Yahoo Finance Carrier Global Corporation (NYSE:CARR) Q1 2024 Earnings Call Transcript
Carrier Global Corporation (NYSE:CARR) Q1 2024 Earnings Call Transcript April 25, 2024
Carrier Global Corporation beats earnings expectations. Reported EPS is $0.62, expectations were $0.5. Carrier Global Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and welcome to Carrier's First Quarter 2024 Earnings Conference Call. I would like to introduce your host for today's conference, Sam Pearlstein, Vice President of Investor Relations. Please go ahead, sir.
Sam Pearlstein: 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. 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. 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 one 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.
David Gitlin: 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. Starting with the highlights of our strong first quarter results on Slide 3. On low-single-digit organic sales growth, we drove 280 basis points of adjusted margin expansion and 19% adjusted EPS growth. I am very proud of the team. We have made enormous progress on our lean journey and driving sustained productivity, and we are seeing it in our results. Our formula is working, drive productivity tenaciously simplify the business, reduce overhead, invest in growth, all while increasing margins.
Our performance and transformation all tied to our clear North Star, to be the global leader in intelligent climate and energy solutions, and we are making great progress on our vision, as you see on Slide 4. We provide our customers with differentiated sustainability solutions. For buildings, our North American small rooftop units have the highest efficiency in the market, with the smallest footprint. Our water-cooled chillers, with magnetic bearings, provide best-in-class efficiency with the ability to match cooling loads with variable demand during the course of the day. For homes, Viessmann's newly launched heat pumps expand our addressable market in Europe by approximately $5 billion and in typical Viessmann fashion, deliver 15% to 25% energy savings versus competitors and are the quietest on the market.
For the cold chain, our new HE19 Trailer Reefer Unit reduces fuel consumption by 30% compared to our previous offerings and by 10% compared to our competition. And our new OptimaLINE container unit consumes roughly 15% less energy than our competitors. Our digital strategy is also a critical enabler and differentiator. For buildings, we now monitor more than 1.2 billion square feet through Abound, a 10% increase from last quarter, with additional key scale customers attracted to our new NetZero features. For homes, Viessmann's One Base digital platform is the only home energy management system in the world that integrates space heating and cooling, water heating, solar PV with battery storage with a grid interface. Both Viessmann One Base platform and our North American Intelligence Platform enable early detection of potential malfunctions, with notifications to installers, helping address problems before they occur.
In the cold chain, we have recently introduced new capabilities to help optimize cooling and thus, reduce our customers' operating costs, helping us increase Lynx subscriptions by 50% in just the past year. In summary, we are very pleased with our clear traction as the Global Climate Champion, driven by technology and digital differentiation. We also remain very purposeful in driving aftermarket growth as you see on Slide 5. In Q1, aftermarket was up 6%, led by another quarter of double-digit growth in commercial HVAC, and we remain on track for another year of double-digit growth. We now have about 75,000 chillers under a long-term agreement, about 35,000 of which are digitally connected. And our attachment rate reached its highest level ever, 48%.
We also connected nearly 5,000 chillers, the highest in a quarter since our spin four years ago. The playbook works and our KPIs are consistent and cascaded globally, bringing focus and execution to this imperative. We remain committed to our goal of $7 billion of aftermarket revenues by 2026. When we made this projection at our 2022 Investor Meeting, it assumed a high single to low double-digit CAGR. With our planned business exits and now the addition of Viessmann, we will divest about $500 million of net aftermarket sales. So to achieve the 2026 target of $7 billion, we now require a low double-digit CAGR. We remain committed to this goal and are accelerating the deployment of our proven playbook to achieve it. Turning to Slide 6. We could not be more proud of our combination with Viessmann Climate Solutions.
Thomas Heim and his team have been all in on ensuring that our teams work as one, sharing best-of-best product technology, digital solutions, supply chain and operational opportunities and working seamlessly on multi-brand, multi-channel strategies globally. Viessmann Climate Solutions is a company built on excellence. This is a team that loves to win. The opportunities to leverage its excellence in customer intimacy, product design, channel differentiation, brand strategy, sustainability solution, culture and talent development and operations will give Carrier a clear advantage to sustain differentiation and premier customer satisfaction. We remain deeply confident in the long-term transition towards electrification and sustained growth in the market.
With Germany aiming to become greenhouse gas neutral by 2045, and individual federal states like Bavaria as soon as 2040, discussions in major municipalities have started as to when the supply of natural gas to households will be limited or effectively stopped. At the same time, two weeks ago, the EU adopted the Energy Performance of Buildings Directive, under which each member country must adopt its own plan to reduce building energy usage by 20% to 22% by 2035, with at least 55% of the reduction coming from renovations to the worst performing buildings. While the long-term trend towards electrification remains robust, we are clear-eyed about the short-term market headwinds in the European residential market. Despite these headwinds, our team outperformed the end markets in Q1 through share gains, new product introductions, boiler sales and pricing.
And our team is poised to continue doing so for the full year. Viessmann's sales in Q1 were down 12% overall, more than half of which was driven by lower solar PV sales, which carry lower margins. For the full year, we now see VCS sales flat to down 5%, with Q2 revenues being similar to Q1 and an expected increase in the second half consistent with a typical seasonal pickup. Though heat pump orders in Q1 were down year-over-year, they were up nearly 60% sequentially and were the highest in the year. Despite 2024 sales expected to be lower than our February guide, we only see a modest impact to our full year adjusted EPS, because the team is driving to offset reduced volume with increased productivity and synergies and favorable mix. Cost synergies are tracking to about $75 million in 2024 and over $200 million by year three.
The cost actions position us for higher earnings conversion, when the broader market recovers. We also remain very encouraged by revenue synergies, which we believe will be in the hundreds of millions of dollars. So we could not be more excited by the opportunities presented by this game-changing combination. Let me shift gears and talk about the unique opportunity presented by data centers, as you see on Slide 7. Over the past three years, we've capitalized on this important opportunity by securing key wins with scale customers globally. The AI movement is driving hyper and sustained growth in this space, not only driving data center growth, but also an outsized opportunity for cooling providers, given that AI chips drive 7x the heat generation versus traditional chips.
Today, AI makes up about 20% of the load of a typical data center, and some of our customers project that percentage to increase to 80% in the next few years, thus spurring huge demand on the grid and increasing the need for differentiated HVAC and control solutions. Accordingly, the data center market for the HVAC business is projected to increase from roughly $7 billion in 2023 to $15 billion to $20 billion in 2027. For us, this vertical represents a low double-digit percentage of our global commercial HVAC applied business. And we see a tremendous opportunity of increasing this segment to well over 20% of our commercial HVAC sales in the next few years. We doubled our backlog in Q1 alone, and in April, secured further key wins as we optimize the use of our global footprint to support our customers.
Turning to our transformation updates on Slide 8. In addition to the Viessmann integration, our business exits also continue to progress well. We are moving with speed and maximizing shareholder value. In March, we announced a definitive agreement for the sale of industrial fire for $1.4 billion in gross proceeds. This deal is expected to close in early 3Q. We now have definitive agreements for three of our four business exits and are within a couple of weeks of issuing our offering memorandum to prospective buyers for our residential and commercial fire business. We are targeting to close that deal by the end of this year. We are focused, but not finished. The entire team remains extremely energized as we draw closer to becoming a higher growth, simpler, leaner pure-play climate champion.
The pace of our transformation and the net proceeds put us on track to achieve about a two times net leverage ratio this year and resume share repurchases in 2024. With that, let me turn this over to Patrick. Patrick?
Patrick Goris: Thank you, Dave, and good morning, everyone. Please turn to Slide 9. We had a good start to the year. Q1 earnings were well ahead of our expectations and the guide we provided in February. Reported sales of $6.2 billion were up 17%, with organic sales up 2% and a 15% net contribution from acquisitions and divestitures, substantially all Viessmann Climate Solutions. Q1 adjusted operating profit of $927 million was up 44% compared to last year, driven by favorable price and productivity and the contribution of Viessmann Climate Solutions, partially offset by investments. Strong price and productivity also drove adjusted operating margin expansion of 280 basis points compared to last year, despite the about 50 basis point dilutive impact from Viessmann.
Core earnings conversion, that is excluding the impact of acquisitions, divestitures and currency, was well over 100% in the quarter. Adjusted EPS of $0.62 was up 19% year-over-year and was well ahead of our Q1 guide of $0.50. March was particularly strong, representing 50% of Q1 earnings. Compared to last year, price and productivity more than offset the impact of increased investments and the expected $0.06 dilution from Viessmann Climate Solutions. We have included a year-over-year adjusted EPS bridge in the appendix on Slide 23. Compared to our Q1 expectations, productivity came in stronger, and we benefited from the timing of a few items, including tax, amounting to about $0.05. Free cash outflow of $64 million was in line with typical seasonality and also reflects payments of M&A-related fees.
Moving on to the segment, starting on Slide 10. HVAC's reported sales growth of 25% reflects the contribution of Viessmann Climate Solutions and 2% organic sales growth. Organic sales in the Americas were up mid-single digits, driven by continued strength in commercial and light commercial, each up around 20%. This was partially offset by a low single-digit decline in resi. North America resi volume was down mid-single digits, as we guided, and we expect volume to be up year-over-year in each of the remaining quarters. Organic sales in EMEA were down high single digits, driven by significant weakness in resi light commercial, while commercial sales in EMEA remained strong and were up around 10%. Sales in Asia Pacific were flat, with growth in China, offsetting a decline in Japan as we continue to improve our mix in that country.
This segment had a very strong quarter, with a 240-basis-point adjusted operating margin expansion due to price and strong productivity and despite the consolidation of Viessmann Climate Solutions that negatively impacted margin by about 80 basis points. VCS earnings were broadly in line with our expectations, with favorable mix, productivity and synergies offsetting the impact of lower-than-expected sales. An excellent quarter for HVAC. And based on first quarter operational performance, we now expect 2024 full year HVAC segment margins to be about 17.5%, up about 100 basis points compared to last year. Transitioning to refrigeration on Slide 11. Both reported and organic sales were down 2%. Within transport, container was up over 50% year-over-year and global truck and trailer was down low teens, driven by North America truck and trailer which was down about 25%, reflecting overall demand and elevated field inventories.
As a reminder, North America truck and trailer was up over 40% in last year's Q1. European truck and trailer was flat, and Asia truck and trailer was up a strong 20%. Our Sensitech business, which provides solutions for tracking and monitoring performance at temperature, was up mid-single-digits. Commercial refrigeration was down low-single-digits year-over-year. We now expect the refrigeration segment to be up low-single-digits in 2024 organically. Adjusted operating margin was down 120 basis points compared to last year. This was mainly due to the absence of a $24 million gain related to a sale in last year's first quarter. Excluding that gain, Q1 adjusted operating margins were up 150 basis points year-over-year, driven by price and productivity.
Moving on to Fire and Security on Slide 12. This segment had strong financial performance in the quarter. Reported sales were up 2%, with 7% organic sales growth, partially offset by a 5% headwind from the KFI deconsolidation. The residential and commercial fire business was up mid-single-digits. Adjusted operating profit was up over 50% versus the prior year, and adjusted operating margins were up a significant 610 basis points year-over-year as volume growth, strong productivity and currency more than offset the headwind of the KFI exit. Overall, a very good quarter for this segment. Turning to Slide 13. Total company orders were down about 7% in the quarter, mostly driven by North America truck and trailer orders due to a tough compare. In Q1 of 2023, North America truck and trailer orders were up 50% year-over-year, 5-0.
Excluding North America truck and trailer, Carrier's organic orders were flattish in Q1. Overall, HVAC orders were down between zero and 5% in the quarter. Within the Americas, commercial orders were up mid-single digits and North America resi orders had a second consecutive quarter of year-over-year growth. Light commercial orders were down roughly 35% as order rates are impacted by lead times and a tough compare. EMEA commercial orders were up almost 30%, with applied equipment orders up around 60%, including an over 45% increase in data center orders. Organic resi and light commercial order intake in EMEA remains very weak. Within Asia, weak orders in Japan offset growth in other regions. Globally, commercial HVAC orders were up about 10%, and the backlog for that business continues to grow year-over-year and sequentially.
Refrigeration orders were down about 25% to 30% in the quarter, mostly driven by the over 40% decline in global truck and trailer, reflecting the trends in North America, I mentioned earlier, along with growth in Europe and Asia. This was only partially offset by continued growth in orders in the container business, where orders were up high teens. Orders in Fire and Security were flat. Turning to Slide 14, guidance. Compared to our prior guidance, the only change with respect to exits is that industrial fire is now included for the first half of the year. Our prior guide included a full year of industrial fire as no definitive agreement had been announced at that time. So all three announced exits, access solutions, commercial refrigeration, and industrial fire are now included for the first half only of our 2024 full year guidance.
Taking that into account, we now expect reported full year sales of a little less than $26 billion. Earlier business exit timing represents roughly $400 million of the reduction and currency translation another $100 million. Lower expected revenue at Viessmann Climate Solutions is roughly offset by expected upside in light commercial and commercial HVAC. The underlying organic growth rate in our guidance remains, therefore, unchanged at mid-single digits. We are increasing our adjusted operating margin guidance to roughly 15.5%, driven by the strong earnings performance in Q1. We now expect full year earnings conversion to be north of 40%. Interest expense will be about $25 million lower, given the redeployment of the net proceeds from the industrial fire sale.
We are maintaining our adjusted EPS guidance range despite the earlier exit of industrial fire, which is a $0.05 headwind, given stronger performance in our core business. With the strong performance in Q1 and the exit of industrial fire in the second half, we now expect roughly 50% of full year adjusted EPS to be realized in the first half of the year. Before I get to free cash flow, I'd like to remind you that proceeds from the sale of businesses are reflected in cash flow from investing, and therefore, do not impact free cash flow. However, the tax payments on the gains on the sale of businesses are reflected in cash flow from operations and therefore, do impact free cash flow. Whereas this, of course, does not impact overall cash performance for the company, it does impact our free cash flow metric.
Our free cash flow outlook is now $400 million, reflecting about $2 billion of tax payments on gains from the business exits and transaction-related costs. So no change in the $2.4 billion underlying free cash flow performance versus the prior guidance. The lower free cash flow outlook only reflects expected tax payments on the now announced industrial fire sale. Moving on to Slide 15. Adjusted EPS guide to guide bridge. As you can see, our adjusted EPS guide at the midpoint remains $2.85, with stronger operational performance offsetting the $0.05 impact of the earlier exit of industrial fire and the impact of lower expected sales at Viessmann Climate Solutions. The dark blue represents the businesses we are retaining, including Viessmann Climate Solutions, whereas the lighter blue represents the adjusted EPS contribution from the businesses we are exiting.
At the midpoint of our new guidance, Core adjusted EPS increases $0.05 compared to our February guide to $2.60. In the appendix on Slide 24, you will find a year-over-year adjusted EPS bridge at guidance midpoint. Given the tremendous transformation in the portfolio of this year, Slide 16 may be a helpful framework for 2025. We start with a baseline of $2.60 from the core business at the midpoint of our 2024 guidance. In addition to our double-digit adjusted EPS growth target from our value creation framework, we expect another half year benefit from deploying the proceeds of industrial fire towards debt reduction. In addition to that, net proceeds from the exit of commercial and residential fire would be available for deployment, including for buybacks.
Finally, an additional lever is 2024 and 2025 free cash flow funded share repurchases. All of this is consistent with our prior messaging that we intend to repurchase at least the equivalent 58.6 million shares issued to the Viessmann family, while maintaining a solid investment-grade credit rating. In short, we have several levers available to deliver meaningful adjusted EPS growth in 2025 and beyond. With that, I'll turn it back over to Dave for Slide 17.
David Gitlin: 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. And with that, we'll open this up for questions.
See also
11 Tips to Get Approved for a Mortgage and
20 Countries That Increased Oil Production the Most in A Decade.
To continue reading the Q&A session, please click here.
