Carrier's Second Quarter 2023 Earnings Conference Call was hosted by Sam Pearlstein, Vice President of Investor Relations, and featured David Gitlin, Chairman and Chief Executive Officer, and Patrick Goris, Chief Financial Officer. They discussed non-GAAP measures and forward-looking statements. Dave Gitlin reported strong performance with 6% organic sales growth and double-digit growth in light commercial and commercial HVAC, global truck and trailer, controls, aftermarket, and Fire & Security.

Toshiba Carrier has seen strong performance in the second quarter, with organic growth, adjusted operating margins, and adjusted EPS all up. The company has seen traction from its sustainability-driven growth initiatives, with double-digit growth in resi heat pump sales in North America and electric transport units doubling in Europe. Half of its sales now relate to clean tech, and Toshiba is on track to reduce customers' carbon emissions by 1 gigaton and become carbon neutral in its own operations. It is also focusing on digitally-enabled aftermarket solutions.

Abound and Lynx, two key digital platforms, are being expanded and deployed to increase part sales, attachment rates, and overall coverage. AI and generative AI capabilities are being embedded into Abound to improve equipment performance and energy efficiency. Viessmann Climate Solutions is performing well, with sales up 20% year-over-year and profitability up significantly. The combined business is expected to generate €200 million in cost synergies and €4 billion in sales and €700 million in EBITDA this year.

Viessmann's prime focus areas include expanding its sustainable heating and home energy management offerings globally, driving sales through its European channel, and building on its digital platform to provide end-to-end solutions. The company is also tracking the sequencing of its Fire & Security and commercial refrigeration exits. Carrier has established itself as a global climate champion in attractive and growing market segments, and has combined its channels, brands, technologies, and talents to create solutions for customers, people, and the planet. Reported sales for the year were $6 billion, with 6% organic growth and 9% growth from acquisitions and divestitures.

In Q2, KFI's deconsolidation had a 3 point negative year-over-year impact on the Fire & Security segment's reported sales, but did not affect the total company sales. Adjusted operating profit of $964 million was up 12%, with a 100 basis point headwind from the consolidation of Toshiba Carrier. Core earnings conversion was around 30% and adjusted EPS of $0.79 was ahead of expectations. Free cash flow generation was up significantly, and HVAC had an excellent performance with organic sales up 9%. North America residential HVAC sales were down mid-single digits, with overall residential volumes down mid-teens due to slower-than-expected movements.

In the quarter, North America residential revenues benefited from price realization and mix up due to the 2023 SEER transition, resulting in a 29% increase in adjusted operating profit and a 70 basis point increase in adjusted operating margin. The Toshiba Carrier acquisition also produced positive results, with double-digit operating margins and $200 million in cost synergies projected. Refrigeration reported a 7% decrease in reported sales, with North America truck and trailer sales up double digits and European truck/trailer up mid-teens, but container sales down 35%.

Refrigeration segment sales were down year-over-year due to pressures in the European food retail market, but the team is doing a great job managing working capital and adjusting the cost base. Fire & Security sales were up 5% on a reported basis with double-digit growth in industrial fire and security and a high-single digit growth in both residential and commercial fire. Adjusted operating profit was up 1% versus the prior year, however, adjusted operating margins were down 50 bps due to mix and the year-over-year impact of the KFI deconsolidation.

In Q1 of 2023, total company organic orders were down mid-single digits, and HVAC orders were down 5-10%. However, backlogs remain at two times 2019 levels, and Refrigeration orders were up 10%. Performance in the first half of 2023 was better than expected, leading to increased revenue and mid-single digit organic growth. Adjusted operating margins are now expected to be between 14-14.5%, driven by higher sales, improved price/cost, and better performance at Toshiba Carrier.

Carrier is performing well and has seen mid-single-digit organic growth in the first half of 2023. Price/cost improvements and productivity are helping margins and funding growth investments. Toshiba is performing well and the Viessmann integration is upcoming. Carrier is also making exciting portfolio moves and raising full year guidance for organic growth, adjusted operating margins, and adjusted EPS. David Gitlin is then ready to answer questions.

David Gitlin is confident in Viessmann's growth regardless of the outcome of the German legislation being debated in September. He notes that the proposed legislation was proposed after Viessmann had already approved their business case. He also mentions that Germany is less than 50% of Viessmann's total sales, and that many other European countries have implemented bans on fossil fuels, heat pump incentives, and bans on fossil fuel boilers for new builds. He also mentions the link between TFC and Viessmann.

David Gitlin explains the playbook used by TCC which includes cultural integration and value creation. He emphasizes the importance of being culturally sensitive and allowing Viessmann Climate Solutions to do what they do best while looking for areas of combined value creation. He notes that the same playbook has been successful with Toshiba and will be successful with Viessmann as well.

In the second quarter, HVAC sales grew 9% despite residential sales being down mid-single digits. For the full year, residential sales are expected to be flat with volume down high-single digits, although the new construction piece is likely to be down closer to 10%. The heat wave is expected to help the replacement business, and the second half of the year has easier comparisons.

David Gitlin discussed the success of the light commercial team, which has been attributed to the new vane axial fan technology that is more energy-efficient and has allowed them to take market share. He noted that sales were up 60%, with half of that due to volume and the other half due to price, mix, and other factors. Backlog is also up over 60% year-over-year, providing strong coverage through the end of 2024. Patrick was then asked about the cadence of earnings and top-line for the second half of the year.

Patrick Goris explains that operating profit in Q3 is expected to be very similar to Q2, with a slight drop in EPS of $0.01 or $0.02. He also predicts mid-single digit organic growth in Q3 and a weaker Q4, with the balance of the growth in Q4. Julian Mitchell then asks about the backlog trends over the next 6-12 months, to which Goris responds that it depends on the business, but for shorter-cycle businesses like residential HVAC, the backlog is typically 4-6 weeks.

David Gitlin and Julian Mitchell of Johnson Controls discussed the normalization of supply chains and backlogs, noting that order intake must adjust in order to return to the four to six-week range for residential HVAC. They also noted that commercial HVAC and Fire & Security have longer backlogs and are still seeing strong demand. To determine future growth projections, they are looking at backlog levels and incoming growth order rates to support their growth projections.

Patrick Goris provides an overview of the organic growth in the quarter, with 4 points from pricing and 2 points from volume and mix. For the full year, the price realization is expected to be closer to 3%. Price/cost has a positive impact on their segment operating margin, with $300 million being positive versus the prior guide of $200 million and a 100 bps benefit for the full year. The most favorable impact is seen on logistics and freight. Dave provides specifics on the sale processes and their timing.

David Gitlin speaks about his appreciation for the teams in Fire & Security and Commercial Refrigeration, and how the decision to change ownership was difficult despite the potential for value creation. He expresses his pleasure in the level of interest from potential buyers, and reassures the teams that the spinoff from UTC will create value for customers. Patrick is asked to provide more detail on the price and mix of the 60% growth in light commercial, as well as the $300 million of price/cost.

Patrick Goris discussed the price/cost of the light commercial sector, and David Gitlin discussed the plans for the Fire & Security assets. The first two of the three assets (commercial refrigeration and security) will be put in the market after Labor Day, and industrial fire will follow a month later. The commercial and residential fire pieces of the portfolio are still being weighed in terms of their options.

Lead times for Carrier's light commercial business are still above normal, but residential lead times are getting closer to normal, with a normal range of four to six weeks. KFI's Board is managing the Chapter 11 process as expected, and the AFFF lawsuits against KFI, Carrier, and other entities have been stayed. The sale process is expected to begin in the next couple of months, with a Chapter 11 discharge anticipated within the next year.

David Gitlin explains that the HVAC backlog is higher than traditional levels, but it varies by region and business. He notes that there have been operational challenges in the Charlotte facility, which the team is working to address, and they are doubling down on the basics to ensure that customers get what they need when they need it. He also mentions that the commercial business has started to reaccelerate, and they are seeing an increase in orders.

Dave Gitlin explains that demand for commercial HVAC systems has been strong in North America, with backlogs higher than historical levels. He also notes that the Architectural Billing Index has been over 50 in the last four months, and Gaurang and his team have been agile in pivoting to areas of strength such as K-12, industrial activity, data centers, and healthcare. Weakness in commercial and residential real estate in parts of China has been offset by increased demand for industrial infrastructure.

David Gitlin discusses how the data suggests that the HVAC market is doing well, but some areas of retail have been weaker. He also notes that commercial real estate is a smaller portion of the North American applied business, and that K-12, higher ed, industrials, chipset, data center, and healthcare are all doing well. Finally, the ABI showing growth could indicate that rates will eventually moderate, driving new construction activity in real estate in the future.

David Gitlin explains that the legislation for heat pumps in IRA has been codified, but there is still some improvement to be made in the legislation for the northern part of the country. He expects to see a tangible benefit in 2024, with the $2,000 incentive for heat pumps in the United States applied to the mid-tier level, and the definition of levels for heat pumps in the North and South to be equalized.

David Gitlin explains that they have been able to obtain various country approvals, such as FDI approval in Germany and China, and are on track to close around year-end. He goes on to explain that they have been using generative AI in their call centers to increase efficiency and responsiveness for customers. This has been encouraging and they have established a center of excellence for this skill set.

David Gitlin believes that pricing is likely to go back to historical levels in the future, but will still remain higher than it was previously. He also expects the mix of products to continue to improve. He believes that advanced AI capabilities such as geo-fencing and prognostics and diagnostics on the cold chain side will be a distinguishing feature of their digital platforms.

Patrick stated that pricing will return to more typical levels and that there will be mix benefits from the transition to lower-emission diesel-powered truck and trailer units, as well as a transition to electric. The team is driving a few hundred million of productivity this year and using a digital platform to set up for 2024 productivity. Patrick also mentioned that TCC will still be margin dilutive in 2024.

David Gitlin recently returned from China and reported that the outlook for the company there is promising, with sales up double digits for the year. Q2 had easier comps due to COVID lockdowns in 2020, but underlying growth is still present. Applied industrial sales are especially strong, with the first half of the year up over 20% and Q2 up 30%.

David Gitlin views the K-12 vertical as having tremendous runway for growth, despite some investors' concerns of peak spending in the market. He believes that there are still opportunities for growth, especially with the government incentivizing further growth. Gitlin also states that the success in the commercial HVAC market has been due to the team's agility in shifting sales incentives to go after the industrial and institutional space.

The federal government has allocated $190 billion of ESSER funding for K-12 education over the next 15 months, with $90 billion of that still to be allocated. Carrier has seen orders up double digits for a long time, with K-12 orders up 20% in the quarter and the Q2 pipeline up 60%. The initial funding is for lower lead time, less expensive projects, while ESSER III funding is for more expensive projects such as HVAC. Dave Gitlin thanked the 55,000 team members at Carrier for their hard work and thanked investors for their participation.

This summary was generated with AI and may contain some inaccuracies.