Good morning and welcome to Carrier's First Quarter 2023 Earnings and Strategic Update Conference Call. I would like to introduce your host for today's conference, Sam Pearlstein, Vice President of Investor Relations. Please, go ahead, sir.

Thank you and good morning and welcome to Carrier's conference call to discuss the transactions we announced last night along with first quarter 2023 earnings. With me here today are David Gitlin, Chairman and Chief Executive Officer; and Patrick Goris, Chief Financial Officer. We will be discussing certain non-GAAP measures on this call which management believes are relevant in 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 Carrier's website at ir.carrier.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 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 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.

Well, 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 and an exciting transformation, a game-changing opportunity to acquire Europe's premier company in the most attractive market in our space, allowing us to capitalize on the energy transition in Europe. Combined 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 generates 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 progressed. Adjusted EPS of $0.52 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 were to drive sustained growth, improved 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%. We 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 important new platforms for our building and cold chain ecosystems Abound and Lynx, with both getting superb traction with our customers. We dramatically improved our portfolio, positioning ourselves in the fast-growing VRF market with the acquisition of Toshiba's HVAC business and Giwee, while completing the sale of Chubb and our bearer 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 2020 to a targeted 30% this year. This outstanding performance has been made possible by our world-class workforce and agile new stand-alone 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 life cycle 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 Viessmann Group's Climate Solutions business, the premier company in the highest growth segment in the heat pump and 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. The former decision was easy, combining with the best asset in the best market could not be more compelling and exciting. The latter decision was tough. We love these businesses and our people in them. We have tremendous brands, gross margins, market positions 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 Viessmann Climate Solutions business on slide six. Viessmann Climate Solutions with 11,000 team members as part of the family-owned Viessmann Group, who have established market leadership over its 106-year-old history. The company has made a purposeful shift from fossil fuel boilers, such that now 70% of its portfolio consists 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. The combination of Carrier and Viessmann's Climate Solutions creates a tremendous game-changing opportunity. And as a result, the Viessmann 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 we look forward to Max Viessmann joining our Board of Directors. Furthermore, we are excited to welcome the tremendous Viessmann team to the Carrier family to help us realize our shared vision. Carrier and Viessmann share a very similar journey as you see on slide seven. A phrase that we have used a lot to describe Carrier is a 100-year-old startup. Interestingly, Viessmann 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-focused, digital industrial leaders. Together, we are establishing a new global climate champion and that is one of the many reasons why Viessmann Climate Solutions just fits like a glove, as you see on slide eight. Thanks to the generations that came before as a Carrier, we have established market-leading positions globally. But when we spun, we had two strategic gaps, BRF, which we have now addressed with the acquisitions of Toshiba and Giwee and European residential light commercial heating, which we are now addressing with the premier asset in the 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, Viessmann 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. The megatrends 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. Fit for 55, targeted 40% renewable energy in Europe by 2030, which was recently raised to 45%, when the EU passed REPowerEU following the Russian invasion of Ukraine. REPowerEU 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 in 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 time frame 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 Viessmann Climate Solutions offering provides 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 pumps, from selling about one million per year, going up to 10 million per year in 2030. Now factor in the positive mix impact with heat pump selling for as much as 4x 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 Viessmann Climate Solutions is the premier company in this space. Thanks to Professor Dr. Martin Viessmann, who represents the third generation of the founding family and his courageous move 30 years ago. Viessmann Climate Solutions is one of the very few companies in Europe that primarily sells directly to installers. 75,000 of them, with whom they have deep, long-standing relationships. This highly differentiated channel allows for best-in-class customer intimacy, rapid innovation in response to the customer desires and digital connectivity. Likewise, the Viessmann brand is iconic and highly trusted across Europe. It has often been compared to as the Mercedes of residential heating brands. During German Chancellor Olaf Scholz's most recent New Year's address, he singled out Viessmann 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, thousands of customers recognize and demand Viessmann climate solutions and are willing to pay a premium for it. Its excellent reputation is largely driven by its track record of product leadership and premier innovation as you see on Slide 14. Viessmann Climate Solutions has leaned into the use of natural refrigerants and as heat pumps require 50% less floor space and installation time. They also developed a new integrated heating solution called Viessmann Invisible, a patented concept which optimizes space and 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, outside top and bottom line growth as you see on Slide 15. We expect approximately €700 million of EBITDA on €4 billion of sales in 2023. Fast forward to 2025, we expect those numbers to increase to over €900 million and €5 billion respectively. That's double-digit top and bottom line growth and it's nothing new for them. They've done it in the last few years and we expect it to continue going forward. So best asset in the best market. What's equally exciting is that the combination positions Carrier to enter an entirely new market, given that Viessmann Climate Solutions has effectively established an ecosystem approach as you see on Slide 16. Viessmann has done a masterful job of creating common 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. Max Viessmann and his team have effectively implemented this strategy. Its 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 an easy, reliable and quick way to operate their energy system via an app. The platform bundles devices and electronic applications into one single climate and energy solution for the home. The beauty as you see on Slide 17, is that Viessmann Climate Solutions is the only company in the industry with such a comprehensive solution level offering. When you combine Viessmann Climate Solutions unique market position and breadth of offerings, with Carrier's technology and global channels, the opportunity for us to create unique value to our homeowners and other customers and importantly the planet is truly differentiated. Homeowners in Germany with boilers spend on average €2,200 per year on gas heating. Switching to an electric heat pump, can reduce the owner's cost by over 20% to €1,700 per year. If those same homeowners implemented a complete renewable solution, with solar PV, battery storage, heat pumps and an energy management solution with effective grid management and controls, they could reduce their annual heating bills by 60% to 80% to about €700 per year. Those 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. Heat pumps sell for about 4x the price of a boiler. When you add solar PV, battery and accessories and services, the installed price can be as high as 15 to 20x the installed price of a stand-alone boiler. The result is Carrier's ability to now pursue a 35 billion fast-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'll continue to do it again, as we see here on Slide 19. Viessmann 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 strong operations and innovation. We have been very impressed with Thomas Heim, Viessmann Climate Solutions CEO and his leadership team. Thomas will lead Carrier and Viessmann Climate Solutions Center of Excellence for our combined residential and light commercial European business, which will continue to be headquartered in Allendorf, Germany. After completing the acquisition and business exits, the vast majority of our business will be HVAC. As a result, Chris Nelson and I have collaboratively agreed 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. A 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 of cost synergies the vast majority of which will be achieved by year three and we have a track record of over achieving our projections. On Toshiba, we committed to €100 million of synergies and we are tracking to do meaningfully better than that. Viessmann 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 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 vents. Cost synergies are expected to increase Viessmann 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 Viessmann Climate Solutions channel and leveraging its digital ecosystem offerings and technologies more broadly across Carrier's channel. Now I will turn it over to Patrick to take you through the transaction itself on Slide 22.

Thank you, Dave. The enterprise value is €12 billion, which is approximately 13 times the forecasted 2023 EBITDA, assuming €200 million of run rate synergies. We are very pleased that the Viessmann founding family chose to take 20% of the transaction value in Carrier equity and that they are committed to a long-term holding. They share our enthusiasm about the future value we believe this transaction will bring to our stakeholders. The number of shares is based on a VWAP prior to signing and is fixed. The remaining purchase price of €9.6 billion will be funded through a mix of cash on hand and debt. Regarding cash, we had $3.3 billion at the end of Q1 and expect it to grow to around $4.5 billion by year-end, not accounting for the impact of the acquisition, as we have paused share repurchases. We have secured fully committed financing for about €7 billion and have hedged the cash portion of the euro-denominated purchase price. Given the growth profile of Viessmann Climate Solutions, the acquisition is anticipated to contribute over 100 basis points to Carrier's overall revenue and EBITDA growth profile. We expect a high single-digit free cash flow yield beginning in year five. While the acquisition is projected to be accretive to adjusted net income in 2024, we anticipate it will be accretive to adjusted EPS starting in 2025 due to the additional shares outstanding. Maintaining solid investment-grade credit ratings is very important to us. Yesterday, Moody's, S&P, and Fitch reaffirmed our current investment-grade ratings following the announcement of this transaction. Excluding proceeds from business exits, we plan to quickly deleverage after the transaction, targeting about 2x net leverage by 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 the Viessmann 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 exiting 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, Sensitech sensors and our Lynx 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, Carrier's revenue CAGR would have been 2x 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 Viessmann 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.

The first question comes from Julian Mitchell with Barclays. Your line is now open.

Hi. Good morning and congratulations.

Thanks, Julian. Good morning.

Maybe just a first question around Viessmann 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 $1.5 billion $2 billion of sales and you talked about sort of a $5 billion TAM somewhere in the deck, but I'm not sure those are 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 with the residential building. In the nonresidential world, the sort of the one-stop shop has been harder for equipment suppliers to get right. So maybe help us understand why in the residential world you're confident of that one-stop shop approach is the one that will drive share gains and returns?

Sure Julian. In terms of their positioning, they are the top premium brand in Europe. Specifically, they lead the premium heat pump market in Germany and rank among the top five for air-to-water heat pumps across Europe. They've impressively designed their products to work seamlessly together, creating an ecosystem. If a homeowner can't purchase solar PV, battery, and heat pump simultaneously, their products are pre-designed to be interoperable and interconnected upon installation. Their uniqueness lies in this interoperability, supported by a digital solution that allows for one control system for all products, enhancing management. Looking ahead, as more people will rely on the grid when they arrive home, the ability to manage the grid with interoperable products is extremely distinctive, making them the only company in the world doing this.

That's helpful. And then just my follow-up would be on the exit side of things Fire & Security and Commercial Refrigeration. Investors may be concerned that you’re buying Viessmann for sort of 17 times or so headline ex-synergy EBITDA and worry about sort of the selling prices of F&S and commercial refrigeration versus 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 that the returns and sort of financial criteria looks okay?

We see this as acquiring 13 times the fully synergized numbers. We're projecting that, at a baseline, we'll generate more EBITDA than we're selling, and when we factor in synergies, it will be even greater. The growth rate of Viessmann significantly exceeds that of any other entity in our portfolio, even the ones we are divesting. Regarding the prices we can expect from these divestitures, we will need to evaluate that over time. I want to remind everyone that when we sold Chubb, it was at a 13 times multiple. While Chubb is an excellent business with 240 branches, it mainly focuses on installations and services. In contrast, the fire and security segments are highly specialized with high gross margins and typically have only a few competitors, making them very attractive. We are still determining the best approach for selling; it might be as a whole, through a spin-off, or in various segments at different times. However, we would be surprised if the multiples on these transactions were lower than what we achieved with Chubb; we anticipate they will be significantly higher.

That's great. Thank you.

Thank you.

Please standby for our next question. The next question comes from Nigel Coe with Wolfe Research. Your line is now open.

Thanks. Good morning, and thanks for the questions.

Good morning.

Good morning. I wanted to discuss the high single-digit free cash flow target. Can you talk about the free cash flow profile for Viessmann over the past several years? The growth has been impressive. How have free cash flow and capital expenditures been trending? More importantly, what kind of capital expenditure investment do you foresee necessary to execute 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-90s so 90% to 95% of net income. And so clearly we believe that there is a continued path to have a combined company that will 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 Viessmann, including in 2023. We have that dial 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 clarify that there are no extraordinary investment requirements. I want to address Julian's question about the format for the exits. There are many inquiries regarding a spin versus a sale. Have you ruled out a spin at this point? Is selling Fire & Security the preferred option? If you do sell it, it seems you have the capacity to buy back more than the approximately 50 million shares you're issuing. Is that the maximum for the buyback, or could it be increased?

It could scale up Nigel very clearly. And the first part of your comment was related to sale versus spin at the end of the day we're evaluating the exits and ultimately we'll pick whatever the exit is that delivers the best after-tax value for Carrier. And so whether that's the sale versus spin that is what we're focused on. And you're right. If it is a sale we certainly see a path with expected proceeds that would enable us to buy more shares than the equivalent shares issued to Viessmann family.

Okay. Thanks very much.

Thank you.

Please standby for our next question. The next question comes from Jeffrey Sprague with Vertical Research. Your line is now open.

Thank you. Good morning, everyone.

Hey, Jeff.

Just back to the deal math even, kind of, looking at the shares issue particularly given the $1 billion or so of cash you're going to generate year-to-date, it actually looks to me like there is a path to first-year all-in EPS accretion. I just wonder if there's something in I don't know how these guys report. It's a private company, right? If we're talking IFRS or something else. Is there just something in the way they report where we've got to normalize the numbers to conform to a Carrier basis or how would you respond to maybe the potential of upside to what you're saying on accretion versus dilution?

Yes Jeff, as we've indicated on the slide, we anticipate being slightly dilutive in the first year, which we assume to be 2024. This includes an accretive adjusted net income for the company, but the addition of shares will lead to a modest dilution in adjusted EPS for that year, while we expect it to be accretive afterward. In the first year, we also foresee some integration costs related to implementing synergies, which we believe will be relatively modest. We estimate about €200 million in run rate synergies, with the cost to achieve these being roughly one-fourth of that amount. Additionally, we expect integration expenses around $100 million, which will affect the EPS dilution calculated for the first year.

Okay. And then just on the exits Patrick, I think you've appropriately said best after-tax path. Can you just give us a sense of what the tax basis is in the targeted companies? I would assume, it's low and certainly some of them, but perhaps not. And you do have obviously some legacy liability in there right kind of the whole PFAS question. So how might you address that as part of the exit equation?

Yes. If there is a sales path or if we assume there will be one, we would expect some leakage. We estimate it to be in the mid-teens due to a modest tax basis in the assets. That's the first part of your question. When you mentioned some of the legacy liabilities, I assume you were referring to ASSS, Jeff?

Yes. Yes.

Okay. So to the extent there is any ASSS liability at all, we believe it resides within Kidde-Fenwal. And just as we plan to exit Fire & Security, we plan to exit Kidde-Fenwal too and regardless of how we exit Fire & Security could spin we expect to exit and at the end this to be a clean exit.

Thank you.

Thank you, Jeff.

Please standby for our next question. The next question comes from Joe Ritchie with Goldman Sachs. Your line is now open.

Thank you. Good morning. Congratulations, everyone.

Good morning, Joe.

Hi, Dave can you maybe just take a step back for us here and talk through how this deal came together? When we had dinner about a year ago you talked about wanting to scale into a European HVAC. I'm just also curious whether there's any potential risk associated with another bidder coming in it doesn't sound like it but just walk us through some of the history and that last piece of the question.

Yes. We have a rigorous strategic review process, and it became clear early on that we had two significant gaps: VRF and European residential heating. We chose to focus on VRF first due to its underlying technology and were fortunate to enter that market with both Giwee and Toshiba. Then we concentrated our efforts on European residential heating. There are no overlaps or antitrust concerns in this space. If you analyze the growth rates over the next decade for every segment we compete in, European residential heating stands out as the most attractive market, where we currently lack a strong presence. We started engaging with almost every company in Europe, meeting with virtually every CEO in the sector, and they are truly impressive. However, entering this market is challenging since many players are multi-generational family-owned businesses. About a year ago, Max and I connected in Allendorf, Germany, and we discovered a shared understanding of the potential within this market. Viessmann stands out as the premier player in European residential heating, possessing the strongest brand, best channel, and top-notch technology, making them a unique asset with exceptional people. As we continued to develop our relationship, we believed that our synergy could yield results beyond our separate capabilities. The combination of Carrier and Viessmann Climate Solutions has the potential to deliver unparalleled value for our employees, shareholders, customers, and the environment. Over the past year, we've shared numerous dinners discussing the evolution of this relationship. The contract we have in place is designed to address potential competitors. While there will inevitably be interest in Viessmann from others, we are excited that Max shares our vision for the future and the possibilities ahead.

That's a very helpful answer. Thank you. I have a quick follow-up. You've provided projections for the heat pump market and your opportunities within it. I'm interested in understanding the core business. Looking back a decade, how did Viessmann perform? How cyclical was it? With the progress and acceleration in the heat pump market, how should we consider their growth rate?

Well, it's such a unique phenomenon with the shift to heat pump. So, they've traditionally grown the market is a lot like the US where it's 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 banned 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 our utility room, you're going to put in a heat pump and instead of spending a few K, you're going to spend 10K. 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 for 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 at our forecast, it continues to grow at least double-digit rates for the foreseeable future. And I could tell you that there's many parts of our market. If you ask me what are they going to grow in 2025 it will be very difficult for me to answer that sitting here today. This is probably given the energy transition happening in Europe. I would say this is the most predictable sustained growth market in the world. We could give you very high confidence this is going to grow clearly double-digits in 2025, in 2026 because of the underlying dynamics of the mixing up that you're seeing and the additional value add that they provide.

Super helpful. I'll leave it there.

The next question comes from Tommy Moll with Stephens. Your line is now open.

Good morning and thanks for taking my question.

Hey Tommy.

Dave congrats on the deal and now I wanted to talk about resi North America if that's all right.

Yes.

Just kidding. Let's stick on Viessmann 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.

Sure. The direct-to-installer model started about 30 years ago with Martin Viessmann, who recognized its value. In Europe, the traditional model often involves a chain from distributor to wholesaler to installer to homeowner. However, Viessmann Climate Solutions adopted this direct model, which offers numerous benefits not just in terms of margins but also in fostering strong relationships with customers. The demand for heat pumps in Europe is so high that installers are having difficulty meeting it. Viessmann is actively engaging with homeowners to assist with both replacements and new installations, creating significant value through this direct connection. This model isn't unique to Germany; it extends to many other countries as well. One major draw for us to Viessmann is their presence in key markets undergoing rapid heat pump transitions, like Germany, Poland, Italy, and France. They are very well positioned both in Europe and globally.

That's helpful. Thank you, David. And 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 it's a 20x multiplier potentially in 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 Viessmann moat around this opportunity and how being part of Carrier potentially can help deepen that what would you point us to?

I would highlight the channel. Anyone can create technology, but accessing the channel is the most challenging part. This holds true both in Europe and in the United States. Access is crucial because these are extensively installed and configured systems, requiring highly trained installers who can reach the homeowner. Viessmann invests significantly in training its broad installation network, which grants them superior access due to their unique channel model. Additionally, they possess a strong brand, not only in Germany but also due to their association with German technology, which generates substantial demand for the Viessmann brand. Furthermore, they have advanced technology, including initiatives like Viessmann Invisible, which showcases their digital overlay and interconnected systems. Their commitment to natural refrigerants and hydrogen-enriched boilers enhances their offerings. Overall, Viessmann has effectively built a competitive advantage through an interconnected approach that combines channel access, brand strength, and technological innovation, making them a distinct asset not just in Germany but across Europe.

Thanks, Dave. I'll turn it back.

Thanks, Tommy.

Please stand by for our next question. The next question comes from Noah Kaye with Oppenheimer. Your line is now open.

Thanks, Dave, congratulations. I'm also interested in the discussion about the battery storage and solar PV opportunity. In your prepared remarks, you mentioned the potential to expand these offerings across carriers. While I understand it may be early to discuss this, how do you envision implementing and designing similar offerings for North America or other markets? Is this something where we start small and then expand over time?

I believe so. We have been analyzing how to connect these elements in North America for a while. We are engaged in discussions with solar providers and have recently had strategy discussions, including with our Board, focusing on battery integration. It's not a question of if these systems will be interconnected, but rather when. When considering an electric heat pump and solar energy that uses DC, it eliminates the need for DC to AC conversion, allowing DC to directly feed into batteries for storage and then into the heat pumps. These systems will inevitably be linked. There are likely more complexities in the U.S. market compared to Europe, but we are developing strategies to enter the U.S. with a comprehensive offering. What sets Viessmann apart is their distinct battery capability; they not only purchase the cells but also offer a modular design that can be tailored to any home size and demand. Their battery design and capabilities are quite unique, making it potentially easier for initial entry into the U.S., followed by solar expansion. Our primary focus will be to enhance their capabilities and investments across Europe first, followed by global expansion, including the U.S., in a phased manner. Additionally, when we presented our $250 billion total addressable market at our Investor Day last year, we did not account for Solar PV and Battery, which could add nearly another $50 billion to our addressable market, representing significant growth potential and differentiation.

If we can discuss heat pump technology and development for a moment, there are clear differences between your product portfolio and Viessmann's. As you noted, they have been strong proponents of natural refrigerants. How do we view the ways in which their portfolio enhances your existing offerings? What are the potential product development synergies we might explore over time?

I think that's one of the most exciting aspects. We haven't included any of the revenue synergies in the €200 million estimate we provided. When considering their strengths, they excel with natural refrigerants. For instance, their heat pump requires 50% less floor space and significantly reduces installation time, which is a major advantage considering the shortage of qualified installers in Europe. This can add considerable value to us at Carrier beyond Viessmann. On the other hand, with companies like Toshiba, we possess world-class inverter technology. Over the years, we've made substantial investments in heat exchangers, fans, and air handlers. We have a significant number of engineers at Carrier dedicated to developing world-class compressor designs, which we aim to integrate into the Viessmann portfolio. The synergies from technology combined with digital synergies, considering they have one base and we have developed numerous digital subscription offerings and platforms, will create seamless integration across both companies.

That's great color. Thanks.

Thank you. Thanks Noah.

The next question comes from Deane Dray with RBC. Your line is open.

Thank you. Good morning everyone. I add my congratulations.

Thank you, Deane.

Dave, I may have missed this, but Patrick, are you planning to discontinue Fire & Security and commercial refrigeration? What would the process and timing look like?

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 Viessmann how they fare during the whole supply chain pressures how did they do in price cost? And any sense about their backlog and past due?

I would say they faced challenges similar to many companies, but the good news is they will come in with backlog as they encountered the same supply chain issues. They managed these challenges as well as, if not better than, others. We all faced some constraints. They are positive in terms of price and cost, and one exciting aspect is their ability to charge a premium, which they will continue to do. Pricing is not a concern for them. I believe our combination will bring significant value on the cost side through our supply chain. It's important to note that over the past few years, despite supply chain issues, they have achieved a 15% sales and EBIT CAGR from 2020 to 2023, and their margins have improved during this period. In fact, their margins exceeded expectations for March. They consistently under-promise and over-deliver, and I anticipate this will continue.

That's really helpful. And can you just clarify in your answer to Tommy's question regarding the distribution model, just going directly to 75,000 installers if it works for them, that's great. I don't think you would try to fix something that's not broken. But how does that strike you in terms of efficiency?

It's very efficient in the European market. In Europe, you start with distributors followed by wholesalers, who typically carry multiple brands and provide installers with what they request. In the United States, our distribution channel is generally exclusive, with distributors focusing solely on our brands. This makes for an extremely efficient model. Our goal is to expand and invest in it to facilitate further growth. They have done an outstanding job improving it over the past 30 years, and we want to continue to invest in expanding it to maintain its distinctiveness.

Thank you.

Thank you.

Please standby for the next question. The next question comes from Josh Pokrzywinski with Morgan Stanley. Your line is now open.

Hi, good morning guys. Congrats on the deal. Dave, so I know there's been a lot of stimulus and REPowerEU and elements like that that are encouraging the electrification of heat chartered by European IRA where does the product portfolio fit into that? I got to imagine it's on the virtuous side of it, but anything in particular that you're excited about in terms of their lineup that captures something that is going to be a policy target?

If you consider the various legislation across Europe, whether at the EU level or within individual countries, there are two main aspects to focus on: the rapid adoption of renewables and the quick deployment of heat pumps. Viessmann is uniquely positioned to excel in both areas. What makes this situation particularly exciting is the impact of the regulations being enacted in 17 countries, presenting a once-in-a-generation opportunity. We are witnessing a market transition from outdated fossil fuel boilers to heat pumps, with replacement heating systems priced up to four times higher than traditional options. This shift is unprecedented in any industry related to our field. This extraordinary phenomenon provides a compelling reason to invest. Max deserves credit for recognizing the significant value homeowners can gain by integrating these systems, which can potentially reduce energy bills by up to 80% when combined. Additionally, there’s a pressing need for energy independence, especially given that not long ago, half of Europe's gas supply came from Russia. The urgency to transition to heat pumps and renewables is critical for Europe. While Europe narrowly avoided a crisis last winter, the push for energy independence is intensifying, and no company is better positioned to lead this transition than Viessmann.

Got it. That's helpful. And then just a follow-up on the pricing comment. I think from Deane's question. I think in the US, there aren't a lot of markets out there that have I'll call it lack of transparency to the end consumer the way resi HVAC does in a good way in terms of not a lot of pushback, not a lot of context what these things should cost. How does that work in Europe for the Viessmann product? Is it just, hey, a list price this is what you pay, or is there a little bit of configuration and extra costs that maybe cloud that a bit?

These systems are highly customized. The situation is similar to what you find in the United States. For example, with batteries, different homes have varying demands, which is why Viessmann developed a modular design. Each home is unique, leading to a system that is typically tailored and complex. The pricing often depends on the homeowner and the installer, creating significant variability and less transparency.

Got it. Congrats again.

Thanks, Josh.

Please stand-by for the next question. The next question comes from Brett Linzey with Mizuho Group. Your line is now open.

Good morning and congratulations.

Thanks, Brett.

I wanted to just come back to the revenue synergies. I understand, you're 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, Brett. We have some internal estimates, but it's still early. We need to allow the team to really engage and drive results. As we gain traction, we'll provide more details on these aspects. Considering their channel with 75,000 installers who have strong relationships, we could certainly introduce a second brand like Carrier Toshiba, which presents an exciting opportunity. Their digital connectivity includes world-class solutions, such as smart thermostats, which we could utilize across Europe and also expand into North America and Asia. We've been focusing on improving digital connectivity with both our distributors and dealer network, as well as potentially reaching homeowners. By integrating their technology into our channel and introducing our brands into theirs, while leveraging our respective technologies, I believe the revenue synergies will be quite impressive. Looking back five years from now, I think we will have surpassed our cost synergies, as what excites us more is the potential for 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, with the 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?

Backlog for commercial HVAC increased by 20% organically, reflecting strong orders during the quarter. We are experiencing consistent growth globally, with sales rising in the mid-teens range. Aftermarket and controls also saw increases just under 20%, while commercial applied grew in the mid-teens. We are very satisfied with the order trends, particularly in North America. Although orders in China were slightly down this quarter, we believe this is just a timing issue and remain optimistic about future orders as the country begins to recover. Notably, March marked the first month since last September where the Architectural Billing Index exceeded 50, which we are closely monitoring to determine if it might impact demand. However, we have not observed any constraints in the underlying business.

Okay. Great. I'll leave it there. Thanks.

Thanks, Brett.

Please stand-by for the next question. The next question comes from Andrew Obin with Bank of America. Your line is now open.

Hey guys. Good morning and congratulations.

Thanks, Andrew.

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 does the company does there? And I guess, how does it fit strategically with your HVAC vision? Thank you.

Well, the beauty of their solar PV that they've gotten into recently is, it's really part of a broader solution. There's a lot of players globally that do some level of solar PV. The issue with Viessmann is they're 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, someone should think about them as an energy management solution provider. So as more and more regulations are passed 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 to 64 degrees in the middle of a cold winter, here's how you can achieve the objectives that the government has set up for you and it's that interconnectivity of a solar PV that seamlessly interacts with a 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. And I completely appreciate that the deal is a lot more about heat pump market tripling in Europe and channel synergies, et cetera, et cetera and revenue synergies totally get it. But 5% recent deals were more like 8% to 10% in the industry. So I'm thinking about 5% and we've also been getting questions on the headline and the FT that Germany will review sale of Viessmann, how does that just basically buying a storied midsize German company, how does that figure into your approach to costs in 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. 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 blazing. This is a very well-run business. This has as I mentioned one ERP system, this is a phenomenal business. So this is not about headcount reductions. They have 11,000 people. We are not coming in to reduce G&A heads. We're not coming in to close factories it's the opposite. We're coming in to invest in Germany, invest in the workforce, invest in growth because the worst thing you can do in the middle of the very outset of a huge growth opportunity is start to 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 in-sourcing procurement. That's an easy go do. We know how to do that, Viessmann knows how to do that together. We're just going to go make that happen. Well the number end 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. Thank you and Sam.