Sam Pearlstein, Vice President of Investor Relations, introduces the hosts for Carrier's fourth quarter 2023 earnings conference call, David Gitlin (Chairman and CEO) and Patrick Goris (CFO). They will be discussing non-GAAP measures and remind listeners that forward-looking statements are subject to risks and uncertainties. The company asks that participants limit themselves to one question and one follow-up. Gitlin thanks the team for delivering excellent results and welcomes the 12,000 new team members from Viessmann Climate Solutions. The formal kick-off last month was filled with energy, warmth, and excitement.

The speaker believes that the business combination will be highly impactful and the company had a strong finish to the year with 33% adjusted EPS growth, double-digit aftermarket growth, and margin expansion. Despite challenges, the team consistently outperformed and delivered 17% EPS growth, 3% organic sales growth, and improved free cash flow. The company has also taken key actions for growth and productivity planning to position for future success. This has led to strong shareholder returns since becoming a public company. The company aims to leverage its strengths and create a new Carrier with a performance culture, innovation, customer intimacy, and a simplified business and portfolio. They also prioritize continuous improvement, productivity, and recurring revenues.

The organization has focused on sustainability and is committed to becoming a global leader in intelligent climate and energy solutions. They have invested in developing differentiated sustainable technologies and have seen growth in European commercial heat pump sales, North American residential split systems, and electric transport refrigeration. They are also committed to reducing emissions and achieving carbon neutrality by 2030, and net-zero greenhouse gas emissions by 2050. In addition, they have achieved consistent double digit growth in the aftermarket for the past three years.

In summary, the company has seen significant growth in their aftermarket business and is targeting another year of double-digit growth. They have a deep culture of excellence and are fortunate to have Max Viessmann on their board. They are planning for mid-single digit growth in Viessmann Climate Solution sales by 2024, with high teens adjusted EBITDA margins. They are also targeting significant revenue synergies and expect to return to solid growth in the second half of 2024. The company is off to a strong start and is focused on achieving or exceeding their year one business case adjusted EBITDA.

The company is using a successful integration strategy to preserve Viessmann's team and culture while creating value. They have announced successful business exits and expect to achieve a 2 times net leverage ratio earlier than previously indicated. Despite lower sales, Q4 earnings were ahead of expectations due to strong performance in key markets and a focus on productivity. The company is targeting mid-single digit growth and over 50 basis points of adjusted operating margin expansion in the future.

Despite flat sales, Q4 adjusted operating profit for the HVAC segment increased by 8%, resulting in an 80 basis point expansion in adjusted operating margin. Adjusted EPS also saw a significant increase of 33% compared to last year. Free cash flow for the quarter was $829 million, surpassing October's guidance, and for the full year, the company converted over 100% of adjusted net income into free cash flow. Despite a decline in North American residential HVAC sales, the segment saw growth in light commercial, commercial, and aftermarket sales. The light commercial HVAC business had an exceptional year with 35% growth and a 250 basis point increase in adjusted operating margin.

The HVAC business had a successful year, with the transition to refrigeration resulting in a 6% increase in organic sales. While commercial refrigeration was down, transport refrigeration and the Sensitech business saw growth. In the fire and security segment, organic sales were down due to tough comparisons in Access Solutions, but industrial fire saw a 20% increase. Operating margins for this segment were impacted by investments and one-time items. Backlogs for longer cycle commercial HVAC business continue to increase, while shorter cycle businesses are normalizing. Total company orders were down, but excluding North America truck and trailer, organic orders were up in the mid-single digits.

In the eighth paragraph, the company discusses their HVAC orders, which returned to low single digit growth due to an increase in residential orders and a decline in light commercial orders. Commercial HVAC orders were also up, and the backlog for longer cycle projects remains strong. However, refrigeration orders were down, with a significant decline in global truck and trailer orders. This was partially offset by growth in container and commercial refrigeration orders. The company expects to see continued growth in residential HVAC and container orders in 2024. The paragraph also mentions the company's guidance for the year, which includes the recent acquisition of Viessmann Climate Solutions and the planned sale of global access solutions and commercial refrigeration. The guidance assumes that these sales will be completed midyear and the proceeds will be used to pay down debt. The company also includes industrial fire and residential and commercial fire in their guidance until definitive agreements are in place for their sale.

In 2024, the company expects reported sales of $26.5 billion with mid-single-digit organic growth from Viessmann Climate Solutions and a 5% headwind from divestitures. The adjusted operating margin is expected to increase by over 50 basis points due to price, volume, and productivity. Adjusted EPS guidance is estimated to be between $2.80 and $2.90, with a 30% core earnings conversion rate. Underlying free cash flow is expected to increase by 10%, but reported free cash flow will be lower due to portfolio transformation activities. The company expects to net about $700 million in free cash flow after tax payments and fees related to divestitures and the Viessmann acquisition. There will also be higher than typical restructuring charges in 2024.

In the second half of the year, the company expects their free cash flow to be back half-weighted. The divestitures will not impact free cash flow as they will be shown as investing activities. The company also expects mid-single digit organic growth in all three segments and an increase in adjusted EPS from $2.73 to $2.85 at the midpoint. This includes volume leverage, strong productivity, and over 30% core earnings conversion. The company's core business is expected to be up close to 15% in 2024, despite the dilutive impact of Viessmann. The net contribution from Viessmann Climate Solutions and the impact of losing six months of earnings from Access Solutions and Commercial Refrigeration will be offset by interest savings from the proceeds. The company expects a headwind from tax in 2024 and their full year guidance includes about $0.30 of adjusted EPS related to businesses being exited. This does not reflect the benefit of redeploying net proceeds from the exits. Other estimates are provided in the appendix on Slide 20.

In 2024, the company plans to focus on deleveraging and increasing their cash flow. They expect low single-digit organic revenue growth and a slight margin expansion in the first quarter. They also expect a $0.10 adjusted EPS headwind due to various factors. The company is determined to deliver strong results and will remain focused on execution. They are also excited about the potential benefits of their recent acquisition and plan to continue performing while transforming in 2024.

Dave, the CEO of Viessmann, is confident about the company's performance in 2024 despite challenges in the German market due to political uncertainty and changes in regulations. He believes that the company is well positioned and expects an increase in orders in the first quarter of the year. The company has seen a slight pause in new orders in the last quarter of 2023 due to delays in legislation, but with more clarity and definitive regulations in place, they expect to see growth in countries like France, Poland, and Germany. The company's EBITDA is expected to be more back-end loaded, with a majority of the synergies coming in the second half of the year.

In the paragraph, the speaker discusses the current state of the company's orders and growth, specifically in relation to the finalization of German legislation. They mention an increase in heat pump applications and preorders on their website as positive signs. They also mention their focus on filling second half growth and achieving their full year EBITDA goal. The speaker then pivots to addressing Patrick and asks for a precise breakdown of revenue and profit for the security and commercial refrigeration businesses that are leaving. Patrick responds by stating that they will lose about 5% of the exits for the full year, with the businesses being evenly loaded throughout the year and a similar margin profile.

The speaker, David Gitlin, discusses the sales guidance for the HVAC segment, stating that it is expected to increase in the mid-single digits for the full year. He also mentions that the North American light commercial business may see a decrease in sales. Gitlin then provides more details on the expected growth, stating that it will primarily be driven by volume and mix, with a small percentage coming from price. He also addresses concerns about heat pumps and mentions that Viessmann Climate Solutions, a subsidiary of the company, is not solely focused on heat pumps and has a diverse portfolio of products. Overall, Gitlin expresses confidence in the mid-single digit growth due to various factors.

The speaker discusses their company's ability to adapt to market conditions and anticipate share gains in the boiler industry. They mention new products and expansion into new markets. The geographic mix is expected to be favorable, with Germany's recovery in the second half. They also mention internal targets and potential revenue synergies. The speaker expresses confidence in growth in the second half and expects sales to increase in the high single digits for the year, with a breakdown between price and volume not provided.

David Gitlin discusses the progress of rolling out the new 454-B units and the expected impact on price and volume mix in the residential market. He also mentions that they have successfully reduced inventory in the channel by 16% and will continue to focus on de-stocking in the first quarter.

The speaker believes that the recent decline in growth for HVAC is temporary and expects it to return to normal levels in the next month or two. They also mention that commercial HVAC orders have reaccelerated, particularly in the Americas and Europe, driven by demand for data centers and industrial projects. China is a weak spot, but the company is still optimistic about growth in the country due to demand in other sectors.

Deane Dray asks about the seasonality in the company's guide and Patrick Goris responds that it is similar to previous years with a heavy focus on Q2 and Q3. Dave Gitlin mentions the company's strong position in mega projects and a central group targeting scale customers, particularly in the data center industry.

The company expects mid-single-digit organic growth in its Refrigeration segment by 2024, driven by a strong rebound in the container business and a modest growth in the global truck trailer market. The North American truck trailer market is expected to decline. The company also anticipates gaining market share in the container business.

The speaker discusses the company's growth last year and predicts a flattish performance for the current year, with potential for growth in the commercial refrigeration business. They also mention a focus on free cash flow conversion, with a goal of reaching over 100% in 2023 and an expected elevation in 2024 due to increased CapEx.

The Viessmann Climate Solutions business is finalizing some larger projects, leading to a higher CapEx outlook for 2024. However, the company is targeting 100% free cash flow conversion and expects a slower start to the year due to lower orders in the second half of 2023. The sales and EBITDA are expected to be more weighted towards the second half of the year, and the recent definitive legislation in Germany has had a positive impact on sales.

The Viessmann web pages saw increased activity and energy among installers, leading to a rise in heat pump applications. The uncertainty in legislation impacted new orders, but with a level of certainty, heat pump sales are expected to increase in the second half. Viessmann sales were down in Q4 of 2023, but are expected to be flattish in Q1 of this year with a pickup in the second half. The company is back to normal levels of backlog in security and has good coverage for growth projections in commercial HVAC. Inventory levels in the channel are being monitored and partly influenced the prediction of sales being down in the mid-single-digit range.

Patrick Goris, CEO of Carrier, discussed the company's forecast for 2024, stating that it would still be lower than previous years. He also mentioned that they are keeping an eye on inventory levels and have strong coverage for the second quarter. The company's light commercial division makes up about 5% of their business. Nigel Coe from Wolfe Research asked about Viessmann, and Patrick clarified that the company ended 2023 slightly below their expected sales and EBITDA. He also stated that Viessmann's operating margin for the full year is in the mid-teens.

The speaker discusses the performance of the company in the mid-teens, with a high EBITDA margin and an operating margin in line with the company average. There was a step-up in fixed assets as part of a recent transaction which boosted depreciation. The company expects long-term growth in heat pumps, which have a higher price point than boilers. The expected mix between heat pumps and boilers is factored into the company's mid-single-digit revenue growth forecast for this year. A question is asked about the sell-through versus sell-in for the residential market and the reason for the mid-single-digit decline in the light commercial market.

In the paragraph, David Gitlin discusses the current state of the light commercial and residential markets for Carrier. He explains that they are looking at coverage and demand in the light commercial space, with some verticals remaining strong, and are back to normal levels in the residential market. He also notes that they expect to see a 1:1 match between sales and movement from distributors, and that the market is currently at the same level as pre-COVID.

The speaker discusses the company's financial performance in the previous year and their plans for growth in the current year. They mention their priority to close a deal with a buyer for their commercial and residential fire business, and their preparations for a possible sale or public market exit. The speaker also mentions their focus on improving the performance of their franchises and maximizing long-term shareholder value. The next question is from a caller who congratulates the company on closing a recent deal.

The conversation between Stephen Tusa and David Gitlin revolves around the financial data for North America's split volume, with Tusa seeking clarification on how it differs from HRI data. They also discuss the projected growth for the company in 2025, with Tusa asking for more details on the expected impact of OP roll-off and interest savings. Patrick Goris provides insight on the EPS bridge and predicts that the core business will continue to grow at double-digit rates, with the potential for additional growth from the redeployment of net proceeds and repurchasing of stock. Tusa estimates a growth rate of around 10% for the core business in 2025.

The company saw a 20% increase in orders in China in the fourth quarter, with strong performance in the refrigeration sector and some headwinds in the commercial HVAC sector. The company is pleased with the overall performance in China, which now accounts for 9% of their sales after acquiring Toshiba's residential and light commercial business.

Carrier has launched new products and identified revenue synergies with Viessmann, which will help them enter new markets and industries such as EV, electronics, infrastructure, and manufacturing. They expect to see high single-digit growth in China and will continue to monitor the market. The revenue synergies from Viessmann will come from multichannel and multi-brand strategies, such as introducing the Carrier brand into Viessmann's installer network and expanding the Viessmann brand into other regions. The exact size and timing of these synergies will be revealed in the future.

David Gitlin discusses the various opportunities for growth and innovation within Carrier and Viessmann. He mentions the potential for driving services growth through digital tools, the possibility of expanding into niche markets like air to water heat pumps and geothermal in the United States, and the potential for integrated offerings like home energy management systems and district heating. He also mentions the company's audacious target for growth and the excitement surrounding the future of the company.

The speaker expresses pride in their team's accomplishments in regards to sustainability and believes that their future is bright. They thank the participants and end the program.

This summary was generated with AI and may contain some inaccuracies.