Carrier Global Corporation — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Good morning, and welcome to Carrier's First Quarter 2024 Earnings Conference Call.
Thank you, and good morning, and welcome to Carrier's First Quarter 2024 Earnings Conference Call. With me here today are David Gitlin, Chairman and Chief Executive Officer; and Patrick Goris, Chief Financial Officer.
Thank you, Sam, and good morning, everyone. We've had an exciting start to the year. We welcomed 12,000 new team members from Viessmann Climate Solutions to the Carrier family, made great progress on our business exits and delivered very strong financial results, positioning us for yet another year of significant margin expansion and solid growth.
Thank you, Dave, and good morning, everyone. Please turn to Slide 9.
Thanks, Patrick. We delivered very strong results in the first quarter, and are confident that we will continue to perform while we transform. With the integration of Viessmann Climate Solutions, the completion of our exits and the superb progress on our base business, we continue to position ourselves as the global leader in intelligent climate and energy solutions.
[Operator Instructions] Our first question comes from Julian Mitchell with Barclays.
In terms of, I guess, the first question, maybe on VCS, no surprise. You talked about sales down low-double digits in Q1 and sort of down low-single digits for the full year as a whole. Maybe help us understand sort of year-on-year, how we should think about the second quarter playing out within that? And then for the year as a whole, how much of that decline is driven by that solar PV business as opposed to the sort of core HVAC part of VCS?
Sure, Julian. Let me start and Patrick can add. Well, we did say actually flat to down mid-single digits for the full year previously, of course, up mid-single digits. We expect for Q2 will be -- the absolute sales number should be about the same as Q1, which, in that case, would put Q2 year-over-year down about 10% to 15%. Our forecast assumes in the second half that revenue would be up about 20% compared to the first half.
That's very helpful. And then just a quick follow-up on the HVAC segment. So I think, Patrick, you talked about the full year margins in HVAC being up about 100 points year-on-year. Is that kind of a similar year-on-year rate, we should expect each quarter for the balance of the year? And I just wondered if you made any changes to the assumptions within HVAC? I think you called out stronger growth assumed now for light and applied commercial HVAC?
Yes. Overall, for the year compared to our earlier guide, we think light commercial and commercial HVAC will be a little bit better. In terms of the year-over-year margin for HVAC as a segment, we do expect Q2 to be up about 100 basis points year-over-year. Q3 will probably be somewhat similar, and then we expect Q4 to be better year-over-year as well.
Our next question comes from Jeffrey Sprague with Vertical Research Partners.
Dave, interesting to hear resi and commercial fire now prioritizing sale with kind of year-end close, right? So it sounds like you're close to something -- and so maybe you could address that? And is there something happening on PFAS to kind of expedite this and get it to kind of a sale process that can close? Obviously, we all saw JCI settled something in the MDL a couple of weeks ago.
Yes. Look, we feel that we've been progressing with PFAS very well. The Chapter 11 with KFI has gone exactly kind of as we expected and gone well. And we've been in mediation with the plaintiffs, and that's been progressing well. So we looked at the JCI. Of course, their settlement was for the water claims cases. It didn't cover PI. But I think in terms of us, we're very pleased overall with the progress that the legal team has been making on PFAS.
Great. And the biggest question I get on Carrier actually maybe, hits a little close to home. But Dave, you have a recent kind of deal with the company incentive program and the like. Are you there for good? Is the door still cracked open to consider something else. Every other day, I get asked if you're going to Boeing.
Well, Jeff, frankly, I'm really glad you asked that because I do want to address it head on, and I want to be clear that look, I've notified both our Board and the Boeing Board that I am 100% committed to Carrier. I'm really honored to be on the Boeing Board. I'll do everything I can to support that important company as a Board member.
Our next question comes from Andy Kaplowitz with Citigroup.
You talked about data centers, low-double digits, global HVAC sales could be 20% over time. I think you said that data centers doubled this quarter in terms of backlog. So could you talk a little bit more about Carrier's position in the data center market? Maybe what you think your share is, where Carrier is in terms of liquid cooling and how to think about the shape of bookings going forward as '24 evolves? Do you see data center bookings continue to increase from what you booked in Q1?
Yes. I think, frankly, we got some really good quarters, Andy, in just even a couple of weeks ago in April. So this is a unique moment in time. It's exponential. Today, I would say in the U.S. We have low share. This is both for water cooled and air cooled chillers, but we think we're incredibly well positioned from a technology perspective.
Very helpful. And Dave, maybe give us just a little more color into the productivity you drove in Q1. And what you're thinking for the rest of the year? I know you've guided to 30% incrementals in pass, but obviously did 100% there. I obviously understand you raised your margin guidance. But how sustainable is the kind of productivity acceleration you saw in Q1? And given rising material costs, how do you think about sort of the offset there with pricing?
Yes. I have to tell you that Adrian Button and operations team working with our businesses, it is the best that I have felt since I've been at Carrier about our ability to achieve sustained productivity. We have one single source of the truth. Every single one of our productivity actions globally is in one database. We can sort it 20 different ways. We all are marching to the beat of the same drum.
Our next question comes from Tommy Moll with Stephens Inc.
Dave, I wanted to start with an update on A2L. What can you give us there in terms of when you plan to start or ramp production on the pricing front? Any revision or a reaffirmation of what you expect to capture over this year and next?
Yes, I think, first of all, yes, we would reaffirm what we've said about 15% to 20% price increase over 2 years. I mean that includes low-double-digit base price increase, 454B versus the 410A. And then you'll get a few percent of base price this year and next year. So I know there's some skeptics on that. We're already selling the 454B units. We shipped our first in the first quarter. Obviously, it won't be that much over the short term. But we already have a price point in the marketplace for them. We feel confident in the 15% to 20% over 2 years.
And Dave, a follow-up on light commercial HVAC trends in Americas. Orders were down meaningfully, but obviously on a tough comp. Can you just refresh us on your revenue expectation there this year and describe any aspect of the demand environment?
It's hard to look at year-over-year quarters, yes. Quarters -- orders in the quarter were down significantly. We look more at how we're positioned for the year. I think that we had said that sales for light commercial would be down mid-single digits this year, which assumed volume down high-single digits. Given that our first quarter was up a little north of 20% on sales, and we still have good backlog.
Our next question comes from Deane Dray with RBC.
Just circle back on Viessmann. People were holding their breath about destocking. So just kind of where does that all shake out? And your line of sight on the resumption of the various European country incentives. I know you touched on that, in the prepared remarks. But what's the typical lag once the Germany reinstatates, Italy reinstates, I think they have done that already. But what's the typical lag between you start getting those orders?
Well, look, I think in terms of the first piece. Because we're direct to installer, we don't see the same destocking that many of our peers do. So I think that the way we look at it is that piece is largely behind us. We're now back to traditional book and ship business.
That's really helpful. And then one of the other questions that we get on the dynamics of the heat pumps in Europe as -- what about this threat of some of the Asian players coming in at a discount product? And would that matter? Would it take share -- and our view is that there's always been a good, better, best stratification of brands in HVAC, and Viessmann is at the high end. You rattled off some of the future comparisons. But just what -- is there a risk about new entrants into the European heat pump market?
Well, I think you answered it perfectly well, Deane. I do think that Viessmann clearly plays in the premium end of the market. So I do think that even though there will be more competition at the entry tier level and the mid-tier, we think that because of the brand, the technology differentiation, the unique channel, we don't see that as a major threat directly to Viessmann.
Our next question comes from Noah Kaye with Oppenheimer & Company.
Dave, I'd like to stick with VCS. You highlighted early on the new product introductions, expanding the TAM by $5 billion. Would just love some more color on those product introductions. Curious to know to what extent they were developed in kind of any kind of synergy or technology road map coordination with legacy Carrier? And to what extent that's an opportunity going forward across the portfolio?
Yes. Look, no, I wish I could take some form of credit, but this was done well before our watch. I mean this was Viessmann, over a period of time, developing products for the 16 to 19-kilowatt range, which is in that very high-end single-family home which is a new market for them, which they introduced in the first quarter. And here in the second quarter, they introduced 19 up to 40 kilowatts, which gets you into that small multifamily residential space. So very, very attractive new -- very attractive new product introductions. I mentioned this $5 billion TAM that they now position themselves for.
Very interesting. And just on applied strength. I mean how much of this is just the data center story? How broad-based is it? Maybe you can talk on some of the other verticals where the demand just continues to sustain?
Well, a lot of it is data centers. That's been very, very strong. Higher ed still remains strong. Healthcare, like hospitals, remains strong. When you look at it, it varies a little bit by region. We've seen some changes in China, for example. What was very strong in China was EV, solar production, all things renewables, that's now shifted in China. So we're now seeing strength in China from things like infrastructure and some of the other aspects of decarbonization.
Our next question comes from Nigel Coe with Wolfe Research.
I want to go back to the C&R fire sale. I've got to say we were expecting a capital markets transaction, Dave. So just wondering if you had some indication of interest for that asset that gives you confidence in that sale process? And maybe, Patrick, if you could maybe size that business, we've got $2 billion of revenues, about 10% EBITDA margin, maybe it sounds like it's having a good year. So maybe just give us a projection for 2024.
Yes. Look -- and Nigel, I mean you were expecting it because I said it. So very fair. So we've changed. We are 100% prioritizing a sale. We completed about, I think, a 15-page teaser. We've discussed that with a number of interested buyers. The interest has been very high. So we've been extremely pleased with the reaction because it's a great set of assets.
Yes, Nigel, you can think of that business being roughly $2 billion, I'm rounding. And the current run rate EBITDA is in about the mid-200s now. So much better, and so we're happy with the improvement we're seeing in that business.
Okay. That's great color. And then back to VCS. I mean based on the comments, Patrick, you made about the dilutive impact on the segments, I'm backing into maybe a 14.5% operating margin, maybe 15.5% EBITDA margin. For the quarter, is that right? And I'm just wondering if that is correct, if my math isn't too wonky, what is the path to high teens for the full year?
Yes. So from an operating profit margin point of view, Nigel, you can think of Q1 being about 12.5%. And for the full year, again at the EBIT low it will be around 15%. Actually, we think maybe a little higher than that. So in line with the overall company average, but below the average for the HVAC segment. And that's at the EBIT level. And you can probably add a couple of points for that 2, 3 points to get to EBITDA.
And our next question comes from Stephen Tusa with JPMorgan Chase & Company.
Just on that EBIT comment, that's EBITA, right, excluding the amortization when you say EBIT?
Yes, that's right, Steve. We adjust out the intangible amortization and some of the step-ups as well.
Yes, you guys said, I think previously, you added a bunch to D&A versus the prior guidance. Is that just truing up some of the financials on Viessmann?
Yes, Steve, you're right. In essence, at the time of the February guide, of course, we didn't have all the detail to provide the best accurate estimate of the DNA. And so inventory and backlog step-up was not yet fully included there. And also since then, we refined the difference between the intangibles and then the goodwill, and that impacts the amortization as well. So you can think of that being the new driver.
Got it. And then sorry, just on resi, just to follow up on the 454 A2L. Did you guys -- I think -- you guys are like -- at least we had heard your amongst the earlier movers on that. You already have a product in the channel, which is congratulations on that. That's definitely ahead of some of your peers.
Yes. Let me -- yes, Steve, let me start on the A2L. Our strategy is to -- we did it with the SEER change. We're doing it with the A2L change, derisk everything, get way out in front. We don't want any technical producibility, capacity, any issues as we get into the end of this year. Our #1 priority is to support our customers to make this a seamless transition.
Okay. And then Steve, following up on your questions about price. Price for the quarter was about 2%. For the overall company, we expect that to be about the same for the full year. So about half of our organic growth price.
Our next question comes from Gautam Khanna with TD Cowen.
I was wondering if -- just talking about 2025 in that bridge, is the growth algorithm still kind of north of 10% earnings growth off of the adjusted base? If you could just talk through kind of your '25 expectations, given the bridge that you provided on what the remainco is and the like? Just off of what basis, if you will?
Right. So if you look at Slide 23 of the deck that we posted, our core business this year is up 12% -- or in Q1 was up 12%. For the full year, we expect our core business, including the dilution from Viessmann in year 1, the growth to be 17%. And our value creation framework says that we'd like to grow our business double digits every year.
And what would your opinion of free cash conversion in '25 be off of that approximately $3 number?
We -- I haven't provided the $3 number, but whatever the number is, we target about 100% of net income.
And just a quick follow-up on resi. There's been a lot of chatter about repair versus replace and potential trading down. Have you seen any evidence of that? I know it's early in the cooling season, but any opinion on...
Yes, sorry to interrupt. No, we have not seen any evidence of that. We ask that ourselves a lot, and we have not seen evidence of that.
Our next question comes from Brett Linzey with Mizuho.
I wanted to come back to light commercial. Obviously, it's been a source of strength for a few years here, orders did take a step down in the first quarter. But you did talk about the light commercial being a profit outperformer for the year. Maybe just some detail on the expectations on some of those moving pieces.
Yes. Look, I mean, it's a question we get because it's been so strong for so long. So -- last year, we were up 35%. We knew we'd have a tough comp coming in into this year. But I think it's a very nice combination of share gains, the underlying verticals that have been strong, generally remaining strong, the team performing. And of course, we don't talk about it as much, but we'll have the same 454B dynamic here, where we see the same kind of base price and mix increase that we're mentioning for resi, we see for light commercial. So that 15% to 20% over 2 years.
Okay. Great. And then just shifting over to container up 50%. I guess is the worst behind us here? What are you hearing from some of those customers? And then anything on sort of the sequential trends through the -- in the last couple of quarters?
Yes, I do think the worst is behind us, Brett. I mean we were up significantly in the fourth quarter. We were up about 50% in the first quarter. I think for the full year, it's probably up in the 30% range.
Our next question comes from Andrew Obin with Bank of America.
Just a question on the buyback. You guys alluded that you have capacity to start the buyback in '24. How is it incorporated in your current outlook? Just trying to understand that? Or is that where the margin of safety comes for the guide?
Yes, Andrew, thank you for your question, and I'll provide some context on this. So since the acquisition, we paid down about $500 million in term loans in Q1. And the 3 exits that we have announced will yield about $5.5 billion in net proceeds. So that's our expectation. And what we communicated is that all of this will be used for deleveraging, although we may keep some as cash as it may be economically more attractive than just paying down some of the debt.
And just a follow-up on Viessmann. What's your ability if -- for whatever reason, second half orders do not pick up as you expected, what's your ability to accelerate restructuring at Viessmann? Because I guess you guys kept the outlook for restructuring flat versus last quarter. Are you gated or limited in any way what you -- on the timing what you can do in Germany? Are there levers on cost at Viessmann that you can still pull in '24?
Yes. Andrew, I have to say I've been so proud of Thomas and the team working with the central apps folks at Carrier to be incredibly and appropriately aggressive on cost. And if you look at the actions that Thomas has taken, what's been very important for that -- for our 12,000 new colleagues at Viessmann that fully understand this is it has nothing to do with the combination with Carrier. It's all actions that business would have taken because of the overall market conditions.
So when you talk about cost synergies, that excludes whatever actions, as you have alluded, Viessmann would have taken these actions, regardless given the market conditions? Is that the fair point that there's $200 million by year 3, we have, but at the same time, Viessmann can accelerate internal cost control given the market conditions? Is that the right way to think about it? Sorry.
I think it's a fair description, Andrew. I -- look, I think cost synergies, we have a very specific definition we use. It's cost that's taken out because of the combination. So there's a bunch of examples of that where we both buy from the same supplier, and we have the ability to go renegotiate with those suppliers or the ability to get more work to certain suppliers.
Thank you for your participation. This does conclude the program, and you may now disconnect. Everyone, have a great day.