Q2 2023 Carrier Global Corp Earnings Call
Good morning, and welcome to carriers second quarter 2023 earnings Conference call I would like to introduce your host for todays conference Sam Pearlstein, Vice President of Investor Relations. Please go ahead Sir.
Thank you and good morning, and welcome to carry a second quarter 2023 earnings Conference call with me here today are David <unk>, Chairman and Chief Executive Officer, and Patrick <unk>, 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 carriers web site at IR Doc carrier Dot com.
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 look.
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.
Thank you Sam and good morning, everyone. Our theme of carrier remains performing while transforming and I am proud of our team as we are progressing well with both U.
Do you see that strong performance in our Q2 results on slide two.
Organic sales growth grew 6% with both eight track and fire <unk> security up 9%.
We drove strong double digit growth in light commercial and commercial HVAC global truck and trailer controls and aftermarket.
Within fire and security growth was broad based across security residential commercial and industrial fire.
Total company backlog remains well above historical levels up 30% on a two year stack.
Adjusted operating profit and adjusted EPS were up 12% and 13%, respectively and free cash flow was strong at over $300 million.
Price cost was increasingly positive in Q2, Toshiba carrier performance came in stronger than expected and we are on track to deliver $300 million of gross productivity this year as.
As a result of our strong first half performance, we are raising our full year guidance for organic growth adjusted operating margins and adjusted EPS.
A key driver of our sustained organic growth and robust backlog as a result of our team leaning into secular trends around sustainability and healthy buildings as you see on slide three.
With our clear and unwavering focus on being the global leader in intelligent climate and energy solutions, we continue to see traction from our sustainability driven growth initiatives.
Whereas the heat pump sales in North America have been up double digits year to date.
We saw another quarter of over 20% growth in commercial heat pump sales in Europe , and electric transport units doubled in Europe .
Our healthy buildings pipeline is up over two <unk> to $1 6 billion driven in part by K through 12 in the U S where orders were up over 20% in the quarter.
We are clearly positioned at the core of it.
A transition to a more sustainable planet we.
We published our 2030, ESG report yesterday, and which we now disclose sustainability progress through the CDP.
After completing our portfolio moves about half of our sales will relate directly to clean tech and we expect that proportion to continue to increase we remain on track to reduce our customers' carbon emissions by more than one gig at time by 2030, while achieving carbon neutrality in our own operations.
Our laser focus on digitally enabled aftermarket solutions continues to gain traction as you see on slide four.
Q2 saw yet another quarter of double digit aftermarket growth with the first half up mid teens compared to last year and we remain on track to deliver double digit growth this year and beyond.
The playbook is working expanding the capabilities and deployment of a bound and links are key digital platforms, increasing parts sales supported by agile pricing and improve fulfillment rates increase the attachment rates and overall coverage across the portfolio and deploying connected devices to increase recurring and subscription based revenues.
We are also embedding AI and generative AI capabilities into about to drive solutions for our customers.
Analyzing sensor data patterns and performance metrics generative AI can help prevent equipment failures drive improved air quality by controlling ventilation and increase energy efficiency by controlling temperature set points airflow rates and scheduling strategies. So our execution is progressing well.
Update on our portfolio transformation on slide five.
Climate solutions. The short version is the more we get to know them. The more excited we are to close our integration planning team in Frankfurt is actively working to ensure that we hit the ground running on day one.
Vis vis climate solutions is performing very well ahead of their projections first half sales were up an impressive 20% year over year with heat pump sales up over 40%.
Vis vis climate solutions profitability is also up significantly compared to last year and they remain on track to deliver 4 billion euros and sales 700 million euros in EBITDA this year.
We remain confident in the 200 million.
<unk> of cost synergies, driven primarily by supply chain and sourcing and value engineering.
The growth opportunity for the combined business is even more compelling.
Focus areas include expanding <unk> sustainable heating and home energy management offerings globally, driving incremental sales through visa European channel using a multi brand strategy and building on <unk> digital platform to provide even more differentiated end to end solutions globally.
Moving to the fire and security and commercial refrigeration exits. The good news is that strategic and sponsors have expressed considerable interest in these superb assets.
We are tracking to the sequencing we've established for these exits we expect to have commercial refrigeration now, including pro forma mechanical systems and the security business in the market in September .
With residential fire initiating initiating its sale process a month or so later.
Commercial and residential fire exits will follow.
The result is the new carrier that you see on slide six.
The combination of the acquisitions of Toshiba carrier investment climate solutions together with the tremendous positioning that carrier has established over the past century positioning the combined entity to become a true global climate champion in very attractive and growing market segments.
Focus matters and our focus on sustainability differentiation position us as a pure play high growth company, our combined channels brands technologies and World class talent, we will create solutions for our customers our people and the planet for generations to come and with that let me turn it over to Patrick Patrick Thank you Dave.
Good morning, everyone. Please turn to slide seven.
We had record reported sales of about $6 billion up 15% versus the prior year with 6% organic growth now.
9% growth from acquisitions, and divestitures was substantially driven by Toshiba carrier, whose results will become organic.
Starting in August the deconsolidation of care five was not material to Q2 total company sales, but had a three point negative impact due to fire and security segment reported sales.
Q2, adjusted operating profit of $964 million was up 12% compared to the prior year.
<unk> operating margin in the quarter was 16, 1% and includes a 100 basis point headwind from the consolidation of Toshiba carrier.
This means adjusted operating margins would have expanded about 60 basis points, excluding the impact from the <unk> consolidation driven by volume productivity and price cost.
As well as strong margins in PCC.
Core earnings conversion was about 30% in the quarter.
Adjusted EPS of <unk> 79 was ahead of our expectations, mostly because of stronger than expected sales.
Cost and PCC performance.
Free cash flow generation of $310 million was up significantly compared to last year helped by inventory reduction.
This positions us well to deliver approximately $1 $9 billion of free cash flow for the full year.
You will notice that our U S. GAAP results include the impact of the deconsolidation of KFI and the mark to market adjustments related to foreign currency hedges associated with the <unk> acquisition.
You may recall that we fully hedged the cash portion of the euro dominated purchase price.
As of Yesterdays rates most of the Q2 noncash loss on the hedges would be neutralized.
We exclude these items from our adjusted results.
Now please turn to slide eight to cover our segment performance in more detail.
HVAC had an excellent performance in Q2.
Organic sales were up 9% driven by high teens growth in commercial HVAC double digit growth in aftermarket and controls and over 60% growth in light commercial.
North America residential HVAC sales were down mid single digits in the quarter EBIT weaker than we expected.
Overall residential volumes were down mid teens, as we adjusted to slower than expected movements in the quarter.
North America residential revenues continued to benefit from price realization and mix up from the 2023 seer transition.
Adjusted operating profit for the HVAC segment was up 29% compared to last year, driven by volume productivity PCC performance and favorable price cost.
Adjusted operating margin was up 70 basis points compared to last year. Despite a 200 basis point headwind from the consolidation of DCC.
All three businesses within HVAC had strong margin expansion.
Residential like commercial commercial and global comfort solutions.
Just on the first half performance. We now expect 2023 full year HVAC segment margins to be closer to 16% versus our prior guide of over 15%.
Let me move to slide nine and provide a brief update on our to see the Courier acquisition as we close that transaction about one year ago.
As a reminder, we acquired Toshiba carrier for $900 million.
10 X EBIT.
We committed to a $100 million in cost synergies in five years and projected to achieve mid teens EBITDA margins in that same timeframe.
Our Tokyo based team is doing an outstanding job and performance is running ahead of all of our projections.
Japan returned to profitability earlier. This year, we are already achieving double digit operating margins and are now projecting $200 million of cost synergies, which would drive EBITDA margins in the high teen rather than mid teens.
In short excellent performance by the management team and we are of course, using their experience and playbook as we plan for the <unk> integration.
Moving to refrigeration on slide 10.
Reported sales were down 7% in the quarter with organic sales down 6% the.
The difference is the small divestiture, we discussed in the first quarter.
Within transport refrigeration, North American reconcile our sales were up double digits and European truck trailer was up mid teens.
This continued strong performance was more than offset by container, which was down roughly 35% in the quarter year over year.
Importantly, we delivered more container units sequentially and we expect the sequential improvement to continue in Q3 and Q4.
The result, we expect the container business and the entire refrigeration segment to return to organic sales growth in the second half of this year.
Commercial refrigeration was down high teens year over year.
European food retail customers continue to see pressures the.
The commercial refrigeration team is doing a great job managing working capital and adjusting our cost base to position this business for strong financial performance as the top line improves.
Adjusted operating margin was down 240 basis points compared to last year.
Mainly due to the volume declines in container and commercial refrigeration and the absence of the $7 million gain in last year's second quarter.
Price cost was favorable.
Excluding the onetime gain on sale in the first quarter Q2, adjusted operating margins for refrigeration grew 250 basis points sequentially from Q1.
We are pleased with the progress this segment made in the quarter.
Moving on to fire <unk> security on slide 11.
<unk> security sales were up 5% on a reported basis organic sales were up 9%. This was partially offset by 1% currency and a 3% decline from the deconsolidation of KFI.
We saw strong organic growth across the <unk> portfolio, including double digit growth in industrial fire and security and high single digit growth in both residential and commercial fire.
Adjusted operating profit was up 1% versus the prior year, which includes the year over year headwinds from the deconsolidation of <unk>, which was about $10 million or about a penny of adjusted EPS to carrier.
Adjusted operating margins were down 50 bps in the quarter as favorable price cost volume and productivity were offset by mix and the year over year impact of the.
KFI deconsolidation.
Sequentially adjusted operating margins were up 230 basis points, and we expect adjusted operating margins to improve as the year progresses.
Turning to slide 12.
Total company organic orders were down mid single digits in the quarter as lead times continue to normalize throughout our business.
As you can see on the left backlogs remain at very healthy levels.
About two X 2019 levels and.
For our longer cycle businesses extend into next year.
We believe that strong backlogs and normalizing supply chains are reflected in our order rates.
Overall, HVAC orders were down 5% to 10% in the quarter with both business units seeing some declines.
Commercial HVAC orders were down mid single digits, but the backlog remains robust and grew sequentially. Excluding the rest go.
Over the past month commercial HVAC orders have returned to grow.
Refrigeration orders were up 10% in the quarter with.
With growth in transport refrigeration any decline in commercial refrigeration.
Global truck and trailer demand remained strong with orders up about 40% and those were partially offset by declines in container.
Container orders were about flat sequentially as demand begins to recover.
Orders in industrial fire remains strong and were up double digits with lead times, improving and security and commercial fire orders moderated and were down in the quarter.
Now moving onto guidance on slide 13.
Performance in the first half of 2023 was better than we expected.
We now expect 2023 revenues to be a couple of $100 million more than $22 billion.
With mid single digits organic growth the increase is primarily driven by commercial and light commercial HVAC.
And somewhat higher net price.
We now expect adjusted operating margin to be between 14% and 14, 5%.
Little higher than what we previously guided driven by slightly higher organic sales.
<unk> price cost and better performance at Toshiba carrier.
We now expect full year price cost to be about $300 million positive for the year.
As a result, despite <unk> <unk> adjusted EPS headwind from the deconsolidation of <unk>, we are increasing our adjusted EPS guidance range by <unk> <unk> and.
And we expect full year adjusted EPS to be at the midpoint.
The new range.
For your benefit we included in adjusted EPS Guide The guide bridge on Slide 17.
As a free cash flow, we continue to expect to generate approximately $1 $9 billion. This year. So overall another good quarter and an improved outlook for 2023 with that I'll turn it back over to you there.
Thanks, Patrick Let me first correct something that I misstated on the business exits, we expect to have commercial refrigeration and security in the market in September industrial fire, a month or so later and then <unk> in commercial fire will follow.
So just in summary, before we get into the Q&A.
Carrier continues performing while we are transforming despite resi HVAC declines we realized mid single digit organic growth in the first half of 2023 secular trends and our aftermarket focus continue to drive demand price cost improvements and productivity are helping operating margins and funding growth investments Toshiba performances.
Well ahead of schedule and giving us further confidence in the upcoming <unk> integration, our exciting portfolio moves are tracking to schedule and we are raising full year guidance for organic growth.
Adjusted operating margins and adjusted EPS and with that we will get into the questions.
Thank you if you'd like to ask a question. Please press star one one.
Your question has been answered and you'd like to remove yourself from the queue. Please press star one again, our first question comes from Jeffrey Sprague with vertical research partners. Your line is open.
Thank you good morning, Dave and Patrick.
Good morning, Jeff.
Good morning, Dave.
Love your view on kind of the.
Political wrangling in Germany.
The heat pump related incentives.
How that plays into or does not play into your view on kind of eastern growth as you look forward. The next couple of years.
Well, we're confident in the <unk> growth, regardless of specifically, how the German legislation plays out I mean keep in mind. The proposed legislation that's being debated now it was proposed in April well. After we had already approved our business case.
And what we're going to see in Germany is a clear transition to heat pumps, we're going to see continued you may see more district heating than we thought previously which will be good for us. So what we know is that regardless of whatever legislation gets approved in September our business case stands fully intact and perhaps.
<unk> continues to do is under promise and over deliver and that's what we saw in the first half of the year I mentioned, 20% overall growth 40% growth in heat pumps without this proposed legislation and by the way, Germany is less than 50% of their total sales I think it's just over 40% and.
More broadly in Europe . There are 17 countries that have announced or implemented bans on fossil fuels 19 countries.
In total have heat pump incentives 12 European countries have bands on fossil fuel boilers for Newbuild. So look we'll continue to monitor the specific German legislation, but our confidence in their transition away from fossil fuels towards electric heat pumps toward solar PV towards battery batteries remains very very calm.
<unk>.
And then also maybe you could.
Elaborate a little bit more on the length your truck.
Indicating between TFC in DS Smith, and I guess when you support a spirit of my question right is.
<unk> is not about head count reductions and culturally those are difficult I don't think a big part of what you've done at TFC.
But you are seeing better synergy capture so maybe just elaborate a little bit on what you mean by that playbook and lessons learned that you're going to apply to visa.
Yes look the first.
Aspect of the playbook and TC has been.
Cultural integration with a multi.
Country representation pulling together as one team to drive results for our customers you look at what <unk> and the team have done there, it's really been being very culturally sensitive to what's working extremely well and not not breaking what works well and just focusing clearly on value creation, we had similar.
Strength in terms of head count in Japan that we do with Jeremy with Germany, most of the synergies, which as Patrick said will be far higher than $100 million. We're looking at at least 200 million now for TTC, that's coming from the same kind of area. So it's coming from sourcing is coming from value engineering. There are some elements of it.
Sourcing so that same playbook on the cost synergy side applies there, but we're also seeing tremendous synergies on the revenue side Toshiba has tremendous technology that we've cascaded globally Dietzman climate solutions has tremendous technology that we plan to Cascade globally, we want to be very culturally sensitive.
And look these men climate solutions is a phenomenally well run company Thomas time will be running our European business, which will include re hello.
Our goal is to make sure that we allow them to go do what they need what they know how to do better than anyone in the world. While we look for areas of combined value creation, that's worked with Toshiba and that same playbook will work here.
Alright, thank you.
Thank you Jeff.
Yes.
Yes.
Thank you. Our next question comes from Steve Tusa with Jpmorgan. Your line is open.
Hey, guys good morning.
Good morning, Steve.
Just turning towards resi and light commercial.
On the resi side.
Where do you see channel inventories now relative to where you were in the first quarter.
Yes, we are.
When we look at inventory levels, Steve we basically closed <unk> imbalance.
And underneath that furnaces were down about mid single digits splits were higher than we would've liked we do expect some destocking there.
In the second half and what I'll say.
More broadly Steve is that.
Obviously, you know we get a lot of questions on <unk>, we've been saying that it's 20% of our portfolio and that we can grow of course with resi down and Thats exactly what we saw in the in the last quarter, we saw HVAC grow 9% with <unk> being down mid single digits. So look as we calibrate where we are for <unk> for the for the rest of the year remember.
For the full year, we said that sales will be flat with volume down high single digits.
It still feels about right to us, even though <unk> is a little bit lower than we had thought.
We will see some level of destocking on splits in the second half, but when you look at it more recently, obviously the heat wave will translate into movement, which will help our replacement business. We had thought that the new construction piece, we came into the year, saying residential new construction will be down 20% to 25%.
It looks like it's going to be better than we thought it'd probably down closer to 10% or so so as we look at the full year, we still feel calibrated and what we said I mean could it instead of it being flat going to be down a point or two perhaps but we're still in the zone and remember in the second half of the year, we have easier comparison, we're pleased with some of.
The recent the recent trends the only other thing I'll say on inventory levels as splits was down sequentially in terms of inventory levels in the channel.
And then light commercial.
Pretty big numbers.
Catching up on backlog, obviously, but even backlogs up.
A lot I mean.
What's what's the driver of that and is that is that like a tough comp for next year at all of these are like some pretty big numbers. Unlike commercial.
Well look anytime you you produced sales over 60% you create inherently a tough comp, but look I think we could not be more pleased with how the Justin and Christian in the light commercial team are doing and it's frankly, it's a good example of where we've invested in technology differentiation. We are seeing result in growth and share gains.
You've talked a lot about this vein axial fan, which is far more energy efficient than the previous generation and that that has proven to help help us take share the right way because we've been getting a lot of price, we talked about 60% sales but.
About half of that was volume and the other half was about <unk>.
Price and mix and a whole bunch of other things because remember theres mix involved in light commercial just like there is in the residential piece. So overall light commercial it was an easy compare in terms of versus <unk> of last year, but that team is performing very well, we will continue to track inventory.
Levels in the channel there, but the good news is backlog is very robust backlogs up over 60% year over year and it gives us strong coverage through the rest of 'twenty three that extends into 'twenty four.
Got it great. Thanks, a lot.
Thank you.
Thank you. Our next question comes from Julian Mitchell with Barclays. Your line is open.
Hi, good morning.
Maybe.
Just a first question, perhaps Patrick around.
The cadence of sort of earnings in the top line within the second half.
So should we be thinking that sort of EPS is flattish sequentially.
Q3, and then a normal step down and then on the organic sales front.
Thank you grew low to mid single digit organically first half and then the years up sort of mid singles. So what do we think about an acceleration year on year kind of in Q4 being up mid to high single digit is that the way to think about sales.
Julien on the on the first question you can think of operating profit being very similar in Q3 than in Q2, a key difference we will be the effective tax rate, we think will be closer to 25% and.
And basically that gets you to an EPS that very similar maybe a penny or two below and so then you have after that normal drop down in Q4.
That you that you were referring to.
Yes.
The sequence in terms of organic growth for the full year.
We're now at mid single digits, which is better than the low to mid single digits, we had before.
Similar organic growth in Q3, and we expect as we've seen in Q2 and then the balance of course would be in Q4, which means that Q4 would be a little weak.
Our current assumption.
Thanks, very much and then just.
My second question.
Looking at Slide 12, where you have the backlog trend chart on the left hand side.
You know clearly different markets and geographies are sort of rebalancing lower at different times as lead times shorten, but when you're thinking about the backlog trends.
From here next call it six to 12 months.
Just wondering how youre thinking about kind of the aggregate.
Carey do we see the backlog naturally moderate because of normalizing supply chains, just any thoughts around that please.
Julien that is when we were looking at it and I think it depends for what businesses. We're looking at if you look at some of our shorter cycle businesses and we've seen as the Best example is probably residential HVAC tip.
Typically we would have four maybe six weeks in backlog.
A few quarters ago, we were talking about backlog more than one quarter.
And so as supply chains have normalized we've seen the backlog normalize for for example, residential HVAC. We're back in that four to six week range and you don't get through that without an adjustment of the order intake and Thats why we see some of the big declines in orders year over year.
As those backlogs normalized so I would expect that some for some of our short cycle businesses, we will see a more back to normal backlog level at the same time, there are some longer cycle businesses.
Commercial HVAC those are businesses that have backlog.
Six months in some cases longer and there we see continued growth that we see is continued strong demand.
Yeah, what I'd add.
Julien is that if you look at sort of Vietnam lease of the environment that we've seen over the last couple of years COVID-19, leading into supply chain issues looking purely at year over year order trends.
<unk> is really not the best indicator of future growth projections. So what we've been looking a lot at is the backlog levels, which we feel still very good about with commercial light commercial HVAC and some of the longer pieces fire and security, we like where the backlog levels are so we're.
King at do we have the backlog and incoming growth order rates to support our growth projections and we do feel good about those.
Great. Thank you.
Thank you.
Thank you. Our next question comes from Deane Dray with RBC capital markets. Your line is open. Thank you good morning, everyone.
Good morning, I was hoping to go through some of the price cost dynamics in the quarter and you mentioned the higher mix contribution from the new Sir could.
Could you take us through that and then the the pace of improving price cost.
That $300 million what was the if you cannot decompose that how much was let's say.
The raw material better better pricing there as well thanks.
Okay.
Patrick you are in terms of.
The quarter, you can think of the 6%.
Organic growth, we think of that as pricing being about four points and think of volume and mix. So we put the mix up as part of the volume mix as being the remainder.
Two points, so thats kind of a.
<unk>.
The overview for the quarter for the full year.
I think that the price realizations you won't be 4%, we think it will be a little less than 4% for the full year, probably closer to 3%, which is of course to be expected as we as the <unk>.
Some of the price increases from.
From last year and then the second part of your question was Oh.
Just.
You said the pace.
Improving price cost.
Yes, you may recall that in Q1.
Mentioned that price cost was modestly positive.
It had a few tenths of a basis point positive impact on our segment operating margin and we said that Q1 would be the weakest price cost of the year.
You can think of price cost being closer to 300 million positive versus $200 million prior guidance and it's about 100 bps.
Benefit for the full year year over year, so better than in Q1, which is basically what we expected in terms of the equation both price is.
As a little bit better on.
On the cost side, we're seeing some pluses and minuses the area, where we probably see the best.
The most favorable impact is on logistics.
Alright, yes, we're seeing someone material, there's some plus and minuses, there, but logistics and freight is probably the area, where we see the biggest.
On the cost equation.
That's real helpful. And then just as a follow up Dave you gave a lot of specifics on the sale processes going on and the timing and so forth.
Which is really helpful and just from a.
Our management side to this how do you keep each one of the units focused when there is this a change in ownership.
Pending and just how do you keep the eye on the ball here.
Well, we are so fortunate to have.
Our phenomenal team in both fire and security and commercial refrigeration.
European and his team in fire and security, Tim working with markets on commercial refrigeration. There are true professionals and they know what we know which is that the opportunity for these businesses in the hands of someone who is either a strategic or a sponsor who it's the core of what they do we will create value for their people for generations to come so.
We are very lucky it's one of the reasons why the decision was so tough because we're partnering with team members that come to work everyday put their heads down and do a phenomenal job for their customers and create value, they're performing very well. So we're lucky to have great people.
We work closely with them to paint the vision for the future for them in their businesses.
Phenomenal franchises phenomenal brands I have been very very pleased with the level of interest and we've shared that with both respective teams. So we know it's just like when carrier spun there was a fair amount of uncertainty as we spun from UTC, but we knew that and Greg knew that us as an independent company would create value for us and our customers and the same will be true for them.
Thank you.
Thank you.
Thank you. Our next question comes from Nigel Coe with Wolfe Research. Your line is open.
Thanks, Good morning, everyone. Thanks for the question.
Yeah.
Hey, this is going to go back to the price and maybe mix Patrick.
Obviously luck commercial a 60% growth how much of that would it be price and mix and maybe the $300 million of price cost. If you can just maybe be a bit more granular in terms of how that phases through the through the year.
Yes for light commercial more than.
Half would be volume and the remainder about equally split between.
The mix up in that price realization.
And then on price cost.
Do we can think about it.
So this is so I've mentioned at 300.
Millions for the full year I mentioned that 100 bps benefit for the full year weakest by far was Q1. The next two quarters will be similar and I think Q4 will be a little bit.
Strong in Q1.
Can't say the exact numbers by quarter, but clearly we've seen a significant pick up in the second quarter, we expect that to continue for the year and from a year over year margin perspective.
The.
Margin impact on Q2, Q4 will be similar to get to the 100 bps for the year. So basically a little over 100 bps every quarter Q2 three four.
That's kind of granularity.
That's great. Thanks, Patrick and then my follow on is.
So coming back to the portfolios I mean based on the indications of interest you've clearly seen from.
Both P and strategic.
At a point now where you can rule out.
Spin process do you think there's a buyer out there potentially for the whole package of assets, maybe exceed them commercial refrigeration, but the whole productivity assets and I know that the medical offices question, but it's the KFI chapter 11.
Still a gating factor for the Sarnia sales. Thanks.
Yes, the way I would describe it Nigel is that for commercial refrigeration and then the security business and industrial fire those will be divestitures. We we mentioned that we would have the first two of those three.
We're targeting having those in the market a bit after labor day, So we're targeting having those.
Out in the market before the end of September and then industrial fire will follow a month or so later and that will also we also planning that to be a divestiture and we are still weighing through all of our options with respect to the commercial and residential fire pieces of that portfolio and those can take a whole bunch of different forms that can be divested.
<unk> spin split like that the different forms those can take and go in a lot of direction directions, and we're gonna be weighing all of those but right now we're focused primarily on those first three to make progress and tried to get.
Signed executed deals here in the coming months on those.
And in terms of the in terms of the Caf II process, that's being of course handled by the independent Board.
Of Caf II.
It's our sense that they have been progressing well and appropriately through the chapter 11.
<unk> all of the a triple S litigation against KFI was automatically state upon the filing and.
Since then all of the eight Triple left claims against carrier and Fnf's have also been stayed and that came with the consent of the creditors committee. So that whole process is proceeding as planned we anticipate the sale process that that the board will do forecast I will begin as they start to sell themselves in the next couple of <unk>.
<unk>.
And then within the next year, we do anticipate chapter 11 discharge for Caf, II, which would resolve the triple S lawsuits against KFI carrier and and the other entities. So I think that's progressing as I think they are bored would've expected it to progress.
Okay. Thanks.
Thank you.
Yeah.
Thank you. Our next question comes from Joe Ritchie with Goldman Sachs. Your line is open.
Hey, Thanks, good morning, everyone.
Good morning, Jeff.
Maybe maybe maybe just starting off on the.
The lead times normalizing comment.
Just curious.
How far above normal are we still with lead times and when do you expect that will fully normalized.
Joe It varies a little bit by business light commercial has come down but it's still.
Above normal it looks like <unk> is getting closer to normal it's closer kind of Patrick said in that four to six week range four to six week range would be normal and it's starting to.
Starting to kind of approached those levels that we've seen in the past.
For resi and commercial HVAC still has a very strong backlog that would be above normal and it almost varies by region.
In places like Europe , and China, it's a little bit closer, but higher than traditional backlog levels, but in the United States.
We've had some operational challenges in our Charlotte facility, which the team is working very hard to address has been making a lot of progress on some of the underlying issues.
But until we get those fully in the box will continue to see elevated backlog levels that go well beyond this year into next year. So it's nice to have the backlog, but we still do need to make in that particular site more progress on the supply chain issue. So in general it is getting closer to.
Traditional levels, but it kind of varies by region by business and it varies a little bit based on our supply chain overall performance.
What I will add Joe is that one thing that we're doing is doubling down on the basics. We brought in a new team to help with our SIOP processes, our sales inventory operations planning because we're in an environment, where there is some fluidity on the demand side and we still have some longer lead times for things like chips.
So we need to have very agile demand and materials planning. So we can give our customers what they want and what they need when they need it and not get stuck in the middle of it with inventory levels and that's been our whole focus area for us internally.
Got it Dave that makes sense and I guess, maybe just.
Connecting the dots with the backlog. It was it was good to hear that backlog grew sequentially.
It sounded like the commercial business had started to really reaccelerate.
But don't want to put words in your mouth. So just maybe maybe just talk to us a little bit about.
The order trajectory, there and what Youre seeing on the ground real time.
Yes, I think that with respect to commercial Patrick mentioned that.
I think Joe the questions about commercial HVAC.
Yes.
Commercial break.
And applied more broadly.
But yes, I think that look it was nice to see.
Over the past four weeks or so we've seen that demand.
Positive.
Look at the.
The commercial HVAC business, we still have in some cases as I mentioned in North America. For example, backlogs that go well above well beyond historical levels and that does have an effect on incoming orders so as those.
Backlog levels will start to moderate, especially in North America, we do expect that the demand will continue to be there you look at Abi is was over 50. The architectural billing index was over 50 in both May and June it's been over 53 of the last four months.
And I think when I look at the job that go wrong and the team are doing they've been very agile.
We talk a lot about when you fish you go where the fish are when you go when you're in a business like ours, you go where the customers are so K through 12, it's been strong healthy buildings.
<unk> activity has been strong data centers continues to be positive healthcare is positive and then we transition away from some of the areas what show some areas of weakness so.
Commercial and residential real estate in parts of China were weak, we pivoted hard to industrial infrastructure and that's been driving a lot of demand. So we feel good about the backlog and it's nice to see the order rates over the last months or so.
Yeah.
Great. Thanks, Dave.
Thank you.
Thank you. Our next question comes from Josh Poker's Lewinsky with Morgan Stanley . Your line is open.
Hi, good morning, guys.
Hey, Josh Josh.
Dave I wanted to just pick your brain a little bit on follow up to that last question. What's your sense on nonresidential construction I think some of the data is getting worked around by the Mega projects, which I think maybe the HVAC content is a little harder to tease out.
Obviously things like warehouse that are declining, but maybe not as important so what's your sense on that market now the data seems like it's good you've talked more about backlog normalization and real demand shifts, but are you seeing anything on the ground level there.
Well, yes, I think that clearly we've seen the areas that had been a bit weaker.
Some areas of retail, but interestingly some of the lower end.
Retail has been positive so not all retail, but some some areas of retail in our applied business and areas of commercial real estate.
<unk> have been weaker and that's.
And you know this Josh, but remember that commercial real estate is less than 10% of our north American applied business. So we watch it we watch some of the reaction that we're going to see with the regional banks, but there's been nothing terribly acute and I think on the flip side. Some of the areas that had a continue to be very positive as case rates.
Well I mean, we still have a significant amount of that <unk> funding to be spent higher Ed has been extremely strong and then you look at industrials chips Act, bringing some new construction back to the United States in that in that space has been positive data centers. Good healthcare goods. So we look at it globally.
I think in general the theme is around real estate is a watch item I will tell you on the flip side. It's encouraging you know that Abi has about a six month, leading indicator for new order activity, so to see Abi showing some growth.
Could indicate that folks see an eventual moderating of rates, which should drive some new construction activity on the real estate side six months out. So we'll have to watch and see if that happens, but in the meantime, some of the other verticals.
<unk> have been strong and as you mentioned warehouse has been a bit on the weaker side I would say.
Got it that's helpful very comprehensive and then just a follow up somewhat.
Someone asked this already I missed it I apologize.
Heat pumps, and Iras, something obviously very topical kind of six to nine months ago and it was maybe gotten a little less attention lately. It seems like the heat pump market in general has been strong, but whats your sense on the IRR uptake and maybe any kind of.
Hydro quantification of what you think that might be worth over the next 12 18 months.
It's hard to exactly dimensionalize, it, but I will say what happened is the legislation got passed and then we went into a bit of a lull period, while that was actually getting effectuate it and in some cases youre dealing with not only the IRS, but a state by state implementation, So I <unk>.
Think that I would call like 2023, the year of things getting codify 'twenty 'twenty four is going to be the year, where we start to really see the benefit of it and I think it is going to kick in really in the first quarter of 'twenty four and we're very pleased with how it's gotten quantified overall, which has been that.
The 2000 dollar incentive for heat pumps in the United States getting applied to that mid tier level, which was very important to see the kind of take rate that you would want to see to have the impact you would want.
Consumers, but also on the planet there still is one area where or how they define.
For your approval as as we've been going along such as trying now that was positive to see and I think the the the key one that will be down to us in the European Union, and that's frankly progressing very well and it's progressing well because there's really no material overlap between us and them. So you know we said that we would close around your and we remain on track for that.
Okay great.
Switching to a different topic aftermarket services you know after work in another double digit quarter services sales up 16% and you mentioned in the prepared remarks run embedding generative AI and abound in the digital platform.
I'm just wondering if you could maybe help tie together for us some of those investments.
And the sales traction you're saying.
How does the items and dinner today I actually help increase.
Increased penetration <unk>.
Digital an aftermarket.
Well you know, we've working with Bobby Georgia, and the digital team, we're establishing and Edward and AI generative AI Center of excellence as as a skill set you know like we've been using it for awhile. There are some areas, where it's a bit more basic like in our call centers, where we can drive much more efficiency and <unk>.
Johnson is for our customers and our call centers you using gender today I and that's very encouraging and I think in the area of things like our digital platforms abound in length.
What you're really looking at is capturing data and using that data to make using algorithms to anticipate issues before they occur that can that affect the controls and ultimately to drive automation and that as we filled out all of the applications and capabilities around abounded and links the <unk>.
<unk> fundamental capabilities around generative AI are gonna be very significant we've been at this for many years, we're now taking it to a new level because there's some of the advances we're seeing in the in the AI capabilities, where you start to anticipate a failure of equipment before it occurs because you're looking at certain physics space out <unk>.
Rhythms associated with the temperature pressure other aspects of the equipment you start to look us links to use G O fencing and other capabilities that go beyond temperature controls and prognostics and diagnostics on the cold Jane side. So it's very exciting it's yet another distinguishing feature we can add to our.
Digital platforms.
That's really interesting thanks for the call.
Thank you.
Thank you. Our next question comes from Stephen Volkmann with Jeffries. Your line is open.
Great. Good morning, Thanks for putting me in here just a couple of questions, maybe a little bit longer term.
But I'm trying to think about or how you think about pricing in 24 25, do we kind of go back to the historical norm do you think or is there a reason that might stay a little bit higher and is there any reason that mix wouldn't continue to improve as we go a little bit longer term.
Well look I think that I do see pricing, continuing but being Mora historical levels. I mean, you have to keep in mind that you look at pricing over the last couple of years. You know we're dealing with I think close to a couple of billion dollars a price over the last two years and we're gonna continue to see I think Patrick sat around 600 miles.
The price of this year, so I think that we will be in the normal what we're we're zoom. We two more typical levels that price, we don't certainly see price reductions, but we see continued price increasing but not at the kind of pace that of course, we've seen over the last couple of years mixed continues.
To be positive will <unk> will continue to see the twenty-three.
Benefits that we saw on the sheer change extend it to next year on the residential light commercial side, we also see mixed benefits.
The refrigeration side the same transition that we're seeing on the HVAC side, we're seeing in places like the United States and Europe as they transition to lower emission diesel powered trucks and trailer units, but also a transition to electric that mix up is very beneficial to the truck trailer side as well and that is we.
Get into the parts of 24 that extend it is 25 and the in North America will have the refrigerant change as well, which would be a further mixed up so mixed will continue to be positive on both on all aspects of the business and then we'll resume normal pricing levels, but in the background, it's our job to drive productivity.
So we talked about two to three per cent net productivity forever. The teams driving a few hundred million dollars. This year and one of the things that are you head of operations agent button and the team are doing very well, it's not only looking at your productivity for twenty-three, but we have one source of the truth truth, one digital platform that everyone looks at every week and were huge.
Seeing that digital tools et cetera ourselves up for 24 productivity as well so we get really good line of sight going well beyond 12 months.
Perfect. Okay. Thanks, and then just a quick follow up maybe for Patrick how should we think about the cadence of P. C. C. As we get into 24 is it still margin dilutive.
The the T well the key reason why this year, it's Martin Duluth that that would've been instead of recording equity income as we did prior to the acquisition hour consolidated the entire you know.
So this year I mentioned that they're operating margin with the <unk>.
Already at the double digit level, so a little bit lower than the company average uhm I would expect that to continue to improve and next year. It might not <unk> company I would if I would expect to get significantly closer to it but.
But the main reason why <unk>.
It is diluted this year, because we basically consolidate $2 billion in revenue with.
Uhm.
Hundred million, plus plus ish of incremental operating profit.
That would've been back.
Perfect. Thank you guys.
Thanks.
Thank you and our last question comes from Black <unk> with Citigroup. Your line is open.
Good morning, guys. Thanks for taking my call.
Okay.
Okay.
So you just wanted to ask about the the uptick in China orders in the quarter I know Yearago comps gonna look got easier, but China's one more can I think we're just trying to understand.
A little better what <unk>, what the trends are in there. So can you just talk about what you're seeing in terms of underlying demand trends in China, and how you're thinking about the potential domain maintain positive corners momentum, they're going forward over the next couple of quarters.
Yeah, I'm glad I got back recently from China, and you know just the level set it's about 9% of our total sales and our overall outlook in China is promising we we see it up double digits for us this year of the cops.
But easier, but we do we still do see underlying wrote the first half was up just over 20 per cent now Q T Q too.
Had some easy compares because remember there what are the Covid lockdowns in Q2 of last year. Two two was up 30 per cent or so for us in China, but when we look overall, we see growth and apply it in China.
Especially on the industrial side, though the industrial verticals were up over 20% in the first half and it was vertical as like the renewable energy medical farmer with strong and that help that's been helping us offset some of the weakness that we saw in the commercial real estate side and.
And you know by the way I think I Might've said that the first half was just under 20 per cent not over 20 per cent, but it was kind of in that range and the other thing I'll say about our teams in China and this applies to commercial HVAC. It applies to the the residential light commercial side, that's part of our G. C S business.
Our foreign and security and Rep side.
As we've seen the key to success is being very agile that's true globally, but I think it's true.
Especially in China. If you look at where we are a commercial HVAC just five years ago or mixed with 70 per cent property 30 per cent industrial it's not 40 60. The reverse so we've been very very purposeful about shifting our sales folk sell ourselves incentives to go after where are we see the growth which has been extremely strong.
With some of our partners over there in that I and I space, So and I do believe that the government will continue to incentivize further growth. There. So we we overall, it's not gonna be a straight line, but overall, we remain bullish on China.
Okay, Great. That's that's really helpful. Dave and then.
This is my follow up maybe shifting to North America, I know you mentioned and you've seen obviously good strength in the K to 12 from vertical.
You know one one question or concern that we hear from some investors is around potentially peak ish spending and that K to 12 market just given the strength. We've seen there. So can you talk about how you're thinking about <unk> wait in the K to 12 vertical broadly going forward and.
Whether you are seeing any signs of sort of increased budget constraints and from those customers.
Yeah, I I actually I view at the opposite of of that I think there's tremendous runway on K through 12, I remember that.
This is the first time in decades, where the K through to a very K through 12 area has had dedicated and sufficient funding and they've allocated the federal government's added allocated $190 billion, a extra funding or 290, there's 190 and that S are fun over and over the next.
15 months and 890 billion of that has still yet to be allocated so 90 of the 190 still has to be allocated over the coming 15 months now whether or not that's physically possible remains to be seen whether or not there will be an extension of that remains to be seen I would suspect there needs to be but in the meantime, there is an.
Actually more runway ahead, then there has been growth in the past I mean, we continue to see orders or had been up double digits for a long time, we saw K through 12 orders of 20 per cent as I mentioned in in the quarter our pipeline in in two two is now up 60% over where it where it had been so we think it's a very attractive.
Vertical and the way that funding gets spent some of the initial funding is the <unk> the lower lead time less expensive type projects as you get into S or three funding and there's still 120 of 190 as an S or three that's when you get into things that have to do more with like H B a C. So we think there's a.
<unk> run way ahead in K through 12 in the U S.
I appreciate the color <unk>. Thanks.
Thank you.
Thank you I like to turn the call back over to Dave for closing remarks.
Well look my thanks to the 55000 team members carrier, we have a lot of moving parts in the system. The team continues to work tirelessly on behalf of our customers and and achieve great results. So my thanks to everyone. At carrier are thanks to our investors and of course, Sam will be available for questions. As we go through the day. So thank you all.
Thank you for your participation. This concludes the program you may now disconnect everyone have a great day.
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