Carrier (CARR) Q1 2024: Margin Expands 280bps as Data Center Backlog Doubles

April 25, 2024 | By EarningsIQ Research

Carrier’s Q1 marked a pivotal inflection in profitability and strategic focus, with margin expansion outpacing tepid organic growth as transformation efforts reshaped the portfolio. Data center demand, aftermarket execution, and cost discipline offset macro headwinds in Europe, while divestitures and integration of Wiesman Climate Solutions position Carrier for a leaner, higher-growth profile. Investors should watch for the pace of data center penetration and Wiesman synergy realization as key levers for 2024 and beyond.

Summary

• Margin Expansion Outpaces Growth: Productivity and mix drive significant profitability gains even as organic sales slow.
• Data Center Vertical Accelerates: Backlog doubled, signaling Carrier’s growing position in a structurally expanding market.
• Portfolio Transformation Advances: Divestitures and Wiesman integration set up a focused, higher-return climate platform.

Business Overview

Carrier Global Corporation (Carrier) is a leading provider of heating, ventilation, air conditioning (HVAC), refrigeration, and fire and security solutions. The company generates revenue through three major segments: HVAC (comfort and climate systems for buildings and homes), Refrigeration (transport and commercial cold chain), and Fire & Security (safety and building systems, currently being divested). Carrier’s business model blends new equipment sales, aftermarket services (maintenance contracts and digital monitoring), and increasingly, digital platform subscriptions. The recent acquisition of Wiesman Climate Solutions, premium European HVAC and heat pump business, and ongoing divestitures are reshaping Carrier into a focused climate and energy solutions company.

Performance Analysis

Carrier’s Q1 results underscore a disciplined shift toward profitability and operational focus, with adjusted operating margin expanding 280 basis points and adjusted EPS up 19% year-over-year. Organic sales growth was modest at 2%, but total reported sales rose 17% due to the consolidation of Wiesman Climate Solutions. Productivity gains and favorable pricing were the primary drivers, more than offsetting investments and dilution from the Wiesman acquisition.

Segment performance revealed a nuanced picture. HVAC led with 25% reported sales growth (mainly from Wiesman) and 2% organic growth, with Americas commercial and light commercial up around 20%. Refrigeration was down 2% organically, but container sales surged over 50%, offsetting declines in North America truck and trailer. Fire & Security delivered strong margin expansion, aided by mix and productivity, even as the business is being prepared for sale. Aftermarket revenues, a critical recurring revenue stream, climbed 6% and remain on track for double-digit growth in 2024.

• Backlog Strength: Commercial HVAC backlog and orders, especially in data centers, grew sharply, doubling in Q1 and positioning Carrier for sustained growth in this vertical.
• Europe Headwinds: Wiesman sales declined 12% in Q1, mainly due to lower solar PV volumes, but heat pump orders rebounded sequentially and aftermarket remained robust.
• Order Dynamics: Total company orders were down 7%, skewed by tough truck/trailer comparables, but excluding that, orders were flat; Americas commercial and EMEA applied equipment showed resilience.

Cash flow was seasonally negative due to transaction fees and tax payments on divestitures, but underlying free cash remains healthy. The margin and productivity narrative is reinforced by strong core earnings conversion and disciplined cost takeout, positioning Carrier for continued margin expansion as the portfolio transitions.

Executive Commentary

Strategic Positioning

1. Data Center Penetration as a Growth Engine

Carrier is capitalizing on the surging demand for data center cooling, with AI-driven workloads pushing HVAC requirements exponentially. Management highlighted that data center backlog doubled in Q1, and bookings in April continued to accelerate. While current U.S. share remains low, Carrier’s focus on expanding capacity and investment in liquid cooling (via Strategic Thermal Labs) positions the company to capture a larger share of a market projected to grow from $7B in 2023 to $15-20B by 2027. Carrier aims to drive data centers to well over 20% of commercial HVAC sales in the next few years.

2. Wiesman Integration and Electrification Tailwinds

The Wiesman acquisition is both a growth and synergy lever, expanding Carrier’s European addressable market by $5B and adding premium heat pump technology. While near-term sales are pressured by solar PV declines and macro softness, Wiesman’s aftermarket, new product launches, and channel differentiation are mitigating downside. Cost synergies are tracking to $75M in 2024 and $200M+ by year three, with management also targeting hundreds of millions in revenue synergies via cross-portfolio technology and channel leverage.

3. Portfolio Simplification and Capital Deployment

Carrier’s divestiture program is on track, with three of four non-core exits (including industrial fire for $1.4B) under agreement and residential/commercial fire expected to close by year-end. These moves will yield $5.5B in net proceeds for debt reduction and eventual share buybacks, supporting a return to a 2x net leverage ratio and reinforcing the company’s focus as a pure-play climate solutions provider.

4. Aftermarket and Digital Recurring Revenue

Aftermarket remains a core strategic pillar, with recurring service contracts, digital monitoring, and new platforms like Lynx (container) and OneBase (Wiesman) driving higher attachment rates and margin stability. The company’s goal of $7B aftermarket revenue by 2026 now requires a low double-digit CAGR, but management is accelerating the global playbook to achieve this, leveraging digital connectivity and predictive maintenance.

5. Productivity and Cost Discipline as Margin Levers

Carrier’s lean transformation is yielding tangible results, with global productivity actions coordinated through a single database and material/logistics savings driving more than half of the gains. Overhead reduction and factory productivity have resumed after a period of drag, and management remains confident in sustaining these benefits even as material inflation (notably copper) presents headwinds.

Key Considerations

Carrier’s Q1 sets a new baseline for its transformed operating model, but the path forward will be shaped by several key variables:

Key Considerations:

• Data Center Ramp: Carrier’s ability to convert backlog into sustainable sales and increase share in the data center vertical is critical for long-term growth.
• Wiesman Execution: Realizing cost and revenue synergies, managing European macro volatility, and driving heat pump adoption are central to delivering on acquisition promises.
• Aftermarket Acceleration: Double-digit aftermarket growth is required to offset divested revenue and meet 2026 targets, with digital connectivity and service attachment rates as KPIs to watch.
• Portfolio Transition: Successful and timely completion of planned divestitures will determine capital flexibility and the timeline for share buybacks.
• Margin Sustainability: Maintaining productivity momentum and managing commodity inflation (especially copper) are essential to preserving margin gains as the business mix evolves.

Risks

Macro and regulatory headwinds in Europe, especially for residential HVAC and heat pumps, could weigh on Wiesman’s near-term contribution and require accelerated cost actions. Execution risk remains in integrating Wiesman and delivering on synergy targets, particularly as the company juggles multiple divestitures and operational changes. Commodity inflation (notably copper) and potential competitive pricing pressure, especially from new entrants in Europe, could erode margin gains if not offset by productivity and mix. Order softness in certain segments (truck/trailer, EMEA light commercial) and reliance on sustained data center demand also pose risks to the growth narrative.

Forward Outlook

For Q2 2024, Carrier guided to:

• HVAC segment margin up approximately 100 basis points YoY
• Wiesman sales flat to down 5% for the full year, with Q2 similar to Q1 and a second-half seasonal pickup expected

For full-year 2024, management maintained guidance:

• Reported sales just under $26B, reflecting earlier business exit timing and currency headwinds
• Adjusted operating margin raised to ~15.5%
• Adjusted EPS midpoint unchanged at $2.85, with core business EPS raised by $0.05 to $2.60
• Free cash flow outlook at $400M due to tax payments on divestitures, but underlying free cash flow unchanged at $2.4B

Management expects significant earnings growth in 2025 and beyond, citing double-digit EPS targets, deployment of divestiture proceeds for debt reduction and buybacks, and continued margin expansion as key drivers.

Takeaways

Carrier is executing a major portfolio transformation while delivering margin and productivity gains, setting a new standard for profitability and operational discipline in the climate solutions sector.

• Margin Expansion as a Core Theme: Productivity, mix, and cost discipline are driving profitability, even as organic sales growth remains muted in some segments.
• Strategic Focus on Data Centers and Aftermarket: Data center backlog and aftermarket growth are emerging as the most important long-term levers, with digital and service revenue set to become a larger share of the business.
• Transformation Execution Will Be Key: The next phase hinges on successfully closing divestitures, integrating Wiesman, and maintaining cost/margin discipline as the business mix evolves and macro conditions fluctuate.

Conclusion

Carrier’s Q1 2024 results reinforce its trajectory as a leaner, higher-margin, and more focused climate champion. The combination of portfolio simplification, data center acceleration, and aggressive productivity sets a strong foundation, but sustained execution on synergies, aftermarket, and digital will determine if Carrier can deliver on its ambitious growth and return targets.

Industry Read-Through

Carrier’s experience highlights several prevailing forces in the global climate and HVAC industry. The outsized growth in data center cooling demand and shift to digital, subscription-based aftermarket services are tailwinds for all leading HVAC players, especially those with scale, technology, and global reach. European electrification and heat pump adoption remain secular themes, but near-term volatility and policy lags require operational agility and brand/channel strength. Portfolio simplification and capital redeployment are likely to continue across the sector as companies seek to focus on higher-growth, higher-margin climate and energy solutions. Margin expansion through productivity and mix, rather than just volume, is becoming the new performance benchmark for industrials in this space.

CARR Industrials Building Products Data Centers Aftermarket Portfolio Transformation HVAC Electrification