Carrier Global Corporation

Good morning and welcome to Carrier's second quarter 2022 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 now introduce your host for today's conference, Sam Perlstein, Vice President, Investor Relations. Please go ahead, sir.

Thank you and good morning and welcome to Carrier's second quarter 2022 earnings conference call. With me here today are David Gitlin, Chairman 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 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. 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 the forward-looking statements. 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. I'd like to start by saying how proud I am of the carrier's team ability to deliver strong results amidst the current backdrop of inflation, continued supply chain challenges, and COVID lockdowns overseas. Our team's hard work fueled by our high-performance culture resulted in another quarter of solid organic sales and adjusted operating profit growth, capping a strong first half and enabling us to raise our full-year adjusted EPS guidance. Looking specifically at our Q2 results on slide two, we delivered 7% organic sales growth, expanded operating margins by 130 basis points, and increased adjusted operating profit by 4% year-over-year despite the chub divestiture. Price cost was positive in the quarter, and we now expect to be price cost positive for the year. Our backlog is up 20% compared to last year. Aftermarket performed particularly well and was up double digits. Free cash flow improved meaningfully compared to last quarter, but was a use of cash. Turning to slide three, the value creation framework that we outlined at our investor day has not changed, driving above-market organic growth, expanding margins, delivering strong free cash flow, and disciplined capital allocation. We recognize that there are concerns about slowing economies. In such times, we do not need a new playbook. We double down on the playbook that we have. We are focused on controlling the controllables, and our track record demonstrates that we execute in the face of challenges. We are playing offense, investing in growth, particularly digitally enabled aftermarket solutions. We have effectively driven price and aggressively driven costs out of the system, and our strong balance sheet provides us with plenty of flexibility for value-added capital deployments. including investments that will benefit from the compelling multi-year secular trends of healthy and sustainable environments, as you see on slide four. Indoor air quality is critical to our health, safety, and cognitive performance. Studies show that improved ventilation and filtration reduce the spread of microscopic particulates, including COVID, by up to 80%. But IAQ does more than prevent the spread of airborne illnesses. 8% of children suffer from asthma, and improved ventilation in schools reduces their symptoms. Students also perform better with improved indoor air quality. 60% of K-12 classrooms have inadequate ventilation today. Studies show that cognitive performance improves by 2x when optimizing CO2 and VOC levels. Proper filtration systems are equally important and can prevent harmful outside air, whether from forest fires or pollution, from entering the classroom or the home. IAQ is no longer a nice-to-have. It's critical to our health and safety and our ability to perform. We are responding to the challenge. K-12 orders were up over 35% in the first half of the year. In Q2, we saw a 20% year-over-year increase in healthy building orders, and the pipeline remains at over $800 million. Some key wins include a new US theme park featuring air handling units, antimicrobial coating, and UV light technology, and an industrial manufacturing facility upgrade in China with air handling units and HEPA filtration. Carrier also won the opportunity to partner with a large school district in North Carolina to provide holistic HVAC solutions for three new schools that will prioritize indoor air quality. Customers not only want healthy air environments in their schools, office buildings, and restaurants, but also in their homes. And our diversified portfolio offers unique solutions. For example, our kit of business recently introduced a series of smart, healthy, and connected products that includes the industry's first integrated smoke, carbon monoxide, and indoor air quality detectors. We are also excited about our recent Healthy Homes partnership with Procter & Gamble. We will start by educating our respective consumers on the benefits of healthy homes with a vision towards joint marketing and promotion activities in the future. On sustainability, the last nine years rank among the 10 warmest years on record. Recently, we saw record temperatures in the UK and Germany where less than 5% of homes have air conditioning. Demand for AC is increasing in those countries, and we are poised to support this demand in a sustainable manner. Addressing increased demand for air conditioning with sustainable solutions is critical to help reduce emissions and fight climate change. Therefore, we remain committed to providing innovative, energy efficient solutions using low GWP refrigerants and coupling them with digital capabilities to optimize asset utilization and energy efficiency. A proof point of our progress on differentiated solutions is in our North American light commercial business, where our rooftop units will now feature our innovative EcoBlue technology. This technology improves performance and efficiency while decreasing installation and maintenance costs through our exclusive, patented, bell-less direct-drive vane axial fan system. An industry first for rooftop units. Our units equipped with EcoBlue are up to 40% more energy efficient compared to the industry's traditional belt drive fans in a similar footprint, a real game changer. It's the same with heating, where various factors are driving an accelerated shift away from fossil fuels and toward heat pump solutions. This shift presents a significant opportunity, and we start from a position of strength. We have the market-leading position in European commercial heat pumps, and are the leading player in residential and light commercial heat pumps in North America with over 30% of our residential splits today comprising heat pumps. We are also investing in effective and efficient low temperature heat pump solutions. We have successfully completed all of the requirements for the Department of Energy's residential cold climate heat pump challenge, where we validated a coefficient of performance higher than 2.1 at an ambient temperature of five degrees Fahrenheit And we are now commercializing that solution for market introduction. Including the heat pump revenues of Toshiba Carrier, an acquisition that we expect to close in early August, we will have about $2 billion of annual heat pump revenues globally. And we are confident that the combination of Toshiba Carrier, GEWE, and our Riello business in Italy will enable us to grow in the European residential heat pump market with compelling product offerings. We see the same shift to electrification in our transport refrigeration business with demand for our all electric vector equal units steadily increasing. Dawson Group, along with many other transport companies, added carrier transical vector equal units to their fleet to be more efficient and sustainable. We are expanding our market leadership position in this space. Regarding digitalization, we continue to enhance our Abound and Lynx platforms to further differentiate our lifecycle solution offerings. Abound continues to gain traction in verticals ranging from commercial office and university buildings to data centers to national retailers, with our focus remaining on providing scale customers with the solutions that they desire. Our advanced Lynx digital platform aimed at significantly improving the cold chain through enhanced visibility and increased connectivity received a silver ranking from the Edison Awards for Excellence in Supply Chain Innovation. Like Abound, we are adding new features to Lynx. Our recent Lynx fleet rollout incorporates customer feedback and provides key alerts and metrics around fuel and battery levels and asset run hours. These notifications, shown in a summary dashboard, help to minimize unit downtime and load loss, ultimately reducing our customers' operational costs. We remain on track to have 100,000 linked subscriptions by the end of this year. Another critical growth driver is higher margin aftermarket and recurring revenues, which you see on slide five. Aftermarket has been up double digits through the first half of the year, and we're on track for another year of double-digit growth. All of our three segments saw double-digit aftermarket growth in Q2. Commercial HVAC is now up to over 15,000 connected chillers, putting us ahead of schedule for 20,000 connected chillers this year. We also remain on track for 70,000 chillers under Blue Edge LTAs by the end of this year. In residential and light commercial, the team continues to see expanded adoption of the Breeze platform by new national account customers to increase aftermarket part sales. So, our aftermarket playbook is working. Before I turn it over to Patrick, a bit more color on the Toshiba carrier acquisition on slide six. TCC's technology positions as well to accelerate the VRF international light commercial and heat pump opportunities. TCC's pioneering inverter technology coupled with its rotary compressors allow for dynamic and intelligent balancing of air conditioning demand, thereby providing customers with greater energy efficiency, longer life, and quieter system operation. We will deploy our multi-brand, multi-channel strategy to further penetrate critical markets, and our complementary global footprints and supply chains give us confidence in achieving run rate synergies of $100 million. We created a new business unit within the HVAC segment, Global Comfort Solutions, with a strong leadership team based in Tokyo. Global Comfort Solutions will include the TCC and GIWI acquisitions, as well as our European Riello business and the light commercial business outside of North America. The team has been working on detailed execution plans, and collectively, we're ready to go.