Carrier strives to reduce operating costs 2%-3% annually

Business Strategy and Outlook

Carrier Global, a leading supplier of climate control and fire and security solutions, was spun off from United Technologies in April 2020. Carrier is a high-quality franchise with leading brands across most of its product portfolio. After the spinoff, Carrier increased spending on research and development, its sales organization, and capital projects to support product development and growth initiatives; this will help management accomplish its goal of mid-single-digit top-line growth over the midterm. Two of Carrier’s higher-profile growth initiatives include increasing its service attachment rate and becoming the leader in the applied HVAC market within five years. Carrier will successfully increase its service revenue, but it will be challenging to usurp Trane Technologies and Johnson Controls in the applied HVAC market.

Carrier’s HVAC segment (its largest segment at approximately 60% of sales) has the strongest long-term growth potential due to its commercial HVAC market exposure. The commercial HVAC market will grow above GDP due to increased demand for energy-efficient and indoor air quality solutions. Residential HVAC demand remained robust in 2021-22, but there’s a cautious outlook. On the one hand, housing starts will rebound to 1.4-1.5 million units annually by 2025 after a near-term contraction in 2023-2024) and regulation changes (refrigerants and energy efficiency standards) should be a tailwind. On the other hand, the replacement cycle is maturing. Elevated investment spending, public company costs, and a challenging operating environment during 2020-21 due to the pandemic, supply chain disruptions, and cost inflation have pressured Carrier’s profit margins. However, Carrier strives to reduce operating costs 2%-3% annually. If the company can achieve its cost-cutting goal and expand its aftermarket mix, profit margins should improve, assuming healthy end-market demand and supply chains.

Financial Strength

After becoming a stand-alone entity following its April 2020 spinoff from United Technologies, Carrier now benefits from a narrowed strategic focus and complete autonomy over its capital allocation decisions. The company paid a price for its freedom; the separation left it saddled with a significant amount of net debt. However, Carrier generates significant free cash flow (about $1.7 billion annually over the last three years), and deleveraging has been a top capital allocation priority. In early 2022, Carrier completed the sale of Chubb, its service-centric fire and security business, for $2.7 billion net of taxes. Carrier expects to reduce debt by $750 million in 2022. At year-end 2021, Carrier had $9.7 billion of debt and $3.0 billion of cash on its balance sheet, which equates to a net debt/estimated 2022 EBITDA ratio of about 2. However, with the Chubb sale and Carrier’s 2022 free cash flow, the cash balance will swell to approximately $7.5 billion. Aside from paying down debt, the firm will allocate about $900 million to fund its acquisition of Toshiba’s remaining ownership stake in the Toshiba-Carrier joint venture, and management has earmarked $500 million for dividends and $1.6 billion for share repurchases in 2022. Carrier’s next maturing debt issuance isn’t until 2025, when its 2.242% $1.2 billion outstanding notes are due. Another $900 million is due in 2027, $2 billion is due in 2030, and $4.250 billion is due after 2030. Carrier’s debt maturities are well staggered, and no worries about solvency can be seen.

Bulls Say’s

After separating from United Technologies, Carrier is in full control of its destiny. Near-term reinvestment should boost its long-term growth prospects, and cost cutting initiatives should result in stronger profit margins.
The company has significant franchise value with leading brands across most of its product portfolio. The flagship Carrier brand has demonstrable pricing power.
In the wake of the coronavirus, air filtration, air-quality assessment, cold-chain solutions, and touchless access control solutions should become larger market opportunities.

Company Profile

Carrier Global manufactures heating, ventilation, and air conditioning, refrigeration, and fire and security products. The HVAC business serves both residential and commercial markets (HVAC segment sales mix is 60% commercial and 40% residential). Carrier’s refrigeration segment consists of its transportation refrigeration, Sensitech supply chain monitoring, and commercial refrigeration businesses. The firm’s fire and security business manufactures fire detection and suppression, access controls, and intrusion detection products.

(Source: MorningStar)

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