Release Date: July 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Carrier Global Corp (CARR, Financial) reported a strong Q2 with organic orders up roughly 30% year over year.
- Q2 adjusted operating margins expanded by 200 basis points to 18.1%, reflecting significant margin expansion.
- The company achieved strong free cash flow of about $550 million in the quarter.
- Carrier Global Corp (CARR) is initiating a multibillion-dollar share buyback, with $1 billion targeted for the second half of the year.
- The company continues to innovate with new product launches, including a low GWP variant of the Aqua Edge water-cooled chiller and new rooftop units with low GWP refrigerants.
Negative Points
- Weakness in residential and light commercial (LC) businesses in Europe and China impacted overall performance.
- Visteon Climate Solutions (VCS) Q2 sales were down about 30% year over year, with a revised outlook assuming a 15% drop in year-over-year sales.
- The residential market in Europe has been weaker than expected, affecting overall sales.
- Carrier Global Corp (CARR) expects a higher year-over-year adjusted effective tax rate, which will impact earnings.
- The company faces headwinds from lower earnings at Visteon Climate Solutions and the earlier timing of the Access Solutions exit.
Q & A Highlights
Q: How would you characterize the new guidance for Visteon Climate Solutions (VCS)? Is it more de-risked for the second half?
A: David Gitlin, Chairman and CEO: I would call it more de-risked, but it's also about 15% to 20% growth in the second half over the first half. We do think we've de-risked the forecast for the rest of the year. We are looking at an inflection point as we get closer to October, which in Germany is when the subsidies start paying back. We feel balanced for the revised forecast for this year.
Q: Could you give more color into the order trends you saw in the quarter? Was it mostly data centers and commercial, or is it more broad-based?
A: David Gitlin, Chairman and CEO: We gained about 120 bps of share in US residential HVAC. Orders were up over 100%, and even excluding orders for late Q3 and Q4 deliveries, they were still up about 60%. Commercial HVAC was strong, particularly in the Americas and Europe. Data centers were a significant part, but other verticals like healthcare and K-12 were also strong.
Q: Can you elaborate on the preorders into the back half? Is this some kind of pre-buy happening on the A-2 well conversion?
A: David Gitlin, Chairman and CEO: Our distributors are trying to figure out what they want on the shelf at the end of this year, leading into next. It's all about production planning. We have a disciplined sales process to plan our factories accordingly.
Q: Could you clarify the third-quarter commentary? It sounded like a large sequential margin drop.
A: Patrick Goris, CFO: We expect margins to be down about 100 bps in Q3 versus the prior year. The dilutive impact of VCS and exits will result in losing about $100 million of operating profit. Tax represents about a six-penny headwind. This is offset by volume pickup and strong price and productivity.
Q: Can you provide an update on the resi and commercial fire divestiture timing?
A: Patrick Goris, CFO: It is most likely going to a sponsor, so we don't see any real regulatory issues. The time between sign and close should be pretty brief, similar to our industrial fire exits.
Q: What are your updated expectations around the mix of 14 A. versus 454 for the year?
A: David Gitlin, Chairman and CEO: We think there will be lower 454 B this year than previously expected, probably closer to 5%. Distributors and dealers are not in a major rush to put in 454 B. Next year, it will probably be closer to 80%.
Q: Can you talk more about the progress with data center orders and your plans to increase North America content?
A: David Gitlin, Chairman and CEO: We are very enthusiastic about the data center opportunity. We have a dedicated team focused on this vertical. We had a big order in Q2 and are in discussions with other hyperscalers. We are adding capacity in our Charlotte, North Carolina facility and building out our Mexico facility.
Q: Can you provide more details on the second half margin expectations for HVAC?
A: Patrick Goris, CFO: We continue to see strong productivity, over 150 bps of margin. The VCS acquisition offsets that. We see larger investments and some currency impacts, taking us about 200 bps lower margin year over year in Q3.
Q: Are you seeing any evidence of trade-down by consumers opting for repair over replacement?
A: David Gitlin, Chairman and CEO: We have not seen customers opting to repair instead of replace. No real material trend.
Q: Can you talk about the competitive landscape with Bosch and Lennox's recent moves?
A: David Gitlin, Chairman and CEO: Bosch is a great competitor and a rational one. We don't see any material change to the landscape. Lennox and Samsung's partnership is a nice combination, but we don't see a change there. Our resi team is performing well with great margins, growth, and share gains.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
