Carrier Global Corporation

Good morning and welcome to Carrier's second quarter 2021 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 2021 earnings conference call. We appreciate your flexibility in accommodating the earlier start time for the call. Since we plan to discuss the Chubb transaction as well as the second quarter earnings, we have more flexibility if the call runs a little longer. With me here today are David Gitlin, Chairman and Chief Executive Officer, and Patrick Orris, 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 second quarter and discuss the full year 2021 outlook and the agreement we announced Tuesday to sell our Chubb business. We will leave time for questions at the end. Once the call is open 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. It is great to be hosting this call from the Carrier Cooled New York Stock Exchange, and we appreciate the support that we've received from the team here. Please turn to slide two. Before we discuss the second quarter results, let me address the press release that we issued Tuesday announcing that we signed an agreement to sell our Chubb business to API Group for an enterprise value of $3.1 billion. To be clear, Carrier's global fire and security products business is not part of this transaction and remains an integral part of Carrier's portfolio and our healthy, safe, sustainable, and intelligent building strategy. We committed at our investor day last year to objectively assess our portfolio and do so through a rigorous application of our strategic and financial priorities. Within our fire and security portfolio, our products business is differentiated with leading market positions and attractive margins. Chubb is an industry leader with 13,000 employees that do a great job with installation and maintenance supporting our customers. but it is an agnostic business that does not pull through our products and yields lower margins. We concluded that Chubb is more strategic to API Group than it is to us. Divesting Chubb will significantly simplify our business. Chubb represents over 20% of our employees, but less than 10% of our adjusted operating earnings. Selling Chubb will increase our focus on our core businesses and enable us to reinvest the proceeds consistent with our capital allocation priorities to create long-term shareholder value. Patrick will discuss in more detail, but our capital allocation priorities have remained consistent, funding organic and inorganic growth, dividends, and share buyback within a solid investment-grade credit rating. Our intention is to use the cash proceeds and excess cash on the balance sheet for acquisitions, buyback, and debt pay down over 12 to 18 months to help position the company for strategic growth and to generate attractive shareholder returns. The net result will be a new, more focused Carrier with more product differentiation, faster revenue growth, higher margins, and higher returns on invested capital. This was an important deal for Carrier, and I want to thank our team and advisors for their tremendous work. Now, turning to our Q2 results on slide three. Q2 was another strong quarter for us. Our growth continues to be fueled by broad economic momentum, our position at the epicenter of important secular trends, and the benefit of our strategic investments. Managing the surge in growth has strained our extended supply chain, but our teams are navigating those challenges well to support our customers. You see our progress reflected in our 2Q results. Organic sales were up over 30%. Particularly encouraging was that the growth was strong across our portfolio and that we even grew 7% versus 2Q of 2019. Orders were up about 35% organically compared to last year, driving our backlog up 8% sequentially and up over 20% year over year, positioning us well for 3Q and the second half of the year. we produced $821 million of adjusted operating profit up over 70 percent year-over-year, and consistent with what we said during the April earnings call, Q2 incremental margins improved sequentially from Q1. Free cash flow continues to be strong, with first-half free cash flow up more than 30 percent over the first half of last year. Given our first-half performance, strong backlog, and expectations around the balance of the year, we are again raising our full-year guidance for sales, earnings, and cash. We now expect organic sales to grow 10 to 12 percent, adjusted EPS to increase by about 30 percent compared to last year, and we are increasing our projected free cash flow by $200 million to about $1.9 billion. Now, turning to slide four, we remain confident in sustained growth in our end markets and that our new operating system, culture, and team performance position us well to lead within our space. Key secular trends are likely to propel sustained growth for our industry. With people spending 90% of their time indoors and increasingly returning to their offices and recreational activities, we see more spend being allocated to the health, safety, comfort, and intelligence of indoor environments of all types, from homes to schools to hospitals to commercial office buildings. Likewise, the need for safe cold chain solutions has been intensified by the focus on vaccine distribution and the increasing global middle classes demand for more fresh produce and other refrigerated products. And of course, the need for sustainable solutions. Given that the building sector contributes about 40% of carbon emissions and food waste contributes another 10 to 15%, we are confident that spend on sustainability will continue to drive demand for our green solutions. We, therefore, remain laser-focused on healthy, safe, sustainable, and intelligent building and cold chain solutions, and we are leaning into those trends by executing on our three-pronged growth strategy, growing our core, expanding product extensions, and increasing recurring revenues through digitally-enabled aftermarket offerings. and we are seeing strong progress, as you can see on slide five. We have booked 250 million in healthy building orders year to date, and our active pipeline sits at 500 million. We are confident that spend on healthy buildings is not only sticky, but that it will accelerate as building owners will play both defense and offense on behalf of their occupants. Defensive spend is largely focused on defending against the spread of airborne illnesses, for example, Forty percent of classrooms in the United States have insufficient ventilation, and studies show that better ventilation and filtration materially reduce the spread of microscopic particulates like COVID and other illnesses like the flu and common colds. Building owners are also starting to invest in better ventilation to play offense. Recent studies have shown that people perform twice as well when the indoor environment is optimized. High CO2 levels, which can occur in crowded classrooms and offices with poor ventilation, have been proven to impact brain-based skills while better ventilation and filtration significantly improve cognitive function. Because of the many benefits of healthy indoor air environments, our goal is to make indoor air visible so good air quality becomes as important and expected as safe drinking water. Abound is a key enabler to make that happen. We received favorable feedback from our key launch customers, which include a commercial office building and an elementary school, and we have deployed it in our company headquarters where we have been demonstrating its power to customers. We are now leveraging our global sales force to deploy Abound and have had significant interest from marquee customers. In addition to Abound, we recently launched a Wi-Fi-enabled carrier home air purifier with a HEPA-level filter as one of our latest healthy home offerings. We have now sold over 38,000 OptiClean units. On K through 12, we have a dedicated team offering kitted solutions to our customers, resulting in sales to about 15 to 20 percent more school districts so far this year compared to last year as part of what we expect to be a significant opportunity over the next few years. Similarly, our connected cold chain offerings are gaining traction. Our cloud-based digital links offering that we are building in partnership with AWS was recognized by Fast Company as one of 2021's world-changing ideas. In the container space, we are adding connectivity for thousands of units each month and now can support mixed fleets, carrier and non-carrier, thereby increasing our recurring revenues and reducing our customer maintenance and logistic costs. We had significant links wins this quarter with Truck Trailer, including 1,700 more trailer refrigeration units for Prime and a three-year supply agreement with U.K. grocer Sandsbury's for all of its truck and trailer transport refrigeration equipment. Cortex is Carrier's AI and IoT platform that offers predictive insights, recommendations, and autonomous actions to optimize equipment performance and building operations. while minimizing our customers' energy consumption. Currently, over 220,000 pieces of equipment are connected to Cornix. Digital solutions are helping to drive increased aftermarket and recurring revenues. Aftermarket sales for Carrier were up about 20% in Q2 over last year, all helped by our differentiated BlueEdge tiered offerings. Our attachment rate in commercial HVAC was more than 35% in Q2. and we are on track to add another 10,000 chillers to long-term contracts this year from about 50,000 to 60,000. Likewise, in our refrigeration business, our Europe truck trailer business sold nearly 6,000 BlueEdge service agreements in the first half of the year. In addition, our fired security segment continues to expand our key digital offerings. Earlier this year, Linelis 2 was featured in the Apple Worldwide Developers Conference, and we're excited to work with Apple on providing Blue Diamond mobile credentials in Apple Wallet, on iPhone, and Apple Watch. As employees come back to office buildings, this work can increase the profile of access control solutions that help reduce touch points, enhance occupant experience, and increase confidence in indoor environments. So, very significant progress on healthy, safe, and intelligent offerings and recurring revenues. And on slide six, you see similar progress on our focus on sustainability. In short, we are committed to providing environmentally sustainable solutions, and our performance over the past year reflects just that. We are on track to meet our commitment of reducing our customers' carbon emissions by more than one gigaton, and ensuring our operations are carbon neutral by 2030. Electrification and energy efficiency are major focus areas for us. Commercial heat pumps in Europe and residential heat pumps in North America were both up 20 to 30 percent in the quarter. Electrification is equally critical to our refrigeration business. Interest in our vector e-cool unit in Europe remains high, and our backlog continues to grow. This is the only 100% electric trailer to reefer unit in the market today. Our efforts in helping customers reduce emissions and creating more energy-efficient solutions are starting to be reflected in some of our external ratings, including improvements in both our MSCI and Sustainalytics scores in the past year. As you can see on the slide, we are now considered a leader in the industry. So great progress on ESG, which is a fundamental aspect of who we are. So before I turn it over to Patrick, a word on a leadership change that we recently announced. In a couple of weeks, Tim White will join us as president of our refrigeration segment. Tim has been running GE's multibillion-dollar onshore wind business for the Americas region, and he ran key P&Ls within Collins Aerospace that included electric systems, environmental control systems, and engine control systems. He is the perfect leader to take this well-positioned business to the next level as we focus on electrification, digitalization, and sustainable solutions. I also want to thank David Apple for his tremendous leadership of the segment. We are fortunate to have David moving to Paris where our commercial refrigeration business is headquartered to provide the focus that that business needs to improve operational, strategic, and financial performance. We appreciate David taking on this critical assignment. So with that, let me turn it over to Patrick.