Carrier Global Corporation

Good morning and welcome to Carrier's second quarter 2023 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 second quarter 2023 earnings conference call. With me here today are David Gitlin, Chairman and Chief Executive Officer, and Patrick Gores, 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 theme at Carrier remains performing while transforming, and I am proud of our team as we are progressing well with both. You see that strong performance in our Q2 results on slide two. Organic sales growth grew 6%, with both HVAC and fire and security up 9%. We drove strong double-digit growth in light commercial and commercial HVAC, global truck and trailer, controls, and aftermarket. Within fire and security, growth was broad-raced across security, residential, commercial, and industrial fire. Total company backlog remains well above historical levels, up 30% on a two-year stack. Adjusted operating profit and adjusted EPS were up 12% and 13% respectively, and free cash flow was strong at over $300 million. Price cost was increasingly positive in Q2. Toshiba carrier performance came in stronger than expected, and we are on track to deliver $300 million of gross productivity this year. As a result of our strong first half performance, we are raising our full year guidance for organic growth, adjusted operating margins, and adjusted EPS. A key driver of our sustained organic growth and robust backlog is the result of our team leaning into secular trends around sustainability and healthy buildings, as you see on slide three. With our clear and unwavering focus on being the global leader in intelligent climate and energy solutions, we continue to see traction from our sustainability-driven growth initiatives. Resi heat pump sales in North America have been up double digits year-to-date, We saw another quarter of over 20% growth in commercial heat pump sales in Europe and electric transport units doubled in Europe. Our healthy buildings pipeline is up over 2x to 1.6 billion driven in part by K through 12 in the US where orders were up over 20% in the quarter. We are clearly positioned at the core of a transition to a more sustainable planet. We published our 2030 ESG report yesterday in which we now disclose sustainability progress through the CDP. After completing our portfolio moves, about half of our sales will relate directly to clean tech, and we expect that proportion to continue to increase. We remain on track to reduce our customers' carbon emissions by more than one gigaton by 2030 while achieving carbon neutrality in our own operations. Our laser focus on digitally-enabled aftermarket solutions continues to gain traction, as you see on slide four. Q2 saw yet another quarter of double-digit aftermarket growth, with the first half up mid-teens compared to last year, and we remain on track to deliver double-digit growth this year and beyond. The playbook is working, expanding the capabilities and deployment of Abound and Lynx, our key digital platforms, increasing part sales supported by agile pricing and improved fulfillment rates. increased attachment rates and overall coverage across the portfolio, and deploying connected devices to increase recurring and subscription-based revenues. We are also embedding AI and generative AI capabilities into Abound to drive solutions for our customers. By analyzing sensor data, patterns, and performance metrics, generative AI can help prevent equipment failures, drive improved air quality by controlling ventilation, and increase energy efficiency by controlling temperature set points, airflow rates, and scheduling strategies. So, our execution is progressing well. A brief update on our portfolio transformation on slide five. On Visa and Climate Solutions, the short version is, the more we get to know them, the more excited we are to close. Our integration planning team in Frankfurt is actively working to ensure that we hit the ground running on day one. Wiesman Climate Solutions is performing very well ahead of their projections. First half sales were up an impressive 20% year over year, with heat pump sales up over 40%. Wiesman Climate Solutions profitability is also up significantly compared to last year, and they remain on track to deliver €4 billion in sales and €700 million in EBITDA this year. We remain confident in the €200 million of cost synergies, driven primarily by supply chain, insourcing, and value engineering. The growth opportunity for the combined business is even more compelling. The prime focus areas include expanding Wiesman's sustainable heating and home energy management offerings globally, driving incremental sales through Wiesman's European channel using a multi-brand strategy, and building on Wiesman's digital platform to provide even more differentiated end-to-end solutions globally. Moving to the fire and security and commercial refrigeration exits. The good news is that strategics and sponsors have expressed considerable interest in these superb assets. We are tracking to the sequencing we've established for these exits. We expect to have commercial refrigeration, now including profile mechanical systems, and the security business in the market in September, with residential fire initiating its sale process a month or so later. Commercial and residential fire exits will follow. The result is the new carrier that you see on slide six. The combination of the acquisitions of Toshiba Carrier Investment Climate Solutions, together with the tremendous positioning that Carrier has established over the past century, position the combined entity to become a true global climate champion in very attractive and growing market segments. Focus matters, and our focus on sustainability differentiation position us as a pure play high-growth company. Our combined channels, brands, technologies, and world-class talent will create solutions for our customers, our people, and the planet for generations to come. And with that, let me turn it over to Patrick. Patrick? Thank you, Dave, and good morning, everyone.