Carrier Global Corporation

Good morning, ladies and gentlemen, and welcome to Carrier's fourth quarter 2022 earnings conference call. 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 2022 earnings conference call. With me here today are David Gitlin, Chairman and Chief Executive Officer, and Patrick Orr, 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 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. Our Q4 results for sales, earnings, and cash flow were all in line with our expectations, as you can see starting on slide two. We delivered organic sales growth of 5% supported by another quarter of double-digit growth in light commercial and commercial HVAC, global truck and trailer, and aftermarket. Pricing remained strong and our realization continued to offset inflationary headwinds. Supply chain improvements continued. allowing for reduction of our past due shipments with further improvements anticipated in 2023. Our backlog, which ended up mid-single digits year over year, up 40% on a two-year stack, and up 2x from 2019, remains at very healthy levels. Adjusted operating margins of 10.1% were flattish compared to last year, despite a 70 basis point impact from the consolidation of the Toshiba joint venture. We made great progress on our productivity initiatives in the quarter and achieved our full year target of $300 million in savings. Adjusted EPS was 40 cents in the quarter at the high end of our guidance range. We generated about $1 billion of free cash flow in the quarter ending 2022 with $3.5 billion of cash, allowing us to continue to play offense with capital deployment as we head into 2023. Moving to slide three. I am proud of our team's accomplishments last year. We delivered on our full year outlook for sales, adjusted operating margin, and adjusted EPS while significantly advancing our strategic priorities. We drove 8% organic sales growth, adjusted operating margin expansion of 60 basis points, and adjusted EPS growth of about 15% when we exclude the impact of the Chubb divestiture. But we did fall short of our original 1.65 billion free cash flow guide as we discussed in October, resulting from supply chain and related inventory challenges. We did deliver on our revised guidance of 1.4 billion as a result of our strong Q4 performance. So our track record of delivering results without surprises continues, and our team is poised to continue to deliver in 2023, in part because of key secular trends that drive demand, as you can see on slide four. Our customers continue to look to us for healthy and sustainable solutions, and we have differentiated offerings that meet their needs, particularly in the fast-growing heat pump space. Our North America residential heat pump sales grew 35% in the quarter, and our European commercial heat pump sales were up 30%. We expect those areas to only grow stronger as the Inflation Reduction Act and the Repower EU initiative propel increased adoption. Additionally, Toshiba's innovative and leading inverter technology continues to impress. When combined with our multi-rotary compressors, heat pump efficiency and capacity dramatically improve. Toshiba's technology and expertise are also helping us penetrate the attractive and growing residential heat pump market in Europe. Our position in transport electrification is also market-leading. We have units operating in 15 countries and plan to ramp significantly with more than half of refrigerated transport units sold to be electric by 2030. The healthy building trends continued to be a positive in the quarter as orders were up over 80% and our pipeline increased to over $1 billion. For the full year, healthy building orders were up about 50%. K through 12 also remains encouraging with our pipeline up about 60% year over year. And with almost two thirds of the federal government's ESSER funds yet to be allocated, we expect further acceleration into 2023. As we continue to distinguish ourselves as a climate systems and solutions company, we remain focused not only on achieving our own ESG goals, but also helping our customers achieve theirs as well. We recently increased our previous aggressive 2030 net zero targets, committing to set greenhouse gas emission reduction targets in line with the science-based target initiative criteria. Additionally, Carrier continues to be recognized in the ESG space, including distinguished recognition in London where our customer's heating network will provide a 50% reduction in carbon emissions to network participants. We also continue to perform on our aftermarket growth objectives, as you can see on slide five. When we became a standalone public company in early 2020, we emphasized increasing aftermarket growth rates from historical low single digit levels. And last year, we produced another year of double digit aftermarket growth. Our focus remains on providing differentiated digital solutions through our Abound and Lynx platforms and connecting not only our new products, but also our significant install base. Our Bound technology now monitors over 1 billion square feet, and we recently onboarded over 100 commercial office sites for a key large-scale customer. We recently released the Bound Net Zero Management, which provides customers with an easy way to view, track, and analyze energy usage and emissions data across their global footprints and proactively identify conservation measures. We've made similar progress with our innovative LINX platform and launched several new capabilities in the quarter. We expanded our reefer health capabilities to include early refrigerant leak detection and launched a managed services LINX fleet offering for a major grocery retail chain in the US. We achieved our goal of having 70,000 chillers under long-term agreements by the end of 2022 and expect to increase that by another 10,000 in 2023. Importantly, we also achieved our objective of having 20,000 connected chillers and plan to connect another 10,000 this year. We recently announced a strategic collaboration agreement with Amazon Web Services to jointly build, market, and sell Carrier's digital solutions. Not only are we delivering on our financial and strategic imperatives, we are also making great progress on our portfolio optimization and executing on our capital deployment priorities as you can see on slide six. You'll recall that at the time of our spin, we carried approximately $11 billion of debt on our balance sheet in cash of about $1 billion. Over the course of just two and a half years, we have reduced our net debt levels nearly in half from that $10 billion level to $5.3 billion, while increasing our strategic organic growth investments by over $300 million. We have also completed a number of compelling acquisitions highlighted by the consolidation of Toshiba Carrier. All acquisitions have been strategic and core to our business, focused on enhancing sustainability leadership, accelerating aftermarket growth, driving digital and technology differentiation, and expanding adjacencies and geographic coverage. We've also been disciplined in evaluating our existing portfolio to ensure each business is core and that we are the best owner. As a result, we optimized our portfolio by completing the sale of Chubb and our shares, completing the sale of Chubb and our shares in Bayer while also reducing our minority joint venture count from 41 to 29 since spin. In addition to our portfolio moves, we've been disciplined and proactive with our other capital deployment actions. We have steadily and consistently increased our dividend and have completed about 2 billion in share repurchases, excuse me, since spin. All of this to say we have made great progress over the last few years, but that does not mean that we are done. We are always evaluating acquisitions in our current portfolio for potential opportunities for simplification and value creation. We will remain steadfast in our commitment to keep evaluating our portfolio as we enter 2023 and beyond. Patrick will cover our 2023 guidance in more detail, but I will emphasize a few highlights on slide seven. Focus remains very thematic for us. All of our 52,000 team members are aligned on our key priorities, and those priorities remain consistent. Carrier 2.0 is a term that we have been using internally, which represents a very purposeful shift from a primary focus on selling equipment to now using digital and innovation to provide our customers with sustainable and healthy outcomes throughout the lifecycle of our product and service offerings. The result will be our continued pursuit of higher margin, high aftermarket growth rates. We remain focused on reducing costs and expect to get another $300 million in productivity in 2023. We are clear-eyed about the broader economic challenges and uncertainty in 2023, and have done our best to calibrate macro factors in our guidance that you see along the left of this slide. We expect to deliver solid organic growth, strong margin expansion, excluding TCC, and high single digits to low double digits adjusted EPS growth. Strong free cash flow and a very healthy balance sheet enable us to play offense on capital deployment. With that, let me turn it over to Patrick. Patrick?