Good. Good. Microphone's live, the microphone's definitely live. Good afternoon and welcome to the post-lunch periods here at the Wolfe Conference. Very pleased to welcome back and start again with Carrier CFO Patrick Goris on stage with me. Thanks, Patrick, for being here, and so is Sam Pearlstein, Head of IR. I think we could just go and do Q&A, right, Patrick- Yeah ... unless you wanna make some opening comments. No. Q&A is fine. Q&A is good? Yeah. Okay. Normally I'd wanna start off with macro, kind of trade environment. I think given the announcements you've made over the last, month or so... Mm-hmm I think portfolio is sort of where I wanna start really, and I wanna kick off with, maybe Viessmann. Just maybe first and foremost, you know, how do you see the timeline for the closure of Viessmann? What are the some of the regulatory hurdles we need to, you know, go through and, you know, what do we need to monitor there? Yeah. If I just may, provide some context as what we've done. Sure ... for the acquisition. You can think about Carrier since the spins from United Technologies, we've worked on simplifying our portfolio. We sold an asset, an equity investment we had in Beijer Ref. We sold Chubb, what we thought non-core assets. What we've done is we've increased our stake, or we've acquired businesses in higher growth areas. One was the acquisition of Toshiba Carrier. A joint venture gives us access to a faster growing VRF market, technology we can use in different parts of the world. We announced earlier this year, which, what you were referring to, Nigel, the acquisition of Viessmann, which provides us basically with immediate access to residential heating and cooling in Europe, a much faster growing end market where Carrier had had very little exposure. That being said for context, there are no hurdles that we see that are not the usual hurdles. They're the normal regulatory requirements or approvals that we need. They're in Europe, they're in other parts of the world, including in Asia. That's why we came up with the timeline around the end of this year. That has not changed, although these items are either filed already or are in process of being filed. There is really no change there in terms of the timing. Yeah. I saw some headlines around, you know, the German regulator, you know, some of the public interest of acquiring a, you know, crown jewel of the German industrial sector. I mean, do you see any issues there? We don't. First of all, the reaction we think is understandable because we agree. You mentioned crown jewel. We think it is the crown jewel in this part of the market, not just in Germany, but in Europe in general. They actually have. Viessmann has sales in Asia as well. They have sales in the United States, so it's much more than just a European player. They're always concerned if someone buys a national or the crown jewels of a country or an industry. We've made it very clear that we're not there to call it to over-manage the business. They are really good at what they do. We can learn a lot from Viessmann. We can use their technology in other parts of the world. We can use their channel to push through additional products that are already in our portfolio. Frankly, it's the key reason why the Viessmann management team will be the management team of that business going forward. We actually may fold some of our businesses within Europe underneath that management team because they've done such an outstanding job. Right. I think you mentioned, you know, one of the attractions of Viessmann partnering with Carrier is you're helping to, you know, expand and to invest and to make the necessary investments required to meet some of those targets. Maybe just talk about some of the investment spend you know, kind of the investments and capacity expansions you see over the next several years to support the forecast that you have out there. It's specific to Viessmann? Viessmann, exactly. Yeah. If you look at Viessmann investment profile, they have made some significant investments last year. This year is, I think, is about the peak because you basically have an entire industry of their entire business, which is shifting from boilers to heat pumps, you need more capacity for heat pumps and less capacity over time for boilers. In all of our analysis and due diligence, this is the biggest peak. The nice thing is going forward, we think there will be less requirements than this year also because we have existing facilities in Europe. We have existing facilities in that region that we also acquired through the acquisition of Toshiba Carrier, there is some space in those facilities. I do not expect that this would have a significant impact on our free cash flow conversion. Actually, if I look at Viessmann's free cash flow conversion, the last few years was in that 90%-95% range with some important investments. There will be 1 or 2 years of some important investments, but I don't see a change in our free cash flow profile as a result of this. Okay. There are some nice, as I mentioned, some nice synergies there given our footprint in that region as well. Sure. I see the clock start, ticking. Okay. We have a lot of time. Yeah, we have a lot of time. Still about 30 minutes to go, that's good news. Okay, I lost my train of thought there. We talked about capacity. How fungible is the boiler capacity with heat pump capacity? As the heat pump business, you know, falls off, can that capacity be easily repurposed for heat pumps? I believe it is new equipment that you need. Okay. Hence some of the capital investments required. Also, it's interesting, the boiler business, we expect it to decline mid-single digits going forward. The boiler business is actually still growing in parts of the world. It's not like, for example, in Asia, in some countries there, their boilers business is still growing. It's not a one-for-one reduction, and that's why we expect also from an overall company point of view for Viessmann, we expect attractive revenue growth rates going forward. Yes, mid-single digits decline in boilers. We expect heat pumps to be growing at a attractive growth rate, so strong double digits. The price per unit in heat pumps can be about 3, 4x what it is for a boiler. Without any volume growth or without any unit volume growth, you can see significant revenue growth. The margin% is about the same on a heat pump as it is for a boiler. It shows the attractiveness of the opportunity there. Okay. The boiler business will be grown, would be falling off much faster than mid-single digits, but offset by, in Europe, growth outside of Europe in, some reservoirs. It would grow, it would decrease faster than mid-single digits in Europe. That's our assumption. There is still some growth in other parts of the world. Okay. Great. The other part of the portfolio move is the fire and security assets. Yeah ... and the commercial refrigeration assets. Maybe talk about, you know, what, how much progress you've made towards getting this done. You know, I don't know what you can tell us, but in terms of, you know, how far down the path have you gone there? Well, all the work streams are in flight. The bankers are all engaged. Clearly we're in the process of going to market, as I say, as soon as possible, which I expect to be briefly after the summer or at the end of the summer. Okay. CCR, commercial refrigeration, I should say, that will be a sale. That's very clear there. On the fire and security side, frankly, we have some flexibility. Is it all at once or is it in parts? That's something that we're looking at to optimize. Frankly, and we've been very clear, we have three priorities. One, we want a clean exit. Two, its proceeds. Three is timing. Okay. We're definitely gonna talk about the clean exit in a second. When we think about the fire and security package today, obviously excluding the KFI business that's gone into Chapter 11. Yeah. When we think about the remaining portfolio, it's a mix of residential and commercial assets. Is that a natural bundle or do you think that they could be separable? It could be separable, but there are different ways of thinking about it. You, one way to think about it is residential versus commercial. Okay. Another way of thinking about it is the security businesses compared to the fire businesses. That's some of the work that we're doing now. What is the best way to have a clean exit, maximize proceeds, and in timing? Yeah. There are different ways of going at this, and so it's still open, whether we sell it all at once or in parts. Okay. When you say sell, it sounds like sale is more likely than spin at this point. I said sell. I should have said exit. Clearly, the reason I said sell is because it's our preference. Yeah. Yeah. Yeah. For sure. Yeah. For sure. I mean, I don't know, it sounds like you haven't gone... The bankers are engaged, and I'm sure they are. They're not that busy right now.... as far as sort of the interest out there, how would you sort of characterize that? Strong, we're not surprised. Frankly, we've had interest and incoming calls way before the announcement. The reason frankly is if you look at fire and security, if you look at each of the businesses that are part of that segment, they tend to be number one or number two in their market. Tend to be high margin businesses, tend to be businesses that don't require an enormous amount of capital to support them. It's just that we don't believe we're the best owners of those businesses. We've had significant interest in incoming calls. We're quite optimistic on the exits here. Great. Maybe a couple of more on portfolio before we get into the actual business. I think you said mid-2024 to have, you know, everything done by. Over the course of 2024. Over the course of 2024. Yeah. It sounds like that could be a conservative timeline. Do you think you could maybe get it done by year-end? This year it might be a little bit aggressive, but if you, as I mentioned earlier, if we, late summer, if we want to be able to go to market, as I call it, could there be a scenario where we could see some exits, earlier, at least some announcements? Could be. We just, I think we just shared over the course of 2024, we'd rather surprise to the upside than the other way around. Sure. Absolutely. You mentioned, the desire for a clean exit. Obviously KFI has been unplugged from that, from that package. Given what you've done... you haven't done it, your subsidiary has declared bankruptcy. Yeah. Um- It filed for Chapter 11. Chapter, filed for Chapter 11. Does that cleanly ring-fence that liability? Actually, in our view, in Carrier's view, the location of the liability was always crystal clear. It was always in KFI and nowhere else. KFI has been in business for 35 years. It's a profitable business. It has good customers, good product lines. Has $200 million in sales. It just happened to have owned a business for 8 years, ending in 2013, that manufactured AFFF. Right. Carrier never owned that business. We never got any dividends from that business. We got that business as part of the spin. As it goes with either ring-fencing or containing liability, we think it's a very, very strong position we're in, and that's why we're comfortable with the decision that the KFI board has made. Obviously this may impact whether this is a sale or a spin of some of the FNS businesses. Okay. Just finally, this is my final question. By the way, guys, I'm gonna go out with questions. We still have 30 minutes, by the way. I know. It's like some kinda like Twilight Zone kinda situation. I will be going out to questions to the audience in a moment. Is it possible you can actually exit the remaining businesses, so the core businesses without the KFI approval? Do you think some kind of resolution around KFI needs to happen before we can finalize the sales? I think it is possible that we could exit parts of fire and security, before call it the complete resolution on the Chapter 11 process. I'm not sure there would be a complete outcome or a complete exit without having a clear outcome there in terms of the discharge of any liabilities. Okay. Yep. Very clear. Okay. I think that covers portfolio, unless there's any questions out there on portfolio. Any questions? Yeah, right here, please. There's a mic. Yeah. Sorry. There's a mic. Sorry. Just had a quick question going back to your heat pump comment. You mentioned the pricing was 3 to 4 x that of a boiler. I'm wondering, are there any material differences in the aftermarket in servicing and maintenance when that shift happens? Like, is it more captured in that upfront cost? Yeah. Actually, it's both. The reason I mentioned this, the initial cost is a multiple of. One of the beauties about Viessmann is they're much more than just a heat pump company. They provide a integrated solution. The solar panels, generation of electricity. Two, they have home battery storage, energy storage in their homes with batteries. Three, they have the heat pumps. They have sanitary hot water, they have the home energy management systems that optimizes the energy generation, the storage, and the usage. The initial sale of the heat pump is a multiple of. If you then include all these accessories, that provides a significant additional revenue streams, the opportunity to attach services to all of that. And by the way, this is something that really differentiates Viessmann because we don't see anyone else in Europe being able to provide that. It's much more the much more than the initial heat pump sale. It's the overall package or solution sold to customer, being able to attach services and having a level of customer intimacy and basically a dependency of the customer on the company that's very different than being just a provider of equipment. For us, of course, and I'm adding on to my answer, but the opportunity is to be able to provide the same thing in some other markets, including in North America residential, where we have a very attractive market share where no one provides that complete offering today. That's something that, of course, that we're looking into from a revenue synergy point of view. Question. Anything else? Okay. Let's continue. Maybe one more question on Viessmann. That's, you know, we get a lot of questions around the potential of you know, competition in the European heat pump market to really explode. A lot of, Asian, very capable Asian competitors coming in. Daikin's obviously expanding capacity. How important is that installation network that Viessmann has, the 70,000 plus installers? Is that a walled garden? Are they exclusive to Viessmann? I mean, what protects you from competition? We think that installer base is critical. There is a shortage of installers, so we can, or anyone can produce as many units or heat pump units as you want. Unless you have installers that are trained on your equipment, have the loyalty towards your brand, it can be really hard to find someone to sell them to. Yeah. The installers are critical. Viessmann, I think that model is somewhat similar to the U.S. Installers in the U.S. tend to have a primary brand, could be 80 something% of their sales. They tend to have a secondary brand. The relationships are decades old. I mentioned the training academies. It's really hard to switch, and it's certainly hard to switch from the number one premium brand in Germany. We, Carrier, when we looked at that market in Europe, we always said technology is not our biggest challenge to enter that market. It is the channel. Channel is one. Two is, you may be able to provide or to manufacture and deliver a heat pump, but as I mentioned earlier, the energy transition is much more than selling heat pumps. The opportunity is for that entire integrated solution, and that's someone that we see Viessmann being the only one who provides that today. Those are two really important elements. A third one is having the installed base. The customers know you, the customer know your brand. Viessmann, I think for 17 years in a row, has been named the number one brand in Germany from a customer loyalty point of view. Very hard to break and A key reason why we acquired them, obviously. Sure. Okay. Great. Can we just talk about a quick pulse check on what's happening out there in the market right now? The field checks on residential are coming in pretty weak right now. Commercial sounds like it's on fire and transport, I don't know. I have no idea about that. Anything you can help with in terms of what you're seeing out there? Yeah. We would say that there are parts of our portfolio that have continued to be strong through the first quarter. You mentioned commercial HVAC. I would put light commercial HVAC right next to it with even higher performance there. North America truck and trailer continuing to do really well. The areas that for us have been weaker, one, our container business. Container is a really good business. went through a downturn starting in the third quarter of last year. We actually believe our second quarter will be better than our first quarter from a volume point of view in container. Commercial refrigeration is also going through a weaker period. We expect that to improve in the second half of the year. Not sure whether it's gonna be at Q3 or Q4 element. With respect to resi, the item we watched the most this movement. First quarter, as we expected, volumes were down, mid-single digits. Sales were down high. Mid-teens. Mid- Mid-teens volume. sorry, mid-teens. That's why Sam is here to correct me. Mid-teens. Volume mid-teens. Revenues down high single digits. We think in Q2, sales will be down low single digit for resi. We actually, in our April guide, we assume that volumes will be, or sales will be slightly up in resi in the back half of the year. We'll know for sure once we look at the movement, particularly in May and in June as we enter the busy season. Yeah. Seems like weather's been unhelpful. Is that, is that fair to say? Yes. We always wish for warmer summers and colder winters, and so it could be warmer in some parts of our country. Okay. As I mentioned, this can change as we all know, this can change in a week, and in a week you have a heat wave, and it changes the whole dynamics of our business. For sure. Couple days of heat, changes. Yep ... the whole thing. Thinking about, you know, obviously you and WATSCO have a very symbiotic relationship. WATSCO's margins have been significantly higher over the last couple of years. It feels like there's been some transfer between the manufacturers, not just Carrier, but manufacturers to the distribution channel. Is that the right way to think about it, that there's been more incentives provided to grow? I believe they may have seen the margin expansion earlier than we would have seen. Clearly, we have a tremendous focus internally on one, not just the price realization, but two, the productivity, but also capturing any cost deflation. We have not seen it in Q1. Actually, we didn't expect it in Q1. We expect to see a bigger benefit from that deflation capture and starting in the second quarter of this year than what we've seen in Q1. We start to see improving margin fundamentals in the second quarter, and then a big tailwind in the second half of the year. We actually expect that deflation capture to be higher, second half of the year than the first half of the year. Okay. We're still on track for price cost of $200 million. Yeah ... I think. Yep. Yeah. Okay. That's great. On the commercial side, any areas of concern out there? I mean, there's a lot of chatter around commercial construction weakness. Are you seeing any pockets of weakness in your portfolio? You, in North America, for commercial HVAC, we think commercial real estate is about 10%, a little less than 10% of our total business. The tailwinds we've seen in this business is, one, focus on sustainability, decarbonization globally, healthy buildings, some government incentives. If you look at commercial HVAC, we believe we have leading positions in Asia, and in Europe. Very strong offering from a heat pump point of view. The biggest opportunity, frankly, we have in that business is in North America, where we're not the number 1, 2, or 3 player. It's an area where we've made some investments in our product portfolio, magnetic bearing equipment. Also we're in the process of seeing expanding some of the mag-bearing product line we have in the U.S. and introducing some of the heat pump technology in the U.S. that we're so successful with in Europe. So attractive business and of course one of the key attractiveness of that business is large installed base and then our opportunity to monetize that installed base with more aftermarket sales. That is something that we've been very open about is our number 1 priority in that business. Frankly, for a company in total, aftermarket is a key priority. I think it's fair to say that compared to some of our peers, we started later. It also means that we have more opportunity for growth now. Look, if I look at your larger HVAC peers, service revenues have expanded and accelerating to double digits, which is something we haven't seen before. Has there been a change in the dynamic between, you know, the big players, the big OEMs, and maybe some of the ISPs out there, in terms of trade have swung towards the manufacturers with the, you know, genuine parts and, you know, predictive maintenance? I think it's hard to tell. For us, what we know what drove it is, one, historically, it has not been a big focus. We put in a playbook that was used, frankly, in the aerospace industry, which worked really well there. Since we've put that playbook in place, we've been growing at strong double digits. Q1 was up mid-teens. High teens. High teens. That is an area where we have significant more room for growth because we still estimate that today our aftermarket business is about $5 billion. We still estimate that it's about 20%-25% of the total aftermarket revenue available for our installed base. We capture too low of a piece of that market, hence a big focus. Whichever business you talk to internally within our company, there is an aftermarket plan, aftermarket leader, aftermarket targets. Very clear. Container. By the way, I wish I had Sam on my shoulder as well. To be fair, yeah, I get lots of numbers wrong, so. On the container side, very hard for us to track what's going on real-time in container. Are you seeing signs of that inflection that you called out and it feels like your guidance implies that container revenues will be up sequentially. Is that the way you have it planned? The way you can think about it is we said that typically container goes through four quarters of a down cycle. For us, that would have started in Q3 of last year. We expect Q2 in unit sales and therefore revenue sales to be better than Q1. We would expect to see some growth in the back half of the year-over-year. year-over-year on the container. sequential growth in Q2, year-over-year growth in the second half of the year. Yeah. Okay, great. That's again, a really attractive business. I don't know whether you know this, but we have over 1 million sea container units out there. When we talk about aftermarket, for that business, it's all about finding the units, connecting them, and then attaching services to them, whether it's the Carrier Link combined with our sense tech technologies, like remotely monitor the performance of those sea containers, being able to tell the end customer or the manufacturer or the producer of the medicine or the food to say, "This is the temperature at which your goods were throughout the sea journey," being able to provide predictive maintenance ideas to the operators. That's the aftermarket in container. A tremendous opportunity. Yeah. I think by the end of this year, we plan to have, well over 100,000, close to 200,000 units, under contract. Okay. Compared to? less than $100,000 at the end of last year. Right. 0 a few years ago. Yeah. All right, we've got 2 minutes. I think the clock's right now. 2 minutes left. Any questions in the audience? Otherwise, I will continue. Going back to residential, just wanna touch on inventories. Again, your big channel partner increased inventories in the 1st quarter. They're talking about more channel burn in the 2nd half of the year. How do you view inventories across your broad spectrum of channel partners? Just specific to resi? Resi. We would expect. We don't expect to see a reduction in field inventories till the back half of the year. If I look at our outlook for resi for this year, high single digits volume down, it would be mid-single digits without any inventory reduction in the field. Yeah. The key question, that's why I mentioned earlier, the key item for us is gonna be watching that movement and is that assumption still valid or maybe it's gonna be better or a little bit worse. Okay. We don't think that we will see that inventory destocking till Q3, Q4. Q3, Q4. We expect some. The question will be is how much is this gonna be more or less than what our assumption is. Obviously, there's a huge offset from price and mix, this year. Right ...in residential. For sure. Yeah. Yeah. That's why we expect our revenues in resi still to be about flat year-over-year, even though the declines in volume are high single digits. Yeah. It's quite a nice offset. It's the, it's the mix up. Yeah. The SEER pricing is holding. Yep ...that mix up on SEER, there's about 10%-15% mix up, I think it is. Yeah. The new units, the SEER units, they're about 10%-15% higher price per unit. Yeah. That's holding. The price itself, I mean, just remind us in terms of the price and actions you're taking this year, I mean, what's in the plan? We expect to have about $500 million from an overall company perspective in pricing. That's about 2%-3% for the full year. We've seen pricing hold. In the case that we see additional input cost headwinds, we'll of course consider additional pricing. So far it's holding and we don't see any change in market behavior. Yeah. Incentives are normal. No change. No change. Yeah. Great. That's fantastic. Patrick, we're out of time. Thanks for the conversation. It's good chat and look forward to seeing you next year. Good. Glad to be here. Thanks, Pat. Thank you.