Carrier Global Corporation

Good morning and welcome to Carrier's Third Quarter 2022 Earnings Conference Call. 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 Third Quarter 2022 Earnings Conference Call. With me here today are David Gitlin, Chairman and Chief Executive Officer, and Patrick Orris, Chief Financial Officer. We will be discussing certain non-GAAP measures on this call which management believes are relevant in assessing the financial performance of the business. These non-GAAP measures are reconciled to GAAP figures in our earnings presentation, which is available to download from Carrier's website at ir.carrier.com. 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 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. Good morning, everyone. Let me start by saying how proud I am of this tremendous carrier team, which continues to deliver strong and consistent results. Turning to slide two for a summary of our Q3 results. We delivered 8% organic sales growth on the heels of continued traction on pricing. Total company organic orders were up 3% in the quarter, and our backlog is up about 10% year over year. Importantly, we continue to deliver double-digit aftermarket organic growth. Adjusted operating profit was slightly better than we expected, and price cost continues to be positive. We are tracking to about 300 million of gross productivity, about 100 million of which will come from G&A reductions. We generated strong free cash flow in the quarter of approximately $700 million. Supply chains are generally improving. We have increased dual sourcing for critical components, and supplier on-time delivery has meaningfully improved. The improvements, though steady, have been later in the year than planned, thus impacting our full-year free cash flow forecast. As supply chain and working capital improve, we expect to return to 100% free cash flow conversion. We successfully closed the Toshiba carrier acquisition during the quarter, and we are making important progress on integration and are starting to realize synergies. We still have plenty of capacity for additional value-add capital deployment as our balance sheet remains very solid with approximately $3 billion of cash and no debt maturities until 2025. Earlier this week, our board approved a $2 billion share repurchase authorization, which is on top of the $300 million remaining on the previous authorization. We are confident in our strategy and long-term prospects and remain committed to delivering shareholder value through disciplined capital allocation, including organic growth investments, M&A, dividends, and share buybacks. Moving to slide three. I WANT TO AGAIN EMPHASIZE OUR COMMITMENT TO THE VALUE CREATION FRAMEWORK THAT WE PRESENTED AT OUR INVESTOR DAY EARLIER THIS YEAR. OUR TEAM REMAINS LASER FOCUSED ON THESE FOUR PRINCIPLES OF DRIVING ABOVE MARKET ORGANIC GROWTH, EXPANDING MARGINS, DELIVERING STRONG FREE CASH FLOW AND DISCIPLINE CAPITAL ALLOCATION. WE HAVE A THOROUGH GOAL ALIGNMENT PROCESS THAT CASCADES OUR CRITICAL FOCUS AREAS TO EACH OF OUR 55,000 TEAM MEMBERS INDIVIDUAL PERFORMANCE GOALS. We are making significant progress on our priorities, as you can see on slide four. Secular trends continue to drive sticky customer demand, and one theme that certainly fits that definition is sustainability. Our customers in both the commercial and residential verticals are motivated to achieve their ESG targets and reduce their carbon footprint and energy bills, with government mandates, policies, and incentives further fueling this demand. A key sustainability enabler is the shift to electrification in buildings and cold chain distribution. Starting with buildings, in the U.S., the rapid transition to heat pumps will be further accelerated by the recently passed Inflation Reduction Act. Today, over 30% of our residential split sales include heat pumps. In Q3, our residential heat pump shipments were up over 30% compared to last year. We established our Tennessee facility as our North American heat pump center of excellence and are expanding customer financing offerings through our new eco home initiative. In addition to heat pumps, we continue to lead through innovation with energy efficient solutions. The cut over to our differentiated new 2023 CO2 compliant units has gone well, and our Resi HVAC team has done a great job managing the production and inventory transition. We recently hosted 8,000 Carrier and Bryant dealers in Las Vegas, and our industry-leading dealer network is energized about the product lineup. Our new indoor and outdoor units are complete redesigns, differentiated in performance, size, and weight. In addition, a 45% SKU reduction provides flexibility and operational efficiencies to the channel and to us. We are driving aggressive cost reduction actions and are pricing the new, more efficient units at least a 10% to 15% premium over previous generation products. In Europe, where we are the leader in commercial heat pumps, Q2 and Q3 heat pump orders were up 30%, and we anticipate the same magnitude for the full year. And the TCC acquisition enables us to accelerate product development in the heat pump segment and become a more significant player in the fast-growing Asia VRF heat pump market. We also continue to benefit from the shift to electrification in our truck trailer business with strong traction on our innovative Vector E-Cool units. Customers now operate these units in 11 countries, and our market leadership in this segment is being recognized. Just recently, Vector eCool earned the top product of the year award from the Environment and Energy Leader Awards program. In addition to sustainability, we continue to lean into the opportunity presented by the increased focus on health and wellness. We are proud to partner with our friend Russell Wilson as we work with large scale customers to provide them with safe and healthy indoor environments. Demand for our innovative solution continues to build. In Q3, healthy building orders were up over 55% compared to last year, and our pipeline increased to about $900 million. Within the K through 12 vertical, Q3 orders were up 20%, and we are up about 35% year to date. Our intense focus on digitalization for many reasons, but at its core, We are transitioning Carrier from an equipment-centric provider to a solutions company with more aftermarket and recurring revenues. The opportunity to use digital offerings to embed ourselves in our customers' ecosystems to help them achieve specific outcomes is tremendous. Our Abound and Lynx digital platform sense and collect data and interact with key building and cold chain system technologies to provide customers with the outcomes they desire. Abound not only provides healthy and sustainable solutions, we have also introduced new applications, including Abound Predictive Insights that reduce the total cost of asset ownership by enabling smarter, more predictive maintenance to optimize equipment health and performance. My leadership team and I are interacting directly with scale customers, and I can tell you that their willingness to make long-term commitments to Carrier is encouraging. Recent Abound wins include a nationwide drugstore chain that will add an additional 2,500 stores to our growing portfolio of managed multi-site retail locations and an installation at more than 100 commercial office buildings for a key scale customer. Our efforts here are being recognized as Abound Ecoenergy has received five awards in 2022 for innovation, impact, and customer service excellence and its ability to deliver positive outcomes. Growing abound sales will generate higher margin, more predictable recurring revenues, and a stronger pull for additional equipment sales and services. And the same holds true for Lynx and our cold chain initiatives. We continue to add capabilities to our Lynx platform focused on providing our customers with greater flexibility, visibility, and intelligence across the cold chain. Our advanced reefer equipment insights and analytic models provide early and automated detection of refrigerant loss. enabling our customers to improve their asset uptime and operational performance and to protect the invaluable refrigerated cargo. In our North American truck trailer business, Q3 saw a more than 60% year over year increase in service revenues driven by thousands of new link subscriptions. We remain on track for 100,000 new link subscriptions by year end. Our traction on solution selling driving more recurring revenues is reflected in our continued aftermarket performance, as you can see on slide five. Aftermarket was up double digits organically in the third quarter, and we continue to expect to realize over $7 billion in revenue by 2026. Connected devices are a fundamental enabler. We remain on track for about 20,000 connected chillers. Our attachment rate was 40% in the third quarter, And we expect to have 70,000 chillers under BlueEdge contracts by year end. We are also expanding our part sales enabled by our Breeze platform where we onboarded two new national accounts. Our aftermarket playbook is deeply embedded in our DNA and we are seeing the results quarter over quarter. Lastly, on slide six, we continue to be confident in our ability to drive shareholder value even in the face of economic uncertainty by staying true to our proven strategy. We have consistently exceeded our expectations, and we will utilize that same playbook in 2023 and beyond, driving strong and recurring growth through differentiated solutions that address secular trends and increased aftermarket opportunities, eliminating waste and driving tenacious cost reduction, and remaining disciplined in our capital allocation to accelerate growth and return capital to shareholders. AS WE CLOSE OUT Q4 AND LOOK AHEAD TO 2023, WE WILL CONTROL THE CONTROLLABLES BY DOUBLING DOWN ON THIS PROVEN PLAYBOOK. I AM DEEPLY CONFIDENT IN THE CARRIERS TEAM ABILITY TO DRIVE CONTINUED STRONG RESULTS DESPITE CHALLENGES THAT MAY BE THROWN OUR WAY. WITH THAT, LET ME TURN IT OVER TO PATRICK. PATRICK?