Carrier Global Corporation

Good morning, and welcome to Carrier's first quarter 2021 earnings conference call. This call is being carried live on the Internet, and there is a presentation available to download from the Carrier's website at ir.carrier.com. I would now 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 first quarter 2021 earnings conference call. With me here today are David Gitlin, Chairman and CEO, 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 reminds listeners that the sales, 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 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 the forward-looking statements. This morning, we'll review our financial results for the first quarter and discuss the full-year 2021 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 Chairman and CEO, Dave Gitlin. Thank you, Sam, and good morning, everyone.

Starting on slide two with an overview of the quarter, Q1 was a great quarter for us and an early indication that a global economic recovery is underway. Areas of our portfolio that have been performing well have continued to improve, and those businesses and verticals that were acutely impacted by the pandemic are showing early indications of recovery. Overall, volume came in stronger than we planned. Reported sales were up over 20%, including organic growth of 17%, driven by another very strong quarter in North American residential, which was up 50%. We also saw strong growth in commercial HVAC and transport refrigeration. All of our segments contributed to the organic growth in Q1 as the organization continued to execute well on our growth initiatives, including the aftermarket, which grew close to double digits. Notably, compared to the first quarter of 2019, we grew sales about 6 percent organically. This was coupled with strong order trends leading to a healthy backlog at the end of the quarter. Orders were up over 30% compared to last year, driving the organic backlog up 13% sequentially and up close to 20% year-over-year. We produced $608 million of adjusted operating profit, up approximately 40% year-over-year. Given supply chain constraints, we are incurring some additional inflationary pressures and higher logistics costs in meeting customer demand. We are working to mitigate these headwinds through additional costs and pricing actions. Finally, I am encouraged by our free cash flow generation in the first quarter. Though we do not expect to regularly adjust guidance for the full year after just one quarter, we are increasing guidance on sales, earnings, and free cash flow given our stronger than expected Q1 results and confidence in the macro trends that we're seeing. We now expect reported sales to grow 7% to 10%, including a 2% tailwind from FX. We expect adjusted EPS to increase by about 20% at the midpoint, and we are increasing our projected free cash flow for the year by about $100 million to about $1.7 billion. Slide 3 shows the flywheel that I've used in prior earnings calls to explain how our key focus areas will drive shareholder value. In the upper left, we continue to ensure that we drive a performance culture. We are now one year into our journey as a standalone public company, and we are building momentum. We started off by putting a playbook in place, and a year later, I can say that we are a fundamentally different company from our culture to our strategy to our targeted investment prioritization, balance sheet, and capital position. Carrier 700 is the cornerstone of our unrelenting focus on cost reduction and and we achieved about $60 million in Q1 in a tough environment. Increased input costs are putting pressure on our $225 million target for the year, so we are driving additional costs and price actions to offset the unplanned headwind. Also, core to our new culture is a focus on profitable growth. We are gaining traction on all three pillars of our growth strategy. We are gaining share across the portfolio, helped by innovation arising from our increasing R&D spend from $400 million in 2019 to about $475 million this year, and an additional 600 sales and sales support people that we've added over the past nine months. Regarding aftermarket and digital offerings, we are gaining significant traction as we push our business models to focus more on recurring revenues. We are on track to deliver double-digit aftermarket growth this year, and we continue to expect the number of chillers under contract to increase from 50,000 to 60,000 this year. Increased service coverage and traction on our BlueEdge offerings are enabled by our digital solutions that we are implementing across all of our segments. Lastly, we continue to take a very disciplined approach to capital allocation, which Patrick will cover. We also said that we would continue to invest in solutions for healthy, safe, and sustainable building and cold chain solutions and inorganic growth, both of which I'll discuss on slide four. In Q1, we had over $80 million of orders for healthy building products and services, and we currently have a global pipeline of sales opportunities of more than 500 million. We created a new healthy building solutions organization under Ajay Agrawal's leadership with a seasoned team dedicated to this effort. We also introduced differentiated sought-after offerings and were energized by this week's release of our new digital offering called Abound. It is all about giving customers confidence to reenter crowded indoor environments and providing a healthier indoor experience. Abound gathers performance data from disparate systems, sensors, and sources and presents it in a smart, simple interface. It gives a clear view of building systems and sensor performance data and identifies and helps to address anomalies. This solution is not a simple rebranding of digital offerings that we had in our portfolio. It is an open architecture, SaaS, cloud-based platform and acts as an intelligence layer interfacing with not only our automated logic controls platform, but also with third-party building management systems and sensors throughout the building. We have had pilots underway with key vertical customers in the office building space, the educational sector, and the sports and entertainment vertical. Those have gone tremendously well. A huge vote of confidence is that we signed a deal to support the Atlanta Braves as they start to welcome fans back to Truist Park. Abound will monitor the indoor space covering a range of of food and beverage locations, and club spaces for guests. As a SaaS platform, Abound is expected to drive more recurring revenues, including subscription and services, and also to help pull through additional carrier equipment sales. We are seeing equally strong progress on our other key ecosystem of focus, healthy, safe, and sustainable cold chain solutions. Sensitech, our cargo monitoring business, had a record Q1 with sales up 16% due in large part to demand related to the distribution of COVID vaccines. Similar to Abound, a key differentiator is our cloud-based digital offering that we are building in partnership with AWS called Lynx. As a key launch customer, CQube recently selected the Lynx Fleet solution to deliver enhanced digital capabilities for 2,000 refrigerated containers. And finally, on the right side of the chart, we highlight our inorganic growth progress. We were very pleased to announce our agreement to acquire G-Way, which we refer to by its brand name of Chigo. This acquisition will help accelerate our growth in the attractive variable refrigerant flow and international light commercial markets, which have consistently had outsized growth rates over traditional markets. With the acquisition of Chigo, we will own important VRF technology, design capabilities, and low-cost manufacturing that we can scale globally. We expect to close the transaction with the majority shareholder in 2Q, and we are excited to welcome the Chigo team to the Carrier family. We also continue to add and promote superb talent as we lean into the deployment of the Carrier way. As an example, we recently welcomed Jennifer Anderson to Carrier, leading corporate development strategy and serving as our chief sustainability officer. She will help drive another key strategic focus, ESG. ESG remains a very important focal point for Carrier as we work toward delivering on our 2030 commitments. We are tracking to our commitment of reducing our customers' carbon emissions by more than one gigaton as we introduce more energy-efficient and electric solutions. Last week, Carrier improved to a top quartile score with Sustainalytics, and we are now number five within the building products category out of 129 companies. And we also continue to make good progress on our D&I initiatives. Our number of diverse executives has increased significantly since 2015, and we are leaning in to making sustainable changes to ensure that we have a truly inclusive culture. With that, let me turn it over to Patrick.