Carrier Global Corporation

Good morning and welcome to Carrier's first quarter 2024 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 first quarter 2024 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 10K, 10Q, and 8K, 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. Good morning, everyone. We've had an exciting start to the year. We welcome 12,000 new team members from Wiesman Climate Solutions to the Carrier family. made great progress on our business exits and delivered very strong financial results, positioning us for yet another year of significant margin expansion and solid growth. Starting with the highlights of our strong first quarter results on slide three. On low single digit organic sales growth, we drove 280 basis points of adjusted margin expansion and 19% adjusted EPS growth. I am very proud of the team. We have made enormous progress on our lean journey and driving sustained productivity, and we are seeing it in our results. Our formula is working. Drive productivity tenaciously, simplify the business, reduce overhead, invest in growth, all while increasing margins. Our performance and transformation all tie to our clear north star to be the global leader in intelligent climate and energy solutions, and we are making great progress on our vision, as you see on slide four. We provide our customers with differentiated sustainability solutions. For buildings, our North American small rooftop units have the highest efficiency in the market with the smallest footprint. Our water cool chillers with magnetic bearings provide best-in-class efficiency with the ability to match cooling loads with variable demand during the course of the day. For homes, Wiesman's newly launched heat pumps expand our addressable market in Europe by approximately $5 billion and In typical Wiesman fashion, deliver 15 to 25% energy savings versus competitors and are the quietest on the market. For the cold chain, our new AG19 trailer reefer unit reduces fuel consumption by 30% compared to our previous offerings and by 10% compared to our competition. And our new Optimal Line container unit consumes roughly 15% less energy than our competitors. Our digital strategy is also a critical enabler and differentiator. For buildings, we now monitor more than 1.2 billion square feet through a bound, a 10% increase from last quarter, with additional key scale customers attracted to our new net zero features. For homes, Wiesman's one-based digital platform is the only home energy management system in the world that integrates space heating and cooling, water heating, solar PV, and with battery storage with a grid interface. Both Visamon's OneBase platform and our North American IntelliSense platform enable early detection of potential malfunctions with notifications to installers, helping address problems before they occur. In the cold chain, we have recently introduced new capabilities to help optimize cooling and thus reduce our customers' operating costs, helping us increase link subscriptions by 50% in just the past year. In summary, we are very pleased with our clear traction as the global climate champion, driven by technology and digital differentiation. We also remain very purposeful in driving aftermarket growth, as you see on slide five. In Q1, aftermarket was up 6% led by another quarter of double-digit growth in commercial HVAC, and we remain on track for another year of double-digit growth. We now have about 75,000 chillers under long-term agreement, about 35,000 of which are digitally connected, and our attachment rate reached its highest level ever, 48%. We also connected nearly 5,000 chillers, the highest in a quarter since our spin four years ago. The playbook works, and our KPIs are consistent and cascaded globally, bringing focus and execution to this imperative. We remain committed to our goal of $7 billion of aftermarket revenues by 2026. When we made this projection at our 2022 investor meeting, it assumed a high single to low double-digit CAGR. With our planned business exits and now the addition of Eastman, we will divest about $500 million of net aftermarket sales. So to achieve the 2026 target of $7 billion, we now require a low double-digit CAGR. We remain committed to this goal and are accelerating the deployment of our proven playbook to achieve it. Turning to slide six, we could not be more proud of our combination with Wiesman Climate Solutions. Thomas Heim and his team have been all in on ensuring that our team's work is one, sharing best of best product technology, digital solutions, supply chain, and operational opportunities, and working seamlessly on multi-brand, multi-channel strategies globally. Wiesman Climate Solutions is a company built on excellence. This is a team that loves to win. The opportunities to leverage its excellence in customer intimacy, product design, channel differentiation, brand strategy, sustainability solutions, culture and talent development, and operations will give Carrier a clear advantage to sustain differentiation and premier customer satisfaction. We remain deeply confident in the long-term transition towards electrification and sustained growth in the market. With Germany aiming to become greenhouse gas neutral by 2045 and individual federal states like Bavaria as soon as 2040, discussions in major municipalities have started as to when the supply of natural gas to households will be limited or effectively stopped. At the same time, two weeks ago, the EU adopted the Energy Performance of Buildings Directive, under which each member country must adopt its own plan to reduce building energy usage by 20 to 22% by 2035, with at least 55% of the reduction coming from renovations to the worst performing buildings. While the long-term trend towards electrification remains robust, we are clear-eyed about the short-term market headwinds in the European residential market. Despite these headwinds, our team outperformed the end markets in Q1 through share gains, new product introductions, boiler sales, and pricing. And our team is poised to continue doing so for the full year. VCS sales in Q1 were down 12% overall, more than half of which was driven by lower solar PV sales, which carry lower margins. For the full year, we now see VCS sales flat to down 5%, with Q2 revenues being similar to Q1 and an expected increase in the second half consistent with a typical seasonal pickup. Though heat pump orders in Q1 were down year over year, they were up nearly 60% sequentially and were the highest in the year. Despite 2024 sales expected to be lower than our February guide, we only see a modest impact to our full year adjusted EPS because the team is driving to offset reduced volume with increased productivity and synergies and favorable mix. CoS synergies are tracking to about $75 million in 2024 and over $200 million by year three. The CoS actions position us for higher earnings conversion when the broader market recovers. We also remain very encouraged by revenue synergies, which we believe will be in the hundreds of millions of dollars. So we could not be more excited by the opportunities presented by this game changing combination. Let me shift gears and talk about the unique opportunity presented by data centers, as you see on slide seven. Over the past three years, we've capitalized on this important opportunity by securing key wins with scale customers globally. The AI movement is driving hyper and sustained growth in this space, not only driving data center growth, but also an outsized opportunity for cooling providers, given that AI chips drive 7x the heat generation versus traditional chips. Today, AI makes up about 20% of the load of a typical data center and some of our customers project that percentage to increase to 80% in the next few years, thus putting huge demand on the grid and increasing the need for differentiated HVAC and control solutions. Accordingly, the data center market for the HVAC business is projected to increase from roughly 7 billion in 2023 to 15 to 20 billion in 2027. For us, this vertical represents a low double digit percentage of our global commercial HVAC applied business. And we see a tremendous opportunity of increasing this segment to well over 20% of our commercial HVAC sales in the next few years. We doubled our backlog in Q1 alone and in April secured further key wins as we optimize the use of our global footprint to support our customers. Turning to our transformation updates on slide eight. Mike Nygren, In addition to the basement integration, our business exits also continue to progress well, we are moving with speed and maximizing shareholder value. Mike Nygren, In March, we announced a definitive agreement for the sale of industrial fire for 1.4 billion and gross proceeds this deal is expected to close in early three Q. We now have definitive agreements for three of our four business exits and are within a couple of weeks of issuing our offering memorandum to prospective buyers for our residential and commercial fire business. We are targeting to close that deal by the end of this year. We are focused, but not finished. The entire team remains extremely energized as we draw closer to becoming a higher growth, simpler, leaner, pure play climate champion. The pace of our transformation and the net proceeds put us on track to achieve about a 2x net leverage ratio this year and resume share repurchases in 2024. With that, let me turn this over to Patrick.