Q1 2023 Carrier Global Corporation Earnings and Portfolio Transformation Call
Good morning, and welcome to carriers first quarter 2023 earnings and strategic update conference call I.
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 conference call to discuss the transactions, we announced last night, along with first quarter 2023 earnings with me here today are David Caitlin, Chairman and Chief Executive Officer, and Patrick <unk>, Chief Financial Officer, we will be discussing certain non-GAAP measures on this call, which management believes are relevant.
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 carriers website at IR Doc carrier Dot com. There are two presentations available there one for the strategic actions and one for the first quarter 2023 results the company reminds listeners that the sales earnings and cash flow.
Our expectations.
And any other forward looking statements provided during the call are subject to risks and uncertainties carrier's SEC filings, including forms 10-K, 10-Q, and 8-K provide details on important factors that could cause actual results to differ materially from those anticipated in the forward looking statements. Once the call is open for questions. We ask that you limit yourself to one question.
And one follow up to give everyone the opportunity to participate with that I'd like to turn the call over to our chairman and CEO , Dave Gitlin.
Thank you Sam and good morning, everyone, a big day for Us and we appreciate your flexibility joining us. This morning on short notice today, we are announcing a new carrier a new direction in an exciting transformation a game changing opportunity to acquire Europe's Premier company in the most attractive market in our space.
Bowing us to capitalize on the energy transition in Europe .
With the planned exits that we are also announcing carrier will become a simpler focused pure play leader in intelligent climate and energy solutions that generate higher growth and superior shareholder returns.
Before we discuss this transformation in more detail, we will cover the highlights of our Q1 results on slide two.
In short good news the team executed very well, we beat our forecast on the top line with 4% organic growth with double digit growth in aftermarket controls commercial and light commercial HVAC and global truck trailer orders were modestly positive in the quarter with year over year orders performance improving as the year.
Adjusted EPS of <unk>, 52 exceeded our projections and we generated significantly more free cash flow year over year.
Based on our strong Q1 results, we now have confidence in the high end of our full year adjusted EPS guidance range.
Before we discuss our exciting announcement about our future. Let me take a brief look back on how far we've come already on slide three.
I am so proud of our team's accomplishments since spin in short we do what we say we're going to do our commitments worth to drive sustained growth improve margins through rigorous cost reduction increased aftermarket revenues deliver strong free cash flow innovate and ensure customer loyalty energize, our teams and culture and.
Strengthen our portfolio and balance sheet.
We have grown sales at an 8% CAGR since 2020 and since 2021, we have expanded margins by 150 basis points and have driven an adjusted EPS CAGR of 19%.
Have effectively driven significant productivity growing our aftermarket double digits annually and have introduced over 400, new products over the past three years, we launched an important new platforms for our building in cold chain ecosystems abound and links with both getting superb traction with our customers.
<unk> dramatically improved our portfolio of positioning ourselves in the fast growing <unk> market with the acquisition of Toshiba's, HVAC business and Geely, while completing the sale of Chubb and our bearish, there and our bare shares we improved our balance sheet, reducing our net debt by 50% from $10 billion to $5 billion.
All while doing $2 billion of share buyback and increasing our dividend payout ratio from 17% in 2022, a targeted 30% this year.
This outstanding performance has been made possible by our world class workforce and agile new Standalone culture. As a result of all of that carrier stock price has appreciated 229% since our spin date compared to 66% appreciation for the S&P 500.
So with our foundation firmly in place and a track record of execution. We are now announcing a purposeful shift in our strategy, which is what you see on slide four we have a very clear and compelling vision.
To be the world leader in intelligent climate and energy solutions strategically we are positioning ourselves in the fastest growing geographies with highly differentiated channel access and the most comprehensive and differentiated suite of sustainable technology and services.
Digitally enabled lifecycle solutions will increase aftermarket and recurring revenues our energized team will continue to drive unparalleled customer loyalty and superior shareholder returns.
This strategic shift in our vision has led us to the decision to further focus our portfolio and align it with faster growing end markets, which leads to the announcement that we're making today on slide five.
The first is the acquisition of Eastman group's climate solutions business.
A premier company in the highest growth segment in the heat pump in energy transition markets. This will also expand our capabilities as a one stop shop for renewable and climate management solutions.
We are also announcing that we are initiating the process of exiting our fire and security and commercial refrigeration businesses.
Our decision was easy combining with the best asset in the best market could not be more compelling and exciting.
Our decision was tough we love these businesses and our people in them.
We have tremendous brands gross margins market position and customer stickiness, but we saw the benefit of focus as we spun from UTC and we are confident that further focus will create additional tremendous value.
The result will be a new carrier with higher revenue and EBITDA growth profiles, leading market positions globally with a portfolio. Unlike any other company in the world.
So let me start with an overview of <unk> climate solutions business on slide six please.
This may climate solutions with 11000 team members as part of the family owned <unk> Group, who have established market leadership over its 106 year old history.
The company has made a purposeful shift.
Fossil fuel boilers, such that now 70% of its portfolio consist of premier heat pumps digitally enabled services solar PV and battery offerings.
It also has highly differentiated boiler business that includes state of the art hydrogen ready offerings about 40% of its sales are in Germany.
With very strong positions in France, Poland and Italy.
Those four countries make up more than 50%.
Of the heat pump installed base in Europe , with 20% annual heat pump growth rates there.
The combination of carrier and this meant climate solutions creates a tremendous game changing opportunity and as a result, the <unk> founding family is showing great confidence in the combined entity, taking 20% of the purchase price and equity which has been fixed at signing and.
And we look forward to Max <unk>, joining our board of directors.
Furthermore, we are excited to welcome the tremendous <unk> team to the carrier family to help us realize our shared vision.
Carrier and <unk> share a very similar journey as you see on slide seven.
We have used a lot to describe carrier is a 100 year old startup intra.
Interestingly <unk> is very much the same both companies had visionary founders, who largely created and shaped the markets that we're in and both of our businesses have evolved into agile rapid innovation climate focus digital industrial leaders together, we are establishing a new global.
<unk> champion and that is one of the many reasons why these men climate solutions, just fits like a glove as you see on slide eight.
The generations that came before us a carrier we have established market leading positions globally, but when we spun we had two strategic gaps pier F, which we have now addressed with the acquisitions of Toshiba and Geely and European residential light commercial heating, which we are now addressing with the premier asset in this space.
These transformative moves position carrier with market leading positions now globally.
So as we look at slide nine you see the three primary rationales for this tremendously exciting acquisition.
First it is the most attractive market in our space globally.
Second <unk>.
<unk> climate solutions is the premier asset in that market.
And third it positions our portfolio to expand into integrated renewable offerings in a unique and differentiated way.
So I'll address each of these three elements starting on slide 10, explaining why the market itself is so attractive.
<unk> trends that you see here are reshaping our industry climate change and sustainability energy security and the rapid adoption of Green energy solutions accelerated by government regulations and incentives.
These secular trends are indeed, global but are clearly most acute in Europe .
Europe has long been out in front on sustainability, the Paris agreement and the European Green deal set a target for a 55% reduction in greenhouse gas emissions by 2030.
Good for 55 targeted 40% renewable energy in Europe by 2030, which was recently raised to 45% when the EU past Repower EU following the Russian invasion of Ukraine.
Repower EU also aims to double the current rate of individual heat pumps to reach 10 million additional units over the next five years.
Likewise 17 European countries have announced or implemented bans on newly installed fossil fuel heating systems for homes, which has been supported by government subsidies.
The result is the massive growth that you see on slide 11.
There are $8 5 million heat pumps, and European homes, which is expected to increase 25% annually to $40 million by 2030.
Residential battery sales are also projected to increase over 20% annually. During this timeframe with a double digit annual increase in residential solar PV sales as well.
Carrier does not offer solar PV and home battery solutions today, So <unk> climate solutions offering.
<unk> carrier the perfect opportunity to pursue an incremental fast growing annual Tam of 35 billion.
The shift to heat pumps is unique and compelling given the mix up opportunity that you see on slide 12.
First is the rapid adoption of heat pump heat pumps from selling about $1 million per year.
Up to $10 million per year in 2030.
Now factor in the positive mix impact with heat pumps, selling or as much as four X per unit compared to boilers.
The result of that combination is that the EU residential heat pump market is expected to grow revenues, 25% annually for the coming years.
The opportunity is tremendous.
So turning to slide 13, let me provide some additional color on why this meant climate solutions is the Premier company in this space.
Thanks to professor Dr. Martin <unk> men, who represents the third generation of the founding family and his courageous move 30 years ago. This.
This may climate solutions is one of the very few companies in Europe that primarily sells directly to installers 75000 of them with whom they have deep longstanding relationships. This highly differentiated channel allows for best in class customer intimacy rapid innovation in response to customer design.
<unk> and digital connectivity.
Likewise, the <unk> brand is iconic and highly trusted across Europe .
Has often been compare to as the Mercedes of residential heating brands during Germany chance our <unk>. Most recent new year's address he singled out basement as a shining example of the innovative side of Germany.
It has the highest ranked heating and energy brand in Germany and has been the most trusted OEM for almost two decades the result.
<unk> of customers recognize and demand. These men climate solutions and are willing to pay a premium for it.
<unk> excellent reputation is largely driven by its track record of product leadership and Premier innovation as Youll see on slide 14.
This may climate solutions has lead in to the use of natural refrigerants and its heat pumps require 50% less floor space and installation time.
We also developed a new integrated heating solution called <unk> invisible, a patented concept, which optimizes space in aesthetics by integrating the heat pump air handler water tank and accessories into a decorative indoor panel.
They are at the digital forefront, providing innovative heating as a service offerings and generating subscription based recurring revenues. The result, outsized top and bottom line growth as you see on slide 15.
We expect approximately 700 million euros of EBITDA and 4 billion euros of sales in 2023.
Fast forward to 2025, we expect those numbers to increase to over $900 million and 5 billion euros, respectively.
Double digit top and bottom line growth and it's nothing new for them. They have done it in the last few years and we expect it to continue going forward.
So.
The best asset in the best market, what's equally exciting is that the combination positions carrier to enter an entirely new market given that business climate solutions has effectively established an ecosystem approach as you see on slide 16. This.
<unk> has done a masterful job of creating comment and distinctive designs across its product portfolio that all interact seamlessly with one another so the consumer becomes attached to its ecosystem with multiple interoperable products digital and value added services <unk> and his team have effectively imp.
Element of this strategy, it's solar PV battery and heat pump systems can all be installed at different times, but are then seamlessly interconnected and interoperable all underpinned by their common digital platform. One base one base gives the customer and easy reliable and quick way to operate their energy.
Via an app.
Platform bundles devices and electronic applications into one single climate and energy solutions for the home.
The beauty as you see on slide 17 is that these make climate solutions as the only company in the industry with such a comprehensive solution level offering.
When you combine these men climate solutions unique market position and breadth of offerings with carriers technology and global channels the opportunity for us to create unique value to our homeowner and other customers and importantly, the planet is truly differentiated homeowners in Germany with boiler spend on average 2200.
Per year on gas eating switching to an electric heat pump can reduce the owner's costs by over 20% to <unk> hundred euros euros per year.
If those same home owners implemented a complete renewable solution with solar PV battery storage heat pumps and in energy management solution with effective grid management and controls they could reduce annual heating bills by 60% to 80% to about 700 euros per year.
Those same owners same homeowners would also reduce their individual carbon footprint by about 50%. So the world continues to be more electrified integrated solutions provide a step change in customer value and benefit to our planet.
This broad suite of offerings introduces a new addressable market to carrier as you see on slide 18.
The heat pump sales for about four ex the price of a boiler when you add solar PV battery and accessories and services the installed bright and solid price can be as high as 15 to 20 ex the installed price of a standalone boiler.
The result is carriers' ability to now pursue a 35 billion.
Growing market opportunity.
The key to success is effectively integrating and coming together as one team we have done it so effectively before and I have no doubt that we will continue to do it again as we see here on slide 19.
This may climate solutions is a highly integrated successful well run business. It has tremendous people one ERP system, one brand a deep well established channel and a strong operations and innovation.
We have been very impressed with Thomas Haim <unk> climate solutions, CEO and his leadership team Thomas.
Thomas will lead carrier investment climate solution Center of excellence for our combined residential and light commercial European business, which will continue to be headquartered in Allendorph, Germany.
After completing the acquisition and business exits the vast majority of our business will be HVA.
As a result, Chris.
Kris Nelson and I have collaboratively agree to streamline the organization.
Our superb HVAC business leaders will now report directly to me and Chris will be departing carrier next month.
He has served the company for 19 years, so well and we wish him nothing but the best.
Another reason for confidence in the integration is how well our cultures align as you see on slide 20, our.
Our passion for customers and results unwavering commitment to our people values and purpose innovation community and a deep passion for the environment together, we will achieve important and compelling sustainability targets, we are aligned and cannot wait to move forward together as one team.
Our base business case includes the cost synergies that you see on slide 21.
We have identified 200 million euros of cost synergies synergies the vast majority of which will be achieved by year, three and we have a track record of over our achieving our projections.
Toshiba, we committed to $100 million of synergies and we're tracking to do meaningfully meaningfully better than that.
In climate solutions is a rapidly growing business. So this is not about employment reductions rather about 85% of the cost synergies are driven by procurement and in sourcing for.
For example, we anticipate in sourcing differentiated inverter drives from Toshiba heat exchangers from our facilities in Spain, and Poland as well as other components like rotary compressors and Vance.
Cost synergies are expected to increase the spend climate solutions margins by over 200 basis points within three years.
There were also revenue synergy opportunities, which we have not included in our base estimates such as introducing multi tier offerings into this meant climate solutions channel and leveraging its digital ecosystem offerings and technologies more broadly across carriers channel now I will turn it over to Patrick to take you through the Transat.
<unk> itself on slide 22.
Thank you Dave.
The enterprise value is 12 billion euros, which is about 13 times forecasted 2023, EBITDA, assuming 200 million euros of run rate synergies.
We are very pleased that the <unk> founding family elected to take 20% of the transaction value.
Equity and at the family is making a long term holding commitment.
They share our excitement about the future the future value. We believe this transaction will provide to all stakeholders.
The numbers the number of shares are based on a Z with prior to signing and are thus fixed.
The balance of the purchase price $9 6 billion euros will be funded through a combination of cash on hand and debt with respect to cash we had $3 $3 billion at the end of Q1, and we expect that to grow to about $4 5 billion by year end, excluding the impact of the acquisition.
Since we paused share repurchases.
We have fully committed financing in place for about 7 billion euros and have hedged the cash portion of the euro based purchase price.
Given these men climate solutions growth profile of the acquisition is expected to add over 100 basis points to <unk> overall revenue and EBITDA growth profile.
We expect a high single digit free cash flow yield starting in year five.
While the acquisition is expected to be adjusted net income accretive in 2024, we expect the acquisition to be adjusted EPS accretive.
<unk> in 2025.
Because of the additional shares outstanding.
Retaining solid investment grade credit ratings is very important to us.
Yesterday, Moody's S&P and Fitch have reaffirmed our current investment grade ratings following the announcements of this transaction.
Excluding proceeds from the business exits we plan on deleveraging quickly following the transaction.
Returning to about two <unk> net leverage and 2025, after which we expect to resume share repurchases.
The timing and net proceeds of the business exits may of course accelerate the timing of both the deleveraging and the resumption of share repurchases.
We expect to repurchase the equivalent number of shares issued to <unk> founding family as soon as we reach our target leverage.
This could happen as soon as 2024.
Finally, we remain committed to a sustainable and growing dividend and expect the transaction to close around the end of 2023.
Well, thank you Patrick.
So the $1 $1 billion business that we are exit.
Being at high single digit EBITDA margins last year, we have invested significantly in restructuring and improving the margins of the business, which will significantly benefit the business going forward.
We expect to exit this business over the course of 2024.
To be clear, we are retaining our cold chain solutions and transport refrigeration business, which includes truck trailer container sensor tech centers and our links platform and all the related aftermarket and digital offerings.
So in summary on slide 25.
These moves position us as a higher top and bottom line growth company.
Had we made these transformational moves.
Three years ago carriers revenue CAGR would have been two X the rate that we indeed achieved mid teens rather than 8%.
Thus, giving us confidence that we are transforming into a sustained higher growth profile company.
With these may climate solutions, we are now positioning ourselves to be the global climate solutions champion we are buying the premier asset in the Premier market, we are standing by our commitment with our portfolio to be clinical and dispassionate and though we are selling tremendous franchises. The result will be a focused differentiated carrier that drives higher growth.
And returns for our shareholders and value for our employees and customers and with that we'll open this up for questions.
Okay.
As a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced.
Your question. Please press star one one again, please standby, while we compile the Q&A roster.
Okay.
Okay.
The first question comes from Julian Mitchell with Barclays. Your line is now open.
Hi, good morning, and congratulations.
Good morning.
Good morning, maybe just.
First question around.
<unk> itself. So a couple of things one was maybe if you could help us understand its market shares.
In the main businesses that you're most attracted to in it for example heat pumps.
I think it's got close to maybe one and a half 2 billion of sales and you talk about sort of a 5 billion Tam somewhere in the deck, but I'm not sure those are <unk>.
Apples to apples, so maybe just help us understand the market share and also.
You talk about the appeal of it.
The uniqueness of the sort of one stop shop aspect within the residential building.
In the nonresidential world the sort of the one stop shop has been harder for for equipment suppliers to get right.
Maybe help us understand why in the residential world you're confident that that one stop shop approach is the one that will drive.
Share gains and returns.
Sure Julien in terms of their positioning what I will tell you is that they are the number one premium brand across Europe . So in a premium market with heat pumps, there number one within Germany, and heat pumps, there number one and across Europe .
Air to water heat pumps, there in the top five.
In terms of the the latter question.
What they've done that is incredibly impressive.
Is that they've designed it you can think of it almost as the Apple of their space because all of their products are seamlessly integrated into an ecosystem approach.
Homeowner caterpillar Dubai solar PV battery and a heap up all at the same time, they redesign them. So they're all interoperable and interconnected at the time of installation. So what really makes them unique is there ability. So if you only install the heat pump in the battery and a year later you install solar PV.
It's been seamlessly integrated so what they've done unique is have their products interoperable and it's underpinned by a digital solution. So you have this one based system that can control all of the various products and also provide greater management, because if you fast forward to the future. We're all going to get to a point someday, where you get home at the same.
You plug in your car you turn on your heating system Youre, putting a lot of.
Reliance on the grid all at the same time, so being able to do great management and have their products interoperable is very very unique and they're the only one in the world that does it.
That's helpful. Thank you and then just my follow up would be on the exit side of things.
And security and commercial refrigeration.
Investors may be concerned.
Buying <unk> for sort of 17 times, so so headline.
Ex synergy EBIT.
Sure.
And worry about sort of the selling prices of fnf's in commercial refrigeration.
Is that so maybe help us understand kind of how you're thinking about the exit route for those in terms of spins or outright divestment.
And how you're confident that as we go through this process of sort of 4 billion of sales out 4 billion of sales in.
The returns and sort of financial criteria looks okay.
Well a few things Julian first of all we think of it as buying 13 ex pay fully synergize number second we're going to be bringing in just on a base level more EBITDA than we're selling and then you add synergies to it and it's even more than the growth rate of these men is far higher than anything else on a sustained basis that we.
<unk> in the portfolio, including the businesses that we're exiting in terms of the price that we'll realize on these divestitures will have to see but what I would remind folks is that when we sell chubb, we sold that for a 13 X multiple and as great as our business Chavez with 240 branches, it's largely an installation and services business earlier.
Dealing with especially on the fire and security side highly differentiated high gross margin businesses usually with.
Three to five competitors in their spaces, they're going to be hugely sought after and we're going to see how as we go through the process. What's the best way to sell we may sell it its entirety, we may do a spend we may sell it off in various pieces some quicker than others. So we'll go through the process, but I think it would be very surprising for us to get anywhere close to the multiple on.
Chubb are lower we would expect it to be materially higher.
That's great. Thank you.
Please standby for our next question.
Okay.
The next question comes from Nigel Coe with Wolfe Research. Your line is now open.
Thanks, Good morning, and thanks for the question.
Good morning, Joe.
Morning, just wanted to talk about the maybe to dig into the free cash flow the high single digit free cash flow.
Target near five can you maybe just talk about the free cash flow profile for persimmon.
Over the past several years, obviously, the growth's been very impressive has have the free cash flow in the on the capex being been trending maybe more importantly, going forward, what sort of capex or investment do you see required to execute on this plan.
Yes, Nigel Patrick here. So 2023 is still ongoing of course, but the two prior years, we believe that their free cash flow.
Conversion has been in the mid Ninety's, so 90% to 95% of net income and so clearly we believe that there is a continued path to have a combined company there'll be in about 100% free cash flow conversion range as to Capex investments clearly given the significant opportunity in heat pumps there have been.
Heavy capital investments made by of Eastman, including in 2023.
We have that dialed into our numbers and as I said, we expect going forward to continue to be a company that converts about 100% of net income into free cash flow.
Okay. That's helpful.
Let me just no extraordinary investment requirements.
That's what I heard from that but maybe just clarify that.
Do you want to pick up on <unk> question about the the format for the exits.
Lots of questions about spin the sale.
Have you ruled out a spin at this point.
Taylor farms acuity the preferred option.
And if you do sell.
It seems that you've got the capacity to buy more than the 50.
The odd million shares via issuing so is that the upper limit of the buyback or could the Quebec scaleup.
It could scale up Nigel very clearly and.
The first part of your comment was related to sale versus spin.
At the end of day, we are evaluating the exits and ultimately you will pick whatever the exited that delivers the best after tax value for carrier.
And so whether that's the sale or spin that is what we're focused on and you're right. If it is a sale.
Certainly see a path with expected proceeds that would enable us to buy more shares than the equivalent shares issued to reason family.
Okay. Thanks very much.
Thank you. Thanks Helene please standby for our next question.
Okay.
Okay.
The next question comes from Jeffrey Sprague with vertical research. Your line is now open.
Hi, Thank you good morning, everyone.
Hey, Jeff and just back to the deal math.
Even kind of looking at the shares issued particularly given.
The billion or so of cash youre going to generate year to date, it actually looks to me likely there's a path.
First year all in EPS accretion.
I just wonder if there is something in.
I don't know how these guys report, it's a private company right. If we're talking <unk> or something else is there is.
Is there just something in the way they report where we've got a normalize the numbers to conform to a carrier basis or how would you respond to maybe be.
The potential of upside to what youre, saying on accretion versus dilution.
Yes, Jeff we believe as we have from.
Shared on the slide that in year, one, let's assume 2024 that will be modestly diluted.
That would include and as I mentioned.
Net income accretive adjusted net income accretive to the company, but given additional shares adjusted EPS modestly dilutive in year one.
Creative thereafter, a year one we do expect some <unk>.
Integration of cost to implement some of the synergies we think the.
Cost to get to the synergies are relatively modest we have $200 million of run rate synergies. We think the cost to get to these is maybe a quarter of dose. In addition to that we have.
Integration expenses that are probably about $100 million or so we'll see some of that in year, one and so that may impact the EPS dilution as well that you calculate in year one.
Okay.
And then just on the on the exits.
Patrick I think you appropriately said the best after tax path.
Can you just give us a sense of.
What the tax basis is.
And the targeted companies I would assume its low and certainly some of them, but perhaps not.
And you do have obviously some legacy liability in there right.
Kind of the whole PFS question, So how might you address that as part of the exit equation.
Yes, if there is a if there is a sales.
Or assuming a sales past there would be you would expect there to be some leakage.
We estimate maybe in the in the mid teens given a modest.
Tax basis in the assets. So thats the first part of your question.
I think when you were referring to some of the legacy liabilities I assume you're referring to a AAA, Jeff yes, yes.
So to the extent there is any a triple S liability at all we believe it resides.
<unk>.
And just as we plan to exit fire and security we plan to exit <unk>.
And regardless of.
How are we exiting pirate security to fund, what we expect to exit.
<unk> just to be a clean exit.
Thank you.
Thank you Jeff.
Please standby for our next question.
Okay.
The next question comes from Joe Ritchie with Goldman Sachs. Your line is now open.
Thank you good morning, congratulations everyone.
Thanks, John and Joe.
Hey, Dave can you.
Can you maybe just take a step back for us here and talk through how this deal came together.
When we had been or about a year ago, you talked about one with scale and a European HVAC I'm. Just also curious whether there is any potential risk associated with another bidder coming in it doesn't sound like it but just walk us through some of that some of the history and and that last piece of the question.
Yes, we are.
We have a pretty rigorous strat review process and it was clear from a very early days when we spun we had two big gaps. So we didnt, we <unk> when we had European residential heating. So we wanted to start with <unk> because of the underlying technology that it brings and we were fortunate with both <unk> and Toshiba to be able to enter.
That market and then it was really all hands on deck on European residential heating clearly no overlap no antitrust issues and it was if you look across our space and you did buy chart showing growth rates predictable growth rates over the next 10 years in every single space in which we compete the single most attractive market.
Is European residential heating and we don't have a real presence there so.
We started meeting with effectively every single company across Europe I had.
Dinners.
With I would say virtually every CEO in the space and they're very very impressive group. It's just very very difficult to break into that market because they are traditionally.
<unk> multi generation family owned businesses, and Max and I had dinner about a year ago in Allendorph, Germany, and I think that we hit it off because we both had this common realization of the art of what's possible. They truly are world class I mean, they are the leader if you could pick any company to come together.
And European residential heating it would clearly be B Smith, they have the best brand the best channel the breast technology. They are a very very unique asset with great people.
And as we continue to develop the relationship our whole premise was that one plus one has to be something greater than four and if you look at the combination of carrier investment climate solutions. We said that we can do something that no. Other company in the world can do to create value for our people our shareholders our customers and the planet. So we probably had 15 dinner.
Over the course of the last year as we continue to evolve.
What this relationship could be I think the contract is very.
Manages this idea of a potential interloper clearly there'll be a lot of people interested investment, but we're just thrilled that.
<unk> had this share the same vision that we had in the art of what's possible for the future.
That's super helpful answer. Thank you and then maybe just.
Quick follow up to that you've given us that projections.
On what you expect the heat pump market to do and your opportunity. There I'm just curious on that on the core business. If you went back a decade on this on the <unk> business like what it <unk> grow.
Cyclical was it Ed.
And I'm really just trying to understand.
What the.
As we see the progress and the acceleration in the heat pump market, how we should be thinking about their growth rate.
Well, the it's such a unique phenomenon with the shift to heat pump. So they have traditionally grown the market's a lot like the U S with an 80% replacement market people need heating heating fails you replace it.
The most amazing thing is given that 17 countries in Europe have either announced or band fossil fuel heating.
If you picture you're in a European home you take a wall hung boiler off the wall of your bathroom or your utility room, you're going to put in a heat pump instead of spending a few K youre going to spend 10-K. So if you pictured no unit rate of growth and the only thing you had was mixing up they'd be growing double digits now you put on top of that.
All of their other venues that they have our growth between solar PV and battery. That's why they have consistently been growing over recent years in these mid teens and if you look in their forecast.
It continues to grow at least double digit rates for the foreseeable future and I can tell you that there's many parts of our market. If you asked me what are they going to grow in 2025, it would be very difficult for me to answer that sitting here. Today. This is probably given the energy transition happening in Europe .
This is the most predictable sustained growth market in the world. We could give you a very high confidence this is going to grow clearly double digits in 2025 in 2026.
The underlying dynamics of the mixing up that youre seeing and the additional value add that they provide.
Super helpful I'll leave it there.
Please standby for our next question.
The next question comes from Tommy Moll with Stephens. Your line is now open.
Good morning, and thanks for taking my questions.
Hey, Tommy.
Dave Congrats on the deal and now I wanted to talk about resin North America, that's alright.
Yes.
Just kidding, let's stick on visa in here.
I was interested in any more context, you could share on their direct to installer model, how long ago did they pivot in that direction is that primarily only within Germany or does it also apply outside of Germany. Just any context, you can give us there would be appreciated.
It started about 30 years ago.
With.
Martin basement Professor Dr. Martin <unk> really had the courage to see the value in going to this direct to install our model and if you think about Europe and met in many cases bulk sell to distributors, who sell to wholesalers, who saw two south to installers, who sell to the homeowner.
In Germany in many of its other countries.
Our business climate solutions did establish this direct to install our model, which has so many advantages in Germany and in Europe .
Not only the obvious that they.
From a margin perspective, but even more importantly is that they end up with a lot of customer intimacy and what's also happening is that the demand for these heat pumps is so acute throughout Europe that that theyre installers are struggling to just keep up with the underlying demand. So riesman themselves have been in there.
With the homeowners not only helping with some of the replacements by helping with the new installations. So it has created so much value just having that direct installation customer intimacy and again it is not a model that they have that's unique to Germany. They have it in many other countries as well and I think one of the things that really attracted us.
Many of the many things that attracted us to dive Eastman is there and all the best countries. When you look at the countries that are making the most rapid transition to heat pumps and you look at the countries that have the highest demand it is countries like Germany, and Poland, and Italy, and France. So they are really well positioned globally, but certainly within.
Europe .
That's helpful. Thank you Dave.
I want to follow up.
Just talking about the market opportunity that you described which if you think about the spend on a per household basis at the 20 X multiplier potentially.
And a large and fast growing market.
But every other major player in the World is looking at the same market. So if you had to identify what is the core element of the <unk> moat around this opportunity and how being part of carrier potentially can help deepen that well.
Would you point us to.
The first point to the channel anyone can develop technology. The hardest thing is to access the channel and that that's true in Europe , It's true in the United States you need access because it's that these are highly install highly configured system. So you need highly trained installers that actually have access to the homeowner and.
That's what they have basement spends a lot of resources investing in training it's yeah.
Extensive installation network. So first as they have access and they have the best access because of their very unique.
Channel model. The second thing is to have the brand that not only in Germany, but it has that German technology. There's a lot of pull for that basement brand third is they have the technology I mentioned <unk> invisible I mentioned that how they've designed their digital overlay and theyre interconnected system. So they put a lot of energy into.
The natural refrigerants and <unk>.
Hydrogen enriched boiler so a lot of what they have done to build the moat is interconnecting channel brand technology holistic and ecosystem level offerings to really make them a very very unique asset again, not just in Germany, but across Europe .
Thanks, Dave I'll turn it back.
Thanks Tommy.
Please standby for our next question.
The next question comes from Noah Kaye with Oppenheimer. Your line is now open.
Thanks, David Congratulations.
Likewise intrigued by the commentary around the battery storage and solar PV opportunity I think you said in your prepared remarks, there was an opportunity to take some of those.
Offerings more broadly across carriers so.
I know maybe it's early days in thinking about this but how might you actually implement that how much you architect.
Similar offerings for the company in North America or other markets is it sort of are we learn at the start here and then build that over time.
Yes, I think so.
We have long been studying how do we connect these dots in North America.
And we've been in discussions with.
Solar providers, we've been having a series even with our board just last week a series of strategies strategy discussions around battery because if raw whether it's when these systems get interconnected when you think about an electric heat pump do you think about solar that relies on DC solar producing D C avoiding D.
The AC conversion D C.
Solar feeding batteries for storage feeding into the heat pumps. These systems are inevitably going to be connected there are probably more channel complexities in the U S than there are in Europe .
But we have been working on strategies to really enter.
The U S with a holistic offering what's really unique about these men is they have a very unique battery capability. So they know they only by themselves, but they have a modular concept.
They can actually customize the batteries to any size home for any demand they have.
They are battery design and capabilities are a bit unique that may be an initial easier part for the U S. And then solar may follow but.
The first order of business.
Expand all of their capabilities and investments throughout Europe second will be take it to places like the U S and globally and we will have to do that in a phased approach, but again when we showed our $250 billion Tam at our Investor Day last year, we never included solar PV and battery that just introduces close to another 50 billion Tam.
Which has tremendous upside and <unk>.
Importantly, differentiating.
Right.
If we can talk about the heat pump technology in development for a minute.
There are some differences obviously between your product portfolio and we've been there.
Ben as you actually mentioned they've been a very vocal advocate for natural refrigerants, how do we think about.
Some of the ways in which their portfolio complements your existing one how do we think about maybe some product development synergies over time.
I think thats one of the most exciting things we haven't factored in any of the revenue synergies into the 200 million Euro estimate that we gave.
You think about some of the things they do very well they are very much out in front on natural refrigerants I mentioned that in terms of there.
There he pub actually uses 50% less floor space and it uses significantly less installation time, which again when you have a shortage of qualified installers or across Europe , that's enormously differentiating and that can provide a lot of value to us per carrier outside of.
Outside of Eastman.
On the flip side with companies like Toshiba, we have world class inverter technology, we've invested so much over the years and heat exchanger spans air handler. So theres a lot of technology that we put you know with our 5000 engineers today, a carrier a lot of resources into developing world class compressor designs, how we.
Bring that into the basement portfolio as well so the technology synergies added on with the digital synergies because they have one base we have abound.
Lot of the digital subscription type offerings and digital platforms will really cut across both entities seamlessly.
That's great color. Thanks.
Thank you. Thanks, Noah please standby for our next question.
Okay.
Okay.
The next question comes from Dan <unk> with RBC. Your line is open.
Thank you and good morning, everyone add my congratulations.
Thanks Dean.
I just I might have missed this but for Patrick are you going to move fire and security and commercial refrigeration to discontinued.
That process be and timing.
We will do that at the right point my expectation is that several quarters away and there are some specific requirements that need to be met for us to get there and so if it happens at all it's going to happen several quarters from now got it.
And then.
Maybe just give us a perspective on the Eastman how they fared during the whole supply chain pressures.
How did they do in price cost.
And any sense about their backlog and past due.
Well I would say, they're very similar to what us and many other companies experienced I think the good news is that there'll be coming in with backlog because they experienced.
Some of the same supply chain issues that we all experienced they navigated it.
As well if not better than anyone but look we all ran into some of the same constraints.
The price cost positive Dave.
One of the very I think exciting many exciting things is that they clearly can charge a premium are they have they will continue to be able to do so so pricings are not an issue for them and I think that one of the exciting things on the combination is I think we will bring a lot of value on the cost side with our supply chain and then keep in mind there.
If you look at the last few years, despite all of the supply chain, they've been growing 15% sales and EBIT CAGR between 2020 three and their margins have improved during this time and impact Max just told me two nights ago that their margins were exceeded their expectations for March so they continue to.
To under promise and over deliver and I expect that they will continue to do so.
That's real helpful and just can you just clarify in your answer to Tommy's question regarding the distribution model.
Just going directly to 75000 installers, if it works for them that's great. Thank.
Thank you would try to fix something that's not broken but how.
How does that strike you in terms of efficiency.
Well look at it it's extremely efficient in the European market.
One of the things that is in Europe .
Yes, which is a little bit different than the United States is that first you start with distributors that you have wholesalers and the wholesalers. There are typically agnostic they will carry multiple different brands and they will provide the installer what the installer pulse for our distribution channel here in the United States. It's typically exclusive so our.
Peter is our exclusive exclusively Austin our brands. So I think it's an extremely efficient model. There are only goal would be to expand it expand it invest in it continue to grow it and they've done a phenomenal job getting it from where it is from where it was 30 years ago to where it is today.
And we just want to invest in expanding it and continue to make it.
Truly differentiated channel that it is.
Thank you.
Thank you.
Please standby for the next question.
The next question comes from Josh <unk> with Morgan Stanley . Your line is now open.
Hey, good morning, guys congrats on the deal.
Yes.
So I know there's been a lot of.
Yes.
Stimulus and kind of Repower, you and elements like that that are encouraging kind of the electrification of heat.
Chatter about European IRI, where does the product portfolio fit into that I got to imagine a time youre kind of the virtuous side of it but anything in particular that you're excited about in terms of their lineup that capture something that is going to be a policy target.
Well, if you think about there's really.
With all of the different led us legislation throughout Europe either.
And EU level or within the countries, there's really two aspects to it whether it's the European Green deal are a fit for 55 or Repower EU. It all really comes down to two things. One is the rapid adoption of renewables and two is the rapid deployment of heat pumps and visa is the only one that's well positioned in both of those so what's real.
Exciting is if you overlay that with the regulations that the 17 countries are passing it's literally a once in a generation opportunity you do not see markets, where they're basically, forcing you to transition from legacy fossil fuel boilers to heat pumps, and youre going to be charging about uptake for <unk>.
The price for that replacement, that's a mix up that is unlike any other industry in the world that's anywhere close to our space. So that's why it is a such a unique phenomenon and such.
<unk>, a compelling reason to want to get in and <unk> credit.
We're the first to see the truly value add that you can you can create for the homeowner by interconnecting the systems I mentioned that your energy Bill can be 80% less if you buy all of these systems together, which is a huge huge number and then you add onto it this existential risk.
A year ago half of the gas for Europe coming from Russia.
So the imperative to become energy independent and rapidly transition to heat pumps in renewables. It is.
Not a nice to have it's a must have for Europe .
We all know Europe , that's a bit of a bull at this past year, because there was a fairly mild winter, but the <unk>.
Caucus picking on energy independence in Europe .
Countries are pushing it and there is no one better positioned to lead in that transition than basement.
Got it that's helpful. And then just a follow up on the pricing comment I think <unk> question, Yes, I think in the U S. There arent a lot of markets out there that have I'll call. It lack of transparency to the end consumer the way <unk> does in a good way in terms of.
Not a lot of push back not a lot of context, what biggest things should cost how does that work.
In Europe for for the visa product is is it sort of just hey, AOS price. This is what you pay or is there a little bit of kind of configuration.
Kind of extra cost that maybe cloud that a bit.
Yes, I mean these are highly configured system. So I think that the dynamic is very much what you see in the United States. Even I'll just take a small example of battery you can have different size home with different size demands and that's why they have basement innovated a modular design because every home is slightly different so they are typically cut.
<unk> highly configured highly <unk>.
Technical.
And the price is really something that's between the homeowner and the installer. So there is a lot of variability and not as much.
Guess.
Ubiquitous transparency.
Got it congrats again, thanks a lot.
Josh.
Please standby for the next question.
The next question comes from Brett Linzey with Mizuho Group. Your line is now open.
Hi, good morning, and congratulations.
Thanks, Brett.
Hey wanted to just come back to the revenue synergies understand youre not contemplating in the deal framework, but are you able to maybe dimension what the potential revenue synergies could look like as you propagate some of the legacy technologies in the different markets.
Yes internally, we have some numbers that we put on it.
But I think it's early days, we need to let the team get in there and really and drive them and then as we get as we get traction we will start to put more meat on the bone on dimensionalize those but if you think about it there are channel with the 75000 installers that they have these intimate relationship with them that we could clear.
We introduced the second brand into the into their channel, whether it's carrier Toshiba that would be a very very exciting opportunity you think about they're a digital connectivity. They have a whole bunch of I would say world class digital solutions. They are smart thermostat that we could really use very much throughout Europe , but outside.
Of Europe , we could bring that into North America, we could bring that into Asia, because one of the things we've been working on it as digital connectivity with our.
Distributor and dealer network, but also potentially with the homeowner as well so as we bring their technology outside into our channel we bring some of our brands into their channel and then we leverage our respective.
Buying technologies I think the revenue synergies will end up being far more exciting when we look back five years from now we will have gotten truthfully, we will have exceeded our cost synergies because that's what we do what we will end up being more excited about is the revenue synergies.
Yes, no that makes sense.
Maybe just one on the quarter HVAC orders were up double digits organically commercial backlog up I guess as you think about the HVAC commercial business. I mean are you seeing any cracks from the bank turmoil and then I guess secondarily, what's the <unk>.
Supply chain is improving and the shipments out of backlog, improving where do you see backlog landing at the end of the year in the commercial business.
Well the backlog when we look at commercial HVAC backlog was up 20% organically, we had very strong orders.
In the quarter for commercial.
HVAC.
We are seeing is a continued growth across the globe frankly, we saw sales up mid teens in the quarter aftermarket was up just under 20% controls which are up just under 20.
And commercial applied was up in the mid teens, so when we look at.
Orders were very pleased with what we're seeing especially North America, China orders were a bit a bit down in the quarter, but we think that is timing. We think we're very bullish on what we're going to see for China orders. This year, because as that country starts to come back and I'll tell you interestingly in the middle of all the banking issues that.
We were all watching.
March was the first month since September of last year, where the architectural billing index was north of 50. So I think we all have we're all watching whether or not that could create.
Some constraints on demand we've seen none of it in the underlying business.
Okay, Great I'll leave it there thanks.
Thanks, Brett.
Please standby for the next question.
The next question comes from Andrew <unk> with Bank of America. Your line is now open.
Hey, guys good morning, and congratulations thanks.
Thanks, Andrew.
Hey, just a question can you talk a little bit more about.
The solar business, because it's a fairly large chunk of the company and I just want to understand better what it is the company.
Does there and I guess, how does it fit strategically it was Gary Tracy vision. Thank you.
Well you know.
<unk>.
The beauty of their solar PV that they've gotten into recently.
It's really part of a broader solution.
Lot of players globally that do some level of solar PV.
The issue of Eastman as they are the only player kind of directly in our space that has it as a core offering and the reason that's important is it's part of a broader ecosystem of offering. So it's not that people should think of them as a pure play solar PV somewhat should think about them as a energy management.
<unk> provider, so as more and more regulations are past throughout Europe , they're saying, here's how much heating you can use you as a homeowner here's how much carbon emissions that you're allowed to have a typical homeowner has no idea how to navigate achieving certain targets that are being given so what you.
Really want is a one stop shop, you want someone who can come in and say I can help you achieve these objectives that you have instead of reducing your thermostat 64 degrees in the middle of a cold winter Here's how you can achieve the objectives that the government has set out for you and it's that interconnectivity of our solar PV.
Seamlessly interacts with our wall hung battery plus the heat pump plus a grid management energy management digital solution, it's that interconnectivity that makes it such an important part of their portfolio.
Got you and just a question on synergies.
Completely appreciate that the deal is a lot more about.
Heat pump market tripling in Europe , and channel synergies etcetera, etcetera, and revenue centers totally got it but you know 5%.
Recent deals were more like 8% to 10% of the industry. So I'm thinking about 5% and we're also been question I'm getting questions on the headline of Ft that Germany will review sale of Eastman.
Does that just basically buying a storied middle Star German company, how does that figure into your approach.
Two costs.
This deal and what can you do going forward. Thank you.
Well, what I'd say Andrew is first.
Your observation that 5% seems conservative I would agree with you know I do think your typical synergies are in the high single digits and that's been.
I think our experience I think that so is it conservative that we would get to $200 million. The vast majority of which is by year three perhaps I do think we were pragmatic and very focused on what we're trying to do with this integration we are not coming in guns. A blazing. This is a very well run business.
As I mentioned, one ERP system. This is a phenomenal business. So this is not about head count reductions. They have 11000 people we are not coming in to reduce G&A heads were not coming in to close factories, it's the opposite where coming into invest in Germany invest in the workforce invest in growth because.
The worst thing you can do in the middle at the very outset of a huge growth opportunity and start the suisse squeeze costs and not build for the capacity to keep up with the demand that is so clearly in front of them. So we got low hanging fruit on the synergies with the in sourcing procurement. That's an easy go do we know how to do that prevalent basement knows how to.
Do that together, we're just going to go make that happen, where the number ends up being higher we'll see but our focus will be on those two pieces of the synergies and then equally important will be driving the revenue synergies.
Downtime, congratulations I know how impossible with these companies to get them greater congratulations on getting this deal done.
Thank you Andrew.
Please standby for the next question.
The next question comes from Nicole <unk> with Deutsche Bank. Your line is now open.
Yeah. Good morning, Thanks for taking my questions guys.
Yes.
Just a couple of more financial questions. So going back to I think Jeff described asked this question towards the beginning of the call.
Would you do we need to make any adjustments to the EBITDA figure that you guys included in the slides as presumably decent.
<unk> would need to transition from <unk> to GAAP.
Yeah.
Nicole Patrick here, we believe that there is a good approximation.
So for mobile kind of diligent work yes.
Okay. Thank you for confirming that and then with respect to the synergies.
Does that that 200 million, how should we think about the phasing of that I think typically sourcing can take a little bit longer like tends to be towards the end of our synergy process and a deal. So is that more backend loaded across the three years or will you start to get some of those synergies.
Upfront. Thank you.
Yes, Nicole we expected by year three the vast majority of those synergies will be achieved so think about 75%.
I'd say as the phasing.
Is the insourcing is ago do you know there might be some minor.
Tweaking to the product, but toshiba's already in Europe . So in terms of qualification I don't see that as a major issue. So I think that in sourcing will be I think relatively quick sourcing frankly could be relatively quick as well so I think.
It's what it typically takes longer is if you start closing factories and things like that that is not part of any part of our calculation. So I think achieve.
Achieving these relatively within the next couple of years is quite doable.
Thank you I'll pass it on.
Thank you.
Please standby for the next question.
The next question comes from Steve Tusa with Jpmorgan. Your line is now open.
Hi, good morning Congrats.
Thanks, Dave.
Any any margin differences between these various businesses.
Within these men.
The Pie chart there.
Yes.
No I'd say that the margins.
For things like <unk> services are all similar batteries might be slightly lower solar a bit lower than that.
I think the nice thing is that the margins on boilers and heat pumps, because we are going through that transition or are very similar.
Got it and then just Patrick on the on the guidance.
Any moving parts on bridge items, and then just any color on.
Kind of the cadence first quarter to second quarter. The seasonality that you guys expect this year.
Yes, Steve So in essence, our prior guide assume one $5 billion to $2 billion share repurchases.
We're pausing that would that we lose about four or five pennies versus our February guidance, that's being offset given Q1 performance, but also some adjustments on interest income for example that you see in the back of the of the slide deck in terms of timing for the balance of the year.
We're thinking about this in February I mentioned that.
First half adjusted EPS would be a little less than half.
The full year given our performance in Q1, we think that first half second half EPS will be very similar.
At the midpoint of our guidance of $2 55.
Okay, and then just any update on price cost and the spread there or what was that in the first quarter and what do you expect now for the year.
So price cost was slightly positive in Q.
Q1, and we expected Q1 price cost to be the most difficult per what we said in.
In February we expect price cost for the full year to be positive and we expect it also to have a <unk>.
Slightly positive impact on margins.
And then one last one how much price do you now expect for the year.
<unk>.
We still expect most of the organic growth with this year to be priced so it's now in the colored in the $4 million to $500 million range Steve.
Great. Thanks for all the details and congrats again on the deal I think everybody covered most of the questions I had thanks.
Thanks, Steve and.
I was handed a note by Sam that.
My might cut out during fire and security and so.
So I apologize for that what I was basically saying is what's on the slide that.
For fire and security, it's great businesses, great teams, great leading positions you all know the brands and how the great growth potential I was clarifying that even though it's $3 6 billion of sales, we're going to retain the utech business, which makes controls for HVAC and refrigeration. So it's a natural part to.
Keep in our portfolio the business. We're exiting therefore is about $3 one and it has EBITDA margins in the high teens, it's split between fire at $2 1 billion securities around $1 billion.
And like I said upfront is that this was a very very difficult decision juergen and his team have done a phenomenal job.
Creating a world class business that is highly differentiated and it's a true unique asset that I know many many will be extremely interested.
But just because.
It's such a phenomenal business doesn't mean that it belongs in our portfolio. So.
Excuse me, we had to make the very tough decision.
To exit those businesses and we will use those proceeds as Patrick said, well, we'll pay down some debt we will do a buyback and then we will continue to invest.
In our core business of being the global leader in intelligent climate and energy solutions. So a tough decision, but I think the right decision for the long term of the business.
And with that we will leave it there I do thank all of you for your.
Your flexibility moving this up a day and I just want to reiterate my thanks to our employees into the.
11000 basement employees that will become part of our family. You know this is I think this is a once in a generation opportunity to truly bring to <unk>.
World class phenomenon organizations together to be an unambiguous global leader and I couldnt be excited about the days that lay ahead. So my thanks to all of you.
Okay.
This concludes today's conference call. Thank you for participating you may now disconnect.
Yes.
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