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Headline EPS of $1.56 edges Street/WRe at $1.53/1.52 - we mark this as a 2c core beat, as a modest segment miss - driven by downside in the ES segment –was offset by lower corporate. Core sales missed by 2ppts vs. WRe, with organic sales growth of 2.9% on sharp deterioration at ES (1.7%) and another step down at Refrigeration (-3%) despite easy comps. Free cash of $155m is in line with WRe, but conversion remains weak at 68%. See Exhibit 1-3 for more details.
First, let’s make it clear that this is a very solid quarter with $2.10 EPS at the high end of $2.05-2.10 guidance and a $0.02 beat vs. WRe/Consensus. Net/net we mark this as a $0.01 core beat with another penny below the line, driven by upside from Aero and PMT segments, that offset significant downside at SPS.
The early reads for Europe point to ~2ppts of core sales deceleration Q/Q, which is broadly in line with expectations with solid execution, offset by Industrial demand deterioration, while global construction appears to be a relative safe harbor; autos and electronics remain major areas of risk, but very known and visible. The issue is visibility around demand recovery, with 3Q setting up as another challenging quarter.
The next week amounts to a gentle warm up for the Category 1 climb that sits around the corner. In fact, our attention is more focused on the European Cap Goods sector where many bellwethers and US comps will be reporting over the next couple of days: Assa, KONE and SKF to name a few. See Ex 5 for our updated Earnings Calendar through 30 July.
Our first HVAC survey, here at Wolfe, points to generally positive trends for the HVAC industry with June in MSD range, strong pricing and inventory levels that are OK. We think investor expectations are low given weather headwinds and choppy industry data QTD. Weather and rising incentive spending are watch items into 3Q19. We are bullish IR and UTX into the Q; bearish LII.
This week we circle back to our preview and highlight some of the feedback and pushback we have received on our calls, by addressing the following questions.
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