Q2 2022 Carrier Global Corp Earnings Call
Yeah.
Good morning, and welcome to carriers second quarter 2022 earnings Conference call. This call is being carried live on the Internet and there is a presentation available to download from carriers website at.
<unk> dot carrier dotcom.
Like to now introduce your host for todays conference Sam Pearlstein, Vice President Investor Relations. Please go ahead Sir.
Thank you and good morning, and welcome to carry the second quarter of 2022 earnings Conference call with me here today are David <unk>, Chairman and Chief Executive Officer, and Patrick <unk>, Chief Financial Officer, except as otherwise noted the company will be speaking to results from operations.
Excluding restructuring costs and other significant items of a nonrecurring <unk> nonoperational nature, often referred to by management as other significant items. 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.
SEC filings include four 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 <unk>.
Chairman and CEO , Dave Gitlin.
Thank you Sam and good morning, everyone I'd like to start by saying how proud I am of the carriers team ability to deliver strong results amidst the current backdrop of inflation continued supply chain challenges and Covid lockdowns overseas.
Our team's hard work fuelled by our high performance culture resulted in another quarter of solid organic sales and adjusted operating profit growth.
Being a strong first half and enabling us to raise our full year adjusted EPS guidance.
Looking specifically at our Q2 results on slide two.
We delivered 7% organic sales growth expanded operating margins by 130 basis points and increased adjusted operating profit by 4% year over year, Despite the Chubb divestiture.
Price cost was positive in the quarter and we now expect to be price cost positive for the year.
Our backlog is up 20% compared to last year aftermarket performed particularly well and was up double digits free cash flow improved meaningfully compared to last quarter, but what is the use of cash.
Turning to slide three.
The value creation framework that we outlined at our Investor day has not changed driving above market organic growth expanding margins delivering strong free cash flow and disciplined capital allocation.
We recognize that there are concerns about slowing economies in such times, we do not need a new playbook, we double down on the playbook that we have we are focused on controlling the controllable and our track record demonstrates that we execute in the face of challenges. We are playing offense investing in growth, particularly digitally enabled aftermarket.
<unk>.
We have effectively driven price and aggressively driving cost out of the system and our strong balance sheet provides us with plenty of flexibility for value added capital deployment.
Including investments that will benefit from the compelling multiyear secular trends of healthy and sustainable environment as you see on slide four.
Indoor Air quality is critical to our health safety and cognitive performance.
<unk> show that improve ventilation and filtration reduce the spread of microscopic particular, including COVID-19 by up to 80%.
But <unk> does more than prevent the spread of Arab airborne illnesses, 8% of children suffer from asthma and improve ventilation in schools reduces their symptoms.
Students also performed better with improved indoor air quality, 60% of K 12 classrooms have inadequate ventilation today.
How do you show that cognitive performance improves by two <unk>, one optimizing cotwo and <unk> levels.
Proper filtration systems are equally important and can prevent harmful outside era, whether from forest fires or pollution from entering the classroom more of the home.
<unk> is no longer a nice to have it's critical to our health and safety in our ability to perform well.
We are responding to the challenge K through 12 orders were up over 35% in the first half of the year.
In Q2, we saw a 20% year over year increase in healthy building orders and the pipeline remains at over $800 million.
Some key wins include a new U S theme Park, featuring air handling units antimicrobial coating and UV light technology at an industrial manufacturing facility upgrade in China with air handling units and hepa filtration.
Carrier also won the opportunity to partner with a large school district in North Carolina to provide holistic hvac's solutions for three new schools that will prioritize indoor air quality.
Customers not only want healthy air environments in their schools office buildings and restaurants, but also in their homes and our diversified portfolio offers unique solutions for.
For example, our coated business recently introduced a series of smart healthy and connected products that includes the industry's first integrated smoke carbon monoxide and indoor air quality detectors.
We're also excited about our recent healthy homes partnership with Procter and Gamble.
We will start by educating our respective consumers on the benefits of healthy homes with a vision towards joint marketing and promotion activities in the future.
On sustainability.
Nine years ranked among the 10 warmest year on record.
Recently, we saw record temperatures in the UK, and Germany, where less than 5% of homes have air conditioning.
Demand for AC is increasing in those countries and we are poised to support this demand in a sustainable manner.
Addressing increased demand for air conditioning with sustainable solutions is critical to help reduce emissions and fight climate change. Therefore, we remain committed to providing innovative energy efficient solutions, using low GWB refrigerants and coupling them with digital capabilities to optimize asset utilization and <unk>.
<unk> efficiency.
A proof point of our progress on differentiated solutions is in our North American light commercial business, where our rooftop units will now feature our innovative eco blue technology.
This technology improves performance and efficiency, while decreasing installation and maintenance costs through our exclusive patented bell Lyft direct drive vein axial fan system.
An industry first for rooftop units.
Our units equipped with ego blue are up to 40% more energy efficient compared to the industry's traditional belt dry fans in a similar footprint a real game changer.
It's the same with heating where various factors are driving an accelerated shift away from fossil fuels and toward heat pump solutions.
This shift presents a significant opportunity and we start from a position of strength.
We have the market leading position in European commercial heat pumps.
And are the leading player in residential and light commercial heat pumps in North America with over 30% of our residential split today comprising heat pumps.
We are also investing in effective and efficient low temperature heat pump solution.
We have successfully completed all of the requirements for the department of Energy's residential cold climate heap from challenge where.
Where we validated a coefficient of performance higher than 2.1 at an ambient temperature five degrees Fahrenheit and we are now commercializing that solution for market introduction.
Including the heat pump revenues of Toshiba carrier an acquisition that we expect to close in early August .
We will have about $2 billion of annual heat pump revenues globally, and we are confident that the combination of Toshiba carrier Geely and our <unk> business in Italy will enable us to grow in the European residential heat pump market with compelling product offerings.
We see the same shift to electrification in our transport refrigeration business with demand for our all electric vector equal units steadily increasing.
<unk> group along with many other transport companies added carrier transit called vector equal units to their fleet to be more efficient and sustainable we are expanding our market leadership position in this space.
Regarding digitalization, we continue to enhance our bound and links platforms to further differentiate our lifecycle solution offerings.
Abound continues to gain traction in verticals ranging from commercial office and University buildings to data centers to national retailers with our focus remaining on providing scale customers with the solutions that they desire.
Our advanced links digital platform aimed at significantly improving the cold chain through enhanced visibility and increased connectivity received a silver ranking from the Edison Awards for excellence in supply chain innovation.
Like abound, we are adding new features to links our recent links fleet rollout incorporates customer feedback and provides key alerts and metrics around fuel and battery levels and asset run hours.
These notifications shown in our summary, dashboard help to minimize unit downtime and low loss ultimately, reducing our customers' operational costs.
We remain on track to have 100000 linked subscriptions by the end of this year.
Another critical growth driver is higher aftermarket higher margin aftermarket and recurring revenues, which you see on slide five.
Aftermarket has been up double digits through the first half of the year.
And we're on track for another year of double digit growth.
All of our three segments saw a double digit aftermarket growth in Q2 commercial HVAC is now up to over 15000 connected chillers, putting US ahead of schedule for 20000 connected Chillers this year.
We also remain on track for 70000, Chillers under Blue edge LTA is by the end of this year in.
In residential and light commercial the team continues to see expanded adoption of the <unk> platform by new National account customers to increased aftermarket part sales.
So our aftermarket playbook is working.
Before I turn it over to Patrick a bit more color on the Toshiba carrier acquisition on slide six.
Gcc's technology positions us well to accelerate the Vrs international light commercial and heat pump opportunities.
Gcc's pioneering inverter technology, coupled with its rotary compressors allow for dynamic and intelligent balancing of air conditioning demand, thereby providing customers with greater energy efficiency longer life and quieter system operation.
We will deploy our multi brand multichannel strategy to further penetrate critical markets.
And our complementary global footprint and supply chain to give us confidence in achieving run rate synergies of $100 million.
We created a new business unit within the HVAC segment Global comfort solutions with a strong leadership team based in Tokyo.
Global comfort solutions will include the TTC and <unk> acquisitions, as well as our European <unk> business and the light commercial business outside of North America. The team has been working on detailed execution plans and collectively we're ready to go with that let me turn it over to Patrick Patrick.
Thank you, Dave and good morning, everyone.
Please turn to slide seven.
Reported sales of $5 2 billion were down as expected due to the Chubb divestiture.
Currency translation was the higher than expected headwind of 3%.
All segments grew organically in the quarter, resulting in 7% organic growth for the total company.
The impact of the Shanghai Lockdowns on Q2 sales was in line with our expectations roughly $100 million.
All segments realized significant price in the quarter more than offsetting higher than anticipated inflation.
Q2, adjusted operating profit was up 4% compared to last year, despite lower risk lower reported sales.
Adjusted operating profit in the quarter includes the benefit of about $35 million or <unk> <unk>, a favorable one time items.
Our results included gains on the sale of two placebo carrier joint ventures, and one with refrigeration joint venture.
These transactions are consistent with our plans to simplify carrier and reduce the number of minority owned joint ventures.
Even excluding these one time items operating profit was stronger than expected, mainly as a result of productivity and better price cost despite currency headwinds.
Q2, adjusted operating margin was up 130 basis points compared to last year.
Whereas price cost was positive in Q2, it was still dilutive to margins.
Adjusted EPS of <unk> 69.
With stronger than expected, mainly due to better than expected margins.
For your reference we have a year over year Q2, adjusted EPS bridge in the appendix on slide 17.
Free cash flow was a use of $34 million, we paid about $70 million of taxes on the gain related to the Chubb sale in Q2 in.
In addition stronger than expected sales in June , particularly the second half of June led to higher receivables.
Inventories were relatively flat sequentially.
Supply chain challenges have not yet subsided and continue to affect our inventory levels.
Starting with slide eight we will cover our segments performance in more detail.
HVAC organic sales were up 8% driven by double digit growth in residential and our ALC controls businesses.
Q2, RASM was flat after the weak may move in was up very strong in June .
Residential HVAC growth was driven by price.
Our light commercial business was down mid single digits due to supply chain challenges and a tough comparison as Q2 as Q2 of last year grew over 60%.
Light commercial demand.
<unk> is very strong.
As we expected commercial HVAC, some modest low single digit growth in the quarter due to the impact from the Shanghai Lockdowns.
Adjusted operating profit for the HVAC segment was up 5% compared to last year driven by strong productivity.
Both price cost and the higher equity income from the PCC gains I mentioned earlier, which are reflected in equity income in this segment.
Operating margin was down 70 bps compared to last year.
Mainly due to the impact of price cost and lower volumes, which offset strong productivity and the margin impact of the onetime gains.
We expect the HVAC segment to remain price cost positive for the full year.
The consolidation of TTC will dilute margins of this segment by about 100 basis points. This year as we will no longer record equity income related to PCC, but instead, we will consolidate its entire income statements and incurred about $20 million in upfront integration costs.
Our current expectation of <unk> full year 2022 operating margin is therefore about 15%.
Moving to refrigeration on slide nine organic.
Organic sales were up 9% in the quarter driven by high single digit growth for both transport and commercial refrigeration.
This is despite an almost 40% reduction in China refrigeration sales related to the lockdown and related project delays.
Within transport refrigeration container was up low single digits on top of last year's almost 40%.
North America, and Europe truck trailer saw double digit growth as some of the component shortages that held up deliveries in Q1 were resolved in Q2.
Since the tech continues to deliver solid results as it grew low teens in the quarter.
Adjusted operating margins were up 230 basis points compared to last year, mainly due to volume productivity improvements and the small onetime gain on the sale of a joint venture.
Commercial refrigeration margins were up almost 300 basis points sequentially.
We're pleased with the progress this segment made in the quarter.
Moving on to fire and security on Slide 10.
Excluding <unk> sales from the second quarter of 2021 Finance security segment sales were up 4%.
Adjusted operating margins expanded 310 basis points in the quarter, mainly because of the chubb divestiture and strong productivity.
Price cost was positive in this segment as well.
Slide 11 provides more details on orders performance.
Total company organic orders were flattish for the quarter.
Backlog remains at very healthy levels throughout all segments as.
As we expected residential HVAC and transport refrigeration orders were down in the quarter as both businesses continued to proactively manage their order book.
Backlog for both <unk> <unk>.
And North America truck 300, refrigeration continued to grow sequentially.
Light commercial orders were up about 25% in the quarter.
Continued strong demand in that business.
Commercial HVAC also saw solid continued demand in the quarter, marking its sixth consecutive quarter of double digit orders growth with growth across all regions and backlog up about 20% compared to last year.
Refrigeration orders were down approximately 20% in the quarter.
This segment's backlog remains up almost 10% year over year with transport refrigeration backlog up mid teens, along with a slight decline in commercial refrigeration backlog as we are very much focused on profitability of that business.
Demand for our fire and security products remain healthy up about 10% to 15%.
As you can see on the right side or the activity was flattish in the Americas and down in EMEA and China orders were down in the quarter, primarily due to the Shanghai locked down, but the Asia region, excluding China saw strong demand.
Before talking about guidance I wanted to provide an update on capital deployment in the quarter, we repurchased about $275 million worth of shares consistent with our plan to complete the remaining authorization by the end of the year.
Year to date, we've repurchased about $1 billion.
We borrowed approximately $400 million under again the nominated term loan earlier. This week that will be used to partially fund the $900 million TTC acquisition the.
The balance will be funded by cash.
Consistent what we shared with you in February our full year debt reduction will be about $750 million.
The divestitures I referred to earlier further simplify our portfolio and are expected to yield approximately $75 million in after tax proceeds, which we expect to collect in the second half of the year.
Our actions will continue to be consistent with the capital deployment priorities, we laid out at our Investor day.
And our balance sheet provides plenty of flexibility for continued balanced value add capital deployment.
Now moving onto guidance on slide 12.
Performance in the first half of 2022 has been better than expected. In addition, our updated guidance now includes the impact of consolidating <unk> into our financials.
Last quarter, I mentioned that we expected price to exceed $1 billion for 2022.
We now expect the year over year impact from price to be closer to one 5 billion.
The additional revenue from price will be mostly offset by the unfavorable impact of currency translation and slightly lower volume as a result of supply chain challenges.
We expect the <unk> acquisition to add about $800 million in revenues this year.
With that we are increasing our adjusted EPS guidance range <unk> two.
<unk> to $2 25 to $2 35.
This is primarily due to the strong performance year to date.
Lower net interest expense and a lower share count offset by a headwind from foreign exchange.
Earnings impact of higher price is largely offset by increased input costs.
We do not expect an adjusted EPS impact from TCT. This year as operating profit contribution is expected to be mostly offset by the loss of ink equity income and integration costs.
As we expected excluding the equity income from these joint ventures and consolidate the income statement.
We will reduce full year 2022 operating margin by about 30 to 40 basis points.
In addition.
Equity income is our share of after tax income consolidating <unk> will increase our effective tax rate tax rate for the full year 2022 by about 25 to 50 basis points importantly.
Importantly, this does not change our actual tax expense or the dollars of income, but only changes the tax rate calculation.
We continue to expect to generate approximately $1 65 billion in free cash flow this year.
<unk>. This target has become more challenging given continued supply chain headwinds, but the team is focused on better working capital performance in the second half.
Lastly, as we shared in the press release this morning.
With the close of DCC, we will exclude the impact of intangible amortization related to M&A activity from carriers adjusted operating profit adjusted net income and adjusted EPS.
The nature of this acquisition requires us to step up the value of the 60% economic interest in the joint venture, we already own which would drive unusually high amortization.
We believe this adjustment provides investor investor's better information to evaluate our operating performance.
We estimate the full year 2022, adjusted earnings will now exclude about $20 million or <unk> <unk> of intangible amortization related to acquisitions compared to our prior guidance.
For your benefit we included a guide to guide adjusted EPS Bridge on Slide 18.
So overall, another good quarter and an improved outlook for 2022.
I'll turn it back over to you Dave.
Well. Thanks, Patrick we are pleased with our performance through the first half of the year.
Our backlog instills confidence in our outlook for the second half and I am confident in our team's ability to keep driving strong results with that we'll open this up for questions.
Certainly ladies and gentlemen, if you have a question at this time. Please press Star then one one moment for our first question.
And our first question comes from the line.
Joe Ritchie from Goldman Sachs. Your question. Please.
Thanks, Good morning, everyone.
Good morning, gentlemen, and Joe.
Hey, guys, so look nice quarter I'm curious.
Maybe just parse out the <unk>.
<unk> this quarter it looks like it looks like all of them.
Was price I just wanted to wonder if you're seeing how much pricing is coming through not just there but also across the rest of your HVAC business.
The volume was it.
Are there any volume growth in the business this quarter and then the.
The other key things that I'd like to parse out.
As commodities are declining right now.
How do you guys feel about your ability to keep that price.
How will that play kind of translate into margins going forward.
Let me, let me start with the latter piece and then Patrick can discuss the pricing on the first part.
Our goal Joe is to keep the price increases that we've gotten youll recall, we came into the year expecting $1 billion of pricing. This year, which is about $20 billion of sales would have been about 5%. We're now looking at a 1 billion and a half a price which is a <unk>.
Seven 5% or so realization for the year and our expectation is that we maintain that price not just in resi, but across the portfolio in some parts of the business we needed more discipline in any case on pricing like in our commercial refrigeration business, where the team has done a nice job. So our expectation is that we certainly retain price.
As we get into the second half of this year into next year and then we'll see about the commodities if they continue to come down things like copper steel and aluminum that should be some tailwind as we get into next year, but we'll have to we'll have to see on that piece, but we're pretty well block for the second half of this year, but.
Our hope and expectation is that if they remain low would be a bit of tailwind as we get into 'twenty three.
Joe on the first part of your question.
For the HVAC segment, most of the organic growth was price and so volume was actually slightly negative there net of course impacted by the commercial HVAC performance, which was as we expected weak given the Shanghai locked down and we expect commercial HVAC growth to pick up in the second half of the year.
Got it that's helpful. And then you guys commented that it sounded like things started to pick up in.
In the June timeframe can you, maybe just talk a little bit about the trends as you were exiting the quarter and then.
Obviously, it's still pretty early in <unk>, but as we kind of had started both the July timeframe.
Yes, what we saw in resi in particular was movement really picked up as we got into June June movement was up around 10% and it had been a bit weaker in April and May so.
That was you know movement in resi is something that we watch very very carefully and it was encouraging to see movement pick up in June and that's continued into July which is encouraging because our expectation for ourselves is that we end the year with inventory levels about and balanced to where we would expect them to be so we are trying very hard to match.
The inventory levels in the channel, while supporting our customers. So it's nice to see movement fairly strong over the last the last couple of months and other parts of the business a lot of it really had to do with just us recovering on the supply chain a bit more as we got into June we've still been paced by chips, which is about two thirds of our problem in <unk>.
<unk> of our business like transport refrigeration, we saw controls catching up as we got into the latter part of the quarter and that helped us with output as we got into June .
Yes.
Helpful. Thanks, guys.
Thank you.
Thank you once again, if you have a question. Please press Star then one one.
One moment for our next question.
And our next question comes from the line of Julian Mitchell from Barclays. Your question. Please.
Hi, good morning.
Maybe just a first question around the orders outlook. So the orders are.
Flattish in Q2, after what had been four or five quarters of extreme kind of strength.
So just wondered if the orders development was broadly in line with what you were thinking.
How we should think about that orders year on year trend in the back half and I suppose, particularly interested in transport refrigeration, where I think the ICT data has been signed you obviously had a pretty steep decline in orders. So maybe how you're thinking about that in particular as well for the back half on orders.
Julian let me give some color on orders if you take about half of our business orders were up double digits commercial HVAC has been up double digits now for six quarters in a row.
So we're very pleased with the orders there that we're seeing in commercial HVAC in their underlying it is that we look at Abi, which you know the architectural billing index has been north of 50% for 17 straight months. So that's very encouraging our Fms business, which doesn't get as many questions. They had double digit orders light commercial had double.
Double digit orders I think it was.
In the range of 25%. So there it was more of a supply chain issue supporting the output, but orders have been extremely strong in light commercial.
The real two areas that kind of gave carrier and overall flattish was resi and truck trailer on Rajeev, we usually measure backlog in terms of weeks say four weeks or so in terms of backlog were sitting at about four months. So as backlog normalizes, we've been saying now for many quarters in a row that we expect year over year orders to come down for resi.
That is not the metric that we that we track we track movement, we track inventory levels, we expect orders to decline, but we are still sitting on very strong backlog and a truck trailer to your specific question. There we have been managing the order book, especially in North American truck trailer with our customers. So.
It's something that we're very well positioned in terms of our backlog and truck trailer. We watch those acte metrics for next year I think it used to be in the double digit range. It's probably high single digits is what theyre, saying for right now, but the backlog is good. So the two areas of resi truck trailer or things that were being quite purposeful in and then we expected container to be.
Down and it was down given the very very tough compares and the last thing I'll mention is CCR CCR orders.
Were challenged a bit but what we have to figure out is how much of that is driven by the market and how much is driven by US we were very clear with our team that we expect to improve margins on CCR and we're going to bid things at the right margins and we're not going to bid things at the wrong margin. So we did see orders decline a little bit, but we also saw a significant.
Improvement in margins, which is encouraging to see so.
Julien we're sitting on backlog levels that are up 20 more than 20% over last year. So we will continue to watch orders in light of what everyone is concerned about what the economic slowdowns, but for US what we see is nothing be nothing less than what we expected in some cases actually beyond what we expected.
That's helpful. Dave. Thank you and then maybe just a question on the we can see what the sort of second half EPS implied in our full year guidance is just wondering if there's any points you would highlight around the sort of split of earnings between the third and fourth quarter and any dynamic in <unk>.
Margin trends year on year, perhaps between Q3 and Q4 because of price cost for example.
Yeah, So Julian Patrick here, we actually expect organic growth to be pretty similar to Q3 and Q4 about.
Close to 10%, each maybe a little bit below.
And then which is not unusual we expect a little over 60% of our adjusted EPS for the second half of the year to be in Q3.
So a little bit higher EPS in Q3 and in Q4, similar overall growth rates.
Great. Thanks, Patrick.
Thanks Julien.
Thank you one moment for our next question.
Okay.
And our next question comes from the line of Nigel Coe from Wolfe Research. Your question. Please.
Thanks, Good morning, Good morning, Dave Patrick and Sam.
Good morning.
Morning.
Lots out this morning so.
Sorry, Patrick I didn't quite understand the amortization.
Are we now sort of on a.
So FY 'twenty two on a cash EPS basis in the principle of my question is the <unk> add back you've got a lot more on amortization through your P&L.
So I'm not quite so why is <unk> not seeming a little bit higher than that so if you can just clarify that that would be great.
Sure Nigel the way you can think about this is in our current P&L in our outlook. We had back in April we had about <unk> <unk> for the full year amortization of intangibles related to acquisition.
With the acquisition of PCC.
Our amortization expense will likely go up by about $100 million and whats kind of interested it is we already own today economically 60% of the overall interest in Toshiba amortize.
Amortization expense would go up significantly including for the part that we already own up to <unk>.
We have decided to exclude the amortization related to acquisitions going forward and so compared to the prior guidance that is a <unk> <unk> improvement in adjusted EPS.
Of course, the impact going forward would be significantly higher because of the large increase in amortization expense that I just mentioned.
Okay and the reason why we Havent got accretion from Toshiba in the back half of the year.
<unk> is because of the integration costs that you're absorbing in the P&L. Okay. That's making you. Thanks, Patrick and then on the step up in pricing from from one to $1 $5 billion.
Due to additional price actions that you you didn't have in place as of April or was it due to just better yields on the announced price increases.
I think it is.
A bit of both.
Came into the year pretty well priced and we had to do a bit more to get to the $1 billion and we've actually announced subsequent price increases as the year has gone along so we announced.
A recent price increase for our North American commercial light commercial HVAC business refrigeration, both fire and security have had two announced price increases during the course of the year and then I will say that our realization has been a bit higher than than we had planned. So I think it's a combination of within your price announced increases.
Less realization.
And then just based on where commodities are right now.
Are they trending do you anticipate that we now beyond the <unk>.
Nice increases and maybe if we could just focus more on the residential business here that that'd be helpful.
Yes.
Nigel one with respect to copper steel aluminum clearly, we're seeing the trends there.
I think it's too early for us to say that some other components call. It that we purchase for rest of the HVAC that we've seen the end of the cost increases obviously that is something that we are <unk>.
Very much negotiating but.
I would not say that besides steel copper aluminum.
That we're on the downward trend.
Thank you Peter Thank you very much.
Thank you guys.
Thank you.
One moment for our next question.
And our next question comes from the line of Tommy Moll from Stephens. Your question. Please.
Good morning, and thanks for taking my questions.
Hey, Tommy.
I wanted to drill down on HVAC margins, if I recall correctly.
Last quarter, you guided us for.
For this quarter as <unk> down year over year, and you gave some some factors there can you give us any similar insight into <unk>, if not quantitative then maybe qualitative.
Yeah.
Well.
First of all with respect to Q2.
The margins came in a little bit better than we expected of course, the gain help with that that was about 80 or so bps, but I'll also say that for Q2.
We still saw a headwind on price cost from a margin perspective, so price cost positive from a dollar operating profit perspective, but price cost for the HVAC segment was still about 100 point.
Headwind on operating margin in the quarter for the balance of the year.
<unk> margins will of course be impacted by the.
Consolidation of PCC, we expect for the full year now the margins of HVAC to be down to be closer to 15% versus 616% prior guidance and including for Q3, we still expect a sizable headwind from price cost on HVAC margins.
That's helpful. Thank you Patrick.
And Dave I wanted to circle back to some of your commentary around the orders you walked us through some of the parts of the business where orders trended down in the second quarter and you gave some reasons why but you also alluded to what I think a lot of investors are focused on which is just is there any sign of.
Of an economic slowdown that youre seeing in your business and you gave us some reasons why that might not be the case, just simply looking at your order trends.
But are there any.
Macro signs that you can point to that may have moderated a bit or are maybe falling short of what you would have expected even if we're not currently seeing in the orders of the P&L.
The direct answer is not really I mean, we.
We saw orders decline in China, but we wouldn't blame that on.
The macro we would blame that on the Covid related lockdowns.
If we had to look for one area that came in a little bit lower than we expected. It was in CCR and to some extent in European truck trailer.
Orders in the quarter and.
I would say a couple of months is too early to call a trend, but the thing in particular with <unk> that we have to watch is how much is self induced because of our pricing discipline and how much is market related and the true answer is we don't know just yet because.
This is probably the most aggressive we've been in that company's history. So we'll have to we'll have to keep an eye on that but by and large North America remains strong southeast Asia, which we don't talk a lot about was extremely strong China was weak, but we expected it will have to see how the rest of <unk> plays out and again <unk> and truck trailer.
It wasn't an alarming because a lot of that was us managing.
The order book and inventory levels.
I appreciate it David Thats helpful and I will pass it back.
Thanks, Tommy Thanks, Tom.
Thank you one moment for our next question.
And our next question comes from the line of Deane Dray from RBC. Your question. Please thank you and good morning, everyone.
Good morning, Good morning, Hey, Dave that statistic got a lot of headlines with the UK on the average household only 5% with some form of air conditioning, how prepared is.
Carrier for this expected ramp and kind of new capacity.
And are you seeing any of that demand given the past couple of months.
Well, it's one of the reasons that we're very excited to close on.
Sheba.
<unk> really positions us in that kind of multifamily in that light commercial space.
Globally in places like Germany, and the U K. So obviously, we're not a major player in Europe for single family homes, but when you get into the multifamily.
Holmes, our Toshiba technology, and <unk> to some extent position us very well and then for the larger obviously commercial HVAC. We would we would say that we are doing extremely well. So we're positioned well for that demand in Europe and then it's the same on the heat pump side, which is as we get into these winter months.
We would say that we're number one in commercial HVAC heat pumps in Europe , and that's going to be a big trend that people are going to be talking a lot about is the transition to heat pumps in Europe as well. So when you see parts of the world that have never had air conditioning before whether its Portland, Oregon, and Seattle are now London and Frankfurt.
Youre going to see us leaning into that Acs, but AC space, but also with more sustainable solutions as well because obviously, we want to be part of the solution not part of the problem of climate change.
Yes, that's great to hear and then the K to 12 opportunity.
Summer is the prime time for construction activity. So there should be a lot going on right now is or how does this compare to previous cycles, especially given the indoor air quality mandate, but.
I'm just concerned that are there is there a shortage of <unk>.
Destruction labor parts anything that might have for what should be some significant installation time and the cycle over the summer.
Yes, I think thats, just the broad macro concern in the U S. Right now is labor constraints, but I think specifically with K through 12, I think we're extremely encouraged by it and I don't think that will put a significant damper on the opportunity. I mean, you think about 190 billion of total <unk> spending for K through 12 140.
Of that 190 has not yet been allocated and because thats because <unk> three.
Is where the bulk will really go towards sort of the larger appropriations and Thats a 120 of the 120 <unk>. So our orders were up in the first half 35% in K through 12, when we think about verticals that could do well during an economic slowdown K through 12 of the amount of funding. They have is one of them and we put a.
The team on this space and they are performing well so we were.
We're very encouraged by the space.
All good to hear thank you.
Thank you Dan.
Thank you one moment for our next question.
And our next question comes from the line of Gautam Khanna from Cowen Your question. Please.
Yes, thank you too.
Two questions first.
I am curious about price elasticity or elasticity in the resi business given.
All the price hikes, you get the industry has announced and in the face of.
Declining commodities.
What do you think the.
Do you think the industry will be able to hold price next year.
And if there is any pricing pressures in the business where would they emerge would it be in commercial would it be what can you say about that than I have.
Well, let me yes.
Yes, let me first comment on <unk>.
<unk>.
We've seen I think that the industry has seen an ability to appropriately increase price given all the commodity headwind and retain it and we think that.
That would continue into next year, because what youre going to see next year is a switch over to the 2023.
Higher seer units, which is going to come with 10% to 15% price increase so we will have to watch the elasticity curves I think it's clear to say that we won't continue with the same kind of price rate increases that we've been seeing I think we've had six increases over the last 18 months or so and obviously that will subside, but we do not see today.
Prices declining in fact, as we get into next year, we would expect an increase given the seer shift.
But more more broadly I think that all of us have been in a situation with our peers.
But.
Raised prices and Fortunately, we're in markets, where we sell essential products.
And whether it's life safety equipment or whether it's we're transporting critical vaccines or foods to certain parts of the world or whether it's when your air conditioner breaks when it's really hot outside youre going to replace it.
So I think we've seen an ability to increase price and retain it and we do not expect going into next year of price reductions, we will watch the elasticity curves for sure but right now we do not see price decreases.
Thank you and just as a quick follow up David you made some comments early on about supply chain, improving and controls and I just wondered if you could maybe give us some metrics around where the supply chain has gotten better where it hasnt and whats your visibility on the areas are that happens.
Yes, it's been a trend over the next couple of quarters. Thanks.
Yes, what we saw.
At the end of the second quarter was we were waiting on controls and some of our reefer units that had been in inventory for a while and we saw those get delivered and we were able to release those units to the field. So.
Excuse me that was.
That was encouraging at a more macro level we.
We have not seen a sustained improvement on our supply chain that we expect to see yet we're still dealing with chip issues in a significant way and that contributes to about two thirds of our problem. We said last quarter that we would redesigned 30% of our critical components by the end of last quarter, 50% by the end of the year, we continue to do that but we continue.
To see challenges not just with chips, but things like motors and other suppliers.
Continue to surprise us and that does cause productivity issues in the factories and it does cause us to hurt our customers where today, we are sitting on hundreds of millions of overdue to our customers. So.
We are counting on supply chain, improving as we get into really <unk>, leading into next year, and we're going to need that to make sure that we hit our.
Our cash numbers in the back half and we also.
Are still looking at logistics. The good news is that spot rates have come down the <unk>.
Good news is that because of supply chain challenges, we're having to do a bit more air freight than usual. So we're anticipating improvement as we get into the back half of this year and I think the team is doing the right things, but it does continue to be a challenge.
Thank you.
Thank you.
Thank you one moment for our next question.
And our next question comes from the line of Steve Tusa from Jpmorgan. Your question. Please.
Hey, guys good morning.
Thanks, Steve.
Yeah.
So.
Just on the price cost can you just give us the absolute price and cost numbers for the second quarter and then.
You gave us a price for the year, but what's the cost estimate for the year and then I have a follow up.
Yes. So in Q1, I said that price was over $300 million in Q2 price overall company was about 450 and it was a price cost positive, but still dilutive to margin. So if you do the math, it's maybe a couple of pennies.
And then for the year what are you expecting now on costs I think it was 1 billion before what are you expecting now on cost.
We expect price to be about $1 billion, five and again, we expect price cost to be positive it's going to be pennies, it's not going to be a dime. So it's below that and still priced.
<unk> margin.
Diluted by.
About 40 bps for the overall got it got it and then Patrick.
Got it and sorry, just one just for your info on a two year stack.
About neutral now to slightly positive.
Right right.
That makes sense.
Then.
Patrick I think in response to Julians question, you said the second half would be kind of a 50 50 weighting <unk> when it came to Etfs.
I guess.
Im a little bit surprised because <unk>, usually is seasonally weaker and I just want to make sure I'm doing the math right.
<unk>.
55 cents for both quarters.
Hi, Steve.
CIT to Julien I mentioned, a little over 50% So think close to 60 40.
Okay.
That makes a lot more sense, Okay, and then one last one just for the resi market. This year whats your most what's your kind of most up to date view on.
What do you expect from the resi market volume wise.
For the year.
We I would say that volume is going to be up like low single digits.
Overall, we were up 20% in the first half second half will be about 10, so called the full year about 15%. We had previously said <unk> was going to be I think high single digits. So low.
That eight to 10 range, it's now going to be closer to <unk>, the bulk of that from price, but we do expect some volume in the low single digits. Okay awesome. Thanks for the color I appreciate it.
Thanks Rich.
Sure.
Thank you one moment for our next question.
And our next question comes from the line of Andrew <unk> from Bank of America. Your question. Please.
Hey, guys good morning.
Good morning, Andrew.
Just a question going back to.
The whole chip supply how much visibility do you have into next year.
And are you counting more on existing capacity freeing up coming out of places like Asia or new incremental capacity being added in North America. How do you think about improving chip supply going forward, what's the biggest driver.
Well we are.
We work with.
Folks are our friends at Ti and NXP, and Microchip and others and right now we are trying to really for our critical shortages design around chips that are available we.
We do know that our partners are building capacity as we get into next year and that's hopefully going to come on sooner rather than later I think over time the chips Act.
Once that goes through will be beneficial, but for now it's a fairly tactical exercise around redesigns, while we really anxiously anticipate and await the additional capacity coming online next year into 'twenty four.
And just a follow up on that.
It seems that just not just for you but for everybody. The mix is shifting to sort of lower seer units, just because of chip availability. So how much of a lift structurally on like for like basis could you get.
As mix improves as chips become more available next year and mix improves towards higher end products. Eventually how shall we think about that impact on the mix down the line. Thanks.
Actually Andrew.
That one of the.
Benefits, we may see is with the new regulations.
We estimate that over half of the resi market.
Is that the lowest tier level.
With the new regulations in 'twenty three it means that we think that a little over half the market will.
We will mix up if you want.
Meaning.
At 10% to 15% price increase and from a margin perspective.
Positive from a margin dollar perspective, and at least neutral from a margin percentage point of view.
So we think that may be the biggest the big.
<unk> driver from a mixed shift point of view.
Right, but that assuming you can get the chips available.
Yes, but we are already in production so those new units and we're starting to sell them. This month.
Terrific. Thanks, a lot.
Thank you Andrew.
Thank you one moment for our next question.
And our next question comes from the line of John Walsh from Credit Suisse. Your question. Please.
Hi, good morning, everyone.
Hey, John Good morning, John .
Hey.
So a lot of ground covered on HVAC and refrigeration wanted to talk a little bit about the fire and security margin.
I think last quarter, you kind of suggested you were looking a little bit better than the 16%.
You had put out there wondered if we could just get a little bit of a bridge back half H two H, one on the fire and security margins.
Yes, actually if you look at fire and security there are two items that we expect to benefit us in the second half of the year.
One organic growth rates are expected to be higher for fire and security in the second half of the year versus the first half of the year and then the second element is our price cost for fire <unk> security you may recall that in Q1 firing security was price cost neutral, we expect price cost to be favorable.
The back half of the year.
For the back half of the year and so we think that a combination of these two will be the main driver of improved margin performance for that segment.
Great and then just going back to pricing, if we could talk about the commercial pricing.
<unk> AC.
Is this all structural are there any kind of fuel surcharges are things that that might reverse out.
And then just anything around spares pricing as well there on the commercial side. Thank you.
Yes, we believe structural we're trying to to the best of our ability avoid.
Surcharges are things that are ephemeral in nature. So it's it's structural it's actual price increases that we intend to sustain and the second part of the question.
Oh, just around the ability to also push through on non contractual pricing outside of service of spare parts are part that Oh, yes, yes, that's something that we really try to.
B much more intelligent about and using creating more algorithms.
Kind of akin to.
What was.
What we what we used to do a bit more on the aerospace side and really look at the elasticity curves more at a part number level. So I think the team has gotten.
Much better models on pricing on the parts side and and.
And I think that's been an area that we've had a lot of focus and success with it.
Great I'll pass it along thanks.
Thanks, John .
Thank you one moment for our next question.
And our next question comes from the line of led by strict from Citigroup. Your question. Please.
Good morning, guys. Thanks for taking my call good morning, Glenn.
So maybe just as a follow up on fire and security obviously, a lot of talk about the chips situation.
On the HVAC side, but can you talk about the.
Supply chain and electronics components available availability in fire secure fire and security and whether thats any different than what youre seeing on the <unk> side and how you see that resolving.
Yeah, I would say that it's actually been even more acute for fire and security than it has been for for HVAC.
In particular in one of our highest margin businesses, which is access solutions. We've had very strong demand in parts of that business, whether it's for analysis to or our blue Diamond.
Or even our audits and super businesses, which are quietly very well positioned businesses high margin. The team is doing a great job and we're really plagued by by chips in those businesses and our supplier partners know what they have been.
<unk> been working with us to support us, but thats, where a lot of our overdue has been so.
We talked about coming into the year as Patrick said at about a 16% Ros the expectation is it would be a bit higher than that in the reliance's.
On recovering on some of our higher margin businesses that have been really impacted by chips. We are anticipating a recovery as we get into <unk>. There I mean, it's not just it's not just hope there are specific part numbers that we track that we know when they're when they're going to get redesigned when we start to introduce those new products. So we have line of sight to it but it has to.
Happen over the next few months.
And that's good.
Good to hear that you have line of sight to some improvement there.
We're watching that is just shifting too.
So cheap a carrier.
Obviously, a big deal for you can you talk about as you look to close the acquisition in August what you know what.
<unk> you seem to do things.
Differently that you couldn't have done under the historical JV construct and then also any color on the timeline to achieving those $100 million in synergies.
Sure.
Got to tell you we could not be more excited we said early August the expectation is here that we close early next week.
So we're gearing up we're ready to go the teams spend at the integration over the last six months or so.
And we've worked very well with Toshiba Corp, and the PCC team well, we have found and remember that as a JV partner is a minority JV partner, we didn't really control design ore production.
Really the JV overall, we did some distribution globally, but now as we look at it we have traveled the world and there is so much demand for this product line. It's Scott this phenomenal inverter technology, which enables us to use rotary compressors, which is lower cost and it's Scott.
Really differentiated technology. It has a great brand, especially in countries like China, where Toshiba is going to actually be our high end brand followed by carrier and then gili.
So as we get into things like European heat pumps, especially for residential we're talking to some of the Oems there that are really pulling for our compressor and condensing unit designs. We were traveling in the middle East, where we see there is so much excitement and they can't wait for us to close so I could tell you that.
The excitement on the product line is building.
<unk> has brand new facilities TTC in places like Poland in China that we can really leverage across our portfolio and Theres also phenomenal supply chain opportunities between the two companies. So we said $100 million on a run rate basis over the next I would say five years or so.
And we're confident that we're going to achieve that.
That's good very exciting.
Thanks.
Thank you. This does conclude the question and answer session I'd like to hand, the program back to management for any further remarks.
Okay, well. Thank you everyone for joining on what I know is a busy morning for all of you and of course, we and Sam are around for questions. So thank you all.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
The conference will begin shortly to raise your hand during Q&A you can dial one one.
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Okay.
Good.