Q4 2020 Carrier Global Corp Earnings Call
Ladies and gentlemen, please standby your carrier fourth quarter 2020 earnings conference call will begin momentarily. Thank you for your patience and please standby.
[music].
Good morning, and welcome to carrier as fourth quarter 2020 earnings Conference call. This call is being carried live on the Internet and there is day presentation available to download from carriers website at IR Dot carrier Dot com I would like to introduce your host for todays conference Sam Pearlstein, Vice President of Investor Relations.
Please go ahead Sir.
Thank you and good morning, and welcome to carriers fourth quarter 2020 earnings Conference call with me here today are David Caitlin, President and Chief Executive Officer, and Patrick <unk>, Chief Financial Officer.
<unk> otherwise noted the company will be speaking to results from operations, excluding restructuring costs and other significant items of a nonrecurring <unk> nonoperational nature, often referred to by management as other significant items. The company also reminds listeners that the earnings and cash flow expectations and any other forward looking.
The statements provided during the call are subject to risks and uncertainties carrier 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 forward looking statements.
This morning, we will review our financial results for the fourth quarter and full year 2020 discuss the full year 2021 outlook and we'll leave time for questions at the end.
Once the call is opened 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 president and CEO, Dave Gitlin.
Okay. Thank you Sam and good morning, everyone I'll provide a quick summary of our fourth quarter performance on slide two and Patrick will provide more color in short no surprises sales were up 2% on a reported basis flat organically as residential HVAC remained very strong with a 25% year over year increase we produced 450.
$3 million of adjusted operating profit executing on the cost actions that we plan to communicated including accelerated growth investment incremental public company costs and some one time items that Patrick will cover.
And we are very pleased with our free cash flow generation in the quarter, excluding the bear tax payment of $272 million, we would've exceeded our forecast by about 100 million importantly.
Importantly, we continue to consistently execute on our long term strategic growth agenda, while maintaining strong traction on our carrier 700, and G&A cost reduction initiatives on.
All of this positions us well for 2021 and beyond.
Turning to slide three.
Before we dive into 2021, let me provide a broader look back at 2020.
I look at 2020, as both a foundational and transformational year for carrier.
With the spin from UTC. It was clear that we had a unique opportunity to create tremendous value, but to do so we needed to create on.
New carrier.
We started with our culture and took an intentional and deliberate approach to launching the carrier way.
Our culture reinforces our value on is centered around customers agility innovation talent and winning and the energy level within carrier is tremendous in addition to culture, we have invested in a promoted existing employees.
Infusing the team with key outside talent, who have brought fresh perspectives and proven leadership.
We also launched several new initiatives designed to further enhance the agility and effectiveness of our organization. For example, we launched carrier excellence, our new operating system.
Harrier Alliance, our new supply chain program, and we undertook a holistic and structural approach to driving sustained G&A reductions and simplicity across the business.
We put a disciplined process in place to drive $600 million of recurring cost savings over three years carrier 600, and given our strong progress. We recently increased our target to $700 million under the renamed carrier 700.
We also dramatically improved the balance sheets and spin we now have increased financial flexibility to invest in growth execute bolt on M&A and return capital to shareholders.
In December we announced a 50% increase in the dividend and today, we announced the share repurchase program.
And we leaned in to becoming ESG leaders committing to significant achievable and important goals such as by 2030, reducing our customers' carbon footprint by more than one gigaton and achieving carbon neutrality in our operations commitments that are not only good for the environment, but also.
Good for business.
We also made progress on our profound commitment to improving our diversity representation and creating a truly inclusive culture.
And we Reframed, our focus to position carrier as a growth company.
While the Covid pandemic in 2020 presented unprecedented challenge challenges.
It also serve to reinforce our position as the world leader in healthy safe and sustainable building and cold chain solutions.
With this as our enterprise strategy supplemented by our three pillar approach to driving sustained growth. We are confident in our top line opportunities for 2021 and beyond.
Slide four shows the flywheel that I used on our last earnings call to help explain how our key focus areas will drive shareholder value.
Has COVID-19 shined, a light on the criticality of healthy safe and sustainable buildings in cold chain. So we acted on our ambition to become a world leader in both.
There has been a tectonic shift in how business government and society value.
The safety of indoor environments, and the importance of robust systems for distributing food and medicine there.
There has also been a groundswell of recent focus on sustainability, all of which represent opportunities for carrier business now and in the future.
On the building side, we introduced new products like our optically on you in at the time magazine recognized as a top innovation of 2020.
More recently as part of our healthy home strategy, we introduced an air purifier for the home. This is our first direct to consumer product focused on improving air quality and we also are now selling carrier one inch filters directly to consumers.
Overall, we have over $100 million of orders for healthy building products and services and have a pipeline of more than $200 million.
The next milestone is the release of a new digital solution that we're calling a pound that will work with building management systems to provide visibility to indoor air quality and other key healthy building indicators.
Using machine learning this solution will connect to building control systems and auto mitigate deficiencies. The overall goal is to work with our customers to give their patrons and tenants confidence to reenter indoor environments. As an example, we recently signed a sponsorship with the American Hotel and lodging Association.
We're carrier will help define the a H L. A safe stay guidelines for guests and staff around indoor air quality and contactless solutions and then we'll play our part to help hotels implement those solutions.
On the refrigeration side, we continue to see traction on connected cold chain offerings that address the critical challenges inherent to food and pharmaceutical distribution.
Sales at our industry, leading cargo monitoring center Tech business were up about 10% in the fourth quarter and we enter 2021 with a backlog that is up over 170% over the same period last year and we continue to push for adoption of our cloud based links platform that we are co developing with AWS.
To extend our current digital offerings.
Our growth levers are further fueled by delivering against our three strategic pillars first.
In terms of growing the core we can say with confidence that we gained share in many of our core markets.
We met our objective of adding over 500 sales and sales support people invested over 400 million and R&D, enabling us to introduce over 120, new products last year.
We continue to have key new wins, our team never needed to be pushed to win just given the freedom and the investments needed to get back to our market leading routes.
We also continue to push on product extension, such as VR, App and geographic coverage with a focus on increasing sales in China.
Our third pillar growing services and digital has yielded very strong initial results as we push our business models to focus more on recurring revenues.
To kick start progress, we focused last year on our conversion rates that is converting new OEM units coming off warranty to long term agreements.
We started the year at 20% conversion rates, we committed to end the year at 30% and we did.
Going forward, our focus will be on overall coverage that is of our overall installed base of chillers in the market. How many of those are under some sort of long term agreement today, we have coverage of about 50000 units.
And our plan is to increase that by about 10000 units per year.
We have similar objectives in other parts of our business as well.
Increased coverage is enabled by digital solutions, our truck trailer segment launched E solutions, two point O with a web based dashboard that provides critical fleet information enhanced visibility and improved Geo fencing.
And in FNF, we launched our Edwards E S. T for network fire alarm and emergency communications platform to tie multiple remote buildings together to provide more flexibility and cost effective solutions to our customers.
We also continue to invest in and grow our ALC building automation and controls business, where customers have embraced our open architecture solutions.
Ft per cent of our 2020 sales in that business came from recently introduced products.
And we're complementing that with continued investments in our channel and field network.
From its culture and our growth mindset, we are taking a very disciplined approach to capital allocation.
In the span of just nine months, we reduced our net debt from about $10 billion to approximately $7 billion and ended the year with over $3 billion of cash.
Our balance sheet improvement now opens the door to bolt on M&A.
Our acquisitions will align with our focus on healthy safe and sustainable building in cold chain solutions and more broadly with the three pillars of growth that we have laid out.
Before I turn it over to Patrick Let me give you some color on how we're thinking about 'twenty 'twenty one on slide five.
Our outlook for the year reflects our objective of being a consistent mid single digit organic growth company.
We expect sales to grow 6% to 8% and that includes 2% tailwind from FX.
And with strong conversion, we expect adjusted EPS to increase by about 14% at the midpoint, we will continue to invest in growth, while we project improving margins by about 70 basis points and producing strong free cash flow of about $1 $6 billion.
While we are starting this year with continued uncertainty around the global economic recovery as the pandemic continues to impact people and economies around the world. We are optimistic that the uncertainty will subside as we get into the second half of the year following more widespread vaccine distribution.
The good news for our first half is that our backlog is solid given the strength in orders in <unk> that is continued very well into January.
As we get into the second half of the year, we expect some of the businesses that we're acutely challenged by the pandemic to start to recover particularly in retail hospitality and small to medium sized businesses. So with that let me now turn it over to Patrick Patrick.
Thank you Dave.
And good morning, everyone.
Good to be with you on the call today and very excited to be part of the carrier team.
I've spent the last two months, gaining a deeper understanding of our strength and the opportunities we have in front of us.
I see tremendous opportunities to create value given our focus on innovation.
Accelerating profitable growth driving internal efficiencies free cash flow generation and capital deployment and portfolio management.
I will sharpen this focus on drive execution. So we can continue to deliver long term superior financial returns to shareowners.
Let me share some detail around the quarter, please turn to slide six.
As Dave discussed Q4 was broadly in line with our outlook.
As you can see on the right side, we exceeded the outlook. We gave you in October for sales and adjusted operating profit.
Sales of $4 $6 billion were up 2% versus the prior year and flat organically.
Currency was a two point tailwind for sales in the quarter about $100 million, but with little profit contribution.
The sales growth was driven by continued strength in our residential HVAC business, which was up 25% in the quarter.
We saw continued sequential improvement across our other businesses.
As expected adjusted operating profit.
A 453 million was down versus the prior year as carrier 700 cost savings were more than offset by the reversal of some temporary cost actions related to COVID-19.
Do you expect $75 million of investments.
About $25 million of incremental public company costs and about $50 million of one time items in the quarter.
These one time items were about $20 million higher than we expected.
<unk> included a pre spin vendor contract termination and legal and related costs.
Free cash flow of $38 million in the quarter included $272 million in tax payments related to the sale of the buyer of shares.
We anticipate $50 million to $60 million of that from the September sales, but the remainder associated with the December transaction was not captured in our October outlook.
Moving on to the full year.
Sales of $17 for a $5 billion were above our most recent outlook of about $17 3 billion due to currency translation.
Full year adjusted operating profit was $2 $2 3 billion just over our October guidance.
And excluding the tax payments for the sale of buy your shares we would've exceeded our free cash flow target by about $100 million.
Let's now look at how the segments performed starting on slide seven.
H back organic sales were up 4% in the quarter driven by the 25% increase in residential.
As expected field inventory levels have now normalized and we should see more typical growth trends in net business going forward, but recognize there will be a much easier compare in the first half versus the second half of 2021.
Commercial HVAC sales were down mid single digits organically.
Light commercial was down 10% and continued to lag, but the rate of decline improved sequentially.
Turning to refrigeration.
<unk> of $949 million were down 3% on on organic basis, but improved sequentially.
This was by far the best quarter from a year over year perspective for this segment.
Organic sales for the fire and security segment also continued to improve sequentially in Q4 and were down 5% compared to last year.
We saw a 6% decline in the products business and a 2% decrease in the field business.
Within the product businesses, which represents about 60% of the segment's sales residential and commercial fire continued to be solid while access solutions and our industrial businesses remained challenging.
Now let me review the order activity, we saw on the fourth quarter because that is important to understand what is driving our 2021 outlook.
As you can see on slide eight our.
Our residential and light commercial businesses continued to see strong orders driven by residential.
We intentionally worked with our channel partners to exit 2020 with more normalized inventory levels.
Backlog in residential is up almost three fold compared to year ago.
And it puts us in a solid position for shipments in the first half of 2021.
Commercial HVAC orders were about flat compared to last year, and we exited 2020 with backlog up mid teens year over year.
For refrigeration order activity for the trucks, we other business continued to improve sequentially.
North American truck trailer orders were up well over 100% in the quarter and Europe was up about 10%.
Container orders up almost 50% pointing to a recovery in 2021.
Commercial refrigeration orders were up mid teens organically as.
As the business is also seeing pent up demand.
Strong order intake and backlog exiting the year positioned the refrigeration segment for the strongest growth of the three segments in 2021.
Order intake for fire and security segments also continued to improve sequentially.
Product orders were down low single digits.
Prior quarters industrial end markets and global access solutions remain weak for you.
<unk> orders were up low double digits year over year, and we exited 2020 with record backlog for installations in this business.
Overall, a generally improving order trends gives us confidence in our ability to deliver solid growth in 2021.
Please turn to slide nine as I walk you through our 2021 outlook.
Based on current exchange rates, we expect reported sales to be up 6% to 8%.
We expect organic growth of 4% to 6% and the currency translation tailwind of about 2%.
We expect HVAC and fire and security organic growth to be low to mid single digits.
And expect for refrigeration to be up low teens.
We expect adjusted operating margin to expand by about 70 basis points at the midpoint to around 13, 5%.
We expect our full year adjusted effective tax rate to be about 25% one point lower than last year.
And adjusted EPS is expected to be between $1 85 for $1 95.
This represents about 14% EPS growth at the midpoint.
We expect about $1 $6 billion on free cash flow, which represents about 95% conversion, despite higher capital spending and about $100 million more in interest payments.
Moving to slide 10, let's walk through the pieces and our 2021 adjusted EPS Bridge.
Adjusted EPS growth will come almost entirely from operational performance is the increased volume converts to earnings.
Core earnings conversion, which excludes the impact of currency for 2020 by your sales and a 2020 Q4 items is about 30%.
We anticipate additional benefits from carrier 700 of about $225 million in 2021.
And expect the absence of Covid related inefficiencies and disruptions in our factories and supply chain to benefit us by about $125 million.
Offsetting that is about $200 million of cost containment snapback and about $150 million of planned incremental investments.
We previously talked about the three year plan as $100 million of investment in each year of 2000, 22021 and 2022.
We are accelerating some investments into 2021, and therefore currently expect incremental investments in 2022 to be only $50 million.
We expect the net impact of pricing and input costs to be neutral for the year.
Interest expense will be a headwind in 2021.
We've raised most of the debt in late February 2020, So we did not have an entire year's worth of interest expense last year.
Lastly.
We currently have some restrictions in our debt covenants on the total number of shares we can repurchase and so while we target repurchasing about 5 million shares in 2021. The average number of shares used for EPS in 2021 will still be above 2020, and so that represents about a <unk> <unk>.
<unk> 'twenty one versus 'twenty.
Page 16 of the slide deck includes some additional items related to our 2021 outlook.
Let's shift focus to the balance sheet and our leverage profile on slide 11.
Carrier completed the spin in April with substantial leverage.
Since that time.
We've been able to reduce leverage significantly through strong free cash flow performance and the sale of our stake in buyer.
We repeat we repaid the entire $1 $75 billion term loan in the fourth quarter and net debt adjusted EBIT and net debt to adjusted EBITDA improved from about three point for at the time of the spin down to about $2 eight at the end of fiscal 2020.
We expect 2021 year end net debt, just north of $6 billion, which would bring our net debt to adjusted EBITDA ratio closer to two one by the end of 2021.
That is assuming no impact from potential acquisitions.
Or divestitures.
The bottom line.
Is that we're in a much stronger position today, given the improved health of our balance sheet, which provides us more flexibility with respect to capital deployment.
That takes us to slide 12.
During 2020, it was clear that the focus has to be on reducing leverage as.
As we enter 2021, we plan a more balanced capital deployment, while remaining within our overall capital structure of an investment grade credit rating.
We expect 2021 capex to be about $375 million.
Dave talked about some of our priorities with respect to inorganic investments, we're not putting a dollar amount placeholder here, but we will be opportunistic on bolt on M&A.
On bolt on M&A that help achieve our strategic objectives and meet our financial criteria.
We plan to reduce debt by $500 million in 2021.
And in light of our pending redemption, we will not have any debt maturing until 2025.
In December we announced the dividend increase.
We now expect 2021 dividend payments to amount to about $425 million and today. The board authorized share repurchase program of $350 million and our outlook for 'twenty. One incorporates repurchasing about 5 million shares this year.
Before I turn it back to Dave Let me just add that the volatile quarters in 2020 should lead to some unusual comparisons in 2021.
We expect strong double digit organic growth in the first half of 2021 and closer to flat organic performance in the second half given the residential comparisons.
In addition, we expect the first quarter to have the lowest incremental margins for the year.
Probably in the high teens due to having more buyer income in last year's Q1 than other quarters.
Larger currency conversion headwind and some prior year deferred comp favorable items.
With that I'll turn it back to Dave.
Okay. Thank you Patrick.
Our results demonstrate that we successfully navigated through 2020.
We remain focused on driving key strategic growth initiatives alongside aggressive cost actions that will fuel future investment and innovation.
Our balance sheet improvement and provides additional flexibility to create shareholder value through bolt on M&A dividends and share buybacks on.
All of these factors combined with the tailwind from important mega trends position us well for strong top and bottom line growth in 2021 and beyond so with that we'll open this up for questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please stand by we proposed the Q&A roster.
Yes.
Our first question comes from Stephen Volkmann with Jefferies. You May proceed with your question.
Hi, Good morning, guys. Thanks for taking the question I'm, hoping you can just talk a little bit more about the commercial HVAC business, obviously strong backlog heading into 'twenty one.
But orders kind of flattish, maybe you can give us a little bit more color either by market or by type of product or anything that sort of give us a sense of the cash.
<unk> on non commercial HVAC. Thank you.
Yes. Good morning, Steve Yes, we are pleased with the backlog being up in the mid teens, but clearly there are some watch items there the Abi being at about 43 and December has been below since 50 since April so.
We have a watch on it remember that commercial new construction is about 15% of our overall business.
Things that.
Give us a lot of confidence or some verticals remain very strong globally data centers warehouses education health care have all been strong number two is we are seeing traction in our whole focus on indoor air quality healthy buildings, we have a pipeline of 200 million. There. So it's clearly a watch item, particularly North America.
Please China's continued to be strong Europe, we actually saw coming back you may recall earlier in 2020.
I felt like we werent gaining the share in Europe that we had been in North America, China. The team made a number of changes in Europe, and we're seeing traction there so.
Signs of life in Europe orders were up about 5% there in the fourth quarter.
Asia Pacific actually showing.
A bit of strength towards the end of last year for the first time in eight or nine months, so signs of progress, but clearly a couple of watch items, probably the biggest being North America and new construction.
Great.
And.
Do you feel like people are are able to get out into the field now and do more of the kind of service maintenance upgrade stuffs, but that is probably sort of represents pent up demand for 'twenty, one or is that still on the come.
No we do.
Good news for the aftermarket is that we actually come in HVAC services backlog ended the Europe about 20%. So we are seeing people get out there even in Europe, where it's a bit spotty in some markets or more close than others.
Even though they've been distributing the vaccine in England, we still see some pockets of closed down locations there same with Germany.
But by and large we are getting our field support and our technicians out into building certainly in the United States. So we're looking at double digit.
<unk> aftermarket growth in 2020, and it will be fueled by folks getting back into the buildings.
Super Thanks, I'll pass it on thank.
Thank you Steve.
Thank you for our next question comes from Joe Ritchie with Goldman Sachs. You May proceed with your question.
Thanks, Good morning, everybody.
Morning, Jeff Good morning.
Hey, can you guys, maybe provide a little bit more color around the $50 million charge that you.
This quarter and then whether all of that came through on HVAC margin this quarter.
Yes, Joe Patrick here so.
Really one big item as part of those onetime items as a as I mentioned vendor contract renegotiation think of it as a pre spin contract that we had from one other UTC umbrella. We think we can do better than that specific contract. So we decided to terminate it there were costs associated with that that we.
<unk> incurred in the quarter will.
We will benefit from debt in in future years, and the NPV obsolete.
Positive on that on debt transaction that was by far the biggest items within the $50 million.
And I would say debt.
Clearly HVAC had the biggest part of debt onetime cost of about $50 million in the quarter. So clearly HVAC.
Margins were impacted by that more than the other segments.
Okay. That's helpful. Patrick maybe Mike just one follow up maybe just sticking with HVAC margins I think that that was probably the area, where we're hearing the most from investors today.
You guys just kind of parse out.
What what really kind of happened within the quarter outside of this one contract because margins still would have been down outside of.
Yes <unk>.
Growth in the quarter and I recognize.
That you spent about $75 million on investment, but maybe just kind of parse out.
What were the kind of the key drivers for us.
For the margins in HVAC for this quarter.
Sure. So within HVAC currency helped us currency translation was a tailwind on sales of about $40 million basically with no operating profit contribution.
We did see a benefit of the higher volume, particularly in <unk>, which was up 25%.
<unk> was actually a headwind in the quarter and actually that relates to commercial HVAC.
The applied equipment.
So for commercially that we turned to growth we saw it up low single digit which is a good thing we saw good growth in China.
We have not yet seen service and aftermarket has returned to growth service and aftermarket was down year over year in the fourth quarter. They tend to have better margins now. The good thing is backlog for service and aftermarket was up double digits for us in the quarter, so that bodes well for future periods.
Other items that impact that the HVAC margins in the quarter one.
Referred to investments investments were up $75 million in the quarter for the overall company.
HVAC so the vast majority of that and so that together with the one timers that I referred to earlier is really the story around each fact margins for.
For next year, we expect for the full year HVAC margins to be.
Close to 16%.
Okay, great. Thank you.
Thank you Joe.
Thank you. Our next question comes from Nigel Coe with Wolfe Research you May proceed with your question.
Thanks, Good morning.
Patrick good to hear once again.
Okay.
Okay.
Okay.
So I think we just kind of address the HVAC margin issue quite well when you say the vast majority of the investment spending.
Talking about like over 50 of that 75% would've been within that segment, just trying to size the impact of that investment spend yes.
Yes, north of 50 million would've impacted HVAC, Nigel and then the nature of the investment spending.
Primarily head count and spending.
And then on Im wondering if the Kai for that $1 50, if it's mainly just the analyst nation of what's on.
<unk> expense in the second half of this year.
Yes, Nigel it.
Good morning, Nigel it's Dave Yeah recall that.
We really look at our investments in three categories. We said that we would add the first is selling and salespeople. We said, we'd add 500 sales and sales support people last year, we ended up adding.
More like 550, and a lot of that we started to see in the fourth quarter. We also invested in R&D that was a big chunk of it we had tap the brakes, a little bit on some of our investments in <unk>, we started to release it in <unk> into <unk>. So we did accelerate R&D investments and also the third pieces.
As digital a little bit less in the R&D side, but we're going to come out with some new digital products here at the beginning of the second quarter, especially tied into healthy building. So we really try to lean forward because that's what.
What we see as one of the most transformational opportunities has to be it has to do with a digital offering that's going to be an extraction layer that has that gives customers visibility into things like indoor air quality. So we really accelerated some of our investments there on the fourth quarter and then Nigel.
The $150 million about half of it would be carryover from investments made late in 2020.
Thank you.
Question on service attach.
Yeah.
For the thing that's going on.
And the installed base of.
It's been set up.
What is driving that uptick on what are you doing differently today that you want to in this time last year and then secondly.
I saw that would you be pointing towards double digit sales growth going forward.
Well certainly we feel positive about double digit service growth in 'twenty, one and we'll have to see as we get into 'twenty, two and beyond but you look at.
That we have a relatively small percentage of RSA chillers under some form of long term agreement, it's less than 25%.
On the reality is it should be something thats exponentially higher one other ways to do it is having those chillers be connected so we're going out of our way to add debt edge devices to the chiller. So we could have more of a two way communication with our customers. So we cannot only do things like diagnostics and.
And prognosis.
Diagnostics and prognostics, but other value added services, such as energy efficiency through making the devices connected so connecting the devices as one adding the salespeople is another key one one other reasons we were successful in our conversion rates last year was simply putting people in the building working with the building operator to say why.
All the while it's under warranty or while it's under an agreement with someone else Theres value added services that we can provide so increasing our sales forces in a very targeted way. So for example in China and some of the tier two cities in the North America. Some of the underserved regions that we have today so.
Really it's a lot of blocking and tackling.
I'm very confident in the double digit aftermarket growth this year.
Great. Thanks, Scott.
Thank you.
Thank you. Our next question comes from Jeff Sprague with vertical research you May proceed with your question.
Thank you and good morning, everyone.
Morning, Jeff Good morning.
Wondering if you could address.
A little bit more what youre expecting on the price cost side.
Was it an issue in the quarter you did go through a lot of the margin dynamics in Q4, but I don't think you mentioned price cost, but more importantly.
As you look forward into 2021, what do you see and what do you have modeled.
Yes, Jeff for for 2020 price realization was really about flat obviously for 'twenty. One we are very closely monitoring commodity prices, especially steel copper aluminum.
We expect price to offset commodity inflation in 2021.
We announced our price increase during.
During a normal cycle, which is early in our first quarter.
And then for me blocking or locking point of view currently over 75% of our 2021 requirements or locked for blocked.
If prices stay high of course, this could be a watch item for 2022, but we will be continuing to look at this closely and looking of course, that's contingent recovery through pricing as well.
So overall neutral for fiscal 'twenty one.
And I'm also just wondering kind of.
New co independent carrier.
You provided in the appendix kind of the outlook on corporate expense on the like are we.
Largely yet run rate, though coming out of Q4 on pulp.
Public company costs anything that's left over on TSA is that sort of thing maybe you could just address.
What if any.
You know kind of nuances or headwinds, we should be thinking about is as you kind of get into your full first for independent year here.
Yes, Geoff I think this will be de Minimis in fiscal 2021, there might be a little bit in in the first quarter, but really not a big number for the full year and I would add Jeff that.
Look we've been we've been clear that our G&A is just too high.
So it's it's.
We have a very structured focused around taking G&A out it's not something that you can kind of do the right way overnight, what we're trying to do rather than just give kind of head count targets or things like that we're trying to make structural changes we have a leader that reports to me Ive azula, who's leading our whole low cost center of <unk>.
<unk> approach, where outsourcing some aspects we're moving some of the work to low cost and we're really trying to reduce our G&A on a structured way 21 is a lot of putting that in place. So we'll start to see a lot of the benefit of it as we get into 'twenty, two and beyond so our G&A should come down for sure and one $100 million.
The carrier 700 is G&A. So we expect to start seeing that drop through certainly as we get into 'twenty two.
Great. Thanks, Scott.
Thank you. Our next question comes from Steve Tusa with Jpmorgan you May proceed with your question.
Hey, good morning.
Good morning.
Yeah.
Can you just clarify what the raw material impact is just so you have an idea of what those those two components are just following up on Jeff's question.
For the.
Full year, yes.
Yes, we see a headwind of several tens of millions of dollars.
Okay got it and then what it carrier 700 ultimately come in at for the year.
On the benefits side.
200, 700 came in at $2 50 in fiscal 'twenty, we expect that 'twenty, one to be about $2 25.
Okay got it and then just one more on on on <unk>. You said your backlog was up like three ex is there any.
You know by in there ahead of those price increases that's influencing that number I mean that just seems like a pretty.
Big number for December.
Year end December 31.
Yeah.
Certainly we were pleased with backlog coming in three ex higher than it was at the same time last year Steve.
What we've really worked very purposefully on with our distributors is to make sure that we were trying to match our flow to them with their movements at the dealer base. So as Patrick said, we had sales in the fourth quarter up 25% movement from the distributors into the dealers was about 20% inventory was up around 10.
<unk> coming out of last year into this year, so fairly normalized.
We saw order strength continue to be very very strong in January now part of it is that you know that we have a good position with new home construction that was up.
8% last year, we expect it to continue to be strong this year, but we're working very closely with our channel partners to make sure that we're giving them what they need when they need it.
And Theres just a lot of demand in the system, but we're trying to modulate that to make sure. We're there to support them. So they can support the dealer network.
Got it okay. Thanks for the info.
Thank you. Thank you.
Thank you. Our next question comes from Jeff Hammond with Keybanc Capital markets. You May proceed with your question.
Hey, good morning, guys.
Jeff Good morning, So slide 10, great color on the different moving pieces in cost just just wondering how you think of cadence for investments and you gave good color on Incrementals on <unk>, just how some of those moving pieces impact.
On a cadence on Incrementals as you kind of move through the year.
Yes, Jeff I think from an investment point of view you can expect.
Net to be fairly even throughout the year in 2021 from a incremental point of view as I mentioned Q1.
A little weaker than the other quarters.
Okay.
And then just on kind of the first half second half I understand.
I mean I guess the.
Things have been improving through 2020, but outside of residential being so strong on the second half.
Or else do you see.
Quote tough comps to kind of get you to that flat dynamic in the second half.
I think it's really driven by by residential in the second half. So obviously, we had a very strong second half in that in 2020 with very high growth rates as we lap. These.
Some of those headwinds get parts will get offset by what we expect to be a pickup in light commercial commercial HVAC and fire and security businesses and so that's really the.
What we're counting on in the second half of the year that there is a recovery related to COVID-19 that helps offset some of those headwinds in resi, yes, Jeff I'd add debt.
I think we really view this as a tale of two halves you look at the first half we're coming in with very strong backlogs orders Patrick.
Patrick mentioned were 15% in the fourth in the fourth quarter. Some are quite high like in our transport refrigeration business very strong there. So we like our opening backlog position orders continued to be very strong in January almost across the portfolio. So we expect that the backlog in orders to carry us through the first half clearly you have the compare.
But as you get into the second half there is pent up demand and some other key verticals that have been acutely challenged so our light commercial business. We start that we would expect to see recovery as we get into the second half of this year you start looking at some parts of our fire and security business that were hurt by small and medium sized businesses and the impact of retail.
And some of the big box retail impacts that we've seen so we expect that first half carry through with backlog second half.
Economies start to reopen and there is some pent up demand, we expect that to give us some lift in the second half tough compares but progress on some acutely impacted verticals.
Okay, if I could sneak one more on just sell in versus sell through your sense for residential as you look at your independence.
Or just.
What your distributors are telling you of what sell through was in <unk>.
Well, we looked at we were looking at 20% movement in <unk> from our distributors into the dealer. So we were trying very hard.
So really match, our sell in and sell out.
Little bit higher on what we sold to them that what they moved out but not materially so.
There is significant.
Demand in the channel I would say that one thing thats that is positive as debt. We have gained share. It's always complicated when you look at share on a quarter to quarter basis with all the different moving parts on selling either direct to dealers are selling through independent distribution, but if you just step back and look at 2000.
<unk> as a whole resi sales were up 10% and Youre looking at probably a market that was up 7% to 8%. So we feel positive that we're gaining share the right way our partnership with our distribution partners has been has been very positive new construction as new home construction has been positive so we feel positive.
<unk> about where we are and where we're going on <unk> and we're trying to be very careful to not get out over our skis ourselves or our distribution.
<unk> partners.
Great. Thanks, a lot.
Thank you. Our next question comes from Deane Dray with RBC capital markets. You May proceed with your question.
Thank you and good morning, everyone and Dave Congrats on being named Chairman. Thank.
Thank you Dan appreciate that.
Hey, first question for Patrick.
You don't often hear about covenants that restrict buybacks.
I know it does happen, but the expectation if youre going to be a $2. One net leverage by year end you would think those covenants would not be in play and maybe they can get rolled back.
I know you negotiated covenants.
Last year might just be an opportunity as well.
Yes.
Our current covenants, we have those restrictions.
And those remain there till the end of the year.
We could decide to renegotiate them. The other factor that's at play here is that our current capital structure.
Kind of growing into our existing credit ratings and so by the end of the year, our capital structure will be much more aligned with our existing credit rating and so this would not be the time to buy back significantly more shares as were trying as we're still working our way into our existing credit rating.
And so that's the other element that's at play here, we could renegotiate it but there is still the credit rating that's in play as well and it's clearly our intention to remain a solid credit rating company.
I appreciate that and just.
If you could expand on the opportunities and bolt on M&A. So I'm, just saying the covenants don't restrict that it would appear.
What's the funnel look like.
Especially Mike across the product lines.
Dean we're in the process of building up that that pipeline. We've had some that we've been working we are adding more to the pipeline.
<unk>.
It's something that as we continue to look at the portfolio. There is still some things that we would say that we're assessing whether or not they would be of more value in the hands of others and then we look at our overall strategic.
Priorities are healthy safe and sustainable buildings is a big ecosystem, the cold chain and other ecosystem. Our three pillars of growth we want to grow the core we want to look at Adjacencies. We're underrepresented in China. We're underrepresented in V. RF. So those are areas and anything that builds out our services and aftermarket offerings as we continue to shift to <unk>.
Recurring revenue so we have some things in the pipeline that we've been working we're trying to.
<unk>.
To that pipeline as we go.
That's helpful. Thank you.
Thank you.
Thank you for our next question comes from led by strength with.
Citigroup you May proceed with your question.
Florida, Arizona, Please on mute Hi, Hi, good morning, guys, sorry about that.
From.
So lots of great color on the quarter is always one thing I was a little surprising is looking at the order trends it looks like APAC.
APAC outside of China was actually stronger than China in terms of orders can.
Can you talk about what drove that strength in APAC outside of China, and how you're thinking about the sustainability of the strong order growth in the APAC region.
Yes, I would say that the whole southeast Asia.
It is still fragile.
I mean, it actually caught us a bit by surprise because it had been quite negative in the second and third quarter.
Even places like India, we started to see traction in other places Singapore, Australia.
Hong Kong is still a mixed bag because of a multitude of reasons there but.
We were pleasantly surprised by some of the traction we started to see in parts of Asia outside of China and look China is just.
Remained just continuously strong really across the portfolio on the cold chain side both in.
Commercial refrigeration and transport refrigeration.
Overall look at carrier, our China in the fourth quarter, China sales were up 10% orders were up about 5% in China.
Particularly strong in refrigeration, where it was up about 20%. So we remain very very bullish.
On China overall, and it was nice to see progress on southeast Asia, but it's still a watch item, we got to see more vaccine distribution in places like India, and then we will get more confidence on the sustainability.
Okay, Great. That's helpful and then just thinking about the.
'twenty one.
Free cash flow outlook can you just maybe help to level set us in terms of how you're seeing about the seasonality of free cash flow in 2021.
Yes, <unk>, we would expect and which is typical for our business at the first quarter would be on our weakest quarter of free cash flow and at the second half would generally be stronger than the first half. So generally Q1 would expect to be our lowest quarter of free cash flow.
Followed by stronger quarters in a significantly stronger second half for the first half.
And that's of course related to some of the seasonality in our business, especially in alright and HVAC.
Alright, so more typical seasonality.
Correct that's helpful. Thanks.
I'll get back in queue.
Thank you for our next question comes from Julian Mitchell with Barclays. You May proceed with your question.
Thanks, Good morning, maybe.
Maybe just trying to home in a little bit on the Q1.
Context, then understand that in general.
This is seasonality, maybe a little bit different at least on on earnings if not cash flow than the normal so any extra color on that but if I start with Q1.
You'd mentioned in the high teens incremental.
That compares with I guess, the full EBITDA guide of more like 25%.
For revenues in Q1 should we be thinking that sort of up high single digits and so.
You ended up with about 50 bps of margin expansion again 70 bps.
For the year as a whole is that roughly the right framework.
Yes, we do expect double digit organic growth in the first quarter and we do expect margin expansion as well in the first quarter.
And as I mentioned earlier, we think that the the timing of the investments it's pretty even throughout the year.
And also Julien.
Again because of the strong Q4 orders that continued into January our coverage for Q1 is solid so we feel positive about that.
Thank you very much.
And then just thinking about the free cash flow guidance for the year on a whole understood the context on.
Seasonality that you just provided Patrick but for the year as a whole.
If I back out the day of tax payments.
Payments it looks like.
Youre guiding for around flattish.
Operating cash flow year on year in 'twenty one.
Just wondered about any moving parts within that you.
You would have that $100 million interest expense I think called out.
Maybe help us understand what you're dialing in for the working capital.
We'll have headwinds.
Yes, actually so for the full year free cash flow, we expect it to be about flat.
Year over year.
Obviously adjusted net income is expected to be up year over year. That's a tailwind. There. There are two items that are large offsets you mentioned one of them.
Payable as we will make an extra $100 million of interest payments and then Capex. We expect also to be up about $65 million and so that offsets most of the adjusted net income.
We do expect working capital overall to be a slight tailwind on.
On the headwinds associated with with free cash flow.
We expect comp and benefits to be a little bit of a headwind there.
In fiscal 'twenty one.
But those are the biggest pieces it's really.
Higher adjusted income offset by a $100 million extra interest payment and $65 million additional capex.
And then Greg Thank you for to make it about flat year over year.
Thanks, Julie perfect. Thanks.
Thank you for our next question comes from Gautam Khanna with Cowen and company. You May proceed with your question.
Yes, Hi, guys. This is Dan on for Gautam. Thanks for the question.
Yeah.
Could you discuss how you see current restaurant.
And brick and mortar closures impacting the near term versus longer term for our security demand.
If that has any impact on your long term view that business. Thank you.
Yeah, I would look at it.
It impacted kidder.
As we start to see some other brick and mortar we saw very strong E commerce sales in our residential smoke detector business, but we did see an impact on more of the brick and mortar piece of that business. So we are expecting.
With the vaccine distribution some recovery there as we get into the latter part of 2021, another piece of the business as some of the security portfolio.
Some of that piece of that business is tied a little bit more towards SMB in small and medium sized businesses. So if you take our <unk> business. For example, we start we would expect to see that to start open up with pent up demand with the SMB side of the business as we get into the second half of the year.
Okay. So you would expect.
On the pent up demand aspect to be stronger than say like I don't know what do they say like one third of restaurants may have closed permanently now.
Yes, I mean, I think look the restaurant closures I mean, it's something that we watch not only for our fire and security business, but our light commercial business. We look at that business that was down 10% in the first quarter and we have that business up mid single digits. This year. So we do.
Clearly there has been.
A big impact on that whole industry, but we do expect to see some pent up demand as people start to reenter society in the second half of the year.
Okay, that's really helpful. Thanks.
Yes.
Thank you. Our next question comes from Josh.
Lindsay with Morgan Stanley You May proceed with your question.
Hi, good morning, guys.
Good morning, Josh.
First question on on <unk>.
Service versus equipment in commercial I think maybe relative to some of your peers out there.
This looks for a little bit more sanguine on service and saw equipment kind of lagging behind you seem to have a bit of the opposite experience, but I know you're still sort of working your way up the curve on service market share is there something about either the timing of being able to actually schedule that or the nature of it.
The service you guys are winning debt would suggest that there is sort of a lag.
Just curious debt.
That building access phenomenon I suspect is kind of similar for everybody.
That seems to be impacting your more but you're doing better on equipment a lot of moving pieces, there, but I guess kind of comes down to.
How do you feel about either timing or kind of the nature of service maybe versus the broader market.
Yeah on the equipment side look we've.
We've added the salespeople we've introduced some new products, it's not really putting a new machine or new.
Construct in place it was really accelerating and doing what we know how to do with more focus on energy. So the ability to turn that in an effective way.
<unk> has been positive and a bit easier than it has been on the aftermarket for us because it hasn't traditionally been as big of a focus area for us as it has been perhaps for a couple of our peers that have done well in this area. So I would say on the aftermarket we added a new head of aftermarket Ajay Agra, while he's been working tightly with.
New heads of aftermarket there'll be put in place in the <unk> and the Bu President and now we've put in place a playbook that we know works, but it's not a playbook that you can affect overnight, so adding the sales and sales support people, adding a blue edge tiered offering adding digital offerings that can really differentiate the overall offerings. So a lot of this playbook.
Of how we think about pricing parts and how we can provide more value added services to our customers that playbook is in the process of being rolled out, but when we talk about a 20% increase in our chiller coverage. This year, that's a pretty big percentage.
Lot of 2020 was putting that foundation in place 2021 for US is the show me year and now we gotta.
<unk> realized a lot of that foundation.
We put in place last year.
Okay, and then on the portfolio side clearly asset prices are high out there I know parts of fire and security, namely Chubb.
<unk> got a peek under the Hood a couple a couple of years ago now.
Whats the appetite to maybe explore.
Some some disposition just given the multiples are fairly high in the marketplace.
Look we've.
We said consistently that we would be.
Very objective as we look at our current portfolio and that's continued we started that process day, one and that's going to continue really forever. So we look at all aspects of the portfolio, whether they're worth more to someone else than they are to us on whether they fit in our long term strategy and that that applies I mean, you mentioned chubb it applies really across the board so.
We will continue to assess we will continue to do what's right for our shareholders. If we make that determination, we will look at what to sell on whats the right time to sell and then the exciting thing for me is the debt. We now have the balance sheet flexibility to start looking more aggressively at bolt on M&A. So we're hopeful to see some of that in 'twenty one.
As well.
Alright, thanks, guys.
Thank you and I would now like to turn the call back over to Dave for any further remarks.
Okay well. Thank you. Thank you everyone for joining Sam is around to take your questions and we appreciate all of the focus and attention. This morning.
Thank you.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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