CARR - Carrier Global Corporation (CARR) Wolfe Research 16th Annual Global Transportation & Industrials Conference (Transcript)
2023-05-23 15:18:02 ET
Carrier Global Corporation (CARR)
Wolfe Research 16th Annual Global Transportation & Industrials Conference
May 23, 2023, 12:30 PM ET
Company Participants
Nigel Coe - Managing Director, Wolfe Research, LLC
Conference Call Participants
Patrick Goris - SVP & CFO
Presentation
Nigel Coe
…and welcome to the post-lunch period here at the Wolfe Conference. Very pleased to welcome back and start again with Carrier. CFO, Patrick Goris on stage with me. Thanks Patrick for being here and so is Sam Pearlstein, Hear of IR.
So I think we're just going to the Q&A right. Patrick, unless you want to make some opening comments.
Patrick Goris
No. Q&A is just fine.
Question-and-Answer Session
Q - Nigel Coe
Q&A is good. Okay. So normally, I want to start off with macro kind of trading environment. I think given the announcements you've made over the last month or so, I think the portfolio is sort of where I want to start and I wanted to kick off with Wiesmann and just maybe just first and foremost, how do you see the timeline for the closure of Wiesmann? What are some of the regulatory hurdles we need to go through? And what do we need to monitor there?
Patrick Goris
Yeah, and if I just may provide some context as what we've done for the acquisition, you can think about carriers since dispensed from United Technologies. We've worked on simplifying our portfolio. We sold an asset, an equity investment we had in Beijer. We sold Chubb, what we thought non-core assets. And then what we've done is we've increased our stake or we've acquired businesses in higher growth areas.
One was the acquisition of Toshiba Carrier. Joint venture, it gives us access to a faster growing VRF market, technology we can use in different parts of the world. And then we announced earlier this year, which you were referring to, Nigel, the acquisition of Wiesmann, which provides us basically with immediate access to residential heating and cooling in Europe, a much faster growing end market where Carrier has had very little exposure.
So that being said for context, there are no hurdles that we see that are not the usual hurdles. They're the normal regulatory requirements or approvals that we need. They're in Europe. They're in other parts of the world, including in Asia. That's why we came up with the timeline around the end of this year. And so that has not changed, although these items are either filed already or are in process of being filed and there is really no change there in terms of the timing.
Nigel Coe
Yeah. I saw some headlines around, the German regulator, some of the public interest of acquiring a Crown Jewel of the German industrial sector. Do you see any issues there?
Patrick Goris
We don't. But first of all, the reaction we think is understandable because we agree. You mentioned Crown Jewel. We think it is the crown jewel in this part of the market, not just in Germany, but in Europe in general. We actually have -- Wiesmann has sales in Asia as well. They have sales in the United States. So it's much more than just a European player.
They're always concerned if someone buys a national or the crown jewels of a country or an industry. But we've made it very clear that we're not there to -- call it to over-manage the business. They are really good at what they do. We can learn a lot from Wiesmann. We can use their technology in other parts of the world.
We can use their channel to push through additional products that are already in our portfolio. And, frankly, it's the key reason why the Wiesmann management team will be the Wiesmann -- will be the management team of that business going forward. And we actually may fold some of our businesses within Europe underneath that management team because they've done such an outstanding job.
Nigel Coe
Right. And I think you mentioned one of the attractions of Wiesmann partnering with Carrier is helping to expand and to invest and to make necessary investments required to meet some of those targets. Maybe just talk about some of the investment spend, kind of the investment capacity expansions you see over the next several years to support the forecast that you have out there.
Patrick Goris
It's specific to Wiesmann? So if you look at Wiesmann investment profile, they have made some significant investments last year. This year, I think, is about the peak because you basically have an entire industry of their entire business, which is shifting from boilers to heat pumps. And so you need more capacity for heat pumps and less capacity over time for boilers.
In all of our analysis and due diligence, this is the year where it's the biggest peak. The nice thing is going forward, we think there will be less requirements than this year, also because we have existing facilities in Europe. We have existing facilities in that region that we also acquired through the acquisition of Toshiba Carrier, and there is some space in those facilities.
And so I do not expect that this would have a significant impact on our free cash flow conversion. Actually, if I look at Wiesmann's free cash flow conversion, the last few years was in that 90% to 95% range with some important investments. So there will be one or two years of some important investments, but I don't see a change in our free cash flow profile as a result of this. And there are some nice, as I mentioned, some nice synergies there given our footprint in that region as well.
Nigel Coe
Sure. I see the clock's not ticking, so we have a lot of time. We have a lot of time. We have 30 minutes to go, so that's good news. Okay, so I lost my train of thought there. So we talked about capacity. How fungible is the boiler capacity with heat capacity? So as the heat pump business falls off, can that capacity be easily repurposed for heat pumps?
Patrick Goris
I believe it is new equipment that you need, hence some of the capital investments required. Also, it's interesting, the boiler business, we expect it to decline amidst single digits going forward. The boiler business is actually still growing in parts of the world, and so it's not like, for example, in Asia, in some countries there, their boiler business is still growing. And so it's not a one-for-one reduction and that's why we expect also from an overall company point of view for Wiesmann, we expect attractive revenue growth rates going forward.
Yes, amidst single digits decline in boilers, but we expect heat pumps to be growing at an attractive growth rate, so strong double digits, but the price per unit in heat pumps can be about 3X, 4X what it is for a boiler.
So without any volume growth or without any unit volume growth, you can see significant revenue growth, and the margin percent is about the same on a heat pump as it is for a boiler. And so it shows the attractiveness of the opportunity there.
Nigel Coe
Okay. So the boiler business would be falling off much faster than mid-single digits, but offset by in Europe, but offset by growth outside of Europe?
Patrick Goris
It would decrease faster than mid-single digits in Europe. That's our assumption. But there is still some growth in other parts of the world.
Nigel Coe
Okay, great. So the other part of the portfolio move is the foreign security assets and the commercial refrigeration assets. Maybe talk about how much progress you've made towards getting this done. I don't know what you can tell us, but in terms of how far down the path have you gone there?
Patrick Goris
Well, all the work streams are in flight. The bankers are all engaged, and so clearly we're in the process of going to market, as I say, as soon as possible, which I expect to be briefly after the summer or at the end of the summer and CCR, commercial refrigeration, I should say, that will be a sale. So that's very clear there.
And then on the foreign security side, frankly, we have some flexibility. Is it all at once or is it in parts? And so that's something that we're looking at to optimize frankly, and we've been very clear, we have three priorities. One, we want a clean exit. Two, it's proceeds, and three, it's timing.
Nigel Coe
Okay. We're definitely going to talk about the clean exit in a second. When we think about the foreign security package today, obviously excluding the KFI business that's gone into Chapter 11, but when you think about the remaining portfolio, it's a mix of residential and commercial assets. Is that a natural bundle, or do you think that they could be separable?
Patrick Goris
It could be separable, but there are different ways of thinking about it. One way to think about it is residential versus commercial. Another way of thinking about it is the security businesses compared to the fire businesses. And so that's some of the work that we're doing now, what is the best way to have a clean exit, maximize proceeds, and then timing. So there are different ways of going at this and so it's still open whether we sell it all at once or in parts.
Nigel Coe
Okay. But when you say sell, it sounds like sale is more likely to spin at this point.
Patrick Goris
I said sell. I should have said exit, but clearly the reason I said sell is because it's our preference.
Nigel Coe
Yeah, for sure. Yeah, for sure. And how would you -- I don't know. It sounds like you haven't gone – so the bankers are engaged, and I'm sure they are. They're not that busy right now. But as far as sort of the interest out there, how would you sort of characterize that?
Patrick Goris
Strong, and we're not surprised. Frankly, we've had interest in incoming calls way before the announcement. And the reason, frankly, is if you look at fire and security, if you look at each of the businesses that are part of that segment, they tend to be number one or number two in their market.
Tend to be high-margin businesses, tend to be businesses that don't require an enormous amount of capital to support them. It's just that we don't believe we're the best owners of those businesses. So we've had significant interest in incoming calls, and so we're quite optimistic on the exits here.
Nigel Coe
Great. Maybe a couple more on portfolio before we get into the actual business. So I think you said mid-2024 to have everything done by…
Patrick Goris
Over the course of '24.
Nigel Coe
Over the course of '24. It sounds like that could be sort of a conservative timeline. Do you think you could maybe get it done by year-end?
Patrick Goris
This year-end might be a little bit aggressive, but if you -- as I mentioned earlier, if we -- late summer, if we want to be able to go to market, as I call it, could there be a scenario where we could see some exits earlier, at least some announcements? Could be. We just shared over the course of 2024, we'd rather surprise to the upside than the other way around.
Nigel Coe
Sure. Absolutely. And then you mentioned the desire for a clean exit. Obviously, KFI has been unplugged from that package. Given what you've done -- well, you haven't done it. Your subsidiary has declared bankruptcy. It filed for Chapter 11. Does that clean the ring fence, that liability?
Patrick Goris
Actually, in our view, in Carrier's view, the location of the liability was always crystal clear. It was always in KFI and nowhere else. KFI has been in business for 35 years. It's a profitable business. It has good customers, good product lines. It has $200 million in sales.
It just happened to have owned a business for eight years, ending in 2013, that manufactured AFFF. Carrier never owned that business. We never got any dividends from that business. We got that business as part of the spin. And so, as it goes with either ring fencing or containing liability, we think it's a very, very strong position we're in, and that's why we're comfortable with the decision that the KFI board has made. And, obviously, this may impact whether this is a sale or a spin of some of the F&S businesses.
Nigel Coe
Okay. And just finally, this is my final question. And, by the way, guys, I'm going to go out with questions.
Patrick Goris
We still have 30 minutes.
Nigel Coe
I know. It's like some kind of Twilight Zone kind of situation. But I will be going out to questions of the audience in a moment. But is it possible you can actually exit the remaining businesses, the core businesses, without the KFI approval? Or do you think some kind of resolution around KFI needs to happen before we can finalize the sales?
Patrick Goris
I think it is possible that we could exit parts of fire and security before calling the complete resolution on the Chapter 11 process. I'm not sure there would be a complete outcome or a complete exit without having a clear outcome there in terms of the discharge of any liabilities.
Nigel Coe
Okay. Very clear. Okay, I think that Carrier's portfolio. Unless there's any questions out there on portfolio. Any questions?
Unidentified Analyst
Just had a quick question going back to your heat pump comment. You mentioned the pricing was 3 to 4x that of a boiler, wondering are there any material differences in the aftermarket in servicing and maintenance when that shift happens? Like is it more captured in that upfront cost?
Patrick Goris
Yes. Actually, it's both. And the reason I mentioned this, so the initial cost is a multiple of. But one of the beauties about Wiesmann is it's -- they're much more than just a heat pump company. They provide their customers an integrated solution, the solar panels, so generation of electricity.
Two, they have home battery storage, energy storage in their homes with batteries; three, and they have the pumps, they have a sanitary hot water and then they have the home energy management systems that optimizes the energy generation, the storage and the usage. And so the initial sale of the heat pump is a multiple of.
But if you then include all these accessories, that provides a significant additional revenue streams and then the opportunity to attach service to all of that. And so -- and by the way, this is something that really differentiates Wiesmann because we don't see anyone else in Europe being able to provide that.
And so it's much more than the initial heat pump sale. It's the overall package of solutions sold to customer, being able to attach services and having a level of customer intimacy and basically a dependency of the customer on the company that's very different than being just a provider of equipment.
And then for us, of course, and I'm adding on to my answer, but the opportunity is to be able to provide the same thing in some other markets, including in North America residential, where we have a very attractive market share where no one provides that complete offering today. And that's something that, of course, that we're looking into from a revenue synergy point of view.
Nigel Coe
Anything else? Okay. Let's continue. Maybe one more question on Wiesmann. We get a lot of questions around the potential competition in the European heat pump market to really explode. So a lot of Asian -- very capable Asian competitors coming in. Daikin is obviously expanding capacity. How important is that installation network that Wiesmann has, the 70,000-plus in stores. Is that a wall garden? Are they exclusive to Wiesmann? What protects you from competition?
Patrick Goris
We think that installer base is critical. One, there is a shortage of installers. So we can -- or anyone can produce as many units or heat pump units as an he wants unless you have installers that are trained on your equipment, have the loyalty towards your brand. It's going to be really hard to find someone to sell them to.
So the installers are critical. Wiesmann -- and I think that model is somewhat similar to the U.S. Installers in the U.S. tend to have a primary brand, could be 80-something percent of their sales. They tend to have a secondary brand. But the relationships are I mentioned the training, the training academies. It's really hard to switch. And it's certainly hard to switch from the number one premium brand in Germany.
And so we, Carrier, when we looked at that market in Europe, we always said technology is not our biggest challenge to enter that market. It is the challenge. And so challenge is one. Two is you may be able to provide or to manufacture and deliver a heat pump. But as I mentioned earlier, the energy transition is much more than selling heat pumps. The opportunity is for that entire integrated solution, and that's someone that we see Wiesmann being the only one who provides that today.
And so those are two really important elements. And then a third one is having the installed base. The customers know you, the customer know your brand. Wiesmann, I think, for 17 years in a row has been named the number one brand in Germany from a customer loyalty point of view. Very hard to break. And a key reason why we acquired them, obviously.
Nigel Coe
Sure. Okay. Great. Can we just talk about a quick post check on what's happening out there in the market right now? The field checks on residential are coming in pretty weak right now. Commercial sounds like it's on fire, and transport, I don't know. I have no idea about that. But anything you can help with what you've seen out there?
Patrick Goris
Yes. We would say that there are parts of our portfolio that have continued to be strong through the first quarter. You mentioned commercial HVAC, I would put light commercial HVAC right next to it or even higher performance there. North American truck and trailer continuing to do really well. The areas that for us have been weaker on our container business. Container is a really good business. It went through a downturn starting in the third quarter of last year. We actually believe our second quarter will be better than our first quarter from a volume point of view in container.
Commercial refrigeration is also going through a weaker period. We expect that to improve in the second half of the year. I'm not sure whether that's going to be a Q3 or Q4 element. With respect to resi, the item we watch the most is movement. First quarter, as we expected, volumes were down mid-single digit sales with -- mid-teens sorry, mid-teens. That's why Sam is here to correct me.
Mid-teens, volume mid-teens, revenues down high single digits, we think in Q2, sales will be down low single digit for resi. We actually, in our April guide, we assume that volumes will be -- or sales will be slightly up in resi in the back half of the year. We'll know for sure once we look at the movements, particularly in May and in June, as we enter the busy season.
Nigel Coe
Yes. It seems like weather has been unhelpful. Is that fair to say?
Patrick Goris
Yes, we always were warmer summer and colder winters. And so it could be warmer in some parts of our country. But as I mentioned, this can change, as we all know, this can change in a week. And in a week, you have a heat wave and it changes the whole dynamic of our business.
Nigel Coe
For sure. A couple of days of heat changes the whole thing. And then thinking about -- obviously, you and Watsco have a very symbiotic relationship. Watsco's margins have been significantly higher over the last couple of years. It feels like there's been some transfer between the manufacturers, not carrier, but manufacturers to the distribution channel. Is that the right way to think about it that there's been more incentives provided to grow?
Patrick Goris
I believe they may have seen the margin expansion earlier than we would have seen. But clearly, we have a tremendous focus internally on one the -- not just the price realization, but two, the productivity but also capturing any cost deflation. We have not seen it in Q1. Actually, we didn't expect that in Q1. We expect to see a bigger benefit from that deflation capture and starting in the second quarter of this year than what we've seen in Q1.
Nigel Coe
So we start to see improving margin for metals in the second quarter then a big tailwind in the second half of the year.
Patrick Goris
We actually expect that deflation capture to be higher second half of the year than the first half of the year.
Nigel Coe
And we're still on track for price cost of $200 million?
Patrick Goris
Yes.
Nigel Coe
Okay. That's great. And then on the commercial side, any areas of concern out there. I mean there's a lot of chatter around commercial construction weakness. Are you seeing any pockets of weakness in your portfolio?
Patrick Goris
In North America, for commercial HVAC, we think commercial real estate is less than -- or about 10% -- a little less than 10% of our total business. The tailwinds we've seen in this business is, one, focus on sustainability, decarbonization globally, healthy buildings, some government incentives. But if you look at commercial HVAC, we believe we have leading positions in Asia and in Europe, a very strong offering from a heat pump point of view.
And the biggest opportunity, frankly, we have in that business is in North America where we're not the number one, two or three player. It's an area where we've made some investments in our product portfolio, magnetic bearing equipment. But also, we're in the process of seeing expanding some of the mac bearing product line we have in the U.S. and introducing some of the heat pump technology in the U.S. that we're so successful within Europe.
And so attractive business and of course, the one of the key attractiveness of that business is large installed base and then our opportunity to monetize that installed base with more aftermarket sales. And that is something we've been very open about is our number one priority in that business. And frankly, for a company in total, aftermarket is a key priority. And I think it's fair to say that compared to some of our peers, we started later, but it also means that we more have more opportunity for growth now.
Nigel Coe
If you look at your larger HVAC peers, service revenues have expanded and accelerating to double digits, which is something we haven't seen before, has there been a change in the dynamic between the big players, the big OEMs and maybe some of the ISPs out there in terms of trade of some tools [ph] the manufacturers with the genuine parts and the predictive maintenance.
Patrick Goris
I think it's hard to tell. For us, what we know what drove it is, one, historically, it has not been a big focus. We put in a playbook that was used, frankly, in the aerospace industry, which worked really well there. Since we've put that playbook in place, we've been growing at strong double digits. Q1 was up mid-teens?
High teens. And so that is an area where we have significant more room for growth because we still estimate that today, our aftermarket business is about $5 billion. We still estimate that it's about 20%, 25% of the total aftermarket revenue available for our installed base. So we capture too low of a piece of that market. Hence, a big focus, whichever business you talk to internally within our company, that is an aftermarket plan, aftermarket leader, aftermarket targets.
Nigel Coe
Very clear. Container. By the way, I wish I had Sam on my shoulder as well. I get lots of numbers wrong. So on the container side, very hard for us to track what's going on real-time in container. Are you seeing signs of that inflection that you called out? And it feels like your guidance implies that container revenues will be up sequentially. Is that the way you have a plan?
Patrick Goris
The way you can think about it is, we said that typically, container goes through four quarters of a down cycle. For us, that would have started in Q3 of last year. We expect Q2 in unit sales and therefore, revenue sales to be better than Q1 and would expect to see some growth in the back half of the year -- year-over-year, the container.
Nigel Coe
Quite some growth in Q2. You have the growth in the second half of the year. Okay. Great.
Patrick Goris
And that's, again, really attractive business. I don't know what you know this, but we have over one million sea container units out there. And when we talk about aftermarket for that business, it's all about finding the units, connecting them and then attaching services to them, whether it's the Link platform, combined with our sensor technologies like remotely monitor the performance of those sea containers; being able to tell the end customer or the manufacturer or the producer of the medicine for the food to say, this is the temperature at which your goods were throughout the sea journey; being able to provide predictive maintenance ideas to the operators, that's the aftermarket in container, a tremendous opportunity. And I think by the end of this year, we plan to have well over 100,000 -- close to 200,000 units under contract
Nigel Coe
Compared to?
Patrick Goris
Less than 100,000 at the end of last year.
Nigel Coe
All right. We've got two minutes. I think the clock is right now is two minutes left. Any questions in the audience? Continue. Going back to residential. I just want to touch on inventories. Again, your big channel partner increased inventories in the first quarter. And they're talking about more channel burn in the second half of the year. So how do you view inventories across your broad spectrum of channel partners?
Patrick Goris
If I -- specific to resi?
Nigel Coe
Resi.
Patrick Goris
We would expect -- we don't expect to see a reduction in field inventories until the back half of the year. If I look at our outlook for resi for this year, high single digits volume down. It would be mid-single digits without any inventory reduction in the field. And so the key question -- that's why I mentioned earlier, the key item for us is going to be watching that movement and is that assumption still valid?
Or maybe it's going to be better or a little bit worse. We don't think that we will see that inventory destocking until Q3, Q4. We expect some. The question will be is how much is it going to be more less than what our assumption?
Nigel Coe
And obviously, there's a huge offset from price and mix this year in residential.
Patrick Goris
Yes. That's why we expect our revenues in resi still to be about flat year-over-year, even though the declines in volume are high single digits.
Nigel Coe
Yes. Quite nice offset.
Patrick Goris
And it's the mix up.
Nigel Coe
Yes. So the sea pricing is holding. So that [indiscernible] up on the 10%, 15% mix up. I think it is?
Patrick Goris
Yes. The new units, the SEER units, about 10%, 15% higher price that's holding.
Nigel Coe
And then the price itself, I mean, just remind us in terms of the pricing actions you've taken this year, what's in the plan?
Patrick Goris
We expect to have about $500 million from an overall company perspective in pricing. That's about 2%, 3% for the full year. We've seen pricing hold in the case that we see additional input cost headwinds will, of course, consider additional pricing. But so far, it's holding and we don't see any change in market behavior.
Nigel Coe
Incentives are normal.
Patrick Goris
No change.
Nigel Coe
That's fantastic. So Patrick Goris. Thanks for the conversation. It's good chat, and look forward to seeing next year.
Patrick Goris
Thank you.
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Carrier Global Corporation (CARR) Wolfe Research 16th Annual Global Transportation & Industrials Conference (Transcript)