sales and sales support people, invested over $400 million in R&D, enabling us to introduce over 120 new products last year. We continue to have key new wins. Our team never needed to be pushed to win, just given the freedom and the investments needed to get back to our market-leading roots. We also continue to push on product extensions, such as VRF and geographic coverage, with a focus on increasing sales in China. Our third pillar, growing services and digital, has yielded very strong initial results as we push our business models to focus more on recurring revenues. To kickstart progress, we focused last year on our conversion rates, that is, converting new OEM units coming off warranty to long-term agreements. We started the year at 20% conversion rates. We committed to end the year at 30%, and we did. Going forward, our focus will be on overall coverage. That is, of our overall installed base of chillers in the market, how many of those are under some sort of long-term agreement? Today, we have coverage of about 50,000 units, and our plan is to increase that by about 10,000 units per year. We have similar objectives in other parts of our business as well. Increased coverage is enabled by digital solutions. Our truck trailer segment launched eSolutions 2.0 with a web-based dashboard that provides critical fleet information, enhanced visibility, and improved geofencing. And in FNS, we launched our Edwards EST4 network fire alarm and emergency communications platform to tie multiple remote buildings together to provide more flexibility and cost effective solutions to our customers. We also continue to invest in and grow our ALC building automation and controls business where customers have embraced our open architecture solutions. 50% of our 2020 sales in that business came from recently introduced products. And we are complimenting that with continued investments in our channel and field network. It's culture. and our growth mindset, we are taking a very disciplined approach to capital allocation. In the span of just nine months, we reduced our net debt from about $10 billion to approximately $7 billion and ended the year with over $3 billion of cash. Our balance sheet improvement now opens the door to bolt-on M&A. Our acquisitions will align with our focus on healthy, safe, and sustainable building and cold chain solutions more broadly with the three pillars of growth that we have laid out before i turn it over to patrick let me give you some color on how we're thinking about 2021 on slide five our outlook for the year reflects our objective of being a consistent mid-single-digit organic growth company we expect sales to grow six to eight percent and that includes two percent tailwind from fx and with strong conversion We expect adjusted EPS to increase by about 14% at the midpoint. We'll continue to invest in growth while we project improving margins by about 70 basis points and producing strong free cash flow of about $1.6 billion. While we are starting this year with continued uncertainty around the global economic recovery as the pandemic continues to impact people and economies around the world, We are optimistic that the uncertainty will subside as we get into the second half of the year following more widespread vaccine distribution. The good news for our first half is that our backlog is solid given the strength in orders in 4Q that has continued very well into January. As we get into the second half of the year, we expect some of the businesses that were acutely challenged by the pandemic to start to recover, particularly in retail, hospitality, and small to medium-sized businesses. So with that, let me now turn it over to Patrick. Patrick?