Q2 2024 Summary
Published Jan 10, 2025, 5:10 PM UTC- Carrier is experiencing strong growth in data center HVAC orders, with large orders in Q2 and ongoing discussions with major customers. They are ramping up capacity in the US and Mexico to meet demand and building out an aftermarket strategy for this critical sector.
- Despite weaknesses in Europe and China, Carrier expects growth to pick up in the second half, with the Americas expected to be up double digits, and EMEA and Asia Pacific up high single digits.
- Carrier has gained approximately 120 basis points of market share over the last 12 months and is confident of continuing to see outsized growth due to having the right products at the right price when customers need them.
- Significant sales declines in Viessmann Climate Solutions products, with heat pumps down about 30% year-over-year in Q2, and solar PV sales down 60% in Q2 and projected to be down around 40% for the full year, which could negatively impact Carrier's performance.
- Expected margin pressures in Q3, as adjusted operating margins are projected to decline by approximately 100 basis points compared to the prior year, due to dilution from the Viessmann acquisition, loss of operating profit from divestitures, and tax headwinds.
- Weakness in China's and Europe's residential and light commercial HVAC markets, with sales down mid-teens in both regions, potentially affecting Carrier's growth prospects in these important markets.
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Viessmann Guidance and Margins
Q: How does Viessmann's outlook impact your guidance?
A: David Gitlin explained they have derisked the forecast for Viessmann, expecting about 15% to 20% growth in the second half over the first half. They anticipate third-quarter Viessmann sales to be down high teens year-over-year, with fourth-quarter sales expected to be flat. They project Viessmann's full-year margins to be mid-teens for EBITDA, with operating margins a few points lower. -
Data Center Growth
Q: Can you elaborate on data center opportunities?
A: David Gitlin stated they are enthusiastic about the data center market, with a dedicated team focused on this vertical. They've seen significant order growth, with data center orders in the first half exceeding last year's total. Data centers currently represent over 10% of Commercial HVAC sales, expected to increase to 15% next year on a higher base. -
Residential Orders and Share Gains
Q: What drove the strong residential orders and share gains?
A: David Gitlin noted residential orders were up over 100%, and even after adjusting for extended lead times, they were up 60%. They've gained about 120 basis points of share over the last 12 months. Strong order trends position them well for high single-digit, possibly 10% growth in residential this year. -
Refrigerant Transition Impact
Q: How is the refrigerant transition affecting your business?
A: David Gitlin mentioned that this year only about 5% of units will use the new 454B refrigerant, lower than previously expected. Next year, they anticipate closer to 80% adoption of 454B. The transition will involve a 10% to 15% base price increase, aligning with a 15% to 20% cumulative increase over two years. -
Margin Expectations and Viessmann Dilution
Q: What are your margin expectations considering Viessmann's impact?
A: Patrick Goris indicated that third-quarter margins are expected to be down about 100 basis points year-over-year, with Viessmann remaining dilutive. They expect Viessmann to contribute approximately $550 million in EBITDA for the full year. -
Divestitures and Stranded Costs
Q: How are you addressing stranded costs from divestitures?
A: Patrick Goris stated they proactively executed an $80 million cost reduction program to eliminate stranded costs. They're aligning the overhead structure with a simpler, more focused company, expecting G&A expenses to be lower in 2024 and beyond. -
Residential Growth Outlook
Q: What's the outlook for residential sales in Q3 and Q4?
A: David Gitlin expects strong residential sales, with high single-digit growth in Q3 and potentially double-digit growth in Q4. He noted they are well booked for the second half, and inventory levels are down over 10% year-over-year. -
Light Commercial Outlook
Q: How is the light commercial segment performing?
A: David Gitlin reported that light commercial sales were up 20% in Q1, 10% in Q2, and they now expect full-year sales to be up low single digits, an improvement from the prior guide of down low single digits. They also saw the first positive orders in several quarters, up about 5%. -
China and Europe Weakness
Q: How are sales in China and Europe affecting HVAC growth?
A: Patrick Goris explained that in Q2, HVAC sales in Asia Pacific were down mid-teens due to weakness in China. In Europe, residential and light commercial segments were down mid-teens, though commercial HVAC grew mid-teens driven by data centers. -
Share Repurchase Plan
Q: Will you repurchase Viessmann-related shares?
A: David Gitlin confirmed it is reasonable to expect that all of the Viessmann dilutive shares could be taken back out of the float by the end of next year. -
Pricing Outlook
Q: Do you need additional pricing actions this year?
A: Patrick Goris stated they are pretty much set on pricing for the year, with annual increases already in place. -
Competitive Landscape
Q: Any changes due to competitors' recent moves?
A: David Gitlin doesn't see any material change in the competitive landscape with Bosch's acquisition or Lennox's JV with Samsung. He remains confident in their team's performance and offerings. -
Consumer Behavior in Residential Market
Q: Are customers opting to repair instead of replace units?
A: David Gitlin noted they have not seen customers opting to repair instead of replace; no material trend in that direction. -
K-12 Market Outlook
Q: What's the outlook for the K-12 vertical?
A: David Gitlin mentioned K-12 remains strong, aided by ESSER funds. While funds need to be committed by September, many states have applied for extensions, allowing spending to continue potentially beyond March 2026. -
Mega Project Outlook
Q: Any updates on mega project bids?
A: David Gitlin said they have had significant activity and key wins in mega projects related to the Chips Act and other large initiatives. They are positioning well with dedicated program teams. -
Data Center Technology Trends
Q: How is data center technology evolving?
A: David Gitlin explained they have both air-cooled and water-cooled chiller technology suitable for data centers. They are developing liquid cooling solutions and partnering with companies like STL for future technologies. -
Competitor Supply Issues Impacting Share Gains
Q: Are competitor supply issues helping you gain share?
A: David Gitlin acknowledged hearing anecdotal reports of competitors' supply issues but focuses on serving their customers, which has contributed to share gains of about 120 basis points. -
Stranded Costs from Divestitures
Q: How are you managing stranded costs from divestitures?
A: Patrick Goris reiterated that they are executing cost reductions and aligning overhead with the simpler company structure, planning to lower G&A expenses. -
Prebuying Ahead of Refrigerant Transition
Q: Is there significant prebuying before the refrigerant transition?
A: David Gitlin stated it's not clear how much prebuying will occur; distributors are deciding how much 410A refrigerant units they want on hand going into next year. -
Pricing Impact of Refrigerant Transition
Q: Will the refrigerant transition affect pricing?
A: David Gitlin confirmed a 10% to 15% base price increase due to the transition to 454B refrigerant, contributing to a 15% to 20% cumulative price increase over two years, including annual increases.